<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 26, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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THE DII GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 84-1224426
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
6273 MONARCH PARK PLACE
NIWOT, COLORADO 80503
(303) 652-2221
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
THOMAS J. SMACH
CHIEF FINANCIAL OFFICER
THE DII GROUP, INC.
6273 MONARCH PARK PLACE
NIWOT, COLORADO 80503
(303) 652-2221
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
JEFFREY N. OSTRAGER, ESQ. MARC S. ROSENBERG, ESQ.
CURTIS, MALLET-PREVOST, COLT & MOSLE CRAVATH, SWAINE & MOORE
101 PARK AVENUE WORLDWIDE PLAZA
NEW YORK, NEW YORK 10178-0061 825 EIGHTH AVENUE
(212) 696-6000 NEW YORK, NEW YORK 10019-7475
(212) 474-1000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) SHARE(2) PRICE(2) REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.01 par
value(3)....................... 6,900,000 shares $33.6875 $232,443,750 $64,620
- ---------------------------------------------------------------------------------------------------------------------------------
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</TABLE>
(1) Includes 900,000 shares that the underwriters may purchase to cover
over-allotments.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933 based on the
average of the high and low prices reported on the Nasdaq National Market on
May 24, 1999.
(3) Including associated Series A Junior Participating Preferred Stock Purchase
Rights attached thereto.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED MAY 26, 1999
PROSPECTUS
[DII GROUP INC. LOGO]
6,000,000 SHARES
THE DII GROUP, INC.
COMMON STOCK
$ PER SHARE
------------------
We are selling 6,000,000 shares of our common stock. The underwriters named
in this prospectus may purchase up to 900,000 additional shares of our common
stock from us to cover over-allotments.
Our common stock is quoted on the Nasdaq National Market under the symbol
"DIIG." The last reported sale price of our common stock on the Nasdaq National
Market on May 25, 1999 was $32.88 per share.
------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE 7.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
---------- ----------
<S> <C> <C>
Public Offering Price....................................... $ $
Underwriting Discount....................................... $ $
Proceeds to The DII Group, Inc.(before expenses)............ $ $
</TABLE>
The underwriters are offering the shares subject to various conditions. The
underwriters expect to deliver the shares to purchasers on or about
, 1999.
------------------
SALOMON SMITH BARNEY
BANCBOSTON ROBERTSON STEPHENS
DONALDSON, LUFKIN & JENRETTE
BEAR, STEARNS & CO. INC.
THOMAS WEISEL PARTNERS LLC
, 1999
<PAGE> 3
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
DIFFERENT INFORMATION. WE ARE NOT MAKING AN OFFER OF THESE SECURITIES IN ANY
STATE WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE
INFORMATION PROVIDED BY THIS PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN
THE DATE ON THE FRONT OF THIS PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Where You Can Find More Information... 2
Summary............................... 3
Cautionary Statements Regarding
Forward-looking Statements.......... 6
Risk Factors.......................... 7
Price Range of Common Stock and
Dividend Policy..................... 11
Use of Proceeds....................... 12
Capitalization........................ 13
Selected Consolidated Financial
Data................................ 14
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 16
Business.............................. 27
Management............................ 32
Underwriting.......................... 34
Legal Matters......................... 36
Experts............................... 36
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and other reports, proxy statements and other
information with the SEC. You may read and copy any of the documents we file
with the SEC at the SEC's public reference room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information about the public reference room. The SEC maintains an Internet site,
"http://www.sec.gov", that contains reports, proxy and information statements,
and other information regarding companies, including the DII Group, that file
electronically with the SEC.
The SEC allows us to "incorporate by reference" the information we file
with them. This means that we can disclose important information to you
contained in other documents by referring you to those documents. The
information incorporated by reference is considered to be part of this
prospectus, and information we file later with the SEC will automatically update
and supersede this information. We incorporate by reference the documents listed
below and any future filings we make with the SEC under Sections 13(a), 13(c),
14 or 15(d) of the Securities Exchange Act of 1934 until we sell all of these
securities:
- Our Annual Report on Form 10-K for the fiscal year ended January 3, 1999;
- Our Quarterly Report on Form 10-Q for the quarter ended April 4, 1999;
and
- The descriptions of our common stock and the associated Series A Junior
Participating Preferred Stock Purchase Rights contained in our
registration statement on Form 10, as amended.
Information found on our website is not part of this prospectus.
We will provide to each person, including any beneficial owner, to whom a
prospectus is delivered, a copy of any or all of the information that we have
incorporated by reference in this prospectus but have not delivered with this
prospectus. You may request a copy of any of our filings, at no cost, by writing
or calling:
Sharon Sweet
The DII Group, Inc.
6273 Monarch Park Place
Niwot, Colorado 80503
(303) 652-2221
2
<PAGE> 4
SUMMARY
The following summary contains basic information about this offering. This
summary may not contain all of the information that is important to you. You
should carefully read this entire document and the other documents we refer to
for a more complete understanding of this offering. In addition, we incorporate
important business and financial information in this prospectus by reference.
You may obtain the information incorporated by reference in this prospectus
without charge by following the instructions in the "Where You Can Find More
Information" section of this prospectus. Unless otherwise indicated, the
information in this prospectus assumes that the underwriters' over-allotment
option has not been exercised.
OUR COMPANY
We are a leading global provider of electronics design and manufacturing
services (EMS). We offer our products and services to original equipment
manufacturers (OEMs) of electronics products who outsource the design and
manufacture of their products. Like many EMS providers, we design, assemble and
distribute printed circuit boards and completed electronics products. We seek to
differentiate ourselves from our EMS competitors by providing comprehensive and
integrated design and manufacturing services, including semiconductor design and
printed circuit board design and fabrication. This allows us to reduce our
customers' product costs and compress the time from product concept to market
introduction. In addition, through our global network of 19 facilities in North
America, Europe, China and Southeast Asia, we are able to service our customers'
worldwide manufacturing requirements more effectively and at lower costs. We
believe that the combination of these capabilities enables us to become more
integral to our customers' product development and manufacturing strategy and
provides us with a significant competitive advantage.
The EMS industry has grown rapidly over the past several years, as an
increasing number of OEMs have outsourced their design and manufacturing
requirements. According to a leading industry source, the EMS industry has grown
from revenues of $22.3 billion in 1993 to $89.6 billion in 1998, a compound
annual growth rate of 32%. We have capitalized on this industry growth through a
combination of internal expansion and strategic acquisitions. Our total net
sales have increased from $165 million in 1993 to $926 million in 1998, a
compound annual growth rate of 41%. We believe that we are well-positioned to
capitalize on continued growth in the EMS industry.
We provide our customers with three primary product and service offerings:
semiconductor design; printed circuit board design and fabrication; and systems
assembly and distribution. These products and services are provided to more than
300 OEMs, including OEMs in the telecommunications, data communications,
high-end computing and medical devices industries. Our customers include
industry leaders such as 3Com Corporation, EMC Corporation, Hewlett-Packard
Company, IBM, Motorola, and Siemens Medical Systems. Our ten largest customers,
in the aggregate, accounted for 48% of our total net sales in 1998.
Approximately 40% of our total net sales in fiscal 1998 were derived from
customers utilizing two or more of our primary product and service offerings.
We have actively pursued acquisitions to expand our geographic presence,
enhance our product and service offerings, diversify our customer base, increase
our speed to market and increase our volume production capabilities. An
increasing number of OEMs are outsourcing and divesting their manufacturing
operations as an integral part of their manufacturing strategy. We intend to
selectively pursue OEM divestitures and other strategic acquisition
opportunities which we believe will favorably impact our profitability. In 1998,
we completed acquisitions in the Czech Republic, Germany and the People's
Republic of China. In 1998, we also sharpened our focus on our core business and
decided to sell our semiconductor fabrication facility and our non-core
operations.
3
<PAGE> 5
STRATEGY
Our goal is to capitalize on the growth in the electronics outsourcing
industry and to be the fastest and most comprehensive global provider of custom
design and manufacturing services to OEMs. To achieve this objective, we will
continue to implement the following strategies:
- Offer comprehensive and integrated design and manufacturing services
- Reduce our customers' product costs and time-to-market
- Provide worldwide manufacturing capabilities near our customers' end
markets
- Become an integral part of our customers' product development and
manufacturing strategy
- Actively pursue strategic acquisitions
The address of our principal executive offices is 6273 Monarch Park Place,
Niwot, Colorado 80503. Our Internet address is www.diigroup.com. Our telephone
number is (303) 652-2221. We are incorporated in Delaware, and our common stock
is quoted on the Nasdaq National Market under the symbol "DIIG."
THE OFFERING
Common stock we are selling................. 6,000,000 shares
Common stock to be outstanding after the
offering.................................... 35,503,171 shares(1)
Use of proceeds............................. We intend to use the proceeds of
this offering to repay our
outstanding borrowings of $57.5
million under our revolving
credit facility, to fund capital
expenditures and acquisitions,
and for general corporate
purposes.
Nasdaq National Market Symbol............... DIIG
- ------------------------
(1) This figure does not include 3.2 million shares which may be issued
upon the exercise of stock options, of which 1.4 million stock options
are presently exercisable. This figure also does not include 0.6
million shares which may be issued upon the vesting of performance
shares.
4
<PAGE> 6
SUMMARY CONSOLIDATED FINANCIAL DATA
The summary consolidated financial data presented below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," our audited consolidated financial statements and
related notes and our unaudited interim condensed consolidated financial
statements and related notes, all appearing elsewhere in this prospectus. All
amounts in the following tables are in thousands, except per share data.
<TABLE>
<CAPTION>
QUARTER ENDED FISCAL YEAR ENDED
-------------------- ----------------------------------------------------------------------
APRIL 4, MARCH 29, JANUARY 3, DECEMBER 28, DECEMBER 29, DECEMBER 31, DECEMBER 31,
1999 1998 1999 1997 1996 1995 1994
-------- --------- ---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales.............. $247,468 $235,374 $925,543 $779,603 $458,893 $396,978 $258,464
Cost of sales:
Cost of sales........ 209,539 201,932 786,611 647,663 370,610 319,572 213,487
Non-recurring
charges............ -- 52,156 74,182 -- 11,883 -- 5,105
-------- -------- -------- -------- -------- -------- --------
Total cost of
sales............ 209,539 254,088 860,793 647,663 382,493 319,572 218,592
-------- -------- -------- -------- -------- -------- --------
Gross profit
(loss)............. 37,929 (18,714) 64,750 131,940 76,400 77,406 39,872
Selling, general
and administrative
expenses............. 20,110 19,176 77,318 68,783 48,540 38,851 21,717
Non-recurring
charges.............. -- 1,844 2,454 -- 4,649 -- 6,995
Interest expense
(income), net........ 6,088 3,792 18,786 8,917 4,535 2,037 (873)
Amortization of
intangibles.......... 1,295 1,121 4,661 3,968 3,118 2,481 778
Other, net............. (14) (168) 63 607 (115) (180) (341)
-------- -------- -------- -------- -------- -------- --------
Income (loss) from
continuing operations
before income taxes
and extraordinary
item................. $ 10,450 $(44,479) $(38,532) $ 49,665 $ 15,673 $ 34,217 $ 11,596
======== ======== ======== ======== ======== ======== ========
Income (loss) before
extraordinary item... $ 8,883 $(32,047) $(17,032) $ 35,320 $ 10,035 $ 23,654 $ 8,803
======== ======== ======== ======== ======== ======== ========
Earnings (loss) per
common share before
extraordinary item:
Basic................ $ 0.32 $ (1.27) $ (0.68) $ 1.43 $ 0.42 $ 1.05 $ 0.44
Diluted.............. $ 0.31 $ (1.27) $ (0.68) $ 1.26 $ 0.40 $ 0.95 $ 0.41
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF APRIL 4,
APRIL 4, 1999
1999 (AS ADJUSTED)
BALANCE SHEET DATA: -------- -------------
<S> <C> <C>
Cash and cash equivalents................................... $ 42,522 $172,996
Working capital............................................. 94,898 225,372
Total assets................................................ 752,610 883,084
Long-term debt.............................................. 288,557 231,057
Total stockholders' equity.................................. 272,579 460,553
</TABLE>
See footnotes to "Selected Consolidated Financial Data."
5
<PAGE> 7
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
We make statements in this prospectus and in the documents we incorporate
by reference that may be considered "forward-looking statements" within the
"safe harbor" provision of the Private Securities Litigation Reform Act of 1995.
Sometimes these statements will contain words such as "believes," "expects,"
"intends," "anticipates," "estimates," "strategy," "plans," and other similar
words. We have based these statements on our current expectations of future
events. These statements are not guarantees of our future performance and are
subject to risks, uncertainties and other important factors that could cause our
actual results to be materially different from those we project. These risks,
uncertainties and factors include:
- general economic and business conditions
- our dependence on the electronics industry
- our dependence on important customers
- potential changes in demand for our products and services or the products
of our customers
- the risks of delays or cancellations of our customers' orders
- the risks of our manufacturing capacity being underutilized
- the availability of components
- price and product competition
- the risk of failing to keep up with technological change
- our ability to integrate acquisitions
- our ability to manage growth
- risks associated with international operations
- problems related to the Year 2000
- the availability and terms of needed capital
- risks of loss from environmental liabilities
Given these uncertainties, you should not place undue reliance on these
forward-looking statements. We discuss many of these risks in greater detail
under the heading "Risk Factors." Also, these forward-looking statements
represent our estimates and assumptions only as of the date of this prospectus.
You should read this prospectus and the documents that we incorporate by
reference in this prospectus completely and with the understanding that our
actual future results may be materially different from what we expect. We may
not update these forward-looking statements, even though our situation may
change in the future. We qualify all of our forward-looking statements by these
cautionary statements.
6
<PAGE> 8
RISK FACTORS
Before making an investment decision, you should consider carefully the
following risk factors concerning our company and the other information included
or incorporated by reference in this prospectus.
OUR ACQUISITIONS MAY PRESENT DIFFICULTIES FOR US.
We have made three acquisitions in the past twelve months, and we intend to
make additional acquisitions in the future. We are subject to numerous risks as
a result of acquisitions, including the following:
- it may be difficult to integrate the operations we acquire into our
business;
- we may have difficulty managing our existing business due to the need to
integrate acquired operations;
- it may not be possible to retain all the key employees of the operations
we acquire; and
- we may face increased exposure to Year 2000 problems.
We cannot assure you that any of our recent or future acquisitions will be
successful. For example, our 1996 acquisition of Orbit Semiconductor adversely
impacted our operating results and consolidated financial position. We
ultimately sold Orbit's underutilized semiconductor fabrication facility,
resulting in pre-tax non-recurring charges of $76.6 million in fiscal 1998. If
any of our other acquisitions are not successful, it is likely that our
performance will be adversely affected.
WE ARE SUBJECT TO THE DEMANDS AND UNCERTAINTIES OF THE ELECTRONICS INDUSTRY.
Our business depends on the electronics industry, which is subject to rapid
technological change, short product life cycles and pricing and margin pressure.
When these factors adversely affect our customers, we may suffer similar
effects. In addition, the electronics industry has historically been cyclical
and subject to significant economic downturns characterized by diminished
product demand, rapid declines in average selling prices and over-capacity. For
example, the economic downturn in Asia in 1998 had a negative effect on the
prices of electronics products. The economic conditions affecting the
electronics industry, in general, or any of our major customers, in particular,
may adversely affect our operating results.
OUR PERFORMANCE DEPENDS ON THE BUSINESS OF OUR MAJOR CUSTOMERS.
We depend on a small number of customers for a significant portion of our
business. The following table sets forth the percentages of our total net sales
to customers who accounted for 10% or more of our total net sales and the
percentage of our total net sales to our ten largest customers in each period
presented:
<TABLE>
<CAPTION>
FISCAL YEAR
QUARTER ENDED ------------
APRIL 4, 1999 1998 1997
------------- ---- ----
<S> <C> <C> <C>
Hewlett-Packard Company.................................. 16% 10% 17%
IBM...................................................... 10% 10% N/A
Mylex Corporation........................................ 11% N/A N/A
Ten largest customers as a group......................... 58% 48% 50%
</TABLE>
We expect to continue to depend on sales to our major customers. If a major
customer significantly reduced the amount of business it does with us there
would be a material adverse impact on our operating results. In addition, we
usually do not obtain firm long-term commitments or volume guarantees from our
customers. As a result, our customers may cancel, delay or reduce orders without
penalty. Since it is not always possible to replace lost business on a timely
basis, it is likely that our operating results would be materially adversely
affected if our customers were to cancel, delay or reduce significant amounts of
business in the future. In the past, changes in our customers' orders have had a
significant impact on our operating results.
7
<PAGE> 9
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY.
Our quarterly results of operations may vary significantly for a variety of
reasons, including the following:
- economic conditions in the markets we serve
- price and product competition
- the timing and volume of our customers' orders
- changes in the mix of products we sell
- the levels at which we utilize our manufacturing capacity
- our level of experience in manufacturing a particular product
- difficulties we may face integrating acquired operations
- costs associated with adding new geographical locations
- shortages of components or experienced labor
- foreign currency exposure
Each of these factors has had in the past, and may have in the future, an
adverse effect on our operating results. Additionally, as is the case with many
technology companies, we typically ship a significant portion of our products in
the last few weeks of a quarter. As a result, our operating results may vary
significantly from one quarter to the next.
WE DEPEND ON OUR SUPPLIERS AND UPON THE AVAILABILITY OF COMPONENTS.
We order raw materials and components to complete our customers' purchase
orders. Although we work with our customers and suppliers to minimize the impact
of shortages in materials, we sometimes experience short-term adverse effects
due to price fluctuations and delayed shipments. In the past, industry-wide
shortages of electronic components, particularly of memory and logic devices,
have occurred. If a significant shortage of raw materials or components were to
occur, our operating results would be materially adversely affected. We also
depend on a small number of suppliers for many of the raw materials and
components that we use in our business. If we were unable to continue to
purchase these raw materials and components from our suppliers, our operating
results would be materially adversely affected.
OUR BUSINESS REQUIRES SUBSTANTIAL CAPITAL.
We have made and will continue to make substantial capital expenditures to
expand our operations and remain competitive in the rapidly changing electronics
industry. Our capital expenditures were approximately $153.9 million in fiscal
1998, $121.3 million in fiscal 1997, and $33.3 million in fiscal 1996. We expect
that we will make capital expenditures of approximately $80 million to $90
million in fiscal 1999, not including possible purchases of manufacturing assets
from OEMs. In May 1999, we entered into a memorandum of understanding with
Ericsson Austria AG to purchase Ericsson's manufacturing assets in Kindberg,
Austria for an estimated purchase price of approximately $20 million. There can
be no assurance that we will consummate this acquisition.
In addition, we have made and will continue to make strategic business
acquisitions. We spent approximately $53.9 million for business acquisitions in
fiscal 1998, $7.9 million in fiscal 1997 and $2.1 million in fiscal 1996. In
1999, we have made two strategic minority investments aggregating $20.5 million.
We intend to finance our capital expenditures and business acquisitions with the
proceeds from this offering, borrowings under our credit facility, funds
provided by our business, our existing cash reserves and leasing capabilities.
We may seek additional equity or debt financing if the funds available from
these sources are not adequate to satisfy our capital requirements. It is
possible that we will not be able to obtain sufficient financing to enable us to
finance all of our growth and acquisition plans. Also, it is possible that
financing may not be available on acceptable terms.
OUR RECENT DIVESTITURES MAY HAVE A NEGATIVE IMPACT ON OUR OPERATING RESULTS.
In 1998, we decided to sell our non-core operations involved in the
production of equipment and tooling used in the printed circuit board assembly
process. In March and April 1999, we sold two of these operations
8
<PAGE> 10
and, in April 1999, we entered into a letter of intent to sell the remaining
non-core operations. We anticipate that our operating results will be adversely
affected by approximately a 7% reduction in total net sales and net income until
we reinvest the proceeds from these divestitures into our core business.
WE FACE SIGNIFICANT COMPETITION.
We operate in a highly competitive industry. We compete against many
domestic and foreign companies, some of which have substantially greater
manufacturing, financial, research and development, and marketing resources than
we have. Since we design and fabricate printed circuit boards, some of our EMS
competitors are also our customers. As we continue to expand our operations,
some of our competitors may decide to place orders with companies with which
they are in less direct competition.
WE MUST MAINTAIN OUR TECHNOLOGICAL AND MANUFACTURING PROCESS EXPERTISE.
The market for our manufacturing services is characterized by rapidly
changing technology and continuing process development. We are continually
evaluating the advantages and feasibility of new manufacturing processes. We
believe that our future success will depend upon our ability to develop and
provide manufacturing services which meet our customers' changing needs. This
requires that we maintain technological leadership and successfully anticipate
or respond to technological changes in manufacturing processes on a
cost-effective and timely basis. We cannot assure you that our process
development efforts will be successful.
OPERATING IN FOREIGN COUNTRIES EXPOSES US TO INCREASED RISK.
Our operations outside of the United States generated 43% of our total net
sales in fiscal 1998, 42% of our total net sales in fiscal 1997 and 25% of our
total net sales in fiscal 1996. We expect that the percentage of our net sales
generated by our non-U.S. operations will increase significantly as a result of
our recent and future acquisitions outside the United States. Recently, we
acquired operations in Germany, the People's Republic of China and the Czech
Republic, and we have continued to increase our investment in foreign
operations. Our international operations expose us to the following risks of
doing business abroad:
- economic and political conditions in each country
- managing and staffing operations spread over various countries
- greater difficulty in accounts receivable collection
- export duties
- tariffs and other trade barriers
- currency fluctuations and exchange controls
- unexpected changes in foreign regulations
- burdens of complying with a wide variety of foreign laws
WE MAY SUFFER YEAR 2000-RELATED FAILURES.
Many software applications, embedded computer chips and computer equipment
have been designed to determine the year based upon only the last two digits.
Upon the turn of the millennium, these systems may mistake the year 2000 for the
year 1900, resulting in miscalculations and potentially catastrophic systems
failures.
We cannot be certain that our efforts to address the Year 2000 issue will
be appropriate, adequate or complete. We also depend upon third-party software
and services. If third parties, including material vendors and suppliers, fail
to adequately address their Year 2000 issues, or if their remediation results in
system incompatibilities, our production, shipment and financial operations
would be materially impaired.
9
<PAGE> 11
OUR STOCK PRICE MAY BE VOLATILE.
