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EXHIBIT 99.1
BUSINESS
Sanmina is a leading independent provider of customized integrated
electronic manufacturing services, known as EMS, including turnkey electronic
assembly and manufacturing management services, to original equipment
manufacturers, or OEMs, in the electronics industry. Our electronics
manufacturing services consist primarily of the manufacture of complex printed
circuit board assemblies using surface mount and pin-through-hole
interconnection technologies, the manufacture of custom designed backplane
assemblies, fabrication of complex multi-layered printed circuit boards,
electronic enclosure systems 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. Through Sanmina Cable Systems, we also manufacture
custom cable and wire harness assemblies for electronic industry OEMs. In
addition, we have recently developed enclosure systems capabilities which
manufactures and assembles metal enclosures that house large electronic systems
and subsystems. As a result of these services, Sanmina can offer an end to end
total EMS solution for its customers.
Surface mount and pin-through-hole 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
us generally require greater manufacturing expertise and have shorter delivery
cycles than mass produced interconnect products, and therefore, typically have
higher profit margins.
Our customers include leading OEMs in the communications, medical and
industrial instrumentation and high-speed computer sectors. Our principal
customers include Alcatel, Cisco Systems, Lucent Technologies, Motorola, Nortel
Networks and Tellabs.
We locate our manufacturing facilities near our customers and,
increasingly, our customers' end users. Our assembly plants are located in
Northern California, Richardson, Texas, the greater Boston, Massachusetts area,
Manchester, New Hampshire, Durham, North Carolina, Guntersville, Alabama,
Calgary, Alberta, Canada and Dublin, Ireland. Our printed circuit board
fabrication facilities are located in Northern California, Southern California,
the greater Boston, Massachusetts area and Nashua, New Hampshire. Sanmina Cable
Systems' principal manufacturing facility is located in Carrollton, Texas. Our
principal enclosure manufacturing facilities are located in the Toronto, Canada
area.
Through our June 2000 acquisition of Hadco Corporation, we added printed
circuit board fabrication facilities in the greater Boston, Massachusetts area,
Northern California, Phoenix, Arizona, Owego, New York and Kuching, Malaysia. We
also obtained backplane and assembly facilities in Salem, New Hampshire and San
Jose, California as well as an engineering facility in Limerick, Ireland. In
June 2000, we also acquired Essex AB, an EMS company with operations in Sweden
and Finland. In July 2000, we acquired an EMS operation in the Shenzhen region
of the Peoples' Republic of China. In August 2000, Sanmina acquired a design and
engineering group from Nortel Networks. Also in August 2000, Sanmina announced
an agreement to acquire the San Jose, California system integration and
fulfillment operation of Lucent Technologies.
We have pursued and intend to continue to pursue business acquisition
opportunities, particularly when these opportunities have the potential to
enable us to increase our net sales while maintaining operating margins, to
access new customers, technologies or geographic markets, to implement our end
to end total solution vertical integration strategy and to increase capacity and
obtain facilities and equipment. In particular, we expect that we will continue
to pursue opportunities to acquire assembly operations being divested by
electronics industry OEMs, particularly those in the communications sector.
This Report on Form 8-K contains certain forward looking statements
regarding future events with respect to Sanmina. 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
We are 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 we believe 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 are increasingly 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
knowledge.
- 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 lifecycles, 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.
SANMINA BUSINESS STRATEGY
Our objective is to provide OEMs with a total EMS solution. Our strategy
encompasses several key elements:
- Concentrate on high value added products and services for leading OEMs.
We focus 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, we are
able to realize higher margins than many other participants in the
interconnect and EMS industries.
- Leverage vertical integration. Building on our integrated manufacturing
capabilities, we can provide our 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 us with further opportunities to leverage
our vertical integration. By manufacturing printed circuit boards,
electronic enclosure systems, and custom cable assemblies used in our EMS
assemblies,
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we, through our vertical integration, are able to add greater value and
realize additional manufacturing margin. In addition, our vertical
integration provides greater control over quality, delivery and cost, and
enables us to offer our customers a complete EMS solution.
- Focus on high growth customer sectors. We have focused our marketing
efforts on key, fast growing industry sectors. Our customers include
leading OEM companies in communications, industrial and medical
instrumentation and computer sectors. Sales efforts will focus on
increasing penetration of our existing customer base as well as
attracting new customers, thus diversifying our revenue across a wider
base.
- Geographic expansion of manufacturing facilities. Since 1993, we have
significantly expanded and upgraded our operations through the opening of
and acquisition of new facilities and operations in various locations
throughout the United States, including Northern California, Southern
California, the Dallas-Fort Worth area, the greater Boston area, the
greater Chicago area and other locations. These facilities provide us
with operations in key geographic markets for the electronics industry.
We will continue to aggressively and opportunistically pursue future
expansion opportunities in other markets. In particular, through two
recent acquisitions, we have established operations in Sweden, Finland
and the Peoples' Republic of China.
- Aggressive pursuit of acquisition opportunities. Our strategy involves
the pursuit of business acquisition opportunities, particularly when
these opportunities have the potential to enable us to increase our net
sales while maintaining operating margin, access new customers,
technologies and geographic markets, implement our vertical integration
strategy and obtain facilities and equipment on terms more favorable than
those generally available in the market. These acquisitions have involved
both acquisitions of entire companies as well as acquisitions of selected
assets, principally equipment, inventory and customer contracts and, in
certain cases, facilities or facility leases. We intend to continue to
evaluate and pursue acquisition opportunities on an ongoing basis.
- Develop long-term customer relationships. We seek to establish
"partnerships" with our customers by focusing on early stage involvement
in product design, state-of-the-art technology, quick-turnaround
manufacturing and comprehensive management support for materials and
inventory. We also work closely with our customers to help them manage
their manufacturing cycle and reduce their time to market. While we will
continue to emphasize growth with our current customers, we have been
successful in attracting new clients. To further these efforts, we intend
to continue to expand our direct sales staff. We believe our direct sales
force is one of our key competitive advantages.
- Extend technology leadership. Today we can provide a total EMS solution
with services ranging from design services to fabrication of circuit
boards and complete system assemblies. In providing these services, we
use a variety of processes and technologies. We strive for continuous
improvement of our processes and have adopted a number of quality
improvement and measurement techniques to monitor our performance. We
have also recently made significant capital expenditures to upgrade plant
and equipment at our facilities. We intend to stay on the leading edge of
technology development and will evaluate new interconnect and packaging
technologies as they emerge.
CUSTOMERS, MARKETING AND SALES
Our customers include a diversified base of OEMs in the communications,
medical and industrial instrumentation and high-speed computer systems segments
of the electronics industry. Our principal customers include Alcatel, Cisco
Systems, Lucent Technologies, Motorola, Nortel Networks and Tellabs. The
following table shows the estimated percentage of our fiscal 1999 sales in each
of these industry sectors.
<TABLE>
<S> <C>
Communications.............................................. 71%
Medical and Industrial Instrumentation...................... 12%
High-Speed Computer Systems................................. 17%
</TABLE>
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The percentages in the table above give effect to the restatement of our
results of operations to reflect the acquisitions of Hadco and Essex.
Historically, Hadco's revenues had been derived primarily from sales of printed
circuit boards as well as sales in the computer systems, communications and
instrumentation sectors. Essex's revenues were derived primarily from sales of
printed circuit board assemblies to communications companies.
We develop relationships with our customers and market our manufacturing
services through a direct sales force augmented by a network of manufacturers'
representative firms and a staff of in-house customer support specialists. Our
sales resources are directed at multiple management and staff levels within
target accounts. Our direct sales personnel work closely with the customers'
engineering and technical personnel to better understand their requirements. Our
manufacturers' representatives are managed by our direct sales personnel, rather
than from corporate headquarters, in order to provide for greater accountability
and responsiveness. We also conduct advertising and public relations activities,
as well as receiving referrals from current customers.
Historically, we have had substantial recurring sales from existing
customers. We have also expanded our 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 us with several new key customer accounts with
significant growth potential. In addition, the November 1997 acquisition of
Elexsys, the November 1998 acquisition of Altron, the December 1998 acquisition
of Telo, and the March 1999 acquisition of Manu-Tronics provided us with several
major new customer accounts. Our October and November 1999 acquisitions of
certain Nortel Networks assembly operations has expanded our customer
relationship with Nortel. This relationship was enhanced by our acquisition of a
Nortel Networks design engineering group in August 2000. Our recent transactions
with Harris and Alcatel will provide us with the opportunity to significantly
expand our relationship with these customers. Finally, our acquisitions of Hadco
and Essex and our acquisition of EMS operations in China will enable us to
broaden our customer base as well our geographic base.
Although we seek to diversify our customer base, a small number of
customers are responsible for a significant portion of our net sales. During the
first nine months of fiscal 2000, fiscal year 1999 and fiscal year 1998, sales
to our ten largest customers accounted for 56%, 49% and 44%, respectively, of
our net sales. For the first nine months of fiscal 2000, only sales to one
customer represented more than 10% of our net sales. For fiscal 1999, only sales
to Cisco Systems represented more than 10% of our net sales. For fiscal year
1998, no single major customer exceeded 10% of net sales. This information
regarding our principal customers gives effect to the restatement of our results
of operations to reflect the acquisitions of Hadco and Essex.
Although we cannot assure you that our principal customers will continue to
purchase products and services from us at current levels, if at all, we expect
to continue to depend upon our principal customers for a significant portion of
our net sales. Our 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 our customers
participate. The loss of one or more major customers, or declines in sales to
major customers, could harm our business and operating results.
MANUFACTURING SERVICES
We specialize in manufacturing complex printed circuit board assemblies,
backplane assemblies and printed circuit boards that are used in the manufacture
of sophisticated electronic equipment. We began manufacturing backplane
assemblies in 1981 and began providing electronic assembly and turnkey
manufacturing management services, including the assembly and testing of
sophisticated electronic systems, in October 1993.
We seek to establish "partnerships" with our customers by providing a
responsive, flexible total manufacturing services solution. These services
include computer integrated manufacturing, known as CIM, and design and
engineering services, quick-turnaround manufacturing of prototype and
preproduction assemblies, and materials procurement and management. CIM services
provided by us consist of developing manufacturing processes, tooling and test
sequences for new products from customer designs. We also
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evaluate customer designs for manufacturability and test, and, when appropriate,
recommend 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, we manufacture prototype or preproduction versions of
that product on a quick-turnaround basis. We expect 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 us
include planning, purchasing, warehousing and financing of electronic components
and enclosures used in the assemblies and systems.
MANUFACTURING AND ENGINEERING
Manufacturing Processes. We produce complex, technologically advanced
surface mount and pin-through-hole 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. Today, we are capable of
efficiently producing commercial quantities of printed circuit boards with up to
60 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.
In addition to volume fabrication of printed circuit boards, Sanmina has
facilities which specialize in prototype and pre-production manufacturing.
Prototypes typically require lead times of three to seven days, and often as
short as 24 hours. Prototype development at these facilities has included
multilayer printed circuit boards of up to 60 layers, embedded discrete
components, heavy copper substrates, sequential lamination, cavity substrates,
thermal management products, single chip carriers, planar magnetics, advanced
surface finishes and various high performance substrates for the high frequency
microwave market. These facilities also support advanced attachment technologies
such as Direct Chip Attach (DCA) and High Density Interconnect (HDI). In
combining the design of a printed circuit with the manufacture of the prototype,
Sanmina can reduce the length of the design/manufacture cycle. By working
closely with customers at the design and prototype stage, Sanmina believes it
strengthens long-term relationships with its customers and gains an advantage in
securing a preferred vendor status when customers begin volume production. Pre-
production is the manufacture of limited quantities of electronic interconnects
during the transition period from prototype to volume production. Pre-production
generally requires quick-turn delivery to accommodate time-to-volume pressures
or as a temporary solution for unforeseen customer demands. Pre-production is
done both in the quick-turn prototype and volume production facilities.
The manufacture of surface mount and pin-through-hole 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
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circuit board that we also manufacture. We use surface mount, pin-through-hole
and press-fit technologies in backplane assembly.
The integration of all these processes allows us to offer an end to end
total EMS solution.
All of our 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, we have 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, we believe
that United States electronics manufacturers are increasing their use of ISO
9002 registration as a criteria for suppliers.
In addition to ISO 9002 certification, we are BellCore, British Approval
Board for Telecommunications, or BABT, and Underwriters Laboratories, or 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.
Facilities. We manufacture our products in 52 decentralized plants,
consisting of 27 electronics assembly facilities, 18 printed circuit board
fabrication facilities, 4 cable assembly facilities and 3 enclosure assembly
facilities. Generally, each of our decentralized plants has its own production,
purchasing, and materials management and quality capabilities located on site.
The production expertise of some plants overlaps, which enables us 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 Park area, New England, the
greater Chicago area and Northern Alabama, as well as international locations
including Ireland, China, France, Canada, Malaysia, Finland and Sweden, we are
also able to allocate production based on geographic proximity to the customer,
process capabilities and available capacity. Decentralized plants can focus on
particular product types and respond quickly to customers' specific
requirements. We believe that decentralized facilities also allow us to achieve
improved accountability, quality control and cost control.
In November 1998, we entered into a lease with an option to purchase a
330,000 square foot campus facility located in San Jose, California. The
facility consists of four buildings on a single site. We consolidated our
corporate headquarters and some of our San Jose area assembly operations at this
facility. As of July 2, 2000, this campus site was fully occupied.
TECHNOLOGY DEVELOPMENT
Our close involvement with our customers at the early stages of their
product development positions us at the leading edge of technical innovation in
the manufacturing of SMT and PTH assemblies, backplane assemblies, and printed
circuit boards. We selectively seek orders that require the use of
state-of-the-art materials or manufacturing techniques in order to further
develop our 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. In
addition, Hadco has developed a material known as Buried
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Capacitance as well as various other microvia processes which are designed to
provide improved electrical performance and greater interconnect densities on
printed circuit boards.
We have developed expertise and techniques which we use in the manufacture
of circuit boards, backpanels and subsystems. Generally, we rely on common law
trade secret protection and on confidentiality agreements with our employees to
protect our expertise and techniques. Although we hold several patents, we
believe that patents and other intellectual property rights are not of
fundamental importance to our business.
SUPPLIER RELATIONSHIPS
We order materials and components based on purchase orders received and
accepted and seek to minimize our inventory of materials or components that are
not identified for use in filling specific orders.
Historically, the majority of raw materials used in Sanmina's manufacture
of printed circuit boards and components used in backplane and system assemblies
have been readily available. However, recent shortages of electronic components
have become increasingly prevalent and have affected the ability of Sanmina and
other manufacturers to complete and ship assemblies on a timely basis. Component
shortages can force Sanmina to delay shipments to customers, which could harm
Sanmina's results of operations for a particular fiscal period and could also
expose Sanmina to contractual penalties for failure to complete deliveries as
scheduled. Accordingly, component shortages could harm Sanmina's business,
financial condition and results of operations.
INTELLECTUAL PROPERTY
Sanmina holds various United States and foreign patents directed to printed
circuit boards and methods of manufacturing printed circuit boards. Although
Sanmina seeks to protect certain proprietary technology and other intangible
assets through patents and trademark filings, it has relatively few patents and
relies primarily on trade secret protection. There can be no assurance that
Sanmina will be able to protect its trade secrets or that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to Sanmina's trade secrets. The future
success of Sanmina will depend on the continued development of processes and
capabilities. Sanmina believes that its accumulated experience with respect to
materials and process technology is also important to its operations.
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 municipal sanitary sewer systems. 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 our printed circuit board
and electronics assembly plants have personnel responsible for monitoring
environmental compliance. These individuals report to our 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, we 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 us to cease or
limit production at one or more of our facilities, thereby having an adverse
impact on our results of operations. We are 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.
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In November 1997, we acquired Elexsys, which, by virtue of such
acquisition, became our wholly owned subsidiary. 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.
Contamination was discovered at Elexsys' Irvine, California facility in 1989 and
Elexsys voluntarily installed a groundwater remediation system at the facility
in 1994. Additional investigation is being undertaken by other parties in the
area at the request of the California Regional Water Quality Control Board. It
is unknown whether any additional remediation activities will be required as a
result of such investigations or whether any third party will bring claims
against us alleging that they have been damaged in any way by the existence of
the contamination at the Irvine facility.
We have 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, we could be ordered to undertake soil and/or groundwater
cleanup. To date, we have not been ordered to undertake any soil or groundwater
cleanup activities at the Mountain View facilities, and do not believe any such
activities should be required. Test results received to date are not sufficient
to enable us 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 our
financial condition. However, in the event we are required to undertake
additional groundwater or soil cleanup, the costs of such cleanup are likely to
be substantial. We are currently unable to estimate the amount of such soil and
groundwater cleanup costs because no soil or groundwater cleanup has been
ordered and we cannot determine from available test results what remediation
activities, if any, are likely to be required. We believe, based on the limited
information currently available, that the cost of any groundwater or soil
clean-up that may be required would not harm our business, financial condition
and results of operations. Nevertheless, the process of remediating contaminated
soil and groundwater is costly, and if we are 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 would not harm our
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 we believe 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. We do not anticipate that such costs, if any, will
be material to our financial condition or results of operations.
We have been named as a potentially responsible party at several
contaminated disposal sites as a result of the past disposal of hazardous waste
by companies we acquired or their corporate predecessors. While liabilities for
such historic disposal activities has not been material to our financial
condition to date, there can be no guarantee that past disposal activities will
not result in material liability to us in the future.
Hadco, which we acquired in June 2000, has several facilities that have
soil and/or groundwater contamination. These matters are described in greater
detail under "Factors Affecting Operating Results." We believe, based on the
limited information currently available, that the cost of any groundwater or
soil clean-up that may be required at these facilities would not materially harm
our business, financial condition and results of operations. Nevertheless, the
process of remediating contaminated soil and groundwater is costly, and there
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can be no assurance that the costs of such activities would not harm our
business, financial condition and results of operations.
BACKLOG
Our backlog was approximately $688 million at October 2, 1999, and
approximately $435 million at September 30, 1998. Backlog consists of purchase
orders we received, 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 our backlog may be subject to cancellation or
postponement without significant penalty. Typically, a substantial portion of
our backlog is scheduled for delivery within the next six months.
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. We believe that
competition in the market sectors we serve is based more on product quality and
responsive customer service and support than on price, in part because the cost
of interconnect products we manufacture 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 our customers.
We believe that our primary competitive strengths are our ability to provide an
end to end total EMS solution which includes responsive, flexible, short
lead-time manufacturing services, our engineering and manufacturing expertise
and our customer service support.
We face intense competition from a number of established competitors in our
various product markets. Certain of our competitors have greater financial and
manufacturing resources than we do, including significantly greater surface
mount assembly capacity. During periods of recession in the electronic industry,
our 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 we generally do not pursue
high-volume, highly price sensitive interconnect product business, we may be at
a competitive disadvantage with respect to price when compared to manufacturers
with lower cost structures, particularly those manufacturers with more extensive
offshore facilities where labor and other costs are lower.
