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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
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) April 11, 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
--------------------------------------------------------------
(Former name or former address, if changed since last report.)
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Item 5. Other Events
On November 30, 1999, Solectron Corporation ("Solectron") completed its
acquisition of SMART Modular Technologies, Inc. ("SMART"). Included herein as
Exhibit 99.1 are the audited 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. These consolidated financial statements
give retroactive effect to the acquisition of SMART which was accounted for as a
pooling of interests.
Item 7. Financial Statements and Exhibits.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit Description Page
- ------- ----------- ----
<S> <C> <C>
23.1 Consent of KPMG LLP, Independent Auditors.....................
99.1 Business...................................................... 1
Properties.................................................... 11
Executive Officers of Solectron............................... 12
Selected Financial Data....................................... 14
Management's Discussion and Analysis of
Financial Condition and Results of Operations................. 14
Quantitative and Qualitative Disclosures
About Market Risk............................................. 31
Financial Statements and Supplementary Data................... 32
Independent Auditors' Report.................................. 60
Financial Statement Schedule.................................. 61
</TABLE>
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: April 11, 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
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<S> <C>
23.1 Consent of KPMG LLP, Independent Auditors
99.1 Business
Properties
Executive Officers of Solectron
Selected Financial Data
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures
About Market Risk
Financial Statements and Supplementary Data
Independent Auditors' Report
Financial Statement Schedule
</TABLE>
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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 and
33-33461) on Forms S-3, S-4 and S-8 of Solectron Corporation of our report dated
April 4, 2000, relating to the consolidated balance sheets of Solectron
Corporation and subsidiaries as of August 31, 1999 and 1998, and the related
consolidated statements of income, stockholders' equity, comprehensive income
and cash flows for each of the years in the three-year period ended August 31,
1999, and the related financial statement schedule, which report appears in the
Form 8-K dated April 11, 2000 of Solectron Corporation.
KPMG LLP
Mountain View, California
April 11, 2000
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EXHIBIT 99.1
BUSINESS
Solectron Corporation ("Solectron" or "the Company") 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) and Hewlett-Packard Company
(HP) and International Business Machines Corporation (IBM). These companies
contract with Solectron to build their products or to obtain other related
services.
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. This geographic presence gives our customers access to
manufacturing services in the locations where they need to be close to their
expanding markets for faster product delivery.
We were originally incorporated in California in August 1977. In February 1997,
we were reincorporated in Delaware. Our principal executive offices are located
at 777 Gibraltar Drive, Milpitas, California 95035. Our telephone number is
(408)957-8500 and our Internet address is www.solectron.com.
The information contained within this overview of the business is qualified in
its entirety by, and is subject to, the detailed information, consolidated
financial statements and notes thereto contained elsewhere within this document
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "Financial Statements and Supplementary Data."
Certain statements contained in this document 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.
INDUSTRY OVERVIEW
Solectron is well recognized for its printed circuit board (PCB) assembly
business. While we continue to lead in this industry, we have grown into a
global supply chain facilitator expanding our capabilities across the entire
product cycle to include: product design, pre-production planning, New Product
Introduction (NPI) management, manufacturing, distribution, and end-of-life
product service and support. We are benefiting from increased worldwide market
acceptance of, and reliance upon, the use of outsourcing manufacturing services
by many electronics OEMs. We expect the trend towards outsourcing manufacturing
to continue for many reasons including the following:
Reduce Time-to-Market. Due to intense competitive pressures in the electronics
industry, OEMs are facing increasingly shorter product life cycles and therefore
have a growing need to reduce the time required to bring a product to market.
OEMs can reduce the time-to-market by using Solectron's manufacturing expertise
and infrastructure. OEMs can further reduce the time-to-market by partnering
with Solectron at the stages of product design and product improvement to
expedite the transition into large volume of production in its manufacturing
centers.
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Reduce Investment. As electronic products have become more technologically
advanced and are shipped in greater unit volumes, the necessary investment
required for internal product design, manufacturing, and end-of-life support
services by OEMs has increased significantly for working capital, capital
equipment, labor, systems and infrastructure. Solectron, a global supply chain
facilitator, enables OEMs to gain access to its worldwide advanced technology
facilities including NPI centers, manufacturing and depot repair facilities. As
a result, OEMs can substantially reduce their overall resource requirements.
Focus Resources. The electronics industry is experiencing greater levels of
competition and more rapid technological change. Many OEMs increasingly are
seeking to focus their resources on activities and technologies which add the
greatest value. By offering comprehensive electronics assembly and related
manufacturing services, Solectron allows OEMs to focus on their own core
competencies such as next-generation product development, sales and marketing.
Access Leading Manufacturing Technology. Electronic products and electronics
manufacturing technology have become increasingly sophisticated and complex,
making it difficult for OEMs to maintain the necessary technological expertise
to manufacture products internally. OEMs are motivated to work with Solectron to
gain access to its expertise in interconnect, test and process technologies.
Improve Inventory Management and Purchasing Power. Electronics industry OEMs are
faced with increasing difficulties in planning, procuring and managing their
inventories efficiently due to frequent design changes, short product
life cycles, large investments in electronic components, component price
fluctuations and the need to achieve economies of scale in materials
procurement. OEMs can reduce production costs by using Solectron's volume
procurement capabilities. In addition, Solectron's expertise in inventory
management can provide better control over inventory levels and increase the
OEM's return on assets.
Access Worldwide Manufacturing Capabilities. OEMs are increasing their
international activities in an effort to lower costs and access foreign markets.
Solectron with worldwide capabilities is able to offer such OEMs a variety of
manufacturing location options to better address their objectives including cost
containment, compliance with local content regulations, and the elimination of
expensive freight costs, tariffs and time-consuming customs clearances.
STRATEGY
Solectron's goal is to offer its customers significant competitive advantages of
electronics outsourcing, such as access to design and product improvement,
advanced manufacturing technologies, reduced overall cost, shortened product
time-to-market, effective asset utilization, and superior end-of-life product
support services. To achieve this goal, Solectron emphasizes the following key
elements:
Quality. Solectron believes that product quality is a critical success factor in
the electronics manufacturing market. We strive for continuous improvement of
our processes and have adopted a number of quality improvement and measurement
techniques to monitor our performance. We have received numerous superior
service and quality awards, including:
- - Malcolm Baldrige National Quality Award in 1991 and again in 1997;
- - Ranked No. 3 World's Best Performing Information Technology 100 Listing by
Business Week in 1999;
- - One of the World's 100 Best Managed Companies named by Industry Week in 1999;
- - North Carolina National Team Excellence Award in 1999;
- - North Carolina Charlotte-Mecklenburg Utility Award in 1999;
- - Arc of Washington State's Employer of the Year Award in 1999;
- - Mexico Jalisco State Quality Award in 1999;
- - Best Manufacturing Plant in North America Award from Industry Week in 1998;
- - Washington State Quality Award of Merit in 1998; and
- - Numerous other awards from our customers.
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All of our manufacturing facilities are certified under ISO-9000 standards which
are international quality standards for design, manufacturing and distribution
management systems.
Partnerships. An important element of Solectron's strategy is to establish
partnerships with major and emerging OEM leaders in diverse segments across the
electronics industry. Our customer base consists of leaders in industry segments
such as networking, telecommunications, workstations, personal computers,
computer peripherals, instrumentation, semiconductor equipment and avionics. Due
to the costs inherent in supporting customer relationships, we focus our efforts
on customers with high potential for long-term business partnerships. Our goal
is to deliver a total product life cycle solution to our customers. We offer
OEMs advanced building block design solutions, NPI management which includes
design and layout, concurrent engineering, test development, and prototype
engineering. We continue the cycle to provide solutions in manufacturing and
distribution including just-in-time delivery on low-to-medium volume turnkey,
price-sensitive and high volume production, and projects that require more
value-added services. Additionally, we serve OEMs that need end-of-life services
such as product repair and warranty services.
Turnkey Capabilities. Another element of Solectron's strategy is to provide a
complete range of manufacturing management and value added services, including
materials management, board design, concurrent engineering, assembly of complex
printed circuit boards and other electronic assemblies, test engineering,
software manufacturing, accessory packaging and post-manufacturing services. We
believe that as manufacturing technologies become more complex and as product
life cycles shorten, OEMs will increasingly contract for manufacturing on a
turnkey basis as they seek to reduce their products' time-to-market, capital
asset and inventory costs. A substantial portion of our revenue is from our
turnkey business. We believe that our ability to manage and support large
turnkey projects is a critical success factor. In addition, we believe that due
to the difficulty and long lead time required to change manufacturers, turnkey
projects generally increase an OEM's dependence resulting in greater stability
of our customer base and in closer working relationships. We also have been
successful in establishing sole source positions for certain products with many
of our customers.
Advanced Manufacturing Process and Electronic Product Technologies. Solectron
intends to continue to offer its customers the most advanced manufacturing
process technologies, including surface mount technology (SMT) and ball grid
array (BGA) assembly as well as testing and emerging interconnect technologies.
We have developed substantial SMT expertise including advanced, vision based
component placement equipment. We believe that the cost of SMT assembly
facilities and the required technical capability to operate a high yield SMT
operation are significant competitive factors in the market for electronic
assembly. We also have the capability to manufacture using
tape automated bonding, chip-on-substrate and other more advanced manufacturing
processes. Additionally, Solectron intends to continue to offer its customers
through the technology business solutions group, certain electronic product
technologies such as embedded computer platforms, memory modules and
input/output devices.
Diverse Geographic Operations. An important element of Solectron's strategy is
to establish production facilities in areas of high customer density or where
manufacturing efficiencies can be achieved. We currently have operations
throughout the Americas, Europe and Asia. We believe that our facilities in
these diverse geographic locations enable us to better address our customers'
requirements such as cost containment, compliance with local content
regulations, and the elimination of expensive freight costs, tariffs and
time consuming customs clearances. We intend to expand our operations
continually as necessary to serve our existing customers and to develop new
business.
INTERNATIONAL MANUFACTURING CAPABILITY
As Solectron manages the existing operations and expands geographically, it may
experience certain inefficiencies from the management of geographically
dispersed operations. Additionally, Solectron's results of operations will be
adversely affected if these new facilities do not achieve revenue growth
sufficient to offset increased expenditures associated with geographic
expansion.
In fiscal 1999, approximately 36% of Solectron's sales were from operations
outside of the United States. As a result of continuous customer demand
overseas, we expect foreign sales to increase. Our foreign sales and operations
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are subject to risks of doing business abroad, including fluctuations in the
value of currency, export duties, import controls and trade barriers (including
quotas), restrictions on the transfer of funds, employee turnover, work
stoppages, longer payment cycles, greater difficulty in accounts receivable
collection, burdens of complying with a wide variety of foreign laws and, in
certain parts of the world, political instability. While, to date, these factors
have not materially affected Solectron's results of operations, we cannot assure
that there will not be such an impact in the future.
On March 31, 2000, Solectron completed the acquisition of Alcatel's
manufacturing business in Aguadilla, Puerto Rico. The acquisition of Alcatel's
manufacturing assets in Longview, Texas is expected to be closed in June 2000
and is subject to various conditions of closing. Alcatel is a world leader 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
hopes to 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. Under the
proposed agreement for Longview, Solectron hopes to assume full manufacturing
responsibility for Alcatel's build-to-order (BTO) RF communication systems and
also provide a full range of manufacturing services to Alcatel for the next
three years including NPI management of RF systems and BTO systems build.
On April 4, 2000, Solectron signed a definitive agreement to acquire certain
Nortel Networks' NPI prototyping, PCB and telephone set ("telset") assembly
assets in North America and Asia. The companies are also discussing the
divestiture or outsourcing of certain manufacturing and repair operations in
Europe. Under the terms of the agreement, and the proposed agreements, Solectron
will pay approximately $900 million to assume these operations contemplated in
these agreements. The companies also agreed to enter into a multi-year supply
agreement, with the option to renew. Solectron will provide NPI prototyping,
manufacturing and repair services for Nortel Networks' optical, carrier,
enterprise and wireless products. As a result of the agreement for North America
and Asia, Solectron will be gaining NPI prototyping and manufacturing
capabilities in Calgary, Canada, and Research Triangle Park, North Carolina; and
manufacturing capabilities in Monterrey, Mexico, and Istanbul, Turkey. Under the
terms proposed in Europe, Solectron would acquire NPI prototyping and
manufacturing operations in Monkstown, Northern Ireland, and manufacturing and
repair capabilities in Cwmcarn, Wales. In addition, Solectron has submitted an
offer to acquire certain PCB assembly and telset assets of Matra-Nortel
Communications S.A.S. in France. In addition to the acquired locations,
Solectron will be transferring other Nortel Networks products to Solectron
locations to align the global supply chain with Nortel Networks' cost-to-market
and time-to-market strategies. As part of the agreement, Solectron will be
setting up a new operating unit comprised of the acquired Nortel Networks sites.
This operating unit will be a part of the manufacturing and operations business
unit, and will be focused on maintaining continuity of supply and enhancing
competitive performance to Nortel Networks, while the sites transition to the
Solectron business model. It is expected that the transactions will be closed in
North America by the end of the second quarter of calendar year 2000; in Europe,
by the end of the second quarter or beginning of the third quarter of calendar
year 2000; and in Asia, in the third quarter of calendar year 2000. All
transactions are subject to customary conditions and regulatory approvals. In
addition, the transaction with Matra-Nortel Communications S.A.S. is subject to
the employee consultation processes in Europe.
Americas
Western United States. Solectron's headquarters and largest manufacturing
operations are located in Silicon Valley, principally in Milpitas, California,
in the midst of one of the largest concentrations of OEM electronics
manufacturers. This facility offers a full range of services that span the
product life cycle including design consultation, prototyping, NPI management,
PCB assembly, build-to-order, configure-to-order, complex systems assembly, and
end-of-life support services. With our recent asset acquisition in Sunnyvale,
California from Trimble Navigation Limited, we have extended our manufacturing
capacities to Global Positioning System (GPS) and related radio frequency (RF)
technology products. Additionally, we have a smaller site strategically located
in Everett, Washington to help serve our customers in the Pacific Northwest and
elsewhere.
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Southwestern United States. Solectron believes that its facility in Austin,
Texas, is situated in a geographic region with strong growth of electronics OEMs
that will allow Solectron to better serve its existing customers and to attract
new ones. This facility was expanding and was further expanded by an asset
acquisition of IBM's Electronic Card Assembly and Test in February 1999. The
site offers a wide range of services across the entire product life cycle
including PCB design, NPI management, complex PCB and systems assembly,
distribution, and support services.
