<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 4, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-21374
THE DII GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 84-1224426
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
6273 MONARCH PARK PLACE
NIWOT, COLORADO 80503
(Address and zip code of principal executive offices)
(303) 652-2221
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
OUTSTANDING AT
CLASS MAY 10, 1999
----- --------------
<S> <C>
Common Stock, Par Value $0.01 29,468,973
</TABLE>
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<PAGE> 2
PART I
FINANCIAL INFORMATION
EXPLANATORY NOTE: Pursuant to this Form 10-Q/A, The DII Group, Inc. amends
"ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS" and "ITEM 2. "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" of
Part I and "ITEM 6(a). EXHIBITS" of Part II of its Quarterly Report on Form 10-Q
for the quarterly period ended April 4, 1999.
This amendment includes additional disclosures concerning unusual charges
recognized by the Company. Additionally, the financial statements for the three
month period ended April 4, 1998 have been restated from amounts previously
reported to remove certain expenses from unusual charges and to reflect these
expenses as period costs when incurred. In addition, certain costs related to
the unusual charges were reclassified from operating expenses to cost of sales
to properly reflect the nature of those charges.
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
"ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS" is hereby amended to
read as follows:
THE DII GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE FIRST QUARTER ENDED
----------------------------
MAR. 29, 1998
AS RESTATED
APR. 4, 1999 (SEE NOTE 13)
------------ -------------
<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
Unusual charges........................................... -- 49,314
-------- --------
Total cost of sales............................... 209,539 251,246
-------- --------
Gross profit (loss)....................................... 37,929 (15,872)
Selling, general and administrative expenses................ 20,110 19,176
Unusual 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 (41,637)
</TABLE>
1
<PAGE> 3
<TABLE>
<CAPTION>
FOR THE FIRST QUARTER ENDED
----------------------------
MAR. 29, 1998
AS RESTATED
APR. 4, 1999 (SEE NOTE 13)
------------ -------------
<S> <C> <C>
Income tax expense (benefit)................................ 1,567 (11,636)
-------- --------
Net income (loss)......................................... $ 8,883 $(30,001)
======== ========
Earnings (loss) per common share:
Basic..................................................... $ 0.32 $ (1.19)
Diluted................................................... $ 0.31 $ (1.19)
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.
2
<PAGE> 4
THE DII GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE DATA)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
APRIL 4, JANUARY 3,
1999 1999
----------- ----------
<S> <C> <C>
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.
3
<PAGE> 5
THE DII GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE FIRST 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.
4
<PAGE> 6
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 unusual 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 cash acquired,
amounted to $55,699 and liabilities assumed were $21,801, including estimated
acquisition costs. The cost in excess of net assets acquired amounted to
$17,897.
5
<PAGE> 7
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
In March 1999, the Company acquired 15,000 non-voting preferred shares of
DVB (Group) Limited ("DVB"), an affiliate of Capetronic International Holdings
Limited (Capetronic) for a purchase price of $15,500. The preferred stock
accrues a 5% annual dividend and can be converted into common stock of
Capetronic after 15 months and at a price of HK$4.80 per share. Additionally, at
anytime after 15 months, Capetronic can force conversion if the market price is
at least HK$10.00 per share. At a conversion price of HK$4.80 per share, (based
on an agreed exchange rate of US$1.00 equals HK$7.50) the Company would hold
approximately 24,219 common shares of Capetronic, which currently would
represent approximately 13% of the issued common stock of Capetronic effected
for this conversion, excluding the effect of other dilutive instruments which
are currently in existence that, if converted, would reduce the Company's
ultimate ownership percentage. However, under the terms of the agreement, the
Company can not hold more than 10% of the outstanding common stock of
Capetronic. If, upon conversion, the Company holds in excess of 10% of the
outstanding common stock of Capetronic, the Company would be required to divest
of shares to reduce its holdings to 10% or less.
The Company currently accounts for its investment in Capetronic under the
cost method. Once the criteria for conversion are reached, the Company will
account for this investment as an available-for-sale marketable equity security
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
Through this strategic investment and a related manufacturing agreement, 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.
(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.
6
<PAGE> 8
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
(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) UNUSUAL CHARGES
During fiscal 1998, the Company recognized unusual pre-tax charges of
$72,794, 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 $51,158 and $21,636 of the charges in the first
and fourth quarters of fiscal 1998, respectively. As discussed below, $49,314 of
the unusual pre-tax charges had been classified as a component of cost of sales
in the first quarter 1998.
The components of the unusual charge recorded in fiscal 1998 are as
follows:
<TABLE>
<CAPTION>
FIRST FOURTH FISCAL NATURE OF
QUARTER QUARTER 1998 CHARGE
------- ------- ------- ---------
<S> <C> <C> <C> <C>
Severance..................................... $ 498 $ 900 $ 1,398 cash
Long-lived asset impairment................... 38,257 15,083 53,340 non-cash
Losses on sales contracts..................... 2,658 3,100 5,758 non-cash
Incremental uncollectible accounts
receivable.................................. 900 -- 900 non-cash
Incremental sales returns and allowances...... 1,500 500 2,000 non-cash
Inventory write-downs......................... 5,500 250 5,750 non-cash
Other exit costs.............................. 1,845 1,803 3,648 cash
------- ------- -------
Total unusual pre-tax charges....... $51,158 $21,636 $72,794
======= ======= =======
</TABLE>
7
<PAGE> 9
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the activity related to the charges taken in
connection with the 1998 unusual charges:
<TABLE>
<CAPTION>
LONG-LIVED LOSSES UNCOLLECTIBLE SALES RETURNS INVENTORY
ASSET ON SALES ACCOUNTS AND WRITE- OTHER
SEVERANCE IMPAIRMENT CONTRACTS RECEIVABLE ALLOWANCES DOWNS EXIT COSTS TOTAL
--------- ---------- --------- ------------- ------------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December
28, 1997........... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Activities during the
year:
1998 provision..... 1,398 53,340 5,758 900 2,000 5,750 3,648 72,794
Cash charges....... (498) -- -- -- -- -- (465) (963)
Non-cash charges... -- (53,340) (4,658) (767) (1,500) (5,500) (643) (66,408)
------ -------- ------- ----- ------- ------- ------ --------
Balance at January 3,
1999............... 900 -- 1,100 133 500 250 2,540 5,423
Activities during the
period:
Cash charges....... (900) -- -- -- -- -- (601) (1,501)
Non-cash charges... -- -- (1,100) (133) -- (250) -- (1,483)
------ -------- ------- ----- ------- ------- ------ --------
Balance at April 4,
1999............... $ -- $ -- $ -- $ -- $ 500 $ -- $1,939 $ 2,439
====== ======== ======= ===== ======= ======= ====== ========
</TABLE>
The unusual pre-tax charges include $53,340 for the write-down of
long-lived assets to fair value. This amount has been classified as a component
of cost of sales. Included in the long-lived asset impairment are charges of
$50,739, which relate to the Fab which was written down to its net realizable
value based on its sales price. The Company kept the Fab in service until the
sale date in January 1999. In accordance with SFAS No. 121, the Company
discontinued depreciation expense on the Fab when it determined that it would be
disposed of and its net realizable value was known. The impaired long-lived
assets consisted primarily of machinery and equipment of $52,418, which were
written down by $43,418 to a carrying value of $9,000 and building and
improvements of $7,321, which were written down to a carrying value of zero. The
long-lived asset impairment also includes the write-off of the remaining
goodwill related to Orbit of $601. The remaining $2,000 of asset impairment
relates to the write-down to net realizable value of a facility the Company
exited during 1998.
The Company purchased Orbit in August of 1996, and supported Orbit's
previously made decision to replace its wafer fabrication facility ("fab") with
a higher technology fab. The transition to the 6-inch fab was originally
scheduled for completion during the summer of 1997, but the changeover took
longer than expected and was finally completed in January 1998.
