SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): September 5, 2000
SOLECTRON CORPORATION
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(Exact name of registrant as specified in charter)
DELAWARE 1-11098 94-2447045
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(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
777 GIBRALTAR DRIVE, MILPITAS, CALIFORNIA 95035
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 957-8500
NOT APPLICABLE
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(Former name or former address, if changed since last report.)
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Item 5. Other Events
On April 28, 2000, Solectron Corporation (Solectron) completed its acquisition
of AMERICOM Wireless Services, Inc. (AMERICOM). Solectron also completed the
acquisition of the Bluegum Group (Bluegum) on July 14, 2000. Included herein as
Exhibit 99.1 are (i) the audited supplemental consolidated financial statements
of Solectron and subsidiaries as of August 31, 1999 and 1998 and for each of the
years in the three-year period ended August 31, 1999 and (ii) the unaudited
supplemental condensed consolidated financial statements of Solectron and
subsidiaries as of May 31, 2000 and 1999 and for the nine-month periods ended
May 31, 1999 and 1998. These supplemental consolidated financial statements give
retroactive effect to the acquisitions of AMERICOM and Bluegum which were both
accounted for as a pooling of interests.
Item 7. Financial Statements and Exhibits
(a) Exhibits
Exhibit Description Page
------- ----------- ----
23.1 Consent of KPMG LLP, Independent Auditors.............. 5
99.1 Selected Supplemental Consolidated Financial Data...... 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 6
Quantitative and Qualitative Disclosures About Market
Risk................................................. 23
Supplemental Financial Statements and Data............. 25
Independent Auditors' Report........................... 65
Financial Statement Schedule........................... 66
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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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: September 5, 2000 SOLECTRON CORPORATION
/s/ SUSAN S. WANG
Susan S. Wang
Senior Vice President,
Chief Financial Officer and Secretary
(Principal Financial and
Accounting Officer)
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EXHIBIT INDEX
Exhibit Description
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23.1 Consent of KPMG LLP, Independent Auditors
99.1 Selected Supplemental Consolidated Financial Data
Management's Discussion and Analysis of Financial
Condition an Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Supplemental Financial Statements and Data
Independent Auditors' Report
Financial Statement Schedule
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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. 333-92269, 333-89035, 333-85949, 333-75813, 33-75865, 333-69443,
333-24293, 333-17643, 333-02523, 33-57575, 33-58580, 33-46686, 33-75270,
33-33461, 333-34494, and 333-40176) on Forms S-3, S-4 and S-8 of Solectron
Corporation of our report dated August 28, 2000, relating to the supplemental
consolidated balance sheets of Solectron Corporation and subsidiaries as of
August 31, 1999 and 1998, and the related supplemental 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 Form 8-K dated
September 5, 2000 of Solectron Corporation.
KPMG LLP
Mountain View, California
September 5, 2000
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EXHIBIT 99.1
SELECTED SUPPLEMENTAL CONSOLIDATED FINANCIAL DATA
The following selected supplemental consolidated financial information of
Solectron, combined with AMERICOM and Bluegum on a pooling of interests basis
should be read in conjunction with the supplemental consolidated financial
statements and the notes included therein, and the unaudited supplemental
condensed consolidated financial statements and notes included elsewhere in this
document.
Selected Financial Highlights
(In millions, except per share data)
Consolidated Statements of Income Data:
Nine Months Ended
May 31, Years Ended August 31,
----------------- --------------------------------------------
2000 1999 1999 1998 1997 1996 1995
-------- -------- -------- -------- -------- ------- -------
Net sales $9,401.3 $6,961.7 $9,669.2 $6,102.2 $4,408.5 $3,231.8 $2,347.2
Operating income 461.2 366.1 516.1 368.6 303.2 213.6 144.0
Income before
income taxes 488.0 362.3 514.5 375.5 307.5 213.2 140.6
Net income 326.2 246.8 350.3 251.3 203.7 139.6 92.2
Basic net income
per share(1) 0.54 0.46 0.65 0.49 0.42 0.31 0.25
Diluted net income
per share(1) 0.52 0.44 0.61 0.47 0.40 0.30 0.22
Consolidated Balance Sheet Data:
As of May 31, As of August 31,
----------------- --------------------------------------------
2000 1999 1999 1998 1997 1996 1995
-------- -------- -------- -------- -------- -------- -------
Net working
capital $5,738.2 $2,062.3 $3,162.7 $1,278.1 $1,137.5 $ 860.9 $ 377.5
Total assets 9,221.4 3,967.7 5,420.5 2,843.7 2,209.9 1,627.9 1,034.4
Long-term debt 3,295.8 917.7 922.7 386.8 386.2 388.3 31.8
Stockholders'
equity 3,584.6 1,968.1 3,166.9 1,475.4 1,150.2 787.8 564.8
(1) All net income per share amounts have been adjusted to reflect the
two-for-one stock splits through March 8, 2000.
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.
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, Inc.
(Cisco), Compaq Computer Corporation (Compaq), Ericsson Telecom AB (Ericsson),
Hewlett-Packard Company, Inc. (HP), International Business Machines Corporation
(IBM) and Nortel Networks Limited (Nortel). These companies contract with
Solectron to build their products or to obtain other related services.
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Solectron furnishes integrated supply-chain solutions that span the entire
product life cycle - from technology solutions, to manufacturing and operations,
to global services. These services include the following range of services:
- Advanced building block design solutions;
- Product design and manufacturing;
- 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);
- Systems 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/Pacific. 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.
During 1997, Solectron established a strategic, global manufacturing partnership
with Ericsson's Business Area Infocom Systems. 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 February 1998, Bluegum, an Australian subsidiary of Solectron, acquired IBM's
manufacturing facility in Wangaratta, Australia. Under the agreements, IBM
outsourced the manufacturing and functional testing of PCB and the assembly and
system final testing of personal computers and servers to Solectron for three
years. IBM also made available certain of its intellectual property rights to
Solectron.
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 outsourced the manufacturing of certain computer
components to Solectron for at least five years.
In June 1998, Solectron acquired IBM'S 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 provide
PCB assembly services to IBM in North America for three years. In addition, IBM
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.
In September 1998, Solectron's Australian subsidiary, Bluegum, acquired another
manufacturing facility in Australia through the purchase of Alcatel
telecommunications manufacturing operations based in Liverpool, New South Wales.
Alcatel specializes in building next-generation networks and end-to-end data
voice solutions. Under the agreements, we provide a range of manufacturing
services to Alcatel for three years including telecommunications equipment and
PCB assembly. Alcatel also made available certain of its intellectual property
rights to Solectron.
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
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(Mitsubishi). Under the terms of the agreement, we 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.
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, we provide
PCB assembly for motherboards used in IBM's mobile computer products
manufactured worldwide for three years. These services include 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 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 acquired Sequel's business
operations in San Jose, California; Memphis, Tennessee; and Reading, United
Kingdom. We 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 three years. Trimble
specializes 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 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 announced the acquisition of manufacturing assets
in several phases 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 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 also provide IBM for three years fully integrated PCB assembly services
including early prototyping, new product launch, assembly and test, volume
production, end-of-life support and life cycle management. The volume PCB
assembly services were transferred from IBM's Greenock facility to our existing
global manufacturing operations. In addition, we have established a new,
full-service NPI center in Port Glasgow, Scotland, to support the IBM design
teams.
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.
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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 expect to 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.
In November 1999, Solectron completed its acquisition of SMART Modular
Technologies, Inc. (SMART) which was accounted for as a pooling of interests.
SMART is a designer and manufacturer of memory modules and memory cards,
embedded computers, and I/O products. Through the acquisition, Solectron gained
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, Solectron gained design centers in
Fremont, California; Bangalore, India; Boston, Massachusetts; and Ayr, Scotland.
The acquisition enables Solectron to expand its service capabilities and
infrastructure by integrating SMART into the technology business unit with Force
Computers, Inc. (Force). In addition, Solectron is benefiting from the business
purchase transaction of Compaq's embedded and real time product line and
business in Fremont, California and Scotland by SMART in August 1999.
In March 2000, Solectron completed the acquisition of the complex systems
manufacturing assets of Ericsson's telecommunications infrastructure equipment
operations in Longuenesse, France, and Ostersund, Sweden. As part of the
agreement, we 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.
In March 2000, Solectron completed the acquisition of Alcatel's manufacturing
business in Aguadilla, Puerto Rico. As part of the acquisition, we assumed full
manufacturing responsibility for Alcatel's PCB products focused on the
networking and telecommunication industries. Additionally, we will provide a
full range of manufacturing services to Alcatel for the next three years
including prototyping and high-volume PCB assembly.
In April 2000, Solectron completed the acquisition of the manufacturing assets
of Premisys Communications, Inc., a wholly owned subsidiary of Zhone
Technologies, Inc. (Zhone). Zhone is a communications equipment provider
integrating expertise in voice, video and data communications. Under the
agreement, we become Zhone's virtual supply-chain partner and signed a five-year
commitment with Zhone to provide product life cycle management services,
including NPI through repair and end-of-life services.
In April 2000, Solectron completed the acquisition of AMERICOM which was
accounted for as a pooling of interests. AMERICOM, a privately held corporation,
specializes in wireless handset repair and refurbishment and outsourced
technical customer support services. As part of the transaction, we expect to
gain specialized repair and testing equipment and assume responsibility for
AMERICOM's business operations in Los Angeles, California; Louisville, Kentucky;
Baltimore, Maryland; and Dallas, Texas; as well as AMERICOM's field technicians
and support operations throughout the United States.
In June 2000, Solectron acquired the manufacturing assets of six Nortel
manufacturing and repair facilities including Calgary, Canada; Research Triangle
Park, North Carolina; Monterrey, Mexico; Cwmcarn, Wales; Pont de Buis and
Douarnenez, France; and Monkstown, Northern Ireland. On August 31, 2000, we
completed an additional asset acquisition at Nortel manufacturing and repair
operation in Turkey. We will provide prototyping, PCB assembly, small
sub-assembly and repair services to Nortel in these locations. Following the
transaction in Northern Ireland, Solectron purchased a 50,000 square-foot
facility in Carrickfergus, just outside of Belfast. During renovations, we will
operate from Nortel's facility in Monkstown and will transfer work to the new
site, which is expected to be fully operational in September 2000. The new site
will be a NPI center that will serve
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Nortel telecommunications needs and manufacture optical networking products.
Under the terms of the agreements with Nortel, we will pay approximately $900
million to assume the assets contemplated in these agreements. The companies
also entered into a multi-year supply agreement, in excess of $10 billion in
sales, with the option to renew.
In June 2000, Solectron completed the acquisition of IBM Corporation's
manufacturing operations in Hortolandia, Sao Paulo state, Brazil. We will assume
responsibility for the systems configuration and assembly of IBM's Personal
Systems Group, Retail Systems Solutions Group, and Enterprise Systems Group
products sold into the Brazilian, Mercosul and Andean markets. As part of the
multi-year agreement, we will provide IBM with an extensive range of integrated
services including NPI support, PCB and systems assembly, product configuration
services, repair and end-of-life product support.
In July 2000, Solectron completed the acquisition of Bluegum, Australia's
leading electronics contract manufacturer. The transaction was accounted as a
pooling of interests. It is expected that Solectron will gain NPI,
manufacturing, systems assembly, and services capability in Liverpool, New South
Wales; and Wangaratta and Melbourne, Victoria; and program offices in Sydney and
North Melbourne, Australia and Singapore.
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.
In addition, Solectron acquired AMERICOM effective April 28, 2000 and Bluegum
effective July 14, 2000, accounting for both acquisitions as a pooling of
interests. Accordingly, our historical financial statements have been restated
retroactively to include the financial results of both AMERICOM and Bluegum.
RESULTS OF OPERATIONS FOR YEARS ENDED AUGUST 31, 1999, 1998 AND 1997
The following table sets forth, for the periods as indicated certain items in
the Supplemental Consolidated Statements of Income as a percentage of net sales.
The financial information and the discussion below should be read in conjunction
with the supplemental consolidated financial statements and notes thereto.
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Years Ended August 31,
-----------------------
1999 1998 1997
------ ------ ------
Net sales 100.0% 100.0% 100.0%
Cost of sales 90.3 89.1 87.6
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Gross profit 9.7 10.9 12.4
Operating expenses:
Selling, general and
Administrative 3.9 4.4 4.9
Research and development 0.4 0.5 0.5
Acquisition costs -- -- 0.1
------ ------ -----
Operating income 5.4 6.0 6.9
Net interest income -- 0.1 0.1
------ ------ ------
Income before income taxes 5.4 6.1 7.0
Income taxes 1.7 2.0 2.4
------ ------ ------
Net income 3.7% 4.1% 4.6%
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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 $9.7 billion, an
increase of 58.5% over fiscal 1998 net sales. Fiscal 1998 net sales of $6.1
billion were 38.4% 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. 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.
