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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2001
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______________ to ______________
Commission file numbers:
DDi Corp. 000-30241
DDi Capital Corp. 333-41187
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DDi CORP.
DDi CAPITAL CORP.
(Exact names of registrants as specified in their charters)
Delaware 06-1576013
California 33-0780382
(State or other jurisdiction
of incorporation or organization) (I.R.S. Employer Identification Nos.)
1220 Simon Circle Anaheim, California 92806
(Address of Principal Executive Offices) (Zip Code)
(714) 688-7200
(Registrants' telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
DDi Corp.-Common Stock, par value $.01 per share
(Title of class)
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Indicate by check mark whether DDi Corp. and DDi Capital Corp.: (1) have
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 (or for such shorter period
that the registrant was required to file such reports), and (2) have been
subject to such filing requirements for the past 90 days: Yes [X] No [_] .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [_] .
The aggregate market value of the DDi Corp.'s voting Common Stock held by
non-affiliates of DDi Corp. was approximately $518,246,064 (computed using the
closing price of $12.27 per share of Common Stock on March 11, 2002, as
reported by The Nasdaq Stock Market, Inc.). On March 11, 2002, all of the
voting stock of DDi Capital Corp. was held by DDi Intermediate Holdings Corp.,
and all of the voting stock of DDi Intermediate Holdings Corp. was held by DDi
Corp.
As of March 11, 2002, DDi Corp. had 47,975,106 shares of common stock, par
value $0.01 per share, outstanding. As of March 11, 2002, DDi Capital Corp. had
1,000 shares of common stock, par value $.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of DDi Corp.'s Proxy Statement prepared in connection with the
Annual Meeting of Stockholders to be held in 2002 are incorporated by reference
into Part III of this Form 10-K.
This Annual Report on Form 10-K is a combined annual report being filed
separately by two registrants: DDi Corp ("DDi Corp." f/k/a DDi Holdings Corp.)
and DDi Capital Corp. ("DDi Capital"). Except where the context clearly
indicates otherwise, any references in this report to "DDi Corp." includes all
subsidiaries of DDi Corp. including DDi Capital. DDi Capital makes no
representation as to the information contained in this report in relation to
DDi Corp. and its subsidiaries other than DDi Capital.
DDi Capital meets the conditions set forth in General Instructions I(1)(a)
and (b) of Form 10-K, and are filing this form with the reduced disclosure
format pursuant to General Instruction I(2).
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DDi CORP.
DDi CAPITAL CORP.
FORM 10-K INDEX
Page
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PART I
Item 1 Business............................................................................. 3
Item 1A Executive Officers of DDi Corp....................................................... 12
Item 2 Properties........................................................................... 13
Item 3 Legal Proceedings.................................................................... 13
Item 4 Submission of Matters to a Vote of Security Holders.................................. 13
PART II
Item 5 Market for the Registrants' Common Equity and Related Stockholder Matters............ 14
Item 6 Selected Financial Data.............................................................. 15
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 18
Item 7A Quantitative and Qualitative Disclosures About Market Risk........................... 37
Item 8 Financial Statements and Supplementary Data.......................................... 38
Item 9 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. 38
PART III
Item 10 Directors and Executive Officers of the Registrant................................... 39
Item 11 Executive Compensation............................................................... 39
Item 12 Security Ownership of Certain Beneficial Owners and Management....................... 39
Item 13 Certain Relationships and Related Transactions....................................... 40
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K..................... 41
2
Except for the historical information contained herein, this Annual Report
on Form 10-K contains forward-looking statements that involve risks and
uncertainties. Actual results could differ materially from those discussed
here. Readers should pay particular attention to the considerations described
in "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations--Factors that May Affect Future Results."
PART I
ITEM 1. BUSINESS
Overview
DDi Corp., formerly known as DDi Holdings Corp. ("DDi Corp."), provides
technologically advanced, time-critical electronics design, development and
manufacturing services to original equipment manufacturers and other providers
of electronics manufacturing services. Operating through our primary operating
subsidiaries, Dynamic Details, Incorporated ("Dynamic Details") and DDi Europe
Limited ("DDi Europe"), we target customers that are characterized by new
product development programs demanding the rapid application of advanced
technology and design. The technologically advanced, time-critical segment of
the electronics manufacturing services industry in which we operate is
characterized by high margins and significant customer diversity.
Our customers use our services to develop and produce a wide variety of end
products, including communications switching and transmission equipment,
wireless base stations, wireless telephone handsets, computer work stations,
high-end computing equipment, data networking equipment, medical devices,
automotive components, industrial and test equipment, and various aerospace
products.
DDi Corp.'s predecessor corporation was incorporated in California in 1978.
In 1991, new management, led by our President and Chief Executive Officer,
Bruce D. McMaster, began to focus primarily on the time-critical segment of the
electronics manufacturing services industry. In January 1996, we were
recapitalized by Chase Manhattan Capital, LLC and its affiliates. In October
1997, we were recapitalized again by investors led by Bain Capital, Inc.,
Celerity Partners, L.L.C. and Chase Capital Partners. In April 2000, in
conjunction with the closing of DDI Corp.'s initial public offering, DDi Corp.
was reincorporated in Delaware.
In October 1997, in connection with a second recapitalization, DDi Corp.
incorporated Dynamic Details as a new, wholly-owned subsidiary, and contributed
substantially all of its assets, subject to certain liabilities, to Dynamic
Details. In November 1997, DDi Corp. organized DDi Capital Corp., a California
corporation ("DDi Capital"), as a wholly-owned subsidiary, and in February
1998, DDi Corp. contributed substantially all of its assets (consisting
primarily of all of the shares of capital stock of Dynamic Details), subject to
certain liabilities, including senior discount notes, to DDi Capital. In July
1998, DDi Corp. organized DDi Intermediate Holdings Corp. ("Intermediate") as a
wholly-owned subsidiary and contributed its ownership of DDi Capital to
Intermediate.
Acquisitions have been important to our growth. Set forth below is a summary
of our acquisitions:
. In December 1997, Dynamic Details acquired all of the outstanding shares
of common stock of Colorado Springs Circuits, Inc., a Colorado
corporation d/b/a Dynamic Details, Inc.--Colorado Springs.
. In July 1998, Dynamic Details merged with Dynamic Circuits, Inc., a
Delaware corporation. DCI was primarily a manufacturer of complex
printed circuit boards and related components based in Silicon Valley
and with additional facilities in Texas, Georgia and Massachusetts.
. In December 1999, Dynamic Details implemented a plan to consolidate its
Colorado operations into its Texas facility and to close the Colorado
facility. The closure of this facility was effectively complete as of
March 31, 2000. By combining the Texas and Colorado operations, Dynamic
Details eliminated lower-margin product lines and decreased overhead
costs, and gained efficiency through better capacity utilization and
streamlined management.
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. In April 2000, DDi Corp. acquired MCM Electronics Limited, a
time-critical electronics manufacturing service provider based in the
United Kingdom. MCM Electronics has been combined with our other
European operations and does business as DDi Europe.
. In August 2000, Dynamic Details acquired substantially all the U.S.
assets of Automata International, Inc., a Virginia-based manufacturer of
technologically advanced printed circuit boards.
. In September 2000, Dynamic Details acquired substantially all the assets
of Golden Manufacturing, Inc., a Texas-based manufacturer of engineered
metal enclosures and provider of value-added assembly services to
communications and electronics original equipment manufacturers.
. In March 2001, DDi Europe completed the acquisition of Thomas Walter
Limited, a leading circuit board manufacturer based in Marlow, England.
Thomas Walter is a well-established provider of complex, quick-turn
rigid and rigid-flex printed circuit boards for the European electronics
industry.
. In April 2001, Dynamic Details, through its wholly-owned subsidiary, DDi
Sales Corp., formed Kabushiki Kaisha DDJ, a Japanese corporation, to
serve as a sales office in Tokyo, Japan.
. In April 2001, Dynamic Details completed the acquisition of the assets
of Nelco Technology, a wholly owned subsidiary of Park Electrochemical
Corp. Nelco is an Arizona-based manufacturer of semi-finished printed
wiring boards, commonly known as mass lamination.
. In May 2001, Dynamic Details completed the acquisition of Olympic
Circuits Canada, a Canada-based time-critical electronics manufacturing
service provider specializing in quick-turn prototype printed circuit
boards.
. In June 2001, Dynamic Details completed the acquisition of the assets of
Altatron, a Southern California based provider of value-add assembly
services to electronics original equipment manufacturers.
In October 2001, our management and Board of Directors approved a plan to
close our Garland, Texas and Marlborough, Massachusetts facilities. Prior to
its closure, the Garland plant had manufactured our lowest technology
pre-production volume printed circuit boards. The Marlborough plant provided
electronic interconnect products to selected customers in the New England area.
Our decision to close these facilities was based on their contribution to our
financial objectives in 2001 as well as their expected contribution going
forward. The closure of the facilities is estimated to be completed by June 30,
2002.
This report is a combined annual report filed separately by two registrants,
DDi Corp. and DDi Capital. DDi Capital is a wholly-owned subsidiary of
Intermediate, and Intermediate is a wholly-owned subsidiary of DDi Corp. Each
registrant has its principal executive offices at 1220 Simon Circle, Anaheim,
California and their telephone number is (714) 688-7200.
As used herein, the "Company," "we," "us" or "our" means DDi Corp. and its
wholly-owned subsidiaries, including DDi Capital, or their predecessor entities
as the context requires.
Industry Background
Electronics manufacturing services, or EMS, companies provide a range of
services to electronics original equipment manufacturers, or OEMs. EMS industry
revenues have increased from approximately $22 billion in 1993 to approximately
$104 billion in 2001. In 2001, approximately 13.7% of the cost of goods sold by
electronics OEMs was attributable to components and products outsourced to EMS
providers.
Electronics manufacturing services were historically labor-intensive
functions outsourced by OEMs to obtain additional capacity during periods of
high demand and initially consisted mainly of printed circuit board assembly.
Early EMS providers acted essentially as subcontractors, providing production
capacity on a
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transactional basis. With advances in process technology, EMS providers
developed additional capabilities and were able both to improve quality and to
reduce OEMs' costs. Over time, OEMs came to rely on EMS providers to perform a
broader array of manufacturing services, including design and development
activities. In recent years, EMS providers have expanded their range of
services to encompass design, product development, packaging and distribution
and overall supply chain management.
By using EMS providers, OEMs are able to focus on their core competencies,
including product development, sales, marketing and customer service.
Outsourcing allows OEMs to take advantage of the manufacturing expertise,
advanced technology and capital investment of EMS providers, to achieve overall
cost benefits and to enhance their competitive position by:
. reducing time to market and time to volume production;
. reducing operating costs and invested capital;
. improving supply chain management;
. focusing their resources on core competencies;
. accessing advanced manufacturing capabilities and process technologies;
and
. improving access to global markets.
The DDi Customer Solution
We engineer technologically advanced materials for customers within
extremely short turnaround times, which distinguishes us from traditional
electronics manufacturing service providers, and provides our customers with a
competitive advantage in delivering their new products to market quickly. Our
customers benefit from the following components of the DDi customer solution:
. Time-critical Service. Based on industry data, we believe we are one of
the largest providers of quick-turn complex printed circuit boards in
the United States. We can deliver highly complex printed circuit boards
to customers in as little as 24 hours. Approximately 45% of our net
sales in 2001 were generated from services delivered in 10 days or less.
. Advanced Technology. The focus on time-critical design, development and
manufacturing services requires our engineers to remain on the cutting
edge of electronics technology, and our customers benefit from the
expertise we have developed as they seek to introduce new products.
Approximately 55% of our net sales in 2001 involved the design or
manufacture of printed circuit boards with at least eight layers, an
industry-accepted measure of complexity. In addition, many of our lower
layer-count boards are complex as a result of the incorporation of other
technologically advanced features.
. Proactive Sales Force. Our knowledgeable and innovative sales force
enables current and prospective customers to understand and exploit a
wide range of services provided by our facilities across the country and
in Europe.
. Relationships with Research and Development Personnel. In many cases,
we have design engineers stationed on-site in customers' product
development divisions. As a result, we help customers develop workable
technical solutions to their concepts for next generation products.
. Experienced Management. Our management team, led by Bruce D. McMaster,
collectively has more than 75 years of experience in the electronics
manufacturing services industry.
We believe that these attributes allow us to consistently meet and exceed
our customers' expectations and that, as a result, we will continue to attract
leading original equipment manufacturers and other providers of electronics
manufacturing services as customers.
