<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 JULY 4, 1999
( ) 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 August 13, 1999
----- ---------------
Common Stock, Par Value $0.01 29,634,649
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. 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 SIX MONTHS ENDED
--------------------------- -----------------------------
JULY 4, 1999 JUNE 28, 1998 JULY 4, 1999 JUNE 28, 1998
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Net sales:
Systems assembly and distribution $ 181,405 142,712 332,318 293,131
Printed wiring boards 80,564 46,123 151,885 96,831
Other 18,124 33,103 43,358 67,350
--------- --------- --------- ---------
Total net sales 280,093 221,938 527,561 457,312
Cost of sales:
Cost of sales 237,781 188,796 447,320 390,728
Unusual charges -- -- -- 52,156
--------- --------- --------- ---------
Total cost of sales 237,781 188,796 447,320 442,884
--------- --------- --------- ---------
Gross profit 42,312 33,142 80,241 14,428
Selling, general and administrative expenses 20,686 19,384 40,796 38,560
Unusual charges -- -- -- 1,844
Interest expense 5,371 4,669 11,853 9,388
Interest income (356) (677) (750) (1,604)
Amortization of intangibles 1,307 1,094 2,602 2,215
Other, net 814 169 800 1
--------- --------- --------- ---------
Income (loss) before income taxes 14,490 8,503 24,940 (35,976)
Income tax expense (benefit) 2,150 2,376 3,717 (10,056)
--------- --------- --------- ---------
Net income (loss) $ 12,340 6,127 21,223 (25,920)
========= ========= ========= =========
Earnings (loss) per common share:
Basic $ 0.42 0.24 0.75 (1.03)
Diluted $ 0.40 0.23 0.73 (1.03)
Weighted average number of common
shares and equivalents outstanding:
Basic 29,463 25,044 28,408 25,110
Diluted 30,921 30,450 29,802 25,110
</TABLE>
See accompanying notes to condensed consolidated financial statements
2
<PAGE> 3
THE DII GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except par value data)
(Unaudited)
<TABLE>
<CAPTION>
JULY 4, JANUARY 3,
1999 1999
----------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 35,734 55,972
Accounts receivable, net 157,828 153,861
Inventories 89,821 66,745
Prepaid expenses 13,442 11,570
Other 12,390 7,249
--------- ---------
Total current assets 309,215 295,397
Property, plant and equipment, net 343,090 326,226
Goodwill, net 94,596 97,475
Debt issue costs, net 7,096 9,319
Investments in minority owned entities 20,507 --
Other 23,565 18,892
--------- ---------
$ 798,069 747,309
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 162,820 122,536
Accrued expenses 39,619 44,134
Accrued interest payable 5,037 6,769
Current portion of capital lease obligations 1,121 5,617
Current portion of long-term debt 30,543 29,031
--------- ---------
Total current liabilities 239,140 208,087
Capital lease obligations, net of current portion 831 1,820
Long-term debt, net of current portion 265,540 271,864
Convertible subordinated notes payable -- 86,235
Other 3,854 3,582
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; 31,126,137 and 26,169,344 shares issued
and 29,479,137 and 24,522,344 shares outstanding 311 262
Additional paid-in capital 214,222 124,410
Retained earnings 114,294 93,071
Treasury stock, at cost; 1,647,000 shares (28,544) (28,544)
Accumulated other comprehensive loss (4,247) (4,139)
Deferred compensation (7,332) (9,339)
--------- ---------
Total stockholders' equity 288,704 175,721
--------- ---------
$ 798,069 747,309
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
<PAGE> 4
THE D I I GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
---------------------------
JULY 4, 1999 JUNE 28, 1998
------------ -------------
<S> <C> <C>
Net cash provided by operating activities $ 29,687 42,183
-------- --------
Cash flows from investing activities:
Additions to property, plant and equipment (48,291) (33,572)
Proceeds from sales of property, plant and equipment 9,128 3,800
Proceeds from business divestitures 26,051 --
Investments in minority owned entities (20,507) --
-------- --------
Net cash used by investing activities (33,619) (29,772)
-------- --------
Cash flows from financing activities:
Payments to acquire treasury stock -- (16,158)
Repayments of capital lease obligations (5,485) (2,479)
Repayments of long-term debt (17,039) (2,164)
Long-term debt borrowings 3,000 --
Proceeds from stock issued under stock plans 3,426 3,146
Other (101) --
-------- --------
Net cash used by financing activities (16,199) (17,655)
-------- --------
Effect of exchange rate changes on cash (107) (40)
-------- --------
Net decrease in cash and cash equivalents (20,238) (5,284)
Cash and cash equivalents at beginning of period 55,972 85,067
-------- --------
Cash and cash equivalents at end of period $ 35,734 79,783
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
<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 January 3, 1999 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 January 3, 1999 included in
the annual report on Form 10-K previously filed with the Securities and Exchange
Commission. 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 six-month period ended July 4, 1999 are not
necessarily indicative of the results that may be expected for the year ending
January 2, 2000.
The Company's fiscal year consists of either a 52-week or 53-week period ending
on the Sunday nearest to December 31. Fiscal 1998 comprised 53 weeks and ended
on January 3, 1999 and fiscal 1999 will comprise 52 weeks and will end on
January 2, 2000. The accompanying condensed consolidated financial statements
are therefore presented as of and for the quarters ended July 4, 1999 and June
29, 1998, both of which are 13-week periods.
(2) INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
JULY 4, JANUARY 3,
1999 1999
-------- ----------
<S> <C> <C>
Raw materials $ 50,666 44,669
Work in process 41,748 24,922
Finished goods 5,169 6,622
-------- ------
97,583 76,213
Less allowance 7,762 9,468
-------- ------
$ 89,821 66,745
======== ======
</TABLE>
The Company made provisions to the allowance for inventory impairment (including
unusual charges, see Note 7) of $336 and $7,280 during the six month periods
ended July 4, 1999 and June 28, 1998, respectively.
(3) BUSINESS COMBINATIONS, ASSET PURCHASES AND STRATEGIC INVESTMENTS
In August 1998, the Company acquired Greatsino Electronic Technology, a printed
wiring 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 $51,795. 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. This
acquisition was accounted for as a purchase with the results of operations from
the acquired business included in the Company's results of operations from the
acquisition date forward. Pro forma results of operations would not be
materially different from the historical results reported. The cost of this
acquisition was allocated on the basis of the estimated fair value of assets
acquired and liabilities assumed. The fair value of the assets acquired,
excluding cash acquired, amounted to $55,699 and liabilities assumed were
$21,801, including estimated acquisition costs. The cost in excess of net assets
acquired amounted to $17,897.
5
<PAGE> 6
Goodwill associated with this acquisition, as well as previous acquisitions, is
subject to future adjustments from contingent purchase price adjustments for
varying periods, all of which end no later than June 2001. The Company increased
goodwill and notes payable to sellers of businesses acquired in the amount of
$9,500 for contingent purchase price adjustments during the six months ended
July 4, 1999. There were no contingent purchase price adjustments during the six
months ended June 28, 1998.
In October 1998, the Company acquired Hewlett-Packard Company's ("HP") printed
wiring board fabrication facility located in Boeblingen, Germany, and its
related production equipment, inventory and other assets for a purchase price of
approximately $89,900. The purchase price was allocated to the assets acquired
based on the relative fair values of the assets at the date of acquisition.
During the first quarter of fiscal 1999, the Company made two strategic minority
investments amounting to $20,507. First, the Company entered into a joint
venture with Virtual IP Group ("VIP"), a complex integrated circuit design
company with locations in Hyderabad, India and Sunnyvale, California. The
Company acquired a 49% interest in VIP for approximately $5,007. The Company
accounts for its investment in VIP under the equity method.
In March 1999, the Company acquired 15,000 non-voting preferred shares of DVB
(Group) Limited ("DVB"), a wholly-owned subsidiary of Capetronic International
Holdings Limited (Capetronic). The preferred stock accrues a 5% annual dividend
and can be converted into common stock of Capetronic after 15 months and at a
price of HK$4.80 per share. Additionally, at anytime after 15 months, Capetronic
can force conversion if the market price is at least HK$10.00 per share. At a
conversion price of HK$4.80 per share (based on an agreed exchange rate of
US$1.00 equals HK$7.50) the Company would hold approximately 24,219 common
shares of Capetronic, which currently would represent approximately 13% of the
issued common stock of Capetronic after giving effect to the conversion,
excluding the effect of other dilutive instruments which are currently in
existence that, if converted, would reduce the Company's ultimate ownership
percentage. However, under the terms of the agreement, the Company can not hold
more than 10% of the outstanding common stock of Capetronic. If, upon
conversion, the Company holds in excess of 10% of the outstanding common stock
of Capetronic, the Company would be required to divest of shares to reduce its
holdings to 10% or less.
