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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM --------------- TO ---------------.
COMMISSION FILE NUMBER: 0-21272
SANMINA CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 77-0228183
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
355 EAST TRIMBLE ROAD, SAN JOSE, CA 95131
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 954-5500
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosures 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]
The aggregate value of voting stock held by non-affiliates of the Registrant
was approximately $1,385,072,000 as of September 30, 1998, based upon the
average of the high and low prices of the Registrant's Common Stock reported for
such date on the Nasdaq National Market. Shares of Common Stock held by each
executive officer and director and by each person who owns 10% or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
to be affiliates. The determination of affiliate status is not necessarily a
conclusive determination for other purposes. As of September 30, 1997, the
Registrant had outstanding 48,265,295 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information is incorporated into Part III of this report by
reference to the Proxy Statement for the Registrant's 1999 annual meeting of
stockholders to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year covered
by this Form 10-K. Certain information is incorporated into Parts II and IV of
this report by reference to the Registrant's annual report to stockholders for
the year ended September 30, 1998.
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PART I
ITEM 1. BUSINESS
THE COMPANY
Sanmina Corporation ("Sanmina" or "the Company") is a leading
independent provider of customized integrated electronic manufacturing services
("EMS"), including turnkey electronic assembly and manufacturing management
services, to original equipment manufacturers ("OEM") in the electronics
industry. Sanmina's electronics manufacturing services consist primarily of the
manufacture of complex printed circuit board assemblies using surface mount
("SMT") and pin-through hole ("PTH") interconnection technologies, the
manufacture of custom designed backplane assemblies, fabrication of complex
multi-layered printed circuit boards, and testing and assembly of completed
systems. In addition to assembly, turnkey manufacturing management also involves
procurement and materials management, as well as consultation on printed circuit
board design and manufacturing. Sanmina, through its Sanmina Cable Systems
("SCS") subsidiary (formerly known as Golden Eagle Systems), also manufactures
custom cable and wire harness assemblies for electronic industry OEMs. In
addition, as part of the Elexsys International ("Elexsys") acquisition completed
in November 1997, the Company acquired and currently operates a metal stamping
and plating business.
SMT and PTH printed circuit board assemblies are printed circuit boards on
which various electronic components, such as integrated circuits, capacitors,
microprocessors and resistors have been mounted. These assemblies are key
functional elements of many types of electronic products. Backplane assemblies
are large printed circuit boards on which connectors are mounted to interconnect
printed circuit boards, integrated circuits and other electronic components.
Interconnect products manufactured by Sanmina generally require greater
manufacturing expertise and have shorter delivery cycles than mass produced
interconnect products and therefore typically have higher profit margins.
Sanmina's customers include leading OEMs in the telecommunications,
networking (data communications), industrial and medical instrumentation and
high-speed computer systems sectors. Sanmina's assembly plants are located in
Northern California, Richardson, Texas, Manchester, New Hampshire, Durham, North
Carolina, Guntersville, Alabama, and Dublin, Ireland. Sanmina's printed circuit
board fabrication facilities are located in Northern California, Southern
California, Nashua, New Hampshire, and Peterborough, England. SCS's
manufacturing facility is located in Carrollton, Texas. As a result of the
Pragmatech Inc. ("Pragmatech") acquisition, completed in February 1998, Sanmina
added new assembly plants in Northern California. In addition, as a result of
Sanmina's recent acquisition of Altron Inc. ("Altron"), Sanmina has added new
fabrication and assembly plants in the Boston Massachusetts area, Northern
California, and Richardson, Texas.
Sanmina was formed in 1989 to acquire the printed circuit board and
backplane operations of its predecessor company, which has been in the printed
circuit board and backplane business since 1980. Sanmina's principal offices are
located at 355 East Trimble Road, San Jose, California 95131. Sanmina's
telephone number is (408) 954-5500.
Sanmina and the Sanmina logo are trademarks of the Company. Trademarks of
other corporations are also referred to in this report.
This Report on Form 10-K contains certain forward looking statements
regarding future events with respect to the Company. Actual events and/or future
results of operations may differ materially as a result of the factors described
herein and in the documents incorporated herein by reference, including, in
particular, those factors described under "Factors Affecting Operating Results."
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INDUSTRY OVERVIEW
Sanmina is benefiting from increased market acceptance of the use of
manufacturing specialists in the electronics industry. Many electronics OEMs
have adopted and are becoming increasingly reliant upon manufacturing
outsourcing strategies, and Sanmina believes the trend towards outsourcing
manufacturing will continue. Electronics industry OEMs use EMS specialists for
many reasons including the following:
Reduce Time to Market. Due to intense competitive pressures in the
electronics industry, OEMs are faced with increasingly shorter product
life-cycles and therefore have a growing need to reduce the time required to
bring a product to market. OEMs can reduce their time to market by using a
manufacturing specialist's established manufacturing expertise and
infrastructure.
Reduce Capital Investment. As electronic products have become more
technologically advanced, the manufacturing process has become increasingly
automated, requiring a greater level of investment in capital equipment.
Manufacturing specialists enable OEMs to gain access to advanced manufacturing
facilities, thereby reducing the OEMs' overall capital equipment requirements.
Focus Resources. Because the electronics industry is experiencing greater
levels of competition and more rapid technological change, many OEMs
increasingly are seeking to focus their resources on activities and technologies
in which they add the greatest value. By offering comprehensive electronic
assembly and turnkey manufacturing services, manufacturing specialists allow
OEMs to focus on core technologies and activities such as product development,
marketing and distribution.
Access Leading Manufacturing Technology. Electronic products and electronics
manufacturing technology have become increasingly sophisticated and complex,
making it difficult for OEMs to maintain the necessary technological expertise
in process development and control. OEMs are motivated to work with a
manufacturing specialist in order to gain access to the specialist's process
expertise and manufacturing know-how.
Improve Inventory Management and Purchasing Power. Electronics industry OEMs
are faced with increasing difficulties in planning, procuring and managing their
inventories efficiently due to frequent design changes, short product life
cycles, large investments in electronic components, component price fluctuations
and the need to achieve economies of scale in materials procurement. By using a
manufacturing specialist's volume procurement capabilities and expertise in
inventory management, OEMs can reduce production and inventory costs.
Access Worldwide Manufacturing Capabilities. OEMs are increasing their
international activities in an effort to lower costs and access foreign markets.
Manufacturing specialists with worldwide capabilities are able to offer such
OEMs a variety of options on manufacturing locations to better address their
objectives regarding cost, shipment location, frequency of interaction with
manufacturing specialists and local content requirements of end-market
countries.
The total estimated 1998 market for the EMS industry is $95 billion
worldwide. Sanmina primarily markets its manufacturing services to electronics
industry OEMs in the United States and Canada. The United States EMS industry is
highly fragmented, with a few manufacturers with over $1 billion in annual
revenues, several large manufacturers with over $500 million in annual revenues,
and numerous other manufacturers with annual revenues from under $10 million to
several hundred million dollars. Industry sources estimate that the United
States sales of backplane assemblies and printed circuit boards in 1998 were
approximately $1.8 billion and $8.3 billion respectively, and approximately 40%
of backplane assemblies and 7% of printed circuit boards were accounted for by
OEM in-house ("captive") production. In addition, industry sources estimate that
the total merchant market for custom cable and wiring harness assemblies is
approximately $7.6 billion. In June 1997, Sanmina opened an EMS facility in
Dublin, Ireland to service the European market, principally western Europe.
Also, as part of the Elexsys acquisition, Sanmina added a printed circuit board
facility in Peterborough, England. The total EMS market for Western Europe in
1998 was estimated at $15.5 billion.
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SANMINA BUSINESS STRATEGY
Sanmina's objective is to provide OEMs with a total EMS solution. Sanmina's
strategy encompasses several key elements:
-Concentrate on high value added products and services for leading
OEMs. Sanmina focuses on leading manufacturers of advanced electronic
products that generally require custom-designed, more complex
interconnect products and short lead-time manufacturing services. By
focusing on complex interconnect products and manufacturing services
for leading OEMs, Sanmina is able to realize higher margins than many
other participants in the interconnect and EMS industries.
-Leverage vertical integration. Building on its integrated
manufacturing capabilities, Sanmina can provide its customers with a
broad range of high value added manufacturing services from fabrication
of bare boards to final system assembly and test. The cable assembly
capabilities of Sanmina Cable Systems provide Sanmina with further
opportunities to leverage its vertical integration. By manufacturing
printed circuit boards and custom cable assemblies used in its EMS
assemblies, Sanmina, through its vertical integration, is able to
provide greater value added and realize additional manufacturing
margin. In addition, Sanmina's vertical integration provides it with
greater control over quality, delivery and cost, and enables the
Company to offer its customers a complete EMS solution.
-Focus on high growth customer sectors. Sanmina has focused its
marketing efforts on key, fast growing industry sectors. Sanmina's
customers include leading OEM companies in telecommunications,
networking (data communications), industrial and medical
instrumentation and high-end computer systems. Sales efforts will focus
on increasing penetration of its existing customer base as well as
attracting new customers, thus diversifying its revenue across a wider
base.
-Geographic expansion of manufacturing facilities. Since 1993, Sanmina
has significantly expanded and upgraded its operations through the
opening of and acquisition of new facilities in Richardson, Texas, San
Jose, California, Manchester, New Hampshire and Durham, North Carolina.
In November 1996, Sanmina acquired the former Comptronix Corporation
contract manufacturing facilities located in Guntersville, Alabama. In
June 1997, Sanmina opened an EMS facility in the Dublin, Ireland area
to serve customers in the European market. In November 1997, Sanmina
acquired Elexsys, which has facilities in Northern and Southern
California, New Hampshire and England. These facilities provide the
Company with operations in key geographic markets for the electronics
industry. Sanmina will continue to aggressively and opportunistically
pursue future expansion opportunities in other markets.
-Aggressive pursuit of acquisition opportunities. Sanmina's strategy
involves the pursuit of business acquisition opportunities,
particularly when these opportunities have the potential to enable
Sanmina to increase its net sales while maintaining operating margin,
access new geographic markets, implement Sanmina's vertical integration
strategy and/or obtain facilities and equipment on terms more favorable
than those generally available in the market. These acquisitions have
involved both acquisitions of entire companies, such as the June 1995
acquisition of Assembly Solutions in Manchester, New Hampshire, the
January 1996 acquisition of Golden Eagle Systems, now known as Sanmina
Cable Systems, the November 1997 merger with Elexsys, the February 1998
acquisition of Pragmatech and the November 1998 merger with Altron. In
addition, Sanmina has in other instances acquired selected assets,
principally equipment, inventory and customer contracts and, in certain
cases, facilities or facility leases. Acquisitions of this nature
completed by Sanmina include the November 1996 acquisitions of the
Guntersville, Alabama operations of Comptronix Corporation and certain
assets of the custom manufacturing services division of Lucent
Technologies. These acquisitions provide Sanmina with several new key
customer accounts as well as with equipment that has been moved to
various Sanmina facilities. Sanmina intends to continue to evaluate
acquisition opportunities on a ongoing basis.
-Develop long-term customer relationships. Sanmina seeks to establish
"partnerships" with its customers by focusing on state-of-the-art
technology, quick-turnaround manufacturing and comprehensive management
support for materials and inventory. Sanmina also works closely with
its customers to help them manage their manufacturing cycle and reduce
their time to market. While Sanmina will continue to emphasize growth
with its current customers, it has been successful in attracting new
clients. To further these efforts, the Company intends to continue to
expand its direct sales staff. Sanmina believes its direct sales force
is one of its key competitive advantages.
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- Extend technology leadership. Today Sanmina can provide services from
the fabrication of circuit boards to complete system assemblies. In
providing these services, Sanmina uses a variety of processes and
technologies. Sanmina strives for continuous improvement of its
processes and has adopted a number of quality improvement and
measurement techniques to monitor its performance. Sanmina has also
recently made significant capital expenditures to upgrade plant and
equipment at its facilities. Sanmina intends to stay on the leading edge
of technology development and will evaluate new interconnect and
packaging technologies as they emerge.
CUSTOMERS, MARKETING AND SALES
Sanmina's customers include a diversified base of OEMs in the
telecommunications, networking (data communications), industrial and medical
instrumentation and high-speed computer systems segments of the electronics
industry. The following table shows the estimated percentage of Sanmina's fiscal
1998 sales in each of these segments.
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Telecommunications............................................ 53%
Networking (Data Communications).............................. 28%
Industrial and Medical Instrumentation........................ 12%
Computer Systems.............................................. 7%
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Sanmina develops relationships with its customers and markets its
manufacturing services through a direct sales force augmented by a network of
manufacturers' representative firms and a staff of in-house customer support
specialists. Sanmina's sales resources are directed at multiple management and
staff levels within target accounts. Sanmina's direct sales personnel work
closely with the customers' engineering and technical personnel to better
understand their requirements. Sanmina's manufacturers' representatives are
managed by the Company's direct sales personnel, rather than from corporate
headquarters, in order to provide for greater accountability and responsiveness.
The Company has also expanded its customer base through acquisitions. In
particular, the acquisition of the Comptronix Guntersville, Alabama operations
and certain assets of the former custom manufacturing services division of
Lucent Technologies provided the Company with several new key customer accounts
with significant growth potential. In addition, the November 1997 acquisition of
Elexsys also provided the Company with several major new customer accounts. The
November 1998 acquisition of Altron also provided the Company with several major
new customer accounts.
Historically, Sanmina has had substantial recurring sales from existing
customers. Sanmina also conducts advertising and public relations activities, as
well as receiving referrals from current customers.
Although Sanmina seeks to diversify its customer base, a small number of
customers are responsible for a significant portion of Sanmina's net sales.
During fiscal 1998 and 1997, sales to Sanmina's ten largest customers accounted
for 59% and 52%, respectively, of Sanmina's net sales. For fiscal 1998, sales to
Cisco Systems and DSC Communications each represented more than 10% of the
Company's net sales. For fiscal 1997, sales to DSC represented more than 10% of
the Company's net sales. Although there can be no assurance that Sanmina's
principal customers will continue to purchase products and services from Sanmina
at current levels, if at all, Sanmina expects to continue to depend upon its
principal customers for a significant portion of its net sales. Sanmina's
customer concentration could increase or decrease, depending on future customer
requirements, which will be dependent in large part on market conditions in the
electronics industry segments in which Sanmina's customers participate. The loss
of one of more major customers or declines in sales to major customers could
have a material adverse effect on Sanmina's business, financial condition and
results of operations.
MANUFACTURING SERVICES
Sanmina specializes in manufacturing complex printed circuit board
assemblies, backplane assemblies and printed circuit boards that are used in the
manufacture of sophisticated electronic equipment. Sanmina had been
manufacturing backplane assemblies since 1981 and, in October 1993, Sanmina
began providing electronic assembly and turnkey manufacturing management
services including the assembly and testing of sophisticated electronic systems.
For fiscal 1998, approximately 84% of Sanmina's net sales consisted of assembly
revenues and approximately 16% of Sanmina's net sales consisted of printed
circuit boards. Assembly revenues are sales derived from shipments to Sanmina's
customers from one of Sanmina's value added assembly facilities and includes the
value of the printed circuit board which is, in most cases, manufactured at one
of the Company's printed circuit board facilities. Printed circuit board
revenues are sales derived from shipments directly to Sanmina's customers from
one of Sanmina's printed circuit board facilities.