EMPLOYEES
As of July 2, 2000, we had approximately 23,000 full-time employees,
including approximately 22,500 in manufacturing and engineering, approximately
250 in marketing and sales and approximately 250 in general administration and
finance. None of our U.S. employees are represented by a labor union and we have
never experienced a work stoppage or strike. We believe our relationship with
our employees is good.
FACILITIES
Our principal facilities comprise an aggregate of approximately 4.3 million
square feet. Except for our 72,000 square foot Manchester, New Hampshire
facility, the 160,000 square foot facility occupied by Sanmina Cable Systems in
Carrollton, Texas, a 70,000 square foot facility located in Nashua, New
Hampshire, a 200,000 square foot facility located in Wilmington, Massachusetts,
a 104,000 square foot facility located in Woburn, Massachusetts, a 44,200 square
foot facility located in Irvine, California, a 197,600 square foot facility
located in Kenosha, Wisconsin, a 105,000 square foot facility located in
Guntersville, Alabama, a 52,000 square foot facility located in Dublin, Ireland,
a 292,000 square foot facility in Owego, New York, a 275,000 square foot
facility in Phoenix, Arizona, a 200,000 square foot facility in Derry, New
Hampshire and a 67,000 square foot facility in Hudson, New Hampshire all of the
facilities are leased, and the leases for these facilities expire between 2000
and 2007. The leases generally may be extended at our option. We have 17
principal facilities located in the greater San Jose, California area, with
other facilities located in Southern
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<PAGE> 10
California, Plano, Texas, Richardson, Texas, Manchester, New Hampshire, the
greater Boston, Massachusetts area, Guntersville, Alabama, Durham, North
Carolina, Wilmington and Woburn, Massachusetts, the greater Chicago area,
Calgary, Canada, Toronto, Canada, Dublin, Ireland, Kuching, Malaysia, Shenzhen,
Peoples Republic of China, Sweden and Finland.
In November 1998, we entered into a lease with an option to purchase a
330,000 square foot campus facility located in San Jose, California. The
facility consists of four buildings on a single site. We consolidated our
corporate headquarters and some of our San Jose area assembly operations at this
facility. As of July 2, 2000, these buildings were fully occupied. We believe
that our facilities are adequate to meet our reasonably foreseeable requirements
for at least the next two years. We continually evaluate our expected future
facilities requirements.
LEGAL PROCEEDINGS
Sanmina and certain of its subsidiaries, Hadco, Elexsys and Altron, are
involved in various administrative proceedings related to environmental matters.
These matters are described in greater detail under "Factors Affecting Operating
Results." Although Sanmina could incur significant costs relating to these
matters, Sanmina believes, on the limited information currently available, that
the cost of any groundwater or soil clean-up that may be required at these
facilities would not materially harm our business, financial condition and
results of operations.
From time to time, Sanmina is a party to litigation which arises in the
ordinary course of business. Sanmina believes that the resolution of this
litigation will not materially harm Sanmina's business, financial condition or
results of operations.
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<PAGE> 11
SELECTED FINANCIAL DATA
The following selected historical financial information of Sanmina,
combined with Hadco and Essex on a pooling of interests basis, has been derived
from the historical consolidated financial statements and should be read in
conjunction with the consolidated financial statements and the notes included
therein.
FIVE YEAR SELECTED FINANCIAL HIGHLIGHTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Net sales..................... $2,393,983 $1,941,454 $1,522,811 $1,006,302 $762,900
Operating income.............. 211,113 109,021 91,127 139,248 91,926
Income before provision for
income taxes................ 188,063 87,529 81,170 138,913 34,888
Gain from exchange of
convertible subordinated
debentures.................. -- -- -- -- 1,833
Net income.................... $ 118,267 $ 33,198 $ 15,870 $ 88,334 $ 59,455
========== ========== ========== ========== ========
Basic net income per share.... $ 0.86 $ 0.27 $ 0.14 $ 0.80 $ 0.56
========== ========== ========== ========== ========
Diluted net income per
share....................... $ 0.82 $ 0.26 $ 0.13 $ 0.71 $ 0.50
========== ========== ========== ========== ========
Shares used in computing
diluted per share amount.... 144,536 126,704 120,819 128,635 125,097
</TABLE>
CONSOLIDATED BALANCE SHEET DATA:
<TABLE>
<CAPTION>
AS OF YEAR END
--------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents....... $ 148,754 $ 96,425 $ 68,911 $197,831 $187,469
Net working capital............. 742,350 412,409 314,172 277,463 244,209
Total assets.................... 2,007,441 1,472,509 1,087,975 702,047 545,856
Convertible subordinate debt.... 355,259 5,767 98,250 -- --
Long-term debt.................. 303,297 396,327 116,637 126,154 118,872
Stockholders' equity............ 864,094 688,397 546,625 381,206 271,441
</TABLE>
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SANMINA CORPORATION
OVERVIEW
Sanmina Corporation ("Sanmina") was incorporated in Delaware in May 1989 to
acquire its predecessor company which had been in the printed circuit board and
backplane business since 1980. Sanmina is an 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, electronic enclosure systems 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 Texas, L.P.
subsidiary, previously known as Sanmina Cable Systems (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, Sanmina 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, and Nashua, New Hampshire.
Sanmina Cable System's manufacturing facility is located in Carrollton, Texas.
As a result of Sanmina's November 1998 acquisition of Altron Incorporated
("Altron"), Sanmina has added new fabrication and assembly plants in the Boston,
Massachusetts area, Northern California, and Plano, Texas. In addition, as a
result of Sanmina's acquisition of Telo Electronics Incorporated ("Telo") and
Manu-Tronics, Inc. ("Manu-Tronics"), Sanmina has added new assembly plants in
San Jose, California and in the greater Chicago area. As part of Sanmina's
agreement to acquire certain assembly operations of Nortel Networks Corporation,
Sanmina added an assembly plant in Calgary, Alberta, Canada on October 1, 1999.
In addition, Sanmina also added an assembly plant in Chateaudun, France in
November 1999. As part of Sanmina's acquisition of Devtek Electronics Packaging
Systems Division on October 5, 1999, Sanmina added an enclosure facility in
Toronto, Ontario, Canada. Sanmina acquired Essex AB on June 1, 2000 (see below)
which added engineering design, printed circuit board assembly, system
integration and test capabilities and facilities in Sweden and Finland. As a
result of the acquisition of Hadco Corporation, which was completed in June
2000, Sanmina added printed circuit board fabrication facilities in Santa Clara
and San Jose, California, Owego, New York, Phoenix, Arizona, Derry, Hew
Hampshire, Kuching, Malaysia and Hudson, New Hampshire; quick turn printed
circuit board manufacturing facilities in Haverhill, Massachusetts, Watsonville,
California and Austin, Texas; backplane and system assembly facilities in Salem,
New Hampshire and San Jose, California; design and engineering operations in
Salem, New Hampshire, Santa Clara, California and Limerick, Ireland.
On June 1, 2000, Sanmina acquired Essex AB ("Essex"), an EMS company with
operations in Sweden and Finland. The transaction was structured as a stock for
stock exchange and was accounted for as a pooling of interests. Under the terms
of the agreement, each share of Essex common stock was converted into
approximately 10.2 shares of Sanmina common stock. Approximately 2.0 million
shares of Sanmina common stock were issued to acquire Essex. On June 23, 2000,
Sanmina completed its acquisition of Hadco Corporation, a major manufacturer of
advanced electronic interconnect products. This acquisition was accounted for as
a pooling of interests. Accordingly, each outstanding share of Hadco common
stock was converted into 1.4 shares of Sanmina common stock. Approximately 19.6
million shares of common stock were issued to acquire Hadco.
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<PAGE> 13
As a result of the acquisitions of Essex and Hadco, Sanmina's historical
financial statements have been restated retroactively to include the financial
results of Essex and Hadco. Essex's results of operations for the years ended
December 31, 1999, 1998 and 1997 and Hadco's results of operations for the years
ended October 30, 1999, October 31, 1998 and October 25, 1997 have been combined
with Sanmina's results of operations for the years ended October 2, 1999 and
September 30, 1998 and 1997, respectively. In addition, Essex's balance sheets
as of December 31, 1999 and 1998 and Hadco's balance sheets as of October 30,
1999 and October 31, 1998 have been combined with Sanmina's balance sheets as of
October 2, 1999 and September 30, 1998, respectively. The fiscal years for Essex
and Hadco changed to coincide with Sanmina's beginning in fiscal 2000. The
restated financial information includes certain adjustments to eliminate the net
sales between the combining companies and certain reclassifications to conform
to Sanmina's financial statement presentation. No adjustments were necessary to
conform the accounting policies of the combining companies.
In June 2000, Sanmina completed a cash purchase of Interworks Computer
Products, Inc., a leading designer and manufacturer of standard and custom
modular subsystems. In July 2000, Sanmina acquired an EMS operation in the
Shenzhen region of the People's Republic of China. In August 2000, Sanmina
acquired a design and engineering group from Nortel Networks. Also in August
2000, Sanmina announced an agreement to acquire the San Jose, California system
integration and fulfillment operation of Lucent Technologies.
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 margins, to access new geographic markets, to implement Sanmina's
vertical integration strategy and/or to obtain access to new customers,
geographic regions and facilities and equipment on terms more favorable than
those generally available in the market. In particular, Sanmina expects that it
will continue to pursue opportunities to acquire assembly operations being
divested by electronics industry OEMs.
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."
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<PAGE> 14
RESULTS OF OPERATIONS
FISCAL YEARS ENDED OCTOBER 2, 1999, SEPTEMBER 30, 1998 AND 1997
The following table sets forth, for the periods indicated, certain
statements of operations data expressed as a percentage of net sales.
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------
OCTOBER 2, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1997
---------- ------------- -------------
<S> <C> <C> <C>
Net sales.............................................. 100.0% 100.0% 100.0%
Cost of sales.......................................... 82.6 82.6 79.6
----- ----- -----
Gross profit......................................... 17.4 17.4 20.4
----- ----- -----
Operating expenses:
Selling, general and administrative.................. 6.5 7.3 8.2
Amortization of goodwill and intangibles............. 0.7 0.7 0.5
Restructuring, plant closing and other non-recurring
charges........................................... 0.7 0.2 0.6
Write-off of acquired in-process research and
development....................................... -- 3.2 5.1
Write down of long-lived assets...................... 0.5 0.1 --
Merger costs......................................... 0.2 0.2 --
----- ----- -----
Total operating expenses............................... 8.6 11.7 14.4
----- ----- -----
Operating income....................................... 8.8 5.7 6.0
Other income (expenses), net........................... (1.0) (1.1) (0.7)
----- ----- -----
Income before provision for income taxes............... 7.8 4.6 5.3
Provision for income taxes............................. (2.9) (2.8) (4.3)
----- ----- -----
Net income............................................. 4.9% 1.8% 1.0%
===== ===== =====
</TABLE>
Net Sales. Net sales in fiscal 1999 increased 23.3% to $ 2,394.0 million
from $1,941.5 million in fiscal 1998, which was an increase of 27.5% from fiscal
1997 sales of $1,522.8 million. The increase in net sales for fiscal 1999 was
due primarily to increased shipments of EMS assemblies to both existing and new
customers obtained both through acquisitions and internal growth. The increase
in net sales for fiscal 1998 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. Sanmina's printed circuit board fabrication operations focused
increasingly on manufacturing printed circuit boards used in EMS assemblies
manufactured by Sanmina. Growth in EMS assembly revenues during these periods
was influenced by the electronics industry trend towards outsourcing, expansion
of Sanmina's operations, both through acquisitions and Sanmina-originated
expansions, and a generally positive economic environment in the communications,
medical and industrial instrumentation, and computer sectors of the electronics
industry. These industry sectors continued to experience overall growth during
these periods.
Gross Margin. Gross margin was 17.4%, 17.4% and 20.4% in fiscal 1999,
1998, and 1997, respectively. Sanmina expects gross margins to continue to
fluctuate based on product and customer mix. Gross margin was unchanged between
1999 and 1998. The 1999 fiscal year gross margin reflects charges related to the
write down of obsolete inventory and other manufacturing related assets. The
1999 gross margin also reflects an offsetting increase to the gross margin
resulting from improved mix and capacity utilization from printed circuit boards
and assembly operations from acquired companies. The decrease in margins between
1998 and 1997 was a result of component pricing and capacity utilization which
was offset due to increases in gross margins for fiscal 1998 due to Sanmina's
ability to realize synergies associated with the Elexsys acquisition. As the
integration of these operations is complete, Sanmina does not anticipate
achieving incremental gross margin improvements in future periods as a result of
Elexsys synergies achieved in connection with this acquisition. Due to increased
competition, product and customer mix, and pricing structures negotiated in
14
<PAGE> 15
OEM divestiture transactions, including the recent Nortel Networks transactions
and possible future transactions, Sanmina may experience decreases in gross
margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for fiscal 1999, 1998, and 1997 were $156.3 million, $
141.1 million, and $124.9 million, respectively. The percentage decreases in
selling, general and administrative expenses for fiscal 1999 and 1998 were due
to Sanmina's ability to grow sales while maintaining or reducing operating
expenses as a percentage of net sales. The absolute dollar increases in selling,
general and administrative expenses were primarily the result of increased
expenditures to support higher sales volume.
Amortization of Goodwill and Intangibles. Sanmina incurred $15.8 million,
$13.1 million, and $7.5 million in amortization expense for fiscal years 1999,
1998, and 1997, respectively. These amortization expenses reflect the
amortization of intangibles and goodwill related to those acquisitions which
were accounted for as purchase transactions.
Restructuring, plant closing and other non-recurring
charges. Restructuring, plant closing and other non-recurring charges for
fiscal 1999, 1998 and 1997 were $16.9 million, $4.5 million and $8.9 million,
respectively. Restructuring, plant closing and other non-recurring charges of
$16.9 million are a result of Sanmina's acquisitions in the first quarter of
fiscal 1999 and Sanmina's relocation to a new campus facility. Sanmina closed
certain manufacturing plants in Fremont, California and Woburn, Massachusetts
and merged the operations from these facilities into existing manufacturing
facilities within the same regions. These closures were made to eliminate
duplicate facilities and other costs resulting from the acquisition of Altron.
Concurrent with the plant closures, Sanmina reduced its workforce in the same
regions by approximately 50 people. Plant closing, relocation and severance
costs totaled $12.8 million, of which $2.0 million was unpaid as of fiscal year
end 1999. In conjunction with the closure of manufacturing facilities and
Sanmina's relocation to its new campus facility in fiscal 2000, other
non-recurring costs include payments required under lease contracts (less any
applicable sublease income) after the properties are abandoned, any applicable
lease buyout costs, restoration costs associated with certain lease arrangements
and the costs to maintain facilities during the period after abandonment. Asset
related write-offs consist of excess equipment and leasehold improvements to
facilities that were abandoned and whose estimated fair market value is zero.
Sanmina's move to the new campus facility commenced in fiscal 1999 and was
completed in the second quarter of fiscal 2000. Noncancelable lease payments on
vacated facilities will be paid out through most of fiscal 2000. Sanmina also
discontinued the use of enterprise-wide software and hardware used internally by
the acquired companies, as these were no longer required post acquisition. The
closing of the plants discussed above, and the costs related to the integration
of information systems and hardware, were all incurred in fiscal 1999. Total
other non-recurring charges totaled $4.1 million.
In fiscal 1998, Hadco incurred restructuring, plant closing, and other
non-recurring charges of approximately $4.5 million. The charges were a result
of the consolidation of several manufacturing facilities, and consisted of $2.0
million related to the loss on abandoned assets, $1.2 million as a result of an
approximate 3% reduction in workforce and $1.3 million related to lease
termination costs on abandoned facilities.
In fiscal 1997, Sanmina incurred charges related to plant closings and
other non-recurring charges of $8.9 million. The charges were a result of the
change in strategy to become a value added electronics manufacturer and the
planned closures of duplicate facilities resulting from the acquisition of
Elexsys. The $8.9 million charge consisted primarily of the costs associated
with remaining lease commitments on abandoned facilities and write off of
certain property, plant, and equipment that were abandoned.
Write-off of acquired in-process R&D. On January 10, 1997, Hadco acquired
Zycon. Hadco added facilities for multilayer printed circuits and backplane and
system assemblies in the Silicon Valley area, a quick-turn prototype and design
facility in Massachusetts, and a newly constructed facility for volume
production of printed circuits in Malaysia. Hadco acquired Zycon for
approximately $212.5 million (including acquisition costs) and recorded the
acquisition under the purchase method of accounting. As a result, a purchase
price premium of approximately $182.0 million was recorded on the transaction. A
significant portion of the purchase price was identified in an independent
appraisal, using proven valuation procedures and techniques, as intangible
assets. These intangible assets included approximately $78.0 million for
acquired in-
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<PAGE> 16
process research and development ("in-process R&D") for projects that did not
have future alternative uses. This allocation represents the estimated fair
market value based on risk-adjusted cash flows related to the in-process R&D
projects. At the date of acquisition, the development of these projects had not
yet reached technological feasibility, and the in-process R&D had no alternative
future uses. Accordingly, these costs were written off in fiscal 1997. The
remaining premium of approximately $104.0 million was allocated to identifiable
intangibles and goodwill. The acquisition was financed with borrowings under a
credit facility, plus existing cash and equivalents.
On March 20, 1998, Hadco acquired Continental, further broadening Hadco's
product and service capabilities. The acquisition added a facility for volume
production of multilayer printed circuits in Phoenix, Arizona, a quick-turn
prototype facility in Austin, Texas, a flexible printed circuit facility in
California (which was sold on April 30, 1999) and printed circuit engineering
and design sites in California, Texas and Colorado. Hadco acquired Continental
for approximately $190.2 million (including acquisition costs) and recorded the
acquisition under the purchase method of accounting. As a result, a purchase
price premium of $165.0 million was recorded on the transaction. A significant
portion of the purchase price was identified in an independent appraisal, using
proven valuation procedures and techniques, as intangible assets. These
intangible assets included approximately $63.1 million for in-process R&D for
projects that did not have future alternative uses. This allocation represents
the estimated fair market value based on risk-adjusted cash flows related to the
in-process R&D projects. At the date of acquisition, the development of these
projects had not yet reached technological feasibility, and the in-process R&D
had no alternative future uses. Accordingly, these costs were written off in
fiscal 1998. The remaining premium of $101.9 million was allocated to
identifiable intangibles and goodwill. The acquisition was financed from
borrowings under a credit facility. Write-offs attributable to acquired
in-process R&D for fiscal 1998 and 1997 were $63.1 million acquired from
Contintental and $78.0 million from Zycon, respectively. This allocation
represents the estimated fair value based on risk-adjusted cash flows related to
the in-process R&D projects. At the date of each acquisition, the development of
these projects had not yet reached technological feasibility, and the in-process
R&D had no alternative future uses. Accordingly, these costs were expensed as of
the respective acquisition date.