The Company currently accounts for its investment in Capetronic under the cost
method. Once the criteria for conversion are reached, the Company will account
for this investment as an available-for-sale marketable equity security in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
Through this strategic investment and a related manufacturing agreement, the
Company has obtained the rights to manufacture a majority of DVB's requirements
for set-top boxes to be used for the delivery of video entertainment, data and
educational materials in China.
(4) DIVESTITURES
The Company has undertaken an initiative to divest of its non-core business unit
known as Process Technologies International ("PTI"). PTI is a group of
manufacturing companies that produce equipment and tooling used in the printed
circuit board assembly process. In April 1999, the Company completed the
divestiture of IRI International and Chemtech (U.K.) Limited, manufacturers of
surface mount printed circuit board solder cream stencils. In March 1999, the
Company completed the divestiture of TTI Testron, Inc., its subsidiary that
manufactures in-circuit and functional test hardware and software. The Company
received cash proceeds from these sales amounting to $26,051, net of divestiture
costs.
The Company is divesting this non-core business unit in order to sharpen its
focus on the Company's core businesses of design and semiconductor services,
fabrication of printed wiring boards, and systems assembly and distribution. The
Company does not believe that the sale of PTI will have any adverse impact on
its consolidated financial position. However, the Company's consolidated
revenues and operating results will be adversely impacted (by less than 10%)
until such time as the proceeds are reinvested back into the Company's core
businesses of design and semiconductor services, design and fabrication of
printed wiring boards, and systems assembly and distribution.
6
<PAGE> 7
(5) LONG-TERM DEBT
Long-term debt was comprised of the following:
<TABLE>
<CAPTION>
JULY 4, JANUARY 3,
1999 1999
--------- ----------
<S> <C> <C>
Senior subordinated notes $150,000 150,000
Bank term loan 92,000 100,000
Outstanding under line-of-credit 40,500 37,500
Notes payable to sellers of businesses acquired 9,500 11,550
Other 4,083 1,845
--------- -------
Total long-term debt 296,083 300,895
Less current portion 30,543 29,031
--------- -------
Long-term debt, net of current portion $ 265,540 271,864
========= =======
</TABLE>
(6) CONVERTIBLE SUBORDINATED DEBT
As of February 18, 1999, substantially all of the Company's convertible
subordinated notes were converted into approximately 4,600,000 shares of common
stock and the unconverted portion was redeemed for $101. Stockholders' equity
was increased by the full amount of the convertible subordinated notes less the
unamortized issuance costs. The conversion was a non-cash addition to
stockholders' equity during the first quarter of fiscal 1999.
(7) UNUSUAL CHARGES
During fiscal 1998, the Company recognized unusual pre-tax charges of $76,636,
substantially all of which related to the operations of the Company's wholly
owned subsidiary, Orbit Semiconductor. The Company decided to sell Orbit's
6-inch, 0.6 micron wafer fabrication facility ("Fab") and adopt a fabless
manufacturing strategy to complement Orbit's design and engineering services.
The charges were primarily due to the impaired recoverability of inventory,
intangible assets and fixed assets, and other costs associated with the exit of
semiconductor manufacturing. The manufacturing facility was sold in January 1999
and the Company has successfully adopted a fabless manufacturing strategy. The
Company recorded $54,000 and $22,636 of the charges in the first and fourth
quarters of fiscal 1998, respectively. As discussed below, $52,156 of the
unusual pre-tax charges had been classified as a component of cost of sales in
the first quarter 1998.
The components of the unusual charge recorded in fiscal 1998 are as follows:
<TABLE>
<CAPTION>
FIRST FOURTH NATURE OF
COMPONENTS OF CHARGE QUARTER QUARTER TOTAL CHARGE
-------------------- -------- -------- -------- ----------
<S> <C> <C> <C> <C>
Severance.................................. $ 498 $ 900 $ 1,398 cash
Long-lived asset impairment................ 38,257 15,083 53,340 non-cash
Losses on sales contracts.................. 5,500 4,100 9,600 non-cash
Incremental uncollectible accounts
receivable............................... 900 -- 900 non-cash
Incremental sales returns and allowances... 1,500 500 2,000 non-cash
Inventory write-downs...................... 5,500 250 5,750 non-cash
Other exit costs........................... 1,845 1,803 3,648 cash
-------- ------- --------
Total............................ $ 54,000 $22,636 $ 76,636
======== ======= ========
</TABLE>
The following table summarizes the activity related to the charges taken in
connection with the 1998 unusual charges:
<TABLE>
<CAPTION>
LONG-LIVED LOSSES UNCOLLECTIBLE SALES RETURNS INVENTORY
ASSET ON SALES ACCOUNTS AND WRITE- OTHER
SEVERANCE IMPAIRMENT CONTRACTS RECEIVABLE ALLOWANCES DOWNS EXIT COSTS TOTAL
--------- ---------- --------- ------------- ------------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December
28, 1997 .......... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Activities during the
year:
1998 provision .... 1,398 53,340 9,600 900 2,000 5,750 3,648 76,636
Cash charges ...... (498) -- -- -- -- -- (465) (963)
Non-cash charges .. -- (53,340) (8,500) (767) (1,500) (5,500) (643) (70,250)
-------- -------- -------- -------- -------- -------- -------- --------
Balance at January 3,
1999 .............. 900 -- 1,100 133 500 250 2,540 5,423
Activities during the
period:
Cash charges ...... (900) -- -- -- -- -- (601) (1,501)
Non-cash charges .. -- -- (1,100) (133) -- (250) -- (1,483)
-------- -------- -------- -------- -------- -------- -------- --------
Balance at April 4,
1999 .............. -- -- -- -- 500 -- 1,939 2,439
Activities during the
period:
Cash charges ...... -- -- -- -- -- -- (584) (584)
Non-cash charges .. -- -- -- -- (500) -- -- (500)
-------- -------- -------- -------- -------- -------- -------- --------
Balance at July 4,
1999 .............. $ -- $ -- $ -- $ -- $ -- $ -- $ 1,355 $ 1,355
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
7
<PAGE> 8
The unusual pre-tax charges include $53,340 for the write-down of long-lived
assets to fair value. This amount has been classified as a component of cost of
sales. Included in the long-lived asset impairment are charges of $50,739, which
relate to the Fab which was written down to its net realizable value based on
its sales price. The Company kept the Fab in service until the sale date in
January 1999. In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of," the Company
discontinued depreciation expense on the Fab when it determined that it would be
disposed of and its net realizable value was known. The impaired long-lived
assets consisted primarily of machinery and equipment of $52,418, which were
written down by $43,418 to a carrying value of $9,000 and building and
improvements of $7,321, which were written down to a carrying value of zero. The
long-lived asset impairment also includes the write-off of the remaining
goodwill related to Orbit of $601. The remaining $2,000 of asset impairment
relates to the write-down to net realizable value of a facility the Company
exited during 1998.
The Company 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 the 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.
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 was characterized by excess capacity, which
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, requiring Orbit to outsource more of its manufacturing
requirements than originally expected. Based upon these continued conditions and
the future outlook, the Company took this first quarter 1998 charge to correctly
size Orbit's asset base to allow its recoverability based upon its then current
business size.
The first quarter 1998 unusual charge included $38,257 for the write-down of
long-lived assets to fair value. The fair value of these assets was based on
estimated market value at the date of the charge. Fair market value was
determined in accordance with SFAS No. 121, and included the use of an
independent valuation. The impairment charge consists of $37,656 related to
property, plant and equipment and $601 related to goodwill. This amount was
classified as a component of cost of sales.
Additionally, the first quarter 1998 unusual charge included $7,900 for losses
on sales contracts, incremental amounts of uncollectible accounts receivable,
and estimated incremental sales returns and allowances, primarily resulting from
the fab changeover quality issues. This amount was classified as a component of
cost of sales.
The first quarter 1998 unusual pre-tax charge also included $7,843 primarily
associated with inventory write-downs. This write-down primarily resulted from
excess inventory created by deciding to downsize operations.
As previously stated, the Company subsequently decided to sell the manufacturing
facility (which occurred in January 1999). This decision resulted in additional
unusual pre-tax charges in the fourth quarter of 1998 of $22,636.
