UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to ___________________
Commission File No. 0-2251
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SCI SYSTEMS, INC.
(Exact name of registrant as specified in its
charter)
Delaware 63-0583436
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
SCI Systems, Inc.
2101 West Clinton Avenue
Huntsville, Alabama 35805
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code (256) 882-4800
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Securities registered pursuant to Section 12 (b) of the Act:
Title of each class Name of each exchange on which
registered
Common Stock, $.10 Par Value New York Stock Exchange
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Securities registered pursuant to Section 12 (g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12
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months (or for such shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days. |X| Yes |_| No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K. |X|
At September 15, 2000, the aggregate market value of the voting stock held
by non-affiliates of the registrant was approximately $6,110,165,000. At
September 15, 2000, there were 145,818,057 outstanding shares of the
registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for its October 27,
2000, Annual Meeting of Shareholders are incorporated by reference into Part
III.
PART I
FORWARD-LOOKING STATEMENTS
We make "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, throughout this document and in the documents
we incorporate by reference into this filing. You can identify these statements
by forward-looking words such as "may," "will," "expect," "anticipate,"
"believe," "estimate," "plan" and "continue" or similar words. We have based
these statements on our current expectations about future events. Although we
believe that our expectations reflected in or suggested by our forward-looking
statements are reasonable, we cannot assure you that these expectations will be
achieved. Our actual results may differ materially from what we currently
expect. Important factors which could cause our actual results to differ
materially from the forward-looking statements set forth in the "Risk Factors"
section of this Form 10-K, and elsewhere in this filing.
Item 1. Business.
SCI SYSTEMS, INC.
We are a diversified international electronics manufacturing services provider.
We design, manufacture, distribute, and service electronic products for
virtually every market segment. Markets served by us include the computer,
peripheral, datacom, telecom, medical, industrial, consumer, aerospace, defense,
and entertainment industries, as well as the U.S. Government.
Founded in 1961, we were initially engineering oriented -- with the U.S.
Government's National Aeronautics and Space Administration (NASA) and its prime
contractors as our early customers. Building on a strong technical and
engineering base, which we still maintain today, we participated in a number of
significant Department of Defense programs and later expanded into a variety of
commercial activities.
In the mid-1970s, we pioneered the electronic contract manufacturing services
industry, which encompasses a full range of outsourcing services to Original
Equipment Manufacturers (OEMs) for the production and assembly of electronic
products, including engineering, procurement and inventory management, testing,
distribution and depot repair services. We became the world's premier provider
of electronics manufacturing services, and we continue as a leader in surface
mount technology (SMT) production capacity.
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Although we derive much of our revenue from hardware manufacturing and maintain
a broad technology base, we are primarily a vertically integrated engineering
and manufacturing services provider with dedication to close customer
interaction forming the cornerstone of our activities. The key elements of our
operating philosophy -- quality products, competitive pricing, and customer
responsiveness -- are a proven foundation for success. These fundamental tenets
will continue to guide us as we pursue opportunities for growth and expansion.
We currently have 39 facilities in 17 different countries. We believe we produce
the broadest range of subassemblies and finished products of any electronic
manufacturing services company. These products and a full range of engineering,
distribution, logistic, and after sales services are supplied to a large
multinational customer base for a highly diversified mix of commercial
applications as well as for military and space programs.
Our customers have included many of the foremost global OEMs that require
electronic manufacturing services and enclosures, such as Hewlett-Packard,
Compaq, Dell, Nortel, Nokia, Ericsson, Philips, Silicon Graphics, Cabletron,
General Electric, Cisco, Roche, NCD, ECI, Telrad, Johnson & Johnson, Boeing,
Echostar (Houston Tracker), Intel, AMD, LSI Logic, and McData.
A majority of our revenues are derived from direct sales to original equipment
manufacturers. Marketing is conducted primarily by factory-based personnel in
Brazil, Canada, Finland, France, Hungary, Ireland, Israel, Malaysia, Mexico, The
Netherlands, People's Republic of China, Singapore, Spain, Sweden, Thailand, the
United Kingdom, and the United States. Such marketing efforts are coordinated by
a corporate Marketing Department. We advertise on a small scale and participate
in a modest number of industry trade shows.
HIGH GROWTH BUSINESS ENVIRONMENT
New orders received during fiscal 2000 amounted to $9.6 billion compared to $7.1
billion in 1999, an increase of 35%. The Electronic Manufacturing Services
(EMS)Iindustry continues to benefit from the trend toward outsourcing on a
global basis, and we believe SCI's opportunities for growth and diversification
have improved. The business environment fully supports continued improvement in
our business mix, engagement with a number of new customers, healthy organic
growth with an impressive group of existing customers, and strategic
acquisitions that will strengthen both our service offerings and customer base.
While demand for desktop computers may not be expanding at historic rates, other
business sectors we serve are experiencing rapid expansion that is significantly
benefitting our ongoing growth and margin improvement. The Internet is expected
to drive augmented growth in demand for a wide range of Web-oriented products
and systems and spur the development of a multitude of technology innovations
for some time to come. Today, EMS companies have penetrated only about one
quarter of the available market, estimated to be about $600 billion. Further
penetration, coupled with available market growth, will provide a superior
growth environment for years to come.
CUSTOMER AND PRODUCT DIVERSIFICATION CONTINUES
SCI has a diversified and high quality customer base. We have embarked on a
growth strategy that includes priority focus on the addition of a number of
multinational world-class, high growth companies to our customer base and
continued emphasis on balanced industry segment participation. Our goal is to
achieve industry leading business, product and customer mixes to provide the
basis for sustained growth. We are also committed to maintaining a balance of
mature, high growth, and emerging growth markets.
During fiscal 2000, we made progress in achieving this diversification
objective. Several major new customers were acquired. Our involvement with
communication equipment grew substantially. SCI's personal computer business
grew but declined as a percent of total business. Encouraging progress was made
in posturing SCI for continued growth in other areas such as servers, peripheral
products, set top boxes, "digital home appliances," and medical products. We
continue to look for opportunities to enlarge our enclosure business through
acquisitions and geographic expansions of existing capabilities.
SCI - THE e-EMS COMPANY
We enjoy a reputation for delivering on the cornerstones of SCI's long-standing
operating philosophy: cost competitiveness, high quality, and customer
responsiveness. As we enter the new millennium, opportunities to enhance new
business models and information technologies are numerous and compelling. When
properly implemented, we believe these opportunities will allow us to not only
confirm our existing philosophy, but also to rise above the competition in
delivering lower cost solutions, the highest quality products and services, and
responsiveness in customer dealings, supply chain management and adaptation to a
full range of business dynamics. SCI is beginning to employ the Internet
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and selected e-business tools to automate our customer and supplier
transactions, so as to change the way business is conducted between SCI and our
partners.
We are committed to being e-business driven and are making the necessary
investments in our organization, technology, people, and information systems to
get us there. We therefore believe it highly appropriate that we identify
ourselves as "SCI - The e-EMS Company (TM)" and have registered that trademark
so that we can be identified as what we are and what we stand for in this new
business age.
Order Backlog
In recent years, components used in our products have experienced substantial
price and lead time fluctuations. These fluctuations have significantly affected
the timing and size of order placements by the Company's customers.
Consequently, backlog is not considered a definitive indicator of future
revenue. Backlog at June 30, 2000, was approximately $4.36 billion compared with
June 30, 1999's approximate $3.07 billion and June 30, 1998's approximate $2.64
billion.
Patents and Licenses
Patents are not significant to our business. We believe that our success depends
more upon the creativity of our personnel than upon patent ownership. Because of
rapid technological change and rate of new patent issuance, certain of our
products, manufacturing processes, and purchased equipment may inadvertently
infringe others' patents. If patent infringements inadvertently occur, we
believe that, based upon industry practice, necessary licenses can be obtained
without material adverse impact; however, there can be no assurance given to
that effect. See Item 3. - Legal Proceedings.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Concentration of customers
A majority of our revenues are derived from direct sales to original equipment
manufacturers. Although we have several hundred customer accounts, in any
particular period a significant percentage of sales is derived from a limited
group of customers. In fiscal 2000, our ten largest customers contributed more
than 75% of revenues. Significant reductions in sales to any of these customers
could have a material adverse effect on our results of operations.
Sales to individual customer that exceeded 10% of annual consolidated sales in
any of the last three fiscal years were: Hewlett-Packard ($2,629 million in
2000, $2,465 million in 1999, and $2,692 million in 1998); Nortel ($931 million
in 2000); Dell ($681 million in 1999); and Compaq ($840 million in 1999).
Customer contracts can be canceled and volume levels changed or delayed at any
time without notice, subject to cancellation costs, if any. Timely replacement
of canceled, delayed, or reduced contracts with new business cannot be assured.
These risks are exacerbated as a majority of our sales are to customers in the
electronics industry, which is subject to rapid market and technological changes
and frequent product obsolescence. Factors affecting the electronics industry in
general or any of our major customers in particular could have a material
adverse effect upon our results of operations.
Our major contracts are with customers in the high technology industry. Credit
terms relating to both accounts receivable and contract inventories are extended
to customers after performing credit evaluations. When significant credit risks
exist, letters of credit or other appropriate security are generally requested.
However, credit losses on customer contracts have occurred in the past and no
assurances can be given that credit losses, which could be material, will not
reoccur.
