ITEM 1. BUSINESS
Solectron Corporation 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. The Company's goal is to offer its customers competitive advantages such as access to advanced manufacturing technologies, shortened product time-to-market, reduced cost of production and more effective asset utilization that can be attained from outsourcing their manufacturing. The Company currently conducts operations in the Western and Eastern United States, Europe and Southeast Asia. The Company believes that the geographically diverse locations of its facilities enable it to build closer regional relationships with its customers and to better meet its customer's cost and local market content requirements.
Solectron Corporation was incorporated in California in August 1977. Solectron's corporate headquarters are located at 777 Gibraltar Drive, Milpitas, California 95035. The Company's telephone number is (408) 957-8500. As used herein, "Solectron" and the "Company" refer to Solectron Corporation and its subsidiaries, unless the context otherwise requires.
Industry Overview
Solectron is benefiting from increased worldwide market acceptance of the use of manufacturing specialists in the electronics industry. Many electronics OEMs have adopted and are becoming increasingly reliant upon manufacturing outsourcing strategies. The Company 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 Capital Investment. As electronic products have become more technologically advanced, the manufacturing process has become increasingly automated, requiring a greater level of investment in capital equipment. Manufacturing specialists enable OEMs to gain access to advanced manufacturing facilities, thereby reducing the OEMs' overall capital equipment requirements.
Focus Resources. Because the electronics industry is experiencing greater levels of competition and more rapid technological change, many OEMs increasingly are seeking to focus their resources on activities and technologies in which they add the greatest value. By offering comprehensive electronics assembly and related manufacturing services, 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 options on manufacturing locations to better address their objectives regarding cost, shipping location, frequency of interaction with manufacturing specialists and local content requirements of end-market countries.
Strategy
The Company's strategy emphasizes the following key elements:
Quality. Solectron believes that product quality is a critical success factor in the electronics manufacturing market. The Company strives for continuous improvement of its processes and has adopted a number of quality improvement and measurement techniques to monitor its performance. The Company has received numerous superior service and quality awards, including the Malcolm Baldrige National Quality Award in October 1991, the State of California Governor's Golden State Award in September 1994, and numerous awards from its customers such as Apple Computer, Applied Materials, Exabyte, Hewlett-Packard Company, International Business Machines Corporation (IBM) and Sun Microsystems, Inc. Nearly all the Company's manufacturing facilities are certified under ISO-9002, an international quality standard for 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 the electronics industry. Due to the costs inherent in supporting customer relationships, the Company focuses its efforts on customers with which the opportunity exists to develop long-term business partnerships. The Company's goal is to provide its customers with total manufacturing solutions for both new and more mature products, as well as across product generations. The Company's manufacturing services range from providing 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. In order for the Company to continue to develop long-term business partnerships with leading OEMs in the electronics industry, the Company will be required to continue to increase staffing and other expenses, as well as its expenditures on capital equipment and leasehold improvements. The Company's customers generally do not commit to firm production schedules for more than one quarter. Should the Company increase its expenditures in anticipation of a future level of sales which does not materialize, its profitability would be adversely affected. On occasion, customers may require rapid increases in production which can place an excessive burden on the Company's resources. In order to maintain its sales growth and profitability, the Company will be required to continue managing its assets efficiently.
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. The Company 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 the Company's revenue is from its turnkey business. The Company 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, the Company 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 the Company's customer base and in closer working relationships. The Company 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) assembly and testing and emerging interconnect technologies. The Company has developed substantial SMT expertise including advanced, vision-based component placement equipment. The Company 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. The Company also has the capability to manufacture using tape-automated-bonding, chip-on-substrate, chip-on-flex, ball- grid arrays and other more advanced manufacturing processes. However, to date the Company has not utilized these manufacturing processes on a significant scale.
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. The Company currently has operations in the Western and Eastern United States, Europe and Southeast Asia. The Company 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 end-market countries. See "International Manufacturing Capability" below. In addition, the Company also has 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.
International Manufacturing Capability
Western United States. The Company's headquarters and largest manufacturing operations are located in Silicon Valley, principally at a single site in Milpitas, California. The Company believes that the location of these facilities in one of the largest concentrations of OEM electronics manufacturers permits it to more efficiently provide electronic assembly, manufacturing management and other services to such OEMs. In September 1993, the Company acquired operations in Everett, Washington. In addition to serving customers in that region, this facility specializes in low volume, high mix production.
Eastern United States. The Company's Eastern United States operations are located in Charlotte, North Carolina and were acquired in September 1992 from IBM. This facility is staffed by personnel with extensive electronics manufacturing and product design experience. The Company believes that the Charlotte facility allows it to better pursue new business opportunities with new and existing customers with Eastern United States operations because of Charlotte's status as a transportation hub and its relative proximity to major Eastern United States electronics markets.
Europe. The Company has three European sites. One site is located in Bordeaux, France and was also acquired in September 1992 from IBM. The Bordeaux facility is staffed largely by former IBM employees, many with extensive electronics manufacturing and product design experience. In connection with the acquisitions from IBM, IBM committed to purchase from the Bordeaux facility certain volumes of sub-assemblies for a period of three years ending in December 1995. While the Company expects to continue to do business with IBM after the agreement expires, there can be no guarantee that such business will be avaialable at satisfactory terms to the Company. However, Solectron believes that its Bordeaux facility will continue to allow it to better serve IBM and to develop new business with other customers having European operations.
In September 1993, the Company also acquired operations in Dunfermline, Scotland. The facility was expanded in fiscal 1995 to accommodate increased customer demand. Solectron believes that this facility allows it to better serve the many electronics OEMs located in the United Kingdom and Ireland.
In November 1995, the Company completed a transaction with Hewlett-Packard GmbH (HP), a subsidiary of Hewlett -Packard Company, to acquire the assets of HP's printed circuit board assembly operation in Boeblingen, Germany. This facility is expected to allow the Company to better serve the German market and Hewlett-Packard.
Southeast Asia. The Company's Southeast Asia manufacturing operation is located in Penang, Malaysia and was opened in 1991. This facility was expanded in fiscal 1994 due to increased customer demand. The Penang operation was 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 facility currently provides electronics assembly, materials management and other services to customers located in Malaysia, Singapore, Japan, the United States and other locations.
The Company has established operations in five new locations since September 1992. As the Company manages the existing operations and expands geographically, it may experience certain inefficiencies from the management of geographically dispersed operations. In addition, the Company'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 1995, approximately 38% of the Company's sales were from operations outside of the United States. As a result of continued customer demand overseas, the Company expects foreign sales as a percentage of total sales to increase. As a result of its foreign sales and facilities, the Company's 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 the Company'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, the Company combines advanced manufacturing technology, such as computer-aided manufacturing and testing, with Japanese manufacturing techniques, including just-in-time manufacturing, total quality control, 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 the Company to deliver products to customers in the quantities and time frame required. Total quality control is a management philosophy which seeks to impart high levels of quality in every operation of the Company 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 the Company 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. Continuous flow manufacturing is a manufacturing technique for making operators responsible for quality, thereby eliminating separate quality control staffs and minimizing the perpetuation of defects through large quantities of assembled units.
In order to successfully implement these management techniques, Solectron has developed the ability to timely collect and utilize large amounts of data. The Company 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, the Company uses sophisticated computer systems for material resource planning, shop floor control, work-in-process tracking, statistical process control and activity-based product costing.