The missed plan for the changeover and running both fabs simultaneously put
pressure on the work force, with resulting quality problems. Compounding these
problems, the semiconductor industry was characterized by excess capacity, which
led larger competitors to invade Orbit's niche market. Further, many of Orbit's
customers migrated faster than expected to a technology in excess of Orbit's
fabrication capabilities, requiring Orbit to outsource more of its manufacturing
requirements than originally expected. Based upon these continued conditions and
the future outlook, the Company took this first quarter 1998 charge to correctly
size Orbit's asset base to allow its recoverability based upon its then current
business size.
The first quarter 1998 unusual charge included $38,257 for the write-down
of long-lived assets to fair value. The fair value of these assets was based on
estimated market value at the date of the charge. Fair market value was
determined in accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be disposed of," and included the use
of an independent valuation. The impairment charge consists of $37,656 related
to property, plant and equipment and $601 related to goodwill. This amount was
classified as a component of cost of sales.
8
<PAGE> 10
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Additionally, the first quarter 1998 unusual charge included $5,058 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. The Company entered into
certain non-cancelable sales contracts to provide semiconductors to customers at
fixed prices. Because the Company was obligated to fulfill the terms of the
agreements at selling prices which were not sufficient to cover the cost to
produce or acquire such products, a liability for losses on sales contracts was
recorded for the estimated future amount of such losses. This amount was
classified as a component of cost of sales.
The first quarter 1998 unusual pre-tax charge also included $7,843
primarily associated with inventory write-downs, severance and other costs. This
write-down primarily resulted from excess inventory created by deciding to
downsize operations.
As previously stated, the Company subsequently decided to sell the
manufacturing facility (which occurred in January 1999). This decision resulted
in additional unusual pre-tax charges in the fourth quarter of 1998 of $21,636.
The exit plan is expected to be completed in the third quarter of 1999. As
of April 4, 1999, the total remaining cash expenditures expected to be incurred
are $1,939 of other exit costs, including legal settlement costs, environmental
clean-up costs and other exit costs. These expenditures will continue to be
funded through operating cash flows of the Company which are expected to be
sufficient to fund these expenditures. These amounts were recorded in accrued
expenses at April 4, 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 $(30,001)
Other comprehensive loss --
Foreign currency translation adjustments.................. (115) (9)
------ --------
Comprehensive income (loss)................................. $8,768 $(30,010)
====== ========
</TABLE>
The foreign currency translation adjustments are not currently adjusted for
income taxes since they relate to investments that are permanent in nature.
(9) EARNINGS (LOSS) PER SHARE
Earnings (loss) per common share ("EPS") data were computed as follows:
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
-------------------------------
APRIL 4, 1999 MARCH 29, 1998
------------- --------------
<S> <C> <C>
BASIC EPS:
Net income (loss)......................................... $ 8,883 $(30,001)
======= ========
Weighted-average common shares outstanding................ 27,352 25,303
======= ========
Basic EPS................................................. $ 0.32 $ (1.19)
======= ========
DILUTED EPS:
Net income (loss)......................................... $ 8,883 $(30,001)
</TABLE>
9
<PAGE> 11
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
-------------------------------
APRIL 4, 1999 MARCH 29, 1998
------------- --------------
<S> <C> <C>
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 (30,001)
======= ========
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 $ (1.19)
======= ========
</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
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 2000 trial date has been set
for the state court action. No trial date has been set for the 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
vigorously against such claims.
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 Sections
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 an agreement to settle the case on a classwide basis, which is
subject to final court approval.
10
<PAGE> 12
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In addition, the Company is involved in certain litigation and
environmental matters arising in the ordinary course of business. Although
management is of the opinion that these matters and the matters discussed above
will not have a material adverse effect on the consolidated financial position
or results of operations of the Company, the ultimate outcome of the litigation
and environmental matters cannot, at this time, be predicted in light of the
uncertainties inherent in these matters. Based upon the facts and circumstances
currently known, management cannot estimate the most likely loss or the maximum
loss for these matters. The Company has accrued the minimum estimated costs,
which amounts are immaterial, associated with these matters in the accompanying
condensed consolidated financial statements.
The Company determines the amount of its accruals for environmental matters
by analyzing and estimating the range of possible costs in light of information
currently available. The imposition of more stringent standards or requirements
under environmental laws or regulations, the results of future testing and
analysis undertaken by the Company at its operating facilities, or a
determination that the Company is potentially responsible for the release of
hazardous substances at other sites, could result in expenditures in excess of
amounts currently estimated to be required for such matters. No assurance can be
given that actual costs will not exceed amounts accrued or that costs will not
be incurred with respect to sites as to which no problem is currently known.
Further, there can be no assurance that additional environmental matters will
not arise in the future.
The Company has approximately $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 believes that these sales
will not have any adverse impact on its consolidated financial position.
However, the Company's consolidated revenues and operating results will be
adversely impacted (by approximately 7%) until such time as the proceeds are
reinvested back into the Company's core businesses.
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
11
<PAGE> 13
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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>
12
<PAGE> 14
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
-------------------------------
APRIL 4, 1999 MARCH 29, 1998
------------- --------------
<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 unusual charge of $51,158 for the quarter ended March 29, 1998, which
related primarily to Other Services. See Note 7 for additional information
regarding the unusual charges.
The following summarizes financial information by geographic areas:
<TABLE>
<CAPTION>
FOR THE 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
======== ========
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 unusual charge of $51,158 for the quarter ended March 29, 1998, which
related to businesses operated in North America. See Note 7 for additional
information regarding the unusual charges.
13
<PAGE> 15
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(13) RESTATEMENT
Subsequent to the issuance of the Company's financial statements for the
year ended January 3, 1999, management determined that certain expenses included
in its original estimate of losses on sales contracts recorded as unusual
charges (See Note 7) should have been reflected as selling, general and
administrative expenses in the quarters in which those costs were incurred. As a
result, the financial statements for the quarter ended March 29, 1998 have been
restated from amounts previously reported to remove these expenses from unusual
charges. These expenses will be reflected as period costs when incurred.
Additionally, certain costs related to the unusual charges were reclassified
from operating expenses to cost of sales to properly reflect the nature of those
charges. The balance sheet effect of the restatement results in a reduction of
accrued expenses of $2,046 and an increase of retained earnings of $2,046 as
compared to what was previously reported.
A summary of the effects of the restatement on the statement of operations
is as follows:
<TABLE>
<CAPTION>
FOR THE FIRST QUARTER ENDED
MARCH 29, 1998
----------------------------
AS AS PREVIOUSLY
RESTATED REPORTED
---------- ---------------
<S> <C> <C>
Net sales:
Contract electronics manufacturing........................ $150,419 $150,419
Other..................................................... 84,955 84,955
-------- --------
Total net sales................................... 235,374 235,374
Cost of sales:
Cost of sales............................................. 201,932 201,932
Unusual charges........................................... 49,314 12,844
-------- --------
Total cost of sales............................... 251,246 214,776
Gross profit (loss)....................................... (15,872) 20,598
Selling, general and administrative expenses................ 19,176 19,176
Unusual charges............................................. 1,844 41,156
Interest income............................................. (927) (927)
Interest expense............................................ 4,719 4,719
Amortization of intangibles................................. 1,121 1,121
Other, net.................................................. (168) (168)
-------- --------
Loss before taxes................................. (41,637) (44,479)
Income tax benefit.......................................... (11,636) (12,432)
-------- --------
Net loss.......................................... $(30,001) $(32,047)
======== ========
Loss per common share:
Basic and diluted......................................... $ (1.19) $ (1.27)
======== ========
Weighted average number of common shares and equivalents
outstanding:
Basic and diluted......................................... 25,303 25,303
======== ========
</TABLE>
14
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(DOLLARS IN THOUSANDS)
"ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" is hereby amended to read as follows:
FORWARD-LOOKING STATEMENTS
CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995.