Eastern United States. Solectron's Eastern United States facility is located in
Westborough, Massachusetts, near Boston, in the center of a geographic region
with a large concentration of electronics OEMs. We have recently expanded this
facility's manufacturing capacity. This facility provides a full range of
integrated solutions across the entire product life cycle from pre-production
planning and design to manufacturing, to end-of-life product service and
support. This site also includes a NPI center that specializes in quick-turn
prototype services. These two groups work together to shorten customers' product
development and manufacturing cycles, ultimately reducing their products'
time-to-market.
Southeastern United States. Solectron's Southeastern United States operations
are located in Charlotte, North Carolina; Columbia, South Carolina; and Suwanee,
Georgia. Its operations in Charlotte, North Carolina, which were expanded by the
acquisition of IBM's Electronic Card Assembly and Test manufacturing assets,
specializes in low to medium volume, highly complex PCB assembly, systems
assembly and end-of-life support services. This site also has a NPI center. In
addition, the Charlotte site provides printed circuit boards to the Columbia,
South Carolina site, which specializes in customized systems design services and
complex computer systems assembly. The manufacturing facility in Columbia was
recently expanded to meet growing customer demand.
Solectron previously had facilities in Duluth, Georgia, acquired from NCR
Corporation and in Braselton, Georgia, acquired from Mitsubishi Consumer
Electronics America, Inc. In September 1999, these two operations were merged
into a new facility in Suwanee, Georgia, to serve as our East Coast center for
medium to low complexity, medium to high volume systems assembly and NPI
services for PC, server, workstation, telecommunications and networking
equipment customers. This facility is part of our build-to-order systems
division.
Another subsidiary of Solectron, Fine Pitch Technology, Inc., provides extensive
prototype services for electronics OEMs, further enhancing Solectron's ability
to address the needs of design teams who require almost immediate availability
of highly complex prototype assemblies.
Mexico. Solectron's site in Guadalajara, Mexico began providing a full range of
PCB assembly and systems build manufacturing services in the first quarter of
fiscal 1998. This site offers our customers a low cost and high volume
manufacturing center for PCB assembly, build-to-order and configure-to-order
systems assembly for the Americas.
Brazil. Solectron's operation in Sao Paulo, Brazil, was acquired from Ericsson's
Business Area Infocom Systems in October 1997. This site provides a full range
of capabilities across the product life cycle including NPI management, systems
build capabilities, engineering, PCB and flex assembly, custom packaging and
distribution services, and factory repair support services primarily to
multinational customers seeking access to the Latin American market. The
manufacturing facility in Brazil was recently expanded as a result of demand
growth for electronics manufacturing services in Brazil.
Europe
Solectron has manufacturing operations in Bordeaux, France; Herrenberg, Germany;
Dublin, Ireland; Timisoara, Romania; and Dunfermline, Scotland. Each of these
sites provides a full range of manufacturing capabilities to a multinational
customer base. In addition, each site is developing an area of specific
expertise to offer to all customers. The Germany site offers design support,
prototype services and low volume, high-mix manufacturing services. The Romania
site has recently been expanded to serve as Solectron's full service, high
volume, low cost manufacturing hub for its rapidly growing European customer
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base. The Scotland site specializes in building PCB assemblies, subassemblies
and systems for multinational customers in the European market. In September
1999, we further expanded our presence in Scotland through an asset acquisition
of IBM's Netfinity servers operations in Greenock, Scotland. To support the IBM
design team, we are establishing a new full-service NPI center in Port Glasgow,
Scotland. In addition, we have NPI centers in France and Sweden which offer a
full range of electronics product development services, including design and
layout, concurrent engineering, test development and prototype engineering.
SMART Modular Technologies, Inc. also has a manufacturing facility in East
Kilbride, Scotland and a design center in Ayr, Scotland.
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, 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.
Asia
Solectron's Southeast Asia manufacturing operations are located in Penang and
Johor, Malaysia. The operations were established to better serve the needs of
OEMs requiring price sensitive, high volume production capabilities and to
provide more efficient manufacturing services to customers located in Southeast
Asia. The facilities currently provide electronics assembly, materials
management and other services to customers located in Malaysia, Singapore,
Japan, Europe, the United States and other locations. Our facility in Suzhou,
China began operations in fiscal 1997. This facility currently provides a full
range of low cost, high-volume manufacturing services. In April 1999, Solectron
established a New Product Introduction center just outside of Tokyo, Japan,
providing a complete range of electronics pre-manufacturing services which
include design and layout, testing capabilities, prototype development, and
concurrent and component engineering.
TECHNOLOGY SOLUTIONS
Solectron's subsidiary, Force Computers, Inc. (Force), is a leading designer and
supplier of open, scalable system and board level embedded computer platforms
for the communications, industrial and command and control markets. Unlike
general purpose computers, embedded computers are incorporated into systems and
equipment to perform a single or limited number of critical control functions
and are generally integrated into larger automated systems. A processor
independent company, Force delivers products based on SPARC, Pentium, PowerPC
and 68K technologies and has expertise in systems design, board design, systems
integration and manufacturing. Force also provides support services, such as
systems configurations, application consulting and training to its customers.
Force further enhances our array of services, particularly in pre-manufacturing
areas.
To expand its technology and design service capabilities, Solectron completed
its acquisition of SMART Modular Technologies, Inc. (SMART), on November 30,
1999, which was accounted for as a pooling of interests. SMART is a leading
manufacturer of specialty and standard memory modules and Flash memory cards and
also manufactures high performance embedded computer modules, as well as
communications card solutions in PC card and other form factors. Through the
acquisition, we have 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, we have
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 and Force into
the technology solutions business unit. In addition, we have benefited from the
business purchase transaction of Compaq's embedded and real time product
business in Fremont, California and Scotland by SMART in August 1999.
The demand for semiconductor memory devices and other subsystems in digital
electronic systems has grown dramatically over the last several years as a
result of the increasing importance of both of these components in determining
systems performance. The demand for greater overall systems performance, as well
as the increasing number and variety of electronic devices, has required that
electronics manufacturers increase the number and functionality of memory
devices and the performance of other subsystems.
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The factors contributing to the increasing demand for memory devices and
communications and embedded computer subsystems include the expanding unit sales
of PCs in the business and consumer market segments; the increasing use of PCs
to perform memory intensive graphics and multimedia functions; the volume of
memory required to support faster microprocessors; the proliferation of
increasingly complex operating system and applications software; the increased
use of local area network and wide area network routing and switching equipment
that incorporates complex memory and embedded computer subsystems; the growth in
on-line communications, such as e-mail and the Internet; and, in general, the
increasing performance requirements of workstations, servers and networking and
telecommunications equipment.
Memory integrated circuits ("ICs") and subsystems encompass several types of
devices designed to perform specific functions within computer and other
electronic systems. The three most significant categories of memory ICs are
DRAM, SRAM and non-volatile memory, including Flash. DRAM provides large
capacity "main" memory; SRAM provides specialized high speed memory; and Flash
and other non-volatile memory provide low power memory that retains data after a
system is turned off. Within each of these broad categories of memory products,
semiconductor manufacturers are offering an increasing variety of memory devices
that are designed for different application and performance requirements. For
example, the variety of DRAM memory ICs has increased in recent years with the
introduction and adoption of technologies such as Rambus DRAM, DDR, SDRAM,
SGRAM, VRAM, FPM and EDO. This increase in the variety of memory ICs has placed
greater demands on OEMs to maintain a current knowledge base and expertise. In
addition, other specialized subsystems, such as modems, networking devices and
embedded computer solutions, enable critical data transfer and data processing
functions.
GLOBAL SERVICES
Our services do not stop at the end of the assembly line. We offer a range of
integrated solutions from the time the product is designed until it is removed
from the market. These services include product repair, upgrades,
remanufacturing and maintenance through factory and fast hub service centers
located around the world; help-desk support through customer call centers for
end users; logistics and parts management; returns processing; warehousing;
engineering change management; and end-of-life manufacturing. These services are
expected to give our customers improved speed from the service pipeline by
Solectron taking direct receipt responsibility for returns from the end user and
making sure that various buffer stock and inventory mechanisms are established.
These services also minimize shipping costs and time by handling repairs at our
various international locations. In addition, our data collection system can
provide invaluable information to analyze product design reliability. As a
result, the OEMs can focus their efforts on developing next generation products.
Our recently acquired subsidiary, Sequel Inc., specializes in notebook computer
and liquid crystal display (LCD) repair services and support. This subsidiary
has a hub facility in Memphis, Tennessee, which offers integrated call
management, remote failure diagnostics, air express dispatch, systems repair,
component level repair, configuration and upgrades, returns processing and
administration, refurbishment and redistribution services. In November 1999, we
acquired the repair operations of IBM's NULOGIX Technical Services, Inc. in
Vaughan, Canada. NULOGIX provides a complete range of technology repair,
remanufacturing and refurbishment services for a large extent of electronics
products. As a result of this transaction, we will now be able to provide the
Canadian market a full range of value added support service solutions. These
services include: product repair, upgrades, remanufacturing and maintenance
through factory and fast hub service centers located around the world; help desk
support through customer call-in centers for end-users; logistics and parts
management; returns processing; warehousing; engineering change management and
end-of-life manufacturing.
On February 28, 2000, Solectron signed a letter of intent to acquire AMERICOM
Wireless Services (AMERICOM) in its entirety, a privately held corporation which
specializes in wireless handset repair and refurbishment and outsourced
technical customer support services. As part of the transaction, Solectron will
gain specialized repair and testing equipment and assume responsibility for
AMERICOM's business operations in Los Angeles, California; Louisville, Kentucky;
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Baltimore, Maryland; and Dallas, Texas; as well as AMERICOM's field technicians
and support operations throughout the United States. The acquisition is expected
to be completed by the end of May 2000. Completion of the transaction is subject
to applicable government approvals and various conditions of closing.
NEW PRODUCT INTRODUCTION CENTERS
Solectron, a global supply chain facilitator, has NPI centers geographically, in
countries including the United States, France, Sweden, Germany, Malaysia and
Japan. These NPI centers offer a range of electronics product development
services, including design and layout, concurrent engineering, test development
and prototype engineering. We believe our NPI services will shorten customers'
product development cycles by offering full design and development services to
complement our customers' in-house capabilities. We partner with our customers
as early as possible in the new product development process to optimize their
products' design for volume manufacturing. To enhance our product development
capacities, we are establishing a new, full service NPI center in Port Glasgow,
Scotland.
ALLIANCE
In October 1999, Solectron signed a definitive agreement with Acer, Inc. (Acer),
a core unit of the Acer Group, the world's third largest PC manufacturer, to
form a strategic alliance to provide global design, manufacturing and service
solutions for OEM-branded personal computers, servers and workstations. As a
result of this alliance, it is expected that customers will be able to access
the extensive technology, motherboard and system level design services, and
global supply base, manufacturing, distribution, logistics and Global Services
operations of both companies to further streamline their global supply chain.
Solectron and Acer plan to leverage their combined resources, including
facilities, systems and personnel to provide the industry's first fully
integrated, global and optimized, end-to-end design, manufacturing and services
solution. Both companies will manage this alliance under a joint management
matrix.
MANUFACTURING
To achieve excellence in manufacturing, Solectron combines advanced
manufacturing technology, such as computer aided manufacturing and testing, with
manufacturing techniques including just-in-time manufacturing, total quality
management, statistical process control and continuous flow manufacturing.
Just-in-time manufacturing is a production technique which minimizes
work-in-process inventory and manufacturing cycle time while enabling Solectron
to deliver products to customers in the quantities and time frame required.
Total quality management is a management philosophy which seeks to impart high
levels of quality in every operation of Solectron and is accomplished by the
setting of quality objectives for every operation, tracking performance against
those objectives, identifying work flow and policy changes required to achieve
higher quality levels and a commitment by executive management to support
changes required to deliver higher quality. Statistical process control is a set
of analytical and problem solving techniques based on statistics and process
capability measurements through which we can track process inputs and resulting
quality and determine whether a process is operating within specified limits.
The goal is to reduce variability in the process, as well as eliminate
deviations that contribute to quality below the acceptable range of each process
performance standard.
In order to successfully implement these management techniques, Solectron has
developed the ability to collect and utilize large amounts of data in a timely
manner. We believe this ability is critical to a successful assembly operation
and represents a significant competitive factor, especially in large turnkey
projects. To manage the data, we use sophisticated computer systems for material
resource planning, shop floor control, work-in-process tracking, statistical
process control and activity based product costing.
ELECTRONICS ASSEMBLY AND OTHER SERVICES
Solectron's electronics assembly activities consist primarily of the placement
and attachment of electronic and mechanical components on printed circuit boards
and flexible cables. We also assemble higher level sub systems and systems
incorporating printed circuit boards and complex electromechanical components,
in some cases manufacturing and packaging products for shipment directly to our
8
<PAGE> 9
customers' distributors. In addition, we provide other manufacturing services
including refurbishment and remanufacturing. We manufacture on a turnkey basis,
directly procuring some or all of the components necessary for production and on
a consignment basis, where the OEM customer supplies all or some components for
assembly.
In conjunction with our assembly activities, we also provide computer aided
testing of printed circuit boards, sub systems and systems, which contributes
significantly to our ability to deliver high quality products on a consistent
basis. We have developed specific strategies and routines to test board and
system level assemblies. In-circuit tests verify that all components have been
properly inserted and that the electrical circuits are complete. Functional
tests determine if the board or systems assembly is performing to customer
specifications. We either design and procure test fixtures and develop our own
test software or utilize our customers' existing test fixtures and test
software. In addition, we provide environmental stress tests of the board or
systems assembly.
We provide turnkey manufacturing management to meet our customers' requirements,
including procurement and materials management and consultation on board design
and manufacturability. Individual customers may select various services from
among our full range of turnkey capabilities.
Procurement and materials management consists of the planning, purchasing,
expediting, warehousing, preparing and financing of the components and materials
required to assemble a printed circuit board or electronic system. OEMs have
increasingly used electronic manufacturing specialists like Solectron to
purchase all or some components directly from component manufacturers or
distributors and to finance and warehouse the components.
Solectron also assists its customers in evaluating board designs for
manufacturability. We evaluate the board design for ease and quality of
manufacture and, when appropriate, recommend design changes to reduce
manufacturing costs or lead times or to increase the quality of finished
assemblies. Board design services consist of the engineering and design
associated with the arrangement and interconnection of specified components on
printed circuit boards to achieve an OEM's desired level of functionality. We
also offer Application Specific Integrated Circuit (ASIC) design services and
our subsidiary, Force Computers, offers product design services for the embedded
computer market. Our subsidiary, SMART Modular Technologies, Inc. offers
advanced building block design solutions, such as memory modules and
communications input/output devices.
The Company believes that the efficiency of its manufacturing operations has
benefited from its extensive experience and its library of proven designs which
stress high manufacturability and quality. Through its extensive library of
memory module designs and its experience in designing and manufacturing memory
modules, the Company is able to work closely with its customers and suppliers to
design competitive solutions to system memory problems and shorten the time it
takes its customers to get their products to market.