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Our Strategy
Our goal is to be the leading provider of technologically advanced,
time-critical electronics manufacturing services. To achieve this goal, we will:
Strengthen Technology and Process Management Leadership in the Time-Critical
Segment of the Electronics Manufacturing Services Industry and Continue to
Improve Quality and Delivery Times by Incorporating Emerging Technologies and
Consistently Refining Manufacturing Processes. We have consistently been among
the earliest users of new developments in printed circuit board design,
development and manufacturing and are continuously incorporating new technology
into our manufacturing processes in order to further improve quality and reduce
delivery times. Because we concentrate on cutting-edge methods, we have the
ability to service emerging providers of next-generation technology. This
ability allows us to build customer relationships with companies with the
potential for significant growth and enables us to provide these cutting-edge
methods to customers accustomed to more traditional methods. We have developed
process management expertise over time and are continuously enhancing our
ability to quickly adapt design and production facilities on demand to serve
time-critical customer needs. We believe this expertise and ability position us
as an industry leader in providing flexible and responsive technologically
advanced, time-critical services.
Leverage Leadership in Quick-Turn Design and Manufacturing Services to
Further Expand Assembly Operations and Other Value-Added Services. As a
quick-turn design and manufacturing service provider, we gain early access to
our customers' product development processes, giving us the opportunity to
leverage the provision of design services into providing other value-added
services including assembly of printed circuit boards and other electronic
components and total system assembly and integration of electronics products.
We predominantly use these additional capabilities in our customers' new
product development programs to enable them to further reduce their time to
market and overall cost.
Pursue Customers with Significant New Product Development Activity. Our
marketing efforts focus on customers having new product development programs
that require the rapid application of advanced technology and design. These
customers include original equipment manufacturers, emerging providers of
next-generation technology, and providers of electronics manufacturing services
that serve similar customers.
Capitalize on Strong Customer Relationships and Design Expertise to
Participate in Future Product Introductions and Further Outsourcing
Programs. We have served established original equipment manufacturers for many
years, through multiple product generations. We have positioned ourselves as a
strategic partner in our customers' new product initiatives by focusing on
direct relationships with our customers' research and development personnel. As
a result, we have developed expertise and gained knowledge of our customers'
new product design programs, all of which position us as a preferred service
provider for future product generations.
Pursue Selected Acquisition Opportunities, Including Asset Divestitures by
Original Equipment Manufacturers. We have actively pursued acquisitions to
enhance service offerings, expand geographic presence and increase production
capabilities. An increasing number of original equipment manufacturers are
divesting their production capabilities as an integral part of their
manufacturing strategy. We completed four acquisitions in 2001: Thomas Walter,
Nelco Technology, Olympic Circuits Canada and Altatron Technology. We intend to
continue to pursue strategic acquisition opportunities, including asset
divestitures by original equipment manufacturers, that we believe will
complement internal growth.
Further Expand International Operations to Better Serve the Needs of
Customers Seeking to Outsource Their Worldwide Design and Manufacturing
Activities. We are serving a growing number of European customers from DDi
Europe's four U.K. facilities. We believe European markets offer significant
growth opportunities as large electronics equipment manufacturers are
increasing their global distribution and are seeking electronics manufacturing
service providers with the ability to operate in multiple markets. We are
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actively pursuing other acquisition possibilities in Europe. In addition, in
2001 we acquired a facility in Canada increasing our capability to serve
customers in that geographic area. We also opened a sales office in Tokyo,
Japan, which we are using to target opportunities for geographic expansion in
Japan and other Asian markets.
Our Services
We provide a suite of value-added, integrated services, used by our
customers predominantly in the development of their new products, including:
On-campus and In-the-field Design of Complex Printed Circuit Boards. We
target our design and development engineering services primarily at the
earliest stages of the new product development process. We provide design and
engineering assistance early in new product development to ensure that both
mechanical and electrical considerations are integrated into a cost-effective
manufacturing solution. We design and develop printed circuit boards that meet
or exceed established operating parameters for new products. In doing so, we
often recommend and assist in implementing design changes to reduce
manufacturing costs and lead times, increase manufacturing yields and improve
the quality of the finished product.
Time-critical Development and Fabrication of Prototype Complex Printed
Circuit Boards. Our time-critical, or quick-turn, services are used in the
design, test and launch phases of new electronics product development and are
generally delivered within 10 to 20 days or in as little as 24 hours. Larger
volumes of printed circuit boards are needed as a product progresses past the
testing, design and pre-production phases. The advanced design, development and
manufacturing technologies we employ facilitate quick-turn production of
complex, multi-layered printed circuit boards utilizing
technologically-advanced methods. See "Technology, Development and Processes."
Our ability to provide these services on a quick-turn and longer lead-time
delivery basis involves working closely with customers from the initial design
of new products through development and launch.
Assembly of Printed Circuit Boards, Backpanels and Other Components of
Electronics Products. We assemble printed circuit boards, backpanels, card
cages and wire harnesses on a low volume, quick-turn basis. Backpanels are
large printed circuit boards, and card cages and wire harnesses integrate wires
with connectors and terminals to transmit electricity between two or more
points. As the electronics industry has worked to increase component speed and
performance, the design of these components has become more integrated. We have
responded to this trend and provide these additional assembly services to
complement design and development capabilities.
Assembly and Integration of Customers' Complete Systems and Products. We
provide full system assembly services, predominantly for products in
development by original equipment manufacturers. These services require
logistical capabilities and supply chain management to rapidly acquire
components, assemble prototype products, perform complex testing and deliver
products to the customer.
Our Customers and Markets
We believe that we have one of the broadest customer bases in the
electronics manufacturing services industry. As of December 31, 2001, we had
more than 2,000 customers, comprised of original equipment manufacturers and
electronics manufacturing services providers representing a wide range of
end-user markets. Our customers principally consist of leading communications
and networking equipment and computer manufacturers, as well as medical,
automotive, industrial and aerospace equipment manufacturers. During 2001,
sales to our largest customer accounted for approximately 7% of net sales. We
expect that sales to this customer will decline materially in the future
because of circumstances in the communications industry. During 2001, sales to
our ten largest customers accounted for approximately 34% of our net sales. We
have been successful at retaining customers and have worked with our three
largest customers since 1991.
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Approximately 80% of our net sales are made to original equipment
manufacturers, and the remainder are to electronics manufacturing service
providers. The following table shows, for the periods indicated, the percentage
of our sales in each of the principal end-user markets we served for the years
ended December 31, 1999, 2000 and 2001.
Year Ended December 31,
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End-User Markets 1999 2000 2001
- ---------------- ---- ---- ----
Communications and networking equipment.................... 55% 61% 55%
Computer and peripherals................................... 21 25 18
Medical, automotive, industrial and test instruments....... 9 9 14
Aerospace equipment........................................ 2 2 5
Other...................................................... 13 3 8
--- --- ---
Total................................................... 100% 100% 100%
=== === ===
The following table indicates, for the year ended December 31, 2001, our
largest original equipment manufacturers, or OEMs, and electronics
manufacturing services, or EMS, customers in terms of net sales, in
alphabetical order, and the primary end products for which we provided our
services.
OEM Customers End Products
- ------------- ------------
Alcatel...................... Communications switching and transmission equipment, networking and
optical networking equipment
IBM.......................... Network servers; high-end computers; memory, storage and personal
computer products
Intel........................ Personal computers and peripherals; mid- to high-end computers;
semicondutor test equipment servers; memory
Marconi Communications....... Communications switching and transmission equipment, networking and
optical networking equipment
Motorola..................... Wireless base station and handset products; two-way radio communication
equipment; semiconductor test equipment
EMS Customers End Products
- ------------- ------------
Celestica.................... Communications equipment; mid- to high-end computers; servers; storage
and memory products
Jabil........................ Communications and computing equipment; optical networking products
Solectron.................... Communications equipment; mid- to high-end computers; servers;
printers; memory and storage products
Technology, Development and Processes
We maintain a strong commitment to research and development and focus our
efforts on enhancing existing capabilities as well as developing new
technologies. Our close involvement with our customers in the early stages of
their product development positions us at the leading edge of technical
innovation in the design of quick-turn and complex printed circuit boards. Our
staff of approximately 300 experienced engineers, chemists and laboratory
technicians works in conjunction with our sales staff to identify specific
needs and develop innovative, high performance solutions to customer issues.
This method of product development allows customers to augment their own
internal development teams while providing us with the opportunity to gain an
in-depth understanding of our customers' businesses and enabling us to better
anticipate and serve our customers' future needs.
The market for our products and services is characterized by rapidly
changing technology and continuing process development. In recent years, the
trend in the electronics equipment industry has been to increase speed
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and performance of components while at the same time reducing their size. This
trend requires increasingly complex printed circuit boards with higher
densities. The future success of our business will depend in large part upon
our ability to maintain and enhance our technological capabilities, develop and
market products and services that meet changing customer needs, and
successfully anticipate or respond to technological changes on a cost-effective
and timely basis. In the last three years, we have made substantial investments
in equipment and technology to meet these needs and maintain our competitive
advantage.
We believe the highly specialized equipment we use is among the most
advanced in the industry. We provide a number of advanced technologies,
including:
. Laser Direct Imaging. Laser direct imaging is a new process that allows
us to increase board density through the use of increasingly small and
accurate laser technology.
. Microvias. Microvias are small holes, or vias, generally created with
lasers employing depth control rather than mechanical drills, through
which printed circuit board layers are interconnected. Microvias
generally have diameters between .001 and .005 inches.
. Blind or Buried Vias. Blind or buried vias are small holes which
interconnect inner layers of high layer-count printed circuit boards.
. Ball Grid Arrays. A ball grid array is a method of mounting an
integrated circuit or other component to a printed circuit board. Rather
than using pins, also called leads, the component is attached with small
balls of solder at each contact. This method allows for greater
component density and is used in printed circuit boards with higher
layer counts.
. Flip Chips. Flip chips are structures that house circuits which are
interconnected without leads. They are utilized to minimize printed
circuit board surface area when compact packaging is required.
. Multichip Module-Laminates. Multichip module-laminates are a type of
printed circuit board design that allows for the placement of multiple
integrated circuits or other components in a limited surface area.
. Advanced Substrates. Advanced substrates are a recent generation of
printed circuit board materials that enable the use of ball grid arrays,
flip chips and multichip module laminates. They are used for products
requiring high-frequency transmission and have thermal properties
superior to standard materials.
We are qualified under various industry standards, including Bellcore
compliance for communications products and UL (Underwriters Laboratories)
approval for electronics products. In addition, all of our production
facilities are ISO-9002 certified. These certifications require that we meet
standards related to management, production and quality control, among others.
On December 17, 2001, we announced that we will participate in collaborative
sponsorship of a printed circuit board technology project that both (a)
benefits the high technology and electronics engineering academia of two
leading Virginia universities, and (b) serves as a commercial printed circuit
board design/manufacturing facility. DDi will oversee the operations of the
Center for Advanced Printed Circuit Board Design and Manufacturing Technology.
The Center will be funded and supported in collaboration with Virginia
Commonwealth University and the University of Virginia and three other industry
sponsors, DuPont, Panasonic and Zuken. The State of Virginia has indicated a
willingness to fund one half of the costs incurred by the sponsors up to $0.5
million in the first year of operations and up to $1.2 million in the second
year of operations, pending final approval from state procurement and budget
officials. At this stage, we are working with the universities to establish the
specific terms and conditions of the project and a budget for the Center.
Manufacturing
We produce highly complex, technologically advanced multi-layer and
low-layer printed circuit boards, backpanel assemblies, printed circuit board
assemblies, card cage and wire harness assemblies and full system
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assembly and integration that meet increasingly tight tolerances and
specifications demanded by original equipment manufacturers. The manufacture of
printed circuit boards involves several steps: etching the circuit image on
copper-clad epoxy laminate, pressing the laminates together to form a panel,
drilling holes and depositing copper or other conducive material to form the
inter-layer electrical connections and, lastly, cutting the panels to shape.
Our advanced interconnect products require additional critical steps, including
dry film imaging, photoimageable soldermask processing, computer-controlled
laser drilling and routing, automated plating and process controls and
achievement of controlled impedance.
Multi-layering, which involves placing multiple layers of electrical
circuitry on a single printed circuit board or backpanel, expands the number of
circuits and components that can be contained on the interconnect product and
increases the operating speed of the system by reducing the distance that
electrical signals must travel. Increasing the density of the circuitry in each
layer is accomplished by reducing the width of the circuit tracks and placing
them closer together on the printed circuit board or backpanel.
Interconnect products having narrow, closely spaced circuit tracks are known
as fine line products. The manufacture of complex multi-layer interconnect
products often requires the use of sophisticated circuit interconnections,
called blind or buried vias, between printed circuit board layers and adherence
to strict electrical characteristics to maintain consistent circuit
transmission speeds, referred to as controlled impedance. These technologies
require very tight lamination and etching tolerances and are especially
critical for printed circuit boards with ten or more layers.
Manufacture of printed circuit boards used in backpanel assemblies requires
specialized expertise and equipment because of the larger size of the backpanel
relative to other printed circuit boards and the increased number of holes for
component mounting. We have no patents for these proprietary techniques and
rely primarily on trade secret protection.
Accomplishing these operations in time-critical situations, as we do,
requires the attention of highly-qualified personnel. Furthermore, our
manufacturing systems are managed to maximize flexibility to accommodate widely
varying projects for different customers with minimal or no turnover time. We
seek to maximize the use of our production and manufacturing capacity through
the efficient management of time-critical production schedules.