Management of growth
We have experienced rapid growth over recent years. We have acquired and built
substantial facilities in several locations and continue to do so. There can be
no assurance that historical revenue growth will continue or that we will
successfully manage existing operations or future plants we may acquire or
build. As we manage our operations and expand geographically, we may experience,
as we have in the past, inefficiencies related to new operations and broadened
geographic diversification. We may be adversely affected by new and acquired
facilities that do not achieve growth sufficient to offset increased
expenditures associated with expansion. In addition, should we increase capacity
and expenditures in anticipation of future sales levels which do not
materialize, profitability could be adversely affected. Moreover, customers may
occasionally require rapid production increases which can stress our resources.
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Operating internationally
We operate internationally with approximately even generation of revenue between
the United States and international operations. Additionally, much of our
manufacturing material is sourced from international suppliers. As a result of
our international sales and facilities, our operations are subject to a variety
of risks that are unique to our international operations, including the
following: 1.) adverse movement of international currencies against the U.S.
dollar (our reporting currency); 2.) import and export duties and value-added
taxes that we may have to absorb; 3.) import and export regulation changes that
could affect our profit margins or restrict exports; 4.) potential restrictions
on the transfer of funds, and 5.) the burden and cost of compliance with
international laws.
U.S. export sales approximated $175,000,000, $116,000,000, and $185,000,000 for
the year ended June 30, 2000, 1999, and 1998, respectively. Sales by our
non-U.S. operations amounted to $4,211,141,000 in fiscal 2000, $2,807,547,000 in
fiscal 1999, and $2,106,311,000 in fiscal 1998. Non U.S. sales represented 50.5%
of consolidated sales in fiscal 2000, 41.8% in fiscal 1999, and 30.9% in fiscal
1998. Property, plant, and equipment investments in non-U.S. operations were
$427,096,000, $308,401,000, and $271,200,000 at June 30, 2000, 1999, and 1998,
respectively. Refer to Note G to June 30, 2000's Consolidated Financial
Statements, which are included under Item8. for further geographic information.
Operating in a highly competitive industry
We operate primarily in the Electronics Manufacturing Services Industry. We
compete against numerous domestic and international companies which participate
in our industry. We also face competition from current and prospective customers
who evaluate our capabilities against the merits of internal manufacturing.
Competition varies depending upon the type of service offered and the geographic
area of competition. Competition is intense and is expected to continue to be so
as more companies enter our industry and existing competitors expand capacity.
We could be adversely affected if our competitors introduce superior or lower
priced services.
To remain competitive, we must continue to develop and provide technologically
advanced engineering services, information systems, and manufacturing processes.
We must also maintain high quality, offer flexible delivery schedules, deliver
products on a timely basis, and continue to price our products and services
competitively. Failure to satisfy any of the foregoing requirements could
adversely affect us.
Shortages and prices of electronic components
Components are sourced globally. Component availability is periodically subject
to constraints, shortages, and abundances. Many components are available only
from a limited number of sources. Some components are subject to periodic
allocation by suppliers. Although no assurances can be given, we have generally
been able to obtain adequate supply to maintain production when shortages occur.
However, shipment delays have occurred and may reoccur. Significant component
constraints could adversely affect us. Our revenues are primarily generated from
turnkey manufacturing services. Accordingly, average selling prices for our
products fluctuate proportionally to component prices.
Seasonality
We have not historically considered its business to be consistently seasonal,
although seasonal demands for our customers' products sold to consumers may
impact quarterly revenues. In recent periods the proportion of our customers'
products ultimately sold at retail has expanded, which has increased seasonality
in our sales. Operating margins have seen seasonal fluctuations in the past,
particularly in the first fiscal quarter due to slowing effects of the summer
season. We believe these seasonality effects may continue.
Operating results may fluctuate
Our operating results are dependent upon our ability to identify and react in a
timely manner to changes in business conditions and customer requirements,
especially our actions in balancing inventory quantities, property, plant, and
equipment capacity, staffing levels, and liquidity amounts. Accordingly,
operating results could vary over time as such conditions change.
Dependence on key personnel
Our success depends largely upon the efforts and abilities of key managerial and
technical employees. The loss of services of certain key personnel could
adversely affect us. Our business depends upon our ability to recruit, train,
and retain senior managers, skilled professional and technical salaried
personnel, and skilled and semi-skilled hourly employees at competitive costs
for which there is intense competition. Failure to do so could adversely affect
us.
At June 30, 2000, the Company employed 31,707 individuals, of which 9,939 were
based in the United States. Except for eleven foreign plants, employees are not
subject to collective bargaining agreements. There have been no work stoppages
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caused by employee activities. The Company believes that its employee relations,
in general, are good.
Environmental risks
We are subject to a variety of environmental regulations relating to the use,
storage, discharge, and disposal of hazardous materials used in our
manufacturing processes. Our failure to comply with present and future
regulations could subject us to future liabilities or the suspension of
production. In addition, such regulations could restrict our ability to expand
our facilities or could require us to acquire costly equipment or to incur other
significant expenses to comply with environmental regulations.
Interest rate fluctuations
Short-term interest rate changes can impact the Company's interest expense on
its variable interest rate debt, as well as the discount (reflected as interest
expense) on its accounts receivable sold under an asset securitization
agreement.
International currency exchange rates fluctuations
We predominantly conduct our international sales and purchase transactions in
U.S. dollars or under customer contract provisions that protect against most
major currency risks. Our largest currency risk is that associated with the
Brazilian operation. Unlike our other international operations, our Brazilian
plant is directly subjected to the effects of currency devaluation on certain
customers' contracts until forward pricing is adjusted accordingly (normally
monthly). Other currency exchange risks primarily relate to current assets and
liabilities denominated in other than the U.S. dollar. Although we endeavor to
balance such items against each other where possible at individual operations,
no assurance can be given that we will be successful in mitigating the effects
of changes in currency exchange rates upon such international dollar
transactions. Changes in some international currency exchange rates impact the
geographic areas where our revenue is derived. When international currencies are
devalued, manufacturing costs of plants in those countries may become more
competitive with other established plants.
Volatility of stock price
Our common stock is traded on the New York Stock Exchange. Our common stock
market price has fluctuated substantially in the past and could fluctuate
substantially in the future based on a variety of factors, including among
others: 1.) future announcements about us or our key customers or competitors;
2.) demand for our services; 3.) changes in earnings estimates by analysts; 4.)
fluctuations in quarterly operating results; 5.) general conditions in the
contract manufacturing, communications, computer peripherals, personal computer,
automotive or consumer products industries; 6.) general economic, political and
market conditions, such as recessions or international currency fluctuations;
7.) litigation, and 8.) government regulations.
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Item 2. Properties.
At June 30, 2000, we owned or leased the following facilities:
Location Square Footage
Americas
Huntsville, Alabama 1,261,000
(Seven facilities)
(Includes facilities financed through
industrial revenue bonds)
Lacey's Spring, Alabama 148,800
(Financed through industrial revenue bonds)
Arab, Alabama 137,000
(Financed through industrial revenue bonds)
Graham, North Carolina 139,000
(Financed through industrial revenue bonds)
Rapid City, South Dakota 230,000
Colorado Springs, Colorado 155,000
Fountain, Colorado 360,000
San Jose, California (two plants) 250,000
Augusta, Maine 311,000
Hooksett, New Hampshire 72,000
(Financed with industrial revenue bond)
San Antonio, Texas 36,000
Pointe-Claire, Quebec, Canada 92,000
Brockville, Ontario, Canada 475,000
Guadalajara, Jalisco, Mexico 419,200
(Two plants)
Mexico City, Distrito Federal, Mexico 118,000
Apodaca, Nuevo Leon, Mexico (Monterrey) 282,200
Hortolandia, Sao Paulo, Brazil (Campinas) 120,000
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Total Americas 4,606,200
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Europe
Irvine, Scotland, UK 170,000
Fermoy, County Cork, Ireland 110,000
Grenoble, France 82,000
Tatabanya, Hungary 220,000
Oulu, Finland (leased facility) 81,000
Motala, Sweden 664,000
(423,800 square feet is currently leased to other
occupants and not used in production
by the Company)
Leganes, Spain (leased facility) 108,400
Heerenveen, Leek, The Netherlands 250,000
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Total Europe 1,685,400
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Asia
Republic of Singapore 155,000
Pathum Thani, Thailand (Bangkok) 122,500
Penang, Malaysia 116,000
Kunshan, China (Shanghai) 210,000
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Total Asia 603,500
Middle East
Tel Aviv, Israel (leased facility) 58,000
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Other, primarily leased 144,158
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Total 7,097,258
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Item 3. Legal Proceedings.
We have been sued by the Lemelson Medical Educational Research Foundation
(Lemelson), together with 87 other defendants, including our major domestic
competitors and customers, alleging infringement on 15 patents relating to
machine vision and use of bar coding and bar code readers in manufacturing.
Lemelson has been successful in settling similar assertions against certain
automobile and semiconductor manufacturers. Lemelson is requesting damages equal
to a certain percent of sales for a 10-year period. We, together with other
major defendants, intend to contest the validity of the patents. In addition,
possible recourse exists against manufacturers of the equipment that Lemelson is
alleging violated its patents. While no guarantee can be given, we do not
believe that outcome of this lawsuit will result in any material adverse effect
on the Company. The maximum exposure for this suit is currently estimated to be
less than one percent of our current assets, and we have provided for what we
believe will be the likely outcome of the suit. Additionally, if Lemelson's
patents are upheld, we believe we will be able to obtain adequate licenses to
use them.
