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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
______________________
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
______________________________________________
Mark One
[x] Annual report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee Required]
For the Fiscal Year Ended August 31, 1997,
or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the Transition Period From ____________ to ____________
Commission File Number 1-11098
SOLECTRON CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-2447045
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
777 Gibraltar Drive, Milpitas, California 95035
(Address of principal executive offices and Zip Code)
Registrant's telephone number, including area code: (408) 957-8500
Securities registered pursuant to Section 12(b) of the Act:
Common Stock traded on New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such report(s), and (2) has
been subject to such filing requirements for the past 90 days.
YES __X__ NO _____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the Registrant's Common Stock held by non-
affiliates on October 31, 1997 (based upon the last reported price of
the Common Stock on the New York Stock Exchange on such date) was
approximately $2,850 million.
As of October 31, 1997, there were approximately 114,880,598 shares of
the Registrant's Common Stock outstanding.
1
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on January 14, 1998, which the Company will file
with the Securities and Exchange Commission within 120 days after the
end of the fiscal year covered by this report, is incorporated by
reference in Part III of this Form 10-K to the extent stated herein.
2
SOLECTRON CORPORATION
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
Part I
Item 1. Business 4
Item 2. Properties 13
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of
Security Holders 14
Part II
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters 15
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
Item 8. Financial Statements and Supplementary Data 29
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 51
Part III
Item 10. Directors and Executive Officers of the
Registrant 52
Item 11. Executive Compensation 55
Item 12. Security Ownership of Certain Beneficial
Owners and Management 55
Item 13. Certain Relationships and Related Transactions 55
Part IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 56
Signatures 57
3
PART I
ITEM 1: SOLECTRON BUSINESS
Solectron Corporation (the Company or Solectron) is an independent
provider of customized manufacturing services to electronics original
equipment manufacturers (OEMs). Solectron provides a wide variety of
pre-manufacturing, manufacturing and post-manufacturing services.
Solectron's goal is to offer its customers the significant competitive
advantages that can be obtained from manufacturing outsourcing such as
access to advanced manufacturing technologies, shortened product time-
to-market, reduced cost of production and more effective asset
utilization. Solectron currently conducts operations in the Western,
Southwestern and Eastern United States, Europe and Asia. In fiscal 1998,
the Company added facilities in Mexico and Brazil. Solectron believes
that the geographically diverse locations of its facilities enable it to
build closer regional relationships with its customers and to better
meet its customers' cost and local market content requirements.
Solectron Corporation was originally incorporated in California in
August 1977 and reincorporated in Delaware in February 1997. Solectron's
corporate headquarters are located at 777 Gibraltar Drive, Milpitas,
California 95035. Its telephone number is (408) 957-8500.
The information contained within this overview of the business, is
qualified in its entirety by, and is subject to, the detailed
information, consolidated financial statements and notes thereto
contained elsewhere within this document under "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and
"Financial Statements and Supplementary Data".
Industry Overview
Solectron is benefiting from increased worldwide market acceptance of,
and reliance upon, the use of manufacturing specialists by many
electronics OEMs. Solectron believes the trend towards outsourcing
manufacturing will continue. OEMs utilize manufacturing 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 manufacturing expertise and
infrastructure.
Reduce Investment. As electronic products have become more
technologically advanced and shipped in greater unit volumes, the
necessary investment required for internal manufacturing has increased
significantly for working capital, capital equipment, labor, systems and
infrastructure. Use of manufacturing specialists enables OEMs to gain
access to advanced manufacturing capabilities while substantially
reducing overall resource requirements.
Focus Resources. Because the electronics industry is experiencing
greater levels of competition and more rapid technological change, many
OEMs increasingly are seeking to focus their resources on activities and
technologies in which they add the greatest value. By offering
comprehensive electronics assembly and related manufacturing services,
4
manufacturing specialists allow OEMs to focus on their own core
competencies such as product development and marketing.
Access Leading Manufacturing Technology. Electronic products and
electronics manufacturing technology have become increasingly
sophisticated and complex, making it difficult for OEMs to maintain the
necessary technological expertise to manufacture products internally.
OEMs are motivated to work with a manufacturing specialist in order to
gain access to the specialist's expertise in interconnect, test and
process technologies.
Improve Inventory Management and Purchasing Power. Electronics industry
OEMs are faced with increasing difficulties in planning, procuring and
managing their inventories efficiently due to frequent design changes,
short product life-cycles, large investments in electronic components,
component price fluctuations and the need to achieve economies of scale
in materials procurement. OEMs can reduce production costs by using a
manufacturing specialist's volume procurement capabilities. In addition,
a manufacturing specialist's expertise in inventory management can
provide better control over inventory levels and increase the OEM's
return on assets.
Access Worldwide Manufacturing Capabilities. OEMs are increasing their
international activities in an effort to lower costs and access foreign
markets. Manufacturing specialists with worldwide capabilities are able
to offer such OEMs a variety of manufacturing location options to better
address their objectives regarding cost, shipping location, frequency of
interaction with manufacturing specialists and local content
requirements of end-market countries.
Strategy
Solectron's goal is to offer its customers the significant competitive
advantages of manufacturing outsourcing, such as access to advanced
manufacturing technologies, shortened product time-to-market, reduced
cost of production and more effective asset utilization. To achieve this
goal Solectron's strategy emphasizes the following key elements:
Quality. Solectron believes that product quality is a critical success
factor in the electronics manufacturing market. Solectron strives for
continuous improvement of its processes and has adopted a number of
quality improvement and measurement techniques to monitor its
performance. Solectron has received numerous superior service and
quality awards, including the Malcolm Baldrige National Quality Award in
1991 and again in 1997, the State of California Governor's Golden State
Award in 1994, the North Carolina Quality Leadership Award in 1996,
Malaysian Quality Management Excellence Award in 1996 as well as the
Malaysian Prime Minister's Quality Award in 1997, the Texas Quality
Award in 1996 and numerous awards from its customers. All of Solectron's
manufacturing facilities, except for Fine Pitch Technology, Inc. and the
recently-established facilities in China and Mexico, are certified under
ISO-9000 standards, which are international quality standards for
design, manufacturing and distribution management systems.
Manufacturing Partnerships. An important element of Solectron's
strategy is to establish partnerships with major and emerging OEM
leaders in diverse segments across the electronics industry. Solectron's
customer base consists of leaders in industry segments such as
networking, telecommunications, workstations, personal computers,
computer peripherals, instrumentation, semiconductor equipment and
5
avionics. Due to the costs inherent in supporting customer
relationships, Solectron focuses its efforts on customers with which the
opportunity exists to develop long-term business partnerships.
Solectron's goal is to provide its customers with total manufacturing
solutions for both new and more mature products, as well as across
product generations. Solectron's manufacturing services range from
providing design and new product introduction services, to just-in-time
delivery on low to medium volume turnkey and consignment projects and
projects that require more value-added services, to servicing OEMs that
require price-sensitive, high-volume production.
Turnkey Capabilities. Another element of Solectron's strategy is to
provide a complete range of manufacturing management and value-added
services, including materials management, board design, concurrent
engineering, assembly of complex printed circuit boards and other
electronic assemblies, test engineering, software manufacturing,
accessory packaging and post-manufacturing services. Solectron believes
that as manufacturing technologies become more complex and as product
life-cycles shorten, OEMs will increasingly contract for manufacturing
on a turnkey basis as they seek to reduce their time to market and
capital asset and inventory costs. A substantial portion of Solectron's
revenue is from its turnkey business. Solectron believes that the
ability to manage and support large turnkey projects is a critical
success factor and a significant barrier to entry for the market it
serves. In addition, Solectron believes that due to the difficulty and
long lead-time required to change manufacturers, turnkey projects
generally increase an OEM's dependence on its manufacturing specialist,
resulting in greater stability of Solectron's customer base and in
closer working relationships. Solectron has been successful in
establishing sole source positions with many of its customers for
certain of their products.
Advanced Manufacturing Process Technology. Solectron intends to
continue to offer its customers the most advanced manufacturing process
technologies, including surface mount technology (SMT) and ball-grid
array (BGA) assembly and testing and emerging interconnect technologies.
Solectron has developed substantial SMT expertise including advanced,
vision-based component placement equipment. Solectron believes that the
cost of SMT assembly facilities and the technical capability required to
operate a high-yield SMT operation are significant competitive factors
in the market for electronic assembly. Solectron also has the capability
to manufacture using tape-automated-bonding, chip-on-substrate and other
more advanced manufacturing processes.
Diverse Geographic Operations. An important element of Solectron's
strategy is to establish production facilities in areas of high customer
density or where manufacturing efficiencies can be achieved. Solectron
currently has operations in the Western, Southwestern and Eastern United
States, Mexico, Brazil, Europe and Asia. Solectron believes that its
facilities in these diverse geographic locations enable Solectron to
better address its customers' objectives regarding cost, shipping
location, frequency of interaction with manufacturing specialists and
local content requirements of endmarket countries. In addition,
Solectron has its Asia/Pacific headquarters office in Taipei, Taiwan,
and a business development office in Tokyo, Japan. Solectron intends to
continue to expand its operations as necessary to continue to serve its
existing customers and to develop new business.
6
International Manufacturing Capability
Western United States. Solectron's headquarters and largest
manufacturing operations are located in Silicon Valley, principally in
Milpitas, California. Solectron believes that the location of these
facilities in one of the largest concentrations of OEM electronics
manufacturers permits it to more efficiently provide low to high volume
printed circuit board assembly, system build and other services to such
OEMs. In addition, Solectron has a smaller site strategically located in
Everett, Washington to help serve Solectron's customers in the Pacific
Northwest and elsewhere.
The Company's subsidiary, Fine Pitch Technology, Inc., headquartered in
San Jose, California, provides extensive prototype services for
electronics OEMs, further enhancing Solectron's ability to address the
needs of design teams who require almost immediate availability of
highly complex prototype assemblies.
In November 1996, the Company completed its acquisition of Force
Computers, Inc. (Force), a leading designer and supplier of open,
scalable system- and board-level embedded computer platforms for the
telecomunications, industrial and command and control markets. Unlike
general purpose computers, embedded computers are incorporated into
systems and equipment to perform a single or limited number of critical
control functions and are generally integrated into larger automated
systems. A processor independent company, Force delivers products based
on SPARC, Pentium, PowerPC and 68K technologies and has expertise in
system design, board design, system integration and manufacturing. Force
also provides support services, such as system configurations,
application consulting and training to its customers. The addition of
Force Computers further enhances the Company's array of services,
particularly in pre-manufacturing areas. Force Computers' corporate
headquarters are located in San Jose, California. Its European
headquarters and a significant portion of its manufacturing operations
are located in Munich, Germany. In addition to its headquarters
locations, Force has thirteen sales support offices in the United States
and six sales support offices in various international locations.
Southwestern United States. In March 1996, Solectron acquired the
Austin, Texas-based Custom Manufacturing Services business from Texas
Instruments Incorporated (TI). This facility is staffed primarily by
former TI personnel with extensive manufacturing experience. Solectron
believes that the Austin facility is situated in a geographic region
with strong growth of electronics OEMs which will allow Solectron to
better service its existing customers and to attract new ones.
Eastern United States. Solectron's Eastern United States operations are
located in Charlotte, North Carolina and Westborough, Massachusetts.
These facilities are staffed by personnel with extensive electronics
manufacturing and product design experience. Solectron believes that the
Charlotte facility allows it to better pursue new business opportunities
with new and existing customers having Eastern United States operations
because of Charlotte's status as a transportation hub and its relative
proximity to major Eastern United States electronics markets. The
Westborough facility is located near Boston, in the center of a
geographic region with a large concentration of electronics OEMs.
Mexico. Solectron's site in Guadalajara, Mexico is expected to begin
providing printed circuit board assembly and system-build manufacturing
services to both existing and new customers in the first quarter of
7
fiscal 1998. This site was established to offer customers a low-cost
manufacturing facility in North America.
Europe. Solectron has three European sites. One site is located in
Bordeaux, France. This facility was purchased from International
Business Machines Corporation (IBM). Solectron also has operations in
Dunfermline, Scotland, which were acquired from Philips Electronics.
Solectron believes that this facility allows it to better serve the many
electronics OEMs located in the United Kingdom. Solectron's printed
circuit board assembly operation now located in Herrenberg, Germany, was
acquired from Hewlett-Packard Company. This facility allows Solectron to
better serve the German market. In addition, Force Computers' European
headquarters and a major portion of its manufacturing operations are
located in Munich, Germany.
Asia. Solectron's Southeast Asia manufacturing operations are located
in Penang and Johor, Malaysia. The operations were established to better
serve the needs of OEMs requiring price-sensitive, high-volume
production capabilities and to provide more efficient manufacturing
services to customers located in Southeast Asia. The facilities
currently provide electronics assembly, materials management and other
services to customers located in Malaysia, Singapore, Japan, the United
States and other locations.
Solectron's facility in Suzhou, China began operations in fiscal 1997.
This facility currently provides low-cost manufacturing services to
Solectron's Asian customer base.
Acquisition of Ericsson Manufacturing Facility and Related Transactions.