Manufacturing and Operations
Net sales from our worldwide manufacturing operations group have contributed a
significant share of total sales for the past three fiscal years. Fiscal year
1999 sales grew to $8.5 billion, an increase of 62.1% over fiscal year 1998. In
fiscal year 1998 net sales of $5.2 billion were 45.8% greater than fiscal 1997.
Within the Americas, sales growth 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 strategic 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.
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In 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.
All Asia/Pacific 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 Asia/Pacific 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. In addition, Bluegum acquired
Alcatel's telecommunications manufacturing operations in New South Wales,
Australia in September 1998.
Technology Solutions
The technology solutions group consists of SMART Modular Technologies, Inc. and
Force Computers, subsidiaries of Solectron. This business unit was formed on
November 30, 1999 coincident with the merger of SMART. Net sales for the
technology solutions business unit consist of sales of specialty and standard
memory products, PC cards, embedded computer modules and communications card
products. Net sales for fiscal years 1999, 1998 and 1997 were $1.1 billion, $830
million, and $795 million, respectively. The increase in fiscal 1999 of 37.0%
over fiscal 1998 was primarily due to an increase in the average memory
densities of the standard memory products, as well as an increase in embedded
computer and communications card products. Fiscal 1998 sales were slightly
higher than fiscal 1997 due to an increase in sales of standard memory products,
communications card products and embedded computer modules, partially offset by
a substantial decline in the cost of certain memory devices used in production
and a decrease in sales of specialty products.
Global Services
This group was established in June 1999. It consists of three business
acquisitions including Sequel in July 1999, NULOGIX in November 1999 and
AMERICOM in April 2000, as well as a small division of Solectron in Milpitas.
Net sales were $103.9 million, $65.4 million, and $47.5 million in fiscal years
1999, 1998 and 1997, respectively.
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Net Sales from International Sites - Net sales from Solectron's international
sites, as a percentage of consolidated net sales, have grown over the last three
fiscal years. International locations contributed 33% of consolidated net sales
in fiscal 1999, compared to 28% in fiscal 1998 and 21% in fiscal 1997. 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.
Net Sales to Major Customers - Three 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.
Years Ended August 31,
-----------------------
1999 1998 1997
------ ------ -------
Compaq Computer Corporation
(Compaq) 12% * *
Cisco Systems, Inc. (Cisco) 11% 10% *
Hewlett-Packard Company (HP) * 11% 11%
* 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, 68%
of net sales in fiscal 1998 and 63% of net sales in fiscal 1997. We are
dependent upon continued revenues from Compaq, Cisco, HP, IBM 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.
GROSS PROFIT
The gross margin percentages were 9.7%, 10.9% and 12.4% for fiscal 1999, 1998
and 1997, respectively. The reductions primarily reflect increased sales derived
from systems build projects that generally yield lower margins, green field
start-up operations, and an increase in the proportion of technology solutions'
net sales derived from its lower margin standard memory products. Solectron's
net sales from systems build projects contributed 21% of net sales in fiscal
1999, 19% of net sales in fiscal 1998 and 9% 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 our worldwide manufacturing operations, we anticipate that a larger
percentage of our sales may be derived from systems-build projects which
generally yield lower profit margins than PCB assembly. For our technology
solutions business, we expect that a majority of our sales from technology
solutions may continue to be derived from turnkey projects which typically yield
lower profit margins than the consignment projects. In addition, factors
affecting technology solutions' profit margins include the mix between sales of
specialty memory modules, standard memory modules, communication card products
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and embedded computer modules, as well as changes in average memory densities
used in memory products. Currently, a significant amount of net sales are
derived from the sales of standard memory modules which typically have lower
profit margins than its specialty memory modules.
In the foreseeable future, Solectron's overall 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, percentage of sales derived from systems-build and turnkey projects,
pricing within the electronics industry, component costs and delivery linearity,
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.
Increases in the systems-build business or turnkey projects, additional costs
associated with new projects, and price erosion within the electronics industry
could harm our gross margin.
In addition, we have experienced component shortages. While the component
availability fluctuates from time to time and is still subject to lead time and
other constraints, this could possibly have a negative impact on our sales and
gross margins for the foreseeable future. Therefore, 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 41.6% in fiscal 1999 over fiscal 1998 and 24.3% 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. Expenses
incurred relating to the business acquisition from Alcatel in Australia by
Bluegum and the asset acquisitions from Mitsubishi in Braselton, Georgia 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 3.9% in fiscal 1999, 4.4% in
fiscal 1998 and 4.9% 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 technology solutions business unit, 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.
Technology solutions' R&D efforts are concentrated on the design and testing of
new products to be included in its memory, embedded computers and I/O product
lines.
As a percentage of net sales, R&D expenses were 0.4% in fiscal 1999, and 0.5% in
fiscal 1998 and 1997. In absolute dollars, R&D expenses increased 35.5% in
fiscal 1999 over fiscal 1998 and 27.2% in fiscal 1998 over fiscal 1997. The
increases in R&D expenses were primarily due to technology solutions business
unit's focused efforts on the development
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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 technology solutions and the 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 Asia/Pacific sites, particularly at the sites in Malaysia
because of the tax holiday. (See "Income Taxes.")
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 $1.6 million in fiscal 1999 compared to net interest
income of $6.9 million and $4.3 million in fiscal 1998 and fiscal 1997,
respectively. The net interest expense in fiscal 1999 versus net interest income
in fiscal 1998 was primarily attributable to the issuance of 4% yield zero
coupon convertible senior notes in January 1999, partially offset by lower
interest expense from the redemption of 6% convertible subordinated notes due
2006 which were converted to common stock in March 1999. SMART's secondary
public offering of common stock completed during September 1997 has resulted in
significant increases in interest income during fiscal 1998 as compared to
fiscal 1997.
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.
We expect to use more of our cash and short term investments during future
periods in order to fund anticipated future growth.
INCOME TAXES
Income taxes increased to $164.2 million in fiscal 1999 from $124.2 million in
fiscal 1998 and $103.8 million in fiscal 1997, primarily due to increased income
before income taxes. Solectron's effective income tax rate decreased slightly to
31.9% in fiscal 1999 from 33.1% in fiscal 1998 and 33.8% 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.
LIQUIDITY AND CAPITAL RESOURCES
Net working capital was $3.2 billion at August 31, 1999, compared to $1.3
billion at August 31, 1998. A major component of working capital at August 31,
1999, primarily consisted of 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 $164.2 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 as
well as business acquisitions including Alcatel's telecommunications
manufacturing operations in New South Wales, Australia by Bluegum and Compaq's
embedded and real time product line and business in Fremont, California and
Scotland by SMART. In the first nine months 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 operations for the
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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. Subsequent to the year end of fiscal 1999,
Solectron has experienced shortages in certain components resulting in
incomplete kits which contributed to an increase in inventory on hand.
Cash provided by operating activities was $96.6 million in fiscal 1999, $212.3
million in fiscal 1998 and $217.8 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 before
depreciation and amortization, and current liabilities.
During fiscal 1999, Solectron invested approximately $449.4 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 approximately $450 million.
In addition to working capital as of August 31, 1999, which included cash and
cash equivalents of $1.4 billion and short-term investments of $453.6 million,
Solectron has available a $100 million unsecured multi-currency revolving credit
facility is subject to certain financial covenants. We also have approximately
$105 million in unused foreign credit facilities of which $24 million is a
committed credit line.
RESULTS OF OPERATIONS FOR NINE MONTHS ENDED MAY 31, 2000 AND 1999
The following table sets forth, for the periods indicated, certain items in the
Unaudited Supplemental Condensed Consolidated Statements of Income as a
percentage of net sales. The financial information and the discussion below
should be read in conjunction with the unaudited supplemental condensed
consolidated financial statements and notes thereto.
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Nine Months Ended
May 31,
-----------------
2000 1999
------- -------
Net sales 100.0% 100.0%
Cost of sales 90.8 90.4
------- -------
Gross profit 9.2 9.6
Operating expenses:
Selling, general and
administrative 3.4 3.9
Research and development 0.5 0.5
Acquisition and restructuring 0.4 --
------- -------
costs
Operating income 4.9 5.2
Net interest income (expense) 0.3 (0.1)
------- -------
Income before income taxes and
cumulative effect of change
in accounting principle 5.2 5.1
Income tax expense 1.7 1.6
------- -------
Income before cumulative effect of
change in accounting principle 3.5 3.5
------- -------
Cumulative effect of change in
accounting principle -- --
------- -------
Net income 3.5% 3.5%
======= =======
NET SALES
Net sales for the nine-month period of fiscal 2000 increased to $9.4 billion,
35.0% over the same period in fiscal 1999. The growth in sales was primarily
attributable to major new program ramp-ups, strong demand from our customers
worldwide and acquisitions made during fiscal 1999 and through the third quarter
of fiscal 2000. However, the sales increase was constrained by component
shortages.
Solectron has three business units including manufacturing and operations,
technology solutions, and global services. Our core business group,
manufacturing and operations, provided 87.5% and 87.0%, respectively, of net
sales for the nine-month periods in fiscal 2000 and 1999. Our newly established
technology solutions group consisting of SMART and Force contributed 10.8% and
12.0%, respectively, of net sales for the nine-month periods in fiscal 2000 and
1999. The new global services unit pooled with AMERICOM and the services unit of
Bluegum, which started in fiscal 2000, contributed 1.7% and 1.0%, respectively,
of net sales for the nine-month periods in fiscal 2000 and 1999.
Manufacturing and Operations
Net sales from our worldwide manufacturing operations group grew to $8.3 billion
for the nine-month period in fiscal 2000 compared to $6.1 billion for the same
period in fiscal 1999. This increase was 35.8% over the comparable period of
fiscal 1999. The increase in net sales was principally due to strong demand
growth from our customers and acquisitions including Alcatel's
telecommunications manufacturing business in Liverpool, Australia by Bluegum in
September 1998; manufacturing assets of Mitsubishi in October 1998; IBM ECAT in
Austin, Texas in February 1999; Trimble, California in August 1999; IBM's
Netfinity server operations in Greenock, Scotland in September 1999; Ericsson's
telecommunications infrastructure equipment operations in Longuenesse, France
and Ostersund, Sweden in March 2000; and Zhone, California in April 2000; as
well as the acquisition of Alcatel's manufacturing business in Aguadilla, Puerto
Rico in March 2000.
Within the Americas, the Milpitas site in California, Guadalajara site in Mexico
and Charlotte site in North Carolina were the largest contributors primarily due
to new programs from our customers. However, sales in the Americas were impeded
by the shortage of components. Sales growth in the Milpitas site continued
despite the strategic transfer of personal computer PCB programs and computer
peripherals systems assembly programs to Mexico and networking business to
Penang.
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In Europe, the net sales increase in the nine-month period of fiscal 2000 over
the same period of fiscal 1999 primarily resulted from greater demand from our
mobile phone and telecommunications customers. Additionally, the acquisitions of
manufacturing assets of IBM's Netfinity server operations in Greenock, Scotland
in September 1999 and Ericsson's telecommunications infrastructure equipment
operations in Longuenesse, France and Ostersund, Sweden in March 2000
contributed incremental net sales for the nine-month period in fiscal 2000.
In Asia/Pacific, the net sales growth was primarily due to demand growth in
mobile phones, networking and personal computer projects for the nine-month
period in fiscal 2000 compared to the same period of fiscal 1999. Additionally,
the China site started expanding in production to meet demand growth. Our Penang
site in Malaysia continues to benefit from the growth of networking business.
Also, Bluegum acquired Alcatel's telecommunications manufacturing operations in
New South Wales, Australia in September 1998.
Technology Solutions
Net sales from our new technology solutions group, which includes SMART and
Force, grew 22.6% to $1.0 billion for the nine-month period over the same period
of fiscal 1999. The increase in net sales primarily resulted from an overall
increase in the average memory densities incorporated into the standard memory
products and growth in sales of communication card products and embedded
computer modules. In addition, the embedded and real time product line and
business acquired during August 1999 from Compaq further contributed to the
increase. The increase in net sales was partially offset by declines in average
selling prices.
Global Services
This newly established group reported net sales of $160.2 million for the
nine-month period of fiscal 2000 compared to $68.4 million for the same period
in fiscal 1999. Net sales benefited from the business acquisitions of Sequel in
July 1999, NULOGIX in November 1999, AMERICOM in April 2000, and the services
unit of Bluegum in July 2000.