In implementing its manufacturing approach, the Company emphasizes timely delivery and accurate, up-to-date documentation for each product. The Company develops an appropriate production process and a complete set of manufacturing process instructions, inspection plans and a quality assurance plan. In the case of turnkey orders, the Company analyzes each customer's materials specifications to identify the suppliers from whom to purchase the materials. The Company then plans and executes purchase orders and receives, inspects and warehouses components, expedites critical components and delivers a complete set of components to the production floor for assembly in sufficient time to meet customer requirements.
Responsiveness to customers, particularly as to engineering changes once manufacturing has commenced, is an important component of Solectron's manufacturing approach. Many products manufactured by the Company are in the early stages of their product life cycle and therefore may have many design or engineering changes. Upon receiving an engineering change notice, the Company identifies the impact of such changes on the production process, current inventory and open purchase orders. To support a continuous production flow while minimizing excess and obsolete inventory costs for the customer, the Company restructures bills of material and expedites orders for new components, as authorized. The Company also identifies and makes changes to its manufacturing instructions and test plans. In order to assure prompt customer response, the Company assigns each project a project manager, quality assurance engineer, product engineer, test engineer and customer service representative. Solectron maintains regular contact with its customers to assure adequate information exchange, document control and activities coordination necessary to support a high level of quality and on-time delivery.
Electronic Assembly and Other Services
Solectron's electronic assembly activities consist primarily of the placement and attachment of electronic and mechanical components on printed circuit boards and flexible cables. The Company 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 the customer's distributors. In addition, Solectron provides other manufacturing services including refurbishment, disk duplication and packaging services and remanufacturing. Solectron manufactures on a turnkey basis with Solectron directly procuring some or all of the components necessary for production, and on a consignment basis, where the OEM customer supplies all 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 the Company's ability to deliver high quality products on a consistent basis. The Company 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. The Company either designs and procures test fixtures and develops its own test software or utilizes the customer's existing test fixtures and test software. In addition, the Company also 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 the Company'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.
The Company 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. The Company also offers board design services for a fee. 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.
Sales and Marketing
Sales and marketing at Solectron is an integrated process involving direct salespeople and project managers, as well as the Company's senior executives. The Company's sales resources are directed at multiple management and staff levels within targeted accounts. The Company also uses independent sales representatives in certain geographic areas. The Company also receives unsolicited inquiries resulting from advertising and public relations activities, as well as referrals from current customers. These opportunities are evaluated against the Company's customer selection criteria and are assigned to direct salespeople or independent sales representatives, as appropriate. Historically, the Company has had substantial recurring sales from existing customers.
Over 90% of the Company's net sales during fiscal 1995 were derived from customers which were also customers during fiscal 1994. Although Solectron seeks to diversify its customer base, a small number of customers currently are responsible for a significant portion of the Company's net sales. During fiscal 1995, 1994, and 1993, the Company's ten largest customers accounted for over 70%, 73%, and 75% of consolidated net sales respectively. However, with the exception of IBM Corporation, which represented 21%, 28% and 26% of net sales in fiscal 1995, 1994 and 1993, respectively, Apple Computer, Inc. which represented 12% of net sales in fiscal 1994, and Sun Microsystems, Inc. which represented 12% of net sales in fiscal 1993, no other individual customer accounted for more than 10% of the Company'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, 1995, Solectron's backlog was approximately $520 million. The backlog was approximately $350 million at August 31, 1994. Because customers may cancel or reschedule deliveries, backlog is not a meaningful indicator of future financial results.
Competition
The electronic assembly and manufacturing 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 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 the Company's competitors have broader geographic breadth. They also 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 is manufacturing technology, quality, responsiveness, the provision of value-added services and price. To remain competitive, the Company must continue to provide technologically advanced manufacturing services, maintain quality levels, offer flexible delivery schedules, deliver finished products on a reliable basis and compete favorably on the basis of price. The 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.
Employees
As of August 31, 1995, the Company employed 11,049 persons, including 2,982 temporary employees. Of the Company's 11,049 persons employed, 4,579 were employed by the Company's foreign operations.
Patents and Trademarks
The Company obtained a limited number of U.S. patents in 1995 related to the process and equipment used in its surface mount technology. These patents are considered valuable to the Company.
Although the Company does not believe that its manufacturing process infringes on the intelectual property rights of third parties, there can be no assurance that third parties will not assert infringement claims against the Company in the future. If such an assertion where to be made, it may become necessary or useful for the Company to enter into licensing arrangements or to resolve such an issue through litigation. However, there can be no asurance that such license rights would be available to the Company on commercially acceptable terms or that any such litigation could be resolved favorably. Additionally, such litigation could be lengthy and costly and could have a material adverse effect on the Company's financial condition regardless of the outcome of such litigation.
The Company does not believe that trademark protection is an important competitive factor in its market.
ITEM 2:

ITEM 2: PROPERTIES
The Company's domestic manufacturing facilities are located in California, North Carolina and Washington. In and around Milpitas, California, Solectron Corporation leases approximately 1,112,000 square feet of facilities under leases expiring through 2000. In Charlotte, North Carolina, the Company owns a single facility of approximately 175,000 square feet on 73 acres of land and occupies an additional facility of approximately 36,000 square feet under a short-term lease. In Everett, Washington, the Company leases approximately 70,000 square feet.
In Europe, the Company owns approximately 319,000 square feet of facilities on 240 acres of land in Bordeaux, France. In Dunfermline, Scotland, the Company owns two facilities totaling approximately 213,000 square feet on approximately 15 acres of land. In connection with the November 1995 acquisition its site in Boeblingen, Germany, the Company now leases facilities in Boeblingen approximating 50,000 square feet.
The Company's Asian manufacturing operation is located in Penang, Malaysia. The Company owns facilities of 196,000 square feet on 5 acres of land which are leased pursuant to a 60-year lease.
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.
ITEM 3:

ITEM 3: LEGAL PROCEEDINGS
Not applicable.
ITEM 4:

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.
PART II
ITEM 5:

ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
Common Stock Information The following table sets forth the quarterly high and low per share sales prices of the Company's common stock for the two- year period ended August 31, 1995, as quoted on the New York Stock Exchange.