The exit plan is expected to be completed in the third quarter of 1999. As of
July 4, 1999, the total remaining cash expenditures expected to be incurred are
$1,355 of other exit costs, including legal settlement costs, environmental
clean-up costs and other exit costs. These expenditures will continue to be
funded through operating cash flows of the Company which are expected to be
sufficient to fund these expenditures. These amounts were recorded in accrued
expenses at July 4, 1999.
(8) COMPREHENSIVE INCOME
The components of comprehensive income were as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED ENDED
--------------------- ----------------------
JULY 4, JUNE 28, JULY 4, JUNE 28,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) $ 12,340 6,127 $ 21,223 (25,920)
Other comprehensive loss-
Foreign currency translation adjustments 7 (44) (108) (53)
======== ======== ======== ========
Comprehensive income (loss) $ 12,347 6,083 $ 21,115 (25,973)
======== ======== ======== ========
</TABLE>
8
<PAGE> 9
The foreign currency translation adjustments are not currently adjusted for
income taxes since they relate to investments that are permanent in nature.
(9) EARNINGS (LOSS) PER SHARE
Earnings (loss) per common share ("EPS") data were computed as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED ENDED
-------------------- --------------------
JULY 4, JUNE 28, JULY 4, JUNE 28,
1999 1998 1999 1998
------- -------- ------- --------
<S> <C> <C> <C> <C>
BASIC EPS:
Net income (loss) $12,340 6,127 $21,223 (25,920)
======= ======= ======= =======
Weighted-average common shares outstanding 29,463 25,044 28,408 25,110
======= ======= ======= =======
Basic EPS $ 0.42 0.24 $ 0.75 (1.03)
======= ======= ======= =======
DILUTED EPS:
Net income (loss) $12,340 6,127 $21,223 (25,920)
Plus income impact of assumed conversions:
Interest expense (net of tax) on convertible
subordinated notes -- 776 400 --
Amortization (net of tax) of debt issuance cost
on convertible subordinated notes -- 65 33 --
======= ======= ======= =======
Net income (loss) available to common stockholders $12,340 6,968 $21,656 (25,920)
======= ======= ======= =======
Shares used in computation:
Weighted-average common shares outstanding 29,463 25,044 28,408 25,110
Shares applicable to exercise of dilutive options 1,216 741 1,164 --
Shares applicable to deferred stock compensation 242 68 230 --
Shares applicable to convertible subordinated
notes -- 4,597 -- --
------- ------- ------- -------
Shares applicable to diluted earnings 30,921 30,450 29,802 25,110
======= ======= ======= =======
Diluted EPS $ 0.40 0.23 $ 0.73 (1.03)
======= ======= ======= =======
</TABLE>
The common equivalent shares from common stock options, deferred stock
compensation and convertible subordinated notes were antidilutive for the six
month period ended June 28, 1998, and therefore not assumed to be converted for
diluted earnings per share computations.
(10) COMMITMENTS, CONTINGENCIES AND SUBSEQUENT EVENTS
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. Both actions were brought by
the same plaintiffs' law firm as the Orbit action discussed below. In July 1999
the federal court action was dismissed with prejudice. The state court action
purports 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 claims 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 complaint seeks compensatory and other damages, as well as equitable relief.
The Company has filed an answer denying that it misled the securities market. A
May 2000 trial date has been set and discovery has commenced. The Company
believes that the claims asserted in the action are without merit and intends to
defend vigorously against such claims.
9
<PAGE> 10
A class action complaint (as amended in March 1996 and January 1997) 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 alleged that Orbit and three of its officers
were responsible for actions of securities analysts that allegedly misled the
market for Orbit's then existing public common stock, and sought relief under
Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated
thereunder. The amended complaint sought 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. On May 24, 1999, the
Court approved a class-wide settlement of the case, providing for a settlement
fund of $1.7 million. Orbit's contribution to the settlement fund was $143,000,
and the balance was paid by Orbit's insurance carriers.
In addition, the Company is involved in certain litigation and environmental
matters arising in the ordinary course of business. Although management is of
the opinion that these matters and the matters discussed above will not have a
material adverse effect on the consolidated financial position or results of
operations of the Company, 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 $3,468 of capital commitments as of July 4, 1999.
As of July 4, 1999, there were $40,500 in borrowings outstanding under the
Company's $110,000 senior secured revolving line-of-credit facility. This credit
facility requires compliance with certain financial covenants and is secured by
substantially all of the Company's assets. As of July 4, 1999, the Company was
in compliance with all loan covenants.
On May 4, 1999, the Company announced that it has signed a memorandum of
understanding with Ericsson Austria AG to purchase Ericsson's manufacturing
facility and related assets located in Kindberg, Austria. Subject to concluding
this transaction, the Company will enter into a long-term supply agreement with
Ericsson to provide printed circuit board assembly, box build, and the
associated logistics and distribution activities. The transaction is expected to
be completed during the Company's third fiscal quarter of 1999. Completion of
the transaction is subject to applicable government approvals and various
conditions of closing. The transaction will be accounted for as a purchase of
assets. Subject to final negotiations, due diligence and working capital levels
at the time of closing, the estimated purchase price is approximately $15,000.
(11) INCOME TAXES
The Company's estimated effective income tax rate differs from the U.S.
statutory rate due to domestic 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,
management's current assessment of the required valuation allowance and the
implementation of several tax planning initiatives resulted in an estimated
effective income tax rate of 15% for the three and six month periods ended July
4, 1999.
10
<PAGE> 11
(12) BUSINESS SEGMENTS AND GEOGRAPHIC AREAS
The Company's businesses are organized, managed, and internally reported as
three reportable segments. These segments, which are based on differences in
products, technologies, and services are Systems Assembly and Distribution,
Printed Wiring Boards, and Other (which includes Dii Semiconductor and PTI).
These segments offer products and services across most sectors of the
electronics industry in order to reduce exposure to downturn in any particular
sector.
Transactions between segments are recorded at cost. The Company's businesses are
operated on an integrated basis and are characterized by substantial
intersegment cooperation, cost allocations, and marketing efforts. Substantially
all interest expense is incurred at Corporate. Therefore, management does not
represent that these segments, if operated independently, would report the
operating income and other financial information shown.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
---------------------------- ----------------------------
JULY 4, 1999 JUNE 28, 1998 JULY 4, 1999 JUNE 28, 1998
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
NET SALES:
Systems assembly and distribution $ 181,405 $ 142,712 $ 332,318 $ 293,131
Printed wiring boards 80,564 46,123 151,885 96,831
Other 18,124 33,103 43,358 67,350
--------- --------- --------- ---------
$ 280,093 $ 221,938 $ 527,561 $ 457,312
========= ========= ========= =========
INCOME (LOSS) BEFORE INCOME TAXES*:
Systems assembly and distribution $ 8,706 $ 7,205 $ 16,337 $ 14,155
Printed wiring boards 8,556 5,066 17,553 13,468
Other 5,564 3,428 8,266 4,066
Unallocated general corporate (8,336) 9 (7,196) (17,216) 9 (13,665)
--------- --------- --------- ---------
$ 14,490 $ 8,503 $ 24,940 $ 18,024
========= ========= ========= =========
DEPRECIATION AND AMORTIZATION:
Systems assembly and distribution $ 3,425 $ 3,774 $ 6,774 $ 5,440
Printed wiring boards 5,410 2,667 10,456 5,315
Other 878 2,160 1,818 6,062
Unallocated general corporate 286 275 592 578
--------- --------- --------- ---------
$ 9,999 $ 8,876 $ 19,640 $ 17,395
========= ========= ========= =========
CAPITAL EXPENDITURES:
Systems assembly and distribution $ 10,106 $ 8,269 $ 21,413 $ 14,400
Printed wiring boards 15,588 8,098 24,024 12,622
Other 1,030 2,022 1,929 6,468
Unallocated general corporate 225 30 925 82
--------- --------- --------- ---------
$ 26,949 $ 18,419 $ 48,291 $ 33,572
========= ========= ========= =========
</TABLE>
11
<PAGE> 12
<TABLE>
<CAPTION>
IDENTIFIABLE ASSETS AT THE END JULY 4, JANUARY 3,
OF EACH PERIOD: 1999 1999
- ------------------------------ -------- ----------
<S> <C> <C>
Systems assembly and distribution $266,761 $238,027
Printed wiring boards 432,741 390,194
Other 40,229 79,453
Unallocated general corporate 58,338 39,635
-------- --------
$798,069 $747,309
======== ========
</TABLE>
* Excludes unusual charges of $54,000 for the six months ended June 28, 1998,
which related primarily to Other Services. See Note 7 for additional information
regarding the unusual charges.