In March 1997, Solectron entered into a memorandum of understanding with
Ericsson Telecom AB's Business Area Infocom Systems (Ericsson) to set up
a New Product Introduction center in Norrkoping and Stockholm, Sweden,
transfer a portion of production from certain Ericsson plants to
Solectron manufacturing sites and purchase an existing Ericsson printed
circuit board assembly operation. In July 1997, Solectron and Ericsson
signed certain definitive agreements regarding these transactions. In
October 1997, Solectron acquired certain assets, primarily inventory and
equipment, of Ericsson's Brazil operation and hired approximately 370
persons formerly associated with the printed circuit board assembly
operations of Ericsson Telcomunicacoes S.A. as employees of Solectron's
newly-formed subsidiary, Solectron Brasil Ltda. Under the terms of the
agreement, Ericsson will contract for Solectron's services from
Solectron Brasil Ltda. through September 1999. Thereafter, Solectron
will bear the risk of filling the manufacturing capacity at the site
with renewed business from Ericsson or new business from other
customers. Additional agreements related to the New Product Introduction
center and the transfer of certain other assets are being negotiated.
These transactions are expected to undergo multiple closings through
January 1998, subject to the successful negotiation of additional
definitive agreements and various closing conditions.
As Solectron manages the existing operations and expands geographically,
it may experience certain inefficiencies from the management of
geographically dispersed operations. In addition, Solectron's results of
operations will be adversely affected if these new facilities do not
achieve revenue growth sufficient to offset increased expenditures
associated with geographic expansion.
In fiscal 1997, approximately 26.8% of Solectron's sales were from
operations outside of the United States. As a result of continuous
8
customer demand overseas, Solectron expects foreign sales to increase.
Solectron's foreign sales and operations are subject to risks of doing
business abroad, including fluctuations in the value of currency, export
duties, import controls and trade barriers (including quotas),
restrictions on the transfer of funds, employee turnover, work
stoppages, longer payment cycles, greater difficulty in accounts
receivable collection, burdens of complying with a wide variety of
foreign laws and, in certain parts of the world, political instability.
While to date these factors have not had an adverse impact on
Solectron's results of operations, there can be no assurance that there
will not be such an impact in the future.
Manufacturing
Solectron's Approach
To achieve excellence in manufacturing, Solectron combines advanced
manufacturing technology, such as computer-aided manufacturing and
testing, with manufacturing techniques including just-in-time
manufacturing, total quality management, statistical process control and
continuous flow manufacturing. Just-in-time manufacturing is a
production technique which minimizes work-in-process inventory and
manufacturing cycle time while enabling Solectron to deliver products to
customers in the quantities and time frame required. Total quality
management is a management philosophy which seeks to impart high levels
of quality in every operation of Solectron and is accomplished by the
setting of quality objectives for every operation, tracking performance
against those objectives, identifying work flow and policy changes
required to achieve higher quality levels and a commitment by executive
management to support changes required to deliver higher quality.
Statistical process control is a set of analytical and problem-solving
techniques based on statistics and process capability measurements
through which Solectron can track process inputs and resulting quality
and determine whether a process is operating within specified limits.
The goal is to reduce variability in the process, as well as eliminate
aberrations which contribute to quality below the acceptable range of
each process performance standard.
In order to successfully implement these management techniques,
Solectron has developed the ability to collect and utilize large amounts
of data in a timely manner. Solectron believes this ability is critical
to a successful assembly operation and represents a significant
competitive factor, especially in large turnkey projects. To manage this
data, Solectron uses sophisticated computer systems for material
resource planning, shop floor control, work-in-process tracking,
statistical process control and activity-based product costing.
Electronics Assembly and Other Services
Solectron's electronics assembly activities consist primarily of the
placement and attachment of electronic and mechanical components on
printed circuit boards and flexible cables. Solectron also assembles
higher-level sub-systems and systems incorporating printed circuit
boards and complex electromechanical components, in some cases
manufacturing and packaging products for shipment directly to its
customers' distributors. In addition, Solectron provides other
manufacturing services including refurbishment and remanufacturing.
Solectron manufactures on a turnkey basis, directly procuring some or
all of the components necessary for production and on a consignment
9
basis, where the OEM customer supplies all or some components for
assembly.
In conjunction with its assembly activities, Solectron also provides
computer-aided testing of printed circuit boards, sub-systems and
systems, which contributes significantly to Solectron's ability to
deliver high quality products on a consistent basis. Solectron has
developed specific strategies and routines to test board and system
level assemblies. In-circuit tests verify that all components have been
properly inserted and that the electrical circuits are complete.
Functional tests determine if the board or system assembly is performing
to customer specifications. Solectron either designs and procures test
fixtures and develops its own test software or utilizes its customers'
existing test fixtures and test software. In addition, Solectron
provides environmental stress tests of the board or system assembly.
Solectron provides turnkey manufacturing management to meet its
customers' requirements, including procurement and materials management
and consultation on board design and manufacturability. Individual
customers may select various services from among Solectron's full range
of turnkey capabilities.
Procurement and materials management consists of the planning,
purchasing, expediting, warehousing, preparing and financing of the
components and materials required to assemble a printed circuit board or
electronic system. OEMs have increasingly utilized electronic
manufacturing specialists to purchase all or some components directly
from component manufacturers or distributors and to finance and
warehouse the components.
Solectron also assists its customers in evaluating board designs for
manufacturability. Solectron evaluates the board design for ease and
quality of manufacture and, when appropriate, recommends design changes
to reduce manufacturing costs or lead times or to increase the quality
of finished assemblies. Board design services consist of the engineering
and design associated with the arrangement and interconnection of
specified components on printed circuit boards to achieve an OEM's
desired level of functionality. Solectron also offers ASIC design
services and its subsidiary, Force Computers, offers product design
services for the embedded computer market.
Sales and Marketing
Sales and marketing at Solectron is an integrated process involving
direct salespersons and project managers, as well as Solectron's senior
executives. Solectron's sales resources are directed at multiple
management and staff levels within targeted accounts. Solectron also
uses independent sales representatives in certain geographic areas.
Solectron receives unsolicited inquiries resulting from advertising and
public relations activities, as well as referrals from current
customers. These opportunities are evaluated against Solectron's
customer selection criteria and are assigned to direct salespersons or
independent sales representatives, as appropriate. Historically,
Solectron has had substantial recurring sales from existing customers.
Over 78% of Solectron's net sales during fiscal 1997 were derived from
customers which were also customers during fiscal 1996. Although
Solectron seeks to diversify its customer base, a small number of
customers currently are responsible for a significant portion of
Solectron's net sales. During fiscal 1997, 1996 and 1995, Solectron's
10
ten largest customers accounted for 65.5%, 64.0% and 70.2% of
consolidated net sales, respectively. Several customers each accounted
for more than 10% of net sales during these years. Hewlett-Packard
Company represented 13.5% and 10.7% of net sales in fiscal 1997 and
1996, respectively. Bay Network Incorporated accounted for 10.4% of net
sales in fiscal 1997. IBM Corporation represented 20.9% of net sales in
fiscal 1995. No other individual customer accounted for more than 10% of
Solectron's net sales in any of these years.
Backlog
Backlog consists of contracts or purchase orders with delivery dates
scheduled within the next twelve months. At August 31, 1997, Solectron's
backlog was approximately $875 million. The backlog was approximately
$612 million at August 31, 1996. Because customers may cancel or
reschedule deliveries, backlog is not a meaningful indicator of future
financial results.
Competition
The electronic manufacturing services industry is comprised of a large
number of companies, several of which have achieved substantial market
share. Solectron also faces competition from current and prospective
customers which evaluate Solectron's capabilities against the merits of
manufacturing products internally. Solectron competes with different
companies depending on the type of service or geographic area. Certain
of Solectron's competitors may have greater manufacturing, financial,
research and development and marketing resources than Solectron.
Solectron believes that the primary basis of competition in its targeted
markets is manufacturing technology, quality, responsiveness, the
provision of value-added services and price. To remain competitive,
Solectron must continue to provide technologically advanced
manufacturing services, maintain quality levels, offer flexible delivery
schedules, deliver finished products on a reliable basis and compete
favorably on the basis of price. Solectron currently may be at a
competitive disadvantage as to price when compared to manufacturers with
lower cost structures, particularly with respect to manufacturers with
established facilities where labor costs are lower.
Employees
As of August 31, 1997, Solectron employed 18,215 persons worldwide,
including 3,696 temporary employees. Solectron's international
operations employed 7,256 persons.
Patents and Trademarks
Solectron has obtained a limited number of U.S. patents related to the
process and equipment used in its surface mount technology. The
Company's subsidiary, Force Computers, holds a number of patents related
to VME technology. In addition, the Company has registered trademarks in
the United States and many countries throughout the world. These patents
and trademarks are considered valuable to Solectron.
Although Solectron does not believe that its trademarks, manufacturing
process or Force's technology infringes on the intellectual property
rights of third parties, there can be no assurance that third parties
will not assert infringement claims against Solectron in the future. If
such an assertion were to be made, it may become necessary or useful for
Solectron to enter into licensing arrangements or to resolve such an
11
issue through litigation. However, there can be no assurance that such
license rights would be available to Solectron on commercially
acceptable terms or that any such litigation could be resolved
favorably. Additionally, such litigation could be lengthy and costly and
could have an adverse material effect on Solectron's financial condition
regardless of the outcome of such litigation.
12
ITEM 2: PROPERTIES
The Company's manufacturing facilities are located throughout North
America, Europe and Asia. The table below lists the locations and square
feet owned or leased for the Company's major operations.
Square Feet Lease
---------------------- Termination
Location Owned Leased Dates
- -------------------- ---------- ---------- -----------
North America:
Milpitas, California (1) -- 1,149,000 1998 - 2005
San Jose, California -- 129,000 1999 - 2001
Charlotte, North Carolina 175,000 75,000 1998
Everett, Washington -- 75,000 1998
Austin, Texas -- 507,000 2000
Westborough, Massachusetts -- 75,000 2002
Guadalajara, Mexico 320,000 38,000 1998
Europe:
Dunfermline, Scotland 212,000 --
Bordeaux, France (2) 319,000 --
Herrenberg, Germany 71,000 --
Munich, Germany -- 210,000 1999 - 2001
Asia:
Penang, Malaysia 190,000 179,000 2000
Johor, Malaysia -- 66,000 1999
Suzhou, China (3) -- 30,000 1998
(1) Includes facilities located nearby in Fremont and Newark,
California. Approximately 30,000 square feet of facilies at this
location is subleased on a short term lease.
(2) Includes approximately 34,000 square feet subleased to a third party
under the terms of an annual warehousing agreement.
(3) A facility owned by the Company located on land leased for a term of
50 years from the government of China is currently under
construction at this location.
Around the world, the Company is subject to a variety of environmental
regulations relating to the use, storage, discharge and disposal of
hazardous chemicals used during its manufacturing process. Any failure
by the Company to comply with present and future regulations could
subject it to future liabilities or the suspension of production. In
addition, such regulations could restrict the Company's ability to
expand its facilities or could require the Company to acquire costly
equipment or to incur other significant expenses to comply with
environmental regulations.
13
ITEM 3: LEGAL PROCEEDINGS
Not applicable.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
14
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Common Stock Information
The following table sets forth the quarterly high and low per share
sales prices of Solectron's Common Stock for the two-year period ended
August 31, 1997, as quoted on the New York Stock Exchange. All data has
been adjusted to reflect the two-for-one stock split effective August 4,
1997.
High Low
-------- --------
Fiscal 1996
First Quarter 21 13/16 17 1/2
Second Quarter 25 1/16 18 1/4
Third Quarter 25 20 1/8
Fourth Quarter 21 15/16 15 1/2
Fiscal 1997
First Quarter 29 15/16 17 1/8
Second Quarter 30 11/16 25 3/4
Third Quarter 32 1/2 23 9/16
Fourth Quarter 45 9/16 29 9/16
Solectron has not paid any dividends since its inception and does not
intend to pay any dividends in the foreseeable future. Additionally, the
covenants to the Company's financing agreements prohibit the payment of
cash dividends. At August 31, 1997, there were approximately 1,064
stockholders of record based on data obtained from the Company's
transfer agent.
15
ITEM 6: SELECTED FINANCIAL DATA
The following selected historical financial information of Solectron 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 Income Data:
Years Ended August 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------
Net sales $3,694,385 $2,817,191 $2,065,559 $1,456,779 $ 836,326
Operating income 236,422 175,425 123,434 88,350 53,140
Income before
income taxes 238,407 173,077 120,494 84,159 48,613
Net income 158,059 114,232 79,526 55,545 30,600
Primary net income
per share (1) $1.37 $1.10 $0.91 $0.66 $0.40
Fully diluted net
income per share (1) $1.36 $1.08 $0.81 $0.59 $0.38
Consolidated Balance Sheet Data:
As of August 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------
Working capital $ 931,690 $ 786,355 $ 355,603 $ 309,203 $ 265,025
Total assets 1,852,419 1,452,198 940,855 766,395 603,285
Long-term debt 385,850 386,927 30,043 140,709 137,011
Stockholders' equity 919,069 700,569 538,141 330,789 260,980
(1) Adjusted to reflect two-for-one stock split effective August 4, 1997.
16
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements
that involve risks and uncertainties. Solectron's actual results could
differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those factors set
forth under "Trends and Uncertainties" below.
General
Solectron's net sales are derived from sales to electronics systems
original equipment manufacturers (OEMs). The majority of Solectron's
customers compete in the networking and data communications,
workstation, personal computer and computer peripheral segments of the
electronics industry. The Company uses advanced manufacturing
technologies in assembly and manufacturing management of complex printed
circuit boards and electronics systems. Solectron also provides pre-
manufacturing and post-manufacturing services. A discussion of some of
the potential fluctuations in operating results is included under
"Trends and Uncertainties".
