<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 27, 1998
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-21374
THE DII GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 84-1224426
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6273 Monarch Park Place
Niwot, Colorado 80503
(Address and zip code of principal executive offices)
(303) 652-2221
(Registrant's telephone number, including area code)
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, and (2) has been subject to such filing
requirements for the past 90 days. [ X ] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
OUTSTANDING AT
CLASS November 6, 1998
----- ----------------
Common Stock, Par Value $0.01 24,342,864
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM I. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THE DII GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except earnings per share)
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
-------------------------- -------------------------
SEPT. 27, 1998 SEPT. 28, 1997 SEPT. 27, 1998 SEPT. 28, 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales:
Systems assembly and distribution $ 131,016 141,503 424,147 349,089
Interconnect technologies 43,964 34,228 140,795 83,139
Other 30,937 37,133 98,287 101,813
-------------- -------------- -------------- --------------
Total net sales 205,917 212,864 663,229 534,041
Cost of sales:
Cost of sales 173,895 179,562 564,623 441,880
Non-recurring charges - - 12,844 -
-------------- -------------- -------------- --------------
Total cost of sales 173,895 179,562 577,467 441,880
-------------- -------------- -------------- --------------
Gross profit 32,022 33,302 85,762 92,161
Selling, general and administrative expenses 17,664 17,098 56,224 51,424
Non-recurring charges - - 41,156 -
Interest income (613) (256) (2,217) (654)
Interest expense 4,910 2,504 14,298 5,924
Amortization of intangibles 1,168 1,033 3,383 2,762
Other, net (173) 245 (172) 919
-------------- -------------- -------------- --------------
Income (loss) before income taxes 9,066 12,678 (26,910) 31,786
Income tax expense (benefit) 2,534 2,723 (7,522) 9,214
-------------- -------------- -------------- --------------
Net income (loss) $ 6,532 9,955 (19,388) 22,572
============== ============== ============== ==============
Earnings (loss) per common share:
Basic $ 0.26 0.40 (0.78) 0.92
Diluted $ 0.25 0.35 (0.78) 0.81
Weighted average number of common shares
and equivalents outstanding:
Basic 24,775 25,058 25,004 24,533
Diluted 29,948 31,203 25,004 31,014
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 3
THE DII GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except par value data)
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 27, DECEMBER 28,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 63,270 85,067
Accounts receivable, net 124,824 132,590
Inventories 68,062 74,059
Other 12,708 8,535
------------- ------------
Total current assets 268,864 300,251
Property, plant and equipment, net 235,708 207,257
Intangible assets, net 93,019 77,653
Other 8,310 7,568
------------- ------------
$ 605,901 592,729
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 103,547 98,688
Accrued expenses 30,611 29,766
Accrued interest payable 2,988 4,688
Current installments of long-term financing obligations 4,101 6,491
------------- ------------
Total current liabilities 141,247 139,633
Senior subordinated notes payable 150,000 150,000
Convertible subordinated notes payable 86,247 86,250
Long-term financing obligations, excluding current installments 53,196 6,545
Other 1,647 2,953
Commitments and contingent liabilities
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares
authorized; none issued - -
Common stock, $0.01 par value; 90,000,000 shares
authorized; 25,757,006 and 25,328,914 shares issued and
24,383,006 and 25,136,414 shares outstanding 258 253
Additional paid-in capital 121,837 117,612
Retained earnings 90,715 110,103
Treasury stock, at cost; 1,374,000 and 192,500 shares (25,290) (4,209)
Cumulative foreign currency translation adjustments (4,142) (4,095)
Deferred stock compensation (9,814) (12,316)
------------- ------------
Total stockholders' equity 173,564 207,348
------------- ------------
$ 605,901 592,729
============= ============
</TABLE>
See accompanying notes to condensed consolidated financial statements
<PAGE> 4
THE D I I GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
-------------------------
SEPT. 27, 1998 SEPT. 28, 1997
------------------- --------------------
<S> <C> <C>
Net cash provided by operating activities $ 47,220 41,660
------------------- --------------------
Cash flows from investing activities:
Payments for business acquisitions, net of cash acquired (45,609) (7,939)
Additions to property, plant and equipment (49,399) (106,103)
Proceeds from sales of equipment 3,362 2,578
------------------- --------------------
Net cash used by investing activities (91,646) (111,464)
------------------- --------------------
Cash flows from financing activities:
Payments to acquire treasury stock (21,081) -
Repayments of long-term financing obligations (6,541) (10,973)
Repayments of notes payable to sellers of businesses acquired - (826)
Proceeds from senior subordinated notes payable - 150,000
Debt issuance costs - (4,934)
Proceeds from line-of-credit borrowings 45,861 -
Proceeds from stock issued under stock plans 4,481 6,064
------------------- --------------------
Net cash provided by financing activities 22,720 139,331
------------------- --------------------
Effect of exchange rate changes on cash (91) (96)
------------------- --------------------
Net increase (decrease) in cash and cash equivalents (21,797) 69,431
Cash and cash equivalents at beginning of year 85,067 25,010
------------------- --------------------
Cash and cash equivalents at end of period $ 63,270 94,441
=================== ====================
</TABLE>
See accompanying notes to condensed consolidated statements
<PAGE> 5
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Financial information as of December 28, 1997 has been derived
from the audited consolidated financial statements of The DII Group, Inc. and
subsidiaries (the "Company").
The condensed consolidated financial statements do not include all information
and notes required by generally accepted accounting principles for complete
financial statements. However, except as disclosed herein, there has been no
material change in the information disclosed in the notes to the consolidated
financial statements as of and for the year ended December 28, 1997 included in
the annual report on Form 10-K previously filed with the Securities and Exchange
Commission (the "SEC"). In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included in the accompanying condensed consolidated
financial statements. Operating results for the nine-month period ended
September 27, 1998 are not necessarily indicative of the results that may be
expected for the year ending January 3, 1999.
The Company operates and reports financial results on a fiscal year of 52 or 53
weeks ending on the Sunday nearest to December 31. Fiscal 1997 comprised 52
weeks and ended on December 28, 1997 and fiscal 1998 will comprise 53 weeks and
will end on January 3, 1999. The accompanying condensed consolidated financial
statements are therefore presented as of and for the nine month periods ended
September 27, 1998 and September 28, 1997.