Per share trading price range:
First Quarter Second Quarter Third Quarter Fourth Quarter
1995 1994 1995 1994 1995 1994 1995 1994 High 31 3/8 28 5/8 27 1/4 33 1/4 31 32 1/2 38 5/8 31 1/4 Low 24 3/4 20 3/4 22 1/2 26 1/8 22 7/8 25 3/4 30 1/8 23 3/4
ITEM 6:

ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General Solectron's net sales are derived from sales to electronics original equipment manufacturers. The majority of the Company's customers compete in the telecommunications, computer peripherals, workstation, and personal computer segments of the electronics industry. The Company uses advanced manufacturing technologies in assembly and manufacturing management of complex printed circuit boards and electronics systems. Operating results are affected by a number of factors, including the degree of turnkey manufacturing, the material content and volume of products built, manufacturing efficiencies, utilization of capacity, start-up costs associated with new customer projects, and price competition. Over the past several years, the Company's strategy has been to increase the percentage of sales it derives from turnkey manufacturing, which currently represents a substantial portion of the Company's sales. Turnkey projects, in which the Company procures some or all of the components necessary for production, typically generate higher net sales and higher gross profits with lower gross margins than consignment projects due to the inclusion in the Company's operating results of sales and costs associated with the purchase and sale of components. The increase in gross profit and the decrease in gross margin over the past several years has been due primarily to this shift toward turnkey manufacturing. More recently, the Company has assembled products with varying degrees of material content, which has caused the Company's gross margin to fluctuate. In addition, the degree of startup costs and inefficiencies associated with new customer projects has affected the Company's gross margin. The Company has manufacturing operations in six locations: three in the U.S., two in Europe, and one in Malaysia. Additionally, on August 17, 1995, the Company executed definitive agreements with Hewlett-Packard GmbH (HP), a subsidiary of Hewlett-Packard Company, to acquire HP's printed circuit board assembly operation in Boeblingen, Germany. This transaction is expected to close in November 1995. As the Company manages its existing operations and expands geographically, it may experience certain inefficiencies from the management of geographically dispersed operations. 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 make significant expenditures to comply with environmental regulations. The Company competes within the electronics manufacturing services (EMS) segment of the electronics industry. The EMS segment is currently growing at a faster rate than the overall electronics industry, but the EMS segment is also comprised of a large number of companies, some of which have achieved substantial market share. In addition to competing with other EMS companies, the Company also faces competition from current and prospective customers that evaluate Solectron's capabilities against the merits of manufacturing products internally. The Company believes that the primary basis of competition in its targeted markets is manufacturing technology, quality, responsiveness, the provision of value- added services, and price.
Results of Operations The following table sets forth the percentage of net sales of certain items in the Consolidated Statements of Income. The financial information and the discussion below should be read in conjunction with the Consolidated Financial Statements and Notes thereto.
Years ended August 31, 1995 1994 1993 Net sales 100.0% 100.0% 100.0% Cost of sales 90.2 90.0 88.2
Gross profit 9.8 10.0 11.8 Operating expenses: Selling, general and administrative 3.6 3.6 5.0 Research and development 0.2 0.3 0.4
Operating income 6.0 6.1 6.4 Net interest expense 0.1 0.3 0.6
Income before income taxes 5.9 5.8 5.8 Income taxes 2.0 2.0 2.1
Net income 3.9% 3.8% 3.7%
Net Sales During the past few years, the Company's net sales have increased significantly due primarily to an increasing trend toward outsourcing within the electronics industry. In fiscal 1995, net sales grew to $2.1 billion, an increase of $609 million, or 42%, over the previous year. Net sales in fiscal 1994 were $1.5 billion, an increase of $620 million, or 74%, over fiscal 1993. The increase in fiscal 1995 was due to increased orders from existing customers, the addition of new customers, and growth in the Company's turnkey business. The increase in fiscal 1994 was due to increased orders from existing customers, conversion of certain customers to turnkey arrangements, and the acquisition in September 1993 of manufacturing sites in Scotland and Washington. The Company's two largest customers during fiscal 1995 and 1994 were International Business Machines Corporation (IBM) and Apple Computer, Inc. (Apple). Net sales to IBM in fiscal 1995 and 1994 were 21% and 28% of consolidated net sales, respectively. Net sales to Apple in fiscal 1995 and 1994 were less than 10% and 12% of consolidated net sales, respectively. While net sales to these customers increased in absolute amounts during fiscal 1995 compared to fiscal 1994, the Company has obtained significant new business from other customers, thereby reducing its dependency on these accounts. Net sales to the Company's top ten customers accounted for 70% of consolidated net sales during both fiscal 1995 and fiscal 1994. The Company is dependent upon continued revenues from IBM, Apple, and the rest of its top ten customers. Any material change in orders from these or other customers could have a material effect on the Company's results of operations. Net sales at the Company's foreign sites grew at a faster rate over the last year than net sales at the Company's domestic sites. Foreign locations contributed 38% of consolidated net sales in fiscal 1995, compared to 35% for fiscal 1994. As a result of the Company's foreign sales and facilities, the Company's operations are subject to risks of doing business abroad, including fluctuations in the value of currency, changes to import and export regulations, possible restrictions on the transfer of funds, and in certain parts of the world, political instability. While to date these dynamics have not had a materially adverse impact on the Company's results of operations, there can be no assurance that there will not be such an impact in the future. The Company's operation in California contributed a substantial portion of the Company's net sales and operating income during fiscal 1995 and 1994. The performance of this operation is expected to continue as a significant factor in the overall financial results of the Company. Any material change to the customer base, product mix, efficiency, or other attributes of this site could have a material effect on the Company's consolidated results of operations. Over the past few years, the Company's revenues have grown substantially. The Company believes that its ability to continue to achieve rapid growth will depend primarily on growth in sales to existing customers for their current and future product generations and successful marketing to new customers. The Company has no firm long-term volume commitments from its customers and over the last few years has experienced reduced lead-time in customer orders. 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. The Company has a manufacturing services agreement with IBM at the France facility that expires on December 31, 1995. While the Company expects to continue business with IBM after the agreement expires, there can be no guarantee that such business will be available at satisfactory terms to the Company. Because of these factors, there can be no assurance that the Company's historical revenue growth rate will continue. The Company currently serves the electronics industry, which is subject to rapid technological change, product obsolescence, and price competition. These and other factors affecting the electronics industry, or any of the Company's major customers in particular, could have a materially adverse effect on the Company's results of operations. Gross Profit Gross profit increased by $55.5 million, or 38%, in fiscal 1995 compared to fiscal 1994 and $47.5 million, or 48%, during fiscal 1994 compared to fiscal 1993. Gross margin decreased to 9.8% in fiscal 1995, from 10.0% in fiscal 1994 and 11.8% in fiscal 1993. The slight decrease in gross margin in fiscal 1995 compared to fiscal 1994 resulted primarily from underutilization of the facility in France, manufacturing inefficiencies at the Scotland and North Carolina sites from new project start-up costs, and growth in turnkey business at the Scotland site. Offsetting these factors were improved efficiencies at the Company's operation in California and improvements in product mix. In fiscal 1994, the Company's gross margin was lower than fiscal 1993 due to an increase in turnkey business and larger concentrations of high volume, low margin business. In the future, the Company's gross margin is expected to depend primarily on product mix, the level of inefficiencies associated with new customer projects, and pricing within the electronics industry. While the availability of raw materials appears adequate to meet the Company's current revenue projections, component availability to support revenue increases beyond the Company's current plans is limited. Furthermore, availability of customer-consigned parts and unforeseen shortages of components on the world market are beyond the Company's control and could adversely affect revenue levels and operating efficiencies.
Selling, General and Administrative Expenses Selling, general and administrative (SG&A) expenses increased to $73.6 million in fiscal 1995, compared to $53.8 million in fiscal 1994 and $42.0 million in fiscal 1993. However, SG&A expenses as a percentage of net sales decreased to 3.6% in fiscal 1995 and 1994 from 5.0% in fiscal 1993, as the Company leveraged its fixed operating expenses. The increases in SG&A expenses during these periods were due primarily to growth in personnel and related departmental expenses at all manufacturing locations and investments in information systems. These expenditures are designed to support the increased size and complexity of the Company's business. In fiscal 1994, the increase in SG&A expenses was also due to the acquisitions of the Scotland and Washington sites in September 1993. The Company anticipates SG&A expenses will increase in absolute amounts in the future as the Company builds the infrastructure necessary to support its current and prospective business.