On November 26, 1996, Solectron exchanged approximately 6.2 million
shares of common stock for all of the outstanding stock of Force
Computers, Inc. (Force), and assumed all of the outstanding options of
Force, after giving effect to the exchange ratio. Force is a designer
and provider of computer platforms for the embedded market. This
transaction was accounted for under the pooling of interests method.
The results of operations of Force prior to its acquisition were not
considered material to the Company's consolidated results of operations.
Accordingly, the Company's historical financial statements have not been
restated to reflect the financial position and results of operations of
Force, and pro-forma financial information has not been disclosed.
As of August 31, 1997, excluding the locations of the Force Computers
and Fine Pitch Technologies subsidiaries, the Company had manufacturing
operations in eleven locations, six of which are overseas. On April 2,
1997, the Company announced its twelfth manufacturing location in
Guadalajara, Mexico, which is expected to begin offering manufacturing
services to OEM customers in the first quarter of fiscal 1998.
Solectron has a sales support office located in Japan and in September
1997, opened its Asia/Pacific headquarters office in Taipei, Taiwan.
Force Computers and Fine Pitch Technologies are both headquartered in
San Jose, California. Force's European headquarters and a significant
portion of its operations are located in Munich, Germany. In addition
to its headquarters locations, Force has thirteen sales support offices
in the United States and six sales support offices in various
international locations. Fine Pitch has operations in California and in
Massachusetts.
In March 1997, the Company announced that it had signed a memorandum of
understanding with Ericsson Telecom AB's Business Area Infocom Systems
(Ericsson) to establish a strategic, global manufacturing partnership.
Under the terms of the memorandum of understanding, the Company will set
up a New Product Introduction center in Norrkoping and Stockholm, Sweden
and transfer production from certain Ericsson plants worldwide to
Solectron manufacturing sites around the world. In July 1997, Solectron
17
and Ericsson signed definitive agreements upon completion of
negotiations of the general terms and conditions for Solectron's supply
of certain products to Ericsson, for the establishment of the New
Product Introduction center and for the transfer of certain assets to
Solectron.
In October 1997, Solectron acquired certain assets, primarily equipment
and inventory, of Ericsson's printed circuit board assembly operation in
Brazil. In addition, Solectron's newly-established subsidiary, Solectron
Brasil Ltda., hired approximately 370 persons formerly employed by
Ericsson Telecomunicacoes S.A. in Brazil.
Additional agreements related to the New Product Introduction center and
the transfer of certain other assets are being negotiated. These
transactions are expected to undergo multiple closings through January
1998, subject to the successful negotiation of additional definitive
agreements and various closing conditions.
Results of Operations
The electronics industry is subject to rapid technological change,
product obsolescence and price competition. These and other factors
affecting the electronics industry, or any of Solectron's major
customers in particular, could have an adverse material effect on
Solectron's results of operations. See "Trends and Uncertainties --
Potential Fluctuations in Operating Results" and "Competition" for
further discussion of potential fluctuations in operating results.
The following table sets forth, for the periods indicated, certain items
in the Consolidated Statements of Income as a percentage of net sales.
The financial information and the discussion below should be read in
conjunction with the Consolidated Financial Statements and Notes
thereto.
Years Ended August 31,
-----------------------------
1997 1996 1995
----- ----- -----
Net sales 100.0% 100.0% 100.0%
Cost of sales 88.4 90.0 90.2
----- ----- -----
Gross profit 11.6 10.0 9.8
Operating expenses:
Selling, general and administrative 4.7 3.6 3.6
Research and development 0.4 0.2 0.2
Acquisition costs 0.1 -- --
----- ----- -----
Operating income 6.4 6.2 6.0
Net interest income (expense) 0.1 (0.1) (0.1)
----- ----- -----
Income before income taxes 6.5 6.1 5.9
Income taxes 2.2 2.1 2.0
----- ----- -----
Net income 4.3% 4.0% 3.9%
===== ===== =====
18
Net Sales
The Company's net sales have increased significantly in each of the past
several years, reflecting the growing trend toward outsourcing within
the electronics industry. For the year ended August 31, 1997, net sales
grew to $3.7 billion, an increase of 31.1% over fiscal 1996 net sales.
Fiscal 1996 net sales of $2.8 billion were 36.4% greater than net sales
in fiscal 1995. The fiscal 1997 sales growth is attributable to
significant increases in sales volume from both existing and new
customers in North America, higher international sales and the
acquisitions of the Custom Manufacturing Services (CMS) business,
located in Austin, Texas and Force in March and November 1996,
respectively. The sales increase in fiscal 1996 was due to increased
orders from both new and existing customers at existing sites, the CMS
acquisition in March 1996 and the acquisition of the site now located in
Herrenberg, Germany in November 1995.
Sales in the North American region reflected increases in sales at all
locations to existing and new customers in fiscal 1997 compared to
fiscal 1996 as well as in fiscal 1996 compared to fiscal 1995. The
overall increase in sales in fiscal 1997 over fiscal 1996 was partially
offset by the effect of several ongoing programs reaching end-of-life
and deliberate management actions to achieve improved global load
balancing as well as specific product program transitioning. The growth
in North American sales in fiscal 1996 over fiscal 1995 reflects the
impact of the acquisitions of CMS and Fine Pitch in March 1996. Fiscal
1997 sales in most of the Company's European operations increased over
fiscal 1996 sales as a result of the global load balancing efforts noted
above as well as higher sales to existing and new customers. These
increases were partially offset by declines in sales during fiscal 1997
from older programs in the Bordeaux facility as these programs reach
end-of-life. Fiscal 1996 sales in Europe were lower than fiscal 1995
sales due to the same end-of-life issues in Bordeaux and similar issues
in the Scotland facility. Fiscal 1997 sales for the Company's Asian
sites increased over fiscal 1996 despite the impact of many of the same
end-of-life factors as in Europe. The growth in Asian sales in fiscal
1996 compared to fiscal 1995 primarily reflects increased orders from
new and existing customers in that region. Although the Company does not
currently anticipate any future decline in sales, to lessen the
potential impact of any possible future declines to customers within any
particular region or market segment, the Company is committed to seeking
diversification of its customer base among many countries, market
segments and product lines within market segments.
Several major customers accounted for more than 10% of the Company's net
sales in fiscal 1997, 1996 and 1995. In fiscal 1997 and 1996, Hewlett-
Packard Company (HP) was Solectron's largest customer and accounted for
13.5% and 10.7% of consolidated net sales in fiscal 1997 and 1996,
respectively. Bay Networks, Inc. accounted for 10.4% of consolidated net
sales in fiscal 1997. International Business Machines Corporation (IBM)
was Solectron's largest customer during fiscal 1995 and accounted for
20.9% of consolidated net sales in that year. Net sales to IBM in fiscal
1997 and 1996 were less than 10% of consolidated net sales, reflecting
both a decrease in actual sales volume to IBM and an overall increase in
Solectron's total consolidated net sales from all other customers. No
other customers accounted for more than 10% of net sales during any of
the years presented.
Solectron's top ten customers accounted for 65.5%, 64.0% and 70.2% of
consolidated net sales in fiscal 1997, 1996 and 1995, respectively. The
19
lower percentage of sales attributable to the top ten customers over the
three-year period has resulted primarily from Solectron's ability to
obtain significant new business from other customers, thereby reducing
its dependence on these accounts. Solectron is still dependent upon
continued revenues from HP, Bay Networks and its other top ten customers
and there can be no guarantee that these or any other customers will not
increase or decrease as a percentage of consolidated net sales either
individually or as a group. Consequently, any material decrease in sales
to these or other customers could have an adverse material effect on
Solectron's results of operations.
Net sales at Solectron's international sites, as a whole, grew at a
slower rate over the last three fiscal years than aggregate net sales at
Solectron's domestic sites. International locations contributed 26.8% of
consolidated net sales in fiscal 1997, compared to 30.9% and 38.7% in
fiscal 1996 and 1995, respectively. In addition to the end-of-life
issues impacting international sales discussed above, the primary reason
for the decrease in international sales as a percentage of total sales
is strong growth in domestic sales, aided by the acquisition of the CMS
business in Austin, Texas, which is substantially comprised of domestic
sales.
As a result of Solectron's international sales and facilities,
Solectron's operations are subject to risks of doing business abroad.
While to date these dynamics have not had an adverse material effect on
Solectron's results of operations, there can be no assurance that there
will not be such an impact in the future. See "Trends and Uncertainties
- -- International Operations" for a further discussion of potential
fluctuations in operating results associated with the risks of doing
business abroad.
Solectron's operations in Milpitas, California contributed a substantial
portion of Solectron's net sales and operating income during fiscal
1997, 1996 and 1995. The performance of this operation is expected to
continue as a significant factor in the overall financial performance of
Solectron. Any adverse material change to the customer base, product
mix, efficiency, or other attributes of this site could have an adverse
material effect on Solectron's consolidated results of operations.
Solectron believes that its ability to continue achieving growth will
depend upon growth in sales to existing customers for their current and
future product generations, successful marketing to new customers and
future geographic expansion. Customer contracts can be canceled and
volume levels can be changed or delayed. The timely replacement of
delayed, canceled or reduced orders with new business cannot be assured.
In addition, there can be no assurance that any of Solectron's current
customers will continue to utilize Solectron's services. Because of
these factors, there can be no assurance that Solectron's historical
revenue growth rate will continue. See "Trends and Uncertainties" for a
discussion of certain factors affecting the management of growth,
geographic expansion and potential fluctuations in sales and results of
operations.
Gross Profit
The gross margin percentage improved to 11.6% for fiscal 1997 from 10.0%
for fiscal 1996 and 9.8% in fiscal 1995. The improvement is primarily
due to the inclusion of Force since its acquisition in November 1996.
Gross profit margins on Force's products are significantly higher than
those of the rest of the Company. Without Force's contribution, gross
20
margins for fiscal 1997 would have been 10.4%. In addition to the impact
of Force, the improved gross margin percentage in fiscal 1997 reflects a
shift in product mix toward the higher margin workstation and networking
and data communications market segments, projects with a higher than
normal consignment content and increased manufacturing efficiencies at
the Dunfermline, Scotland and Austin, Texas sites.
For the foreseeable future, Solectron's gross margin is expected to
depend primarily on product mix, production efficiencies, utilization of
manufacturing capacity, start-up and integration costs of new and
acquired businesses, the percentage of sales derived from turnkey
manufacturing and pricing within the electronics industry. Over time,
gross margins at the individual sites and for the Company as a whole may
continue to fluctuate. Consignment projects typically have higher gross
margin percentages than turnkey projects. Increases in turnkey business,
additional costs associated with new projects and price erosion within
the electronics industry could adversely affect the Company's gross
margin. Additionally, changes in product mix could cause the Company's
gross margin to fluctuate. Also, while the availability of raw materials
appears adequate to meet the Company's current revenue projections for
the foreseeable future, component availability is still subject to lead
time and other constraints that could possibly limit the Company's
revenue growth. Because of these factors and others discussed under
"Trends and Uncertainties" below, there can be no assurance that the
Company's gross margin will not fluctuate or decrease in future periods.
Selling, General and Administrative Expenses
In absolute dollars, selling, general and administrative (SG&A) expenses
increased 72.4% in fiscal 1997 over fiscal 1996 and 36.3% in fiscal 1996
over fiscal 1995. The inclusion of Force since its acquisition in
November 1996 and the Austin, Texas site for the full year of fiscal
1997 accounts for approximately half of the fiscal 1997 increase. The
remainder of the increase in fiscal 1997 and the fiscal 1996 increase
over fiscal 1995 is due primarily to investment in infrastructure such
as personnel and related departmental expenses at all manufacturing
locations as well as continuing investment in information systems to
support the increased size and complexity of the Company's business. The
addition in fiscal 1997 and 1996 of new sites in Malaysia (Johor),
California (Fine Pitch Technologies), China, Massachusetts and, most
recently, Mexico, has also contributed to the growth in SG&A expenses.
As a percentage of net sales, SG&A expenses were 4.7%, 3.6% and 3.6% in
fiscal 1997, 1996 and 1995, respectively. The most significant reasons
for the fiscal 1997 increase in SG&A expenses as a percentage of net
sales are the inclusion of Force, which has a more sales-intensive
operating structure, the costs associated with investments in starting
up new sites and investments in the Company's information systems. The
Company anticipates SG&A expenses will continue to increase in terms of
absolute dollars in the future, and may possibly increase as a
percentage of revenue, as the Company continues to build the
infrastructure necessary to support its current and prospective
business.
Research and Development Expenses
With the exception of its Force Computers operation, the Company's
research and development (R&D) activities have been focused primarily on
the development of prototype and engineering design capabilities, fine
pitch interconnecting technologies (which include ball-grid array, tape-
automated bonding, multichip modules, chip-on-flex, chip-on-board and
21
flip chip), high reliability environmental stress test technology and
the implementation of environmentally-friendly assembly processes, such
as VOC-free and no-clean. Force's R&D efforts are concentrated on new
product development and improvement of product designs through
improvements in functionality and support of next generation
microprocessors. Research and development expenses, in absolute dollars
and as a percentage of net sales, respectively, were $15.0 million and
0.4% in fiscal 1997, $6.7 million and 0.2% in fiscal 1996 and $4.8
million and 0.2% in fiscal 1995. The increase in R&D expenses in fiscal
1997 compared to fiscal 1996 is due to the acquisition of Force in
November 1996. The Company expects that R&D expenses will increase in
absolute dollars in the future and may increase as a percentage of net
sales as Force continues to invest in its R&D efforts and additional R&D
projects are undertaken at certain of the Company's Asian sites.
