SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
----------------------
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Mark One
[x] Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act
of 1934 For the Fiscal Year Ended August 27, 1999,
or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From ____________ to _______________
Commission File Number 1-11098
SOLECTRON CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-2447045
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
777 Gibraltar Drive, Milpitas, California 95035
(Address of principal executive offices and Zip Code)
Registrant's telephone number, including area code: (408) 957-8500
Securities registered pursuant to Section 12(b) of the Act:
Common Stock traded on New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days.
YES __X__ NO _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Registrant's Common Stock held by
non-affiliates on November 1, 1999 was approximately $16,268 million (based upon
the last reported price of the Common Stock on the New York Stock Exchange on
such date). Shares of Common Stock held by each officer, director, and holder of
5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
As of November 1, 1999, there were 271,914,272 shares of the Registrant's common
stock outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on January 11, 2000, which Solectron will file with the
Securities and Exchange Commission within 120 days after the end of the fiscal
year covered by this report, is incorporated by reference in Part III of this
Form 10-K to the extent stated herein.
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SOLECTRON CORPORATION
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
Part I
Item 1. Business 4
Item 2. Properties 14
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of
Security Holders 15
Part II
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters 18
Item 6. Selected Financial Data 19
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 20
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk 37
Item 8. Financial Statements and Supplementary Data 37
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 62
Part III
Item 10. Directors and Executive Officers of the
Registrant 62
Item 11. Executive Compensation 62
Item 12. Security Ownership of Certain Beneficial
Owners and Management 62
Item 13. Certain Relationships and Related Transactions 62
Part IV
Item 14. Exhibits, Financial Statement Schedule and
Reports on Form 8-K 63
Signatures 64
Solectron and the Solectron logo are registered trademarks of Solectron
Corporation. All other names are trademarks and/or registered trademarks of
their respective owners.
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PART I
ITEM 1: BUSINESS
Solectron provides electronics manufacturing services to original equipment
manufacturers (OEMs) who design and sell networking equipment, workstations,
personal and notebook computers, computer peripherals, telecommunications
equipment or other electronic equipment. These OEMs include Cisco Systems,
Hewlett-Packard Company, Inc., International Business Machines Corporation
(IBM), and Sun Microsystems, Inc. These companies contract with Solectron to
build their products for them or to obtain other related services from
Solectron.
Solectron furnishes integrated supply-chain solutions that span the entire
product life cycle - from technology, to manufacturing, to global services.
These solutions include the following range of services:
- - Product design;
- - New Product Introduction management;
- - Materials purchasing and management;
- - Prototyping;
- - Printed circuit board assembly (the process of placing components
on an electrical printed circuit board that controls the processing functions
of a personal computer or other electronic equipment);
- - System assembly (for example, building complete systems such as mobile
telephones and testing them to ensure functionality);
- - Distribution;
- - Product repair; and
- - Warranty services.
Solectron's performance of these services allows its customers to remain
competitive by focusing on their core competencies of sales, marketing, and
research and development. We have manufacturing facilities in the Americas,
Europe and Asia. This geographic presence gives our customers access to
manufacturing services in the locations where they need to be close to their
expanding markets for faster product delivery.
We were originally incorporated in California in August 1977. In February 1997,
we were reincorporated in Delaware. Our principal executive offices are located
at 777 Gibraltar Drive, Milpitas, California 95035. Our telephone number is
(408) 957-8500 and Internet address is www.solectron.com.
The information contained within this overview of the business is qualified in
its entirety by, and is subject to, the detailed information, consolidated
financial statements and notes thereto contained elsewhere within this document
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "Financial Statements and Supplementary Data."
Industry Overview
Solectron is well recognized for its printed circuit board (PCB) assembly
business. While we continue to lead in this industry, we have grown into a
global supply-chain facilitator expanding our capabilities across the entire
product cycle to include: product design, pre-production planning, New Product
Introduction (NPI) management, manufacturing, distribution, and end-of-life
product service and support. We are benefiting from increased worldwide market
acceptance of, and reliance upon, the use of outsourcing manufacturing services
by many electronics OEMs. We expect the trend towards outsourcing manufacturing
to continue for many reasons including the following:
Reduce Time to Market. Due to intense competitive pressures in the electronics
industry, OEMs are facing increasingly shorter product life-cycles and
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therefore have a growing need to reduce the time required to bring a product to
market. OEMs can reduce the time to market by using Solectron's manufacturing
expertise and infrastructure. OEMs can further reduce the time to market by
partnering with Solectron at the stages of product design and product
improvement to expedite the transition into large volume of production in its
manufacturing centers.
Reduce Investment. As electronic products have become more technologically
advanced and are shipped in greater unit volumes, the necessary investment
required for internal product design, manufacturing, and end-of-line support
services by OEMs has increased significantly for working capital, capital
equipment, labor, systems and infrastructure. Solectron, a global supply-chain
facilitator, enables OEMs to gain access to its worldwide advanced technology
facilities including NPI centers, manufacturing and depot repair facilities. As
a result, OEMs can substantially reduce their overall resource requirements.
Focus Resources. The electronics industry is experiencing greater levels of
competition and more rapid technological change. Many OEMs increasingly are
seeking to focus their resources on activities and technologies which add the
greatest value. By offering comprehensive electronics assembly and related
manufacturing services, Solectron allows OEMs to focus on their own core
competencies such as next-generation product development, sales and marketing.
Access Leading Manufacturing Technology. Electronic products and electronics
manufacturing technology have become increasingly sophisticated and complex,
making it difficult for OEMs to maintain the necessary technological expertise
to manufacture products internally. OEMs are motivated to work with Solectron to
gain access to its expertise in interconnect, test and process technologies.
Improve Inventory Management and Purchasing Power. Electronics industry OEMs are
faced with increasing difficulties in planning, procuring and managing their
inventories efficiently due to frequent design changes, short product
life-cycles, large investments in electronic components, component price
fluctuations and the need to achieve economies of scale in materials
procurement. OEMs can reduce production costs by using Solectron's volume
procurement capabilities. In addition, Solectron's expertise in inventory
management can provide better control over inventory levels and increase the
OEM's return on assets.
Access Worldwide Manufacturing Capabilities. OEMs are increasing their
international activities in an effort to lower costs and access foreign markets.
Solectron with worldwide capabilities is able to offer such OEMs a variety of
manufacturing location options to better address their objectives including cost
containment, compliance with local content regulations, and the elimination of
expensive freight costs, tariffs and time-consuming customs clearances.
Strategy
Solectron's goal is to offer its customers significant competitive advantages of
electronics outsourcing, such as access to design and product improvement,
advanced manufacturing technologies, reduced overall cost, shortened product
time-to-market, effective asset utilization, and refined end-of-life product
support services. To achieve this goal, Solectron emphasizes the following key
elements:
Quality. Solectron believes that product quality is a critical success factor in
the electronics manufacturing market. We strive for continuous improvement of
our processes and have adopted a number of quality improvement and measurement
techniques to monitor our performance. We have received numerous superior
service and quality awards, including:
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- - Malcolm Baldrige National Quality Award in 1991 and again in 1997;
- - Ranked No. 3 World's Best Performing Information Technology 100 Listing by
Business Week in 1999;
- - One of the World's 100 Best Managed Companies named by Industry Week
in 1999;
- - North Carolina National Team Excellence Award in 1999;
- - North Carolina Charlotte-Mecklenburg Utility Award in 1999;
- - Arc of Washington State's Employer of the Year Award in 1999;
- - Mexico Jalisco State Quality Award in 1999;
- - Best Manufacturing Plant in North America Award from Industry Week in
1998;
- - Washington State Quality Award of Merit in 1998; and
- - Other numerous awards from our customers.
All of our manufacturing facilities are certified under ISO-9000 standards which
are international quality standards for design, manufacturing and distribution
management systems.
Partnerships. An important element of Solectron's strategy is to establish
partnerships with major and emerging OEM leaders in diverse segments across the
electronics industry. Our customer base consists of leaders in industry segments
such as networking, telecommunications, workstations, personal computers,
computer peripherals, instrumentation, semiconductor equipment and avionics. Due
to the costs inherent in supporting customer relationships, we focus our efforts
on customers with high potential for long-term business partnerships. Our goal
is to deliver a total product life cycle solution to our customers. We offer
OEMs NPI management which includes design and layout, concurrent engineering,
test development and prototype engineering. We continue the cycle to provide
solutions in manufacturing and distribution including just-in-time delivery on
low- to medium-volume turnkey, price-sensitive and high-volume production, and
projects that require more value-added services. Additionally, we serve OEMs
that need end-of-life services such as product repair and warranty services.
Turnkey Capabilities. Another element of Solectron's strategy is to provide a
complete range of manufacturing management and value-added services, including
materials management, board design, concurrent engineering, assembly of complex
printed circuit boards and other electronic assemblies, test engineering,
software manufacturing, accessory packaging and post-manufacturing services. We
believe that as manufacturing technologies become more complex and as product
life-cycles shorten, OEMs will increasingly contract for manufacturing on a
turnkey basis as they seek to reduce their products' time-to-market, capital
asset and inventory costs. A substantial portion of our revenue is from our
turnkey business. We believe that our ability to manage and support large
turnkey projects is a critical success factor. In addition, we believe that due
to the difficulty and long lead-time required to change manufacturers, turnkey
projects generally increase an OEM's dependence resulting in greater stability
of our customer base and in closer working relationships. We also have been
successful in establishing sole source positions for certain products with many
of our customers.
Advanced Manufacturing Process Technology. Solectron intends to continue to
offer its customers the most advanced manufacturing process technologies,
including surface mount technology (SMT) and ball-grid array (BGA) assembly as
well as testing and emerging interconnect technologies. We have developed
substantial SMT expertise including advanced, vision-based component placement
equipment. We believe that the cost of SMT assembly facilities and the required
technical capability to operate a high-yield SMT operation are significant
competitive factors in the market for electronic assembly. We also have the
capability to manufacture using tape-automated-bonding, chip-on-substrate and
other more advanced manufacturing processes.
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Diverse Geographic Operations. An important element of Solectron's strategy is
to establish production facilities in areas of high customer density or where
manufacturing efficiencies can be achieved. We currently have operations
throughout the Americas, Europe and Asia. We believe that our facilities in
these diverse geographic locations enable us to better address our customers'
requirements such as cost containment, compliance with local content
regulations, and the elimination of expensive freight costs, tariffs and
time-consuming customs clearances. We intend to expand our operations
continually as necessary to serve our existing customers and to develop new
business.
International Manufacturing Capability
As Solectron manages the existing operations and expands geographically, it may
experience certain inefficiencies from the management of geographically
dispersed operations. Additionally, Solectron's results of operations will be
adversely affected if these new facilities do not achieve revenue growth
sufficient to offset increased expenditures associated with geographic
expansion.
In fiscal 1999, approximately 36% of Solectron's sales were from operations
outside of the United States. As a result of continuous customer demand
overseas, we expect foreign sales to increase. Our foreign sales and operations
are subject to risks of doing business abroad, including fluctuations in the
value of currency, export duties, import controls and trade barriers (including
quotas), restrictions on the transfer of funds, associate turnover, work
stoppages, longer payment cycles, greater difficulty in accounts receivable
collection, burdens of complying with a wide variety of foreign laws and, in
certain parts of the world, political instability. While, to date, these factors
have not materially affected Solectron's results of operations, we cannot assure
that there will not be such an impact in the future.
Americas
Western United States. Solectron's headquarters and largest manufacturing
operations are located in Silicon Valley, principally in Milpitas, California,
in the midst of one of the largest concentrations of OEM electronics
manufacturers. This facility offers a full range of services that span the
product life cycle including design consultation, prototyping, NPI management,
PCB assembly, build-to-order, configure-to-order, complex systems assembly, and
end-of-life support services. With our recent asset acquisition in Sunnyvale,
California from Trimble Navigation Limited, we have extended our manufacturing
capacities to Global Positioning System (GPS) and related radio frequency (RF)
technology products. Additionally, we have a smaller site strategically located
in Everett, Washington to help serve our customers in the Pacific Northwest and
elsewhere.
Southwestern United States. Solectron believes that its facility in Austin,
Texas, is situated in a geographic region with strong growth of electronics OEMs
that will allow Solectron to better service its existing customers and to
attract new ones. This facility was expanding and was further expanded by an
asset acquisition of IBM's Electronic Card Assembly and Test in February 1999.
The site offers a wide range of services across the entire product life cycle
including PCB design, NPI management, complex PCB and systems assembly,
distribution, and support services.
Eastern United States. Solectron's Eastern United States facility is located in
Westborough, Massachusetts, near Boston, in the center of a geographic region
with a large concentration of electronics OEMs. We have recently expanded this
facility's manufacturing capacity. This facility provides a full range of
integrated solutions across the entire product life cycle from pre-production
planning and design to manufacturing, to end-of-life product service and
support. This site also includes a NPI center that specializes in quick-
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turn prototype services. These two groups work together to shorten customers'
product development and manufacturing cycles, ultimately reducing their
products' time-to-market.
Southeastern United States. Solectron's Southeastern United States operations
are located in Charlotte, North Carolina; Columbia, South Carolina; and Suwanee,
Georgia. Its operation in Charlotte, North Carolina, which was expanded by the
acquisition of IBM's Electronic Card Assembly and Test manufacturing assets,
specializes in low- to medium-volume, highly complex PCB assembly, systems
assembly and end-of-life support services. This site also has a NPI center. In
addition, the Charlotte site provides printed circuit boards to the Columbia,
South Carolina site, which specializes in customized systems design services and
complex computer systems assembly. The manufacturing facility in Columbia was
recently expanded to meet growing customer demand.
Solectron previously had facilities in Duluth, Georgia, acquired from NCR
Corporation and in Braselton, Georgia, acquired from Mitsubishi Consumer
Electronics America, Inc. In September 1999, these two operations were merged
into a new facility in Suwanee, Georgia, to serve as our East Coast center for
medium- to low-complexity, medium- to high-volume systems assembly and NPI
services for PC, server, workstation, telecommunication and networking equipment
customers. This facility is part of our build-to-order systems division. We
believe that these facilities allow us to better pursue new business
opportunities with new and existing customers, in particular, because of
Charlotte's status as a transportation hub and its relative proximity to major
Southeastern United States electronics markets.
Solectron's subsidiary, Force Computers, Inc. (Force), is a leading designer and
supplier of open, scalable system- and board-level embedded computer platforms
for the communications, industrial and command and control markets. Unlike
general purpose computers, embedded computers are incorporated into systems and
equipment to perform a single or limited number of critical control functions
and are generally integrated into larger automated systems. A processor
independent company, Force delivers products based on SPARC, Pentium, PowerPC
and 68K technologies and has expertise in system design, board design, system
integration and manufacturing. Force also provides support services, such as
system configurations, application consulting and training to its customers.
Force further enhances our array of services, particularly in pre-manufacturing
areas.
To expand Solectron's technology and design service capabilities and
infrastructure, Solectron signed a definitive merger agreement with SMART
Modular Technologies, Inc.(SMART) in September 1999. SMART is a designer and
manufacturer of memory modules and memory cards, embedded computers and I/O
products. The proposed merger is expected to be completed prior to the end of
calendar year 1999, subject to various conditions of closing.
Another subsidiary of Solectron, Fine Pitch Technology, Inc., provides extensive
prototype services for electronics OEMs, further enhancing Solectron's ability
to address the needs of design teams who require almost immediate availability
of highly complex prototype assemblies.
Solectron's newly acquired subsidiary, Sequel Inc., specializes in notebook
computer and liquid crystal display (LCD) repair services and support. This
subsidiary has a hub facility in Memphis, Tennessee, which offers integrated
call management, remote failure diagnostics, air express dispatch, systems
repair, component level repair, configuration and upgrades, returns processing
and administration, refurbishment and redistribution services.
Mexico. Solectron's site in Guadalajara, Mexico began providing a full range of
PCB assembly and systems build manufacturing services in the first quarter
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of fiscal 1998. This site offers our customers a low-cost and high-volume
manufacturing center for PCB assembly, build-to-order and configure-to-order
systems assembly for the Americas.
Brazil. Solectron's operation in Sao Paulo, Brazil, was acquired from Ericsson
Telecom AB's Business Area Infocom Systems (Ericsson) in October 1997. This site
provides a full range of capabilities across the product life cycle including
NPI management, systems build capabilities, engineering, PCB and flex assembly,
custom packaging and distribution services, and factory repair support services
primarily to multinational customers seeking access to the Latin American
market. The manufacturing facility in Brazil was recently expanded as a result
of demand growth for electronics manufacturing services in Brazil.
Europe
Solectron has manufacturing operations in Bordeaux, France; Herrenberg, Germany;
Dublin, Ireland; Timisoara, Romania; and Dunfermline, Scotland. Each of these
sites provides a full range of manufacturing capabilities to a multinational
customer base. In addition, each site is developing an area of specific
expertise to offer to all customers. The Germany site offers design support,
prototype services and low-volume, high-mix manufacturing services. In addition,
Force's European headquarters are located in Munich, Germany. The Romania site
has recently been expanded to serve as Solectron's full-service, high-volume,
low-cost manufacturing hub for its rapidly growing European customer base. The
Scotland site specializes in building PCB assemblies, subassemblies and systems
for multinational customers in the European market. In September 1999, we
further expanded our presence in Scotland through an asset acquisition of IBM's
Netfinity servers operations in Greenock, Scotland. To support the IBM design
team, we are establishing a new full-service NPI center in Port Glasgow,
Scotland. In addition, we have NPI centers in France and Sweden which offer a
full range of electronics product development services, including design and
layout, concurrent engineering, test development and prototype engineering.
In November 1999, we announced the signing of memoranda of understanding for
Solectron to acquire the complex systems manufacturing assets of Ericsson's
telecommunications infrastructure equipment operations in Longuenesse, France,
and Ostersund, Sweden. As part of the agreement, we will provide a complete
range of integrated supply-chain solutions to Ericsson. This includes
supply-base management, early prototyping, NPI management, complex PCB assembly,
configure-to-order and build-to-order complex systems assembly and Global
Services. The transaction is expected to be completed by the first quarter of
calendar year 2000. Completion of the transaction is subject to the applicable
government approvals and various conditions of closing.