(2) INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 27, DECEMBER 28,
1998 1997
------------- ------------
<S> <C> <C>
Raw materials $48,174 51,802
Work in process 24,401 24,890
Finished goods 3,568 2,839
------- ------
76,143 79,531
Less allowance 8,081 5,472
------- ------
$68,062 74,059
======= ======
</TABLE>
The Company made provisions to the allowance for inventory impairment (including
non-recurring charges, see Note 6) of $7,322 and $2,676 during the nine months
ended September 27, 1998 and September 28, 1997, respectively.
<PAGE> 6
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
(3) ACQUISITIONS
In August 1998, the Company acquired all of the stock of Greatsino Electronic
Technology ("Greatsino"), a wholly owned subsidiary of Valenta Holdings Limited,
a wholly owned subsidiary of Universal Appliances Limited, a Hong Kong Limited
Corporation. Greatsino is a printed circuit board fabricator and contract
electronics manufacturer with operations in the People's Republic of China. The
cash purchase price, net of cash acquired, amounted to $43,409. The initial
purchase price is subject to adjustments for contingent consideration of no more
than approximately $40,000 based upon the business achieving specified levels of
earnings through August 31, 1999. The fair value of the assets acquired,
excluding cash acquired, amounted to $47,313 and liabilities assumed were
$21,801, including estimated acquisition costs. The cost in excess of net assets
acquired amounted to $17,897.
In July 1998, the Company completed a business combination that is immaterial to
the Company's results from operations and financial position. The cash purchase
price, net of cash acquired, for the acquisition amounted to $2,200. The fair
value of the assets acquired and liabilities assumed from this acquisition is
immaterial.
During the second quarter of 1997, the Company completed certain business
combinations that are immaterial to the Company's results from operations and
financial position. The cash purchase price, net of cash acquired, amounted to
$7,939. The fair value of the assets acquired and liabilities assumed from these
acquisitions was immaterial. The cost in excess of net assets acquired through
these acquisitions amounted to $9,133.
Each of the above acquisitions was accounted for as purchases with the results
of operations from the acquired businesses included in the Company's results of
operations from the acquisition dates forward. Pro forma results of operations
would not be materially different from the historical results reported. The
costs of these acquisitions have been allocated on the basis of the estimated
fair value of the assets acquired and the liabilities assumed.
(4) STOCKHOLDERS' EQUITY
During the nine month period ended September 27, 1998, the Company repurchased
1,181,500 shares of its common stock at a cost of $21,081. The Company could
repurchase an additional 626,000 shares of common stock in future periods as
part of its share repurchase plan, subject to certain restrictions under its
Credit Agreement.
(5) NON-RECURRING CHARGES
In March 1998, the Company recognized a non-recurring pre-tax charge of $54,000,
substantially all of which related to the operations of the Company's wholly
owned subsidiary, Orbit Semiconductor ("Orbit"). The charge was primarily due to
the impaired recoverability of certain sales contracts, inventory, intangible
assets and fixed assets.
The DII Group purchased Orbit in August of 1996, and supported Orbit's
previously made decision to replace its wafer fabrication facility (fab) with a
higher technology fab. The transition to this 6-inch fab was originally
scheduled for completion during the summer of 1997, but the changeover took
longer than expected and was finally completed in January 1998.
<PAGE> 7
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
(5) NON-RECURRING CHARGES, CONTINUED
The missed plan for the changeover and running both fabs simultaneously put
pressure on the work force, with resulting quality problems. Compounding these
problems, the semiconductor industry has been characterized by excess capacity
that arose about the time Orbit was acquired, which has led larger competitors
to invade Orbit's niche market. Further, many of Orbit's customers migrated
faster than expected to a technology in excess of Orbit's fabrication
capabilities, which required Orbit to outsource more of its manufacturing
requirements than originally expected. Based upon these continued conditions and
the future outlook, the Company took this non-recurring charge to correctly size
Orbit's asset base to allow its recoverability based upon its current business
size.
The non-recurring pre-tax charges consisted of (i) $38,258 associated with the
write-down of long-lived assets to fair value, (ii) $7,900 associated with the
impairment of sales contracts and accounts receivable as well as estimated costs
for sales returns and allowances, primarily as a result of the fab changeover
quality issues, and (iii) $7,842 primarily associated with excess inventory
created by quality issues and the downsizing of Orbit's operations. The
allowances established in connection with the non-recurring charge have been or
are expected to be completely utilized in fiscal 1998. There are no material
differences between the current amount of the accrual and the original
estimates.
In October 1998, the Company announced its intention to exit semiconductor
manufacturing. The Company will divest Orbit's 6-inch, 0.6 micron wafer
fabrication facility ("Fab") and adopt a fabless strategy to complement Orbit's
application-specific integrated circuit design, gate array conversion services,
and mixed-signal design product lines. The Company is in discussions with
certain potential acquirers of its wafer fabrication facility. If such
discussions do not result in a firm agreement to sell the facility before the
end of the fourth quarter, the Company plans to adopt an orderly exit strategy,
which would result in the Fab closing by June 30, 1999. If the Fab is
successfully sold, the Company will determine the financial impact of such a
transaction once the terms of sale are known. If the Fab is closed, it would
result in total nonrecurring after-tax charges in the fourth quarter of 1998 of
approximately $15,000 to $18,000, consisting of approximately $11,000 to $13,000
of long-lived asset write-offs and $4,000 to $5,000 of primarily exit costs.
(6) COMPREHENSIVE INCOME
The Company adopted Financial Accounting Standards Board (FASB) Statement No.
130, "Reporting Comprehensive Income" ("SFAS 130"), at the beginning of fiscal
year 1998. SFAS 130 establishes standards for reporting and display of
comprehensive earnings and its components in general purpose financial
statements. Components of comprehensive income are net income and all other
nonowner changes in equity such as the change in the cumulative foreign currency
translation adjustments. This statement requires that an entity: (a) classify
items of other comprehensive income by their nature in a financial statement and
(b) display an amount representing total comprehensive income for the period in
that financial statement. The adoption of this statement had no impact on the
Company's net earnings or shareholders' equity. There were no material
differences between net earnings (loss) and comprehensive income (loss) for the
three and nine months ended September 27, 1998, and September 28, 1997. The
Company has accumulated other comprehensive losses at September 27, 1998 and
December 28, 1997 which consisted of foreign currency translation adjustments of
$4,142 and $4,095, respectively.