We are also party to several lawsuits incidental toour various activities and
incurred in the ordinary course of business. We believe that we have meritorious
claims and defenses in each case that either will absolve us of or limit our
liability. We believe we have adequately provided for any likely material
adverse outcome of pending litigation.
We are subject to a variety of environmental regulations relating to the use,
storage, discharge, and disposal of hazardous materials used in our
manufacturing processes. Failure by us to comply with present and future
regulations could subject us to future liabilities or the suspension of
production. In addition, such regulations could restrict our ability to expand
our facilities or could require us to acquire costly equipment or to incur other
significant expenses to comply with environmental regulations. We are not
involved in any material environmental proceedings.
Item 4. Submission of Matters to a Vote of Security Holders. --None
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters.
At September 15, 2000, there were 1,800 shareholders of record. Our Common Stock
is traded on the New York Stock Exchange. We have not paid cash dividends on our
Common Stock to date. Payment of dividends is restricted as described in Note B
to the Company's 2000 Consolidated Financial Statements, which are attached
under Item 8. We have paid stock dividends in the past in the form of common
stock splits, lastly in February 2000.
Our quarterly high and low closing common stock prices, as reported on the New
York Stock Exchange, for the last two fiscal years were are follows:
2000
Fourth Third Second First
Quarter Quarter Quarter Quarter
High $58.375 $55.125 $ 43.156 $28.438
Low 32.750 33.500 19.531 21.125
1999
Fourth Third Second First
Quarter Quarter Quarter Quarter
High $25.000 $29.688 $28.969 $22.250
Low 12.625 14.594 10.375 10.625
On January 24, 2000, we filed a $800,000,000 Shelf Registration Statement on
Form S-3 with the Securities and Exchange Commission (SEC File Number
333-95297). On March 15, 2000, we sold $575,000,000, at par, of 3% Convertible
Subordinated Notes, due 2007, under this registration statement. Costs
associated with this issuance, including underwriters
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discount for the two lead underwriters (Salmon Smith Barney and Banc of America
Securities LLC) which account for the majority of such costs, amounted to
$13,149,200. The proceeds from this issuance were used to fund fiscal 2000
acquisitions and to pay down higher interest rate borrowings.
Item 6. Selected Financial Data.
<TABLE>
<CAPTION>
(Dollars in millions, except per share data) 2000 1999 1998 1997 1996
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $8,342.6 $6,710.8 $6,805.9 $5,762.7 $4,544.8
Depreciation and Amortization 151.5 115.2 103.5 76.8 61.0
Operating Income 321.7 234.8 257.1 206.2 159.5
Net Income 196.7 137.8 145.1 112.7 81.0
Diluted Earnings per Share 1.34 1.00 1.06 0.84 0.67
"Cash" Earnings per Share 1.45 1.03 1.06 0.84 0.67
Working Capital 1,288.8 876.4 759.4 754.2 549.7
Long-term Debt 748.4 140.9 440.5 454.3 388.8
Capital Expenditures 596.4 156.1 236.8 111.4 109.9
Net Property, Plant, and Equipment 589.2 448.0 436.1 301.0 264.1
Goodwill 316.2 21.0 4.8 6.3 2.1
Total Assets 3,351.3 2,322.7 1,944.7 1,869.9 1,283.2
Shareholders' Equity 1,367.9 1,164.8 748.0 594.7 472.3
Per Share $ 9.46 $ 8.09 $ 6.23 $ 4.98 $ 3.99
Employees 31,707 25,325 23,287 18,470 15,524
Operating Margin Before
Amortization of Intangibles 4.15% 3.60% 3.80% 3.59% 3.53%
</TABLE>
"Cash" Earnings per Share are calculated by adding back the after-tax effect of
amortization expense for intangibles to net income.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following table sets forth, for the fiscal years indicated, the percentage
of net sales of items in the Consolidated Statement of Income. This financial
information and the following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto.
Year ended June 30,
-------------------
2000 1999 1998
---- ---- ----
Net sales 100.00% 100.00% 100.00%
Costs and expenses 95.85 96.40 96.20
Intangibles amortization 0.29 0.10 0.02
------------------------------------------
Operating Income 3.86 3.50 3.78
Net interest expense 0.37 0.25 0.31
Other income (expense) 0.03 (0.01) --
------------------------------------------
Income before income taxes 3.52 3.24 3.47
Income taxes 1.16 1.18 1.34
------------------------------------------
Net income 2.36% 2.06% 2.13%
==========================================
Results of Operations
Sales for fiscal year 2000 were $8.343 billion, a 24% increase over the $6.711
billion in fiscal 1999. A continued shift in business mix towards communications
end markets contributed to the improved operating margins and earnings per
share, especially in the fourth quarter. Communications products represented
approximately 25% of fiscal 2000 fourth quarter sales, a previously declared
goal of our product diversification strategy. The expansion of business with
Nortel Networks resulting from the acquisition in August 1999 of their
Brockville, Canada plant and new Nortel business for other SCI plants aided this
sales growth. Besides the Nortel acquisition, we acquired the manufacturing
assets of TAG Manufacturing, Inc. (a U.S.-based enclosure company), and ECI
Telecom's Petah Tikva, Israel plant. These acquisitions also contributed to
fiscal 2000's product diversification and sales growth. PC finished product
sales, which historically have a higher asset turnover to mitigate their lower
operating margin, declined to 19% of fiscal 2000 sales from the beginning of the
year run rate of 34%. Volume increases during fiscal 2000 offset a moderate
decline in average selling prices, which abated during the year as component
shortages arose.
Fiscal 1999 sales were slightly less (a 1% decrease) than the $6.806 billion in
fiscal 1998. Market shifts and changeovers in customers' products, together with
lower average selling prices, accounted for the lower fiscal 1999 sales.
A majority of our revenue is generated by servicing multinational companies in
various global manufacturing facilities. International (non-U.S.) operation
sales accounted for 50% of fiscal 2000 sales, 42% in fiscal 1999 and 31% in
fiscal 1998. Sales are expected to continue to grow faster internationally than
domestically, especially in Mexico, Canada and Central Europe. International
operations grew 50% and U.S. operations grew 6% in fiscal 2000, compared with
17% domestic sales decline and 33% international sales growth in fiscal 1999.
The international operations' growth is attributable to both organic growth and
acquisitions.
Accelerated expansion of international production capacity began in fiscal 1999.
These expansions, together with the acquisition of certain Scandinavian
operations from Nokia in late fiscal 1998, and fiscal 1999's acquisition of an
Ericsson Telecom Spanish facility and Hewlett-Packard's Verifone, Inc. China
plant, and the aforementioned fiscal 2000 international acquisitions, generated
the international sales growth over the last two fiscal years. Two of our
Mexican plants will enter a third expansion phase shortly. Mexico represents the
fastest growing geographic area for us. Its low production costs and geographic
proximity to U.S. markets make it extremely attractive to our customers. Several
major programs previously executed at our domestic facilities have been
transferred to the Mexican plants.
Bookings for fiscal 2000 of $9.632 billion were a record, reflecting business
strength across a broad range of end markets, and giving rise to a backlog of
$4.358 billion, the highest level ever. Our current mix of business, backlog,
and prospects for new business puts us in position for continued growth.
Operating margins before amortization of intangibles improved to 4.15% in fiscal
2000 from 3.60% last fiscal year mainly as a
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result of the business mix shift and improved operating results in operations
that were in a startup phase in fiscal 1999. Such operations are quickly
approaching full production capacity in existing facilities that were expanded
during fiscal 2000. Reduced losses, including currency exchange losses, at the
Brazilian plant also contributed to the improved operating margin. Fiscal 1999's
operating margins before amortization of intangibles declined from the 3.80% in
fiscal 1998 primarily as a result of transition and startup costs associated
with new and enlarged facilities and projects, industry price pressures, and
increased international currency exchange losses.
Goodwill and contract intangible amortization increased to .3% of sales in
fiscal 2000 from less than .1% in fiscal 1999 and 1998. This increase is
attributable to the intangible assets arising from several acquisitions closed
during fiscal 2000 and represents the results of an aggressive acquisition
program that will continue in fiscal 2001. Depreciation expense remained fairly
consistent as a percent of sales in the last three fiscal years (1.52% in fiscal
2000, 1.61% in fiscal 1999, and 1.48% in fiscal 1998).
The sales shift to higher margin/lower turnover products, together with a
tightening in the availability of certain components, led to lower asset
turnovers in fiscal 2000. Shortages and extended purchase lead times are
currently being experienced on certain components. Also contributing to lower
asset turnovers this fiscal year is higher capital intensity in the EMS
industry, caused by increased cost of current production equipment and increased
acquisition activity. Capital expenditures increased significantly in fiscal
2000.
Net interest expense increased to .37% of sales in fiscal 2000 from .25% in
fiscal 1999 as a result of increased borrowings and accounts receivables sold
under the asset securitization program to fund revenue and asset growth.
Interest expense may grow in the next fiscal year as debt increases to fund
anticipated organic growth and acquisition activity. Net interest expense was
.31% of sales in fiscal 1998. Fiscal 1999's net interest expense declined from
that in fiscal 1998 mainly because of lower borrowing requirements and the May
1999 conversion of outstanding convertible notes into common stock.
The effective income tax rate (33.0% in fiscal 2000, 36.5% in fiscal 1999 and
38.5% in fiscal 1998) differs from the U.S. statutory rate primarily due to the
effects of state income taxes, offset by lower taxed international earnings
considered permanently reinvested abroad. Increased lower taxed international
earnings accounted for the lower effective income tax rates in fiscal 2000 and
fiscal 1999.