Our common stock has experienced significant price volatility, and this
volatility may continue in the future. The market price for our common stock may
be affected by a number of factors, including quarterly variations in our
results of operations, changes in earnings estimates or recommendations by
securities analysts, developments in our industry, sales of substantial numbers
of shares of our common stock in the public market, general market conditions
and other factors, including factors unrelated to our operating performance.
These factors and fluctuations, as well as general economic, political and
market conditions, such as recessions, may materially adversely affect the
market price of our common stock.
WE ARE SUBJECT TO A VARIETY OF ENVIRONMENTAL LAWS.
We are subject to various federal, state, local and foreign environmental
laws and regulations, including those governing the use, discharge and disposal
of hazardous substances in the ordinary course of our manufacturing process.
Although we believe that our current manufacturing operations comply in all
material respects with applicable environmental laws and regulations,
environmental legislation has been enacted and may in the future be enacted or
interpreted to create environmental liability with respect to our facilities or
operations. In addition, we are responsible for cleanup of contamination at some
of our current and former manufacturing facilities. If more stringent compliance
or cleanup standards under environmental laws or regulations are imposed, or the
results of our future testing and analyses at our operating facilities indicate
that we are responsible for the release of hazardous substances, we may be
subject to additional remediation liability. Further, there can be no assurance
that additional environmental matters will not arise in the future at sites
where no problem is currently known or at sites that we may acquire in the
future.
PROVISIONS IN OUR CHARTER DOCUMENTS AND STATE LAW MAY MAKE IT DIFFICULT FOR
OTHERS TO OBTAIN CONTROL OF THE DII GROUP, EVEN THOUGH SOME STOCKHOLDERS MAY
CONSIDER IT TO BE BENEFICIAL.
Our shareholder rights plan, specific provisions of our Certificate of
Incorporation and the Delaware General Corporation Law may delay, inhibit or
prevent someone from gaining control of us through a tender offer, business
combination, proxy contest or some other method. These provisions include:
- a "poison pill" shareholder rights plan;
- authority given to our Board of Directors to issue preferred stock and to
determine the price, rights, preferences, privileges and restrictions of
those shares without any further stockholder vote;
- anti-takeover provisions of the Delaware General Corporation Law; and
- provisions of our Certificate of Incorporation and by-laws.
10
<PAGE> 12
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock is quoted on the Nasdaq National Market under the symbol
"DIIG." The following table sets forth the high and low per share sale prices of
our common stock as reported by the Nasdaq National Market for the periods
indicated. The prices set forth in the table have been adjusted to reflect the
two-for-one stock split effective September 2, 1997.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1997
First quarter............................................. $14.75 $10.19
Second quarter............................................ 22.13 11.09
Third quarter............................................. 32.78 21.00
Fourth quarter............................................ 33.50 18.00
1998
First quarter............................................. 29.88 20.13
Second quarter............................................ 23.81 14.38
Third quarter............................................. 18.75 11.88
Fourth quarter............................................ 24.13 9.88
1999
First quarter............................................. 30.44 21.75
Second quarter (through May 25, 1999)..................... 38.00 23.88
</TABLE>
On May 25, 1999, the closing price per share of our common stock was
$32.88.
We have not paid any cash dividends on our common stock in the past and are
restricted from paying dividends under the terms of our existing credit
facility. For more information about the terms of our credit facility, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our audited consolidated financial statements and related notes.
We presently intend to retain earnings for use in our business and do not
anticipate paying cash dividends in the foreseeable future.
11
<PAGE> 13
USE OF PROCEEDS
We estimate that we will receive net proceeds from the sale of our common
stock of approximately $188.0 million, or approximately $216.2 million if the
underwriters exercise their over-allotment option in full. This estimate
reflects an assumed offering price of $32.88 per share and deductions for
underwriting discounts and commissions and other estimated fees and expenses we
will pay. We intend to use a portion of the proceeds to repay outstanding
borrowings under our revolving credit facility which matures November 1, 2003.
As of April 4, 1999, we had $57.5 million of outstanding borrowings under this
facility and the effective interest rate was 7.24%. We borrowed these funds
partly to fund our acquisition in China in 1998 and to finance two strategic
minority investments that we made in the first quarter of 1999. We will not
reduce the commitment level under our revolving credit facility.
We intend to use the remaining proceeds to fund capital expenditures and
acquisitions, and for general corporate purposes. We will have substantial
discretion in utilizing these remaining proceeds. We are currently considering a
number of acquisitions, but we have not yet entered into any definitive
agreements. We also expect additional acquisition opportunities to arise. On May
4, 1999, we entered into a memorandum of understanding with Ericsson Austria AG
to purchase Ericsson's manufacturing facility and related assets in Kindberg,
Austria for an estimated purchase price of approximately $20 million, subject to
working capital levels at the time of closing. As part of this acquisition, we
would enter into a long-term supply agreement with Ericsson to manufacture
equipment used in the business phone market. This acquisition is subject to
negotiation of a definitive agreement and customary closing conditions, and we
cannot assure you that we will complete this acquisition. Other acquisitions
will be subject to various contingencies, including the results of negotiations
with third parties, obtaining required governmental approvals, and obtaining
required stockholder or board approvals.
Pending these uses, we intend to invest the proceeds not used to repay debt
in short-term, interest-bearing investments, or bank deposits.
12
<PAGE> 14
CAPITALIZATION
The following table sets forth our capitalization as of April 4, 1999, and
as adjusted to give effect to our sale of 6,000,000 shares of common stock and
the application of the net proceeds as described in "Use of Proceeds." The table
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," our audited consolidated
financial statements and related notes and our unaudited interim condensed
consolidated financial statements and related notes, all appearing elsewhere in
this prospectus.
<TABLE>
<CAPTION>
AS OF APRIL 4, 1999
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents:.................................. $ 42,522 $172,996
======== ========
Total debt:
Senior subordinated notes................................. 150,000 150,000
Bank term loan............................................ 96,000 96,000
Line-of-credit............................................ 57,500 --
Capital lease obligations and other....................... 4,191 4,191
Notes payable to sellers of businesses acquired........... 6,373 6,373
-------- --------
Total debt........................................ 314,064 256,564
-------- --------
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; 30,930,260 and 36,930,260 shares issued;
29,283,260 and 35,283,260 shares outstanding........... 309 369
Additional paid-in capital................................ 211,367 399,281
Retained earnings......................................... 101,954 101,954
Treasury stock, at cost: 1,647,000 shares................. (28,544) (28,544)
Accumulated other comprehensive loss...................... (4,254) (4,254)
Deferred compensation..................................... (8,253) (8,253)
-------- --------
Total stockholders' equity........................ 272,579 460,553
-------- --------
Total capitalization........................................ $586,643 $717,117
======== ========
</TABLE>
13
<PAGE> 15
SELECTED CONSOLIDATED FINANCIAL DATA
The following information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," our
audited consolidated financial statements and related notes and our unaudited
interim condensed consolidated financial statements and related notes, all
appearing elsewhere in this prospectus. All amounts in the following tables are
in thousands except per share data.
<TABLE>
<CAPTION>
QUARTER ENDED FISCAL YEAR ENDED
-------------------- ----------------------------------------------------------------------
APRIL 4, MARCH 29, JANUARY 3, DECEMBER 28, DECEMBER 29, DECEMBER 31, DECEMBER 31,
1999 1998(3) 1999(3) 1997 1996(4) 1995(5) 1994(6)
-------- --------- ---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (1):
Net sales:
Systems assembly and
distribution.................. $150,913 $150,419 $589,286 $514,078 $274,651 $252,175 $179,662
Printed circuit boards.......... 71,321 50,708 208,696 128,107 72,851 56,425 15,635
Other........................... 25,234 34,247 127,561 137,418 111,391 88,378 63,167
-------- -------- -------- -------- -------- -------- --------
Total net sales.......... 247,468 235,374 925,543 779,603 458,893 396,978 258,464
Cost of sales:
Cost of sales................... 209,539 201,932 786,611 647,663 370,610 319,572 213,487
Non-recurring charges........... -- 52,156 74,182 -- 11,883 -- 5,105
-------- -------- -------- -------- -------- -------- --------
Total cost of sales...... 209,539 254,088 860,793 647,663 382,493 319,572 218,592
-------- -------- -------- -------- -------- -------- --------
Gross profit (loss)............. 37,929 (18,714) 64,750 131,940 76,400 77,406 39,872
Selling, general and
administrative expenses......... 20,110 19,176 77,318 68,783 48,540 38,851 21,717
Non-recurring charges............. -- 1,844 2,454 -- 4,649 -- 6,995
Interest income................... (394) (927) (2,894) (1,744) (1,732) (1,812) (1,813)
Interest expense.................. 6,482 4,719 21,680 10,661 6,267 3,849 940
Amortization of intangibles....... 1,295 1,121 4,661 3,968 3,118 2,481 778
Other, net........................ (14) (168) 63 607 (115) (180) (341)
-------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations before income taxes
and extraordinary item.......... $ 10,450 $(44,479) $(38,532) $ 49,665 $ 15,673 $ 34,217 $ 11,596
======== ======== ======== ======== ======== ======== ========
Income (loss) before extraordinary
item............................ $ 8,883 $(32,047) $(17,032) $ 35,320 $ 10,035 $ 23,654 $ 8,803
======== ======== ======== ======== ======== ======== ========
Earnings (loss) per common share
before extraordinary item(2):
Basic........................... $ 0.32 $ (1.27) $ (0.68) $ 1.43 $ 0.42 $ 1.05 $ 0.44
Diluted......................... $ 0.31 $ (1.27) $ (0.68) $ 1.26 $ 0.40 $ 0.95 $ 0.41
Weighted average number of common
shares and equivalents
outstanding(2):
Basic........................... 27,352 25,303 24,888 24,719 23,678 22,544 19,992
Diluted......................... 30,477 25,303 24,888 30,702 25,074 25,628 21,706
CASH DIVIDENDS DECLARED........... $ -- $ -- $ -- $ -- $ -- $ -- $ --
</TABLE>
14
<PAGE> 16
<TABLE>
<CAPTION>
APRIL 4, JANUARY 3, DECEMBER 28, DECEMBER 29, DECEMBER 31, DECEMBER 31,
1999 1999 1997 1996 1995 1994
-------- ---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (1):
Cash and cash equivalents................... $ 42,522 $ 55,972 $ 85,067 $ 25,010 $ 55,533 $ 15,161
Total assets................................ 752,610 747,309 592,729 335,851 327,311 211,460
Convertible subordinated notes (2).......... -- 86,235 86,250 86,250 86,250 --
Long-term debt, excluding convertible
subordinated notes........................ 288,557 273,684 156,545 12,938 9,401 31,872
Total stockholders' equity (2).............. 272,579 175,721 207,348 159,037 145,549 118,452
</TABLE>
- ---------------
(1) For information regarding business combinations, asset purchases and
strategic investments, see Notes 2 and 4 of our audited consolidated
financial statements and Note 3 of our unaudited interim condensed
consolidated financial statements.
(2) As of February 18, 1999, we converted substantially all of our convertible
subordinated notes into approximately 4.6 million shares of common stock and
redeemed the unconverted portion for $0.1 million.
(3) We recorded non-recurring pre-tax charges of $76.6 million in fiscal 1998,
of which $54.0 million was recognized during the quarter ended March 29,
1998. The charges were primarily due to the impaired recoverability of fixed
assets, intangible assets, inventory and accounts receivable, and other
costs associated with the decision to sell Orbit's 6-inch, 0.6 micron
semiconductor facility and exiting semiconductor manufacturing. We completed
the sale of the manufacturing facility in January 1999.
(4) We recorded a non-recurring pre-tax charge of $16.5 million in fiscal 1996.
This non-recurring charge included $4.6 million of costs associated with the
Orbit merger and $11.9 million of costs associated with the closing and sale
of Orbit's 4-inch, 1.2 micron wafer fabrication facility.
(5) We recorded an extraordinary loss of $0.7 million, net of tax, in fiscal
1995. This extraordinary loss was related to the early extinguishment of
debt.
(6) We recorded a non-recurring pre-tax charge of $12.1 million in fiscal 1994.
This non-recurring charge was primarily associated with the write-down of
inventory and receivables to their net realizable value relating to two
under-capitalized start-up customers.
15
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read together with the "Selected
Consolidated Financial Data," our audited consolidated financial statements and
related notes and our unaudited interim condensed consolidated financial
statements and related notes, all appearing elsewhere in this prospectus. For a
discussion of factors that may affect our operating results, please see "Risk
Factors."
Our fiscal year consists of either a 52-week or 53-week period ending on
the Sunday nearest to December 31. Accordingly, our audited consolidated
financial statements are presented as of January 3, 1999 and December 28, 1997,
and for the 53 weeks ended January 3, 1999 and 52 weeks ended December 28, 1997
and December 29, 1996. Our unaudited interim condensed consolidated financial
statements are presented as of and for the quarters ended April 4, 1999 and
March 29, 1998, both of which are 13-week periods.
RECENT ACQUISITIONS AND DIVESTITURES
In August 1998, we acquired Greatsino Electronic Technology, a printed
circuit board fabricator and provider of systems assembly and distribution with
operations in the People's Republic of China. The cash purchase price, net of
cash acquired, amounted to $51.8 million. The initial purchase price is subject
to adjustment for contingent consideration of no more than approximately $40.0
million based upon the business achieving specified levels of earnings through
August 31, 1999. In October 1998, we acquired Hewlett-Packard's printed circuit
board fabrication facility located in Boeblingen, Germany, and its related
production equipment, inventory and other assets for a purchase price of
approximately $89.9 million.
During the first quarter of fiscal 1999, we made two strategic minority
investments amounting to $20.5 million. For $5.0 million, we acquired a 49%
interest in Virtual IP Group (VIP), a complex integrated circuit design company
with locations in Hyderabad, India and Sunnyvale, California. We also acquired a
minority interest in DVB (Holdings) Limited, an affiliate of Capetronic
International Holdings Limited, a Hong Kong publicly-traded company, through the
purchase of preferred stock of DVB for approximately $15.5 million. The
preferred stock is convertible into common stock of Capetronic beginning in June
2000 at the market price of Capetronic common stock at the time of conversion,
provided that we may not convert our preferred stock into Capetronic common
stock at a price per share lower than $4.80 Hong Kong (HK). In addition,
beginning in June 2000, Capetronic may require us to convert our preferred stock
into Capetronic common stock at the market price of Capetronic common stock if
the market price is equal to or greater than $10.00 HK per share. Through this
strategic investment and a related manufacturing agreement, we have 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.
In May 1999, we entered into a memorandum of understanding with Ericsson
Austria AG to purchase Ericsson's manufacturing facility and related assets
located in Kindberg, Austria for an estimated purchase price of approximately
$20 million. If we consummate this transaction, we will enter into a long-term
supply agreement to provide printed circuit board assembly, systems assembly and
distribution services for Ericsson.
In 1998, we sharpened our focus on our core business and decided to sell
certain non-core operations involved in the production of equipment and tooling
used in the printed circuit board assembly process. In March and April 1999, we
sold two of these operations and, in April 1999, we entered into a letter of
intent to sell the remaining operations. We do not believe that any of these
sales will have an adverse impact on our financial position. We anticipate that
our operating results will be adversely affected by approximately a 7% reduction
in total net sales and net income until we reinvest the proceeds from these
divestitures into our core business.
In January 1999, we completed the sale of Orbit's semiconductor fabrication
facility.
16
<PAGE> 18
RESULTS OF OPERATIONS
The following table presents the percentage relationship that certain items
in our consolidated statements of operations bear to total net sales for the
periods indicated:
<TABLE>
<CAPTION>
QUARTER ENDED FISCAL YEAR ENDED
-------------------- ----------------------------------------
APRIL 4, MARCH 29, JANUARY 3, DECEMBER 28, DECEMBER 29,
1999 1998 1999 1997 1996
-------- --------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
NET SALES:
Systems assembly and distribution.... 61.0% 63.9% 63.7% 66.0% 59.8%
Printed circuit boards............... 28.8 21.5 22.5 16.4 15.9
Other................................ 10.2 14.6 13.8 17.6 24.3
-------- -------- -------- -------- --------
Total net sales............ 100.0 100.0 100.0 100.0 100.0
COST OF SALES:
Cost of sales........................ 84.7 85.8 85.0 83.1 80.8
Non-recurring charges................ -- 22.2 8.0 -- 2.6
-------- -------- -------- -------- --------
Total cost of sales........ 84.7 108.0 93.0 83.1 83.4
-------- -------- -------- -------- --------
Gross profit......................... 15.3 (8.0) 7.0 16.9 16.6
Selling, general and administrative
expenses........................... 8.1 8.1 8.4 8.8 10.6
Non-recurring charges................ -- 0.8 0.3 -- 1.0
Interest income...................... (0.1) (0.4) (0.3) (0.2) (0.4)
Interest expense..................... 2.6 2.0 2.3 1.3 1.3
Amortization expense................. 0.5 0.5 0.5 0.5 0.7
Other, net........................... -- (0.1) -- 0.1 --
-------- -------- -------- -------- --------
11.1 10.9 11.2 10.5 13.2
-------- -------- -------- -------- --------
Income (loss) before income taxes.... 4.2 (18.9) (4.2) 6.4 3.4
Income tax expense (benefit)......... 0.6 (5.3) (2.4) 1.8 1.2
-------- -------- -------- -------- --------
Net income (loss).................... 3.6% (13.6)% (1.8)% 4.6% 2.2%
======== ======== ======== ======== ========
</TABLE>
Quarter Ended April 4, 1999 Compared with Quarter Ended March 29, 1998
NET SALES. Our total net sales for the quarter ended April 4, 1999
increased $12.1 million to $247.5 million from $235.4 million for the
corresponding period in 1998. This represents a 5% increase in total net sales,
which is lower than our five-year compound annual growth rate of 41%. As further
explained below, we believe this lower growth rate is attributable to reduced
orders for certain product lines from some of our major customers, as well as to
divestitures of certain operations.
Our net sales from systems assembly and distribution for the quarter ended
April 4, 1999 increased $0.5 million to $150.9 million, or 61% of net sales,
from $150.4 million, or 64% of net sales, for the corresponding period in 1998.
The slight increase in net sales is the result of expanded sales to our existing
customer base as well as sales to new customers, which offset reduced orders for
certain product lines from some of our major customers.
Our net sales from printed circuit board manufacturing operations for the
quarter ended April 4, 1999 increased $20.6 million to $71.3 million, or 29% of
net sales, from $50.7 million, or 22% of net sales, for the corresponding period
in 1998. This represents a 41% increase. This increase is primarily attributable
to the August 1998 acquisition of Greatsino Electronic Technology and the
October 1998 purchase of the Hewlett-Packard printed circuit board fabrication
facility located in Boeblingen, Germany.
Our net sales from our other products and services for the quarter ended
April 4, 1999 decreased $9.0 million to $25.2 million, or 10% of net sales, from
$34.2 million, or 14% of net sales, for the corresponding
17
<PAGE> 19
period in 1998. This represents a 26% decrease. This decrease is primarily
attributable to the sale of one of our non-core operations and the sale of
Orbit's 6-inch, 0.6 micron semiconductor fabrication facility, both of which
occurred during the first quarter of fiscal 1999.
GROSS PROFIT. Excluding non-recurring charges, our gross profit for the
quarter ended April 4, 1999 increased $4.5 million to $37.9 million from $33.4
million for the corresponding period in 1998. Excluding non-recurring charges,
gross margin improved to 15.3% for the quarter ended April 4, 1999 as compared
with gross margin of 14.2% for the quarter ended March 29, 1998. The gross
margin increase was primarily the result of significantly improved margin
performance from our design and semiconductor services since divesting Orbit's
semiconductor fabrication facility, and the change in our sales mix resulting
from an increase in printed circuit board revenues, which generate higher
margins than our systems assembly and distribution operations, whose revenues
remained relatively flat.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Our selling, general and
administrative expenses increased $0.9 million to $20.1 million for the quarter
ended April 4, 1999 from $19.2 million for the corresponding period in 1998. The
percentage of SG&A expenses to net sales remained unchanged at 8.1% for both the
quarter ended April 4, 1999 and the quarter ended March 29, 1998. The slight
increase in absolute dollars was primarily attributable to our August 1998
acquisition of Greatsino and the October 1998 purchase of the Hewlett-Packard
printed circuit board fabrication facility located in Boeblingen, Germany,
combined with the continued investment in our sales and marketing, finance, and
other general and administrative infrastructure necessary to support our
business expansion.
NON-RECURRING CHARGES. During fiscal 1998, we recognized non-recurring
pre-tax charges of $76.6 million, of which $54.0 million was recognized during
the quarter ended March 29, 1998, substantially all of which related to the
operations of our wholly-owned subsidiary, Orbit Semiconductor. We ultimately
decided to sell Orbit's 6-inch, 0.6 micron semiconductor fabrication facility
and outsource our semiconductor manufacturing 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 exiting semiconductor manufacturing. We completed the sale of
the manufacturing facility in January 1999.
The non-recurring pre-tax charges recognized in March 1998 consisted of:
- $38.3 million associated with the write-down of long-lived assets to fair
value;
- $7.9 million for losses on sales contracts, incremental amounts of
uncollectible accounts receivable, and estimated incremental costs for
sales returns and allowances;
- $5.5 million for losses associated with inventory write-downs; and
- $2.3 million of employee termination costs and costs related to the
exiting of semiconductor manufacturing.
See Note 7 of our audited consolidated financial statements and Note 7 of our
unaudited interim condensed consolidated financial statements for more
information regarding our non-recurring pre-tax charges.
INTEREST EXPENSE. Our interest expense increased $1.8 million to $6.5
million for the quarter ended April 4, 1999 from $4.7 million for the
corresponding period in 1998. This increase is primarily associated with the
increased borrowings used to fund our acquisitions and strategic investments. In
February 1999, we converted substantially all of our convertible subordinated
notes into approximately 4.6 million shares of common stock and we redeemed the
unconverted portion for $0.1 million.
INTEREST INCOME. Our interest income decreased $0.5 million to $0.4
million for the quarter ended April 4, 1999, from $0.9 million for the
corresponding period in 1998. This decrease is attributable to lower average
balances of invested cash and cash equivalents.
AMORTIZATION EXPENSE. Our amortization expense increased $0.2 million to
$1.3 million for the quarter ended April 4, 1999, from $1.1 million for the
corresponding period in 1998. This increase is attributable to the amortization
of debt issue costs associated with our increased borrowings as well as
amortization of goodwill associated with acquisitions.