Acquisition Costs
A one time charge for acquisition costs of approximately $4.0 million
was incurred as a result of the acquisition of Force Computers during
the quarter ended November 30, 1996.
Net Interest Income (Expense)
Net interest income was $2.0 million in fiscal 1997 compared to net
interest expense of $2.3 million in fiscal 1996 and $2.9 million in
fiscal 1995. The Company issued convertible subordinated notes in
February 1996 and senior notes in March 1996. Interest expense on the
debt is approximately $24.9 million annually and, in fiscal 1997, has
been offset by interest earned on undeployed cash and investments. Net
interest expense was lower in fiscal 1996 than in fiscal 1995 because
the higher interest expense resulting from the two debt offerings was
offset by higher interest income on the undeployed cash realized from
the offerings. Solectron expects to utilize more of the undeployed cash
during fiscal 1998 in order to fund anticipated future growth. See
"Trends and Uncertainties -- Management of Growth" and "Potential
Fluctuations in Operating Results."
Income Taxes
Income taxes increased to $80.3 million in 1997 from $58.8 million in
fiscal 1996 and $41.0 million in fiscal 1995, primarily due to increased
income before income taxes. Solectron's effective income tax rate
decreased slightly to 33.7% in fiscal 1997 from 34% in both fiscal 1996
and 1995.
In general, the effective income tax rate is largely a function of the
balance between income from domestic and international operations.
Solectron's international operations, taken as a whole, have been taxed
at a lower rate than in the United States, primarily due to the tax
holiday granted to the Company's Penang, Malaysia site. The Malaysian
tax holiday is effective through January 31, 2002, subject to certain
conditions. The Company has also been granted various tax holidays in
China, which are effective for various terms and are subject to certain
conditions.
Liquidity and Capital Resources
Working capital was $932 million at August 31, 1997 compared to $786
million at the end of fiscal 1996. In fiscal 1997, increases in working
22
capital from cash generated from operations were augmented by working
capital resulting from the acquisition of new sites. A major component
of working capital at August 31, 1997 continues to be undeployed cash
from the proceeds of the two debt offerings during fiscal 1996. As
Solectron continues to grow, it is expected that the Company will
require greater amounts of working capital to support its operations.
The Company believes that its current level of working capital, together
with cash generated from operations and the Company's available credit
facilities, will provide adequate working capital for the foreseeable
future.
Inventory levels fluctuate directly with the volume of the Company's
manufacturing. Changes or significant fluctuations in product market
demands can cause fluctuations in inventory levels which may result in
changes in levels of inventory turns and liquidity. Historically, the
Company has been able to manage its inventory levels with regard to
these fluctuations. However, should material fluctuations occur in
product demand, the Company could experience slower turns and reduced
liquidity.
During fiscal 1997, the Company invested approximately $188 million in
capital expenditures. The largest component of these expenditures
related to the purchase of new equipment-primarily surface mount
assembly and test equipment-to meet current and expected production
levels, as well as to replace or upgrade older equipment that was
retired or sold. In addition, significant expenditures were made for the
acquisition of land and buildings for the Company's new manufacturing
sites, principally in China and Mexico. The Company expects capital
expenditures in fiscal 1998 to be in the range of $125 million to $165
million.
In addition to working capital as of August 31, 1997, which included
cash and cash equivalents of $225 million and short-term investments of
$258 million, the Company has available a $100 million unsecured
multicurrency revolving credit facility, subject to financial covenants.
The Company also has approximately $77.9 million in available foreign
credit facilities. In September 1997, the Company entered into a $120
asset securitization arrangement, which is subject to certain financial
covenants and management representations. No borrowings have been made
against this facility.
Trends and Uncertainties
Customer Concentration; Dependence on the Electronics Industry
In fiscal 1997, 1996 and 1995, the Company's ten largest customers
accounted for at least 64% of consolidated net sales. The Company is
dependent upon continued revenues from its top ten customers. Any
material delay, cancellation or reduction of orders from these or other
significant customers could have an adverse material effect on the
Company's results of operations. During fiscal 1997, HP and Bay
Networks, Inc. accounted for 13.5% and 10.4%, respectively, of net
sales, compared to 10.7% and less than 10%, respectively, during fiscal
1996. There can be no assurance that the Company will continue to do
business with HP, Bay Networks or any other customer.
The percentage of the Company's sales to its major customers may
fluctuate from period to period. Significant reductions in sales to any
of these customers would have an adverse material effect on the
23
Company's results of operations. The Company has no firm long-term
volume purchase commitments from its customers, and over the past few
years has experienced reduced lead-times in customer orders. In
addition, customer contracts can be canceled and volume levels can be
changed or delayed. The timely replacement of canceled, delayed or
reduced contracts with new business cannot be assured. These risks are
increased because a majority of the Company's sales are to customers in
the electronics industry, which is subject to rapid technological change
and product obsolescence. The factors affecting the electronics
industry in general, or any of the Company's major customers in
particular, could have an adverse material effect on the Company's
results of operations.
There can be no assurance that sales to customers within any particular
market segment will not experience decreases that could have an adverse
effect on the Company's sales.
Management of Growth; Geographic Expansion
The Company has experienced substantial growth over the last five fiscal
years, with net sales increasing from $836 million in fiscal 1993 to
$3.7 billion in fiscal year 1997. In recent years, the Company has
acquired or established facilities in many locations. During fiscal
1997, the Company announced the establishment of new manufacturing
facilities in Suzhou, China and Guadalajara, Mexico; began operations at
its manufacturing facility in Westborough, Massachusetts; and, in
November 1996, acquired Force Computers Inc., which has operations in
California and Germany. In September 1997, the Company announced the
opening of its Asia/Pacific headquarters office in Taipei, Taiwan. In
addition, the Company established a manufacturing facility near Sao
Paolo, Brazil, and intends to open a New Product Introduction center in
Sweden, as further discussed in "Pending Acquisition of Ericsson
Manufacturing Operation and Related Transactions." The Company
continually evaluates growth and acquisition opportunities and may
pursue additional opportunities over time. There can be no assurance
that the Company's historical revenue growth will continue or that the
Company will successfully manage the integration of Force Computers, the
facilities in China and Mexico, the partnership with and acquisitions
from Ericsson or any other business it may acquire in the future. As
the Company manages its existing operations and expands geographically,
it may experience certain inefficiencies as it integrates new operations
and manages geographically dispersed operations. In addition, the
Company's results of operations could be adversely affected if its new
facilities do not achieve growth sufficient to offset increased
expenditures associated with geographic expansion. The completion of
the proposed transactions with Ericsson will increase the Company's
expenses and working capital requirements. Should the Company increase
its expenditures in anticipation of a future level of sales that does
not materialize, its profitability would be adversely affected. On
occasion, customers may require rapid increases in production that can
place an excessive burden on the Company's resources.
Acquisition of Force Computers, Inc.
The acquisition of Force Computers, Inc. has created a number of
challenges, including managing the integration of the operations,
retaining key employees at Force Computers and managing an
increasingly larger and more geographically disparate business.
In addition, Solectron has no significant prior experience in
managing and operating a computer platform design business. There
24
can be no assurance the Company will successfully manage this
business or obtain the anticipated business synergy. In the event
that Solectron is unsuccessful in managing and integrating the
Force Computers business, the acquisition could require
significant additional management attention. If the Company is
unsuccessful in integrating and managing the Force Computers
business, Solectron's results of operations could be materially
adversely affected.
Pending Acquisition of Ericsson Manufacturing Operation and Related
Transactions
In March 1997, Solectron entered into a memorandum of understanding with
Ericsson Telecom AB's Business Area Infocom Systems (Ericsson) to set up
a New Product Introduction Center in Norrkoping and Stockholm, Sweden,
transfer a portion of production from certain Ericsson plants to
Solectron manufacturing sites and purchase an existing Ericsson printed
circuit board assembly operation. In July 1997, Solectron and Ericsson
signed certain definitive agreements regarding these transactions. In
October 1997, Solectron acquired certain assets, primarily inventory and
equipment, of Ericsson's Brazil operation and hired approximately 370
persons formerly associated with the printed circuit board assembly
operations of Ericsson Telcomunicacoes S.A. as employees of Solectron's
newly-formed subsidiary, Solectron Brasil Ltda. Under the terms of the
agreement, Ericsson will contract for Solectron's services from
Solectron Brasil Ltda. through September 1999. Thereafter, Solectron
will bear the risk of filling the manufacturing capacity at the site
with renewed business from Ericsson or new business from other
customers. Additional agreements related to the New Product Introduction
center and the transfer of certain other assets are being negotiated.
These transactions are expected to undergo multiple closings though
January 1998, subject to the successful negotiation of additional
definitive agreements and various closing conditions.
The proposed transactions with Ericsson entail a number of risks,
including successfully managing the integration of the operations,
retention of key employees, integrating purchasing operations and
information systems, managing an increasingly larger and more
geographically disparate business and renewing the Ericsson business or
replacing it with new business after expiration of the Ericsson
commitment. In addition, the completion of the transactions with
Ericsson will increase Solectron's expenses and working capital
requirements and there is no assurance that Solectron will achieve
sufficient revenue to offset the increased expenses. There can be no
assurance the remaining transactions contemplated by the memorandum of
understanding will close completely or that Solectron will successfully
manage the risks of these transactions.
International Operations
As a result of its international sales and facilities, the Company's
operations are subject to risks of doing business abroad, including but
not limited to, fluctuations in the value of currency, export duties,
changes to import and export regulations (including quotas), possible
restrictions on the transfer of funds, employee turnover, labor unrest,
longer payment cycles, greater difficulty in collecting accounts
receivable, the burdens and costs of compliance with a variety of
foreign laws and, in certain parts of the world, political instability.
While to date these factors have not had an adverse material impact on
the Company's results of operations, there can be no assurance that
25
there will not be such an impact in the future. In particular, the
current instability in Southeast Asia's currencies, economy and
political situation could adversely affect the Company's operations in
Malaysia.
The Company has been granted a tax holiday for its Penang, Malaysia
site, which is effective through January 31, 2002, subject to certain
conditions. The Company has also been granted various tax holidays in
China. These tax holidays are effective for various terms and are
subject to certain conditions. There is no assurance that any future
tax holidays that the Company may seek will be granted. If additional
tax holidays are not granted in the future, the Company's effective
income tax rate would likely increase.
Availability of Components
A substantial portion of the Company's net sales are derived from
turnkey manufacturing in which the Company provides both materials
procurement and assembly. In turnkey manufacturing, the Company
potentially bears the risk of component price increases, which could
adversely affect the Company's gross profit margins. At various times
there have been shortages of components in the electronics industry. If
significant shortages of components should occur, the Company may be
forced to delay manufacturing and shipments, which could have an adverse
material effect on the Company's results of operations.
Potential Fluctuations in Operating Results
The Company's operating results are affected by a number of factors,
including the mix of turnkey and consignment projects, capacity
utilization, price competition, the degree of automation that can be
used in the assembly process, the efficiencies that can be achieved by
the Company in managing inventories and fixed assets, the timing of
orders from major customers, fluctuations in demand for customer
products, the timing of expenditures in anticipation of increased sales,
customer product delivery requirements and increased costs and shortages
of components or labor. Turnkey manufacturing currently represents a
substantial portion of Solectron's sales. Turnkey projects, in which
Solectron procures some or all of the components necessary for
production, typically generate higher net sales and higher gross profits
with lower gross profit percentages than consignment projects due to the
inclusion in Solectron's operating results of sales and costs associated
with the purchase and sale of components. Solectron assembles products
with varying degrees of material content, which may cause Solectron's
gross margin to fluctuate. In addition, the degree of startup costs and
inefficiencies associated with new sites and new customer projects may
affect Solectron's gross margin. All of these factors can cause
fluctuations in the Company's operating results.
Competition
The electronics manufacturing services industry is comprised of a large
number of companies, several of which have achieved substantial market
share. The Company also faces competition from current and prospective
customers that evaluate Solectron's capabilities against the merits of
manufacturing products internally. Solectron competes with different
companies depending on the type of service or geographic area. Certain
competitors may have greater manufacturing, financial, research and
development and marketing resources than the Company. The Company
believes that the primary basis of competition in its targeted markets
26
is manufacturing technology, quality, responsiveness, the provision of
value-added services and price. To be competitive, the Company must
provide technologically advanced manufacturing services, high product
quality levels, flexible delivery schedules and reliable delivery of
finished products on a timely and price competitive basis. The Company
currently may be at a competitive disadvantage as to price when compared
to manufacturers with lower cost structures, particularly with respect
to manufacturers with established facilities where labor costs are
lower.
Intellectual Property Protection
The Company's ability to compete may be affected by its ability to
protect its proprietary information. The Company holds a limited number
of U.S. patents related to the process and equipment used in its surface
mount technology. In addition, the Company's subsidiary, Force
Computers, holds a number of patents related to VME technology. The
Company believes these patents are valuable. However, there can be no
assurance that these patents will provide meaningful protection for the
Company's manufacturing process and equipment innovations or Force's
technology.
There can be no assurance that third parties will not assert
infringement claims against the Company or its customers in the future.
In the event a third party does assert an infringement claim, the
Company may be required to expend significant resources to develop a
non-infringing manufacturing process or technology or to obtain licenses
to the manufacturing process or technology that is the subject of
litigation. There can be no assurance that the Company would be
successful in such development or that any such licenses would be
available on commercially acceptable terms, if at all. In addition, such
litigation could be lengthy and costly and could have an adverse
material effect on the Company's financial condition regardless of the
outcome of such litigation.