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Sanmina seeks to establish "partnerships" with its customers by providing a
responsive, flexible total manufacturing services solution. These services
include computer integrated manufacturing ("CIM") and engineering services,
quick-turnaround manufacturing and prototype and reproduction interconnect
products and materials procurement and management. CIM services provided by
Sanmina consist of developing manufacturing processes, tooling and test
sequences for new products from product designs received from customers. Sanmina
also evaluates customer designs for manufacturability and test, and, when
appropriate, recommends design changes to reduce manufacturing cost or lead
times or to increase manufacturing yields and the quality of the finished
product. Once engineering is completed, Sanmina manufactures prototype or
preproduction versions of that product on a quick-turnaround basis. Sanmina
expects that the demand for engineering and quick-turnaround prototype and
preproduction manufacturing services will increase as OEMs' products become more
complex and as product life cycles shorten. Materials procurement and handling
services provided by Sanmina include planning, purchasing, warehousing and
financing of electronic components and enclosures used in the assemblies and
systems.
Prices of Sanmina's SMT or PTH assemblies, backplane assemblies, printed
circuit board assemblies, cable assemblies or systems vary depending upon their
size and complexity, the specified manufacturing turnaround time, the extent of
design and engineering services provided by the Company, the market for the
various electronic components used and the quantity ordered. These prices of SMT
and PTH assemblies, backplane assemblies, and systems typically range from
several hundred dollars to several thousand dollars per unit. Prices of printed
circuit boards manufactured by Sanmina typically range from several dollars to
$7,000 per unit. Prices of custom cable assemblies manufactured by Sanmina
typically range from several dollars to $10,000 per unit.
MANUFACTURING AND ENGINEERING
Facilities
Sanmina manufactures its products in 27 decentralized plants, consisting of
19 assembly facilities and 8 printed circuit board fabrication facilities. These
facilities include the Altron plants acquired in November 1998. Generally, each
of Sanmina's decentralized plants have their own production, purchasing, and
materials management and quality capabilities located on site. The production
expertise of some plants overlaps, which enables Sanmina to allocate production
based on product type and available capacity at one or more plants. With
assembly facilities located in major electronics industry centers throughout the
country, including Silicon Valley, Southern California, the Dallas-Forth Worth
area, the Research Triangle area, New England and Northern Alabama, Sanmina is
also able to allocate production based on geographic proximity to the customer,
process capabilities and available capacity. Sanmina believes that this flexible
approach differs from that of its competition. Decentralized plants can focus on
particular product types and respond quickly to customers' specific
requirements. Sanmina believes that decentralized facilities also allow it to
achieve improved accountability, quality control and cost control. Each plant is
managed as a separate profit center, and each plant manager's compensation
depends, in part, upon that plant meeting quality, shipment and gross profit
targets.
Sanmina has pursued a strategy of expanding the capacity and geographic
scope of its assembly capability in order to position itself to serve
electronics industry OEMs in key geographic markets. In October 1993, Sanmina
established a backplane assembly operation in Richardson, Texas in order to
better serve major customers in the Dallas-Forth Worth area, and in 1995,
Sanmina expanded its operation in Texas by doubling the production capacity of
such facility. In October 1994, the Company acquired a 100,000 square foot,
state-of-the-art contract assembly facility in San Jose, California. This
facility in San Jose now serves as the cornerstone of Sanmina's Northern
California assembly operations. Following the acquisition, a smaller assembly
operation was consolidated with, and the Company's corporate headquarters were
moved to, this facility in San Jose. In June 1995, Sanmina acquired a contract
assembly company in Manchester, New Hampshire in order to address the New
England market, and in January 1996, these operation were moved into a new,
72,000 square foot state-of-the-art assembly facility built to the Company's
specifications.
In January 1996, Sanmina acquired Sanmina Cable Systems (formerly known as
Golden Eagle Systems) which gave the Company a value added custom cable and
wiring harness facility in Carrollton, Texas. In the first quarter of fiscal
1997, Sanmina expanded the custom cable operations of Sanmina Cable Systems by
purchasing a 72,000 square foot facility in Carrollton and the Sanmina Cable
Systems operations have been moved into this facility. In November 1996, Sanmina
acquired the Guntersville, Alabama assembly facilities and operations of
Comptronix Corporation. This acquisition provides the Company with manufacturing
operations in the Huntsville, Alabama area, a major center of electronics
industry activity. The acquisition also provides Sanmina with several
significant new customers.
In June 1997, Sanmina opened its first overseas EMS assembly facility in
Dublin, Ireland. In November 1997, Sanmina acquired Elexsys, which has an
assembly facility located in Northern California and printed circuit board
fabrication facilities in Northern and Southern California, Nashua, New
Hampshire and Peterborough, England. In November 1998, Sanmina acquired
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Altron, which has assembly facilities located in Woburn, Massachusetts,
Richardson, Texas, Fremont, California, and a printed circuit board fabrication
facility in Wilmington, Massachusetts. In November 1998, Sanmina acquired the
electronics manufacturing services of Harris Canada, which provided Sanmina with
its first facility in Canada.
In November 1998, Sanmina entered into a lease with an option to purchase
for a 330,000 square foot campus facility located in San Jose, California. The
facility consists of 4 buildings on a single site. Sanmina intends to
consolidate its corporate headquarters and San Jose area assembly operations at
this facility. Consolidation activities will begin in calendar 1999. Sanmina's
San Jose area printed circuit board fabrication facilities will not be
consolidated at the campus facility and will remain at their current locations.
Manufacturing Processes
Sanmina produces complex, technologically advanced SMT and PTH assemblies,
backplane assemblies and multilayer printed circuit boards, custom cable
assemblies and full systems that meet increasingly tight tolerances and
specifications demanded by OEMs. Multilayering, which involves placing multiple
layers of electrical circuitry on a single printed circuit board or backplane,
expands the number of circuits and components that can be contained on the
interconnect product and increases the operating speed of the system by reducing
the distance that electrical signals must travel. Increasing the density of the
circuitry in each layer is accomplished by reducing the width of the circuit
tracks and placing them closer together on the printed circuit board or
backplane. Interconnect products having narrow, closely spaced circuit tracks
are known as "fine line" products. Today, Sanmina and other industry leaders are
capable of efficiently producing commercial quantities of printed circuit boards
with up to 36 layers and circuit track widths as narrow as three mils. The
manufacture of complex multilayer interconnect products often requires the use
of sophisticated circuit interconnections between certain layers (called "blind
or buried vias") and adherence to strict electrical characteristics to maintain
consistent circuit transmission speeds (referred to as "controlled impedance").
These technologies require very tight lamination and etching tolerances and are
especially critical for printed circuit boards with ten or more layers.
The manufacture of printed circuit boards involves several steps: etching
the circuit image on copper-clad epoxy laminate, pressing the laminates together
to form a panel, drilling holes and depositing copper or other conductive
material to form the inter-layer electrical connections and, lastly, cutting the
panels to shape. Certain advanced interconnect products require additional
critical steps, including dry film imaging, photoimageable soldermask
processing, computer controlled drilling and routing, automated plating and
process controls and achievement of controlled impedance. Manufacture of printed
circuit boards used in backplane assemblies requires specialized expertise and
equipment because of the larger size of the backplane relative to other printed
circuit boards and the increased number of holes for component mounting.
The manufacture of SMT and PTH assemblies involves the attachment of various
electronic components, such as integrated circuits, capacitors, microprocessors
and resistors to printed circuit boards. The manufacture of backplane assemblies
involves attachment of electronic components, including printed circuit boards,
integrated circuits and other components, to the backplane, which is a large
printed circuit board manufactured by Sanmina. Sanmina uses SMT, PTH and
press-fit technologies in backplane assembly.
All but one of Sanmina's manufacturing facilities are certified under ISO
9002, a set of standards published by the International Organization of
Standardization and used to document, implement and demonstrate quality
management and assurance systems in design and manufacturing. As part of the ISO
9002 certification process, the Company has developed a quality systems manual
and an internal system of quality controls and audits. Although ISO 9002
certification is of particular importance to the companies doing business in the
European Community, Sanmina believes that United States electronics
manufacturers are increasing their use of ISO 9002 registration as a criteria
for suppliers.
In addition to ISO 9002 certification, Sanmina is BellCore, British Approval
Board for Telecommunications ("BABT") and Underwriters Laboratories ("UL")
compliant. These qualifications establish standards for quality, manufacturing
process control and manufacturing documentation and are required by many OEMs in
the electronics industry, including suppliers to AT&T and the Regional Bell
Operating Companies.
The Company orders materials and components based on purchase orders
received and accepted and seeks to minimize its inventory of materials or
components that are not identified for use in filling specific orders. Materials
used in manufacturing printed circuit boards are readily available in the open
market and the Company has not to date experienced any significant shortages of
such materials. Electronic components used by Sanmina in producing SMT and PTH
assemblies and its backplane assemblies are purchased by Sanmina and, in certain
circumstances, it may be required to bear the risk of component price
fluctuations. In addition, shortages of certain types of electronic components
have occurred in the past and may occur in the future. Component shortages or
price fluctuations could have an adverse effect on the Company's SMT and PTH
assemblies and
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its backplane assembly business, thereby adversely affecting the Company's
results of operations. Due to the continued expansion of the Company's contract
manufacturing and backplane assembly businesses as a percentage of the Company's
net sales, component shortages and price fluctuations would adversely affect the
Company's results of operations to a greater extent than in prior fiscal years.
Technology Development
Sanmina's close involvement with its customers at the early stages of their
product development positions it at the leading edge of technical innovation in
the manufacturing of SMT and PTH assemblies, backplane assemblies, and printed
circuit boards. Sanmina selectively seeks orders that require the use of
state-of-the-art materials or manufacturing techniques in order to further
develop its manufacturing expertise. Current areas of manufacturing process
development include reducing circuit widths and hole sizes, establishing new
standards for particle contamination and developing new manufacturing processes
for the use with new materials and new surface mount connector and component
designs.
Recent developments in the electronics industry have necessitated
improvements in the types of laminate used in the manufacture of interconnect
products. New laminate materials may contain new chemical formulations to
achieve better control of flow, resin systems with high glass transition
temperatures, reduced surface imperfections and greatly improved dimensional
stability. Future generations of interconnect products will require ultra fine
lines, multilayers of much greater complexity and thickness, and extremely small
holes in the 4 to 10 mil range. The materials designed to meet these
requirements, such as BT epoxy, cyanate esters, polyamide quartz, and Kevlar
epoxy, are beginning to appear in the marketplace. Widespread commercial use of
these materials will depend upon statistical process control and improved
manufacturing procedures to achieve the required yields and quality.
The Company has developed expertise and techniques which it uses in the
manufacture of circuit boards, backpanels and subsystems. Generally, the Company
relies on common law trade secret protection and on confidentiality agreements
with its employees to protect its expertise and techniques. The Company owns but
five patent and believes that patents have not historically constituted a
significant form of intellectual property right in its industry.
ENVIRONMENTAL CONTROLS
Proper waste disposal is a major consideration for printed circuit board
manufacturers because metals and chemicals are used in the manufacturing
process. Water used in the printed circuit board manufacturing process must be
treated to remove metal particles and other contaminants before it can be
discharged into the municipal sanitary sewer system. In addition, although the
electronics assembly process generates significantly less waste water than
printed circuit board fabrication, maintenance of environmental controls is also
important in the electronics assembly process. Each of Sanmina's printed circuit
board and electronics assembly plants has personnel responsible for monitoring
environmental compliance. These individuals report to Sanmina's director of
environmental compliance, who has overall responsibility for environmental
matters.
Each plant operates under effluent discharge permits issued by the
appropriate governmental authority. These permits must be renewed periodically
and are subject to revocation in the event of violations of environmental laws.
There can be no assurance that violations will not occur in the future as a
result of human error, equipment failure or other causes. In the event of a
future violation of environmental laws, Sanmina could be held liable for damages
and for the costs of remedial actions and could be also subject to revocation of
effluent discharge permits. Any such revocation could require Sanmina to cease
or limit production at one or more of its facilities, thereby having an adverse
impact on Sanmina's results of operations. Sanmina is also subject to
environmental laws relating to the storage, use and disposal of chemicals, solid
waste and other hazardous materials as well as air quality regulations.
Furthermore, environmental laws could become more stringent over time, and the
costs of compliance with and penalties associated with violation of more
stringent laws could be substantial.
In November 1997, Sanmina acquired Elexsys, which, by virtue of such
acquisition, became a wholly-owned subsidiary of Sanmina. Several facilities
owned or occupied by Elexsys at the time of the acquisition, or formerly owned
or occupied by Elexsys or companies acquired by Elexsys, had either soil
contamination or contamination of groundwater underneath or near the facility
including the following: Contamination was discovered at Elexsys' Irvine,
California facility in 1989 and Elexsys voluntarily installed a groundwater
remediation system at the facility in 1994. The California Regional Water
Quality Control Board has requested that Sanmina extend the investigation of the
groundwater contamination at the Irvine facility to off-site areas. It is
unknown what the results of this additional investigation will be and whether
any additional remediation activities will be required. Sanmina has been
required by the California Department of Toxic Substances Control to undertake
investigation of soil and/or groundwater at certain facilities formerly owned or
occupied by a predecessor company to Elexsys in Mountain View, California.
Depending upon the results of this soil sampling and groundwater testing,
Sanmina could be ordered to undertake soil and/or groundwater cleanup. To date,
Sanmina has not been ordered to undertake any soil or groundwater cleanup
activities at the
<PAGE> 9
Mountain View facilities, and does not believe any such activities should be
required. Test results received to date are not sufficient to enable Sanmina to
determine whether or not such cleanup activities are likely to be mandated.
Contamination has also been discovered at other current and former
Elexsys facilities and has been reported to the relevant regulatory agencies. No
remediation or further investigation of such contamination has been required by
regulatory agencies. To date, the cost of the various investigations and the
cost of operating the remediation system at the Irvine facility have not been
material to Sanmina's financial condition. However, in the event Sanmina is
required to undertake additional groundwater or soil cleanup, the costs of such
cleanup are likely to be substantial. Sanmina is currently unable to estimate
the amount of such soil and groundwater cleanup costs because no soil or
groundwater cleanup has been ordered and Sanmina cannot determine from available
test results what remediation activities, if any, are likely to be required.
Sanmina believes, based on the limited information currently available, that the
cost of any groundwater or soil clean-up that may be required would not have a
material adverse effect on Sanmina's business, financial condition and results
of operations. Nevertheless, the process of remediating contaminated soil and
groundwater is costly, and if Sanmina is required to undertake substantial
remediation activities at one or more of the former Elexsys facilities, there
can be no assurance that the costs of such activities costs would not have a
material adverse effect on Sanmina's business, financial condition and results
of operations.
Altron was advised in 1993 by Olin Corporation that contamination
resulting from activities of prior owners of property owned by Olin Corporation
and located close to the Altron manufacturing plant in Wilmington,
Massachusetts, had migrated under the Altron plant. Olin has assumed full
responsibility for any remediation activities that may be required and has
agreed to indemnify and hold Altron harmless from any and all costs,
liabilities, fines, penalties, charges and expenses arising from and relating to
any action or requirement, whether imposed by statute, ordinance, rule,
regulation, order, decree or by general principles of law to remediate, clean up
or abate contamination emanating from the Olin site, Although the Company
believes that Olin's assumption of responsibility will result in no remediation
cost to Altron from the contamination, there can be no assurance that Altron
will not be subject to some costs regarding this matter, but Altron does not
anticipate that such costs, if any, will be material to its financial condition.