Write Down of Long-Lived Assets. Sanmina continually evaluates whether
long-lived assets have been impaired in value. This process includes evaluating
whether projected results of operations of acquired businesses would support the
carrying value of related assets including the future amortization of the
remaining unamortized balance of goodwill. In the first quarter of fiscal 1999,
such evaluation with respect to the acquisition of Pragmatech, Incorporated
("Pragmatech"), indicated the fair value of assets related to Pragmatech were
less than the carrying value of the Pragmatech assets. Accordingly, in the first
quarter of fiscal 1999, Sanmina recorded an adjustment to write down the
remaining $11.4 million of unamortized goodwill arising from the acquisition.
The fair value of Pragmatech at the acquisition date was based on the estimated
future cash flows to be generated from the assets based on reasonable and
supportable assumptions. Financial projections prepared at the time of the
acquisition of Pragmatech reflected Sanmina's belief that Sanmina would continue
to provide electronics manufacturing services to existing Pragmatech customers
and would grow the Pragmatech business at Pragmatech's existing facilities.
However, the existing Pragmatech customer relationships could not be
restructured to conform to Sanmina's pricing and revenue models, and as a
result, the relationships with the former Pragmatech customers have terminated.
In addition, Sanmina closed several of the former Pragmatech facilities in
fiscal 1998. As a result of these operational factors, Sanmina's analysis of
projected revenues, results of operations, and cash flows attributable to the
few remaining Pragmatech customers did not support the carrying value of
Pragmatech assets, including the unamortized goodwill. During 1998, Sanmina
incurred a charge of approximately $2.5 million, which represents the write down
of existing assets to their net realizable value.
Merger costs. Merger costs of $5.5 million in 1999 consisted of fees for
investment bankers, attorneys, accountants, and other direct merger related
expenses, all of which have been paid in fiscal 1999 and relate to those
acquisitions that were accounted for using the pooling of interests method. In
1998, Sanmina recorded a charge of $3.9 million related to the acquisition of
Elexsys.
Other Income and Expense, net. In fiscal 1999, net other expense was $23.1
million as compared to net other expense of $21.5 million and $10.0 million in
1998 and 1997, respectively. The components of other
16
<PAGE> 17
income and expense are primarily interest expense on borrowings and convertible
subordinated notes and interest income on cash balances and short-term
investments. For fiscal 1999, the increase in net other expense was largely due
to interest expense on outstanding debt related to the acquisition of
Continental and Zycon. In 1998, $86.3 million of outstanding convertible
subordinated notes, issued by Sanmina in August 1995, were converted into common
stock as a result of a redemption call for such notes issued by Sanmina. Other
income and expense, net was higher in 1998 compared to 1997 primarily due to
interest incurred related to the acquisition of Zycon and Continental.
Provision for Income Taxes. For fiscal 1999, 1998, and 1997, Sanmina's
effective tax rate was 37.1%, 62.1%, and 80.4%, respectively. The rates for 1998
and 1997 include the non-deductible effects of the write-off of acquired
in-process R&D. The effective rate was also increased by amortization of
goodwill and intangibles, which is not tax deductible, and was offset by the tax
benefit of Sanmina's foreign sales corporation and various state investment tax
credits. For fiscal 1999, the rate decreased as utilization of net operating
loss carryforwards of Elexsys were recognized and the write off of acquired in
process R&D mentioned above related to 1998 and 1997 only. Also, the lower rate
in fiscal 1998 represents the benefit of foreign operations and acquired
companies taxed at a reduced rate.
LIQUIDITY AND CAPITAL RESOURCES
Sanmina generated cash from operating activities of $261.6 million, $161.1
million, and $128.8 million in fiscal years 1999, 1998, 1997, respectively.
These increases in cash generated from operations each year were primarily due
to Sanmina's increase in profitability.
Cash used for investing activities included net purchases of short-term
investments during fiscal 1999, 1998, and 1997 of $418.4 million, $101.2
million, and $138.4 million, respectively. For fiscal 1999, Sanmina paid
approximately $ 607.1 million for short-term and long-term investments as well
as capital equipment. Additionally, Sanmina paid approximately $75.1 million in
cash for acquired business. These payments were offset by $194.2 million in
maturities of short-term investments.
Investing activities during 1998 included payments of approximately $250.3
million for short-term investments and capital equipment. Additionally, Sanmina
paid approximately $198.2 million in cash paid for acquired businesses. These
payments were partially offset by $106.6 million in maturities of short-term
investments as well as proceeds of $2.6 million from the sale of assets.
During fiscal 1997, cash used in investing activities included payments of
approximately $277.6 million for short-term investments and equipment. Sanmina
also paid approximately $228.5 million for acquired businesses. These payments
were partially offset by $149.6 in maturities of short-term investments as well
as proceeds of $3.1 million from the sale of assets.
Net cash provided by financing activities for fiscal 1999 of $278.4 million
primarily consisted of $340.7 million in net proceeds from the issuance of
convertible subordinated notes. The issuance proceeds were partly offset by
$24.0 million in payments for long-term liabilities and $77.8 million in
payments for usage of line of credits by the Sanmina's subsidiaries. Proceeds
from the sale of common stock were $39.5 million in fiscal 1999. In addition, in
February 2000, Sanmina completed an offering of 9.55 million shares of common
stock which resulted in aggregate gross proceeds of $563.5 million.
In 1998 cash provided by financing activities was $205.7 million which was
largely a result of the issuance of $200.9 million of 9 1/2% Senior Subordinated
Notes due 2008 ("9 1/2% Notes"). In fiscal 1998, Sanmina paid approximately $7.5
million on a line of credit and $5.7 million for long-term liabilities. Proceeds
from exercise of stock options and stock purchase rights were $17.8 million. In
August 1998, Sanmina called for redemption of an aggregate principal amount of
$86.3 million in convertible subordinated notes which were originally issued in
August 1995. The notes were converted to Sanmina common stock at a price of
$7.05 per share, or 141.84 shares of Sanmina's Common Stock per $1,000 principal
amount of Notes. Cash was paid in lieu of fractional shares.
Cash provided by financing activities was $205.2 million in fiscal 1997.
Financing activities in fiscal 1997 consisted primarily of receipt of proceeds
from the exercise of stock options and stock purchase rights in the
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<PAGE> 18
amount of $142.4 million. The balance is attributable to the proceeds from the
issuance of notes payable in the amount of $68.2 million which is offset by
payments of other long term liabilities and the line of credit in the amount of
$5.4 million.
Sanmina'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 $742.4 million at October 2, 1999.
Sanmina has evaluated and will continue to evaluate possible business
acquisitions. In this regard, Sanmina anticipates incurring additional
expenditures during fiscal 2000 in connection with the integrations of its
recently acquired businesses and expenditures associated with the anticipated
growth.
Sanmina has entered into an operating lease agreement for new facilities in
San Jose, California, where it will establish its corporate headquarters and
certain of its assembly operations. In connection with these transactions,
Sanmina pledged $52.9 million of its cash and investments as collateral for
certain obligations of the lease.
In July 2000, Sanmina initiated an offer to purchase the 9 1/2% Notes. The
offer to redeem was required by the terms of the Indenture under which the
9 1/2% Notes were issued as a result of a change in control provision when
Sanmina acquired Hadco. The redemption was at 101% of the principal amount of
the 9 1/2% Notes. On August 24, 2000, Sanmina redeemed 187.9 million of the
outstanding 9 1/2% Notes. The redemption premium and deferred debt costs related
to the 9 1/2% Notes will be expensed by Sanmina in the fourth quarter of fiscal
2000. These costs are expected to be approximately $8.0 million. All 9 1/2%
Notes not redeemed as part of the offer will remain outstanding. Sanmina may
elect to purchase the remaining outstanding notes through the open market or
negotiated transactions, additional tenders, or exchange offers.
Sanmina 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 the next twelve months. Sanmina may
seek to raise additional capital through the issuance of either debt or equity
securities. Debt financing may require Sanmina to pledge assets as collateral
and comply with financial ratios and covenants. Equity financing may result in
dilution to stockholders.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
Recent Accounting Pronouncements -- Effective in the first quarter of
fiscal 1999, Sanmina adopted the American Institute of Certified Public
Accountants ("AICPA") Statement of Position ("SOP") 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for internal use." SOP 98-1
provides guidance on accounting for the costs of computer software developed or
obtained for internal use and for determining when specific costs should be
capitalized and when they should be expensed. The impact of adopting SOP 98-1
was not significant to Sanmina's financial position, results of operations or
cash flows.
In June 1999, the Financial Accounting Standards Board issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133," which amends SFAS No. 133 to be
effective for all fiscal years beginning after June 15, 2000. The statement
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value. The statement also requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Sanmina expects that the adoption of SFAS No.
137 will not have a material impact on its financial position, results of
operations or cash flows. Sanmina will adopt SFAS No. 133 in the first quarter
of fiscal 2001.
In December 1999, the Securities and Exchange Commission issued SAB No.
101, "Revenue Recognition in Financial Statements," which will be effective for
Sanmina in the fourth quarter of fiscal 2001. Sanmina is currently analyzing
this statement and management does not expect the adoption of this statement to
have a material effect on its results of operations or cash flows.
In March 2000, the FASB issued Financial Standards Board Interpretation No.
44, "Accounting for Certain Transactions involving Stock Compensation -- an
Interpretation of APB Opinion No. 25" ("FIN No. 44"). FIN No. 44 addresses the
application of APB No. 25 to clarify, among other issues, (a) the
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definition of employee for purposes of applying APB No. 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN No. 44 is effective July 1,
2000, but certain conclusions cover specific events that occur after either
December 15, 1998, or January 12, 2000. To the extent FIN No. 44 covers events
occurring during the period after applying the interpretation, the events will
be recognized on a prospective basis from July 1, 2000. Sanmina is currently
evaluating FIN No. 44 and does not expect that it will have a material effect on
its financial position or results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
Sanmina's exposure to market risk for changes in interest rates relates
primarily to Sanmina's investment portfolio. Currently, Sanmina does not use
derivative financial instruments in its investment portfolio. Sanmina invests in
high credit quality issuers and, by policy, limits the amount of principal
exposure to any one issuer. As stated in Sanmina's policy, Sanmina seeks to
ensure the safety and preservation of its invested principal funds by limiting
default and market risk.
Sanmina seeks to mitigate default risk by investing in high-credit quality
securities and by positioning its investment portfolio to respond to a
significant reduction in a credit rating of any investment issuer, guarantor or
depository. Sanmina seeks to mitigate market risk by limiting the principal and
investment term of funds held with any one issuer and by investing funds in
marketable securities with active secondary or resale markets.
The table below presents carrying amounts and related average interest
rates by year of maturity for Sanmina's investment portfolio as of October 2,
1999 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------------------------------------
2000 2001 2002 2003 2004 THEREAFTER TOTAL
-------- ------- ---- ----- ------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash equivalents,
short-term, and long-term
investments............... $452,396 $11,670 -- $ 937 $52,850 $2,414 $520,267
Average interest rate....... 5.1% 5.7% -- 7.6% 5.2% 5.9% 5.1%
</TABLE>
FOREIGN CURRENCY EXCHANGE RISK
Sanmina transacts business in foreign countries. Sanmina's primary foreign
currency cash flows are in certain European countries, Canada and Asia.
Currently, Sanmina does not employ a foreign currency hedge program with respect
to transactions and expenditures originating in these or any other foreign
countries. Sanmina believes that its foreign currency exchange risk is
immaterial.
FACTORS AFFECTING OPERATING RESULTS
A holder of securities issued by Sanmina should be aware of various risks,
including those described below. The risks set out below are not the only risks
we face. If any of the following risks occur, our business, financial condition
and results of operations could be materially adversely affected. In such case,
the trading price of debt and equity securities issued by Sanmina, including
Sanmina's common stock, could decline.
Keep these risk factors in mind when you read "forward-looking" statements
elsewhere in this report and in other reports and documents filed by Sanmina
with the Securities and Exchange Commission. These are statements that relate to
our expectations for future events and time periods. Generally, the words
"anticipate," "expect," "intend" and similar expressions identify
forward-looking statements. Forward-looking statements involve risks and
uncertainties, and future events and circumstances could differ significantly
from those anticipated in the forward-looking statements.
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Sanmina is heavily dependent on the electronics industry, and changes in
the industry could harm Sanmina's business and operating results. Sanmina's
business is heavily dependent on the health of the electronics industry.
Sanmina's customers are manufacturers in the communications, industrial and
medical instrumentation and high-speed computer systems sectors of the
electronics industry. These industry sectors, 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. Any discontinuance or modification of orders or
commitments could harm Sanmina's operating results. 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 harm Sanmina's business and operating results.
Sanmina typically does not obtain long-term volume purchase commitments
from customers, and cancellations and rescheduling of purchase orders could harm
Sanmina's operating results and cause its stock price to decline. Sanmina
typically does not obtain long-term volume purchase contracts from its
customers. Customer orders may be canceled and volume levels may be changed or
delayed. For example, Sanmina experienced certain cancellation and rescheduling
of shipment dates of customer orders during the fourth fiscal quarter of 1998.
As a result, Sanmina's results of operations for that quarter failed to meet the
expectations of stock market analysts, and the price of Sanmina common stock
declined. Sanmina cannot assure you that it will be able to replace canceled,
delayed or reduced contracts with new business. As a result, future
cancellations or rescheduling of orders or commitments could cause Sanmina's
operating results to be below expectations, which would likely cause Sanmina's
stock price to decline.
Sanmina's results of operations can be affected by a variety of factors,
which could cause Sanmina's operating results to fail to meet expectations and
Sanmina's stock price to decline. 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 products ordered by and shipped to major customers, including the
mix between backplane assemblies and printed circuit board assemblies;
- the volume of orders as related to Sanmina's capacity;
- pricing and other competitive pressures;
- component shortages, which could cause Sanmina to be unable to meet
customer delivery schedules;
- Sanmina's ability to effectively manage inventory and fixed assets; and
- Sanmina's ability to time expenditures in anticipation of future sales.
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 Sanmina's 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 six months. 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 is dependent on a small number of customers for a large portion of
Sanmina's revenues, and declines in sales to major customers could harm
Sanmina's operating results. A small number of customers
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<PAGE> 21
are responsible for a significant portion of Sanmina's net sales. During the
first nine months of fiscal year 2000, fiscal year 1999 and fiscal year 1998,
sales to Sanmina's ten largest customers accounted for 56%, 49% and 44%,
respectively, of Sanmina's net sales. For the first nine months of fiscal 2000,
only sales to one customer represented more than 10% of Sanmina's net sales. For
fiscal 1999, only sales to Cisco Systems represented more than 10% of Sanmina's
net sales. For fiscal 1998, no single customer exceeded 10% of net sales. This
customer information gives effect to the restatement of Sanmina's results of
operations to reflect the acquisitions of Hadco and Essex.
Although Sanmina cannot assure you that its 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 Sanmina's 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 or more major
customers or declines in sales to major customers could significantly harm
Sanmina's business and operating results and lead to declines in the price of
Sanmina common stock.
Sanmina is subject to risks associated with its strategy of acquisitions,
and these risks could harm Sanmina's operating results and cause its stock price
to decline. Sanmina has, for the past several fiscal years, pursued a strategy
of growth through acquisitions. These acquisitions have involved acquisitions of
entire companies, such as the November 1997 acquisition of Elexsys
International, Inc., the November 1998 acquisition of Altron, Incorporated, the
December 1998 acquisition of Telo Electronics, Inc. the March 1999 acquisition
of Manu-Tronics, Inc., the June 2000 acquisition of Essex AB and the June 2000
acquisition of Hadco Corporation.
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 October and November 1999, Sanmina
acquired the electronics assembly operations of Nortel Networks located in
Calgary, Canada and Chateaudun, France. In October 1999, Sanmina also acquired
the electronics enclosure systems business of Devtek, located in Toronto,
Canada. In March 2000, Sanmina acquired a printed circuit board assembly
operation located principally in San Antonio, Texas from Harris Corporation. In
March 2000, Sanmina also acquired an electromechanical assembly operation
located in Clinton, North Carolina from Alcatel USA. Acquisitions of companies
and businesses and expansion of operations involve 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;
- the possible need to restructure, modify or terminate customer
relationships of the acquired company; and
- loss of key employees of acquired operations.
Accordingly, Sanmina may experience problems in integrating the recently
acquired operations or operations associated with any future acquisition.
Sanmina therefore cannot assure you that any recent or future acquisition will
result in a positive contribution to Sanmina's results of operations.
Furthermore, Sanmina can not assure you that Sanmina will realize value from any
acquisition which equals or exceeds the consideration paid. In particular, the
successful combination of Sanmina and any businesses Sanmina acquires in the
future 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, the
activities of any future
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acquisition, problems associated with integration of management information and
reporting systems, and delays in implementation of consolidation plans, could
harm Sanmina's ability to realize the anticipated benefits of any future
acquisition. Any failure of Sanmina to realize the anticipated benefits of its
acquisitions could harm Sanmina's business and operating results, and could
cause the price of its common stock to decline. In addition, future acquisitions
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
harm Sanmina's business and operating results and cause the price of Sanmina's
common stock to decline.
In addition, Sanmina has pursued and expects to continue to pursue
opportunities to acquire assembly operations being divested by electronics
industry OEMs. Sanmina expects that competition for these opportunities among
electronics manufacturing services firms will be intense as these transactions
typically enable the acquiror to enter into long-term supply arrangements with
the divesting OEM. Accordingly, Sanmina's future results of operations could be
harmed if it is not successful in attracting a significant portion of the OEM
divestiture transactions Sanmina pursues. In addition, due to the large scale
and long-term nature of supply arrangements typically entered into in OEM
divestiture transactions and because cost reductions are generally a major
reason why the OEM is divesting operations, pricing of manufacturing services
may be less favorable to the manufacturer than in standard contractual
relationships. For example, Sanmina experienced declines in gross margins in the
first quarter of fiscal 2000 due to Sanmina's increase in sales to Nortel under
Sanmina's supply agreement relating to the operations it acquired. As Sanmina
enters into new OEM divestiture transactions, Sanmina may experience further
erosion in gross margins.