The following summarizes financial information by geographic areas:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
---------------------------- ---------------------------
JULY 4, 1999 JUNE 28, 1998 JULY 4, 1999 JUNE 28, 1998
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
NET SALES:
North America $ 157,115 $ 162,262 $ 297,132 $ 331,765
Europe 53,623 40,407 109,992 81,823
Asia 69,355 19,269 120,437 43,724
--------- --------- --------- ---------
$ 280,093 $ 221,938 $ 527,561 $ 457,312
========= ========= ========= =========
INCOME (LOSS) BEFORE INCOME TAXES*:
North America $ 12,264 $ 9,984 $ 18,623 $ 19,821
Europe 2,388 4,710 9,028 9,537
Asia 8,174 1,005 14,505 2,331
Unallocated general corporate (8,336) (7,196) (17,216) (13,665)
--------- --------- --------- ---------
$ 14,490 $ 8,503 $ 24,940 $ 18,024
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
LONG-LIVED ASSETS AT THE END JULY 4, JANUARY 3,
OF EACH PERIOD: 1999 1999
- ----------------------------- -------- ----------
<S> <C> <C>
North America $222,614 $232,134
Europe 106,438 110,296
Asia 106,526 80,635
Unallocated general corporate 9,204 9,955
-------- --------
$444,782 $433,020
======== ========
</TABLE>
* Excludes unusual charges of $54,000 for the six months ended June 28, 1998,
which related to businesses operated in North America. See Note 7 for additional
information regarding the unusual charges.
12
<PAGE> 13
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Dollars in thousands)
FORWARD-LOOKING STATEMENTS - CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995.
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. Words such as "expects," "anticipates,"
"forecasts," "intends," "plans," "believes," "projects," and "estimates" and
variations of such words and similar expressions are intended to identify such
forward-looking statements. These statements include, but are not limited to,
statements regarding prospective sales growth, new customers, integration of
acquired businesses, contingencies, Year 2000 readiness, environmental matters
and liquidity under "Part I, Financial Information - Item 2 Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere herein. These statements are not guarantees of future performance and
involve risks and uncertainties and are based on a number of assumptions that
could ultimately prove to be wrong. Actual results and outcomes may vary
materially from what is expressed or forecast in such statements. Among the
factors that could cause actual results to differ materially are: general
economic and business conditions; the Company's dependence on the electronics
industry; changes in demand for the Company's products and services or the
products of the Company's customers; the risk of delays or cancellations of
customer orders; fixed asset utilization; the timing of orders and product mix;
availability of components; competition; the risk of technological changes and
of the Company's competitors developing more competitive technologies; the
Company's dependence on certain important customers; the Company's ability to
integrate acquired businesses; the Company's ability to manage growth; risks
associated with international operations; the availability and terms of needed
capital; risks of loss from environmental liabilities; and other risks detailed
in this report. The Company undertakes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise.
A. OVERVIEW
The Company is a leading provider of electronics design and manufacturing
services, which operates through a global network of independent business units
in North America, Europe, and Asia. These business units are uniquely linked to
provide the following related core products and services to original equipment
manufacturers ("OEMs"): custom semiconductor design; design and manufacture of
printed wiring boards; assembly of printed circuit boards; final systems
assembly ("box build"); and distribution. By offering comprehensive and
integrated design and manufacturing services, the Company believes that it is
better able to differentiate its product and service offerings from those of its
competitors, develop long-term relationships with its customers and enhance its
profitability.
The Company provides the following related products and services to customers in
the global electronics manufacturing industry:
Design and Semiconductor Services-- Through Dii Technologies, the Company
provides printed circuit board and backpanel design services, as well as
design for manufacturability and test and total life cycle planning.
Through Dii Semiconductor (formerly known as Orbit Semiconductor), the
Company provides the following application specific integrated circuit
("ASIC") design services to its OEM customers:
o Conversion services from field programmable gate arrays ("FPGAs") to
ASICs. These services focus on designs that utilize primarily digital
signals, with only a small amount of analog signals.
o Design services for mixed-signal ASICs. These services focus on designs
that utilize primarily analog signals, with only a small amount of
digital signals.
o Silicon integration design services. These services utilize silicon
design modules that are used to accelerate complex ASIC designs,
including system-on-a-chip.
Dii Semiconductor utilizes external foundry suppliers for its customers'
silicon manufacturing requirements, thereby using a "fabless" manufacturing
approach.
13
<PAGE> 14
By integrating the combined capabilities of design and semiconductor
services, the Company can compress the time from product concept to market
introduction and minimize product development costs. The Company believes
that its semiconductor design expertise provides it with a competitive
advantage by enabling the Company to offer its customers reduced costs
through the consolidation of components onto silicon chips.
Printed Wiring Boards-- The Company manufactures high density, complex
multilayer printed wiring boards and back panels through Multek.
Systems Assembly and Distribution-- The Company assembles complex electronic
circuits and provides final system assembly and distribution services
through Dovatron International ("Dovatron").
With the above core competencies, the Company has the ability to provide
customers with total design and manufacturing outsourcing solutions. 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.
In addition, the Company manufactures machine tools and process automation
equipment through its non-core business unit known as Process Technologies
International ("PTI"). In March 1999, the Company sold TTI Testron, Inc., a
manufacturer of functional and in-circuit test fixtures. In April 1999, the
Company sold IRI International and Chemtech (U.K.) Limited, manufacturers of
surface mount printed circuit board solder cream stencils. The Company is
divesting this non-core business unit in order to sharpen its focus on the
Company's core businesses of design and semiconductor services, fabrication of
printed wiring boards, and systems assembly and distribution. The Company does
not believe that the sale of PTI will have any adverse impact on its
consolidated financial position. However, the Company's consolidated revenues
and operating results will be adversely impacted (by less than 10%) until such
time as the proceeds are reinvested back into the Company's core businesses of
design and semiconductor services, design and fabrication of printed wiring
boards, and systems assembly and distribution.
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
employed 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. Each of these factors has had in the past, and may have in the
future, an adverse effect on the Company's operating results.
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,
which have been characterized by diminished product demand, accelerated erosion
of average selling prices and overcapacity. The Company's customers also are
subject to short product life cycles and pricing and margin pressures, which
risks are borne by the Company. 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.
The Company offers manufacturing capabilities in three major electronics markets
of the world (North America, Europe and Asia). The Company's European and Asian
operations, combined, generated approximately 44% and 27% of total net sales for
the six months ended July 4, 1999 and June 28, 1998, respectively. The Company's
international operations subject the Company to the risks of doing business
abroad, including currency fluctuations, export duties, import controls and
trade barriers, restrictions on the transfer of funds, greater difficulty in
accounts receivable collection, burdens of complying with a wide variety of
foreign laws and, in certain parts of the world, political and economic
instability.
Substantially all of the Company's business outside the United States is
conducted in U.S. dollar-denominated transactions. Some transactions of the
Company and its subsidiaries are made in currencies different from their
functional currencies. 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 non-functional currency
14
<PAGE> 15
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. Gains and losses on
these foreign currency hedges are generally offset by corresponding losses and
gains on the underlying transaction. To date, the Company's hedging activity has
been immaterial, and there were no open foreign exchange contracts as of the
balance sheet dates included in the accompanying Consolidated Financial
Statements. As of July 4, 1999, the Company had the following unhedged net
foreign currency monetary asset (liability) positions:
<TABLE>
<CAPTION>
NET NET
FOREIGN U.S. DOLLAR
CURRENCY EQUIVALENT
ASSETS ASSETS
(LIABILITIES) (LIABILITIES)
------------- -------------
<S> <C> <C>
British Pound Sterling (887) $(1,399)
Chinese Renminbi (4,863) (588)
Czech Krown (190) (6)
Euro 1,163 1,193
Hong Kong Dollar (1,662) (214)
Malaysian Ringgit (1,637) (432)
Mexican Peso (121) (13)
</TABLE>
At any given time, certain customers may account for significant portions of the
Company's business. Hewlett-Packard Company ("HP") accounted for approximately
17% of net sales during the six months ended July 4, 1999. HP and IBM accounted
for 10% and 11% of net sales during the six months ended June 28, 1998,
respectively. No other customer accounted for more than 10% of net sales during
the six months ended July 4, 1999 or June 28, 1998.