BACKLOG
Sanmina's backlog was approximately $233 million at September 30, 1998 and
approximately $175 million at September 30, 1997. Backlog consists of purchase
orders received by the Company, including, in certain instances, forecast
requirements released for production under customer contracts. Cancellation and
postponement charges generally vary depending upon the time of cancellation or
postponement, and a certain portion of the Company's backlog may be subject to
cancellation or postponement without significant penalty. Typically, a
substantial portion of the Company's backlog is scheduled for delivery within
120 days.
COMPETITION
Significant competitive factors in the market for advanced backplane
assemblies and printed circuit boards include product quality, responsiveness to
customers, manufacturing and engineering skills, and price. Sanmina believes
that competition in the market segments served by Sanmina is based more on
product quality and responsive customer service and support than on price, in
part because the cost of interconnect products manufactured by Sanmina is
usually low relative to the total cost of the equipment for which they are
components and in part because of the greater importance of product reliability
and prompt delivery to Sanmina's customers. Sanmina believes that its primary
competitive strengths are its ability to provide responsive, flexible, short
lead-time manufacturing services, its engineering and manufacturing expertise
and its customer service support.
Sanmina faces intense competition from a number of established competitors
in its various product markets. Certain of Sanmina's competitors have greater
financial and manufacturing resources than Sanmina, including significantly
greater SMT assembly capacity. During periods of recession in the electronic
industry, the Company's competitive advantages in the areas of quick-turnaround
manufacturing and responsive customer service may be of reduced importance to
electronics OEMs, who may become more price sensitive. In addition, captive
interconnect product manufacturers may seek orders in the open market to fill
excess capacity, thereby increasing price competition. Although the Company
generally does not pursue high-volume, highly price-sensitive interconnect
product business, it may be at a competitive disadvantage with respect to price
when compared to manufacturers with lower cost structures, particularly those
manufacturers with offshore facilities where labor and other costs are lower.
EMPLOYEES
At September 30, 1998, Sanmina had 4,005 full-time employees, including
3,746 in manufacturing and engineering, 136 in marketing and sales, and 123 in
general administration and finance. None of Sanmina's employees is represented
by a labor union and Sanmina has never experienced a work stoppage or strike.
Sanmina believes its relationship with its employees is good.
<PAGE> 10
The Company's success depends to a large extent upon the continued services
of key managerial and technical employees. The loss of such personnel could have
a material adverse effect on the Company. To date, the Company has not
experienced significant difficulties in attracting or retaining such personnel.
Although the Company is not aware that any of its key personnel currently intend
to terminate their employment, their future services cannot be assured.
FACTORS AFFECTING BUSINESS AND RESULTS OF OPERATIONS
In addition to the information set forth in this report on Form 10-K and in
the documents incorporated herein by reference, the following factors should be
carefully considered by prospective investors in the Company's securities.
Sanmina is subject to risks related to Year 2000 problems. Many
currently installed computer systems and software products are coded to accept
only two digit entries in the date code field. As the Year 2000 approaches,
these code fields will need to accept four digit entries to distinguish years
beginning with "19" from those beginning with "20." As a result, in less than
two years, computer systems and/or software products used by many companies may
need to be upgraded to comply with such Year 2000 requirements. Sanmina is
currently expending resources to review its products and services, as well as
its internal use software in order to identify and modify those products,
services and systems that are not Year 2000 compliant. Additionally, Sanmina is
in the process of evaluating the need for contingency plans with respect to Year
2000 requirements. The necessity of any contingency plan must be evaluated on a
case-by-case basis and will vary considerably in nature depending on the Year
2000 issue it may need to address. There can be no assurance however, that
Sanmina will be able to solve all potential Year 2000 issues. Sanmina's reliance
on its key suppliers, and therefore on the proper functioning of their
information systems and software, is increasing, and there can be no assurance
that another company's failure to address Year 2000 issues could not have an
adverse effect on Sanmina. Sanmina has initiated formal communications with each
of its significant suppliers and customers to determine the extent to which
Sanmina is vulnerable to those third parties' failure to remediate their own
Year 2000 issues. Sanmina is requesting that third party vendors represent their
products and services to be Year 2000 compliant and that they have a program to
test for Year 2000 compliance. However, the response of those third parties is
beyond Sanmina's control. To the extent that Sanmina does not receive adequate
responses by December 31, 1998, it is prepared to develop contingency plans,
with completion of these plans scheduled for no later than March 31, 1999. At
this time, Sanmina cannot estimate the additional cost, if any, that might
develop from such contingency plans. Breakdowns in Sanmina's computer systems
and applications, such as its manufacturing application software, its bar-coding
systems, and the computer chips embedded in its plant equipment, as well as
other Year 2000-related problems such as disruptions in the delivery of
materials, power, heat or water to Sanmina's facilities, could prevent Sanmina
from being able to manufacture and ship its products. Sanmina plans to replace
or upgrade or otherwise work around any of its date driven systems that are not
Year 2000 compliant. Sanmina's Year 2000 Project Team completed compliance
solutions or work arounds by January 31, 1999, and intends to complete
compliance testing by June 30, 1999. If Sanmina fails to correct a material Year
2000 problem, its normal business activities and operations could be
interrupted. Such interruptions could materially and adversely affect Sanmina's
results of operations, liquidity and financial condition. To date, Year 2000
costs are not considered by Sanmina to be material to its financial condition.
Sanmina currently estimates that, in order to complete Year 2000 compliance,
Sanmina will be required to incur expenditures of approximately $1.1 million.
Dependence on Electronics Industry. Sanmina's business is heavily
dependent on the health of the electronics industry. Sanmina's customers are
manufacturers in the telecommunications, networking (data communications),
industrial and medical instrumentation and computer systems segments of the
electronics industry. These industry segments, and the electronics industry as a
whole, are subject to rapid technological change and product obsolescence.
Sanmina's customers can discontinue or modify products containing components
manufactured by Sanmina. Such discontinuance or modification could adversely
affect Sanmina's results of operations. The electronics industry is also subject
to economic cycles and has in the past experienced, and is likely in the future
to experience, recessionary periods. A general recession in the electronics
industry could have a material adverse effect on Sanmina's business, financial
condition and results of operations. Sanmina typically does not obtain long-term
volume purchase contracts from its customers and has recently experienced
reduced lead times in customer orders. Customer orders may be canceled and
volume levels may be changed or delayed. In particular, Sanmina experienced
certain cancellation and rescheduling of shipment dates of customer orders
during the fourth fiscal quarter of 1998. The timely replacement of canceled,
delayed or reduced contracts with new business cannot be assured.
Factors Affecting Operating Results. Sanmina's results of operations
have varied and may continue to fluctuate significantly from period to period,
including on a quarterly basis. Sanmina's operating results are affected by a
number of factors. These factors include timing of orders from major customers,
mix of product ordered by and shipped to major customers, the volume of orders
as related to Sanmina's capacity, the ability of Sanmina to effectively manage
inventory and fixed assets, and the ability of Sanmina to time expenditures in
anticipation of future sales. Sanmina's results are also affected by the mix of
products between backplane assemblies and printed circuit boards. Sanmina's
results are also affected by general economic conditions in the electronics
industry. Sanmina's results can also be significantly influenced by development
and introduction of new products
<PAGE> 11
by Sanmina's customers. From time to time, Sanmina experiences changes in the
volume of sales to each of its principal customers, and operating results may be
affected on a period-to-period basis by these changes. Sanmina's customers
generally require short delivery cycles, and a substantial portion of Sanmina's
backlog is typically scheduled for delivery within 120 days. Quarterly sales and
operating results therefore depend in large part on the volume and timing of
bookings received during the quarter, which are difficult to forecast. Sanmina's
backlog also affects its ability to plan production and inventory levels, which
could lead to fluctuations in operating results. In addition, a significant
portion of Sanmina's operating expenses are relatively fixed in nature and
planned expenditures are based in part on anticipated orders. Any inability to
adjust spending quickly enough to compensate for any revenue shortfall may
magnify the adverse impact of such revenue shortfall on Sanmina's results of
operations. Results of operations in any period should not be considered
indicative of the results to be expected for any future period. In addition,
fluctuations in operating results may also result in fluctuations in the price
of Sanmina Common Stock.
Competition and Technological Change. The electronic interconnect
product industry is highly fragmented and it is characterized by intense
competition. Sanmina competes in the technologically advanced segment of the
interconnect product market, which is also highly competitive but is much less
fragmented than the industry as a whole. Sanmina's competitors consist primarily
of larger manufacturers of interconnect products, and some of these competitors
have greater manufacturing and financial resources than Sanmina as well as
greater SMT assembly capacity. As a participant in the interconnect industry,
Sanmina must continually develop improved manufacturing processes to accommodate
its customers' needs for increasingly complex products. During periods of
recession in the electronics industry, Sanmina's competitive advantages in the
areas of quick turnaround manufacturing and responsive customer service may be
of reduced importance to electronics OEMs, who may become more price sensitive.
In addition, captive interconnect product manufacturers seek orders in the open
market to fill excess capacity, thereby increasing price competition. Sanmina
may be at a competitive disadvantage with respect to price when compared to
manufacturers with lower cost structures, particularly those with offshore
facilities where labor and other costs are lower.
Risks Associated with Acquisitions and Expansions. Sanmina has, for the
past several fiscal years, pursued a strategy of growth. This growth has come in
part through acquisitions. These acquisitions have involved both acquisitions of
entire companies, such as the June 1995 acquisition of Assembly Solutions in
Manchester, New Hampshire, the January 1996 acquisition of Golden Eagle Systems,
now known as Sanmina Cable Systems, the November 1997 merger with Elexsys, the
February 1998 acquisition of Pragmatech and the November 1998 merger with
Altron. In addition, Sanmina has in other instances acquired selected assets,
principally equipment, inventory and customer contracts and, in certain cases,
facilities or facility leases. Acquisitions of this nature completed by Sanmina
include the November 1996 acquisitions of the Guntersville, Alabama operations
of Comptronix Corporation and certain assets of the custom manufacturing
services division of Lucent Technologies. In addition to these acquisitions,
Sanmina has also grown its operations through internal expansion, such as the
opening of its Richardson, Texas assembly facility, its Durham, North Carolina
assembly facility and its Dublin, Ireland assembly facility. Acquisitions of
companies and businesses and expansion of operations involves certain risks,
including the following:
* the potential inability to successfully integrate acquired operations and
businesses or to realize anticipated synergies, economies of scale or
other value,
* diversion of management's attention,
* difficulties in scaling up production at new sites and coordinating
management of operations at new sites,
* loss of key employees of acquired operations.
Accordingly, Sanmina may experience problems in integrating the Altron
operations or operations associated with any future acquisition. Accordingly,
there can be no assurance that the merger with Altron or any other future
acquisition will result in a positive contribution to Sanmina's results of
operations. Furthermore, there can be no assurance that Sanmina will realize
value from any such acquisition, which equals or exceeds the consideration paid.
In particular, the successful combination of Sanmina and Altron will require
substantial effort from each company, including the integration and coordination
of sales and marketing efforts. The diversion of the attention of management and
any difficulties encountered in the transition process, including, the
interruption of, or a loss of momentum in, Altron's activities, problems
associated with integration of management information and reporting systems, and
delays in implementation of consolidation plans, could have an adverse impact on
Sanmina's ability to realize the anticipated benefits of the Merger. Therefore,
there can be no assurance that Sanmina will realize any of these anticipated
benefits. In addition, there can be no assurance that Sanmina will realize
anticipated strategic and other benefits from expansion of existing operations
to new sites. Any such problems could have a material adverse effect on
Sanmina's business, financial condition and results of operations. In addition,
future acquisitions by Sanmina may result in dilutive issuances of equity
securities, the incurrence of additional debt, large one-time write-offs and the
creation of goodwill or other intangible assets that could result in
amortization expense. These factors could have a material adverse effect on
Sanmina's business, financial condition and results of operations.
Risks Associated with International Operations. Sanmina opened its first
overseas facility, located in Dublin, Ireland, in
<PAGE> 12
June 1997. In addition, Sanmina has obtained a printed circuit board fabrication
facility in Peterborough, England as a result of the acquisition of Elexsys. A
number of risks are inherent in international operations and transactions.
International sales and operations may be limited or disrupted by the imposition
of government controls, export license requirements, political instability,
trade restrictions, changes in tariffs, and difficulties in staffing,
coordinating communications among and managing international operations.
Additionally, Sanmina's business, financial condition and results of operations
may be adversely affected by fluctuations in international currency exchange
rates as well as increases in duty rates, difficulties in obtaining export
licenses, constraints on its ability to maintain or increase prices, and
competition. There can be no assurance that Sanmina will realize the anticipated
strategic benefits of its expansion in Ireland or that Sanmina's international
operations will contribute positively to Sanmina's business, financial condition
and results of operations. Furthermore, difficulties encountered in scaling up
production at overseas facilities or in coordinating Sanmina's United States and
international operations, as well as any failure of the international operations
to realize anticipated revenue growth, could, individually or in the aggregate,
have a material adverse effect on Sanmina's business, financial condition and
results of operations.
Possible Volatility of Note and Stock Price. The trading price of the
Sanmina Common Stock has been and could in the future be subject to significant
fluctuations in response to variations in quarterly operating results,
developments in the electronics industry, general economic conditions, changes
in securities analysts' recommendations regarding Sanmina's securities and other
factors. In addition, the stock market in recent years has experienced
significant price and volume fluctuations which have affected the market prices
of technology companies and which have often been unrelated to or
disproportionately impacted by the operating performance of such companies.
These broad market fluctuations may adversely affect the market price of
Sanmina's Common Stock.
ITEM 2. PROPERTIES
Sanmina's principal facilities, including Altron, comprise an aggregate of
approximately 1.6 million square feet. Except for the Company's 72,000 square
foot Manchester, New Hampshire facility, the 72,000 square foot facility
occupied by Sanmina Cable Systems in Carrollton, Texas, a 70,000 square foot
facility located in Nasuha, New Hampshire, a 204,000 square foot facility
located in Wilmington, Massachusetts, a 104,000 square foot facility located in
Woburn, Massachusetts, and the Company's 50,000 square foot facility located in
Dublin, Ireland, all of the facilities are leased, and the leases for these
facilities expire from 1998 through 2013. The leases generally may be extended
at the Company's option. In addition, the Company's Guntersville, Alabama
facilities are leased under leases with the Guntersville, Alabama industrial
development board. Under the leases, no rent is payable and the facilities may
be purchased by the Company for nominal consideration at any time up to and
including the expiration of the respective terms of such leases. Sanmina has
twelve principal facilities located in the greater San Jose, California area,
with other facilities located in Southern California, Richardson, Texas,
Manchester, New Hampshire, Guntersville, Alabama, Durham, North Carolina,
Peterborough, England, and Calgary, Canada
In November 1998, Sanmina entered into a lease with an option to
purchase for a 330,000 square foot campus facility located in San Jose,
California. The facility consists of 4 buildings on a single site. Sanmina
intends to consolidate its corporate headquarters and San Jose area assembly
operations at this facility. Consolidation activities will begin in calendar
1999. Sanmina's San Jose area printed circuit board fabrication facilities will
not be consolidated at the campus facility and will remain at their current
locations. Sanmina believes that its facilities are adequate to meet its
reasonably foreseeable requirements for at least the next two years. The Company
continually evaluates its expected future facilities requirements.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently a party to any material pending legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
<PAGE> 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The information required by this item is incorporated by reference to page
25 of the Registrant's 1998 annual report to stockholders under the caption
"quarterly results."