The Company's manufacturing processes rely on a high level of automation and
involve the use of a substantial base of fine pitch surface mount equipment
which is customized for the production of the multiple products. As a result of
its design efficiencies, high level of automation and general manufacturing
expertise, the Company has achieved relatively high manufacturing yields. In
addition, due to the high level of automation in the Company's manufacturing
approach, the Company has maintained a relatively low percentage of direct labor
costs. The Company believes that it has achieved a rapid manufacturing cycle and
is able to offer its customers quick turnaround of both small and large
projects.
SALES AND MARKETING
Sales and marketing at Solectron is an integrated process involving direct
salespersons and project managers, as well as its senior executives. Solectron's
sales resources are directed at multiple management and staff levels within
targeted accounts. We also use independent sales representatives in certain
geographic areas as well as channel partners for our embedded products. We
receive unsolicited inquiries resulting from advertising and public relations
activities, as well as referrals from current customers. These opportunities are
evaluated against our customer selection criteria and are assigned to direct
salespersons or independent sales representatives, as appropriate. Historically,
we have had substantial recurring sales from existing customers.
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<PAGE> 10
Solectron's top ten customers accounted for 75% of net sales in fiscal 1999, 68%
of net sales in fiscal 1998, and 63% of net sales in fiscal 1997. Several
customers each accounted for more than 10% of net sales during these years.
Compaq accounted for 12% of net sales in fiscal 1999. Cisco accounted for 11% of
net sales in fiscal 1999 and 10% of net sales in fiscal 1998. HP represented 10%
of net sales in fiscal 1999 and 11% of net sales in both fiscal 1998 and fiscal
1997. No other individual customer accounted for more than 10% of Solectron's
net sales in any of these years.
BACKLOG
Backlog consists of contracts or purchase orders with delivery dates scheduled
within the next twelve months. At August 31, 1999, Solectron's backlog was
approximately $1.9 billion. The backlog was approximately $1.4 billion at August
31, 1998. Because customers may cancel or reschedule deliveries, backlog is not
a meaningful indicator of future financial results.
COMPETITION
The electronic manufacturing services industry is comprised of a large number of
companies, several of which have achieved substantial market share. Solectron
also faces competition from current and prospective customers that evaluate
Solectron's capabilities against the merits of manufacturing products
internally. We compete with different companies depending on the type of service
or geographic area. Certain of our competitors may have greater manufacturing,
financial, research and development and marketing resources than Solectron. We
believe that the primary basis of competition in our targeted markets is
manufacturing technology, quality, responsiveness, the provision of value-added
services and price. To remain competitive, we must continue to provide
technologically advanced manufacturing services, maintain quality levels, offer
flexible delivery schedules, deliver finished products on a reliable basis and
compete favorably on the basis of price.
The memory module, communications card and embedded computer subsystem
industries are intensely competitive. Each of these markets includes a large
number of competitive companies, several of which have achieved a substantial
market share. Certain of the Company's competitors in each of these markets have
greater name recognition, lower cost structures and larger customer bases than
the Company. In the memory module market, the Company competes against
semiconductor manufacturers that maintain captive memory module production
capabilities. The Company faces competition from current and prospective
customers that evaluate the Company's capabilities against the merits of
manufacturing products internally.
ASSOCIATES
Currently, Solectron employs approximately 46,000 associates worldwide, nearly
half of which are outside the United States.
PATENTS AND TRADEMARKS
Solectron has a number of U.S. patents related to the process and equipment used
in its surface mount technology. Our subsidiary, Force Computers, holds a number
of patents related to Versa Module Eurocard (VME) technology. In addition, as
part of our recent acquisitions of the IBM ECAT manufacturing assets, we have
access to a number of IBM patents and license rights. We also have registered
trademarks in the United States and many countries throughout the world. These
patents and trademarks are considered valuable to Solectron.
Although Solectron does not believe that its trademarks, manufacturing process,
Force's technology or the IBM patents and license rights to which it has access
infringe on the intellectual property rights of third parties, we cannot assure
that third parties will not assert infringement claims against Solectron in the
future. If such an assertion were to be made, it may become necessary or useful
for us to enter into licensing arrangements or to resolve such an issue through
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<PAGE> 11
litigation. However, we cannot assure that such license rights would be
available to Solectron on commercially acceptable terms or that any such
litigation could be resolved favorably. Additionally, such litigation could be
lengthy and costly and could materially harm our financial condition regardless
of the outcome of such litigation.
On June 23, 1999, Solectron was served, along with 87 other companies including
SMART Modular Technologies, Inc., as a defendant in a lawsuit brought by the
Lemelson Medical, Education & Research Foundation. The lawsuit alleges that
Solectron has infringed certain of the plaintiff's patents relating to machine
vision and bar code technology. Solectron believes it has meritorious defenses
to these allegations and does not expect that this litigation will result in a
material impact on its financial position or results of operations.
PROPERTIES
Solectron's manufacturing facilities are located throughout the Americas, Europe
and Asia. The table below lists the locations and square feet owned or leased
for its major operations.
<TABLE>
<CAPTION>
Square Feet Lease
-------------------- Termination
Location Owned Leased Dates
-------- -------- --------- -----------
<S> <C> <C> <C>
Americas:
Milpitas, California(1) - 1,762,938 2001 - 2006
San Jose, California - 196,000 2001
Suwanee, Georgia - 496,000 2003
Westborough, Massachusetts - 168,000 2002 - 2004
Charlotte, North Carolina 620,000 243,000 2000 - 2002
Columbia, South Carolina - 208,000 2000
Austin, Texas - 1,142,000 2002 - 2014
Everett, Washington - 179,000 2003
Memphis, Tennessee - 100,000 2000
Vaughan, Canada - 77,000 2006
Guadalajara, Mexico(2) 716,000 - -
Sao Paulo, Brazil 327,000 - -
Aguada, Puerto Rico - 83,000 2007
Europe:
Bordeaux, France 116,000 211,000 2008
Herrenberg, Germany 71,000 40,000 2000
Munich, Germany - 168,000 2002
Dublin, Ireland 42,000 70,000 2004
Timisoara, Romania 200,000 40,000 2000
Dunfermline, Scotland 221,000 8,000 2014
East Kilbride, Scotland - 50,000 2006
Norrkoping, Sweden - 43,000 2004
Asia:
Suzhou, China 333,000 - -
Johor, Malaysia - 200,000 2000 - 2001
Penang, Malaysia 372,000 93,000 2000 - 2001
</TABLE>
(1) Includes facilities located nearby in Fremont and Newark, California.
(2) Includes approximately 37,000 square feet leased to a third party on a
short-term lease.
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<PAGE> 12
Around the world, Solectron is subject to a variety of environmental regulations
relating to the use, storage, discharge and disposal of hazardous chemicals used
during its manufacturing process. Any failure by Solectron to comply with
present and future regulations could subject it to future liabilities or the
suspension of production. In addition, such regulations could restrict
Solectron's ability to expand its facilities or could require Solectron to
acquire costly equipment or to incur other significant expenses to comply with
environmental regulations.
EXECUTIVE OFFICERS OF SOLECTRON
Solectron's executive officers and their ages are currently as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---------------------------- ------ -------------------------------
<S> <C> <C>
Koichi Nishimura, Ph.D. 61 President, Chief Executive
Officer and Chairman of the Board
G. Fred Forsyth 55 Corporate Vice President and
President of Solectron Americas
David Kynaston 59 Corporate Vice President and
President of Solectron Europe
Daniel Perez 49 Corporate Vice President and
Chief Administrative Officer
Ajay Shah 40 President and Chief Executive Officer
of Solectron's Technology Solutions Business Unit
Ken K. N. Tsai 58 Senior Vice President and
President of Solectron Asia
Susan S. Wang 49 Senior Vice President, Chief
Financial Officer and Secretary
Walter W. Wilson 56 Senior Vice President, Business
Integration and Information Technology
Saeed Zohouri, Ph.D. 48 Senior Vice President and
Chief Operating Officer
</TABLE>
Dr. Koichi Nishimura has served as Chairman of the Board since 1996, Chief
Executive Officer since 1992 and President since 1990. He was Co-Chief Executive
Officer from 1991 to 1992 and Chief Operating Officer from 1988 to 1991. He was
also a director of the Board since 1991 before serving as Chairman of the Board.
From 1964 to 1988, Dr. Nishimura was with IBM in various technology and
management positions. Dr. Nishimura serves as a director on the boards of Merix
Corporation, the Center for Quality Management and the Santa Fe Institute. He
also serves on the advisory board of Santa Clara University's Leavey School of
Business, and the board of the Santa Clara Valley Manufacturing Group. Dr.
Nishimura serves as a member of the Board of Directors in the capacity of Vice
President for the Foundation for the Malcolm Baldrige National Quality Award,
Inc.
Mr. G. Fred Forsyth has served as Corporate Vice President and President of
Solectron Americas since July 1999. He joined Solectron in March 1999 as
Corporate Vice President and President of Systems Engineering and Services
Division. Prior to joining Solectron, Mr. Forsyth was President of the
Professional Products Division at Iomega Corporation from August 1997 to March
1999. He was Senior Vice President and General Manager of the Power Macintosh
Group of Apple Computer, Inc. from June 1996 to April 1997 and Senior Vice
President Worldwide Operations from June 1993 to June 1996. Mr. Forsyth also
held a variety of management positions at Digital
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<PAGE> 13
Equipment Corporation and General Electric Company. Mr. Forsyth is a director of
Genus Corporation, a semiconductor equipment manufacturer.
Mr. David Kynaston has served as Corporate Vice President and President of
Solectron Europe since he joined Solectron in 1996. Mr. Kynaston worked for
Philips Electronics for the previous 15 years in various capacities, including
Managing Director of Philips Mullard Ltd. subsidiary, Managing Director of the
Business Communications Systems Division and most recently, Managing Director of
the Private Mobile Radio Division. Prior to joining Philips Electronics, Mr.
Kynaston held senior technical management positions at EMI Medical Ltd. and
Cambridge Scientific Instruments Ltd.
Mr. Daniel Perez has served as Corporate Vice President and Chief Administrative
Officer since 1996. Mr. Perez joined Solectron in 1991 as Director of Materials,
and was soon named Vice President of Materials for Solectron's California
facility. He became the General Manager of Solectron's Fremont, California,
printed circuit board assembly operation in 1995 and assumed his current role in
1996. Prior to joining Solectron, Mr. Perez spent 14 years with IBM Corporation
in various management positions in corporate administration, manufacturing,
materials planning, and acquisition and control. Most recently, he was Senior
Manager for Supply and Demand at IBM's disk storage business. Mr. Perez also
serves as a director of the Tech Museum of Innovation, the California State
Center for Quality Education and Development, the Mexican Heritage Corporation,
the Center for Training and Careers in San Jose, California, and El Teatro
Campesino.
Mr. Ajay Shah is the President and Chief Executive Officer of Solectron's
Technology Solutions Business Unit. Mr. Shah co-founded SMART Modular
Technologies, Inc. (SMART) and served as SMART's Chairman and Chief Executive
Officer from its inception in 1989 until its merger with Solectron Corporation
in November 1999. Prior to launching SMART, Mr. Shah held strategic marketing
management and product line management positions at Samsung Semiconductor, Inc.,
and at Advanced Micro Devices. Mr. Shah also serves on the Board of Directors of
Krypton Isolation, Inc., Proactive Networks, Inc., and Netscaler, Inc.
Mr. Ken K. N. Tsai has served as Senior Vice President and President of
Solectron Asia since May 1995. Mr. Tsai was Vice President of Solectron from
1990 to 1995. He served as Director of Manufacturing for Solectron from 1989 to
1990 and was in various manufacturing and other positions from 1984 to 1989.
Prior to joining Solectron, Mr. Tsai served in various management and business
planning positions at American Cyanamid Company from 1968 to 1984.
Ms. Susan S. Wang has served as Senior Vice President and Chief Financial
Officer of Solectron since 1990 and as Secretary since 1992. She was Vice
President, Finance and Chief Financial Officer of Solectron from 1986 to 1990
and Director of Finance of Solectron from 1984 to 1986. Prior to joining
Solectron, Ms. Wang held various accounting and finance positions with Xerox
Corporation. Ms. Wang also held accounting and auditing positions with Westvaco
Corp. and Price Waterhouse & Co. She is a Certified Public Accountant.
Mr. Walter W. Wilson has served as Senior Vice President, Business Integration
and Information Technology since June 1999. He was President, Solectron Americas
from April 1997 to May 1999; President, Solectron North America from September
1995 to March 1997; President Solectron California Corporation from March 1992
to February 1996; and Senior Vice President of Solectron since 1990. From 1989
to 1990, he served as an operational Vice President of Solectron. Prior to
joining Solectron, Mr. Wilson held various management positions with IBM in
manufacturing and product development from 1965 to 1989. Mr. Wilson also serves
as a director on the board of Asyst Technologies and Mylex Corporation.
Dr. Saeed Zohouri has served as Senior Vice President and Chief Operating
Officer of Solectron since June 1999. He was Chief Technology Officer from 1994
to May 1999; President of Solectron California Corporation from March 1996 to
August 1998; and President, Solectron North America since August 1998. Dr.
Zohouri joined Solectron in 1980 and held various management positions including
Director of Technology. His prior experience includes teaching chemistry at a
major international university.
There is no family relationship among any of the foregoing individuals.
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<PAGE> 14
SELECTED FINANCIAL DATA
The following selected historical financial information of Solectron, combined
with SMART on a pooling of interest basis, has been derived from the historical
consolidated financial statements and should be read in conjunction with the
consolidated financial statements and the notes included therein.
Five Year Selected Financial Highlights
(In millions, except per share data)
Consolidated Statements of Income Data:
<TABLE>
<CAPTION>
Years Ended August 31,
------------------------------------------------------
1999 1998 1997 1996 1995
--------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net sales $9,358.3 $5,978.3 $4,384.0 $3,211.1 $2,340.2
Operating income 510.9 366.7 302.8 213.2 143.9
Income before
income taxes 511.1 374.2 307.2 212.8 140.4
Net income 347.5 250.0 203.5 139.3 92.1
Basic net income
per share(1) 0.64 0.49 0.42 0.31 0.25
Diluted net income
per share(1) 0.61 0.47 0.40 0.30 0.22
</TABLE>
Consolidated Balance Sheet Data:
<TABLE>
<CAPTION>
As of August 31,
------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net working capital $3,163.5 $1,277.6 $1,137.7 $ 860.5 $ 377.1
Total assets 5,319.3 2,776.5 2,203.7 1,623.5 1,032.8
Long-term debt 922.6 385.5 386.1 388.2 31.6
Stockholders'equity 3,140.5 1,460.6 1,149.3 787.1 564.4
</TABLE>
(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, including those factors set forth
under "Trends and Uncertainties" below.