Asia
Solectron's Southeast Asia manufacturing operations are located in Penang and
Johor, Malaysia. The operations were established to better serve the needs of
OEMs requiring price-sensitive, high-volume production capabilities and to
provide more efficient manufacturing services to customers located in Southeast
Asia. The facilities currently provide electronics assembly, materials
management and other services to customers located in Malaysia, Singapore,
Japan, the United States and other locations. Our facility in Suzhou, China
began operations in fiscal 1997. This facility currently provides a full range
of low-cost high volume manufacturing services. In April 1999, Solectron
established a New Product Introduction center just outside of Tokyo, Japan,
providing a complete range of electronics pre-manufacturing services which
include design and layout, testing capabilities, prototype development, and
concurrent and component engineering.
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New Product Introduction Centers
Solectron, a global supply-chain facilitator, has NPI centers geographically, in
countries including the U.S., France, Sweden, Germany, Malaysia, and Japan.
These NPI centers offer a full range of electronics product development
services, including design and layout, concurrent engineering, test development
and prototype engineering. We believe our NPI services will shorten customers'
product development cycles by offering full design and development services to
compliment our customers' in-house capabilities. We partner with our customers
as early as possible in the new product development process to optimize their
products' design for volume manufacturing. To enhance our product development
capacities, we are establishing a new, full-service NPI center in Port Glasgow,
Scotland.
Global Services
Our services don't stop at the end of the assembly line. We offer a full range
of integrated solutions from the time the product is designed until it is
removed from the market. These services include product repair, upgrades,
remanufacturing and maintenance through factory and fast-hub service centers
located around the world; help-desk support through customer call centers for
end-users; logistics and parts management; returns processing; warehousing;
engineering change management; and end-of-life manufacturing. These services
will give our customers improved speed from the service pipeline by Solectron
taking direct receipt responsibility for returns from the end user and making
sure that various buffer stock and inventory mechanisms are established. These
services also minimize shipping costs and time by handling repairs at our
various international locations. In addition, our data collection system can
provide invaluable information to analyze product design reliability. As a
result, the OEMs can focus their efforts on developing next-generation products.
Our recently acquired subsidiary, Sequel Inc., specializes in notebook computer
and liquid crystal display (LCD) repair services and support. This subsidiary is
headquartered in San Jose, California, and has a hub facility in Memphis,
Tennessee, which offers integrated call management, remote failure diagnostics,
air express dispatch, systems repair, component level repair, configuration and
upgrades, returns processing and administration, refurbishment and
redistribution services. In November 1999, we acquired the repair operations of
IBM's NULOGIX Technical Services, Inc. in Vaughan, Canada. NULOGIX provides a
complete range of technology repair, remanufacturing and refurbishment services
for a large extent of electronics products. As a result of this transaction, we
will now be able to provide the Canadian market a full range of value-added
support service solutions. These services include: product repair, upgrades,
remanufacturing and maintenance through factory and fast-hub service centers
located around the world; help-desk support through customer call-in centers for
end-users; logistics and parts management; returns processing; warehousing;
engineering change management and end-of-life manufacturing.
Alliances
In October 1998, Solectron signed a definitive agreement with Ingram Micro Inc.
under which the two companies entered into a strategic alliance to provide
global build-to-order and configure-to-order assembly services for personal
computers, servers and related products in the United States, Canada, Europe,
Asia and Latin America. The alliance is managed by both companies under a joint
management matrix that includes a sales and marketing staff, program management,
materials management, information technology resources and test and process
engineers and, in most cases, uses existing facilities, systems and personnel.
Shipments to customers under the arrangement started in April 1999.
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In October 1999, Solectron signed a definitive agreement with Acer, Inc. (Acer),
a core unit of the Acer Group, the world's third largest PC manufacturer, to
form a strategic alliance to provide global design, manufacturing and service
solutions for OEM-branded personal computers, servers and workstations. As a
result of this alliance, it is expected that customers will be able to access
the extensive technology, motherboard and system level design services, and
global supply-base, manufacturing, distribution, logistics and Global Services
operations of both companies to further streamline their global supply chain.
Solectron and Acer plan to leverage their combined resources, including
facilities, systems and personnel to provide the industry's first fully
integrated, global and optimized, end-to-end design, manufacturing and services
solution. Both companies will manage this alliance under a joint management
matrix.
Manufacturing
To achieve excellence in manufacturing, Solectron combines advanced
manufacturing technology, such as computer-aided manufacturing and testing, with
manufacturing techniques including just-in-time manufacturing, total quality
management, statistical process control and continuous flow manufacturing.
Just-in-time manufacturing is a production technique which minimizes
work-in-process inventory and manufacturing cycle time while enabling Solectron
to deliver products to customers in the quantities and time frame required.
Total quality management is a management philosophy which seeks to impart high
levels of quality in every operation of Solectron and is accomplished by the
setting of quality objectives for every operation, tracking performance against
those objectives, identifying work flow and policy changes required to achieve
higher quality levels and a commitment by executive management to support
changes required to deliver higher quality. Statistical process control is a set
of analytical and problem-solving techniques based on statistics and process
capability measurements through which we can track process inputs and resulting
quality and determine whether a process is operating within specified limits.
The goal is to reduce variability in the process, as well as eliminate
deviations that contribute to quality below the acceptable range of each process
performance standard.
In order to successfully implement these management techniques, Solectron has
developed the ability to collect and utilize large amounts of data in a timely
manner. We believe this ability is critical to a successful assembly operation
and represents a significant competitive factor, especially in large turnkey
projects. To manage this data, we use sophisticated computer systems for
material resource planning, shop floor control, work-in-process tracking,
statistical process control and activity-based product costing.
Electronics Assembly and Other Services
Solectron's electronics assembly activities consist primarily of the placement
and attachment of electronic and mechanical components on printed circuit boards
and flexible cables. We also assemble higher-level sub-systems and systems
incorporating printed circuit boards and complex electromechanical components,
in some cases manufacturing and packaging products for shipment directly to our
customers' distributors. In addition, we provide other manufacturing services
including refurbishment and remanufacturing. We manufacture on a turnkey basis,
directly procuring some or all of the components necessary for production and on
a consignment basis, where the OEM customer supplies all or some components for
assembly.
In conjunction with our assembly activities, we also provide computer-aided
testing of printed circuit boards, sub-systems and systems, which contributes
significantly to our ability to deliver high quality products on a consistent
basis. We have developed specific strategies and routines to test board and
system level assemblies. In-circuit tests verify that all components have been
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properly inserted and that the electrical circuits are complete. Functional
tests determine if the board or system assembly is performing to customer
specifications. We either design and procure test fixtures and develop our own
test software or utilizes our customers' existing test fixtures and test
software. In addition, we provide environmental stress tests of the board or
system assembly.
We provide turnkey manufacturing management to meet our customers' requirements,
including procurement and materials management and consultation on board design
and manufacturability. Individual customers may select various services from
among our full range of turnkey capabilities.
Procurement and materials management consists of the planning, purchasing,
expediting, warehousing, preparing and financing of the components and materials
required to assemble a printed circuit board or electronic system. OEMs have
increasingly used electronic manufacturing specialists like Solectron to
purchase all or some components directly from component manufacturers or
distributors and to finance and warehouse the components.
Solectron also assists its customers in evaluating board designs for
manufacturability. We evaluate the board design for ease and quality of
manufacture and, when appropriate, recommend design changes to reduce
manufacturing costs or lead times or to increase the quality of finished
assemblies. Board design services consist of the engineering and design
associated with the arrangement and interconnection of specified components on
printed circuit boards to achieve an OEM's desired level of functionality. We
also offer Application Specific Integrated Circuit (ASIC) design services and
our subsidiary, Force Computers, offers product design services for the embedded
computer market.
Sales and Marketing
Sales and marketing at Solectron is an integrated process involving direct
salespersons and project managers, as well as its senior executives. Solectron's
sales resources are directed at multiple management and staff levels within
targeted accounts. We also use independent sales representatives in certain
geographic areas. We receive unsolicited inquiries resulting from advertising
and public relations activities, as well as referrals from current customers.
These opportunities are evaluated against our customer selection criteria and
are assigned to direct salespersons or independent sales representatives, as
appropriate. Historically, we have had substantial recurring sales from existing
customers.
Over 98% of Solectron's net sales during fiscal 1999 were derived from customers
which were also customers during fiscal 1998. Although we seek to diversify our
customer base, a small number of customers currently are responsible for a
significant portion of our net sales.
Solectron's top ten customers accounted for 74% of net sales in fiscal 1999, 69%
of net sales in fiscal 1998, and 66% of net sales in fiscal 1997. Several
customers each accounted for more than 10% of net sales during these years.
Cisco Systems, Inc. accounted for 12% of net sales in fiscal 1999 and 11% of net
sales in fiscal 1998. Hewlett-Packard Company represented 11% of net sales in
fiscal 1999, and 14% of net sales in both fiscal 1998 and 1997. Sun
Microsystems, Inc. accounted for 11% of net sales in fiscal 1998. Nortel
Networks, Inc., formerly Bay Networks, Inc., accounted for 10% of net sales in
fiscal 1997. No other individual customer accounted for more than 10% of
Solectron's net sales in any of these years.
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Backlog
Backlog consists of contracts or purchase orders with delivery dates scheduled
within the next twelve months. At August 31, 1999, Solectron's backlog was
approximately $1.7 billion. The backlog was approximately $1.3 billion at August
31, 1998. Because customers may cancel or reschedule deliveries, backlog is not
a meaningful indicator of future financial results.
Competition
The electronic manufacturing services industry is comprised of a large number of
companies, several of which have achieved substantial market share. Solectron
also faces competition from current and prospective customers that evaluate
Solectron's capabilities against the merits of manufacturing products
internally. We compete with different companies depending on the type of service
or geographic area. Certain of our competitors may have greater manufacturing,
financial, research and development and marketing resources than Solectron. We
believe that the primary basis of competition in our targeted markets is
manufacturing technology, quality, responsiveness, the provision of value-added
services and price. To remain competitive, we 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. We currently may be at a competitive
disadvantage as to price when compared to manufacturers with lower cost
structures, particularly with respect to manufacturers with established
facilities where labor costs are lower.
Associates
As of August 31, 1999, Solectron employed 37,936 associates worldwide, including
10,465 temporary associates. Solectron's international operations employed
20,408 associates.
Patents and Trademarks
Solectron has a number of U.S. patents related to the process and equipment used
in its surface mount technology. Our subsidiary, Force Computers, holds a number
of patents related to Versa Module Eurocard (VME) technology. In addition, as
part of our recent acquisitions of the IBM-ECAT manufacturing assets, we have
access to a number of IBM patents and license rights. We also have registered
trademarks in the United States and many countries throughout the world. These
patents and trademarks are considered valuable to Solectron.
Although Solectron does not believe that its trademarks, manufacturing process,
Force's technology or the IBM patents and license rights to which it has access
infringe on the intellectual property rights of third parties, we cannot assure
that third parties will not assert infringement claims against Solectron in the
future. If such an assertion were to be made, it may become necessary or useful
for us to enter into licensing arrangements or to resolve such an issue through
litigation. However, we cannot assure that such license rights would be
available to Solectron on commercially acceptable terms or that any such
litigation could be resolved favorably. Additionally, such litigation could be
lengthy and costly and could materially harm our financial condition regardless
of the outcome of such litigation.
On June 23, 1999, Solectron was served, along with 87 other companies including
SMART Modular Technologies, Inc., as a defendant in a lawsuit brought by the
Lemelson Medical, Education & Research Foundation. The lawsuit alleges that
Solectron has infringed certain of the plaintiff's patents relating to machine
vision and bar-code technology. Solectron believes it has meritorious defenses
to these allegations and does not expect that this litigation will result in a
material impact on its financial position or results of operations.
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ITEM 2: PROPERTIES
Solectron's manufacturing facilities are located throughout the Americas, Europe
and Asia. The table below lists the locations and square feet owned or leased
for its major operations.
Square Feet Lease
---------------------- Termination
Location Owned Leased Dates
- -------------------- ---------- ---------- -----------
Americas:
Milpitas, California (1) - 1,522,000 1999 - 2006
San Jose, California - 196,000 2001
Suwanee, Georgia - 496,000 2003
Westborough, Massachusetts - 168,000 2002 - 2004
Charlotte, North Carolina 620,000 243,000 2000 - 2002
Columbia, South Carolina - 208,000 2000
Austin, Texas - 1,142,000 2002 - 2003
Everett, Washington - 179,000 2003
Memphis, Tennessee - 100,000 2000
Vaughan, Canada - 77,000 2006
Guadalajara, Mexico (2) 716,000 - -
Sao Paulo, Brazil 327,000 - -
Europe:
Bordeaux, France 116,000 211,000 2008
Herrenberg, Germany 71,000 40,000 2000
Munich, Germany - 168,000 2002
Dublin, Ireland 42,000 70,000 2004
Timisoara, Romania (3) 200,000 40,000 2000
Dunfermline, Scotland 221,000 8,000 2000
Norrkoping, Sweden - 43,000 2004
Asia:
Suzhou, China 333,000 - -
Johor, Malaysia - 200,000 2000 - 2001
Penang, Malaysia 372,000 60,000 2000 - 2001
(1) Includes facilities located nearby in Fremont and Newark, California.
(2) Includes approximately 37,000 square feet leased to a third party on a
short-term lease.
(3) Facility owned by Solectron is currently under construction at this
location.
Around the world, Solectron is subject to a variety of environmental regulations
relating to the use, storage, discharge and disposal of hazardous chemicals used
during its manufacturing process. Any failure by Solectron to comply with
present and future regulations could subject it to future liabilities or the
suspension of production. In addition, such regulations could restrict
Solectron's ability to expand its facilities or could require Solectron to
acquire costly equipment or to incur other significant expenses to comply with
environmental regulations.
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ITEM 3: LEGAL PROCEEDINGS
On June 23, 1999, Solectron was served, along with 87 other companies including
SMART Modular Technologies, Inc., as a defendant in a lawsuit brought by the
Lemelson Medical, Education & Research Foundation. The lawsuit alleges that
Solectron has infringed certain of the plaintiff's patents relating to machine
vision and bar-code technology. Solectron believes it has meritorious defenses
to these allegations and does not expect that this litigation will result in a
material impact on its financial position or results of operations.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
Executive Officers of Solectron
Solectron's executive officers and their ages as of August 31, 1999 are as
follows:
Name Age Position
- ---------------------------- ------ -------------------------------
Koichi Nishimura, Ph.D. 61 President, Chief Executive
Officer and Chairman of the Board
G. Fred Forsyth 55 Corporate Vice President and
President of Solectron Americas
David Kynaston 58 Corporate Vice President and
President of Solectron Europe
Daniel Perez 48 Corporate Vice President and
Chief Administrative Officer
Ken K. N. Tsai 57 Senior Vice President and
President of Solectron Asia
Susan S. Wang 48 Senior Vice President, Chief
Financial Officer and Secretary
Walter W. Wilson 55 Senior Vice President, Business
Integration and Information Technology
Saeed Zohouri, Ph.D. 48 Senior Vice President and
Chief Operating Officer
Dr. Koichi Nishimura has served as Chairman of the Board since 1996, Chief
Executive Officer since 1992 and President since 1990. He was Co-Chief Executive
Officer from 1991 to 1992 and Chief Operating Officer from 1988 to 1991. He was
also a director of the Board since 1991 before serving as Chairman of the Board.
From 1964 to 1988, Dr. Nishimura was with International Business Machines
Corporation (IBM) in various technology and management positions. Dr. Nishimura
serves as a director on the boards of Merix Corporation, the Center for Quality
Management and the Santa Fe Institute. He also serves on the Baan Company
supervisory board, the advisory board of Santa Clara University's Leavey School
of Business, and the board of the Santa Clara Valley Manufacturing Group. Dr.
Nishimura serves as a member of the Board of Directors in the capacity of Vice
President for the Foundation for the Malcolm Baldrige National Quality Award,
Inc.
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Mr. G. Fred Forsyth has served as Corporate Vice President and President of
Solectron Americas since July 1999. He joined Solectron in March 1999 as
Corporate Vice President and President of Systems Engineering and Services
Division. Prior to joining Solectron, Mr. Forsyth was President of the
Professional Products Division at Iomega Corporation from August 1997 to March
1999. He was Senior Vice President and General Manager of Power Macintosh Group
from June 1996 to April 1997 and Senior Vice President Worldwide Operations from
June 1993 to June 1996. Mr. Forsyth also held a variety of management positions
at Digital Equipment Corporation and General Electric Company. Mr. Forsyth is a
director of Genus Corporation, a semiconductor equipment manufacturer.
Mr. David Kynaston has served as Corporate Vice President and President of
Solectron Europe since he joined Solectron in 1996. Mr. Kynaston worked for
Philips Electronics for the previous 15 years in various capacities, including
Managing Director of Philips Mullard Ltd. subsidiary, Managing Director of the
Business Communications Systems Division and most recently, Managing Director of
the Private Mobile Radio Division. Prior to joining Philips Electronics, Mr.
Kynaston held senior technical management positions at EMI Medical Ltd. and
Cambridge Scientific Instruments Ltd.
Mr. Daniel Perez has served as Corporate Vice President and Chief Administrative
Officer since 1996. Mr. Perez joined Solectron in 1991 as Director of Materials,
and was soon named Vice President of Materials for Solectron's California
facility. He became the General Manager of Solectron's Fremont, California,
printed circuit board assembly operation in 1995 and assumed his current role in
1996. Prior to joining Solectron, Mr. Perez spent 14 years with IBM Corporation
in various management positions in corporate administration, manufacturing,
materials planning, and acquisition and control. Most recently, he was Senior
Manager for Supply and Demand at IBM's disk storage business. Mr. Perez also
serves as a director of the Tech Museum of Innovation, the California State
Center for Quality Education and Development, the Mexican Heritage Corporation,
the Center for Training and Careers in San Jose, California, and El Teatro
Campesino.
Mr. Ken K. N. Tsai has served as Senior Vice President and President of
Solectron Asia since May 1995. Mr. Tsai was Vice President of Solectron from
1990 to 1995. He served as Director of Manufacturing for Solectron from 1989 to
1990 and was in various manufacturing and other positions from 1984 to 1989.
Prior to joining Solectron, Mr. Tsai served in various management and business
planning positions at American Cyanamid Company from 1968 to 1984.
Ms. Susan S. Wang has served as Senior Vice President and Chief Financial
Officer of Solectron since 1990 and as Secretary since 1992. She was Vice
President, Finance and Chief Financial Officer of Solectron from 1986 to 1990
and Director of Finance of Solectron from 1984 to 1986. Prior to joining
Solectron, Ms. Wang held various accounting and finance positions with Xerox
Corporation. Ms. Wang also held accounting and auditing positions with Westvaco
Corp. and Price Waterhouse & Co. She is a Certified Public Accountant.