The Company's top ten customers accounted for approximately 56% and 50% of net
sales for the six months ended July 4, 1999 and June 28, 1998, respectively. The
percentage of the Company's sales to its major customers may fluctuate from
period to period. Significant reductions in sales to any of these customers
would have 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 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.
In the past, changes in customer orders have had a significant impact on the
Company's results of operations due to corresponding changes in the level of
overhead absorption.
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
fabrication, final assembly, and distribution of printed circuits and finished
products for customers. The Company's acquisitions have enabled the Company to
provide more integrated outsourcing technology solutions with time-to-market and
lower cost advantages. OEM divestitures and acquisitions have also played an
important part in expanding the Company's presence in the global electronics
marketplace.
OEM divestitures and 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 Company 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 integration of certain operations following an acquisition will require the
dedication of management resources that may distract attention from the
day-to-day business of the Company. 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.
15
<PAGE> 16
B. RESULTS OF OPERATIONS
Total net sales for the quarter ended July 4, 1999 increased $58,155 to $280,093
from $221,938 for the comparable period in 1998. This represents a 26% increase
in total net sales, which is lower than the Company's five year compound annual
growth rate of 41%. Total net sales for the six months ended July 4, 1999
increased $70,249 to $527,561 from $457,312 for the comparable period in 1998.
This represents a 15% increase in total net sales, which is lower than the
Company's five year compound annual growth rate of 41%. As further explained
below, the Company believes these lower growth rates are attributable to reduced
orders from certain product lines from some of the Company's major customers, as
well as to divestitures of certain operations.
Net sales from systems assembly and distribution, which represented 65% of net
sales for the quarter ended July 4, 1999, increased $38,693 (27%) to $181,405,
from $142,712 (64% of net sales) for the corresponding period in 1998. Net sales
from systems assembly and distribution, which represented 63% of net sales for
the six months ended July 4, 1999, increased $39,187 (13%) to $332,318, from
$293,131 (64% of net sales) for the corresponding period in 1998. These
increases are primarily the result of the Company's ability to continue to
expand sales to new customers worldwide, and to a lesser extent, expanding sales
to its existing customer base, which offset approximately $14,786 and $23,451 in
reduced orders from some of the Company's major customers for the three and six
month periods ended July 4, 1999, respectively.
Net sales from printed wiring board manufacturing operations, which represented
29% of net sales for the quarter ended July 4, 1999, increased $34,441 (75%) to
$80,564 from $46,123 (21% of net sales) for the comparable period in 1998. Net
sales from printed wiring board manufacturing operations, which represented 29%
of net sales for the six months ended July 4, 1999, increased $55,054 (57%) to
$151,885 from $96,831 (21% of net sales) for the comparable period in 1998.
These increases are attributable to the August 1998 Greatsino acquisition and
the October 1998 purchase of the HP printed wiring board fabrication facility
located in Boeblingen, Germany.
Net sales for the Company's other products and services, which represented 6% of
net sales for the quarter ended July 4, 1999, decreased $14,979 (45%) to $18,124
from $33,103 (15% of net sales) for the comparable period in 1998. Net sales for
the Company's other products and services, which represented 8% of net sales for
the six months ended July 4, 1999, decreased $23,992 (36%) to $43,358 from
$67,350 (15% of net sales) for the comparable period in 1998. Approximately
$10,518 of the decrease for the quarter and $17,515 of the decrease for the six
month period is attributable to the previously described sale of the PTI
business units and the sale of Orbit's 6-inch, 0.6 micron wafer fabrication
facility ("Fab").
Gross profit for the quarter ended July 4, 1999 increased $9,170 to $42,312 from
$33,142 in the comparable period in 1998. Gross profit for the six months ended
July 4, 1999 increased $65,813 to $80,241 from $14,428 in the comparable period
in 1998. Gross margin increased to 15.1% in the quarter ended July 4, 1999 from
14.9% in the comparable period in 1998. The slight improvement in gross margin
is attributable to the increased concentration of sales from the Company's
printed wiring board operations, which generate higher margins than the
Company's other products and service offerings. Gross margin increased to 15.2%
in the six months ended July 4, 1999 from 3.2% in the comparable period in 1998.
The increase in gross margin is primarily attributable to $52,156 of unusual
pre-tax charges during the first quarter of 1998 associated with the exit from
wafer fabrication at Orbit. Excluding unusual charges, gross profit for the six
months ended July 4, 1999 increased $13,657 to $80,241 from $66,584 for the
comparable period in 1998. Excluding unusual charges, gross margin improved to
15.2% for the six months ended July 4, 1999 from 14.6% for the six months ended
June 28,1998. The gross margin increase was primarily the result of (i)
significantly improved margin performance from Dii Semiconductor resulting from
a more focused and efficient business model since divesting of its Fab and (ii)
the change in sales mix resulting from an increase in printed wiring board
revenues, which generate higher margins than the Company's other products and
service offerings.
Selling, general and administrative (SG&A) expense increased $1,302 to $20,686
for the quarter ended July 4, 1999 from $19,384 for the comparable period in
1998. The percentage of SG&A expense to net sales decreased to 7.4% for the
quarter ended July 4, 1999 from 8.7% in the comparable period in 1998. The
increase in absolute dollars was primarily attributable to $2,371 of incremental
SG&A expense associated with the addition of Multek's August 1998 Greatsino
acquisition and October 1998 purchase of the HP printed wiring board fabrication
facility located in Boeblingen, Germany, increased incentive-based stock
compensation in the amount of $529, the recognition of which is based upon
expected achievement of certain earnings per share targets established by the
Compensation Committee of the Board of Directors, combined with the continued
investment in the Company's sales and marketing, finance, and other general and
administrative infrastructure necessary to support the Company's business
expansion offset by a reduction in expenses of approximately $2,755, which is
attributable to the previously described sale of the PTI business units and the
sale of Orbit's 6-inch, 0.6 micron wafer fabrication facility.
16
<PAGE> 17
Selling, general and administrative (SG&A) expense increased $2,236 to $40,796
for the six months ended July 4, 1999 from $38,560 for the comparable period in
1998. The percentage of SG&A expense to net sales decreased to 7.7% for the six
months ended July 4, 1999 from 8.4% in the comparable period in 1998. The
increase in absolute dollars was primarily attributable to $4,220 of incremental
SG&A expense associated with the addition of Multek's August 1998 Greatsino
acquisition and October 1998 purchase of the HP printed wiring board fabrication
facility located in Boeblingen, Germany, increased incentive-based stock
compensation in the amount of $738, the recognition of which is based upon
expected achievement of certain earnings per share targets established by the
Compensation Committee of the Board of Directors, combined with the continued
investment in the Company's sales and marketing, finance, and other general and
administrative infrastructure necessary to support the Company's business
expansion offset by a reduction in expenses of approximately $4,598, which is
attributable to the previously described sale of the PTI business units and the
sale of Orbit's 6-inch, 0.6 micron wafer fabrication facility.
During fiscal 1998, the Company recognized unusual pre-tax charges of $76,636,
substantially all of which related to the operations of the Company's wholly
owned subsidiary, Orbit Semiconductor. The Company decided to sell Orbit's
6-inch, 0.6 micron wafer fabrication facility ("Fab") and adopt a fabless
manufacturing strategy to complement Orbit's design and engineering services.
The charges were primarily due to the impaired recoverability of inventory,
intangible assets and fixed assets, and other costs associated with the exit of
semiconductor manufacturing. The manufacturing facility was sold in January 1999
and the Company has successfully adopted a fabless manufacturing strategy. The
Company recorded $54,000 and $22,636 of the charges in the first and fourth
quarters of fiscal 1998, respectively. As discussed below, $52,156 of the
unusual pre-tax charges had been classified as a component of costs of sales in
the first quarter 1998.