Sanmina may experience component shortages, which would cause Sanmina to
delay shipments to customers, resulting in potential declines in revenues and
operating results. Recently, a number of components purchased by Sanmina and
incorporated into assemblies and subassemblies it produces has been the subject
of shortages. These components include application-specific integrated circuits,
capacitors and connectors. Unanticipated component shortages caused Sanmina to
be unable to make certain scheduled shipments to customers in the first nine
months of fiscal 2000 and may do so in the future. The inability to make
scheduled shipments in the future could cause Sanmina to experience a shortfall
in revenues. Sanmina could also experience negative customer goodwill due to the
delay in shipment. Component shortages may also increase Sanmina's cost of goods
due to premium charges it must pay to purchase components in short supply and
due to changes in the mix of assemblies shipped to customers. For example,
shortages in certain components negatively affected Sanmina's operating results
and contributed to an increase in inventory levels during the first [nine]
months of fiscal 2000. Accordingly, component shortages could harm Sanmina's
operating results for a particular fiscal period due to the resulting revenue
shortfall or cost increases and could also damage customer relationships over a
longer-term period.
Sanmina is subject to competition and technological change, and its
business may be harmed by competitive pressures and failure to adapt to
technological changes. The electronic interconnect industry is highly
fragmented and characterized by intense competition. Sanmina competes in the
technologically advanced segment of the interconnect 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 surface mount 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 manufacturers seek orders in the open market to fill excess
capacity, thereby increasing price competition. In addition, 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. Sanmina does not currently have offshore
facilities in lower cost locations, such as Asia and Latin America. If the
Merger is completed, however, Sanmina will gain a manufacturing facility in
Malaysia. Although Sanmina plans to establish other offshore facilities, Sanmina
may not do so in time to be competitive.
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Environmental matters are a key consideration in Sanmina's business, and
failure to comply with the requirements of environmental laws could harm
Sanmina's business. Sanmina is subject to a variety of local, state and federal
environmental laws and regulations relating to the storage, use, discharge and
disposal of chemicals, solid waste and other hazardous materials used during
their manufacturing processes, as well as air quality regulations and
restrictions on water use. Proper waste disposal is a major consideration for
printed circuit board manufacturers because metals and chemicals are used in the
manufacturing process. Maintenance of environmental controls is also important
in the electronics assembly process. When violations of environmental laws
occur, Sanmina can be held liable for damages and the costs of remedial actions
and can also be subject to revocation of permits necessary to conduct its
businesses. There can be no assurance that violations of environmental laws will
not occur in the future as a result of the inability to obtain permits, human
error, equipment failure or other causes. Any permit revocations could require
Sanmina to cease or limit production at one or more facilities, which could
seriously harm Sanmina's business, financial condition and results of
operations. Moreover, the failure to comply with present and future regulations
could restrict the combined company's ability to expand facilities or could
require it to acquire costly equipment or to incur other significant expenses to
comply with environmental regulations.
Environmental laws could become more stringent over time, imposing greater
compliance costs and increasing risks and penalties associated with violations.
Sanmina operates in several environmentally sensitive locations and is subject
to potentially conflicting and changing regulatory agendas of political,
business and environmental groups. Changes or restrictions on discharge limits,
emissions levels, permitting requirements or processes, or material storage or
handling might require a high level of unplanned capital investment and/or
relocation. Compliance with new or existing regulations could seriously harm
Sanmina's business, financial condition and results of operations.
Sanmina is subject to environmental contingencies at sites operated by
acquired companies and could incur substantial costs for environmental
remediation and related activities at these sites. In November 1997, Sanmina
acquired Elexsys International, Inc. which became Sanmina's wholly-owned
subsidiary. 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.
Additional investigation is being undertaken by other parties in the area at the
request of the California Regional Water Quality Control Board. It is unknown
whether any additional remediation activities will be required as a result of
such investigations or whether any third party claims will be brought against
Sanmina alleging that they have been damaged in any way by the existence of the
contamination at the Irvine facility. 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 Sanmina 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 harm
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
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substantial remediation activities at one or more of the former Elexsys
facilities, there can be no assurance that the costs of such activities would
not harm Sanmina's business, financial condition and results of operations.
In November 1998, Sanmina acquired Altron Incorporated which became a
wholly owned subsidiary of Sanmina. 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 Sanmina
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 Sanmina does not
anticipate that such costs, if any, will be material to its financial condition
or results of operations.
Sanmina has been named as a potentially responsible party at several
contaminated disposal sites as a result of the past disposal of hazardous waste
by companies acquired by Sanmina or their corporate predecessors. While
liabilities for such historic disposal activities have not been material to
Sanmina's financial condition to date, there can be no guarantee that past
disposal activities will not result in material liability to Sanmina in the
future.
Hadco, which was recently acquired by Sanmina, is subject to environmental
contingencies at sites currently or formerly operated by it and could incur
substantial costs for environmental remediation and related activities at these
sites. In June 2000, Sanmina completed its acquisition of Hadco, which is now a
wholly-owned subsidiary of Sanmina. Hadco is aware of certain chemicals that
exist in the ground at certain of its facilities. Hadco has notified various
governmental agencies and continues to work with them to monitor and resolve
these matters. During March 1995, Hadco received a Record Of Decision (ROD) from
the New York State Department of Environmental Conservation (NYSDEC), regarding
soil and groundwater contamination at its Owego, New York facility. Based on a
Remedial Investigation and Feasibility Study (RIFS) for apparent on-site
contamination at that facility and a Focused Feasibility Study (FFS), each
prepared by environmental consultants of Hadco, the NYSDEC has approved a
remediation program of groundwater withdrawal and treatment and iterative soil
flushing. Hadco has executed a Modification of the Order on Consent to implement
the approved ROD. Capital equipment for this remediation has already been
acquired by Hadco, and future operation and maintenance costs, which will be
incurred and expended over the estimated life of the program of the next 28
years, are estimated at between $40,000 and $100,000 per year. In the summer of
1998, NYSDEC took additional samples from a wetland area near Hadco's Owego
facility. Analytical reports of earlier sediment samples indicated the presence
of certain inorganics. The new samples showed elevated levels of certain metals,
but NYSDEC has not made a determination as to the potential source of such
metals, the remedial action to be taken, or the persons to undertake and/or pay
for any remediation. Hadco and/or other third parties may be required to conduct
additional investigations and remediation at that location, the costs of which
are currently indeterminable.
Hadco commenced the operation of a groundwater extraction system at its
Derry, New Hampshire facility to address certain groundwater contamination and
groundwater migration control issues. Further investigation is underway to
determine the extent of the groundwater contaminant plume. Because of the
uncertainty regarding both the quantity of contaminants beneath the building at
the site and the long-term effectiveness of the groundwater migration control
system Hadco has installed, it is not possible to make a reliable estimate of
the length of time remedial activity will have to be performed. However, it is
anticipated that the groundwater extraction system will be operated for at least
30 years. Hadco may be required to conduct additional investigations and
remediation relating to the Derry facility. The total costs of such groundwater
extraction system and of conducting any additional investigations and
remediation relating to the Derry facility are not fully determinable.
Hadco is one of 33 entities which have been named as potentially
responsible parties in a lawsuit pending in the federal district court of New
Hampshire concerning environmental conditions at the Auburn Road,
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Londonderry, New Hampshire landfill site. Local, state and federal entities and
certain other parties to the litigation seek contribution for past costs,
totaling approximately $20 million, allegedly incurred to assess and remediate
the Auburn Road site. In December 1996, following publication and comment
period, the EPA amended the ROD to change the remedy at the Auburn Road site
from active groundwater remediation to future monitoring. In June 1999, Hadco
entered into a Consent Decree with 30 of the defendants and third-party
defendants. The Consent Decree was approved by the Court in March 2000. Under
the terms of the Consent Decree, Hadco is a cash-out party and does not have
responsibility for performance of ongoing remedial or monitoring work at the
site.
From 1974 to 1980, Hadco operated a printed circuit manufacturing facility
in Florida as a lessee. This property is the subject of a pending lawsuit in the
circuit court for Broward County, Florida (the "Florida Lawsuit") and an
investigation by the Florida Department of Environmental Protection ("FDEP"). In
connection with the investigation, Hadco and others have participated in
alternative dispute resolution regarding the site with an independent mediator.
Mediation sessions began in 1992 and continued over the next several years
through May 1998. In June 1995, Hadco and Gould, Inc., another prior lessee of
the site, were joined as third-party defendants in the pending Florida lawsuit
by a party who had previously been named as a defendant when the Florida lawsuit
was commenced in 1993 by the FDEP. As a result of the mediation, a Settlement
Agreement was entered into among Hadco, Gould and the FDEP in March 1999. The
third-party complaints against Hadco and Gould in the pending Florida lawsuit
were dismissed. The Settlement Agreement provides that Hadco and Gould will
undertake remedial action based on a Supplemental Contamination Assessment
Report and a later Feasibility Study, which has been prepared by a consultant to
Hadco and Gould and approved by FDEP. The estimated cost of the recommended
source removal described in the Feasibility Study is approximately $165,000, and
for ongoing monitoring and remediation is approximately $2.1 million. Actual
remedial activities have not yet commenced but are expected to begin in the near
future.
In March 1993, the EPA notified Hadco Santa Clara of its potential
liability for maintenance and remediation costs in connection with a hazardous
waste disposal facility operated by Casmalia Resources, a California Limited
Partnership, in Santa Barbara County, California. The EPA identified Hadco Santa
Clara as one of the 65 generators which had disposed of the greatest amounts of
materials at the site. Based on the total tonnage contributed by all generators,
Hadco Santa Clara's share is estimated at approximately 0.2% of the total
weight.
The Casmalia site was regulated by the EPA during the period when the
material was accepted. There is no allegation that Hadco Santa Clara violated
any law in the disposal of material at the sites. Rather the EPA's actions
stemmed from the fact that Casmalia Resources may not have the financial means
to implement a closure plan for the site and because of Hadco Santa Clara's
status as a generator of hazardous waste.
In June 1997, the United States District Court in Los Angeles, California
approved and entered a Consent Decree among the EPA and 49 entities (including
Hadco Santa Clara) acting through the Casmalia Steering Committee (CSC). The
Consent Decree sets forth the terms and conditions under which the CSC will
carry out work aimed at final closure of the site. Certain closure activities
will be performed by the CSC. Later work will be performed by the CSC, if funded
by other parties. Under the Consent Decree, the settling parties will work with
the EPA to pursue the non-settling parties to ensure they participate in
contributing to the closure and long-term operation and maintenance of the
facility.
The EPA will continue as the lead regulatory agency during the final
closure work. Because long-term maintenance plans for the site will not be
determined for a number of years, it has not yet been decided which regulatory
agency will oversee this phase of the work plan or how the long-term costs will
be funded. However, the Consent Decree provides a mechanism for ensuring that an
appropriate federal, state or local agency will assume regulatory responsibility
for long-term maintenance.
Failure to manage Sanmina's growth may seriously harm its
business. Sanmina's business has grown in recent years through both internal
expansion and acquisitions, and continued growth may cause a significant strain
on Sanmina's infrastructure and internal systems. To manage its growth
effectively, Sanmina must
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continue to improve and expand its management information systems. Sanmina will
face additional growth management challenges, particularly as a result of its
recent acquisitions in Europe and Asia. Future acquisitions, both in the United
States and internationally, could place additional strains on Sanmina's
management infrastructure. If Sanmina is unable to manage growth effectively,
its results of operations could be harmed.
Sanmina's existing international operations and plans to expand
international operations involve additional risks, and failure to effectively
expand internationally could harm Sanmina's operating results. Sanmina opened
its first overseas facility, located in Dublin, Ireland, in June 1997. During
June 2000 and July 2000, Sanmina acquired operations in China, Sweden and
Finland. By virtue of the Hadco acquisition, Sanmina acquired operations in
Ireland and Malaysia. 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
and economic instability, trade restrictions, changes in tariffs, labor unrest
and difficulties in staffing, coordinating communications among and managing
international operations. Additionally, Sanmina's business and operating results
may be harmed by fluctuations in international currency exchange rates as well
as increases in duty rates, difficulties in obtaining export licenses,
misappropriation of intellectual property, constraints on Sanmina's ability to
maintain or increase prices, and competition. Sanmina cannot assure you that it
will realize the anticipated strategic benefits of its international expansion
or that international operations will contribute positively to Sanmina's
business and operating results. In addition, to respond to competitive pressures
and customer requirements, Sanmina plans to further expand internationally in
lower cost locations, particularly additional locations in Asia and Latin
America. As a result of this proposed expansion, Sanmina could encounter
difficulties in scaling up production at overseas facilities or in coordinating
Sanmina's United States and international operations. In addition, Sanmina may
not realize anticipated revenue growth at new international operations. Sanmina
may elect to establish start-up operations rather than acquiring existing
businesses, which would require Sanmina to recruit management and other
personnel and build a customer base at a completely new operation. Accordingly,
unanticipated problems Sanmina encounters in establishing new international
operations could harm its business and operating results and cause its stock
price to decline.
Sanmina is subject to risks related to intellectual property rights held by
third parties. Sanmina is subject to risks related to intellectual property
rights held by third parties. In certain cases, Sanmina may find it necessary or
desirable to license or otherwise acquire rights to intellectual property rights
held by others. In July 2000, Sanmina settled one such dispute through a
licensing arrangement with the Lemelson Foundation. Other such disputes, which
could involve Sanmina in litigation or in administrative proceedings before the
United States Patent and Trademark Office or patent authorities in foreign
countries, could arise in the future. These proceedings could be costly to
conduct and could also result in the diversion of management time and attention.
In addition, adverse determinations in any proceedings of this nature could
require Sanmina to pay monetary damages and could also result in the loss of
intellectual property rights. In the event Sanmina were able to settle disputes
through licensing or similar arrangements, the costs of these licenses could be
substantial. Accordingly, future disputes regarding intellectual property rights
could harm Sanmina's business, financial condition and results of operations.
Sanmina depends on certain key personnel, and the loss of key personnel may
harm Sanmina's business. Sanmina's future success depends in large part on the
continued service of its key technical and management personnel and on its
ability to continue to attract and retain qualified employees, particularly
those highly skilled design, process and test engineers involved in the
manufacture of existing products and the development of new products and
processes. The competition for such personnel is intense, and the loss of key
employees, none of whom is subject to an employment agreement for a specified
term or a post-employment non-competition agreement, could harm Sanmina's
business.