Mr. Walter W. Wilson has served as Senior Vice President, Business Integration
and Information Technology since June 1999. He was President, Solectron Americas
from April 1997 to May 1999; President, Solectron North America from September
1995 to March 1997; President Solectron California Corporation from March 1992
to February 1996; and Senior Vice President of Solectron since 1990. From 1989
to 1990, he served as an operational Vice President of Solectron. Prior to
joining Solectron, Mr. Wilson held various management positions with IBM in
manufacturing and product development from 1965 to 1989. Mr. Wilson also serves
as a director on the board of Asyst Technologies and Mylex Corporation.
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Dr. Saeed Zohouri has served as Senior Vice President and Chief Operating
Officer of Solectron since June 1999. He was Chief Technology Officer from 1994
to May 1999; President of Solectron California Corporation from March 1996 to
August 1998; and President, Solectron North America since August 1998. Dr.
Zohouri joined Solectron in 1980 and held various management positions including
Director of Technology. His prior experience includes teaching chemistry at a
major international university.
There is no family relationship among any of the foregoing individuals.
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PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Common Stock Information
The following table sets forth the quarterly high and low per share sales prices
of Solectron's common stock for the two-year period ended August 31, 1999, as
quoted on the New York Stock Exchange under the symbol SLR.
High Low
-------- --------
Fiscal 1999
First Quarter 34 11/16 19 13/32
Second Quarter 47 1/8 32 1/2
Third Quarter 57 7/8 40 1/2
Fourth Quarter 78 15/16 52 1/4
Fiscal 1998
First Quarter 23 23/32 16 31/32
Second Quarter 24 13/16 14 7/16
Third Quarter 24 9/32 18 7/32
Fourth Quarter 26 9/16 17 23/32
Solectron has not paid any cash dividends since its inception and does not
intend to pay any cash dividends in the foreseeable future. Additionally, the
covenants to its financing agreements prohibit the payment of cash dividends. As
of August 31, 1999, there were approximately 1,100 stockholders of record based
on data obtained from our transfer agent.
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ITEM 6: SELECTED FINANCIAL DATA
The following selected historical financial information of Solectron has been
derived from the historical consolidated financial statements and should be read
in conjunction with the consolidated financial statements and the notes included
therein.
Five Year Selected Financial Highlights
(In millions, except per share data)
Consolidated Statements of Income Data:
Years Ended August 31,
------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
Net sales $8,391.4 $5,288.3 $3,694.4 $2,817.2 $2,065.6
Operating income 438.9 299.0 236.4 175.4 123.4
Income before
income taxes 432.3 299.0 238.4 173.1 120.5
Net income 293.9 198.8 158.1 114.2 79.5
Basic net income
per share (1) 1.19 0.86 0.71 0.56 0.46
Diluted net income
per share (1) 1.13 0.82 0.69 0.54 0.41
Consolidated Balance Sheet Data:
As of August 31,
------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
Working capital $2,880.9 $1,046.7 $ 931.7 $ 786.4 $ 355.6
Total assets 4,834.7 2,410.5 1,876.4 1,452.2 940.9
Long-term debt 922.6 385.5 385.9 386.9 30.0
Stockholders'equity 2,793.1 1,181.3 919.1 700.6 538.1
(1) All net income per share amounts have been adjusted to reflect the
two-for-one stock split effective February 24, 1999.
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ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain statements contained in the following Management's Discussion and
Analysis of Financial Condition and Results of Operations, including, without
limitation, statements containing the words "believes," "anticipates,"
"estimates," "expects," and words of similar import, constitute forward-looking
statements which involve risks and uncertainties. Solectron's actual results
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those factors set forth
under "Trends and Uncertainties" below.
General
Solectron's net sales are derived from sales to electronics original equipment
manufacturers (OEMs). The majority of our customers compete in the networking,
data and voice communications, workstation, personal computer and computer
peripheral segments of the electronics industry. We provide integrated
supply-chain solutions that span the entire product life cycle - from
technology, to manufacturing, to global services. We offer our customers
competitive outsourcing advantages such as access to advanced manufacturing
technologies, shortened time-to-market, reduced total cost of ownership and more
effective asset utilization. A discussion of some of the potential fluctuations
in operating results is included under "Trends and Uncertainties."
Solectron has 23 manufacturing operations throughout the world, including the
Americas, Europe and Asia. We have program offices in Japan, Israel, Sweden,
Taiwan and the United Kingdom. Our subsidiaries, Force Computers (Force), Fine
Pitch Technologies (Fine Pitch) and Sequel, Inc. (Sequel), are all headquartered
in San Jose, California. Force's European headquarters and a significant portion
of its operations are located in Munich, Germany. In addition to its
headquarters' locations, Force has sales support offices in various locations in
the United States and internationally.
During 1997, Solectron established a strategic, global manufacturing partnership
with Ericsson Telecom AB's Business Area Infocom Systems (Ericsson). We
established a New Product Introduction (NPI) center in Sweden and transferred
production from certain Ericsson plants worldwide to our manufacturing sites
around the world. In October 1997, we acquired certain assets, primarily
equipment and inventory, of Ericsson's printed circuit board (PCB) assembly
operation located in Sao Paulo, Brazil.
In April 1998, Solectron acquired NCR Corporation's (NCR) manufacturing assets
in Columbia, South Carolina; Duluth, Georgia; and Dublin, Ireland. Under the
terms of the agreement, NCR will outsource the manufacturing of certain computer
components to Solectron for at least five years. The site in Duluth was
subsequently merged with the Braselton, Georgia, site into a newly constructed
manufacturing facility in Suwanee, Georgia, in October 1999. The Braselton site
was originally acquired from Mitsubishi in October 1998.
In June 1998, Solectron acquired International Business Machines Corporation's
(IBM) Electronic Card Assembly and Test (ECAT) manufacturing assets in
Charlotte, North Carolina, and non-exclusive rights to certain IBM intellectual
property. Under the terms of the agreement, we will provide PCB assembly
services to IBM in North America for the next three years. In addition, IBM has
made available to Solectron intellectual property rights covering a wide
spectrum of technologies and capabilities. IBM also provided to Solectron
failure analysis and characterization tools for process development and
manufacturing, including fault detection and isolation.
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<PAGE>
In October 1998, Solectron acquired the wireless telephone manufacturing assets
of Mitsubishi Consumer Electronics America, Inc.'s (MCEA) Cellular Mobile
Telephone (CMT) division in Braselton, Georgia. MCEA was a subsidiary of
Mitsubishi Electric Corporation (Mitsubishi). Under the terms of the agreement,
we will provide MCEA-CMT with a full range of manufacturing services for five
years, including NPI management, PCB assembly and full systems assembly for
MCEA's branded and private-label cellular products sold in North America. In
October 1999, we combined the operations of Braselton and Duluth into a newly
constructed manufacturing facility in Suwanee, Georgia.
Also in October 1998, Solectron signed a definitive agreement with Ingram Micro
Inc. under which the two companies entered into a strategic alliance to provide
global build-to-order and configure-to-order assembly services for personal
computers, servers and related products in the United States, Canada, Europe,
Asia and Latin America. The alliance is managed by both companies under a joint
management matrix that includes a sales and marketing staff, program management,
materials management, information technology resources, test and process
engineers, and in most cases, uses existing facilities, systems and personnel.
Shipments to customers under the arrangement began in April 1999.
In February 1999, Solectron acquired IBM's Electronic Card Assembly and Test
(ECAT) manufacturing assets in Austin, Texas, and non-exclusive rights to
certain IBM intellectual property. Under the terms of the agreement, for the
next three years we will provide PCB assembly for motherboards used in IBM's
mobile computer products manufactured worldwide. This includes physical design,
early prototyping, new product launch, PCB assembly and test, volume production,
end-of-life support, field return services and life cycle management. We will
also provide IBM's worldwide design teams a full range of integrated NPI
services which involve pre-manufacturing support, such as design and layout,
component and concurrent engineering, test development, prototype, procurement
and assembly.
In July 1999, Solectron issued common stock to acquire Sequel, Inc. (Sequel).
Sequel was a privately held corporation specializing in notebook computer and
liquid crystal display repair service and support. We have assumed
responsibility for Sequel's business operations in San Jose, California;
Memphis, Tennessee; and Reading, United Kingdom. We have also assumed Sequel's
ownership in joint-venture operations in Japan and Taiwan. The acquisition is
expected to enable us to expand our global support services capabilities by
adding quick-turn service operations, customer service centers and help-desk
support for the end-users of Solectron-built products.
In August 1999, Solectron acquired the manufacturing assets of Trimble
Navigation Limited (Trimble) in Sunnyvale, California, and assumed full
manufacturing responsibility of Trimble's Global Positioning System (GPS) and
related radio frequency (RF) technology products for the next three years.
Trimble is a leader in RF products enabled by GPS technology. We also acquired
certain intellectual property rights related to RF technology. Under the terms
of the agreement, we will provide Trimble a full range of integrated services
across the entire product life cycle including design consultation, prototyping,
NPI management, and volume PCB and systems assembly.
In September 1999, Solectron acquired the manufacturing assets of IBM's
Netfinity server operations in Greenock, Scotland. In addition, we acquired
certain IBM intellectual property rights included in the design and manufacture
of PC server motherboards. Under the terms of the agreement, we assumed NPI and
manufacturing responsibility for the PCB assemblies used in IBM's Netfinity
server lines which were formerly manufactured at IBM's Greenock operations. We
will provide IBM full-service NPI management which includes a full range of
premanufacturing services, specifically component and concurrent engineering,
test development, prototype, procurement and assembly. We will also provide to
IBM for the next three years fully integrated PCB assembly services including
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<PAGE>
early prototyping, new product launch, assembly and test, volume production,
end-of-life support and life cycle management. The volume PCB assembly services
will be transferred from IBM's Greenock facility to our existing global
manufacturing operations. In addition, we are establishing a new, full-service
NPI center in Port Glasgow, Scotland, to support the IBM design teams.
Also in September 1999, Solectron signed a definitive merger agreement with
SMART Modular Technologies, Inc. (SMART) to exchange approximately 23 million
shares of Solectron common stock for all of the outstanding common stock and
stock options of SMART. The transaction was valued at approximately $1.8 billion
based on Solectron's closing sales price on the last full trading day before the
public announcement of the proposed merger. SMART is a designer and manufacturer
of memory modules and memory cards, embedded computers, and I/O products. The
acquisition is another step in enabling Solectron to expand its service
capabilities and infrastructure as it continues to transform itself into a
global supply-chain facilitator. We will be gaining a manufacturing presence in
Aguada, Puerto Rico, and additional manufacturing capacity through SMART's
facilities in Fremont, California; Penang, Malaysia; and East Kilbride,
Scotland. In addition, we will gain design centers in Fremont, California;
Bangalore, India; Boston, Massachusetts; and Ayr, Scotland. Solectron and SMART
expect to complete the merger by the end of calendar year 1999. Completion of
the merger is subject to the approval of SMART's shareholders, applicable
government approvals and various conditions of closing.
In October 1999, Solectron signed a definitive agreement with Acer, Inc. (Acer),
a core unit of the Acer Group, the world's third-largest PC manufacturer, to
form a strategic alliance to provide global design, manufacturing and service
solutions for OEM-branded personal computers, servers and workstations. As a
result of the alliance, it is expected that customers will be able to access the
extensive technology, motherboard and system-level design services, and global
supply-base, manufacturing, distribution, logistics and Global Services
operations of both companies to further streamline their global supply chain.
Solectron and Acer plan to leverage their combined resources, including
facilities, systems and personnel, to provide the industry's first fully
integrated, global and optimized end-to-end design, manufacturing and services
solution. The companies will manage this alliance under a joint management
matrix.
In November 1999, Solectron acquired NULOGIX Technical Services, Inc. (NULOGIX),
a wholly owned subsidiary of IBM Canada, in its entirety. NULOGIX is located in
Vaughan, Canada, and specializes in repair, remanufacturing and refurbishment.
With this acquisition, we will be able to provide the Canadian market a full
range of value-added global service solutions. These services include product
repair, upgrades, remanufacturing and maintenance through factory and fast-hub
service centers located around the world; help-desk support through customer
call centers for end-users; logistics and parts management; returns processing;
warehousing; engineering change management; and end-of-life manufacturing.
Also in November 1999, Solectron announced the signing of memoranda of
understanding for Solectron to acquire the complex systems manufacturing assets
of Ericsson's telecommunications infrastructure equipment operations in
Longuenesse, France, and Ostersund, Sweden. As part of the agreement, Solectron
will provide a complete range of integrated supply-chain solutions to Ericsson.
This includes supply-base management, early prototyping, NPI management, complex
PCB assembly, configure-to-order and build-to-order complex systems assembly,
and global services. The transaction is expected to be completed by the first
quarter of calendar year 2000. Completion of the transaction is subject to
applicable government approvals and various conditions of closing.
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Results of Operations
The electronics industry is subject to rapid technological change, product
obsolescence and price competition. These and other factors affecting the
electronics industry, or any of Solectron's major customers in particular, could
materially harm Solectron's results of operations. See "Trends and
Uncertainties" for factors relating to possible fluctuation of operating results
and our competitors.
The following table sets forth, for the periods indicated, certain items in the
Consolidated Statements of Income as a percentage of net sales. The financial
information and the discussion below should be read in conjunction with the
Consolidated Financial Statements and Notes thereto.
Years Ended August 31,
-----------------------------
1999 1998 1997
----- ----- -----
Net sales 100.0% 100.0% 100.0%
Cost of sales 90.7 89.8 88.4
----- ----- -----
Gross profit 9.3 10.2 11.6
Operating expenses:
Selling, general and administrative 3.7 4.1 4.7
Research and development 0.4 0.4 0.4
Acquisition costs - - 0.1
----- ----- -----
Operating income 5.2 5.7 6.4
Net interest income (expense) (0.1) 0.0 0.1
----- ----- -----
Income before income taxes 5.1 5.7 6.5
Income taxes 1.6 1.9 2.2
----- ----- -----
Net income 3.5% 3.8% 4.3%
===== ===== =====
Net Sales
Solectron's net sales have increased significantly in each of the past several
years, reflecting the growing trend toward outsourcing within the electronics
industry. For the year ended August 31, 1999, net sales grew to $8.4 billion, an
increase of 58.7% over fiscal 1998 net sales. Fiscal 1998 net sales of $5.3
billion were 43.1% greater than fiscal 1997. The sales growth in fiscal 1999
compared to fiscal 1998 was attributable to significant sales volume increases
from our worldwide customers and from our acquisitions. The sales growth in
fiscal 1998 over fiscal 1997 was primarily due to significant increases in sales
volume from both existing and new customers worldwide, including the completion
of the transfer of production from certain Ericsson plants to various Solectron
locations around the world. Net sales at Solectron's international sites, as a
percentage of consolidated net sales, have grown over the last three fiscal
years. International locations contributed 36% of consolidated net sales in
fiscal 1999, compared to 34% in fiscal 1998 and 27% in fiscal 1997.
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Americas - Within the Americas, the sales growth in fiscal 1999 was primarily
due to demand increases and acquisitions of assets from Ericsson, NCR, IBM ECAT
and Mitsubishi during fiscal 1999 and 1998. Sales from the acquisition of IBM
ECAT in Austin, Texas, were recognized beginning in March 1999 because the Texas
site consistently reports its results one month in arrears. In addition, the
Mexico site was among the largest contributors due to the strong demand growth
in fiscal 1999 as compared to fiscal 1998. The Milpitas, California, site also
experienced sales growth despite the planned transfer of personal computer PCB
programs and computer peripherals systems assembly programs to Mexico and
networking business to Penang. The sales growth from fiscal 1997 to fiscal 1998
was attributable to start-up and major new programs at the Texas and
Massachusetts sites and the addition of new sites in Mexico and Brazil in fiscal
1998. Additionally, the acquired sites from NCR and IBM ECAT in Charlotte
contributed incremental net sales to fiscal 1998 as compared to fiscal 1997.
Solectron's operations in Milpitas, California, contributed a substantial
portion of Solectron's net sales and operating income during fiscal 1999, 1998
and 1997. In recent years, management has undertaken deliberate actions to
achieve improved global load balancing by transferring certain projects from the
Milpitas site to other sites worldwide. However, the performance of the Milpitas
operation is expected to continue to be a significant factor in the overall
financial performance of Solectron. Any adverse material change to the customer
base, product mix, efficiency or other attributes of this site could materially
harm Solectron's consolidated results of operations.
Europe - Net sales at all of Solectron's European sites increased in fiscal 1999
over fiscal 1998. The increase was principally due to overall business growth
and increased demand from our telecommunications customers. Net sales from our
European operations in fiscal 1998 increased over fiscal 1997 primarily due to
core business growth and new accounts. Sales growth at the Scotland site was
particularly strong due to the ramp up of major customers' PCB assembly
activities. The new locations in Sweden also contributed to the sales increase
in fiscal 1998 compared to fiscal 1997.
Asia - All Asian sites contributed to the sales increase in fiscal 1999 over
fiscal 1998 primarily due to core business growth. In particular, sales growth
at the Penang, Malaysia, site was attributable to increased demand from personal
computer customers and networking business transferred from Milpitas,
California. The Johor, Malaysia, site also experienced higher product demand.
Net sales from the Asian manufacturing locations increased in fiscal 1998 over
fiscal 1997 primarily as a result of certain projects transferred from the
Milpitas, California, site to meet demand growth. Solectron does not currently
anticipate any future decline in sales, but continues to seek diversification of
our customer base among many countries, market segments and product lines within
market segments.
As a result of Solectron's international sales and facilities, Solectron's
operations are subject to the risks of doing business abroad. While, to date,
these dynamics have not materially harmed Solectron's results of operations, we
cannot assure that there will not be such an impact in the future. See "Trends
and Uncertainties" for factors pertaining to our international sales and
fluctuations in the exchange rates of foreign currency for further discussion of
potential adverse effects in operating results associated with the risks of
doing business abroad.
Net Sales to Major Customers - Several major customers accounted for more than
10% of our net sales in fiscal 1999, 1998 and 1997. The following table lists
these customers and the percentage of net sales attributed to them.