The components of the unusual charge recorded in fiscal 1998 are as follows:
<TABLE>
<CAPTION>
FIRST FOURTH NATURE OF
COMPONENTS OF CHARGE QUARTER QUARTER TOTAL CHARGE
-------------------- ------- ------- ------- ---------
<S> <C> <C> <C> <C>
Severance .............................. $ 498 $ 900 $ 1,398 cash
Long-lived asset impairment ............ 38,257 15,083 53,340 non-cash
Losses on sales contracts .............. 5,500 4,100 9,600 non-cash
Incremental uncollectible accounts
receivable ........................... 900 -- 900 non-cash
Incremental sales returns and allowances 1,500 500 2,000 non-cash
Inventory write-downs .................. 5,500 250 5,750 non-cash
Other exit costs ....................... 1,845 1,803 3,648 cash
------- ------- -------
Total ........................ $54,000 $22,636 $76,636
======= ======= =======
</TABLE>
The following table summarizes the activity related to the charges taken in
connection with the 1998 unusual charges:
<TABLE>
<CAPTION>
LONG-LIVED LOSSES UNCOLLECTIBLE SALES RETURNS INVENTORY
ASSET ON SALES ACCOUNTS AND WRITE- OTHER
SEVERANCE IMPAIRMENT CONTRACTS RECEIVABLE ALLOWANCES DOWNS EXIT COSTS TOTAL
--------- ---------- --------- ------------- ------------ --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December
28, 1997 .......... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Activities during the
year:
1998 provision .... 1,398 53,340 9,600 900 2,000 5,750 3,648 76,636
Cash charges ...... (498) -- -- -- -- -- (465) (963)
Non-cash charges .. -- (53,340) (8,500) (767) (1,500) (5,500) (643) (70,250)
-------- -------- -------- -------- -------- -------- -------- --------
Balance at January 3,
1999 .............. 900 -- 1,100 133 500 250 2,540 5,423
Activities during the
period:
Cash charges ...... (900) -- -- -- -- -- (601) (1,501)
Non-cash charges .. -- -- (1,100) (133) -- (250) -- (1,483)
-------- -------- -------- -------- -------- -------- -------- --------
Balance at April 4,
1999 .............. -- -- -- -- 500 -- 1,939 2,439
Activities during the
period:
Cash charges ...... -- -- -- -- -- -- (584) (584)
Non-cash charges .. -- -- -- -- (500) -- -- (500)
-------- -------- -------- -------- -------- -------- -------- --------
Balance at July 4,
1999 .............. $ -- $ -- $ -- $ -- $ -- $ -- $ 1,355 $ 1,355
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
The unusual pre-tax charges include $53,340 for the write-down of long-lived
assets to fair value. This amount has been classified as a component of cost of
sales. Included in the long-lived asset impairment are charges of $50,739, which
relate to the Fab which was written down to its net realizable value based on
its sales price. The Company kept the Fab in service until the sale date in
January 1999. In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of," the Company
discontinued
17
<PAGE> 18
depreciation expense on the Fab when it determined that it would be disposed of
and its net realizable value was known. The impaired long-lived assets consisted
primarily of machinery and equipment of $52,418, which were written down by
$43,418 to a carrying value of $9,000 and building and improvements of $7,321,
which were written down to a carrying value of zero. The long-lived asset
impairment also includes the write-off of the remaining goodwill related to
Orbit of $601. The remaining $2,000 of asset impairment relates to the
write-down to net realizable value of a facility the Company exited during 1998.
The Company 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 the 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.
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 was characterized by excess capacity, which
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, requiring Orbit to outsource more of its manufacturing
requirements than originally expected. Based upon these continued conditions and
the future outlook, the Company took this first quarter 1998 charge to correctly
size Orbit's asset base to allow its recoverability based upon its then current
business size.
The first quarter 1998 unusual charge included $38,257 for the write-down of
long-lived assets to fair value. The fair value of these assets was based on
estimated market value at the date of the charge. Fair market value was
determined in accordance with SFAS No. 121, and included the use of an
independent valuation. The impairment charge consists of $37,656 related to
property, plant and equipment and $601 related to goodwill. This amount was
classified as a component of cost of sales.
Additionally, the first quarter 1998 unusual charge included $7,900 for losses
on sales contracts, incremental amounts of uncollectible accounts receivable,
and estimated incremental sales returns and allowances, primarily resulting from
the fab changeover quality issues. This amount was classified as a component of
cost of sales.
The first quarter 1998 unusual pre-tax charge also included $7,843 primarily
associated with inventory write-downs. This write-down primarily resulted from
excess inventory created by deciding to downsize operations.
As previously stated, the Company subsequently decided to sell the manufacturing
facility (which occurred in January 1999). This decision resulted in an
additional unusual pre-tax charges in the fourth quarter of 1998 of $22,636.
The exit plan is expected to be completed in the third quarter of 1999. As of
July 4, 1999, the total remaining cash expenditures expected to be incurred are
$1,355 of other exit costs, including legal settlement costs, environmental
clean-up costs and other exit costs. These expenditures will continue to be
funded through operating cash flows of the Company which are expected to be
sufficient to fund these expenditures. These amounts were recorded in accrued
expenses at July 4, 1999.
Interest expense increased $702 to $5,371 for the quarter ended July 4, 1999
from $4,669 for the comparable period in 1998. Interest expense increased $2,465
to $11,853 for the six months ended July 4, 1999 from $9,388 for the comparable
period in 1998. These increases are primarily associated with the increased
borrowings used to fund the business acquisitions, purchases of manufacturing
facilities and strategic investments as described in Note 3 of the condensed
consolidated financial statements. In February 1999, substantially all of the
Company's convertible subordinated notes were converted into approximately
4,600,000 shares of common stock and the unconverted portion was redeemed for
$101.
Interest income decreased $321 to $356 for the quarter ended July 4, 1999 from
$677 for the comparable period in 1998. Interest income decreased $854 to $750
for the six months ended July 4, 1999 from $1,604 for the comparable period in
1998. These decreases are attributable to the decreased earnings generated on
the lower average balances of invested cash and cash equivalents.
Amortization expense increased $213 to $1,307 for the quarter ended July 4, 1999
from $1,094 for the comparable period in 1998. Amortization expense increased
$387 to $2,602 for the six months ended July 4, 1999 from $2,215 for the
comparable period in 1998. This increase is attributable to the amortization of
debt issue costs associated with the increased borrowings as well as
amortization of goodwill associated with acquisitions.
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<PAGE> 19
Other expense (net) increased $645 and $799 for the three and six month periods
ended July 4, 1999, respectively. These increases are primarily the result of
decreased net gains realized on foreign currency transactions combined with
increased provisions for doubtful accounts.
The Company's estimated effective income tax rate differs from the U.S.
statutory rate due to domestic 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,
management's current assessment of the required valuation allowance and the
implementation of several tax planning initiatives resulted in an estimated
effective income tax rate of 15% for the three and six months ended July 4,
1999. The Company's effective income tax rate was 28% for the three and six
months ended June 28, 1998 resulting from the mix of foreign and domestic
earnings, income tax credits, and changes in previously established valuation
allowances for deferred tax assets.
C. BUSINESS COMBINATIONS, ASSET PURCHASES AND STRATEGIC INVESTMENTS
In August 1998, the Company acquired Greatsino Electronic Technology, a printed
wiring 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 $51,795. 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. This
acquisition was accounted for as a purchase with the results of operations from
the acquired business included in the Company's results of operations from the
acquisition date forward. Pro forma results of operations would not be
materially different from the historical results reported. The cost of this
acquisition was allocated on the basis of the estimated fair value of assets
acquired and liabilities assumed. The fair value of the assets acquired,
excluding cash acquired, amounted to $55,699 and liabilities assumed were
$21,801, including estimated acquisition costs. The cost in excess of net assets
acquired amounted to $17,897.
Goodwill associated with this acquisition, as well as previous acquisitions, is
subject to future adjustments from contingent purchase price adjustments for
varying periods, all of which end no later than June 2001. The Company increased
goodwill and notes payable to sellers of businesses acquired in the amount of
$9,500 for contingent purchase price adjustments during the six months ended
July 4, 1999. There were no contingent purchase price adjustments during the six
months ended June 28, 1998.
In October 1998, the Company acquired Hewlett-Packard Company's ("HP") printed
wiring board fabrication facility located in Boeblingen, Germany, and its
related production equipment, inventory and other assets for a purchase price of
approximately $89,900. The purchase price was allocated to the assets acquired
based on the relative fair values of the assets at the date of acquisition.
During the first quarter of fiscal 1999, the Company made two strategic minority
investments amounting to $20,507. First, the Company entered into a joint
venture with Virtual IP Group ("VIP"), a complex integrated circuit design
company with locations in Hyderabad, India and Sunnyvale, California. The
Company acquired a 49% interest in VIP for approximately $5,007. The Company
accounts for its investment in VIP under the equity method.