GENERAL
Solectron's net sales are derived from sales to electronics original equipment
manufacturers (OEMs). The majority of our customers compete in the networking,
data and voice communications, workstation, personal computer and computer
peripheral segments of the electronics industry. We provide integrated supply
chain solutions that span the entire product life cycle, including technology,
manufacturing and services. We offer our customers competitive outsourcing
advantages such as access to advanced manufacturing
14
<PAGE> 15
technologies, shortened time-to-market, reduced total cost of ownership and more
effective asset utilization. A discussion of some of the potential fluctuations
in operating results is included under "Trends and Uncertainties."
Solectron has 27 manufacturing operations throughout the world, including the
Americas, Europe and Asia. We have program offices in Japan, Israel, Sweden,
Taiwan and the United Kingdom. Also, SMART and Force have sales support offices
in various locations in the United States and internationally.
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 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. The site in Duluth was
subsequently merged with the Braselton, Georgia, site into a newly constructed
manufacturing facility in Suwanee, Georgia, in October 1999. The Braselton site
was originally acquired from Mitsubishi in October 1998.
In June 1998, Solectron acquired International Business Machines Corporation's
(IBM) Electronic Card Assembly and Test (ECAT) manufacturing assets in
Charlotte, North Carolina, and non-exclusive rights to certain IBM intellectual
property. Under the terms of the agreement, we will provide PCB assembly
services to IBM in North America for the next three years. In addition, IBM has
made available to Solectron intellectual property rights covering a wide
spectrum of technologies and capabilities. IBM also provided to Solectron
failure analysis and characterization tools for process development and
manufacturing, including fault detection and isolation.
In October 1998, Solectron acquired the wireless telephone manufacturing assets
of Mitsubishi Consumer Electronics America, Inc.'s (MCEA) Cellular Mobile
Telephone (CMT) division in Braselton, Georgia. MCEA was a subsidiary of
Mitsubishi Electric Corporation (Mitsubishi). Under the terms of the agreement,
we will provide MCEA-CMT with a full range of manufacturing services for five
years, including NPI management, PCB assembly and full systems assembly for
MCEA's branded and private-label cellular products sold in North America. In
October 1999, we combined the operations of Braselton and Duluth into a newly
constructed manufacturing facility in Suwanee, Georgia.
In February 1999, Solectron acquired IBM's Electronic Card Assembly and Test
(ECAT) manufacturing assets in Austin, Texas, and non-exclusive rights to
certain IBM intellectual property. Under the terms of the agreement, for the
next three years we will provide PCB assembly for motherboards used in IBM's
mobile computer products manufactured worldwide. This includes physical design,
early prototyping, new product launch, PCB assembly and test, volume production,
end-of-life support, field return services and life cycle management. We will
also provide IBM's worldwide design teams a full range of integrated NPI
services which involve pre-manufacturing support, such as design and layout,
component and concurrent engineering, test development, prototype, procurement
and assembly.
In July 1999, Solectron issued common stock to acquire Sequel, Inc. (Sequel).
Sequel was a privately held corporation specializing in notebook computer and
liquid crystal display repair service and support. We have assumed
responsibility for Sequel's business operations in San Jose, California;
Memphis, Tennessee; and Reading, United Kingdom. We have also assumed Sequel's
ownership in joint-venture operations in Japan and Taiwan. The acquisition is
expected to enable us to expand our global support services capabilities by
adding quick-turn service operations, customer service centers and help-desk
support for the end-users of Solectron-built products.
In August 1999, Solectron acquired the manufacturing assets of Trimble
Navigation Limited (Trimble) in Sunnyvale, California, and assumed full
manufacturing responsibility of Trimble's
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<PAGE> 16
Global Positioning System (GPS) and related radio frequency (RF) technology
products for the next three years. Trimble is a leader in RF products enabled by
GPS technology. We also acquired certain intellectual property rights related to
RF technology. Under the terms of the agreement, we will provide Trimble a 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 will provide IBM full service NPI management
which includes a full range of premanufacturing services, specifically component
and concurrent engineering, test development, prototype, procurement and
assembly. We will also provide IBM for the next 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 will be 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.
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.
On November 30, 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 has
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 has 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 and Force into the
technology business unit. In addition, Solectron has benefited from the business
purchase transaction of Compaq Computer Corporation's embedded and real time
product business in Fremont, California and Scotland by SMART in August 1999.
In August 1999, Solectron announced the business acquisition of Compaq's
embedded and real time product line. This business included hardware and
software products and technologies as well as a worldwide team of over 100
hardware, software, and applications developers and engineers, as well as
marketing, sales, and management professionals. This acquisition is expected to
add systems design capability from board level subsystems to system level
integration.
On February 28, 2000, Solectron signed a letter of intent to acquire AMERICOM
Wireless Services (AMERICOM) in its entirety, a privately held corporation which
specializes in wireless handset repair and refurbishment and outsourced
technical customer support services. As part of the transaction, Solectron will
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. The acquisition is expected
to be completed by the end of May 2000. Completion of the transaction is subject
to applicable government approvals and various conditions of closing.
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<PAGE> 17
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, 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 acquisition of Alcatel's
manufacturing assets in Longview, Texas is expected to be closed in June 2000
and is subject to various conditions of closing. Alcatel is a world leader 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. Under the proposed
agreement for Longview, Solectron will assume full manufacturing responsibility
for Alcatel's build-to-order (BTO) RF communication systems and will also
provide a full range of manufacturing services to Alcatel for the next three
years including NPI management of RF systems and BTO systems build.
On April 4, 2000, Solectron signed a definitive agreement to acquire certain
Nortel Networks' NPI prototyping, PCB and telephone set ("telset") assembly
assets in North America and Asia. The companies are also discussing the
divestiture or outsourcing of certain manufacturing and repair operations in
Europe. Under the terms of the agreement, and the proposed agreements, Solectron
will pay approximately $900 million to assume these operations contemplated in
these agreements. The companies also agreed to enter into a multi-year supply
agreement, with the option to renew. Solectron will provide NPI prototyping,
manufacturing and repair services for Nortel Networks' optical, carrier,
enterprise and wireless products. As a result of the agreement for North America
and Asia, Solectron will be gaining NPI prototyping and manufacturing
capabilities in Calgary, Canada, and Research Triangle Park, North Carolina; and
manufacturing capabilities in Monterrey, Mexico, and Istanbul, Turkey. Under the
terms proposed in Europe, Solectron would acquire NPI prototyping and
manufacturing operations in Monkstown, Northern Ireland, and manufacturing and
repair capabilities in Cwmcarn, Wales. In addition, Solectron has submitted an
offer to acquire certain PCB assembly and telset assets of Matra-Nortel
Communications S.A.S. in France. In addition to the acquired locations,
Solectron will be transferring other Nortel Networks products to Solectron
locations to align the global supply chain with Nortel Networks' cost-to-market
and time-to-market strategies. As part of the agreement, Solectron will be
setting up a new operating unit comprised of the acquired Nortel Networks sites.
This operating unit will be a part of the manufacturing and operations business
unit, and will be focused on maintaining continuity of supply and enhancing
competitive performance to Nortel Networks, while the sites transition to the
Solectron business model. It is expected that the transactions will be closed in
North America by the end of the second quarter of calendar year 2000; in Europe,
by the end of the second quarter or beginning of the third quarter of calendar
year 2000; and in Asia, in the third quarter of calendar year 2000. All
transactions are subject to customary conditions and regulatory approvals. In
addition, the transaction with Matra-Nortel Communications S.A.S. is subject to
the employee consultation processes in Europe.
On April 6, 2000, Solectron announced the completion of acquisition for 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 proposed agreement, Solectron will become Zhone's virtual supply chain
partner and will sign a five year commitment with Zhone to provide product life
cycle management services, including NPI through repair and end-of-life
services.
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 associated with new projects, and price
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<PAGE> 18
operations. See "Trends and Uncertainties" for factors relating to possible
fluctuation of operating results and our competitors.
In addition, Solectron acquired SMART effective November 30, 1999 and accounted
for the acquisition as a pooling of interests. Accordingly, the Company's
historical financial statements have been restated retroactively to include the
financial results of SMART.
The following table sets forth, for the periods indicated, certain items in the
Consolidated Statements of Income as a percentage of net sales. The financial
information and the discussion below should be read in conjunction with the
Consolidated Financial Statements and Notes thereto.
<TABLE>
<CAPTION>
Years Ended August 31,
-----------------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 90.3 89.0 87.7
----- ----- -----
Gross profit 9.7 11.0 12.3
Operating expenses:
Selling, general and administrative 3.8 4.3 4.8
Research and development 0.4 0.5 0.5
Acquisition costs - - 0.1
----- ----- -----
Operating income 5.5 6.2 6.9
Net interest income - 0.1 0.1
----- ----- -----
Income before income taxes 5.5 6.3 7.0
Income taxes 1.8 2.1 2.4
----- ----- -----
Net income 3.7% 4.2% 4.6%
===== ===== =====
</TABLE>
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 $9.4 billion, an
increase of 56.5% over fiscal 1998 net sales. Fiscal 1998 net sales of $6.0
billion were 36.4% 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 $8.2 billion, an increase of 60.1% over fiscal year 1998. In
fiscal year 1998 net sales of $5.2 billion were 43.4% 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
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<PAGE> 19
beginning in March 1999 because the Texas site consistently reports its results
one month in arrears. In addition, the Mexico site was among the largest
contributors due to the strong demand growth in fiscal 1999 as compared to
fiscal 1998. The Milpitas, California, site also experienced sales growth
despite the planned transfer of personal computer PCB programs and computer
peripherals systems assembly programs to Mexico and networking business to
Penang. The sales growth from fiscal 1997 to fiscal 1998 was attributable to
start-up and major new programs at the Texas and Massachusetts sites, and the
addition of new sites in Mexico and Brazil in fiscal 1998. Additionally, the
acquired sites from NCR and IBM ECAT in Charlotte contributed incremental net
sales to fiscal 1998 as compared to fiscal 1997.
Solectron's operations in Milpitas, California, contributed a substantial
portion of Solectron's net sales and operating income during fiscal 1999, 1998
and 1997. In recent years, management has undertaken deliberate actions to
achieve improved global load balancing by transferring certain projects from the
Milpitas site to other sites worldwide. However, the performance of the Milpitas
operation is expected to continue to be a significant factor in the overall
financial performance of Solectron. Any adverse material change to the customer
base, product mix, efficiency or other attributes of this site could materially
harm Solectron's consolidated results of operations.
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 Asian sites contributed to the sales increase in fiscal 1999 over fiscal
1998 primarily due to core business growth. In particular, sales growth at the
Penang, Malaysia, site was attributable to increased demand from personal
computer customers and networking business transferred from Milpitas,
California. The Johor, Malaysia, site also experienced higher product demand.
Net sales from the Asian manufacturing locations increased in fiscal 1998 over
fiscal 1997 primarily as a result of certain projects transferred from the
Milpitas, California, site to meet demand growth.
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 on a pooled basis for fiscal years 1999, 1998 and 1997 were
$1.1 billion, $806 million, and $790 million, respectively. The increase in
fiscal 1999 of 41.2% 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
the production of the Company's products and a decrease in sales of specialty
products.
Global Services
This group was established in June 1999. It consists of two business
acquisitions including Sequel in July 1999 and NULOGIX in November 1999, as well
as a small division of Solectron in Milpitas. Net sales were $40.2 million,
$28.7 million, and $23.0 million in fiscal years 1999, 1998 and 1997,
respectively.
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 36% of consolidated net sales
in fiscal 1999, compared to
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<PAGE> 20
34% in fiscal 1998 and 25% 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. See "Trends and Uncertainties" for
factors pertaining to our international sales and fluctuations in the exchange
rates of foreign currency for further discussion of potential adverse effects in
operating results associated with the risks of doing business abroad.
Net Sales to Major Customers - 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.
<TABLE>
<CAPTION>
Years Ended August 31,
-------------------------
1999 1998 1997
------ ------ -----
<S> <C> <C> <C>
Compaq Computer Corporation (Compaq) 12% * *
Cisco Systems, Inc. (Cisco) 11% 10% *
Hewlett-Packard Company (HP) 10% 11% 11%
</TABLE>
---------------------------
* 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 75% 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. See "Trends and Uncertainties" for a discussion of
certain factors affecting the management of growth, geographic expansion, and
potential fluctuations in sales and results of operations.
GROSS PROFIT
The gross margin percentages were 9.7%, 11.0% and 12.3% 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 19% of net sales in fiscal
1999, 17% of net sales in fiscal 1998 and 8% of net sales in fiscal 1997. In
addition, the amortization of intellectual property resulting from certain
acquisitions reduced gross margins. The decrease in fiscal 1998 from fiscal 1997
was primarily due to a shift toward higher volume projects and systems build
projects that typically have lower margins and start-up costs associated with
our operations in China and Mexico.
For the foreseeable future, Solectron's gross margin is expected to depend
primarily on product mix, production efficiencies, utilization of manufacturing
capacity, start-up and integration costs of new and acquired businesses, the
percentage of sales derived from systems build projects, pricing within the
electronics industry, and the cost structure at individual sites. Over time,
gross margins at the individual sites and for Solectron as a whole may continue
to fluctuate. Increases in high volume and systems build business, additional
costs
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<PAGE> 21
erosion within the electronics industry could harm our gross margin. Also, while
the availability of raw materials fluctuates from time to time and generally
meets our revenue projections for the foreseeable future, component availability
is still subject to lead time and other constraints that could possibly limit
our revenue growth. Because of these factors and others discussed under "Trends
and Uncertainties" below, we cannot assure that Solectron's gross margin will
not fluctuate or decrease in future periods.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
In absolute dollars, selling, general and administrative (SG&A) expenses
increased 38.1% in fiscal 1999 over fiscal 1998 and 24.0% in fiscal 1998 over
fiscal 1997. The dollar increase in fiscal 1999 primarily reflects expenses
associated with sales growth including increased human resources costs necessary
to support business infrastructure and further development costs of information
systems, as well as increased costs of acquisition related activities. The
addition of newly acquired sites in fiscal 1999 from Mitsubishi and IBM ECAT in
Austin, Texas, also contributed to the increase in SG&A expenses. The fiscal
1998 increase was due to investment in infrastructure such as personnel and
related departmental expenses at all manufacturing locations as well as
investment in information systems to support the increased size and complexity
of our business. Additionally, the sites added in fiscal 1998, including Brazil,
NCR and IBM ECAT in Charlotte, North Carolina, contributed to the increase in
SG&A expenses.