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Years Ended August 31,
-------------------------
1999 1998 1997
------ ------ ------
Cisco Systems, Inc. (Cisco) 12% 11% *
Hewlett-Packard Company (HP) 11% 14% 14%
Sun Microsystems, Inc. (Sun) * 11% *
Nortel Networks, Inc. (formerly
Bay Networks, Inc.) * * 10%
---------------------------
* net sales less than 10%
No other customers accounted for more than 10% of net sales during any of the
years presented.
Solectron's top ten customers accounted for 74% of net sales in fiscal 1999, 69%
of net sales in fiscal 1998 and 66% of net sales in fiscal 1997. We are
dependent upon continued revenues from Cisco, HP, IBM, Sun and our other top ten
customers. We cannot guarantee that these or any other customers will not
increase or decrease as a percentage of consolidated net sales either
individually or as a group. Consequently, any material decrease in sales to
these or other customers could materially harm Solectron's results of
operations.
Solectron believes that its ability to continue achieving growth will depend
upon growth in sales to existing customers for their current and future product
generations, successful marketing to new customers, and future geographic
expansion. Customer contracts can be canceled and volume levels can be changed
or delayed. The timely replacement of delayed, canceled or reduced orders with
new business cannot be assured. In addition, we cannot assure that any of
Solectron's current customers will continue to utilize Solectron's services.
Because of these factors, we cannot assure that Solectron's historical revenue
growth rate will continue. See "Trends and Uncertainties" for a discussion of
certain factors affecting the management of growth, geographic expansion, and
potential fluctuations in sales and results of operations.
Gross Profit
The gross margin percentages were 9.3%, 10.2% and 11.6% for fiscal 1999, 1998
and 1997, respectively. The reduction in fiscal 1999 compared to fiscal 1998
primarily reflects increased sales derived from systems build projects that
generally yield lower margins than PCB assembly, high-volume PCB projects and
green field start-up operations. Solectron's net sales from systems build
projects contributed 21% of net sales in fiscal 1999, 19% of net sales in fiscal
1998 and 10% of net sales in fiscal 1997. In addition, the amortization of
intellectual property resulting from certain acquisitions reduced gross margins.
The decrease in fiscal 1998 from fiscal 1997 was primarily due to a shift toward
higher-volume projects and systems build projects that typically have lower
margins and start-up costs associated with our operations in China and Mexico.
For the foreseeable future, Solectron's gross margin is expected to depend
primarily on product mix, production efficiencies, utilization of manufacturing
capacity, start-up and integration costs of new and acquired businesses, the
percentage of sales derived from systems-build projects, pricing within the
electronics industry, and the cost structure at individual sites. Over time,
gross margins at the individual sites and for Solectron as a whole may continue
to fluctuate. We anticipate that a larger percentage of our sales may be derived
from systems-build projects in future periods. Increases in the systems-build
business, additional costs associated with new projects, and price erosion
within the electronics industry could harm our gross margin.
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Also, while the availability of raw materials fluctuates from time to time and
generally meets our revenue projections for the foreseeable future, component
availability is still subject to lead time and other constraints that could
possibly limit our revenue growth. Because of these factors and others discussed
under "Trends and Uncertainties" below, we cannot assure that Solectron's gross
margin will not fluctuate or decrease in future periods.
Selling, General and Administrative Expenses
In absolute dollars, selling, general and administrative (SG&A) expenses
increased 41.8% in fiscal 1999 over fiscal 1998 and 26.3% in fiscal 1998 over
fiscal 1997. The dollar increase in fiscal 1999 primarily reflects expenses
associated with sales growth including increased human resources costs necessary
to support business infrastructure and further development costs of information
systems, as well as increased costs of acquisition-related activities. The
addition of newly acquired sites in fiscal 1999 from Mitsubishi and IBM ECAT in
Austin, Texas, also contributed to the increase in SG&A expenses. The fiscal
1998 increase was due to investment in infrastructure such as personnel and
related departmental expenses at all manufacturing locations as well as
investment in information systems to support the increased size and complexity
of our business. Additionally, the sites added in fiscal 1998, including Brazil,
NCR and IBM ECAT in Charlotte, North Carolina, contributed to the increase in
SG&A expenses.
As a percentage of net sales, SG&A expenses were 3.7% in fiscal 1999, 4.1% in
fiscal 1998 and 4.7% in fiscal 1997. The primary reason for the fiscal 1999 and
1998 decrease in SG&A expenses as a percentage of net sales is the significant
increase in the sales base, partially offset by the costs associated with
investments in our business infrastructure, information systems and start-up
costs for new sites. We anticipate SG&A expenses will continue to increase in
terms of absolute dollars in the future and may possibly increase as a
percentage of net sales as we continue to develop the infrastructure necessary
to support our current and prospective business.
Research and Development Expenses
With the exception of our Force Computers operation, Solectron's research and
development (R&D) activities have been focused primarily on the development of
prototype and engineering design capabilities, fine pitch interconnecting
technologies (which include ball-grid array, tape-automated bonding, multichip
modules, chip-on-flex, chip-on-board and flip chip), high-reliability
environmental stress test technology and the implementation of environmentally
friendly assembly processes such as VOC-free and no-clean. Force's R&D efforts
are concentrated on new product development and improvement of product designs
through improvements in functionality and the use of microprocessors in embedded
applications.
In absolute dollars, R&D expenses increased 34.9% in fiscal 1999 over fiscal
1998 and 39.3% in fiscal 1998 over fiscal 1997. As a percentage of net sales,
R&D expenses were 0.4% in fiscal 1999, 1998 and 1997. The increases in R&D
expenses were primarily due to Force's focused effort on development and
improvement of its products. We expect that R&D expenses will increase in
absolute dollars in the future and may increase as a percentage of net sales
while Force and the newly acquired IBM sites continue to invest in their R&D
efforts. In addition, certain new R&D projects will be undertaken at some of
Solectron's Asian sites, particularly at the sites in Malaysia because of the
tax holiday. (See "Income Taxes.")
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Acquisition Costs
A one-time charge for acquisition costs of approximately $4.0 million was
incurred in fiscal 1997 as a result of the acquisition of Force Computers in
November 1996.
Net Interest Income (Expense)
Net interest expense was $6.6 million in fiscal 1999 and zero in fiscal 1998.
Net interest income was $2.0 million in fiscal 1997. The net increase in
interest expense in fiscal 1999 over fiscal 1998 was attributable to the
issuance of 4% yield zero-coupon convertible senior notes in January 1999,
partially offset by lesser interest expense from the convertible subordinated
notes which were converted to common stock in March 1999. The interest expense
in fiscal 1999 principally related to the zero-coupon convertible senior notes,
convertible subordinated notes and senior notes. Additionally, the fiscal 1999
interest expense was partially offset by interest income earned on undeployed
cash and short-term investments. In fiscal 1999, we capitalized approximately
$3.2 million of interest expense related to the costs of computer software
developed for internal use and the facility construction projects at the Brazil,
China, Mexico and Romania sites. In fiscal 1998, the net zero interest expense
was primarily due to the interest expense related to the senior notes and
convertible subordinated notes entirely offset by interest income earned on
undeployed cash and short-term investments. We expect to use more of our
undeployed cash during future periods in order to fund anticipated future
growth. See "Trends and Uncertainties" for factors relating to management growth
and potential fluctuations in operating results.
Income Taxes
Income taxes increased to $138.4 million in fiscal 1999 from $100.2 million in
fiscal 1998 and $80.3 million in fiscal 1997, primarily due to increased income
before income taxes. Solectron's effective income tax rate decreased slightly to
32.0% in fiscal 1999 from 33.5% in fiscal 1998 and 33.7% in fiscal 1997.
In general, the effective income tax rate is largely a function of the balance
between income from domestic and international operations. Solectron's
international operations, taken as a whole, have been taxed at a lower rate than
those in the United States, primarily due to the tax holiday granted to
Solectron's sites in Malaysia. The Malaysian tax holiday is effective through
January 31, 2002, subject to some conditions, including certain levels of
research and development expenditures. Solectron has also been granted various
tax holidays in China, which are effective for various terms and are subject to
some conditions.
Recent Accounting Pronouncements
Effective in the first quarter of fiscal 1999, Solectron adopted Statement of
Financial Accounting Standards No. 130 (SFAS No. 130), "Reporting Comprehensive
Income," which requires us to report and display certain information related to
comprehensive income. Comprehensive income includes net income and other
comprehensive income. Other comprehensive income is classified separately into
foreign currency items, minimum pension liability adjustments, and unrealized
gains and losses on certain investments in debt and equity securities. The
adoption of SFAS No. 130 had no impact on Solectron's financial position,
results of operations or cash flows.
Effective in the first quarter of fiscal 1999, Solectron adopted the American
Institute of Certified Public Accountants (AICPA) Statement of Position (SOP)
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 provides guidance on accounting for the costs of
computer software developed or obtained for internal use and for determining
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when specific costs should be capitalized and when they should be expensed. The
impact of adopting SOP 98-1 was not significant to Solectron's financial
position, results of operations or cash flows.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities." SOP 98-5 requires that all start-up costs related to new operations
must be expensed as incurred. In addition, all start-up costs that were
capitalized in the past must be written off when SOP 98-5 is adopted. Solectron
expects that the adoption of SOP 98-5 will not have a material impact on its
financial position, results of operations or cash flows. We will be required to
implement SOP 98-5 in our first quarter of fiscal 2000.
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes methods of accounting for derivative financial instruments and
hedging activities related to those instruments as well as other hedging
activities. Solectron anticipates that the adoption of SFAS No. 133 will not
have a material impact on its financial position, results of operations or cash
flows. Implementation of this standard has recently been delayed by the FASB for
a 12-month period. We will now adopt SFAS No. 133 in our first quarter of fiscal
2001.
Liquidity and Capital Resources
Working capital was $2.9 billion at August 31, 1999, compared to $1.0 billion at
August 31, 1998. A major component of working capital at August 31, 1999,
primarily consisted of undeployed cash from the proceeds of the zero-coupon
convertible senior notes in January 1999 and the common stock offering in August
1999.
During fiscal 1999, we used approximately $125 million of cash and short-term
investments to fund our asset acquisitions including Mitsubishi in Braselton,
Georgia; IBM's ECAT in Austin, Texas; and Trimble in Sunnyvale, California. In
the first quarter of fiscal 2000, we used additional funds for our acquisitions.
As we continue to grow, it is expected that we will require greater amounts of
working capital to support our operations. We believe that our current level of
working capital, together with cash generated from operations and our available
credit facilities, will provide adequate working capital for the foreseeable
future. However, we may need to raise additional funds to finance our rapid
expansion, including establishing new locations or financing additional
acquisitions. We cannot assure that such funds, if needed, will be available on
terms acceptable to us or at all.
Inventory levels fluctuate directly with the volume of Solectron's
manufacturing. Changes or significant fluctuations in product market demands can
cause fluctuations in inventory levels that may result in changes of inventory
turns and liquidity. Historically, we have been able to manage our inventory
levels with regard to these fluctuations. However, should material fluctuations
occur in product demand, we could experience slower turns and reduced liquidity.
The increase in inventory levels at year-end 1999 from year-end 1998 is
substantially a result of overall growth and the greater number of manufacturing
locations at August 31, 1999, compared to August 31, 1998, as each location must
maintain a level of inventory adequate to allow the location to respond to
customer manufacturing requirements.
Cash provided by operating activities was $38 million in fiscal 1999, $150
million in fiscal 1998 and $202 million in fiscal 1997. The decreases in fiscal
1999 and 1998 were primarily due to increased levels of accounts receivable and
inventory, partially offset by increases in net income, depreciation and
amortization, and current liabilities.
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During fiscal 1999, Solectron invested approximately $426 million in capital
expenditures. A large portion of these expenditures related to the purchase of
new equipment, primarily surface mount assembly and test equipment, to meet
current and expected production levels, as well as to replace or upgrade older
equipment that was retired or sold. Significant expenditures were also made for
the acquisition of land and buildings for our new manufacturing sites,
principally in Brazil, Mexico and Romania. We expect capital expenditures in
fiscal 2000 to be in the range of $500 million to $600 million.
In addition to working capital as of August 31, 1999, which included cash and
cash equivalents of $1.3 billion and short-term investments of $363 million,
Solectron has available a $100 million unsecured multicurrency revolving credit
facility that is subject to financial covenants and expires in April 2002. We
also have approximately $86 million in available uncommitted foreign credit
facilities.
"Year 2000" Issues
Solectron has developed a comprehensive program to address the issues associated
with the programming code in existing computer systems as the year 2000
approaches. The Year 2000 problem is pervasive and complex, as computer systems,
manufacturing equipment and industrial control systems will be affected in some
way by the rollover of the two-digit year value to 00. Systems that do not
properly recognize such dates could generate erroneous information or cause a
system to fail. The Year 2000 issue creates risk for us from unforeseen problems
in our systems and from third parties with whom we deal on business transactions
worldwide. Failures of Solectron's and/or third parties' computer systems,
manufacturing equipment and industrial control systems could materially harm our
ability to conduct business.
We have formed a worldwide task force and have implemented a comprehensive
program to analyze our internal systems as well as all external systems
(including, without limitation, vendor, customer and banking systems) upon which
we are dependent, to identify and evaluate any potential Year 2000 issues. This
task force meets regularly and tracks progress against the program, modifying it
as needed to help ensure timely completion. We are committed to achieving Year
2000 compliance; however, because a significant portion of the potential problem
is external to us and therefore outside of our direct control, we cannot assure
that we will be fully Year 2000 compliant. In addition, as full testing of Year
2000 functionality must occur in a simulated environment, we will not be able to
test full system Year 2000 interfaces and capabilities prior to the year 2000.
As of August 31, 1999, we had completed an inventory, assessment, remediation
and testing of internal systems, hardware, software, manufacturing equipment and
embedded chips in industrial control instruments. While we believe that our
testing and evaluation have been entirely comprehensive, we cannot assure that
all systems critical to Year 2000 compliance have been identified, or that the
corrective actions identified will be completely successful.
As of August 31, 1999, we had inventoried every key supplier of goods and
services to us and considered the potential impact on us and our customers of
Year 2000 compliance by these suppliers. Also, we have evaluated the key
suppliers' responses to our mailing surveys and have been auditing these
suppliers. We will continue to disqualify potentially noncompliant sources, look
for alternative sources and requalify new suppliers to help mediate potential
business disruptions. We are also involved with various geographic Year 2000
consortiums worldwide, with the intent to leverage contacts and information for
commonly used suppliers and services such as utility companies. We are a
founding member of the High Tech Consortium (HTC) - Year 2000 & Beyond, which
through collaborative efforts has the goal of ensuring that member companies
address Year 2000 readiness on a coordinated basis. The
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HTC has been addressing the risk associated with the interconnected supply
chain. Detailed supplier audits by the HTC's independent consultants started in
late March. In addition, we have nearly completed the review of EDI linkages and
data transmission for our customers and suppliers. While we believe that we will
be able to qualify alternative suppliers, we cannot fully evaluate the extent of
potential problems and the costs associated with corrective actions.
We now estimate the cost to complete the current compliance program to be in the
range of $32 million to $36 million. Of this amount, approximately $10 million
is for the replacement of capital equipment, of which approximately half
comprises noncompliant systems that would not otherwise have been replaced at
this time. The variability in these estimates depends on the extent to which
supplier requalification is needed and contingency plan implementation costs. We
cannot assure that actual costs will not be materially higher than currently
anticipated. A significant portion of these costs is not incremental to us, but
rather represents the redeployment of existing information technology resources.
Certain other information technology projects have been delayed due to the focus
on Year 2000 issues. The potential costs of the redeployment of personnel and
delays in implementing other projects is not known but could be substantial. The
total amount spent on the compliance program this fiscal year through August 31,
1999, was $27 million, of which $18 million principally pertained to payroll
costs for personnel involved in the program and costs of outside consultants and
$9 million principally pertained to the replacement of capital equipment. Prior
to fiscal 1999, costs of software and hardware applications incurred for Year
2000 compliance were not material and related payroll costs for the information
systems group were not tracked separately.
We have developed contingency plans for the replacement and requalification of
suppliers, the possible stockpiling of key supplies, the relocation of
production using our disaster recovery plans, and the purchase of emergency
generators in the event of power outages at any of our worldwide locations. We
are unable to determine the extent of the potential effect on us, our suppliers
or our customers due to the failure of any systems caused by the Year 2000
issues. Any significant failures could materially harm our results of operations
and financial condition.
Trends and Uncertainties
A majority of our net sales comes from a small number of customers; if we lose
any of these customers, our net sales could decline significantly.
A majority of our annual net sales comes from a small number of our customers.
Our ten largest customers accounted for 74% of net sales in fiscal 1999. Since
we are dependent upon continued net sales from our ten largest customers, any
material delay, cancellation or reduction of orders from these or other major
customers could cause our net sales to decline significantly. Some of these
customers individually account for more than ten percent of our annual net
sales. We cannot guarantee that we will be able to retain any of our ten largest
customers or any other accounts. In addition, our customers may materially
reduce the level of services ordered from us at any time. This could cause a
significant decline in our net sales and we may not be able to reduce the
accompanying expenses at the same time.
Our long-term contracts do not include minimum purchase requirements.
Although we have long-term contracts with a few of our top ten customers,
including Ericsson Telecom AB, NCR Corporation and IBM Corporation, under which
these customers are obligated to obtain services from us, they are not obligated
to purchase any minimum amount of services. As a result, we cannot guarantee
that we will receive any net sales from these contracts. In addition,
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these customers with whom we have long-term contracts may materially reduce the
level of services ordered at any time. This could cause a significant decline in
our net sales and we may not be able to reduce our accompanying expenses at the
same time.
Possible fluctuation of operating results from quarter to quarter could affect
the market price of our common stock.
Our quarterly earnings may fluctuate in the future due to a number of factors
including the following:
- - Differences in the profitability of the types of manufacturing services we
provide. For example, systems assembly services have lower gross margins
than PCB assembly services;
- - Our ability to maximize the hours of use of our equipment and facilities is
dependent on the duration of the production run time for each job and
customer;
- - The amount of automation that we can use in the manufacturing process for
cost reduction varies depending upon the complexity of the product being
made;
- - Our ability to optimize the ordering of inventory as to timing and amount to
avoid holding inventory in excess of immediate production; and
- - Fluctuations in demand for our services or the products being manufactured.
Therefore, our operating results in the future could be below the expectations
of securities analysts and investors. If this occurs, the market price of our
common stock could be harmed.
We are dependent upon the electronics industry which continually produces
technologically advanced products with short life cycles; Our inability to
continually manufacture such products on a cost-effective basis would harm our
business.