Sales and Marketing
Our marketing strategy focuses on developing close working relationships
with customers early in the design phase and throughout the lifecycle of the
product. Accordingly, our senior management personnel and engineering staff
advise our customers with respect to applicable technology, manufacturing
feasibility of designs and cost implications through on-line computer technical
support and direct customer communication. We have focused our marketing
efforts on developing long-term relationships with research and development
personnel at key customers in high-growth segments of the electronics equipment
industry.
In order to establish individual salesperson accountability for each client,
each customer is assigned one member of the sales staff for all services across
all facilities. We have developed a comprehensive database and allocation
process to control calling and cross-selling effort, and have a global account
program for coordinating sales to our top 20 customers.
We market our design, development and manufacturing services through an
internal sales force of approximately 150 individuals and an expansive sales
network consisting of 10 organizations comprised of approximately 44
manufacturers' representatives across the United States. Approximately 44% of
our net sales in 2001 were generated through manufacturers' representatives.
For many of these manufacturers' representatives, we are the largest revenue
source and the exclusive supplier of quick-turn and pre-production printed
circuit boards. In 1997, we opened a sales office in London, England. Following
our acquisition of MCM, we integrated MCM's sales force into our pre-existing
European staff and we plan to continue expanding our international sales
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efforts. In April 2001, we opened a sales office in Tokyo, Japan. The financial
information for geographic areas is included in Note 2 to the Consolidated
Financial Statements under the caption "Segment Reporting."
Our Suppliers
Our raw materials inventory is small relative to sales and must be regularly
and rapidly replenished. We use just-in-time procurement practices to maintain
raw materials inventory at low levels, and work closely with our suppliers to
incorporate technological advances in the raw materials we purchase. Because we
provide primarily lower-volume quick-turn services, this inventory policy does
not hamper our ability to complete customer orders. Although we have preferred
suppliers for some raw materials, multiple sources exist for all materials.
Adequate amounts of all raw materials have been available in the past and we
believe this will continue in the foreseeable future.
The primary raw materials that we use in production are core materials
(copperclad layers of fiberglass of varying thickness impregnated with bonding
materials) and chemical solutions (copper, gold, etc.) for plating operations,
photographic film and carbide drill bits.
Competition
The electronics manufacturing services industry is highly fragmented and
characterized by intense competition. We principally compete in the
time-critical segment of the industry against independent, small private
companies and integrated subsidiaries of large, broadly based volume producers,
as well as the internal capacity of original equipment manufacturers. We
believe that competition in the market segment we serve, unlike in the
electronics manufacturing services industry, generally is not driven by price.
Instead, because customers are willing to pay a premium for a responsive,
broad-reaching capability to produce customized complex products in a very
short time, we compete primarily on the basis of quick turnaround, product
quality and customer service. In addition, we do not compete in the high volume
production manufacturing aspect of the industry and as a result are less
exposed to competition from low cost manufacturers who compete on price in the
commodity segment of this market.
Competition in the complex and time-critical segment of our industry has
increased due to consolidation, resulting in potentially better capitalized
competitors. Our basic technology is generally not subject to significant
proprietary protection, and companies with significant resources, international
operations or a sufficiently large customer base may enter the market.
Backlog
Although we obtain firm purchase orders from our customers, our customers
typically do not make firm orders for delivery of products more than 30 to 90
days in advance. We do not believe the backlog of expected product sales
covered by firm purchase orders is a meaningful measure of future sales since
orders may be rescheduled or canceled.
Governmental Regulation
Our operations are subject to certain federal, state and local laws and
regulatory requirements relating to environmental compliance and site cleanups,
waste management and health and safety matters. Among others, we are subject to
regulations promulgated by:
. the Occupational Safety and Health Administration pertaining to health
and safety in the workplace;
. the Environmental Protection Agency pertaining to the use, storage,
discharge and disposal of hazardous chemicals used in the manufacturing
processes; and
. corresponding state and local agencies.
11
To date the costs of compliance and environmental remediation have not been
material to us. Nevertheless, additional or modified requirements may be
imposed in the future. If such additional or modified requirements are imposed
on us, or if conditions requiring remediation were found to exist, we may be
required to incur substantial additional expenditures.
Employees
As of December 31, 2001, we had approximately 2,300 employees, none of whom
are represented by unions. Of these employees, approximately 1,800 were
involved in manufacturing and engineering, 150 worked in sales and marketing
and 350 worked in other support capacities. We have not experienced any labor
problems resulting in a work stoppage and believe we have good relations with
our employees.
ITEM 1A. EXECUTIVE OFFICERS OF DDi CORP.
The following table sets forth the executive officers of DDi Corp., their
ages as of March 11, 2002, and the positions currently held by each person:
Name Age Office
---- --- ------
Bruce D. McMaster 40 President, Chief Executive Officer and Director
Joseph P. Gisch 45 Chief Financial Officer, Secretary and Treasurer
Thomas Ingham 46 Vice President, Sales and Marketing
Terry L. Wright 42 Vice President and Chief Technology Officer
Kevin McClelland 43 Vice President, Operations - West Coast
Michael Moisan 47 Vice President, Operations - East Coast
The President, Chief Executive Officer, Chief Financial Officer, Secretary
and Treasurer are elected annually by the Board of Directors at its first
meeting following the annual meeting of stockholders. Other executive officers
may be appointed by the Board of Directors at such meeting or at any other
meeting. All executive officers serve at the pleasure of the Board of Directors.
Bruce D. McMaster has served as our President since 1991 and as a Director
and our Chief Executive Officer since 1997. Before becoming our President,
Mr. McMaster worked in various management capacities in our engineering and
manufacturing departments. Mr. McMaster also serves as President and Chief
Executive Officer of DDi Capital and Dynamic Details and serves as an executive
officer of our other subsidiaries.
Joseph P. Gisch has served as our Chief Financial Officer since 1995. Mr.
Gisch also serves as Vice President, Chief Financial Officer and Treasurer of
Dynamic Details. From 1986 to 1995, Mr. Gisch was a partner at the accounting
firm of McGladrey & Pullen, LLP where he was responsible for the audit,
accounting and information systems for a variety of manufacturing clients. Mr.
Gisch was responsible for our general accounting and income tax matters. Mr.
Gisch has not been responsible for any of our audit services since 1991.
Thomas Ingham has served as our Vice President of Sales and Marketing since
September 2001. Mr. Ingham has served Dynamic Details in various positions in
sales and marketing over the last five years, starting as Regional Manager.
Prior to joining Dynamic Details, Mr. Ingham worked for 12 years at Insulectro,
a supplier of PCB materials and laminates, in various positions, most recently
as Vice President, Sales and Marketing.
Terry L. Wright joined us in 1991 and has served as our Vice President,
Engineering from 1995 through 2000 and Chief Technology Officer since 2000.
During 2001, Mr. Wright assumed the role of Vice President, Operations -
Anaheim. Prior to joining us, Mr. Wright was a general manager at Applied
Circuit Solutions and a quality assurance manager at Sigma Circuits.
Kevin McClelland has served as our Vice President, Operations - West Coast
since October 2001. He has more than two decades of experience in electronics
manufacturing services including electronics engineering,
12
operations and business development. Before joining Dynamic Details, he was
Vice President of Business Development for Multek, an EMS provider, from 1980
to 2001, where he was involved extensively in acquisitions and transition
management domestically and in Europe and Mexico.
Michael Moisan has served as our Vice President, Operations - East Coast
since October 2001. Mr. Moisan has over two decades of experience in the
EMS/PCB industry. Mr. Moisan oversaw our Anaheim operation from 1996 to October
2001. Prior to joining DDi, he was Director of Engineering at Circuitwise, an
automotive printed circuit board supplier, from 1995 to 1996. He served as
Director of Operations at AMP AKZO, a printed circuit board company, from 1990
to 1996 and as Director of Research at PCK Technology, an electronics research
and development company, from 1982 to 1990.
There are no arrangements or understandings pursuant to which any of the
persons listed in the table above was selected as executive officers.
ITEM 2. PROPERTIES
We conduct our operations within approximately 981,000 square feet of
building space. Our significant facilities are as follows:
Square
Location Function Feet Remaining Lease Term
- -------- -------- ------- --------------------
Anaheim, California Quick-turn printed circuit boards 150,000 1 to 5 years (a)
Milpitas, California Quick-turn printed circuit boards 41,000 0.5 to 1.5 years (a)
Milpitas, California Quick-turn printed circuit boards 40,000 10 years
Marlow, England Quick-turn printed circuit boards 29,000 7 years
Tewkesbury, England Quick-turn printed circuit boards 60,000 7 years
Sterling, Virginia Quick-turn printed circuit boards 100,000 8 years
Toronto, Canada Quick-turn printed circuit boards 52,000 8.5 years
Tolworth, England Longer lead-time printed circuit boards 35,000 0.5 years
Tempe, Arizona Longer lead-time printed circuit boards 68,000 1 to 4 years
San Jose, California Assembly 62,000 4.5 years
Dallas, Texas Assembly 49,000 0.5 year (a)
Calne, England Assembly 90,000 21.5 years
Hertford, England Assembly 40,000 16.5 years
Dallas, Texas Assembly 90,000 1.75 years
Moorpark, California Assembly 54,000 2 years
-------
960,000
- --------
(a) All of these leases have an option to renew or to purchase the property at
fair market value after a specified date during the lease term.
In addition to the facilities listed above, we also occupy space for our
design operations in various states aggregating approximately 21,000 square
feet. We lease our executive office space, which comprises approximately 20,000
square feet (including corporate administration, sales, finance and accounting,
and engineering.) Our executive office space is located at 1220 Simon Circle in
Anaheim, California and is included in the 150,000 square foot Anaheim,
California location. We believe our facilities are currently adequate for our
operating needs.
ITEM 3. LEGAL PROCEEDINGS
We are a party to various legal actions arising in the ordinary course of
our business. We believe that the resolution of these legal actions will not
have a material adverse effect on our financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
13
PART II
ITEM 5. MARKET FOR THE REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
DDi Corp.'s common stock has been quoted on the Nasdaq National Market under
the symbol "DDIC" since April 11, 2000. Prior to that time, there was no public
market for DDi Corp.'s common stock. The following table sets forth the high
and low sales prices of DDi Corp.'s common stock for the periods indicated as
reported on the Nasdaq National Market.
Common Stock
Price
-------------
High Low
------ ------
2001
Fourth Quarter................................................ $13.40 $ 5.71
Third Quarter................................................. $21.48 $ 7.30
Second Quarter................................................ $27.74 $12.40
First Quarter................................................. $33.63 $10.88
2000
Fourth Quarter................................................ $45.87 $19.25
Third Quarter................................................. $45.94 $21.81
Second Quarter................................................ $31.25 $ 9.50
We presently intend to retain earnings to finance future operations,
expansion and capital investment and to reduce indebtedness. There were
approximately 151 record holders of our common stock as of March 11, 2002.
There is no established trading market for the common stock of DDi Capital.
As of December 31, 2001, DDi Capital had 1,000 shares of common stock, par
value $.01 per share outstanding, all of which were held by Intermediate, which
is a wholly-owned subsidiary of DDi Corp.
We have not declared or paid a cash dividend on common stock since January
1996, and we do not anticipate paying any cash dividends for the foreseeable
future. Our existing debt instruments restrict our ability to pay dividends and
restrict our subsidiaries' ability to pay dividends to us. Dynamic Details'
ability to pay dividends is limited under its senior credit facility. DDi
Capital's ability to pay dividends is limited under an indenture dated November
18, 1997, as supplemented by a supplemental indenture dated February 10, 1998
among DDi Corp., DDi Capital and State Street Bank & Trust Co. as trustee. DDi
Corp.'s 5 1/4% Convertible Subordinated Notes due March 1, 2008 does not
restrict its ability to pay dividends; however, the conversion price on these
notes may be adjusted if dividends exceed certain amounts. We presently intend
to retain earnings to finance future operations, expansion and capital
investment and to reduce indebtedness. See "Description of Indebtedness" within
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
14
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data as of and for the dates and periods
indicated have been derived from the consolidated financial statements of DDi
Capital and DDi Corp. The selected financial data with respect to the
consolidated statement of operations data for the years ended December 31, 1997
and 1998 and the consolidated balance sheet data as of December 31, 1997, 1998
and 1999 were derived from our audited consolidated financial statements that
are not included herein. The selected historical consolidated statement of
operations data for the years ended December 31, 1999, 2000 and 2001 and the
historical consolidated balance sheet data as of December 31, 2000 and
2001 were derived from the audited historical consolidated financial statements
of DDi Capital and DDi Corp. included elsewhere herein. You should read the
data set forth below in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the consolidated
financial statements and the related notes thereto appearing elsewhere herein.
Year Ended December 31,
-----------------------------------------------------------------------
DDi
Corp.