As a percentage of net sales, SG&A expenses were 3.8% in fiscal 1999, 4.3% in
fiscal 1998 and 4.8% 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 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 newly
acquired IBM sites continue to invest in their R&D efforts. In addition, certain
new R&D projects will be undertaken at some of Solectron's Asian sites,
particularly at the sites in Malaysia because of the tax holiday. (See "Income
Taxes.")
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 income was $0.2 million in fiscal 1999 compared to $7.5 million and
$4.4 million in fiscal 1998 and fiscal 1997, respectively. The decrease in net
interest income in fiscal 1999 versus fiscal 1998 was 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 convertible
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<PAGE> 22
subordinated notes 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 other 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. See "Trends and
Uncertainties" for factors relating to management growth and potential
fluctuations in operating results.
INCOME TAXES
Income taxes increased to $163.6 million in fiscal 1999 from $124.2 million in
fiscal 1998 and $103.7 million in fiscal 1997, primarily due to increased income
before income taxes. Solectron's effective income tax rate decreased slightly to
32.0% in fiscal 1999 from 33.2% 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.
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." SFAS No.
133 establishes methods of accounting for derivative financial instruments and
hedging activities related to those instruments as well as other hedging
activities. Solectron anticipates that the adoption of SFAS No. 133 will not
have a material impact on its financial position, results of operations or cash
flows. Implementation of this standard has recently been delayed for a 12-month
period. We will adopt SFAS No. 133 in our first fiscal quarter of 2001.
In December 1999, the Securities and Exchange Commission issued SAB No. 101,
"Revenue Recognition in Financial Statements," which will be effective for the
Company in the first quarter of fiscal 2001. The Company is currently analyzing
this statement.
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<PAGE> 23
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 $141 million of cash and short-term
investments to fund our asset acquisitions including Mitsubishi in Braselton,
Georgia; IBM's ECAT in Austin, Texas; Trimble in Sunnyvale, California and
Compaq's embedded and real time business unit in Boston, Massachusetts. In the
first and second quarter of fiscal 2000, we used additional funds for our
acquisitions. As we continue to grow, it is expected that we will require
greater amounts of working capital to support our operations. We believe that
our current level of working capital, together with cash generated from
operations and our available credit facilities, will provide adequate working
capital for 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. 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 been experiencing component shortages which contributed to an
increase in inventory on hand.
Cash provided by operating activities was $80 million in fiscal 1999, $213.5
million in fiscal 1998 and $217.9 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 $443.3 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 $500 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 and an unsecured revolving bank line of credit up to $30 million that
expire in April 2002 and May 2000, respectively. These credit facilities are
subject to certain financial covenants.
"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.
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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 represents 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.
TRENDS AND UNCERTAINTIES
A MAJORITY OF OUR NET SALES COMES FROM A SMALL NUMBER OF CUSTOMERS; IF WE LOSE
ANY OF THESE CUSTOMERS, OUR NET SALES COULD DECLINE SIGNIFICANTLY.
A majority of our annual net sales comes from a small number of our customers.
Our ten largest customers accounted for approximately 75%, 68%, and 63% of net
sales in fiscal 1999, 1998 and 1997, respectively. Since we are dependent upon
continued net sales from our ten largest customers, any material delay,
cancellation or reduction of orders from these or other major customers could
cause our net sales to decline significantly. Some of these customers
individually account for more than ten percent of our annual net sales. We
cannot guarantee that we will be able to retain any of our ten largest customers
or any other accounts. In addition, our customers may materially reduce the
level of services ordered from us at any time. This could cause a significant
decline in our net sales and we may not be able to reduce the accompanying
expenses at the same time. Moreover, our business, financial condition and
results of operations will continue to depend in significant part on our ability
to obtain orders from new customers, as well as on the financial condition and
success of our customers. Therefore, any adverse factors affecting any of our
customers or their customers could have a material adverse effect on our
business, financial condition and results of operations.
OUR LONG-TERM CONTRACTS DO NOT INCLUDE MINIMUM PURCHASE REQUIREMENTS.
Although we have long-term contracts with a few of our top ten customers,
including Ericsson and IBM, under which these customers are obligated to
obtain services from us, they are not obligated to purchase any minimum amount
of services. As a result, we cannot guarantee that we will receive any net sales
from these contracts. In addition, these customers with whom we have long-term
contracts may materially reduce the level of services ordered at any time. This
could cause a significant decline in our net sales and we may not be able to
reduce our accompanying expenses at the same time.
POSSIBLE FLUCTUATION OF OPERATING RESULTS FROM QUARTER TO QUARTER COULD AFFECT
THE MARKET PRICE OF OUR COMMON STOCK.
Our quarterly earnings may fluctuate in the future due to a number of factors
including the following:
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<PAGE> 25
- - Differences in the profitability of the types of manufacturing services we
provide. For example, high velocity and low complexity PCB and systems
assembly services have lower gross margins than low volume/complex PCB or
systems assembly services;
- - Our ability to maximize the hours of use of our equipment and facilities is
dependent on the duration of the production run time for each job and
customer;
- - The amount of automation that we can use in the manufacturing process for cost
reduction varies, depending upon the complexity of the product being made;
- - Our ability to optimize the ordering of inventory as to timing and amount to
avoid holding inventory in excess of immediate production needs;
- - Fluctuations in demand for our services or the products being manufactured;
- - Timing of expenditures in anticipation of increased sales;
- - Cyclicality in our target markets, and
- - Expenses associated with acquisitions.
Therefore, our operating results in the future could be below the expectations
of securities analysts and investors. If this occurs, the market price of our
common stock could be harmed.
WE ARE DEPENDENT UPON THE ELECTRONICS INDUSTRY WHICH CONTINUALLY PRODUCES
TECHNOLOGICALLY ADVANCED PRODUCTS WITH SHORT LIFE CYCLES; OUR INABILITY TO
CONTINUALLY MANUFACTURE SUCH PRODUCTS ON A COST EFFECTIVE BASIS WOULD HARM OUR
BUSINESS.
A majority of our net sales is to companies in the electronics industry, which
is subject to rapid technological change and product obsolescence. If our
customers are unable to create products that keep pace with the changing
technological environment, our customers' products could become obsolete and the
demand for our services could decline significantly. If we are unable to offer
technologically advanced, cost effective, quick response manufacturing services
to customers, demand for our services will also decline. In addition, a
substantial portion of our net sales is derived from our ability to offer
complete service solutions for our customers. For example, if we fail to
maintain high-quality design and engineering services, our net sales would
significantly decline.
For our technology solutions business, we have experienced, and may in the
future experience, delays from time to time in the development and introduction
of new products. Moreover, we cannot assure that we will be successful in
selecting, developing, manufacturing and marketing new products or enhancements.
We cannot assure that defects or errors will not be found in our products after
commencement of commercial shipments, which could result in the delay in market
acceptance of such products. The inability to introduce new products or
enhancements could harm our business, financial condition and results of
operations.
WE ARE DEPENDENT ON LIMITED OR SOLE SOURCE OF SUPPLIERS FOR CRITICAL COMPONENTS.
THE INABILITY TO OBTAIN SUFFICIENT COMPONENTS AS REQUIRED WOULD CAUSE SALES
REDUCTIONS.
We are dependent on certain suppliers, including limited and sole source
suppliers, to provide key components used in our products. We have experienced
and may continue to experience delays in component deliveries which could cause
delays in product shipments and require the redesign of certain products. Also
for our technology solutions business, we are dependent upon certain limited or
sole source suppliers for critical components used for our memory module,
communications card and embedded computer products. The electronics industry has
experienced in the past, and may experience in the future, shortages in
semiconductor devices, including DRAM, SRAM, Flash memory, tantalum capacitors
and other commodities that may be caused by such conditions as overall market
demand surges or supplier production capacity constraints. Except for certain
commodity parts, we generally have no written agreements with our suppliers. We
cannot assure that we will receive adequate component supplies on a timely basis
in the future. The inability to continue to obtain sufficient components as
required, or to develop alternative sources if required, could cause delays,
disruptions or reductions in product shipments or require product redesigns
which could damage relationships with current or prospective customers thereby
causing sales reduction.
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<PAGE> 26
WE POTENTIALLY BEAR THE RISK OF PRICE INCREASES ASSOCIATED WITH POTENTIAL
SHORTAGES IN THE AVAILABILITY OF ELECTRONICS COMPONENTS.
At various times, there have been shortages of components in the electronics
industry. One of the services that we perform for many customers is purchasing
electronics components used in the manufacturing of the customers' products. As
a result of this service, we potentially bear the risk of price increases for
these components because we are unable to purchase components at the pricing
level anticipated to support the margins assumed in our agreement with our
customers.
OUR NET SALES COULD DECLINE IF OUR COMPETITORS PROVIDE COMPARABLE MANUFACTURING
SERVICES AND IMPROVED PRODUCTS AT A LOWER COST.
We compete with different contract manufacturers, depending on the type of
service we provide or the geographic locale of our operations. The memory
module, communications card and embedded computer subsystem industries are also
intensely competitive. These competitors may have greater manufacturing,
financial, R&D and/or marketing resources than we have. In addition, we may not
be able to offer prices as low as some of our competitors because those
competitors may have lower cost structures as a result of their geographic
location or the services they provide. Our inability to provide comparable or
better manufacturing services at a lower cost than our competitors could cause
our net sales to decline. We also expect our competitors to continue to improve
the performance of their current products, to reduce their current product sales
prices and to introduce new products that may offer greater performance and
improved pricing. Any of these could cause a decline in sales, loss of market
acceptance of our products, or profit margin compression.
WE ARE DEPENDENT ON THE MEMORY MODULE PRODUCT MARKET.
A substantial majority of our technology solutions business' net sales is
derived from the memory modular products. The market for these products is
characterized by frequent transitions in which products rapidly incorporate new
features and performance standards. A failure to develop products with required
feature sets or performance standards or a delay as short as a few months in
bringing a new product to market could reduce our net sales which may have a
material adverse effect on our business, financial condition and results of
operations. In addition, the market for semiconductor memory devices has been
cyclical. The industry has experienced significant economic downturns at various
times, characterized by diminished product demand, accelerated erosion of
average selling prices and excess production. In the past, there were
significant declines in the prices for DRAM, SRAM and Flash. Such occurrences
will reduce our profit.
WE ARE DEPENDENT ON THE CONTINUING TREND OF OUTSOURCING BY OEM'S.
A substantial factor in our revenue growth is attributable to the transfer of
manufacturing and supply base management activities from our OEM customers.
Future growth is partially dependent on new outsourcing opportunities. To the
extent that these opportunities are not available, our future growth would be
unfavorably impacted. These outsourcing opportunities may include the transfer
of assets such as facilities, equipment and inventory.
IF WE ARE UNABLE TO MANAGE OUR RAPID GROWTH AND ASSIMILATE NEW OPERATIONS IN A
COST EFFECTIVE MANNER, OUR PROFITABILITY COULD DECLINE.
We have experienced rapid growth over many years. Our historical growth may not
continue. In recent years, we have established operations in different places
throughout the world. For example, in fiscal 1998, we opened offices in Taipei,
Taiwan, Tel Aviv, Israel, and Norrkoping and Stockholm, Sweden, and commenced
manufacturing operations in Guadalajara, Mexico, Suzhou, China, and Timisoara,
Romania. Also in fiscal 1998, we acquired foreign facilities in Sao Paulo,
Brazil, and Dublin, Ireland. Furthermore, through acquisitions in fiscal 1998
and 1999, we acquired facilities in Columbia, South Carolina, Memphis,
Tennessee, and San Jose, California and enhanced our capabilities in Charlotte,
North Carolina, Austin, Texas, and Milpitas, California.
26
<PAGE> 27
During October and November of 1999, we completed the asset acquisition of IBM's
Netfinity server operations in Greenock, Scotland, and acquired IBM Canada's
NULOGIX Technical Services, Inc. subsidiary in Vaughan, Canada, in its entirety.
Also in October 1999, we signed a definitive agreement with Acer, Inc. (Acer), a
core unit of the Acer Group, the world's third largest PC manufacturer, to form
a strategic alliance to provide global design, manufacturing and service
solutions for OEM branded personal computers, servers and workstations. On
November 30, 1999, we completed the acquisition of SMART Modular Technologies,
Inc. which was accounted for as a pooling of interests. In addition, we are
benefiting from the business purchase transaction of Compaq Computer
Corporation's embedded and real time product business in Fremont, California and
Scotland by SMART in August 1999.
On February 28, 2000, Solectron signed a letter of intent to acquire AMERICOM
Wireless Services (AMERICOM) in its entirety, a privately held corporation which
specializes in wireless handset repair and refurbishment and outsourced
technical customer support services. On March 1, 2000, we acquired the complex
systems manufacturing assets of Ericsson's telecommunications infrastructure
equipment operations in Longuenesse, France, and Ostersund, Sweden. On March 31,
2000, Solectron completed the acquisition of Alcatel's manufacturing business in
Aguadilla, Puerto Rico.
On April 4, 2000, Solectron signed a definitive agreement to acquire certain
Nortel Networks' NPI prototyping, PCB and telephone set ("telset") assembly
assets in North America and Asia. The companies are also discussing the
divestiture or outsourcing of certain manufacturing and repair operations in
Europe. On April 6, 2000, we announced the completion of acquisition for the
manufacturing assets of Premisys Communications, Inc., a wholly owned subsidiary
of Zhone Technologies, Inc.
Since we have been significantly expanding our operations, the growth has
resulted in a significant increase in responsibility for existing management
which has placed, and may continue to place, a heavy strain on our personnel and
management, manufacturing and other resources. Our ability to manage the
expansion to date, as well as any future expansion, will require progressive
increases in manufacturing capacity, as well as enhancements or upgrades of
accounting and other internal management systems and the implementation of a
variety of procedures and controls. We cannot assure that significant problems
in these areas will not occur. Any failure to enhance or expand these systems
and implement such procedures and controls in an efficient manner and at a pace
consistent with our business activities could harm our financial condition and
results of operations. Also, in order to achieve anticipated revenue and other
financial performance targets, we will continue to be required to manage our
assets and operations efficiently. In addition, should we continue to expand
geographically, we may experience certain inefficiencies from the management of
geographically dispersed facilities.
As we manage and continue to expand new operations, we may incur substantial
infrastructure and working capital costs. If we do not achieve sufficient growth
to offset increased expenses associated with rapid expansion, our profitability
will decline.
WE NEED TO MANAGE INTEGRATION OF OUR ACQUISITIONS TO MAINTAIN PROFITABILITY.