A majority of our net sales is to companies in the electronics industry, which
is subject to rapid technological change and product obsolescence. If our
customers are unable to create products that keep pace with the changing
technological environment, our customers' products could become obsolete and the
demand for our services could decline significantly. If we are unable to offer
technologically advanced, cost-effective, quick-response manufacturing services
to customers, demand for our services will also decline. In addition, a
substantial portion of our net sales is derived from our ability to offer
complete service solutions for our customers. For example, if we fail to
maintain high-quality design and engineering services, our net sales would
significantly decline.
We potentially bear the risk of price increases associated with potential
shortages in the availability of electronics components.
At various times, there have been shortages of components in the electronics
industry. One of the services that we perform for many customers is purchasing
electronics components used in the manufacturing of the customers' products. As
a result of this service, we potentially bear the risk of price increases for
these components because we are unable to purchase components at the same time
as we agree with our customers on the pricing for the components.
Our net sales could decline if our competitors provide comparable manufacturing
services at a lower cost.
We compete with different contract manufacturers, depending on the type of
service we provide or the geographic locale of our operations. These
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competitors may have greater manufacturing, financial, R&D and/or marketing
resources than we have. In addition, we may not be able to offer prices as low
as some of our competitors because those competitors may have lower cost
structures as a result of their geographic location or the services they
provide. Our inability to provide comparable or better manufacturing services at
a lower cost than our competitors could cause our net sales to decline.
If we are unable to manage our rapid growth and assimilate new operations in a
cost-effective manner, our profitability could decline.
We have experienced rapid growth over the last five fiscal years. Our historical
growth may not continue. In recent years, we have established operations in
different places throughout the world. For example, in fiscal 1998, we opened
offices in Taipei, Taiwan; Tel Aviv, Israel; and Norrkoping and Stockholm,
Sweden, and commenced manufacturing operations in Guadalajara, Mexico, and
Timisoara, Romania. Also in fiscal 1998, we acquired foreign facilities in Sao
Paulo, Brazil, and Dublin, Ireland. Furthermore, through acquisitions in fiscal
1998 and 1999, we acquired facilities in Duluth, Georgia; Columbia, South
Carolina; and Memphis, Tennessee, and enhanced our capabilities in Charlotte,
North Carolina; Austin, Texas; and Milpitas, California. Also during that
period, we announced a joint venture with Ingram Micro Inc.
In September 1999, we announced the acquisition of SMART Modular Technologies,
Inc. During October and November of 1999, we completed the asset acquisition of
IBM's Netfinity server operations in Greenock, Scotland, and acquired IBM's
NULOGIX Technical Services, Inc. in Vaughan, Canada, in its entirety. Also in
October 1999, we signed a definitive agreement with Acer, Inc. (Acer), a core
unit of the Acer Group, the world's third-largest PC manufacturer, to form a
strategic alliance to provide global design, manufacturing and service solutions
for OEM-branded personal computers, servers and workstations. Also in November
1999, we announced the signing of memoranda of understanding for Solectron to
acquire the complex systems manufacturing assets of Ericsson's
telecommunications infrastructure equipment operations in Longuenesse, France,
and Ostersund, Sweden.
As we manage and continue to expand new operations, we may incur substantial
infrastructure and working capital costs. If we do not achieve sufficient growth
to offset increased expenses associated with rapid expansion, our profitability
will decline.
We need to manage integration of our acquisitions to maintain profitability.
In fiscal 1998 and 1999, we completed acquisitions of manufacturing assets and
facilities from Ericsson, NCR, IBM, Mitsubishi and Trimble Navigation Limited
and acquired all of the capital stock of Sequel, Inc. We also continue to
evaluate acquisition opportunities and may pursue additional acquisitions over
time. These acquisitions involve risks, including:
- - Integration and management of the operations;
- - Retention of key personnel;
- - Integration of purchasing operations and information systems;
- - Management of an increasingly larger and more geographically
disparate business; and
- - Diversion of management's attention from other ongoing business concerns.
Our profitability will suffer if we are unable to successfully integrate and
manage recent acquisitions, as well as any future acquisitions that we might
pursue, or if we do not achieve sufficient revenue to offset the increased
expenses associated with these acquisitions.
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Our international sales are a significant and growing portion of our net sales;
we are increasingly exposed to risks associated with operating internationally.
In fiscal 1999, approximately 36% of our net sales came from outside of the
United States. As a result of our foreign sales and facilities, our operations
are subject to a variety of risks that are unique to international operations,
including the following:
- - Adverse movement of foreign currencies against the U.S. dollar in which
our results are reported;
- - Import and export duties, and value-added taxes;
- - Import and export regulation changes that could erode our profit margins or
restrict exports;
- - Potential restrictions on the transfer of funds;
- - Inflexible employee contracts in the event of business downturns; and
- - The burden and cost of compliance with foreign laws.
In addition, we have operations in several locations that have inflationary
economies or potentially volatile currencies, including Guadalajara, Mexico; Sao
Paulo, Brazil; Suzhou, China; and Timisoara, Romania. In the future, these
factors may harm our results of operations. Markets in Southeast Asia, Latin
America and Eastern Europe have recently experienced and are experiencing
currency, economic and political instability. As of August 31, 1999, we recorded
$87.5 million in cumulative foreign exchange translation losses on our balance
sheet which were primarily the result of the devaluation of the Brazilian real.
While, to date, these factors have not had a significant adverse impact on our
results of operations, we cannot assure that there will not be such an impact.
Furthermore, while we may adopt measures to reduce the impact of losses
resulting from volatile currencies and other risks of doing business abroad, we
cannot assure that such measures will be adequate.
The Malaysian government adopted currency exchange controls, including controls
on its currency, the ringgit, held outside Malaysia, and established a fixed
exchange rate for the ringgit against the U.S. dollar. The fixed exchange rate
provides a stable rate environment when applied to local expenses denominated in
ringgit. The long-term impact of such controls is not predictable due to dynamic
economic conditions that also affect or are affected by other regional or global
economies.
We have been granted a tax holiday which is effective through January 31, 2002,
subject to some conditions, for our Malaysian sites. We have also been granted
various tax holidays in China. These tax holidays are effective for various
terms and are subject to some conditions. It is possible that the current tax
holidays will be terminated or modified or that future tax holidays that
Solectron may seek will not be granted. If the current tax holidays are
terminated or modified, or if additional tax holidays are not granted in the
future, Solectron's effective income tax rate would likely increase.
We are exposed to fluctuations in the exchange rates of foreign currency.
We do not use derivative financial instruments for speculative purposes. Our
policy is to hedge our foreign currency denominated transactions in a manner
that substantially offsets the effects of changes in foreign currency exchange
rates. Presently, we use foreign currency borrowings and foreign currency
forward contracts to hedge only those currency exposures associated with certain
assets and liabilities denominated in nonfunctional currencies. Corresponding
gains and losses on the underlying transaction generally offset the gains and
losses on these foreign currency hedges.
As of August 31, 1999, all of the foreign currency hedging contracts were
scheduled to mature in three months or less and there were no material deferred
gains or losses. In addition, our international operations in some instances
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act as a natural hedge because both operating expenses and a portion of sales
are denominated in local currency. In these instances, including our current
experience involving the devaluation of the Brazilian real, although an
unfavorable change in the exchange rate of a foreign currency against the U.S.
dollar will result in lower sales when translated to U.S. dollars, operating
expenses will also be lower in these circumstances. However, because less than
10% of net sales are denominated in currencies other than the U.S. dollar, we do
not believe our total exposure to be significant.
Fluctuations in the rate of exchange between the U.S. dollar and the currencies
of countries other than the U.S. in which we conduct business could seriously
harm our business, operating results and financial condition. For example, if
there is an increase in the rate at which a foreign currency is exchanged for
U.S. dollars, it will require more of the foreign currency to equal a specified
amount of U.S. dollars than before the rate increase. In such cases, and if we
price our products and services in the foreign currency, we will receive less in
U.S. dollars than we did before the rate increase went into effect. If we price
our products and services in U.S. dollars and competitors price their products
in local currency, an increase in the relative strength of the U.S. dollar could
result in our prices being uncompetitive in markets where business is transacted
in the local currency.
We have a task force which evaluates the effect of the Euro conversion on us
from many perspectives. We continue to evaluate our tax positions and all
outstanding contracts in currencies of the participating countries to determine
the effects, if any, of the Euro conversion. It is possible that the Euro
conversion could significantly harm our results of operations and financial
position due to competitive and other factors relating to the conversion that we
cannot predict.
We are exposed to fluctuations in interest rates.
The primary objective of our investment activities is to preserve principal,
while at the same time, maximize yields without significantly increasing risk.
To achieve this objective, we maintain our portfolio of cash equivalents and
short-term investments in a variety of securities, including both government and
corporate obligations, certificates of deposit and money market funds. As of
August 31, 1999, approximately 93% of our total portfolio was scheduled to
mature in one year or less, with the remainder maturing in less than two years.
See Note 2 of Notes to Consolidated Financial Statements.
The following table presents the amounts of our cash equivalents and short-term
investments that are subject to interest rate risk by year of expected maturity
and weighted-average interest rates as of August 31, 1999:
2000 2001 Total Fair Value
-------- -------- -------- ----------
(dollars in millions)
Cash equivalents and short-
term investments $1,207.3 $ 99.5 $1,306.8 $1,306.8
Average interest rates 5.18% 5.30%
We have entered into an interest rate swap transaction under which we pay a
fixed rate of interest hedging against the variable interest rates charged by
the lessor for the facility lease at Milpitas, California. The interest rate
swap expires in the year 2002, which coincides with the maturity date of the
lease term. As we intend to hold the interest rate swap until the maturity date,
we are not subject to market risk. In fact, such interest rate swap has fixed
the interest rate for the facility lease, thus reducing interest rate risk.
34
<PAGE>
Solectron's debt instruments are subject to fixed interest rates. In addition,
the amount of principal to be repaid at maturity is also fixed. In the case of
the convertible notes, such notes are based on fixed conversion ratios into
common stock. Therefore, we are not subject to market risk from our debt
instruments. See Note 6 of Notes to Consolidated Financial Statements.
We may not be able to adequately protect or enforce our intellectual property
rights; and we could become involved in intellectual property disputes.
Our ability to effectively compete may be affected by our ability to protect our
proprietary information. We hold a number of patents and other license rights.
These patent and license rights may not provide meaningful protection for our
manufacturing processes and equipment innovations. On June 23, 1999, Solectron
was served, along with 87 other companies including SMART Modular Technologies,
Inc., as a defendant in a lawsuit brought by the Lemelson Medical, Education &
Research Foundation. The lawsuit alleges that Solectron has infringed certain of
the plaintiff's patents relating to machine vision and bar-code technology.
Solectron believes it has meritorious defenses to these allegations and does not
expect that this litigation will result in a material impact on its financial
condition or results of operations. In the future, third parties may assert
infringement claims against Solectron or its customers. In the event of an
infringement claim, we may be required to spend a significant amount of money to
develop a non-infringing alternative or to obtain licenses. We may not be
successful in developing such an alternative or obtaining a license on
reasonable terms, if at all. In addition, any such litigation could be lengthy
and costly and could harm our financial condition.
Failure to comply with environmental regulations could harm our business.
As a company in the electronics manufacturing services industry, we are subject
to a variety of environmental regulations relating to the use, storage,
discharge and disposal of hazardous chemicals used during our manufacturing
process. Although we have never sustained any significant loss as a result of
noncompliance with such regulations, any failure by us to comply with
environmental laws and regulations could result in liabilities or the suspension
of production. In addition, these laws and regulations could restrict our
ability to expand our facilities or require us to acquire costly equipment or
incur other significant costs to comply with regulations.
Our stock price may be volatile due to factors outside of our control.
Our stock price could fluctuate due to the following factors, among others:
- - Announcements of operating results and business conditions by our customers;
- - Announcements by our competitors relating to new customers or
technological innovation or new services;
- - Economic developments in the electronics industry as a whole;
- - Political and economic developments in countries in which we have
operations; and
- - General market conditions.
Failure to retain key personnel and skilled associates could hurt our
operations.
Our continued success depends to a large extent upon the efforts and abilities
of key managerial and technical associates. Losing the services of key personnel
could harm us. Our business also depends upon our ability to continue to attract
and retain senior managers and skilled associates. Failure to do so could harm
our operations.
35
<PAGE>
Year 2000 problems may have an adverse effect on our operations and ability to
offer products and services without interruption.
The Year 2000 issue is a result of computer programs being written using two
digits rather than four to define the applicable year. Computer programs that
have this date-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in system failures or
miscalculations causing disruptions of operations including, among other things,
a temporary inability to process transactions, send invoices, order materials or
otherwise engage in normal business activities.
A key to our ability to successfully manage our operations is the responsiveness
of the supply chain for electronics components. This supply chain is often
controlled by computer systems, which could fail. While Solectron controls some
of these systems, our vendors, our customers, transportation companies and other
service providers that are outside of Solectron's control operate some of these
computer systems, as well. If any of these computer systems fail, it could delay
our receipt of previously ordered electronics components, thereby causing us to
delay, cancel or modify orders from our customers, which could harm our
business.
We have developed a contingency plan to address the Year 2000 problem. This
contingency plan may still not be successful in preventing a disruption of our
operations. Although we have extensively tested our equipment and interfaces
with other companies, we cannot be sure that this testing will fully replicate
the actual situation when the year 2000 arrives.
Our anti-takeover defense provisions may deter potential acquirors and may
depress our stock price.
Our certificate of incorporation and bylaws contain provisions that could have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, control of Solectron.
These provisions allow us to issue preferred stock with rights senior to those
of our common stock and impose various procedural and other requirements that
could make it more difficult for our stockholders to effect certain corporate
actions.
36
<PAGE>
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Management's Discussion and Analysis of Financial Condition and Results of
Operations for factors related to fluctuations in the exchange rates of foreign
currency and fluctuations in interest rates under "Trend and Uncertainties."
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by item 8 of Form 10-K is presented here in the
following order:
Page
--------
Unaudited Quarterly Financial Information 37
Consolidated Balance Sheets 38
Consolidated Statements of Income 39
Consolidated Statements of Stockholders' Equity 40
Consolidated Statements of Comprehensive Income 41
Consolidated Statements of Cash Flows 42-43
Notes to Consolidated Financial Statements 44-60
Independent Auditors' Report 61
Unaudited Quarterly Financial Information
For each fiscal quarter during the two fiscal years ended August 31, 1999 (in
millions except percentages and per share data):
First Second Third Fourth
1999 Quarter Quarter Quarter Quarter
- ------------------- --------- --------- --------- ---------
Net sales $1,945.6 $1,908.1 $2,151.5 $2,386.1
Gross profit $ 175.9 $ 178.4 $ 201.6 $ 220.9
Gross margin 9.0% 9.3% 9.4% 9.3%
Operating income $ 97.2 $ 98.6 $ 113.3 $ 129.8
Operating margin 5.0% 5.1% 5.3% 5.4%
Net income $ 63.9 $ 65.5 $ 75.7 $ 88.8
Basic net income
per share (1) $ 0.27 $ 0.28 $ 0.30 $ 0.34
Diluted net income
per share (1) $ 0.26 $ 0.26 $ 0.29 $ 0.33
First Second Third Fourth
1998 Quarter Quarter Quarter Quarter
- ------------------- --------- --------- --------- ---------
Net sales $1,136.8 $1,186.8 $1,278.1 $1,686.5
Gross profit $ 123.7 $ 126.1 $ 133.1 $ 155.3
Gross margin 10.9% 10.6% 10.4% 9.2%
Operating income $ 67.4 $ 73.2 $ 72.4 $ 86.0
Operating margin 5.9% 6.2% 5.7% 5.1%
Net income $ 44.9 $ 48.8 $ 49.2 $ 55.9
Basic net income
per share (1) $ 0.20 $ 0.21 $ 0.21 $ 0.24
Diluted net income
per share (1) $ 0.19 $ 0.20 $ 0.20 $ 0.23
(1) Adjusted to reflect two-for-one stock split effective February 24, 1999.
37
<PAGE>
SOLECTRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except per share data)
As of August 31,
----------------------
1999 1998
ASSETS -------- --------
Current assets:
Cash and cash equivalents $1,325.6 $ 225.2
Short-term investments 362.8 83.6
Accounts receivable, less allowances of
$5.6 and $4.0, respectively 1,118.3 670.2
Inventories 1,080.1 788.5
Prepaid expenses and other current assets 107.3 120.0
-------- --------
Total current assets 3,994.1 1,887.5
Net property and equipment 653.6 448.0
Other assets 187.0 75.0
-------- --------
Total assets $4,834.7 $2,410.5
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 21.4 $ -
Accounts payable 902.6 666.5
Accrued employee compensation 88.9 72.1
Accrued expenses 40.4 34.9
Other current liabilities 59.9 67.3
-------- --------
Total current liabilities 1,113.2 840.8
Long-term debt 922.6 385.5
Other long-term liabilities 5.8 2.9
-------- --------
Total liabilities 2,041.6 1,229.2
-------- --------
Commitments
Stockholders' equity:
Preferred stock, $.001 par value; 1.2
shares authorized; no shares issued - -
Common stock, $.001 par value; 400.0
shares authorized; 271.4 and 235.3
shares issued and outstanding,
respectively, adjusted for stock split 0.3 0.1
Additional paid-in capital 1,910.1 510.8
Retained earnings 971.2 677.4
Accumulated other comprehensive losses (88.5) (7.0)
-------- --------
Total stockholders' equity 2,793.1 1,181.3
-------- --------
Total liabilities and stockholders' equity $4,834.7 $2,410.5
======== ========
See accompanying notes to consolidated financial statements.
38
<PAGE>
SOLECTRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share data)
Years Ended August 31,
------------------------------
1999 1998 1997
-------- -------- --------
Net sales $8,391.4 $5,288.3 $3,694.4
Cost of sales 7,614.6 4,750.0 3,266.1
-------- -------- --------
Gross profit 776.8 538.3 428.3
Operating expenses:
Selling, general and
administrative 309.7 218.4 172.9
Research and development 28.2 20.9 15.0
Acquisition costs - - 4.0
-------- -------- --------
Operating income 438.9 299.0 236.4
Interest income 29.9 24.8 28.5
Interest expense (36.5) (24.8) (26.5)
-------- -------- --------
Income before income taxes 432.3 299.0 238.4
Income taxes 138.4 100.2 80.3
-------- -------- --------
Net income $ 293.9 $ 198.8 $ 158.1
======== ======== ========
Net income per share:
Basic $ 1.19 $ 0.86 $ 0.71
Diluted $ 1.13 $ 0.82 $ 0.69
Weighted average number of shares:
Basic 246.3 231.7 223.0
Diluted 263.5 253.1 230.6
See accompanying notes to consolidated financial statements.