Capital Resources and Liquidity
During fiscal 2000, organic growth fueled working capital needs as well as
capital expenditures for plant expansions, and capital was used for several
acquisitions. We expect organic growth and acquisitions to continue at a rapid
pace; thus, access to the capital markets is very important to our continued
growth and success. We have taken several steps to ensure ready access to
capital. SCI has an investment grade rating on its debt from both Standard &
Poor's and Moody's. As we grow, we intend to maintain or even improve that
credit rating. We filed an $800 million universal shelf in January 2000 and
pulled down $575 million of the shelf in a successful convertible debenture
offering in March. During June, we renegotiated our two major bank facilities,
increasing the amounts available and thus providing the financial capacity to
handle future growth. See Note B to the Company's 2000 Consolidated Financial
Statements, which are included under Item8.
Cash was consumed in our operating activities in fiscal 2000 in the amount of
$68.0 million due to the need for working capital to support growth. This
compared to cash generated by operating activities of $200.3 million in fiscal
1999 as growth slowed for a brief interval.
Higher investing activity in fiscal 2000 required more use of cash than in the
prior year. We expanded our facilities to meet increasing demand and expanded
our acquisition activities. Acquisitions completed during fiscal 2000 were
Nortel Networks' Brockville, Ontario, Canada plant and certain other
manufacturing assets in August 1999, TAG Manufacturing, Inc.'s operations in
December 1999, and ECI Telecom's Shemer manufacturing plant in January 2000.
Other noncurrent assets cash usage increased because of investments in Uniwill
Computer Corporation and eHITEX, and the acquisition of a noncurrent pension
asset associated with the Nortel acquisition. Fiscal 2000 capital expenditures
(including acquisition intangibles) were $596 million ($280 million in property,
plant and equipment additions and $316 million in other acquisition
expenditures). The Company has an ongoing program of actively investigating
business opportunities generated by other companies' divestitures as well as
acquisition of companies in related businesses, so cash needs are expected to be
high again in fiscal 2001. Fiscal 2000 acquisitions were funded using the
convertible note issue in March and available liquidity.
Page 11 of 31
<PAGE>
Available liquidity at June 30, 2000 was $840 million, which consisted of $673
million in unused credit facilities and $167 million in cash and cash
equivalents. The Company believes it can adequately fund its expected growth in
the intermediate term.
Item 7a. Quantitative and Qualitative Disclosure About Market Risk.
Interest rate fluctuations
Short-term interest rate changes can impact our interest expense on our variable
interest rate debt, as well as the discount (reflected as interest expense) on
its accounts receivable sold under an asset securitization agreement.
Outstanding variable interest rate debt and accounts receivable sold
approximated $243 million at June 30, 2000. A one-half percentage point change
in short-term interest rates would have a current impact of increasing interest
expense by approximately $1.2 million on an annual basis. Changing interest
rates could have a larger impact on future earnings if variable interest rate
debt is used to finance acquisitions and growth beyond that currently projected.
Presently, fixed rate debt is largely being used to finance our operations.
International currency exchange rates fluctuations
We predominantly conduct our international sales and purchase transactions in
U.S. dollars or under customer contract provisions that protect against most
major currency risks. Our largest currency risk is that associated with the
Brazilian operation. Unlike our other international operations, our Brazilian
plant is directly subjected to the effects of currency devaluation on certain
customers' contracts until forward pricing is adjusted accordingly (normally
monthly). Other currency exchange risks primarily relate to current assets and
liabilities denominated in other than the U.S. dollar. Although we endeavor to
balance such items against each other where possible at individual operations,
no assurance can be given that we will be successful in mitigating the effects
of changes in currency exchange rates upon such international dollar
transactions. Changes in some international currency exchange rates impact the
geographic areas where our revenue is derived. When international currencies are
devalued, manufacturing costs of plants in those countries may become more
competitive with other established plants.
During fiscal 1999, the Brazilian currency experienced severe devaluations which
adversely impacted the fiscal 1999 operating results in Brazil. At June 30,
2000, we had approximately $35 million of net current assets offset by $23
million in long-term intercompany advances subject to this currency exposure.
Approximately $19 million of inventory is subject to repricing arrangements for
currency fluctuations.
We use other international dollar denominated long-term intercompany advances to
offset currency exposures in other international subsidiaries. At June 30, 2000,
approximately $18 million of such advances were denominated in Finnish Marks and
approximately $55 million denominated in Euros. The exchange rate fluctuations
on these advances and the $23 million denominated in Brazilian Reais are
reflected in the financial statements as translation adjustment in Shareholders'
Equity.
Page 12 of 31
<PAGE>
Item 8. Financial Statements and Supplementary Data.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
(In Thousands of Dollars, Except Share and Per Share Data) 2000 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 166,759 $ 216,085
Accounts receivable, less allowances of $7,233 in 2000 and $12,630 in 1999 796,616 821,925
Inventories 1,277,979 719,008
Refundable and deferred federal and foreign income taxes 63,132 12,522
Other current assets 86,272 62,159
--------------------------------------------------------------------------------------------------------------------
Total Current Assets 2,390,758 1,831,699
--------------------------------------------------------------------------------------------------------------------
Property, Plant, and Equipment B Note B
Land and improvements 34,110 29,515
Buildings and leasehold improvements, including construction-in-process 226,568 176,388
Equipment 894,138 725,487
Less accumulated depreciation and amortization (565,657) (483,405)
--------------------------------------------------------------------------------------------------------------------
Net Property, Plant, and Equipment 589,159 447,985
--------------------------------------------------------------------------------------------------------------------
Goodwill and Contract Intangibles, net of accumulated amortization of $21,472 in 316,175 21,033
2000 and $17,146 in 1999
Other Noncurrent Assets 55,212 21,943
--------------------------------------------------------------------------------------------------------------------
Total Assets $ 3,351,304 $ 2,322,660
--------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable and accrued expenses $ 1,014,368 $ 874,709
Accrued payroll and related expenses 53,504 44,142
Federal, foreign, and state income taxes 19,743 36,117
Current maturities of long-term debt 14,361 341
--------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 1,101,976 955,309
--------------------------------------------------------------------------------------------------------------------
Deferred Income Taxes 97,607 34,587
Noncurrent Employee Benefits 34,745 27,094
Other Noncurrent Liabilities 652 -0-
Long-term Debt - Note B
Industrial revenue bonds 19,769 21,119
Long-term notes 164,459 119,734
Convertible subordinated notes 564,174 -0-
--------------------------------------------------------------------------------------------------------------------
Total Long-term Debt 748,402 140,853
--------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies B Notes B and I
Shareholders' Equity
Preferred stock, 500,000 shares authorized but unissued -0- -0-
Common stock, $.10 par value: authorized 200,000,000 shares; issued 144,996,374 in 14,500 14,428
2000 and 144,276,474 in 1999
Capital in excess of par value 477,531 462,179
Retained earnings 900,531 703,796
Currency translation adjustment (17,227) (11,288)
Shares held in Rabbi Trusts, 288,472 shares in 2000 and 272,592 shares in 1999, at cost (7,072) (3,957)
Treasury stock B 118,732 shares at cost (341) (341)
--------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 1,367,922 1,164,817
--------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 3,351,304 $ 2,322,660
--------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to Consolidated Financial Statements.
Page 13 of 31
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years ended June 30,
(In Thousands of Dollars, Except Per Share Data) 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 8,342,580 $ 6,710,785 $ 6,805,893
Costs and expenses 7,996,466 6,469,341 6,547,314
Goodwill and contract intangibles amortization expense 24,443 6,642 1,478
-----------------------------------------------------------------------------------------------------------------
Operating Income 321,671 234,802 257,101
-----------------------------------------------------------------------------------------------------------------
Other Income (Expense):
Interest expense (net of interest income of $4,886 in 2000, $7,141 in (30,909) (16,938) (21,304)
1999, and $9,347 in 1998)
Other income (expense), net 2,873 (781) 114
-----------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 293,635 217,083 235,911
Income taxes - Note F 96,900 79,235 90,826
-----------------------------------------------------------------------------------------------------------------
Net Income $ 196,735 $ 137,848 $ 145,085
-----------------------------------------------------------------------------------------------------------------
Earnings per Share - Note D:
Basic $ 1.36 $ 1.11 $ 1.21
-----------------------------------------------------------------------------------------------------------------
Diluted 1.34 1.00 1.06
-----------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Number of Capital in
Shares Common Excess of Retained
Outstanding Stock Par Value Earnings
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In Thousands of Dollars, Except Number of
Shares)
Balance July 1, 1997 119,430,848 $11,956 $166,932 $420,863
Stock options exercised 660,040 66 7,520
Net income for year 145,085
Translation gain
---------------------------------------------------------------------------------------------------------
Balance June 30, 1998 120,090,888 12,022 174,452 565,948
Stock options exercised 482,168 48 7,328
Conversion of notes in May 1999 23,584,686 2,358 280,399
Adoption of EITF No. 97-14 (272,592)
Net income for year 137,848
Translation loss
---------------------------------------------------------------------------------------------------------
Balance June 30, 1999 143,885,150 14,428 462,179 703,796
Stock options exercised 719,900 72 15,352
Net income for year 196,735
Translation loss
Increase in Rabbi Trusts' shares (15,880)
Balance June 30, 2000 144,589,170 $14,500 $477,531 $900,531
---------------------------------------------------------------------------------------------------------
<CAPTION>
Currency Rabbi Total
Translation Trusts Treasury Shareholders'
Adjustment Shares Stock Equity
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In Thousands of Dollars, Except Number of
Shares)
Balance July 1, 1997 $ (4,747) $ -0- $ (341) $ 594,663
Stock options exercised 7,586
Net income for year 145,085
Translation gain 623 623
------------------------------------------------------------------------------------------------------
Balance June 30, 1998 (4,124) -0- (341) 747,957
Stock options exercised 7,376
Conversion of notes in May 1999 282,757
Adoption of EITF No. 97-14 (3,957) (3,957)
Net income for year 137,848
Translation loss (7,164) (7,164)
------------------------------------------------------------------------------------------------------
Balance June 30, 1999 (11,288) (3,957) (341) 1,164,817
Stock options exercised 15,424
Net income for year 196,735
Translation loss (5,939) (5,939)
Increase in Rabbi Trusts' shares (3,115) (3,115)
------------------------------------------------------------------------------------------------------
Balance June 30, 2000 $ (17,227) $ (7,072) $ (341) $ 1,367,922
-------------------------------------------------------------------------------------------------------
</TABLE>
See notes to Consolidated Financial Statements.