26
<PAGE> 27
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
QUARTERLY RESULTS (UNAUDITED)
The following table contains selected unaudited quarterly financial data
for the eight fiscal quarters in the period ended October 2, 1999. 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. Sanmina'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, and March 2000, Sanmina 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 were stock splits. Common
stock prices reflect high and low reported sales prices, as reported by the
Nasdaq National Market. The acquisitions of Elexsys, Altron and Manu-Tronics,
Hadco and Essex AB were accounted for as a pooling of interests, and therefore,
all prior periods presented were restated to combine the results of the
companies.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1999 QUARTER QUARTER QUARTER QUARTER
---- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales............................... $548,738 $576,333 $604,622 $664,290
Gross profit............................ 85,518 101,013 110,105 120,274
Gross margin............................ 15.6% 17.5% 18.2% 18.1%
Operating income........................ 9,184 59,024 67,550 75,355
Operating margin........................ 1.7% 10.2% 11.2% 11.3%
Net income.............................. $ 1,033 $ 33,323 $ 39,465 $ 44,446
======== ======== ======== ========
Basic net income per share.............. $ 0.01 $ 0.24 $ 0.29 $ 0.32
======== ======== ======== ========
Diluted net income per share............ $ 0.01 $ 0.23 $ 0.27 $ 0.30
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1998 QUARTER QUARTER QUARTER QUARTER
---- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales............................... $435,799 $483,010 $499,486 $523,159
Gross profit............................ 86,373 89,209 76,649 85,051
Gross margin............................ 19.8% 18.5% 15.3% 16.3%
Operating income (loss)................. 48,049 (18,854) 35,190 44,636
Operating margin........................ 11.0% (3.9)% 7.0% 8.5%
Net income (loss)....................... $ 28,885 $(36,968) $ 18,086 $ 23,195
======== ======== ======== ========
Basic net income per share.............. $ 0.24 $ (0.31) $ 0.15 $ 0.18
======== ======== ======== ========
Diluted net income per share............ $ 0.22 $ (0.30) $ 0.14 $ 0.18
======== ======== ======== ========
</TABLE>
27
<PAGE> 28
SANMINA CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF
---------------------------
OCTOBER 2, SEPTEMBER 30,
1999 1998
---------- -------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents................................. $ 148,754 $ 96,425
Short-term investments.................................... 318,457 93,526
Accounts receivable, net of allowance for doubtful
accounts of $10,940 and $7,923......................... 335,288 262,066
Inventories, net.......................................... 299,261 196,779
Deferred income taxes..................................... 34,414 36,545
Prepaid expenses and other................................ 19,959 28,815
---------- ----------
Total current assets................................... 1,156,133 714,156
---------- ----------
Property, plant and equipment, net.......................... 549,434 532,107
Goodwill and intangibles.................................... 229,070 215,102
Long-term investments....................................... 53,056 217
Deposits and other.......................................... 19,748 10,927
---------- ----------
$2,007,441 $1,472,509
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable.......................................... $ 280,914 $ 185,332
Accrued liabilities....................................... 52,921 41,689
Accrued payroll and related benefits...................... 65,789 51,658
Current portion of long-term debt......................... 4,071 10,242
Income taxes payable...................................... 10,088 12,826
---------- ----------
Total current liabilities.............................. 413,783 301,747
---------- ----------
Long-term liabilities:
Long-term debt, net of current portion.................... 658,556 402,094
Deferred income tax liability............................. 59,058 61,195
Other..................................................... 11,950 19,076
---------- ----------
Total long-term liabilities............................ 729,564 482,365
---------- ----------
Commitments and contingencies (Note 6)
Stockholders' equity:
Preferred stock, $.01 par value, authorized 5,000 shares,
none outstanding....................................... -- --
Common stock, $.01 par value, Authorized 500,000 shares,
outstanding 138,857 and 133,375 shares................. 1,389 1,334
Additional paid-in capital................................ 479,878 419,603
Accumulated other comprehensive income (loss)............. (1,680) 794
Retained earnings......................................... 384,507 266,943
---------- ----------
Less: treasury stock at cost.............................. -- (277)
---------- ----------
Total stockholders' equity........................ 864,094 688,397
---------- ----------
$2,007,441 $1,472,509
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE> 29
SANMINA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------
OCTOBER 2, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1997
---------- ------------- -------------
<S> <C> <C> <C>
Net sales............................................ $2,393,983 $1,941,454 $1,522,811
Cost of sales........................................ 1,977,073 1,604,172 1,212,407
---------- ---------- ----------
Gross profit....................................... 416,910 337,282 310,404
---------- ---------- ----------
Operating expenses:
Selling, general and administrative................ 156,280 141,136 124,903
Amortization of goodwill and intangibles........... 15,763 13,078 7,498
Restructuring, plant closing and other
non-recurring charges........................... 16,875 4,536 8,876
Write-off of acquired in-process research and
development..................................... -- 63,050 78,000
Write down of long-lived assets.................... 11,400 2,516 --
Merger costs....................................... 5,479 3,945 --
---------- ---------- ----------
Total operating expenses........................ 205,797 228,261 219,277
---------- ---------- ----------
Operating income..................................... 211,113 109,021 91,127
Other income (expense), net.......................... (23,050) (21,492) (9,957)
---------- ---------- ----------
Income before provision for income taxes............. 188,063 87,529 81,170
Provision for income taxes........................... 69,796 54,331 65,300
---------- ---------- ----------
Net income........................................... $ 118,267 $ 33,198 $ 15,870
========== ========== ==========
Earnings per share:
Basic.............................................. $ 0.86 $ 0.27 $ 0.14
========== ========== ==========
Diluted............................................ $ 0.82 $ 0.26 $ 0.13
========== ========== ==========
Shares used in computing per share amounts:
Basic.............................................. 136,851 120,964 114,428
Diluted............................................ 144,536 126,704 120,819
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE> 30
SANMINA CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK AND
ADDITIONAL ACCUMULATED
PAID-IN-CAPITAL OTHER
-------------------- COMPREHENSIVE TREASURY
NUMBER INCOME RETAINED STOCK
OF SHARES AMOUNT (LOSS) EARNINGS AT COST TOTAL
--------- -------- ------------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1996......... 112,026 $154,618 $ (3) $225,043 $(277) $379,381
Exercise of common stock options...... 2,216 7,984 -- -- -- 7,984
Sale of common stock, net of offering
costs............................... 3,417 131,209 -- -- -- 131,209
Issuance of common stock under
employee stock purchase plan........ 442 3,163 -- -- -- 3,163
Cumulative translation adjustment..... -- -- (646) -- -- (646)
Unrealized holding gain on
investments......................... -- -- 42 -- -- 42
Income tax benefit of disqualified
dispositions........................ -- 9,975 -- -- -- 9,975
Distributions by Manu-Tronics and
Essex............................... -- -- -- (354) -- (354)
Net income............................ -- -- -- 15,870 -- 15,870
------- -------- ------- -------- ----- --------
BALANCE AT SEPTEMBER 30, 1997......... 118,101 306,949 (607) 240,559 (277) 546,624
Exercise of common stock options...... 2,413 7,893 -- -- -- 7,893
Sale of common stock.................. 174 4,726 -- -- -- 4,726
Issuance of common stock under
employee stock purchase plan........ 449 5,224 -- -- -- 5,224
Conversion of subordinated debt....... 12,238 86,250 -- -- -- 86,250
Adjustment to conform year end of
pooled entity....................... -- -- -- (3,169) -- (3,169)
Cumulative translation adjustment..... -- -- 1,255 -- -- 1,255
Unrealized holding gain on
investments......................... -- -- 146 -- -- 146
Income tax benefit of disqualified
dispositions........................ -- 9,895 -- -- -- 9,895
Distributions by Manu-Tronics......... -- -- -- (3,645) -- (3,645)
Net income............................ -- -- -- 33,198 -- 33,198
------- -------- ------- -------- ----- --------
BALANCE AT SEPTEMBER 30, 1998......... 133,375 420,937 794 266,943 (277) 688,397
Exercise of common stock options...... 2,836 27,050 -- -- -- 27,050
Issuance of common stock under
employee stock purchase plan........ 779 12,037 -- -- -- 12,037
Director and executive officer stock
grants.............................. 17 401 -- -- -- 401
Conversion of subordinated debt....... 14 398 -- -- -- 398
Retirement of treasury stock.......... -- (277) -- -- 277 --
Issuance of common stock for
businesses acquired................. 1,836 3,763 -- 832 -- 4,595
Cumulative translation adjustment..... -- -- (1,836) -- -- (1,836)
Unrealized holding loss on
investments......................... -- -- (638) -- -- (638)
Income tax benefit of disqualified
dispositions........................ -- 16,958 -- -- -- 16,958
Distributions by Manu-Tronics......... -- -- -- (1,535) -- (1,535)
Net income............................ -- -- -- 118,267 -- 118,267
------- -------- ------- -------- ----- --------
BALANCE AT OCTOBER 2, 1999............ 138,857 $481,267 $(1,680) $384,507 $ -- $864,094
======= ======== ======= ======== ===== ========
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE> 31
SANMINA CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------
OCTOBER 2, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1997
---------- ------------- -------------
<S> <C> <C> <C>
Net income.................................................. $118,267 $33,198 $15,870
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment................. (1,836) 1,255 (646)
Unrealized holding gain (loss) on investments........... (638) 146 42
-------- ------- -------
Comprehensive Income........................................ $115,793 $34,599 $15,266
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE> 32
SANMINA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------
OCTOBER 2, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1997
---------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income................................................ $ 118,267 $ 33,198 $ 15,870
Adjustments to reconcile net income to cash provided by
operating activities:
Adjustment to conform year end of pooled entities....... -- (3,169) --
Depreciation, amortization, and other................... 124,717 104,996 72,645
Restructuring, plant closing, merger and other
non-recurring charges................................. 23,686 1,429 8,876
Provision for doubtful accounts......................... 3,017 1,478 2,615
Deferred income taxes................................... (2,043) (1,955) 1,472
(Gain) loss on disposal of fixed assets................. (21) 1,092 (1,657)
Write-off of acquired in-process research and
development........................................... -- 63,050 78,000
Writedown of long-lived assets.......................... 11,400 2,516 --
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable..................................... (72,009) (29,063) (47,797)
Inventories............................................. (97,354) (28,589) (37,285)
Prepaid expenses, deposits and other.................... 16,875 2,103 (4,064)
Accounts payable and accrued liabilities................ 113,790 11,367 33,616
Income tax accounts..................................... 21,265 2,669 6,494
--------- --------- ---------
CASH PROVIDED BY OPERATING ACTIVITIES....................... 261,590 161,122 128,785
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments....................... (418,396) (101,169) (138,351)
Proceeds from maturity of short-term investments.......... 194,192 106,591 149,605
Purchases of long-term investments........................ (53,056) -- --
Purchase of property, plant and equipment................. (135,611) (149,138) (139,244)
Cash paid for businesses acquired, net.................... (75,108) (198,198) (228,540)
Proceeds from sale of assets.............................. 309 2,591 3,092
--------- --------- ---------
CASH USED FOR INVESTING ACTIVITIES.......................... (487,670) (339,323) (353,438)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on line of credit................................ -- (7,498) (1,543)
Proceeds from notes and credit facilities, net............ (77,844) 200,865 68,221
Issuance (repurchase) of convertible notes, net of
issuance costs.......................................... 340,742 (5,681) --
Payments of long-term liabilities, net.................... (23,977) 186 (3,832)
Proceeds from sale of common stock, net of issuance
costs................................................... 39,488 17,843 142,356
--------- --------- ---------
CASH PROVIDED BY FINANCING ACTIVITIES....................... 278,409 205,715 205,202
--------- --------- ---------
Increase in cash and cash equivalents....................... 52,329 27,514 (19,451)
Cash and cash equivalents at beginning of year.............. 96,425 68,911 88,362
--------- --------- ---------
Cash and cash equivalents at end of year.................... $ 148,754 $ 96,425 $ 68,911
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year:
Interest................................................ $31,494... $ 19,922 $ 19,114
========= ========= =========
Income taxes, net....................................... $57,618... $ 51,026 $ 57,045
========= ========= =========
Non-cash financing information:
Conversion of subordinated notes to equity................ $398...... $ 86,250 $ --
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION OF SANMINA
Sanmina Corporation ("Sanmina") was incorporated in Delaware in 1989 to
acquire its predecessor company which had been in the printed circuit board and
backplane business since 1980. Sanmina is an 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 interconnection 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.
Sanmina has manufacturing plants located in California, Arizona, Massachusetts,
Texas, New Hampshire, New York, North Carolina, Wisconsin, Alabama, Utah,
Canada, France, China, Finland, Sweden, Malaysia and Ireland.
On June 1, 2000, Sanmina acquired Essex AB ("Essex"), a electronics
manufacturing services ("EMS") supplier in Scandinavia. The transaction was
structured as a stock-for-stock exchange and was accounted for as a pooling of
interests. Under the terms of the acquisition agreement, each share of Essex
common stock was converted into approximately 10.2 shares of Sanmina common
stock. Approximately 2.0 million shares of Sanmina common stock were issued to
acquire Essex. On June 23, 2000, Sanmina completed its acquisition of Hadco
Corporation ("Hadco"), a manufacturer of advanced electronic interconnect
products. The acquisition was accounted for as a pooling of interests. Under the
terms of the acquisition agreement, each outstanding share of Hadco common stock
was converted into 1.4 shares of Sanmina common stock. Approximately 19.6
million shares of Sanmina common stock were issued to acquire Hadco.
As a result of the acquisitions of Essex and Hadco, Sanmina's historical
financial statements have been restated retroactively to include the financial
results of Essex and Hadco. Essex's results of operations for the years ended
December 31, 1999, 1998 and 1997 and Hadco's results of operations for the years
ended October 30, 1999, October 31, 1998 and October 25, 1997 have been combined
with Sanmina's results of operations for the years ended October 2, 1999 and
September 30, 1998 and 1997, respectively. In addition, Essex's balance sheets
as of December 31, 1999 and 1998 and Hadco's balance sheets as of October 30,
1999 and October 31, 1998 have been combined with Sanmina's balance sheets as of
October 2, 1999 and September 30, 1998, respectively. The fiscal years for Essex
and Hadco were changed to coincide with Sanmina's year end beginning in fiscal
2000. The restated financial information includes certain adjustments to
eliminate the net sales between the combining companies and certain
reclassifications to conform to Sanmina's financial statement presentation. No
adjustments were necessary to conform the accounting policies of the combining
companies.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year -- Effective October 1, 1998, Sanmina changed its fiscal year
end from September 30 to a 52 or 53-week year ending on the Saturday nearest
September 30. Accordingly, the 1999 fiscal year, which was a 53 week year, ended
on October 2, whereas the previous two years ended on September 30. All general
references to years relate to fiscal years unless otherwise noted.
Principles of Consolidation -- The consolidated financial statements
include the accounts of Sanmina and its wholly-owned subsidiaries. All
intercompany accounts and transactions have been eliminated.
Foreign Currency Translation -- For foreign subsidiaries using the local
currency as their functional currency, assets and liabilities are translated at
exchange rates in effect at the balance sheet date and income and expenses are
translated at average exchange rates. The effects of these translation
adjustments are reported in accumulated other comprehensive income (loss).
Exchange gains and losses arising from transactions denominated in a currency
other than the functional currency of the entity involved and remeasurement
adjustments for foreign operations where the U.S. dollar is the functional
currency are included in income.
33
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Management Estimates and Uncertainties -- 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.
Financial Instruments and Concentration of Credit Risk -- Financial
instruments consist of cash equivalents, short-term investments, accounts
receivable, accounts payable and long-term debt obligations. The fair value of
these financial instruments approximates their carrying amount except for the
9 1/2% Senior Subordinated Notes due 2008 ("the 9 1/2% Notes"), respectively at
October 2, 1999. The fair market value of the 9 1/2% Notes was $191.0 million
with a carrying amount of $199.4 million at October 2, 1999. Although the fair
market value of the 9 1/2% Notes is less than the carrying amount, settlement at
the reported fair value was not possible due to redemption premiums (Note 4).
As of October 2, 1999, Sanmina had no significant off balance sheet
concentrations of credit risk such as foreign currency exchange contracts or
other hedging arrangements. Financial instruments that subject Sanmina to credit
risk consist of cash and cash equivalents, short-term investments and trade
accounts receivable. Sanmina maintains the majority of its cash, cash
equivalents and short-term investment balances with financial institutions.
Sanmina has not experienced any significant losses on these investments to date.
The 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 Sanmina
to monitor current changes in business operations and to respond accordingly.
Cash Equivalents -- Sanmina considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents.
Short Term Investments -- Sanmina's investments are classified as available
for sale and are recorded at their fair value, as determined by quoted market
prices, with any unrealized holding gains or losses classified as a separate
component of stockholders' equity. Upon sale of the investments, any previously
unrealized holding 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 October 2, 1999,
the difference between the aggregate fair value and cost basis was a net
unrealized loss of $431,000. Sanmina 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 Sanmina's investments by
major security type is as follows (in thousands):
<TABLE>
<CAPTION>
AS OF OCTOBER 2, 1999
---------------------------------------------------
AMORTIZED AGGREGATE UNREALIZED UNREALIZED
COST FAIR VALUE GAIN LOSS
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. government and agency securities... $149,169 $148,951 $ 2 $(220)
State and municipal securities.......... 68,510 68,462 4 (52)
U.S. corporate and bank debt............ 160,767 160,602 34 (199)
-------- -------- ---- -----
$378,446 $378,015 $ 40 $(471)
======== ======== ==== =====
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998
---------------------------------------------------
AMORTIZED AGGREGATE UNREALIZED UNREALIZED
COST FAIR VALUE GAIN LOSS
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. government and agency securities... $ 35,912 $ 35,990 $ 79 $ (1)
State and municipal securities.......... 55,247 55,301 55 (1)
U.S. corporate and bank debt............ 33,292 33,367 77 (2)
-------- -------- ---- -----
$124,451 $124,658 $211 $ (4)
======== ======== ==== =====
</TABLE>
34
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Approximately $59.6 million and $31.1 million of the total investments in
debt securities as of October 2, 1999 and September 30, 1998 respectively, are
included in cash and cash equivalents; the remaining balance is classified as
short-term investments. As of October 2, 1999, securities with a fair value of
$352.6 million mature within one year and $25.4 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. Provisions when required are made to reduce excess inventories to
their estimated net realizable values. It is possible that estimates of net
realizable values can change in the near term. The components of inventories are
as follows (in thousands):
<TABLE>
<CAPTION>
AS OF
---------------------------
OCTOBER 2, SEPTEMBER 30,
1999 1998
---------- -------------
<S> <C> <C>
Raw materials............................................... $175,249 $101,575
Work-in-process............................................. 85,505 63,525
Finished goods.............................................. 38,507 31,679
-------- --------
$299,261 $196,779
======== ========
</TABLE>
Property, Plant and Equipment, net -- Property, plant, and equipment are
stated at cost or, in the case of property and equipment acquired through
business combinations accounted for as a purchase, at fair value based upon the
allocated purchase price at the acquisition date. Depreciation and amortization
are provided on a straight-line basis over three to ten years, (ten to forty
years for buildings) or in the case of leasehold improvements, over the
remaining term of the related lease, if shorter. Property, plant and equipment
consists of the following (in thousands):
<TABLE>
<CAPTION>
AS OF
---------------------------
OCTOBER 2, SEPTEMBER 30,
1999 1998
---------- -------------
<S> <C> <C>
Machinery and equipment.................................... $ 819,997 $ 762,675
Furniture and fixtures..................................... 51,476 18,134
Leasehold improvements..................................... 93,331 107,377
Land and buildings......................................... 146,738 109,621
Construction in progress................................... 36,667 21,985
---------- ----------
1,148,209 1,019,792
Less: Accumulated depreciation and amortization............ (598,775) (487,685)
---------- ----------
Net Property, Plant and Equipment.......................... $ 549,434 $ 532,107
========== ==========
</TABLE>
Goodwill and Intangibles -- Sanmina assesses the realizability of
long-lived and intangible assets in accordance with SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." Under SFAS No. 121, Sanmina is required to assess the valuation of its
long-lived assets, including intangible assets, based on the estimated cash
flows to be generated by such assets. Intangibles relate to goodwill, customer
lists, developed technology, workforce, trademarks and other intangibles arising
from Sanmina's acquisitions accounted for as a purchase. Intangibles are
amortized on a straight-line basis over the estimated useful lives of five to
thirty years. The realizability of intangible assets is evaluated periodically
as events or circumstances indicate a possible inability to recover the net
carrying amount. Such evaluation is based on various analyses, including cash
flow and profitability projections that incorporate, as applicable, the impact
of recent business combinations. The analyses involve a significant level of
management judgment in order to evaluate the ability of Sanmina to perform
within projections. During the year ended October 2, 1999, Sanmina determined
that an $11.4 million impairment loss had occurred related to the intangibles
associated with the acquisition of Pragmatech. During the year ended September
30, 1998,
35
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Hadco incurred a charge of approximately $2.5 million, which represents the
write down of existing assets to their net realizable value as part of a SFAS
121 review in fiscal 1998.
Subsequent to October 2, 1999, an evaluation under SFAS No. 121 indicated
that the fair value of certain intangible assets related to Hadco were less than
their carrying value. Accordingly, Sanmina recorded an adjustment to write down
$8.8 million of intangible assets during fiscal 2000. The fair value of the
intangible assets at the time of the original acquisition by Hadco was based on
expected future cash flows to be generated form the assets based on reasonable
and supportable assumptions. The existing customer relationships, and in-place
workforce, valued at the time of the original acquisition, could not be
supported at their current carrying values at the time of the merger in June
2000. As a result, based on future expected cash flows from the related customer
base, and from experienced and expected work force attrition, Sanmina has
recorded an adjustment to the carrying value of these intangible assets in the
amounts of $7.5 million and $1.3 million, respectively, in the third quarter of
fiscal 2000.
Revenue Recognition -- Sanmina recognizes revenue from manufacturing
services at the time of product shipment. Where appropriate, provisions are made
at that time for estimated warranty and return costs.
Comprehensive Income -- Comprehensive income for Sanmina consists of net
income plus the effect of unrealized holding gains or losses on investments
classified as available-for-sale and foreign currency translation adjustments.
As of October 2, 1999, the cumulative unrealized holding loss on investments and
cumulative foreign currency translation adjustment was ($453,000) and
($1,227,000), respectively. As of September 30, 1998, the cumulative unrealized
holding gain on investments and cumulative foreign currency translation
adjustments was $185,000 and $609,000, respectively.
Stock-Based Compensation -- Sanmina has adopted the disclosure provisions
of SFAS 123, "Accounting for Stock Based Compensation." In accordance with the
provisions of SFAS 123, Sanmina applies Accounting Principles Board ("APB")
Opinion 25 and related interpretations in accounting for its employee stock
option plans. See Note 10 for a summary of the pro forma effects on reported net
income and earnings per share for fiscal years 1999, 1998 and 1997 based on the
fair value of options and shares granted as prescribed by SFAS 123.
Reclassification -- Sanmina has reclassified certain prior year information
to conform to the current year's presentation.
Recent Accounting Pronouncements -- Effective in the first quarter of
fiscal 1999, Sanmina adopted the American Institute of Certified Public
Accountants ("AICPA") Statement of Position ("SOP") 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for internal use." SOP 98-1
provides guidance on accounting for the costs of computer software developed or
obtained for internal use and for determining when specific costs should be
capitalized and when they should be expensed. The impact of adopting SOP 98-1
was not significant to Sanmina's financial position, results of operations or
cash flows.
In June 1999, the Financial Accounting Standards Board issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133," which amends SFAS No. 133 to be
effective for all fiscal years beginning after June 15, 2000. The statement
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value. The statement also requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Sanmina expects that the adoption of SFAS No.