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Words such as "expects," "anticipates,"
"forecasts," "intends," "plans," "believes," "projects," and "estimates" and
variations of such words and similar expressions are intended to identify such
forward-looking statements. These statements include, but are not limited to,
statements regarding prospective sales growth, new customers, integration of
acquired businesses, contingencies, Year 2000 readiness, environmental matters
and liquidity under "Part I, Financial Information -- Item 2 Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere herein. These statements are not guarantees of future performance and
involve risks and uncertainties and are based on a number of assumptions that
could ultimately prove to be wrong. Actual results and outcomes may vary
materially from what is expressed or forecast in such statements. Among the
factors that could cause actual results to differ materially are: general
economic and business conditions; the Company's dependence on the electronics
industry; changes in demand for the Company's products and services or the
products of the Company's customers; the risk of delays or cancellations of
customer orders; fixed asset utilization; the timing of orders and product mix;
availability of components; competition; the risk of technological changes and
of the Company's competitors developing more competitive technologies; the
Company's dependence on certain important customers; the Company's ability to
integrate acquired businesses; the Company's ability to manage growth; risks
associated with international operations; the availability and terms of needed
capital; risks of loss from environmental liabilities; and other risks detailed
in this report. The Company undertakes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise.
A. OVERVIEW
The Company is a leading provider of electronics design and manufacturing
services, which operates through a global network of independent business units
in North America, Europe, and Asia. These business units are uniquely linked to
provide the following related core products and services to original equipment
manufacturers ("OEMs"): custom semiconductor design; design and manufacture of
printed wiring boards; assembly of printed circuit boards; final systems
assembly ("box build"); and distribution. By offering comprehensive and
integrated design and manufacturing services, the Company believes that it is
better able to differentiate its product and service offerings from those of its
competitors, develop long-term relationships with its customers and enhance its
profitability.
The Company provides the following related products and services to
customers in the global electronics manufacturing industry:
Design and Semiconductor Services. Through Dii Technologies, the
Company provides printed circuit board and backpanel design services, as
well as design for manufacturability and test and total life cycle
planning.
Through Dii Semiconductor (formerly known as Orbit Semiconductor), the
Company provides the following application specific integrated circuit
("ASIC") design services to its OEM customers:
- 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.
15
<PAGE> 17
- 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. The Company believes
that its semiconductor design expertise provides it with a competitive
advantage by enabling the Company to offer its customers reduced costs
through the consolidation of components onto silicon chips.
Printed Wiring Boards. The Company manufactures high density, complex
multilayer printed wiring boards and back panels through Multek.
Systems Assembly and Distribution. The Company assembles complex
electronic circuits and provides final system assembly and distribution
services through Dovatron International ("Dovatron").
With the above core competencies, the Company has the ability to provide
customers with total design and manufacturing outsourcing solutions. The
Company's ability to offer fully integrated solutions with value-added front-and
back-end product and process development capabilities, coupled with global
volume assembly capabilities, provides customers with significant
speed-to-market and product cost improvements.
In addition, the Company manufactures machine tools and process automation
equipment through its non-core business unit known as Process Technologies
International ("PTI"). In March 1999, the Company sold TTI Testron, Inc., a
manufacturer of functional and in-circuit test fixtures. In April 1999, the
Company sold IRI International and Chemtech (U.K.) Limited, manufacturers of
surface mount printed circuit board solder cream stencils. 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 Company is divesting this non-core business unit in order to
sharpen its focus on the Company's core businesses of design and semiconductor
services, fabrication of printed wiring boards, and systems assembly and
distribution. The Company does not believe that the sale of PTI will have any
adverse impact on its consolidated financial position. However, the Company's
consolidated revenues and operating results will be adversely impacted (by
approximately 7%) until such time as the proceeds are reinvested back into the
Company's core businesses of design and semiconductor services, design and
fabrication of printed wiring boards, and systems assembly and distribution.
Operating results may be affected by a number of factors including the
economic conditions in the markets the Company serves; price and product
competition; the level of volume and the timing of orders; product mix; the
amount of automation employed on specific manufacturing projects; efficiencies
achieved by inventory management; fixed asset utilization; the level of
experience in manufacturing a particular product; customer product delivery
requirements; shortages of components or experienced labor; the integration of
acquired businesses; start-up costs associated with adding new geographical
locations; expenditures required for research and development; and failure to
introduce, or lack of market acceptance of, new processes, services,
technologies and products on a timely basis. Each of these factors has had in
the past, and may have in the future, an adverse effect on the Company's
operating results.
A majority of the Company's sales are to customers in the electronics
industry, which is subject to rapid technological change, product obsolescence
and price competition. The factors affecting the electronics industry in
general, or any of the Company's major customers, in particular, could have a
material adverse affect on the Company's operating results. The electronics
industry has historically been cyclical and subject to economic downturns at
various times, which have been characterized by diminished product demand,
accelerated erosion of average selling prices and overcapacity. The Company's
customers also are subject to short product life cycles and pricing and margin
pressures, which risks are borne by the Company. The
16
<PAGE> 18
Company seeks a well-balanced customer profile across most sectors of the
electronics industry in order to reduce exposure to a downturn in any particular
sector. The primary sectors within the electronics industry served by the
Company are office automation, mainframes and mass storage, data communications,
computer and peripherals, telecommunications, industrial, instrumentation, and
medical.
The Company offers manufacturing capabilities in three major electronics
markets of the world (North America, Europe and Asia). The Company's European
and Asian operations, combined, generated approximately 43% and 28% of total net
sales for the quarters ended April 4, 1999 and March 29, 1998, respectively. The
Company's international operations subject the Company to the risks of doing
business abroad, including currency fluctuations, export duties, import controls
and trade barriers, restrictions on the transfer of funds, greater difficulty in
accounts receivable collection, burdens of complying with a wide variety of
foreign laws and, in certain parts of the world, political and economic
instability.
Substantially all of the Company's business outside the United States is
conducted in U.S. dollar-denominated transactions. Some transactions of the
Company and its subsidiaries are made in currencies different from their
functional currencies. In order to minimize foreign exchange transaction risk,
the Company selectively hedges certain of its foreign exchange exposures through
forward exchange contracts, principally relating to non-functional currency
monetary assets and liabilities. The strategy of selective hedging can reduce
the Company's vulnerability to certain of its foreign currency exposures, and
the Company expects to continue this practice in the future. Gains and losses on
these foreign currency hedges are generally offset by corresponding losses and
gains on the underlying transaction. To date, the Company's hedging activity has
been immaterial, and there were no open foreign exchange contracts as of the
balance sheet dates included in the accompanying Consolidated Financial
Statements. As of April 4, 1999, the Company had the following unhedged net
foreign currency monetary asset (liability) positions:
<TABLE>
<CAPTION>
NET NET
FOREIGN U.S. DOLLAR
CURRENCY EQUIVALENT
ASSETS ASSETS
(LIABILITY) (LIABILITY)
----------- -----------
<S> <C> <C>
British Pound Sterling................................ 230 $ 369
Chinese Renminbi...................................... (28,370) (3,546)
Czech Krown........................................... 3,761 106
Euro.................................................. (5,124) (4,662)
Irish Punt............................................ (52) (73)
Hong Kong Dollar...................................... (6,748) (875)
Malaysian Ringgit..................................... (7,050) (1,865)
Mexican Peso.......................................... (708) (75)
</TABLE>
At any given time, certain customers may account for significant portions
of the Company's business. International Business Machines Corporation ("IBM"),
Hewlett-Packard Company ("HP") and Mylex Corporation accounted for approximately
10%, 16% and 11% of net sales during the quarter ended April 4, 1999,
respectively. HP and IBM accounted for 12% and 10% of net sales during the
quarter ended March 29, 1998, respectively. No other customer accounted for more
than 10% of net sales during the quarters ended April 4, 1999 or March 29, 1998.