Concentration of Sales - The 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.
International Sales - In the first nine months of fiscal 2000, international
locations contributed 42.8% of consolidated net sales compared to 37.9% in the
same period of fiscal 1999. As a result of Solectron's international sales and
facilities, Solectron's operations are subject to the risks of doing business
abroad. While 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, including potential adverse effects in operating results associated with
the risks of doing business abroad.
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Net Sales to Major Customers - Several of our customers accounted for 10% or
more of our net sales in the nine-month periods of fiscal 2000 and 1999. The
following table details these customers and the percentage of net sales
attributed to them.
Nine Months Ended
May 31,
-----------------
2000 1999
------- -------
Cisco Systems, Inc. (Cisco) 12% 10%
Ericsson Telecom AB (Ericsson) 11% *
Compaq Computer Corporation * 13%
(Compaq)
----------------
* Less than 10%.
No other customer accounted for more than 10% of net sales during any of the
periods presented.
Solectron's top ten customers accounted for approximately 71% and 75%,
respectively, of consolidated net sales in the first nine months of fiscal 2000
and 1999. We are dependent upon continued revenues from Cisco, Ericsson and
Compaq, as well as 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.
GROSS PROFIT
The gross margin percentage decreased to 9.2% for the nine-month period of
fiscal 2000 compared with 9.6% for the same period of fiscal 1999. The reduction
was primarily attributable to manufacturing inefficiencies due to non-linearity
of materials receipts, a high level of business development activities and new
site integration support expenditures, as well as capacity ramp-up for future
demand growth.
For our worldwide manufacturing operations, we anticipate that a larger
percentage of our sales may be derived from systems-build projects which
generally yield lower profit margins than PCB assembly. For our technology
solutions business, we expect that a majority of our sales from technology
solutions may continue to be derived from turnkey projects which typically yield
lower profit margins than the consignment projects. In addition, factors
affecting technology solutions' profit margins include the mix between sales of
specialty memory modules, standard memory modules, communication card products
and embedded computer modules, as well as changes in average memory densities
used in memory products. Currently, a significant majority of net sales are
derived from the sales of standard memory modules which typically have lower
profit margins than its specialty memory modules.
In the foreseeable future, Solectron's overall 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, percentage of sales derived from systems-build and turnkey projects,
pricing within the electronics industry, component costs and delivery linearity,
and the cost structure at individual sites. Over
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time, gross margins at the individual sites and for Solectron as a whole may
continue to fluctuate. Increases in the systems-build business or turnkey
projects, additional costs associated with new projects, and price erosion
within the electronics industry could harm our gross margin.
In addition, we have experienced component shortages. While the component
availability fluctuates from time to time and is still subject to lead time and
other constraints, this could possibly have a negative impact on our sales and
gross margins for the foreseeable future. Therefore, 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 19.4%, for the nine-month period of fiscal 2000 over the same period
of fiscal 1999. As a percentage of net sales, SG&A expenses were 3.4% for the
nine-month period in the fiscal 2000 and 3.9% for the comparable period in
fiscal 1999. The increase in absolute dollars for the fiscal 2000 period
primarily resulted from increased human resources and information systems costs
to support sales growth and increased costs of acquisition related activities.
The decline as a percentage of net sales for the fiscal 2000 period reflects our
on-going effort to manage operating expenses relative to sales growth and gross
margin levels. We anticipate SG&A expenses will increase in terms of absolute
dollars in the future, and may possibly increase as a percentage of revenue, as
we continue to invest in our infrastructure such as marketing, sales,
supply-base management as well as continuing investment in information systems
to support the increased size and complexity of our business.
RESEARCH AND DEVELOPMENT EXPENSES
With the exception of our technology solutions operations, 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. Technology solutions'
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.
As a percentage of net sales, R&D expenses were 0.5% for both nine-month periods
in fiscal 2000 and 1999. In absolute dollars, R&D expenses were $44.7 million in
the first nine months of fiscal 2000 compared to $32.5 million in the same
period of fiscal 1999. The increase in R&D expenses in the fiscal 2000 period
compared to the fiscal 1999 period was primarily due to increased R&D effort at
technology solutions and new R&D projects initiated at various sites. We expect
that R&D expenses will increase in absolute dollars in the future and may
increase as a percentage of net sales as SMART and Force continue to invest in
their R&D efforts and additional R&D projects are undertaken at certain sites.
ACQUISITION AND RESTRUCTURING COSTS
For the nine-month period of fiscal 2000, acquisition costs of $25.5 million
included $20.3 million recorded in the second quarter of fiscal 1999 which
related to the merger of SMART consisting of investment banker fees, legal fees,
accounting fees, registration fees and other incidentals. During the third
quarter of fiscal 2000, acquisition costs of $5.2 million were recorded in
connection with the acquisition of AMERICOM. These costs included direct
transaction fees, as well as legal fees, accounting fees, registration fees and
other incidentals.
Total restructuring costs of $7.7 million for the nine-month period comprised of
$4.7 million which was recorded in the second quarter of fiscal 2000 associated
with the consolidation of certain facilities as a result of the mergers with
SMART and Sequel.
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These restructuring transaction costs of $4.7 million included lease exit costs
of approximately $2.4 million, fixed asset write-offs and other incidental costs
of approximately $1.4 million, as well as severance costs of approximately $0.9
million. In the third quarter of fiscal 2000, restructuring costs of $1.8
million related to re-alignment of the operations in Atlanta, Georgia in third
quarter of fiscal 2000. Such restructuring costs consisted of severance costs,
long-term assets written off and other incidental costs. Additionally, $1.2
million was recorded for long-term assets written off due to operations
restructured in Wangaratta, Australia.
As of May 31, 2000, liabilities related to restructuring activities, totaling
approximately $3.6 million, are expected to be paid out by the end of the
calendar year 2000.
NET INTEREST INCOME (EXPENSE)
Net interest income was $26.8 million for the first nine months of fiscal 2000
compared to $3.8 million of net interest expense for the same period of fiscal
1999. The net interest income in the fiscal 2000 periods primarily resulted from
interest income earned on undeployed cash and investments from the proceeds of
the 2.75% zero-coupon convertible senior notes which were issued in May 2000,
offset in part by interest expense on the 4% and 2.75 yield zero-coupon
convertible senior notes as well as on the 7 3/8% senior notes. In the first
nine-month period of fiscal 2000, we capitalized approximately $0.9 million of
interest expense related to the costs of computer software developed for
internal use. We expect to utilize more of the undeployed cash during fiscal
2000 in order to fund anticipated future growth.
INCOME TAXES
For the nine-month period of fiscal 2000, income taxes increased to $158.3
million from $115.5 million in the fiscal 1999 period. The increase was
primarily due to increased income before income taxes. 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.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-up
Activities." This SOP requires companies to expense all costs incurred in
connection with start-up activities. The Company recorded a cumulative effect of
change in accounting principle of $3.5 million, net of $1.6 million tax benefit
in the first quarter of fiscal 2000.
LIQUIDITY AND CAPITAL RESOURCES
Net working capital was $5.7 billion at May 31, 2000 compared to $3.2 billion at
the end of fiscal 1999. During the first nine months of fiscal 2000, cash, cash
equivalents and short-term investments increased to $3.4 billion from $1.9
billion which reflects the proceeds of 2.75% yield zero-coupon convertible
senior debt issued in May 2000.
We used $297.7 million for acquisitions of additional manufacturing assets from
Trimble in California, acquisition funding of manufacturing assets at IBM's
Netfinity server operations in Greenock, Scotland; Ericsson in France and
Sweden; and Zhone, California; as well as the business acquisitions of NULOGIX
in Canada and Compaq's embedded and real time product line and business in
Fremont, California and Scotland, and Alcatel Puerto Rico during the first nine
months of fiscal 2000.
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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 our operations 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. The increase in inventory levels at May 31, 2000 from
fiscal year end 1999 was primarily due to ramp-up programs, incomplete kits on
hand awaiting short components, and purchased inventory through asset
acquistions.
In the first nine months of fiscal 2000, Solectron invested $323.5 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 which was retired or sold. Expenditures were also made for the
construction of buildings for the sites in Mexico, Romania, North Carolina and
Massachusetts. We expect total capital expenditures in fiscal 2000 to be
approximately $450 million.
In addition to cash and cash equivalents of $2.6 billion and short-term
investments of $0.8 billion as of May 31, 2000, Solectron has available a $100
million unsecured multicurrency revolving credit facility that expires in April
2002. This credit facility is subject to certain financial covenants. We also
have approximately $105 million in unused foreign credit facilities of which $24
million is committed credit line.
"YEAR 2000" ISSUES
Solectron developed a comprehensive program to address the issues associated
with the programming code in the computer systems as the year 2000 approached.
The Year 2000 problem was pervasive and complex, since computer systems,
manufacturing equipment and industrial control systems would have been affected
in some way by the rollover of the two digit year value to 00. Systems that
could not properly recognize such dates could have generated erroneous
information or caused a system to fail. The Year 2000 issue created risk for us
from unforeseen problems in our systems and from those of third parties with
whom we do business.
We experienced no significant operational or administrative problems as we
passed the transition to the year 2000. While the New Year rollover was
potentially the most critical period, the computer related problems may not
surface for months from now. We will continue to diligently monitor the systems
for any Year 2000 issues and any other date related computer issues in the
coming months. Any failure of Solectron's and/or third parties' computer
systems, manufacturing equipment and industrial control systems could materially
harm our ability to conduct business.
The total cost for the completion of Year 2000 program was approximately $35
million. Of this amount, approximately $10.0 million was for the replacement of
capital equipment, approximately half of which comprises noncompliant systems
that would not otherwise have been replaced at that point in time. A significant
portion of these costs was not incremental to us, but rather represented the
redeployment of existing resources. Certain other information technology
projects were delayed due to the focus on Year 2000 issues. The total amount
spent on the program in the prior fiscal year ended August 31, 1999, was $27.0
million, of which $18.0 million principally pertained to payroll costs for
personnel involved in the program and costs of outside consultants and $9.0
million principally pertained to capital expenditures. Prior to fiscal 1999,
costs of software and hardware applications incurred for Year 2000 compliance
were not tracked separately, but were estimated to be in the range of $2.0
million to $3.0 million.
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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
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. We adopted
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." As
amended by SFAS No. 137 and 138, 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.
Solectron will adopt SFAS No. 133 in its first fiscal quarter of 2001.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," which provides guidance related to revenue recognition based on
interpretations and practices followed by the SEC and was effective the first
fiscal quarter of fiscal years beginning after December 15, 1999 and requires
companies to report any changes in revenue recognition as a cumulative change in
accounting principle at the time of implementation in accordance with Accounting
Principles Board opinion 20, "Accounting Changes." Subsequently, SAB No.101A and
101B were issued to delay the implementation of SAB No. 101. It will be
effective for Solectron in the Company's fourth quarter of fiscal 2001.
Solectron is currently evaluating the impact, if any, SAB No. 101 will have on
its financial position or results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY EXCHANGE RATES RISK
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 non functional 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 less than three months and there were no material
deferred gains or losses. In addition, our international operations in some
instances act as a natural hedge because both operating expenses and a portion
of sales are denominated in local currency. In these
23
<PAGE>
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.
Also, since less than 12% of Solectron's net sales are denominated in currencies
other than the U.S. dollar, we do not believe our total exposure to be
significant.
Solectron has currency exposures arising from both sales and purchases
denominated in currencies other than the functional currency of Solectron sites.
Fluctuations in the rate of exchange between the currency of the exposure and
the functional currency of the Solectron site 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.
INTEREST RATE RISK
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 May
31, 2000, approximately 85% of our total portfolio was scheduled to mature in
less than six months. 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 Supplemental
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 $1,326.4 $111.4 $1,437.8 $1,437.8
short-term investments
Average interest rates 5.25% 5.39%
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.
Solectron's long-term 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 exposed to variable interest rates
related to our long-term debt instruments.