Page 14 of 31
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended June 30,
(In Thousands of Dollars) 2000 1999 1998
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $ 196,735 $ 137,848 $ 145,085
Adjustments to reconcile net income to net cash (used in)provided by operating
activities:
Depreciation and amortization 151,548 115,212 103,534
Deferred income taxes 19,456 28,712 37,778
Changes in current assets and liabilities:
Accounts receivable 22,466 (190,533) (2,741)
Inventories (563,828) (79,936) (68,839)
Refundable income taxes 758 (522) (3,946)
Other current assets (24,942) (45,215) (5,028)
Accounts payable and accrued expenses 152,991 224,893 (43,513)
Income taxes (23,905) 3,033 (20,977)
Other noncash items - net 748 6,767 2,558
----------------------------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided by Operating Activities (67,973) 200,259 143,911
----------------------------------------------------------------------------------------------------------------------
Investing Activities
Purchase of property, plant, and equipment (280,154) (134,670) (236,799)
Acquisition costs in excess of underlying assets (316,257) (21,390) -0-
Other (19,395) 1,116 2,403
----------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (615,806) (154,944) (234,396)
----------------------------------------------------------------------------------------------------------------------
Financing Activities
Payments on long-term debt (1,037,383) (30,877) (241,748)
Proceeds from long-term debt 1,659,252 13,177 224,107
Issuance of common stock 7,091 4,609 3,090
----------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 628,960 (13,091) (14,551)
----------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 5,493 (485) (1,427)
----------------------------------------------------------------------------------------------------------------------
Net (Decrease) Increase in Cash and Cash Equivalents (49,326) 31,739 (106,463)
Cash and cash equivalents at beginning of year 216,085 184,346 290,809
----------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 166,759 $ 216,085 $ 184,346
----------------------------------------------------------------------------------------------------------------------
</TABLE>
Cash equivalents are primarily short-term interest bearing deposits.
Interest paid was $28,189 in 2000, $26,072 in 1999, and $30,144 in 1998.
Income taxes paid (net of refunds) were $83,976 in 2000, $48,775 in 1999, and
$76,221 in 1998.
See notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Years June 30,
(In Thousands of Dollars) 2000 1999 1998
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income $ 196,735 $ 137,848 $ 145,085
----------------------------------------------------------------------------------------------------------------------
Currency translation (loss) gain (7,586) (7,164) 623
Tax benefit 1,647 -0- -0-
----------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (5,939) (7,164) 623
----------------------------------------------------------------------------------------------------------------------
Comprehensive Income $ 190,796 $ 130,684 $ 145,708
----------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to Consolidated Financial Statements.
Page 15 of 31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A Accounting Policies
Business. SCI Systems, Inc. is a diversified international electronics
manufacturing services provider. SCI designs, manufactures, distributes, and
services electronic products for virtually every market segment in the
Electronic Manufacturing Services Industry. Markets served include the computer,
peripheral, data-com, telecom, medical, industrial, consumer, aerospace,
defense, and multimedia industries, as well as the U.S. Government.
Consolidated financial statements include accounts of the Company and its
majority-owned subsidiaries after elimination of material intercompany accounts
and transactions. Generally Accepted Accounting Principles require that
management make estimates and assumptions in the preparation of the Company's
financial statements. Such estimates and assumptions affect the recognition of
revenue and expenses, recorded values of assets and liabilities, and disclosure
of contingent liabilities. Actual results could differ from these estimates and
assumptions. The functional currency of the majority of the Company's foreign
operations is the U.S. dollar.
Sales and cost of sales are generally recorded as units are shipped. Costs and
expenses principally represent engineering, manufacturing, general and
administrative, and other costs incurred in support of customer contracts.
Credit risk. The Company's major contracts are with customers in the high
technology industry. Credit terms relating to both accounts receivable and
contract inventories are extended to customers after performing credit
evaluations. When significant credit risks exist, letters of credit or other
appropriate security are generally requested.
Inventories primarily consist of costs incurred in support of customer contracts
stated at the lower of cost (principally first-in, first-out method) or market,
adjusted for potential contract valuation issues.
Property, plant, and equipment are recorded at cost and depreciated on the
straight-line method over the estimated useful lives of individual assets.
Leasehold improvements are amortized over the shorter of the lease term or
useful lives. Estimated useful lives currently range between three to five years
for machinery, equipment, furniture and fixtures; and 10 to 20 years for land
improvements and buildings. Depreciation expenses amounted to $126,520,000 in
2000, $107,922,000 in 1999 and $100,850,000 in 1998.
Goodwill and contract intangibles include the unamortized excess of cost over
the underlying net tangible value of assets acquired. Goodwill intangibles are
amortized on a straight-line basis over their estimated useful lives (primarily
10 or 15 years). The estimated useful life assigned to individual acquired
goodwill is established after reviewing its related product area, its market
position and outlook, and other pertinent factors. Contract intangibles are
amortized over the initial contract period.
Long-lived asset impairment reviews are regularly conducted by the Company using
projected future cash flows and such other factors as prescribed by Statement of
Financial Accounting Standard No. 121. During fiscal 1999, an impairment
provision of $4,081,000 was provided for certain intangibles and equipment. This
provision is reflected in the financial statements as depreciation and
amortization expense.
Deferred income taxes are provided on temporary differences as certain contract
related revenues and expenses are reported in periods which differ from those in
which they are taxed. U.S. income taxes in excess of estimated foreign income
tax credits have not been provided on certain undistributed earnings of foreign
subsidiaries aggregating $126 million at June 30, 2000, which are considered to
be permanently reinvested abroad. Otherwise, $25 million of additional deferred
U.S. income taxes (net of related estimated foreign income tax credits) would
have been provided.
Research and development is conducted by the Company under both
customer-sponsored and Company-sponsored programs. Company-sponsored programs
include research and development related to government products and services,
which are allocable and recoverable in the same manner as general and
administrative expenses under U.S. Government regulations. Customer-sponsored
research and development costs are accounted for as any other program cost.
Total engineering costs incurred by the Company, including research and
development, were $37,301,000 in 2000, $35,281,000 in 1999, and $36,961,000 in
1998.
General and administrative expenses included in costs and expenses approximated
$32,274,000 in 2000, $23,681,000 in 1999, and $21,976,000 in 1998.
Forward currency exchange contracts are used in certain instances by the Company
to reduce its risk on component purchases transacted in other than the
applicable functional currency. Realized and unrealized gains or losses on such
contracts that are effective hedges of liabilities, or projected cash flows, as
determined prior to adoption of SFAS No. 133, are recognized as
Page 16 of 31
<PAGE>
foreign currency exchanges gains or losses included in costs and expenses.
Foreign currency exchange net gains (losses) included in costs and expenses
approximated $580,000 in 2000, ($7,732,000) in 1999, and $794,000 in 1998.
Stock split. The Company declared and paid a two-for-one stock split in the form
of a 100% dividend in February 2000. All share and per share data in the
financial statements reflect the effect of this stock split.
Adoption of new financial accounting standards. The Company does not anticipate
any material difference in the presentation of its financial statements when it
adopts FASB Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities in July 2000. The Company also anticipates no impact when it adopts
FASB Interpretation No. 44, Accounting for certain transactions involving stock
compensation in fiscal 2001. Additionally, the Company has reviewed the
Securities and Exchange Commission's Staff Accounting Bulletin 101 and believes
its revenue recognition policies are in compliance.
Note B Long-term Debt
Industrial revenue bonds. The Company is obligated by lease or guarantee for
$21,415,000 at June 30, 2000, and $21,545,000 at June 30, 1999, of industrial
revenue bonds maturing through the year 2015. The majority of such borrowings
currently bear variable interest ranging between 3.89% and 7.03%, and are
secured by related properties or irrevocable letters of credit.
Long-term notes. The Company is obligated under notes maturing through the year
2006 amounting to $20,023,000 and $20,128,000 at June 30, 2000, and 1999,
respectively. Substantially all of the notes bear variable interest rates
ranging between 4.96% and 7.50% at June 30, 2000.
In July 1996, the Company borrowed $100,000,000 under a Senior Note
agreement with a group of institutional lenders. The Notes bear interest at
7.59% and are payable in six annual installments of $16,667,000 beginning in
July 2001. The interest rate may be adjusted upward by 0.75% if the Company
fails to meet certain financial ratios.