The Company's top ten customers accounted for approximately 58% and 53% of
net sales for the quarters ended April 4, 1999 and March 29, 1998, respectively.
The percentage of the Company's sales to its major customers may fluctuate from
period to period. Significant reductions in sales to any of these customers
would have a material adverse effect on the Company's operating results.
Although management believes the Company has a broad diversification of
customers and markets, the Company has few material firm long-term commitments
or volume guarantees from its customers. In addition, customer orders can be
canceled and volume levels can be changed or delayed. From time to time, some of
the Company's customers have terminated their manufacturing arrangements with
the Company, and other customers have reduced or delayed the volume of design
and manufacturing services performed by the
17
<PAGE> 19
Company. The timely replacement of canceled, delayed or reduced contracts with
new business cannot be assured, and termination of a manufacturing relationship
or change, reduction or delay in orders could have a material adverse effect on
the Company's operating results. In the past, changes in customer orders have
had a significant impact on the Company's results of operations due to
corresponding changes in the level of overhead absorption.
The Company has actively pursued acquisitions in furtherance of its
strategy to be the fastest and most comprehensive provider of custom electronics
design and manufacturing services, ranging from microelectronics design through
the fabrication, final assembly, and distribution of printed circuits and
finished products for customers. The Company's acquisitions have enabled the
Company to provide more integrated outsourcing technology solutions with
time-to-market and lower cost advantages. OEM divestitures and acquisitions have
also played an important part in expanding the Company's presence in the global
electronics marketplace.
OEM divestitures and acquisitions involve numerous risks including
difficulties in assimilating the operations, technologies, and products and
services of the acquired companies, the diversion of management's attention from
other business concerns, risks of entering markets in which the Company has no
or limited direct prior experience and where competitors in such markets have
stronger market positions, and the potential loss of key employees of the
acquired company. There can be no assurance that the Company will be able to
successfully integrate newly acquired businesses. Such failures could have a
material adverse effect on the Company's business, financial condition and
results of operations. The integration of certain operations following an
acquisition will require the dedication of management resources that may
distract attention from the day-to-day business of the Company. The Company also
continues to experience rapid internal growth and expansion, and with continued
expansion, it may become more difficult for the Company's management to manage
geographically dispersed operations. The Company's failure to effectively manage
growth could have a material adverse effect on the Company's results of
operations.
B. RESULTS OF OPERATIONS
Subsequent to the issuance of the Company's financial statements for the
year ended January 3, 1999, management determined that certain expenses included
in its original estimate of losses on sales contracts recorded as unusual
charges (See Note 7) should have been reflected as selling, general and
administrative expenses in the quarters in which those costs were incurred. As a
result, the financial statements for the quarter ended March 29, 1998 have been
restated from amounts previously reported to remove these expenses from unusual
charges. These expenses will be reflected as period costs when incurred.
Additionally, certain costs related to the unusual charges were reclassified
from operating expenses to cost of sales to properly reflect the nature of those
charges. The balance sheet effect of the restatement results in a reduction of
18
<PAGE> 20
accrued expenses of $2,046 and an increase of retained earnings of $2,046 as
compared to what was previously reported.
A summary of the effects of the restatement on the statement of operations
is as follows:
<TABLE>
<CAPTION>
FOR THE FIRST QUARTER ENDED
MARCH 29, 1998
----------------------------
AS AS PREVIOUSLY
RESTATED REPORTED
---------- ---------------
<S> <C> <C>
Net sales:
Contract electronics manufacturing........................ $150,419 $150,419
Other..................................................... 84,955 84,955
-------- --------
Total net sales................................... 235,374 235,374
Cost of sales:
Cost of sales............................................. 201,932 201,932
Unusual charges........................................... 49,314 12,844
-------- --------
Total cost of sales............................... 251,246 214,776
Gross profit (loss)....................................... (15,872) 20,598
Selling, general and administrative expenses................ 19,176 19,176
Unusual charges............................................. 1,844 41,156
Interest income............................................. (927) (927)
Interest expense............................................ 4,719 4,719
Amortization of intangibles................................. 1,121 1,121
Other, net.................................................. (168) (168)
-------- --------
Loss before taxes................................. (41,637) (44,479)
Income tax benefit.......................................... (11,636) (12,432)
-------- --------
Net loss.......................................... $(30,001) $(32,047)
======== ========
Loss per common share:
Basic and diluted......................................... $ (1.19) $ (1.27)
======== ========
Weighted average number of common shares and equivalents
outstanding:
Basic and diluted......................................... 25,303 25,303
======== ========
</TABLE>
Total net sales for the quarter ended April 4, 1999 increased $12,094 to
$247,468 from $235,374 for the corresponding period in 1998. This represents a
5% increase in total net sales, which is lower than the Company's five year
compound annual growth rate of 41%. As further explained below, the Company
believes this lower growth rate is attributable to reduced orders from certain
product lines from some of the Company's major customers, as well as to
divestitures of certain operations.
Net sales from systems assembly and distribution, which represented 61% of
net sales for the quarter ended April 4, 1999, increased $494 to $150,913, from
$150,419 (64% of net sales) for the corresponding period in 1998. The slight
increase in net sales is the result of the Company's ability to continue to
expand sales to its existing customer base as well as sales to new customers
amounting to $9,857 which offset $9,363 in reduced orders from certain product
lines from some of the Company's major customers.
Net sales from printed wiring board manufacturing operations, which
represented 29% of net sales for the quarter ended April 4, 1999, increased
$20,613 (41%) to $71,321 from $50,708 (22% of net sales) for the comparable
period in 1998. This increase is attributable to the August 1998 Greatsino
acquisition and the October 1998 purchase of the HP printed wiring board
fabrication facility located in Boeblingen, Germany.
Net sales for the Company's other products and services, which represented
10% of net sales for the quarter ended April 4, 1999, decreased $9,013 (26%) to
$25,234 from $34,247 (14% of net sales) for the comparable period in 1998.
Approximately $6,574 of this decrease is primarily attributable to (i) the sale
of
19
<PAGE> 21
the assets and the business of the Company's subsidiary, TTI Testron, Inc. and
(ii) the sale of Dii Semiconductor's 6-inch, 0.6 micron wafer fabrication
facility ("Fab"), both of which occurred during the first quarter of fiscal
1999.
Gross profit for the quarter ended April 4, 1999 increased $53,801 to
$37,929 from a loss of $15,872 in the comparable period in 1998. Gross margin
increased to 15.3% in the quarter ended April 4, 1999 from (6.7)% in the
comparable period in 1998. The increase in gross margin is primarily
attributable to $49,314 of unusual pre-tax charges during the first quarter of
1998 associated with the downsizing of Orbit's operations. Excluding unusual
charges, gross profit for the quarter ended April 4, 1999 increased $4,487 to
$37,929 from $33,442 for the comparable period in 1998. Excluding unusual
charges, gross margin improved to 15.3% for the quarter ended April 4, 1999 from
14.2% for the quarter ended March 29, 1998. The gross margin increase was
primarily the result of (i) significantly improved margin performance from Dii
Semiconductor resulting from a more focused and efficient business model since
divesting of its Fab and (ii) the change in sales mix resulting from an increase
in printed wiring board revenues, which generate higher margins than the
Company's systems assembly and distribution, which revenues remained relatively
flat.