<PAGE> 8
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
(7) EARNINGS (LOSS) PER SHARE
Earnings (loss) per common share ("EPS") data were computed as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED ENDED
----------------------- ------------------------
SEPT. 27, SEPT. 28, SEPT. 27, SEPT. 28,
1998 1997 1998 1997
--------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
BASIC EPS:
Net income (loss) $ 6,532 9,955 $ (19,388) 22,572
========= =========== =========== ==========
Weighted-average common shares outstanding 24,775 25,058 25,004 24,533
========= =========== =========== ==========
Basic EPS $ 0.26 0.40 $ (0.78) 0.92
========= =========== =========== ==========
DILUTED EPS:
Net income (loss) $ 6,532 9,955 $ (19,388) 22,572
Plus income impact of assumed conversions:
Interest expense (net of tax) on convertible
subordinated notes 776 776 - 2,328
Amortization (net of tax) of debt issuance cost
on convertible subordinated notes 65 65 - 195
========= =========== =========== ==========
Net income (loss) available to common stockholders $ 7,373 10,796 $ (19,388) 25,095
========= =========== =========== ==========
Shares used in computation:
Weighted-average common shares outstanding 24,775 25,058 25,004 24,533
Shares applicable to exercise of dilutive options 558 1,299 - 1,635
Shares applicable to deferred stock compensation 18 246 - 246
Shares applicable to convertible subordinated notes 4,597 4,600 - 4,600
--------- ----------- ----------- ----------
Shares applicable to diluted earnings 29,948 31,203 25,004 31,014
========= =========== =========== ==========
Diluted EPS $ 0.25 0.35 $ (0.78) 0.81
========= =========== =========== ==========
</TABLE>
For the nine month period ended September 27, 1998, the common equivalent shares
from common stock options and deferred stock compensation are excluded from the
computation of diluted loss per share as their effect is antidilutive.
Additionally, the convertible subordinated notes were antidilutive for the nine
month period ended September 27, 1998, and therefore not assumed to be converted
for diluted loss per share computations.
(8) SUBSEQUENT EVENT
On October 30, 1998, the Company completed its acquisition of Hewlett-Packard
Company's Printed Circuit Organization's fabrication facility located in
Boeblingen, Germany, pursuant to a Master Asset Purchase Agreement dated October
30, 1998. The acquired assets include property, plant and equipment,
<PAGE> 9
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
(8) SUBSEQUENT EVENT, CONTINUED
working capital and certain intellectual property. The purchase price was
approximately $89,900, subject to certain post-closing adjustments. The Company
funded the purchase through a 5-year term loan with a syndicate of domestic and
foreign banks as described in Note 9. The transaction will be accounted for as a
purchase of assets.
(9) COMMITMENTS AND CONTINGENCIES
The Company is involved in certain litigation and environmental matters
described in the Company's Annual Report on Form 10-K for the fiscal year ended
December 28, 1997. In April 1998, the Company entered into Consent Orders with
the New York Department of Environmental Conservation concerning the performance
of a remedial investigation/feasibility study with respect to environmental
matters at a formerly owned facility in Kirkwood, New York, and a facility that
is owned and leased out to a third party in Binghamton, New York. The ultimate
outcome of the litigation and environmental matters cannot, at this time, be
predicted in light of the uncertainties inherent in these matters. Based upon
the facts and circumstances currently known, management cannot estimate the most
likely loss or the maximum loss for these matters. The Company has accrued the
minimum estimated costs, which amounts are immaterial, associated with these
matters in the accompanying condensed consolidated financial statements.
The Company determines the amount of its accruals for environmental matters by
analyzing and estimating the range of possible costs in light of information
currently available. The imposition of more stringent standards or requirements
under environmental laws or regulations, the results of future testing and
analysis undertaken by the Company at its operating facilities, or a
determination that the Company is potentially responsible for the release of
hazardous substances at other sites, could result in expenditures in excess of
amounts currently estimated to be required for such matters. No assurance can be
given that actual costs will not exceed amounts accrued or that costs will not
be incurred with respect to sites as to which no problem is currently known.
Further, there can be no assurance that additional environmental matters will
not arise in the future.
The Company has approximately $10,000 of capital commitments as of September 27,
1998.
As of September 27, 1998, there was $45,861 in borrowings outstanding under the
Company's $80,000 senior secured revolving line-of-credit facility. This credit
facility required compliance with certain financial covenants and was secured by
substantially all of the Company's assets. As of September 27, 1998, the Company
was in compliance with all financial covenants. The Company has classified the
borrowings in "Long-term financial obligations, excluding current installments"
as the obligation matures June 30, 2002.
On October 30, 1998, the Company replaced its $80,000 senior secured revolving
line-of-credit facility with a $210,000 Credit Agreement (the "Agreement") with
a syndicate of domestic and foreign banks. The Credit Agreement provides for a
$100,000 5-year term loan ("Term Loan"), and a $110,000 revolving line-of-credit
facility ("Revolver"). The aggregate maturities of the Term Loan are as follows:
$16,000 in fiscal 1999, $18,000 in fiscal 2000, $20,000 in fiscal 2001, $22,000
in fiscal 2002 and $24,000 in fiscal 2003. The Revolver expires on November 1,
2003. Borrowings under the Agreement bear interest, at the Company's option, at
either: (i) the Applicable Base Rate ("ABR") (as defined in the Agreement) plus
the Applicable Margin for ABR Loans ranging between 0.00% and 0.75%, based on
certain financial ratios of the Company, or (ii) the Eurodollar Rate (as defined
in the Agreement) plus the Applicable Margin for Eurodollar Loans ranging
between 1.00% and 2.25%, based on certain financial ratios of the Company.
<PAGE> 10
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
(9) COMMITMENTS AND CONTINGENCIES, CONTINUED
The Company is required to pay a quarterly commitment fee ranging from 0.25% to
0.50% per annum, based on certain financial ratios of the Company, of the unused
commitment under the Revolver.
The loans are secured by substantially all of the Company's assets, and the
Agreement contains certain restrictions on the Company's ability to (i) incur
certain debt, (ii) create liens on its properties and assets, (iii) make certain
investments and capital expenditures, (iv) merge or consolidate with other
entities, (v) pay dividends or make distributions, (vi) repurchase or redeem
common stock, or (vii) dispose of assets. The Agreement also requires that the
Company maintain certain financial covenants, including, among other things, a
maximum ratio of consolidated funded debt to EBITDA (earnings before interest,
taxes, depreciation and amortization), a minimum ratio of consolidated interest
coverage, and minimum levels of consolidated net worth, as defined, during the
term of the Agreement.
<PAGE> 11
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Dollars in thousands)
CERTAIN FORWARD-LOOKING INFORMATION:
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These statements include, but are not limited
to, statements regarding contingencies, litigation, environmental matters,
liquidity, capital expenditures and Year 2000 issues herein under "Part I
Financial Information - Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations." Actual results could differ materially
from those projected in the forward-looking statements as a result of the risk
factors set forth below.