In June 2000, the Company entered into two credit agreements with a group
of domestic and international banks, whereby the Company may borrow principal
amounts up to $300,000,000 under a 364-day revolving credit line, and
$200,000,000 under a five-year credit line. At June 30, 2000, $60,000,000 was
outstanding under these agreements. These credit agreements bear variable
interest based on a defined bank rate, which was 7.162% at June 30, 2000. The
364-day revolving credit line can be extended for one year under certain
conditions. The Company can also request a $25,000,000 increase in the revolving
credit line every six months up to $50,000,000. A similar provision exists in
the five-year credit facility to increase the applicable credit line by
$150,000,000. The agreements contain certain covenants, the most restrictive of
which requires the Company to maintain a certain consolidated net worth which at
June 30, 2000, was $1,027,200,000. A commitment fee is paid on the unused
portion under the credit agreements together with a utilization fee. No
compensating balances are required under the agreements.
Short-term borrowings may be drawn under the credit agreements. Because of
the Company's ability and intent to refinance such borrowings, total borrowings
under the credit agreements up to $200,000,000 may be classified as long-term.
The Company has a $300,000,000 asset securitization agreement expiring in
June 2001 under which certain accounts receivable can be sold with limited
recourse. As funds are collected, additional eligible receivables may be sold to
bring the outstanding balance to the desired level. At June 30, 2000,
$142,000,000 of receivables were sold under this agreement at a weighted
discount rate of 6.62%. No amounts were sold under this agreement at June 30,
1999. A commitment fee is paid on the unused portion, together with a usage fee.
Unused credit facilities and commitments at June 30, 2000, approximated
$673,000,000.
Convertible subordinated notes. In March 2000, the Company issued $575,000,000
of 3% Convertible Subordinated Notes maturing March 15, 2007. The Notes are
convertible into the Company's common stock at $56.23 per share. The Company may
redeem the Notes on or after May 20, 2003, although there is no mandatory
redemption. The majority of June 30, 2000's deferred charges netted against
long-term debt relate to the costs associated with the issuance of these Notes,
including underwriters' discount. In May 1999 the then outstanding 5%
Convertible Subordinated Notes due May 1, 2006, were substantially converted
into 11,792,343 shares of common stock.
Deferred charges netted against total year end long-term debt were $13,675,000
in 2000 and $479,000 in 1999.
Page 17 of 31
<PAGE>
Debt, lease, and rental payments. Long-term debt maturities for the next five
fiscal years are: $14,361,000 in 2001; $16,798,000 in 2002; $16,798,000 in 2003;
$16,798,000 in 2004; and $76,798,000 in 2005. While the Company leases certain
real property in its operations, annual rental expense and future commitments
are not material to its operations.
Note C Financial Instruments
June 30, 2000's estimated fair values of the financial instruments represented
by cash and cash equivalents, and trade receivables approximated their recorded
values. Convertible Subordinated Notes outstanding at June 30, 2000, had a year
end trading price of $563,500,000 on the New York Stock Exchange. No Convertible
Notes were outstanding at June 30, 1999. All other debt instruments' fair value
is estimated to approximate their recorded value, as their applicable interest
rates approximate current market rates.
The Company holds minority interest in two privately held entities:
eHITEX, Inc. and UNIWILL Computer Corporation. Each investment represents less
than 20% ownership of the respective entity. As such, both are accounted for
under the cost method. As of June 30, 2000, the carrying amount of these two
investments is approximately $16,500,000. It was not practicable to estimate the
fair values of these investments because of the absence of a readily
determinable market without incurring excessive cost.
Investments held in Rabbi Trusts other than Company common stock are
recorded at their fair value. Any gain or loss on such assets are offset by a
corresponding decrease or increase in defined compensation expense and related
accrual. Rabbi Trust assets included in other noncurrent assets amounted to
$25,877,000 and $20,136,784 at June 30, 2000 and 1999, respectively.
The Company has forward currency exchange contracts outstanding at June
30, 2000, to reduce its cash flow risk on certain subsidiary's purchase
requirements in currencies other than its functional currency. Such Euro
denominated contracts expire at various dates through September 25, 2000, and
were for the following currencies and amounts: Swedish Krona in the amount of
$19,154,000; Japanese Yen in the amount of $3,393,000; British Pounds in the
amount of $24,412,000, and U.S. Dollars in the amount of $42,585,000.
Note D Per Share Earnings
Basic earnings per share are computed by dividing reported net income for the
period by the weighted average number of shares of common stock outstanding
during the period. A reconciliation of the net income and weighted average
number of shares used for the diluted earnings per share computations follows:
<TABLE>
<CAPTION>
(In thousands of dollars,
except share data) 2000 1999 1998
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $196,735 $137,848 $145,085
Add back after-tax interest expense for convertible subordinated notes 3,618 7,965 9,232
-------------------------------------------------------------------------------------------------------------------
Adjusted net income $200,353 $145,813 $154,317
-------------------------------------------------------------------------------------------------------------------
Weighted average number of shares outstanding during period 144,240,042 124,071,098 119,721,188
Applicable number of shares for stock options outstanding for period 2,478,233 1,510,432 1,844,732
Number of convertible shares for outstanding convertible 2,938,394 19,642,998 23,589,744
subordinated notes
-------------------------------------------------------------------------------------------------------------------
Weighted average number of shares 149,656,669 145,224,528 145,155,664
-------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $1.34 $1.00 $1.06
-------------------------------------------------------------------------------------------------------------------
</TABLE>
Note E Employee Benefit Plans
The Company provides retirement benefits to its domestic employees who
meet certain age and service requirements through three plans: a defined benefit
supplemental pension plan; a qualified savings plan (401(k) Plan); and a
deferred compensation plan. The Company provides defined pension benefits to its
Brockville, Ontario, Canada employees under separate salaried and hourly plans.
Additionally, post retirement medical benefits and a savings plan are provided
to salaried employees at the Brockville location. The actuarial computed accrued
post retirement medical benefits for the Brockville salaried employees at June
30, 2000, was $1,796,000. Fiscal 2000 expense for the plan was $233,000.
Subsequent to year end, a post retirement medical insurance plan was instituted
in the U.S. to cover employees who may retire prior to being eligible for
Medicare. Once a retired employee is eligible for Medicare, coverage ceases
under the plan. The actuarial computed liability for this plan as of the
adoption date is approximately $1,500,000. Defined pension plan benefits are
computed based upon compensation earned during the employee's career at the
Company or its subsidiaries and years of credited service. The Company funds its
Page 18 of 31
<PAGE>
retirement benefit obligations annually at amounts that approximate the maximum
deductible for income taxes. Canadian tax regulations allow for a greater cash
tax deduction than the pension expense recognized in the consolidated financial
statements. In previous years, the Company's Brockville operation (acquired in
fiscal 2000) took full advantage of this tax deduction resulting in a noncurrent
prepaid pension expense asset of $10,886,000 at June 30, 2000. Company
contributions to savings and deferred compensation plans are equal to a
percentage of employees' contributions and are fully funded when the liability
is incurred. The Company's and employees' contributions to the deferred
compensation plan are held in an irrevocable "Rabbi Trust". Nonemployee
Directors also participate in an irrevocable "Rabbi Trust" deferred compensation
plan, and a one-year stock appreciation rights plan that expires in October
2000. The Company also has defined contribution pension plans for its European
employees who meet certain requirements, and savings plans for its
Pointe-Claire, Quebec, Canada, and Thai employees. Company contributions to
these various plans amounted to $11,328,000 in 2000, $8,827,000 in 1999, and
$7,482,000 in 1998.
Summarized details for each of the defined pension benefit plans follows:
<TABLE>
<CAPTION>
Brockville
--------------------------------------
(In thousands of dollars) U.S. Hourly Salaried
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
June 30, 2000's:
Accumulated benefit obligation $41,575 $35,491 $24,354
Fair value of assets 34,600 40,443 28,688
Fiscal 2000 expense 4,790 1,074 227
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note F Income Taxes
The provision for income taxes is summarized as follows:
<TABLE>
<CAPTION>
(In thousands of dollars) 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income before income taxes:
Domestic $177,972 $131,809 $156,219
Foreign 115,663 85,274 79,692
-----------------------------------------------------------------------------------------------------------------------------
Total $293,635 $217,083 $235,911
-----------------------------------------------------------------------------------------------------------------------------
Taxes currently payable:
Domestic $ 62,091 $ 36,602 $ 55,977
Foreign 15,353 13,921 (2,929)
Deferred taxes:
Domestic 7,413 10,131 15,419
Foreign 12,043 18,581 22,359
-----------------------------------------------------------------------------------------------------------------------------
Total $ 96,900 $ 79,235 $ 90,826
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The reconciliation of the provision for income taxes and that based on the U.S.
statutory rate is:
<TABLE>
<CAPTION>
(In thousands of dollars) 2000 1999 1998
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes at U.S. statutory rate $102,772 $75,978 $82,569
Effects of U.S. state income taxes, net of federal benefits 3,642 2,999 5,780
Effects of loss carryforwards (2,124) (657) 31
Effects of foreign operations (17,909) (3,045) (1,607)
Permanent differences 10,519 3,960 4,053
--------------------------------------------------------------------------------------------------------------------------------
Income taxes $ 96,900 $79,235 $90,826
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 19 of 31
<PAGE>
At June 30, 2000 and 1999, the net deferred tax asset was:
<TABLE>
<CAPTION>
2000 1999
----------------------- ------------------------
Deferred Deferred
(In thousands of dollars) Asset Asset
Temporary Difference Amount (Liability) Amount (Liability)
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Difference between book and tax recognized contract profits:
U.S. $ 65,042 $ 22,765 $ 69,067 $ 24,173
Foreign (76,732) (28,283) (78,006) (23,155)
Undistributed foreign earnings not currently taxable in U.S. (169,793) (38,714) (145,874) (30,067)
Accrued expenses not currently deductible:
U.S. 43,773 15,320 44,905 15,384
Foreign 1,204 215 2,240 632
Depreciation and amortization differences:
U.S. 3,229 1,130 (1,564) (547)
Foreign (29,957) (11,441) (45,951) (13,774)
Net foreign operating loss carryforwards 3,942 1,314 4,891 1,416
Valuation allowance:
Beginning of year (4,891) (1,416) (6,871) (2,228)
Net change for year 949 102 1,980 812
----------------------------------------------------------------------------------------------------------------------
Total $(163,234) $(39,008) $(155,183) $(27,354)
----------------------------------------------------------------------------------------------------------------------
</TABLE>
In accordance with SFAS No. 123, the U.S. income tax benefit associated
with exercised stock options of $8,333,000 in 2000, $2,766,000 in 1999, and
$4,497,000 in 1998 is classified as an addition to capital in excess of par
value.