24
<PAGE>
SUPPLEMENTAL FINANCIAL STATEMENTS AND DATA
Unaudited Supplemental Quarterly Financial Information
For each fiscal quarter during the first nine months ended May 31, 2000 and two
fiscal years ended August 31, 1999 and August 31, 1998 (in millions except
percentages and per share data):
First Second Third Fourth
2000 Quarter Quarter Quarter Quarter
---- -------- ------- -------- --------
Net sales $2,834.6 $2,921.7 $3,645.0
Gross profit $ 277.0 $ 279.9 $ 305.5
Gross margin 9.8% 9.6% 8.4%
Operating income $ 155.3 $ 135.7 $ 170.2
Operating margin 5.5% 4.6% 4.7%
Income before cumulative effect of
change in accounting principle $ 113.3 $ 96.7 $ 119.7
Cumulative effect of change in
accounting principle,
net of income tax benefi $ (3.5) $ -- $ --
-------- -------- --------
Net income $ 109.8 $ 96.7 $ 119.7
======== ======== ========
Basic net income per share: (1)
Income before cumulative effect of
change in accounting principle $ 0.19 $ 0.16 $ 0.20
Cumulative effect of change in
accounting principle $ (0.01) $ -- $ --
-------- -------- --------
Net income $ 0.18 $ 0.16 $ 0.20
-------- -------- --------
Diluted net income per share: (1)
Income before cumulative effect
of change in accounting
principle $ 0.18 $ 0.16 $ 0.19
Cumulative effect of change in
accounting principle $ (0.01) $ -- $ --
-------- -------- --------
Net income $ 0.17 $ 0.16 $ 0.19
======== ======== ========
1999
----
Net sales $2,272.0 $2,249.3 $2,440.4 $2,707.5
Gross profit $ 211.7 $ 216.9 $ 240.8 $ 266.9
Gross margin 9.3% 9.6% 9.9% 9.9%
Operating income $ 115.1 $ 117.0 $ 134.0 $ 150.0
Operating margin 5.1% 5.2% 5.5% 5.5%
Net income $ 77.5 $ 78.4 $ 90.9 $ 103.5
Basic net income
per share(1) $ 0.15 $ 0.15 $ 0.16 $ 0.18
Diluted net income
per share(1) $ 0.14 $ 0.14 $ 0.16 $ 0.17
1998
----
Net sales $1,340.9 $1,369.4 $1,465.0 $1,926.9
Gross profit $ 160.3 $ 158.6 $ 159.6 $ 188.1
Gross margin 12.0% 11.6% 10.9% 9.8%
Operating income $ 90.0 $ 92.4 $ 83.4 $ 102.8
Operating margin 6.7% 6.7% 5.7% 5.3%
Net income $ 61.7 $ 63.1 $ 57.8 $ 68.7
Basic net income
per share (1) $ 0.12 $ 0.12 $ 0.11 $ 0.13
Diluted net income
per share (1) $ 0.12 $ 0.12 $ 0.11 $ 0.13
(1) Adjusted to reflect two-for-one stock splits through March 8, 2000.
25
<PAGE>
SOLECTRON CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(In millions, except per share data)
As of August 31,
------------------
1999 1998
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $1,428.1 $ 306.4
Short-term investments 453.6 183.5
Accounts receivable, less allowances
Of $6.4 and $4.7, respectively 1,282.5 785.5
Inventories 1,197.0 843.8
Prepaid expenses and other
current assets 121.2 136.3
-------- --------
Total current assets 4,482.4 2,255.5
Net property and equipment 723.8 505.3
Other assets 214.3 82.9
-------- --------
Total assets $5,420.5 $2,843.7
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 46.9 $ 23.8
Accounts payable 1,050.4 751.2
Accrued employee compensation 103.7 83.2
Accrued expenses 46.6 39.6
Other current liabilities 72.1 79.6
-------- --------
Total current liabilities 1,319.7 977.4
Long-term debt 922.7 386.8
Other long-term liabilities 11.2 4.1
-------- --------
Total liabilities 2,253.6 1,368.3
-------- --------
Commitments
Stockholders' equity:
Preferred stock, $.001 par value; 1.2
shares authorized; no shares issued -- --
Common stock, $.001 par value; 800.0
shares authorized; 594.1 and 519.9
shares issued and outstanding,
respectively, adjusted for stock split
effective March 8, 2000 0.3 0.2
Additional paid-in capital 2,081.4 658.6
Retained earnings 1,173.1 824.8
Accumulated other comprehensive losses (87.9) (8.2)
-------- --------
Total stockholders' equity 3,166.9 1,475.4
-------- --------
Total liabilities and stockholders'
equity $5,420.5 $2,843.7
======== ========
See accompanying notes to supplemental consolidated financial statements.
26
<PAGE>
SOLECTRON CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share data)
Years Ended August 31,
---------------------------
1999 1998 1997
-------- -------- --------
Net sales $9,669.2 $6,102.2 $4,408.5
Cost of sales 8,732.9 5,435.6 3,862.1
-------- -------- --------
Gross profit 936.3 666.6 546.4
Operating expenses:
Selling, general and
Administrative 379.7 268.1 215.7
Research and development 40.5 29.9 23.5
Acquisition costs -- -- 4.0
-------- -------- --------
Operating income 516.1 368.6 303.2
Interest income 36.7 32.3 31.2
Interest expense (38.3) (25.4) (26.9)
-------- -------- --------
Income before income taxes 514.5 375.5 307.5
Income taxes 164.2 124.2 103.8
-------- -------- --------
Net income $ 350.3 $ 251.3 $ 203.7
======== ======== ========
Net income per share:
Basic $ 0.65 $ 0.49 $ 0.42
Diluted $ 0.61 $ 0.47 $ 0.40
Weighted average number of shares:
Basic 542.6 510.1 487.4
Diluted 579.0 556.6 507.8
See accompanying notes to supplemental consolidated financial statements.
27
<PAGE>
SOLECTRON CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In millions)
<TABLE>
<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 460.3 $0.1 $ 415.2 $ 370.7 $ 1.8 $ 787.8
Net income -- -- -- 203.7 -- 203.7
Foreign currency translation -- -- -- -- (12.4) (12.4)
Stock issued under stock
option and employee
purchase plans 15.1 -- 42.0 -- -- 42.0
Stock issued in business
combination 24.8 -- 24.0 -- -- 24.0
Issuance of common stock, net 2.9 -- 86.9 -- -- 86.9
Repayment of shareholder
note receivable -- -- 0.3 -- -- 0.3
Tax benefit associated with
exercise of stock options -- -- 17.9 -- -- 17.9
------ ------ ------- -------- -------- --------
Balances as of August 31,1997 503.1 0.1 586.3 574.4 (10.6) 1,150.2
Net income -- -- -- 251.3 -- 251.3
Foreign currency translation -- -- -- -- 2.4 2.4
Stock issued under stock
option and employee
purchase plans 15.4 0.1 54.2 -- -- 54.3
Issuance of common stock, net 1.9 -- 15.7 -- -- 15.7
Repayment of shareholder
note receivable 0.1 -- 0.1 -- -- 0.1
Cash dividends -- -- -- (0.9) -- (0.9)
Repurchase of common stock (0.6) -- (9.2) -- -- (9.2)
Tax benefit associated with
exercise of stock options -- -- 11.5 -- -- 11.5
------- ------ ------- ------- -------- --------
Balances as of August 31,1998 519.9 0.2 658.6 824.8 (8.2) 1,475.4
Net income -- -- -- 350.3 -- 350.3
Foreign currency translation -- -- -- -- (78.6) (78.6)
Unrealized loss on investments -- -- -- -- (1.1) (1.1)
Stock issued under stock
option and employee
purchase plans 12.7 -- 81.5 -- -- 81.5
Issuance of common stock
dividends -- 0.1 -- (0.1) -- --
Conversion of long-term
debt, net 27.2 -- 225.3 -- -- 225.3
Issuance of common stock,
net of issuance
costs of $32.5 34.2 -- 1,069.9 -- -- 1,069.9
Stock issued in business
combination 0.5 -- 17.8 -- -- 17.8
Cash dividends -- -- -- (1.9) -- (1.9)
Repurchase of common stock (0.4) -- (7.1) -- -- (7.1)
Tax benefit associated with
exercise of stock options -- -- 35.4 -- -- 35.4
------ ------ -------- -------- -------- --------
Balances as of August 31,1999 594.1 $0.3 $2,081.4 $1,173.1 $ (87.9) $3,166.9
====== ====== ======== ======== ======== ========
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
28
<PAGE>
SOLECTRON CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
Years Ended August 31,
------------------------
1999 1998 1997
------- ------- ------
Net income $350.3 $251.3 $203.7
Other comprehensive income (loss):
Foreign currency translation
adjustments, net of income tax benefit
of $0.4 in 1999 (78.6) 2.4 (12.4)
Unrealized loss on investments, net of
income tax benefit of $0.6 in 1999 (1.1) -- --
------ ------ ------
Comprehensive income $270.6 $253.7 $191.3
====== ====== ======
-----------
Accumulated foreign currency translation losses were $86.8 million at August 31,
1999, $8.2 million at August 31, 1998, and $10.6 million 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 $1.1 million at August 31, 1999.
See accompanying notes to supplemental consolidated financial statements.
29
<PAGE>
SOLECTRON CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Years Ended August 31,
--------------------------
1999 1998 1997
-------- --------- -------
Cash flows from operating Activities:
Net income $350.3 $251.3 $203.7
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 200.4 134.6 109.9
Non-cash interest expense 18.5 -- --
Tax benefit associated with the
exercise of stock options 35.4 11.5 17.9
Gain on disposal of fixed assets (4.6) (2.3) --
Other 5.5 (0.6) (6.9)
Changes in operating assets
and liabilities:
Accounts receivable (505.2) (271.2) (110.0)
Inventories (329.7) (165.2) (115.9)
Prepaid expenses and other
current assets 16.2 (38.7) (62.3)
Accounts payable 294.8 248.8 143.4
Accrued expenses and other
current liabilities 15.0 44.1 38.0
------ ------ ------
Net cash provided by
Operating activities 96.6 212.3 217.8
------ ------ ------
Cash flows from investing activities:
Purchases of short-term (598.0) (244.9) (310.8)
investments
Sales and maturities of short-term
investments 327.8 358.1 204.4
Acquisition of manufacturing
locations and assets (164.2) (204.0) --
Capital expenditures (449.4) (279.1) (205.7)
Proceeds from sales of fixed
assets 41.7 60.4 11.5
Other (32.0) (15.6) 16.5
------ ------ ------
Net cash used in investing
activities (874.1) (325.1) (284.1)
------ ------ ------
(continued)
30
<PAGE>
SOLECTRON CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL 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 22.1 22.8 0.8
Net proceeds from issuance of
long-term debt 732.1 1.4 --
Repayments of long-term debt (2.7) (2.3) (4.7)
Repurchase of common stock (7.1) (9.2) --
Proceeds from exercise of stock
options 81.5 54.3 42.0
Net proceeds from issuance of
common stock 1,069.9 15.7 86.9
Dividends paid (1.4) (0.4) --
Other (0.4) (2.2) --
------- ------ ------
Net cash provided by financing
activities 1,894.0 80.1 125.0
------- ------ ------
Effect of exchange rate changes on
cash and cash equivalents 5.2 1.7 (3.5)
------- ------ ------
Net increase (decrease) in cash
and cash equivalents 1,121.7 (31.0) 55.2
Cash and cash equivalents at
beginning of year 306.4 337.4 282.2
------- ------ ------
Cash and cash equivalents at
end of year $1,428.1 $306.4 $337.4
======== ====== ======
Cash paid:
Interest $ 27.7 $ 25.7 $ 38.7
Income taxes $ 114.5 $ 93.7 $108.6
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 supplemental consolidated financial statements.
31
<PAGE>
SOLECTRON CORPORATION AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL 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, including technology, manufacturing and global services. The
Company's primary services include the manufacturing and testing of PCB
assemblies as well as system level assembly and testing. In addition, the
Company designs, manufactures and markets memory modules, flash memory cards,
high performance embedded computer modules and systems and I/O product solutions
primarily to the computer, networking, telecommunications and medical imaging
industries. 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/Pacific.
The accompanying supplemental consolidated financial statements include the
accounts of Solectron and its subsidiaries after elimination of intercompany
accounts and transactions.
On April 28, 2000, Solectron completed its acquisition of AMERICOM, a privately
held corporation which specializes in wireless handset repair and refurbishment
and outsourced technical customer support services. Solectron issued
approximately 1.8 million shares of its common stock to exchange for all
outstanding common stock and to extinguish obligations under the stock
appreciation rights plan of AMERICOM. On July 14, 2000, Solectron completed the
acquisition of Bluegum which is a leading electronics contract manufacturer in
Australia. Solectron issued approximately 2.3 million shares of its common stock
to exchange for all outstanding common shares and stock options of Bluegum. Both
transactions were accounted for as a pooling of interests.