& DDi DDi DDi DDi DDi DDi DDi DDi DDi
Capital Capital Corp. Capital Corp. Capital Corp. Capital Corp.
1997 1998 1998 1999 1999 2000 2000 2001 2001
------- ------- ------ ------- ------ ------- ------ ------- -------
(in millions)
Consolidated Statement of Operations Data:
Net sales......................................... $ 78.8 $174.9 $174.9 $292.5 $292.5 $448.4 $497.7 $284.7 $ 361.6
Cost of goods sold................................ 38.7 119.3 119.6 201.4 202.4 274.7 306.2 209.3 263.6
Restructuring--related inventory impairment(a).... -- -- -- 1.9 1.9 -- -- 3.7 3.7
------ ------ ------ ------ ------ ------ ------ ------ -------
Gross profit...................................... 40.1 55.6 55.3 89.2 88.2 173.7 191.5 71.7 94.3
Operating expenses:
Sales and marketing.............................. 7.3 12.8 12.8 23.6 23.6 38.7 39.7 25.4 27.6
General and administration....................... 2.1 8.5 8.4 16.1 15.3 30.4 36.2 14.3 21.0
Amortization of intangibles...................... -- 10.9 10.9 22.3 22.3 19.5 22.8 17.7 22.6
Restructuring and related charges(a)............. -- -- -- 5.1 5.1 -- -- 75.7 76.1
Stock compensation and related bonuses(b)........ 31.3 -- -- -- -- -- -- -- --
Compensation to the former CEO................... 2.1 -- -- -- -- -- -- -- --
Write-off of acquired in-process research and
development(c)................................... -- 39.0 39.0 -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ -------
Operating income (loss)........................... (2.7) (15.6) (15.8) 22.1 21.9 85.1 92.8 (61.4) (53.0)
Interest rate swap valuation...................... -- -- -- -- -- -- -- 10.0 10.0
Interest expense, net............................. 25.2 35.3 37.4 41.4 46.7 36.3 41.2 14.8 22.1
------ ------ ------ ------ ------ ------ ------ ------ -------
Income (loss) before taxes and extraordinary loss. (27.9) (50.9) (53.2) (19.3) (24.8) 48.8 51.6 (86.2) (85.1)
Income tax benefit (expense)...................... 10.9 2.6 3.5 5.2 7.4 (23.4) (25.0) 13.2 12.0
------ ------ ------ ------ ------ ------ ------ ------ -------
Income (loss) before extraordinary loss........... (17.0) (48.3) (49.7) (14.1) (17.4) 25.4 26.6 (73.0) (73.1)
Extraordinary loss................................ (1.6) (2.4) (2.4) -- -- (2.2) (6.4) (12.0) (12.0)
------ ------ ------ ------ ------ ------ ------ ------ -------
Net income (loss)................................. $(18.6) $(50.7) $(52.1) $(14.1) $(17.4) $ 23.2 $ 20.2 $(85.0) $ (85.1)
====== ====== ====== ====== ====== ====== ====== ====== =======
15
Year Ended December 31,
--------------------------------------------------------------------------
DDi
Corp. &
DDi DDi DDi DDi DDi DDi DDi
Capital Capital Corp. Capital Corp. Capital Corp.
1997 1998 1998 1999 1999 2000 2000
---------- ------- ---------- ------- ---------- ------- -----------
(in millions, except share and per share data)
Consolidated Statement of Operations Data
(continued):
Net income (loss) allocable to common stock...... $ (19.7) n/a $ (58.4) n/a $ (31.5) n/a $ 15.8
Net income (loss) per share of common stock
(basic)......................................... $ (3.71) n/a $ (7.68) n/a $ (3.21) n/a $ 0.50
Net income (loss) per share of common stock
(diluted)....................................... $ (3.71) n/a $ (7.68) n/a $ (3.21) n/a $ 0.47
Weighted average shares outstanding (basic)...... 5,299,600 n/a 7,607,024 n/a 9,831,042 n/a 31,781,536
Weighted average shares outstanding (diluted).... 5,299,600 n/a 7,607,024 n/a 9,831,042 n/a 33,520,447
Other Financial Data:
Depreciation..................................... $ 2.6 $ 9.2 $ 9.2 $ 14.4 $ 14.4 $ 16.7 $ 18.7
Capital expenditures............................. 6.6 18.0 18.0 18.2 18.2 24.0 27.2
Supplemental Data:
Adjusted EBITDA(d)............................... $ 33.3 $ 45.4 $ 44.1 $ 68.8 $ 66.7 $121.7 $ 134.8
Net cash from operating activities............... 9.1 18.9 16.7 24.8 24.8 61.1 64.8
Net cash used in investing activities............ (44.9) (194.8) (194.8) (18.5) (18.6) (56.2) (62.0)
Net cash from (used in) financing activities..... 41.1 172.4 174.9 (7.5) (7.7) 34.1 61.2
Ratio of earnings to fixed charges(e)............ -- -- -- -- -- 2.3x 2.2x
Consolidated Balance Sheet Data:
Cash, cash equivalents and marketable securities. $ 5.4 $ 1.9 $ 2.1 $ 0.6 $ 0.6 $ 39.6 $ 66.9
Working capital (deficit)........................ 23.6 13.2 15.3 19.1 19.1 83.3 108.0
Total assets..................................... 108.9 362.2 365.0 353.6 354.3 459.8 581.4
Total debt, including current maturities......... 273.5 444.9 473.4 439.9 480.7 306.9 334.7
Stockholders' equity (deficit)................... (191.2) (138.0) (169.8) (147.0) (187.1) 62.7 136.4
DDi DDi
Capital Corp.
2001 2001
------- -----------
Consolidated Statement of Operations Data
(continued):
Net income (loss) allocable to common stock...... n/a $ (85.1)
Net income (loss) per share of common stock
(basic)......................................... n/a $ (1.79)
Net income (loss) per share of common stock
(diluted)....................................... n/a $ (1.79)
Weighted average shares outstanding (basic)...... n/a 47,381,516
Weighted average shares outstanding (diluted).... n/a 47,381,516
Other Financial Data:
Depreciation..................................... $ 17.1 $ 21.2
Capital expenditures............................. 24.7 35.2
Supplemental Data:
Adjusted EBITDA(d)............................... $ 52.7 $ 70.6
Net cash from operating activities............... 47.6 55.8
Net cash used in investing activities............ (67.4) (102.8)
Net cash from (used in) financing activities..... (2.3) 3.7
Ratio of earnings to fixed charges(e)............ -- --
Consolidated Balance Sheet Data:
Cash, cash equivalents and marketable securities. $ 39.5 $ 45.5
Working capital (deficit)........................ 54.3 54.7
Total assets..................................... 336.1 470.8
Total debt, including current maturities......... 156.6 282.2
Stockholders' equity (deficit)................... 138.6 122.5
- --------
(a) The 1999 restructuring and related charges represent the charge recorded in
December 1999 in connection with the announced consolidation of the
Colorado operation into the Texas facility and the closure of the Colorado
facility. The charge consists of $1.9 million related to the impairment of
inventory, $2.6 million for severance and other exit costs and $2.5 million
related to the impairment of net property, plant and equipment. The 2001
restructuring and related charges represent the charge recorded in the
fourth quarter of 2001 in connection with the approved plan to downsize and
consolidate facilities and to effect changes in senior management. The
charge consists of $3.7 million related to the impairment of inventory,
$8.8 million and $9.2 million for severance and other exit costs for DDi
Capital and DDi Corp, respectively $15.5 million related to the impairment
of net property, plant and equipment, and $51.4 million related to the
impairment of intangible assets.
(b) Represents the charge for stock compensation and related bonuses recorded
for vested stock options exchanged in conjunction with the recapitalization
in 1997.
(c) Represents the allocation of a portion of the purchase price in the DCI
merger to in-process research and development. At the date of the merger,
technological feasibility of the in-process research and development
projects had not been reached and the technology had no alternative future
uses. Accordingly, we expensed the portion of the merger consideration
allocated to in-process research and development.
(d) EBITDA means earnings before net interest expense, income taxes,
depreciation and amortization. Adjusted EBITDA is presented because
management believes it is an indicator of our ability to incur and service
debt and is used by our lenders in determining compliance with financial
covenants. However, adjusted EBITDA should not be considered as an
alternative to cash flow from operating activities, as a measure of
liquidity or as an alternative to net income as a measure of operating
results in accordance with generally accepted accounting principles. Our
definition of adjusted EBITDA may differ from definitions of adjusted
EBITDA used by other companies.
16
The following table sets forth a reconciliation of EBITDA to adjusted EBITDA
for each period included herein:
Year Ended December 31,
---------------------------------------------------------------
DDi DDi DDi DDi DDi DDi DDi DDi
Capital Corp. Capital Corp. Capital Corp. Capital Corp.
------- ----- ------- ----- ------- ------ ------- -----
1997** 1998 1998 1999 1999 2000 2000 2001 2001
------ ------- ----- ------- ----- ------- ------ ------- -----
(in millions)
EBITDA................................................ $(0.1) $43.5 $43.3 $58.8 $58.6 $121.2 $134.3 $(26.7) $(9.2)
Former CEO compensation(1)............................ 2.1 -- -- -- -- -- -- -- --
Management fee(2)..................................... -- -- -- 1.1 1.1 -- -- -- --
Executive severance(3)................................ -- 0.8 0.8 -- -- -- -- -- --
Stock compensation and bonuses(4)..................... 31.3 -- -- -- -- -- -- -- --
Restructuring and related charges(5).................. -- -- -- 7.0 7.0 0.5 0.5 79.4 79.8
Non-cash expense allocations and other(6)............. -- 1.1 -- 1.9 -- -- -- -- --
----- ----- ----- ----- ----- ------ ------ ------ -----
Adjusted EBITDA....................................... $33.3 $45.4 $44.1 $68.8 $66.7 $121.7 $134.8 $ 52.7 $70.6
===== ===== ===== ===== ===== ====== ====== ====== =====
-----
** DDi Capital and DDi Corp.
(1)Reflects elimination of compensation to the former CEO whose employment
agreement was terminated in October 1997.
(2)Reflects elimination of the management fee incurred under our Bain
management agreement, which was terminated in connection with our
initial public offering.
(3)Reflects one-time severance payments to two of our executives who were
terminated as a result of redundancies created by the DCI merger.
(4)Reflects elimination of the charge for stock compensation and related
bonuses recorded for vested stock options exchanged in conjunction with
the recapitalization.
(5)Reflects elimination of the restructuring and related charges: (a) for
the 1999 consolidation and closure of the Colorado facility, (b) an
additional $0.5 million recorded in 2000 which was recorded to cost of
goods sold and (c) for the 2001 closure of two facilities and changes in
senior management.
(6)Reflects non-cash expense allocations to DDi Capital by its parent,
Intermediate, of $0.8 and $1.9 million in 1998 and 1999, respectively,
and approximately $0.3 million of non-operating income adjustments
recorded in 1998.
(e) For purposes of calculating the ratio of earnings to fixed charges,
earnings represent income before income taxes plus fixed charges. Fixed
charges consist of interest expense (net) and the portion of the operating
rental expense which management believes is representative of the interest
component of rental expense. Historical earnings were deficient in covering
fixed charges for DDi Capital and DDi Corp. by $27.9 million in 1997, $50.9
and $53.2 million, respectively, in 1998, $19.3 million and $24.8 million,
respectively, in 1999 and $86.3 million and $85.1 million, respectively, in
2001. On a pro forma basis, assuming the Dynamic Details senior
subordinated notes and the DDi Capital senior discount notes were
outstanding on January 1, 1997 and after eliminating the non-recurring
stock compensation and related bonuses, the ratio of earnings to fixed
charges would have been 2.4x in 1997. On a pro forma basis, assuming the
merger with DCI was consummated on January 1, 1998 and after eliminating
the non-recurring $39 million write off of acquired in-process research and
development related to the merger with DCI, the deficiency would have been
reduced to $15.1 million for DDi Capital and $17.5 million for DDi Corp. in
1998. On a pro forma basis, after eliminating the non-recurring $1.9
million in restructuring-related inventory impairment and $5.1 million in
restructuring and related charges related to the closure of the Colorado
facility, the deficiency would have been reduced to $12.3 million for DDi
Capital and $17.8 million for DDi Corp. in 1999. On pro forma basis, after
eliminating the non-recurring $3.7 million in restructuring-related
inventory impairment and $76.1 million in restructuring and related charges
related to the 2001 closure of two facilities and changes in senior
management, the deficiency would have been reduced to $6.8 million for DDi
Capital and $5.3 million for DDi Corp. in 2001.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
We provide electronics design, development and manufacturing services to
original equipment manufacturers and other electronics manufacturing service
providers. We target customers that are characterized by new product
development programs demanding the rapid application of advanced technology and
design.
Time-critical. We can deliver highly complex printed circuit boards to
customers in as little as 24 hours. Approximately 45% of our net sales for the
year ended December 31, 2001 were generated from services delivered in 10 days
or less.