18
<PAGE> 20
OTHER INCOME AND EXPENSES. Our net other income decreased $0.2 million for
the quarter ended April 4, 1999 from $0.2 million for the corresponding period
in 1998, due primarily to decreased net gains realized on foreign currency
transactions.
Fiscal 1998 Compared with Fiscal 1997
NET SALES. Our total net sales in fiscal 1998 increased $145.9 million to
$925.5 million from $779.6 million in fiscal 1997. This represents a 19%
increase, which is substantially lower than our five-year compound annual growth
rate of 41%. We believe that this lower growth rate is partially attributable to
the electronics industry's downturn in fiscal 1998, as evidenced by diminished
product demand, declines in average selling prices, and overcapacity, all of
which reduced our customers' growth rates.
Our net sales from systems assembly and distribution in fiscal 1998
increased $75.2 million to $589.3 million, or 64% of net sales, from $514.1
million, or 66% of net sales, in fiscal 1997. This represents a 15% increase.
This increase is primarily the result of increases in sales volume to existing
and new customers, partially offset by reduced orders of certain product lines
from some of our major customers. The sales growth is also attributable, to a
lesser extent, to our acquisitions.
Our net sales from printed circuit board design and manufacturing
operations in fiscal 1998 increased $80.6 million to $208.7 million, or 23% of
net sales, from $128.1 million, or 16% of net sales, in fiscal 1997. This
represents a 63% increase. This sales growth is primarily attributable to our
acquisitions. This increase is also attributable to increases in sales to both
existing and new customers, offset by reduced orders of certain product lines
from some of our major customers in the semiconductor test equipment industry.
Net sales from our other products and services in fiscal 1998 decreased
$9.9 million to $127.5 million, or 13% of net sales, from $137.4 million, or 18%
of net sales, in fiscal 1997. This represents a 7% decrease. This decrease is
primarily attributable to the downturn in the semiconductor and machine tool
industries, which was characterized by diminished product demand, declines in
average selling prices, and overcapacity.
GROSS PROFIT. Excluding non-recurring charges, our gross profit in fiscal
1998 increased $7.0 million to $138.9 million from $131.9 million in fiscal
1997. Excluding non-recurring charges, our gross margin decreased to 15.0% in
fiscal 1998 as compared with 16.9% in fiscal 1997. Our gross margin was
adversely affected by:
- the increased level of final systems assembly projects, which typically
have lower margins than our other systems assembly and distribution
projects;
- the increase in printed circuit board volume production from our
acquisitions, which carries lower gross margins than our quick-turn
production;
- continued manufacturing inefficiencies, underutilization, and yield
problems at our semiconductor fabrication facility; and
- the electronics industry downturn experienced in 1998, especially in the
semiconductor and machine tool industries, characterized by diminished
product demand, declines in average selling prices, and overcapacity.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Our selling, general and
administrative expenses increased $8.5 million to $77.3 million in fiscal 1998
from $68.8 million in fiscal 1997. The percentage of our SG&A expenses to our
net sales decreased to 8.4% in fiscal 1998 from 8.8% in fiscal 1997. The
increase in absolute dollars is related to:
- the continued expansion of our sales and marketing, finance, and other
general and administrative infrastructure necessary to support our
growth;
- SG&A overhead associated with acquired operations; and
- increased SG&A expenses associated with the 19% increase in our net sales
in fiscal 1998.
19
<PAGE> 21
The percentage of our SG&A expenses to our net sales decreased in fiscal
1998 when compared with fiscal 1997 due to better absorption from the increase
in sales.
NON-RECURRING CHARGES. During fiscal 1998, we recognized non-recurring
pre-tax charges of $76.6 million, substantially all of which related to the
operations of Orbit Semiconductor. We decided to sell Orbit's 6-inch, 0.6 micron
semiconductor fabrication facility and outsource semiconductor manufacturing 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 exiting semiconductor manufacturing. The
manufacturing facility was ultimately sold in January 1999.
The non-recurring pre-tax charges recognized in fiscal 1998 consisted of:
- $53.3 million associated with the write-down of long-lived assets to fair
value;
- $12.5 million for losses on sales contracts, incremental amounts of
uncollectible accounts receivable, and estimated incremental costs for
sales returns and allowances;
- $5.8 million for losses associated with inventory write-downs;
- $3.6 million of costs related to exiting semiconductor manufacturing; and
- $1.4 million of employee termination costs.
See Note 7 of our audited consolidated financial statements for more information
regarding the non-recurring pre-tax charges.
INTEREST EXPENSE. Our interest expense increased $11.0 million to $21.7
million in fiscal 1998 from $10.7 million in fiscal 1997. The increase is
primarily due to increased borrowings used to fund our acquisitions.
AMORTIZATION EXPENSE. Our amortization expense increased $0.7 million to
$4.7 million in fiscal 1998 from $4.0 million in fiscal 1997. This increase is
attributable to the amortization of debt issue costs associated with the
increased borrowings used to fund our acquisitions as well as the amortization
of goodwill associated with our acquisitions.
OTHER INCOME AND EXPENSES. Our net other expense decreased $0.5 million to
$0.1 million in fiscal 1998 from $0.6 million in fiscal 1997 mainly due to
increased net gains realized on foreign currency transactions and reduced
provisions for doubtful accounts.
Fiscal 1997 Compared with Fiscal 1996
NET SALES. Our total net sales in fiscal 1997 increased $320.7 million to
$779.6 million from $458.9 million in fiscal 1996. This represents a 70%
increase.
Our net sales from systems assembly and distribution increased $239.4
million to $514.1 million, or 66% of net sales, from $274.7 million, or 60% of
net sales, in fiscal 1996. This represents an 87% increase. The sales growth is
primarily attributable to significant increases in orders from both existing and
new customers, such as the high volume, multi-site production order for
Hewlett-Packard, which began in early fiscal 1997.
Our net sales from printed circuit board design and manufacturing
operations in fiscal 1997 increased $55.2 million to $128.1 million, or 16% of
net sales, from $72.9 million, or 16% of net sales, in fiscal 1996. This
represents a 76% increase. The sales growth in fiscal 1997 is attributable to
increases in sales to both existing and new customers. The sales growth is also
attributable to our acquisitions.
Net sales from our other products and services in fiscal 1997 increased
$26.0 million to $137.4 million, or 18% of net sales, from $111.4 million, or
24% of net sales, in fiscal 1996. This represents a 23% increase. This increase
is attributable to increases in sales to both existing and new customers, as
well as our acquisitions.
GROSS PROFIT. Excluding non-recurring charges, our gross profit in fiscal
1997 increased $43.6 million to $131.9 million from $88.3 million in fiscal
1996. Excluding non-recurring charges, our gross margin decreased
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<PAGE> 22
to 16.9% in fiscal 1997 as compared with 19.2% in fiscal 1996. The gross margin
decrease is primarily the result of:
- the increase in systems assembly and distribution revenues, which
generate lower margins than our other products and service offerings;
- overhead costs associated with the printed circuit board fabrication
facility purchased in August 1997 while we expanded its customer base;
and
- underabsorption of overhead associated with our transition to Orbit's new
6-inch, 0.6 micron semiconductor fabrication facility.
The transition to Orbit's 6-inch, 0.6 micron fabrication facility took longer
than originally anticipated. We completed the transition to its 6-inch, 0.6
micron facility and sold its 4-inch, 1.2 micron semiconductor fabrication
facility during the first quarter of 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Our SG&A expenses increased
$20.3 million to $68.8 million in fiscal 1997 from $48.5 million in fiscal 1996.
The percentage of our SG&A expenses to our net sales was 8.8% in fiscal 1997 and
10.6% for fiscal 1996. The increase in absolute dollars was primarily
attributable to:
- additional costs associated with the start-up of Orbit's newly acquired
semiconductor fabrication facility while winding down its old
semiconductor fabrication facility;
- the continued expansion of our sales and marketing, finance, and other
general and administrative infrastructure necessary to support our
growth;
- increased incentive-based stock compensation, the recognition of which is
based upon expected achievement of certain earnings per share targets
established by the Compensation Committee of our Board of Directors;
- SG&A overhead associated with acquired operations; and
- increased SG&A expenses associated with the 70% increase in net sales in
fiscal 1997.
The percentage of our SG&A expenses to our net sales decreased in fiscal 1997
when compared with fiscal 1996 due to better absorption from the increase in
sales.
INTEREST EXPENSE. Our interest expense increased $4.4 million to $10.7
million in fiscal 1997 from $6.3 million in fiscal 1996. The increase is
primarily due to increased borrowings used to fund our acquisitions.
AMORTIZATION EXPENSE. Our amortization expense increased $0.9 million to
$4.0 million in fiscal 1997 from $3.1 million in fiscal 1996. This increase is
attributable to the amortization of debt issue costs associated with our
increased borrowings used to fund our acquisitions, as well as our amortization
of the goodwill associated with our acquisitions.
OTHER INCOME AND EXPENSES. Our net other expense amounted to $0.6 million
in fiscal 1997 compared to net other income of $0.1 million in fiscal 1996. This
change was the result of increased provisions for doubtful accounts receivable.
Income Taxes
Our estimated effective income tax rate differs from the U.S. statutory
rate due primarily to domestic income tax credits and lower effective income tax
rates on foreign earnings considered permanently invested abroad. Our operations
in China and Malaysia are not subject to tax in fiscal 1999. Upon the expiration
of the tax holiday in China, the Chinese tax rate is expected to increase to
7.5% in each of fiscal years 2002 and 2003, and 15% in each fiscal year
thereafter. We expect to obtain an extension of our Malaysian tax holiday
through fiscal year 2004; however, if we are unsuccessful in obtaining this
extension, our Malaysian tax rate will increase to 28% in each fiscal year
beginning in 2000 and beyond.
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<PAGE> 23
Our effective tax rate for a particular year will vary depending on the mix
of our foreign and domestic earnings, income tax credits and changes in
previously established valuation allowances for deferred tax assets based upon
our current analysis of the realizability of these deferred tax assets. As
foreign earnings considered permanently invested abroad increase as a percentage
of consolidated earnings, our overall consolidated effective income tax rate
will usually decrease because our foreign earnings are generally taxed at a
lower rate than domestic earnings. The mix of our foreign and domestic income
from operations before income taxes, the recognition of income tax loss and tax
credit carryforwards, our current assessment of the required valuation allowance
and the implementation of several tax planning initiatives resulted in the
following effective income tax rates:
<TABLE>
<CAPTION>
QUARTER ENDED FISCAL YEAR
- ------------------------------ ---------------------
APRIL 4, 1999 MARCH 29, 1998 1998(1) 1997 1996
- ------------- -------------- ------- ---- ----
<S> <C> <C> <C> <C>
15% 28% 20% 29% 36%
</TABLE>
- ------------------------
(1) Excludes non-recurring charges. Actual income taxes reflected a net tax
benefit resulting from our non-recurring charges.
Our current effective tax rate is not necessarily indicative of our tax
rate in future periods.
LIQUIDITY, CAPITAL RESOURCES AND COMMITMENTS
At April 4, 1999, we had working capital of $94.9 million and a current
ratio of 1.5x, compared with working capital of $87.3 million and a current
ratio of 1.4x at January 3, 1999. Our cash and cash equivalents at April 4, 1999
were $42.5 million, which represents a decrease of $13.5 million from $56.0
million at January 3, 1999. This decrease resulted primarily from cash used by
investing activities of $20.7 million, offset by cash provided by operating
activities of $4.8 million and cash provided by financing activities of $2.4
million.
At January 3, 1999, we had working capital of $87.3 million and a current
ratio of 1.4x, compared with working capital of $160.6 million and a current
ratio of 2.2x at December 28, 1997. Our cash and cash equivalents at January 3,
1999 were $56.0 million, which represents a decrease of $29.1 million from $85.1
million at December 28, 1997. This decrease resulted primarily from cash used by
investing activities of $204.4 million in 1998, offset by cash provided by
operating activities of $68.1 million and cash provided by financing activities
of $107.3 million in 1998.
Our net cash flows used by investing activities amounted to $20.7 million
for the quarter ended April 4, 1999 and $11.8 million for the quarter ended
March 29, 1998. Our capital expenditures amounted to $21.3 million for the
quarter ended April 4, 1999 and $15.2 million for the quarter ended March 29,
1998. Our capital expenditures represent our continued investment in
high-technology equipment, which enables us to accept complex and higher-volume
orders and to meet current and expected production levels, as well as to replace
or upgrade older equipment that we either returned or sold. We received proceeds
of $9.1 million during the quarter ended April 4, 1999 and $3.4 million during
the quarter ended March 29, 1998 from the sale of property, plant and equipment.
A significant portion of the proceeds received in the quarter ended April 4,
1999, was related to the sale of Orbit's semiconductor fabrication facility in
January 1999. In addition, during the quarter ended April 4, 1999, we made two
strategic minority investments amounting to $20.5 million, and we received $12.0
million from the sale of non-core operations.
Our net cash flows used by investing activities amounted to $204.4 million
in fiscal 1998 and $126.5 million in fiscal 1997. Our capital expenditures
amounted to $153.9 million in fiscal 1998 and $121.3 million in fiscal 1997. A
significant portion of our capital expenditures in fiscal 1998 related to the
$89.9 million purchase of a manufacturing facility in Germany. A significant
portion of our capital expenditures in fiscal 1997 related to the $46.1 million
purchase of the IBM Austin printed circuit board manufacturing facility and
$29.0 million of capital expenditures and leasehold improvements related to
Orbit's 6-inch, 0.6 micron process facility. Our remaining capital expenditures
represented our continued investment in high-technology equipment, which enables
us to accept complex and higher volume orders and to meet current and expected
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<PAGE> 24
production levels, as well as to replace or upgrade older equipment that was
either returned or sold. In addition, we paid $53.9 million for a business
acquisition in 1998 and $7.9 million for business acquisitions in 1997. We
received proceeds of $3.4 million from the sale of equipment in fiscal 1998 and
$2.7 million from the sale of equipment in fiscal 1997. We expect capital
expenditures in fiscal 1999, excluding possible acquisitions of manufacturing
assets from OEMs, to be in the range of $80 million to $90 million.
Our net cash flows provided by financing activities amounted to $2.4
million for the quarter ended April 4, 1999. Our net cash flows used by
financing activities amounted to $9.6 million for the quarter ended March 29,
1998. We repaid $3.5 million in capital lease obligations in the quarter ended
April 4, 1999 and $1.2 million in capital lease obligations in the quarter ended
March 29, 1998. We also repaid $15.5 million in long-term debt in the quarter
ended April 4, 1999 and $12.0 million in long-term debt in the quarter ended
March 29, 1998. We received $1.6 million of proceeds from stock issued under our
stock plans in the quarter ended April 4, 1999 and $2.8 million of proceeds in
the quarter ended March 29, 1998. During the quarter ended March 29, 1998, we
repurchased 0.4 million shares of our common stock at a cost of $9.2 million.
Additionally, during the quarter ended April 4, 1999, we borrowed an additional
$20.0 million under our $110.0 million senior secured revolving line-of-credit
facility. As of April 4, 1999, there was $57.5 million in borrowings outstanding
under our $110.0 million senior secured revolving line-of-credit facility.
As of February 18, 1999, we converted substantially all of our convertible
subordinated notes into approximately 4.6 million shares of common stock and we
redeemed the unconverted portion for $0.1 million.
Our net cash flows provided by financing activities amounted to $107.3
million in fiscal 1998 and $134.7 million in fiscal 1997, primarily resulting
from the proceeds from issuance of long-term debt amounting to $137.5 million in
fiscal 1998 and $150.0 million in fiscal 1997. These borrowings were used to
fund our acquisitions. In addition, we repaid $3.4 million in capital lease
obligations in fiscal 1998 and $2.5 million in capital lease obligations in
fiscal 1997. We also repaid $5.6 million in long-term debt in fiscal 1998 and
$10.2 million in long-term debt in fiscal 1997. We received $6.2 million in
fiscal 1998 and $6.9 million in fiscal 1997 of proceeds from stock issued under
our stock plans. We repurchased 1.5 million shares of our common stock at a cost
of $24.3 million in fiscal 1998 and 0.2 million shares of our common stock in
fiscal 1997 at a cost of $4.2 million. We could repurchase an additional 0.4
million shares of common stock in future years as a part of our share repurchase
plan, subject to specific restrictions under our credit facilities.
On October 30, 1998, we replaced our $80 million senior secured revolving
credit facility with a $210 million credit agreement with a syndicate of
domestic and foreign banks. The agreement provides for a $100 million five-year
term loan and a $110 million revolving credit facility. The revolving line of
credit expires on November 1, 2003. Borrowings under the agreement bear interest
at floating rates based upon specified financial ratios related to our financial
performance and condition. These credit facilities are secured by substantially
all of our assets and require us to maintain certain financial covenants. These
credit facilities also restrict our ability to incur debt and make certain
investments, among other things. As of April 4, 1999, we were in compliance with
all loan covenants. We intend to repay our borrowings outstanding under our
revolving credit facility with a portion of the proceeds from this offering.
We believe that the proceeds of this offering, together with our current
level of working capital, cash generated from our operations, existing cash
reserves, leasing capabilities, and our line-of-credit availability will be
adequate to fund capital expenditures for the next twelve months. We intend to
continue our acquisition strategy and it is possible that future acquisitions
may be significant. If available resources are not sufficient to finance our
acquisitions, we would be required to seek additional equity or debt financing.
There can be no assurance that these funds, if needed, will be available on
terms acceptable to us, or at all.
Substantially all of our business outside the United States is conducted in
U.S. dollars, which is our primary functional currency. We conduct some of our
transactions in the local currencies of our non-U.S. operations. As we expand
our operations outside the United States, we expect increased foreign currency
exposures. We selectively hedge some of our foreign exchange exposures through
forward exchange contracts, principally relating to foreign currency monetary
assets and liabilities. The strategy of selective hedging can reduce our
vulnerability to foreign exchange transaction risks, and we expect to continue
this practice in the
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<PAGE> 25
future. Gains and losses on these foreign currency hedges are generally offset
by corresponding losses and gains on the underlying transaction. To date, our
hedging activity has been immaterial.
Our operations are subject to certain federal, state and local regulatory
requirements relating to the use, storage, discharge and disposal of hazardous
chemicals used during our manufacturing processes. We believe that we are
currently operating in compliance with applicable regulations and do not believe
that costs of compliance with these laws and regulations will have a material
effect upon our capital expenditures, results of operations or competitive
position.
We determine the amount of our 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 we undertake at our operating facilities, or a determination that we
are 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 these matters. No assurance can be given that actual costs will
not exceed amounts accrued or that costs will not be incurred with respect to
sites as to which no problem is currently known. Further, there can be no
assurance that additional environmental matters will not arise in the future.
See Note 9 of our audited consolidated financial statements and Note 10 of
our unaudited interim condensed consolidated financial statements for a
description of commitments, contingencies and environmental matters.
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 computer system
failures or miscalculations causing disruptions of operations, including a
temporary inability to process transactions, send invoices or engage in normal
business transactions.
Our management implemented a company-wide program to prepare our financial,
manufacturing and other critical systems and applications for the Year 2000.
This comprehensive program was developed to ensure that our information
technology assets, including embedded microprocessors (IT assets) and non-IT
assets are Year 2000 ready. We have formed a Year 2000 project team of
approximately 75 employees, overseen by a corporate officer, which is
responsible for monitoring the progress of the program and ensuring timely
completion. This team has a detailed project plan in place with tasks,
milestones, critical paths and dates identified. Our comprehensive program
covers the following six phases:
- inventory all IT and non-IT assets;
- assess repair requirements;
- repair IT and non-IT assets;
- test individual IT and non-IT assets to confirm the correct manipulation
of dates and date-related data;
- communicate with our significant suppliers and customers to determine the
extent to which we are vulnerable to any of their failures to address the
Year 2000 issue; and
- create contingency plans in the event of Year 2000 failures.
Implementing the program is an on-going process. All of our operating
entities have completed the inventory phase. 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 completing each phase of those plans. We
anticipate that all mission-critical software and hardware will be compliant by
the third quarter of 1999. We have yet to begin system integration testing.
Until system integration testing is substantially underway, we cannot fully
estimate the risks of our 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 we may identify
assets that do present a risk of a Year 2000
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<PAGE> 26
related disruption. A Year 2000 disruption could have a material adverse effect
on our financial condition and results of operations.
We are continually contacting suppliers who provide both critical IT assets
and non-IT related goods and services, such as transportation, packaging,
production materials and production supplies. We mailed surveys to our suppliers
in order to evaluate their Year 2000 compliance plans and state of readiness,
and to determine whether a Year 2000 disruption could impede their ability to
continue to provide their goods and services as we approach and pass the Year
2000. A vast majority of those suppliers of IT assets that have responded have
assured us that these assets will correctly manipulate dates and date-related
data. We are in the process of reviewing responses for accuracy and adequacy,
and sending follow-up surveys or contacting non-responsive suppliers directly
via phone.
We also rely, both domestically and internationally, upon government
agencies, utility companies, telecommunications services, and other service
providers outside of our control. There is no assurance that these suppliers,
governmental agencies, or other third parties will not suffer a Year 2000
business disruption. These failures could have a material adverse affect on our
financial condition and results of operations. Further, we have initiated formal
communications with our significant suppliers, customers and critical business
partners to determine the extent to which we may be vulnerable in the event
these parties fail to properly remediate their own Year 2000 issues. We have
taken steps to monitor these parties' progress, and we intend to test critical
system interfaces as the Year 2000 approaches. We will develop appropriate
contingency plans in the event that we identify a significant exposure involving
our dependencies on third-party systems. While we are not presently aware of any
significant exposure, there can be no guarantee that the systems of third
parties on which we rely will be converted in a timely manner, or that a third
party's failure to properly convert would not have a material adverse effect on
us.
Our program calls for the development of contingency plans for our at-risk
business functions. We are finalizing our Year 2000 contingency plans for all of
our business-critical systems worldwide. These plans will address any
business-critical failure, both internal and external, including but not limited
to transportation, banking, telecommunications, suppliers, manufacturing,
accounting and payroll. Because we have not completed testing of
mission-critical systems, and, accordingly, have not fully assessed our risks
from potential Year 2000 failures, we have not yet developed specific Year 2000
contingency plans. We will develop contingency plans if the results of our tests
identify a business function risk. In addition, in the normal course of business
we maintain and deploy contingency plans to address various other potential
business interruptions. These plans may be able to address the interruption of
support provided by third parties resulting from their failure to be Year 2000
compliant.