137 will not have a material impact on its financial position, results of
operations or cash flows. Sanmina will adopt SFAS No. 133 in the first quarter
of fiscal 2001.
In December 1999, the Securities and Exchange Commission issued SAB No.
101, "Revenue Recognition in Financial Statements," which will be effective for
Sanmina in the fourth quarter of fiscal 2001. Sanmina is currently analyzing
this statement and management does not expect the adoption of this statement to
have a material effect on its results of operations or cash flows.
36
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In March 2000, the FASB issued Financial Standards Board Interpretation No.
44, "Accounting for Certain Transactions involving Stock Compensation -- an
Interpretation of APB Opinion No. 25" ("FIN No. 44"). FIN No. 44 addresses the
application of APB No. 25 to clarify, among other issues, (a) the definition of
employee for purposes of applying APB No. 25, (b) the criteria for determining
whether a plan qualifies as a noncompensatory plan, (c) the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. FIN No. 44 is effective July 1, 2000, but
certain conclusions cover specific events that occur after either December 15,
1998, or January 12, 2000. To the extent FIN No. 44 covers events occurring
during the period after applying the interpretation, the events will be
recognized on a prospective basis from July 1, 2000. Sanmina is currently
evaluating FIN No. 44 and does not expect that it will have a material effect on
its financial position or results of operations.
NOTE 3. EARNINGS PER SHARE
Basic earnings per share was computed by dividing net income by the
weighted average number of shares of common stock outstanding during the period.
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 upon issuance, if dilutive. For the years ended
October 2, 1999, and September 30, 1998 and 1997, 4,969,823, 11,154,751 and
12,639,318 potentially dilutive shares from the conversion of the convertible
subordinated debt and after-tax interest expense of $4.6 million, $4.2 million
and $3.5 million, respectively, were not included in the computation of diluted
earnings per share because to do so would be anti-dilutive. A reconciliation of
the net income and weighted average number of shares used for the diluted
earnings per share computations follows (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------
OCTOBER 2, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1997
---------- ------------- -------------
<S> <C> <C> <C>
Net income..................................... $118,267 $ 33,198 $ 15,870
Weighted average number of shares outstanding
during the period............................ 136,851 120,964 114,428
Weighted average number of shares for stock
options outstanding for the period........... 7,685 5,740 6,391
-------- -------- --------
Weighted average number of shares.............. 144,536 126,704 120,819
======== ======== ========
Diluted earnings per share..................... $ 0.82 $ 0.26 $ 0.13
======== ======== ========
</TABLE>
37
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
AS OF
---------------------------
OCTOBER 2, SEPTEMBER 30,
1999 1998
---------- -------------
<S> <C> <C>
Convertible Subordinated Notes due 2004..................... $350,000 $ --
9 1/2% Senior Subordinated Notes due 2008................... 199,422 199,354
Revolving Credit Agreements (Note 5)........................ 99,988 176,031
Obligations under capital leases with interest rates ranging
from 7.0% to 7.75%........................................ 7,318 30,452
Convertible Subordinated Notes due 2012..................... 5,259 5,767
Variable Rate Mortgages..................................... 640 732
-------- --------
Total....................................................... 662,627 412,336
Less: current portion....................................... (4,071) (10,242)
-------- --------
Total Long-term debt........................................ $658,556 $402,094
======== ========
</TABLE>
Convertible Subordinated Notes due 2004 -- On May 1, 1999, Sanmina issued
$350.0 million of 4 1/4% convertible subordinated notes (the "4 1/4% Notes") due
on May 1, 2004. The 4 1/4% Notes are convertible into common stock, at the
option of the note holder, at a conversion price of approximately $44.33 per
share, subject to adjustments in certain events. The 4 1/4% Notes are
subordinated in right of payment to all existing and future senior indebtedness,
as defined, of Sanmina. The 4 1/4% Notes are redeemable at the option of Sanmina
on or after May 6, 2002. Interest is payable semi-annually on May 1 and November
1.
9 1/2% Senior Subordinated Notes due 2008 -- On May 18, 1998, Hadco issued
$200.9 million aggregate principal amount of its 9 1/2% Senior Subordinated
Notes due 2008 (the "9 1/2% Notes"). Interest on the 9 1/2% Notes is payable
semi-annually on each June 15 and December 15 and commenced December 15, 1998.
The 9 1/2% Notes are redeemable at the option of Hadco, in whole or in part, at
any time on or after June 15, 2003, at 104.75% of their principal amount, plus
accrued interest, with such percentages declining ratably to 100% of their
principal amount, plus accrued interest. At any time on or prior to June 15,
2001 and subject to certain conditions, up to 35% of the aggregate principal
amount of the 9 1/2% Notes may be redeemed, at the option of Hadco. In addition,
at any time prior to June 15, 2003, Hadco may redeem the 9 1/2% Notes, at its
option, in whole or in part, at a price equal to the principal amount thereof,
together with accrued interest, plus the applicable premium (as defined in the
Indenture governing the 9 1/2% Notes). The 9 1/2% Notes are guaranteed, on a
senior subordinated basis, by each of certain Hadco subsidiaries. The net
proceeds of $193.8 million received by Hadco from the issuance of the 9 1/2%
Notes, was used to repay outstanding indebtedness incurred to, among other
things, finance acquisitions.
In July 2000, Sanmina initiated an offer to purchase the 9 1/2% Notes. The
offer to redeem was required by the terms of the Indenture under which the
9 1/2% Notes were issued as a result of a change in control provision when
Sanmina acquired Hadco. The redemption was at 101% of the principal amount of
the 9 1/2% Notes. On August 24, 2000, Sanmina redeemed $187.9 million of the
outstanding 9 1/2% Notes. The redemption premium and deferred debt costs related
to the 9 1/2% Notes will be expensed by Sanmina in the fourth quarter of fiscal
2000. These costs are expected to be approximately $8.0 million. All 9 1/2%
Notes not redeemed as part of the offer will remain outstanding. Sanmina may
elect to purchase the remaining outstanding 9 1/2% Notes through the open market
or negotiated transactions, additional tenders, or exchange offers.
Convertible Subordinated Notes due 2012 -- In 1987, Elexsys issued $32.0
million of 5.5% convertible subordinated debentures (the "Debentures") due on
March 1, 2012. The Debentures are currently convertible into shares of common
stock at $29.93, subject to adjustment under certain conditions. The Debentures
are redeemable by Sanmina at declining premiums prior to March 1, 1997 and
thereafter at 100 percent of the
38
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $16.0 million and $4.0 million of
the Debentures in fiscal 1994 and fiscal 1995, respectively, Sanmina 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. The
Debentures are subordinated to all senior indebtedness of Sanmina.
Other -- In 1995, Sanmina issued $86.3 million of 5.5% Convertible
Subordinated Notes (the "5.5% Notes") which were due in 2002. The 5.5% Notes
were convertible into common stock, at the option of the note holder, and were
redeemable at the option of Sanmina 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. On August 19, 1998,
Sanmina called for redemption of the 5.5% Notes which represented $86.3 million
in debt. All note holders elected to convert their notes to equity.
Maturities of long-term debt, including capital lease obligations, are as
follows as of October 2, 1999 (in thousands):
<TABLE>
<CAPTION>
AMOUNT
--------
<S> <C>
FISCAL YEARS ENDING
2000........................................................ $ 4,071
2001........................................................ 9,919
2002........................................................ 83,421
2003........................................................ 8,421
2004........................................................ 350,092
Thereafter.................................................. 206,703
--------
Total............................................. $662,627
========
</TABLE>
NOTE 5. REVOLVING CREDIT AGREEMENTS
Sanmina's revolving line of credit with various banks is related to Hadco's
Amended and Restated Revolving Credit Agreement, as amended (the "Credit
Facility"). The Credit Facility provides, among other things, for direct
borrowings for up to the lesser of $198.8 million or the Borrowing Base, as
defined in the Credit Facility, and expires January 8, 2002. Interest on loans
outstanding under the Credit Facility is payable at Sanmina's option at either
(i) the Base Rate (as defined in the Credit Facility) or (ii) the Eurodollar
Rate, plus the Applicable Eurodollar Rate Margin (both as defined in the Credit
Facility). Sanmina is required to pay a quarterly commitment fee ranging from
0.2% to 0.375% per annum for the unused commitment under the Credit Facility.
Sanmina is also required to pay a quarterly usage fee based on an Applicable
Base Rate Usage Fee Margin and an Applicable Eurodollar Rate Usage Fee Margin
(both as defined in the Credit Facility). At October 2, 1999 and September 30,
1998, borrowings of $75.0 million and $150.0 million, respectively, were
outstanding under the Credit Facility at weighted average interest rates of
6.31% and 6.58%, respectively. Borrowing availability under the Credit Facility
was up to a maximum amount of $123.8 million at October 2, 1999.
The Credit Facility contains customary representations and warranties. The
Credit Facility also contains extensive affirmative and negative covenants,
including, among others, certain limits on the ability of Hadco and its
subsidiaries to incur indebtedness, create liens, make investments, pay
dividends or other distributions, engage in mergers, consolidations,
acquisitions or dispositions, enter into sale and lease-back transactions, enter
into guarantees, prepay subordinated indebtedness, create any new series of
capital stock or amend the terms of existing capital stock. The Credit Facility
also required Hadco to maintain certain financial covenants.
39
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Sanmina also has a line of credit arrangement with a Malaysian bank
denominated in Malaysian ringgits and U.S. dollars for aggregate borrowings of
approximately $3.4 million for the purpose of acquiring land, facilities and
equipment for the Malaysian subsidiary. The arrangement is renewable annually.
At October 2, 1999, and September 30, 1998 there were no amounts outstanding
under this arrangement.
Essex has a line of credit arrangement with a Swedish bank denominated in
Swedish Krona for aggregate borrowings of up to SEK 300,000,000 (approximately
$35.0 million). Borrowings outstanding on this line of credit arrangement are
secured by all of the assets of Essex, accrue interest at 4.63%, and require
that Essex maintain certain financial ratios over a period of five years. As of
October 2, 1999 and September 30, 1998, $25.0 million and $26.0 million,
respectively, were outstanding under this line of credit.
NOTE 6. COMMITMENTS AND CONTINGENCIES
Operating Leases
Sanmina leases its facilities under operating leases expiring at various
dates through 2009. Sanmina is responsible for utilities, maintenance, insurance
and property taxes under the leases. Minimum future lease payments under
operating leases are approximately as follows (in thousands):
<TABLE>
<S> <C>
FISCAL YEARS ENDING
2000........................................................ $19,272
2001........................................................ 16,013
2002........................................................ 14,677
2003........................................................ 13,361
2004........................................................ 8,085
Thereafter.................................................. 25,303
-------
Future Minimum Lease Payments............................... $96,711
=======
</TABLE>
Rent expense under operating leases was approximately $23.1 million, $17.4
million and $13.5 million for the years ended October 2, 1999, September 30,
1998, and 1997, respectively.
In November 1998, Sanmina entered into an operating lease agreement for a
new corporate headquarters and new facilities for its principal Northern
California assembly operations. This campus facility, which comprises
approximately 330,000 square feet, is located in San Jose, California. A
condition of this operating lease is that Sanmina pledges $52.9 million to the
administrative agent until the end of the lease's initial term, which is
included in long-term investments in the accompanying consolidated balance
sheet.
Sanmina had commitments to purchase approximately $9.2 million of
manufacturing equipment and approximately $1.4 million of leasehold improvements
as of October 2, 1999. The majority of these commitments are expected to be
completed by the end of fiscal 2000.
Environmental Matters
In March 1995, Hadco received a Record of Decision ("ROD") from the New
York State Department of Environmental Conservation ("NYSDEC"), regarding soil
and groundwater contamination at its Owego, New York facility. Based on a
Remedial Investigation and Feasibility Study for apparent on-site contamination
at that facility and a Focused Feasibility Study each prepared by environmental
consultants of Hadco, the NYSDEC has approved a remediation program of
groundwater withdrawal and treatment and iterative soil flushing. Hadco has
executed a Modification of the Order on Consent to implement the approved ROD.
Capital equipment for this remediation has already been acquired by Hadco, and
future operation and maintenance costs, which will be incurred and expended over
the estimated life of the program of the next 28 years, are estimated at between
$40,000 and $100,000 per year. In the summer of 1998, NYSDEC took additional
samples from a wetland area near Hadco's Owego facility. Analytical reports of
earlier sediment
40
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
samples indicated the presence of certain inorganics. The new samples showed
elevated levels of certain metals, but NYSDEC has not made a determination as to
the potential source of such metals, the remedial action to be taken, or the
persons to undertake and/or pay for any remediation. There can be no assurance
that Hadco and/or other third parties will not be required to conduct additional
investigations and remediation at that location, the costs of which are
currently indeterminable.
Hadco has commenced the operation of a groundwater extraction system at its
Derry, New Hampshire facility to address certain groundwater contamination and
migration control issues. It is not possible to make a reliable estimate of the
length of time remedial activity will have to be performed. However, it is
anticipated that the groundwater extraction system will be operated for at least
30 years. There can be no assurance that Hadco will not be required to conduct
additional investigations and remediation relating to the Derry facility. The
total costs of such groundwater extraction system and of conducting any
additional investigations and remediation relating to the Derry facility are not
fully determinable.
In November 1997, Sanmina acquired Elexsys International, Inc. ("Elexsys")
which became Sanmina's wholly-owned subsidiary. 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 contamination discovered at Elexsys' Irvine, California facility in
1989. Elexsys voluntarily installed a groundwater remediation system at the
Irvine facility in 1994. Additional investigation is being undertaken by other
parties in the area at the request of the California Regional Water Quality
Control Board. It is unknown whether any additional remediation activities will
be required as a result of such investigations or whether any third party claims
will be brought against Sanmina alleging that they have been damaged in any way
by the existence of the contamination at the Irvine facility. 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 management do 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 or
consolidated statement of operations. However, in the event Sanmina is required
to undertake additional groundwater or soil cleanup, the costs of such cleanup
are likely to be substantial. Management 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.
Management believes, based on the limited information currently available, that
the cost of any groundwater or soil clean-up that may be required would not harm
Sanmina's business, financial condition and results of operations.
In November 1998, Sanmina acquired Altron Incorporated ("Altron") which
became a wholly owned subsidiary of Sanmina. 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
management believe 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,
41
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
but management does not anticipate that such costs, if any, will be material to
its financial condition or results of operations.
Sanmina has been named as a potentially responsible party at several other
contaminated disposal sites as a result of the past disposal of hazardous waste
by companies acquired by Sanmina or their corporate predecessors. Sanmina
accrues estimated costs associated with known environmental matters, when such
costs can be reasonably estimated. The cost estimates relating to future
environmental clean-up are subject to numerous variables, the effects of which
can be difficult to measure, including the stage of the environmental
investigations, the nature of potential remedies, possible joint and several
liability, the magnitude of possible contamination, the difficulty of
determining future liability, the time over which remediation might occur, and
the possible effects of changing laws and regulations. The total reserve for
environmental matters currently identified by Sanmina amounted to $15.4 million
at October 2, 1999 and $16.2 million at September 30, 1998. Management believes
the ultimate disposition of the above known environmental matters will not have
a material adverse effect on the liquidity, capital resources, business or
consolidated financial position of Sanmina. However, one or more of such
environmental matters could have a significant negative impact on the
consolidated financial results for a particular reporting period.
Litigation
Hadco is one of 33 entities which have been named as potentially
responsible parties in a lawsuit pending in the federal district court of New
Hampshire concerning environmental conditions at the Auburn Road, Londonderry,
New Hampshire landfill site. Local, state and federal entities and certain other
parties to the litigation seek contribution for past costs, totaling
approximately $20.0 million, allegedly incurred to assess and remedy the Auburn
Road site. In December 1996, following publication and comment period, the U.S.
Environmental Protection Agency ("EPA") amended the ROD to change the remedy at
the Auburn Road site from active groundwater remediation to future monitoring.
In June 1999, Hadco entered into a Consent Decree with 30 of the defendants and
third-party defendants. The Consent Decree was approved by the federal and state
governments in December 1999, and lodged with the Court. The Court must still
approve the Consent Decree. Under the terms of the Consent Decree, Hadco is a
cash-out party and does not have responsibility for performance of ongoing
remedial or monitoring work at the site.
From 1974 to 1980, Hadco operated a printed circuit manufacturing facility
in Florida as a lessee. This property is the subject of a pending lawsuit in the
circuit court for Broward County, Florida (the "Florida Lawsuit") and an
investigation by the Florida Department of Environmental Protection ("FDEP"). In
connection with the investigation, Hadco and others have participated in
alternative dispute resolution regarding the site with an independent mediator.
Mediation sessions began in 1992 and continued through May 1998. In June 1995,
Hadco and Gould, Inc. ("Gould"), another prior lessee of the site, were joined
as third-party defendants in the pending Florida Lawsuit by a party who had
previously been named as a defendant when the Florida Lawsuit was commenced in
1993 by the FDEP. As a result of the mediation, a Settlement Agreement was
entered into among Hadco, Gould and the FDEP in March 1999. The third-party
complaints against Hadco and Gould in the pending Florida Lawsuit were
dismissed. The Settlement Agreement provides that Hadco and Gould will undertake
remedial action based on a Supplemental Contamination Assessment Report and a
later Feasibility Study, which has been prepared by a consultant to Hadco and
Gould and approved by the FDEP. The estimated cost of the recommended source
removal described in the Feasibility Study is approximately $165,000, and for
ongoing monitoring and remediation is approximately $2.1 million. Actual
remedial activities have not yet commenced.
In March 1993, the EPA notified Hadco of its potential liability for
maintenance and remediation costs in connection with a hazardous waste disposal
facility operated by Casmalia Resources, a California Limited Partnership, in
Santa Barbara County, California. The EPA identified Hadco as one of the 65
generators that had disposed the greatest amounts of materials at the site.
Based on the total tonnage contributed by all generators, Hadco Santa Clara's
share is estimated at approximately 0.2% of the total weight.
42
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In June 1997, the United States District Court in Los Angeles, California
approved and entered a Consent Decree among the EPA and 49 entities (including
Hadco) acting through the Casmalia Steering Committee ("CSC"). The Consent
Decree sets forth the terms and conditions under which the CSC will carry out
work aimed at final closure of the site. Certain closure activities will be
performed by the CSC. Later work will be performed by the CSC, if funded by
other parties. Under the Consent Decree, the settling parties will work with the
EPA to pursue the non-settling parties to ensure they participate in
contributing to the closure and long-term operation and maintenance of the
facility.
The future costs in connection with the lawsuits described in the above
paragraphs are currently indeterminable due to such factors as the unknown
timing and extent of any future remedial actions which may be required, the
extent of any liability of Sanmina and its acquired entities and of other
potentially responsible parties, and the financial resources of the other
potentially responsible parties. Management currently believes, based on the
facts currently known to it, that it is probable that the ultimate dispositions
of the above lawsuits will not have a material adverse effect on Sanmina's
business and financial condition; however, there can be no assurance that this
will be the case.