A. OVERVIEW
The Company is a leading provider of electronics design and manufacturing
services that operates through a global network of independent business units.
These business units are uniquely linked to provide the following related
products and services to original equipment manufacturers ("OEMs"): design and
manufacture of custom microelectronics; design and manufacture of printed
circuit boards; assembly of printed circuit boards; process tooling; machine
tools; process automation equipment; in-circuit and functional test hardware and
software; and final systems assembly and distribution. By offering comprehensive
and integrated design and manufacturing services, the Company believes that it
is better able to develop long-term relationships with its customers, expand
into new markets and enhance its profitability.
The Company provides the following related products and services to customers in
the global electronics manufacturing industry:
Systems Assembly and Distribution--The Company assembles complex
electronic circuits and provides final system configuration and
distribution services (contract electronics manufacturing, or "CEM")
through Dovatron International ("Dovatron").
Interconnect Technologies--The Company provides design and
manufacturing services for printed circuit assemblies through Design
Solutions ("DSI") and manufactures high density, complex multilayer
printed circuit boards through Multek.
Process Technologies--The Company manufactures surface mount printed
circuit board solder cream stencils on a quick-turn basis through IRI
and Chemtech; designs and manufactures in-circuit and functional test
software and hardware on a quick-turn basis through TTI Testron;
manufactures depaneling systems that route individual printed circuit
boards from an assembled master panel in the final step of the
electronics assembly process through Cencorp; and manufactures process
automation equipment through PCT Automation Systems ("PCT").
Custom Microelectronics--Through Orbit Semiconductor ("Orbit"), the
Company provides semiconductor design, manufacturing and engineering
support services to its OEM customers. Orbit provides cost-effective
gate array conversion services, mixed-signal design and production
capabilities as well as high-reliability manufacturing. Orbit utilizes
a combination of internal fabrication capabilities and external foundry
suppliers, thereby using a "fab/fabless" manufacturing approach.
In October 1998, the Company announced its intention to exit semiconductor
manufacturing. See Note 5 of the Company's Condensed Consolidated Financial
Statements included in Part I, Item 1 of this Form 10-Q for a description of its
plan.
<PAGE> 12
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Dollars in thousands)
A. OVERVIEW, CONTINUED
With the above core competencies, the Company has the ability to provide
customers with a total design and manufacturing outsourcing solution. The
Company's ability to offer fully integrated solutions with value-added front-and
back-end product and process development capabilities coupled with global volume
assembly capabilities provides customers with significant speed-to-market and
product cost improvements.
Operating results may be affected by a number of factors including the economic
conditions in the markets the Company serves; price and product competition; the
level of volume and the timing of orders; product mix; the amount of automation
existing on specific manufacturing projects; efficiencies achieved by inventory
management; fixed asset utilization; the level of experience in manufacturing a
particular product; customer product delivery requirements; shortages of
components or experienced labor; the integration of acquired businesses;
start-up costs associated with adding new geographical locations; expenditures
required for research and development; and failure to introduce, or lack of
market acceptance of, new processes, services, technologies and products on a
timely basis.
A majority of the Company's sales are to customers in the electronics industry,
which is subject to rapid technological change, product obsolescence and price
competition. The factors affecting the electronics industry in general, or any
of the Company's major customers, in particular, could have a material adverse
affect on the Company's operating results. The electronics industry has
historically been cyclical and subject to economic downturns at various times,
characterized by diminished product demand, accelerated erosion of average
selling prices and overcapacity. These factors, which may affect the electronics
industry in general, or any of the Company's major customers, in particular,
could have a material adverse effect on the Company's operating results. The
future success of the Company's businesses will depend largely upon its ability
to enhance its existing products and services or to acquire new products and
manufacturing processes in order to keep pace with changing technology and
industry standards and meet the changing needs of customers. There can be no
assurance that the Company will be able to keep pace with the rapidly changing
technology trends. The introduction by competitors of new technologies or the
emergence of new industry standards and customer requirements could render the
Company's existing products and processes obsolete, unmarketable or no longer
competitive.
The Company seeks a well balanced customer profile across most sectors of the
electronics industry in order to reduce exposure to a downturn in any particular
sector. The primary sectors within the electronics industry served by the
Company are office automation, mainframes and mass storage, data communications,
computer and peripherals, telecommunications, industrial, instrumentation, and
medical.
At any given time, certain customers may account for significant portions of the
Company's business. International Business Machines Corporation ("IBM") and
Hewlett Packard Company ("HP") accounted for approximately 10% and 11% of net
sales during the nine months ended September 27, 1998, respectively. HP
accounted for 16% of net sales during the nine months ended September 28, 1997.
No other customer accounted for more than 10% of net sales during the nine
months ended September 27, 1998 and September 28, 1997.
<PAGE> 13
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Dollars in thousands)
A. OVERVIEW, CONTINUED
The Company's top ten customers accounted for approximately 49% of net sales for
each of the nine months ended September 27, 1998 and September 28, 1997. 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
could have a material adverse effect on the Company's operating results.
Although management believes the Company has a broad diversification of
customers and markets, the Company has few material firm long-term commitments
or volume guarantees from its customers. In addition, customer orders can be
canceled and volume levels can be changed or delayed.
From time to time, some of the Company's customers have terminated their
manufacturing arrangements with the Company, and other customers have
significantly reduced or delayed the volume of design and manufacturing services
performed by the Company. The timely replacement of canceled, delayed or reduced
contracts with new business cannot be assured, and termination of a
manufacturing relationship or change, reduction or delay in orders could have a
material adverse effect on the Company's operating results.
The Company has actively pursued acquisitions in furtherance of its strategy to
be the fastest and most comprehensive provider of custom electronics design and
manufacturing services, ranging from microelectronics design through the final
assembly of finished products for OEM customers. The Company's acquisitions have
enabled the Company to provide more integrated outsourcing technology solutions
with time-to-market and lower cost advantages. Acquisitions have also played an
important part in expanding the Company's presence in the global electronics
marketplace. By enhancing the Company's capability to provide a wide range of
related electronics design and manufacturing services to a global market that is
increasingly dependent on outsourcing providers, these acquisitions have enabled
the Company to enhance its competitive position as a leading provider of
comprehensive outsourcing technology solutions.