Research and Development Expenses The primary focus of the Company's recent research and development efforts has been on developing high density interconnecting technologies and deploying processes into manufacturing. Technologies include ball-grid array (plastic, ceramic, and tape platforms), chip-on-substrate by wire bonding, tape-automated bonding, flip-chip, VOC-free, no-clean manufacturing, no-lead soldering, and fluxless soldering. Research and development expenses increased to $4.8 million in fiscal 1995 from $4.2 million in fiscal 1994 and $3.8 million in fiscal 1993.
Net Interest Expense Net interest expense was $2.9 million in fiscal 1995, compared to $4.2 million in fiscal 1994 and $4.5 million in fiscal 1993. The decrease in fiscal 1995 compared to fiscal 1994 was due primarily to the voluntary conversion of nearly 80% of the Company's outstanding zero-coupon subordinated notes during the fourth quarter of fiscal 1995.
Income Taxes Income taxes increased to $41.0 million in fiscal 1995 from $28.6 million in fiscal 1994 and $18.0 million in fiscal 1993, due primarily to increased income before income taxes. The Company's effective income tax rate decreased from 37% in fiscal 1993 to 34% in fiscal 1994 and remained at 34% in fiscal 1995. The principal reasons for a lower effective income tax rate in fiscal 1995 and 1994 compared to fiscal 1993 were an increase in profits from foreign operations which are taxed at lower rates than in the United States and the impact of certain tax advantaged short-term investments in the United States. The Company has a tax holiday in Malaysia that expires in January 1997, subject to certain extensions. If the tax holiday is not extended, the Company's effective income tax rate may increase.
Liquidity and Capital Resources Working capital was $355.6 million at the end of fiscal 1995, an increase of $46.4 million from the end of fiscal 1994. This increase reflects primarily the growth in net sales during fiscal 1995 and the required investment in working capital to support this growth. The increase in working capital was financed primarily by cash generated from operations. The Company anticipates that further increases in working capital will be required to support anticipated revenue growth.
During fiscal 1995 the Company invested $113.6 million in new capital assets, primarily surface mount assembly and test equipment to meet current and expected production levels. To support growth and to replace aging equipment, the Company expects capital expenditures in fiscal 1996 to be in the range of $75 million to $120 million. Beginning in September 1997, the Company will be required to pledge approximately $44 million of cash or marketable securities as collateral for its obligation under the terms of the Company's operating lease for certain of its facilities in California. The lease expires in September 1999. In addition to the Company's working capital as of August 31, 1995, which includes cash and cash equivalents of $90.0 million and short-term investments of $58.6 million, the Company also has available a $100 million unsecured domestic revolving credit facility, subject to financial covenants and restrictions, and $33 million in available foreign credit facilities. During the fourth quarter of fiscal 1995, nearly 80% of the Company's outstanding zero-coupon subordinated notes were voluntarily converted to common stock. The result of these conversions was to decrease long-term debt by $113.9 million, decrease other assets by $3.0 million (unamortized debt issuance costs), and increase common stock by $110.9 million.
ITEM 8:

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by item 8 of form 10-K is presented here in the following order:
Unaudited Quarterly Financial Information
Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Shareholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements
Independent Auditors' Report
Unaudited Quarterly Financial Information
For each fiscal quarter during the two fiscal years ended August 31, (in thousands, except per share data) First Quarter Second Quarter Third Quarter Fourth Quarter Net sales $506,678 $471,266 $516,892 $570,723 Gross profit $ 45,443 $ 46,369 $ 52,379 $ 57,639 Gross margin 9.0% 9.8% 10.1% 10.1% Operating income $ 28,721 $ 28,419 $ 31,917 $ 34,377 Operating margin 5.7% 6.0% 6.2% 6.0% Net income $ 18,194 $ 18,034 $ 20,328 $ 22,970 Primary net income per share $ 0.43 $ 0.43 $ 0.48 $ 0.48 Fully diluted net income per share $ 0.38 $ 0.38 $ 0.42 $ 0.45
Net sales $321,840 $327,208 $365,083 $442,648 Gross profit $ 32,879 $ 34,768 $ 38,585 $ 40,096 Gross margin 10.2% 10.6% 10.6% 9.1% Operating income $ 19,168 $ 20,267 $ 23,697 $ 25,218 Operating margin 6.0% 6.2% 6.5% 5.7% Net income $ 11,890 $ 12,375 $ 14,690 $ 16,590 Primary net income per share $ 0.28 $ 0.29 $ 0.35 $ 0.39 Fully diluted net income per share $ 0.26 $ 0.27 $ 0.31 $ 0.35
Consolidated Balance Sheets
As of August 31, (in thousands) 1995 1994
Assets Current assets: Cash and cash equivalents $ 89,959 $ 67,906 Short-term investments 58,643 94,070 Accounts receivable, less allowances of $3,501 and $2,459, respectively 254,898 188,794 Inventories 298,809 232,389 Prepaid expenses and other current assets 24,049 18,977 Total current assets 726,358 602,136
Net property and equipment 203,609 147,822 Other assets 10,888 16,437 Total assets $940,855 $766,395
Liabilities and Shareholders' Equity Current liabilities: Current portion of long-term debt and capital lease obligations $ 4,796 $ 3,149 Accounts payable 310,680 241,930 Accrued employee compensation 28,705 21,598 Accrued expenses 15,264 16,257 Other current liabilities 11,310 9,999 Total current liabilities 370,755 292,933
Long-term debt and capital lease obligations 30,043 140,709 Other long-term liabilities 1,916 1,964 Total liabilities 402,714 435,606
Shareholders' equity: Preferred stock, no par value; 1,200 shares authorized; no shares issued --- --- Common stock, no par value; 80,000 shares authorized; 49,584 and 41,302 shares issued and outstanding, respectively 329,265 206,257 Retained earnings 206,321 126,795 Cumulative translation adjustment and other 2,555 (2,263) Total shareholders' equity 538,141 330,789
Commitments
Total liabilities and shareholders' equity $940,855 $766,395
See accompanying notes to consolidated financial statements.
Consolidated Statements of Income
(in thousands, except per share data) Years ended August 31, 1995 1994 1993 Net sales $2,065,559 $1,456,779 $836,326 Cost of sales 1,863,729 1,310,451 737,458
Gross profit 201,830 146,328 98,868 Operating expenses: Selling, general and administrative 73,554 53,816 41,965 Research and development 4,842 4,162 3,763 Operating income 123,434 88,350 53,140
Interest income 6,611 6,484 6,051 Interest expense (9,551) (10,675) (10,578) Income before income taxes 120,494 84,159 48,613
Income taxes 40,968 28,614 18,013 Net income $ 79,526 $ 55,545 $ 30,600
Net income per share: Primary $ 1.82 $ 1.32 $ 0.80 Fully diluted $ 1.62 $ 1.18 $ 0.75 Weighted average number of shares: Primary 43,773 42,205 38,132 Fully diluted 52,582 52,033 47,816
See accompanying notes to consolidated financial statements.