From time to time, Sanmina is a party to litigation which arises in the
ordinary course of business. Sanmina believes that the resolution of this
litigation will not materially harm Sanmina's business, financial condition or
results of operations.
NOTE 7. RETIREMENT PLANS
Sanmina has various retirement plans that cover the majority of its
employees. Sanmina's retirement plans permit participants to elect to have
contributions made to the retirement plans in the form of reductions in salary
under Section 401(k) of the Internal Revenue Code. Under the Sanmina retirement
plans, Sanmina matched a portion of employee contributions. The amounts
contributed by Sanmina and its acquired businesses as 401(k) matches against
employee contributions were approximately $6.4 million, $4.2 million, and $1.1
million during the fiscal years ended October 2, 1999, September 30, 1998 and
September 30, 1997, respectively.
NOTE 8. ACQUISITIONS
On January 10, 1997, Hadco acquired all of the outstanding common stock of
Zycon Corporation ("Zycon") (the "Zycon Acquisition"), and on March 20, 1998,
Hadco acquired all of the outstanding common stock of Continental Circuits Corp.
("Continental") (the "Continental Acquisition," and together with the Zycon
Acquisition, the "Acquisitions"). The Acquisitions were financed by Hadco's
unsecured senior revolving credit facility with a group of banks. Hadco borrowed
approximately $215.0 million upon consummation of the Zycon Acquisition and
approximately $220.0 million upon consummation of the Continental Acquisition.
The Acquisitions were accounted for as purchases and, accordingly, Zycon's and
Continental's operating results since the respective dates of acquisition are
included in the accompanying consolidated financial statements. The purchase
price of the Acquisitions was based on the fair value of the assets acquired and
liabilities assumed at the acquisition date. Significant portions of the
purchase price of both were identified in independent appraisals, using proven
valuation procedures and techniques, as intangible assets. These intangible
assets include approximately $78.0 million and $63.1 million for Zycon and
Continental, respectively, for acquired in-process research and development
("in-process R&D") for projects that did not have future alternative uses. This
allocation represents the estimated fair value based on risk-adjusted cash flows
related to the in-process R&D projects. At the date of each acquisition, the
development of these projects had not yet reached technological feasibility, and
the in-process R&D had no alternative future uses. Accordingly, these costs were
expensed as of the respective acquisition date.
43
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate purchase prices of $212.5 million and $190.2 million,
including acquisition costs, for the Zycon Acquisition and Continental
Acquisition, respectively, were allocated as follows (in thousands):
<TABLE>
<CAPTION>
ZYCON CONTINENTAL
--------- -----------
<S> <C> <C>
Current assets....................................... $ 41,790 $ 24,056
Property, plant and equipment........................ 95,193 67,144
Acquired intangibles................................. 65,500 46,190
In-process R&D....................................... 78,000 63,050
Other assets......................................... 3,526 233
Goodwill............................................. 38,979 55,864
Liabilities assumed.................................. (110,503) (66,381)
--------- --------
$ 212,485 $190,156
========= ========
</TABLE>
Unaudited pro forma operating results of Sanmina, assuming the Zycon
Acquisition occurred on October 1, 1996 and the Continental Acquisition occurred
on October 1, 1997, are as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------- -------------
<S> <C> <C>
Revenue........................................... $1,994,817 $1,712,839
Net income........................................ 88,827 89,907
Diluted net income per share...................... $ 0.70 $ 0.74
Shares used in calculating per share amounts...... 126,704 120,819
</TABLE>
For purposes of these pro forma operating results, the in-process R&D for
Zycon and Continental of approximately $78.0 million and $63.1 million,
respectively was assumed to have been written off prior to September 30, 1996
and September 30, 1997, respectively, so that the operating results presented
include only recurring costs.
In November 1997, Sanmina acquired Elexsys. Under the terms of the
acquisition agreement, Sanmina's common stock was exchanged for all of Elexsys'
outstanding common stock. Approximately 6.6 million shares of common stock were
issued to acquire Elexsys. The acquisition was accounted for as a
pooling-of-interests, and therefore, all prior periods presented were restated
to combine the results of the two companies.
On February 23, 1998, Sanmina 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 purchase price was allocated to the
net liabilities assumed on a fair value basis. The acquisition resulted in
goodwill of $11.5 million which was to be amortized over a ten year period.
During fiscal 1999, Sanmina recorded an adjustment to write down the remaining
$11.4 million of unamortized goodwill arising from the acquisition. The fair
value of Pragmatech at the acquisition date was based on the estimated future
cash flows to be generated from the assets based on reasonable and supportable
assumptions. Financial projections prepared at the time of the acquisition of
Pragmatech reflected Sanmina's belief that Sanmina would continue to provide
electronics manufacturing services to existing Pragmatech customers and would
grow the Pragmatech business at Pragmatech's existing facilities. However, the
existing Pragmatech customer relationships could not be restructured to conform
to Sanmina's pricing and revenue models, and as a result, the relationships with
the former Pragmatech customers have terminated. In addition, Sanmina closed
several of the former Pragmatech facilities in fiscal 1998. As a result of these
operational factors, Sanmina's analysis of projected revenues, results of
operations, and cash flows attributable to the few
44
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
remaining Pragmatech customers did not support the carrying value of Pragmatech
assets, including the unamortized goodwill.
The unaudited pro forma financial information for the years ended September
30, 1998 and 1997 is presented below as if Pragmatech had been acquired on
October 1, 1996 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------- -------------
<S> <C> <C>
Revenue........................................... $1,968,450 $1,577,365
Net Income........................................ 30,643 13,992
Diluted net income per share...................... $ 0.24 $ 0.12
Shares used in calculating per share amounts...... 126,704 120,819
</TABLE>
In November 1998, Sanmina acquired Altron. Under the terms of the
acquisition agreement, each share of Altron common stock was converted into
0.909 shares of Sanmina common stock. Approximately 14.4 million shares of
common stock were issued to acquire Altron. The acquisition was accounted for as
a pooling-of-interests, and therefore, all prior periods presented were restated
to combine the results of the companies. Altron's year end was December 31. For
purposes of the restatement, Altron's restated year ended September 30, 1998 was
combined with Sanmina's year ended September 30, 1998 and Altron's years ended
December 31, 1997 and December 31, 1996 were combined with Sanmina's year ended
September 30, 1997 and September 30, 1996 respectively. As a result, the net
sales and net income of Altron for the quarter ended December 31, 1997, have
been included in both fiscal 1998 and 1997. An adjustment of $3.2 million to
account for the duplication of net income has been made to retained earnings in
fiscal 1998.
On December 28, 1998, Sanmina acquired Telo Electronics, Incorporated, a
California corporation ("Telo"). Sanmina issued approximately 1.9 million shares
of Sanmina common stock in exchange for 100% of the outstanding common stock of
Telo. The acquisition was accounted for as a pooling of interests. Due to the
immateriality of this acquisition to Sanmina's consolidated financial position
and results of operations, Telo has been included in Sanmina's consolidated
results of operations as of the beginning of fiscal 1999 (October 1, 1998), and
therefore, amounts presented for periods prior to fiscal 1999 have not been
restated to include Telo's historical results of operations.
In March 1999, Sanmina acquired Manu-Tronics, Incorporated, a Wisconsin
corporation ("Manu-Tronics"). Sanmina issued approximately 1.7 million shares of
Sanmina common stock in exchange for 100% of the outstanding common stock of
Manu-Tronics. The acquisition was accounted for as a pooling-of-interests, and
therefore, all prior periods presented were restated to combine the results of
the two companies.
On August 4, 1999, Sanmina announced the agreement to acquire certain
operations of Nortel Networks Corporation's Wireless Electro-Mechanical
Subsystem Assembly ("EMSS"). As part of the agreement, Sanmina would acquire
certain assets of Nortel's EMSS operations in Calgary, Alberta, Canada, and
Chateaudun, France. On October 1, 1999, Sanmina completed the acquisition of
certain Calgary EMSS assets and liabilities for a purchase price of
approximately $47.2 million which was accounted for as a purchase. The purchase
price was allocated to the net assets acquired, which consisted of inventories,
equipment, and accrued payroll related expenses, on a fair value basis. The
results of operations for the year ended October 2, 1999, include the results of
operations of this business from the date of acquisition. The acquisition
resulted in goodwill of $29.6 million which is being amortized over a fifteen
year period.
45
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The unaudited pro forma financial information for the years ended October
2, 1999 and September 30, 1998 is presented below as if the Calgary EMSS
operations had been acquired on October 1, 1997 (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------
OCTOBER 2, SEPTEMBER, 30
1999 1998
---------- -------------
<S> <C> <C>
Revenue............................................ $2,528,124 $2,068,654
Net Income......................................... 118,298 33,192
Diluted net income per share....................... $ 0.82 $ 0.26
Shares used in calculating per share amounts....... 144,536 126,704
</TABLE>
As a result of the recent pooling of interests accounting for Essex and
Hadco, and the prior pooling of interests accounting for Elexsys, Altron and
Manu-Tronics, Sanmina has retroactively restated its historical results of
operations to include the results of operations of all entities. The financial
information presented gives effect to such restatement. A reconciliation of the
net sales and net income for the year ended October 2, 1999, September 30, 1998
and 1997, to previously reported information, is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------
OCTOBER 2, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1997
---------- ------------- -------------
<S> <C> <C> <C>
Net Sales:
Sanmina......................... $1,214,744 $ 722,581 $ 405,212
Elexsys......................... -- -- 164,575
Altron.......................... -- 201,207 172,428
Manu-Tronics.................... -- 68,033 60,849
Hadco........................... 1,005,970 826,359 648,705
Essex........................... 176,409 124,685 72,125
Eliminations....................... (3,140) (1,411) (1,083)
---------- ---------- ----------
Combined........................ $2,393,983 $1,941,454 $1,522,811
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------
OCTOBER 2, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1997
---------- ------------- -------------
<S> <C> <C> <C>
Net Income:
Sanmina.............................. $ 93,697 $ 68,151 $ 40,902
Elexsys.............................. -- -- (10,377)
Altron............................... -- 13,088 14,667
Manu-Tronics......................... -- 4,390 4,164
Hadco................................ 21,964 (54,110) (36,493)
Essex................................ 2,606 1,679 3,007
-------- -------- --------
Combined.......................... $118,267 $ 33,198 $ 15,870
======== ======== ========
</TABLE>
Merger costs of $5.5 million in fiscal 1999 consisted of fees for
investment bankers, attorneys, accountants and other direct merger related
expenses for those acquisitions that were accounted for using the pooling-of-
interests method. In 1998, Sanmina recorded a charge of $3.9 million related to
the merger costs for the Elexsys acquisition.
In connection with the acquisition of Essex and Hadco in the third quarter
of fiscal 2000, Sanmina incurred merger and restructuring costs of $47.2
million. The merger and restructuring costs are comprised of $27.3 million for
executive severance, expected work force attrition and related costs ((accrual
made in
46
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accordance with the criteria in EITF 94-3 "Liability Recognition for Costs to
Exit an Activity" (including certain costs incurred in a restructuring)), $15.9
million for investment banking and related fees and expenses, $2.9 million for
accounting, legal, and related fees and expenses, and $1.1 million of other
related restructuring costs.
Sanmina has also completed several other smaller acquisitions during fiscal
1999. These transactions involved the purchase of either stock or assets in
exchange for cash and were accounted for as purchase transactions. Pro forma
statements of operations reflecting these acquisitions are not shown, as they
would not differ materially from reported results.
Acquisitions subsequent to October 2, 1999
On October 5, 1999, Sanmina acquired Devtek Electronic Packaging Systems
Division ("DEPS") of Devtek Electronics Enclosure, Inc. The purchase price was
approximately $26.5 million. The acquisition, which was accounted for as a
purchase in the first quarter of fiscal 2000, included the payment of cash and
the assumption of debt.
On November 3, 1999, Sanmina completed the acquisition of certain
Chateaudun EMSS assets and liabilities of Nortel Networks Corporation for a
purchase price of approximately $14.2 million, which was accounted for as a
purchase in the first quarter of fiscal 2000. The purchase price was allocated
to the net assets acquired, which consisted of inventories, equipment, and
accrued payroll related expenses, on a fair value basis. The acquisition
resulted in goodwill of $6.0 million, which will be amortized over fifteen
years.
On March 1, 2000, Sanmina acquired certain printed circuit board assembly
("PCBA") manufacturing assets from Harris Corporation ("Harris") for a cash
purchase price of approximately $1.7 million. This transaction was accounted for
as a purchase in the second quarter of fiscal 2000. Under the terms of the
agreement, Sanmina acquired Harris' PCBA manufacturing assets and inventory and
will lease Harris' ISO 9002-certified, state-of-the art manufacturing facility
in San Antonio, Texas. The agreement also includes a three-year strategic
manufacturing partnership agreement for Harris to outsource its commercial PCBA
manufacturing to Sanmina.
On March 6, 2000, Sanmina acquired Alcatel's North Carolina electronic
enclosure systems facility for a purchase price of approximately $23.8 million.
This transaction was accounted for as a purchase in the second quarter of fiscal
2000. The purchase price was allocated to the net assets acquired, which
consisted of inventories, equipment, and accrued payroll related expenses, based
on fair market value, resulting in goodwill of approximately $8 million, which
will be amortized over a period of 10 years. The transaction also includes a
three-year manufacturing service contract between Sanmina and Alcatel.
On June 27, 2000, Sanmina acquired InterWorks Computer Products, Inc.
("Interworks") for a cash purchase price of approximately $45.0 million.
Interworks is a designer and manufacturer of standard and custom modular
subsystems, focused on meeting the growing needs of the networking equipment and
communications sectors. This transaction was accounted for as a purchase in the
third quarter of fiscal 2000. InterWorks designs, manufactures, tests and
distributes a complete line of Digital Signal Processor modular solutions and
advanced memory products to leading electronics original equipment manufacturers
serving the networking and telecommunications markets.
On July 10, 2000, Sanmina acquired a PCB assembly and system assembly
facility located in Shenzhen, Guang Dong province in China. The acquisition,
which will be accounted for as a purchase in the fourth quarter of fiscal 2000,
also includes administrative offices in Hong Kong and a branch procurement
office in Taiwan. The purchase price was approximately $65.0 million in cash.
The facilities in China include a manufacturing facility with administrative and
dormitory buildings.
On August 4, 2000, Sanmina acquired certain Electronics Computer-Aided
Design ("ECAD"), Electronics Systems Packaging Design ("ESP") and Product
Integrity ("PI") operations from Nortel Networks. The agreement calls for the
acquisition of test facilities and related equipment and would involve
47
<PAGE> 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the transfer of employees in several expert physical design teams. The
transaction will be accounted for as a purchase in the fourth quarter of fiscal
2000. The purchase price for this acquisition was approximately $6.5 million in
cash.
On August 31, 2000, Sanmina announced that it has signed a definitive
agreement to acquire the San Jose system integration and fulfillment operation
of Lucent Technologies. The agreement calls for the acquisition of a
manufacturing facility and related equipment and would involve the transfer of
employees to Sanmina.
NOTE 9. RESTRUCTURING, PLANT CLOSING AND OTHER NON-RECURRING CHARGES
In fiscal 1997, Sanmina incurred charges related to plant closings and
other non-recurring charges of $8.9 million. The charges were a result of the
change in strategy to become a value added electronics manufacturer and the
planned closures of duplicate facilities resulting from the acquisition of
Elexsys. The $8.9 million charge consisted primarily of costs associated with
remaining lease commitments on abandoned facilities and the write off of certain
property, plant, and equipment that were abandoned.
In fiscal 1998, Hadco incurred restructuring, plant closing, and other
non-recurring charges of approximately $4.5 million. The charges were a result
of the consolidation of several manufacturing facilities, and consisted of $2.0
million related to the loss on abandoned assets, $1.2 million as a result of an
approximate 3% reduction in workforce and $1.3 million related to lease
termination costs on abandoned facilities. As of September 30, 1999, all amounts
accrued for had been paid.
In the first quarter of fiscal 1999, Sanmina incurred plant closing and
other non-recurring charges of $16.9 million. The charges were a result of
Sanmina's acquisitions and Sanmina's planned relocation to a new campus
facility. Sanmina closed certain manufacturing plants in Fremont, California and
Woburn, Massachusetts and merged the operations from these facilities into
existing manufacturing facilities within the same regions. These closures were
made to eliminate duplicate facilities and other costs resulting from the merger
with Altron. Concurrent with the plant closures, Sanmina reduced its workforce
in the same regions by approximately 50 people. Plant closing, relocation and
severance costs totaled $12.8 million, of which $2.0 million was unpaid as of
fiscal year ended 1999. In conjunction with the closure of manufacturing
facilities and Sanmina's planned relocation to its new campus facility in fiscal
2000, other non-recurring costs include payments required under lease contracts
(less any applicable sublease income) after the properties are abandoned, any
applicable lease buyout costs, restoration costs associated with certain lease
arrangements and the costs to maintain facilities during the period after
abandonment. Asset related write-offs consist of excess equipment and leasehold
improvements to facilities that were abandoned and whose estimated fair market
value is zero. Sanmina's move to the new campus facility commenced in fiscal
1999 and was completed in the second quarter of fiscal 2000. Noncancelable lease
payments on vacated facilities will be paid out through most of fiscal 2000.
Sanmina also discontinued the use of enterprise-wide software and hardware used
internally by the acquired companies, as these were no longer required post
acquisition. The closing of the plants discussed above, and the costs related to
the integration of information systems and hardware, were all incurred in fiscal
1999. Total other non-recurring charges totaled $4.1 million.
NOTE 10. STOCKHOLDERS' EQUITY
Common Stock -- In June 1998 and March 2000, Sanmina 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 splits. On
February 8, 2000, Sanmina completed a public offering of 9,550,000 shares of
common stock at $59.00 per share for the aggregate gross proceeds of $563.5
million.
Sanmina Stock Option Plans
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
48
<PAGE> 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
individuals to purchase shares of Sanmina's Common Stock at amounts not less
than 100% of the fair market value of the shares on the date of the grant.
On January 29, 1999, shareholders approved an amendment to adopt Sanmina's
1999 Stock Plan (the "1999 Plan"). The 1999 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 Sanmina'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 Sanmina or any
subsidiary of Sanmina 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 Sanmina'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 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 but unissued under all Sanmina option plans are 23,860,228 at October
2, 1999.