Selling, general and administrative (SG&A) expense increased $934 to
$20,110 for the quarter ended April 4, 1999 from $19,176 for the comparable
period in 1998. The percentage of SG&A expense to net sales remained unchanged
at 8.1% for both the quarter ended April 4, 1999 and March 29, 1998. The slight
increase in absolute dollars was primarily attributable to $1,859 of incremental
SG&A expense associated with the addition of Multek's August 1998 Greatsino
acquisition and October 1998 purchase of the HP printed wiring board fabrication
facility located in Boeblingen, Germany, combined with the continued investment
in the Company's sales and marketing, finance, and other general and
administrative infrastructure necessary to support the Company's business
expansion offset by a reduction in SG&A expenses as a result of the sale of TTI
Testron and the adoption of a fabless manufacturing approach, which approximated
$1,524.
During fiscal 1998, the Company recognized unusual pre-tax charges of
$72,794, 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 $51,158 and $21,636 of the charges in the first
and fourth quarters of fiscal 1998, respectively. As discussed below, $49,314 of
the unusual pre-tax charges had been classified as a component of cost of sales
in the first quarter 1998.
The components of the unusual charge recorded in fiscal 1998 are as
follows:
<TABLE>
<CAPTION>
FIRST FOURTH FISCAL NATURE OF
QUARTER QUARTER 1998 CHARGE
------- ------- ------- ---------
<S> <C> <C> <C> <C>
Severance..................................... $ 498 $ 900 $ 1,398 cash
Long-lived asset impairment................... 38,257 15,083 53,340 non-cash
Losses on sales contracts..................... 2,658 3,100 5,758 non-cash
Incremental uncollectible accounts
receivable.................................. 900 -- 900 non-cash
Incremental sales returns and allowances...... 1,500 500 2,000 non-cash
Inventory write-downs......................... 5,500 250 5,750 non-cash
Other exit costs.............................. 1,845 1,803 3,648 cash
------- ------- -------
Total unusual pre-tax charges....... $51,158 $21,636 $72,794
======= ======= =======
</TABLE>
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<PAGE> 22
The following table summarizes the activity related to the charges taken in
connection with the 1998 unusual charges:
<TABLE>
<CAPTION>
LONG-LIVED LOSSES UNCOLLECTIBLE SALES RETURNS INVENTORY
ASSET ON SALES ACCOUNTS AND WRITE- OTHER
SEVERANCE IMPAIRMENT CONTRACTS RECEIVABLE ALLOWANCES DOWNS EXIT COSTS TOTAL
--------- ---------- --------- ------------- ------------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December
28, 1997........... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Activities during the
year:
1998 provision..... 1,398 53,340 5,758 900 2,000 5,750 3,648 72,794
Cash charges....... (498) -- -- -- -- -- (465) (963)
Non-cash charges... -- (53,340) (4,658) (767) (1,500) (5,500) (643) (66,408)
------ -------- ------- ----- ------- ------- ------ --------
Balance at January 3,
1999............... 900 -- 1,100 133 500 250 2,540 5,423
Activities during the
period:
Cash charges....... (900) -- -- -- -- -- (601) (1,501)
Non-cash charges... -- -- (1,100) (133) -- (250) -- (1,483)
------ -------- ------- ----- ------- ------- ------ --------
Balance at April 4,
1999............... $ -- $ -- $ -- $ -- $ 500 $ -- $1,939 $ 2,439
====== ======== ======= ===== ======= ======= ====== ========
</TABLE>
The unusual pre-tax charges include $53,340 for the write-down of
long-lived assets to fair value. This amount has been classified as a component
of cost of sales. Included in the long-lived asset impairment are charges of
$50,739, which relate to the Fab which was written down to its net realizable
value based on its sales price. The Company kept the Fab in service until the
sale date in January 1999. In accordance with SFAS No. 121, the Company
discontinued depreciation expense on the Fab when it determined that it would be
disposed of and its net realizable value was known. The impaired long-lived
assets consisted primarily of machinery and equipment of $52,418, which were
written down by $43,418 to a carrying value of $9,000 and building and
improvements of $7,321, which were written down to a carrying value of zero. The
long-lived asset impairment also includes the write-off of the remaining
goodwill related to Orbit of $601. The remaining $2,000 of asset impairment
relates to the write-down to net realizable value of a facility the Company
exited during 1998.
The Company purchased Orbit in August of 1996, and supported Orbit's
previously made decision to replace its wafer fabrication facility ("fab") with
a higher technology fab. The transition to the 6-inch fab was originally
scheduled for completion during the summer of 1997, but the changeover took
longer than expected and was finally completed in January 1998.
The missed plan for the changeover and running both fabs simultaneously put
pressure on the work force, with resulting quality problems. Compounding these
problems, the semiconductor industry was characterized by excess capacity, which
led larger competitors to invade Orbit's niche market. Further, many of Orbit's
customers migrated faster than expected to a technology in excess of Orbit's
fabrication capabilities, requiring Orbit to outsource more of its manufacturing
requirements than originally expected. Based upon these continued conditions and
the future outlook, the Company took this first quarter 1998 charge to correctly
size Orbit's asset base to allow its recoverability based upon its then current
business size.
The first quarter 1998 unusual charge included $38,257 for the write-down
of long-lived assets to fair value. The fair value of these assets was based on
estimated market value at the date of the charge. Fair market value was
determined in accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and Assets to be Disposed of," and included the use of an
independent valuation. The impairment charge consists of $37,656 related to
property, plant and equipment and $601 related to goodwill. This amount was
classified as a component of cost of sales.
Additionally, the first quarter 1998 unusual charge included $5,058 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. The Company entered into
certain non-cancelable sales contracts to provide semiconductors to customers at
fixed prices. Because the Company was obligated to fulfill the terms of the
agreements at selling prices which were not sufficient to cover the cost to
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<PAGE> 23
produce or acquire such products, a liability for losses on sales contracts was
recorded for the estimated future amount of such losses. This amount was
classified as a component of cost of sales.
The first quarter 1998 unusual pre-tax charge also included $7,843
primarily associated with inventory write-downs, severance and other costs. The
inventory write-down primarily resulted from excess inventory created by
deciding to downsize operations.
As previously stated, the Company subsequently decided to sell the
manufacturing facility (which occurred in January 1999). This decision resulted
in additional unusual pre-tax charges in the fourth quarter of 1998 of $21,636.
The exit plan is expected to be completed in the third quarter of 1999. As
of April 4, 1999, the total remaining cash expenditures expected to be incurred
are $1,939 of other exit costs, including legal settlement costs, environmental
clean-up costs and other exit costs. These expenditures will continue to be
funded through operating cash flows of the Company which are expected to be
sufficient to fund these expenditures. These amounts were recorded in accrued
expenses at April 4, 1999.
Interest expense increased $1,763 to $6,482 for the quarter ended April 4,
1999 from $4,719 for the comparable period in 1998. This increase is primarily
associated with the increased borrowings used to fund the business acquisitions,
purchases of manufacturing facilities and strategic investments as described in
Note 3 of the condensed consolidated financial statements. In February 1999,
substantially all of the Company's convertible subordinated notes were converted
into approximately 4,600,000 shares of common stock and the unconverted portion
was redeemed for $101.
Interest income decreased $533 to $394 for the quarter ended April 4, 1999
from $927 for the comparable period in 1998. This decrease is attributable to
the earnings generated on the lower average balances of invested cash and cash
equivalents.
Amortization expense increased $174 to $1,295 for the quarter ended April
4, 1999 from $1,121 for the comparable period in 1998. This increase is
attributable to the amortization of debt issue costs associated with the
increased borrowings as well as amortization of goodwill associated with
acquisitions.
Other income (net) decreased $154 for the quarter ended April 4, 1999 from
the comparable period of 1998, due primarily to decreased net gains realized on
foreign currency transactions in the three months ended April 4, 1999 as
compared with the three months ended March 29, 1998.
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. The
Company's effective income tax rate was 28% for the quarter ended March 29, 1998
resulting from the mix of foreign and domestic earnings, income tax credits, and
changes in previously established valuation allowances for deferred tax assets.