Acquisitions involve numerous risks including difficulties in assimilating the
operations, technologies, and products and services of the acquired companies,
the diversion of management's attention from other business concerns, risks of
entering markets in which the DII Group has no or limited direct prior
experience and where competitors in such markets have stronger market positions,
and the potential loss of key employees of the acquired company. There can be no
assurance that the Company will be able to successfully integrate newly acquired
businesses. Such failures could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company also
continues to experience rapid internal growth and expansion, and with continued
expansion, it may become more difficult for the Company's management to manage
geographically dispersed operations. The Company's failure to effectively manage
growth could have a material adverse effect on the Company's results of
operations.
B. RESULTS OF OPERATIONS
Total net sales for the three months ended September 27, 1998 decreased $6,947
(3%) to $205,917 from $212,864 for the comparable period in 1997. Total net
sales for the nine months ended September 27, 1998 increased $129,188 (24%) to
$663,229 from $534,041 for the comparable period in 1997. The electronics
industry was believed to be in a downturn for the bulk of fiscal 1998, as
evidenced by diminished product demand, accelerated erosion of average selling
prices and over-capacity, the impact of which could reduce the historical growth
rates experienced by the Company's existing customer base.
<PAGE> 14
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Dollars in thousands)
B. RESULTS OF OPERATIONS, CONTINUED
Systems assembly and distribution, which represented 64% of net sales for the
three months ended September 27, 1998, decreased $10,487 (7%) to $131,016 from
$141,503 for the comparable period in 1997. Systems assembly and distribution,
which represented 64% of net sales for the nine months ended September 27, 1998,
increased $75,058 (22%) to $424,147 from $349,089 for the corresponding period
in 1997. The decrease in systems assembly sales over the three month period
ended September 27, 1998 is primarily related to reduced orders from certain
product lines from some of the Company's major customers. The increases for the
nine months ended September 27, 1998 are primarily the result of sales to new
customers.
Interconnect technologies, which represented 21% of net sales for the three
months ended September 27, 1998, increased $9,736 (28%) to $43,964 from $34,228
for the comparable period in 1997. Interconnect technologies, which represented
21% of net sales for the nine months ended September 27, 1998, increased $57,656
(69%) to $140,795 from $83,139 for the corresponding period in 1997. These
increases are primarily attributable to the August 1997 acquisition of the IBM
Austin printed circuit board fabrication facility, combined with the August 1998
Greatsino acquisition.
Net sales for the Company's other products and services for the three months
ended September 27, 1998 decreased $6,196 (17%) to $30,937 from $37,133 for the
comparable period in 1997. Net sales for the Company's other products and
services for the nine months ended September 27, 1998 decreased $3,526 (4%) to
$98,287 from $101,813 for the comparable period in 1997. These decreases are
primarily attributable to the downturn in the semiconductor and machine tool
industries, characterized by diminished product demand, accelerated erosion of
average selling prices and over capacity.
Gross profit for the three months ended September 27, 1998 decreased $1,280 to
$32,022 from $33,302 for the comparable period in 1997. Excluding non-recurring
charges, gross profit for the nine month period ended September 27, 1998,
increased $6,445 to $98,606 from $92,161 for the comparable period in 1997. The
gross margin remained unchanged at 15.6% for the three months ended September
27, 1998 as compared to the three months ended September 28, 1997. Excluding
non-recurring charges, gross margin decreased to 14.9% for the nine month period
ended September 27, 1998 from 17.3% for the nine month period ended September
28, 1997. The gross margin decrease was primarily the result of (i) the increase
in the contract electronics manufacturing revenues which generate lower margins
than the Company's other products and service offerings; (ii) the incremental
production from the Multek Austin high volume printed circuit board fabrication
facility which carries lower gross margins than historical Multek high
technology and quick-turn business; (iii) continued inefficiencies and yield
problems at Orbit; and (iv) the continued electronics industry downturn
(especially in the semiconductor and machine tool industries), characterized by
diminished product demand, accelerated erosion of average selling prices and
over capacity.
Selling, general and administrative (SG&A) expense increased $566 to $17,664 for
the three months ended September 27, 1998 from $17,098 for the comparable period
in 1997. The percentage of SG&A expense to net sales increased to 8.6% for the
three months ended September 27, 1998 from 8.0% for the three months ended
September 28, 1997. The increase in absolute dollars and the percentage of SG&A
expense to net sales was primarily attributable to: (i) the continued expansion
of the Company's sales and marketing, finance, and other general and
administrative; (ii) the addition of Multek's August 1997 acquisition of a high
volume printed circuit board fabrication facility in Austin, Texas; and (iii)
lower sales in the current period versus the comparable prior year period.
<PAGE> 15
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Dollars in thousands)
B. RESULTS OF OPERATIONS, CONTINUED
SG&A expense increased $4,800 to $56,224 for the nine months ended September 27,
1998 from $51,424 for the comparable period in 1997. The percentage of SG&A
expense to net sales decreased to 8.5% for the nine months ended September 27,
1998 from 9.6% for the nine months ended September 28, 1997. The dollar increase
is related to (i) the continued expansion of the Company's sales and marketing,
finance, and other general and administrative infrastructure necessary to
support the Company's growth; (ii) the addition of the Multek Austin facility;
and (iii) the 24% increase in net sales in the nine months ended September 27,
1998 versus the comparable period in 1997. The percentage of SG&A expense to net
sales decreased during the nine months ended September 27, 1998 versus September
28, 1997 due to better absorption from the increase in revenues.
In March 1998, the Company recognized a non-recurring charge of $54,000,
substantially all of which related to the operations of the Company's wholly
owned subsidiary, Orbit Semiconductor. The non-recurring pre-tax charges
consisted of (i) $38,258 associated with the write-down of long-lived assets to
fair value; (ii) $7,900 associated with the impairment of sales contracts and
accounts receivable as well as estimated costs for sales returns and allowances,
primarily as a result of the fab changeover quality issues; and (iii) $7,842
primarily associated with excess inventory created by quality issues and the
downsizing of Orbit's operations.
Interest expense increased $2,406 to $4,910 for the three months ended September
27, 1998 from $2,504 for the comparable period in 1997. Interest expense
increased $8,374 to $14,298 for the nine months ended September 27, 1998 from
$5,924 for the comparable period in 1997. These increases are primarily
associated with the Company's issuance of $150,000 of 8.50% senior subordinated
notes in September 1997 and the borrowings in the current quarter on the
Company's line-of-credit facility of $45,861.
Amortization expense increased $135 to $1,168 for the three months ended
September 27, 1998 from $1,033 for the comparable period in 1997. Amortization
expense increased $621 to $3,383 for the nine months ended September 27, 1998
from $2,762 for the nine months ended September 28, 1997. These increases are
attributable to the amortization of debt issue costs associated with the senior
subordinated notes issued in September 1997 and the amortization of the goodwill
associated with the Company's acquisitions.