Environmental Compliance
The Company is subject to a variety of environmental regulations
relating to the use, storage, discharge and disposal of hazardous
chemicals used during its manufacturing process. Any failure by the
Company to comply with present and future regulations could subject it
to future liabilities or the suspension of production. In addition,
such regulations could restrict the Company's ability to expand its
facilities or could require the Company to acquire costly equipment or
to incur other significant expenses to comply with environmental
regulations.
Dependence on Key Personnel and Skilled Employees
The Company's continued success depends to a large extent upon the
efforts and abilities of key managerial and technical employees. The
loss of services of certain key personnel could have an adverse material
effect on the Company. The Company's business also depends upon its
ability to continue to attract and retain senior managers and skilled
employees. Failure to do so could adversely affect the Company's
operations.
27
Possible Volatility of Market Price of Common Stock
The trading price of the common stock is subject to significant
fluctuations in response to variations in quarterly operating results,
general conditions in the electronics industry and other factors. In
addition, the stock market is subject to price and volume fluctuations
that affect the market price for many high technology companies in
particular, and that often are unrelated to operating performance.
28
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by item 8 of form 10-K is presented here in the
following order:
Page
--------
Unaudited Quarterly Financial Information 29
Consolidated Balance Sheets 30
Consolidated Statements of Income 31
Consolidated Statements of Stockholders' Equity 32
Consolidated Statements of Cash Flows 33-34
Notes to Consolidated Financial Statements 35-49
Independent Auditors' Report 50
Unaudited Quarterly Financial Information
For each fiscal quarter during the two fiscal years ended August 31,
1997 (in thousands, except percentages and per share data):
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter
- ---------------------- ---------- ---------- ---------- ----------
Net sales $807,725 $858,698 $983,222 $1,044,740
Gross profit $ 86,148 $102,198 $115,877 $ 124,056
Gross margin 10.7% 11.9% 11.8% 11.9%
Operating income $ 48,286 $ 55,563 $ 62,619 $ 69,954
Operating margin 6.0% 6.5% 6.4% 6.7%
Net income $ 31,475 $ 37,565 $ 41,537 $ 47,482
Primary net income
per share (1) $ 0.29 $ 0.32 $ 0.36 $ 0.40
Fully diluted net
income per share (1) $ 0.29 $ 0.32 $ 0.35 $ 0.40
First Second Third Fourth
1996 Quarter Quarter Quarter Quarter
- ---------------------- ---------- ---------- ---------- ----------
Net sales $690,624 $657,176 $680,554 $788,837
Gross profit $ 66,346 $ 65,361 $ 71,793 $ 78,878
Gross margin 9.6% 9.9% 10.5% 10.0%
Operating income $ 40,803 $ 41,944 $ 44,701 $ 47,977
Operating margin 5.9% 6.4% 6.6% 6.1%
Net income $ 27,347 $ 27,650 $ 27,720 $ 31,515
Primary net income
per share (1) $ 0.27 $ 0.27 $ 0.26 $ 0.30
Fully diluted net
income per share (1) $ 0.26 $ 0.26 $ 0.26 $ 0.29
(1) Adjusted to reflect two-for-one stock split effective August 4,
1997.
29
SOLECTRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except
per share data)
As of August 31,
------------------------
1997 1996
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 225,073 $ 228,830
Short-term investments 257,829 181,520
Accounts receivable, less allowances of
$4,049 and $2,992, respectively 418,682 341,200
Inventories 494,622 368,862
Prepaid expenses and other current assets 79,426 24,312
---------- ----------
Total current assets 1,475,632 1,144,724
Net property and equipment 326,361 249,570
Other assets 50,426 57,904
---------- ----------
Total assets $1,852,419 $1,452,198
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued interest and current portion of
long-term debt $ 1,464 $ 14,094
Accounts payable 415,896 280,840
Accrued employee compensation 56,218 38,216
Accrued expenses 24,787 9,280
Other current liabilities 45,577 15,939
---------- ----------
Total current liabilities 543,942 358,369
Long-term debt 385,850 386,927
Other long-term liabilities 3,558 6,333
---------- ----------
Total liabilities 933,350 751,629
---------- ----------
Stockholders' equity:
Preferred stock, $.001 par value; 1,200
shares authorized; no shares issued -- --
Common stock, $.001 par value; 200,000
shares authorized; 114,546 and 105,022
shares issued and outstanding,
respectively 115 105
Additional paid-in capital 451,093 378,214
Retained earnings 478,612 320,553
Cumulative translation adjustment (10,751) 1,697
---------- ----------
Total stockholders' equity 919,069 700,569
---------- ----------
Commitments
Total liabilities and stockholders'
equity $1,852,419 $1,452,198
========== ==========
See accompanying notes to consolidated financial statements.
30
SOLECTRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Years Ended August 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
Net sales $3,694,385 $2,817,191 $2,065,559
Cost of sales 3,266,106 2,534,813 1,863,729
---------- ---------- ----------
Gross profit 428,279 282,378 201,830
Operating expenses:
Selling, general and
administrative 172,872 100,260 73,554
Research and development 14,985 6,693 4,842
Acquisition costs 4,000 -- --
---------- ---------- ----------
Operating income 236,422 175,425 123,434
Interest income 28,536 13,302 6,611
Interest expense (26,551) (15,650) (9,551)
---------- ---------- ----------
Income before income taxes 238,407 173,077 120,494
Income taxes 80,348 58,845 40,968
---------- ---------- ----------
Net income $ 158,059 $ 114,232 $ 79,526
========== ========== ==========
Net income per share:
Primary $ 1.37 $ 1.10 $ 0.91
Fully diluted $ 1.36 $ 1.08 $ 0.81
Weighted average number of shares:
Primary 115,321 104,254 87,546
Fully diluted 123,581 110,353 105,165
See accompanying notes to consolidated financial statements.
31
SOLECTRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
Common Stock Additional Cumulative Total
---------------- Paid-In Retained Translation Stockholders'
Shares Amount Capital Earnings Adjustment Equity
------- ------- ---------- -------- ----------- ------------
Balances as of August 31, 1994 82,604 $ 83 $ 206,174 $126,795 $ (2,263) $ 330,789
Options exercised 1,146 1 7,857 -- -- 7,858
Stock issued under employee
purchase plan 262 -- 2,901 -- -- 2,901
Conversion of long-term debt 15,156 15 110,900 -- -- 110,915
Tax benefit associated with
exercise of stock options -- -- 1,334 -- -- 1,334
Net income -- -- -- 79,526 -- 79,526
Cumulative translation
adjustment -- -- -- -- 4,818 4,818
------- ------- ---------- -------- ----------- ------------
Balances as of August 31, 1995 99,168 99 329,166 206,321 2,555 538,141
Options exercised 1,238 1 10,163 -- -- 10,164
Stock issued under employee
purchase plan 278 -- 4,339 -- -- 4,339
Conversion of long-term debt 3,946 4 30,398 -- -- 30,402
Stock issued in business
combination 392 1 1,667 -- -- 1,668
Tax benefit associated with
exercise of stock options -- -- 2,481 -- -- 2,481
Net income -- -- -- 114,232 -- 114,232
Cumulative translation
adjustment -- -- -- -- (858) (858)
------- ------- ---------- -------- ----------- ------------
Balances as of August 31, 1996 105,022 105 378,214 320,553 1,697 700,569
Options exercised 3,008 3 31,316 -- -- 31,319
Stock issued under employee
purchase plan 325 1 6,758 -- -- 6,759
Stock issued in business
combination 6,191 6 24,012 -- -- 24,018
Tax benefit associated with
exercise of stock options -- -- 10,793 -- -- 10,793
Net income -- -- -- 158,059 -- 158,059
Cumulative translation
adjustment -- -- -- -- (12,448) (12,448)
------- ------- ---------- -------- ----------- ------------
Balances as of August 31, 1997 114,546 $ 115 $ 451,093 $478,612 $ (10,751) $ 919,069
======= ======= ========== ======== =========== ============
See accompanying notes to consolidated financial statements.
32
SOLECTRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended August 31,
---------------------------------
1997 1996 1995
--------- --------- ---------
Cash flows from operating activities:
Net income $ 158,059 $ 114,232 $ 79,526
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 104,590 84,804 61,416
Interest accretion on zero-
coupon subordinated notes -- 1,173 8,240
Interest accrual on
long-term debt 19 12,507 --
Tax benefit associated with the
exercise of stock options 10,793 2,481 1,334
Other 3,504 5,629 3,763
Changes in operating assets
and liabilities:
Accounts receivable (66,293) (32,379) (64,906)
Inventories (115,560) (27,053) (63,654)
Prepaid expenses and other
current assets (48,947) (234) (4,566)
Accounts payable 135,287 (56,784) 63,681
Accrued expenses and other
current liabilities 31,124 6,272 1,889
--------- --------- ---------
Net cash provided by
operating activities 212,576 110,648 86,723
--------- --------- ---------
Cash flows from investing activities:
Purchases of short-term investments (274,160) (781,266) (183,299)
Sales and maturities of short-term
investments 197,851 658,436 218,805
Purchase of facilities -- (131,893) --
Capital expenditures (188,171) (115,446) (113,613)
Other 16,637 9,806 (426)
--------- --------- ---------
Net cash used in investing
activities (247,843) (360,363) (78,533)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from bank lines of credit -- 6,340 4,366
Proceeds from long-term debt -- 380,000 --
Debt acquisition costs -- (7,808) --
Repayments of long-term debt
and capital lease obligations (3,079) (4,796) (3,484)
Net proceeds from sale of
common stock 38,078 14,503 10,759
--------- --------- ---------
Net cash provided by financing
activities 34,999 388,239 11,641
--------- --------- ---------
(continued)
33
SOLECTRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In thousands)
Years Ended August 31,
---------------------------------
1997 1996 1995
--------- --------- ---------
Effect of exchange rate changes on
cash and cash equivalents (3,489) 347 2,222
--------- ---------- ---------
Net increase in cash and
cash equivalents (3,757) 138,871 22,053
Cash and cash equivalents at
beginning of year 228,830 89,959 67,906
--------- --------- ---------
Cash and cash equivalents at
end of year $ 225,073 $ 228,830 $ 89,959
========= ========= =========
Cash paid:
Interest $ 38,306 $ 517 $ 482
Income taxes 93,420 54,937 44,429
Non-cash investing and financing
activities:
Issuance of common stock upon
conversion of long-term debt -- 30,402 110,915
Issuance of common stock for
business combination 24,018 1,668 --
See accompanying notes to consolidated financial statements.
34
SOLECTRON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 1997 and 1996
Note 1: Summary of Significant Accounting Policies
(a) Description of Operations and Principles of Consolidation:
Solectron Corporation (the Company) is an independent provider of
customized manufacturing services to original equipment manufacturers in
the electronics industry and operates in this one industry segment. The
Company's primary services include materials procurement, materials
management and the manufacture and testing of printed circuit board
assemblies. In addition, the Company provides consultation on board
design and manufacturability, as well as system level assembly and test,
flexible cable assembly, refurbishment, packaging and remanufacturing
services. These services include turnkey services, where the Company
procures certain or all of the materials required for product assembly,
and consignment services, where the customer supplies the materials
necessary for product assembly. Turnkey services include material
procurement and warehousing in addition to manufacturing, and involve
greater resource investment than consignment services. The Company has
manufacturing operations located in North America, Europe and Asia.
The accompanying consolidated financial statements include the accounts
of the Company and its subsidiaries after elimination of intercompany
accounts and transactions.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(b) Reincorporation: On February 25, 1997, the Company was
reincorporated in the State of Delaware. In connection with the
reincorporation, as approved by the stockholders, the number of
authorized shares of the Company's Common Stock was increased to two
hundred million (200,000,000) and each share of Common Stock was
assigned a par value of $.001. The accompanying financial statements
have been restated to give effect to the reincorporation.
(c) Cash Equivalents and Short-Term Investments: Cash equivalents are
highly liquid investments purchased with an original maturity of less
than three months. Short-term investments are investment grade short-
term debt instruments with original maturities greater than three
months.
Investments in debt securities are classified as "available-for-sale."
Such investments are recorded at fair value, as determined from quoted
market prices, and the cost of securities sold is determined based on
the specific identification method. If material, unrealized gains and
losses are reported as a component of stockholders' equity. See Note 2.
(d) Inventories: Inventories are stated at the lower of weighted
average cost or market. See Note 3.
35
(e) Property and Equipment: Property and equipment are recorded at
cost. Depreciation and amortization are computed based on the shorter of
the estimated useful lives or the related lease terms, using the
straight-line method. Estimated useful lives are presented below. See
Note 4.
Machinery and equipment 2 - 5 years
Furniture and fixtures 3 - 5 years
Leasehold improvements Lease term
Buildings 6 -50 years
(f) Other Assets: Other assets include goodwill and debt issuance
costs. Debt issuance costs are amortized using the straight-line method,
which does not differ materially from the interest method, over the debt
term (ten years). Goodwill is also amortized using the straight-line
method over ten years.
(g) Accounting for Long-Lived Assets: The Company reviews property and
equipment for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of property and equipment is measured by comparison of
its carrying amount, including the unamortized portion of goodwill
allocated to the property and equipment, to future net cash flows the
property and equipment are expected to generate. If such assets are
considered to be impaired, the impairment to be recognized is measured
by the amount by which the carrying amount of the property and
equipment, including the allocated goodwill, if any, exceeds its fair
market value. The Company assesses the recoverability of enterprise
level goodwill by determining whether the unamortized goodwill balance
can be recovered through undiscounted future results of the acquired
operation. The amount of enterprise level goodwill impairment, if any,
is measured based on projected discounted future results using a
discount rate reflecting the Company's average cost of funds. To date,
the Company has made no adjustments to the carrying value of its long-
lived assets.