In March 1999, the Company acquired 15,000 non-voting preferred shares of DVB
(Group) Limited ("DVB"), a wholly-owned subsidiary of Capetronic International
Holdings Limited (Capetronic). The preferred stock accrues a 5% annual dividend
and can be converted into common stock of Capetronic after 15 months and at a
price of HK$4.80 per share. Additionally, at anytime after 15 months, Capetronic
can force conversion if the market price is at least HK$10.00 per share. At a
conversion price of HK$4.80 per share (based on an agreed exchange rate of
US$1.00 equals HK$7.50) the Company would hold approximately 24,219 common
shares of Capetronic, which currently would represent approximately 13% of the
issued common stock of Capetronic after giving effect to the conversion,
excluding the effect of other dilutive instruments which are currently in
existence that, if converted, would reduce the Company's ultimate ownership
percentage. However, under the terms of the agreement, the Company can not hold
more than 10% of the outstanding common stock of Capetronic. If, upon
conversion, the Company holds in excess of 10% of the outstanding common stock
of Capetronic, the Company would be required to divest of shares to reduce its
holdings to 10% or less.
The Company currently accounts for its investment in Capetronic under the cost
method. Once the criteria for conversion are reached, the Company will account
for this investment as an available-for-sale marketable equity security in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
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<PAGE> 20
Through this strategic investment and a related manufacturing agreement, the
Company has obtained the rights to manufacture a majority of DVB's requirements
for set-top boxes to be used for the delivery of video entertainment, data and
educational materials in China.
D. LIQUIDITY, CAPITAL RESOURCES AND COMMITMENTS
At July 4, 1999, the Company had working capital of $70,075 and a current ratio
of 1.3x compared with working capital of $87,310 and a current ratio of 1.4x at
January 3, 1999. Cash and cash equivalents at July 4, 1999 were $35,734, a
decrease of $20,238 from $55,972 at January 3, 1999. This decrease resulted
primarily from cash used by investing and financing activities of $33,619 and
$16,199, respectively, offset by cash provided by operating activities of
$29,687.
Cash provided by operating activities amounted to $29,687 and $42,183 for the
six month periods ended July 4, 1999 and June 28, 1998, respectively. For the
six months ended July 4, 1999, cash provided by operating activities reflects
net income of $21,223 and depreciation and amortization of $19,640 versus a net
loss of $25,920, non-cash unusual charges of $51,657 and depreciation and
amortization of $17,395 in the six months ended June 28, 1998. The increase in
depreciation and amortization of $2,225 is due mainly to the Company's
acquisitions. Cash provided by operating activities for the six month period
ended July 4, 1999 also reflects an increase in accounts payable of $40,911,
offset by increases of $9,331 and $28,195 in accounts receivable and inventory,
respectively. For the six months ended June 28, 1998, cash provided by operating
activities also reflected decreases in accounts receivable of $15,719 and
inventory of $912, offset by a decrease of $13,928 in accrued expenses.
The Company's net cash flows used by investing activities amounted to $33,619
and $29,772 for the six month periods ended July 4, 1999 and June 28, 1998,
respectively. Capital expenditures amounted to $48,291 and $33,572 for the
quarters ended July 4, 1999 and June 28, 1998, respectively. The capital
expenditures represent the Company's continued investment in state-of-the-art,
high-technology equipment, which enables the Company to accept increasingly
complex and higher-volume orders and to meet current and expected production
levels, as well as to replace or upgrade older equipment. The Company received
proceeds of $9,128 and $3,800 from the sale of property, plant and equipment
during the six month periods ended July 4, 1999 and June 28, 1998, respectively.
A significant portion of the proceeds in the six months ended July 4, 1999 was
related to the sale of Dii Semiconductor's wafer fabrication facility in January
1999.
In April 1999, the Company completed the divestiture of IRI International and
Chemtech (U.K.) Limited, manufacturers of surface mount printed circuit board
solder cream stencils. In March 1999, the Company completed the divestiture of
TTI Testron, Inc., its subsidiary that manufactures in-circuit and functional
test hardware and software. The Company received cash proceeds from these sales
amounting to $26,051, net of divestiture costs.
As discussed in C above, during the six months ended July 4, 1999, the Company
made two strategic minority investments amounting to $20,507.
The Company's net cash flows used by financing activities amounted to $16,199
and $17,655 for the six month periods ended July 4, 1999 and June 28, 1998,
respectively. The Company repaid $5,535 and $2,479 in capital lease obligations
in the six months ended July 4, 1999 and June 28, 1998, respectively. The
Company also repaid $16,989 and $2,164 in long-term debt in the six months ended
July 4, 1999 and June 28, 1998, respectively. The Company received $3,426 and
$3,146 in proceeds from stock issued under its stock plans in the six months
ended July 4, 1999 and June 28, 1998, respectively. Additionally, during the six
months ended June 28, 1998, the Company repurchased 850,000 shares of its common
stock at a cost of $16,158.
During the six months of 1999, the Company borrowed an additional $3,000 under
its $110,000 senior secured revolving line-of-credit facility. As of July 4,
1999, there were $40,500 in borrowings outstanding under the Company's $110,000
senior secured revolving line-of-credit facility. This credit facility requires
compliance with certain financial covenants and is secured by substantially all
of the Company's assets. As of July 4, 1999, the Company was in compliance with
all loan covenants.
As of February 18, 1999, substantially all of the Company's convertible
subordinated notes were converted into approximately 4,600,000 shares of common
stock and the unconverted portion was redeemed for $101.
On May 4, 1999, the Company announced that it has signed a memorandum of
understanding with Ericsson Austria AG to purchase Ericsson's manufacturing
facility and related assets located in Kindberg, Austria. Subject to concluding
this transaction, the Company will enter into a long-term supply agreement with
20
<PAGE> 21
Ericsson to provide printed circuit board assembly, box build, and the
associated logistics and distribution activities. The transaction is expected to
be completed during the Company's third fiscal quarter of 1999. Completion of
the transaction is subject to applicable government approvals and various
conditions of closing. The transaction will be accounted for as a purchase of
assets. Subject to final negotiations, due diligence and working capital levels
at the time of closing, the estimated purchase price is approximately $15,000.
Management believes that its current level of working capital, together with
cash generated from operations, existing cash reserves, leasing capabilities,
and line-of-credit availability will be adequate to fund the Company's current
capital expenditure plan for fiscal 1999. 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. There can be no assurance that such funds, if needed, will be
available on terms acceptable to the Company or at all.
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 10 of the condensed consolidated financial statements for a description
of commitments, contingencies and environmental matters.
E. 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 implemented a company-wide program to prepare its financial,
manufacturing, and other critical systems and applications for the Year 2000.
This comprehensive program was developed to ensure the Company's information
technology assets, including embedded microprocessors ("IT assets") and non-IT
assets are Year 2000 ready. The Company has formed a Year 2000 project team of
approximately 75 employees, overseen by a corporate officer, which team is
responsible for monitoring the progress of the program and ensuring timely
completion. The team has a detailed project plan in place with tasks,
milestones, critical paths, and dates identified.
The Company's comprehensive program covers the following six phases: (i)
inventory of all IT and non-IT assets; (ii) assessment of repair requirements;
(iii) repair of IT and non-IT assets; (iv) testing of individual IT and non-IT
assets to determine the correct manipulation of dates and date-related data; (v)
communication 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; and (vi) creation of contingency plans in the
event of Year 2000 failures.
Implementation of the program is ongoing with all of the operating entities
having completed the inventory and assessment phases. 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 mission-critical software and hardware will be
compliant by the third quarter of 1999 for all but two sites, both of which will
be compliant by November 1999. The Company has projected to have completed all
system testing by the close of September 1999, except for one site, which will
be completed in November 1999. Until system testing is completed, the Company
cannot fully estimate the risks of its Year 2000 issue. To date, management has
not identified any IT assets that present a material risk of not being Year
2000-ready, or for which a suitable alternative cannot be implemented. However,
as the program proceeds into subsequent phases, it is possible that the Company
may identify assets that do present a risk of a Year 2000-related disruption. It
is also possible that such a disruption could have a material adverse effect on
financial condition and results of operations.
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<PAGE> 22
The Company is continually contacting suppliers who provide both critical IT
assets and non-information technology related goods and services (e.g.
transportation, packaging, production materials, production supplies, etc.). The
Company mailed surveys to its suppliers in order to (i) evaluate the suppliers'
Year 2000 compliance plans and state of readiness and (ii) determine whether a
Year 2000-related event will impede the ability of such suppliers to continue to
provide such goods and services as the Year 2000 is approached and reached. For
a vast majority of those suppliers of IT assets that have responded, the Company
has received assurances that these assets will correctly manipulate dates and
date-related data as the Year 2000 is approached and reached. The Company is in
the process of reviewing responses for accuracy and adequacy, and sending
follow-up surveys or contacting suppliers directly via phone for those
non-responsive suppliers.