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated by reference to page
20 of the Registrant's 1998 annual report to stockholders under the caption
"Selected Financial Data."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this item is incorporated by reference to pages
22 through 28 of the Registrant's 1998 annual report to stockholders under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by reference to pages
30 through 38 of the Registrant's 1998 annual report to stockholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
<PAGE> 14
PART III
Certain information required by Part III is omitted from this Report on Form
10-K in that the Registrant will file a definitive proxy statement within 120
days after the end of its fiscal year pursuant to Regulation 14A with respect to
the 1999 Annual Meeting of Stockholders (the "Proxy Statement") to be held
January 29, 1999 and certain information included therein is incorporated herein
by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item relating to directors is incorporated
by reference to the information under the caption "Proposal No. 1 -- Election of
Directors" in the Proxy Statement.
The executive officers of the Registrant, who are elected by the board of
directors, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --- -----------------------------------------
<S> <C> <C>
Jure Sola.......................... 47 Chairman and Chief Executive Officer
Randy W. Furr...................... 44 President and Chief Operating Officer
Bernard J. Whitney................. 42 Executive Vice President and Chief Financial
Officer
Michael J. Landy................... 44 Executive Vice President of Sales and Marketing
</TABLE>
Mr. Sola co-founded Sanmina in 1980 and initially held the position of Vice
President of Sales and Marketing and was responsible for the development and
growth of the Company's sales organization. He became Vice President and General
Manager in October 1987 with responsibility for all manufacturing operations as
well as sales and marketing. Mr. Sola was elected President in October 1989 and
has served as Chairman of the Board and Chief Executive Officer since April
1991. Mr. Sola relinquished the title of President when Mr. Furr was appointed
to such position in March 1996.
Mr. Furr joined Sanmina as Vice President and Chief Financial Officer in
August 1992. In March 1996, Mr. Furr was appointed President and Chief Operating
Officer. From April to August 1992, Mr. Furr was Vice President and Chief
Financial Officer of Aquarius Systems Inc. North America ("ASINA"), a
manufacturer of personal computers. Prior to working at ASINA, he held numerous
positions in both financial and general management for General Signal
Corporation during a 13 year period, serving most recently as Vice President and
General Manager of General Signal Thinfilm Company. Mr. Furr is a Certified
Public Accountant.
Mr. Whitney joined Sanmina as Vice President and Chief Financial Officer in
August 1997. From June 1995 to July 1997, he worked for Network General
Corporation, a network fault and performance management solutions company,
serving first as Corporate Controller, then in May 1996, he was named Vice
President of Finance. Prior to joining Network General, he worked for Conner
Peripherals serving in a variety of positions in corporate finance from February
1987 to June 1995.
Mr. Landy became Vice President of Sales and Marketing at Sanmina in October
1997. He joined Sanmina in August 1993 as General Manager of the Company's
Richardson, Texas operations and in 1995 was promoted to Vice President Assembly
Operations for the Central Region of the United States. Prior to his employment
with Sanmina, Mr. Landy held a senior management position with a
telecommunications corporation.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
information under the caption "Executive Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
information under the caption "Record Date and Stock Ownership" in the Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
information under the caption "Certain Transactions" in the Proxy Statement.
<PAGE> 15
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)1. FINANCIAL STATEMENTS
The following Financial Statements of Sanmina Corporation and Report of
Independent Public Accountants are incorporated by reference to pages
30 through 39 of the Registrant's 1998 annual report to stockholders:
Report of Independent Public Accountants
Consolidated Balance Sheets, As of September 30, 1998 and 1997
Consolidated Statements of Operations, Years Ended September 30,
1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity, Years Ended
September 30, 1998, 1997 and 1996
Consolidated Statements of Cash Flows, Years Ended September 30,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULE
The following financial statement schedule of Sanmina Corporation is
filed as part of this report on Form 10-K and should be read in
conjunction with the Financial Statements of Sanmina Corporation
incorporated by reference herein:
Schedule II -- Valuation and Qualifying Accounts
Report of Independent Public Accountants on Schedule
All other schedules are omitted because they are not applicable or
the required information is shown in the Financial Statements or the
notes thereto.
3. EXHIBITS
Refer to (c) below.
(b) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the fiscal
quarter ended September 30, 1998.
On December 14, 1998, the Company filed with the Commission a report on
Form 8-K relating to the acquisition of Altron. Pro forma financial
information relating to such transaction will be filed with the
Commission within the time frame prescribed by Regulation S-X and the
rules regarding reporting on Form 8-K.
<PAGE> 16
(c) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- ----------------------------------------------------------------------------
<S> <C>
3.2(8) Restated Certificate of Incorporation of Registrant.
3.3(1) Bylaws of Registrant, as amended.
4.2(1) Specimen Stock Certificate.
10.4(1) Form of Indemnification Agreement.
10.2(4) Amended 1990 Incentive Stock Plan.
10.3(1) 1993 Employee Stock Purchase Plan.
10.9(k)(2) Amended and Restated Credit Agreement dated as of August 18, 1993
among Sanmina Corporation, Chemical Bank and other lenders.
10.9(k)(5) Amendment dated July 27, 1995 to Amended and Restated Credit Agreement dated
August 18, 1993.
10.9(1)(2) Revolving Credit Note, $12,000,000.00, Chemical Bank.
10.10(1) Lease for premises at 2109 O'Toole Avenue, Suites A-E, San Jose, California
(Portion of Plant I).
10.11(1) Lease for premises at 2101 O'Toole Avenue, San Jose, California (Portion of Plant I).
10.12(1) Lease for premises at 2539 Scott Boulevard, Santa Clara, California (Plant III).
10.14(1) Lease for premises at 2060-2068 Bering Drive, San Jose, California (Plant II).
10.15(1) Lease for premises at 4220 Business Center Drive, Fremont, California (Plant V).
10.16(1) Lease for premises at McCarthy Boulevard, Milpitas, California (Plant VI).
10.17(1) Lease for premises at 2121 O'Toole Avenue, San Jose, California (Corporate Headquarters).
10.19(2) Lease for premises at 1250 American Parkway, Richards, Texas (Plant VII).
10.20(2) Lease for premises at 6453 Kaiser Drive, Fremont, California (Plant VIII).
10.21(3) Asset Purchase Agreement dated September 28, 1994 between Registrant and
Comptronix Corporation.
10.22(4) Lease for premises at 355 East Trimble Road, San Jose, California.
10.23(5) Stock Purchase Agreement dated May 31, 1995 between Sanmina Corporation,
Assembly Solutions, Inc. and the principal stockholders of Assembly Solutions, Inc.
10.24(6) Indenture dated August 15, 1995 between Registrant and Norwest Bank Minnesota,
N.A. as Trustee.
10.25(7) Asset Purchase Agreement dated September 20, 1996 between Registrant and
Comptronix Corporation.
10.26(9) Agreement and Plan of Merger dated July 22, 1997 among Registrant, SANM
Acquisition Subsidiary, Inc. and Elexsys International, Inc.
10.26(10) Agreement and Plan of Merger dated September 2, 1998 among Registrant, SANM
Acquisition Subsidiary, Inc. and Altron, Inc.
10.27 Synthetic lease agreement.
11.1 Statement of Computation of Earnings Per Share
13 Annual Report to Stockholders.
21 Subsidiaries of the Registrant.
23 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.
</TABLE>
(1) Incorporated by reference to the like-numbered exhibits previously filed
with Registrant's Registration Statement on Form S-1, No. 33-70700 filed
with the Securities and Exchange Commission ("SEC") on February 19, 1993.
(2) Incorporated by reference to the like-numbered exhibits previously filed
with Registrant's Registration Statement on Form S-1 No. 33-70700 filed
with the SEC on October 22, 1993.
(3) Incorporated by reference to exhibit no. 2 previously filed with
Registrant's Report on Form 8-K filed with the SEC on October 28, 1994.
(4) Incorporated by reference to the like-numbered exhibits previously filed
with Registrant's Report on Form 10-K filed with the SEC on December 29,
1994.
<PAGE> 17
(5) Incorporated by reference to the like-numbered exhibit previously filed
with Registrant's Report on Form 10-Q filed with the SEC on July 31, 1995.
(6) Incorporated by reference to the like-numbered exhibit previously filed
with Registrant's Report on Form 10-K for the fiscal year ended September
30, 1995.
(7) Incorporated by reference to exhibit 2 previously filed with the
Registrant's Report on Form 8-K filed with the SEC on November 15, 1996.
(8) Incorporated by reference to the like numbered exhibit previously filed
with Registrant's Report on Form 10-K for the fiscal year ended September
30, 1997.
(9) Incorporated by reference to exhibit 2.1 previously filed with Registrant's
Report on Form 8-K filed with the SEC on November 21, 1997.
(10) Incorporated by reference to exhibit 2.1 previously filed with
Registrant's Report on Form 8-K filed with the SEC on September 4, 1998.
<PAGE> 18
SIGNATURES
Pursuant to the requirements 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.
SANMINA CORPORATION
By:
Jure Sola
Chairman and Chief Executive Officer
Date: December 22, 1998
KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Jure Sola and Randy W. Furr, jointly and
severally, his or her attorneys-in-fact, and each with the power of
substitution, for him or her in any and all capacities, to sign any amendments
to this Report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his or her substitute or substitutes, may do or cause to
be done by virtue thereof.
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 date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- ------------------------------ -----------------
<S> <C> <C>
Chairman, Chief Executive December 22, 1998
- ---------------------------------------- Officer and Director
Jure Sola (Principal Executive Officer)
Executive Vice President and December 22, 1998
- ---------------------------------------- Chief Financial Officer
Bernard J. Whitney (Principal Financial and
Accounting Officer)
Director December 22, 1998
- ----------------------------------------
Samuel Altschuler
Director December 22, 1998
- ----------------------------------------
Neil Bonke
Director December 22, 1998
- ----------------------------------------
John Bolger
Director December 22, 1998
- ----------------------------------------
Bernard Vonderschmitt
Director December 22, 1998
- ----------------------------------------
Mario M. Rosati
</TABLE>
<PAGE> 19
SCHEDULE II
SANMINA CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
OF PERIOD EXPENSES DEDUCTIONS PERIOD
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts and Returns
Fiscal year ended September 30, 1996............ $1,387 $ 532 $214 $1,705
Fiscal year ended September 30, 1997............ $1,705 $2,133 $218 $3,620
Fiscal year ended September 30, 1998............ $3,620 $1,994 $945 $4,669
</TABLE>
S-1
<PAGE> 20
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To the Board of Directors and Stockholders
of Sanmina Corporation:
We have audited in accordance with generally accepted auditing standards,
the financial statements included in Sanmina Corporation's annual report to
shareholders incorporated by reference in this Form 10-K, and have issued our
report thereon dated October 23, 1998. Our audit was made for the purpose of
forming an opinion on those statements taken as a whole. The schedule at Item
14(a)2 above is the responsibility of the Company's management and is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
San Jose, California
October 23, 1998
S-2
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -------------------------------------------------------------------
<S> <C>
10.27 Synthetic lease agreement.
11.1 Statement of Computation of Earnings Per Share
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 11.1
SANMINA CORPORATION
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
BASIC DILUTED
------- --------
<S> <C> <C>
YEAR ENDED SEPTEMBER 30, 1998
Net income............................................................ $68,151 $68,151
Add interest expense on convertible subordinated debentures, net of
tax................................................................. -- 3,676
------- --------
$68,151 $71,827
======= ========
Weighted average shares outstanding................................... 42,356 42,356
Net effect of dilutive stock options.................................. -- 2,618
Assumed conversion of subordinated debentures -- 5,426
------- --------
Common and common equivalent shares used in computing per share
amounts............................................................. 42,356 50,400
======= ========
Net income per share.................................................. $ 1.61 $ 1.43
======= ========
YEAR ENDED SEPTEMBER 30, 1997
Net income............................................................ $30,525 $30,525
Add interest expense on convertible subordinated debentures, net of
tax................................................................. -- 3,101
------- -------
$30,525 $33,626
======= =======
Weighted average shares outstanding................................... 40,432 40,432
Net effect of dilutive stock options.................................. -- 2,875
Assumed conversion of subordinated debentures......................... -- 6,119
------- -------
Common and common equivalent shares used in computing per share
amounts............................................................. 40,432 49,426
======= =======
Net income per share.................................................. 0.75 0.68
======= =======
YEAR ENDED SEPTEMBER 30, 1996
Net income............................................................ 36,565 36,565
Add interest expense on convertible subordinated debentures, net of
tax................................................................. -- 3,152
------- -------
$36,565 $39,717
======= =======
Weighted average shares outstanding................................... 39,356 39,356
Net effect of dilutive stock options.................................. -- 2,015
Assumed conversion of subordinated debentures......................... -- 6,119
Common and common equivalent shares used in computing per share ------ -------
amounts............................................................. 39,356 47,490
======= =======
Net income per share.................................................. $ 0.93 $ 0.84
======= =======
</TABLE>
<PAGE> 1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Sanmina Corporation ("Sanmina" or "the Company") is a leading independent
provider of customized integrated electronic manufacturing services ("EMS"),
including turnkey electronic assembly and manufacturing management services, to
original equipment manufacturers ("OEM") in the electronics industry. Sanmina's
electronics manufacturing services consist primarily of the manufacture of
complex printed circuit board assemblies using surface mount ("SMT") and
pin-through hole ("PTH") interconnection technologies, the manufacture of custom
designed backplane assemblies, fabrication of complex multi-layered printed
circuit boards, and testing and assembly of completed systems. In addition to
assembly, turnkey manufacturing management also involves procurement and
materials management, as well as consultation on printed circuit board design
and manufacturing. Sanmina, through its Sanmina Cable Systems ("SCS") subsidiary
(formerly known as Golden Eagle Systems), also manufactures custom cable and
wire harness assemblies for electronic industry OEMs. In addition, as part of
the Elexsys International ("Elexsys") acquisition completed in November 1997,
the Company acquired and currently operates a metal stamping and plating
business.
Sanmina's assembly plants are located in Northern California, Richardson, Texas,
Manchester, New Hampshire, Durham, North Carolina, Guntersville, Alabama, and
Dublin, Ireland. Sanmina's printed circuit board fabrication facilities are
located in Northern California, Southern California, Nashua, New Hampshire, and
Peterborough, England. SCS's manufacturing facility is located in Carrollton,
Texas. As a result of the Pragmatech Inc. ("Pragmatech") acquisition, completed
in February 1998, Sanmina added new assembly plants in Northern California. In
addition, as a result of Sanmina's recent acquisition of Altron Incorporated
("Altron"), Sanmina has added new fabrication and assembly plants in the Boston
Massachusetts area, Northern California, and Richardson, Texas.
Sanmina has pursued, and intends to continue to pursue, business acquisition
opportunities, particularly when these opportunities have the potential to
enable Sanmina to increase its net sales while maintaining operating margin, to
access new geographic markets, to implement Sanmina's vertical integration
strategy and/or to obtain facilities and equipment on terms more favorable than
those generally available in the market. In this regard, on September 2, 1998,
Sanmina entered into an Agreement and Plan of Merger with Altron providing for
the acquisition of Altron by Sanmina in a stock-for-stock merger transaction
under which each share of Altron Common Stock would be converted into 0.4545
shares of Sanmina Common Stock. The acquisition was completed November 30, 1998
and will be accounted for as a pooling-of-interest.
This report contains forward-looking statements within the meaning of Section
72A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Actual events and/or future results of operations may differ materially
from those contemplated by such forward-looking statements, as a result of the
factors described herein, and in the documents incorporated herein by reference,
including, in particular, those factors described under "Factors Affecting
Operating Results."