Consolidated Statements of Shareholders Equity
Cumulative Common Common Translation Total Stock Stock Retained Adjustment Shareholders' (In thousands) Shares Amount Earnings and Other Equity
Balances as of 8/31, 1992 32,988 $63,595 $40,650 $ --- $104,245 Proceeds from public offering, net 6,644 127,566 --- --- 127,566 Options exercised 881 2,028 --- --- 2,028 Stock issued under employee purchase plan 123 1,740 --- --- 1,740 Tax benefit associated with exercise of stock options --- 2,810 --- --- 2,810 Net income --- --- 30,600 --- 30,600 Cumulative translation adjustment and other --- --- --- (8,009) (8,009)
Balances as of 8/31, 1993 40,636 197,739 71,250 (8,009) 260,980 Options exercised 527 3,601 --- --- 3,601 Stock issued under employee purchase plan 126 2,697 --- --- 2,697 Conversion of long-term debt 13 174 --- --- 174 Tax benefit associated with exercise of stock options --- 2,046 --- --- 2,046 Net income --- --- 55,545 --- 55,545 Cumulative translation adjustment and other --- --- --- 5,746 5,746
Balances as of 8/31, 1994 41,302 206,257 126,795 (2,263) 330,789 Options exercised 573 7,858 --- --- 7,858 Stock issued under employee purchase plan 131 2,901 --- --- 2,901 Conversion of long-term debt 7,578 110,915 --- --- 110,915 Tax benefit associated with exercise of stock options --- 1,334 --- --- 1,334 Net income --- --- 79,526 --- 79,526 Cumulative translation adjustment and other --- --- --- 4,818 4,818
Balances as of 8/31, 1995 49,584 $329,265 $206,321 $ 2,555 $538,141
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows
Years ended August 31, (in thousands) 1995 1994 1993
Cash flows from operating activities: Net income $ 79,526 $ 55,545 $ 30,600 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 61,416 45,708 26,381 Interest accretion on zero-coupon subordinated note 8,240 8,894 8,235 Other 3,763 2,349 1,745 Changes in operating assets and liabilities: Accounts receivable (64,906) (51,870) (82,192) Inventories (63,654) (66,221) (97,383) Prepaid expenses and other current assets (4,566) (6,470) (5,243) Accounts payable 63,681 65,283 116,778 Accrued expenses and other current liabilities 3,223 12,689 21,625 Net cash provided by operating activities 86,723 65,907 20,546
Cash flows from investing activities: Purchases of short-term investments (183,299) (338,192) (391,824) Sales and maturities of short-term investments 218,805 380,335 319,574 Purchases of facilities, equipment, and other assets --- (14,383) (55,215) Capital expenditures (113,613) (58,959) (68,286) Other (426) (1,998) (950) Net cash used in investing activities (78,533) (33,197) (196,701)
Cash flows from financing activities: Proceeds from bank lines of credit 4,366 --- --- Repayments of long-term debt and capital lease obligations (3,484) (8,864) (7,245) Net proceeds from sale of common stock 10,759 6,298 131,334 Net cash provided by (used in) financing activities 11,641 (2,566) 124,089
Effect of exchange rate changes on cash and cash equivalents 2,222 2,530 (1,208)
Net increase (decrease) in cash and cash equivalents 22,053 32,674 (53,274) Cash and cash equivalents at beginning of year 67,906 35,232 88,506 Cash and cash equivalents at end of year $ 89,959 $ 67,906 $ 35,232
Supplemental Disclosures Cash paid: Interest $ 482 $ 1,242 $ 2,436 Income taxes 44,429 25,551 10,552 Non-cash investing and financing activities: Issuance of common stock upon conversion of long-term debt 110,915 174 --- Tax benefit associated with exercise of stock options 1,334 2,046 2,810 New equipment acquired under long-term debt --- --- 1,800 Debt incurred to purchase facilities, equipment, and other assets --- --- 3,640
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements
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. Other manufacturing services include systems assembly, flexible cable assembly, disk duplication, and packaging. In addition, the Company provides pre-manufacturing services, such as consultation on product design and manufacturability, and post-manufacturing services, including fulfillment, repair and refurbishment, upgrades, and end-of-product-life manufacturing. The Company's 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 the United States, Europe, and Asia. The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries after elimination of intercompany accounts and transactions. (b) Cash Equivalents and Short-Term Investments Cash equivalents are highly liquid investments purchased with an original maturity of less than three months. The Company adopted Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities," effective September 1, 1994. Under the provisions of SFAS No. 115, the Company has classified its investments in debt securities 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. Unrealized gains and losses are included in shareholders' equity. Adoption of SFAS No. 115 did not have a material effect on the Company's consolidated financial position. See Note 2. (c) Inventories Inventories are stated at the lower of weighted average cost or market. See Note 3. (d) Property and Equipment Property and equipment are recorded at cost. Depreciation and amortization are computed based on the shorter of the estimated useful lives or the lease terms of the respective assets, using the straight-line method. Estimated useful lives are presented below. See Note 4. Machinery and equipment 2 - 5 years Equipment recorded under capital lease 3 - 5 years Furniture and fixtures 3 - 5 years Leasehold improvements Lease term Buildings 6 - 50 years The Financial Accounting Standards Board recently issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement requires long-lived assets to be evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company will adopt SFAS No. 121 on September 1, 1996 and does not expect its provisions to have a material effect on the Company's consolidated results of operations in the year of adoption. (e) Other Assets Other assets include debt issuance costs associated with the outstanding zero-coupon subordinated notes described in Note 6 and goodwill related to the purchase of facilities and equipment described in Note 13. Debt issuance costs are amortized using the effective interest rate method over the debt term (20 years). Goodwill is amortized using the straight- line method over ten years. (f) Income Taxes As described in Note 9, the Company adopted SFAS No. 109, "Accounting for Income Taxes," effective September 1, 1993. The adoption of SFAS No. 109 did not have a material effect on the Company's consolidated results of operations. (g) 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 zero-coupon subordinated notes. (h) Revenue Recognition The Company recognizes revenue upon shipment of product to its customers. (i) 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 component of shareholders' 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 U.S. dollar is the functional currency are included in income. To date, the effect on income of such amounts has been immaterial. (j) 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. See Note 7. (k) Year-End The Company's financial reporting year consists of either 52- or 53-week periods ending on the last Friday in August. Fiscal years 1993, 1994, and 1995 each contained 52 weeks; however, fiscal year 1996 will contain 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.
Note 2 Cash, Cash Equivalents, and Short-term Investments Cash, cash equivalents, and short-term investments consisted of the following:
Cash and Cash Short-term As of August 31, 1995 (in thousands) Investments Equivalents
Cash $32,050 $ --- Money market funds 41,342 --- Certificates of deposit 11,909 7,944 U.S. government securities --- 11,225 Municipal obligations 3,000 39,474 Other 1,658 --- Total $89,959 $58,643
As of August 31, 1995 unrealized gains and losses were not material. All of the Company's short-term investments mature within two years, except certain municipal obligations which have stated maturities greater than nine years. For these securities, the Company has the option of adjusting the respective interest rates or liquidating these investments at face value on stated auction dates at intervals up to 180 days.