Technologically advanced. Approximately 55% of our net sales during the
same period involved the design or manufacture of printed circuit boards with
at least eight layers, an industry-accepted measure of complexity. In addition,
many lower layer-count boards are complex as a result of the incorporation of
technologically advanced features.
Growth rate. Our net sales have grown at a compound annual growth rate of
37.9% for DDi Capital and 46.4% for DDi Corp. from $78.8 million for the year
ended December 31, 1997 to $284.7 million for DDi Capital and $361.6 million
for DDi Corp. for the year ended December 31, 2001, inclusive of the growth
attributable to the acquisition of Colorado Springs Circuits, Inc., or NTI, in
1997, the merger with Dynamic Circuits, Inc., or DCI, in 1998 and the
acquisitions of MCM Electronics (by DDi Corp.), Automata and Golden
Manufacturing in 2000 and the acquisitions of Thomas Walter, Nelco Technology,
Olympic Circuits Canada and Altatron Technology in 2001.
Company History and Significant Transactions
Our predecessor corporation was organized in 1978. In 1991, we installed new
management, headed by Bruce D. McMaster, and began to focus primarily on
time-critical electronics manufacturing services.
Recapitalization
In October 1997, we were recapitalized by investors led by Bain Capital,
Celerity Partners and Chase Capital Partners, which collectively invested $62.4
million. After completing the recapitalization, investment funds associated
with these entities owned stock representing approximately 72.5% of DDi Corp.'s
fully-diluted equity; and management owned stock and options representing
approximately 27.5% of DDi Corp.'s fully-diluted equity.
In connection with the recapitalization, we incurred the following
nonrecurring charges:
. fees and interest charges on bridge loans aggregating $14.5 million;
. $31.3 million for the accelerated vesting of variable employee stock
options and related bonuses;
. $2.7 million for the early extinguishment of long-term debt, before
income taxes; and
. $1.2 million for the buyout of our former CEO's employment contract.
Colorado Facility (formerly NTI)
In December 1997, Dynamic Details acquired Colorado Springs Circuits, Inc.,
or NTI, for approximately $38.9 million. NTI manufactured printed circuit
boards requiring lead times of twenty days or more for original equipment
manufacturers. At that time, the acquisition provided us with additional
capacity and access to new customers.
We accounted for the NTI acquisition under the purchase method of accounting
and recorded approximately $27 million in goodwill. This goodwill was
originally scheduled to be amortized over a period of 25 years. The unamortized
balance as of October 2001 was reduced to zero, however, in connection with the
closure of our Texas facility.
18
From December 1999 through March 2000, we implemented a plan to consolidate
our Colorado operations into our Texas facility and to close our Colorado
facility, which operated at a loss in 1999.
DCI Merger
On July 23, 1998, Dynamic Details merged with Dynamic Circuits, Inc., or
DCI, for an aggregate consideration paid to DCI stockholders of approximately
$250 million. A portion of the consideration was paid in cash, and the balance
of the consideration (approximately $73 million) was paid through the issuance
of DDi Corp. capital stock. Concurrent with this transaction, DDi Corp.
contributed its investment in DCI through Intermediate and through DDi Capital
to Dynamic Details.
DCI provided design and manufacturing services relating to complex printed
circuit boards, backpanel assemblies and electromechanical interconnect devices
with operations in California, Texas, Georgia and Massachusetts. DCI
experienced a growth in net sales of more than 67% during 1997, and its net
sales for the six months ended June 30, 1998 were more than double its net
sales for the six months ended June 30, 1997.
We accounted for the DCI merger under the purchase method of accounting and
recorded approximately $120 million in goodwill, approximately $60 million of
identifiable intangible assets (which are being amortized over their estimated
useful lives of 10 years, using an accelerated method of amortization,
reflecting the relative contribution of each developed technology in periods
following the acquisition date), and approximately $21 million and $4 million,
respectively, of intangible assets associated with DCI's customer relationships
and tradenames and assembled workforce assets (which are being amortized on a
straight-line basis over their estimated useful lives of 18 years and 4 years,
respectively). Dynamic Details also identified $39 million of acquired
in-process research and development investments, which was expensed in the
fourth quarter ended December 31, 1998.
Since the DCI merger, we have continued to invest in the development of the
various in-process research and development technologies that existed at DCI at
the time of the merger. We believe that our research and development efforts
are reasonably consistent with DCI's plans at the time of the merger, inclusive
of the expected post-merger total costs to complete the projects and related
project development time frames, given the inherent uncertainties involved in
estimating the technological hurdles of developing next-generation
technologies. These investments have enabled us to market products
incorporating some of the technologies included in DCI's plan. No significant
adjustments have been made in the economic assumptions or expectations on which
we based our merger decision.
In October 2001, we approved a plan to close our Garland, Texas and
Marlborough, Massachusetts facilities (see Note 15 to the Consolidated
Financial Statements). Prior to its closure, the Garland plant had manufactured
our lowest technology pre-production volume printed circuit boards. The
Marlborough plant provided electronic interconnect products to selected
customers in the New England area. Each of the facilities closed was acquired
in the DCI merger. In connection with our decision to close these facilities,
we reduced to zero the value of goodwill and other intangibles acquired in the
DCI merger that relate to the closed facilities. Such intangibles consist of
$25.8 million of goodwill and $2.6 million of identifiable intangibles
(customer relationships and assembled workforce).
Initial Public Offering of DDi Corp.
On April 14, 2000, DDi Corp. completed the initial public offering of its
common stock. We used net proceeds of approximately $156.6 million to repay a
portion of our debt and finance a portion of the MCM Electronics acquisition.
MCM Electronics Acquisition
On April 14, 2000, DDi Corp. acquired MCM Electronics Limited, headquartered
in the United Kingdom, for total consideration of approximately $82 million in
DDi Corp.'s common stock and cash, including repayment of some of MCM
Electronics' debt and the assumption of the remainder of its debt. MCM
19
Electronics, which has been combined with other European operations and renamed
DDi Europe Limited, focuses on the technologically advanced, time-critical
segment of the electronics manufacturing industry.
Under purchase accounting, the total purchase price has been allocated to
the underlying assets and liabilities assumed based upon their respective fair
values at the date of acquisition. We have allocated the total purchase price
to tangible assets acquired (aggregating approximately $30 million), and
liabilities assumed (aggregating approximately $46 million), with the remaining
consideration consisting primarily of goodwill and identifiable intangible
assets.
The identifiable intangibles consist of developed technologies, non-compete
agreements, and assembled workforce. The fair value of the developed technology
assets at the date of acquisition was $1 million and represents the aggregate
fair value of individually identified technologies that were fully developed at
the time of acquisition. Developed technology assets are being amortized over
an estimated useful life of 5 years. The non-compete agreement and assembled
workforce assets were assigned values as of the acquisition date of
approximately $1 million and $2 million, respectively, and are being amortized
over their estimated useful lives of 1 year and 5 years, respectively. Goodwill
generated in the acquisition of MCM has an assigned value of approximately $65
million and is being amortized over its estimated useful life of 20 years.
Automata Acquisition
On August 4, 2000, Dynamic Details acquired substantially all the U.S.
assets of Automata International, Inc., a Virginia-based complex printed
circuit boards manufacturer, for approximately $19.5 million in cash, plus fees
and expenses. The acquisition provides additional capacity for high density,
high layer count printed circuit boards and gives us a significant presence on
the east coast. Since completing the acquisition, we have successfully
increased average selling prices and have streamlined its operations to
increase yields from approximately 50% to almost 90% per panel. In addition, we
have shifted products from our other facilities to the 100,000 square foot
Virginia facility to increase volume and free up capacity at our other
facilities.
Under purchase accounting, the total purchase price has been allocated to
the underlying assets acquired and liabilities assumed based upon their
respective fair market values at the date of acquisition. The excess of the
purchase price was allocated to goodwill and is being amortized over its
estimated useful life of 20 years.
Golden Acquisition
On September 15, 2000, Dynamic Details acquired substantially all of the
assets of Golden Manufacturing, Inc., a Texas-based manufacturer of engineered
metal enclosures and value-added assembly services to communications and
electronics original equipment manufacturers, for approximately $14.4 million,
plus expenses of $0.5 million. The acquisition, which provides us with over
70,000 square feet of production capacity, complements our existing Texas
facilities by providing metal enclosure assembly capabilities for our customers.
Under purchase accounting, the total purchase price has been allocated to
the underlying assets acquired and liabilities assumed based upon their
respective fair market values at the date of acquisition. The excess of the
purchase price was allocated to goodwill and is being amortized over its
estimated useful life of 20 years.
October 2000 Common Stock Public Offering of DDi Corp.
On October 16, 2000, DDi Corp. completed a public offering of 4,608,121
shares of its common stock. We used net proceeds of approximately $122.0
million to repay a portion of our debt and for general corporate purposes.
During 2001, we used a portion of the proceeds for the acquisitions of Thomas
Walter Limited, Olympic Circuits Canada and Altatron Technology (see Note 14 to
the Consolidated Financial Statements).
February 2001 Common Stock and Convertible Subordinated Notes Public
Offerings of DDi Corp.
On February 20, 2001, DDi Corp. and some of its shareholders completed a
follow-on public offering of 6,000,000 shares of its common stock. Three
million shares were sold by DDi Corp. and 3,000,000 shares were sold by selling
shareholders. The shares were sold at $23.50 per share, generating proceeds to
us of
20
approximately $67.0 million, net of underwriting discounts, commissions and
expenses. Concurrently, DDi Corp. issued $100.0 million in aggregate principal
amount of 5 1/4% convertible subordinated notes due March 1, 2008. These notes
are convertible at any time prior to maturity into shares of common stock at a
conversion price of $30.00 per share, subject to certain adjustments. These
notes generated proceeds to us of $97.0 million, net of underwriting discounts,
commissions and expenses. The net proceeds of both transactions were used to
repurchase all of the Dynamic Details senior subordinated notes, repurchase a
portion of the Capital senior discount notes, repay a portion of the Dynamic
Details senior credit facility and for general corporate purposes.
Thomas Walter Acquisition
On March 5, 2001, DDi Europe completed the acquisition of Thomas Walter
Limited, a leading printed circuit board manufacturer based in Marlow, England
for total cash consideration of approximately $24.5 million, plus expenses of
$0.3 million. Thomas Walter's core competencies in time-critical delivery and
complex technology (including its high-end microvia laser technology) have
helped to make DDi Europe the leading provider of quick-turn electronic
manufacturing services in the U.K.
Under purchase accounting, the total purchase price has been allocated to
the underlying assets acquired and liabilities assumed based upon their
respective fair market values at the date of acquisition. The excess of the
purchase price was allocated to goodwill and identifiable intangibles.
Goodwill generated in the acquisition of Thomas Walter has an assigned value
of approximately $17.0 million and is being amortized over its estimated useful
life of 20 years. The identifiable intangibles consist of developed
technologies and assembled workforce. The fair value of the developed
technology assets at the date of acquisition was approximately $0.5 million and
represents the aggregate fair value of individually identified technologies
that were fully developed at the time of acquisition. The assembled workforce
asset was assigned a fair value of approximately $0.8 million at the date of
acquisition.
Nelco Technology Acquisition
On April 27, 2001, Dynamic Details completed the acquisition of the assets
of Nelco, a wholly owned subsidiary of Park Electrochemical Corp., for total
cash consideration of approximately $3.0 million. Nelco is an Arizona-based
manufacturer of semi-finished printed wiring boards, commonly known as mass
lamination. Under purchase accounting, the total purchase price has been
allocated to the underlying assets acquired and liabilities assumed based on
their respective fair values at the date of acquisition.
Olympic Circuits Canada Acquisition
On May 9, 2001, Dynamic Details completed the acquisition of Olympic
Circuits Canada, a Canada-based, time-critical electronics manufacturing
service provider specializing in quick-turn prototype printed circuit boards
for a total cash consideration of approximately $12.8 million, plus contingent
consideration based on earnings in each of the three years following the date
of acquisition plus expenses of $0.1 million. No contingent consideration has
been earned or recorded as of December 31, 2001. If contingent consideration is
earned and paid, it will be capitalized as additional purchase price.
Under purchase accounting, the total purchase price has been allocated to
the underlying assets acquired and liabilities assumed based upon their
respective fair market values at the date of acquisition. The excess of the
purchase price was allocated to goodwill and is being amortized over its
estimated useful life of 20 years.
Altatron Technology Acquisition
On June 4, 2001, Dynamic Details completed the acquisition of the assets of
Altatron, a Southern California-based provider of value-add assembly services
to electronics original equipment manufacturers for a total cash consideration
of approximately $4.8 million, plus contingent consideration based on earnings
in each of the two years following the date of acquisition. No contingent
consideration has been earned or recorded as of December 31, 2001. If
contingent consideration is earned and paid, it will be capitalized as
additional purchase price.