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain statements of
operations data expressed as a percentage of net sales.
<TABLE>
<CAPTION>
Years Ended September 30,
----------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 78.0 80.0 77.9
Gross profit 22.0 20.0 22.1
Operating expenses:
Selling, general and
administrative expenses 6.1 7.7 7.6
Amortization of goodwill 0.4 0.3 0.4
Plant closure costs 0.0 1.6 0.0
Merger costs 0.5 0.0 0.0
Total operating expenses 7.0 9.6 8.0
Operating income 15.0 10.4 14.1
Other expense, net 0.2 0.4 0.3
Provision for income taxes 5.4 4.6 4.4
Net income 9.4% 5.4% 9.4%
================================================================================
</TABLE>
Net Sales Net sales in fiscal 1998 increased 26.8% to $722.6 million from $569.8
million in fiscal 1997, which was an increase of 45.4% from fiscal 1996 sales of
$392.0 million. The increase in net sales for fiscal 1998 was due primarily to
increased shipments of EMS assemblies to both existing and new customers. The
increases in net sales for fiscal 1997 was the result of increased volumes of
business from established customers, the addition of several new major customers
during the year and the addition of customers resulting from acquisitions
completed during the year. EMS assembly revenues represented 84.3% of net sales
in 1998 as compared to 78.1% in 1997 and 69.5% in 1996. During these periods,
Sanmina's printed circuit board fabrication operations focused increasingly on
manufacturing printed circuit boards used in EMS assemblies manufactured by the
Company, rather than manufacturing "bare" boards for sale to third parties.
Growth in EMS assembly revenues during these periods was influenced by the
electronics industry trend towards outsourcing, expansion of the Company's
operations, both through acquisitions and Company-originated expansions, and a
generally positive economic environment in the telecommunications, networking
(data communications) and industrial and medical instrumentation segments of the
electronics industry. These segments continued to experience overall growth
during these periods.
22
<PAGE> 2
NET SALES
(in millions in dollars)
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
392.0 569.8 722.6
</TABLE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
(as a percentage of net sales)
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
7.6% 7.7% 6.1%
</TABLE>
GROSS MARGINS
(as a percentage of net sales)
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
22.1% 20.0% 22.0%
</TABLE>
Gross Margin Gross margin was 22.0%, 20.0%, and 22.1% in fiscal 1998, 1997, and
1996 respectively. The Company expects gross margins to continue to fluctuate
based on product mix and customer mix. The increase in gross margin for fiscal
1998 was due to the Company's ability to realize synergies associated with the
Elexsys acquisition. Gross margin decreased to 20.0% in fiscal 1997 from 22.1%
for fiscal 1996. The decline in gross margin was primarily the result of the
Elexsys acquisition which had a lower gross margin on a stand-alone basis. As
part of the Elexsys acquisition, Sanmina assumed certain backlog obligations
which, combined with the increased overhead associated with the acquisition,
negatively affected gross margins during fiscal 1997. Synergies achieved through
integration of acquired operations, including the former operations of Elexsys
have contributed to the increase in gross margins experienced in 1998. As the
integration of these operations is complete, the Company does not anticipate
achieving incremental gross margin improvements in future periods as a result of
synergies achieved in connection with these acquisitions. Due to increased
competition, product and customer mix, the Company may experience decreases in
gross margins. Due to the nature of the Altron operations, which are most
heavily concentrated in the Boston, Massachusetts area, and the gross margin
improvements achieved during fiscal 1998, the Company does not believe that
synergies which may be realized from the Altron acquisition will enable it to
achieve gross margin improvements during fiscal 1999.
Selling, General and Administrative Expenses Selling, general and administrative
expenses for fiscal 1998, 1997 and 1996 were $43.8 million, $ 44.0 million, and
$ 29.7 million respectively. The absolute dollar and percentage decreases in
selling, general and administrative expenses for fiscal 1998 were due to the
Company's ability to realize synergies associated with the Elexsys acquisition.
This also reflects the Company's strategy of seeking sales growth while
maintaining or reducing operating expenses as a percentage of net sales. The
absolute dollar increases in selling, general and administrative expenses from
fiscal 1996 to 1997 were primarily the result of increased expenditures to
support higher sales volume.
Amortization of Goodwill The Company incurred $2.9 million, $2.0 million and
$1.7 million in amortization expense for fiscal years 1998, 1997 and 1996
respectively. These amortization expenses reflect the amortization of goodwill
related to acquisitions, which were accounted for as purchase transactions,
including the January 1996 acquisition of SCS and the February 1998 acquisition
of Pragmatech.
Merger Costs In 1998, the Company recorded a charge of $3.9 million related to
the acquisition of Elexsys. In addition, in connection with the acquisition of
Altron, the Company anticipates recording a charge during the first quarter of
fiscal 1999.
Net Interest Expense In fiscal 1998, net interest expense was $0.7 million as
compared to net interest expense of $2.5 million and $1.3 million in fiscal 1997
and 1996, respectively. For fiscal 1998, the decrease in net interest expense
was the result of a decrease in outstanding debt. In the first quarter of fiscal
1998, the Company paid approximately $12.8 million of outstanding Elexsys debt.
In addition, in August 1998, $86.3 million of outstanding convertible
subordinated notes, issued by the Company in August 1995, were converted into
Common Stock as a result of a redemption call for such notes issued by the
Company. For fiscal 1997, the increase in net interest expense was a result of
interest expense on the $86.3 million of convertible subordinated notes, and a
decrease in short-term investments in fiscal 1997 compared to fiscal 1996. These
reduced short-term investment balances were due to a decline in the Company's
cash balances as a result of the use of cash to fund certain acquisitions and
capital improvement programs during fiscal 1997.
23
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Provision for Income Taxes For fiscal 1998, 1997 and 1996, the Company's
effective tax rate was 36.5%, 46.3% and 32.3%, respectively. The effective rate
in 1997 increased from fiscal 1996 because the fiscal 1997 losses of Elexsys
were not tax benefited. For fiscal 1998, the rate decreased as utilization of
net operating loss carryforwards of Elexsys were recognized.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its growth primarily through cash generated from
operations and financing transactions. In August 1995, the Company completed an
$86.3 million private placement of convertible debt. In August 1998, the notes
were called for redemption. The notes were converted to Sanmina's Common Stock
at a price of approximately $14.09, or approximately 70.94 shares of Sanmina's
Common Stock per $1,000 principal amount of Notes. Cash was paid in lieu of
fractional shares.
The Company generated cash from operating activities of $83.2 million, $55.1
million and $33.8 million in fiscal years 1998, 1997 and 1996, respectively.
These increases in cash generated from operations each year were primarily due
to the Company's increase in profitability.
Cash used for investing activities, including net purchases of short-term
investments, during fiscal 1998, 1997 and 1996 was $28.5 million, $56.0 million
and $114.8 million, respectively. Investing activities during 1998 included
$29.0 million in property, plant and equipment. Additionally, on February 23,
1998, the Company paid approximately $5.7 million in cash to acquire Pragmatech.
During fiscal 1997, investing activities included the November 1996 acquisition
of the assets of the former Comptronix Corporation for which the Company paid
cash of approximately $17.6 million, as well as investments in property, plant
and equipment of $41.9 million. Investing activities during 1996 included
investments in property, plant and equipment at the Company's EMS operations in
New Hampshire, Texas and North Carolina and equipment upgrades at the Company's
printed circuit board fabrication facilities.
Cash used for financing activities was $21.7 million in fiscal 1998. In fiscal
1998, the Company paid approximately $7.5 million in outstanding debt. The
payments for other long-term liabilities of $18.3 million, which included the
$12.8 million of outstanding Elexsys debt, were offset by the proceeds from
exercise of stock options and stock purchase rights of $9.7 million. Cash
provided by financing activities was $12.6 million and $3.5 million in fiscal
1997 and 1996, respectively. Financing activities in fiscal 1997 and 1996
consisted primarily of receipt of proceeds from exercise of stock options and
stock purchase rights.
The Company's future needs for financial resources include increases in working
capital to support anticipated sales growth and investment in manufacturing
facilities and equipment. Working capital was $227.5 million at September 30,
1998 and $182.0 million at September 30, 1997. The Company has evaluated and
will continue to evaluate possible business acquisitions. In this regard, the
Company anticipates incurring facilities related expenditures during fiscal
1999 in connection with the relocation of its San Jose, California area
assembly facilities and its corporate headquarters to a new campus facility.
The Company believes that its capital resources, together with cash generated
from operations, will be sufficient to meet its working capital and capital
expenditure requirements through at least fiscal 1999. The Company may seek to
raise additional capital through the issuance of either debt or equity
securities. Debt financing may require the Company to pledge assets as
collateral and comply with financial ratios and covenants. Equity financing may
result in dilution to stockholders.
YEAR 2000
Sanmina is subject to risks related to Year 2000 problems. Many currently
installed computer systems and software products are coded to accept only two
digit entries in the date code field. As the Year 2000 approaches, these code
fields will need to accept four digit entries to distinguish years beginning
with "19" from those beginning with "20." As a result, in less than two years,
computer systems and/or software products used by many companies may need to be
upgraded to comply with such Year 2000 requirements. Sanmina is currently
expending resources to review its products and services, as well as its internal
use software in order to identify and modify those products, services and
systems that are not Year 2000 compliant. Additionally, Sanmina is in the
process of evaluating the need for contingency plans with respect to Year 2000
requirements. The necessity of any contingency plan must be evaluated on a
case-by-case basis and will vary considerably in nature depending on the Year
2000 issue it may need to address. There can be no assurance however, that
Sanmina will be able to solve all potential Year 2000 issues. Sanmina's reliance
on its key suppliers, and therefore on the proper functioning of their
information systems and software, is increasing, and there can be no assurance
that another company's failure to address Year 2000 issues could not have an
adverse effect on Sanmina. Sanmina has initiated formal communications with each
of its significant suppliers and customers to determine the extent to which
Sanmina is vulnerable to those third parties' failure to remediate their own
Year 2000 issues. Sanmina is requesting that third party vendors represent their
products and services to be Year 2000 compliant and that they have a program to
test for Year 2000 compliance. However, the response of those third parties is
beyond Sanmina's control. To the extent that Sanmina does not receive adequate
responses by December 31, 1998, it is prepared to develop contingency plans,
with completion of these plans scheduled for no later than March 31, 1999. At
this time, Sanmina cannot estimate the additional cost, if any, that might
develop from such contingency plans. Breakdowns in Sanmina's computer systems
and applications, such as its manufacturing application software, its bar-coding
systems, and the computer chips embedded in its plant equipment, as well as
other
24
<PAGE> 4
Year 2000-related problems such as disruptions in the delivery of materials,
power, heat or water to Sanmina's facilities, could prevent Sanmina from being
able to manufacture and ship its products. Sanmina plans to replace or upgrade
or otherwise work around any of its date driven systems that are not Year 2000
compliant. Sanmina's Year 2000 Project Team will have compliance solutions or
work arounds planned by January 31, 1999, and intends to complete compliance
testing by June 30, 1999. If Sanmina fails to correct a material Year 2000
problem, its normal business activities and operations could be interrupted.
Such interruptions could materially and adversely affect Sanmina's results of
operations, liquidity and financial condition. To date, Year 2000 costs are not
considered by Sanmina to be material to its financial condition. Sanmina
currently estimates that, in order to complete Year 2000 compliance, Sanmina
will be required to incur expenditures of approximately $1.1 million.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In the first quarter of fiscal 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share." SFAS 128 requires the replacement of previously reported primary and
fully diluted earnings per share (EPS) as required by Accounting Principles
Board Opinion No. 15 (APB 15) with basic earnings per share and diluted earnings
per share.
Basic EPS was computed by dividing net income by the weighted average number of
shares of common stock outstanding for all periods presented. Diluted EPS
includes dilutive common stock equivalents, using the treasury stock method, and
assumes that the convertible debt instruments were converted into common stock,
if dilutive. As a result of the adoption of SFAS No. 128, the Company's reported
earnings per share were restated for all periods presented.
In June 1998, the Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities", was issued by
the Financial Accounting Standards Board. SFAS 133 requires certain accounting
and reporting standards for derivative instruments and hedging activities.
Management does not believe the adoption of SFAS No. 133 will have a material
impact on the Company's financial statement disclosures.
QUARTERLY RESULTS
The following table contains selected unaudited quarterly financial data for the
eight fiscal quarters in the period ended September 30, 1998. In management's
opinion, the unaudited data has been prepared on the same basis as the audited
information and includes all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the data for the periods
presented. The Company's results of operations have varied and may continue to
fluctuate significantly from quarter to quarter. Results of operations in any
period should not be considered indicative of the results to be expected from
any future period. In June 1998, the Company effected a two-for-one stock split
in the form of a stock dividend. Accordingly, all share and per share data has
been adjusted to retroactively reflect the stock split. Similarly, the merger
with Elexsys was accounted for as a pooling of interests, and therefore, all
prior periods presented were restated to combine the results of the two
companies.
<TABLE>
<CAPTION>
(in thousands, except
percentages and per share amounts)
Years Ended September 30,
----------------------------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
Quarter First Second Third Fourth First Second Third Fourth
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 159,107 $ 172,146 $ 197,139 $ 194,189 $ 125,174 $ 133,823 $ 150,198 $ 160,592
Gross profit 34,677 37,626 43,431 42,934 27,851 28,036 32,894 25,430
Gross margin 21.8% 21.9% 22.0% 22.1% 22.2% 21.0% 21.9% 15.8%
Operating income 20,170 26,433 30,820 30,604 18,429 17,778 21,149 1,963
Net income/(loss) 12,508 16,873 19,381 19,389 11,813 10,681 13,419 (5,388)
Net income/(loss)
per share (diluted) $ 0.27 $ 0.35 $ 0.40 $ 0.41 $ 0.26 $ 0.23 $ 0.29 $ (0.13)
Shares used in computing
per share amounts 50,227 50,127 50,727 50,616 48,670 49,188 49,348 40,920
Common stock prices:
High $ 44.00 $ 40.19 $ 46.88 $ 47.56 $ 27.50 $ 32.00 $ 33.00 $ 45.06
Low $ 28.72 $ 26.69 $ 33.88 $ 23.50 $ 19.06 $ 20.06 $ 21.88 $ 30.55
===============================================================================================================================
</TABLE>
25
<PAGE> 5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
FACTORS AFFECTING OPERATING RESULTS
In addition to the information set forth in this Management's Discussion and
Analysis of Financial Condition and Results of Operations and in the Company's
report on Form 10-K for the fiscal year ended September 30, 1998, the following
factors should be carefully considered by prospective investors in the Company's
securities.
Sanmina is heavily dependent on the electronics industry. Sanmina's business is
heavily dependent on the health of the electronics industry. Sanmina's customers
are manufacturers in the telecommunications, networking (data communications),
industrial and medical instrumentation and high-end computer technology segments
of the electronics industry. These industry segments, and the electronics
industry as a whole, are subject to rapid technological change and product
obsolescence. Sanmina's customers can discontinue or modify products containing
components manufactured by Sanmina. Such discontinuance or modification could
adversely affect Sanmina's results of operations. The electronics industry is
also subject to economic cycles and has in the past experienced, and is likely
in the future to experience, recessionary periods. A general recession in the
electronics industry could have a material adverse effect on Sanmina's business,
financial condition and results of operations. Sanmina typically does not obtain
long-term volume purchase contracts from its customers and has recently
experienced reduced lead times in customer orders. Customer orders may be
canceled and volume levels may be changed or delayed. In particular, Sanmina
experienced certain cancellation and rescheduling of shipment dates of customer
orders during the fourth fiscal quarter of 1998. The timely replacement of
canceled, delayed or reduced contracts with new business cannot be assured.