Note 3 Inventories Inventories consisted of:
As of August 31, (in thousands) 1995 1994
Raw materials $206,221 $164,817 Work-in-process 92,588 67,572 Total $298,809 $232,389
Note 4 Property and Equipment Property and equipment consisted of:
As of August 31, (in thousands) 1995 1994
Land, buildings and improvements $ 36,100 $ 29,686 Equipment recorded under capital leases --- 1,235 Machinery and equipment 261,702 165,212 Furniture and fixtures 36,296 27,517 Leasehold improvements 15,923 12,398 Construction-in-progress 908 2,049 Total 350,929 238,097 Less accumulated depreciation and amortization 147,320 90,275
Net property and equipment $203,609 $147,822
Accumulated amortization on equipment under capital leases was $1,235,000 as of August 31, 1994. The related amortization expense is included in depreciation expense in the accompanying consolidated financial statements.
Note 5 Lines of Credit The Company has $100 million available under an unsecured domestic revolving line of credit expiring June 30, 1997, which, at the Company's option, currently bears interest at either the bank's prime rate, the London interbank offering rate (LIBOR) plus 0.8%, or the bank's certificate of deposit rate plus 0.8%. As of August 31, 1995 and 1994, there were no borrowings under this line of credit. The agreement contains certain financial covenants; limits new indebtedness, business acquisitions, and repurchases of the Company's common stock, and prohibits the payment of cash dividends. The agreement also stipulates that if the Company pledges any cash, cash equivalents, or short-term investments, the amount of available borrowing under this line of credit will be reduced. The Company also has $37 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, 1995, borrowings under these lines of credit were $4.4 million and are included in other current liabilities in the accompanying consolidated financial statements.
Note 6 Long-Term Debt Long-term debt and capital lease obligations consisted of:
As of August 31, (in thousands) 1995 1994
Zero-coupon subordinated notes due 2012, convertible into 1,973 and 9,551 shares of common stock, respectively $30,043 $135,848 Term loans, bearing interest at rates ranging from 7.2% to 12% due serially until June 1996; secured by equipment 1,054 4,205 Other 3,742 3,805 Total long-term debt and capital lease obligations 34,839 143,858 Less current portion of long-term debt and capital lease obligations 4,796 3,149
Total Long-term debt $30,043 $140,709
In May 1992, the Company issued 460,000 zero-coupon subordinated notes at an initial issue price of $252.57 per note. These notes have a maturity value of $1,000 each payable on May 5, 2012. The Company is accreting the issue price to the maturity value using the effective interest rate (approximately 7%). 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 20.792 shares of common stock. Notes may be redeemed by the holder on May 5, 1997, 2002, and 2007 for a per note purchase price of $356.28, $502.57, and $708.92, respectively. The Company, at its option, may pay the purchase price on any of these redemption dates in cash or common stock, or any combination of both. Beginning on May 5, 1996, the notes are redeemable for cash at the option of the Company, in whole or in part, at redemption prices equal to the issue price plus accrued original issue discount through the date of redemption. The indenture governing the zero-coupon subordinated notes contains cross-default provisions. The market price of these notes, based on a market transaction on August 22, 1995, was $734 per note. During fiscal 1995, 364,457 notes were voluntarily converted by the holders of the notes into 7,577,802 shares of common stock. If these conversions had occurred at the beginning of fiscal 1995, primary net income per share for fiscal 1995 would have been $1.67.
Note 7 Financial Instruments (a) 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 and long-term debt is determined based on quoted market prices (see Notes 2 and 6). (b) Derivatives The Company enters into forward exchange contracts to hedge foreign currency exposures on a continuing basis for periods consistent with its committed exposures. The Company's hedging transactions are considered non-trading and do not involve speculation. These transactions 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 nonperformance by the parties in these contracts. The amount of unrealized gain at risk was immaterial as of August 31, 1995. The Company had $77.0 million and $38.0 million of net foreign currency forward exchange contracts outstanding at the end of fiscal years 1995 and 1994, respectively, primarily for the purchase of European currencies. (c) Business and Credit Concentrations Financial instruments which 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 result from sales to major customers as discussed in Note 12. 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 2000. 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 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. The Company is contingently liable under a first loss clause for a decline in market value of the leased facilities up to $44.2 million in the event the Company does not purchase the property at the end of the five-year lease term. The Company must also maintain compliance with financial covenants similar to its credit facilities. Future minimum payments related to lease obligations are $9.4 million, $8.0 million, $7.0 million, $5.5 million, and $1.6 million in each of the years in the five-year period ending August 31, 2000. Rent expense was $10.8 million, $11.1 million, and $9.4 million for the years ended August 31, 1995, 1994, and 1993, respectively.
Note 9 Income Taxes The Company adopted SFAS No. 109 effective September 1, 1993. The cumulative effect of this change in accounting for income taxes was not material. Prior years' financial statements have not been restated to apply the provisions of SFAS No. 109. The components of income taxes are as follows:
Years ended August 31, (in thousands) 1995 1994 1993
Current: Federal $34,922 $17,682 $11,569 State 4,370 4,151 3,361 Foreign 4,346 7,121 3,375 total current 43,638 28,954 18,305 Deferred: Federal (3,474) (313) (292) State 15 (67) --- Foreign 789 40 --- total deferred $40,968 $28,614 $18,013
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, 1995 1994 1993
Federal tax rate 35.0% 35.0% 34.0% State income tax, net of federal tax benefit 2.4 3.2 4.5 Tax exempt interest (0.7) (1.0) (2.0) Income of foreign subsidiaries taxed at different rates (4.2) (3.5) (1.7) Other 1.5 0.3 2.2 Effective income tax rate 34.0% 34.0% 37.0%
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities are as follows:
As of August 31, (in thousands) 1995 1994
Deferred tax assets: Accruals, allowances, and reserves $ 10,326 $ 7,006 State income tax 920 478 Pre-operating costs 164 277 Acquired intangible assets 463 72 Other 278 434 Total deferred tax assets 12,151 8,267
Deferred tax liabilities: Plant and equipment (1,779) (1,642) Other (2,070) (996) Total deferred tax liabilities (3,849) (2,638)
Net deferred tax assets $ 8,302 $ 5,629
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:
Years ended August 31, (in thousands) 1995 1994 1993 U.S. $ 91,537 $54,241 $36,163 Non-U.S. 28,957 29,918 12,450 Total $120,494 $84,159 $48,613
The Company has not provided for U.S. federal and foreign withholding taxes on approximately $55.5 million of foreign subsidiaries' undistributed earnings as of August 31, 1995 because such earnings are intended to be reinvested indefinitely. The amount of income tax liability that would result had such earnings been repatriated is approximately $9.2 million. The Company has a tax holiday in Malaysia that expires in January, 1997 subject to certain extensions.
Note 10 Shareholders' Equity (a) Stock Split On October 11, 1993 the Board of Directors approved a 2 for 1 split of the Company's common stock effective October 27, 1993. The consolidated financial statements have been retroactively adjusted to reflect the stock split. (b) 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. A summary of stock option activity under the plans follows:
Years ended August 31, 1995 1994
Number of Exercise Number of Exercise Shares Price Shares Price Outstanding at beginning of year 4,067,143 $1.81-$30.75 2,923,526 $0.94-$23.69 Granted 778,250 26.63- 37.38 1,836,000 26.94- 30.75 Exercised (572,780) 1.81- 30.75 (526,629) 0.94- 27.31 Canceled (280,773) 1.94- 37.38 (165,754) 1.94- 30.75 Outstanding at end of year 3,991,840 $1.94-$37.38 4,067,143 $1.81-$30.75
Exercisable at end of year 1,924,029 $1.94-$37.38 1,390,228 $1.81-$30.75
A total of 7,188,395 shares of common stock remain reserved for issuance under the plans as of August 31, 1995. Each independent member of the Company's Board of Directors is granted 6,000 stock options each December 1 at the fair market value as of that date. Such options vest over one year. (c) 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, 1995, 1,529,981 shares remain available for issuance under the Purchase Plan.