Accordingly, Solectron's historical financial statements have been restated
retroactively to include the financial results of AMERICOM and Bluegum. While
AMERICOM's fiscal year was from January 1 to December 31, Bluegum's fiscal year
was from July 1 to June 31 since its inception from February 1998. AMERICOM's
results of operations for the years ended December 31, 1999, 1998 and 1997
together with Bluegum's results of operations for the years ended June 30, 1999
and 1998 have been combined with Solectron's results of operations for the years
ended August 31, 1999, 1998 and 1997, respectively. AMERICOM's balance sheets as
of December 31, 1999 and 1998 together with Bluegum's balance sheets as of June
30, 1999 and 1998 have been combined with Solectron's balance sheets as of
August 31, 1999 and 1998, respectively. Both AMERICOM and Bluegum changed their
fiscal year ends to coincide with Solectron's beginning in fiscal 2000.
Restated financial information includes certain adjustments for the elimination
of net sales and cost of sales related to shipments by Solectron to Bluegum as
well as for certain reclassifications made to AMERICOM's and Bluegum's financial
statements to conform with Solectron's financial statement presentation. There
were no adjustments necessary to conform the accounting policies of the
combining companies.
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
32
<PAGE>
investments are investment grade short-term debt instruments with original
maturities greater than three months.
Solectron accounts for its investments in debt and equity securities pursuant to
the provisions of Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." 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 loss, 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, Australia and Scotland are 30 years, 40
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 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.
(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
33
<PAGE>
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 splits effective through March 8, 2000.
(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.
(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
supplemental 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 supplemental 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 supplemental
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
34
<PAGE>
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.
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." As
amended by SFAS No. 137 and 138, 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.
Solectron will adopt SFAS No. 133 in its first fiscal quarter of 2001.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," which provides guidance related to revenue recognition based on
interpretations and practices followed by the SEC and was effective the first
fiscal quarter of fiscal years beginning after December 15, 1999 and requires
companies to report any changes in revenue recognition as a cumulative change in
accounting principle at the time of implementation in accordance with Accounting
Principles Board opinion 20, "Accounting Changes." Subsequently, SAB No.101A and
101B were issued to delay the implementation of SAB No. 101. It will be
effective for Solectron in the Company's fourth quarter of fiscal 2001.
Solectron is currently evaluating the impact, if any, SAB No. 101 will have on
its financial position or results of operations.
(o) Reclassifications: Certain prior year amounts have been reclassified to
conform to the 1999 presentation.
35
<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 $ 229.6 $ --
Money market funds 119.7 0.7
Certificates of deposit 55.1 38.8
Market auction securities 33.5 39.1
U.S. government securities 603.9 274.4
Corporate obligations 313.9 100.6
Other 72.4 --
------- ------
Total $1,428.1 $453.6
======== ======
1998
----------------------------
Cash $ 138.6 $ --
Money market funds 74.2 --
Certificates of deposit 0.1 11.4
Market auction securities 10.7 28.8
U.S. government securities 52.0 118.2
Corporate obligations 6.0 17.5
Municipal obligations 5.4 --
Other 19.4 7.6
------- ------
Total $ 306.4 $183.5
======= ======
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 and 1998 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 $ 862.9 $617.3
Work-in-process 237.6 175.6
Finished goods 96.5 50.9
-------- ------
Total $1,197.0 $843.8
======== ======
36
<PAGE>
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment as of August 31, 1999 and 1998, consisted of:
1999 1998
------- ------
(in millions)
Land $ 24.8 $ 23.6
Buildings and improvements 142.8 99.4
Leasehold improvements 61.8 46.7
Factory equipment 749.9 575.4
Computer equipment and
software 168.9 92.1
Furniture, fixtures and other 48.9 38.9
Construction-in-progress 94.0 59.3
------ ------
1,291.1 935.4
Less accumulated depreciation
and amortization 567.3 430.1
------ ------
Net property and equipment $723.8 $505.3
====== ======
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.
In May 1999, Solectron entered into a new unsecured revolving bank line of
credit agreement that expired in May 2000. Borrowings under this agreement were
limited to $30 million and bear interest at either one percent below the bank's
prime rate or a 1% spread over LIBOR, at Solectron's option. The Company was
required to maintain specified levels of tangible net worth and comply with
certain other covenants related to this line of credit. As of August 31, 1999,
no borrowings were outstanding under this agreement.
Additionally, AMERICOM had a bank line of credit of $12 million as of its fiscal
year ended December 31, 1999. Borrowings against this line of credit, which was
terminated in May 2000, were $8.0 million with an interest rate of 8.5% per
annum.
Solectron also had approximately $127 million in uncommitted foreign lines of
credit and other bank facilities as of August 31, 1999. Borrowings were payable
on demand. The interest rates ranged 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. In addition, Solectron's
Australian site, Bluegum, had approximately $42.5 million in committed lines of
credit with its local banks, which were terminated in July 2000. As of Bluegum's
fiscal year ended June 30, 1999, borrowings under these lines of credit were
$15.6 million and had a weighted-average interest rate of 6.95% per annum, and
it had a non-interest bearing short-term note balance of $1.8 million to be paid
off in two six-month installments by June 30, 2000 to IBM resulting from its
acquisition of IBM's manufacturing facility in Wangaratta, Australia in February
1998.
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.
37
<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 27.2 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 $5.3 in 1999 and
$7.0 in 1998 5.3 7.0
------ ------
Total long-term debt $922.7 $386.8
====== ======
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 14.944 shares per note, adjusted for the two-for-one
stock splits effective through March 8, 2000. 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 $33.80 per share as
adjusted for the two-for-one stock splits through March 8, 2000. 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 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.
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.
38
<PAGE>
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 AND CONTINGENCIES
Solectron leases various facilities under operating lease agreements. The
facility leases outstanding as of August 31, 1999 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 or reach an agreement with the lessor to extend the lease 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 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 $73.2 million, $58.5 million, $93.5
million, $59.6 million and $69.4 million in each of the years in the five-year
period ending August 31, 2004, and an aggregate $5.0 million for periods after
that date. Rent expense was $89.3 million, $35.9 million and $24.6 million for
the years ended August 31, 1999, 1998 and 1997, respectively.
39
<PAGE>
SMART Modular Technologies, Inc. (SMART), a wholly owned subsidiary of
Solectron Corporation, and certain of SMART's ex-officers and ex-directors
have been named as defendants in six securities class action lawsuits filed
in the United States District Court for the Northern District of California,
Boren v. SMART Modular Technologies, Inc., et al., No. C 98 20692 JW (PVT)
(filed July 1, 1998), Woszczak v. SMART Modular Technologies, Inc., et al.,
No. C 98 2617 JL (filed July 2, 1998), Bisson v. SMART Modular Technologies,
Inc., et al., No. C 98 20714 JF (filed July 8, 1998), D'Amato v. SMART
Modular Technologies, Inc., et al., No. C 98 2804 PJH (filed July 16, 1998),
Cha v. SMART Modular Technologies, Inc., et al., No. C 98 2833 BZ (filed
July 17, 1998) and Chang v. SMART Modular Technologies, Inc., et al., No. C
98 3151 SI (filed August 13, 1998) (collectively, the "Federal Actions").
The plaintiffs in the Federal Actions allege that defendants made material
misrepresentations and omissions during the period from July 1, 1997 through
May 21, 1998 in violation of Section 10(b) of the Securities Exchange Act of
1934 and Rule 10b-5 promulgated thereunder. The Federal Actions were
consolidated on October 9, 1998, and a consolidated complaint was filed on
November 30, 1998 (the "Federal Complaint"). On November 2, 1999, defendants
filed a motion to dismiss the Federal Complaint. This motion is pending.
On October 22, 1998, a putative securities class action lawsuit, captioned
Reagan v. SMART Modular Technologies, Inc., et al., Case No. H204162-5 (the
"State Complaint"), was filed against SMART and certain of ex-officers and
ex-directors in the Superior Court of the State of California, County of
Alameda. The State Complaint alleges violations of Sections 25400 and 25500 of
the California Corporations Code and seeks unspecified damages on behalf of a
purported class of purchasers of SMART common stock during the period from July
1, 1997 through May 21, 1998. The factual allegations of the State Complaint are
nearly identical to the factual allegations contained within the Federal
Complaint. On February 22, 1999, the Superior Court granted SMART's motion to
stay the state action pending resolution of the federal action.
While the Company believes that all claims related to the state and federal
securities actions are without merit and intends to defend itself vigorously
against these actions, it is possible that an unfavorable outcome may result.
The Company is unable to estimate the financial impact, if any, of these cases.
Accordingly, no amounts have been accrued in the accompanying supplemental
consolidated financial statements.
NOTE 9. RETIREMENT PLANS
Solectron has various retirement plans that cover a significant number of its
associates. The major plans are defined contribution plans, which provide
retirement 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
retirement 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 $11.3 million, $5.0 million
and $3.2 million in 1999, 1998 and 1997, respectively.
40
<PAGE>
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 $ 81.6 $ 90.1 $ 75.7
State 15.2 16.4 14.4
Foreign 29.7 19.9 7.5
------ ------ ------
126.5 126.4 97.6
------ ------ ------
Deferred:
Federal (3.1) (7.9) (10.3)
State 1.4 (1.8) (1.4)
Foreign 4.0 (4.0) --
------ ------ -----
2.3 (13.7) (11.7)
------ ------ ------
Charge in lieu of taxes
attributable to
employee stock plans 35.4 11.5 17.9
------ ------ ------
Total $164.2 $124.2 $103.8
====== ====== ======
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 2.9 3.2 3.1
Income of international
subsidiaries taxed at
different rates 0.1 (1.0) (0.9)
Tax holiday (5.9) (5.6) (3.0)
Tax credits (0.1) (0.1) (0.4)
Tax exempt interest income (0.3) (0.4) (0.2)
FSC benefit (0.1) (0.1) (0.1)
Other 0.3 2.1 0.3
---- ---- ----
Effective income tax rate 31.9% 33.1% 33.8%
==== ==== ====
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 $19.3 $22.4
State income tax 5.4 7.1
Acquired intangible assets 3.3 1.9
Net undistributed profits of
Subsidiaries 2.8 2.2
Plant and equipment 4.0 5.8
Net operating loss carryover 8.0 0.6
Other 5.2 3.7
----- -----
Total deferred tax assets 48.0 43.7
----- -----
Deferred tax liabilities:
Depreciation (3.3) (0.5)
Other (2.7) (0.3)
----- -----
Total deferred tax liabilities (6.0) (0.8)
----- -----
Net deferred tax assets $42.0 $42.9
===== =====
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.
41
<PAGE>
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. $349.7 $279.2 $263.1
Non-U.S. 164.8 96.3 44.4
------ ------ ------
Total $514.5 $375.5 $307.5
====== ====== ======
Cumulative undistributed earnings of the international subsidiaries amounted to
$374.6 million as of August 31, 1999, of which approximately $351.7 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
$82.2 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, 34.1
million shares of common stock which generated net proceeds of approximately
$1.1 billion.
Stock Repurchase
During fiscal 1999, SMART repurchased approximately 454,000 shares of its common
stock in the open market at an average purchase price of $15.75 per share and a
total cost of approximately $7.1 million. During fiscal 1998, SMART repurchased
approximately 632,000 shares of its common stock in the open market at an
average purchase price of $14.50 per share and a total cost of approximately
$9.2 million. As of August 31, 1999, all shares repurchased by SMART had been
reissued pursuant to the exercise of stock options previously granted to
employees from its various stock plans.
Stock Split
Effective February 24, 1999 and March 8, 2000, Solectron completed two-for-one
stock splits effected as stock dividends. All references to share and per share
data have been retroactively adjusted to reflect the stock splits.
42
<PAGE>
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 $350.3 $251.3 $203.7
Pro forma $314.3 $222.0 $189.3
Net income per share:
Basic As reported $ 0.65 $ 0.49 $ 0.42
Pro forma $ 0.58 $ 0.43 $ 0.39
Diluted As reported $ 0.61 $ 0.47 $ 0.40
Pro forma $ 0.55 $ 0.42 $ 0.37
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.
1999 1998 1997
----------- ------------ ----------
Expected life of
options 3 to 5 years 3 to 5 years 4.3 to 5 years
Expected life of
purchase rights 3 months 3 months 3 months
Volatility 48% to 80% 44% to 80% 40% to 78%
Risk-free interest
rate 4.5% to 5.8% 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.
In connection with the merger with SMART Modular Technologies, Inc. in November
1999, Solectron assumed all options outstanding under the SMART plans. The
options vest over a three to five year period beginning generally on the grant
date. The term of the options is five years for 10% shareholders (participants
who own stock possessing more than 10% of the voting power of all classes of
SMART's outstanding capital stock) and ten years for all other options. In
October 1995, the Board of Directors suspended the issuance of further grants
under the 1989 Stock Plan. No further options may be granted under the SMART
plans.