Other expense (net) decreased $418 for the three months ended September 27, 1998
and $1,091 for the nine months ended September 27, 1998 from the comparable
periods in 1997, due primarily to increased net gains realized on foreign
currency transactions and reduced provisions for doubtful accounts.
The Company's estimated effective income tax rate differs from the U.S.
statutory rate due to domestic state income tax credits and lower effective
income tax rates on foreign earnings considered permanently invested abroad. The
effective tax rate for a particular year will vary depending on the mix of
foreign and domestic earnings, income tax credits and changes in previously
established valuation allowances for deferred tax assets based upon management's
current analysis of the realizability of these deferred tax assets. As foreign
earnings considered permanently invested abroad increase as a percentage of
consolidated earnings, the overall consolidated effective income tax rate will
usually decrease because the foreign earnings are generally taxed at a lower
rate than domestic earnings. The mix of foreign and domestic income from
operations before income taxes, the recognition of income tax loss and tax
credit carryforwards and management's current assessment of the required
valuation allowance resulted in an estimated effective income tax rate of 28%
for the three and nine month periods ended September 27, 1998. The Company's
effective income tax rate was 21% and 29%, for the three and nine month periods
ended September 28, 1997, respectively.
<PAGE> 16
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Dollars in thousands)
C. ACQUISITIONS
In August 1998, the Company acquired all of the stock of Greatsino Electronic
Technology ("Greatsino"), a wholly owned subsidiary of Valenta Holdings Limited,
a wholly owned subsidiary of Universal Appliances Limited, a Hong Kong Limited
Corporation. Greatsino is a printed circuit board fabricator and contract
electronics manufacturer with operations in the People's Republic of China. The
cash purchase price, net of cash acquired, amounted to $43,409. The initial
purchase price is subject to adjustments for contingent consideration of no more
than approximately $40,000 based upon the business achieving specified levels of
earnings through August 31, 1999. The fair value of the assets acquired,
excluding cash acquired, amounted to $47,313 and liabilities assumed were
$21,801, including estimated acquisition costs. The cost in excess of net assets
acquired amounted to $17,897.
In July 1998, the Company completed a business combination that is immaterial to
the Company's results from operations and financial position. The cash purchase
price, net of cash acquired, for the acquisition amounted to $2,200. The fair
value of the assets acquired and liabilities assumed from this acquisition is
immaterial.
During the second quarter of 1997, the Company completed certain business
combinations that are immaterial to the Company's results from operations and
financial position. The cash purchase price, net of cash acquired, amounted to
$7,939. The fair value of the assets acquired and liabilities assumed from these
acquisitions was immaterial. The cost in excess of net assets acquired through
these acquisitions amounted to $9,133.
Each of the above acquisitions was accounted for as purchases with the results
of operations from the acquired businesses included in the Company's results of
operations from the acquisition dates forward. Pro forma results of operations
would not be materially different from the historical results reported. The
costs of these acquisitions have been allocated on the basis of the estimated
fair value of the assets acquired and the liabilities assumed.
D. FOREIGN CURRENCY EXPOSURE
The Company conducts a significant amount of its business and has a number of
operating facilities in countries outside of the United States. As a result, the
Company may experience transaction and translation gains and losses because of
currency fluctuations. In order to minimize foreign exchange transaction risk,
the Company selectively hedges certain of its foreign exchange exposures through
forward exchange contracts, principally relating to nonfunctional currency
monetary assets and liabilities. The strategy of selective hedging can reduce
the Company's vulnerability to certain of its foreign currency exposures, and
the Company expects to continue this practice in the future. To date, the
Company's hedging activity has been immaterial, and there were no open foreign
exchange contracts as of September 27, 1998 or September 28, 1997.
E. LIQUIDITY, CAPITAL RESOURCES AND COMMITMENTS
At September 27, 1998, the Company had working capital of $127,617 and a current
ratio of 1.9x compared to working capital of $160,618 and a current ratio of
2.2x at December 28, 1997. The decrease in working capital and current ratio is
primarily attributable to (i) the use of cash to purchase shares under the share
repurchase program and (ii) the decrease in accounts receivable and
inventory attributable to lower sales in the quarter. Cash and
<PAGE> 17
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Dollars in thousands)
E. LIQUIDITY, CAPITAL RESOURCES AND COMMITMENTS, CONTINUED
cash equivalents at September 27, 1998 were $63,270, a decrease of $21,797 from
$85,067 at December 28, 1997. This decrease resulted primarily from cash used by
investing activities of $91,646, offset by cash provided from operations and
financing activities of $47,220 and $22,720, respectively.
The Company's net cash flows used by investing activities amounted to $91,646
and $111,464 for the nine months ended September 27, 1998 and September 28,
1997, respectively. Capital expenditures amounted to $49,399 and $106,103 for
the nine months ended September 27, 1998 and September 28, 1997, respectively.
The Company continues to invest in state-of-the-art, high-technology equipment
which enables it to accept increasingly complex and higher-volume orders. The
significant level of capital expenditures for the nine months ended September
28, 1997 is mainly attributable to the $46,064 acquisition of the IBM Austin
printed circuit board fabrication facility combined with approximately $29,013
of additional capital equipment and leasehold improvements for Orbit's 6-inch,
0.6 micron process facility. The Company received proceeds of $3,362 and $2,578
from the sale of property, plant and equipment during the nine months ended
September 27, 1998 and September 28, 1997, respectively, to allow for the
potential replacement of older property, plant and equipment with
state-of-the-art, high-technology equipment.
Payments for business acquisitions, net of cash acquired, amounted to $45,609
and $7,939 for the nine months ended September 27, 1998 and September 28, 1997,
respectively. See Section C, Acquisitions, for a description of acquisitions.
The Company's net cash flows provided by financing activities amounted to
$22,720 and $139,331 for the nine months ended September 27, 1998 and September
28, 1997, respectively. The Company repaid $6,541 and $10,973 in long-term
financing obligations in the nine months ended September 27, 1998 and September
28, 1997, respectively. The Company received $4,481 and $6,064 in proceeds from
stock issued under its stock plans in the nine months ended September 27, 1998
and September 28, 1997, respectively.