(h) Income Taxes: The Company uses the asset and liability method of
accounting for income taxes. Under the asset and liability method,
deferred tax assets and liabilities are recognized for the future
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. When necessary, a valuation allowance is recorded to reduce
tax assets to an amount whose realization is more likely than not. See
Note 10.
(i) Net Income Per Share: Primary net income per share is computed
using the weighted average number of common shares and dilutive common
equivalent shares outstanding during the related period. Common
equivalent shares consist of stock options which are computed using the
treasury stock method. Fully diluted net income per share assumes full
conversion of the Company's outstanding convertible notes.
(j) Revenue Recognition: The Company recognizes revenue upon shipment
of product to its customers.
(k) Employee Stock Plans: The Company accounts for its stock option
plans and its employee stock purchase plan using the intrinsic value
method. See Note 11.
36
(l) Foreign Currency: Assets and liabilities of foreign subsidiaries
where the local currency is the functional currency are translated at
year-end exchange rates. The effects of these translation adjustments
are reported as a separate component of stockholders' equity. 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 United States
dollar is the functional currency are included in income. To date, the
effect on income of such amounts has been immaterial.
(m) Derivatives: Gains and losses on foreign currency forward exchange
contracts designated as hedges of assets and liabilities are included in
income concurrently with the offsetting losses and gains on the related
balance sheet item. Gains and losses on hedges of firm commitments and
anticipated transactions are deferred and included in the basis of the
transaction when it occurs. See Note 7.
(n) Year-End: The Company's financial reporting year consists of either
52-week or 53-week periods ending on the last Friday in August. Fiscal
years 1997 and 1995 each contained 52 weeks, and fiscal year 1996
contained 53 weeks. For purposes of presentation in the accompanying
financial statements and notes thereto, the Company has indicated its
accounting years as ending on August 31.
The Company's subsidiary, Solectron Texas, Inc. (Texas), has a fiscal
year end of July 31. The Company's consolidated financial position as of
August 31, 1997 and 1996 includes the financial position of the Texas
operations as of July 31, 1997 and 1996, respectively. Similarly, the
Company's consolidated results of operations and cash flows for the
years ended August 31, 1997 and 1996 include the results of operations
and cash flows of the Texas operations for the year ended July 31, 1997
and the four-month period since its acquisition ended July 31, 1996,
respectively.
(o) Recent Accounting Pronouncements: In February 1997, the Financial
Accounting Standards Board (FASB) issued SFAS No. 128, "Earnings per
Share." SFAS No. 128 establishes a different method of computing net
income per share than is currently required under the provisions of
Accounting Principles Board Opinion No. 15. Under SFAS No. 128, the
Company will be required to present both basic net income per share and
diluted net income per share. Basic net income per share is expected to
be higher than the currently presented primary net income per share as
the effect of dilutive stock options will not be considered in computing
basic net income per share. Diluted net income per share is expected to
be comparable to the currently presented fully diluted net income per
share.
Solectron will adopt SFAS No. 128 in its fiscal quarter ending February
27, 1998 and at that time all historical net income per share data
presented will be restated to conform to the provisions of SFAS No. 128.
37
Note 2: Cash, Cash Equivalents and Short-Term Investments
Cash, cash equivalents and short-term investments consisted of the
following at August 31:
Cash and Cash Short-Term
Equivalents Investments
------------- -----------
(in thousands)
1997
- -------
Cash $ 39,725 $ --
Money market funds 81,350 --
Certificates of deposit 9,822 23,249
Municipal market auction securities 7,723 --
Corporate market auction securities 14,206 --
U.S. government securities 6,685 173,304
Corporate obligations 58,422 51,542
Municipal obligations 7,140 --
Other -- 9,734
-------- --------
$225,073 $257,829
======== ========
1996
- -------
Cash $ 30,865 $ --
Money market funds 76,595 --
Certificates of deposit 31,779 12,308
U.S. government securities 44,922 139,202
Corporate obligations 34,680 29,179
Municipal obligations 9,989 --
Other -- 831
-------- --------
$228,830 $181,520
======== ========
As of August 31, 1997 and 1996, unrealized gains and losses were not
material. As of August 31, 1997, all of the Company's short-term
investments mature within two years.
Note 3: Inventories
Inventories as of August 31, 1997 and 1996 consisted of:
1997 1996
-------- --------
(in thousands)
Raw materials $365,630 $253,646
Work-in-process 128,992 115,216
-------- --------
$494,622 $368,862
======== ========
38
Note 4: Property and Equipment
Property and equipment as of August 31, 1997 and 1996 consisted of:
1997 1996
-------- --------
(in thousands)
Land, buildings and improvements $ 64,511 $ 37,872
Machinery and equipment 432,963 344,812
Furniture and fixtures 76,485 55,591
Leasehold improvements 41,647 27,749
Construction-in-progress 33,171 773
-------- --------
648,777 466,797
Less accumulated depreciation
and amortization 322,416 217,227
-------- --------
Net property and equipment $326,361 $249,570
======== ========
Note 5: Lines of Credit
The Company has available a $100 million unsecured multicurrency
revolving line of credit which expires April 30, 2002. Borrowings under
the credit facility bear interest, at the Company's option, at either
the bank's prime rate, the London interbank offering rate (LIBOR) plus a
margin, or the bank's certificate of deposit (CD) rate plus a margin.
The margin under the LIBOR or CD rate options will vary depending on the
Company's Standard & Poor's Corporation and/or Moody's Investor
Services, Inc. rating for its long-term senior unsecured debt and was
0.4375% at August 31, 1997. Under the agreement, the Company must meet
certain financial covenants. As of August 31, 1997, there were no
borrowings outstanding under this line of credit and as of August 31,
1996, there were no borrowings outstanding under the previous $100
million unsecured domestic revolving line of credit, which expired April
30, 1997.
The Company also has $86.5 million in foreign lines of credit and other
bank facilities. Borrowings are payable on demand. The interest rates
range from the bank's prime lending rate to the bank's prime rate plus
2.0%. As of August 31, 1997, borrowings and guaranteed amounts under
these lines of credit were $8.6 million.
39
Note 6: Long-Term Debt
Long-term debt at August 31, 1997 and 1996 consisted of:
1997 1996
-------- --------
(in thousands)
6% subordinated notes due 2006, face value
$230,000, fair value of $318,274 in 1997
and $209,875 in 1996. Convertible into
6,804 shares of common stock $230,000 $236,976
7 3/8% senior notes due 2006, face value
$150,000, fair value of $149,300 in 1997
and $143,082 in 1996 149,745 155,257
Other, fair value of $7,569 in 1997 and
$8,788 in 1996 7,569 8,788
-------- --------
Total long-term debt 387,314 401,021
Less current portion of long-term debt 1,464 14,094
-------- --------
$385,850 $386,927
======== ========
In February 1996, the Company issued convertible, subordinated notes for
an aggregate principal amount of $230 million. These notes are in
denominations of and have a maturity value of $1,000 each, payable on
March 1, 2006. Interest is payable semi-annually at 6%. The notes are
subordinated to all existing and future senior indebtedness of the
Company. Each note is convertible at any time by the holder into shares
of common stock at a conversion price of $33.81 per share. Beginning on
March 3, 1999, the notes are redeemable for cash at the option of the
Company, in whole or in part, at redemption prices ranging from 104.2%
of the principal amount in 1999, to 100% of the principal amount in year
2006. Upon a change in control of the Company, each holder of the notes
has the right to require the Company to repurchase the notes for 100% of
the principal amount.
In March 1996, the Company issued $150 million aggregate principal
amount of senior notes. The notes are in denominations of and have a
maturity value of $1,000 each and are due on March 1, 2006. The notes
pay interest at 7 3/8% semi-annually. The notes may not be redeemed
prior to maturity.
As of August 31, 1995, approximately 95,000 zero-coupon, subordinated
notes were outstanding. In May 1996, the remainder of these notes were
converted into approximately 3.9 million shares of common stock.
Note 7: Financial Instruments
Fair Value of Financial Instruments
The fair value of the Company's cash, cash equivalents, accounts
receivable and accounts payable approximates the carrying amount due to
the relatively short maturity of these items. The fair value of the
Company's short-term investments (see Note 2) is determined based on
quoted market prices. The fair value of the Company's long-term debt
(see Note 6) is determined based on broker trading prices.
40
Derivatives
The Company enters into forward exchange contracts to hedge foreign
currency exposures on a continuing basis for periods consistent with its
committed exposures. These transactions generally do not subject the
Company to risk of accounting loss because gains and losses on these
contracts offset losses and gains on the assets, liabilities and
transactions being hedged. The Company is exposed to credit-related
losses in the event of non-performance by the parties in these
contracts. However, because these contracts have maturities of less than
six months, the amounts of unrealized gains and losses are immaterial.
The Company had $75.6 million and $36.7 million of aggregate foreign
currency forward exchange contracts outstanding at the end of fiscal
years 1997 and 1996, respectively, primarily for the purchase and sale
of European currencies, the Malaysian ringgit and the U.S. dollar by the
Company's international subsidiaries.
Business and Credit Concentrations
Financial instruments that potentially subject the Company to
concentrations of credit risk consist of cash, cash equivalents, short-
term investments and trade accounts receivable. The Company's cash, cash
equivalents and short-term investments are managed by recognized
financial institutions which follow the Company's investment policy. The
Company's investments are comprised of investment grade short-term debt
instruments, and the Company's investment policy limits the amount of
credit exposure in any one issue. Concentrations of credit risk in
accounts receivable resulting from sales to major customers are
discussed in Note 13. The Company generally does not require collateral
for sales on credit. The Company closely monitors extensions of credit
and has not experienced significant credit losses in the past.
Note 8: Commitments
The Company leases various facilities under operating lease agreements.
The facility leases expire at various dates through 2006. Substantially
all leases require the Company to pay property taxes, insurance and
normal maintenance costs. All of the Company's leases have fixed minimum
lease payments except the lease for certain facilities in Milpitas,
California. Payments under this lease are periodically adjusted based on
LIBOR rates. This lease provides the Company with the option at the end
of the lease of either acquiring the property at its original cost or
arranging for the property to be acquired. In May 1997, the Company
modified the terms of this lease to extend the lease term through April
2002 and remove the requirement for collateral for its obligation under
the lease. The Company is contingently liable under a first loss clause
for a decline in market value of the leased facilities up to $52.1
million in the event the Company does not purchase the property at the
end of the lease term. The Company must also maintain compliance with
financial covenants similar to its credit facilities.
Future minimum payments related to lease obligations are $17.0 million,
$11.8 million, $9.0 million, $6.5 million and $4.2 million in each of
the years in the five-year period ending August 31, 2002 and an
aggregate $1.1 million for periods after that date. Rent expense was
$22.9 million, $17.0 million and $10.8 million for the years ended
August 31, 1997, 1996 and 1995, respectively.
41
Note 9: Retirement Plans
The Company has various retirement plans which cover a significant
number of its employees. The major pension plans are defined
contribution plans, which provide pension benefits in return for
services rendered, provide an individual account for each participant,
and have terms that specify how contributions to the participant's
account are to be determined rather than the amount of pension benefits
the participant is to receive. Contributions to these plans are based on
varying percentages of each participant's base salary. The Company's
expense for the defined contribution plans totaled $3.0 million, $2.3
million and $1.0 million, in 1997, 1996 and 1995, respectively.
Note 10: Income Taxes
The components of income taxes are as follows (in thousands):
Years Ended August 31,
---------------------------------
1997 1996 1995
------- ------- -------
Current:
Federal $71,957 $51,004 $34,922
State 12,377 7,445 4,370
Foreign 5,944 4,204 4,346
------- ------- -------
90,278 62,653 43,638
Deferred:
Federal (8,808) (2,579) (3,474)
State (1,067) (233) 15
Foreign (55) (996) 789
------- ------- -------
Total $80,348 $58,845 $40,968
======= ======= =======
The overall effective income tax rate (expressed as a percentage of
financial statement income before income taxes) differs from the
expected U.S. income tax rate as follows:
Years Ended August 31,
--------------------------------
1997 1996 1995
------- ------- -------
Federal tax rate 35.0% 35.0% 35.0%
State income tax, net of federal
tax benefit 3.1 2.8 2.4
Tax exempt interest -- (0.1) (0.7)
Income of international subsidiaries
taxed at different rates (3.6) (4.5) (4.2)
Other (0.8) 0.8 1.5
---- ---- ----
Effective income tax rate 33.7% 34.0% 34.0%
==== ==== ====
42
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities are as follows (in
thousands):
As of August 31,
-----------------------
1997 1996
-------- --------
Deferred tax assets:
Accruals, allowances and reserves $ 14,240 $ 11,949
State income tax 3,054 --
Pre-operating costs 15 234
Acquired intangible assets 2,039 875
Net undistributed profits of
subsidiaries 1,635 --
Plant and equipment 1,778 --
Other 2,976 1,181
-------- --------
Total deferred tax assets 25,737 14,239
-------- --------
Deferred tax liabilities:
Plant and equipment -- (1,496)
State income tax -- (469)
Other (1,083) (616)
-------- --------
Total deferred tax liabilities (1,083) (2,581)
-------- --------
Net deferred tax assets $ 24,654 $ 11,658
======== ========
Based on the Company's historical operating income, management believes
it is more likely than not that the Company will realize the benefit of
the deferred tax assets recorded and, accordingly, has established no
valuation allowance.