In fiscal 1998 and 1999, we completed acquisitions of manufacturing assets and
facilities from Ericsson, NCR, IBM, Mitsubishi and Trimble Navigation Limited
and acquired all of the capital stock of Sequel, Inc. For the first half of
fiscal 2000, we completed the asset acquisition of IBM's Netfinity server
operations in Greenock, Scotland, acquired IBM Canada's NULOGIX Technical
Services, Inc. subsidiary in Vaughan, Canada, in its entirety, and completed the
acquisition of SMART Modular Technologies, Inc which was accounted for as a
pooling of interests. On March 1, 2000, we acquired the complex systems
manufacturing assets of Ericsson's telecommunications infrastructure equipment
operations in Longuenesse, France, and Ostersund, Sweden. On March 31, 2000, we
completed the acquisition of Alcatel's manufacturing business in Aguadilla,
Puerto Rico. On April 6, 2000, we announced the completion of acquisition for
the manufacturing assets of Premisys Communications, Inc., a wholly owned
subsidiary of Zhone Technologies, Inc. We also continue to evaluate acquisition
opportunities and may pursue additional acquisitions over time. These
acquisitions involve risks, including:
- - Integration and management of the operations;
27
<PAGE> 28
- - Retention of key personnel;
- - Integration of purchasing operations and information systems;
- - Management of an increasingly larger and more geographically disparate
business; and
- - Diversion of management's attention from other ongoing business concerns.
Our profitability will suffer if we are unable to successfully integrate and
manage recent acquisitions, as well as any future acquisitions that we might
pursue, or if we do not achieve sufficient revenue to offset the increased
expenses associated with these acquisitions.
OUR NON-U.S. LOCATIONS ARE A SIGNIFICANT AND GROWING PORTION OF OUR NET SALES;
WE ARE INCREASINGLY EXPOSED TO RISKS ASSOCIATED WITH OPERATING INTERNATIONALLY.
In fiscal 1999, approximately 36% of net sales came from sites outside the
United States. As a result of our foreign sales and facilities, our operations
are subject to a variety of risks that are unique to international operations,
including the following:
- - Adverse movement of foreign currencies against the U.S. dollar in which our
results are reported;
- - Import and export duties, and value added taxes;
- - Import and export regulation changes that could erode our profit margins or
restrict exports;
- - Potential restrictions on the transfer of funds;
- - Inflexible employee contracts in the event of business downturns; and
- - The burden and cost of compliance with foreign laws.
In addition, we have operations in several locations in emerging or developing
economies that have a potential for higher risk. The risks associated with these
economies include but are not limited to currency volatility, and other economic
or political risks. In the future, these factors may harm our results of
operations. Solectron locations in emerging or developing economies include
Mexico, Brazil, China, Malaysia and Romania. As of August 31, 1999, we recorded
$87.5 million in cumulative foreign exchange translation losses on our balance
sheet which was primarily due to the devaluation of the Brazilian real. While,
to date, these factors have not had a significant adverse impact on our results
of operations, we cannot assure that there will not be such an impact.
Furthermore, while we may adopt measures to reduce the impact of losses
resulting from volatile currencies and other risks of doing business abroad, we
cannot assure that such measures will be adequate.
The Malaysian government adopted currency exchange controls, including controls
on its currency, the ringgit, held outside Malaysia, and established a fixed
exchange rate for the ringgit against the U.S. dollar. The fixed exchange rate
provides a stable rate environment when applied to local expenses denominated in
ringgit. The long-term impact of such controls is not predictable due to dynamic
economic conditions that also affect or are affected by other regional or global
economies.
We have been granted a tax holiday which is effective through January 31, 2002,
subject to some conditions, for our Malaysian sites. We have also been granted
various tax holidays in China. These tax holidays are effective for various
terms and are subject to some conditions. It is possible that the current tax
holidays will be terminated or modified or that future tax holidays that
Solectron may seek will not be granted. If the current tax holidays are
terminated or modified, or if additional tax holidays are not granted in the
future, Solectron's effective income tax rate would likely increase.
WE ARE EXPOSED TO FLUCTUATIONS IN THE EXCHANGE RATES OF FOREIGN CURRENCY.
We do not use derivative financial instruments for speculative purposes. Our
policy is to hedge our foreign currency denominated transactions in a manner
that substantially offsets the effects of changes in foreign currency exchange
rates. Presently, we use foreign currency borrowings and foreign currency
forward contracts to hedge only those currency exposures associated with certain
assets and liabilities denominated in non functional currencies. Corresponding
gains and losses on the underlying transaction generally offset the gains and
losses on these foreign currency hedges.
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<PAGE> 29
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 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 10% 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.
WE ARE EXPOSED TO FLUCTUATIONS IN INTEREST RATES.
The primary objective of our investment activities is to preserve principal,
while at the same time, maximize yields without significantly increasing risk.
To achieve this objective, we maintain our portfolio of cash equivalents and
short-term investments in a variety of securities, including both government and
corporate obligations, certificates of deposit and money market funds. As of
August 31, 1999, approximately 93% of our total portfolio was scheduled to
mature in one year or less, with the remainder maturing in less than two years.
See Note 2 of Notes to Consolidated Financial Statements.
The following table presents the amounts of our cash equivalents and short-term
investments that are subject to interest rate risk by year of expected maturity
and weighted average interest rates as of August 31, 1999:
<TABLE>
<CAPTION>
2000 2001 Total Fair Value
-------- -------- -------- ----------
(dollars in millions)
<S> <C> <C> <C> <C>
Cash equivalents and short-
term investments $1,326.4 $111.4 $1,437.8 $1,437.8
Average interest rates 5.25% 5.39%
</TABLE>
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.
29
<PAGE> 30
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OR ENFORCE OUR INTELLECTUAL PROPERTY
RIGHTS; AND WE COULD BECOME INVOLVED IN INTELLECTUAL PROPERTY DISPUTES.
Our ability to effectively compete may be affected by our ability to protect our
proprietary information. We hold a number of patents and other license rights.
These patent and license rights may not provide meaningful protection for our
manufacturing processes and equipment innovations. On June 23, 1999, Solectron
was served, along with 87 other companies including SMART Modular Technologies,
Inc., as a defendant in a lawsuit brought by the Lemelson Medical, Education &
Research Foundation. The lawsuit alleges that Solectron has infringed certain of
the plaintiff's patents relating to machine vision and bar code technology.
Solectron believes it has meritorious defenses to these allegations and does not
expect that this litigation will result in a material impact on its financial
condition or results of operations. In the semiconductor, computer,
telecommunications and networking industries, companies receive notices from
time to time alleging infringement of patents, copyrights, or other intellectual
property rights or others. We are currently being sued by a party who alleges
that certain of our technology solutions business' communications card products
have infringed and continue to infringe upon the party's intellectual property
rights. Moreover, we have been and may from time to time continue to be notified
of claims that we may be infringing patents, copyrights or other intellectual
property rights owned by other third parties. The current litigation or any
other litigation could result in substantial costs and diversion of resources
and could have a material adverse effect on our business, financial condition
and results of operations. In the future, third parties may assert infringement
claims against Solectron or its customers. In the event of an infringement
claim, we may be required to spend a significant amount of money to develop a
non-infringing alternative or to obtain licenses. We may not be successful in
developing such an alternative or obtaining a license on reasonable terms, if at
all. In addition, any such litigation could be lengthy and costly and could harm
our financial condition.
FAILURE TO COMPLY WITH ENVIRONMENTAL REGULATIONS COULD HARM OUR BUSINESS.
As a company in the electronics manufacturing services industry, we are subject
to a variety of environmental regulations relating to the use, storage,
discharge and disposal of hazardous chemicals used during our manufacturing
process. Although we have never sustained any significant loss as a result of
non compliance with such regulations, any failure by us to comply with
environmental laws and regulations could result in liabilities or the suspension
of production. In addition, these laws and regulations could restrict our
ability to expand our facilities or require us to acquire costly equipment or
incur other significant costs to comply with regulations.
OUR STOCK PRICE MAY BE VOLATILE DUE TO FACTORS OUTSIDE OF OUR CONTROL.
Our stock price could fluctuate due to the following factors, among others:
- - Announcements of operating results and business conditions by our customers;
- - Announcements by our competitors relating to new customers or technological
innovation or new services;
- - Economic developments in the electronics industry as a whole;
- - Political and economic developments in countries in which we have operations;
and
- - General market conditions.
FAILURE TO RETAIN KEY PERSONNEL AND SKILLED ASSOCIATES COULD HURT OUR
OPERATIONS.
Our continued success depends to a large extent upon the efforts and abilities
of key managerial and technical associates. Losing the services of key personnel
could harm us. Our business also depends upon our ability to continue to attract
and retain senior managers and skilled associates. Failure to do so could harm
our operations.
30
<PAGE> 31
OUR ANTI-TAKEOVER DEFENSE PROVISIONS MAY DETER POTENTIAL ACQUIRORS AND MAY
DEPRESS OUR STOCK PRICE.
Our certificate of incorporation and bylaws contain provisions that could have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, control of Solectron.
These provisions allow us to issue preferred stock with rights senior to those
of our common stock and impose various procedural and other requirements that
could make it more difficult for our stockholders to effect certain corporate
actions.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Management's Discussion and Analysis of Financial Condition and Results of
Operations for factors related to fluctuations in the exchange rates of foreign
currency and fluctuations in interest rates under "Trend and Uncertainties."
31
<PAGE> 32
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Unaudited Quarterly Financial Information
For each fiscal quarter during the two fiscal years ended August 31, 1999 and
August 31, 1998 (in millions except percentages and per share data):
<TABLE>
<CAPTION>
First Second Third Fourth
1999 Quarter Quarter Quarter Quarter
- ------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $2,203.1 $2,160.4 $2,366.0 $2,628.8
Gross profit $ 205.9 $ 210.6 $ 235.1 $ 259.8
Gross margin 9.3% 9.7% 9.9% 9.9%
Operating income $ 113.2 $ 116.0 $ 132.8 $ 148.9
Operating margin 5.1% 5.4% 5.6% 5.7%
Net income $ 76.0 $ 78.4 $ 90.0 $ 103.1
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 $ 0.18
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth
1998 Quarter Quarter Quarter Quarter
- ------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $1,333.5 $1,362.1 $1,422.4 $1,860.3
Gross profit $ 158.7 $ 157.2 $ 157.4 $ 183.9
Gross margin 11.9% 11.5% 11.1% 9.9%
Operating income $ 89.4 $ 91.9 $ 83.8 $ 101.6
Operating margin 6.7% 6.8% 5.9% 5.5%
Net income $ 61.3 $ 62.7 $ 58.2 $ 67.8
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
</TABLE>
(1) Adjusted to reflect two-for-one stock splits through March 8, 2000.
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<PAGE> 33
SOLECTRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except per share data)
<TABLE>
<CAPTION>
As of August 31,
-----------------------
1999 1998
ASSETS -------- --------
<S> <C> <C>
Current assets:
Cash, and cash equivalents $1,428.0 $ 300.7
Short-term investments 453.6 183.4
Accounts receivable, less allowances
Of $6.1 and $4.6, respectively 1,237.9 756.9
Inventories 1,170.1 828.0
Prepaid expenses and other
current assets 120.9 135.4
-------- --------
Total current assets 4,410.5 2,204.4
Net property and equipment 705.6 496.0
Other assets 203.2 76.1
-------- --------
Total assets $5,319.3 $2,776.5
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 21.4 $ --
Accounts payable 1,013.7 728.5
Accrued employee compensation 97.5 81.1
Accrued expenses 44.0 38.6
Other current liabilities 70.4 78.6
-------- --------
Total current liabilities 1,247.0 926.8
Long-term debt 922.6 385.5
Other long-term liabilities 9.2 3.6
-------- --------
Total liabilities 2,178.8 1,315.9
-------- --------
Commitments
Stockholders' equity:
Preferred stock, $.001 par value; 1.2
shares authorized; no shares issued -- --
Common stock, $.001 par value; 800.0
shares authorized; 590.3 and 516.3
shares issued and outstanding,
respectively, adjusted for stock split
effective March 8, 2000 0.3 0.2
Additional paid-in capital 2,057.6 643.7
Retained earnings 1,171.1 823.7
Accumulated other comprehensive losses (88.5) (7.0)
-------- --------
Total stockholders' equity 3,140.5 1,460.6
-------- --------
Total liabilities and stockholders' equity $5,319.3 $2,776.5
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 34
SOLECTRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share data)
<TABLE>
<CAPTION>
Years Ended August 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net sales $9,358.3 $5,978.3 $4,384.0
Cost of sales 8,446.9 5,321.1 3,843.6
-------- -------- --------
Gross profit 911.4 657.2 540.4
Operating expenses:
Selling, general and
administrative 360.0 260.6 210.1
Research and development 40.5 29.9 23.5
Acquisition costs - - 4.0
-------- -------- --------
Operating income 510.9 366.7 302.8
Interest income 36.6 32.3 31.2
Interest expense (36.4) (24.8) (26.8)
-------- -------- --------
Income before income taxes 511.1 374.2 307.2
Income taxes 163.6 124.2 103.7
-------- -------- --------
Net income $ 347.5 $ 250.0 $ 203.5
======== ======== ========
Net income per share:
Basic $ 0.64 $ 0.49 $ 0.42
Diluted $ 0.61 $ 0.47 $ 0.40
Weighted average number of shares:
Basic 538.9 507.6 485.7
Diluted 575.1 554.1 506.1
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 35
SOLECTRON CORPORATION AND SUBSIDIARIES
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 458.6 $ 0.1 $ 415.1 $ 370.2 $ 1.7 $ 787.1
Net income -- -- -- 203.5 -- 203.5
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 501.4 0.1 586.2 573.7 (10.7) 1,149.3
Net income -- -- -- 250.0 -- 250.0
Foreign currency translation -- -- -- -- 3.7 3.7
Stock issued under stock option
and employee purchase plans 15.4 0.1 54.2 -- -- 54.3
Issuance of common stock, net 0.1 -- 0.9 -- -- 0.9
Repayment of shareholder
Note receivable -- -- 0.1 -- -- 0.1
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 516.3 0.2 643.7 823.7 (7.0) 1,460.6
Net income -- -- -- 347.5 -- 347.5
Foreign currency translation -- -- -- -- (80.5) (80.5)
Unrealized loss on investments -- -- -- -- (1.0) (1.0)
Stock issued under stock option
and employee purchase plans 12.6 -- 81.5 -- -- 81.5
Issuance of common stock dividend -- 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 34.1 -- 1,061.0 -- -- 1,061.0
Stock issued in business
combination 0.5 -- 17.8 -- -- 17.8
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 590.3 $ 0.3 $2,057.6 $1,171.1 $ (88.5) $3,140.5
======== ======== ======== ======== ======== ========
</TABLE>
35
<PAGE> 36
SOLECTRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
<TABLE>
<CAPTION>
Years Ended August 31,
--------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Net income $347.5 $250.0 $203.5
Other comprehensive income (loss):
Foreign currency translation adjustments,
net of income tax benefit of $0.4 in 1999 (80.5) 3.7 (12.4)
Unrealized loss on investments, net of
income tax benefit of $0.6 in 1999 (1.0) -- --
------ ------ ------
Comprehensive income $266.0 $253.7 $191.1
====== ====== ======
</TABLE>
- ---------------
Accumulated foreign currency translation losses were $87.5 million at August 31,
1999, $7.0 million at August 31, 1998, and $10.7 at August 31, 1997. For fiscal
year 1999, the foreign currency translation loss primarily resulted from the
devaluation of the Brazilian real. Most of Solectron's foreign currency
translation adjustment amounts relate to investments which are permanent in
nature. To the extent that such amounts relate to investments which are
permanent in nature, no adjustment for income taxes is made. Accumulated
unrealized losses on investments were $1.0 million at August 31, 1999.