43
<PAGE>
In connection with the merger with Bluegum in July 2000, Solectron assumed all
options outstanding under the Bluegum plan. The options vested immediately on
the date of grant and the term of the options is five years. No further options
may be granted under the Bluegum 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 45.5 $ 7.37 47.1 $ 4.71 44.6 $ 3.48
Granted 15.6 $18.04 15.5 $11.82 14.9 $ 7.32
Assumed from
Force plan -- -- -- -- 3.4 $ 0.55
Exercised (11.5) $ 5.69 (14.2) $ 3.19 (13.8) $ 2.43
Canceled (3.7) $ 8.39 (2.9) $ 8.50 (2.0) $ 5.50
----- ----- -----
Outstanding,
end of year 45.9 $11.29 45.5 $ 7.37 47.1 $ 4.71
==== ==== =====
Exercisable
at year-end 22.0 $ 7.61 12.3 $ 9.62 10.7 $11.31
==== ==== ====
Weighted-average
fair value of
options granted
during the year $7.07 $ 4.40 $ 2.98
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 Number Remaining Average Number Average
Exercise of Contractual Exercise of Exercise
Prices Shares Life Price Shares Price
------------- ------ ----------- --------- ------ --------
$ 0.33-$ 1.50* 0.7 5.09 years $ 0.84 0.6 $ 0.78
$ 1.51-$ 3.26 0.1 0.40 years $ 1.97 0.1 $ 1.97
$ 3.27-$ 4.75 7.7 2.57 years $ 4.21 7.5 $ 4.20
$ 4.76-$ 6.00 7.0 3.41 years $ 5.78 5.0 $ 5.76
$ 6.01-$11.00 10.0 4.90 years $ 9.27 4.9 $ 8.99
$11.01-$13.50 10.4 6.28 years $ 12.85 2.3 $ 12.77
$13.51-$16.50 1.1 8.50 years $ 15.86 0.2 $ 16.08
$16.51-$26.50 8.1 7.47 years $ 21.20 1.4 $ 20.73
$26.51-$36.50 0.8 7.21 years $ 35.76 -- $ 36.09
---- ----
$ 0.33-$36.50 45.9 5.14 years $ 11.29 22.0 $ 7.61
==== ====
*Options in this range of exercise prices represent the options assumed in
connection with the acquisition of Force and Bluegum.
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 and have a term
of five years.
44
<PAGE>
Employee Stock Purchase Plan
Under Solectron's Employee Stock Purchase Plans (the Purchase Plans), 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 Plans permit eligible associates to purchase common stock
through payroll deductions for up to 15% of qualified compensation. As of August
31, 1999, 3.7 million shares remain available for issuance under the Purchase
Plans.
The weighted average fair value of the purchase rights granted by Solectron in
fiscal 1999, 1998 and 1997 was $9.67, $4.99 and $2.96, respectively. The
weighted-average fair value of the purchase rights granted by SMART in fiscal
1999, 1998 and 1997 was $5.69, $5.86 and $3.41, respectively.
NOTE 12. SEGMENT AND GEOGRAPHIC INFORMATION
Solectron provides integrated supply chain solutions that span the entire
product life cycle, including technology, manufacturing and services. The
Company has 45 manufacturing facilities in the Americas, Europe and Asia/Pacific
to serve these similar customers. Solectron is operated and managed by industry
segment, as well as geographically. Each industry segment 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 an industry segment and 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 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: manufacturing and
operations, global services and technology solutions. Information about the
operating segments for the fiscal years ended August 31, 1999, 1998 and 1997,
was as follows:
45
<PAGE>
1999 1998 1997
-------- -------- -------
(in millions)
Net sales:
Manufacturing and operations $8,495.6 $5,240.2 $3,594.5
Technology solutions 1,137.5 830.4 794.8
Global services 103.9 65.4 47.5
Intersegment adjustments (67.8) (33.8) (28.3)
-------- -------- --------
$9,669.2 $6,102.2 $4,408.5
======== ======== ========
Depreciation and amortization:
Manufacturing and operations $ 167.8 $ 110.2 $ 96.0
Technology solutions 21.5 16.7 9.3
Global services 2.2 1.5 1.2
Corporate 8.9 6.2 3.4
-------- -------- --------
$ 200.4 $ 134.6 $ 109.9
======== ======== ========
Interest income:
Manufacturing and operations $ 8.0 $ 7.1 $ 3.4
Technology solutions 7.2 8.3 2.7
Global services -- -- --
Corporate 21.4 17.7 24.9
Intersegment adjustments 0.1 (0.8) 0.2
-------- -------- --------
$ 36.7 $ 32.3 $ 31.2
======== ======== ========
Interest expense:
Manufacturing and operations $ 3.4 $ 1.9 $ 0.1
Technology solutions 0.7 0.5 0.3
Global services -- -- --
Corporate 34.5 23.7 26.7
Intersegment adjustments (0.3) (0.7) (0.2)
-------- -------- --------
$ 38.3 $ 25.4 $ 26.9
======== ======== ========
Pre-tax income:
Manufacturing and operations $ 484.0 $ 302.8 $ 235.5
Technology solutions 82.6 81.4 79.5
Global services 9.6 5.5 3.5
Corporate (61.7) (14.2) (11.0)
-------- -------- --------
$ 514.5 $ 375.5 $ 307.5
======== ======== ========
Capital expenditures:
Manufacturing and operations $ 392.0 $ 225.7 $ 174.1
Technology solutions 24.1 40.1 24.2
Global services 3.8 2.7 0.5
Corporate 29.5 10.6 6.9
-------- -------- --------
$ 449.4 $ 279.1 $ 205.7
======== ======== ========
Total Assets:
Manufacturing and operations $3,344.7 $2,298.0 $1,454.4
Technology solutions 556.7 430.0 386.2
Global services 64.8 19.3 12.0
Corporate 2,717.0 942.4 886.9
Intersegment adjustments (1,262.7) (846.0) (529.6)
-------- -------- --------
$5,420.5 $2,843.7 $2,209.9
======== ======== ========
46
<PAGE>
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. No country, other than the United States, accounted for more than
10% of total sales or total assets in the periods presented. 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 $6,502.0 $4,167.9 $3,224.9
Systems build 2,058.6 1,128.6 393.9
Technology solutions
products 1,108.6 805.7 789.7
-------- -------- --------
$9,669.2 $6,102.2 $4,408.5
======== ======== ========
Geographic net sales:
United States $6,514.3 $4,380.1 $3,497.6
Europe 1,959.4 1,271.8 679.2
Asia/Pacific and other 1,230.0 469.8 251.0
Intersegment adjustments (34.5) (19.5) (19.3)
-------- -------- --------
$9,669.2 $6,102.2 $4,408.5
======== ======== ========
Long-lived assets:
United States $ 523.2 $ 304.0 $ 229.2
Europe 100.1 95.7 65.5
Asia/Pacific and other 314.8 188.5 108.5
-------- -------- --------
$ 938.1 $ 588.2 $ 403.2
======== ======== ========
NOTE 13. MAJOR CUSTOMERS
Net sales to major customers as a percentage of consolidated net sales were as
follows:
1999 1998 1997
---- ---- ----
Compaq Computer Corp. (Compaq) 12% * *
Cisco Systems, Inc. (Cisco) 11% 10% *
Hewlett-Packard Company (HP) * 11% 11%
-----------
* net sales less than 10%
Solectron has concentrations of credit risk due to sales to these and other
Solectron's significant customers. In particular, Compaq accounts for
approximately 12% of total accounts receivable, and HP accounts for
approximately 9% 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
47
<PAGE>
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.
NOTE 15. BUSINESS COMBINATIONS
In September 1998, Bluegum acquired Alcatel's telecommunications manufacturing
operations in New South Wales, Australia. This transaction was accounted for
under the purchase method of accounting, and the purchase price of approximately
$23.3 million was allocated to the assets acquired based on the relative fair
values of the assets at the date of acquisition. Pro forma results of operations
are not presented because the effect of this acquisition is not significant.
In July 1999, Solectron issued approximately 520,000 shares of common stock to
acquire all of the outstanding capital stock of Sequel. It was 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.
In August 1999, SMART acquired Compaq's embedded and real time product line and
business in Fremont, California and Scotland. Pursuant to the agreement, SMART
acquired certain assets with a fair value totaling $1.2 million. The acquisition
was accounted for under the purchase method of accounting, and the purchase
price of approximately $16.2 million was allocated to the assets acquired based
on the relative fair values of the assets at the date of acquisition. In
addition, the Company may be required to pay an earn-out payment to Compaq in an
amount not to exceed $5 million provided certain milestones are met during the
twelve month period from September 1, 1999 to August 31, 2000. Pro forma results
of operations are not presented because the effect of this acquisition is not
significant.
NOTE 16. NET INCOME PER SHARE
Share and per share data presented reflect the two-for-one stock splits through
March 8, 2000. The following table sets forth the computation of basic and
diluted net income per share.
48
<PAGE>
Years Ended August 31,
----------------------------
1999 1998 1997
--------- --------- --------
(in millions
except per share data)
Net income - basic $ 350.3 $ 251.3 $ 203.7
Interest expense from
convertible subordinated
notes, net of taxes 5.0 9.6 -
-------- -------- --------
Net income - diluted $ 355.3 $ 260.9 $ 203.7
======== ======== ========
Weighted average shares - basic 542.6 510.1 487.4
Common shares issuable upon
stock options exercised 22.6 19.3 20.4
Common shares issuable upon
conversion of convertible
subordinated notes 13.8 27.2 -
------- -------- --------
Weighted average shares - diluted 579.0 556.6 507.8
======= ======== ========
Net income per share - basic $ 0.65 $ 0.49 $ 0.42
======= ======== ========
Net income per share - diluted $ 0.61 $ 0.47 $ 0.40
======= ======== ========
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, 1998 and 1997, the exercise price for 3.9 million options,
9.9 million options and 2.0 million options, respectively were greater than the
average fair market value of the Company's common stock and consequently were
excluded from the diluted calculation.
In addition, the calculation for the year ended August 31, 1999 did not include
the 24.7 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 27.2 million common shares issuable
upon conversion of the convertible subordinated notes as they would have been
antidilutive.
NOTE 17. SUBSEQUENT EVENTS
On April 28, 2000, Solectron completed its acquisition of AMERICOM, a privately
held corporation which specializes in wireless handset repair and refurbishment
and outsourced technical customer support services. Solectron issued
approximately 1.8 million shares of its common stock in exchange for all
outstanding common stock and to extinguish obligations under the stock
appreciation rights plan of AMERICOM. On July 14, 2000, Solectron also completed
the acquisition of Bluegum which is a leading electronics contract manufacturer
in Australia. Solectron issued approximately 2.3 million shares of its common
stock in exchange for all outstanding common shares and stock options of
Bluegum. Both acquisitions were accounted for as a pooling of interests.
Accordingly, the accompanying supplemental financial data have been restated to
include both AMERICOM and Bluegum.
The results of operations previously reported by the separate enterprises and
the combined amounts presented in the accompanying supplemental consolidated
financial statements are summarized below:
49
<PAGE>
Years Ended August 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
(in millions)
Net sales
Solectron $ 8,391.4 $ 5,288.3 $ 3,694.4
SMART * 995.9 714.6 694.6
Americom ** 63.7 36.7 24.5
Bluegum *** 247.2 87.2 -
Eliminations (29.0) (24.6) (5.0)
--------- --------- ---------
$ 9,669.2 $ 6,102.2 $ 4,408.5
========= ========= =========
Net income
Solectron $ 294.0 $ 198.8 $ 158.1
SMART * 53.5 51.5 45.4
Americom ** 2.8 1.8 0.2
Bluegum *** - (0.5) -
Eliminations - (0.3) -
--------- --------- ----------
$ 350.3 $ 251.3 $ 203.7
========= ========= =========
* Results are for the years ended October 31.
** Results are for the years ended December 31.
*** Results are for the years ended June 30.
No adjustments were necessary to conform accounting policies of the combined
entities.
On November 30, 1999, Solectron completed its acquisition of SMART which is a
designer and manufacturer of memory modules and memory cards, embedded computers
and I/O products. Under the terms of the agreement, each share of SMART common
stock was exchanged for 0.51 shares of Solectron common stock. Solectron issued
approximately 47.6 million shares of Solectron common stock and assumed all
stock options held by SMART employees. The acquisition was accounted for as a
pooling of interests.
On March 1, 2000, Solectron completed the acquisition of 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,
New Product Introduction (NPI) management, complex printed circuit board (PCB)
assembly, configure-to-order and build-to-order complex systems assembly, and
global services.