Worldwide income before income taxes consisted of the following (in
thousands):
Years Ended August 31,
--------------------------------
1997 1996 1995
-------- -------- --------
U.S. $198,029 $140,900 $ 91,537
Non-U.S. 40,378 32,177 28,957
-------- -------- --------
Total $238,407 $173,077 $120,494
======== ======== ========
During the fiscal year ended August 31, 1997, the Company adopted a
change regarding undistributed earnings of its German subsidiaries,
which previously were deemed to be permanently reinvested. The effect of
this change is the recognition of net deferred tax assets of
approximately $1.6 million for foreign tax credit utilization.
Cumulative undistributed earnings of the international subsidiaries
amounted to $133.0 million as of August 31, 1997, of which approximately
$122.8 million is intended to be permanently reinvested. The amount of
income tax liability that would result had such earnings been
repatriated is estimated to be approximately $28.0 million.
43
The Company has been granted a tax holiday for its Penang, Malaysia site
which is effective through January 31, 2002, subject to certain
conditions. The Company has also been granted various tax holidays in
China, which are effective for various terms and are subject to certain
conditions.
Note 11: Stockholders' Equity
Stock Split
Effective August 4, 1997, the Company completed a two-for-one stock
split effected as a stock dividend. All share and per-share data has
been retroactively adjusted to reflect the stock split.
Pro Forma Fair Value Disclosures
The Company accounts for its employee stock plans, consisting of fixed
stock option plans and an employee stock purchase plan, using the
intrinsic value method. Accordingly, no compensation expense related to
these plans has been recognized in the Company's financial statements.
The table below sets out the pro forma amounts of net income and net
income per share that would have resulted if the Company accounted for
its employee stock plans under the fair value recognition provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation."
Years Ended August 31,
----------------------
1997 1996
-------- --------
(in thousands, except
per share data)
Net income As reported $158,059 $114,232
Pro forma $144,786 $108,905
Net income per share:
Primary As reported $ 1.37 $ 1.10
Pro forma $ 1.27 $ 1.05
Fully diluted As reported $ 1.36 $ 1.08
Pro forma $ 1.27 $ 1.04
For purposes of computing pro forma net income, the fair value of each
option grant and Employee Stock Purchase Plan purchase right is
estimated on the date of grant using the Black-Scholes option pricing
model. The assumptions used to value the option grants and purchase
rights are stated below.
1997 1996
---------------- ----------------
Expected life of options 4.3 years 4.3 to 4.7 years
Expected life of purchase rights 3 months 3 months
Volatility 40% 40%
Risk-free interest rate 5.21% to 6.46% 5.12% to 6.71%
Dividend yield zero zero
Options vest over several years and new option grants are generally made
each year. Because of this and because the provisions of SFAS No. 123
are effective only for fiscal years 1996 and 1997, the pro forma amounts
44
shown above may not be representative of the pro forma effect on
reported net income in future years.
Stock Option Plans
The Company's stock option plans provide for grants of options to
employees to purchase common stock at the fair market value of such
shares on the grant date. The options vest over a four-year period
beginning generally on the grant date. The term of the options is five
years for options granted prior to November 17, 1993 and seven years for
options granted thereafter. In connection with the acquisition of Force
Computers, Inc. (see Note 14), the Company assumed all options
outstanding under the Force option plan, after the application of the
exchange ratio. Options under the Force plan generally vest over a
four-year period beginning on the grant date and have a ten year term.
No further options may be granted under the Force plan.
A summary of stock option activity under the plans follows:
Years Ended August 31,
--------------------------------------------------------
1997 1996 1995
------------------ ------------------ ------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- --------
Outstanding,
beg. of year 9,431,576 $14.82 7,983,680 $11.69 8,134,286 $10.55
Granted 3,403,074 $26.82 3,173,878 $20.10 1,556,500 $14.18
Assumed from
Force plan 839,264 $ 2.20 -- -- -- --
Exercised (3,007,754) $ 9.76 (1,237,774) $ 8.22 (1,145,560) $ 6.85
Canceled (436,650) $21.03 (488,208) $15.07 (561,546) $11.96
---------- ---------- ----------
Outstanding,
end of year 10,229,510 $18.99 9,431,576 $14.82 7,983,680 $11.69
========== ========== ==========
Exercisable
at year-end 5,181,725 $15.85 5,023,686 $12.48 3,848,058 $10.16
========== ========== ==========
Weighted-average
fair value of
options granted
during the year $11.23 $ 8.47
45
Information regarding the stock options outstanding at August 31, 1997
is summarized in the table below.
Options Outstanding Options Exercisable
---------------------------------- ---------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Shares Contractual Exercise Shares Exercise
Prices Outstanding Life Price Exercisable Price
- ------------- ----------- ----------- -------- ----------- --------
$ 1.32-$ 5.14* 305,502 7.81 years $ 3.27 65,314 $ 2.55
$ 7.38-$11.84 1,136,512 .69 years $11.02 1,136,512 $11.02
$13.31-$17.63 3,062,548 3.12 years $14.41 2,393,992 $14.29
$18.69-$22.31 2,541,658 5.25 years $20.20 1,006,493 $19.93
$23.94-$29.63 2,988,840 6.18 years $26.12 571,800 $26.04
$37.16 194,450 6.86 years $37.16 7,614 $37.16
---------- ---------
$ 1.32-$37.16 10,229,510 4.48 years $18.99 5,181,725 $15.85
========== =========
*Options in this range of exercise prices represent the options assumed
in connection with the acquisition of Force.
A total of 15,277,670 shares of common stock remain reserved for
issuance under the plans as of August 31, 1997.
On December 1 of each year, each independent member of the Company's
Board of Directors is granted an option to purchase 12,000 shares of
common stock at the then current fair market value. Such options vest
over one year.
Employee Stock Purchase Plan
Under the Company's Employee Stock Purchase Plan (the Purchase Plan),
employees meeting specific employment qualifications are eligible to
participate and can purchase shares quarterly through payroll deductions
at the lower of 85% of the fair market value of the stock at the
commencement or end of the offering period. The Purchase Plan permits
eligible employees to purchase common stock through payroll deductions
for up to 10% of qualified compensation. As of August 31, 1997,
2,453,384 shares remain available for issuance under the Purchase Plan.
The weighted-average fair value of the purchase rights granted in fiscal
1997 and 1996 was $5.92 and $4.72, respectively.
46
Note 12: Geographic Information
Information about the Company's operations in different geographic
regions is presented in the table below:
Operating Identifiable
Net Sales Income Assets
---------- --------- ------------
(in thousands)
Fiscal 1997
United States $2,862,941 $200,664 $1,333,189
Europe 580,486 22,157 312,552
Asia 250,958 13,601 206,678
---------- -------- ----------
$3,694,385 $236,422 $1,852,419
========== ======== ==========
Fiscal 1996
United States $1,981,788 $142,470 $1,117,875
Europe 490,606 7,775 224,172
Asia 344,797 25,180 110,151
---------- -------- ----------
$2,817,191 $175,425 $1,452,198
========== ======== ==========
Fiscal 1995
United States $1,280,397 $ 94,078 $ 609,245
Europe 534,038 15,316 213,996
Asia 251,124 14,040 117,614
---------- --------- ----------
$2,065,559 $ 123,434 $ 940,855
========== ========= ==========
Net sales and operating income reflect the destination of the product
shipped.
Note 13: Major Customers
Net sales to major customers as a percentage of consolidated net sales
were as follows (* represents sales less than 10%):
Years Ended August 31,
--------------------------
1997 1996 1995
------ ------ ------
Hewlett-Packard Corporation 14% 11% *
Bay Networks, Inc. 10% * *
IBM Corporation * * 21%
As a result of sales to these and other of the Company's significant
customers, the Company does have concentrations of credit risk. This
situation is intensified due to the fact that the majority of the
Company's customers are in the same industry. The Company believes its
reserves for bad debt are adequate considering its concentrations of
credit risk.
47
Note 14: Acquisitions
On November 26, 1996, the Company exchanged approximately 6.2 million
shares of common stock for all of the outstanding stock of Force
Computers, Inc. (Force) and assumed all of the outstanding options of
Force after giving effect to the exchange ratio. Force is a designer and
provider of computer platforms for the embedded market. This transaction
was accounted for under the pooling of interests method. The results of
operations of Force prior to its acquisition were not material to the
Company's consolidated results of operations. Accordingly, the Company's
historical financial statements have not been restated to reflect the
financial position and results of operations of Force, and pro-forma
financial information has not been disclosed. The Company incurred
transaction expenses of $4.0 million directly related to the acquisition
of Force.
In March 1996, the Company exchanged common stock and common stock
options for all of the outstanding stock and options of Fine Pitch
Technology, Inc., a provider of prototype services. This transaction was
accounted for under the pooling-of-interests method. The results of
operations of Fine Pitch prior to its acquisition were not material to
the Company's consolidated results of operations. Accordingly, the
Company's historical financial statements have not been restated to
reflect the financial position and results of operations of Fine Pitch,
and pro-forma financial information has not been disclosed.
In March 1996, the Company completed its purchase of Texas Instruments
Incorporated's Custom Manufacturing Services (CMS) business. This
business, principally located in Austin, Texas, was acquired for
approximately $132 million. Under the terms of the agreement, Solectron
purchased the CMS business in Austin, Texas and certain assets of the
CMS business in Kuala Lumpur, Malaysia (collectively the CMS
operations). The Company subsequently has moved the CMS business in
Kuala Lumpur to Solectron's Penang, Malaysia operations. This
transaction was accounted for under the purchase method of accounting.
The acquisition resulted in goodwill of approximately $38 million, which
is being amortized on a straight-line basis over 10 years.
The following pro forma financial information gives effect to the
acquisition of the CMS operations on a purchase accounting basis for the
years ended August 31, 1996 and 1995 as if the CMS operations had been
acquired at the beginning of the periods presented. The preparation of
this financial information requires the use of management's estimates.
This pro forma financial information includes certain adjustments for
goodwill amortization, increased depreciation expense, a decrease in
interest income (related to the assumed liquidation of certain current
investments for the purchase of the CMS operations) and the related
income tax effects.
This pro forma combined information is not purported to be indicative of
the results that would have actually been obtained if the combination
had been in effect during the periods indicated, or that may be obtained
in the future. In addition, it does not reflect the effects of any
synergy that might be achieved from the newly combined operations.
48
Pro forma financial information:
Years Ended August 31,
-----------------------
1996 1995
---------- ----------
(in thousands, except
per share data)
Net sales $3,152,962 $2,492,530
Net income $ 115,085 $ 79,651
Net income per share:
Primary $ 1.10 $ 0.91
Fully diluted $ 1.09 $ 0.81
49
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Solectron Corporation:
We have audited the accompanying consolidated balance sheets of
Solectron Corporation and subsidiaries as of August 31, 1997 and 1996,
and the related consolidated statements of income, stockholders' equity
and cash flows for each of the years in the three-year period ended
August 31, 1997. In connection with our audits of the consolidated
financial statements, we also have audited the financial statement
schedule as of August 31, 1997 and for each of the years in the three-
year period ended August 31, 1997, as listed in the Index at Item
14(a)(2). These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Solectron Corporation and subsidiaries as of August 31, 1997 and 1996,
and the results of their operations and their cash flows for each of the
years in the three-year period ended August 31, 1997, in conformity with
generally accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Palo Alto, California
September 11, 1997
50
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable
51
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Solectron's executive officers and directors and their ages as of August
31, 1997 are as follows:
Name Age Position
- ---------------------------- ------ -------------------------------
Koichi Nishimura, Ph.D. 59 President, Chief Executive
Officer and Chairman of the
Board
David Kynaston 56 Vice President and President
Solectron Europe
Stephen T. Ng 42 Senior Vice President and
Chief Materials Officer
Leslie T. Nishimura 53 Senior Vice President and
President Solectron
Washington, Inc.
Ken Tsai 54 Senior Vice President and
President Solectron Asia
Susan S. Wang 46 Senior Vice President, Chief
Financial Officer and
Secretary
Walter W. Wilson 53 Senior Vice President and
President Solectron Americas
Saeed Zohouri, Ph.D. 46 Senior Vice President, Chief
Technology Officer and
President Solectron California
Corporation
Winston H. Chen, Ph.D. (3) 56 Director
Richard A. D'Amore (1) 44 Director
Charles A. Dickinson (3) 74 Director
Heinz Fridrich (1) 64 Director
Kenneth E. Haughton, Ph.D. (2) 69 Director
Paul R. Low, Ph.D. (1) 64 Director
W. Ferrell Sanders (2) 60 Director
Osamu Yamada (3) 68 Director
- ---------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
(3) Member of the Nominating Committee
52
Dr. Koichi Nishimura has served as a director since 1991, Chairman of
the Board since September 1996, Chief Executive Officer since 1992 and
President since 1990. He was Co-Chief Executive Officer from 1991 to
1992 and Chief Operating Officer from 1988 to 1991. From 1964 to 1988,
Dr. Nishimura was employed by International Business Machines
Corporation (IBM) in various technology and management positions. He
also serves as a director of Merix Corporation.
Mr. David Kynaston joined Solectron in February 1996 as Vice President
and President of Solectron Europe. Mr. Kynaston worked for Philips
Electronics for the previous 15 years in various capacities, including
Managing Director of Philips Mullard Ltd. subsidiary, Managing Director
of the Business Communications Systems Division and most recently,
Managing Director of the Private Mobile Radio Division. Mr. Kynaston has
also held senior technical management positions at EMI Medical Ltd. and
Cambridge Scientific Instruments Ltd.