36
<PAGE> 37
SOLECTRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
<TABLE>
<CAPTION>
Years Ended August 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 347.5 $ 250.0 $ 203.5
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 197.2 133.8 109.7
Non-cash interest 18.5 - -
Tax benefit associated with the
exercise of stock options 35.4 11.5 17.9
Gain on disposal of fixed assets (4.9) (2.3) -
Other 5.3 (0.7) (6.9)
Changes in operating assets
and liabilities:
Accounts receivable (490.7) (244.9) (109.0)
Inventories (338.8) (164.9) (115.9)
Prepaid expenses and other
current assets 16.7 (38.0) (62.0)
Accounts payable 282.6 226.3 142.9
Accrued expenses and other
current liabilities 11.2 42.7 37.7
--------- --------- ---------
Net cash provided by
operating activities 80.0 213.5 217.9
--------- --------- ---------
Cash flows from investing activities:
Purchases of short-term investments (598.0) (244.9) (310.8)
Sales and maturities of short-term
investments 327.8 358.1 204.4
Acquisition of manufacturing
locations (140.9) (174.9) -
Capital expenditures (443.3) (277.7) (205.3)
Proceeds from sales of fixed
assets 41.7 60.4 11.5
Other (31.6) (14.4) 16.6
--------- --------- ---------
Net cash used in investing activities (844.3) (293.4) (283.6)
--------- --------- ---------
</TABLE>
(continued)
37
<PAGE> 38
SOLECTRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In millions)
<TABLE>
<CAPTION>
Years Ended August 31,
------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from financing activities:
Net proceeds from bank lines of credit 21.4 -- --
Net proceeds from issuance of
long-term debt 732.1 -- --
Repayments of long-term debt (1.4) (2.2) (4.6)
Repurchase of common stock (7.1) (9.2) --
Proceeds from exercise of stock
options 81.5 54.2 42.0
Net proceeds from issuance of
common stock 1,061.0 0.9 86.9
Other (0.5) (2.1) --
-------- -------- --------
Net cash provided by financing
activities 1,887.0 41.6 124.3
-------- -------- --------
Effect of exchange rate changes on
cash and cash equivalents 4.6 2.6 (3.5)
-------- -------- --------
Net increase (decrease) in cash
and cash equivalents 1,127.3 (35.7) 55.1
Cash and cash equivalents at
beginning of year 300.7 336.4 281.3
-------- -------- --------
Cash and cash equivalents at
end of year $1,428.0 $ 300.7 $ 336.4
======== ======== ========
Cash paid:
Interest $ 26.5 $ 25.1 $ 38.5
Income taxes $ 114.3 $ 93.6 $ 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
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE> 39
SOLECTRON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Operations and Principles of Consolidation: Solectron (the
Company) provides integrated supply chain solutions that span the entire product
life cycle, 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.
The accompanying consolidated financial statements include the accounts of
Solectron and its subsidiaries after elimination of intercompany accounts and
transactions.
On November 30, 1999, Solectron acquired SMART Modular Technologies, Inc.
(SMART). Each share of SMART common stock was exchanged for 0.51 of a share of
Solectron common stock. Solectron issued approximately 47.6 million shares of
Solectron common stock. The acquisition was accounted for as a pooling of
interests. Accordingly, the Company's historical financial statements have been
restated retroactively to include the financial results of SMART. SMART's fiscal
year was from November 1 to October 31. SMART's results of operations for the
years ended October 31, 1999, 1998 and 1997 have been combined with Solectron's
results of operations for the years ended August 31, 1999, 1998 and 1997,
respectively. In addition, SMART's balance sheets as of October 31, 1999 and
1998 have been combined with Solectron's balance sheets as of August 31, 1999
and 1998, respectively. Since the fiscal years for Solectron and SMART differed,
SMART changed its fiscal year end to coincide with Solectron's beginning in
fiscal 2000. As SMART's results of operations from September 1, 1999 to October
31, 1999 are included in SMART's 1999 fiscal year end results as well as in its
first quarter of fiscal 2000, net income for such period will be recorded as an
adjustment to retained earnings. The restated financial information includes
certain adjustments for the elimination of net sales, cost of sales and income
taxes related to shipments by SMART to Solectron as well as for certain
reclassifications 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 investments are investment grade short-term debt instruments
with original maturities greater than three months.
39
<PAGE> 40
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.
<TABLE>
<S> <C>
Machinery and equipment 2 - 5 years
Furniture and fixtures 3 - 5 years
Leasehold improvements Lease term
Buildings* 15-20 years
</TABLE>
*Useful lives for buildings in China and Scotland are 30 years and 50 years,
respectively.
(e) Other Assets: Other assets consist of intangible assets, including
intellectual property rights, goodwill and debt issuance costs. Intangible
assets are amortized using the straight-line method, over the expected life of
the asset - ten years for intellectual property rights and goodwill. Debt
issuance costs related to the zero-coupon convertible senior notes are amortized
using the effective interest method over seven years. Debt issuance costs
related to the senior notes are amortized using the straight-line method, which
does not differ materially from the effective interest method, over the debt
term of ten years.
(f) Impairment of Long-Lived Assets: Solectron reviews property and equipment
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of property
and equipment is measured by comparison to its carrying amount, including the
unamortized portion of goodwill allocated to the property and equipment, to
future net cash flows the property and equipment are expected to generate. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the property and
equipment, including the allocated goodwill, if any, exceeds its fair market
value. Solectron assesses the recoverability of enterprise-level goodwill by
determining whether the unamortized goodwill balance can be recovered through
undiscounted future net cash flows of the acquired operation. The amount of
enterprise-level goodwill impairment, if any, is measured based on projected
discounted future net cash flows using a discount rate reflecting the Company's
average cost of funds. To date, no adjustments to the carrying value of the
Company's long-lived assets have been required.
(g) Income Taxes: Solectron uses the asset and liability method of accounting
for income taxes. Deferred tax assets and liabilities are recognized for the
future consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. When necessary, a valuation allowance is recorded to reduce tax assets to
an amount for which realization is more likely than not. The effect of changes
in tax rates is recognized in the period in which the rate change occurs.
40
<PAGE> 41
(h) Net Income Per Share: Basic net income per share is calculated using the
weighted-average number of common shares outstanding during the period. Diluted
net income per share is calculated using the weighted-average number of common
shares plus dilutive potential common shares outstanding during the period.
Potential common shares consist of stock options that are computed using the
treasury stock method and shares issuable upon conversion of Solectron's
outstanding convertible notes computed using the as-if-converted method. Share
and per-share data presented reflect the two-for-one stock 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
consolidated financial position as of August 31, 1999 and 1998, include the
financial position of the Texas and Brazil operations as of July 31, 1999 and
1998. Similarly, Solectron's consolidated results of operations and cash flows
for the years ended August 31, 1999 and 1998, include the results of operations
and cash flows of the Texas and Brazil operations for the twelve-month periods
ended July 31, 1999 and 1998. Solectron's consolidated results of operations and
cash flows for the year ended August 31, 1997, include the results of operations
and cash flows of the Texas operation for the twelve-month period ended July 31,
1997.
(n) Recent Accounting Pronouncements: Effective in the first quarter of fiscal
1999, Solectron adopted Statement of Financial Accounting Standards No. 130
(SFAS No. 130), "Reporting Comprehensive Income," which requires the Company to
report and display certain information related to comprehensive income.
Comprehensive income includes net income and other comprehensive income. Other
comprehensive income is classified separately into foreign currency items,
minimum pension liability adjustments, and unrealized gains and losses on
certain investments in debt and equity securities. The adoption of SFAS No. 130
had no impact on Solectron's financial position, results of operations or cash
flows.
41
<PAGE> 42
Effective in the first quarter of fiscal 1999, Solectron adopted the American
Institute of Certified Public Accountants (AICPA) Statement of Position (SOP)
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 provides guidance on accounting for the costs of
computer software developed or obtained for internal use and for determining
when specific costs should be capitalized and when they should be expensed. The
impact of adopting SOP 98-1 was not significant to Solectron's financial
position, results of operations or cash flows.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities." SOP 98-5 requires that all start-up costs related to new operations
must be expensed as incurred. In addition, all start-up costs that were
capitalized in the past must be written off when SOP 98-5 is adopted. Solectron
expects that the adoption of SOP 98-5 will not have a material impact on its
financial position, results of operations or cash flows.
In June 1999, the Financial Accounting Standards Board issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133," which amends SFAS No. 133 to be
effective for all fiscal years beginning after June 15, 2000. The statement
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value. The statement also requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. The Company does not expect the adoption of
SFAS No. 137 to have a material effect on the Company's consolidated financial
statements. Solectron will adopt SFAS No. 133 in the first quarter of fiscal
2001.
In December 1999, the Securities and Exchange Commission issued SAB No. 101,
"Revenue Recognition in Financial Statements," which will be effective for the
Company in the first quarter of fiscal 2001. The Company is currently analyzing
this statement.
(o) Reclassifications: Certain prior year amounts have been reclassified to
conform to the 1999 presentation.
42
<PAGE> 43
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:
<TABLE>
<CAPTION>
Cash and Cash Short-Term
Equivalents Investments
----------- -----------
(in millions)
<S> <C> <C>
1999
- --------------------------
Cash $ 229.5 $ --
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 $1,428.0 $ 453.6
======== ========
1998
- --------------------------
Cash $ 132.9 $ --
Money market funds 74.2 --
Certificates of deposit 0.1 11.4
Market auction securities 10.7 28.7
U.S. government securities 52.0 118.2
Corporate obligations 6.0 17.5
Municipal obligations 5.4 --
Other 19.4 7.6
-------- --------
Total $ 300.7 $ 183.4
======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(in millions)
<S> <C> <C>
Raw materials $ 841.2 $ 601.5
Work-in-process 232.6 175.6
Finished goods 96.3 50.9
-------- --------
Total $1,170.1 $ 828.0
======== ========
</TABLE>
43
<PAGE> 44
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment as of August 31, 1999 and 1998, consisted of:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(in millions)
<S> <C> <C>
Land $ 24.3 $ 23.1
Buildings and improvements 136.0 94.0
Leasehold improvements 61.4 46.6
Factory equipment 743.3 574.5
Computer equipment and software 167.2 91.1
Furniture, fixtures and other 44.4 36.6
Construction-in-progress 93.2 59.3
------- -------
1,269.8 925.2
Less accumulated depreciation
and amortization 564.2 429.2
------- -------
Net property and equipment $ 705.6 $ 496.0
======== ========
</TABLE>
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 expires in May 2000. Borrowings under this agreement are
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. Solectron is
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.
Solectron also has approximately $127 million in uncommitted foreign lines of
credit and other bank facilities. Borrowings are payable on demand. The interest
rates range from the bank's prime lending rate to the bank's prime rate plus
2.0%. As of August 31, 1999, borrowings and guaranteed amounts under these lines
of credit were $41 million, which had a weighted-average interest rate of 5.1%
per annum.
Solectron had an asset securitization arrangement with a bank under which it
might sell up to $220 million of eligible accounts receivable. There were no
borrowings outstanding under this arrangement as of August 31, 1999. The
securitization arrangement, at Solectron's discretion, was not renewed upon its
expiration in September 1999.
44
<PAGE> 45
NOTE 6. LONG-TERM DEBT
Long-term debt at August 31, 1999 and 1998, consisted of (in millions):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
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 $5.2 in 1999 and
$5.7 in 1998 5.2 5.7
------ ------
Total long-term debt $922.6 $385.5
====== ======
</TABLE>
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.
45
<PAGE> 46
NOTE 7. FINANCIAL INSTRUMENTS
Fair Value of Financial Instruments
The fair value of Solectron's cash, cash equivalents, accounts receivable and
accounts payable approximates the carrying amount due to the relatively short
maturity of these items. The fair value of Solectron's short term investments
(see Note 2) is determined based on quoted market prices. The fair value of
Solectron's long-term debt (see Note 6) is determined based on broker trading
prices.
Derivatives
Solectron enters into forward exchange contracts to hedge foreign currency
exposures on a continuing basis for periods consistent with its committed
exposures. These transactions generally do not expose Solectron to risk of
accounting loss because gains and losses on these contracts offset losses and
gains on the assets, liabilities and transactions being hedged. The
counterparties to these contracts expose Solectron to credit related losses in
the event of nonperformance. However, the counterparties to these contracts are
substantial and creditworthy multinational commercial banks. The risk of
counterparty nonperformance associated with these contracts is remote. Since
these contracts generally have maturities of less than three months, the amounts
of unrealized gains and losses are immaterial. Foreign currency forward exchange
contracts outstanding totaled $66.0 million at the end of fiscal year 1999 and
$31.3 million at the end of fiscal year 1998. These contracts were originated by
Solectron's international subsidiaries primarily for the purchase and sale of
European currencies, U.S. dollar, Malaysian ringgit and Japanese yen to mitigate
foreign currency exposures.
Business and Credit Concentrations
Financial instruments that potentially subject Solectron to concentrations of
credit risk consist of cash, cash equivalents, short-term investments and trade
accounts receivable. Solectron's cash, cash equivalents and short-term
investments are managed by recognized financial institutions which follow the
Company's investment policy. Such investment policy limits the amount of credit
exposure in any one issue and the maturity date of the investment securities
that typically comprise investment grade short-term debt instruments.
Concentrations of credit risk in accounts receivable resulting from sales to
major customers are discussed in Note 13. Solectron generally does not require
collateral for sales on credit. The Company also closely monitors extensions of
credit and has not experienced significant credit losses in the past.
NOTE 8. COMMITMENTS 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
46
<PAGE> 47
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 $68.1 million, $54.5 million, $90.9
million, $58.4 million and $68.7 million in each of the years in the five-year
period ending August 31, 2004, and an aggregate $4.6 million for periods after
that date. Rent expense was $85.0 million, $34.9 million and $24.3 million for
the years ended August 31, 1999, 1998 and 1997, respectively.
The Company and certain of its officers and 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 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 the Company and certain of its officers
and 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 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 $9.9 million, $4.7 million
and $3.1 million in 1999, 1998 and 1997, respectively.