39
<PAGE>
<TABLE>
SOLECTRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In millions)
<CAPTION>
Accumulated
Common Stock Additional Other Total
------------- Paid-In Retained Comprehensive Stockholders'
Shares Amount Capital Earnings Income(losses) Equity
------ ------ ---------- -------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances as of August 31, 1996 210.0 $0.1 $ 378.2 $320.5 $ 1.7 $ 700.5
Net income - - - 158.1 - 158.1
Foreign currency translation - - - - (12.4) (12.4)
Options exercised 6.0 - 31.3 - - 31.3
Stock issued under employee
purchase plan 0.7 - 6.8 - - 6.8
Stock issued in business
combination 12.4 - 24.0 - - 24.0
Tax benefit associated with
exercise of stock options - - 10.8 - - 10.8
------ ------ ---------- -------- -------------- -------------
Balances as of August 31, 1997 229.1 0.1 451.1 478.6 (10.7) 919.1
Net income - - - 198.8 - 198.8
Foreign currency translation - - - - 3.7 3.7
Options exercised 5.6 - 39.1 - - 39.1
Stock issued under employee
purchase plan 0.6 - 11.3 - - 11.3
Tax benefit associated with
exercise of stock options - - 9.3 - - 9.3
------ ------ ---------- -------- -------------- -------------
Balances as of August 31, 1998 235.3 0.1 510.8 677.4 (7.0) 1,181.3
Net income - - - 293.9 - 293.9
Foreign currency translation - - - - (80.5) (80.5)
Unrealized loss on investments - - - - (1.0) (1.0)
Options exercised 4.6 - 47.7 - - 47.7
Stock issued under employee
purchase plan 0.6 - 17.9 - - 17.9
Issuance of common stock dividend - 0.1 - (0.1) - -
Conversion of long-term debt, net 13.6 - 225.4 - - 225.4
Issuance of common stock, net of
issuance costs of $32.5 17.0 0.1 1,059.7 - - 1,059.8
Stock issued in business
combination 0.3 - 17.8 - - 17.8
Tax benefit associated with
exercise of stock options - - 30.8 - - 30.8
------ ------ --------- -------- -------------- -------------
Balances as of August 31, 1999 271.4 $0.3 $1,910.1 $971.2 $(88.5) $2,793.1
====== ====== ========= ======== ============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
40
<PAGE>
SOLECTRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
Years Ended August 31,
--------------------------
1999 1998 1997
------ ------ ------
Net income $293.9 $198.8 $158.1
Other comprehensive income (loss):
Foreign currency translation adjustments,
net of income tax benefit of $0.4 in 1999 (80.5) 3.7 (12.4)
Unrealized loss on investments, net of
income tax benefit of $0.6 in 1999 (1.0) - -
------ ------ ------
Comprehensive income $212.4 $202.5 $145.7
====== ====== ======
- ---------------
Accumulated foreign currency translation losses were $87.5 million at August 31,
1999, $7.0 million at August 31, 1998, and $10.7 at August 31, 1997. For fiscal
year 1999, the foreign currency translation loss primarily resulted from the
devaluation of the Brazilian real. Most of Solectron's foreign currency
translation adjustment amounts relate to investments which are permanent in
nature. To the extent that such amounts relate to investments which are
permanent in nature, no adjustment for income taxes is made. Accumulated
unrealized losses on investments were $1.0 million at August 31, 1999.
41
<PAGE>
SOLECTRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Years Ended August 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
Cash flows from operating activities:
Net income $ 293.9 $ 198.8 $ 158.1
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 183.2 124.2 104.6
Non-cash interest 17.9 - -
Tax benefit associated with the
exercise of stock options 30.8 9.3 10.8
Gain on disposal of fixed assets (4.9) (2.3) -
Other 5.2 (1.3) (7.1)
Changes in operating assets
and liabilities:
Accounts receivable (458.3) (250.6) (66.3)
Inventories (288.2) (164.1) (115.6)
Prepaid expenses and other
current assets 12.1 (40.4) (48.9)
Accounts payable 233.9 235.8 135.3
Accrued expenses and other
current liabilities 12.4 40.3 31.1
--------- --------- ---------
Net cash provided by
operating activities 38.0 149.7 202.0
--------- --------- ---------
Cash flows from investing activities:
Purchases of short-term investments (446.1) (150.5) (274.1)
Sales and maturities of short-term
investments 166.9 324.8 197.9
Acquisition of manufacturing
locations (124.7) (174.9) -
Capital expenditures (425.8) (244.4) (188.2)
Proceeds from sales of fixed
assets 41.3 60.2 10.6
Other (31.0) (14.4) 16.6
--------- --------- ---------
Net cash used in investing activities (819.4) (199.2) (237.2)
--------- --------- ---------
(continued)
42
<PAGE>
SOLECTRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In millions)
Years Ended August 31,
----------------------------------
1999 1998 1997
--------- --------- ---------
Cash flows from financing activities:
Net proceeds from bank lines of credit 21.4 - -
Net proceeds from issuance of
long-term debt 732.1 - -
Repayments of long-term debt (1.2) (1.2) (3.1)
Proceeds from exercise of stock
options 65.6 50.4 38.1
Net proceeds from issuance of
common stock 1,059.8 - -
Other (0.5) (2.2) -
--------- --------- ---------
Net cash provided by financing
activities 1,877.2 47.0 35.0
--------- --------- ---------
Effect of exchange rate changes on
cash and cash equivalents 4.6 2.6 (3.5)
--------- --------- ---------
Net increase (decrease) in cash
and cash equivalents 1,100.4 0.1 (3.7)
Cash and cash equivalents at
beginning of year 225.2 225.1 228.8
--------- --------- ---------
Cash and cash equivalents at
end of year $1,325.6 $ 225.2 $ 225.1
========= ========= =========
Cash paid:
Interest $ 26.4 $ 25.0 $ 38.3
Income taxes $ 95.0 $ 75.8 $ 93.4
Non cash investing and financing activities:
Issuance of common stock upon
conversion of long-term debt, net $ 225.4 $ - $ -
Issuance of common stock for
business combination, net
of cash acquired $ 14.7 $ - $ 24.0
See accompanying notes to consolidated financial statements.
43
<PAGE>
SOLECTRON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
(a) Description of Operations and Principles of Consolidation: Solectron (the
Company) provides integrated supply-chain solutions that span the entire product
life cycle - from technology, to manufacturing, to global services. The
Company's primary services include the manufacturing and testing of PCB
assemblies as well as system-level assembly and testing. The Company also
provides materials procurement and materials management in support of its
manufacturing, assembly and testing services. In addition, the Company's
services include preproduction planning such as product design and product
prototyping; distribution; and end-of-life product services involving product
repair and warranty services. The Company has manufacturing operations located
in the Americas, Europe and Asia.
The accompanying consolidated financial statements include the accounts of
Solectron and its subsidiaries after elimination of intercompany accounts and
transactions.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(b) Cash Equivalents and Short-Term Investments: Cash equivalents are highly
liquid investments purchased with an original maturity of less than three
months. Short-term investments are investment-grade short-term debt instruments
with original maturities greater than three months.
Investments in debt securities are classified as "available-for-sale." Such
investments are recorded at fair value as determined from quoted market prices,
and the cost of securities sold is determined based on the specific
identification method. If material, unrealized gains or losses are reported as a
component of comprehensive income or losses, net of related tax effect.
(c) Inventories: Inventories are stated at the lower of weighted average cost or
market.
(d) Property and Equipment: Property and equipment are recorded at cost.
Depreciation and amortization are computed based on the shorter of the estimated
useful lives or the related lease terms, using the straight-line method.
Estimated useful lives are presented below.
Machinery and equipment 2 - 5 years
Furniture and fixtures 3 - 5 years
Leasehold improvements Lease term
Buildings* 15-20 years
*Useful lives for buildings in China and Scotland are 30 years and 50 years,
respectively.
(e) Other Assets: Other assets consist of intangible assets, including
intellectual property rights, goodwill and debt issuance costs. Intangible
assets are amortized using the straight-line method, over the expected life of
the asset - ten years for intellectual property rights and goodwill. Debt
issuance costs related to the zero-coupon convertible senior notes are amortized
using the effective interest method over seven years. Debt issuance
44
<PAGE>
costs related to the senior notes are amortized using the straight-line method,
which does not differ materially from the effective interest method, over the
debt term of ten years.
(f) Impairment of Long-Lived Assets: Solectron reviews property and equipment
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of property
and equipment is measured by comparison to its carrying amount, including the
unamortized portion of goodwill allocated to the property and equipment, to
future net cash flows the property and equipment are expected to generate. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the property and
equipment, including the allocated goodwill, if any, exceeds its fair market
value. Solectron assesses the recoverability of enterprise-level goodwill by
determining whether the unamortized goodwill balance can be recovered through
undiscounted future net cash flows of the acquired operation. The amount of
enterprise-level goodwill impairment, if any, is measured based on projected
discounted future net cash flows using a discount rate reflecting the Company's
average cost of funds. To date, no adjustments to the carrying value of the
Company's long-lived assets have been required.
(g) Income Taxes: Solectron uses the asset and liability method of accounting
for income taxes. Deferred tax assets and liabilities are recognized for the
future consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. When necessary, a valuation allowance is recorded to reduce tax assets to
an amount for which realization is more likely than not. The effect of changes
in tax rates is recognized in the period in which the rate change occurs.
(h) Net Income Per Share: Basic net income per share is calculated using the
weighted-average number of common shares outstanding during the period. Diluted
net income per share is calculated using the weighted-average number of common
shares plus dilutive potential common shares outstanding during the period.
Potential common shares consist of stock options that are computed using the
treasury stock method and shares issuable upon conversion of Solectron's
outstanding convertible notes computed using the as-if-converted method. Share
and per-share data presented reflect the two-for-one stock split effective
February 24, 1999.
(i) Revenue Recognition: Solectron recognizes revenue upon shipment of product
to its customers.
(j) Employee Stock Plans: Solectron accounts for its stock option plans and its
Employee Stock Purchase Plan using the intrinsic value method.
(k) Foreign Currency: For foreign subsidiaries using the local currency as their
functional currency, assets and liabilities are translated at exchange rates in
effect at the balance sheet date and income and expenses are translated at
average exchange rates. The effects of these translation adjustments are
reported in other comprehensive income. Exchange gains and losses arising from
transactions denominated in a currency other than the functional currency of the
entity involved and remeasurement adjustments for foreign operations where the
U.S. dollar is the functional currency are included in income. To date, the
effect of such amounts on net income has not been material.
(l) Derivatives: Gains and losses on foreign currency forward exchange contracts
designated as hedges of assets and liabilities are included in income
concurrently with the offsetting losses and gains on the related balance sheet
items. Gains and losses on hedges of firm commitments are deferred and included
in the basis of the transaction when it occurs.
45
<PAGE>
(m) Year End: Solectron's financial reporting year ends on the last Friday in
August. Fiscal years 1999, 1998 and 1997 each contained 52 weeks. For purposes
of presentation in the accompanying financial statements and notes, Solectron
has indicated its accounting years as ending on August 31.
Solectron's subsidiaries, Solectron Texas, Inc. (Texas) and Solectron Brasil,
Ltda. (Brazil), report their results one month in arrears. Solectron's
consolidated financial position as of August 31, 1999 and 1998, include the
financial position of the Texas and Brazil operations as of July 31, 1999 and
1998. Similarly, Solectron's consolidated results of operations and cash flows
for the years ended August 31, 1999 and 1998, include the results of operations
and cash flows of the Texas and Brazil operations for the twelve-month periods
ended July 31, 1999 and 1998. Solectron's consolidated results of operations and
cash flows for the year ended August 31, 1997, include the results of operations
and cash flows of the Texas operation for the twelve-month period ended July 31,
1997.
(n) Recent Accounting Pronouncements: Effective in the first quarter of fiscal
1999, Solectron adopted Statement of Financial Accounting Standards No. 130
(SFAS No. 130), "Reporting Comprehensive Income," which requires the Company to
report and display certain information related to comprehensive income.
Comprehensive income includes net income and other comprehensive income. Other
comprehensive income is classified separately into foreign currency items,
minimum pension liability adjustments, and unrealized gains and losses on
certain investments in debt and equity securities. The adoption of SFAS No. 130
had no impact on Solectron's financial position, results of operations or cash
flows.
Effective in the first quarter of fiscal 1999, Solectron adopted the American
Institute of Certified Public Accountants (AICPA) Statement of Position (SOP)
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 provides guidance on accounting for the costs of
computer software developed or obtained for internal use and for determining
when specific costs should be capitalized and when they should be expensed. The
impact of adopting SOP 98-1 was not significant to Solectron's financial
position, results of operations or cash flows.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities." SOP 98-5 requires that all start-up costs related to new operations
must be expensed as incurred. In addition, all start-up costs that were
capitalized in the past must be written off when SOP 98-5 is adopted. Solectron
expects that the adoption of SOP 98-5 will not have a material impact on its
financial position, results of operations or cash flows. Solectron will be
required to implement SOP 98-5 in the first quarter of fiscal 2000.
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes methods of accounting for derivative financial instruments and
hedging activities related to those instruments as well as other hedging
activities. Solectron anticipates that the adoption of SFAS No. 133 will not
have a material impact on its financial position, results of operations or cash
flows. Implementation of this standard has recently been delayed by the FASB for
a 12-month period. Solectron will now adopt SFAS No. 133 in the first quarter of
fiscal 2001.
(o) Reclassifications: Certain prior year amounts have been reclassified to
conform to the 1999 presentation.
46
<PAGE>
Note 2. Cash, Cash Equivalents and Short-Term Investments
Cash, cash equivalents and short-term investments as of August 31, 1999 and
1998, consisted of the following:
Cash and Cash Short-Term
Equivalents Investments
----------- -----------
(in millions)
1999
- --------------------------
Cash $ 167.3 $ -
Money market funds 119.7 0.7
Certificates of deposit 55.1 38.8
Market auction securities 16.2 -
U.S. government securities 582.6 226.0
Corporate obligations 312.3 97.3
Other 72.4 -
-------- --------
Total $1,325.6 $ 362.8
======== ========
1998
- --------------------------
Cash $ 91.5 $ -
Money market funds 74.2 -
Certificates of deposit 0.1 11.4
Market auction securities 0.8 -
U.S. government securities 27.8 47.1
Corporate obligations 6.0 17.5
Municipal obligations 5.4 -
Other 19.4 7.6
-------- --------
Total $ 225.2 $ 83.6
======== ========
Short-term investments are carried at fair market value, which approximates
cost. As of August 31, 1999 and 1998, unrealized gains and losses were not
significant. Realized gains and losses for the fiscal years ended August 31,
1999, 1998 and 1997 were not significant. As of August 31, 1999, approximately
93% of Solectron's short-term investments mature in one year or less, with the
remainder maturing in less than two years.
Note 3. Inventories
Inventories as of August 31, 1999 and 1998, consisted of:
1999 1998
-------- --------
(in millions)
Raw materials $ 789.6 $ 577.8
Work-in-process 211.1 168.3
Finished goods 79.4 42.4
-------- --------
Total $1,080.1 $ 788.5
======== ========
47
<PAGE>
Note 4. Property and Equipment
Property and equipment as of August 31, 1999 and 1998, consisted of:
1999 1998
-------- --------
(in millions)
Land $ 24.3 $ 23.1
Buildings and improvements 136.0 94.0
Leasehold improvements 61.4 46.6
Factory equipment 674.5 519.4
Computer equipment and software 154.4 81.7
Furniture, fixtures and other 44.3 36.6
Construction-in-progress 92.0 58.4
-------- --------
1,186.9 859.8
Less accumulated depreciation
and amortization 533.3 411.8
-------- --------
Net property and equipment $ 653.6 $ 448.0
======== ========
Note 5. Lines of Credit
Solectron has available a $100 million unsecured multicurrency revolving line of
credit that expires April 30, 2002. Borrowings under the credit facility bear
interest, at Solectron's option, at either the bank's prime rate, the London
interbank offering rate (LIBOR) plus a margin, or the bank's certificate of
deposit (CD) rate plus a margin. The margin under the LIBOR or CD rate options
will vary depending on Solectron's Standard & Poor's Corporation and/or Moody's
Investor Services, Inc. rating for its long-term senior unsecured debt. This
margin was 0.4% at August 31, 1999. Under the credit agreement, the Company must
meet certain financial covenants. As of August 31, 1999 and 1998, there were no
borrowings outstanding under this line of credit.
Solectron also has approximately $127 million in uncommitted foreign lines of
credit and other bank facilities. Borrowings are payable on demand. The interest
rates range from the bank's prime lending rate to the bank's prime rate plus
2.0%. As of August 31, 1999, borrowings and guaranteed amounts under these lines
of credit were $41 million, which had a weighted-average interest rate of 5.1%
per annum.
Solectron had an asset securitization arrangement with a bank under which it
might sell up to $220 million of eligible accounts receivable. There were no
borrowings outstanding under this arrangement as of August 31, 1999. The
securitization arrangement, at Solectron's discretion, was not renewed upon its
expiration in September 1999.
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<PAGE>
Note 6. Long-Term Debt
Long-term debt at August 31, 1999 and 1998, consisted of (in millions):
1999 1998
-------- --------
Zero-coupon convertible senior notes
due 2019, face value $1,656.0,
fair value of $1,029.9 in 1999 $767.6 -
6% subordinated notes due 2006, face value
$230.0, fair value of $333.5 in 1998
converted into 13.6 shares of common stock - $230.0
7 3/8% senior notes due 2006, face value
$150.0, fair value of $143.8 in 1999
and $157.7 in 1998 149.8 149.8
Other, fair value of $5.2 in 1999 and
$5.7 in 1998 5.2 5.7
------ ------
Total long-term debt $922.6 $385.5
====== ======
In January 1999, Solectron issued 1,656,000 zero-coupon convertible senior notes
to qualified institutional investors in a private placement at an issue price of
$452.89 per note which resulted in gross proceeds of approximately $750 million.
These notes are unsecured and unsubordinated indebtedness with a maturity value
aggregating $1.656 billion. There will be no interest payment prior to maturity.