Sanmina's results of operations can be affected by a variety of factors.
Sanmina's results of operations have varied and may continue to fluctuate
significantly from period to period, including on a quarterly basis. Sanmina's
operating results are affected by a number of factors. These factors include
timing of orders from major customers, mix of product ordered by and shipped to
major customers, the volume of orders as related to Sanmina's capacity, the
ability of Sanmina to effectively manage inventory and fixed assets, and the
ability of Sanmina to time expenditures in anticipation of future sales.
Sanmina's results are also affected by the mix of products between backplane
assemblies and printed circuit boards. Sanmina's results are also affected by
general economic conditions in the electronics industry. Sanmina's results can
also be significantly influenced by development and introduction of new products
by Sanmina's customers. From time to time, Sanmina experiences changes in the
volume of sales to each of its principal customers, and operating results may be
affected on a period-to-period basis by these changes. Sanmina's customers
generally require short delivery cycles, and a substantial portion of Sanmina's
backlog is typically scheduled for delivery within 120 days. Quarterly sales and
operating results therefore depend in large part on the volume and timing of
bookings received during the quarter, which are difficult to forecast. Sanmina's
backlog also affects its ability to plan production and inventory levels, which
could lead to fluctuations in operating results. In addition, a significant
portion of Sanmina's operating expenses are relatively fixed in nature and
planned expenditures are based in part on anticipated orders. Any inability to
adjust spending quickly enough to compensate for any revenue shortfall may
magnify the adverse impact of such revenue shortfall on Sanmina's results of
operations. Results of operations in any period should not be considered
indicative of the results to be expected for any future period. In addition,
fluctuations in operating results may also result in fluctuations in the price
of Sanmina Common Stock.
Sanmina experiences customer concentration. A small number of customers are
responsible for a significant portion of Sanmina's net sales. During fiscal 1998
and 1997, sales to Sanmina's ten largest customers accounted for 59% and 52%,
respectively, of Sanmina's net sales. For fiscal 1998, sales to Cisco Systems
and DSC Communications each represented more than 10% of the Company's net
sales. For fiscal 1997, sales to DSC represented more than 10% of the Company's
net sales. Although there can be no assurance that Sanmina's principal customers
will continue to purchase products and services from Sanmina at current levels,
if at all, Sanmina expects to continue to depend upon its principal customers
for a significant portion of its net sales. Sanmina's customer concentration
could increase or decrease, depending on future customer requirements, which
will be dependent in large part on market conditions in the electronics industry
segments in which Sanmina's customers participate. The loss of one of more major
customers or declines in sales to major customers could have a material adverse
effect on Sanmina's business, financial condition and results of operations.
Sanmina is subject to risks associated with its strategy of acquisitions and
expansions. Sanmina has, for the past several fiscal years, pursued a strategy
of growth. This growth has come in part through acquisitions. These acquisitions
have involved both acquisitions of entire companies, such as the June 1995
acquisition of Assembly Solutions in Manchester, New Hampshire, the January 1996
acquisition of Golden Eagle Systems, now known as Sanmina Cable Systems, the
November 1997 merger with Elexsys, the February 1998 acquisition of Pragmatech
and the November 1998 merger with Altron. In addition, Sanmina has in other
instances acquired selected assets, principally equipment, inventory and
customer contracts and, in certain cases, facilities or facility leases.
Acquisitions of this nature completed by Sanmina include the November 1996
acquisitions of the Guntersville, Alabama operations of Comptronix Corporation
and certain assets of the custom manufacturing services division of Lucent
Technologies. In addition to these acquisitions,
26
<PAGE> 6
Sanmina has also grown its operations through internal expansion, such as the
opening of its Richardson, Texas assembly facility, its Durham, North Carolina
assembly facility and its Dublin, Ireland assembly facility. Acquisitions of
companies and businesses and expansion of operations involves certain risks,
including the following:
- - the potential inability to successfully integrate acquired operations and
businesses or to realize anticipated synergies, economies of scale or other
value,
- - diversion of management's attention,
- - difficulties in scaling up production at new sites and coordinating
management of operations at new sites,
- - loss of key employees of acquired operations.
Accordingly, Sanmina may experience problems in integrating the Altron
operations or operations associated with any future acquisition. Accordingly,
there can be no assurance that the merger with Altron or any other future
acquisition will result in a positive contribution to Sanmina's results of
operations. Furthermore, there can be no assurance that Sanmina will realize
value from any such acquisition, which equals or exceeds the consideration paid.
In particular, the successful combination of Sanmina and Altron will require
substantial effort from each company, including the integration and coordination
of sales and marketing efforts. The diversion of the attention of management and
any difficulties encountered in the transition process, including, the
interruption of, or a loss of momentum in, Altron's activities, problems
associated with integration of management information and reporting systems, and
delays in implementation of consolidation plans, could have an adverse impact on
Sanmina's ability to realize the anticipated benefits of the Merger. Therefore,
there can be no assurance that Sanmina will realize any of these anticipated
benefits. In addition, there can be no assurance that Sanmina will realize
anticipated strategic and other benefits from expansion of existing operations
to new sites. Any such problems could have a material adverse effect on
Sanmina's business, financial condition and results of operations. In addition,
future acquisitions by Sanmina may result in dilutive issuances of equity
securities, the incurrence of additional debt, large one-time write-offs and the
creation of goodwill or other intangible assets that could result in
amortization expense. These factors could have a material adverse effect on
Sanmina's business, financial condition and results of operations.
Sanmina is subject to competition and technological change. The electronic
interconnect product industry is highly fragmented and it is characterized by
intense competition. Sanmina competes in the technologically advanced segment of
the interconnect product market, which is also highly competitive but is much
less fragmented than the industry as a whole. Sanmina's competitors consist
primarily of larger manufacturers of interconnect products, and some of these
competitors have greater manufacturing and financial resources than Sanmina as
well as greater SMT assembly capacity. As a participant in the interconnect
industry, Sanmina must continually develop improved manufacturing processes to
accommodate its customers' needs for increasingly complex products. During
periods of recession in the electronics industry, Sanmina's competitive
advantages in the areas of quick turnaround manufacturing and responsive
customer service may be of reduced importance to electronics OEMs, who may
become more price sensitive. In addition, captive interconnect product
manufacturers seek orders in the open market to fill excess capacity, thereby
increasing price competition. Sanmina may be at a competitive disadvantage with
respect to price when compared to manufacturers with lower cost structures,
particularly those with offshore facilities where labor and other costs are
lower.
Environmental matters are a key consideration in Sanmina's business. Proper
waste disposal is a major consideration for printed circuit board manufacturers
because metals and chemicals are used in the manufacturing process. Water used
in the printed circuit board manufacturing process must be treated to remove
metal particles and other contaminants before it can be discharged into the
municipal sanitary sewer system. In addition, although the electronics assembly
process generates significantly less waste water than printed circuit board
fabrication, maintenance of environmental controls is also important in the
electronics assembly process. Each of Sanmina's printed circuit board and
electronics assembly plants has personnel responsible for monitoring
environmental compliance. These individuals report to Sanmina's director of
environmental compliance, who has overall responsibility for environmental
matters. Each plant operates under effluent discharge permits issued by the
appropriate governmental authority. These permits must be renewed periodically
and are subject to revocation in the event of violations of environmental laws.
There can be no assurance that violations will not occur in the future as a
result of human error, equipment failure or other causes. In the event of a
future violation of environmental laws, Sanmina could be held liable for damages
and for the costs of remedial actions and could be also subject to revocation of
effluent discharge permits. Any such revocation could require Sanmina to cease
or limit production at one or more of its facilities, thereby having an adverse
impact on Sanmina's results of operations. Sanmina is also subject to
environmental laws relating to the storage, use and disposal of chemicals, solid
waste and other hazardous materials as well as air quality regulations.
Furthermore, environmental laws could become more stringent over time, and the
costs of compliance with and penalties associated with violation of more
stringent laws could be substantial.
Sanmina is subject to certain environmental contingencies at former Elexsys
International sites. In November 1997, Sanmina acquired Elexsys, which, by
virtue of such acquisition, became a wholly-owned subsidiary of Sanmina. Several
facilities owned or occupied by Elexsys at the time of the acquisition, or
formerly owned or occupied by Elexsys or companies acquired by Elexsys,
27
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
had either soil contamination or contamination of groundwater underneath or near
the facility including the following: Contamination was discovered at Elexsys'
Irvine, California facility in 1989 and Elexsys voluntarily installed a
groundwater remediation system at the facility in 1994. The California Regional
Water Quality Control Board has requested that Sanmina extend the investigation
of the groundwater contamination at the Irvine facility to off-site areas. It is
unknown what the results of this additional investigation will be and whether
any additional remediation activities will be required. Sanmina has been
required by the California Department of Toxic Substances Control to undertake
investigation of soil and/or groundwater at certain facilities formerly owned or
occupied by a predecessor company to Elexsys in Mountain View, California.
Depending upon the results of this soil sampling and groundwater testing,
Sanmina could be ordered to undertake soil and/or groundwater cleanup. To date,
Sanmina has not been ordered to undertake any soil or groundwater cleanup
activities at the Mountain View facilities, and does not believe any such
activities should be required. Test results received to date are not sufficient
to enable Sanmina to determine whether or not such cleanup activities are likely
to be mandated.
Contamination has also been discovered at other current and former Elexsys
facilities and has been reported to the relevant regulatory agencies. No
remediation or further investigation of such contamination has been required by
regulatory agencies. To date, the cost of the various investigations and the
cost of operating the remediation system at the Irvine facility have not been
material to Sanmina's financial condition. However, in the event Sanmina is
required to undertake additional groundwater or soil cleanup, the costs of such
cleanup are likely to be substantial. Sanmina is currently unable to estimate
the amount of such soil and groundwater cleanup costs because no soil or
groundwater cleanup has been ordered and Sanmina cannot determine from available
test results what remediation activities, if any, are likely to be required.
Sanmina believes, based on the limited information currently available, that the
cost of any groundwater or soil clean-up that may be required would not have a
material adverse effect on Sanmina's business, financial condition and results
of operations. Nevertheless, the process of remediating contaminated soil and
groundwater is costly, and if Sanmina is required to undertake substantial
remediation activities at one or more of the former Elexsys facilities, there
can be no assurance that the costs of such activities costs would not have a
material adverse effect on Sanmina's business, financial condition and results
of operations.
Altron was advised in 1993 by Olin Corporation that contamination resulting from
activities of prior owners of property owned by Olin Corporation and located
close to the Altron manufacturing plant in Wilmington, Massachusetts, had
migrated under the Altron plant. Olin has assumed full responsibility for any
remediation activities that may be required and has agreed to indemnify and hold
Altron harmless from any and all costs, liabilities, fines, penalties, charges
and expenses arising from and relating to any action or requirement, whether
imposed by statute, ordinance, rule, regulation, order, decree or by general
principles of law to remediate, clean up or abate contamination emanating from
the Olin site. Although the Company believes that Olin's assumption of
responsibility will result in no remediation cost to Altron from the
contamination, there can be no assurance that Altron will not be subject to some
costs regarding this matter, but Altron does not anticipate that such costs, if
any, will be material to its financial condition.
Sanmina's international operations involve additional risks. Sanmina opened its
first overseas facility, located in Dublin, Ireland, in June 1997. In addition,
Sanmina has obtained a printed circuit board fabrication facility in
Pererborough, England as a result of the acquisition of Elexsys. A number of
risks are inherent in international operations and transactions. International
sales and operations may be limited or disrupted by the imposition of government
controls, export license requirements, political instability, trade
restrictions, changes in tariffs, and difficulties in staffing, coordinating
communications among and managing international operations. Additionally,
Sanmina's business, financial condition and results of operations may be
adversely affected by fluctuations in international currency exchange rates as
well as increases in duty rates, difficulties in obtaining export licenses,
constraints on its ability to maintain or increase prices, and competition.
There can be no assurance that Sanmina will realize the anticipated strategic
benefits of its expansion in Ireland or that Sanmina's international operations
will contribute positively to Sanmina's business, financial condition and
results of operations. Furthermore, difficulties encountered in scaling up
production at overseas facilities or in coordinating Sanmina's United States and
international operations, as well as any failure of the international operations
to realize anticipated revenue growth, could, individually or in the aggregate,
have a material adverse effect on Sanmina's business, financial condition and
results of operations.
Possible Volatility of Stock Price. The trading price of the Sanmina Common
Stock has been and could in the future be subject to significant fluctuations in
response to variations in quarterly operating results, developments in the
electronics industry, general economic conditions, changes in securities
analysts' recommendations regarding Sanmina's securities and other factors. In
addition, the stock market in recent years has experienced significant price and
volume fluctuations which have affected the market prices of technology
companies and which have often been unrelated to or disproportionately impacted
by the operating performance of such companies. These broad market fluctuations
may adversely affect the market price of Sanmina's Common Stock.
28
<PAGE> 8
STATEMENT OF FINANCIAL RESPONSIBILITY
To the Stockholders:
The management of Sanmina is responsible for the preparation of the accompanying
consolidated financial statements. They have been prepared in conformity with
generally accepted accounting principles appropriate in the circumstances and,
as such, include estimates and judgments of management. Management also prepared
the other information in the annual report and is responsible for its accuracy
and consistency with the financial statements. The consolidated financial
statements for the years ended September 30, 1998, 1997, and 1996 were audited
by Arthur Andersen LLP, independent public accountants.
The Company maintains an accounting system and related internal controls that it
believes are sufficient to provide reasonable assurance that assets are
safeguarded, that transactions are executed and recorded in accordance with
management's authorization, and that the financial records are reliable for
preparing financial statements. The concept of reasonable assurance is based on
the recognition that the cost of the system of internal control must be related
to the benefits derived and that the balancing of those factors requires
estimates and judgments. The system is monitored regularly by the Company for
compliance. In addition, solely for the purposes of planning and performing its
audit of the Company's consolidated financial statements, Arthur Andersen LLP
obtained an understanding of, and selectively tested, certain aspects of the
Company's system of internal control.
The Board of Directors has an Audit Committee comprised solely of outside
directors. The Committee meets with management and the independent public
accountants in connection with its review of matters relating to the annual
financial statements, the Company's system of internal accounting controls and
the services of the independent public accountants. Arthur Andersen LLP has full
and free access to meet with the Committee, with or without management
representatives present, to discuss the results of its audits, the adequacy of
internal accounting controls and the quality of financial reporting.