NOTE 10. INCOME TAXES
The components of income taxes for the fiscal years ended August 31, 1999, 1998
and 1997, were as follows (in millions):
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Current:
Federal $ 81.5 $ 90.2 $ 75.7
State 15.2 16.4 14.4
Foreign 28.1 19.6 7.5
------ ------ ------
124.8 126.2 97.6
------ ------ ------
Deferred:
Federal (3.1) (7.9) (10.4)
State 1.4 (1.8) (1.4)
Foreign 5.1 (3.8) --
------ ------ ------
3.4 (13.5) (11.8)
------ ------ ------
Charge in lieu of taxes
attributable to employee
stock plans 35.4 11.5 17.9
------ ------ ------
Total $163.6 $124.2 $103.7
====== ====== ======
</TABLE>
47
<PAGE> 48
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:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- ------
<S> <C> <C> <C>
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) (5.7) (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 0.4 2.3 0.3
---- ---- ----
Effective income tax rate 32.0% 33.2% 33.8%
==== ==== ====
</TABLE>
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):
<TABLE>
<CAPTION>
1999 1998
----- -----
<S> <C> <C>
Deferred tax assets:
Accruals, allowances and reserves $16.5 $21.8
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 4.1 5.9
Net operating loss carryover 7.8 0.6
Other 5.2 3.7
----- -----
Total deferred tax assets 45.1 43.2
----- -----
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 $39.1 $42.4
===== =====
</TABLE>
Based on Solectron's historical operating income, management believes it is more
likely than not that the Company will realize the benefit of the deferred tax
assets recorded. Accordingly, Solectron has not established any valuation
allowance.
Worldwide income before income taxes for the fiscal years ended August 31, 1999,
1998 and 1997, consisted of the following (in millions):
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
U.S. $347.0 $277.4 $262.8
Non-U.S. 164.1 96.8 44.4
------ ------ ------
Total $511.1 $374.2 $307.2
====== ====== ======
</TABLE>
48
<PAGE> 49
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, the Company 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, the Company
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 the
Company had been reissued pursuant to the exercise of stock options previously
granted to employees from the Company's 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.
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."
49
<PAGE> 50
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(in millions, except per share data)
<S> <C> <C> <C> <C>
Net income As reported $347.5 $250.0 $203.5
Pro forma $311.5 $220.8 $189.1
Net income per share:
Basic As reported $0.64 $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
</TABLE>
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.
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ -------------
<S> <C> <C> <C>
Expected life of
options 3 to 5 years 3 to 5 year 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
</TABLE>
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.
50
<PAGE> 51
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):
<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------- -------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding,
beginning of year 43.9 $ 7.61 47.1 $ 4.71 44.6 $ 3.48
Granted 15.6 $18.04 13.9 $13.07 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 (2.5) $12.16 (2.9) $ 8.50 (2.0) $ 5.50
------ ------ ------
Outstanding,
end of year 45.5 $11.37 43.9 $ 7.61 47.1 $ 4.71
====== ====== ======
Exercisable
at year-end 21.6 $ 7.72 11.9 $ 9.88 10.7 $11.31
====== ====== ======
Weighted-average
fair value of
options granted
during the year $ 7.07 $ 4.82 $ 2.98
</TABLE>
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).
51
<PAGE> 52
<TABLE>
<CAPTION>
Outstanding Exercisable
--------------------------------- ---------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number of Contractual Exercise Number of Exercise
Prices Shares Life Price Shares Price
- ------------- --------- ----------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$ 0.33-$ 1.50* 0.3 6.62 years $ 1.03 0.2 $ .97
$ 1.51-$ 3.26 0.1 .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 45.5 5.18 years $11.37 21.6 $7.72
==== ====
</TABLE>
- --------------
*Options in this range of exercise prices represent the options assumed in
connection with the acquisition of Force.
A total of 32.0 million shares of common stock remain reserved for issuance
under the plans as of August 31, 1999.
On December 1, of each year, each independent member of Solectron's Board of
Directors is granted an option to purchase 6,000 shares of common stock at the
fair market value on such date. These options vest over one year.
Employee Stock Purchase Plan
Under Solectron's Employee Stock Purchase 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 27 manufacturing facilities in the Americas, Europe and Asia regions
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
52
<PAGE> 53
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:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(in millions)
<S> <C> <C> <C>
Net sales:
Manufacturing and operations $8,248.4 $5,153.0 $3,594.5
Technology solutions 1,137.5 805.6 789.6
Global services 40.2 28.7 23.0
Intersegment Adjustments (67.8) (9.0) (23.1)
-------- -------- --------
$9,358.3 $5,978.3 $4,384.0
======== ======== ========
Depreciation and amortization:
Manufacturing and operations $ 165.5 $ 109.7 $ 96.0
Technology solutions 21.5 16.7 9.3
Global services 1.3 1.2 1.0
Corporate 8.9 6.2 3.4
-------- -------- --------
$ 197.2 $ 133.8 $ 109.7
======== ======== ========
Interest income:
Manufacturing and operations $ 7.9 $ 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
-------- -------- --------
$ 36.6 $ 32.3 $ 31.2
======== ======== ========
Interest expense:
Manufacturing and operations $ 2.3 $ 1.5 $ 0.1
Technology solutions 0.7 0.5 0.3
Global services -- -- --
Corporate 33.7 23.5 26.6
Intersegment Adjustments (0.3) (0.7) (0.2)
-------- -------- --------
$ 36.4 $ 24.8 $ 26.8
======== ======== ========
</TABLE>
53
<PAGE> 54
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(in millions)
<S> <C> <C> <C>
Pre-tax income:
Manufacturing and operations $ 483.4 $ 303.2 $ 235.5
Technology solutions 82.6 81.4 79.5
Global services 6.8 3.8 3.2
Corporate (61.7) (14.2) (11.0)
--------- -------- --------
$ 511.1 $ 374.2 $ 307.2
========= ======== ========
Capital expenditures:
Manufacturing and operations $ 388.3 $ 225.2 $ 174.1
Technology solutions 24.1 40.1 24.2
Global services 1.4 1.8 0.1
Corporate 29.5 10.6 6.9
--------- -------- --------
$ 443.3 $ 277.7 $ 205.3
========= ======== ========
Total Assets:
Manufacturing and operations $ 3,265.9 $2,243.9 $1,454.4
Technology solutions 556.7 430.0 386.2
Global services 42.4 6.2 5.8
Corporate 2,717.0 942.4 886.9
Intersegment Adjustments (1,262.7) (846.0) (529.6)
--------- -------- --------
$ 5,319.3 $2,776.5 $2,203.7
========= ======== ========
</TABLE>
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.
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(in millions)
<S> <C> <C> <C>
Net sales derived from:
PCB assembly $6,643.0 $4,283.5 $3,325.0
Systems build 1,748.4 1,004.8 369.4
Technology products 966.9 690.0 689.6
-------- -------- --------
$9,358.3 $5,978.3 $4,384.0
======== ======== ========
Geographic net sales:
United States $6,450.6 $4,343.4 $3,473.1
Europe 1,959.4 1,271.8 679.2
Asia and other 982.8 382.6 251.0
Intersegment adjustments (34.5) (19.5) (19.3)
-------- -------- --------
$9,358.3 $5,978.3 $4,384.0
======== ======== ========
Long-lived assets:
United States $ 520.0 $ 302.5 $ 227.8
Europe 100.1 95.7 65.5
Asia and other 288.7 173.9 108.5
-------- -------- --------
$ 908.8 $ 572.1 $ 401.8
======== ======== ========
</TABLE>
54
<PAGE> 55
NOTE 13. MAJOR CUSTOMERS
Net sales to major customers as a percentage of consolidated net sales were as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Compaq Computer Corp. (Compaq) 12% * *
Cisco Systems, Inc. (Cisco) 11% 10% *
Hewlett-Packard Company (HP) 10% 11% 11%
</TABLE>
---------------------------
* 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 12.5% of total accounts receivable, and Hewlett-Packard Company
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 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,
55
<PAGE> 56
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 July 1999, Solectron issued approximately 520,000 shares of common stock to
acquire all of the outstanding capital stock of Sequel, Inc. (Sequel). Sequel is
a privately held corporation specializing in notebook computer and liquid
crystal display repair service and support. This transaction was accounted for
under the purchase method of accounting. The consolidated financial statements
include the operating results of Sequel from the date of acquisition. The total
purchase price was approximately $17.8 million, subject to adjustments. The
acquisition was accounted for as a purchase of a business resulting in goodwill
of approximately $4 million. Pro forma results of operations are not presented
because the effect of this acquisition is not significant.
In August 1999, SMART acquired Compaq's embedded and real time product line and
business. 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. The purchase price above the amount
allocated to the acquired assets was allocated to goodwill. 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.
56
<PAGE> 57
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.
<TABLE>
<CAPTION>
Years Ended August 31,
------------------------------
1999 1998 1997
-------- -------- --------
(in millions
except per share data)
<S> <C> <C> <C>
Net income - basic $347.5 $250.0 $203.5
Interest expense from convertible
subordinated notes, net of taxes 5.0 9.6 -
------ ------ ------
Net income - diluted $352.5 $259.6 $203.5
====== ====== ======
Weighted average shares - basic 538.9 507.6 485.7
Common shares issuable upon
stock options exercised 22.4 19.3 20.4
Common shares issuable upon
conversion of convertible
subordinated notes 13.8 27.2 -
------ ------ ------
Weighted average shares - diluted 575.1 554.1 506.1
====== ====== ======
Net income per share - basic $ 0.64 $ 0.49 $ 0.42
====== ====== ======
Net income per share - diluted $ 0.61 $ 0.47 $ 0.40
====== ====== ======
</TABLE>
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 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 (postsplit) of Solectron common stock and
assumed all stock options held by SMART employees. The acquisition is accounted
for as a pooling of interests. Accordingly, the accompanying historical
financial data have been restated to include SMART.
57
<PAGE> 58
The results of operations previously reported by the separate enterprises and
the combined amounts presented in the accompanying consolidated financial
statements are summarized below:
<TABLE>
<CAPTION>
Years Ended August 31,
------------------------------
1999 1998 1997
-------- -------- --------
(in millions)
<S> <C> <C> <C>
Net sales
Solectron $8,391.4 $5,288.3 $3,694.4
SMART* 995.9 714.6 694.6
Eliminations (29.0) (24.6) (5.0)
-------- -------- --------
$9,358.3 $5,978.3 $4,384.0
======== ======== =========
Net income
Solectron $ 294.0 $ 198.8 $ 158.1
SMART* 53.5 51.5 45.4
Eliminations 0.0 (0.3) 0.0
-------- -------- ---------
$ 347.5 $ 250.0 $ 203.5
======== ======== =========
</TABLE>
* Results are for the years ended October 31.
No adjustments were necessary to conform accounting policies of the combined
entities.
On February 28, 2000, Solectron signed a letter of intent to acquire AMERICOM
Wireless Services (AMERICOM) in its entirety, a privately held corporation which
specializes in wireless handset repair and refurbishment and outsourced
technical customer support services. As part of the transaction, Solectron will
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. The acquisition is expected
to be completed by the end of May 2000. Completion of the transaction is subject
to applicable government approvals and various conditions of closing.
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. The acquisition of Alcatel's
manufacturing assets in Longview, Texas is expected to be closed in June 2000
and is subject to various conditions of closing. Alcatel is a world leader 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. Under the
proposed agreement for Longview, Solectron will assume full manufacturing
responsibility for Alcatel's build-to-order (BTO) RF communication systems and
will also provide a full range of manufacturing services to Alcatel for the next
three years including NPI management of RF systems and BTO systems build.
On April 4, 2000, Solectron signed a definitive agreement to acquire certain
Nortel Networks' NPI prototyping, PCB and telephone set ("telset") assembly
assets in North America and Asia. The companies are also discussing the
divestiture or outsourcing of certain manufacturing and repair operations in
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Europe. Under the terms of the agreement, and the proposed agreements, Solectron
will pay approximately $900 million to assume these operations contemplated in
these agreements. The companies also agreed to enter into a multi-year supply
agreement, with the option to renew. Solectron will provide NPI prototyping,
manufacturing and repair services for Nortel Networks' optical, carrier,
enterprise and wireless products. As a result of the agreement for North America
and Asia, Solectron will be gaining NPI prototyping and manufacturing
capabilities in Calgary, Canada, and Research Triangle Park, North Carolina; and
manufacturing capabilities in Monterrey, Mexico, and Istanbul, Turkey. Under the
terms proposed in Europe, Solectron would acquire NPI prototyping and
manufacturing operations in Monkstown, Northern Ireland, and manufacturing and
repair capabilities in Cwmcarn, Wales. In addition, Solectron has submitted an
offer to acquire certain PCB assembly and telset assets of Matra-Nortel
Communications S.A.S. in France. In addition to the acquired locations,
Solectron will be transferring other Nortel Networks products to Solectron
locations to align the global supply chain with Nortel Networks' cost-to-market
and time-to-market strategies. As part of the agreement, Solectron will be
setting up a new operating unit comprised of the acquired Nortel Networks sites.
This operating unit will be a part of the manufacturing and operations business
unit, and will be focused on maintaining continuity of supply and enhancing
competitive performance to Nortel Networks, while the sites transition to the
Solectron business model. It is expected that the transactions will be closed in
North America by the end of the second quarter of calendar year 2000; in Europe,
by the end of the second quarter or beginning of the third quarter of calendar
year 2000; and in Asia, in the third quarter of calendar year 2000. All
transactions are subject to customary conditions and regulatory approvals. In
addition, the transaction with Matra-Nortel Communications S.A.S. is subject to
the employee consultation processes in Europe.
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INDEPENDENT AUDITORS' REPORT -
The Board of Directors and Stockholders
Solectron Corporation:
We have audited the accompanying consolidated balance sheets of Solectron
Corporation and subsidiaries as of August 31, 1999 and 1998, and the related
consolidated statements of income, stockholders' equity, comprehensive income
and cash flows for each of the years in the three-year period ended August 31,
1999. In connection with our audits of the consolidated financial statements, we
also have audited the financial statement schedule - valuation and qualifying
accounts. These consolidated financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Solectron
Corporation and subsidiaries as of August 31, 1999 and 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended August 31, 1999, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
KPMG LLP
Mountain View, California
April 4, 2000
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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)
<TABLE>
<CAPTION>
Amounts
Balance at Charged Balance at
Beginning To End
Description of Period Operations (Deductions) Of Period
- ---------------------- --------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Year ended August 31, 1999:
Allowance for doubtful
accounts receivable $4.6 $2.2 $(0.7) $6.1
Year ended August 31, 1998:
Allowance for doubtful
accounts receivable $4.7 $2.8 $(2.9) $4.6
Year ended August 31, 1997:
Allowance for doubtful
accounts receivable $3.6 $2.5 $(1.4) $4.7
</TABLE>
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