Each note has a yield of 4% with a maturity value of $1,000 on January 27, 2019.
Solectron is amortizing the issue discount using the effective interest method
over the term of the notes. Each note is convertible at any time by the holder
at a conversion rate of 7.472 shares per note, adjusted for the two-for-one
stock split effective February 24, 1999. Holders may require Solectron to
purchase all or a portion of their notes on January 27, 2002, and January 27,
2009, at a price of $510.03 and $672.97 per note, respectively. Also, each
holder may require Solectron to repurchase all or a portion of such holder's
notes upon a change in control of Solectron occurring on or before January 27,
2002. Solectron, at its option, may redeem all or a portion of the notes at any
time on or after January 27, 2003. In addition, Solectron filed with the
Securities Exchange Commission a registration statement for resales of the notes
and the common stock issuable upon conversion. Such registration statement was
declared effective in June 1999.
In February 1996, Solectron issued convertible subordinated notes for an
aggregate principal amount of $230 million. The notes were in denominations of
and had a maturity value of $1,000 each, payable on March 1, 2006. Interest was
payable semiannually at 6%. Each note was convertible at any time by the holder
into shares of common stock at a conversion price of $16.90 per share as
adjusted for the two-for-one stock split effective February 24, 1999. The notes
were redeemable at the option of Solectron beginning on March 3, 1999. During
February and March 1999, all of the convertible subordinated notes were
voluntarily converted into 13.6 million shares of common stock.
In March 1996, Solectron issued $150 million aggregate principal amount of
senior notes. These notes are in denominations of and have a maturity value of
$1,000 each and are due on March 1, 2006. Interest is payable semiannually at a
rate of 7 3/8% per annum. The notes may not be redeemed prior to maturity.
49
<PAGE>
Note 7. Financial Instruments
Fair Value of Financial Instruments
The fair value of Solectron's cash, cash equivalents, accounts receivable and
accounts payable approximates the carrying amount due to the relatively short
maturity of these items. The fair value of Solectron's short-term investments
(see Note 2) is determined based on quoted market prices. The fair value of
Solectron's long-term debt (see Note 6) is determined based on broker trading
prices.
Derivatives
Solectron enters into forward exchange contracts to hedge foreign currency
exposures on a continuing basis for periods consistent with its committed
exposures. These transactions generally do not expose Solectron to risk of
accounting loss because gains and losses on these contracts offset losses and
gains on the assets, liabilities and transactions being hedged. The
counterparties to these contracts expose Solectron to credit-related losses in
the event of nonperformance. However, the counterparties to these contracts are
substantial and creditworthy multinational commercial banks. The risk of
counterparty nonperformance associated with these contracts is remote. Since
these contracts generally have maturities of less than three months, the amounts
of unrealized gains and losses are immaterial. Foreign currency forward exchange
contracts outstanding totaled $66.0 million at the end of fiscal year 1999 and
$31.3 million at the end of fiscal year 1998. These contracts were originated by
Solectron's international subsidiaries primarily for the purchase and sale of
European currencies, U.S. dollar, Malaysian ringgit and Japanese yen to mitigate
foreign currency exposures.
Business and Credit Concentrations
Financial instruments that potentially subject Solectron to concentrations of
credit risk consist of cash, cash equivalents, short-term investments and trade
accounts receivable. Solectron's cash, cash equivalents and short-term
investments are managed by recognized financial institutions which follow the
Company's investment policy. Such investment policy limits the amount of credit
exposure in any one issue and the maturity date of the investment securities
that typically comprise investment grade short-term debt instruments.
Concentrations of credit risk in accounts receivable resulting from sales to
major customers are discussed in Note 13. Solectron generally does not require
collateral for sales on credit. The Company also closely monitors extensions of
credit and has not experienced significant credit losses in the past.
Note 8. Commitments
Solectron leases various facilities under operating lease agreements. The
facility leases expire at various dates through 2008. All such leases require
Solectron to pay property taxes, insurance and normal maintenance costs.
Payments of some leases are periodically adjusted based on LIBOR rates. Certain
leases for Solectron's facilities, including Milpitas and San Jose, California;
Everett, Washington; Suwanee, Georgia; and Columbia, South Carolina, provide
Solectron with an option at the end of the lease term of either acquiring the
property at its original cost or arranging for the property to be acquired. For
these leases, Solectron is contingently liable under a first loss clause for a
decline in market value of such leased facilities up to 85% of the original
costs, or approximately $129 million in total as of August 31, 1999, in the
event Solectron does not purchase the properties at the end of the respective
lease terms. Under such agreements, the Company must also maintain compliance
with financial covenants similar to its credit facilities. During September
1999, Solectron entered into another
50
<PAGE>
similar facility lease for Milpitas, California, under which the Company is
contingently liable up to an additional amount of approximately $21 million for
a decline in market value.
In addition, Solectron periodically enters into lease arrangements with
third-party leasing companies under which it sells fixed assets and leases them
back from the leasing companies. Solectron is accounting for these leases as
operating leases.
Future minimum payments related to lease obligations, including the $129 million
contingent liability discussed above, are $66.3 million, $52.7 million, $89.1
million, $57.2 million and $67.7 million in each of the years in the five-year
period ending August 31, 2004, and an aggregate $3.0 million for periods after
that date. Rent expense was $83.0 million, $33.3 million and $22.9 million for
the years ended August 31, 1999, 1998 and 1997, respectively.
Note 9. Retirement Plans
Solectron has various retirement plans that cover a significant number of its
associates. The major pension plans are defined contribution plans, which
provide pension benefits in return for services rendered, provide an individual
account for each participant, and have terms that specify how contributions to
the participant's account are to be determined rather than the amount of pension
benefits the participant is to receive. Contributions to these plans are based
on varying percentages of each participant's base salary. Solectron's expense
for the defined contribution plans totaled $9.5 million, $4.5 million and $3.0
million in 1999, 1998 and 1997, respectively.
Note 10. Income Taxes
The components of income taxes for the fiscal years ended August 31, 1999, 1998
and 1997, were as follows (in millions):
1999 1998 1997
------ ------ ------
Current:
Federal $ 68.8 $ 74.2 $ 62.6
State 13.0 15.3 10.9
Foreign 20.2 14.6 5.9
------ ------ ------
102.0 104.1 79.4
------ ------ ------
Deferred:
Federal (1.3) (7.8) (8.8)
State 1.8 (1.6) (1.1)
Foreign 5.1 (3.8) -
------ ------ ------
5.6 (13.2) (9.9)
------ ------ ------
Charge in lieu of taxes
attributable to employee
stock plans 30.8 9.3 10.8
------ ------ ------
Total $138.4 $100.2 $ 80.3
====== ====== ======
51
<PAGE>
The overall effective income tax rate (expressed as a percentage of financial
statement income before income taxes) varied from the U.S. statutory income tax
rate for the fiscal years ended August 31, 1999, 1998 and 1997, as follows:
1999 1998 1997
------- ------- ------
Federal tax rate 35.0% 35.0% 35.0%
State income tax, net of federal
tax benefit 3.0 3.2 3.1
Income of international subsidiaries
taxed at different rates 1.0 (0.9) 0.2
Tax holiday (7.0) (7.1) (3.8)
Other - 3.3 (0.8)
---- ---- ----
Effective income tax rate 32.0% 33.5% 33.7%
==== ==== ====
The tax effects of temporary differences that gave rise to significant portions
of deferred tax assets and liabilities as of August 31, 1999 and 1998, were as
follows (in millions):
1999 1998
------ ------
Deferred tax assets:
Accruals, allowances and reserves $ 13.5 $ 18.7
State income tax 4.4 6.1
Acquired intangible assets 3.3 1.9
Net undistributed profits of
subsidiaries 2.8 2.2
Plant and equipment 4.1 5.9
Net operating loss carryover 7.2 -
Other 4.1 3.4
------ ------
Total deferred tax assets 39.4 38.2
------ ------
Deferred tax liabilities:
Other (2.7) (0.3)
------ ------
Total deferred tax liabilities (2.7) (0.3)
------ ------
Net deferred tax assets $ 36.7 $ 37.9
====== ======
Based on Solectron's historical operating income, management believes it is more
likely than not that the Company will realize the benefit of the deferred tax
assets recorded. Accordingly, Solectron has not established any valuation
allowance.
Worldwide income before income taxes for the fiscal years ended August 31, 1999,
1998 and 1997, consisted of the following (in millions):
1999 1998 1997
------ ------ ------
U.S. $287.9 $217.0 $198.0
Non-U.S. 144.4 82.0 40.4
------ ------ ------
Total $432.3 $299.0 $238.4
====== ====== ======
52
<PAGE>
Cumulative undistributed earnings of the international subsidiaries amounted to
$336.6 million as of August 31, 1999, of which approximately $313.7 million is
intended to be permanently reinvested. The amount of income tax liability that
would result had such earnings been repatriated is estimated to be approximately
$76.6 million.
Solectron has been granted a tax holiday for its Malaysian sites which is
effective through January 31, 2002, subject to certain conditions. Solectron has
also been granted various tax holidays in China, which are effective for various
terms and are subject to certain conditions.
Note 11. Stockholders' Equity
Issuance of Common Stock
In August 1999, Solectron sold, through an underwritten public offering, 17
million shares of common stock which generated net proceeds of approximately
$1.1 billion.
Stock Split
Effective February 24, 1999, Solectron completed a two-for-one stock split
effected as a stock dividend. All references to share and per-share data have
been retroactively adjusted to reflect the stock split.
Pro Forma Fair Value Disclosures
Solectron accounts for its employee stock plans, which consist of fixed stock
option plans and an Employee Stock Purchase Plan, using the intrinsic value
method under APB No. 25. No compensation expense related to these plans has been
recognized in the Company's financial statements. The table below sets out the
pro forma amounts of net income and net income per share that would have
resulted for the fiscal years ended August 31, 1999, 1998 and 1997, if Solectron
accounted for its employee stock plans under the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation."
1999 1998 1997
-------- -------- --------
(in millions, except per share data)
Net income As reported $293.9 $198.8 $158.1
Pro forma $259.5 $176.9 $145.8
Net income per share:
Basic As reported $1.19 $0.86 $0.71
Pro forma $1.05 $0.76 $0.65
Diluted As reported $1.13 $0.82 $0.69
Pro forma 1.01 $0.74 $0.63
For purposes of computing pro forma net income, the fair value of each option
grant and Employee Stock Purchase Plan purchase right is estimated on the date
of grant using the Black-Scholes option pricing model. The assumptions used to
value the option grants and purchase rights are stated below.
53
<PAGE>
1999 1998 1997
------------ ------------ -------------
Expected life of
options 3.5 years 4 years 4.3 years
Expected life of
purchase rights 3 months 3 months 3 months
Volatility 48% 44% 40%
Risk-free interest
rate 4.5% to 5.7% 5.1% to 5.9% 5.2% to 6.5%
Dividend yield zero zero zero
Options vest over several years and new option grants are generally made each
year. In addition, the pro forma disclosures required by SFAS No. 123 are
effective for options granted after the Company's fiscal year 1995. Accordingly,
the pro forma amounts shown above may not be representative of the pro forma
effect on reported net income in future years.
Stock Option Plans
Solectron's stock option plans provide for grants of options to associates to
purchase common stock at the fair market value of such shares on the grant date.
The options vest over a four-year period beginning generally on the grant date.
The term of the options is five years for options granted prior to November 17,
1993, and seven years for options granted thereafter. In connection with the
acquisition of Force Computers, Inc. in November 1996, Solectron assumed all
options outstanding under the Force option plan. Options under the Force plan
generally vest over a four-year period beginning on the grant date and have a
ten-year term. No further options may be granted under the Force plan.
A summary of stock option activity under the plans for the fiscal years ended
August 31, 1999, 1998 and 1997, follows (in millions, except per share data):
1999 1998 1997
----------------- ----------------- -----------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
------- -------- ------- -------- ------- --------
Outstanding,
beginning of year 18.9 $13.47 20.5 $ 9.50 18.8 $ 7.41
Granted 6.1 $35.80 5.3 $22.43 6.8 $13.41
Assumed from
Force plan - - - - 1.7 $ 1.10
Exercised (4.6) $10.59 (5.6) $ 7.41 (6.0) $ 4.88
Canceled (1.0) $22.01 (1.3) $14.08 (0.8) $10.52
------- ------- -------
Outstanding,
end of year 19.4 $20.64 18.9 $13.47 20.5 $ 9.50
======= ======= =======
Exercisable
at year-end 10.0 $14.40 9.5 $10.36 10.4 $ 7.93
======= ======= =======
Weighted-average
fair value of
options granted
during the year $15.16 $ 9.31 $ 5.62
54
<PAGE>
Information regarding the stock options outstanding at August 31, 1999, is
summarized in the table below (in millions, except number of years and per share
data).
Outstanding Exercisable
--------------------------------- ---------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number of Contractual Exercise Number of Exercise
Prices Shares Life Price Shares Price
- ------------- --------- ----------- -------- --------- --------
$ 0.66-$ 2.57* 0.2 6.62 years $ 2.05 0.1 $ 1.94
$ 6.66-$ 9.50 3.8 2.58 years $ 8.44 3.7 $ 8.42
$10.19-$11.97 3.5 3.40 years $11.56 2.5 $11.52
$12.25-$21.91 4.8 4.81 years $18.64 2.3 $18.10
$23.38-$26.59 4.6 5.97 years $25.80 1.0 $25.65
$33.13-$52.13 2.2 6.34 years $43.02 0.4 $40.41
$72.19 0.3 6.88 years $72.19 - $72.19
--------- ---------
$ 0.66-$72.19 19.4 4.62 years $20.64 10.0 $14.40
========= =========
- --------------
*Options in this range of exercise prices represent the options assumed in
connection with the acquisition of Force.
A total of 32.0 million shares of common stock remain reserved for issuance
under the plans as of August 31, 1999.
On December 1, of each year, each independent member of Solectron's Board of
Directors is granted an option to purchase 6,000 shares of common stock at the
fair market value on such date. These options vest over one year.
Employee Stock Purchase Plan
Under Solectron's Employee Stock Purchase Plan (the Purchase Plan), associates
meeting specific employment qualifications are eligible to participate and can
purchase shares quarterly through payroll deductions at the lower of 85% of the
fair market value of the stock at the commencement or end of the offering
period. The Purchase Plan permits eligible associates to purchase common stock
through payroll deductions for up to 10% of qualified compensation. As of August
31, 1999, 3.7 million shares remain available for issuance under the Purchase
Plan.
The weighted-average fair value of the purchase rights granted in fiscal 1999,
1998 and 1997 was $9.67, $4.99 and $2.96, respectively.
Note 12. Segment and Geographic Information
Solectron provides integrated supply-chain solutions that span the entire
product life cycle - from technology, to manufacturing, to global services. The
Company has 23 manufacturing facilities in the Americas, Europe and Asia regions
to serve these similar customers. Solectron is operated and managed
geographically. Each region has its own president and support staff. Solectron's
management uses an internal management reporting system, which provides
important financial data, to evaluate performance and allocate Solectron's
resources on a geographic basis. Intersegment adjustments are related primarily
to intersegment sales that are generally recorded at prices that approximate
arm's length transactions. Certain corporate expenses are allocated to these
operating segments and are included for performance evaluation. Some
amortization expenses are also allocated to these operating
55
<PAGE>
segments, but the related intangible assets are not allocated. The accounting
policies for the segments are the same as for Solectron taken as a whole.
Solectron has three reportable operating segments: the Americas, Europe and
Asia. Information about the operating segments for the fiscal years ended August
31, 1999, 1998 and 1997, was as follows:
1999 1998 1997
-------- -------- --------
(in millions)
Net sales:
Americas $6,258.5 $3,698.5 $2,751.7
Europe 1,215.6 909.9 572.0
Asia 1,077.0 708.6 412.0
Intersegment adjustments (159.7) (28.7) (41.3)
-------- -------- --------
$8,391.4 $5,288.3 $3,694.4
======== ======== ========
Depreciation and amortization:
Americas $ 113.6 $ 73.4 $ 65.2
Europe 24.4 22.8 18.7
Asia 35.6 21.8 19.0
Corporate 9.6 6.2 1.7
-------- -------- --------
$ 183.2 $ 124.2 $ 104.6
======== ======== ========
Interest income:
Americas $ 18.6 $ 14.2 $ 7.4
Europe 2.8 3.7 1.6
Asia 1.9 1.1 0.7
Corporate 37.8 23.8 28.1
Intersegment adjustments (31.2) (18.0) (9.3)
-------- -------- --------
$ 29.9 $ 24.8 $ 28.5
======== ======== ========
Interest expense:
Americas $ 26.5 $ 13.6 $ 6.0
Europe 7.2 6.1 3.5
Asia 0.1 0.2 0.1
Corporate 33.8 22.9 26.4
Intersegment adjustments (31.1) (18.0) (9.5)
-------- -------- --------
$ 36.5 $ 24.8 $ 26.5
======== ======== ========
Pre-tax income:
Americas $ 392.7 $ 236.1 $ 219.0
Europe 36.8 27.7 8.6
Asia 78.7 54.1 24.8
Corporate ( 75.9) (18.9) (14.0)
-------- -------- --------
$ 432.3 $ 299.0 $ 238.4
======== ======== ========
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<PAGE>
1999 1998 1997
-------- -------- --------
Capital expenditures:
Americas $ 268.4 $ 137.0 $ 104.4
Europe 47.2 46.2 26.4
Asia 80.7 50.6 50.5
Corporate 29.5 10.6 6.9
-------- -------- --------
$ 425.8 $ 244.4 $ 188.2
======== ======== ========
Total assets:
Americas $2,492.8 $1,545.0 $ 982.6
Europe 491.7 464.5 307.3
Asia 480.1 331.6 229.1
Corporate 2,317.9 659.9 593.3
Intersegment adjustments (947.8) (590.5) (235.9)
-------- -------- --------
$4,834.7 $2,410.5 $1,876.4
======== ======== ========
The following enterprise-wide information is provided in accordance with SFAS
No. 131. Geographic net sales information reflects the destination of the
product shipped. Long-lived assets information is based on the physical location
of the asset. For major customer information, the Company's operating segments
contributed various percentages aggregating up to 10% or more of consolidated
net sales for such customers identified in Note 13.