To date, we estimate that we have spent approximately $4.1 million
implementing this program, with our employees performing the majority of the
work. We have allocated approximately $7.0 million to address the Year 2000
issue. Our aggregate cost estimate includes internal recurring costs, but does
not include time and costs that we may incur as a result of third party failures
to become Year 2000 compliant or costs to implement any contingency plans. We
are 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.
We accelerated some inventory and manufacturing software-related projects to
ensure Year 2000 compliance. However, this acceleration did not increase the
anticipated costs of the projects. We have not deferred any specific information
technology project as a result of the implementation of the program.
We are committed to achieving Year 2000 compliance; however, because a
significant portion of our Year 2000 exposure is external and therefore outside
our direct control, we cannot provide assurances that we will be fully Year 2000
compliant. If we do not make the modifications and conversions required to make
us Year 2000 compliant on a timely basis, the resulting problems could have a
material impact on our operations. This impact could, in turn, have a material
adverse effect on our results of operations and financial condition.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS 133). This statement
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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 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. We will be
required to adopt SFAS 133 as of January 3, 2000. The impact from our adoption
of SFAS 133 is expected to be immaterial based upon our historical hedging
activities.
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<PAGE> 28
BUSINESS
OVERVIEW
We are a leading global provider of electronics design and manufacturing
services (EMS). We offer our products and services to original equipment
manufacturers (OEMs) of electronics products who outsource the design and
manufacture of their products. Like many EMS providers, we design, assemble and
distribute printed circuit boards and completed electronics products. We seek to
differentiate ourselves from our EMS competitors by providing comprehensive and
integrated design and manufacturing services, including semiconductor design and
printed circuit board design and fabrication. This allows us to reduce our
customers' product costs and compress the time from product concept to market
introduction. In addition, through our global network of 19 facilities in North
America, Europe, China and Southeast Asia, we are able to service our customers'
worldwide manufacturing requirements more effectively and at lower costs. We
believe that the combination of these capabilities enables us to become more
integral to our customers' product development and manufacturing strategy and
provides us with a significant competitive advantage.
The EMS industry has grown rapidly over the past several years, as an
increasing number of OEMs have outsourced their design and manufacturing
requirements. According to a leading industry source, the EMS industry has grown
from revenues of $22.3 billion in 1993 to $89.6 billion in 1998, a compound
annual growth rate of 32%. We have capitalized on this industry growth through a
combination of internal expansion and strategic acquisitions. Our total net
sales have increased from $165 million in 1993 to $926 million in 1998, a
compound annual growth rate of 41%. We believe that we are well-positioned to
capitalize on continued growth in the EMS industry.
We provide our customers with three primary product and service offerings:
semiconductor design; printed circuit board design and fabrication; and systems
assembly and distribution. These products and services are provided to more than
300 OEMs, including OEMs in the telecommunications, data communications,
high-end computing and medical devices industries. Our customers include
industry leaders such as 3Com Corporation, EMC Corporation, Hewlett-Packard
Company, IBM, Motorola and Siemens Medical Systems. Our ten largest customers,
in the aggregate, accounted for 48% of our total net sales in 1998.
Approximately 40% of our total net sales in fiscal 1998 were derived from
customers utilizing two or more of our primary product and service offerings.
We have actively pursued acquisitions to expand our geographic presence,
enhance our product and service offerings, diversify our customer base, increase
our speed to market and increase our volume production capabilities. An
increasing number of OEMs are outsourcing and divesting their manufacturing
operations as an integral part of their manufacturing strategy. We intend to
selectively pursue OEM divestitures and other strategic acquisition
opportunities which we believe will favorably impact our profitability. In 1998,
we completed acquisitions in the Czech Republic, Germany and the People's
Republic of China. In 1998, we also sharpened our focus on our core business and
decided to sell our semiconductor fabrication facility and our non-core
operations.
INDUSTRY BACKGROUND
The EMS industry has grown rapidly over the past several years as an
increasing number of OEMs have outsourced their design and manufacturing
requirements. Factors driving OEMs to favor outsourcing to EMS providers
include:
Reduced Product Cost -- EMS companies are able to manufacture products
at reduced total cost to OEMs. These cost advantages result from higher
utilization of manufacturing and overhead resources and, generally, a
greater focus on cost reduction.
Reduced Time-to-Market -- As product life cycles decrease in the
electronics industry, it is important for OEMs to rapidly accommodate
technological advances and bring innovative products to the market. EMS
providers enable OEMs to develop and introduce products more quickly.
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Access to Advanced Design, Engineering and Manufacturing Capabilities
Without Significant Capital Investment -- EMS companies remain competitive
by staying at the forefront of technology, which requires continuous
training and significant investment. By using EMS companies, OEMs do not
have to maintain highly sophisticated and expensive in-house capabilities
to remain technologically competitive.
Access to Worldwide Manufacturing Capabilities -- The ability to
outsource to EMS companies located in regions in which the end-products are
to be sold allows OEMs to better accommodate local content requirements, as
well as cut their transportation and distribution costs. The ability to
outsource also enables OEMs to have their products manufactured and
assembled in areas of the world with lower labor costs, reducing overall
product cost.
Improved Inventory Management and Purchasing Power -- EMS providers are
able to manage both procurement and inventory, and have demonstrated
proficiency in purchasing components at improved pricing due to the scale
of their operations and their continuous interaction with the materials
marketplace.
Focus of Resources on Greatest Value-Added Efforts -- The ability to
outsource allows OEMs to focus their resources on activities and
technologies where they add their greatest value. Outsourcing enables OEMs
to focus their efforts on their areas of expertise such as research,
product development and marketing.
For these reasons, we believe that a large and growing number of OEMs
utilize EMS providers as an integral part of their design and manufacturing
strategy. We believe that our comprehensive and integrated products and services
combined with our global manufacturing capabilities enhance our competitive
position as an EMS provider.
STRATEGY
Our goal is to capitalize on the growth in the electronics outsourcing
industry and to be the fastest and most comprehensive global provider of custom
design and manufacturing services to OEMs. To achieve this objective, we will
continue to implement the following strategies:
Offer Comprehensive and Integrated Design and Manufacturing
Services: We offer a comprehensive range of related products and services
that includes custom semiconductor design, printed circuit board design and
fabrication, and final systems assembly and distribution. Through our
semiconductor design services, we have the ability to reduce our customers'
product costs by consolidating electronic components onto semiconductors,
which reduces the number of components and the size of printed circuit
boards. We believe that this capability provides us with a significant
competitive advantage over other EMS providers. Although the consolidation
of electronic components generally reduces the revenues and profitability
of EMS providers because of the reduction in the number of component part
placements and cost of materials, we believe that our comprehensive and
integrated service offerings enable us to realize revenues and profits that
offset these reductions.
Reduce Our Customers' Product Costs and Time-to-Market: Through the
integration of design and semiconductor services, printed circuit board
fabrication and systems assembly and distribution services, we reduce
customers' time-to-market and manufacturing costs. Our participation in
product design and quick-turn prototyping allows us to transition to low
cost volume production.
Provide Worldwide Manufacturing Capabilities Near Our Customers' End
Markets: We have established an extensive network of manufacturing
facilities in the world's major electronics markets. We maintain facilities
in the United States, Mexico, China, Malaysia, Ireland, Germany and the
Czech Republic. Our global network of facilities allows us to serve the
increased outsourcing needs of both multinational and regional OEMs. In
addition, by strategically locating facilities near our customers' end
markets, we are better able to coordinate our customers' worldwide
manufacturing requirements, reduce transportation costs, meet local content
requirements, and reduce time-to-market.
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<PAGE> 30
Become an Integral Part of Our Customers' Product Development and
Manufacturing Strategy: We seek to establish "partnerships" with our
customers through involvement in the early stages of their product
development by providing integrated design and manufacturing services. We
have targeted customers in fast-growing industry sectors that require
complex outsourcing solutions together with minimum time-to-market. This
enhances our ability to realize higher margins on our products and services
and makes it difficult for our customers to switch to other EMS providers.
Actively Pursue Strategic Acquisitions: We actively pursue acquisitions
which expand our geographic presence, enhance our product and service
offerings, diversify our customer base, increase our speed to market and
increase our volume production capabilities. We will continue to evaluate
acquisition opportunities which satisfy these criteria and which we believe
will favorably impact our profitability.
RECENT ACQUISITIONS AND DIVESTITURES
Set forth below is a list of our most recent acquisitions and the
opportunities they provide:
Czech Republic............. In July 1998, we acquired Utes Electronika A.S. to
provide low cost EMS capabilities for the European
market, including final systems assembly and
distribution.
People's Republic of
China...................... In August 1998, we acquired Greatsino Electronic
Technology to enter the Chinese EMS market. These
facilities provide low cost systems assembly and
distribution and high-volume printed circuit board
manufacturing operations and can be used by our OEM
customers as a gateway into the China market.
Germany.................... In October 1998, we acquired Hewlett-Packard's
high-volume printed circuit board facilities in
Boeblingen. This facility provides us with highly
automated, high technology, high-volume
capabilities with which to service the European
market.
These acquisitions enabled us to expand our worldwide systems assembly and
distribution capabilities significantly. In addition, upon completion of these
acquisitions, we became the only printed circuit board fabricator with
operations in each of North America, Europe and Asia. We also now offer a full
range of low, medium and high-volume printed circuit board production and
technology capabilities.
In 1998, we sharpened our focus on our core business and decided to sell
our semiconductor fabrication facility and our non-core operations involved in
producing equipment and tooling used in the printed circuit board assembly
process. In January 1999, we sold our semiconductor fabrication facility and
began to outsource semiconductor manufacturing to complement our semiconductor
design services. In March 1999, we sold our TTI TesTron subsidiary, a
manufacturer of in-circuit and functional test hardware and software. In April
1999, we sold our IRI division, a process tooling company. Further, in April
1999, we signed a letter of intent to sell our Cencorp subsidiary, a
manufacturer of process automation equipment, the final remaining non-core
operation.
PRODUCTS AND SERVICES
Design and Semiconductor Services
We provide comprehensive front-end engineering services, including
semiconductor design, circuit board layout, and design for efficient
manufacturing and testing. We offer quick-turn prototyping, which is the rapid
production of a sample of a new product. Once the new product design is
finalized, we often provide high-volume production. Our participation in product
design and prototyping allows us to reduce our customers' manufacturing costs
and their time required to transition to volume production. These services
enable us to strengthen our relationships with customers and help attract new
customers requiring advanced engineering
29
<PAGE> 31
services. In addition, by working closely with customers throughout the
development and manufacturing process, we gain insight into their future product
requirements.
Printed Circuit Boards
Printed circuit boards and backpanels are platforms which provide
interconnection for integrated circuits and other electronic components.
Backpanels also provide interconnection for other printed circuit boards.
Semiconductor designs are currently so complex that they often require printed
circuit boards with many layers of narrow, densely spaced wiring. We manufacture
multilayer printed circuit boards and backpanels on a low-volume, quick-turn
basis, as well as on a high-volume production basis. Our quick-turn prototype
service allows us to provide small test quantities to our customers' product
development groups. We are one of only a few independent manufacturers who can
respond to its customers' demands for an accelerated transition from prototype
to volume production. In recent years, the trend in the electronics industry has
generally been to increase the speed and performance of components, while
reducing their size. These advancements in component technologies have driven
the change in printed circuit board design to higher density printed circuits.
We have invested in the advanced engineering systems and process equipment
needed to meet these higher density requirements.
Systems Assembly and Distribution
Our manufacturing operations include the placement of electronic parts onto
printed circuit boards as well as the manufacture of complete electronics
products. As OEMs seek to provide greater functionality in smaller products,
they increasingly require more sophisticated manufacturing technologies and
processes. Our investment in advanced manufacturing equipment and our experience
with the latest technologies enable us to offer a variety of complex
manufacturing services. We offer testing of assembled printed circuit boards and
testing of all of the functions of the completed product, and we work with our
customers to develop product-specific test strategies. Our test capabilities
include manufacturing defect analysis, in-circuit tests, functional tests and
environmental stress tests of board or system assemblies. We offer our customers
flexible just-in-time and build-to-order delivery programs, allowing product
shipments to be closely coordinated with customers' inventory requirements.
Increasingly, we ship products directly into customers' distribution channels or
directly to the end-user.
MARKETS AND CUSTOMER PROFILE
We believe we have a well-balanced customer profile across a broad range of
industries, which reduces our exposure to a downturn in any particular sector.
The following table shows the percentages of our total net sales to our 25
largest customers by industry, for the periods presented. These customers
represented approximately 77% of our total net sales in the first quarter of
1999, 69% in fiscal 1998 and 74% in fiscal 1997. We believe these figures
present an accurate profile of our total net sales.
SALES TO OUR 25 LARGEST CUSTOMERS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
QUARTER ENDED ------------------------------------
APRIL 4, 1999 JANUARY 3, 1999 DECEMBER 28, 1997
------------- --------------- -----------------
<S> <C> <C> <C>
High-end computing, mainframes and mass
storage....................................... 30.6% 17.4% 16.9%
Telecommunications and data communications...... 18.0 19.2 19.7
Computers and peripherals....................... 17.7 19.1 9.7
Office automation............................... 17.1 17.1 28.7
Industrial and instrumentation.................. 11.9 18.0 15.8
Medical devices................................. 4.7 9.2 9.2
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
30
<PAGE> 32
Our customers include more than 300 OEMs including industry leaders such as
3Com Corporation, EMC Corporation, Hewlett-Packard Company, IBM, Motorola, Inc.,
and Siemens Medical Systems, Inc.
EMPLOYEES
We employ approximately 8,400 employees worldwide, the majority of whom are
engaged in manufacturing operations. Approximately 900 employees in Ireland,
Germany and Mexico are subject to collective bargaining agreements. We believe
that our relations with our employees are good.
PROPERTIES
Our core operations currently occupy the following facilities:
<TABLE>
<CAPTION>
SQUARE OWNED
LOCATION FOOTAGE LEASED
- -------- --------- ------
<S> <C> <C>
Design and Semiconductor Services
Sunnyvale, California....................................... 50,300 Leased
Fremont, California......................................... 3,200 Leased
Santa Barbara, California................................... 5,000 Leased
---------
58,500
---------
Printed Circuit Boards:
Austin, Texas............................................... 696,000 Owned
Boeblingen, Germany......................................... 340,000 Owned
Irvine, California.......................................... 60,000 Owned
Roseville, Minnesota........................................ 68,000 Leased
Zhuhai, Guandong Province, China............................ 220,000 Owned
---------
1,384,000
---------
Systems Assembly and Distribution:
Anaheim, California......................................... 63,000 Leased
Binghamton, New York........................................ 110,000 Owned
Boulder, Colorado (Division Headquarters)................... 9,000 Leased
Brno, Czech Republic........................................ 117,000 Owned
Clearwater, Florida......................................... 128,000 Owned
Cork, Ireland............................................... 20,000 Leased
Cork, Ireland............................................... 100,000 Owned
Guadalajara, Mexico......................................... 127,000 Leased
Longmont, Colorado.......................................... 70,000 Owned
Malacca, Malaysia........................................... 40,000 Leased
Puebla, Mexico.............................................. 43,000 Owned
Puebla, Mexico.............................................. 10,000 Leased
Zhuhai, Guandong Province, China............................ 360,000 Owned
---------
1,197,000
---------
Corporate Headquarters:
Niwot, Colorado............................................. 11,000 Owned
---------
Total............................................. 2,650,500
=========
</TABLE>
We believe that our facilities are well-maintained and suitable for their
respective operations and have sufficient capacity to accommodate our expected
growth in the foreseeable future.
31
<PAGE> 33
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our Board of Directors consists of six members. The following table sets
forth information with respect to our current directors and executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Ronald R. Budacz............... 52 Chairman of the Board and Chief Executive Officer
C. Y. Cheong................... 43 President of Dii Group Asia
Micheal Corkery................ 35 President of Dii Group Europe
Mark D. Herbst................. 38 Senior Vice President -- Corporate Sales and Marketing
Dermott O'Flanagan............. 47 President of DOVatron International
Carl A. Plichta................ 48 Senior Vice President and General Manager of DOVatron
Mexico
Steven C. Schlepp.............. 42 President of Multilayer Technology (Multek)
Thomas J. Smach................ 38 Chief Financial Officer and Treasurer
Ronald R. Snyder............... 42 President of Dii Semiconductor
Carl R. Vertuca, Jr. .......... 52 Director and Executive Vice President -- Finance,
Administration and Corporate Development
Robert L. Brueck............... 63 Director
Constantine S. Macricostas..... 63 Director
Gerard T. Wrixon, Phd. ........ 58 Director
Alexander W. Young............. 55 Director
</TABLE>
RONALD R. BUDACZ has been our Chairman and Chief Executive Officer since
March 1993. He served as President of Dover Electronics Company from 1988 until
March 1993. Mr. Budacz is a director of Capetronic International Holdings
Limited.
C. Y. CHEONG has been a Senior Vice President since February 1998. He has
also been the President of The Dii Group Asia operations since May 1995, and was
Managing Director of DOVatron Singapore from May 1993 until April 1995.
MICHEAL CORKERY has been a Senior Vice President since February 1998. He
has also been the President of The Dii Group Europe since September 1997, Vice
President and General Manager of DOVatron Ireland from January 1996 until
September 1997, and Director of Operations of DOVatron Ireland from December
1993 until January 1996.
MARK D. HERBST has been a Senior Vice President since February 1998. He has
also been our Senior Vice President of Corporate Sales and Marketing since May
1998. He was our Vice President from February 1997 until May 1998, Group Vice
President of Process Technologies from May 1995 until May 1998, and Vice
President/General Manager of IRI International from September 1990 until May
1995.
DERMOTT O'FLANAGAN has been a Senior Vice President since March 1993, and
President of DOVatron International, Inc. since January 1995. He was the
Managing Director of DOVatron Ireland Limited from March 1993 until January
1995.
CARL A. PLICHTA has been a Senior Vice President since March 1993. He has
also been the Senior Vice President and General Manager of DOVatron Mexico since
May 1999. He was our Senior Vice President of Materials and IS for DOVatron
International, Inc. from January 1995 until April 1999, and was the President of
DOVatron Manufacturing New York (a division of DOVatron International, Inc.)
from March 1993 until January 1995.
32
<PAGE> 34
STEVEN C. SCHLEPP has been our Senior Vice President since June 1996. He
has also been the President of Multilayer Technology, Inc. since June 1996. He
was President of Toppan West Incorporated, a wholly-owned subsidiary of Toppan
Printing, Ltd., from January 1991 until June 1996.
THOMAS J. SMACH has been a Senior Vice President, Chief Financial Officer
and Treasurer since August 1997. He was also our Corporate Controller and Vice
President from March 1994 until August 1997.
RONALD R. SNYDER has been a Senior Vice President since March 1993. He has
been the President of Dii Semiconductor since May 1998, our Senior Vice
President of Sales and Marketing from March 1994 until May 1998, and President
of DOVatron Manufacturing Colorado (a division of DOVatron International, Inc.)
from March 1993 until March 1994.
CARL R. VERTUCA, JR. has been our Executive Vice President -- Finance,
Administration and Corporate Development since August 1997 and a director since
May 1993. He was our Chief Financial Officer from March 1993 until August 1997.
ROBERT L. BRUECK has been a director since 1993. He advises on venture
capital investments and serves as a business consultant.
CONSTANTINE S. MACRICOSTAS has been a director since 1996. He has served as
Chairman of the Board of Photronics, Inc. since 1969, and Chief Executive
Officer of that company from 1969 until August 1997. He is currently a director
of Nutmeg Federal Savings and Loan Association.
GERARD T. WRIXON, PHD. has been a director since 1993. He is currently the
President of the National University of Ireland, Cork. He also serves as the
Chairman of Farran Technology and is a director of General Semiconductor, Inc.
From 1982 through 1999, he was the Director of the National Microelectronics
Research Centre in Ireland, and was also a Professor of Microelectronics at
University College in Cork, Ireland during that same period.
ALEXANDER W. YOUNG has been a director since 1993. He is currently the
President of the Services Business Unit of Thomas Group, Inc., a position he has
held since March 1998. He is a director of Thomas Group, Inc. where he also
served as President and Chief Operating Officer from January 1991 through March
1998.
33
<PAGE> 35
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof, each underwriter named below has severally agreed to
purchase, and we have agreed to sell to each underwriter, the number of shares
set forth opposite its name.
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---- ---------
<S> <C>
Salomon Smith Barney Inc. ..................................
BancBoston Robertson Stephens Inc. .........................
Donaldson, Lufkin & Jenrette Securities Corporation.........
Bear, Stearns & Co. Inc. ...................................
Thomas Weisel Partners LLC..................................
---------
Total............................................. 6,000,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares included in this offering are subject to
approval of certain legal matters by counsel and to certain other conditions.
The underwriters are obligated to purchase all the shares (other than those
covered by the over-allotment option described below) if they purchase any of
the shares.
The underwriters, for whom Salomon Smith Barney Inc., BancBoston Robertson
Stephens Inc., Donaldson, Lufkin & Jenrette Securities Corporation, Bear,
Stearns & Co. Inc. and Thomas Weisel Partners LLC are acting as representatives,
propose to offer some of the shares directly to the public at the public
offering price set forth on the cover page of this prospectus and some of the
shares to certain dealers at the public offering price less a concession not in
excess of $ per share. The underwriters may allow, and these dealers may
reallow, a concession not in excess of $ per share on sales to certain other
dealers. If all of the shares are not sold at the initial offering price, the
representatives may change the public offering price and the other selling
terms.
We have granted the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to 900,000 additional shares of
common stock at the public offering price less the underwriting discount. The
underwriters may exercise this option solely for the purpose of covering
over-allotments, if any, in connection with this offering. To the extent the
underwriters exercise this option, each underwriter will be obligated, subject
to certain conditions, to purchase a number of additional shares approximately
proportionate to each underwriter's initial purchase commitment.
We and our officers and directors have agreed that, for a period of 90 days
from the date of this prospectus, we will not, without the prior written consent
of Salomon Smith Barney Inc., dispose of or hedge any shares of our common stock
or any securities convertible into or exchangeable for our common stock. Salomon
Smith Barney Inc. in its sole discretion may release any of the securities
subject to these lock-up agreements at any time without notice.
Our common stock is quoted on the Nasdaq National Market under the symbol
"DIIG."