Effective March 8, 2000, Solectron had a two-for-one stock split effected in the
form of stock dividend and issued to the holders of record as of February 23,
2000. Share and per share data presented reflect such stock split transaction.
On March 31, 2000, Solectron completed the acquisition of Alcatel's
manufacturing business in Aguadilla, Puerto Rico. Alcatel specializes in
building next generation networks and end-to-end data voice solutions. As part
of the acquisition of Alcatel's manufacturing business in Aguadilla, Solectron
will assume full manufacturing responsibility for Alcatel's PCB products
focussed on the networking and telecommunication industries. Additionally,
Solectron will provide a full range of manufacturing services to Alcatel for the
next three years including prototyping and high volume PCB assembly.
On June 5, 2000, Solectron acquired the manufacturing assets of four Nortel
manufacturing facilities including Calgary, Canada; Research Triangle Park,
North Carolina; Monterrey, Mexico; and Cwmcarn, Wales. On June 30, 2000, the
Company completed the purchase of manufacturing assets at two Nortel Networks
manufacturing and repair facilities located in Pont de Buis and Douarnenez,
France, and Monkstown, Northern Ireland. On August 31, 2000, Solectron completed
an additional asset acquisition at Nortel Networks manufacturing and repair
operation in Turkey. Solectron will provide prototyping, PCB assembly, small
sub-assembly and repair services to Nortel in these locations. Under the terms
of the agreements, Solectron will pay approximately $900 million to assume the
assets
50
<PAGE>
contemplated in these agreements. The companies also entered into a multi-year
supply agreement, in excess of $10 billion in sales, with the option to renew.
51
<PAGE>
SOLECTRON CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
May 31, August 31,
2000 1999
--------- ---------
ASSETS
Current assets:
Cash, cash equivalents and
short-term investments $3,419.9 $1,881.7
Accounts receivable, net 1,856.7 1,282.5
Inventories 2,549.3 1,197.0
Prepaid expenses and other
current assets 236.3 121.2
-------- --------
Total current assets 8,062.2 4,482.4
Net property and equipment 848.2 723.8
Other assets 311.0 214.3
-------- --------
Total assets $9,221.4 $5,420.5
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 57.8 $ 46.9
Accounts payable 1,850.5 1,050.4
Accrued employee compensation 120.2 103.7
Accrued expenses 122.5 46.6
Other current liabilities 173.0 72.1
-------- --------
Total current liabilities 2,324.0 1,319.7
Long-term debt 3,295.8 922.7
Other long-term liabilities 17.0 11.2
-------- --------
Total liabilities 5,636.8 2,253.6
-------- --------
Commitments
Stockholders' equity:
Common stock 0.6 0.3
Additional paid-in capital 2,221.5 2,081.4
Retained earnings 1,485.7 1,173.1
Accumulated other comprehensive losses (123.2) (87.9)
-------- --------
Total stockholders' equity 3,584.6 3,166.9
-------- --------
Total liabilities and
stockholders' equity $9,221.4 $5,420.5
======== ========
See accompanying notes to supplemental condensed consolidated financial
statements.
52
<PAGE>
SOLECTRON CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share data)
(Unaudited)
Nine Months Ended
May 31,
--------------------
2000 1999
--------- ---------
Net sales $ 9,401.3 $ 6,961.7
Cost of sales 8,538.9 6,292.3
--------- ---------
Gross profit 862.4 669.4
Operating expenses:
Selling, general and
administrative 323.3 270.8
Research and development 44.7 32.5
Acquisition and restructuring
costs 33.2 --
--------- ---------
Operating income 461.2 366.1
Interest income 67.4 23.4
Interest expense (40.6) (27.2)
--------- ---------
Income before income taxes and
cumulative effect of change
in accounting principle 488.0 362.3
Income tax expense 158.3 115.5
--------- ---------
Income before cumulative effect of
change in accounting principle 329.7 246.8
Cumulative effect of change in
accounting principle (3.5) --
--------- ---------
Net income $ 326.2 $ 246.8
========= =========
Basic net income per share:
Income before cumulative effect
of change in accounting
principle $ 0.55 $ 0.46
Cumulative effect of change in
accounting principle (0.01) --
--------- ---------
$ 0.54 $ 0.46
========= =========
Diluted net income per share:
Income before cumulative effect
of change in accounting
principle $ 0.53 $ 0.44
Cumulative effect of change in
accounting principle (0.01) --
--------- ---------
$ 0.52 $ 0.44
========= =========
Shares used to compute net income
per shares:
Basic 597.8 534.4
Diluted 622.7 573.8
See accompanying notes to supplemental condensed consolidated financial
statements.
53
<PAGE>
SOLECTRON CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
Nine Months Ended
May 31,
---------------------
2000 1999
--------- ---------
Net income $326.2 $246.8
Other comprehensive income (loss):
Foreign currency translation adjustments,
net of income tax benefit of $1.0 in
fiscal 2000 (33.7) (56.9)
Unrealized loss on investments, net of
income tax benefit of $1.0 in fiscal 2000 (1.6) -
-------- ---------
Comprehensive income $ 290.9 $ 189.9
======== =========
---------------
Accumulated foreign currency translation losses were $120.5 million at May 31,
2000 and $86.8 million at August 31, 1999. For the nine-month period of fiscal
year 1999, the foreign currency translation loss primarily resulted from the
devaluation of the Brazilian real. The translation loss for the nine-month
period of fiscal year 2000 was principally due to the weakened French franc and
British sterling. 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 $2.7
million at May 31, 2000 and $1.1 million at August 31, 1999.
See accompanying notes to supplemental condensed consolidated financial
statements.
54
<PAGE>
SOLECTRON CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
Nine Months Ended
May 31,
---------------------
2000 1999
--------- ---------
Cash flows from operating activities:
Net income $ 326.2 $ 246.8
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 173.1 139.1
Non-cash interest expense 27.4 10.6
Tax benefit associated with the
exercise of stock options 52.6 21.5
Cumulative effect of change in
accounting principle for
Start-up costs 3.5 --
Other (4.7) (15.1)
Changes in operating assets
and liabilities:
Accounts receivable (637.7) (255.8)
Inventories (1,192.4) (182.1)
Prepaid expenses and other
current assets (98.6) (10.1)
Accounts payable 874.3 63.9
Accrued expenses and other
current liabilities 198.7 16.6
-------- --------
Net cash (used in) provided by
Operating activities (277.6) 35.4
-------- --------
Cash flows from investing activities:
Purchases of short-term (1,079.1) (494.6)
investments
Sales and maturities of short-term
investments 699.8 286.7
Acquisition of manufacturing
locations and assets (297.7) (108.4)
Capital expenditures (323.5) (328.9)
Proceeds from sales of fixed
assets 71.7 16.8
Other (13.5) (15.4)
--------- --------
Net cash used in investing activities (942.3) (643.8)
--------- -------
(continued)
55
<PAGE>
SOLECTRON CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In millions)
(Unaudited)
Nine Months Ended
May 31,
---------------------
2000 1999
--------- ---------
Cash flows from financing activities:
Net proceeds from bank lines of credit 4.5 14.4
Net proceeds from issuance of
long-term debt 2,297.3 732.2
Repayments of long-term debt (0.5) (2.0)
Repurchase of common stock -- (7.2)
Proceeds from exercise of stock
options 97.1 55.1
Net proceeds from issuance of
common stock 11.1 8.9
Dividends paid (1.4) (1.1)
Other 8.3 15.8
------- -------
Net cash provided by financing
activities 2,416.4 816.1
------- -------
Effect of exchange rate changes on
cash and cash equivalents (15.2) 0.3
-------- -------
Net increase (decrease) in cash
and cash equivalents 1,181.3 208.0
Cash and cash equivalents at
beginning of year 1,417.4 306.4
-------- -------
Cash and cash equivalents at
end of year $2,598.7 $ 514.4
======== =======
Cash paid:
Interest $ 15.8 $ 27.4
Income taxes $ 103.3 $ 85.7
Non cash investing and financing activities:
Issuance of common stock upon
conversion of long-term debt, net $ -- $ 230.0
Issuance of common stock for
business combination, net
of cash acquired $ 1.0 $ --
See accompanying notes to supplemental condensed consolidated financial
statements.
56
<PAGE>
Notes to Supplemental Condensed Consolidated Financial Statements
NOTE A - Basis of Presentation
The accompanying unaudited supplemental condensed consolidated balance sheets as
of May 31, 2000 and August 31, 1999, and the related unaudited supplemental
condensed consolidated statements of income for the nine-month periods ended May
31, 2000 and 1999, and the unaudited supplemental condensed consolidated
statements of comprehensive income for the nine-month periods ended May 31, 2000
and 1999, and the unaudited supplemental condensed consolidated statements of
cash flows for the nine months ended May 31, 2000 and 1999 have been prepared on
substantially the same basis as the annual consolidated financial statements.
Management believes the financial statements reflect all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
Company's financial position, operating results and cash flows for the periods
presented. The results of operations for the nine-month period ended May 31,
2000 are not necessarily indicative of results to be expected for the entire
year. These unaudited supplemental condensed consolidated financial statements
should be read in conjunction with the supplemental consolidated financial
statements and notes thereto for the year ended August 31, 1999 included in Item
5. of this Current Report on Form 8-K.
For clarity of presentation, the Company has indicated its third fiscal quarters
as ending on May 31, 2000 and 1999, and its fiscal year as ending on August 31,
1999. In fact, the Company's third quarter of fiscal 2000 ended on May 26, 2000,
its third quarter of fiscal 1999 ended on May 28, 1999 and its 1999 fiscal year
ended on August 27, 1999.
On April 28, 2000, Solectron acquired AMERICOM, a privately held corporation
which specializes in wireless handset repair and refurbishment and outsourced
technical customer support services. Solectron issued approximately 1.8 million
shares of its common stock in exchange for all outstanding common stock and to
extinguish obligations under the stock appreciation rights plan of AMERICOM. On
July 14, 2000, Solectron acquired Bluegum which is a leading electronics
contract manufacturer in Australia. Solectron issued approximately 2.3 million
shares of its common stock in exchange for all outstanding common shares and
stock options of Bluegum. Both transactions were accounted for as pooling of
interests.
Accordingly, Solectron's historical financial statements have been restated
retroactively to include the financial results of AMERICOM and Bluegum. While
AMERICOM's fiscal year was from January 1 to December 31, Bluegum's fiscal year
was from July 1 to June 31 since its inception from February 1998. AMERICOM and
Bluegum changed their fiscal years to coincide with Solectron's beginning in
fiscal 2000.
Since the results of operations of AMERICOM from September 1, 1999 to December
31, 1999 are included in fiscal year 1999 as well as in first and second
quarters of fiscal 2000, net income of $1.3 million for such period has been
recorded as an adjustment to retained earnings in first quarter of fiscal 2000.
In addition, Bluegum's results of operations for July and August of 1999 are not
included in any fiscal period presented and net loss of $78,000 for such period
has been recorded as an adjustment to retained earnings in the first quarter of
fiscal 2000.
Restated financial information includes certain adjustments for the elimination
of net sales and cost of sales related to shipments by Solectron to Bluegum as
well as for certain reclassifications made on AMERICOM's and Bluegum's to
conform with Solectron's financial statement presentation. There were no
adjustments necessary to conform the accounting policies of the combining
companies.
57
<PAGE>
NOTE B - Inventories
Inventories consisted of (in millions):
May 31, August 31,
2000 1999
-------- ----------
(in millions)
Raw materials $2,006.0 $ 862.9
Work-in-process 380.8 237.6
Finished goods 162.5 96.5
-------- --------
Total $2,549.3 $1,197.0
======== ========
58
<PAGE>
NOTE C - Net Income Per Share
The following table sets forth the computation of basic and diluted net income
per share for the nine-month periods ended May 31, 2000 and 1999.
Nine Months Ended
May 31,
---------------------
2000 1999
--------- ---------
(in millions
except per share data)
Income before cumulative effect
of change in accounting principle $ 329.7 $ 246.8
Cumulative effect of change in
accounting principle, net of
income tax benefit (3.5) --
Interest expense from
convertible subordinated notes,
net of income taxes -- 5.0
-------- ---------
Net income - diluted $ 326.2 $ 251.8
========= =========
Weighted average shares - basic 597.8 534.4
Common shares issuable upon
exercise of stock options 24.9 20.9
Common shares issuable upon
assumed conversion of
convertible subordinated notes -- 18.5
--------- ---------
Weighted average shares - diluted 622.7 573.8
========= =========
Basic net income per share:
Income before cumulative
effect of change in
accounting principle $ 0.55 $ 0.46
Cumulative effect of change in
accounting principle (0.01) --
--------- ---------
Net income per share $ 0.54 $ 0.46
========= =========
Diluted net income per share:
Income before cumulative
effect of change in
accounting principle $ 0.53 $ 0.44
Cumulative effect of change in
accounting principle (0.01) --
--------- ---------
Net income per share $ 0.52 $ 0.44
========== =========
For the nine-month period ended May 31, 2000, options to purchase 1.9 million
shares of the Company's common stock with exercise prices greater than the
average fair market values of its common stock for such period at $39.43, were
not included in the calculation because the effect would have been antidilutive.