1999 1998 1997
-------- -------- --------
(in millions)
Net sales derived from:
PCB assembly $6,643.0 $4,283.5 $3,325.0
Systems build 1,748.4 1,004.8 369.4
-------- -------- --------
$8,391.4 $5,288.3 $3,694.4
======== ======== ========
Geographic net sales:
United States $5,766.0 $3,838.9 $2,862.9
Europe 1,675.4 1,067.2 580.5
Asia and other 950.0 382.2 251.0
-------- -------- --------
$8,391.4 $5,288.3 $3,694.4
======== ======== ========
Long-lived assets:
United States $ 467.5 $ 269.6 $ 208.8
Europe 87.9 82.8 59.5
Asia and other 285.2 170.6 108.5
-------- -------- --------
$ 840.6 $ 523.0 $ 376.8
======== ======== ========
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<PAGE>
Note 13. Major Customers
Net sales to major customers as a percentage of consolidated net sales were as
follows:
1999 1998 1997
------ ------ ------
Cisco Systems, Inc. (Cisco) 12% 11% *
Hewlett-Packard Company (HP) 11% 14% 14%
Sun Microsystems, Inc. (Sun) * 11% *
Nortel Networks, Inc. (formerly
Bay Networks, Inc.) * * 10%
---------------------------
* net sales less than 10%
Solectron has concentrations of credit risk due to sales to these and other
Solectron's significant customers. In particular, Hewlett-Packard Company
accounts for approximately 10% of total accounts receivable at August 31, 1999.
The concentration of credit risk is intensified because the majority of
Solectron's customers are in the same industry. The Company considers its
concentrations of credit risk in establishing the reserves for bad debt and
believes that such reserves are adequate.
Note 14. Purchase of Assets
In October 1998, Solectron acquired the wireless telephone manufacturing assets,
primarily inventory and fixed assets, of Mitsubishi Consumer Electronics
America, Inc.'s (MCEA) Cellular Mobile Telephone (CMT) division in Braselton,
Georgia. MCEA was a subsidiary of Mitsubishi Electric Corporation (Mitsubishi).
The acquisition was accounted for as a purchase of assets, and the purchase
price of approximately $25 million was allocated to the assets acquired based on
their relative fair values at the date of acquisition. Under the terms of the
agreement, the Company will provide MCEA-CMT with a full range of manufacturing
services for five years, including NPI management, PCB assembly and full systems
assembly for MCEA's branded and private-label cellular products sold in North
America.
In February 1999, Solectron acquired IBM's Electronic Card Assembly and Test
(ECAT) manufacturing assets, primarily inventory, in Austin, Texas.
Additionally, Solectron acquired the non-exclusive rights to use certain IBM
intellectual property for approximately $53 million. The total purchase price
for the manufacturing assets and intellectual property rights was approximately
$83 million, subject to adjustment. The transaction was accounted for as a
purchase of assets, and the purchase price was allocated to the assets acquired
based on the relative fair values of the assets at the date of acquisition.
Under the terms of the agreements, Solectron will provide assembly for
motherboards used in IBM's mobile computer products manufactured worldwide for
the next three years. Solectron will also provide IBM's worldwide design teams a
full range of integrated NPI services.
In August 1999, Solectron acquired the manufacturing assets, primarily
inventory, of Trimble Navigation Limited (Trimble) in Sunnyvale, California, and
assumed full manufacturing responsibility of Trimble's Global Positioning System
(GPS) and related radio frequency (RF) technology products for the next three
years. Additionally, Solectron acquired certain intellectual property rights
related to RF technology for approximately $11 million. The total purchase price
for the transaction was approximately $27 million, subject to adjustment. The
acquisition was accounted for as a purchase of assets, and the purchase price
was allocated to the acquired assets based on the relative fair values of the
assets at the date of acquisition.
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<PAGE>
Note 15. Business Combinations
In July 1999, Solectron issued approximately 260,000 shares of common stock to
acquire all of the outstanding capital stock of Sequel, Inc. (Sequel). Sequel is
a privately held corporation specializing in notebook computer and liquid
crystal display repair service and support. This transaction was accounted for
under the purchase method of accounting. The consolidated financial statements
include the operating results of Sequel from the date of acquisition. The total
purchase price was approximately $17.8 million, subject to adjustments. The
acquisition was accounted for as a purchase of a business resulting in goodwill
of approximately $4 million. Pro forma results of operations are not presented
because the effect of this acquisition is not significant.
Note 16. Net Income per Share
The following table sets forth the computation of basic and diluted net income
per share.
Years Ended August 31,
------------------------------
1999 1998 1997
-------- -------- --------
(in millions
except per share data)
Net income - basic $293.9 $198.8 $158.1
Interest expense from convertible
subordinated notes, net of taxes 5.0 9.6 -
------ ------ ------
Net income - diluted $298.9 $208.4 $158.1
====== ====== ======
Weighted average shares - basic 246.3 231.7 223.0
Common stock equivalents-stock options 10.3 7.8 7.6
Common shares issuable upon assumed
conversion of convertible subordinated
notes 6.9 13.6 -
------ ------ ------
Weighted average shares - diluted 263.5 253.1 230.6
====== ====== ======
Net income per share - basic $ 1.19 $ 0.86 $ 0.71
====== ====== ======
Net income per share - diluted $ 1.13 $ 0.82 $ 0.69
====== ====== ======
When the exercise price of an option to purchase common stock is greater than
the average fair market price of the period, such option is not included for the
calculation because the effect would have been antidilutive. During fiscal 1999,
the exercise prices for 1.3 million options were greater than the average fair
market value of $46.02. During fiscal 1998, the exercise prices for 4.2 million
options were greater than the average fair market value of $21.26. At August 31,
1997, the exercise prices for 0.9 million options were greater than the average
fair market value of $14.80.
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<PAGE>
In addition, the calculation for the year ended August 31, 1999 did not include
the 12.4 million common shares issuable upon conversion of the zero-coupon
senior notes as they would have been antidilutive. The calculation for the year
ended August 31, 1997, did not include the 13.6 million common shares issuable
upon conversion of the convertible subordinated notes as they would have been
antidilutive.
Note 17. Subsequent Events
In September 1999, Solectron signed a definitive merger agreement with SMART
Modular Technologies, Inc. (SMART) to exchange approximately 23 million shares
of Solectron common stock for all of the outstanding common stock and stock
options of SMART. SMART is a designer and manufacturer of memory modules and
memory cards, embedded computers and I/O products. Under the terms of the
agreement, the shareholders of SMART will receive 0.51 shares of Solectron
common stock for each share of SMART stock. The transaction is expected to be
accounted for under the pooling of interests method. Solectron and SMART expect
to complete the merger by the end of calendar year 1999. Completion of the
merger is subject to the approval of SMART's shareholders, applicable government
approvals and various conditions of closing.
60
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Solectron Corporation:
We have audited the accompanying consolidated balance sheets of Solectron
Corporation and subsidiaries as of August 31, 1999 and 1998, and the related
consolidated statements of income, stockholders' equity, comprehensive income
and cash flows for each of the years in the three-year period ended August 31,
1999. In connection with our audits of the consolidated financial statements, we
also have audited the financial statement schedule as listed in the Index at
Item 14(a)(2). 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 Solectron
Corporation and subsidiaries as of August 31, 1999 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, 1999, 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.
KPMG LLP
Mountain View, California
September 13, 1999
61
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information required by Item 10 regarding our directors is incorporated by
reference from the information under the caption "Election of Directors" in
Solectron's definitive Proxy Statement. The information required by Item 10
regarding our executive officers appears immediately following Item 4 under Part
I of this Report.
ITEM 11: EXECUTIVE COMPENSATION
The information required by item 11 of Form 10-K is incorporated by reference to
the information contained in the section captioned "Executive Officer
Compensation" of Solectron's definitive Proxy Statement (Notice of Annual
Meeting of Stockholders) for the fiscal year ended August 31, 1999 to be held on
January 11, 2000 which we will file with the Securities and Exchange Commission
within 120 days after the end of the fiscal year covered by this report.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Information regarding this item is incorporated herein by reference from the
section entitled "Security Ownership of Certain Beneficial Owners and
Management" in Solectron's definitive Proxy Statement (Notice of Annual Meeting
of Stockholders) for the fiscal year ended August 31, 1999.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this item is incorporated herein by reference from
the section entitled "Certain Relationships and Related Transactions" in
Solectron's definitive Proxy Statement (Notice of Annual Meeting of
Stockholders) for the fiscal year ended August 31, 1999.
62
<PAGE>
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON
FORM 8-K
(a) 1. Financial Statements. The financial statements listed in Item 8:
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA, above are filed as part of
this Annual Report on Form 10-K, beginning on page 37.
2. Financial Statement Schedule. The financial statement Schedule II -
VALUATION AND QUALIFYING ACCOUNTS is filed as part of this annual
report on Form 10-K, at page 65.
3. Exhibits. The exhibits listed in the accompanying Index to
Exhibits are filed as part of this Annual Report on Form 10-K.
(b) Reports on Form 8-K.
On July 30, 1999, Solectron filed a Current Report on Form 8-K
regarding an Underwriting Agreement entered with Merrill, Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch") providing for the
sale of up to $1,200,000,000 of shares of Solectron's Common Stock.
63
<PAGE>
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.
SOLECTRON CORPORATION
(Registrant)
Date: November 19, 1999 By /s/ Koichi Nishimura
----------------------------
(Koichi Nishimura, President,
Chief Executive Officer and
Chairman of the Board)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Name Title Date
- -------------------------- --------------------- -----------------
/s/ Koichi Nishimura President, Chief
Koichi Nishimura, Ph.D. Executive Officer,
and Chairman of the
Board November 19, 1999
/s/ Susan Wang Chief Financial
Susan S. Wang Officer (Principal
Financial and
Accounting Officer),
Senior Vice President
and Corporate Secretary November 19, 1999
/s/ Winston H. Chen Director November 19, 1999
Winston H. Chen, Ph.D.
/s/ Richard A. D'Amore Director November 19, 1999
Richard A. D'Amore
/s/ Charles A. Dickinson Director November 19, 1999
Charles A. Dickinson
/s/ Heinz Fridrich Director November 19, 1999
Heinz Fridrich
/s/ Philip V. Gerdine Director November 19, 1999
Philip V. Gerdine, Ph.D.
/s/ William A. Hasler Director November 19, 1999
William A. Hasler
/s/ Kenneth E. Haughton Director November 19, 1999
Kenneth E. Haughton, Ph.D.
/s/ Paul R. Low Director November 19, 1999
Paul R. Low, Ph.D.
/s/ Osamu Yamada Director November 19, 1999
Osamu Yamada
64
<PAGE>
SOLECTRON CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in millions)
Amounts
Balance at Charged Balance at
Beginning To End
Description of Period Operations (Deductions) Of Period
- ---------------------- --------- ---------- ------------ ----------
Year ended August 31, 1999:
Allowance for doubtful
accounts receivable $4.0 $2.1 $(0.5) $5.6
Year ended August 31, 1998:
Allowance for doubtful
accounts receivable $4.0 $2.3 $(2.3) $4.0
Year ended August 31, 1997:
Allowance for doubtful
accounts receivable $3.0 $2.3 $(1.3) $4.0
65
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
- ----------- -------------------------------------------------------------------
2.1 [B] Agreement and Plan of Reorganization, by and among the
Company, Force Acq. Corp. and Force Computers, Inc. as
amended.
3.1 [I] Certificate of Incorporation of the Company.
3.2 [I] Bylaws of the Company.
10.1 [A] Preferred Stock Purchase Agreement dated September 29,
1983, together with amendments thereto dated February 28, 1984 and
June 23, 1988.
10.2 [H] Form of Indemnification Agreement between the Company and its
officers, directors and certain other key employees.
10.3 [D] 1983 Incentive Stock Option Plan, as amended August 13, 1991.
10.4 [E] 1988 Employee Stock Purchase Plan, as amended October 1992.
10.5 [C] Amended and Restated 1992 Stock Option Plan.
10.6 [F] Stock Acquisition Agreement dated August 28, 1993, between
the Company and Solectron California Corporation.
10.7 [G] Lease Agreement between BNP Leasing Corporation, as
Landlord, and the Company, as Tenant, Effective September 6, 1994.
10.8 [G] Purchase Agreement, by and between the Company and BNP Leasing
Corporation, dated September 6, 1994.
10.9 [G] Pledge and Security Agreement, by and between the Company, as
Debtor, and BNP Leasing Corporation, as Secured Party, dated
September 6, 1994.
10.10 [G] Assignment and Assumption Agreement between the Company and
Solectron California Corporation, dated November 9, 1994.
10.11 [G] Custodial Agreement by and between the Company, Banque
Nationale De Paris and BNP Leasing Corporation, dated September 6,
1994.
10.12 [H] Modification Agreement (First Amendment to Purchase Agreement
and Second Amendment to Lease Agreement) by and between the Company
and BNP Leasing Corporation, dated May 1, 1997.
10.13 [H] Credit Agreement between the Company and Bank of America
National Trust and Savings Association, as Agent and
Issuing Bank, dated April 30, 1997.
10.14a [I] Amended and Restated Lease Agreement between BNP Leasing
Corporation and Solectron Washington, Inc., dated July 1, 1998.
10.14b [I] Amended and Restated Purchase Agreement between BNP Leasing
Corporation and Solectron Washington, Inc., dated July 1, 1998.
10.14c [I] Amended and Restated Guaranty from Solectron Corporation in
favor of BNP Leasing Corporation, effective as of July 1, 1998.
10.15a [I] Amended and Restated Lease Agreement between BNP Leasing
Corporation and Force Computers, Inc., dated July 16, 1998.
10.15b [I] Amended and Restated Purchase Agreement between BNP Leasing
Corporation and Force Computers, Inc., dated July 16, 1998.
10.15c [I] Amended and Restated Guaranty from Solectron Corporation in
favor of BNP Leasing Corporation, effective as of July 16, 1998.
10.16a [I] Lease Agreement between BNP Leasing Corporation and Solectron
Georgia Corporation, dated October 20, 1998.
10.16b [I] Purchase Agreement between BNP Leasing Corporation and
Solectron Georgia Corporation, dated October 20, 1998.
10.16c [I] Guaranty from Solectron Corporation in favor of BNP Leasing
Corporation, effective as of October 20, 1998.
66
<PAGE>
EXHIBITS (Continued)
Exhibit
Number Description
- ----------- -----------------------------------------------------------
10.17 [J] Agreement and Plan of Reorganization, dated as of September 13,
1999, by and among Solectron Corporation, SM Acquisition
Corporation and SMART Modular Technologies, Inc.
10.18 [J] Stock Option Agreement, dated as of September 13, 1999, by and
between Solectron Corporation and SMART Modular Technologies.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Auditors.
27.1 Financial Data Schedule
Footnotes:
[A] Incorporated by reference to the Exhibits to the Company's
Registration Statement on Form S-1 (File No. 33-22840).
[B] Incorporated by reference to the Exhibits to the Company's
Registration Statement on Form S-4 as amended, filed
November 20, 1996. (File No. 333-15983).
[C] Incorporated by reference to the Exhibits to Company's Registration
Statement on Form S-8 filed April 7, 1999 (File No. 333-75813).
[D] Incorporated by reference to the Exhibits to Company's
Registration Statement on Form S-8 (File No. 33-46686).
[E] Incorporated by reference to the Exhibits to Company's Form 10-K for
the year ended August 31, 1992.
[F] Incorporated by reference to the Exhibits to Company's Form 10-K for
the year ended August 31, 1993.
[G] Incorporated by reference to the Exhibits to Company's Form 10-K for
the year ended August 31, 1994.
[H] Incorporated by reference to the Exhibits to Company's Form 10-K for
the year ended August 31, 1997.
[I] Incorporated by reference to the Exhibits to the Company's Form 10-Q
for the quarter ended February 26, 1999.
[J] Incorporated by reference to the Exhibits to the Company's
Registration Statement on Form S-4 filed October 14, 1999.
67
Exhibit 21.1
SOLECTRON CORPORATION SUBSIDIARIES
State or Other Jurisdiction of
Subsidiary Incorporation or Organization
- ------------ ------------------------------
The Americas
- ------------
Solectron California Corporation California
Solectron Technology, Inc. California
Solectron Washington, Inc. California
Solectron Massachusetts Corporation California
Solectron Texas, Inc. Delaware
Solectron Holdings, Ltd. Delaware
Solectron Georgia Corporation Georgia
Solectron South Carolina Corporation South Carolina
Fine Pitch Technology, Inc. California
Force Computers, Inc. Delaware
Solectron Funding Corporation Delaware
Solectron Federal Systems, Inc. Delaware
Solectron Global Services, Inc. California
Solectron Canada Corporation Canada
Solectron de Mexico, S.A. de C.V. Mexico
Solectron Cayman Ltd. Cayman Islands
Solectron Brasil, Ltda. Brazil
Europe
- ------------
Solectron Sweden AB Sweden
Solectron Romania Srl Romania
Solectron Ireland Holdings, Ltd. Cayman Islands
Solectron Ireland Cayman Islands
Solectron Netherlands Holding B.V. Netherlands
Solectron GmbH Germany
Solectron Grundbesitz GmbH Germany
Solectron France, S.A. France
Solectron Scotland, Limited Scotland
Solectron Israel Ltd. Israel
Force Computers GmbH Germany
Force Computers, SARL France
Force Computers U.K. Limited England
Force Computers Sweden AB Sweden
Asia
- ------------
Solectron Technology Japan, Co. Ltd. Japan
Solectron Cayman (Asia) Ltd. Cayman Islands
Solectron Technology SDN. BHD. Malaysia
Solectron Mauritius Ltd. Mauritius
Solectron Technology (Suzhou) Co., Ltd. Suzhou, Peoples Republic
of China
Solectron Japan, Inc. Japan
Force Computers Japan K.K. Japan
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS
SOLECTRON CORPORATION:
We consent to the incorporation by reference in the registration statements
(Nos. 333-69443, 333-75865, 333-85949, 333-89035, 333-75813, 333-24293,
333-02523, 333-17643, 33-58580, 33-46686, 33-57575, 33-75270 and 33-33461) on
Forms S-3, S-4 and S-8 of Solectron Corporation of our report dated September
13, 1999, relating to the consolidated balance sheets of Solectron Corporation
and subsidiaries as of August 31, 1999 and 1998, and the related consolidated
statements of income, stockholders' equity, comprehensive income and cash flows
for each of the years in the three-year period ended August 31, 1999, and the
related financial statement schedule, which report appears in the August 31,
1999, annual report on Form 10-K of Solectron Corporation.
KPMG LLP
Mountain View, California
November 18, 1999
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