21
Under purchase accounting, the total purchase price has been allocated to
the underlying assets acquired and liabilities assumed based upon their
respective fair market values at the date of acquisition. The excess of the
purchase price was allocated to goodwill and is being amortized over its
estimated useful life of 20 years.
Garland, Texas and Marlborough, Massachusetts Facilities
In October 2001, our management and Board of Directors approved a plan to
close our Garland, Texas and Marlborough, Massachusetts facilities (see Note 15
to the Consolidated Financial Statements). Prior to its closure, the Garland
plant had manufactured our lowest technology pre-production volume printed
circuit boards. The Marlborough plant provided electronic interconnect products
to selected customers in the New England area. Our decision to close these
facilities was based on their contribution to our financial objectives in 2001
as well as their expected contribution going forward. Accordingly, the plant
closures are not expected to adversely impact our results of operations in
future periods. The closure of the facilities is estimated to be effectively
completed by June 30, 2002.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenues and expenses for
each period.
The following represents a summary of our critical accounting policies,
defined as those policies that we believe are: (a) the most important to the
portrayal of our financial condition and results of operations, and (b) that
require management's most difficult, subjective or complex judgments, often as
a result of the need to make estimates about the effects of matters that are
inherently uncertain.
. Valuation of long-lived assets--We assess the potential impairment of
long-lived tangible and intangible assets whenever events or changes in
circumstances indicate that the carrying value may not be recoverable.
Changes in our operating strategy, such as the closure of a facility,
can significantly reduce the estimated useful life of such assets. In
our 1999 and 2001 Consolidated Statements of Operations, we recorded
impairments of long-lived assets resulting from plant closures (see Note
15 to the Consolidated Financial Statements). In addition, under a new
accounting standard effective January 1, 2002, our goodwill and certain
other intangible assets will no longer be subject to periodic
amortization over estimated useful lives. These assets are now
considered to have an indefinite life and their carrying values are
required to be assessed by us for impairment at least annually.
Depending on future market values and other factors, these assessments
could potentially result in impairment reductions of these intangible
assets in the future. (See Note 2 to the Consolidated Financial
Statements regarding recently issued accounting standards).
. Inventory obsolescence--We generally purchase raw materials in
quantities that we anticipate will be fully used in the near term.
Changes in operating strategy, however, such as the closure of a
facility, can limit our ability to effectively utilize all of the raw
materials purchased. In our 1999 and 2001 Consolidated Statement of
Operations, we recorded restructuring-related inventory impairments
resulting from plant closures (see Note 15 to the Consolidated Financial
Statements). In addition to evaluations of the market value in
connection with significant activities, we regularly monitor potential
inventory obsolescence and, when necessary, reduce the carrying amount
of our inventory to its market value.
. Allowance for doubtful accounts--We maintain allowances for doubtful
accounts for estimated losses resulting from the inability of our
customers to make required payments. If the financial condition of our
customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required.
22
. Income taxes--As part of the process of preparing our consolidated
financial statements, we are required to estimate our income taxes in
each of the jurisdictions in which we operate. The process incorporates
an assessment of the current tax exposure together with temporary
differences resulting from different treatment of transactions for tax
and financial statement purposes. Such differences result in deferred
tax assets and liabilities, which are included within the Consolidated
Balance Sheet. The recovery of deferred tax assets from future taxable
income must be assessed and, to the extent that recovery is not likely,
we establish a valuation allowance. Increases in valuation allowances
result in the recording of additional tax expense. Further, if our
ultimate tax liability differs from the periodic tax provision reflected
in the Consolidated Statements of Operations, additional tax expense may
be recorded.
. Litigation and other contingencies--Management regularly evaluates our
exposure to threatened or pending litigation and other business
contingencies. Because of the uncertainties related to the amount of
loss from litigation and other business contingencies, the recording of
losses relating to such exposures requires significant judgment about
the potential range of outcomes. To date, we have not been affected by
any litigation or other contingencies that have had, or are currently
anticipated to have, a material impact on the company's results of
operations or financial position. As additional information about
current or future litigation or other contingencies becomes available,
management will assess whether such information warrants the recording
of additional expense relating to its contingencies. Such additional
expense could potentially have a material impact on our results of
operations and financial position.
We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
Results of Operations
The following table sets forth income statement data expressed as a
percentage of net sales for the periods indicated:
Year Ended December 31,
-----------------------------------------------
DDi DDi DDi DDi DDi DDi
Capital Corp. Capital Corp. Capital Corp.
1999 1999 2000 2000 2001 2001
------- ----- ------- ----- ------- -----
Net sales........................................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold............................... 68.8 69.2 61.3 61.5 73.5 72.9
Restructuring-related inventory impairment....... 0.7 0.6 -- -- 1.3 1.0
----- ----- ----- ----- ----- -----
Gross profit..................................... 30.5 30.2 38.7 38.5 25.2 26.1
Operating expenses:
Sales and marketing........................... 8.1 8.1 8.6 8.0 8.9 7.7
General and administration.................... 5.5 5.3 6.8 7.3 5.1 5.8
Amortization of intangibles................... 7.6 7.6 4.3 4.6 6.2 6.2
Restructuring and related charges............. 1.7 1.7 -- -- 26.6 21.0
----- ----- ----- ----- ----- -----
Operating income (loss).......................... 7.6 7.5 19.0 18.6 (21.6) (14.6)
Interest rate swap valuation..................... -- -- -- -- 3.5 2.8
Interest expense (net)........................... 14.2 16.0 8.1 8.3 5.2 6.1
----- ----- ----- ----- ----- -----
Income (loss) before income taxes and
extraordinary loss............................. (6.6) (8.5) 10.9 10.3 (30.3) (23.5)
Income tax benefit (expense)..................... 1.8 2.5 (5.2) (5.0) 4.6 3.3
Extraordinary loss, net of income tax benefit.... -- -- (0.4) (1.3) (4.2) (3.3)
----- ----- ----- ----- ----- -----
Net income (loss)................................ (4.8)% (6.0)% 5.3% 4.0 % (29.9)% (23.5)%
===== ===== ===== ===== ===== =====
23
Year Ended December 31, 2001 Compared to the Year Ended December 31, 2000
Net Sales
DDi Capital net sales decreased $163.7 million (37%) to $284.7 million in
2001, from $448.4 million in 2000. Such decrease in net sales is attributable
to a reduction in panels produced and the average price per panel, reflecting
softened economic conditions, partially offset by the impact of acquisitions
during 2000 and 2001. DDi Capital net sales in 2001 relating to acquisitions in
this year were $13.7 million. DDi Corp. net sales decreased $136.1 million
(27%) to $361.6 million in 2001, from $497.7 million in 2000. Such decrease in
net sales reflects the lower level of DDi Capital sales, partially offset by
the impact of the acquisitions of MCM Electronics Limited ("MCM") in April 2000
and Thomas Walter in March 2001. DDi Corp. net sales for the twelve months
ended December 2001 relating to acquisitions in 2001 were $26.4 million.
Gross Profit
DDi Capital gross profit decreased $102.0 million (59%) to $71.7 million in
2001, from $173.7 million in 2000. DDi Corp. gross profit decreased $97.2
million (51%) to $94.3 million in 2001, from $191.5 million in 2000. The gross
profit for DDi Capital and DDi Corp. for 2001 includes a $3.7 million one-time
charge for inventory write-downs in connection with our restructuring
initiatives (see the discussion of Restructuring and Other Related Charges for
further information). Excluding the one-time charge, DDi Capital gross profit
was $75.5 million, or 27% of net sales for 2001, down from 39% of net sales for
2000. On the same basis, DDi Corp. gross profit was $98.0 million, or 27% of
net sales for 2001, down from 38% of net sales for 2000. The decreases in the
gross profit for DDi Capital and DDi Corp., excluding the 2001 restructuring
charge, resulted from the lower level of sales generated in 2001. The impact of
the decreases in sales on gross profit was mitigated by various cost control
initiatives relating to materials, production personnel and overhead expenses.
Sales and Marketing Expenses
DDi Capital sales and marketing expenses decreased $13.3 million (34%) to
$25.4 million in 2001, from $38.7 million in 2000. DDi Corp. sales and
marketing expenses decreased $12.1 million (30%) to $27.6 million in 2001, from
$39.7 million in 2000. Such decreases in sales and marketing expenses is
primarily due to the lower level of sales generated in 2001, as well as cost
control measures.
General and Administration Expenses
DDi Capital general and administration expenses decreased $16.1 million
(53%) to $14.3 million in 2001, from $30.4 million in 2000. DDi Corp. general
and administration expenses decreased $15.2 million (42%) to $21.0 million in
2001, from $36.2 million in 2000. Such decreases in general and administrative
expenses are due to the lower level of sales generated in 2001, as well as cost
control measures.
Restructuring and Other Related Charges
Restructuring and related charges in 2001 were $75.7 million for DDi Capital
and $76.1 million for DDi Corp., respectively. Such charges represent one-time
costs incurred in the fourth quarter of 2001 in connection with management's
decision to close various facilities and the separation of certain executives
from the Company (see Note 15 to the Consolidated Financial Statements).
Amortization of Intangibles
DDi Capital amortization of intangibles decreased $1.8 million (9%) to $17.7
million in 2001, from $19.5 million in 2000. Such decrease in amortization of
intangibles is due to the use of accelerated amortization methods with regard
to certain identifiable intangibles and the impact of the impairment of
intangibles in the fourth quarter of 2001 in connection with our restructuring
activities, partially offset by the additional amortization resulting from
acquisitions. DDi Corp. amortization of intangibles decreased $0.2 million (1%)
to $22.6 million in 2001, from $22.8 million in 2000. Such decrease in
amortization of intangibles reflects the decrease in expense incurred by DDi
Capital, which was nearly offset by the impact of the acquisitions of MCM and
Thomas Walter.
24
Interest Rate Swap Valuation
Interest rate swap valuation represents the change in the fair value of an
interest rate swap agreement. (see Note 8 to the Consolidated Financial
Statements). At December 31, 2001, existing interest rate swap agreements for
DDi Capital and DDi Corp. qualify as effective cash flow hedges and,
accordingly, changes in fair value are not charged to operations.
Net Interest Expense
DDi Capital net interest expense decreased $21.5 million (59%) to $14.8
million in 2001, from $36.3 million in 2000. Such decrease in net interest
expense is due primarily to the repayment of a portion of the amounts owed
under the Dynamic Details senior credit facility in April 2000, the redemption
of a portion of the DDi Capital senior discount notes in October 2000 and
during the second quarter of 2001, and the redemption of the Dynamic Details
senior subordinated notes in full in February 2001. Cash generated from equity
offerings funded these redemptions. DDi Corp. net interest expense decreased
$19.1 million (46%) to $22.1 million in 2001, from $41.2 million in 2000. Such
decrease in net interest expense reflects the decrease in net interest expense
incurred by DDi Capital and the redemption of the DDi Intermediate senior
discount notes in full in April and October 2000. These decreases were
partially offset by interest expense incurred from the acquisition of MCM and
$5 million in interest expense relating to the issuance in February 2001 of the
5 1/4% convertible subordinated notes due March 1, 2008.
Income Taxes
DDi Capital income taxes decreased $36.6 million to a benefit of $13.2
million in 2001, from a $23.4 million expense in 2000, reflecting a lower level
of taxable income earned in the current period. DDi Corp. income taxes
decreased $37 million to a benefit of $12 million in 2001, from a $25 million
expense in 2000. Such decrease in income tax expense reflects the decreased DDi
Capital provision, the impact of the acquisitions of MCM and Thomas Walter, and
interest deductions relating to the DDi Corp. 5 1/4% convertible subordinated
notes due March 1, 2008. See Note 12 to the Consolidated Financial Statements
for a reconciliation of the tax expense or benefit recorded in each period to
the corresponding amount of income tax determined by applying the U.S. Federal
income tax rate to the earnings or loss before income taxes.
Year Ended December 31, 2000 Compared to the Year Ended December 31, 1999
Net Sales
DDi Capital net sales increased $155.9 million (53%) to $448.4 million in
2000, from $292.5 million in 1999. Such increase is attributable to: (a) the
production of more complex and larger panels, which increased the average sales
price per panel and (b) the impact of the Automata and Golden acquisitions,
which contributed $60.6 million to our net sales. DDi Corp. net sales increased
$205.2 million (70%) to $497.7 million in 2000, from $292.5 million in 1999.
Such increase reflects the higher level of sales achieved by DDi Capital and
the impact of the acquisition of MCM. In aggregate, the Automata, Golden and
MCM acquisitions contributed $109.9 million to DDi Corp. net sales for 2000.
Excluding the acquisitions, our net sales increased $95.3 million (33%).