Note G Geographic Data and Major Customers Information
The Company operates principally in the Electronics Manufacturing Services (EMS)
Industry, where it serves its major customers on a global basis. Accordingly,
the Company is viewed by its management as a global provider of manufacturing
services to its customers. Evaluations are not only made of individual plant
performances but, most importantly, of worldwide services provided to strategic
customers.
The Company's external sales and long-lived assets associated with its
domestic and foreign operations are as follows:
<TABLE>
<CAPTION>
Sales Long-Lived Assets
-------------------------------------------- -------------------------------------------
(In thousands of dollars) Domestic Foreign Total Domestic Foreign Total
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
2000 $4,131,439 $4,211,141 $8,342,580 $162,063 $427,096 $589,159
1999 3,903,238 2,807,547 6,710,785 139,584 308,401 447,985
1998 4,699,582 2,106,311 6,805,893 164,897 271,200 436,097
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
U.S. export sales approximated $175,000,000, $116,000,000, and $185,000,000 for
the year ended June 30, 2000, 1999, and 1998, respectively.
Sales to individual customer that exceeded 10% of annual consolidated
sales in any of the last three fiscal years were: Hewlett-Packard ($2,629
million in 2000, $2,465 million in 1999, and $2,692 million in 1998); Nortel
($931 million in 2000); Dell ($681 million in 1999); and Compaq ($840 million in
1999).
Note H Stock Option Plans
The Company's stock option plan grants options to officers. Under the plan, the
Board of Directors may award options at less than market price, but to date has
granted all options at not less than 100% of market value on grant date. Vesting
is normally 20% upon granting, with 20% per annum thereafter. Options expire 10
years after granting. The Company's retired Chairman was granted accelerated
full vesting on 268,000 shares on June 30, 2000. He exercised options on
1,745,000 shares in August 2000. Stock options are accounted for in accordance
with APB Opinion 25 and related Interpretations. Accordingly, no nonmonetary
fair value compensation expense associated with options has been recorded. Had
fair value compensation costs been determined under SFAS No. 123, pro forma net
income and diluted earnings per share would have been reflected as follows:
Page 20 of 31
<PAGE>
<TABLE>
<CAPTION>
(In thousands of dollars, except share data) 2000 1999 1998
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income:
As reported $ 196,735 $ 137,848 $ 145,085
Pro forma 187,898 133,677 142,284
Diluted earnings per share:
As reported $ 1.34 $ 1.00 $ 1.06
Pro forma 1.28 .97 1.04
</TABLE>
These pro forma amounts were calculated using the Black-Scholes option
pricing model based on the following weighted average assumptions: risk free
interest rates of 6% in 2000, and 5% in 1999 and 1998; expected option lives of
four years in 2000 and 1999, and three years in 1998; and, expected volatility
factors of 66.0% in 2000, 55.5% in 1999, and 45.7% in 1998.
Information relating to the changes in the Company's stock options follows:
<TABLE>
<CAPTION>
2000 1999 1998
-------------------------------------------------------------------------------------------------
Weighted Average Weighted Average Weighted Average
(Shares in thousands) Shares Exercise Price Shares Exercise Price Shares Exercise Price
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 6,295.9 $12.13 5,446.0 $10.75 4,923.4 $ 6.76
Granted 2,267.0 $28.47 1,478.1 $16.82 1,402.0 $22.73
Exercised (719.9) $43.20 (482.2) $ 9.56 (660.0) $ 4.68
Canceled (372.4) $26.09 (146.0) $17.12 (219.4) $16.01
------------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 7,470.6 $16.82 6,295.9 $12.13 5,446.0 $10.75
------------------------------------------------------------------------------------------------------------------------------------
Exercisable at June 30 4,677.0 $12.45 3,783.0 $ 8.76 3,138.0 $ 6.93
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Shares available for additional granting at June 30 were 1,646,200 in
2000, 3,540,800 in 1999, and 856,800 in 1998. During 1999, an additional
4,000,000 shares for stock options were authorized. The following table
summarizes June 30, 2000's outstanding stock option information.
<TABLE>
<CAPTION>
(Shares in
thousands)
Weighted Average
Range of Number Remaining Weighted Average Number Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Prices Exercisable Exercisable Price
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 1.50 - $ 3.16 782.0 1.13 $ 2.08 782.0 $ 2.08
$ 4.31 - $ 4.72 816.0 3.84 $ 4.63 816.0 $ 4.63
$ 5.16 - $10.25 650.2 5.29 $ 8.62 650.2 $ 8.62
$12.44 - $12.44 860.4 6.32 $12.44 705.2 $12.44
$12.53 - $16.25 150.0 7.53 $13.22 86.0 $13.49
$16.72 - $16.72 1,037.6 8.31 $16.72 471.2 $16.72
$17.44 - $22.00 132.8 8.16 $20.14 60.8 $20.37
$22.19 - $22.19 1,159.6 9.31 $22.19 260.4 $22.19
$22.75 - $22.75 20.0 9.29 $22.75 4.0 $22.75
$22.97 - $47.94 1,862.0 8.35 $29.94 841.2 $26.53
--------------------------------------------------------------------------------------------------------------------------------
$ 1.50 - $47.94 7,470.6 6.73 $16.82 4,677.0 $12.45
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note I Litigation
The Company has been sued by the Lemelson Medical Educational Research
Foundation (Lemelson), together with 87 other defendants, including the
Company's major domestic competitors and customers, alleging infringement on 15
patents relating to machine vision and use of bar coding and bar code readers in
manufacturing. Lemelson has been successful in settling similar assertions
against certain automobile and semiconductor manufacturers. Lemelson is
requesting damages equal to a certain percent of sales for a 10-year period. The
Company, together with other major defendants, intends to contest the validity
of the patents. In addition, possible recourse exists against manufacturers of
the equipment that Lemelson is alleging violated its patents. While no guarantee
can be given, the Company does not believe that outcome of this lawsuit will
result in any material adverse effect on the Company. The maximum exposure for
this suit is currently estimated to be less than one percent of the Company's
current assets, and the Company has provided for what it believes will be the
likely outcome of the suit. Additionally, if Lemelson's patents are upheld, the
Company believes it will be able to obtain adequate licenses to use them.
The Company is involved in other lawsuits incidental to the conduct of
business, but none are considered material.
Page 21 of 31
<PAGE>
Note J Acquisitions
The Company has over the last three years acquired certain assets and operations
from its customers and entered into multiyear manufacturing agreements for
related products. Additionally, the Company has acquired other manufacturing
companies that enhanced its strategic position. These acquisitions have been
accounted for as purchases, with the excess of the purchase price over the
underlying assets being assigned to intangible assets. None of the acquisitions
are considered significant to the Company's operations, and accordingly, no pro
forma information is presented.
In August 1999, the Company acquired Nortel Networks' Brockville, Ontario,
Canada plant and certain other manufacturing assets, and entered into a
multiyear manufacturing agreement. This plant supplies optical, data, and
network subassemblies to Nortel. In December 1999, the Company purchased the
manufacturing assets of TAG Manufacturing, Inc. of San Jose, California. TAG
makes fabricated sheet metal products and assemblies (which are generally
referred to as enclosures) for Original Equipment Manufacturers (OEMs) and
Electronic Manufacturing Services (EMS) providers supporting the computing,
networking, communications, and medical electronic equipment industries. The
Company intends to expand TAG's enclosure operation into other geographic areas.
In January 2000, the Company purchased ECI Telecom's Shemer manufacturing plant,
located in Petah Tikva, Israel, and entered into a multiyear supply agreement.
This plant provides printed circuit board assemblies to ECI for use in their
telecommunications products. The excess of the purchase price over the acquired
underlying tangible assets ($316,257,000) for these acquisitions is being
amortized primarily over 15 years, since they represent substantial market and
product expansions.
In May 1999, the Company acquired the operations of Hewlett-Packard's
Verifone, Inc. Kunshan, China plant and manufacturing operations. This facility
will also be used for manufacturing other SCI customer products. The Company
acquired various assets and operations from Ericsson Telecom, AB in support of
an agreement whereby SCI was designated as one of Ericsson's primary
manufacturing partners. The principal assets acquired were certain assets in
Sweden during fiscal year 1998, a Leganes, Spain manufacturing operation in
October 1998, and a Mexico City manufacturing operation in August 1998. Also, in
support of being designated as a customer's primary manufacturing partner, the
Company acquired certain Nokia Corporation manufacturing operations in Motala,
Sweden, and Oulu, Finland in May and June 1998, and an engineering operation in
fiscal 2000.