During the nine months ended September 27, 1998, the Company repurchased
1,181,500 shares of its common stock at a cost of $21,081. The Company could
repurchase an additional 626,000 shares of common stock in future periods as
part of its share repurchase plan, subject to certain restrictions under its
Credit Agreement. In addition, the Company borrowed $45,861 from its
line-of-credit facility during the nine months ended September 27, 1998 to fund
its acquisition of Greatsino. During September 1997, the Company issued $150,000
of 8.50% senior subordinated notes. The proceeds from the issuance of the senior
subordinated notes were used to repay the Company's outstanding advances against
its line-of-credit. The line-of-credit advances were used for working capital
purposes and to fund the Company's acquisition of the IBM Austin printed circuit
board fabrication facility in August 1997.
During the nine months ended September 28, 1997, debt issue costs associated
with the issuance of the senior subordinated notes and the Company's
line-of-credit amounted to $4,934.
On October 30, 1998, the Company replaced its $80,000 senior secured revolving
line-of-credit facility with a $210,000 Credit Agreement (the "Agreement") with
a syndicate of domestic and foreign banks. The Credit Agreement provides for a
$100,000 5-year term loan ("Term Loan"), and a $110,000 revolving line-of-credit
facility ("Revolver"). The aggregate maturities of the Term Loan are as follows:
$16,000 in fiscal 1999, $18,000 in fiscal 2000, $20,000 in fiscal 2001, $22,000
in fiscal 2002 and $24,000 in fiscal 2003. The Revolver expires on November 1,
2003. Borrowings under the Agreement bear interest, at the Company's option, at
either: (i) the Applicable Base Rate ("ABR") (as defined in the Agreement) plus
the Applicable Margin for ABR Loans ranging between 0.00% and 0.75%, based on
<PAGE> 18
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Dollars in thousands)
E. LIQUIDITY, CAPITAL RESOURCES AND COMMITMENTS, CONTINUED
certain financial ratios of the Company, or (ii) the Eurodollar Rate (as defined
in the Agreement) plus the Applicable Margin for Eurodollar Loans ranging
between 1.00% and 2.25%, based on certain financial ratios of the Company. The
Company is required to pay a quarterly commitment fee ranging from 0.25% to
0.50% per annum, based on certain financial ratios of the Company, of the unused
commitment under the Revolver.
Management believes that cash generated from operations, existing cash reserves,
leasing capabilities, and the line-of-credit availability will be adequate to
fund the Company's capital expenditure plans. The Company intends to continue
its acquisition strategy and it is possible that future acquisitions may be
significant. If available resources are not sufficient to finance the Company's
acquisitions, the Company would be required to seek additional equity or debt
financing.
The Company's operations are subject to certain federal, state and local
regulatory requirements relating to the use, storage, discharge and disposal of
hazardous chemicals used during its manufacturing processes. The Company
believes that it is currently operating in compliance with applicable
regulations and does not believe that costs of compliance with these laws and
regulations will have a material effect upon its capital expenditures, results
from operations or competitive position.
The Company determines the amount of its accruals for environmental matters by
analyzing and estimating the range of possible costs in light of information
currently available. The imposition of more stringent standards or requirements
under environmental laws or regulations, the results of future testing and
analysis undertaken by the Company at its operating facilities, or a
determination that the Company is potentially responsible for the release of
hazardous substances at other sites, could result in expenditures in excess of
amounts currently estimated to be required for such matters. No assurance can be
given that actual costs will not exceed amounts accrued or that costs will not
be incurred with respect to sites as to which no problem is currently known.
Further, there can be no assurance that additional environmental matters will
not arise in the future.
See Note 9 to the condensed consolidated financial statements for a description
of commitments, contingencies and environmental matters.
F. OTHER MATTERS
In October 1998, the Company announced its intention to exit semiconductor
manufacturing. The Company will divest Orbit's 6-inch, 0.6 micron wafer
fabrication facility ("Fab") and adopt a fabless strategy to compliment Orbit's
application-specific integrated circuit design, gate array conversion services,
and mixed-signal design product lines. The Company is in discussions with
certain potential acquirers of its wafer fabrication facility. If such
discussions do not result in a firm agreement to sell the facility before the
end of the fourth quarter, the Company plans to adopt an orderly exit strategy,
which would result in the fab closing by June 30, 1999. If the fab is
successfully sold, the Company will determine the financial impact of such a
transaction once the terms of sale are known. If the fab is closed, it would
result in total nonrecurring after-tax charges in the fourth quarter of 1998 of
approximately $15,000 to $18,000, consisting of approximately $11,000 to $13,000
of long-lived asset write-offs and $4,000 to $5,000 of primarily exit costs.
G. SUBSEQUENT EVENT
On October 30, 1998, the Company completed its acquisition of Hewlett-Packard
Company's Printed Circuit Organization's fabrication facility located in
Boeblingen, Germany, pursuant to a Master Asset Purchase Agreement dated October
30, 1998. The acquired assets include property, plant and equipment, working
capital and certain intellectual property. The purchase price was approximately
$89,900, subject to certain post-closing adjustments. The Company funded the
purchase through a 5-year term loan with a syndicate of domestic and foreign
banks as described in Note 9. The transaction will be accounted for as a
purchase of assets.
<PAGE> 19
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Dollars in thousands)
H. YEAR 2000 ISSUE
The Year 2000 date conversion issue is the result of computer programs being
written using two digits rather than four to define the applicable year. This
issue affects computer systems that have time-sensitive programs that may not
properly recognize the Year 2000. This could result in major system failures or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in normal business activities.
Management has initiated a company-wide program to prepare its financial,
manufacturing and other critical systems and applications for the Year 2000. The
program involves the Company's upper management as well as individuals from each
of its operating companies. The focus of the program is to identify affected
software and hardware, develop a plan to correct that software or hardware in
the most effective manner and implement and monitor that plan. The program also
includes communications with the Company's significant suppliers and customers
to determine the extent to which the Company is vulnerable to any failures by
them to address the Year 2000 issue. Finally, the program involves testing the
Year 2000 readiness of mission critical systems and developing contingency plans
if those systems fail or if its customers or vendors fail to address the Year
2000 issue effectively.
The Company has completed a substantial portion of its inventory and assessment
of software and hardware that may be affected by the Year 2000. Each operating
company has identified those software programs and related hardware that are
non-compliant and is in the process of developing remediation or replacement
plans and establishing benchmark dates for completion of each phase of those
plans. The Company anticipates that all mission critical software and hardware
will be compliant by October 1999.