The following table shows the underwriting discounts and commissions to be
paid to the underwriters by us in connection with this offering. These amounts
are shown assuming both no exercise and full exercise of the underwriters'
option to purchase additional shares of our common stock.
34
<PAGE> 36
<TABLE>
<CAPTION>
PAID BY THE DII GROUP
----------------------------
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per share................................................... $ $
Total....................................................... $ $
</TABLE>
In connection with the offering, Salomon Smith Barney Inc., on behalf of
the underwriters, may purchase and sell shares of common stock in the open
market. These transactions may include:
- over-allotment, which involves syndicate sales of our common stock in
excess of the number of shares to be purchased by the underwriters in the
offering, which creates a syndicate short position;
- syndicate covering transactions, which involve purchases of our common
stock in the open market after the distribution has been completed in
order to cover syndicate short positions; and
- stabilizing transactions, which consist of certain bids or purchases of
our common stock made for the purpose of preventing or retarding a
decline in the market price of our common stock while the offering is in
progress.
The underwriters may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when
Salomon Smith Barney Inc., in covering syndicate short positions or making
stabilizing purchases, repurchases shares originally sold by that syndicate
member.
Any of these activities may cause the price of our common stock to be
higher than the price that otherwise would exist in the open market in the
absence of these transactions. These transactions may be effected on the Nasdaq
National Market or in the over-the-counter market or otherwise and, if
commenced, may be discontinued at any time.
In addition, in connection with this offering, some of the underwriters may
engage in passive market making transactions in our common stock offered on the
Nasdaq National Market, prior to the pricing and completion of the offering.
Passive market making consists of displaying bids on the Nasdaq National Market
no higher than the bid prices of independent market makers and making purchases
at prices no higher than those independent bids and effected in response to
order flow. Net purchases by a passive market maker on each day are limited to a
specified percentage of the passive market maker's average daily trading volume
in our common stock during a specified period and must be discontinued when that
limit is reached. Passive market making may cause the price of the common stock
to be higher than the price that otherwise would exist in the open market in the
absence of those transactions. If the underwriters commence passive market
making, they may discontinue at any time.
We estimate that our total expenses for this offering will be $400,000.
The underwriters or their affiliates have performed certain investment
banking and advisory services for us from time to time for which they have
received customary fees and expenses. The underwriters or their affiliates may,
from time to time, engage in transactions with and perform services for us in
the ordinary course of their business.
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since December
1998, Thomas Weisel Partners LLC has been named as a lead or co-manager on 30
filed public offerings of equity securities, of which 15 have been completed,
and has acted as a syndicate member in an additional 9 public offerings of
equity securities. Thomas Weisel Partners LLC does not have any material
relationship with us or any of our officers, directors or controlling persons,
except with respect to its contractual relationship with us under the
underwriting agreement entered into in connection with this offering.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, or to contribute to
payments the underwriters may be required to make in respect of any of those
liabilities.
35
<PAGE> 37
LEGAL MATTERS
The validity of our common stock offered through this prospectus will be
passed upon for us by Curtis, Mallet-Prevost, Colt & Mosle, New York, New York.
Certain legal matters relating to this offering will be passed upon for the
underwriters by Cravath, Swaine & Moore, New York, New York.
EXPERTS
The consolidated financial statements and the related financial statement
schedules as of January 3, 1999 and December 28, 1997 and for the 53 weeks ended
January 3, 1999 and the 52 weeks ended December 28, 1997 included and
incorporated by reference in this prospectus have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports, which are included
and incorporated by reference herein, and have been so included and incorporated
in reliance upon the reports of such firm given upon their authority as experts
in accounting and auditing.
The consolidated financial statements and the related financial statement
schedule for the 52 weeks ended December 29, 1996, have been included and/or
incorporated by reference herein and in the registration statement in reliance
upon the reports of KPMG LLP, independent certified public accountants,
appearing elsewhere and/or incorporated by reference herein, and upon the
authority of KPMG LLP as experts in accounting and auditing.
36
<PAGE> 38
THE DII GROUP, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Reports............................... F-2
Consolidated Statements of Operations for the fiscal years
ended January 3, 1999, December 28, 1997 and December 29,
1996........................................................ F-4
Consolidated Balance Sheets as of January 3, 1999 and
December 28, 1997........................................... F-5
Consolidated Statements of Stockholders' Equity for the
fiscal years ended January 3, 1999, December 28, 1997 and
December 29, 1996........................................... F-6
Consolidated Statements of Cash Flows for the fiscal years
ended January 3, 1999, December 28, 1997 and December 29,
1996........................................................ F-7
Notes to Consolidated Financial Statements.................. F-8
Condensed Consolidated Statements of Operations for the
quarters ended April 4, 1999 and March 29, 1998
(Unaudited)................................................. F-29
Condensed Consolidated Balance Sheets as of April 4, 1999
and January 3, 1999 (Unaudited)............................. F-30
Condensed Consolidated Statements of Cash Flows for the
quarters ended April 4, 1999 and March 29, 1998
(Unaudited)................................................. F-31
Notes to Condensed Consolidated Financial Statements
(Unaudited)................................................. F-32
</TABLE>
F-1
<PAGE> 39
INDEPENDENT AUDITORS' REPORT
The Board of Directors
The DII Group, Inc.:
We have audited the accompanying consolidated balance sheets of The DII Group,
Inc. and subsidiaries (the "Company") as of January 3, 1999 and December 28,
1997, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the 53 and 52 weeks then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of January 3, 1999
and December 28, 1997, and the results of its operations and its cash flows for
the 53 and 52 weeks then ended in conformity with generally accepted accounting
principles.
We also audited the adjustments described in Note 12 that were applied to
restate the 1996 financial statements to give retroactive effect to the change
in the method of accounting for earnings per share in accordance with Statement
of Financial Accounting Standards No. 128 "Earnings Per Share." In our opinion,
such adjustments are appropriate and have been properly applied.
/s/ DELOITTE & TOUCHE LLP
Denver, Colorado
January 28, 1999
(February 18, 1999 as to the redemption of convertible
subordinated notes described in Note 6)
F-2
<PAGE> 40
INDEPENDENT AUDITORS' REPORT
The Board of Directors
The DII Group, Inc.
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of The DII Group, Inc. and subsidiaries
(the "Company") for the 52 weeks ended December 29, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
the Company for the 52 weeks ended December 29, 1996 in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
Denver, Colorado
January 28, 1997
F-3
<PAGE> 41
THE DII GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
NET SALES:
Systems assembly and distribution.......................... $589,286 $514,078 $274,651
Printed wiring boards...................................... 208,696 128,107 72,851
Other...................................................... 127,561 137,418 111,391
-------- -------- --------
Total net sales.................................. 925,543 779,603 458,893
-------- -------- --------
COST OF SALES:
Cost of sales.............................................. 786,611 647,663 370,610
Non-recurring charges...................................... 74,182 -- 11,883
-------- -------- --------
Total cost of sales.............................. 860,793 647,663 382,493
-------- -------- --------
Gross profit............................................. 64,750 131,940 76,400
Selling, general, and administrative expenses.............. 77,318 68,783 48,540
Non-recurring charges...................................... 2,454 -- 4,649
Interest income............................................ (2,894) (1,744) (1,732)
Interest expense........................................... 21,680 10,661 6,267
Amortization expense....................................... 4,661 3,968 3,118
Other, net................................................. 63 607 (115)
-------- -------- --------
Income (loss) before income taxes........................ (38,532) 49,665 15,673
Income tax expense (benefit)............................... (21,500) 14,345 5,638
-------- -------- --------
Net income (loss)........................................ $(17,032) $ 35,320 $ 10,035
======== ======== ========
EARNINGS (LOSS) PER COMMON SHARE:
Basic.................................................... $ (0.68) $ 1.43 $ 0.42
Diluted.................................................. $ (0.68) $ 1.26 $ 0.40
WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND EQUIVALENTS
OUTSTANDING:
Basic.................................................... 24,888 24,719 23,678
Diluted.................................................. 24,888 30,702 25,074
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 42
THE DII GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE DATA)
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 28,
1999 1997
---------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 55,972 $ 85,067
Accounts receivable, net of allowance for doubtful
accounts of $5,900 and $2,893.......................... 153,861 132,590
Inventories............................................... 66,745 74,059
Deferred income taxes..................................... 7,249 769
Other assets.............................................. 11,570 7,766
-------- --------
Total current assets.............................. 295,397 300,251
-------- --------
Property, plant and equipment............................... 326,226 207,257
Goodwill, net of accumulated amortization of $12,130 and
$8,223.................................................... 97,475 70,371
Debt issue costs, net of accumulated amortization of $2,247
and $1,208................................................ 9,319 7,282
Deferred income taxes....................................... 11,428 --
Other assets................................................ 7,464 7,568
-------- --------
$747,309 $592,729
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $122,536 $ 98,688
Accrued expenses.......................................... 32,414 16,099
Accrued compensation and benefits......................... 11,720 13,667
Accrued interest payable.................................. 6,769 4,688
Current portion of capital lease obligations.............. 5,617 2,482
Current portion of long-term debt......................... 29,031 4,009
-------- --------
Total current liabilities......................... 208,087 139,633
-------- --------
Long-term debt, net of current portion...................... 271,864 151,703
Convertible subordinated notes payable...................... 86,235 86,250
Capital lease obligations, net of current portion........... 1,820 4,842
Deferred income taxes....................................... -- 739
Other....................................................... 3,582 2,214
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 and 45,000,000
shares authorized; 26,169,344 and 25,328,914 shares
issued; and 24,522,344 and 25,136,414 shares
outstanding............................................ 262 253
Additional paid-in capital................................ 124,410 117,612
Retained earnings......................................... 93,071 110,103
Treasury stock, at cost; 1,647,000 and 192,500 shares..... (28,544) (4,209)
Accumulated other comprehensive loss...................... (4,139) (4,095)
Deferred compensation..................................... (9,339) (12,316)
-------- --------
Total stockholders' equity........................ 175,721 207,348
-------- --------
$747,309 $592,729
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 43
THE DII GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
PREFERRED COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE DEFERRED
STOCK STOCK CAPITAL EARNINGS STOCK LOSS COMPENSATION TOTAL
--------- ------ ---------- -------- -------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995.... $-- $228 $ 87,360 $ 64,748 $ -- $(3,443) $ (3,344) $145,549
Net income...................... -- -- -- 10,035 -- -- -- 10,035
Foreign currency translation
adjustments................... -- -- -- -- -- (406) -- (406)
--------
Net comprehensive income...... 9,629
Issuance of 938,562 shares of
common stock under employee
stock plans................... -- 9 1,686 -- -- -- -- 1,695
Tax benefit on common stock
issued under employee stock
plans......................... -- -- 846 -- -- -- -- 846
Amortization of deferred
employee stock compensation... -- -- -- -- -- -- 1,084 1,084
Deferred employee stock
compensation.................. -- -- 1,733 -- -- -- (1,733) --
Issuance of 173,332 shares of
common stock under deferred
employee stock compensation
plan.......................... -- 2 (2) -- -- -- -- --
Issuance of 14,750 shares of
common stock under directors'
stock plan.................... -- -- 234 -- -- -- -- 234
-- ---- -------- -------- -------- ------- -------- --------
BALANCE AT DECEMBER 29, 1996.... -- 239 91,857 74,783 -- (3,849) (3,993) 159,037
Net income...................... -- -- -- 35,320 -- -- -- 35,320
Foreign currency translation
adjustments................... -- -- -- -- -- (246) -- (246)
--------
Net comprehensive income...... 35,074
Issuance of 1,180,136 shares of
common stock under employee
stock plans................... -- 12 6,888 -- -- -- -- 6,900
Tax benefit on common stock
issued under employee stock
plans......................... -- -- 6,029 -- -- -- -- 6,029
Treasury stock, at cost (192,500
shares)....................... -- -- -- -- (4,209) -- -- (4,209)
Amortization of deferred
employee stock compensation... -- -- -- -- -- -- 4,375 4,375
Deferred employee stock
compensation.................. -- -- 12,698 -- -- -- (12,698) --
Issuance of 212,332 shares of
common stock under deferred
employee stock compensation
plan.......................... -- 2 (2) -- -- -- -- --
Issuance of 7,616 shares of
common stock under directors'
stock plan.................... -- -- 142 -- -- -- -- 142
-- ---- -------- -------- -------- ------- -------- --------
BALANCE AT DECEMBER 28, 1997.... -- 253 117,612 110,103 (4,209) (4,095) (12,316) 207,348
Net loss........................ -- -- -- (17,032) -- -- -- (17,032)
Foreign currency translation
adjustments................... -- -- -- -- -- (44) -- (44)
--------
Net comprehensive loss........ (17,076)
Issuance of 555,935 shares of
common stock under employee
stock plans................... -- 6 6,150 -- -- -- -- 6,156
Tax benefit on common stock
issued under employee stock
plans......................... -- -- 1,635 -- -- -- -- 1,635
Treasury stock, at cost
(1,454,500 shares)............ -- -- -- -- (24,335) -- -- (24,335)
Amortization of deferred
employee stock compensation... -- -- -- -- -- -- 1,805 1,805
Deferred employee stock
compensation.................. -- -- (1,172) -- -- -- 1,172 --
Issuance of 274,836 shares of
common stock under deferred
employee stock compensation
plan.......................... -- 3 (3) -- -- -- -- --
Issuance of 8,859 shares of
common stock under directors'
stock plan.................... -- -- 173 -- -- -- -- 173
Conversion of convertible notes
(800 shares).................. -- -- 15 -- -- -- -- 15
-- ---- -------- -------- -------- ------- -------- --------
BALANCE AT JANUARY 3, 1999...... $-- $262 $124,410 $ 93,071 $(28,544) $(4,139) $ (9,339) $175,721
== ==== ======== ======== ======== ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 44
THE DII GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS
----------------------------------
1998 1997 1996
--------- --------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................ $ (17,032) $ 35,320 $ 10,035
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and fixed asset impairment charge......... 81,077 18,374 24,842
Amortization and goodwill impairment charge............ 5,262 3,968 3,544
Provision for doubtful receivables..................... 854 1,237 519
Deferred income taxes.................................. (17,012) 2,179 (1,855)
Loss (gain) on sales of equipment...................... 92 (11) (26)
Stock plan compensation................................ 1,978 4,517 1,318
Other.................................................. 3,511 (4,637) (17,551)
Changes in operating assets and liabilities, excluding
effects of acquisitions:
Accounts receivable................................. (15,737) (52,297) (16,504)
Inventories......................................... 10,782 (26,474) 5,586
Other assets........................................ (4,371) (3,472) (1,832)
Accounts payable.................................... 12,591 50,619 (871)
Accrued expenses.................................... 6,110 22,284 254
--------- --------- --------
Net cash provided by operating activities......... 68,105 51,607 7,459
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for business acquisitions, net of cash
acquired............................................... (53,895) (7,939) (2,056)
Additions to property, plant, and equipment.............. (153,891) (121,269) (33,274)
Proceeds from sales of property, plant, and equipment.... 3,362 2,717 276
--------- --------- --------
Net cash used by investing activities............. (204,424) (126,491) (35,054)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of capital leases............................. (3,375) (2,455) (2,480)
Repayments of long-term debt............................. (5,593) (10,219) (4,060)
Proceeds from issuance of long-term debt................. 137,500 150,000 1,190
Debt issuance costs...................................... (3,076) (5,335) (297)
Proceeds from stock issued under stock plans............. 6,156 6,900 1,695
Payments to acquire treasury stock....................... (24,335) (4,209) --
Proceeds from notes receivable........................... -- -- 1,000
--------- --------- --------
Net cash provided (used) by financing
activities..................................... 107,277 134,682 (2,952)
Effect of exchange rate changes on cash.................. (53) 259 24
--------- --------- --------
Net increase (decrease) in cash and cash
equivalents.................................... (29,095) 60,057 (30,523)
Cash and cash equivalents at beginning of year........... 85,067 25,010 55,533
--------- --------- --------
Cash and cash equivalents at end of year................. $ 55,972 $ 85,067 $ 25,010
========= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 45
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1: DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BACKGROUND
The Dii Group, Inc. (the "Dii Group" or the "Company") was incorporated in
March 1993 as Dovatron International, Inc., in order to serve as a holding
company to effectuate the spin-off of Dover Corporation's electronic outsourcing
business, which occurred on May 21, 1993.
As more fully described in Note 2 below, the Company merged (the "Merger")
with Orbit Semiconductor, Inc. ("Orbit"), on August 22, 1996, and ultimately
Orbit became a wholly owned subsidiary of the Dii Group. This transaction was
accounted for as a pooling-of-interests and, accordingly, all prior period
financial statements have been restated to reflect the combined operations of
the two companies.
The Company's fiscal year consists of either a 52-week or 53-week period
ending on the Sunday nearest to December 31. Accordingly, the accompanying
consolidated financial statements are presented as of January 3, 1999 and
December 28, 1997, and for the 53 weeks ended January 3, 1999 and 52 weeks ended
December 28, 1997 and December 29, 1996. Each fiscal year is referred to herein
as fiscal 1998, 1997 and 1996, respectively.
(b) DESCRIPTION OF BUSINESS
The Dii Group is a leading provider of electronics design and manufacturing
services, which operates through a global network of independent business units.
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 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:
- 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.
- Design services for mixed-signal ASICs. These services focus on designs
that utilize primarily analog signals, with only a small amount of
digital signals.
- 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.
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.
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 configuration ("box build") and
distribution through Dovatron. These services are commonly referred to as
contract electronics manufacturing ("CEM").
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 profitability.
F-8
<PAGE> 46
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Process Technologies -- The Company also has a non-core business unit know
as Process Technologies International ("PTI"). Through this business unit, the
Company manufactures surface mount printed circuit board solder cream stencils
through IRI International and Chemtech; manufactures in-circuit and functional
test software and hardware through TTI Testron; and manufactures depaneling
equipment and automated handling systems used in the printed circuit board
assembly process through Cencorp Automation Systems.
Management has undertaken an initiative to divest of this non-core business
unit, in order to sharpen its focus on the Company's core businesses of custom
semiconductor design, printed wiring board design and fabrication, and systems
assembly and distribution.
The Company does not believe that a sale of PTI would result in any adverse
impact on the Company's 1999 consolidated financial position. If the Company
sells PTI, 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 custom semiconductor
design, printed wiring board design and fabrication, and systems assembly and
distribution.
Operating results may also 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.
The Dii Group has actively pursued acquisitions in furtherance of its
strategy to be the fastest and most comprehensive provider of custom design,
engineering and manufacturing services for original equipment customers, from
microelectronic circuits through the final assembly and distribution of finished
products. Acquisitions involve numerous risks, including difficulties in the
assimilation of the operations, technologies, and products and services of the
acquired companies; the diversion of management's attention from other business
concerns; risks of entering markets in which the Dii Group has no or limited
direct prior experience and where competitors in such markets have stronger
market positions; and the potential loss of key employees of the acquired
company. The integration of certain operations following an acquisition requires
the dedication of management resources, which may distract attention from the
day-to-day business of the Company.
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 effect on the Company's operating results. The electronics
industry has historically been cyclical and subject to significant economic
downturns at various times, which are 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 in turn 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, computers and
peripherals, telecommunications, industrial and instrumentation, and medical.
The Company offers manufacturing capabilities in three major electronics
markets of the world (North America, Europe and Asia). The Company's operations
located outside of the United States generated
F-9
<PAGE> 47
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
approximately 43%, 42%, and 25% of total net sales in fiscal 1998, 1997, and
1996, 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.
(c) BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions are
eliminated.
(d) TRANSLATION OF FOREIGN CURRENCIES
The Company's primary functional currency is the U.S. dollar. Foreign
subsidiaries with a functional currency other than the U.S. dollar translate net
assets at year-end exchange rates, while income and expense accounts are
translated at weighted-average exchange rates. Adjustments resulting from these
translations are reflected in stockholders' equity as cumulative foreign
currency translation adjustments. Some transactions of the Company and its
subsidiaries are made in currencies different from their functional currencies.
Gains and losses from these transactions are included in income as they occur.
To date, the effect on income of such amounts has been immaterial.
In order to minimize foreign exchange transaction risk, the Company
selectively hedges certain of its foreign exchange exposures through forward
exchange contracts, principally relating to nonfunctional currency monetary
assets and liabilities. Gains and losses resulting from these agreements are
deferred and reflected as adjustments to the related foreign currency
transactions. The strategy of selective hedging can reduce the Company's
vulnerability to certain of its foreign currency exposures, and the Company
expects to continue this practice in the future. To date, the Company's hedging
activity has been immaterial, and there were no open foreign exchange contracts
as of the balance sheet dates included in the accompanying Consolidated
Financial Statements. As of January 3, 1999, the Company had the following
unhedged net foreign currency monetary asset (liability) positions:
<TABLE>
<CAPTION>
U.S. DOLLAR
FOREIGN CURRENCY EQUIVALENT
ASSETS ASSETS
(LIABILITY) (LIABILITY)
---------------- -----------
<S> <C> <C>
German Deutsche Mark.............................. 4,300 $ 2,600
British Pound Sterling............................ 88 147
Irish Punt........................................ 989 1,500
Chinese Renminbi.................................. 38,100 4,600
Hong Kong Dollar.................................. (42,000) (5,430)
Malaysian Ringgit................................. 4,081 1,074
</TABLE>
(e) CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
investment instruments with original maturities of three months or less to be
cash equivalents.
F-10
<PAGE> 48
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(f) INVENTORIES
Inventory costs include material, labor, and overhead. An allowance is
provided to reduce inventories to the lower of cost or market. Consideration is
given to deterioration, obsolescence, and other factors when establishing the
allowance. Cost is determined using the first-in, first-out (FIFO) method.
(g) PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment includes the cost of land, buildings,
machinery and equipment, and significant improvements of existing plant and
equipment. Expenditures for maintenance, repairs, and minor renewals are
expensed as incurred.
Plant and equipment are depreciated on straight-line methods over the
estimated useful lives of the assets, which are 30 years for buildings and 3 to
10 years for machinery and equipment.
(h) GOODWILL AND DEBT ISSUANCE COSTS
Goodwill arising from business acquisitions is amortized on the
straight-line basis over 15 to 30 years. Debt issuance costs are amortized on
the straight-line basis over the term of the related debt.