C. BUSINESS COMBINATIONS, ASSET PURCHASES AND STRATEGIC INVESTMENTS
In August 1998, the Company acquired Greatsino Electronic Technology, a
printed wiring board fabricator and contract electronics manufacturer with
operations in the People's Republic of China. The cash purchase price, net of
cash acquired, amounted to $51,795. The initial purchase price is subject to
adjustments for contingent consideration of no more than approximately $40,000
based upon the business achieving specified levels of earnings through August
31, 1999. 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.
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<PAGE> 24
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
$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 dates forward. Pro forma results of operations
would not be materially different from the historical results reported. The
costs of these acquisitions have been allocated on the basis of the estimated
fair value of the assets acquired and the liabilities assumed.
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.
In March 1999, the Company acquired 15,000 non-voting preferred shares of
DVB (Group) Limited ("DVB"), an affiliate of Capetronic International Holdings
Limited (Capetronic) for a purchase price of $15,500. The preferred stock
accrues a 5% annual dividend and can be converted into common stock of
Capetronic after 15 months and at a price of HK$4.80 per share. Additionally, at
anytime after 15 months, Capetronic can force conversion if the market price is
at least HK$10.00 per share. At a conversion price of HK$4.80 per share, (based
on an agreed exchange rate of US$1.00 equals HK$7.50) the Company would hold
approximately 24,219 common shares of Capetronic, which currently would
represent approximately 13% of the issued common stock of Capetronic effected
for this conversion, excluding the effect of other dilutive instruments which
are currently in existence that, if converted, would reduce the Company's
ultimate ownership percentage. However, under the terms of the agreement, the
Company can not hold more than 10% of the outstanding common stock of
Capetronic. If, upon conversion, the Company holds in excess of 10% of the
outstanding common stock of Capetronic, the Company would be required to divest
of shares to reduce its holdings to 10% or less.
The Company currently accounts for its investment in Capetronic under the
cost method. Once the criteria for conversion are reached, the Company will
account for this investment as an available-for-sale marketable equity security
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
Through this strategic investment and a related manufacturing agreement, 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.
D. LIQUIDITY, CAPITAL RESOURCES AND COMMITMENTS
At April 4, 1999, the Company had working capital of $94,898 and a current
ratio of 1.5x compared with working capital of $87,310 and a current ratio of
1.4x at January 3, 1999. Cash and cash equivalents at April 4, 1999 were
$42,522, a decrease of $13,450 from $55,972 at January 3, 1999. This decrease
resulted primarily from cash used by investing activities of $20,745, offset by
cash provided by operations and financing activities of $4,843 and $2,435,
respectively.
Cash provided by operating activities amounted to $4,843 for the quarter
ended April 4, 1999 and cash used by operating activities amounted to $585 for
the quarter ended March 29, 1998. For the quarter ended April 4, 1999, cash
provided by operating activities reflects net income of $8,883 and depreciation
and
23
<PAGE> 25
amortization of $9,641 versus $8,519 in the quarter ended March 29, 1998. This
increase represents a $1,122 increase that is mainly attributable to the
Company's acquisitions. Cash provided by operating activities also reflects
decreases in accounts payable of $492 and accrued expenses of $8,769 combined
with an increase of $8,597 in inventory offset by a $9,322 decrease in accounts
receivable. For the quarter ended March 29, 1998, cash used by operating
activities included a net loss of $32,047, offset by the effects of the non-cash
unusual charges of $51,657. Cash provided by operating activities also reflects
increases in accounts receivable of $5,137 and inventory of $12,118 combined
with a decrease of $15,109 in accrued expenses.
The Company's net cash flows used by investing activities amounted to
$20,745 and $11,801 for the quarters ended April 4, 1999 and March 29, 1998,
respectively. Capital expenditures amounted to $21,342 and $15,153 for the
quarters ended April 4, 1999 and March 29, 1998, respectively. The capital
expenditures represent the Company's continued investment in state-of-the-art,
high-technology equipment, which enables the Company to accept increasingly
complex and higher-volume orders and to meet current and expected production
levels, as well as to replace or upgrade older equipment that was either
returned or sold. The Company received proceeds of $9,104 and $3,352 from the
sale of property, plant and equipment during the quarters ended April 4, 1999
and March 29, 1998, respectively, to allow for the potential replacement of
older property, plant and equipment with state-of-the-art, high-technology
equipment. A significant portion of the proceeds in the quarter ended April 4,
1999 was related to the sale of Dii Semiconductor's wafer fabrication facility
in January 1999.
In March 1999, in accordance with its initiative to divest of its non-core
business unit PTI, 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.
During the quarter ended April 4, 1999, the Company made two strategic
minority investments amounting to $20,507. See Note 3 of the condensed
consolidated financial statements for information regarding the two strategic
minority investments.
The Company's net cash flows provided by financing activities amounted to
$2,435 for the quarter ended April 4, 1999. The Company's net cash flows used by
financing activities amounted to $9,615 for the quarter ended March 29, 1998.
The Company repaid $3,528 and $1,235 in capital lease obligations in the
quarters ended April 4, 1999 and March 29, 1998, respectively. The Company also
repaid $15,504 and $2,044 in long-term debt in the quarters ended April 4, 1999
and March 29, 1998, respectively. The Company received $1,568 and $2,834 in
proceeds from stock issued under its stock plans in the quarters ended April 4,
1999 and March 29, 1998, respectively.
Additionally, during the quarter ended April 4, 1999, the Company borrowed
an additional $20,000 under its $110,000 senior secured revolving line-of-credit
facility. 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.
During the quarter ended March 29, 1998, the Company repurchased 435,000
shares of its common stock at a cost of $9,170.
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.
In April 1999, in accordance with its initiative to divest of its non-core
business unit PTI, 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 Company is divesting this non-core
business unit in order to sharpen its focus on the Company's core businesses of
design and semiconductor services, fabrication of printed wiring boards, and
systems assembly and distribu-
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<PAGE> 26
tion. The aggregate proceeds from these sales are expected to approximate
$30,000. The Company believes that these sales will not have any adverse impact
on its consolidated financial position. However, the Company's consolidated
revenues and operating results will be adversely impacted (by approximately 7%)
until such time as the proceeds are reinvested back into the Company's core
businesses of design and semiconductor services, design and fabrication of
printed wiring boards, and systems assembly and distribution.
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.
Management believes that its current level of working capital, together
with cash generated from operations, existing cash reserves, leasing
capabilities, and line-of-credit availability will be adequate to fund the
Company's current capital expenditure plan for fiscal 1999. The Company intends
to continue its acquisition strategy and it is possible that future acquisitions
may be significant. If available resources are not sufficient to finance the
Company's acquisitions, the Company would be required to seek additional equity
or debt financing. There can be no assurance that such funds, if needed, will be
available on terms acceptable to the Company or at all.
The Company's operations are subject to certain federal, state and local
regulatory requirements relating to the use, storage, discharge and disposal of
hazardous chemicals used during its manufacturing processes. The Company
believes that it is currently operating in compliance with applicable
regulations and does not believe that costs of compliance with these laws and
regulations will have a material effect upon its capital expenditures, results
from operations or competitive position.
The Company determines the amount of its accruals for environmental matters
by analyzing and estimating the range of possible costs in light of information
currently available. The imposition of more stringent standards or requirements
under environmental laws or regulations, the results of future testing and
analysis undertaken by the Company at its operating facilities, or a
determination that the Company is potentially responsible for the release of
hazardous substances at other sites could result in expenditures in excess of
amounts currently estimated to be required for such matters. No assurance can be
given that actual costs will not exceed amounts accrued or that costs will not
be incurred with respect to sites as to which no problem is currently known.
Further, there can be no assurance that additional environmental matters will
not arise in the future.
See Note 10 of the condensed consolidated financial statements for a
description of commitments, contingencies and environmental matters.
E. YEAR 2000 ISSUE
The Year 2000 date conversion issue is the result of computer programs
being written using two digits rather than four to define the applicable year.