Gross Profit
DDi Capital gross profit increased $84.5 million (95%) to $173.7 million in
2000, from $89.2 million in 1999. Gross profit for 1999 includes a $1.9 million
one-time charge for inventory write-downs in connection with our restructuring
initiatives (see the discussion herein of Restructuring and Related Charges for
further information). Excluding the one-time charge, gross profit was $91.1
million for 1999. The increase in gross profit, excluding the 1999
restructuring charge resulted from the higher level of sales, an improvement in
production yields in our pre-production operations, and the impact of the
Automata and Golden acquisitions. DDi
25
Corp. gross profit increased $103.3 million (117%) to $191.5 million in 2000,
from $88.2 million in 1999. Excluding the $1.9 million one-time restructuring
charge, gross profit was $90.1 million for 1999. Such increase, excluding the
1999 restructuring charge reflects the improvements in gross profit achieved by
DDi Capital and the impact of the acquisition of MCM.
Sales and Marketing Expenses
DDi Capital sales and marketing expenses increased $15.1 million (64%) to
$38.7 million in 2000, from $23.6 million in 1999. Such increase is due to: (a)
growth in our sales force to accommodate existing and anticipated near-term
increases in customer demand and related variable expenses due to our increased
sales volume and (b) the impact of the Automata and Golden acquisitions. DDi
Corp. sales and marketing expenses increased $16.1 million (68%) to $39.7
million in 2000, from $23.6 million in 1999. Such increase reflects the
increase in sales and marketing expenses incurred by DDi Capital and the impact
of the acquisition of MCM.
General and Administration Expenses
DDi Capital general and administration expenses increased $14.3 million
(89%) to $30.4 million in 2000, from $16.1 million in 1999. The increase in
expenses is attributable to higher staffing costs and other back-office
expenditures to support our growth (approximately $3.4 million), the impact of
the Automata and Golden acquisitions (approximately $2.1 million), higher
incentive compensation expense (approximately $3 million), and an increase in
bad debt expense (approximately $7.9 million). The increase in credit related
losses resulted from the current economic softening, particularly in the
communications sector. Such increases were partially offset by the elimination
of management fees in connection with the termination of a management agreement
at the time of the initial public offering by DDi Corp. (resulting in a
reduction in expense of $1.1 million). DDi Corp. general and administration
expenses increased $20.9 million (136%) to $36.2 million in 2000, from
$15.3 million in 1999. Such increase reflects the increase in general and
administration expenses incurred by DDi Capital, the impact of the acquisition
of MCM, and approximately $0.7 million in costs incurred in streamlining our
U.K. operations.
Amortization of Intangibles
DDi Capital amortization of intangibles decreased $2.8 million (13%) to
$19.5 million in 2000, from $22.3 million in 1999. The decrease is due to the
use of accelerated amortization methods with regard to certain identifiable
intangibles, partially offset by the additional amortization resulting from the
Automata and Golden acquisitions (approximately $0.2 million). DDi Corp.
amortization of intangibles increased $0.5 million (2%) to $22.8 million in
2000, from $22.3 million in 1999. Such increase reflects the decrease in
amortization of intangibles incurred by DDi Capital, partially offset by
amortization attributable to the acquisition of MCM.
Restructuring and Related Charges
Restructuring and related charges for DDi Capital and DDi Corp. were $5.1
million in 1999, representing one-time costs incurred in connection with
management's decision to close our Colorado facility. These charges consist of
$2.6 million for severance and other exit costs and $2.5 million of costs
related to the impairment of net property, plant and equipment. See Note 15 to
our Consolidated Financial Statements for further information about these
charges.
Net Interest Expense
DDi Capital net interest expense decreased $5.2 (13%) to $36.3 million in
2000, from $41.5 million in 1999. Such decrease is due to the repayment of a
portion of the amounts owed under the Dynamic Details senior credit facility
from part of the proceeds of our initial public offering in April 2000,
partially offset by the impact of discount accretion on the DDi Capital senior
discount notes. DDi Corp. net interest expense decreased $5.5 million (12%) to
$41.2 million in 2000, from $46.7 million in 1999. Such decrease reflects the
decrease in
26
net interest expense incurred by DDi Capital, the redemption of DDi
Intermediate senior discount notes principal resulting from the DDi Corp.
initial public offering in April 2000 and follow-on offering in October 2000
and the repurchase of Capital Senior Discount Notes resulting from the DDi
Corp. follow-on offering in October 2000. These decreases were largely offset
by the impact of the acquisition of MCM. Interest on debt assumed in this
acquisition was $2.0 million in 2000.
Income Taxes
DDi Capital income taxes increased $28.6 million to a tax expense of
$23.4 million in 2000, from a tax benefit of $5.2 million in 1999. The
increased provision reflects a higher level of taxable income earned in the
current period. DDi Corp. income taxes increased $32.4 million to a tax expense
of $25.0 million in 2000, from a tax benefit of $7.4 million in 1999. Such
increase reflects the increased DDi Capital provision and the impact of the
acquisition of MCM, which generated $2.8 million in tax expense in 2000. See
Note 12 to the Consolidated Financial Statements for a reconciliation of the
tax expense or benefit recorded in each period to the corresponding amount of
income tax determined by applying the U.S. Federal income tax rate to the
earnings or loss before income taxes.
Quarterly Financial Information
The following tables present selected quarterly financial information for
each of the twelve quarters ended December 31, 2001. This information is
unaudited but, in our opinion, reflects all adjustments, consisting only of
normal recurring adjustments that we consider necessary for a fair presentation
of this information, in accordance with generally accepted accounting
principles. These quarterly results are not necessarily indicative of future
results.
DDi Capital, Three Months Ended
--------------------------------------------------------------------------
Mar. June Sept. Dec. Mar. June Sept. Dec. Mar. June Sept. Dec.
31, 30, 30, 31, 31, 30, 30, 31, 31, 30, 30, 31,
1999 1999 1999 1999 2000 2000 2000 2000 2001 2001 2001 2001
----- ----- ----- ----- ----- ----- ------ ------ ------ ----- ----- -----
(in millions)
Net sales...................... $59.2 $71.7 $82.9 $78.7 $75.3 $86.9 $132.2 $154.0 $118.7 $65.2 $53.7 $47.1
Cost of goods sold............. 41.8 50.2 57.2 52.2 49.0 55.9 83.9 85.9 74.8 44.9 46.4 43.2
Restructuring-related inventory
impairment.................... -- -- -- 1.9 -- -- -- -- -- -- -- 3.7
----- ----- ----- ----- ----- ----- ------ ------ ------ ----- ----- -----
Gross profit................... $17.4 $21.5 $25.7 $24.6 $26.3 $31.0 $ 48.3 $ 68.1 $ 43.9 $20.3 $ 7.3 $ 0.2
===== ===== ===== ===== ===== ===== ====== ====== ====== ===== ===== =====
DDi Corp., Three Months Ended
---------------------------------------------------------------------------
Mar. June Sept. Dec. Mar. June Sept. Dec. Mar. June Sept. Dec.
31, 30, 30, 31, 31, 30, 30, 31, 31, 30, 30, 31,
1999 1999 1999 1999 2000 2000 2000 2000 2001 2001 2001 2001
----- ----- ----- ----- ----- ------ ------ ------ ------ ----- ----- -----
(in millions)
Net sales...................... $59.2 $71.7 $82.9 $78.7 $75.3 $101.5 $149.6 $171.3 $140.7 $85.8 $70.6 $64.5
Cost of goods sold............. 42.0 50.4 57.4 52.6 49.0 66.5 95.1 95.6 88.1 59.3 59.3 56.9
Restructuring-related inventory
impairment.................... -- -- -- 1.9 -- -- -- -- -- -- -- 3.7
----- ----- ----- ----- ----- ------ ------ ------ ------ ----- ----- -----
Gross profit................... $17.2 $21.3 $25.5 $24.2 $26.3 $ 35.0 $ 54.5 $ 75.7 $ 52.6 $26.5 $11.3 $ 3.9
===== ===== ===== ===== ===== ====== ====== ====== ====== ===== ===== =====
The quarterly financial information provided above does not present income
(loss) before extraordinary items, net income (loss) and related per share
data. Such information is not presented because it does not allow for
meaningful comparisons among quarters; the data fluctuates greatly from quarter
to quarter due to the reclassification of our Class A and Class L common stock
into new common stock in connection with our initial public offering and due to
the changes in our net interest expense (and related tax expense) as a result
of the reduction in debt with the use of proceeds from our debt and equity
offerings. Further quarterly financial information not presented above is
presented in our quarterly reports on Form 10-Q.
27
Liquidity and Capital Resources
As of December 31, 2001, cash, cash equivalents and marketable securities
were $39.5 million for DDi Capital, and $45.5 million for DDi Corp. compared to
$39.6 million for DDi Capital, and $66.9 million for DDi Corp. as of December
31, 2000. Our principal source of liquidity to fund ongoing operations for the
year ended December 31, 2001 was cash provided by operations.
Net cash provided by operating activities for the year ended December 31,
2001 was $47.6 million for DDi Capital and $55.8 million for DDi Corp.,
compared to $61.1 million for DDi Capital and $64.8 million for DDi Corp. for
the year ended December 31, 2000 and $24.8 million for both DDi Capital and DDi
Corp. for the year ended December 31, 1999.
Capital expenditures for the year ended December 31, 2001 were $24.7 million
for DDi Capital, and $35.2 million for DDi Corp., compared to $24.0 million for
DDi Capital and $27.2 million for DDi Corp. for the year ended December 31,
2000 and $18.2 million for both DDi Capital and DDi Corp. during the year ended
December 31, 1999.
As of December 31, 2001, DDi Capital and DDi Corp. had long-term borrowings
of $139.0 million and $261.0 million, respectively. Dynamic Details has a $75.0
million revolving credit facility for revolving credit loans, letters of credit
and swing line loans. Access to the full amount of the revolving credit
facility is subject to conditions set forth in the credit facility agreement.
Under an amendment to the Dynamic Details senior credit facility in December
2001, the maximum amount we can borrow under the revolving credit facility is
limited to $37.5 million until mid-2003. At December 31, 2001, Dynamic Details
had no borrowings outstanding under this revolving credit facility and had $0.7
million reserved against the facility for a letter of credit and had $36.8
million available for borrowing under the facility. Our European operating
subsidiary, DDi Europe, has $11.6 million available for borrowing under its
revolving credit facility. At December 31, 2001, we had $3.0 million
outstanding under this revolving credit facility.
The following table shows our contractual cash obligations and commercial
commitments as of December 31, 2001:
Payments Due by Period
(in thousands)
DDi Capital
Year Ending December 31,
----------------------------------------------------------
Commitments 2002 2003 2004 2005 2006 Thereafter Total
----------- ----------------------------------------------------------
Long-Term Debt............... $15,552 $19,338 $43,410 $57,519 $ -- $16,090 $151,909
Capital Lease Obligations.... 1,625 1,498 1,433 1,312 -- -- 5,868
Operating Leases............. 6,738 5,814 5,055 4,987 3,740 12,274 38,608
----------------------------------------------------------
Total Commitments..... $23,915 $26,650 $49,898 $63,818 $3,740 $28,364 $196,385
==========================================================
DDi Corp.
Year Ending December 31,
----------------------------------------------------------
Commitments 2002 2003 2004 2005 2006 Thereafter Total
----------- ----------------------------------------------------------
Long-Term Debt............... $15,552 $23,706 $47,778 $61,887 $4,368 $120,458 $273,749
Capital Lease Obligations.... 2,305 1,635 1,433 1,312 -- -- 6,685
Operating Leases............. 8,985 7,779 6,832 6,720 5,473 29,601 65,390
----------------------------------------------------------
Total Commitments..... $26,842 $33,120 $56,043 $69,919 $9,841 $150,059 $345,824
==========================================================
The Dynamic Details senior credit facility, the DDi Capital senior discount
notes, the 5 1/4% convertible subordinated notes due March 1, 2008 and the DDi
Europe facilities agreement are described under the caption "Description of
Indebtedness."
28
Based on our current level of operations, we believe that cash, cash
equivalents, marketable securities, cash generated from operations and amounts
available under the Dynamic Details senior credit facility and the DDi Europe
facilities agreement will be adequate to meet our debt service requirements,
capital expenditures and working capital needs for the foreseeable future.
There can be, however, no assurance that our business will generate sufficient
cash flow from operations or that future borrowings will be available to enable
us to service our indebtedness. We have substantial indebtedness and our
operating performance and our ability to service or refinance our indebtedness
will be subject to economic conditions and to financial, business and other
factors, certain of which are beyond our control. For example, current economic
conditions include a downturn in the communications industry that has continued
to have a negative impact on our revenues and operating performance during the
first quarter or 2002. If our revenues and operating performance do not improve
significantly, there is significant risk that DDi Europe and Dynamic Details
will not be able to meet specified financial ratios and satisfy certain
financial condition tests, including a minimum EBITDA covenant contained in the
Dynamic Details senior credit facility. If we do not comply with our covenants,
our lenders will be able to exercise all or any of their rights and remedies
under the credit facilities.