(i) IMPAIRMENT OF ASSETS
Long-lived assets, including goodwill, are reviewed for impairment if
events or circumstances indicate the carrying amount of these assets may not be
recoverable. If this review indicates that these assets will not be recoverable,
based on the forecasted undiscounted future operating cash flows expected to
result from the use of these assets and their eventual disposition, the
Company's carrying value of these assets is reduced to fair value. Except as
disclosed in Note 7, management does not believe current events or circumstances
indicate that its long-lived assets, including goodwill, are impaired as of
January 3, 1999.
(j) INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(k) EMPLOYEE BENEFIT PLANS
The Company maintains various defined contribution plans for employees who
have completed certain length of service and age requirements. Participants may
elect to contribute a certain portion of their compensation on a pre-tax basis
to these plans. The Company matches various percentages of the participants'
contributions up to a maximum percentage of their compensation.
The Company also maintains various deferred profit sharing plans for
certain employees who have completed certain length of service requirements with
certain business units. The Company may, subject to approval by the Board of
Directors, contribute a portion of its profits to these Plans. Such
contributions will be allocated to employees of the business units based upon
their salary and years of service.
In connection with the purchase of a manufacturing facility in Germany, as
discussed in Note 4, the Company assumed a defined benefit pension plan for the
employees of that facility. As of January 3, 1999,
F-11
<PAGE> 49
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
plan assets approximated the accumulated benefit obligation. Pension expense for
the period from the date of purchase to January 3, 1999, was immaterial.
Additionally, the Company provides a nonqualified deferred compensation
plan for select senior executives and directors of the Company. Contributions to
the deferred compensation plan are held in an irrevocable "rabbi trust." The
participants elect to make contributions of portions of their cash and incentive
stock compensation on a pre-tax basis to the plan. The Company matches various
percentages of the participants' cash compensation contributions up to a maximum
percentage of such contributions.
The Company's contribution to all of its employee benefit plans amounted to
$1,983, $1,233, and $464 in fiscal 1998, 1997, and 1996, respectively.
(l) FAIR VALUE OF FINANCIAL INSTRUMENTS
Unless otherwise stated herein, the fair value of the Company's financial
instruments approximates their carrying amount due to the relatively short
periods to maturity of the instruments and/or variable interest rates of the
instruments, which approximate current market interest rates.
(m) COMMITMENTS AND CONTINGENCIES
Liabilities for loss contingencies, including environmental remediation
costs, arising from claims, assessments, litigation, fines and penalties, and
other sources are recorded when the amount of assessment and/or remediation
costs are probable and can be reasonably estimated. The costs for a specific
clean-up site are discounted if the aggregate amount of the obligation and the
amount and timing of the cash payments for that site are fixed or reliably
determinable, generally based upon information derived from the remediation plan
for that site.
Recoveries from third parties that are probable of realization are
separately recorded, and are not offset against the related liability.
(n) REVENUE RECOGNITION
The Company recognizes revenue upon shipment of product to its customers.
(o) EARNINGS PER SHARE
Basic and diluted earnings-per-share ("EPS") amounts for all periods
presented have been calculated, and where necessary restated, to conform to the
requirements of Statement of Financial Accounting Standards No. 128, "Earnings
per Share." Basic EPS excludes dilution and is computed by dividing earnings
available to common shareholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS assumes the conversion of the
convertible subordinated notes, if dilutive, and the issuance of common stock
for other potentially dilutive equivalent shares outstanding.
(p) PERVASIVENESS OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ materially from those estimates.
F-12
<PAGE> 50
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(q) RECLASSIFICATIONS
Certain 1997 and 1996 balances have been reclassified to conform with the
1998 presentation.
(r) COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income (SFAS 130), effective January 1, 1998. SFAS 130
requires that changes in equity during a reporting period, except transactions
with owners in their capacity as owners (for example, the issuance of common
stock and dividends paid on common stock) and transactions reported as direct
adjustments to retained earnings, be reported as a component of comprehensive
income. Comprehensive income is required to be reported in a financial statement
that is displayed with the same prominence as other financial statements.
Disclosure of comprehensive income for the fiscal years ended January 3, 1999,
December 28, 1997, and December 29, 1996, are included in the accompanying
financial statements as part of the statement of stockholders' equity.
NOTE 2: BUSINESS COMBINATIONS
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. 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. In addition, as of January 3, 1999, the Company accrued $9,000 of
contingent consideration.
During fiscal 1998, 1997, and 1996, the Company completed certain other
business combinations that are immaterial to the Company's results from
operations and financial position. The cash purchase price, net of cash
acquired, amounted to $2,100, $7,939, and $2,056, in fiscal 1998, 1997, and
1996, respectively. The fair value of the assets acquired and liabilities
assumed from these acquisitions was immaterial. The cost in excess of net assets
acquired through these acquisitions amounted to $9,133 and $3,677 in fiscal 1997
and 1996, respectively.
The costs of acquisitions have been allocated on the basis of the estimated
fair value of assets acquired and liabilities assumed. Goodwill 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
$11,550 and $1,134 for contingent purchase price adjustments during fiscal 1998
and 1996, respectively. There were no contingent purchase price adjustments in
fiscal 1997.
The acquisitions described above were accounted for by the purchase method
of accounting for business combinations. Accordingly, the accompanying
consolidated statements of income do not include any revenue or expenses related
to these acquisitions prior to their respective closing dates. The pro forma
results for fiscal 1998, 1997, and 1996, assuming these acquisitions had been
made at the beginning of the prior year, would not be materially different from
reported results.
On August 22, 1996, the Dii Group issued 7,359,250 shares of the Dii Group
common stock for all outstanding shares of Orbit common stock, based upon one
share of Orbit common stock converted into 45/100ths (0.45) of a share of Dii
Group common stock, and as further adjusted to account for the two-for-one stock
split.
F-13
<PAGE> 51
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Results of operations for the separate companies prior to the Merger and
for the combined companies as restated are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1996
(UNAUDITED)
----------------
<S> <C>
NET SALES:
Dii Group................................................... $196,230
Orbit....................................................... 31,810
--------
Combined, as restated....................................... $228,040
========
NET INCOME:
Dii Group................................................... $ 9,499
Orbit....................................................... 2,174
--------
Combined, as restated....................................... $ 11,673
========
</TABLE>
NOTE 3: INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
JAN. 3, DEC. 28,
1999 1997
------- --------
<S> <C> <C>
Raw materials............................................ $44,669 $51,802
Work in process.......................................... 24,922 24,890
Finished goods........................................... 6,622 2,839
------- -------
76,213 79,531
Less allowance........................................... 9,468 5,472
------- -------
$66,745 $74,059
======= =======
</TABLE>
NOTE 4: PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consisted of the following:
<TABLE>
<CAPTION>
JAN. 3, DEC. 28,
1999 1997
-------- --------
<S> <C> <C>
Land................................................... $ 12,816 $ 7,714
Buildings.............................................. 125,886 48,859
Machinery and equipment................................ 234,221 203,777
Construction in progress............................... 40,313 9,938
-------- --------
413,236 270,288
Less accumulated depreciation and amortization......... 87,010 63,031
-------- --------
$326,226 $207,257
======== ========
</TABLE>
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, subject to certain post-closing adjustments.
F-14
<PAGE> 52
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
In August 1997, the Company acquired International Business Machine's
("IBM") Austin, Texas, printed wiring board fabrication facility, and its
related production equipment, inventory, and intellectual property, for a
purchase price of approximately $46,064.
NOTE 5: LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
JAN. 3, DEC. 28,
1999 1997
-------- --------
<S> <C> <C>
Senior subordinated notes.............................. $150,000 $150,000
Bank term loan......................................... 100,000 --
Revolving line-of-credit advances...................... 37,500 --
Notes payable with interest rates ranging from 7.74% to
9.05%................................................ 1,845 5,712
Non-interest-bearing notes payable to sellers of
businesses acquired due in 1999...................... 11,550 --
-------- --------
Total long-term debt......................... 300,895 155,712
Less current portion................................... 29,031 4,009
-------- --------
Long-term debt, net of current portion............... $271,864 $151,703
======== ========
</TABLE>
The aggregate maturities of long-term debt for fiscal years subsequent to
January 3, 1999, are as follows: $29,031 in 1999; $18,356 in 2000; $20,008 in
2001; $22,000 in 2002; $61,500 in 2003; and $150,000 in 2007.
The senior subordinated notes bear interest at 8.5% and mature on September
15, 2007. Interest is payable on March 15 and September 15 of each year. The
Company may redeem the notes on or after September 15, 2002. The indenture
contains certain covenants that, among other things, limit the ability of the
Company and certain of its subsidiaries to (i) incur additional debt, (ii) issue
or sell capital stock of certain subsidiaries, (iii) engage in asset sales, (iv)
incur layered debt, (v) create liens on its properties and assets, and (vi) make
distributions or pay dividends. The covenants are subject to a number of
significant exceptions and qualifications. The fair value of the Company's
senior subordinated notes approximated $143,685 at January 3, 1999 and
approximated its carrying amount at December 28, 1997.
On October 30, 1998, the Company replaced its $80,000 senior secured
revolving line-of-credit facility with a $210,000 Credit Agreement (the
"Agreement") with a syndicate of domestic and foreign banks. The Agreement
provides for a $100,000 5-year term loan ("Bank term loan"), and a $110,000
revolving line-of-credit facility ("Revolver"). The Revolver expires on November
1, 2003. Borrowings under the Agreement bear interest, at the Company's option,
at either: (i) the Applicable Base Rate ("ABR") (as defined in the Agreement)
plus the Applicable Margin for ABR Loans ranging between 0.00% and 0.75%, based
on certain financial ratios of the Company; or (ii) the Eurodollar Rate (as
defined in the Agreement) plus the Applicable Margin for Eurodollar Loans
ranging between 1.00% and 2.25%, based on certain financial ratios of the
Company. The Company is required to pay a quarterly commitment fee ranging from
0.25% to 0.50% per annum, based on certain financial ratios of the Company, of
the unused commitment under the Revolver. At January 3, 1999, the
weighted-average interest rate for the Company's Bank term loan was 7.15%. At
January 3, 1999, borrowings of $37,500 were outstanding under the Revolver at a
weighted-average interest rate of 7.21%.
The credit facility is secured by substantially all of the Company's
assets, and contains certain restrictions on the Company's ability to (i) incur
certain debt, (ii) create liens on its properties and assets, (iii) make certain
investments and capital expenditures, (iv) merge or consolidate with other
entities, (v) pay dividends or make distributions, (vi) repurchase or redeem
common stock, or (vii) dispose of assets. The Agreement
F-15
<PAGE> 53
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
also requires that the Company maintain certain financial covenants, including,
among other things, a maximum ratio of consolidated funded debt to EBITDA
(earnings before interest, taxes, depreciation, and amortization), a minimum
ratio of consolidated interest coverage, and minimum levels of consolidated net
worth, as defined, during the term of the Agreement. At January 3, 1999, the
Company was in compliance with all loan covenants.
The Company made long-term debt interest payments of $13,004, $1,353, and
$1,091 during fiscal 1998, 1997, and 1996, respectively.
NOTE 6: CONVERTIBLE SUBORDINATED NOTES
The fair market value of the Company's 6% convertible subordinated notes
approximated $107,794 and $127,969, based upon the last sales price on January
3, 1999, and December 28, 1997, respectively. Interest is payable on April 15
and October 15 of each year. 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.
The Company made convertible subordinated note interest payments of $5,175
during fiscal 1998 and 1997, and $5,247 in 1996.
NOTE 7: NON-RECURRING CHARGES
During fiscal 1998, the Company recognized non-recurring 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
ultimately sold in January 1999. As discussed below, $74,182 of the
non-recurring pre-tax charges have been classified as a component of cost of
sales.
Of the total non-recurring pre-tax charges, $1,398 relate to employee
termination costs and have been classified as a component of costs of sales. As
of January 3, 1999, approximately 40 people have been terminated, and another
170 people were terminated when the Fab was sold in the first quarter of fiscal
1999. The Company paid approximately $498 of employee termination costs during
fiscal 1998. The remaining $900 is classified as accrued compensation and
benefits as of January 3, 1999 and was paid out in the first quarter of fiscal
1999.
The non-recurring pre-tax charges include approximately $53,340 for the
write-down of long-lived assets to fair value. The fair value of these assets
was based on the sale price of the Fab. These assets primarily relate to the
property, plant, and equipment sold. This amount has been classified as a
component of cost of sales.
The non-recurring pre-tax charges include approximately $12,500 for losses
on sales contracts, incremental amounts of uncollectible accounts receivable,
and estimated incremental costs for sales returns and allowances. Of this
amount, $10,767 was realized during fiscal 1998 and $1,733 is expected to be
realized in the first quarter of fiscal 1999 and is included in accrued expenses
at January 3, 1999. These losses are classified as a component of cost of sales.
The non-recurring pre-tax charges also include approximately $9,398 for
losses on inventory write-downs and exit costs. The Company has written off and
disposed of approximately $5,750 of inventory, which have been classified as a
component of cost of sales. The loss on the sale of the Fab includes $3,648 of
incremental
F-16
<PAGE> 54
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
costs and contractual obligations for items such as lease termination costs,
litigation, environmental clean-up costs, and other facility exit costs incurred
directly as a result of the exit plan. Of the $3,648, approximately $1,194 have
been classified as a component of cost of sales. The Company had a remaining
liability of $3,305 related to these exit costs, which have been classified as
accrued expenses as of January 3, 1999.
Non-recurring charges in 1996 amounted to $16,532 and included $4,649 of
costs associated with the Orbit Merger described in Note 2 and $11,883 of costs
associated with the closure of Orbit's 4-inch, 1.2 micron wafer fabrication
facility and the move into its new 6-inch, 0.6 micron facility. The $11,883 of
closure costs, which were classified in cost of sales, include provisions of (i)
$7,970 associated with the impairment of long-lived assets associated with the
closure of Orbit's 4-inch, 1.2 micron wafer fabrication facility, (ii) $1,500
for 4-inch wafer inventory not recoverable on the 6-inch fabrication process,
(iii) $1,763 associated with the write-off of Orbit's investment in a subsidiary
established to expand its manufacturing capacity in Israel, and (iv) $650 of
expenses associated with closure and exit costs of the 4-inch, 1.2 micron wafer
fabrication facility. The Israel expansion was no longer required with the
acquisition of the 6-inch, 0.6 micron facility. The Company completed the
transition into its 6-inch, 0.6 micron facility and sold its 4-inch, 1.2 micron
wafer fabrication facility during the first quarter of 1998. All previously
established provisions associated with the closure were completely utilized in
fiscal 1997 or the first quarter of 1998. The original accrual estimates
approximated the actual amounts required to complete the transaction.
NOTE 8: INCOME TAXES
Income (loss) before income taxes for domestic and foreign operations were
as follows:
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Domestic........................................... $(71,253) $ 23,729 $ 11,023
Foreign............................................ 32,721 25,936 4,650
-------- -------- --------
$(38,532) $ 49,665 $ 15,673
======== ======== ========
INCOME TAXES (BENEFIT) WERE ALLOCATED AS FOLLOWS:
Income (loss) from operations...................... $(21,500) $ 14,345 $ 5,638
Stockholders' equity (for compensation expense for
tax purposes in excess of amounts recognized for
financial reporting purposes).................... (1,635) (5,805) (846)
-------- -------- --------
$(23,135) $ 8,540 $ 4,792
======== ======== ========
</TABLE>
Income tax expense (benefit) attributable to income from operations
consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- --------
<S> <C> <C> <C>
FISCAL 1998:
U.S. Federal...................................... $(7,983) $(15,710) $(23,693)
State............................................. (185) (1,479) (1,664)
Foreign........................................... 3,680 177 3,857
------- -------- --------
$(4,488) $(17,012) $(21,500)
======= ======== ========
</TABLE>
F-17
<PAGE> 55
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- --------
<S> <C> <C> <C>
FISCAL 1997:
U.S. Federal...................................... $ 8,983 $ 297 $ 9,280
State............................................. 672 1,339 2,011
Foreign........................................... 2,511 543 3,054
------- -------- --------
$12,166 $ 2,179 $ 14,345
======= ======== ========
FISCAL 1996:
U.S. Federal...................................... $ 5,859 $ (1,500) $ 4,359
State............................................. 489 (176) 313
Foreign........................................... 1,145 (179) 966
------- -------- --------
$ 7,493 $ (1,855) $ 5,638
======= ======== ========
</TABLE>
The significant components of deferred tax expense (benefit) attributable
to income from operations are:
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS
-----------------------------
1998 1997 1996
-------- ------ -------
<S> <C> <C> <C>
Deferred tax expense (exclusive of the effects of
other components listed below)...................... $(19,414) $ 812 $(3,891)
Charge in lieu of taxes resulting from initial
recognition of acquired tax liabilities that are
allocated to goodwill related to an acquired
entity.............................................. -- (326) --
Increase in the valuation allowance for deferred tax
assets.............................................. 2,402 1,693 2,036
-------- ------ -------
$(17,012) $2,179 $(1,855)
======== ====== =======
</TABLE>
Income tax expense differed from the amounts computed by applying the U.S.
Federal income tax rate of 35 percent for fiscal 1998 and 1997, respectively,
and 34 percent for fiscal 1996 to income (loss) before income taxes as a result
of the following:
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS
------------------------------
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Computed "expected" tax expense (benefit)............ $(13,486) $17,383 $ 5,329
Increase (reduction) in income taxes resulting from:
Foreign tax rate differential...................... (7,695) (5,825) (560)
State income taxes, net of federal income tax
benefit......................................... (1,098) 1,307 207
Tax credits and carryforwards...................... (1,166) (786) (1,498)
Change in the valuation allowance for deferred tax
assets.......................................... 2,402 1,693 2,036
Other.............................................. (457) 573 124
-------- ------- -------
$(21,500) $14,345 $ 5,638
======== ======= =======
</TABLE>
F-18
<PAGE> 56
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
<TABLE>
<CAPTION>
JAN. 3, 1999 DEC. 28, 1997
------------ -------------
<S> <C> <C>
DEFERRED TAX ASSETS:
Inventories............................................... $ 1,604 $ 1,499
Deferred revenues......................................... 5,595 542
Deferred compensation..................................... 1,594 1,522
Compensated absences...................................... 1,093 815
Allowance for doubtful accounts........................... 593 664
Accrued liabilities....................................... 3,598 713
Net operating loss and tax credit carryforwards........... 7,284 581
Federal and state credits................................. 6,628 3,983
Merger costs.............................................. 368 492
Other..................................................... 22 555
------- -------
Total gross deferred tax assets................... 28,379 11,366
Less valuation allowance.......................... 6,966 4,564
------- -------
21,413 6,802
------- -------
DEFERRED TAX LIABILITIES:
Accumulated depreciation.................................. -- 2,718
Goodwill.................................................. 2,723 2,674
Leasing................................................... -- 985
Other..................................................... 13 395
------- -------
Total gross deferred tax liabilities.............. 2,736 6,772
------- -------
Net deferred tax asset............................ $18,677 $ 30
======= =======
</TABLE>
At January 3, 1999, approximately $17,483 of tax losses were available to
carry forward. These carryforwards generally expire in tax years 1999 through
2018. State manufacturing investment tax credits of $4,081 expire in tax years
2002 through 2005. State investment tax credits of $567 expire in tax years 2008
through 2012. State research and development tax credits and alternative minimum
tax credits total $397 and $1,583, respectively, and carry forward with no
expiration. Capital loss carryforwards totaling $254 expire in 1999.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the
periods in which the deferred tax assets are deductible, management believes it
is more likely than not the Company will realize the benefits of these
deductible differences, net of the established valuation allowance.
The Company does not provide for federal income taxes on the undistributed
earnings of its foreign subsidiaries, as such earnings are not intended by
management to be repatriated in the foreseeable future. Deferred income taxes
have not been provided on undistributed foreign earnings of $74,562 as of
January 3,
F-19
<PAGE> 57
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1999. Determination of the amount of the unrecognized deferred tax liability on
these undistributed earnings is not practicable.
The Company made income tax payments of $2,575, $5,235, and $5,936 in
fiscal 1998, 1997, and 1996, respectively.
NOTE 9: COMMITMENTS AND CONTINGENCIES
As of January 3, 1999, and December 28, 1997, the Company has financed a
total of $8,849 and $10,758, respectively, in machinery and equipment purchases
with capital leases. Accumulated amortization for machinery and equipment under
capital leases totals $3,426 and $2,790 at January 3, 1999, and December 28,
1997, respectively. These capital leases have interest rates ranging from 6.77%
to 9.05%. The Company also has several non-cancelable operating leases,
primarily for equipment. These leases generally contain renewal options and
require the Company to pay all executory costs, such as maintenance and
insurance. The capital and operating leases expire in various years through
2005, and require the following minimum lease payments:
<TABLE>
<CAPTION>
OPERATING CAPITAL
--------- -------
<S> <C> <C>
1999..................................................... $ 3,670 $5,938
2000..................................................... 3,438 2,168
2001..................................................... 3,127 120
2002..................................................... 1,817 --
2003..................................................... 1,157 --
Thereafter............................................... 1,136 --
------- ------
Total minimum lease payments................... $14,345 8,226
=======
Less amount representing interest........................ 789
------
Present value of net minimum capital lease payments...... 7,437
Less current portion..................................... 5,617
------
Obligations under capital leases, excluding current
portion................................................ $1,820
======
</TABLE>
Rental expense for operating leases amounted to $6,474, $7,213, and $4,623
in fiscal 1998, 1997, and 1996, respectively.
The Company has approximately $14,294 of capital commitments as of January
3, 1999. The majority of these commitments are expected to be completed by the
end of fiscal 1999.
In 1997 two related complaints, as amended, were filed in the District
Court of Boulder, Colorado, and the U.S. District Court for the District of
Colorado, against the Company and certain of its officers. The lawsuits purport
to be brought on behalf of a class of persons who purchased the Company's common
stock during the period from April 1, 1996, through September 8, 1996, and claim
violations of Colorado and federal laws based on allegedly false and misleading
statements made in connection with the offer, sale, or purchase of the Company's
common stock at allegedly artificially inflated prices, including statements
made prior to the Company's acquisition of Orbit. The complaints seek
compensatory and other damages, as well as equitable relief. The Company filed
motions to dismiss both amended complaints. The motion to dismiss the state
court complaint has been denied, and the Company has filed its answer denying
that it misled the securities market. The motion to dismiss the federal court
complaint is still pending. Both actions were brought by the same plaintiffs'
law firm as the Orbit action discussed below. A May 1999 trial date for the
state court action has been vacated, and a new trial date has not been set. No
trial date has been set in the
F-20
<PAGE> 58
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
federal court action. Discovery has commenced in the state court action. The
Company believes that the claims asserted in both actions are without merit, and
intends to defend against such claims vigorously.