The Company has initiated formal communications with its significant suppliers,
customers and critical business partners to determine the extent to which the
Company may be vulnerable in the event those parties fail to properly remediate
their own Year 2000 issues. The Company has taken steps to monitor the progress
made by those parties, and intends to test critical system interfaces as the
Year 2000 approaches. The Company will develop appropriate contingency plans in
the event that a significant exposure is identified relative to the dependencies
on third-party systems. While the Company is not presently aware of any such
significant exposure, there can be no guarantee that the systems of third
parties on which the Company relies will be converted in a timely manner, or
that a failure to properly convert by another company would not have a material
adverse effect on the Company.
The program involves testing the Year 2000 readiness of mission critical
systems. Because the Company has not begun testing of mission critical systems,
and, accordingly, has not fully assessed its risks from potential Year 2000
failures, the Company has not yet developed Year 2000-specific contingency
plans. The Company will develop such plans if the results of testing mission
critical systems identify a business function at risk. In addition, as a normal
course of business, the Company maintains and deploys contingency plans to
address various other potential business interruptions. These plans may be
applicable to address the interruption of support provided by third parties
resulting from their failure to be Year 2000 ready.
The Company does not expect the costs associated with its Year 2000 efforts to
be substantial. Less than $5,000 has been allocated to address the Year 2000
issue, of which $1,054 has been incurred through September 27, 1998. The
Company's aggregate cost estimate includes certain internal recurring costs but
does not include time and costs that may be incurred by the Company as a result
of the failure of any third parties, including suppliers, to become Year 2000
compliant or costs to implement any contingency plans.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
<PAGE> 20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In 1997, two related complaints, as amended, were filed in the District Court of
Boulder, Colorado and the U.S. District Court for the District of Colorado
against the Company and certain of its officers. The lawsuits purport to be
brought on behalf of a class of persons who purchased the Company's common stock
during the period from April 1, 1996, through September 8, 1996, and claim
violations of Colorado and federal laws based on allegedly false and misleading
statements made in connection with the offer, sale or purchase of the Company's
common stock at allegedly artificially inflated prices, including statements
made prior to the Company's acquisition of Orbit. The complaints seek
compensatory and other damages as well as equitable relief. The Company filed
motions to dismiss both amended complaints. The motion to dismiss the state
court complaint has been denied, and the Company has filed its answer denying
that it misled the securities market. The motion to dismiss the federal court
complaint is still pending. Both actions were brought by the same plaintiffs'
law firm as the Orbit action discussed below. The Company believes that the
claims asserted in both actions are without merit and intends to defend against
such claims vigorously. Discovery has commenced in the state court action and a
trial date has been set for May 1999. No trial date has been set in the federal
court action.
A class action complaint (as amended in March 1996) for violations of federal
securities law was filed against Orbit and three of its officers in 1995 in the
U.S. District Court for the Northern District of California. The amended
complaint was dismissed on November 12, 1996, with leave to amend only as to
certain specified claims relating to the statements made by securities analysts.
In January 1997, a second amended complaint was filed. The second amended
complaint alleges that Orbit and three of its officers are responsible for
actions of securities analysts that allegedly misled the market for Orbit's then
existing public common stock. The second amended complaint seeks relief under
Section 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated
thereunder. The second amended complaint seeks compensatory and other damages as
well as equitable relief. In September 1997, Orbit filed its answer to the
second amended complaint denying responsibility for the actions of securities
analysts and further denying that it misled the securities market. The parties
have entered into a Memorandum of Understanding reflecting a proposed
settlement of the action subject to final terms which are being negotiated.
In addition to the above matters, the Company is involved in certain other
litigation arising in the ordinary course of business.
Although management is of the opinion that these matters will not have a
material adverse effect on the consolidated financial position or results of
operations of the Company, the ultimate outcome of these matters cannot, at this
time, be predicted in light of the uncertainties inherent in litigation. See
Note 11 of the 1997 Consolidated Financial Statements included in Part II, Item
8 of the Company's Form 10-K Annual Report for the fiscal year ended December
28, 1997 for contingencies and environmental matters.
<PAGE> 21
ITEM 6(A). EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
*2.1 Agreement relating to the sale and purchase of the share
in Valenta Holdings Limited, dated as of August 22,
1998. (incorporated by reference to Exhibit 2.1 of the
Registrant's Report on Form 8-K dated September 4, 1998.)
23.1 Report of Independent Accountants - Deloitte & Touche LLP.
27 Financial Data Schedule.
- ----------
* Schedules are not included and will be furnished supplementally to the
Commission upon request.
ITEM 6(B). REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K with the Securities and Exchange
Commission during the quarter ended September 27, 1998.
The following item was reported in the Form 8-K dated September 4, 1998:
Item 2. Acquisition or Disposition of Assets - The Company acquired all of
the stock of Greatsino Electronic Technology, a wholly-owned subsidiary
of Valenta Holdings Limited, a wholly-owned subsidiary of Universal
Appliances Limited, a Hong Kong Limited Corporation. No financial
statements were filed as part of such report.
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE DII GROUP, INC.
Date: November 11, 1998 By: /s/Carl R. Vertuca, Jr.
------------------ ----------------------------------------
Carl R. Vertuca, Jr.
Executive Vice President - Finance,
Administration and Corporate Development
Date: November 11, 1998 By: /s/Thomas J. Smach
------------------ ---------------------------------------
Thomas J. Smach
Chief Financial Officer
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT LOCATION OF EXHIBIT IN
NUMBER DESCRIPTION SEQUENTIAL NUMBERING SYSTEM
- ------- ----------- ---------------------------
<S> <C> <C>
*2.1 Agreement relating to the sale and purchase of the share
in Valenta Holdings Limited, dated as of August 22,
1998. (incorporated by reference to Exhibit 2.1 of the
Registrant's Report on Form 8-K dated September 4, 1998.)
23.1 Report of Independent Accountants - Deloitte & Touche LLP.
27 Financial Data Schedule.
</TABLE>
- ----------
* Schedules are not included and will be furnished supplementally to the
Commission upon request.
<PAGE> 1
INDEPENDENT ACCOUNTANTS' REPORT
The Board of Directors
The DII Group, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of The
DII Group, Inc. and subsidiaries (the "Company") as of September 27, 1998, and
the related condensed consolidated statements of operations and cash flows for
the thirteen weeks and thirty nine weeks ended September 27, 1998 and September
28, 1997. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of The DII Group, Inc. and
subsidiaries as of December 28, 1997, and the related consolidated statements
of income, stockholders' equity, and cash flows for the 52 weeks then ended
(not presented herein); and in our report dated January 22, 1998, we expressed
an unqualified opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying condensed consolidated
balance sheet as of December 28, 1997 is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Denver, Colorado
November 6, 1998
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