Option activity under the Sanmina option plans is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- ----------------
<S> <C> <C>
Balance at September 30, 1996................... 8,311,908 $ 4.06
Granted....................................... 3,529,580 10.42
Exercised..................................... (1,470,584) 3.32
Cancelled..................................... (470,620) 5.72
----------
Balance at September 30, 1997................... 9,900,284 6.35
----------
Granted....................................... 3,671,400 17.05
Exercised..................................... (2,078,358) 3.94
Cancelled..................................... (517,578) 10.53
----------
Balance at September 30, 1998................... 10,975,748 10.20
----------
Altron Plan................................... 1,932,892 12.63
Granted....................................... 3,960,122 23.25
Exercised..................................... (2,494,248) 9.83
Cancelled..................................... (1,233,464) 17.83
----------
Balance at October 2, 1999...................... 13,141,050 $13.79
==========
</TABLE>
49
<PAGE> 50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information regarding stock options
outstanding under the Sanmina option plans at October 2, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS VESTED AND EXERCISABLE
------------------------------------------------ -------------------------------------------------
RANGE WEIGHTED AVERAGE WEIGHTED NUMBER
OF WEIGHTED NUMBER REMAINING AVERAGE NUMBER VESTED VESTED
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE AND EXERCISABLE EXERCISE PRICE
--------------- ----------- ---------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.25 - $ 6.10 3,517,920 5.29 $ 4.11 2,960,410 $ 3.91
$ 6.47 - $11.94.. 3,560,726 7.50 $10.36 1,452,590 $ 9.73
$12.50 - $20.42.. 3,491,416 7.62 $16.40 1,134,694 $16.08
$20.72 - $40.32.. 2,570,988 9.35 $28.21 181,176 $24.76
---------- ---------
$ 0.25 - $40.32.. 13,141,050 7.31 $13.79 5,728,870 $ 8.46
========== =========
</TABLE>
The number of exercisable options and the weighted average exercise price
as of September 30, 1998 and 1997 was 4,550,614 at $7.04 per share and 3,664,422
at $4.33 per share, respectively.
Sanmina Employee Stock Purchase Plan -- Sanmina's employee stock purchase
plan (the "Purchase Plan") provides for the issuance of up to 4,600,000 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 October 2, 1999, 3,230,606 shares had been issued under the
Purchase Plan.
Altron Option Plans
Altron, prior to its merger with Sanmina, had stock option plans. These
plans and the activity therein are separately discussed below for prior period
informational purposes. All outstanding Altron options for fiscal 1999 are
included in the table above. In connection with the merger of Sanmina and
Altron, any options outstanding that were initially granted under the Altron
plans are exercisable into Sanmina common stock. Any forfeitures of Altron
options are returned to the Sanmina stock option plans. The following Altron
plan information reflects the merger exchange ratio of 0.909 shares of Sanmina
common stock for each share of Altron common stock. The Altron 1989 Nonqualified
Stock Option Plan for Non-Employee Directors provided for options exercisable
over five years commencing 12 months from the date of grant and expiring 10
years from the date of grant. The Altron 1991 Stock Option Plan provided for
incentive stock options granted at fair market value at the date of grant and
nonqualified stock options granted at prices determined by a committee of the
Board of Directors. All options are exercisable over a five-year period,
commencing 12 months from the date of grant unless accelerated and expire 10
years from the date of grant. The Altron 1992, 1993 and 1995 Stock Option Plans
for Non-Employee Directors provided for options exercisable over a two-year
period from the date of grant and expiring 10 years from the date of grant. The
Altron 1996 Stock Option Plan for Non-Employee Directors provided for options
exercisable over a three-year period commencing 12 months from the date of grant
and expiring 10 years from the date of grant.
50
<PAGE> 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the Altron stock option activity for the
period ended September 30, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
----------- ----------------
<S> <C> <C>
Outstanding at December 28, 1996................... 1,689,342 $ 9.91
Granted.......................................... 611,304 16.69
Exercised........................................ (207,748) 3.96
Cancelled........................................ (100,916) 14.64
---------
Outstanding at January 3, 1998..................... 1,991,982 12.37
---------
Outstanding at September 30, 1997(*)............... 1,555,660 10.88
Granted.......................................... 726,746 15.83
Exercised........................................ (166,866) 6.73
Cancelled........................................ (182,648) 16.03
---------
Outstanding at September 30, 1998.................. 1,932,892 $12.63
=========
</TABLE>
---------------
(*) -- Because Altron had a different fiscal year end, the above table was
modified to reflect information based on Sanmina's fiscal year end
September 30, 1998.
The following table summarizes information about Altron's stock options
outstanding and exercisable at September 30, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS VESTED AND EXERCISABLE
----------------------------------------------------- -------------------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED
EXERCISE PRICE NUMBER OF REMAINING AVERAGE NUMBER OF AVERAGE
RANGE OPTIONS CONTRACTUAL LIFE EXERCISE PRICE OPTIONS EXERCISE PRICE
--------------- ---------------- ---------------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
$ 1.34 - $ 1.80 87,446 2.3 $ 1.52 87,446 $ 1.52
$2.37 3,682 4.3 $ 2.37 3,682 $ 2.37
$ 5.18 - $ 7.40 273,098 5.0 $ 5.71 255,100 $ 5.62
$ 9.66 - $14.03 723,432 7.2 $11.49 416,738 $11.58
$14.72 - $21.60 845,234 8.6 $17.01 143,516 $18.57
--------- -------
1,932,892 906,482
========= =======
</TABLE>
Hadco Option Plans
Hadco, prior to its merger with Sanmina, had stock option plans. These
plans and the activity therein are separately discussed below for prior period
informational purposes. In connection with the merger of Sanmina and Hadco, any
options outstanding that were initially granted under the Hadco plans are
exercisable into Sanmina common stock. The following Hadco plan information
reflects the merger exchange ratio of 1.4 shares of Sanmina common stock for
each share of Hadco common stock.
Hadco's December 1991 Director plan provided for the granting of options to
purchase up to 420,000 shares of common stock at a price equal to the fair
market value at the date of grant. Initial options granted under this plan are
exercisable ratably over a four-year period and expire no later than seven years
from the date of grant. This plan also provided for an annual grant of a vested
option for 4,200 shares to each non-employee director who has served as a
director for five years or more.
Hadco's November 1995 plan provided for the granting of options to purchase
up to 1,400,000 shares of common stock at a price equal to fair market value at
the date of grant. The options vest according to each option agreement and they
expire no later than 10 years from the date of grant.
51
<PAGE> 52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Hadco's 1998 Stock plan provided for the granting of stock rights including
options, awards, and purchases up to 1,400,000 shares of common stock at a
minimum price equal to the fair market value at the date of grant. Stock rights
may be granted to employees, directors, and other associated parties. Stock
rights will expire as specified by the Compensation Committee, but in no case
longer than 10 years from the date of grant. Hadco made awards of 12,719 shares
under this plan in fiscal 1999.
Hadco adopted the Outside Directors Compensation Plan of 1998 (the
"Directors Plan") in December 1997. The Directors Plan provided that the annual
fee for the outside directors shall be paid in restricted stock, and that
additional meeting fees may, at the option of the director, be paid in
restricted stock. A total of 16,800 shares of common stock have been reserved
for grant under the Directors Plan (as reduced by the Board of Directors from
33,600 shares). Hadco issued 5,237 and 6,210 shares in fiscal 1999 and 1998,
respectively, under the Directors Plan.
Hadco adopted the Outside Directors Compensation Plan of 2000 (the
"Directors Plan of 2000") in December 1999, subject to stockholder approval. The
Directors Plan of 2000 provided that the annual fee for the outside directors
shall be paid in restricted stock, and that additional fees may, at the option
of a director, be paid in restricted stock. A total of 70,000 shares of common
stock have been reserved for grant under the Directors Plan of 2000, and no
shares have been issued to date.
Hadco's Employee Stock Purchase Plan ("ESP Plan") was approved by the
stockholders in March 1998 to allow eligible employees, as defined in the ESP
Plan, to purchase shares of common stock during one or more six-month periods
through payroll deductions. Shares were purchased at 85% of fair value, as
defined. A total of 700,000 shares of common stock have been reserved for
purchase under the ESP Plan. During fiscal 1999 and 1998, Hadco issued 189,882
and 80,116 shares, respectively, under the ESP Plan. At October 30, 1999,
Sanmina has 430,002 shares available for purchase under the ESP Plan.
Hadco had reserved as of October 2, 1999, a total of 3,683,855 shares of
common stock for issuance under stock option plans. The following table
summarizes the Hadco stock option activity with respect to all stock options (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------------
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------------- ----------------
<S> <C> <C>
Outstanding at October 26, 1996........................ 1,551,000 $ 9.45
Granted.............................................. 374,000 48.52
Exercised............................................ (368,000) 4.98
Cancelled............................................ (59,000) 19.68
---------
Outstanding at October 25, 1997........................ 1,498,000 19.87
---------
Granted.............................................. 746,000 48.47
Exercised............................................ (251,000) 6.04
Cancelled............................................ (162,000) 38.60
---------
Outstanding at October 31, 1998........................ 1,831,000 31.72
---------
Granted.............................................. 489,000 30.42
Exercised............................................ (164,000) 5.54
Cancelled............................................ (175,000) 40.42
---------
Outstanding at October 30, 1999........................ 1,981,000 $32.80
---------
</TABLE>
52
<PAGE> 53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about Hadco's stock options
outstanding and exercisable at October 30, 1999:
<TABLE>
<CAPTION>
OPTIONS VESTED AND EXERCISABLE
OPTIONS OUTSTANDING ---------------------------------------------
------------------------------------------------------- WEIGHTED EXERCISE
RANGE OF WEIGHTED AVERAGE WEIGHTED AVERAGE PRICE
EXERCISE REMAINING OPTIONS CONTRACTUAL LIFE EXERCISE OPTIONS OF EXERCISABLE
PRICES OUTSTANDING (YEARS) PRICE EXERCISABLE OPTIONS
---------------- ----------------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 2.78 - $ 4.00 58,000 0.60 $ 3.71 42,000 $ 3.78
$ 4.94 - $ 6.69 31,000 2.13 5.02 31,000 5.02
$ 8.00 - $12.00 383,000 4.41 8.64 238,000 8.66
$27.00 - $38.13 962,000 8.08 32.50 98,000 31.44
$44.25 - $67.00 547,000 7.18 54.96 132,000 52.23
--------- ------
1,981,000 $32.80
========= ======
</TABLE>
As of October 2, 1999, Sanmina has reserved the following shares of
authorized but unissued common stock for all stock option plans:
<TABLE>
<S> <C>
Convertible subordinated debt.................... 4,035,181
Stock option plans............................... 27,544,083
Employee stock purchase plan..................... 1,799,396
----------
33,378,660
==========
</TABLE>
Stock-based Compensation -- Sanmina 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 plans qualified as a
non-compensatory plan. Had compensation cost for all plans been determined
consistent with SFAS No. 123, Sanmina'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>
YEAR ENDED
--------------------------------------------
OCTOBER 2, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1997
---------- ------------- -------------
<S> <C> <C> <C>
Net income:
As reported.......................... $118,267 $33,198 $15,870
Pro forma............................ 72,719 7,452 (68)
Basic EPS:
As reported.......................... $ 0.86 $ 0.27 $ 0.14
Pro forma............................ 0.53 0.06 --
Diluted EPS:
As reported.......................... $ 0.82 $ 0.26 $ 0.13
Pro forma............................ 0.50 0.06 --
</TABLE>
The weighted average fair values of options granted by Sanmina during
fiscal 1999, 1998, and 1997 was $23.27, $9.25, and $6.12 per share,
respectively. The weighted average for values of options granted by Altron
during fiscal 1998 and 1997 was $8.88 and $10.23, respectively. The weighted
average fair values of options granted by Hadco during fiscal 1999, 1998, and
1997 was $13.55, $24.17, and $26.51 per share, respectively. The fair value of
each stock option granted or stock issued under the employee stock purchase
plans is estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted-average assumptions used for grants or
issuances in fiscal 1999, 1998 and 1997, respectively.
53
<PAGE> 54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------------
OCTOBER 2, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Volatility.................................... 44% - 64% 47% - 75% 53% - 78%
Risk-free interest rate....................... 5.20% - 6.00% 4.81% - 6.08% 5.83% - 6.66%
Dividend yield................................ 0% 0% 0%
Expected lives (management and directors)
beyond vesting.............................. 0.8 years 0.6 years 1.0 years
Expected lives (employees) beyond vesting..... 0.3 years 0.3 years 0.6 years
Expected lives (employee stock purchase
plan)....................................... 7 years 6 years 5 years
</TABLE>
NOTE 11. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------
OCTOBER 2, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1997
---------- ------------- -------------
<S> <C> <C> <C>
Federal
Current.............................. $62,634 $55,414 $52,713
Deferred............................. (8,774) (9,409) 1,216
------- ------- -------
53,860 46,005 53,929
State
Current.............................. 16,094 8,924 9,480
Deferred............................. (1,281) (1,298) 621
------- ------- -------
14,813 7,626 10,101
Foreign................................ 1,123 700 1,270
------- ------- -------
Total provision for income taxes....... $69,796 $54,331 $65,300
======= ======= =======
</TABLE>
54
<PAGE> 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the deferred income tax assets and liabilities are as
follows (in thousands):
<TABLE>
<CAPTION>
AS OF
---------------------------
OCTOBER 2, SEPTEMBER 30,
1999 1998
---------- -------------
<S> <C> <C>
Deferred tax assets:
Reserves not currently deductible......................... $ 25,072 $ 27,493
State income taxes........................................ 3,778 1,726
Accruals.................................................. 3,032 3,933
Depreciation.............................................. 908 --
Net operating loss carryforwards.......................... 2,159 4,245
Tax credit carryforwards.................................. 368 405
Deferred compensation..................................... 1,465 1,551
Other..................................................... 159 2,459
Total deferred income tax asset........................... 36,941 41,812
Valuation allowance......................................... (2,527) (5,267)
-------- --------
Net deferred income tax asset............................... $ 34,414 $ 36,545
======== ========
Deferred Tax Liabilities:
Acquisition related intangibles........................... $(39,713) $(39,653)
Property, plant, and equipment, principally due to
depreciation differences............................... (17,629) (19,868)
Other..................................................... (1,716) (1,674)
-------- --------
Total gross deferred tax liability..................... $(59,058) $(61,195)
======== ========
</TABLE>
The valuation allowance provides a reserve against deferred tax assets that
may expire or become unutilized by Sanmina. In accordance with SFAS No. 109
"Accounting for Income Taxes," Sanmina believes it is more likely than not that
Sanmina will not realize a portion of the benefits of these deferred tax assets,
and accordingly, has provided a valuation allowance for them. Foreign net
operating loss carryforwards of $8.8 million will carryforward indefinitely.
The tax rate used in the computation of the provision for federal and state
income taxes differs from the statutory federal and state rates due to the
following:
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Federal tax at statutory rate............................... 35.00% 35.00% 35.00%
State income taxes, net of federal benefit.................. 5.23 4.50 4.95
Foreign subsidiary loss..................................... 0.19 0.27 --
Effect of non-deductible goodwill amortization.............. 0.63 1.30 0.82
Tax Exempt interest income.................................. (0.44) (0.48) (0.40)
Foreign Sales Corporation benefit........................... (0.89) (0.71) (0.63)
Tax Credits................................................. (0.19) (0.53) (0.26)
Change in valuation allowance............................... (1.46) (7.70) (1.99)
Other....................................................... (0.96) 4.43 3.54
----- ----- -----
Provision for income taxes.................................. 37.11% 36.08% 41.03%
===== ===== =====
</TABLE>
The provision for income taxes in 1998 and 1997 is calculated on income
before provision for taxes without taking into account the write-off of acquired
in-process R&D. This write-off was $63.1 million and
55
<PAGE> 56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$78.0 million for 1998 and 1997, respectively. Income before the provision for
income taxes excluding the write-off would have been $150.6 million and $159.2
million for 1998 and 1997, respectively.
NOTE 12. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
Sanmina adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," during fiscal 1999. SFAS No. 131 established standards
for reporting information about operating segments in annual financial
statements and requires selected information about operating segments in interim
financial reports issued to stockholders. It also established standards for
related disclosures about product and services and geographic areas. Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision makers, or decision making group, in deciding how to allocate
resources and in assessing performance. Sanmina's chief operating decision maker
is the Chief Operating Officer. Based on the evaluation of financial
information, including the financial information related to Hadco and Essex, by
the Chief Operating Officer, management currently believe that Sanmina 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. 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 1999, 1998, and 1997, sales to Sanmina's ten
largest customers accounted for 49% and 44%, and 35% respectively, of Sanmina's
net sales. In 1999, sales to Sanmina's largest customer represented 10% of net
sales. In 1998 and 1997, no single customer accounted for more than 10% of net
sales.
The following summarizes financial information by geographic areas (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------
OCTOBER 2, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1997
---------- ------------- -------------
<S> <C> <C> <C>
Net Sales
United States...................................... $1,956,923 $1,627,341 $1,356,747
Canada............................................. 118,970 89,224 62,224
Europe............................................. 259,280 185,330 101,840
Asia, principally Malaysia......................... 49,374 35,372 --
Other.............................................. 9,436 4,187 2,000
---------- ---------- ----------
Total........................................... $2,393,983 $1,941,454 $1,522,811
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
AS OF
--------------------------------------------
1999 1998 1997
---------- ------------- -------------
<S> <C> <C> <C>
Long Lived Assets (excludes goodwill and intangibles)
United States...................................... $ 547,308 $ 464,774 $ 356,663
Canada............................................. 2,836 -- --
Europe............................................. 22,457 29,449 16,347
Asia, principally Malaysia......................... 49,420 49,029 35,314
Other.............................................. 217 -- --
---------- ---------- ----------
Total...................................... $ 622,238 $ 543,252 $ 408,324
========== ========== ==========
</TABLE>
56
<PAGE> 57
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited the accompanying consolidated balance sheets of Sanmina
Corporation (a Delaware Corporation) and its subsidiaries as of October 2, 1999
and September 30, 1998, and September 30, 1997. These financial statements and
the schedule referred to below are the responsibility of Sanmina's management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Sanmina
Corporation and its subsidiaries as of October 2, 1999 and September 30, 1998,
and the consolidated results of their operations and their cash flows for the
years ended October 2, 1999, September 30, 1998 and September 30, 1997 in
conformity with accounting principles generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule at Exhibit 99.2 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 our audits 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
September 1, 2000
57
<PAGE> 58
FINANCIAL STATEMENT SCHEDULE
The financial statement Schedule II -- VALUATION AND QUALIFYING ACCOUNTS is
filed as part of this Form 8-K.
SANMINA CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
PERIOD EXPENSES DEDUCTIONS PERIOD
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts and Returns
Fiscal year ended September 30, 1997.......... $3,830 $3,210 $ 595 $6,445
Fiscal year ended September 30, 1998.......... 6,445 2,822 1,344 7,923
Fiscal year ended October 2, 1999............. 7,923 5,388 2,371 10,940
</TABLE>
58