A class action complaint (as amended in March 1996) for violations of
federal securities law was filed against Orbit and three of its officers in 1995
in the U.S. District Court for the Northern District of California. The amended
complaint was dismissed on November 12, 1996, with leave to amend only as to
certain specified claims relating to statements made by securities analysts. In
January 1997 a second amended complaint was filed. The second amended complaint
alleges that Orbit and three of its officers are responsible for actions of
securities analysts that allegedly misled the market for Orbit's then existing
public common stock. The second amended complaint seeks relief under Section
10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder. The
second amended complaint seeks compensatory and other damages, as well as
equitable relief. In September 1997, Orbit filed its answer to the second
amended complaint denying responsibility for the actions of securities analysts
and further denying that it misled the securities market. The parties have
entered into a Memorandum of Understanding reflecting a proposed settlement of
the action subject to the final terms, which are being negotiated.
In addition to the above matters, the Company is involved in certain other
litigation arising in the ordinary course of business.
Although management is of the opinion that these matters will not have a
material adverse effect on the consolidated financial position or results of
operations of the Company, the ultimate outcome of these matters cannot, at this
time, be predicted, in light of the uncertainties inherent in litigation.
The Company has joined together with other potentially responsible parties
("PRPs") to negotiate with the New York Department of Environmental Conservation
(NYDEC) concerning the performance of a remedial investigation/feasibility study
(RI/FS) at the Roblin Steel Site. In connection therewith, the Company executed
the Roblin Steel Site Deminimus Contributors Participation Agreement. The
Company's share of the agreement is less than 2%. A Consent Order concerning the
performance of a RI/FS was reached with the NYDEC in July of 1997.
In April 1998 the Company entered into Consent Orders with NYDEC concerning
the performance of a RI/FS with respect to environmental matters at a formerly
owned facility in Kirkwood, New York, and a facility that is owned and leased
out to a third party in Binghamton, New York.
The ultimate outcome of these 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 the above environmental matters. The Company has accrued
the minimum estimated costs, which amounts are immaterial, associated with these
matters in the accompanying 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.
F-21
<PAGE> 59
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 10: STOCKHOLDERS' EQUITY
On July 29, 1997, the Company's Board of Directors declared a two-for-one
stock split of the Company's common stock effected in the form of a stock
dividend, which was distributed on September 2, 1997, to shareholders of record
as of August 15, 1997. All share and per-share data included in this report have
been retroactively restated to reflect the split.
During 1998 and 1997, the Company repurchased 1,454,500 and 192,500 shares
of its common stock at a cost of $24,335 and $4,209, respectively. The Company
could repurchase an additional 353,000 shares of common stock in future years as
a part of its share repurchase plan, subject to certain restrictions under its
Credit Agreement.
Each outstanding share of common stock carries a dividend of one preferred
share purchase right ("Right"). The Rights are not exercisable until the earlier
of (i) ten days following a public announcement that, without consent of the
Company, a person or group (an "Acquiring Person") has acquired beneficial
ownership of 20% or more of the voting power of all outstanding securities of
the Company or (ii) ten days following the commencement of a tender or exchange
offer that would result in a person or group becoming an Acquiring Person,
without the prior consent of the Company. In the event that a person or group
becomes an Acquiring Person, each holder of a Right, other than the Acquiring
Person, shall have the right to receive, upon exercise, that number of shares of
the Common Stock of the Company having a market value of two times the exercise
price of the Right. In addition, after a person or group becomes an Acquiring
Person, if the Company is involved in a merger or other business combination
transaction in which the Company is not the surviving corporation, holders of
the Rights, other than the Acquiring Person, will be entitled to purchase shares
of the acquiring company at a similar discount. The Rights will expire, unless
earlier redeemed by the Company, on May 3, 2004.
NOTE 11: STOCK PLANS
Under the Company's 1993 Stock Option Plan, the Compensation Committee of
the Board of Directors is authorized to grant stock options to purchase up to an
aggregate of 1,100,000 shares of common stock. In addition, under the 1994 Stock
Incentive Plan, the Committee is also authorized to make awards of performance
shares and/or grant stock options to purchase up to an aggregate of 4,000,000
shares of common stock. Under the terms of these Plans, shares may be awarded or
options may be granted to key employees to purchase shares of the Company's
common stock. Options are granted at a purchase price equal to the fair market
value of the common stock on the date of the grant, and performance shares are
awarded in the form of shares of restricted common stock.
At the time of the Merger, Orbit had three stock option plans, the KMOS
Semiconductor, Inc., 1989 Stock Option Plan ("1989 Plan"), the KMOS
Semiconductor, Inc., 1990 Non-Qualified Stock Option Plan ("1990 Plan"), and the
Orbit Semiconductor, Inc., 1994 Stock Incentive Plan ("1994 Orbit Plan"), under
which incentive and non-qualified stock options were granted to key employees,
directors, and consultants. The options were generally granted at the fair
market value of Orbit's stock on the date of grant. As a result of the merger,
outstanding options to purchase Orbit common stock at the time of the Merger
were converted into options to acquire an aggregate of 1,990,492 shares of Dii
Group common stock, which is equal to the product of the number of shares of
Orbit common stock that were issuable upon exercise of such options multiplied
by the Exchange Ratio and as further adjusted to account for the two-for-one
stock split. At the time of conversion, the exercise price of the converted
options was determined by dividing the original exercise price of such options
by the Exchange Ratio. Stock options will no longer be granted under the Orbit
stock option plans.
F-22
<PAGE> 60
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table summarizes the stock option transactions under the
Company's Stock Option Plans:
<TABLE>
<CAPTION>
SHARES UNDERLYING WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE
----------------- ----------------
<S> <C> <C>
OPTIONS OUTSTANDING AT DEC. 31, 1995......... 3,513,884 $ 7.28
Granted.................................... 344,250 10.34
Exercised.................................. (330,872) 2.79
Canceled................................... (138,592) 10.96
----------
OPTIONS OUTSTANDING AT DEC. 29, 1996......... 3,388,670 7.81
Granted.................................... 627,700 16.08
Exercised.................................. (1,082,680) 5.60
Canceled................................... (373,100) 9.43
----------
OPTIONS OUTSTANDING AT DEC. 28, 1997......... 2,560,590 10.53
Granted.................................... 1,596,134 14.20
Exercised.................................. (327,734) 7.96
Canceled................................... (340,723) 14.01
----------
OPTIONS OUTSTANDING AT JAN. 3, 1999.......... 3,488,267 11.99
==========
OPTIONS EXERCISABLE AT JAN. 3, 1999.......... 1,519,855 9.90
==========
</TABLE>
The following table summarizes stock option information under the Company's
Stock Option Plans:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AT JAN. 3, 1999 OPTIONS EXERCISABLE AT JAN. 3, 1999
- ------------------------------------------------------ ------------------------------------
WEIGHTED-AVERAGE WEIGHTED-
NUMBER WEIGHTED-AVERAGE REMAINING CONTRACTUAL NUMBER AVERAGE
OUTSTANDING EXERCISE PRICE TERM (IN YEARS) OUTSTANDING EXERCISE PRICE
- ----------- ---------------- --------------------- -------------- -------------------
<S> <C> <C> <C> <C>
784,785 $ 7.18 4.27 758,069 $ 7.17
1,056,430 9.96 8.98 181,083 9.01
603,912 10.66 7.19 353,844 10.73
613,856 15.64 8.82 123,549 14.75
429,284 22.44 8.84 103,310 22.90
--------- ---------
3,488,267 11.99 7.56 1,519,855 9.90
========= =========
</TABLE>
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25"), and related
Interpretations, in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
Statement of Financial Accounting Standard ("SFAS") No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), requires the use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of the grant, no
compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The weighted-average grant date fair value of options granted was
$5.20, $8.56, and $6.52 for fiscal 1998, 1997, 1996 respectively, using a
Black-Scholes option pricing model with the following weighted-average
assumptions: risk-free interest rates of 5.41%, 5.47%, and 5.76% in fiscal 1998,
1997, and 1996, respectively; volatility factors of the expected market price of
the Company's common stock
F-23
<PAGE> 61
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
of 52% in fiscal 1998, 51% in fiscal 1997, and 50% in fiscal 1996; a
weighted-average expected life of the option of three years; and no expected
dividend yields.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of the employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The Company's
pro forma information follows:
<TABLE>
<CAPTION>
FISCAL YEARS
-----------------------------
1998 1997 1996
-------- ------- ------
<S> <C> <C> <C>
Net income (loss)..................................... $(19,453) $33,272 $8,019
Basic earnings (loss) per share....................... (.78) 1.35 0.34
Diluted earnings (loss) per share..................... (.78) 1.08 0.32
</TABLE>
Pro forma net income (loss) reflects only options granted in fiscal 1998,
1997, and 1996. Therefore, the full impact of calculating compensation cost for
stock options under SFAS No. 123 is not reflected in the pro forma net income
amounts presented above because compensation cost for options granted prior to
January 1, 1996, are not considered.
Under the 1993 Stock Option Plan and the 1994 Stock Incentive Plan, most
outstanding options expire ten years from the date of grant and vest over a
three-year period. All outstanding options under the 1994 Orbit Plan, the 1989
Plan, and 1990 Plan were fully vested on January 3, 1999, and expire no later
than 10 years after grant date.
The Compensation Committee of the Board of Directors awarded 456,000,
250,000, and 142,000 shares in fiscal 1998, 1997, and 1996, respectively, to key
executives under the 1994 Stock Incentive Plan. Shares vest over a period of
time, which in no event exceeds eight years. Certain shares may vest at an
accelerated rate upon the achievement of certain annual earnings-per-share
targets established by the Compensation Committee. Non vested shares for
individual participants who are no longer employed by the Company on the plan
termination date are forfeited. Participants will receive all unissued shares
upon their death or disability, or in the event of a change of control of the
Company. The shares are not reported as outstanding until vested. The number of
shares vested amounted to 62,500, 262,336, and 212,332 for fiscal 1998, 1997,
and 1996, respectively.
Unearned compensation equivalent to the market value at the date the shares
were awarded is charged to stockholders' equity and is amortized to expense
based upon the estimated number of shares expected to be issued in any
particular year. Unearned compensation expense amounting to $1,805, $4,375, and
$1,084 was amortized to expense during fiscal 1998, 1997, and 1996,
respectively. The weighted-average fair value of performance shares awarded in
1998, 1997, and 1996 was $19.97, $10.67, and $12.21 per share, respectively.
As of January 3, 1999, there are 92,445 shares available for future grant
under the Company's 1993 Stock Option Plan and 1994 Stock Incentive Plan.
The Company's Non-Employee Directors' Stock Compensation Plan (the
"Directors' Plan") provides for the automatic grant to each non-employee
director of the Company of 2,000 shares of common stock per
F-24
<PAGE> 62
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
annum as consideration for regular service as a director. Shares will be issued
in quarterly installments at the end of each fiscal quarter. The Company
recognizes quarterly compensation expense equal to the fair market value of the
stock to be issued at the end of each quarter. The aggregate number of shares
which may be issued under the Directors' Plan is 60,000 shares, and the plan
will terminate on December 31, 2004. As of January 3, 1999, there are 24,557
shares available for future grant under this plan. The weighted-average fair
value of director shares awarded in fiscal 1998, 1997, and 1996 was $18.36,
$21.95, and $12.90 per share, respectively.
The Company also has a 1994 Employee Stock Purchase Plan under which all
U.S. and international employees may be granted the opportunity to purchase up
to 1,000,000 shares of common stock at 85% of market value on the first or last
business day of a six-month payment period, whichever is lower. As of January 3,
1999, there are 613,721 shares available for sale under this plan. The shares
sold under this plan in fiscal 1998, 1997, and 1996 amounted to 228,201, 64,224,
and 57,076, respectively. The weighted-average fair value of shares sold under
this plan in fiscal 1998, 1997, and 1996 was $17.13, $16.33, and $11.97 per
share, respectively. Compensation expense pursuant to SFAS No. 123 associated
with this plan in fiscal 1998, 1997, and 1996 was immaterial.
NOTE 12: EARNINGS PER SHARE
Earnings (loss) per common share ("EPS") data were computed as follows:
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS
------------------------------
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
BASIC EPS:
Net income (loss).................................... $(17,032) $35,320 $10,035
======== ======= =======
Shares used in computation:
Weighted-average common shares outstanding......... 24,888 24,719 23,678
Basic EPS............................................ $ (0.68) $ 1.43 $ 0.42
======== ======= =======
DILUTED EPS:
Net income (loss).................................... $(17,032) $35,320 $10,035
Plus income impact of assumed conversions:
Interest expense (net of tax) on convertible
subordinated notes.............................. -- 3,105 --
Amortization (net of tax) of debt issuance cost on
convertible subordinated notes.................. -- 260 --
-------- ------- -------
Net income (loss) available to common stockholders... $(17,032) $38,685 $10,035
======== ======= =======
SHARES USED IN COMPUTATION:
Weighted-average common shares outstanding........... 24,888 24,719 23,678
Shares applicable to exercise of dilutive options.... -- 1,242 1,280
Shares applicable to deferred stock compensation..... -- 141 116
Shares applicable to convertible subordinated
notes.............................................. -- 4,600 --
-------- ------- -------
Shares applicable to diluted earnings................ 24,888 30,702 25,074
======== ======= =======
Diluted EPS.......................................... $ (0.68) $ 1.26 $ 0.40
======== ======= =======
</TABLE>
The common equivalent shares from common stock options, deferred stock
compensation and convertible subordinated notes were antidilutive for fiscal
1998, and therefore were not assumed to be converted for
F-25
<PAGE> 63
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
diluted earnings-per-share computations. Additionally, the convertible
subordinated notes were antidilutive for fiscal 1996, and therefore not assumed
converted for diluted earnings-per-share computations.
NOTE 13: BUSINESS CONCENTRATIONS AND GEOGRAPHIC AREAS
During the fourth quarter of fiscal 1998, the Company adopted SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information." 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). See Note 1(b) for
further information regarding the products and services provided by these
segments. 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 FISCAL YEARS
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
NET SALES:
Systems assembly and distribution................ $589,286 $514,078 $274,651
Printed wiring boards............................ 208,696 128,107 72,851
Other............................................ 127,561 137,418 111,391
-------- -------- --------
$925,543 $779,603 $458,893
======== ======== ========
INCOME (LOSS) BEFORE INCOME TAXES*:
Systems assembly and distribution................ $ 32,558 $ 30,645 $ 13,621
Printed wiring boards............................ 29,084 26,935 17,442
Other............................................ 6,647 12,048 11,152
Unallocated general corporate.................... (30,185) (19,963) (10,010)
-------- -------- --------
$ 38,104 $ 49,665 $ 32,205
======== ======== ========
IDENTIFIABLE ASSETS AT THE END OF EACH FISCAL YEAR:
Systems assembly and distribution................ $238,027 $209,886 $126,253
Printed wiring boards............................ 390,194 170,503 92,594
Other............................................ 79,453 143,110 96,281
Unallocated general corporate.................... 39,635 69,230 20,723
-------- -------- --------
$747,309 $592,729 $335,851
======== ======== ========
DEPRECIATION AND AMORTIZATION**:
Systems assembly and distribution................ $ 10,629 $ 6,915 $ 7,326
Printed wiring boards............................ 10,925 7,008 5,627
Other............................................ 10,283 7,628 7,230
Unallocated general corporate.................... 1,162 791 677
-------- -------- --------
$ 32,999 $ 22,342 $ 20,860
======== ======== ========
</TABLE>
F-26
<PAGE> 64
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CAPITAL EXPENDITURES:
Systems assembly and distribution................ $ 21,317 $ 25,493 $ 10,869
Printed wiring boards............................ 118,818 61,326 6,586
Other............................................ 11,912 34,334 15,377
Unallocated general corporate.................... 1,844 116 442
-------- -------- --------
$153,891 $121,269 $ 33,274
======== ======== ========
</TABLE>
- ---------------
* Excludes non-recurring charges of $76,636 and $16,532 in fiscal 1998 and
1996, respectively, which related primarily to other services. See Note 7 for
additional information regarding the non-recurring charges.
** Excludes non-recurring charges related to property, plant, and equipment and
goodwill impairment charges of $53,340 and $7,970 in fiscal 1998 and 1996,
respectively, which related primarily to other services. See Note 7 for
additional information regarding the non-recurring charges.
The following summarizes financial information by geographic areas:
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
NET SALES:
North America.................................... $637,795 $543,469 $356,917
Europe........................................... 175,675 150,174 65,348
Asia............................................. 112,073 85,960 36,628
TRANSFERS BETWEEN GEOGRAPHIC AREAS:
North America.................................... 166 3,021 1,500
Europe........................................... 85 61 33
Asia............................................. 1,091 220 48
Eliminations..................................... (1,342) (3,302) (1,581)
-------- -------- --------
$925,543 $779,603 $458,893
======== ======== ========
INCOME (LOSS) BEFORE INCOME TAXES:
North America.................................... $(38,053) 47,780 23,551
Europe........................................... 20,027 17,635 6,063
Asia............................................. 9,874 4,035 (1,471)
Unallocated general corporate.................... (30,380) (19,785) (12,470)
-------- -------- --------
$(38,532) $ 49,665 $ 15,673
======== ======== ========
LONG-LIVED ASSETS AT THE END OF EACH FISCAL YEAR:
North America.................................... $232,134 $257,673 $155,681
Europe........................................... 110,296 12,466 7,335
Asia............................................. 80,635 7,065 6,971
Unallocated general corporate.................... 9,955 7,706 3,197
-------- -------- --------
$433,020 $284,910 $173,184
======== ======== ========
</TABLE>
Export sales from the United States are immaterial.
At any given time, certain customers may account for significant portions
of the Company's business. Hewlett-Packard accounted for 10% and 17% of net
sales in fiscal 1998 and 1997, respectively. IBM accounted for 10% of net sales
in fiscal 1998. No other customer accounted for more than 10% of net sales in
F-27
<PAGE> 65
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
fiscal 1998, 1997, or 1996. The Company's top ten customers accounted for 48%,
50%, and 43% of net sales in fiscal 1998, 1997, and 1996, 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. 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.
Credit risk represents the accounting loss that would be recognized at the
reporting date if counterparties completely failed to perform as contracted.
Concentrations of credit risk (whether on or off balance sheet) that arise from
financial instruments exist for groups of customers or counterparties when they
have similar economic characteristics that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic or other
conditions. The Company has concentrations of credit risk in accounts receivable
from its top ten customers. The Company performs ongoing credit evaluations of
its customers and generally does not require collateral. The Company maintained
reserves for potential credit losses of $5,900 and $2,893 at January 3, 1999,
and December 28, 1997, respectively. In addition, the Company has concentrations
of credit risk in cash and cash equivalents, which are maintained at recognized
financial institutions. The Company performs ongoing financial evaluations of
these financial institutions.
NOTE 14: SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following summarizes quarterly financial information for the years
ended January 3, 1999, and December 28, 1997:
<TABLE>
<CAPTION>
GROSS PROFIT NET BASIC EARNINGS DILUTED EARNINGS
NET SALES (LOSS) INCOME (LOSS) (LOSS) PER SHARE (LOSS) PER SHARE
--------- ------------ ------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
1998 QUARTERS
First........................ $235,374 $(18,714) $(32,047) $(1.27) $(1.27)
Second....................... 221,938 33,142 6,127 0.24 0.23
Third........................ 205,917 32,022 6,532 0.26 0.25
Fourth....................... 262,314 18,300 2,356 0.10 0.09
-------- -------- --------
$925,543 $ 64,750 $(17,032) (0.68) (0.68)
======== ======== ========
1997 QUARTERS
First........................ $137,080 $ 26,180 $ 5,077 $ 0.21 $ 0.20
Second....................... 184,097 32,679 7,540 0.31 0.27
Third........................ 212,864 33,302 9,955 0.40 0.35
Fourth....................... 245,562 39,779 12,748 0.50 0.44
-------- -------- --------
$779,603 $131,940 $ 35,320 1.43 1.26
======== ======== ========
</TABLE>
The Company recorded $54,000 and $22,636 of non-recurring charges during
the first and fourth quarters of fiscal 1998, respectively, relating to Orbit's
semiconductor wafer fabrication facility. See Note 7 for additional information
regarding the non-recurring charges.