November 1, 1998
/s/ JURE SOLA /s/ RANDY W. FURR /s/ BERNARD J. WHITNEY
Jure Sola Randy W. Furr Bernard J. Whitney
Chairman of the Board and President and Executive Vice
Chief Executive Officer Chief Operating Officer President and Chief
Financial Officer
November 1, 1998
29
<PAGE> 9
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of September 30,
------------------------
(in thousands, except per share amounts) 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 75,339 $ 42,345
Short-term investments 77,284 80,804
Accounts receivable, net of allowance for doubtful accounts of $4,669 and $3,620 96,930 77,333
Inventories 68,953 61,173
Deferred income taxes 19,389 9,115
Prepaid expenses 4,431 6,344
- ---------------------------------------------------------------------------------------------------------------------
Total current assets 342,326 277,114
- ---------------------------------------------------------------------------------------------------------------------
Property and Equipment:
Machinery and equipment 182,901 142,126
Furniture and fixtures 4,110 3,536
Leasehold improvements 22,199 20,281
Land and building 15,202 16,855
- ---------------------------------------------------------------------------------------------------------------------
224,412 182,798
Less: Accumulated depreciation and amortization 116,531 93,624
- ---------------------------------------------------------------------------------------------------------------------
Net property and equipment 107,881 89,174
- ---------------------------------------------------------------------------------------------------------------------
Other Assets:
Intangibles, net of accumulated amortization of $6,917 and $4,094 16,053 7,444
Deposits and other 1,320 2,122
- ---------------------------------------------------------------------------------------------------------------------
Total assets $467,580 $375,854
=====================================================================================================================
Liabilities and Stockholders' Equity
Current Liabilities:
Current portion of long-term debt $ 2,865 $ 8,840
Accounts payable 68,815 56,329
Accrued compensation and related liabilities 16,485 11,864
Other accrued liabilities 15,164 15,893
Income taxes payable 11,517 2,217
- ---------------------------------------------------------------------------------------------------------------------
Total current liabilities 114,846 95,143
- ---------------------------------------------------------------------------------------------------------------------
Long-term Liabilities:
Convertible subordinated debt 5,767 98,250
Other liabilities 2,875 10,684
- ---------------------------------------------------------------------------------------------------------------------
Total long-term liabilities 8,642 108,934
- ---------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (notes 5 and 7)
Stockholders' Equity:
Preferred stock, $.01 par value:
Authorized: 5,000 shares
Outstanding: none -- --
Common stock, $.01 par value:
Authorized: 75,000 shares
Outstanding: 48,265 shares and 40,950 shares 483 410
Additional paid-in capital 194,591 90,805
Unrealized holding gain on investments and foreign currency translation adjustment 386 81
Retained earnings 148,632 80,481
- ---------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 344,092 171,777
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $467,580 $375,854
=====================================================================================================================
</TABLE>
See accompanying notes.
30
<PAGE> 10
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------------------
(in thousands, except per share amounts) 1998 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 722,581 $ 569,787 $ 391,982
Cost of sales 563,913 455,576 305,227
- ------------------------------------------------------------------------------------------------
Gross profit 158,668 114,211 86,755
- ------------------------------------------------------------------------------------------------
Operating Expenses:
Selling, general and administrative 43,845 44,010 29,703
Amortization of goodwill 2,851 2,006 1,723
Provision for plant closing costs -- 8,876 --
Merger costs 3,945 -- --
- ------------------------------------------------------------------------------------------------
Total operating expenses 50,641 54,892 31,426
- ------------------------------------------------------------------------------------------------
Operating income 108,027 59,319 55,329
Other income (expense), net (688) (2,462) (1,345)
- ------------------------------------------------------------------------------------------------
Income before provision for income taxes 107,339 56,857 53,984
Provision for income taxes 39,188 26,332 17,419
- ------------------------------------------------------------------------------------------------
Net income $ 68,151 $ 30,525 $ 36,565
================================================================================================
Earnings per share:
Basic $ 1.61 $ 0.75 $ 0.93
Diluted 1.43 0.68 0.84
Shares used in computing per share amounts:
Basic 42,356 40,432 39,356
Diluted 50,400 49,426 47,490
</TABLE>
See accompanying notes.
31
<PAGE> 11
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional
-------------------- Paid-in Retained
(in thousands) Shares Amount Capital Earnings Other Total
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1995 38,730 $ 387 $ 67,333 $ 13,391 $ (22) $ 81,089
Exercise of common stock options 604 6 2,199 -- -- 2,205
Issuance of common stock under
employee stock purchase plan 206 2 1,489 -- -- 1,491
Issuance of common stock
for businesses acquired 378 5 5,562 -- -- 5,567
Unrealized holding gain
on investments -- -- -- -- 19 19
Income tax benefit of disqualified
dispositions -- -- 1,301 -- -- 1,301
Net income -- -- -- 36,565 -- 36,565
- --------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1996 39,918 400 77,884 49,956 (3) 128,237
Exercise of common stock options 820 8 5,852 -- -- 5,860
Issuance of common stock under
employee stock purchase plan 212 2 2,896 -- -- 2,898
Cumulative translation adjustment -- -- -- -- 42 42
Unrealized holding gain
on investments -- -- -- -- 42 42
Income tax benefit of disqualified
dispositions -- -- 4,173 -- -- 4,173
Net income -- -- -- 30,525 -- 30,525
- --------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1997 40,950 410 90,805 80,481 81 171,777
Exercise of common stock options 1,018 10 5,778 -- -- 5,788
Issuance of common stock under
employee stock purchase plan 178 2 3,923 -- -- 3,925
Conversion of subordinated debt 6,119 61 86,189 -- -- 86,250
Cumulative translation adjustment -- -- -- -- 159 159
Unrealized holding gain
on investments -- -- -- -- 146 146
Income tax benefit of disqualified
dispositions -- -- 7,896 -- -- 7,896
Net income -- -- -- 68,151 -- 68,151
- --------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1998 48,265 $ 483 $194,591 $148,632 $ 386 $344,092
==============================================================================================================
</TABLE>
See accompanying notes.
32
<PAGE> 12
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------------
(in thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 68,151 $ 30,525 $ 36,565
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization 27,284 21,320 13,554
Provision for plant closing costs -- 8,876 --
Provision for doubtful accounts 2,001 505 525
(Gain) loss on disposal of fixed assets (773) 124 --
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable (16,629) (20,782) (8,118)
Inventories (3,833) (13,423) (12,066)
Prepaid expenses, deposits and other 488 -- (168)
Accounts payable and accrued liabilities (1,325) 30,034 3,789
Income tax accounts 7,876 (2,115) (246)
- ----------------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 83,240 55,064 33,835
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (103,020) (123,416) (169,739)
Proceeds from maturity of short-term investments 106,591 128,028 91,201
Cash paid for property and equipment (28,987) (41,912) (29,650)
Cash paid for businesses acquired (5,666) (18,879) (6,687)
Proceeds from sale of assets 2,554 216 27
- ----------------------------------------------------------------------------------------------------------------------------
Cash used for investing activities (28,528) (55,963) (114,848)
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt -- 8,033 118
Proceeds (payments) on line of credit, net (7,498) (1,543) 516
Repurchase of convertible debentures (5,681) -- --
Payments of long-term liabilities (18,250) (2,647) (866)
Proceeds from sale of common stock, net of issuance costs 9,711 8,758 3,695
- ----------------------------------------------------------------------------------------------------------------------------
Cash provided by (used for) financing activities (21,718) 12,601 3,463
- ----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 32,994 11,702 (77,550)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 42,345 30,643 108,193
- ----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 75,339 $ 42,345 $ 30,643
============================================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year:
Interest $ 6,162 $ 6,775 $ 6,097
Income taxes $ 31,270 $ 28,472 $ 16,966
NON-CASH FINANCING INFORMATION:
Conversion of subordinated debt to equity $ 86,250 $ -- $ --
</TABLE>
See accompanying notes.
33
<PAGE> 13
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION OF THE COMPANY
Sanmina Corporation (the "Company") was incorporated in Delaware in 1989 and is
a leading independent provider of customized integrated electronics
manufacturing services, including turnkey electronic assembly and manufacturing
management services to original equipment manufacturers. Sanmina's services
consist primarily of the manufacture of complex printed circuit board assemblies
using surface mount and pin-through hole inter-connection technologies, the
manufacture of custom-designed backplane assemblies, fabrication of complex
multi-layered printed circuit boards, the manufacture of custom cable and wire
harness assemblies, and testing and assembly of completed systems. In addition,
Sanmina provides procurement and materials management, as well as consultation
on board design and manufacturing. The Company's manufacturing plants are
located in California, Texas, New Hampshire, North Carolina, Alabama, Ireland,
and England.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All intercompany
accounts and transactions have been eliminated.
Use of Estimates The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
Cash Equivalents The Company considers all highly liquid investments purchased
with an original maturity of three months or less to be cash equivalents.
Short Term Investments The Company's investments are classified as available for
sale and are recorded at their fair value, as determined by quoted market
prices, with any unrealized gains or losses classified as a separate component
of stockholders' equity. Upon sale of the investments, any previously unrealized
gains or losses are recognized in results of operations. The specific
identification method is used to determine the cost of securities sold. Realized
gains and losses have not been material to date. As of September 30, 1998 the
difference between the aggregate fair value and cost basis was a net unrealized
gain of $207,336. The Company has the intent and ability to liquidate the
investments prior to the maturity period and, as such, has classified its
investments as short-term investments. The value of the Company's investments by
major security type is as follows (in thousands):
<TABLE>
<CAPTION>
Amortized Aggregate Unrealized Unrealized
Cost Fair Value Gain Loss
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
As of September 30, 1998
U.S. government and agency securities $ 25,306 $ 25,384 $ 79 $ (1)
State and municipal securities 50,964 51,018 55 (1)
U.S. corporate and bank debt 31,140 31,215 77 (2)
- ------------------------------------------------------------------------------------------------------
$107,410 $107,617 $ 211 $ (4)
======================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Amortized Aggregate Unrealized Unrealized
Cost Fair Value Gain Loss
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
As of September 30, 1997
U.S. government and agency securities $ 16,973 $ 16,990 $ 16 --
State and municipal securities 46,786 46,809 23 --
U.S. corporate and bank debt 36,439 36,460 22 (1)
- ------------------------------------------------------------------------------------------------------
$100,198 $100,259 $ 61 $ (1)
======================================================================================================
</TABLE>
Approximately $30.3 million and $19.5 million of the total investments in debt
securities as of September 30, 1998 and 1997 respectively, are included in cash
and cash equivalents; the remaining balance is classified as short-term
investments. As of September 30, 1998, debt securities with a fair value of
$54.5 million mature within one year and $53.1 million mature beyond one year.
Inventories Inventories are stated at the lower of cost (first-in, first-out
method) or market. Cost includes labor, material and manufacturing overhead. The
components of inventories are as follows (in thousands):
<TABLE>
<CAPTION>
As of September 30,
-----------------------------
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $39,320 $35,253
Work-in-process 16,677 13,503
Finished goods 12,956 12,417
- --------------------------------------------------------------------------------
$68,953 $61,173
================================================================================
</TABLE>
Property and Equipment Property and equipment are stated at cost or, in the case
of property and equipment acquired through business combinations, at fair value
based upon the allocated purchase price at the acquisition date. Depreciation
and amortization are provided on a straight-line basis over the estimated useful
lives of the related assets (three to five years or twenty-five years, in the
case of buildings) or, in the case of leasehold improvements, over the remaining
term of the related lease, if shorter.
Intangibles Intangibles arising from the Company's acquisitions (see Note 6) are
amortized on a straight-line basis over the estimated useful life of five to ten
years.
Revenue Recognition The Company generally recognizes revenue from manufacturing
services at the time of product ship-
34
<PAGE> 14
ment. Where appropriate, provisions are made at that time for estimated warranty
and return costs.
Net Income Per Share Basic earnings per share was computed by dividing net
income by the weighted average number of shares of common stock outstanding.
Diluted earnings per share includes dilutive common stock equivalents, using the
treasury stock method, and assumes that the convertible debt instruments were
converted into common stock, if dilutive. As a result of the adoption of SFAS
No. 128, the Company's reported earnings per share were restated for all periods
presented (see Note 3).
Stock Based Compensation Effective October 1, 1996, the Company adopted the
disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." In accordance with the provisions of SFAS 123, the Company
continues to apply Accounting Principals Board (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations in accounting for
its stock option plans.
New Accounting Standards In February 1997, FASB issued SFAS No. 129, "Disclosure
of Information about Capital Structure," which will be adopted by the Company in
fiscal 1999. SFAS 129 requires companies to disclose certain information about
their capital structure. SFAS 129 will not have a material impact on the
Company's financial statement disclosures.
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income." SFAS
No. 130 establishes standards for reporting and display of comprehensive income
and its components. SFAS 130 is effective for fiscal year 1999. Management does
not believe the adoption of SFAS 130 will have a material impact on the
Company's financial statement disclosures.
In June 1997, FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS 131 introduces a new model for segment
reporting, called the "management approach." SFAS 131 is effective for fiscal
year 1999. Management believes the adoption of SFAS 131 will increase its
disclosure requirements of operations of the Company.
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities". SFAS 133 requires that derivative instruments be
recorded in the balance sheet at their fair market value, with changes in the
fair value recorded in the income statement unless specific hedging criteria is
met. Management does not believe the adoption of SFAS 133 will have a material
impact on the Company's financial statement disclosures.
NOTE 3. EARNINGS PER SHARE
In the first quarter of fiscal 1998, the Company adopted the provisions of SFAS
No. 128, "Earnings Per Share." SFAS 128 requires the replacement of previously
reported primary and fully diluted earnings per share (EPS) as required by APB
Opinion No. 15 (APB 15) with basic earnings per share and diluted earnings per
share.
Basic EPS was computed by dividing net income by the weighted average number of
shares of common stock outstanding during fiscal 1998, 1997, and 1996. Diluted
EPS includes dilutive common stock equivalents, using the treasury stock method,
and assumes that the convertible debt instruments were converted into common
stock upon issuance, if dilutive. 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,
except per share amounts) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $68,151 $30,525 $36,565
Add back after-tax interest
expense for convertible
subordinated debt 3,676 3,101 3,152
- --------------------------------------------------------------------------------
Income for calculating
earnings per share $71,827 $33,626 $39,717
================================================================================
Weighted average number
of shares outstanding
during the period 42,356 40,432 39,356
Applicable number of
shares for stock options
outstanding for the period 2,618 2,875 2,015
Weighted average number
of shares if convertible
subordinated
debt were converted 5,426 6,119 6,119
- --------------------------------------------------------------------------------
Weighted average
number of shares 50,400 49,426 47,490
- --------------------------------------------------------------------------------
Diluted earnings per share $ 1.43 $ 0.68 $ 0.84
================================================================================
</TABLE>
NOTE 4. CONVERTIBLE SUBORDINATED DEBT
On August 16, 1995, the Company issued $86.3 million of 5.5% convertible
subordinated notes (the "Notes") due on August 15, 2002. The notes were
convertible into common stock, at the option of the note holder, at a conversion
price of approximately $14.09 per share, after giving effect to stock splits,
subject to adjustments in certain events. The notes were subordinated in right
of payment to all existing and future senior indebtedness, as defined, by the
Company. The notes were redeemable at the option of the Company on or after
August 15, 1998, initially at 103.143% of the face value and at decreasing
prices thereafter to 100% at maturity, in each case together with accrued
interest. Interest was payable semi-annually on February 15 and August 15. On
August 19, 1998, the Company called for redemption of the notes which
represented $86.3 million in debt. All note holders elected to convert their
notes to equity.
On February 11, 1987, Elexsys issued $32,000,000 of 5.5% convertible
subordinated debentures (the "Debentures") due on March 1, 2012. The Debentures
are convertible into shares of common stock at $59.85, after the effect of the
merger and stock split, subject to adjustment under certain conditions. The
Debentures are redeemable by the Company at declining premiums prior to March 1,
1997 and thereafter at 100 percent of the principal amount. The Debentures are
also redeemable through the operation of a sinking fund at 100 percent of the
principal amount. Interest is payable semi-annually on September 1 and March 1
of each year. Mandatory annual sinking fund payments, sufficient to retire 5
percent of the aggregate principal amount of the Debentures issued, were to be
made on each March 1 commencing in 1997. As a result of two exchanges of common
stock for $16 million and $4 million of the Debentures in fiscal 1994 and fiscal
1995, respectively, the Company now has sinking fund credits available to offset
these obligations for twelve and one-half years, thus no sinking fund payments
will be required until 2009. In addition, the Company
35
<PAGE> 15
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
repurchased approximately $6.2 million (including premiums) in Debentures during
fiscal 1998. The Debentures are subordinated to all senior indebtedness of the
Company.