The Company has conducted other acquisitions in the past three years which
are of a lesser magnitude than those discussed above.
Note K Subsequent Events (Unaudited)
Subsequent to year end, the Company announced two additional acquisitions in
August 2000: EOG Incorporated, a Mid- Atlantic electronics design and
manufacturing services company with emphasis in telecommunications and optical
networking activities; and Telrad Networks Ltd.'s Ma'alot, Israel facility that
produces printed circuit board assemblies and other products for Telrad Networks
and Nortel Networks.
Note L Selected Quarterly Financial Data (Unaudited)
Quarterly financial results and high and low stock prices, as reported on the
New York Stock Exchange, for the last two fiscal years were:
<TABLE>
<CAPTION>
2000 1999
------------------------------------------------- -------------------------------------------------
(In thousands of dollars, Fourth Third Second First Fourth Third Second First
except per share data) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------------------------------------------------------------------------------ -------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $2,306,489 $2,216,718 $2,155,367 $1,664,006 $1,802,254 $1,603,024 $1,735,930 $1,569,577
Operating profit 92,692 86,549 79,715 62,715 69,521 55,641 56,940 52,700
Net income 57,010 49,719 49,325 40,681 42,833 32,388 32,657 29,970
Diluted earnings per share $ .38 $ .34 $ .34 $ .28 $ .30 $ .24 $ .24 $ .22
Market stock price range:
High $ 58.375 $ 55.125 $ 43.156 $ 28.438 $ 25.000 $ 29.688 $ 28.969 $ 22.250
Low 32.750 33.500 19.531 21.125 12.625 14.594 10.375 10.625
------------------------------------------------------------------------------ -------------------------------------------------
</TABLE>
Quarterly and annual earnings per share are independently computed using
the estimated effective income tax rate and Common Stock market prices
applicable for that period. Consequently, the sum of individual quarterly
diluted earnings per share may not equal the total for the year.
Page 22 of 31
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Shareholders and Board of Directors
SCI Systems, Inc.
We have audited the accompanying consolidated balance sheets of SCI Systems,
Inc. as of June 30, 2000 and 1999, and the related consolidated statements of
income, shareholders' equity, cash flows and comprehensive income for each of
the three years in the period ended June 30, 2000. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of SCI Systems, Inc.
at June 30, 2000 and 1999, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended June 30, 2000, in
conformity with accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Birmingham, Alabama
August 2, 2000
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
- None
PART III.
INFORMATION INCORPORATED BY REFERENCE
The following information required by Part III is incorporated herein by
reference to the Company's definitive Proxy Statement pursuant to Regulation 14A
for the October 27, 2000, Annual Meeting of Shareholders, filed with The
Securities and Exchange Commission within 120 days after close of the fiscal
year:
<TABLE>
<CAPTION>
Proxy Statement
Page (s)
---------------
<S> <C>
ITEM 10. Directors and Executive Officers of the Registrant 4 to 6, and 16 to 17
ITEM 11. Executive Compensation 18 to 20
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management 3 and 4
ITEM 13. Certain Relationships and Related Transactions None
</TABLE>
Page 23 of 31
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Index to exhibits, financial statements and schedules
1. Financial Statements
The following consolidated financial statements of the registrant are
included in Item 8:
Consolidated Balance Sheets as of June 30, 2000, and 1999
For the years ended June 30, 2000, 1999, and 1998
Consolidated Statements of Income
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
Consolidated Statements of Comprehensive Income
Notes to Consolidated Financial Statements
Report of Ernst & Young LLP, Independent Auditors
2. Schedules
Schedule of Accounts Receivable Allowances
<TABLE>
<CAPTION>
Balance at Charged to Charged to Deductions (1) Balance at
beginning of costs and other end
Year ended: period expenses accounts of period
<S> <C> <C> <C> <C> <C>
June 30, 2000 $12,630 $4,678 -- ($10,075) $ 7,233
June 30, 1999 $11,100 (2) -- (2) $12,630
June 30 1998 $11,200 (2) -- (2) $11,100
</TABLE>
(1) Represents write off of uncollectible accounts
(2) Charges to cost and expenses were not significant in these fiscal years
3. Exhibits
o The Registrant's Annual Reports on Form 10-K, Quarterly Reports on Form
10-Q, Current Reports on Form 8-K, and Definitive Proxy Statements are
filed under SEC file No. 0-2251.
NUMBER DESCRIPTION
3.1 Second Restated Certificate of Incorporation, as amended,
with Certificate of Amendment of the Second Restated
Certificate of Incorporation as filed with the Secretary of
State of Delaware on January 26, 1996 (Incorporated herein
by reference to Exhibit 4.1 to Registration Statement on
Form S-3, File No. 333-05917, as amended), and as further
amended, with Certificate of Amendment to Second Restated
Certificate of Incorporation dated December 15, 1997,
(Incorporated herein by reference to Exhibit 3 to the
registrant's Quarterly report on Form 10-Q for the quarter
ended December 8, 1997.)
3.2 By-laws of the Registrant, as amended. (Incorporated herein
by reference to Exhibit 4.2 to Registration Statement on
Form S-3, File No. 333-05917, as amended.)
4.1 Supplemental indenture No. 1 dated as of March 15, 2000,
between the Company and Bank One Trust Company, National
Association, as trustee, relating to the Company's 3%
Convertible Subordinated Notes due 2007. (Incorporated
herein by reference to Exhibit 4. to Form 8-K filed on April
5, 2000.)
10(a)(1) Five-Year Credit Agreement dated June 30, 2000, by and
between the Registrant, its Obligated Subsidiaries and its
Lenders.
10(b)(1) 364-Day Credit Agreement dated June 30, 2000, by and between
the Registrant, its Obligated Subsidiaries and to its
Lenders.
(c)(1) Second Restated Receivable Purchase Agreement dated as of
June 14, 2000, among SCI Funding, Inc. as seller, SCI
Technology, Inc., as initial servicer, SCI Systems, Inc., as
Guarantor, and purchasers and the administrative agent.
(d)(1) SCI Systems, Inc. 1994 Stock Option Incentive Plan.
(Management contracts or compensatory plan) (Incorporated
herein by reference to exhibit 10(d)(1) to the Registrant's
Annual Report on Form 10-K for the year ended June 30,
1995.)
(e)(1) Savings Plan of the SCI Systems, Inc. Employee Financial
Security Program, dated July 1, 1991. (Management contracts
or compensatory plan)(Incorporated herein by reference to
Exhibit 10 (i)(1) to the Registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 1994.)
Page 24 of 31
<PAGE>
(f)(1) Deferred Compensation Plan of SCI Systems Employee Financial
Security Program, as amended and restated January 1,
1992.(Management contracts or compensatory plan)
(Incorporated herein by reference to Exhibit 10(j)(1) to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended June 30, 1994.)
(g)(1) Supplemental Retirement Plan of the SCI Systems, Inc.
Employee Financial Security Program, as amended and restated
April 1994. (Management contracts or compensatory plan)
(Incorporated herein by reference to Exhibit 10(k)(1) to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended June 30, 1994.)
(h)(1) Adjustable Rate Senior Notes due 2006 Purchase Agreement,
made as of June 28, 1996. (Incorporated herein by reference
to Exhibit 10(i)(1) to the Registrant's Annual Report on
Form 10-K for the fiscal year ended June 30, 1997.)
(i)(1) Senior Executive Officers Annual Incentive Plan. (Management
contracts or compensatory plan) (Incorporated herein by
reference to Exhibit 10 (j)(1) to the Registrant's Annual
Report on Form 10-K for the fiscal year ended June 30,
1997.)
(j)(1) Form of agreement with Olin King.
13 2000 Annual Report to Shareholders.
21 Subsidiaries of Registrant.
23 Consent of Independent Auditors
27 Financial Data Schedule
(b) Reports
The Company filed one report on Form 8-K during the period of March 27,
2000, to June 30, 2000. The report, filed on April 5, 2000, dealt with the
issuance of $575,000,000 of 3% Convertible Subordinated Notes on March 15,
2000.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SCI SYSTEMS, INC.
Date: September 27, 2000 By: /s/ A. Eugene Sapp, Jr.
A. Eugene Sapp, Jr.
Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
DATE SIGNATURE TITLE
September 27, 2000 /s/ A. Eugene Sapp, Jr. Chairman, President and
A. Eugene Sapp, Jr. Chief Executive Officer
(Principal Executive Officer)
September 27, 2000 /s/ James E. Moylan, Jr. Senior Vice President and
James E. Moylan, Jr. Chief Financial Officer
(Principal Financial Officer)
September 27, 2000 /s/ John M. Noll Assistant Vice President,
John M. Noll Corporate Controller
(Principal Accounting Officer)
September 27, 2000 /s/ Howard H. Callaway Director
Howard H. Callaway
Page 25 of 31
<PAGE>
September 27, 2000 /s/ William E. Fruhan Director
William E. Fruhan
September 27, 2000 /s/ Olin B. King Director
Olin B. King
September 27, 2000 /s/ Wayne Shortridge Director
Wayne Shortridge
September 27, 2000 /s/ G. Robert Tod Director
G. Robert Tod
September 27, 2000 /s/ Jackie M. Ward Director
Jackie M. Ward