Mr. Stephen T. Ng joined Solectron in September 1989 as Vice President,
Worldwide Material Purchasing and is currently Senior Vice President and
Chief Materials Officer of Solectron. Prior to joining Solectron, Mr. Ng
had 11 years experience in materials management in various capacities
with Xerox Corporation. His last position prior to joining Solectron was
Manager, Material Operations at Xerox Corporation.
Mr. Leslie T. Nishimura is a founder of the Company and President of
Solectron Washington, Inc. He has served as Senior Vice President of
Solectron since 1989, President of Solectron Asia from 1991 to 1993,
Secretary of Solectron from 1989 to 1992 and Vice President,
Manufacturing Technology of Solectron from 1978 to 1989. Mr. Nishimura's
prior experience includes various materials, production control and
inventory control supervisory positions at Ritter Co., Burndy
Corporation and the Norden Division of United Technologies, Inc.
Mr. Ken Tsai is President of Solectron Asia and has served as Senior
Vice President of Solectron since May 1995. Mr. Tsai was Vice President
of Solectron from 1990 to 1995. He served as Director of Manufacturing
for Solectron from 1989 to 1990 and in various manufacturing and other
positions from 1984 to 1989. Prior to joining Solectron, Mr. Tsai served
in various management and business planning positions at American
Cyanamid Company from 1968 to 1984.
Ms. Susan S. Wang has served as Senior Vice President and Chief
Financial Officer of Solectron since 1990 and as Secretary since 1992.
She was Vice President, Finance and Chief Financial Officer of Solectron
from 1986 to 1990 and Director of Finance of Solectron from 1984 to
1986. Prior to joining Solectron, Ms. Wang held various accounting and
finance positions with Xerox Corporation. Ms. Wang also held accounting
and auditing positions with Westvaco Corp. and Price Waterhouse & Co.
She is a certified public accountant.
Mr. Walter W. Wilson has served as President, Solectron Americas since
April 1997, President, Solectron North America from September 1995 to
March 1997, President Solectron California Corporation from March 1992
to February 1996 and Senior Vice President of Solectron since 1990. From
1989 to 1990 he served as an operational Vice President of Solectron.
From 1965 to 1989 Mr. Wilson was employed by IBM in manufacturing and
product development. During his IBM tenure, he held management positions
in the United States, West Germany and Japan.
54
Dr. Saeed Zohouri is Senior Vice President and Chief Technology Officer
since 1994 and President Solectron California Corporation since March
1996. Dr. Zohouri joined Solectron in 1980; he has held various
management positions and has also served as Director of Technology. His
prior experience includes teaching chemistry at a major international
university.
Dr. Winston H. Chen is a founder of the Company and has served as a
director of Solectron since 1978, Chairman of the Board from 1990 to
1994, President from 1979 to 1990, Chief Executive Officer from 1984 to
1991 and as Co-Chief Executive Officer from 1991 through 1992. Dr. Chen
is currently Chairman of the Paramitas Foundation. From 1970 to 1978,
Dr. Chen served as Process Technology and Development Manager of IBM. He
also serves as a director of Intel Corporation and Edison International.
Mr. Richard A. D'Amore has served as a director of Solectron since 1985.
Mr. D'Amore has been a general partner of various venture capital funds
affiliated with Hambro International Venture Funds since 1982 and a
general partner of North Bridge Venture Partners since 1992. He also
serves as a director of Math Soft, Inc., VEECO and Xionics Instruments.
Mr. Charles A. Dickinson has served as a director of Solectron since
1984, and as Chairman of the Board of Directors from 1986 to 1990 and
from 1994 to September 1996. He served as an independent consultant to
Solectron from 1991 to 1993 and is currently serving in that capacity.
He served as President, Solectron Europe from September 1993 to February
1996. From 1986 to 1990, he was Chairman of the Board of Directors,
President and Chief Executive Officer of Vermont Micro Systems, Inc. He
also serves as a director of Trident Microsystems, Inc. and of Aavid
Thermal Technologies, Inc.
Mr. Heinz Fridrich has served as a director of the Company since April
1996. Mr. Fridrich is currently a member of the faculty of the
University of Florida. From 1950 to 1993, Mr. Fridrich held a number of
manufacturing and operations management positions in Europe and the
United States with IBM. He currently serves as a director of Central
Hudson Gas & Electric Company in Poughkeepsie, New York.
Dr. Kenneth E. Haughton has served as a director of Solectron since
1985. Dr. Haughton is currently an independent consultant. From 1990 to
1991, he was Vice President of Engineering at Da Vinci Graphics, a
computer graphics firm. From 1989 to 1990, Dr. Haughton was an
independent consultant and from 1982 to 1989, he served as Dean of
Engineering at Santa Clara University. He also serves as a director of
Seagate Technology.
Dr. Paul R. Low has served as a director of Solectron since 1993 and is
currently the President of PRL Associates. Prior to founding PRL
Associates, Dr. Low worked for IBM from 1957 to 1992. Dr. Low held
senior management and executive positions with successively increasing
responsibility, including President, General Technology Division and IBM
Corporate Vice President; President of General Products Division; and
General Manager, Technology Products business line, also serving on
IBM's corporate management board. He also serves as a director of
Applied Materials, Inc., VEECO, Number Nine, NCD, XION and IPAC.
54
Mr. W. Ferrell Sanders has served as a director of Solectron since 1986.
Since 1987, Mr. Sanders has been a general partner of Asset Management
Associates Venture Fund, a venture capital management firm. From 1981 to
1987, he was an independent management consultant. He also serves as a
director of Adaptec, Inc.
Mr. Osamu Yamada has served as a director of Solectron since 1994. From
1990 to 1991, he was Chairman and Chief Executive Officer of BankCal
Tri-State Corporation, a wholly owned subsidiary of The Mitsubishi Bank,
Limited. From 1987 to 1990, he was Senior Managing Director of The
Mitsubishi Bank, Limited, and in an overlapping period from 1985 to
1990, he was also Chairman, President and Chief Executive Officer of
Bank of California. Prior to that, he held a number of key management
positions with The Mitsubishi Bank, Limited organization. Mr. Yamada
currently serves on a number of boards of major universities and
cultural centers. He also serves as a director of PictureTel.
There is no family relationship among any of the foregoing individuals.
ITEM 11: EXECUTIVE COMPENSATION
The information required by item 11 of Form 10-K is incorporated by
reference to the information contained in the section captioned
"Executive Officer Compensation" of the Registrant's definitive Proxy
Statement (Notice of Annual Meeting of Stockholders) for the fiscal year
ended August 31, 1997 to be held on January 14, 1998 which the Company
will file with the Securities and Exchange Commission within 120 days
after the end of the fiscal year covered by this report.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Information regarding this item is incorporated herein by reference from
the section entitled "Security Ownership of Certain Beneficial Owners
and Management" of the Registrant's definitive Proxy Statement (Annual
Meeting of Stockholders) for the fiscal year ended August 31, 1997.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this item is incorporated herein by
reference from the section entitled "Certain Transactions" of the
Registrant's definitive Proxy Statement (Annual Meeting of Stockholders)
for the fiscal year ended August 31, 1997.
55
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON
FORM 8-K
(a) 1. Financial Statements. The financial statements listed in
Item 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA, above are
filed as part of this Annual Report on Form 10-K, beginning on
page 29.
2. Financial Statement Schedule. The financial statement
Schedule II - VALUATION AND QUALIFYING ACCOUNTS is filed as
part of this annual report on Form 10-K, at page 58.
3. Exhibits. The exhibits listed in the accompanying Index to
Exhibits are filed as part of this Annual Report on Form 10-K.
(b) Reports on Form 8-K. During the fiscal quarter ended
August 31, 1997 no current reports on Form 8-K were filed.
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SOLECTRON CORPORATION
(Registrant)
Date: November 6, 1997 By /s/ Koichi Nishimura
(Koichi Nishimura, President,
Chief Executive Officer and
Chairman of the Board)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Name Title Date
- -------------------------- --------------------- -----------------
/s/ Koichi Nishimura President, Chief
Koichi Nishimura, Ph.D. Executive Officer,
and Chairman of the
Board November 6, 1997
/s/ Susan Wang Chief Financial
Susan S. Wang Officer (Principal
Financial and
Accounting Officer),
Senior Vice
President and
Secretary November 6, 1997
/s/ Winston H. Chen Director November 6, 1997
Winston H. Chen, Ph.D.
/s/ Richard A. D'Amore Director November 6, 1997
Richard A. D'Amore
/s/ Charles A. Dickinson Director November 6, 1997
Charles A. Dickinson
/s/ Heinz Fridrich Director November 6, 1997
Heinz Fridrich
/s/ Kenneth E. Haughton Director November 6, 1997
Kenneth E. Haughton, Ph.D.
/s/ Paul R. Low Director November 6, 1997
Paul R. Low, Ph.D.
/s/ W. Ferrell Sanders Director November 6, 1997
W. Ferrell Sanders
/s/Osamu Yamada Director November 6, 1997
Osamu Yamada
57
SOLECTRON CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Amounts
Balance at Charged Balance at
Beginning To End
Description of Period Operations (Deductions) Of Period
- ---------------------- --------- ---------- ------------ ----------
Year ended August 31, 1995:
Allowance for doubtful
accounts receivable $2,459 $1,602 $ (560) $3,501
Year ended August 31, 1996:
Allowance for doubtful
accounts receivable $3,501 $1,651 $(2,160) $2,992
Year ended August 31, 1997:
Allowance for doubtful
accounts receivable $2,992 $2,319 $(1,262) $4,049
58
INDEX TO EXHIBITS
Exhibit
Number Description
- ----------- ----------------------------------------------------------
2.1 [B] Agreement and Plan of Reorganization, by and among the
Company, Force Acq. Corp. and Force Computers, Inc. as
amended.
3.1 Certificate of Incorporation of the Company.
3.2 Bylaws of the Company.
10.1 [A] Preferred Stock Purchase Agreement dated September 29,
1983, together with amendments thereto dated February 28,
1984 and June 23, 1988.
10.2 Form of Indemnification Agreement between the Company and
its officers, directors and certain other key employees.
10.3 [D] 1983 Incentive Stock Option Plan, as amended August 13,
1991.
10.4 [E] 1988 Employee Stock Purchase Plan, as amended October 1992.
10.5 [H] Amended and Restated 1992 Stock Option Plan.
10.6 [C]+ Asset Purchase Agreement dated as of January 29, 1996, as
amended and restated as of March 29, 1996 by and among
Solectron Texas, L.P., the Company and Texas Instruments,
Incorporated.
10.7 [F] Stock Acquisition Agreement dated August 28, 1993, between
the Company and Solectron California Corporation.
10.8 [G] Lease Agreement between BNP Leasing Corporation, as
Landlord, and the Company, as Tenant, Effective September
6, 1994.
10.9 [G] Purchase Agreement, by and between the Company and BNP
Leasing Corporation, dated September 6, 1994.
10.10 [G] Pledge and Security Agreement, by and between the Company,
as Debtor, and BNP Leasing Corporation, as Secured Party,
dated September 6, 1994.
10.11 [G] Assignment and Assumption Agreement between the Company and
Solectron California Corporation, dated November 9, 1994.
10.12 [G] Custodial Agreement by and between the Company, Banque
Nationale De Paris and BNP Leasing Corporation, dated
September 6, 1994.
10.13 Modification Agreement (First Amemdment ot Purchase
Agreement and Second Amendment to Lease Agreement) by and
between the Company and BNP Leasing Corporation, dated
May 1, 1997.
10.14 Credit Agreement between the Company and Bank of America
National Trust and Savings Association, as Agent and
Issuing Bank, dated April 30, 1997.
10.15a Purchase and Sale Agreement among Solectron Corporation, as
Originator, Servicer and Guarantor, Solectron California
Corporation, as Originator, and Solectron Funding
Corporation, as the Initial Purchaser, dated September 17,
1997
10.15b Receivables Purchase Agreement, among Solectron Funding
Corporation, as Seller, Solectron Corporation, individually
and as Servicer, Receivables Capital Corporation, as Issuer
and Bank of America National Trust and Savings Association,
as Administrator, dated September 17, 1997.
11.1 Statement re: Computation of Net Income Per Share.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Auditors.
27.1 Financial Data Schedule
59
INDEX TO EXHIBITS (Continued)
Footnotes Description
[A] Incorporated by reference to the Exhibits to the Company's
Registration Statement on Form S-1 (File No. 33-22840).
[B] Incorporated by reference to the Exhibits to the Company's
Registration Statement on Form S-4 as amended, filed
November 20, 1996. (File No. 333-15983).
[C] Incorporated by reference to the Exhibits of the Company's
Form 10-Q for the quarter ended February 29, 1996.
[D] Incorporated by reference to the Exhibits to Company's
Registration Statement on Form S-8 (File No. 33-46686).
[E] Incorporated by reference to the Exhibits to Company's Form
10-K for the year ended August 31, 1992.
[F] Incorporated by reference to the Exhibits to Company's Form
10-K for the year ended August 31, 1993.
[G] Incorporated by reference to the Exhibits to Company's Form
10-K for the year ended August 31, 1994.
[H] Incorporated by reference to the Exhibits to Company's
Registration Statement on Form S-8 filed March 31, 1997
(File No. 333-24293).
+ Confidential treatment has been granted for certain portions
of these documents.
60