NOTE 5. COMMITMENTS
The Company leases its facilities under operating leases expiring at various
dates through October 2010. The Company is responsible for utilities,
maintenance, insurance and property taxes under the leases. Minimum future lease
payments under non-cancelable operating leases are approximately as follows (in
thousands):
<TABLE>
<CAPTION>
Years Ending September 30,
- --------------------------------------------------------------------------------
<S> <C>
1999 $ 6,657
2000 5,305
2001 3,684
2002 3,052
2003 2,154
Thereafter 5,806
- --------------------------------------------------------------------------------
$26,658
================================================================================
</TABLE>
Rent expense under operating leases was approximately $5.0 million, $5.1 million
and $4.9 million for the years ended September 30, 1998, 1997 and 1996,
respectively.
In November 1998, the Company entered into an operating lease agreement for its
corporate headquarters and certain of its assembly facilities. The campus
facility, approximately 330,000 square feet, is located in San Jose, California.
NOTE 6. ACQUISITIONS
In November 1997, the Company acquired Elexsys International, Inc. ("Elexsys")
in a merger transaction. Under the terms of the merger agreement, the Company's
common stock was exchanged for all of Elexsys' outstanding common stock.
Approximately 3.3 million shares of common stock were issued to acquire Elexsys.
The merger was accounted for as a pooling of interests, and therefore, all prior
periods presented were restated to combine the results of the two companies. A
reconciliation of the financial statements for the twelve months ended
September 30, 1997 and 1996, to previously reported information, is as follows
(in thousands):
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Revenue:
Sanmina $ 405,212 $ 265,076
Elexsys 164,575 126,906
- --------------------------------------------------------------------------------
Combined $ 569,787 $ 391,982
================================================================================
Net Income (loss):
Sanmina $ 40,902 $ 28,095
Elexsys (10,377) 8,470
- --------------------------------------------------------------------------------
Combined $ 30,525 $ 36,565
================================================================================
</TABLE>
On February 23, 1998, the Company acquired Pragmatech, Inc. ("Pragmatech") in a
stock purchase transaction. The purchase price was approximately $5.7 million.
The acquisition, which was accounted for as a purchase, included the payment of
cash and the assumption of liabilities. Accordingly, the results of operations
for the year ended September 30, 1998, include the results of operations of this
business from the date of acquisition. The acquisition resulted in goodwill of
$11.5 million which is being amortized over a ten year period.
The unaudited pro forma financial information for the years ended September 30,
1998, 1997, and 1996 is presented below as if Pragmatech had been acquired on
October 1, 1995:
<TABLE>
<CAPTION>
Years ended September 30,
(Unaudited)
(in thousands, ----------------------------------------
except per share data) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $749,577 $624,341 $424,208
Net Income 65,596 28,647 34,374
Net income per share - diluted $ 1.37 $ 0.64 $ 0.79
Diluted shares used in
calculating per
share amounts 50,400 49,426 47,490
</TABLE>
NOTE 7. CONTINGENCIES
In the normal course of business, the Company may be subject to litigation
matters. The Company does not believe the ultimate resolution of any such
pending or threatened litigation matters would have a material adverse effect on
the Company's financial position or results of operations.
NOTE 8. STOCKHOLDERS' EQUITY
Common Stock In June 1998, the Company effected a two-for-one stock split
payable in the form of a dividend. Accordingly, all share and per share data has
been adjusted to retroactively reflect the stock split.
Stock Option Plans The 1990 Incentive Stock Plan (the "Plan") provides for the
grant of incentive stock options, non-statutory stock options, and stock
purchase rights to employees and other qualified individuals to purchase shares
of the Company's Common Stock at amounts not less than 100% of the fair market
value of the shares on the date of the grant.
The 1995 Director Option Plan (the "Director Plan") provides for the automatic
grant of stock options to outside directors of the Company or any subsidiary of
the Company at amounts not less than 100% of the fair market value of the shares
on the date of grant.
The 1996 Supplemental Stock Option Plan (the "Supplemental Plan") permits only
the grant of non-statutory options and provides that options must have an
exercise price at least equal to the fair market value of the Company's Common
Stock on the date of the grant. Options under the Supplemental Plan may be
granted to employees and consultants, but executive officers and directors may
not be granted options under the Supplemental Plan.
Options under the three plans vest as determined by the Board of Directors and
in no event may an option have a term exceeding ten years from the date of the
grant. Total shares authorized for issuance under all plans are 9,900,000 at
September 30, 1998.
36
<PAGE> 16
Option activity under all plans is as follows:
<TABLE>
<CAPTION>
Options Outstanding
--------------------------------
Weighted Avg.
Shares Exercise Price
- -----------------------------------------------------------------------------------
<S> <C> <C>
BALANCE AT SEPTEMBER 30, 1995 3,398,861 $ 5.46
Granted 1,662,723 $ 11.53
Exercised (521,917) $ 3.18
Cancelled (383,713) $ 6.03
- -----------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1996 4,155,954 $ 8.12
Granted 1,764,790 $ 20.83
Exercised (735,292) $ 6.64
Cancelled (235,310) $ 11.43
- -----------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1997 4,950,142 $ 12.69
Granted 1,835,700 $ 34.09
Exercised (1,039,179) $ 7.87
Cancelled (258,789) $ 21.06
BALANCE AT SEPTEMBER 30, 1998 5,487,874 $ 20.39
===================================================================================
</TABLE>
The following table summarizes information regarding stock options outstanding
under the Company's option plans at September 30, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Vested and Exercisable
------------------------------------------------- -----------------------------------
Weighted
Number Average Weighted Number Vested Weighted
Range of Outstanding Remaining Average And Exercisable Average
Exercise Prices As of 9/30/98 Contractual Life Exercise Price As of 9/30/98 Exercise Price
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.50 - $ 8.69 1,385,889 5.48 $ 5.96 985,763 $ 5.51
$ 9.63 - $ 20.07 1,527,749 7.48 $ 14.95 643,210 $ 14.53
$ 20.13 - $32.32 1,534,439 8.80 $ 28.00 317,883 $ 27.33
$ 32.38 - $ 45.94 1,039,797 9.32 $ 36.27 122,453 $ 36.34
- -------------------------------------------------------------------------------------------------------------------
$ 0.50 - $ 45.94 5,487,874 7.70 $ 20.39 2,069,309 $ 13.49
===================================================================================================================
</TABLE>
Employee Stock Purchase Plan The Company's employee stock purchase plan (the
"Purchase Plan") provides for the issuance of up to 1,700,000 shares of common
stock. Under the Purchase Plan, employees may purchase, on a periodic basis, a
limited number of shares of common stock through payroll deductions over a
six-month period. The per share purchase price is 85% of the fair market value
of the stock at the beginning or end of the offering period, whichever is lower.
As of September 30, 1998, 1,374,498 shares had been issued under the Purchase
Plan.
As of September 30, 1998, the Company has reserved the following shares of
authorized but unissued Common Stock:
<TABLE>
<S> <C>
Convertible subordinated debt 96,360
Stock option plans 6,835,636
Employee stock purchase plan 325,502
- --------------------------------------------------------------------------------
7,257,498
================================================================================
</TABLE>
Stock-based Compensation The Company accounts for its stock option plans and
employee stock purchase plan under APB Opinion No. 25 and related
interpretations, under which no compensation cost has been recognized as the
exercise price per share for stock options was equal to the fair market value of
the stock on the date of grant and the Purchase Plan qualified as a
non-compensatory plan. Had compensation cost for these Plans been determined
consistent with SFAS No. 123, the Company's net income and net income per share
would have been reduced to the following pro forma amounts (in thousands, except
per share data):
<TABLE>
<CAPTION>
Years Ended September 30,
----------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income:
As reported $ 68,151 $ 30,525 $ 36,525
Pro forma 49,414 19,703 30,711
Basic EPS:
As reported $ 1.61 $ 0.75 $ 0.93
Pro forma 1.17 0.49 0.78
Diluted EPS:
As reported $ 1.43 $ 0.68 $ 0.84
Pro forma 0.98 0.40 0.65
</TABLE>
The weighted average fair values of options granted during fiscal 1998, 1997,
1996 was $18.50, $12.24, and $7.64 per share, respectively. The fair value of
each stock option granted is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in fiscal 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Years Ended September 30,
------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Volatility 75% 78% 78%
Risk-free interest rate 5.7% 6.3% 6.2%
Dividend yield 0% 0% 0%
Expected lives* (management
and directors) beyond vesting 0.6 1.0 1.0
Expected lives* (employees)
beyond vesting 0.3 0.6 0.6
</TABLE>
* measured in years beyond vesting.
37
<PAGE> 17
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
Years Ended September 30,
------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current $ 42,802 $ 22,215 $ 16,329
Deferred (8,832) (1,535) (1,875)
================================================================================
33,970 20,680 14,454
- --------------------------------------------------------------------------------
State:
Current 6,451 5,646 3,419
Deferred (1,233) 6 (454)
================================================================================
5,218 5,652 2,965
- --------------------------------------------------------------------------------
Total provision for
income taxes $ 39,188 $ 26,332 $ 17,419
================================================================================
</TABLE>
The provision for income taxes differs from the amount estimated by applying the
statutory Federal income tax rate to income before taxes as follows (in
thousands):
<TABLE>
<CAPTION>
Years Ended September 30,
------------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Federal tax at
statutory rate $ 37,569 $ 26,546 $ 19,394
State income taxes,
net of federal benefit 5,218 3,473 2,427
Foreign subsidiary loss 410 -- 303
Effect of non-deductible
goodwill amortization 672 692 493
Tax exempt interest income (713) (436) (359)
FSC benefit (179) (530) (355)
Tax credits (792) (412) (507)
Change in valuation
allowance (11,598) (3,168) (3,636)
Other 8,601 167 (341)
- --------------------------------------------------------------------------------
Total provision for
income taxes $ 39,188 $ 26,332 $ 17,419
================================================================================
</TABLE>
The components of the net deferred income tax asset are as follows (in
thousands):
<TABLE>
<CAPTION>
As of September 30,
---------------------------
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Cumulative temporary differences:
State taxes $ 1,726 $ 1,128
Accrued vacation 1,232 1,081
Allowance for doubtful accounts 1,772 1,438
Depreciation (511) (1,619)
Inventory reserve 6,255 5,489
Accrued bonuses 2,251 58
General reserve 1,645 605
Environmental reserve 2,216 2,381
Accrued plant closing costs 450 3,482
Net operating loss carryforwards 4,245 7,381
Tax credit carryforwards 405 961
Other 2,459 3,294
- --------------------------------------------------------------------------------
Total deferred income tax asset 24,145 25,679
Valuation allowance (5,267) (16,865)
- --------------------------------------------------------------------------------
Net deferred income tax asset $ 18,878 $ 8,814
================================================================================
</TABLE>
The valuation allowance provides a reserve against deferred tax assets that may
expire or become unutilized by the Company. In accordance with Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes," the
Company believes it is more likely than not the Company will not realize a
portion of the benefits of these deferred tax assets, and accordingly, has
provided a valuation allowance for them. Federal net operating loss
carryforwards of $6.9 million will expire at various dates from the year 2007
through 2010. State net operating loss carryforwards of $3.9 million will expire
in 1999. Foreign net operating loss carryforwards of $6.0 million will
carryforward indefinitely. Federal minimum tax credit carryforwards of $0.24
million will carryforward indefinitely and state tax credit carryforwards of
$0.25 million will expire at various dates from the year 2002 through 2005.
NOTE 10. BUSINESS SEGMENT AND CONCENTRATION OF CREDIT RISK
The Company operates in one business segment - the manufacture, testing and
servicing of a full spectrum of complex printed circuit boards, custom backplane
interconnect devices, and electronic assembly services. Revenue is principally
derived from customers in the United States.
Sales to major customers who accounted for more than 10% of net sales were as
follows:
<TABLE>
<CAPTION>
Years Ended September 30, 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Customer - A 18.2% * *
Customer - B 13.0% 17.7% 20.3%
</TABLE>
* less than 10% of net sales
The Company's most significant credit risk is the ultimate realization of its
accounts receivable. This risk is mitigated by (i) sales to well established
companies, (ii) ongoing credit evaluation of its customers, and (iii) frequent
contact with its customers, especially its most significant customers, thus
enabling the Company to monitor current changes in business operations and to
respond accordingly.
NOTE 11. SUBSEQUENT EVENTS
In November 1998, the Company and Altron, Inc. (Altron) merged through the
issuance of 7,200,638 shares of common stock in exchange for all of Altron's
outstanding common stock. The acquisition was accounted for as a pooling of
interests.
38
<PAGE> 18
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Sanmina Corporation:
We have audited the accompanying consolidated balance sheets of Sanmina
Corporation (a Delaware Corporation) and its subsidiaries as of September 30,
1998 and 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended September 30, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sanmina Corporation and its
subsidiaries as of September 30, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1998 in conformity with generally accepted accounting principles.
San Jose, California /s/ ARTHUR ANDERSEN LLP
October 23, 1998 Arthur Andersen LLP
(except for the matter discussed
in Note 11, as to which the date is
November 30, 1998)
39
<PAGE> 1
EXHIBIT 21
List of Subsidiaries
Subsidiary Jurisdiction of Incorporation
Sanmina Cable Systems Texas
Comptronix Corporation N/A
Elexsys International Delaware
Neutronic Stamping & Plating subsidiary of Elexsys International
Sanmina B.V. Netherlands
Sanmina Canada Holding Co. Canada
Sanmina Canada (1) Canada
Sanmina Ireland Ltd (2) Ireland
Sanmina United Kingdom United Kingdom
(1) A subsidiary of Sanmina Canada Holding Company.
(2) A subsidiary of Sanmina B.V.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports included (or incorporated by reference) in this Form 10-K, into the
Company's previously filed Registration Statements on Form S-8 File Nos.
333-23565, 33-66554 and 33-90244.
ARTHUR ANDERSEN LLP
San Jose, California
December 22, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 75,339
<SECURITIES> 77,284
<RECEIVABLES> 96,930
<ALLOWANCES> 4,669
<INVENTORY> 68,953
<CURRENT-ASSETS> 342,326
<PP&E> 224,412
<DEPRECIATION> 116,531
<TOTAL-ASSETS> 467,580
<CURRENT-LIABILITIES> 114,846
<BONDS> 5,767
0
0
<COMMON> 483
<OTHER-SE> 343,609
<TOTAL-LIABILITY-AND-EQUITY> 467,580
<SALES> 722,581
<TOTAL-REVENUES> 722,581
<CGS> 563,913
<TOTAL-COSTS> 563,913
<OTHER-EXPENSES> 50,641
<LOSS-PROVISION> 1,994
<INTEREST-EXPENSE> (688)<F1>
<INCOME-PRETAX> 107,339
<INCOME-TAX> 39,188
<INCOME-CONTINUING> 68,151
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 68,151
<EPS-PRIMARY> 1.61<F2>
<EPS-DILUTED> 1.43<F3>
<FN>
<F1>Interest expense is net of Interest Income; the net amount is Interest Expense.
<F2>EPS is reported as "Basic EPS"
<F3>EPS is reported as "Diluted EPS"
</FN>
</TABLE>