This issue affects computer systems that have time-sensitive programs that may
not properly recognize the Year 2000. This could result in major system failures
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in normal business activities.
Management has implemented a company-wide program to prepare its financial,
manufacturing, and other critical systems and applications for the Year 2000.
This comprehensive program was developed to ensure the Company's information
technology assets, including embedded microprocessors ("IT assets") and non-IT
assets are Year 2000 ready. The Company has formed a Year 2000 project team of
approximately 75 employees, overseen by a corporate officer, which team is
responsible for monitoring the progress of the
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<PAGE> 27
program and ensuring timely completion. The team has a detailed project plan in
place with tasks, milestones, critical paths, and dates identified.
The Company's comprehensive program covers the following six phases: (i)
inventory of all IT and non-IT assets; (ii) assessment of repair requirements;
(iii) repair of IT and non-IT assets; (iv) testing of individual IT and non-IT
assets to determine the correct manipulation of dates and date-related data; (v)
communication with the Company's significant suppliers and customers to
determine the extent to which the Company is vulnerable to any failures by them
to address the Year 2000 issue; and (vi) creation of contingency plans in the
event of Year 2000 failures.
Implementation of the program is ongoing with all of the operating entities
having completed the inventory 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 completion of each phase of those plans. The Company
anticipates that all mission-critical software and hardware will be compliant by
the third quarter of 1999. The Company has yet to begin system testing. Until
system testing is substantially in process, the Company cannot fully estimate
the risks of its Year 2000 issue. To date, management has not identified any IT
assets that present a material risk of not being Year 2000-ready, or for which a
suitable alternative cannot be implemented. However, as the program proceeds
into subsequent phases, it is possible that the Company may identify assets that
do present a risk of a Year 2000-related disruption. It is also possible that
such a disruption could have a material adverse effect on financial condition
and results of operations.
The Company is continually contacting suppliers who provide both critical
IT assets and non-information technology related goods and services (e.g.
transportation, packaging, production materials, production supplies, etc.). The
Company mailed surveys to its suppliers in order to (i) evaluate the suppliers'
Year 2000 compliance plans and state of readiness and (ii) determine whether a
Year 2000-related event will impede the ability of such suppliers to continue to
provide such goods and services as the Year 2000 is approached and reached. For
a vast majority of those suppliers of IT assets that have responded, the Company
has received assurances that these assets will correctly manipulate dates and
date-related data as the Year 2000 is approached and reached. The Company is in
the process of reviewing responses for accuracy and adequacy, and sending
follow-up surveys or contacting suppliers directly via phone for those
non-responsive suppliers.
The Company also relies, both domestically and internationally, upon
government agencies, utility companies, telecommunications services, and other
service providers outside of the Company's control. There is no assurance that
such suppliers, governmental agencies, or other third parties will not suffer a
Year 2000 business disruption. Such failures could have a material adverse
affect on the Company's financial condition and results of operations.
Further, the Company has initiated formal communications with its
significant suppliers, customers and critical business partners to determine the
extent to which the Company may be vulnerable in the event those parties fail to
properly remediate their own Year 2000 issues. The Company has taken steps to
monitor the progress made by those parties, and intends to test critical system
interfaces as the Year 2000 approaches. The Company will develop appropriate
contingency plans in the event that a significant exposure is identified
relative to the dependencies on third-party systems. While the Company is not
presently aware of any such significant exposure, there can be no guarantee that
the systems of third parties on which the Company relies will be converted in a
timely manner, or that a failure to properly convert by another company would
not have a material adverse effect on the Company.
The program calls for the development of contingency plans for the
Company's at-risk business functions. The Company is finalizing its Y2K
contingency plans for all of its business critical systems world wide. These
plans will address any business critical failure, both internal and external
dependencies, including but not limited to transportation, banking,
telecommunications, suppliers, manufacturing, accounting and payroll. Because
the Company has not completed testing of mission critical systems, and,
accordingly, has not fully assessed its risks from potential Year 2000 failures,
the Company has not yet developed specific Year 2000 contingency plans. The
Company will develop such plans if the results of testing mission-critical
systems identify a business function risk. In addition, as a normal course of
business, the Company maintains and
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<PAGE> 28
deploys contingency plans to address various other potential business
interruptions. These plans may be applicable to address the interruption of
support provided by third parties resulting from their failure to be Year
2000-ready.
To date, the Company estimates that it has spent approximately $4,100 on
implementation of the program, with the majority of the work being performed by
Company employees. Less than $7,000 has been allocated to address the Year 2000
issue. The Company's aggregate cost estimate includes certain internal recurring
costs, but does not include time and costs that may be incurred by the Company
as a result of the failure of any third parties, including suppliers, to become
Year 2000-compliant or costs to implement any contingency plans. The Company is
expensing as incurred all costs related to the assessment and remediation of the
Year 2000 issue. These costs are being funded through operating cash flows.
Certain inventory and manufacturing software-related projects were accelerated
to ensure Year 2000 compliance. However, such acceleration did not increase the
anticipated costs of the projects. The Company has not deferred any specific
information technology project as a result of the implementation of the program.
The Company is committed to achieving Year 2000 compliance; however, because a
significant portion of the problem is external to the Company and therefore
outside its direct control, there can be no assurances that the Company will be
fully Year 2000 compliant. If the modifications and conversions required to make
the Company Year 2000-ready are not made, or are not completed on a timely
basis, the resulting problems could have a material impact on the operations of
the Company. This impact could, in turn, have a material adverse effect on the
Company's results of operations and financial condition.
F. NEW ACCOUNTING STANDARDS
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS 133). This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in its statement of financial
position and measure those instruments at fair value. The accounting for changes
in the fair value of a derivative (that is, gains and losses) are recognized in
earnings or in other comprehensive income each reporting period, depending on
the intended use of the derivative and the resulting designation. Generally,
changes in the fair value of derivatives not designated as a hedge, as well as
changes in fair value of fair-value designated hedges (and the item being
hedged), are required to be reported in earnings. Changes in fair value of other
types of designated hedges are generally reported in other comprehensive income.
The ineffective portion of a designated hedge, as defined, is reported in
earnings immediately.
The Company will be required to adopt SFAS 133 as of January 2, 2001. The
Company has not completed the process of evaluating the impact, if any, that
will result from adopting SFAS 133.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposures are in the areas of
interest-rate risk and foreign currency exchange rate risk. To manage the
volatility relating to these exposures, the Company may enter into various
derivative transactions to hedge the exposures. The Company does not hold or
issue any derivative financial instruments for trading or speculative purposes.
The Company incurs interest expense on loans made under its Credit
Agreement at interest rates that are fixed for a maximum of six months.
Borrowings under the Credit Agreement bear interest, at the Company's option, at
either: (i) the Applicable Base Rate ("ABR") (as defined in the Credit
Agreement) plus the Applicable Margin for ABR Loans ranging between 0.00% and
0.75%, based on certain financial ratios of the Company, or (ii) the Eurodollar
Rate (as defined in the Credit Agreement) plus the Applicable Margin for
Eurodollar Loans ranging between 1.00% and 2.25%, based on certain financial
ratios of the Company. The Eurodollar Rate is subject to market risks and will
fluctuate. There has been no material change in the Eurodollar Rate and the fair
value of the Company's fixed rate debt since January 3, 1999. The Company had no
open interest rate hedge positions to reduce its exposure to changes in interest
rates at April 4, 1999.
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<PAGE> 29
The Company conducts a significant amount of its business and has a number
of operating facilities in countries outside of the United States. Substantially
all of the Company's business outside the United States is conducted in U.S.
dollar-denominated transactions. Some transactions of the Company and its
subsidiaries are made in currencies different from their functional currencies.