Prior to fiscal 2000, the fiscal years of Solectron and SMART differed.
Solectron's condensed consolidated statements of income for the nine-month
period ended May 31, 1999 were combined with SMART's condensed consolidated
statements of income for the nine-month
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period ended July 31, 1999. For Solectron, options to purchase 3.4 million
shares of Solectron's common stock with exercise prices greater than the average
fair market values of its common stock at $19.69 for the nine-month period ended
May 31, 1999 were not included in the calculation because the effect would have
been antidilutive. For SMART, options to purchase 1.5 million shares of SMART's
common stock with exercise prices greater than the average fair market values of
its common stock at $18.31 for the nine-month period ended July 31, 1999 were
not included in the calculation because the effect would have been antidilutive.
In addition, the calculation for the nine-month period ended May 31, 2000 did
not include the 24.7 million and 49.6 million common shares issuable upon
conversion of the zero-coupon senior convertible notes due 2019 and 2020,
respectively, as they would have been antidilutive.
NOTE D - Commitments
Solectron leases various facilities under operating lease agreements. The
facility leases expire at various dates through 2014. Most of 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, Fremont 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 $170 million in total as of May 31, 2000, 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 $100 million unsecured
multicurrency revolving credit facility.
Additionally, 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.
NOTE E - Segment Information
The Company has transitioned its operations into three strategic business units
- manufacturing and operations, technology solutions, and global services. Each
business unit 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 resources for these three business
units. Intersegment adjustments were related primarily to intersegment sales
that were generally recorded at prices that approximated arm's length
transactions. Certain corporate expenses were allocated to these operating
segments and were included for performance evaluation. Some amortization
expenses were also allocated to these operating segments, but the related
intangible assets were not allocated. The accounting policies for the segments
were the same as for Solectron taken as a whole.
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Segment information by business units for the nine-month periods ended May 31,
2000 and 1999, was as follows:
Nine Months Ended
May 31,
---------------------
2000 1999
--------- ---------
Net sales:
Manufacturing and operations $8,281.2 $6,099.7
Technology solutions 1,044.4 851.8
Global services 160.2 68.4
Intersegment adjustments (84.5) (58.2)
-------- --------
$9,401.3 $6,961.7
======== ========
Depreciation and
amortization:
Manufacturing and operations $ 129.1 $ 118.0
Technology solutions 19.3 15.3
Global services 10.4 0.9
Corporate 14.3 4.9
-------- --------
$ 173.1 $ 139.1
======== ========
Interest income:
Manufacturing and operations $ 5.7 $ 5.7
Technology solutions 5.1 5.2
Global services 0.1 --
Corporate 82.2 23.9
Intersegment adjustments (25.7) (11.4)
-------- --------
$ 67.4 $ 23.4
======== ========
Interest expense:
Manufacturing and operations $ 30.0 $ 13.8
Technology solutions 0.8 0.9
Global services 1.1 0.4
Corporate 34.9 23.5
Intersegment adjustments (26.2) (11.4)
-------- --------
$ 40.6 $ 27.2
======== ========
Pre-tax income:
Manufacturing and operations $ 449.1 $ 335.0
Technology solutions 44.9 59.9
Global services (0.3) 6.2
Corporate (10.8) (38.8)
-------- --------
$ 482.9 a,b $ 362.3
======== ========
Capital expenditures:
Manufacturing and operations $ 270.1 $ 289.6
Technology solutions 21.6 15.9
Global services 12.2 1.7
Corporate 19.6 21.7
-------- --------
$ 323.5 $ 328.9
======== ========
May 31, August 31,
2000 1999
---------- ----------
Total Assets:
Manufacturing and operations $ 5,249.7 $ 3,344.7
Technology solutions 602.8 556.7
Global services 110.3 64.8
Corporate 5,611.0 2,717.0
Intersegment Adjustments (2,352.4) (1,262.7)
--------- --------
$ 9,221.4 $5,420.5
========== ========
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----------------------------
a.Includes $5.1 million for cumulative effect of change in accounting principle
for start-up costs.
b.Reflects acquisition costs of $16.5 million, $5.2 million and $3.8 million,
respectively, recorded in technology solutions, global services and corporate;
and restructuring costs of $2.8 million, $1.9 million and $3.0 million,
respectively, recorded in technology solutions, global services and
manufacturing and operations.
NOTE F - Zero-Coupon Convertible Senior Notes
In May 2000, Solectron issued 4,025,000 zero-coupon convertible senior notes at
an issue price of $579.12 per note which resulted in gross proceeds to Solectron
of approximately $2.3 billion under an effective registration statement filed
with the Securities and Exchange Commission. These notes are unsecured and
unsubordinated indebtedness of Solectron with a maturity value aggregating
$4.025 billion. There will be no interest payment by Solectron prior to
maturity. Each note has a yield of 2.75% with a maturity value of $1,000 on May
8, 2020. 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 12.3309 shares per note. Holders may require
Solectron to purchase all or a portion of their notes on May 8, 2003 and May 8,
2010, at a price of $628.57 and $761.00 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 the Company occurring on or before May 8,
2003. Solectron, at its option, may redeem all or a portion of the notes at any
time on or after May 8, 2003.
Note G - Pooling of Interests
On April 28, 2000, Solectron completed the acquisition of AMERICOM, a privately
held corporation which specializes in wireless handset repair and refurbishment
and outsourced technical customer support services and accounted for the
transaction as a pooling of interests. Solectron issued approximately 1.8
million shares of its common stock in exchange for all outstanding stock and to
extinguish obligations under the stock appreciation rights plan of AMERICOM.
This transaction was previously not considered material to the Company's
consolidated results of operations, and the Company's historical financial
statements were not restated to reflect the financial position and results of
operations of AMERICOM. Acquisition costs of $5.2 million were recorded in
connection with the acquisition of AMERICOM. These costs included direct
transaction fees, as well as legal fees, accounting fees, registration fees and
other incidentals.
On July 14, 2000, Solectron completed the acquisition of Bluegum, a leading
electronics contract manufacturer in Australia, and issued approximately 2.3
million shares of its common stock in exchange for all outstanding common shares
and stock options of Bluegum. This acquisition was accounted for as a pooling of
interests. As the combined effect of Bluegum Group and AMERICOM are deemed
material to the Company's consolidated financial statements, Solectron's
historical financial statements have been restated retroactively to include the
financial results of AMERICOM and Bluegum.
The results of operations previously reported by the separate enterprises and
the combined amounts presented in the accompanying supplemental condensed
consolidated financial statements are summarized below:
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Nine Months Ended
May 31,
--------------------
2000 1999
-------- ---------
(in millions)
Net sales
Solectron $ 8,372.2 $ 6,005.3
SMART * 889.6 745.5
Americom ** 53.5 44.0
Bluegum *** 124.8 188.3
Eliminations (38.8) (21.4)
--------- ---------
$ 9,401.3 $ 6,961.7
========= =========
Net income
Solectron $ 307.7 $ 205.1
SMART * 28.4 39.2
Americom ** (2.8) 2.0
Bluegum *** (6.9) 0.5
Eliminations (0.2) -
--------- ---------
$ 326.2 $ 246.8
========= =========
* Results are for the nine months ended May 31, 2000 and July 31, 1999.
** Results are for the nine months ended May 31, 2000 and September 30, 1999.
*** Results are for the nine months ended May 31, 2000 and March 31, 1999.
No adjustments were necessary to conform accounting policies of the combined
entities.
NOTE H - Acquisitions of Manufacturing Assets and Business
On March 1, 2000, Solectron completed the acquisition of the complex systems
manufacturing assets of Ericsson's telecommunications infrastructure equipment
operations in Longuenesse, France, and Ostersund, Sweden. The total purchase
price for the manufacturing assets and intangible assets was approximately
$162.2 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. 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.
On March 31, 2000, Solectron completed the acquisition of Alcatel's
manufacturing business in Aguadilla, Puerto Rico. The purchase price was
approximately $48.2 million, subject to adjustments. The acquisition was
accounted for as a purchase of a business resulting in foreign goodwill of
approximately $13.3 million, subject to adjustment. The condensed consolidated
financial statements include the operating results of this operation from the
date of acquisition. Pro forma results of operations are not presented because
the effect of this acquisition is not significant. Alcatel specializes in
building next-generation networks and end-to-end data voice solutions. As part
of the acquisition of Alcatel's manufacturing business in Aguadilla, Solectron
will assume full manufacturing responsibility for Alcatel's PCB products focused
on the networking and telecommunication industries. Additionally, Solectron will
provide a full range of manufacturing services to Alcatel for the next three
years including prototyping and high-volume PCB assembly.
On April 6, 2000, Solectron announced the completion of acquisition of the
manufacturing assets of Premisys Communications, Inc., a wholly owned subsidiary
of Zhone Technologies, Inc. (Zhone). The total purchase price for the
manufacturing assets and intangible assets was approximately $15.5 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. Zhone is a
communications equipment provider integrating expertise in voice, video and data
communications. Under the agreement, Solectron becomes Zhone's virtual
supply-chain
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partner and signed a five-year commitment with Zhone to provide product life
cycle management services, including NPI through repair and end-of-life
services.
NOTE I - Subsequent Events
On June 5, 2000, Solectron acquired the manufacturing assets of four Nortel
manufacturing facilities including Calgary, Canada; Research Triangle Park,
North Carolina; Monterrey, Mexico; and Cwmcarn, Wales. On June 30, 2000, the
Company completed the purchase of manufacturing assets at two Nortel Networks
manufacturing and repair facilities located in Pont de Buis and Douarnenez,
France, and Monkstown, Northern Ireland. On August 31, 2000, Solectron completed
an additional asset acquisition at Nortel Networks manufacturing and repair
operation in Turkey. Solectron will provide prototyping, PCB assembly, small
sub-assembly and repair services to Nortel in these locations. Under the terms
of the agreements, Solectron will pay approximately $900 million to assume the
assets contemplated in these agreements. The companies also entered into a
multi-year supply agreement, valued in excess of $10 billion in sales, with the
option to renew.
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INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Solectron Corporation:
We have audited the accompanying supplemental consolidated balance sheets of
Solectron Corporation and subsidiaries as of August 31, 1999 and 1998, and the
related supplemental 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 supplemental
consolidated financial statements, we also have audited the financial statement
schedule - valuation and qualifying accounts. These supplemental consolidated
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
supplemental consolidated financial statements and financial statement schedule
based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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.
The supplemental consolidated financial statements and financial statement
schedule give retroactive effect to the merger of Solectron Corporation and
Americom on April 28, 2000 and Bluegum on July 14, 2000, which have been
accounted for as pooling of interests as described in Note 10 to the
supplemental consolidated financial statements. Generally accepted accounting
principles prescribe giving effect to a consummated business combination
accounted for by the pooling-of-interests method in financial statements that do
not include the date of consummation. These financial statements do not extend
through the date of consummation. However, they will become the historical
consolidated financial statements of Solectron Corporation and subsidiaries
after financial statements covering the date of consummation of the business
combination are issued.
In our opinion, the supplemental 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 applicable after consolidated financial statements are
issued for a period which includes the date of consummation of the business
combination. 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
August 28, 2000
65
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FINANCIAL STATEMENT SCHEDULE
The financial statement Schedule II - VALUATION AND QUALIFYING ACCOUNTS is filed
as part of this Form 8-K.
SOLECTRON CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in millions)
Balance Amounts
at Charged Balance at
Beginning To End
Description of Period Operations (Deductions) Of Period
----------- --------- ---------- ------------ ----------
Year ended August 31, 1999:
Allowance for doubtful
accounts receivable $ 4.7 $ 2.5 $(0.8) $ 6.4
Year ended August 31, 1998:
Allowance for doubtful
accounts receivable $ 4.7 $ 3.0 $(3.0) $ 4.7
Year ended August 31, 1997:
Allowance for doubtful
accounts receivable $ 3.6 $ 2.5 $(1.4) $ 4.7
66