The Company also relies, both domestically and internationally, upon government
agencies, utility companies, telecommunications services, and other service
providers outside of the Company's control. There is no assurance that such
suppliers, governmental agencies, or other third parties will not suffer a Year
2000 business disruption. Such failures could have a material adverse affect on
the Company's financial condition and results of operations.
Further, 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 calls for the development of contingency plans for the Company's
at-risk business functions. The Company is finalizing its Year 2000 contingency
plans for all of its business critical systems worldwide. These plans will
address any business critical failure, both internal and external dependencies,
including but not limited to transportation, banking, telecommunications,
suppliers, manufacturing, accounting and payroll. Because the Company has not
completed testing of mission critical systems, and, accordingly, has not fully
assessed its risks from potential Year 2000 failures, the Company has not yet
developed specific Year 2000 contingency plans. The Company will develop such
plans if the results of testing mission-critical systems identify a business
function 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.
To date, the Company estimates that it has spent approximately $5,900 on
implementation of the program, with the majority of the work being performed by
Company employees. Less than $7,000 has been allocated to address the Year 2000
issue. 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. The Company is
expensing as incurred all costs related to the assessment and remediation of the
Year 2000 issue. These costs are being funded through operating cash flows.
Certain inventory and manufacturing software-related projects were accelerated
to ensure Year 2000 compliance. However, such acceleration did not increase the
anticipated costs of the projects. The Company has not deferred any specific
information technology project as a result of the implementation of the program.
The Company is committed to achieving Year 2000 compliance; however, because a
significant portion of the problem is external to the Company and therefore
outside its direct control, there can be no assurances that the Company will be
fully Year 2000 compliant. If the modifications and conversions required to make
the Company Year 2000-ready are not made, or are not completed on a timely
basis, the resulting problems could have a material impact on the operations of
the Company. This impact could, in turn, have a material adverse effect on the
Company's results of operations and financial condition.
F. NEW ACCOUNTING STANDARDS
In 1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS 133). This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives), and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in its statement of financial position and measure
those instruments at fair value. The accounting for changes in the fair value of
a derivative (that is, gains and losses) are recognized in earnings or in other
comprehensive income each reporting period, depending on the intended use of the
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<PAGE> 23
derivative and the resulting designation. Generally, changes in the fair value
of derivatives not designated as a hedge, as well as changes in fair value of
fair-value designated hedges (and the item being hedged), are required to be
reported in earnings. Changes in fair value of other types of designated hedges
are generally reported in other comprehensive income. The ineffective portion of
a designated hedge, as defined, is reported in earnings immediately.
The Company will be required to adopt SFAS 133 as of January 2, 2001. The
Company has not completed the process of evaluating the impact, if any, that
will result from adopting SFAS 133.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposures are in the areas of interest-rate
risk and foreign currency exchange rate risk. To manage the volatility relating
to these exposures, the Company may enter into various derivative transactions
to hedge the exposures. The Company does not hold or issue any derivative
financial instruments for trading or speculative purposes.
The Company incurs interest expense on loans made under its Credit Agreement at
interest rates that are fixed for a maximum of six months. Borrowings under the
Credit Agreement bear interest, at the Company's option, at either: (i) the
Applicable Base Rate ("ABR") (as defined in the Credit 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 Credit Agreement) plus the Applicable Margin for Eurodollar Loans ranging
between 1.00% and 2.25%, based on certain financial ratios of the Company. The
Eurodollar Rate is subject to market risks and will fluctuate. There has been no
material change in the Eurodollar Rate and the fair value of the Company's fixed
rate debt since January 3, 1999. The Company had no open interest rate hedge
positions to reduce its exposure to changes in interest rates at July 4, 1999.
The Company conducts a significant amount of its business and has a number of
operating facilities in countries outside of the United States. Substantially
all of the Company's business outside the United States is conducted in U.S.
dollar-denominated transactions. Some transactions of the Company and its
subsidiaries are made in currencies different from their functional currencies.
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 non-functional 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. Gains and losses on these
foreign currency hedges are generally offset by corresponding losses and gains
on the underlying transaction. To date, the Company's hedging activity has been
immaterial, and there were no open foreign exchange contracts as of the balance
sheet dates included in the accompanying Consolidated Financial Statements. As
of July 4, 1999, the Company had the following unhedged net foreign currency
monetary asset (liability) positions:
<TABLE>
<CAPTION>
NET NET
FOREIGN U.S. DOLLAR
CURRENCY EQUIVALENT
ASSETS ASSETS
(LIABILITIES) (LIABILITIES)
------------- -------------
<S> <C> <C>
British Pound Sterling (887) $(1,399)
Chinese Renminbi (4,863) (588)
Czech Krown (190) (6)
Euro 1,163 1,193
Hong Kong Dollar (1,662) (214)
Malaysian Ringgit (1,637) (432)
Mexican Peso (121) (13)
</TABLE>
The Company believes that its revenues and operating expenses currently incurred
in foreign currencies are immaterial, and therefore any associated market risk
is unlikely to have a material adverse affect on the Company's business, results
of operations or financial condition.
23
<PAGE> 24
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. Both actions were brought by
the same plaintiffs' law firm as the Orbit action discussed below. In July 1999
the federal court action was dismissed with prejudice. The state court action
purports 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 claims 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 complaint seeks compensatory and other damages, as well as equitable relief.
The Company has filed an answer denying that it misled the securities market. A
May 2000 trial date has been set and discovery has commenced. The Company
believes that the claims asserted in the action are without merit and intends to
defend vigorously against such claims.
A class action complaint (as amended in March 1996 and January 1997) 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 alleged that Orbit and three of its officers
were responsible for actions of securities analysts that allegedly misled the
market for Orbit's then existing public common stock, and sought relief under
Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated
thereunder. The amended complaint sought 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. On May 24, 1999, the
Court approved a class-wide settlement of the case, providing for a settlement
fund of $1.7 million. Orbit's contribution to the settlement fund was $143,000,
and the balance was paid by Orbit's insurance carriers.
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 9 of the 1998 Consolidated Financial Statements included in Part II, Item 8
of the Company's Form 10-K Annual Report for the fiscal year ended January 3,
1999 for contingencies and environmental matters.
ITEM 6(a). EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
15 Letter re: Unaudited Interim Financial Information.
23.1 Report of Independent Accountants - Deloitte & Touche LLP.
27 Financial Data Schedule.
- ----------
ITEM 6(b). REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter for which this report is
filed.
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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: August 18, 1999 By: /s/ Carl R. Vertuca, Jr.
--------------------------------------
Carl R. Vertuca, Jr.
Executive Vice President--Finance,
Administration and Corporate
Development
Date: August 18, 1999 By: /s/ Thomas J. Smach
--------------------------------------
Thomas J. Smach
Chief Financial Officer
25
<PAGE> 26
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
15 Letter re: Unaudited Interim Financial Information.
23.1 Report of Independent Accountants - Deloitte & Touche LLP.
27 Financial Data Schedule.
</TABLE>
26
<PAGE> 1
EXHIBIT 15
August 13, 1999
The DII Group, Inc.
6273 Monarch Park Place
Niwot, Colorado
We have made a review, in accordance with standards established by the American
Institute of Certified Public Accountants, of the unaudited interim financial
information of The DII Group, Inc. and subsidiaries for the periods ended July
4, 1999 and June 28, 1998, as indicated in our report dated August 13, 1999;
because we did not perform an audit, we expressed no opinion on that
information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended July 4, 1999, is
incorporated by reference in Registration Statement Nos. 33-73556, 33-90572,
33-79940, 333-10999, 333-11001, 333-11005, and 333-11007 on Form S-8.
We also are aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
Very truly yours,
DELOITTE & TOUCHE LLP
<PAGE> 1
EXHIBIT 23.1
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 July 4, 1999, and the
related condensed consolidated statements of income and cash flows for the
thirteen weeks and twenty six weeks ended July 4, 1999 and June 28, 1998. 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 January 3, 1999, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the 53 weeks then ended
(not presented herein); and in our report dated January 28, 1999, (February 18,
1999 as to the redemption of convertible subordinate notes described in Note 6),
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 January 3, 1999 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
DELOITTE & TOUCHE LLP
Denver, Colorado
August 13, 1999
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