In order to minimize foreign exchange transaction risk, the Company selectively
hedges certain of its foreign exchange exposures through forward exchange
contracts, principally relating to non-functional currency monetary assets and
liabilities. The strategy of selective hedging can reduce the Company's
vulnerability to certain of its foreign currency exposures, and the Company
expects to continue this practice in the future. Gains and losses on these
foreign currency hedges are generally offset by corresponding losses and gains
on the underlying transaction. To date, the Company's hedging activity has been
immaterial, and there were no open foreign exchange contracts as of the balance
sheet dates included in the accompanying Consolidated Financial Statements. As
of April 4, 1999, the Company had the following unhedged net foreign currency
monetary asset (liability) positions:
<TABLE>
<CAPTION>
NET NET
FOREIGN U.S. DOLLAR
CURRENCY EQUIVALENT
ASSETS ASSETS
(LIABILITY) (LIABILITY)
----------- -----------
<S> <C> <C>
British Pound Sterling................................ 230 $ 369
Chinese Renminbi...................................... (28,370) (3,546)
Czech Krown........................................... 3,761 106
Euro.................................................. (5,124) (4,662)
Irish Punt............................................ (52) (73)
Hong Kong Dollar...................................... (6,748) (875)
Malaysian Ringgit..................................... (7,050) (1,865)
Mexican Peso.......................................... (708) (75)
</TABLE>
The Company believes that its revenues and operating expenses currently
incurred in foreign currencies are immaterial, and therefore any associated
market risk is unlikely to have a material adverse affect on the Company's
business, results of operations or financial condition.
28
<PAGE> 30
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In 1997 two related complaints, as amended, were filed in the District
Court of Boulder, Colorado and the U.S. District Court for the District of
Colorado against the Company and certain of its officers. The lawsuits purport
to be brought on behalf of a class of persons who purchased the Company's common
stock during the period from April 1, 1996, through September 8, 1996, and claim
violations of Colorado and federal laws based on allegedly false and misleading
statements made in connection with the offer, sale or purchase of the Company's
common stock at allegedly artificially inflated prices, including statements
made prior to the Company's acquisition of Orbit. The complaints seek
compensatory and other damages, as well as equitable relief. The Company filed
motions to dismiss both amended complaints. The motion to dismiss the state
court complaint has been denied, and the Company has filed its answer denying
that it misled the securities market. The motion to dismiss the federal court
complaint is still pending. Both actions were brought by the same plaintiffs'
law firm as the Orbit action discussed below. A May 2000 trial date has been set
for the state court action. No trial date has been set for the 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
vigorously against such claims.
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 Sections
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 an agreement to settle the case on a classwide basis, which is
subject to final court approval.
In addition to the above matters, the Company is involved in certain other
litigation arising in the ordinary course of business.
Although management is of the opinion that these matters will not have a
material adverse effect on the consolidated financial position or results of
operations of the Company, the ultimate outcome of these matters cannot, at this
time, be predicted in light of the uncertainties inherent in litigation. See
Note 9 of the 1998 Consolidated Financial Statements included in Part II, Item 8
of the Company's Form 10-K Annual Report for the fiscal year ended January 3,
1999 for contingencies and environmental matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's annual shareholders' meeting, which was held on May 6,
1999, the Company's shareholders elected the following six persons as directors
to one-year terms: Ronald R. Budacz, Chairman and Chief Executive Officer, Carl
R. Vertuca, Jr., Executive Vice President, Robert L. Brueck, Constantine S.
Macricostas, Gerard T. Wrixon, Alexander W. Young. Not less than 24,552,710
shares were cast for each of the Directors.
The shareholders approved the proposal to amend the Company's 1994 Stock
Incentive Plan to increase the number of shares of common stock reserved for
issuance thereunder from 4,000,000 to 5,500,000 shares. Voting in favor were
17,294,803, opposed were 2,388,960, abstaining were 79,497, and broker non-votes
were 5,519,715.
29
<PAGE> 31
The shareholders ratified the selection of Deloitte & Touche LLP as the
Company's independent auditors. Voting in favor were 24,880,856, opposed were
352,601, abstaining were 49,518, and broker non-votes were zero.
ITEM 6(a). EXHIBITS
"ITEM 6(a). EXHIBITS" is hereby amended for the sole purpose of including
updated Reports of Independent Auditors.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1 Restated Bylaws of Registrant, as amended through March 10,
1999. (Previously filed)
10.1 Employment Agreement dated as of January 1, 1997 between The
DII Group, Inc. and Steven C. Schlepp (Previously filed)
10.2 First Amendment to Employment Agreement dated as of January
1, 1997 between The DII Group, Inc. and Steven C. Schlepp
(Previously filed)
10.3 Senior Executive Severance Agreement dated as of January 1,
1997 between The DII Group, Inc. and Steven C. Schlepp
(Previously filed)
10.4 1994 Stock Incentive Plan as amended through May 6, 1999.
(Previously filed)
15 Letter re: Unaudited Interim Financial Information
23.1 Report of Independent Accountants -- Deloitte & Touche LLP
27 Financial Data Schedule (Previously filed)
</TABLE>
ITEM 6(b). REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter for which this report
is filed.
30
<PAGE> 32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
<TABLE>
<S> <C>
THE DII GROUP, INC.
Date: September 8, 1999 By:
----------------------------------------
Carl R. Vertuca, Jr.
Executive Vice President -- Finance,
Administration and Corporate
Development
Date: September 8, 1999 By:
----------------------------------------
Thomas J. Smach
Chief Financial Officer
</TABLE>
31
<PAGE> 33
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1 Restated Bylaws of Registrant, as amended through March 10,
1999. (Previously filed)
10.1 Employment Agreement dated as of January 1, 1997 between The
DII Group, Inc. and Steven C. Schlepp (Previously filed)
10.2 First Amendment to Employment Agreement dated as of January
1, 1997 between The DII Group, Inc. and Steven C. Schlepp
(Previously filed)
10.3 Senior Executive Severance Agreement dated as of January 1,
1997 between The DII Group, Inc. and Steven C. Schlepp
(Previously filed)
10.4 1994 Stock Incentive Plan as amended through May 6, 1999.
(Previously filed)
15 Letter re: Unaudited Interim Financial Information
23.1 Report of Independent Accountants -- Deloitte & Touche LLP
27 Financial Data Schedule (Previously filed)
</TABLE>
32
<PAGE> 1
EXHIBIT 15
September 8, 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
(September 8, 1999 as to Note 13); because we did not perform an audit, we
expressed no opinion on that information. However, such report includes an
explanatory paragraph referring to the restatement discussed in Note 13.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended April 4, 1999, is
incorporated by reference in Registration Statement Nos. 33-73556, 33-90572,
33-79940, 333-10999, 333-11001, 333-11005, and 333-11007 on Form S-8.
We also are aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
DELOITTE & TOUCHE LLP
Denver, Colorado
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT ACCOUNTANTS' REPORT
The Board of Directors
The DII Group, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of The
DII Group, Inc. and subsidiaries (the Company) as of April 4, 1999, and the
related condensed consolidated statements of income and cash flows for the
thirteen weeks ended April 4, 1999 and March 29, 1998. These financial
statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to such condensed consolidated financial statements for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of The DII Group, Inc. and
subsidiaries as of January 3, 1999, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the 53 weeks then ended
(not presented herein); and in our report dated January 28, 1999 (February 18,
1999 as to the redemption of convertible subordinate notes described in Note 6
and September 8, 1999 as to Note 15), we expressed an unqualified opinion on
those consolidated financial statements and included an explanatory paragraph
relating to the restatement discussed in Note 15. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of January 3, 1999 is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
As discussed in Note 13, the accompanying condensed consolidated financial
statements for the thirteen week period ended March 29, 1998 have been restated.
DELOITTE & TOUCHE LLP
Denver, Colorado
(September 8, 1999, as to Note 13)