F-28
<PAGE> 66
THE DII GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
-----------------------------
APR. 4, 1999 MAR. 29, 1998
------------ -------------
<S> <C> <C>
NET SALES:
Systems assembly and distribution......................... $150,913 $150,419
Printed wiring boards..................................... 71,321 50,708
Other..................................................... 25,234 34,247
-------- --------
Total net sales................................... 247,468 235,374
-------- --------
COST OF SALES:
Cost of sales............................................. 209,539 201,932
Non-recurring charges..................................... -- 52,156
-------- --------
Total cost of sales............................... 209,539 254,088
-------- --------
Gross profit (loss)....................................... 37,929 (18,714)
Selling, general and administrative expenses................ 20,110 19,176
Non-recurring charges....................................... -- 1,844
Interest income............................................. (394) (927)
Interest expense............................................ 6,482 4,719
Amortization of intangibles................................. 1,295 1,121
Other, net.................................................. (14) (168)
-------- --------
Income (loss) before income taxes......................... 10,450 (44,479)
Income tax expense (benefit)................................ 1,567 (12,432)
-------- --------
Net income (loss)......................................... $ 8,883 $(32,047)
======== ========
EARNINGS (LOSS) PER COMMON SHARE:
Basic..................................................... $ 0.32 $ (1.27)
Diluted................................................... $ 0.31 $ (1.27)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND EQUIVALENTS
OUTSTANDING:
Basic..................................................... 27,352 25,303
Diluted................................................... 30,477 25,303
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-29
<PAGE> 67
THE DII GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
APRIL 4, JANUARY 3,
1999 1999
-------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 42,522 $ 55,972
Accounts receivable, net.................................. 144,480 153,861
Inventories............................................... 70,891 66,745
Prepaid expenses.......................................... 13,214 11,570
Other..................................................... 11,560 7,249
-------- --------
Total current assets.............................. 282,667 295,397
-------- --------
Property, plant and equipment, net.......................... 328,122 326,226
Goodwill, net............................................... 95,882 97,475
Debt issue costs, net....................................... 7,388 9,319
Investments in minority owned entities...................... 20,507 --
Other....................................................... 18,044 18,892
-------- --------
$752,610 $747,309
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $122,022 $122,536
Accrued expenses.......................................... 37,840 44,134
Accrued interest payable.................................. 2,400 6,769
Current portion of capital lease obligations.............. 2,421 5,617
Current portion of long-term debt......................... 23,086 29,031
-------- --------
Total current liabilities......................... 187,769 208,087
-------- --------
Capital lease obligations, net of current portion........... 1,488 1,820
Long-term debt, net of current portion...................... 287,069 271,864
Convertible subordinated notes payable...................... -- 86,235
Other....................................................... 3,705 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; 30,930,260 and 26,169,344 shares issued and
29,283,260 and 24,522,344 shares outstanding........... 309 262
Additional paid-in capital................................ 211,367 124,410
Retained earnings......................................... 101,954 93,071
Treasury stock, at cost; 1,647,000 shares................. (28,544) (28,544)
Accumulated other comprehensive loss...................... (4,254) (4,139)
Deferred compensation..................................... (8,253) (9,339)
-------- --------
Total stockholders' equity........................ 272,579 175,721
-------- --------
$752,610 $747,309
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-30
<PAGE> 68
THE DII GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
-----------------------------
APR. 4, 1999 MAR. 29, 1998
------------ -------------
<S> <C> <C>
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES............ $ 4,843 $ (585)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment................ (21,342) (15,153)
Proceeds from sales of property, plant and equipment...... 9,104 3,352
Proceeds from business divestitures....................... 12,000 --
Investments in minority owned entities.................... (20,507) --
-------- --------
Net cash used by investing activities.................. (20,745) (11,801)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments to acquire treasury stock........................ -- (9,170)
Repayments of capital lease obligations................... (3,528) (1,235)
Repayments of long-term debt.............................. (15,504) (2,044)
Long-term debt borrowings................................. 20,000 --
Proceeds from stock issued under stock plans.............. 1,568 2,834
Other..................................................... (101) --
-------- --------
Net cash provided (used) by financing activities....... 2,435 (9,615)
Effect of exchange rate changes on cash..................... 17 (29)
-------- --------
Net decrease in cash and cash equivalents.............. (13,450) (22,030)
Cash and cash equivalents at beginning of period............ 55,972 85,067
-------- --------
Cash and cash equivalents at end of period.................. $ 42,522 $ 63,037
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-31
<PAGE> 69
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 three-month period ended April
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 April 4, 1999 and March
29, 1998, both of which are 13-week periods.
(2) INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
APRIL 4, JANUARY 3,
1999 1999
-------- ----------
<S> <C> <C>
Raw materials............................................... $44,311 $44,669
Work in process............................................. 31,875 24,922
Finished goods.............................................. 3,627 6,622
------- -------
79,813 76,213
Less allowance.............................................. 8,922 9,468
------- -------
$70,891 $66,745
======= =======
</TABLE>
The Company made provisions to the allowance for inventory impairment
(including non-recurring charges, see Note 7 of $40 and $6,028 during the
quarters ended April 4, 1999 and March 29, 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. The fair value of the assets acquired, excluding
F-32
<PAGE> 70
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
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.
The cost of the acquisition has been allocated on the basis of the
estimated fair value of assets acquired and liabilities assumed. Goodwill 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
$5,000 for contingent purchase price adjustments during the quarter ended April
4, 1999. There were no contingent purchase price adjustments during the quarter
ended March 29, 1998.
The above 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
costs of this acquisition has been allocated on the basis of the estimated fair
value of the assets acquired and the liabilities assumed.
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.
The Company also acquired a minority interest in a subsidiary that is
primarily owned by Capetronic, a Hong Kong publicly traded company, through the
purchase of preferred stock for approximately $15,500. The preferred stock can
be exchanged into common stock of Capetronic at any price above $4.80 Hong Kong
("HK") per share any time after 15 months from the date of agreement.
Additionally, any time after 15 months Capetronic can force conversion at $10 HK
per share. The Company accounts for its investment under the cost method.
Through this strategic partnership, the Company has obtained the rights to
manufacture the majority of the set-top boxes for the delivery of video
entertainment, data and educational materials to the Mandarin Chinese-speaking
markets in China, Singapore, Taiwan and Hong Kong.
(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. The Company is divesting of 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.
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 the sale amounting to $12,000,
which approximated the book value of the disposed assets.
F-33
<PAGE> 71
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
(5) LONG-TERM DEBT
Long-term debt was comprised of the following:
<TABLE>
<CAPTION>
APRIL 4, JANUARY 3,
1999 1999
-------- ----------
<S> <C> <C>
Senior subordinated notes................................... $150,000 $150,000
Bank term loan.............................................. 96,000 100,000
Outstanding under line-of-credit............................ 57,500 37,500
Notes payable to sellers of businesses acquired............. 6,373 11,550
Other....................................................... 282 1,845
-------- --------
Total long-term debt...................................... 310,155 300,895
Less current portion........................................ 23,086 29,031
-------- --------
Long-term debt, net of current portion.................... $287,069 $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) NON-RECURRING CHARGES
During fiscal 1998, the Company recognized non-recurring 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 non-recurring pre-tax charges had been classified as a component of cost of
sales in the first quarter 1998.
The Company purchased Orbit in August of 1996, and, as a precondition to
the merger, 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 that
arose about the time Orbit was acquired, 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.
F-34
<PAGE> 72
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
The first quarter 1998 non-recurring charge included approximately $38,258
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. These
assets primarily related to the property, plant and equipment. This amount was
classified as a component of cost of sales.
Additionally, the first quarter 1998 non-recurring charge included
approximately $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 non-recurring pre-tax charge also included
approximately $7,842 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 non-recurring pre-tax charge in the fourth quarter of 1998 of
$22,636. As of April 4, 1999, the Company has paid all employee termination
costs associated with its exit from the fab. Included in accrued expenses at
April 4, 1999 is $500 related to allowances for sales returns and $1,439 of
other items such as litigation, environmental clean-up costs and other facility
exit costs. These remaining accruals relate to the charge taken in the fourth
quarter of fiscal 1998 and, in management's opinion, are adequate and are
expected to be paid out during fiscal 1999.
(8) COMPREHENSIVE INCOME
The components of comprehensive income were as follows:
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
---------------------
APRIL 4, MARCH 29,
1999 1998
-------- ---------
<S> <C> <C>
Net income (loss)........................................... $8,883 $(32,047)
Other comprehensive loss --
Foreign currency translation adjustments.................. (115) (9)
------ --------
Comprehensive income (loss)................................. $8,768 $(32,056)
====== ========
</TABLE>
The foreign currency translation adjustments are not currently adjusted for
income taxes since they relate to investments that are permanent in nature.
F-35
<PAGE> 73
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
(9) EARNINGS (LOSS) PER SHARE
Earnings (loss) per common share ("EPS") data were computed as follows:
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
-------------------------------
APRIL 4, 1999 MARCH 29, 1998
------------- --------------
<S> <C> <C>
BASIC EPS:
Net income (loss)......................................... $ 8,883 $(32,047)
======= ========
Weighted-average common shares outstanding................ 27,352 25,303
======= ========
Basic EPS................................................. $ 0.32 $ (1.27)
======= ========
DILUTED EPS:
Net income (loss)......................................... $ 8,883 $(32,047)
Plus income impact of assumed conversions:
Interest expense (net of tax) on convertible
subordinated notes................................... 400 --
Amortization (net of tax) of debt issuance cost on
convertible subordinated notes....................... 33 --
------- --------
Net income (loss) available to common stockholders........ $ 9,316 $(32,047)
======= ========
SHARES USED IN COMPUTATION:
Weighted-average common shares outstanding.............. 27,352 25,303
Shares applicable to exercise of dilutive options....... 1,101 --
Shares applicable to deferred stock compensation........ 182 --
Shares applicable to convertible subordinated notes..... 1,812 --
------- --------
Shares applicable to diluted earnings..................... 30,447 25,303
======= ========
Diluted EPS............................................... $ 0.31 $ (1.27)
======= ========
</TABLE>
The common equivalent shares from common stock options, deferred stock
compensation and convertible subordinated notes were antidilutive for the
quarter ended March 29, 1998, and therefore not assumed to be converted for
diluted earnings per share computations.
(10) COMMITMENTS, CONTINGENCIES AND SUBSEQUENT EVENTS
The Company is involved in certain litigation and environmental matters
described in the Company's Annual Report on Form 10-K for the fiscal year ended
January 3, 1999. 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 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
F-36
<PAGE> 74
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
excess of amounts currently estimated to be required for such matters. No
assurance can be given that actual costs will not exceed amounts accrued or that
costs will not be incurred with respect to sites as to which no problem is
currently known. Further, there can be no assurance that additional
environmental matters will not arise in the future.
The Company has approximately $10,336 of capital commitments as of April 4,
1999.
As of April 4, 1999, there were $57,500 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 April 4, 1999, the Company was
in compliance with all loan covenants.
Subsequent to April 4, 1999, the Company sold IRI International and
Chemtech (U.K.) Limited, manufacturers of surface mount printed circuit board
solder cream stencils. Additionally, in April 1999, the Company signed a letter
of intent to sell Cencorp, its subsidiary that manufactures depaneling equipment
for fully assembled printed circuit boards. The aggregate proceeds from these
sales are expected to approximate $30,000. The Company does not believe that
these sales will have any adverse impact on its consolidated financial position.
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 $20,000.
(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 quarter ended April 4, 1999.
(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.
F-37
<PAGE> 75
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
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 QUARTER ENDED
-------------------------------
APRIL 4, 1999 MARCH 29, 1998
------------- --------------
<S> <C> <C>
NET SALES:
Systems assembly and distribution....................... $150,913 $150,419
Printed wiring boards................................... 71,321 50,708
Other................................................... 25,234 34,247
-------- --------
$247,468 $235,374
======== ========
INCOME (LOSS) BEFORE INCOME TAXES*:
Systems assembly and distribution....................... $ 7,631 $ 8,950
Printed wiring boards................................... 8,996 8,402
Other................................................... 2,702 (1,362)
Unallocated general corporate........................... (8,879) (6,469)
-------- --------
$ 10,450 $ 9,521
======== ========
DEPRECIATION AND AMORTIZATION:
Systems assembly and distribution....................... $ 3,349 $ 1,666
Printed wiring boards................................... 5,046 2,648
Other................................................... 940 3,902
Unallocated general corporate........................... 306 303
-------- --------
$ 9,641 $ 8,519
======== ========
CAPITAL EXPENDITURES:
Systems assembly and distribution....................... $ 11,307 $ 6,131
Printed wiring boards................................... 8,436 4,524
Other................................................... 899 4,446
Unallocated general corporate........................... 700 52
-------- --------
$ 21,342 $ 15,153
======== ========
</TABLE>
F-38
<PAGE> 76
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
APRIL 4, 1999 JANUARY 3, 1999
------------- ---------------
<S> <C> <C>
IDENTIFIABLE ASSETS AT THE END OF
EACH PERIOD:
Systems assembly and distribution....................... $225,915 $238,027
Printed wiring boards................................... 406,355 390,194
Other................................................... 61,901 79,453
Unallocated general corporate........................... 58,439 39,635
-------- --------
$752,610 $747,309
======== ========
</TABLE>
- ---------------
* Excludes non-recurring charge of $54,000 for the quarter ended March 29, 1998,
which related primarily to Other Services. See Note 6 for additional
information regarding the non-recurring charges.
The following summarizes financial information by geographic areas:
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
-------------------------------
APRIL 4, 1999 MARCH 29, 1998
------------- --------------
<S> <C> <C>
NET SALES:
North America........................................... $141,277 $ 169,503
Europe.................................................. 56,369 41,415
Asia.................................................... 49,822 24,456
-------- -----------
$247,468 $ 235,374
======== ===========
INCOME (LOSS) BEFORE INCOME TAXES*:
North America........................................... $ 6,957 $ 9,837
Europe.................................................. 6,640 4,827
Asia.................................................... 5,732 1,326
Unallocated general corporate........................... (8,879) (6,469)
-------- -----------
$ 10,450 $ 9,521
======== ===========
</TABLE>
<TABLE>
<CAPTION>
APRIL 4, 1999 JANUARY 3, 1999
------------- ---------------
<S> <C> <C>
LONG-LIVED ASSETS AT THE END OF EACH PERIOD:
North America........................................... $217,198 $ 232,134
Europe.................................................. 112,018 110,296
Asia.................................................... 93,388 80,635
Unallocated general corporate........................... 8,788 9,955
-------- ------------
$431,392 $ 433,020
======== ============
</TABLE>
- ---------------
* Excludes non-recurring charge of $54,000 for the quarter ended March 29, 1998,
which related to businesses operated in North America. See Note 6 for
additional information regarding the non-recurring charges.
F-39
<PAGE> 77
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6,000,000 SHARES
THE DII GROUP, INC.
COMMON STOCK
[LOGO]
------------
PROSPECTUS
, 1999
------------
SALOMON SMITH BARNEY
BANCBOSTON ROBERTSON STEPHENS
DONALDSON, LUFKIN & JENRETTE
BEAR, STEARNS & CO. INC.
THOMAS WEISEL PARTNERS LLC
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 78
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses to be paid by the
registrant in connection with the sale and distribution of the securities being
registered. All of the amounts shown are estimated except the SEC registration
fee, the NASD filing fee and the Nasdaq additional shares listing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 64,620
NASD filing fee............................................. 23,744
Nasdaq additional listing fee............................... 17,500
Legal fees and expenses..................................... 150,000
Transfer agent fees......................................... 10,000
Printing costs.............................................. 80,000
Accounting fees and expenses................................ 50,000
Blue Sky fees and expenses.................................. 2,000
Miscellaneous expenses...................................... 2,136
--------
Total............................................. $400,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTOR AND OFFICERS.
In accordance with Section 102(b)(7) of the Delaware General Corporation
Law (the "DGCL"), our restated certificate of incorporation contains a provision
to limit the personal liability of our directors for violations of their
fiduciary duties. This provision eliminates each director's liability to the
company or its stockholders for monetary damages except (i) for any breach of
the director's duty of loyalty to the company or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL providing for
liability of directors for unlawful payment of dividends or unlawful stock
purchases or redemptions, or (iv) for any transaction from which the director
derived an improper personal benefit. The effect of this provision is to
eliminate the personal liability of directors for monetary damages for actions
involving a breach of their fiduciary duty of care, including any such actions
involving gross negligence.
Section 145 of the DGCL provides that a corporation may indemnify any
person, including officers and directors, who are, or are threatened to be made,
parties to any threatened, pending or completed legal action, suit or
proceeding, whether civil, criminal, administrative or investigative (other than
an action by or in the right of such corporation), by reason of the fact that
such person was an officer, director, employee or agent of such corporation, or
is or was serving at the request of such corporation as a director, officer,
employee or agent of another corporation. The indemnity may include expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding, provided such officer, director, employee or agent acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
corporation's best interests and, for criminal proceedings, had no reasonable
cause to believe that his conduct was unlawful. A Delaware corporation may
indemnify officers and directors in an action by or in the right of the
corporation under the same conditions, except that no indemnification is
permitted without judicial approval if the officer or director is adjudged to be
liable to the corporation. Where an officer or director is successful on the
merits or otherwise in defense of any action referred to above, the corporation
must indemnify him against the expenses which such officer or director actually
or reasonably incurred. The Restated By-laws of the company provide for
indemnification of the officers and directors to the fullest extent permitted by
the DGCL. In addition, the company maintains officers' and directors' liability
insurance which insures against liabilities that our officers and directors may
incur in such capacities.
II-1
<PAGE> 79
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
<C> <S>
*1.1 Form of Underwriting Agreement
4.1(a) Restated Certificate of Incorporation of Registrant,
together with the Certificate of Amendment of the Restated
Certificate of Incorporation of Registrant (incorporated by
reference to Exhibit 3.1 of the Registrant's Form 10-K
Annual Report for fiscal year ended December 31, 1995, File
No. 0-21374).
4.1(b) Amendment to the Restated Certificate of Incorporation of
Registrant (incorporated by reference to Exhibit 3.1 of the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 29, 1998, File No. 0-21374).
4.2(a) Restated Bylaws of Registrant (incorporated by reference to
Exhibit 3.1 of the Registrant's Quarterly Report in Form
10-Q for the quarter ended April 4, 1999, File No. 0-21374)
4.3 Form of Stock Certificate (incorporated by reference to
Exhibit 4.1 of the Registrant's Registration Statement on
Form 10, as amended, File No. 0-21374)
4.4 Rights Agreement dated as of May 4, 1993 between the
Registrant and Norwest Bank Minnesota, N.A., as Rights Agent
(incorporated by reference to Exhibit 10.5 of the
Registrant's Registration Statement on Form S-1,
Registration No. 33-71138)
*5.1 Opinion of Curtis, Mallet-Prevost, Colt & Mosle
15.1 Letter re: Unaudited Interim Financial Information
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of KPMG LLP
*23.3 Consent of Curtis, Mallet-Prevost, Colt & Mosle (included as
part of Exhibit 5.1 hereto)
24.1 Power of Attorney (included on signature page)
</TABLE>
- ---------------
* To be filed by amendment.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under
II-2
<PAGE> 80
the Securities Act shall be deemed to be part of this registration statement as
of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-3
<PAGE> 81
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Niwot, State of Colorado, on the 26th day of May,
1999.
The DII Group, Inc.
By: /s/ THOMAS J. SMACH
------------------------------------
Name: Thomas J. Smach
Title: Chief Financial Officer
POWER OF ATTORNEY
We, the undersigned directors and officers of The DII Group, Inc. do hereby
constitute and appoint Carl R. Vertuca, Jr. and Thomas J. Smach, and each of
them, our true and lawful attorneys and agents, to do any and all acts and
things in our names and on our behalf in our capacities as directors and
officers and to execute any and all instruments for us and in our names in the
capacities indicated below, which said attorneys and agents, or either of them,
may deem necessary or advisable to enable said corporation to comply with the
Securities Act of 1933 and any rules, regulations and requirements of the
Securities and Exchange Commission, in connection with this Registration
Statement, including specifically, but without limitation, power and authority
to sign for us or any of us in our names in the capacities indicated below, any
and all amendments (including post-effective amendments) hereto; and we do
hereby ratify and confirm all that said attorneys and agents, or either of them,
shall do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ RONALD R. BUDACZ Chairman and Chief Executive May 26, 1999
- --------------------------------------------------- Officer
Ronald R. Budacz
/s/ CARL R. VERTUCA, JR. Director, Executive Vice May 26, 1999
- --------------------------------------------------- President -- Finance,
Carl R. Vertuca, Jr. Administration and Corporate
Development
/s/ THOMAS J. SMACH Chief Financial Officer (Principal May 26, 1999
- --------------------------------------------------- Financial Officer and Principal
Thomas J. Smach Accounting Officer)
/s/ ROBERT L. BRUECK Director May 26, 1999
- ---------------------------------------------------
Robert L. Brueck
/s/ CONSTANTINE S. MACRICOSTAS Director May 26, 1999
- ---------------------------------------------------
Constantine S. Macricostas
</TABLE>
II-4
<PAGE> 82
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ GERARD T. WRIXON, PH.D. Director May 26, 1999
- ---------------------------------------------------
Gerard T. Wrixon, Ph.D.
/s/ ALEXANDER W. YOUNG Director May 26, 1999
- ---------------------------------------------------
Alexander W. Young
</TABLE>
II-5
<PAGE> 83
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE
- ----------- ---------------------- ------------
<C> <S> <C>
*1.1 Form of Underwriting Agreement..............................
4.1(a) Restated Certificate of Incorporation of Registrant,
together with the Certificate of Amendment of the Restated
Certificate of Incorporation of Registrant (incorporated by
reference to Exhibit 3.1 of the Registrant's Form 10-K
Annual Report for fiscal year ended December 31, 1995, File
No. 0-21374)
4.1(b) Amendment to the Restated Certificate of Incorporation of
Registrant (incorporated by reference to Exhibit 3.1 of the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 29, 1998, File No. 0-21374)
4.2(a) Restated Bylaws of Registrant (incorporated by reference to
Exhibit 3.1 of the Registrant's Quarterly Report on Form
10-Q for the quarter ended April 4, 1999, File No. 0-21374)
4.3 Form of Stock Certificate (incorporated by reference to
Exhibit 4.1 of the Registrant's Registration Statement on
Form 10, as amended, File No. 0-21374)
4.4 Rights Agreement dated as of May 4, 1993 between the
Registrant and Norwest Bank Minnesota, N.A., as Rights Agent
(incorporated by reference to Exhibit 10.5 of the
Registrant's Registration Statement on Form S-1,
Registration No. 33-71138)
*5.1 Opinion of Curtis, Mallet-Prevost, Colt & Mosle.............
15.1 Letter re: Unaudited Interim Financial Information..........
23.1 Consent of Deloitte & Touche LLP............................
23.2 Consent of KPMG LLP.........................................
*23.3 Consent of Curtis, Mallet-Prevost, Colt & Mosle (included as
part of Exhibit 5.1 hereto).................................
24.1 Power of Attorney (included on signature page)..............
</TABLE>
- ---------------
* To be filed by amendment.
<PAGE> 1
EXHIBIT 15.1
May 25, 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 April 4, 1999 and March 29, 1998 as indicated in our report dated May 12,
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 was included in your
Quarterly Report on Form 10-Q for the quarter ended April 4, 1999, is being used
in this Registration Statement.
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.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement
of The DII Group, Inc. and subsidiaries (the Company) on Form S-3 of our reports
dated January 28, 1999 (February 8, 1999 as to the redemption of convertible
subordinated notes described in Note 6), included and incorporated by reference
in the Annual Report on Form 10-K of the Company for the year ended January 3,
1999 and to the use of our report dated January 28, 1999 (February 18, 1999 as
to the redemption of convertible subordinated notes described in Note 6)
appearing in the Prospectus, which is part of this Registration Statement. We
also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ DELOITTE & TOUCHE LLP
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DELOITTE & TOUCHE LLP
Denver, Colorado
May 25, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
The DII Group, Inc.:
We consent to the use of our reports dated January 28, 1997, included
and/or incorporated by reference herein and to the reference to our firm under
the heading "Experts" in the prospectus.
/s/ KPMG LLP
- ---------------------------------------------------------
KPMG LLP
Denver, Colorado
May 24, 1999