Note 11 Business Segment Information Information about the Company's operations in different geographic regions is presented in the table below:
Operating Identifiable (in thousands) Net Sales Income Assets 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 Total $2,065,559 $123,434 $940,855
Fiscal 1994 United States $ 945,742 $ 58,488 $485,854 Europe 389,257 22,286 201,262 Asia 121,780 7,576 79,279 Total $1,456,779 $ 88,350 $766,395
Fiscal 1993 United States $ 601,449 $ 40,908 $441,658 Foreign (primarily Europe) 234,877 12,232 161,627 Total $ 836,326 $ 53,140 $603,285
Note 12 Major Customers Net sales to major customers as a percentage of consolidated net sales were as follows: Years ended August 31, 1995 1994 1993 IBM 21% 28% 26% Apple < 10% 12% < 10% Sun Microsystems, Inc. < 10% < 10% 12%
Note 13 Asset Acquisitions In September 1992, the Company purchased facilities and printed circuit board assembly equipment located in Charlotte, North Carolina and Bordeaux, France, from IBM for a purchase price of $58.9 million. In September 1993, the Company acquired similar operations in Dunfermline, Scotland and printed circuit board assembly equipment in Everett, Washington. In conjunction with these asset acquisitions, the Company also purchased inventory and hired certain employees associated with the assembly operations conducted at these sites. These acquisitions have been accounted for by the purchase method of accounting, and accordingly the purchase price has been allocated to the assets acquired based on estimated fair values at the date of acquisition. The excess of purchase price over the estimated fair values of the assets acquired has been recorded as goodwill, which is being amortized over ten years. On August 17, 1995, the Company executed definitive agreements with Hewlett-Packard GmbH (HP), a subsidiary of Hewlett-Packard Company, to acquire HP's printed circuit board assembly operation in Boeblingen, Germany. The transaction is expected to close in November 1995.
The Board of Directors and Shareholders Solectron Corporation: We have audited the accompanying consolidated balance sheets of Solectron Corporation and subsidiaries as of August 31, 1995 and 1994, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the years in the three-year period ended August 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Solectron Corporation and subsidiaries as of August 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended August 31, 1995, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP San Jose, California September 8, 1995
ITEM 9:

ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable
PART III
ITEM 10:

ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The Company's executive officers and directors and their ages as of August 31, 1995 are as follows:
Name Age Position
Charles A. Dickinson (3) 71 Chairman of the Board, President Solectron Europe, and Director
Koichi Nishimura,Ph.D. 57 President, Chief Executive Officer, and Director
Stephen T. Ng 40 Senior Vice President and Chief Materials Officer
Leslie T. Nishimura 51 Senior Vice President and President Solectron Washington, Inc.
Ken Tsai 52 Senior Vice President and President Solectron Asia
Susan S. Wang 44 Senior Vice President, Chief Financial Officer, and Secretary
Walter W. Wilson 51 Senior Vice President and President Solectron North America
Saeed Zohouri, Ph.D. 44 Senior Vice President and Chief Technology Officer
Winston H. Chen, Ph.D.(3) 53 Director
Richard A. D'Amore (1) 41 Director
Kenneth E. Haughton, Ph.D.(3) 67 Director
Paul R. Low, Ph.D. (2)(1) 62 Director
W. Ferrell Sanders (2) 58 Director
Osamu Yamada 65 Director
(1) Member of the Audit Committee (2) Member of the Compensation Committee (3) Member of the Nominating Committee
Mr. Charles A. Dickinson has served as a director of the Company since 1984, and as Chairman of the Board of Directors from 1986 to 1990 and from 1994 to the present. He served as an independent management consultant to the Company from 1991 to 1993. He served as President, Solectron France, S.A. from 1992 to 1993 and has served as President, Solectron Europe since 1993. From 1986 to 1990, he was Chairman of the Board of Directors, President and Chief Executive Officer of Vermont Micro Systems, Inc., a manufacturer of microcomputer-based graphics cards. He currently serves as a director of Vermont Micro Systems, Inc.
Dr. Koichi Nishimura has served as a director since 1991, 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, a manufacturer of technologically advanced electronic interconnection products.
Mr. Leslie T. Nishimura is President of Solectron Washington, Inc. and has served as Senior Vice President of the Company since 1989, President of Solectron Asia from 1991 to 1993, Secretary of the Company from 1989 to 1992 and Vice President, Manufacturing Technology of the Company 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.
Ms. Susan S. Wang has served as Secretary of the Company since 1992 and Senior Vice President and Chief Financial Officer of the Company since 1990. She was Vice President, Finance and Chief Financial Officer of the Company from 1986 to 1990 and Director of Finance of the Company from 1984 to 1986. Prior to joining the Company, 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 North America since September 1995, President, Solectron California Corporation since March 1992 and Senior Vice President of the Company since 1990. From 1989 to 1990 he served as an operational Vice President of the Company. 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.
Mr. Ken Tsai is President of Solectron Asia and has served as Senior Vice President of the Company since May 1995, Vice President of the Company from 1990 to 1995. He served as Director of Manufacturing for the Company 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.
Dr. Winston H. Chen has served as a director of the Company 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, Megatest Corporation, SCEcorp and Paramitas Investment Corp.
Mr. Richard A. D'Amore has served as a director of the Company 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. and VEECO.
Dr. Kenneth E. Haughton has served as a director of the Company 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, a manufacturer of disk drives.
Dr. Paul R. Low has served as a director of the Company 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, Nexgen, and Number Nine.
Mr. W. Ferrell Sanders has served as a director of the Company 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 the Company since 1994. Mr. Yamada is currently an advisor to The Mitsubishi Bank, Limited. 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 as a director of PictureTel and on number of boards of major universities and cultural centers.
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 the Company. 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. Ng holds an MBA from the University of Dallas and is a certified purchasing manager.
Dr. Saeed Zohouri is Senior Vice President and Chief Technology Officer at Solectron Corporation. Dr. Zohouri joined Solectron in 1980; he has held various management positions and has also served as Director of Technology. Dr. Zohouri was promoted to his current position in 1994. His prior experience includes teaching chemistry at a major international university. Dr. Zohouri holds a master of science degree in organic chemistry from Manchester University in England and a doctorate degree in chemistry from Stanford University.
There is no family relationship among any of the foregoing individuals.
ITEM 11:

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 Shareholders) for the fiscal year ended August 31, 1995 to be held on January 9, 1996 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:

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 Shareholders) for the fiscal year ended August 31, 1995.
ITEM 13:

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 Shareholders) for the fiscal year ended August 31, 1995.
PART IV
ITEM 14:

ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES 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.
2. Financial Statement Schedules. The financial statement Schedule ii - VALUATION AND QUALIFYING ACCOUNTS is filed as part of this annual report in Form 10-K.
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, 1995 no current reports on Form 8-K were filed.
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 20, 1995 By /s/ Koichi Nishimura (Koichi Nishimura, President and Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Name Title Date
President, Chief Executive /s/ Koichi Nishimura Officer, and Director 11/20/1995 Koichi Nishimura
Chief Financial Officer (Principal Financial and Accounting Officer), Senior /s/ Susan S. Wang Vice President, and Secretary 11/20/1995 Susan S. Wang
Chairman of the Board, President Solectron Europe, /s/ Charles A. Dickinson and Director 11/20/1995 Charles A. Dickinson
/s/ Winston H. Chen Director 11/20/1995 Winston H. Chen
/s/ Richard A. D'Amore Director 11/20/1995 Richard A. D'Amore
/s/ Kenneth E. Haughton Director 11/20/1995 Kenneth E. Haughton
/s/ Paul R. Low Director 11/20/1995 Paul R. Low
/s/ W. Ferrell Sanders Director 11/20/1995 W. Ferrell Sanders
/s/ Osamu Yamada Director 11/20/1995 Osamu Yamada
SOLECTRON CORPORATION AND SUBSIDIARIES SCHEDULE ii - VALUATION AND QUALIFYING ACCOUNTS (in thousands)
Amounts Charged Balance at (Credited) Balance at Beginning To Recoveries End Description of Period Operations (Deductions) of Period
Fiscal 1993 Allowance for doubtful accounts recievable $1,010 $849 $3 $1,861
Fiscal 1994 Allowance for doubtful $1,861 $989 ($391) $2,459 accounts receivable
Fiscal 1995 Allowance for doubtful accounts receivable $2,459 $1,602 ($560) $3,501 accounts receivable
INDEX TO EXHIBITS
Exhibit Number Description
3.1 [viii] Articles of Incorporation of Company, as amended 3.2 [viii] Bylaws of Company 4.1 [ii] Form of Certificate for Liquid Yield Option Notes (LYONs) 4.2 [ii] Form of Indenture between the Company and Bankers Trust Company, relating to the LYONs. 10.1 [i] Preferred Stock Purchase Agreement dated September 29, 1983, together with amendments thereto dated February 28, 1984 and June 23, 1988. 10.2 [i] Form of Indemnification Agreement between Company and its officers, directors and certain other key employees. 10.3 [i] Amendment to form of Indemnification Agreement. 10.4 [iv] 1983 Incentive Stock Option Plan, as amended August 13, 1991. 10.5 [vi] 1988 Employee Stock Purchase Plan, as amended October 1992. 10.6 [v] Amended and Restated 1992 Stock Option Plan. 10.7 [iii] Master Asset Transfer and Stock Purchase Agreement dated August 17, 1992, as amended, between Company and International Business Machines Corporation. 10.8 [vi]+ ECAT Manufacturing Agreement dated August 17, 1992, between Company and International Business Machines Corporation (the "ECAT Agreement"). 10.9 [vi]+ Amendment to the ECAT Agreement dated September 30, 1992 between Company and International Business Machines. 10.10 [vii] Stock Acquisition Agreement dated August 28, 1993, between Company and Solectron California Corporation 10.11 [vii] Multicurrency Credit Agreement dated June 30, 1993, between Company and Bank of America National Trust and Savings Association as Agent and Issuing Bank 10.12 [viii] Lease Agreement between BNP Leasing Corporation, as Landlord, and Company, as Tenant, Effective September 6, 1994. 10.13 [viii] Purchase Agreement, by and between Company and BNP Leasing Corporation, dated September 6, 1994 10.14 [viii] Pledge and Security Agreement, by and between Company, As Debtor, and BNP Leasing Corporation, as Secured Party, dated September 6, 1994 10.15 [viii] Assignment and Assumption Agreement between Company and Solectron California Corporation, dated November 9, 1994 10.16 [viii] Custodial Agreement by and between Company, Banque Nationale De Paris, and BNP Leasing Corporation, dated September 6, 1994 10.17 [viii] First Amendment to Multicurrency Credit Agreement, dated August 29, 1994 10.18 [viii] Second Amendment to Multicurrency Credit Agreement, dated September 30, 1994 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
INDEX TO EXHIBITS (Continued)
Footnotes Description
[i] Incorporated by reference to the Exhibits to Company's Registration Statement on Form S-1 (File No. 33-22840). [ii] Incorporated by reference to the Exhibits to Company's Registration Statement on Form S-1 filed April 6, 1992 (Registration No. 33-46971). [iii] Incorporated by reference to the Company's Form 8-K filed October 15, 1992. [iv] Incorporated by reference to the Exhibits to Company's Registration Statement on Form S-8 (File No. 33-46686) [v] Incorporated by reference to the Exhibits to Company's Registration Statement on Form S-8, filed Febuary 2, 1995 (File No. 33-75270) [vi] Incorporated by reference to the Exhibits to Company's Form 10-K for the year ended August 31, 1992 [vii] Incorporated by reference to the Exhibits to Company's Form 10-K for the year ended August 31, 1993 [viii] Incorporated by reference to the Exhibits to Company's Form 10-K for the year ended August 31, 1994
+ Confidential treatment has been granted for certain portions of these documents.
Exhibit 11.1
SOLECTRON CORPORATION AND SUBSIDIARIES STATEMENT REGARDING COMPUTATION OF NET INCOME PER SHARE (in thousands, except per share data)
Twelve months ended August 31, 1995 1994 1993
Weighted average number of common stock equivalents:
Primary: Common stock 42,861 41,023 36,698 Common stock equivalents - stock options 912 1,182 1,434 43,773 42,205 38,132
Fully diluted: Common shares issuable upon assummed conversion of zero-coupon subordinated notes 8,286 9,557 9,562 Incremental increase in common stock equivalent options using end of period market price 523 271 122 52,582 52,033 47,816
Net income $ 79,526 $ 55,545 $ 30,600
Interest accretion on zero-coupon subordinated notes, net of taxes 5,439 5,944 5,283
Net income - fully diluted $ 84,965 $ 61,489 $ 35,883
Net income per share - primary $1.82 $1.32 $0.80
Net income per share - fully diluted $1.62 $1.18 $0.75
Exhibit 21.1
SOLECTRON CORPORATION
SUBSIDIARIES
Jurisdiction of Subsidiary Incorporation or Organization
Solectron California Corporation California
Solectron Technology, Inc. California
Solectron Washington, Inc. California
Solectron France, S.A. France
Solectron Scotland Limited Scotland
Solectron Japan, Inc. Japan
Solectron Technology SDN. BHD. Malaysia
Exhibit 23.1
Consent of Independent Auditors
The Board of Directors and Shareholders Solectron Corporation:
We consent to incorporation by reference in the registration statements (Nos. 33-75270, 33-58580, 33-46686 and 33-33461) on Form S-8 of Solectron Corporation of our report dated September 8, 1995, relating to the consolidated balance sheets of Solectron Corporation and subidiaries as of August 31, 1995 and 1994, and the related consolidated statements of income, shareholders' equity, cash flows for each of the years in the three-year period ended August 31, 1995, and related schedule, which report appears in the August 31, 1995, annual report on Form 10-K of Solectron Corporation.
KPMG Peat Marwick LLP
San Jose, California November 16, 1995
Exhibit 27.1 _______________________________ TMTrademark of Merrill Lynch & Co., Inc.