Description of Indebtedness
Dynamic Details Senior Credit Facility
Dynamic Details has entered into a credit agreement, as amended, for which
JPMorgan Chase Bank is the collateral, co-syndication and administrative agent
and for which Bankers Trust Company is the documentation and co-syndication
agent. The lenders are a syndicate comprised of various banks, financial
institutions or other entities which hold transferable interests in the Dynamic
Details senior credit facility. The Dynamic Details senior credit facility, as
of December 31, 2001 consists of:
. Tranche A term facility of approximately $47.6 million;
. Tranche B term facility of approximately $88.2 million; and
. a revolving line of credit of up to $75 million, including revolving
credit loans, letters of credit and swing line loans (access to the full
amount is subject to conditions set forth in the agreement and is
currently limited to $37.5 million through mid-2003), of which no
amounts are outstanding, and $0.7 million is reserved for a letter of
credit.
The Dynamic Details senior credit facility is jointly and severally
guaranteed by DDi Capital and its subsidiaries and secured by the assets of all
of our domestic subsidiaries. Future domestic subsidiaries of Dynamic Details
will also guarantee the senior credit facility and secure that guarantee with
their assets. The senior credit facility requires Dynamic Details to meet
financial ratios and benchmarks and to comply with other restrictive covenants,
including restrictions on making distributions or loans to DDi Corp. to pay
interest or principal on the notes.
The Tranche A term facility amortizes in quarterly installments from June
1999 until July 2004 when the remaining outstanding loans under the Tranche A
term facility become repayable. The Tranche B term facility amortizes in
quarterly installments from June 1999 until September 2004 at which time the
remaining outstanding loans under the Tranche B term facility becomes repayable
in two equal quarterly installments with a final payment in April 2005. The
revolving line of credit terminates in July 2004.
Borrowings under the Dynamic Details senior credit facilities for Tranche A
and the revolving credit facility bear interest at varying rates based, at our
option, on either LIBOR plus 300 basis points or the bank rate plus 200 basis
points in each case subject to adjustment based on the consolidated leverage
ratio of Dynamic Details, as defined in the credit agreement. Borrowings for
Tranche B under the Dynamic Details senior credit facility bear interest at
rates based, at our option, on either LIBOR plus 400 basis points or the bank
rate plus 300 basis points. The overall effective interest rate for the term
loans, after giving effect to the interest rate swap agreement, as of
29
December 31, 2001, was 8.05%. Dynamic Details is required to pay to the lenders
under the senior credit facility a commitment on the average unused portion of
the revolving credit facility and a letter of credit fee on each letter of
credit outstanding. The senior credit facility requires Dynamic Details to
apply proceeds of sales of debt, equity or material assets to prepay its senior
credit facility, subject to some exceptions, and Dynamic Details must also, in
some circumstances, pay excess cash flow to the lenders under its senior credit
facility.
DDi Europe Facilities Agreement
In connection with DDi Corp.'s acquisition of MCM Electronics, DDi Corp.
assumed MCM Electronics' debt obligations under a facilities agreement dated
May 27, 1999 between MCM Electronics and The Governor and Company of the Bank
of Scotland, as arranger, agent, security trustee, term loan bank and working
capital bank. MCM Electronics has been combined with our other European
operations to form DDi Europe Limited. We amended and restated the facilities
agreement in part on November 15, 2001. This facility consists of:
. Tranche A term loan facility of up to an aggregate principal amount of
(Pounds)17.25 million;
. Tranche B term loan facility of up to an aggregate principal amount of
(Pounds)0.75 million; and
. working capital facilities of an aggregate maximum principal amount of
(Pounds)10.0 million
The term loan facilities require DDi Europe to meet financial ratios and to
comply with other restrictive covenants. Substantially all of the assets of DDi
Europe are pledged as collateral under the DDi Europe facilities agreement.
As of December 31, 2001, an aggregate of (Pounds)17 million, or $24.8
million, was outstanding under the facilities.
The Tranche A term loan facility is repayable in increasing quarterly
installments beginning in June 2000 with the final payment payable in September
2007. Pursuant to an amendment in November 2001, no payments are due on the
Tranche A term loan facility from October 2001 through February 2003. The
Tranche B term loan facility is repayable in full in December 2007. The working
capital facility is available until November 2002 and may be renewed at Bank of
Scotland's discretion.
Borrowings under the facilities bear interest at varying rates, comprising
of LIBOR at the dates of commencement of the relevant quarterly interest period
plus a margin of 150 basis points for Tranche A, Tranche B and the working
capital facility. The agreement requires DDi Europe to make interest hedging
arrangements and consequently DDi Europe has entered into an interest rate swap
agreement covering 100% of its borrowings under these facilities. The overall
effective interest rate for the DDi Europe term loan facilities, after giving
effect to the interest rate swap agreement, as of December 31, 2001, was 8.42%.
DDi Europe is required to pay non-utilization fees on the average unused
portion of each of the facilities.
DDi Capital Senior Discount Notes
The DDi Capital senior discount notes were issued in an aggregate principal
amount at maturity of $110 million and will mature on November 15, 2007. The
senior discount notes were issued under an indenture dated as of November 18,
1997 between DDi Corp., as issuer, and The State Street Bank and Trust Company,
as trustee, as supplemented by the supplemental indenture dated as of February
10, 1998 between DDi Capital and the trustee. The senior discount notes are
senior unsecured obligations of DDi Capital. The senior discount notes were
issued at a discount to their aggregate principal amount at maturity and will
accrete in value until November 15, 2002 at a rate per annum equal to 12.5%,
compounded semi-annually. Cash interest on the senior discount notes will not
accrue prior to November 15, 2002. Thereafter, interest will accrue at the rate
of 12.5% per annum, payable semi-annually in arrears on each May 15 and
November 15 of each year commencing May 15, 2003 to the holders of record on
the immediately preceding May 1 and November 1, respectively.
30
On or after November 15, 2002, the DDi Capital senior discount notes may be
redeemed at the option of DDi Capital, in whole at any time or in part from
time to time, at a redemption price that is greater than the accreted value of
the notes, plus accrued and unpaid interest, if any, to the redemption date. We
used $37.6 million of the proceeds from DDi Corp.'s October 2000 follow-on
public offering to repurchase a portion of the DDi Capital senior discount
notes with an aggregate principal amount at maturity of $47.0 million, and we
used $45.5 million of the proceeds from our February 2001 public offering to
repurchase notes with an aggregate principal amount at maturity of $46.9
million.
DDi Corp. 5 1/4% Convertible Subordinated Notes due March 1, 2008
The DDi Corp. 5 1/4% convertible subordinated notes were issued in an
aggregate principal amount of $100 million and will mature on March 1, 2008.
The convertible subordinated notes were issued under an indenture dated as of
February 20, 2001, as supplemented by a supplemental indenture dated as of
February 20, 2001, in each case between us, as issuer, and The State Street
Bank and Trust Company, as trustee. The convertible subordinated notes are
subordinated, unsecured obligations of DDi Corp. Cash interest on the
convertible subordinated notes accrues at the rate of 5.25% per annum, payable
semi-annually in arrears on each March 1 and September 1 of each year
commencing September 1, 2001 to the holders of record on the immediately
preceding February 15 and August 15, respectively.
On or after March 5, 2004, the convertible subordinated notes may be
redeemed at the option of DDi Corp., in whole or in part, at a redemption price
that is greater than the outstanding principal amount of the notes, plus
accrued and unpaid interest, if any, to the redemption date.
Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141 and No. 142. SFAS No. 141 "Business Combinations" requires that the
purchase method of accounting be used for all business combinations,
establishes specific criteria for recognizing intangible assets separately from
goodwill and requires certain disclosures regarding reasons for a business
combination and the allocation of the purchase price paid. SFAS No. 141 is
effective for all business combinations initiated after June 30, 2001 and for
all business combinations accounted for using the purchase accounting method
for which the date of acquisition is after June 30, 2001. SFAS No. 142
"Goodwill and Other Intangible Assets" establishes that goodwill and certain
intangible assets will not be amortized and the amortization period of certain
intangible assets will no longer be limited to forty years. In addition, SFAS
No. 142 requires that goodwill and intangible assets that are not amortized be
tested for impairment at least annually. SFAS No. 142 is effective in fiscal
years beginning after December 15, 2001. For acquisitions effective before June
30, 2001, we adopted both SFAS No. 141 and No. 142 on January 1, 2002. We will
also implement SFAS No. 141 and SFAS No. 142 for any acquisitions occurring
after June 30, 2001. As part of the adoption of SFAS No. 142 on January 1,
2002, we will no longer amortize goodwill or intangible assets with indefinite
lives related to existing goodwill and intangible assets. We expect that upon
adoption of SFAS No. 142, we will no longer record annual fiscal year
amortization associated with existing goodwill of approximately $10.0 million.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. SFAS No. 144
develops one accounting model for long-lived assets that are to be disposed of
by sale, requires that long-lived assets that are to be disposed by sale be
measured at the lower of book value or fair value less cost to sell and expands
the scope of discontinued operations to include all components of an entity
with operations that (a) can be distinguished from the rest of the entity and
(b) will be eliminated from the ongoing operations of the entity in a disposal
transaction. SFAS No. 144 is effective for all fiscal years beginning after
December 15, 2001 and is therefore effective for us beginning with our fiscal
quarter ending March 31, 2002. We are currently evaluating the impact of the
adoption of SFAS No. 144 on our consolidated financial statements.
31
FORWARD-LOOKING STATEMENTS
A number of the matters and subject areas discussed in this Form 10-K are
forward-looking in nature. The discussion of such matters and subject areas is
qualified by the inherent risks and uncertainties surrounding future
expectations generally, and also may differ materially from our actual future
experience involving any one or more of such matters and subject areas. We wish
to caution readers that all statements other than statements of historical
facts included in this Annual Report on Form 10-K regarding our financial
position and business strategy may constitute forward-looking statements. All
of these forward-looking statements are based on estimates and assumptions made
by our management, which although believed to be reasonable, are inherently
uncertain. Therefore, undue reliance should not be placed on such estimates and
statements. No assurance can be given that any of such estimates or statements
will be realized and it is likely that actual results will differ materially
from those contemplated by such forward-looking statements. Factors that may
cause such differences include: (1) changes in general economic conditions in
the markets in which we may compete and fluctuations in demand in the
electronics industry; (2) ability to sustain historical margins as the industry
develops; (3) increased competition; (4) increased costs; (5) loss or
retirement of key members of management; (6) increases in our cost of
borrowings or unavailability of additional debt or equity capital on terms
considered reasonable by management; (7) adverse state, federal or foreign
legislation or regulation or adverse determinations by regulators; and
(8) inability to consummate acquisitions on attractive terms. We have attempted
to identify, in context, certain of the factors that we currently believe may
cause actual future experience and results to differ from our current
expectations regarding the relevant matter or subject area. In addition to the
items specifically discussed in the foregoing, our business and results of
operations are subject to the rules and uncertainties described under the
heading "Factors That May Affect Future Results" contained herein, however, the
operations and results of our business also may be subject to the effect of
other risks and uncertainties. Such risks and uncertainties include, but are
not limited to, items described from time to time in our reports filed with the
Securities and Exchange Commission.
FACTORS THAT MAY AFFECT OUR FUTURE RESULTS
Substantial Indebtedness
We have a substantial amount of indebtedness. As of December 31, 2001, our
total debt was approximately $282.2 million for DDi Corp. and $156.6 million
for DDi Capital. As of December 31, 2001, we had $36.8 million available under
the Dynamic Details senior credit facility and $11.6 million available under
the DDi Europe revolving credit facility for future borrowings for general
corporate purposes and working capital needs. Access to the full amount amount
available under the Dynamic Details senior credit facility is subject to
conditions set forth in the agreement. In addition, subject to the restrictions
in the DDi Capital senior discount notes, the DDi Europe facilities agreement
and Dynamic Details senior credit facility, we may incur additional
indebtedness from time to time to finance acquisitions or capital expenditures
or for other purposes.
As a result of our level of debt and the terms of our debt instruments:
. our vulnerability to adverse general economic conditions is heightened;
. we will be required to dedicate a substantial portion of our cash flow
from operations to repayment of debt, limiting the availability of cash
for other purposes;
. we are and will continue to be limited by financial and other
restrictive covenants in our ability to borrow additional funds,
consummate asset sales, enter into transactions with affiliates or
conduct mergers and acquisitions;
. our flexibility in planning for, or reacting to, changes in its business
and industry will be limited;
. we are sensitive to fluctuations in interest rates because some of our
debt obligations are subject to variable interest rates; and
. our ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions, general corporate purposes
or other purposes may be impaired.
32
Our ability to pay principal and interest on our indebtedness and to satisfy
our other debt obligations will depend upon our future operating performance,
which will be affected by prevailing economic conditions and financial,
business and other factors, some of which are beyond our control, as well as
the availability of revolving credit borrowings under the Dynamic Details
senior credit facility and the DDi Europe facilities agreement or successor
facilities. We anticipate that our existing cash and marketable securities,
operating cash flow, amounts available under our existing credit facilities and
the proceeds of DDi Corp.'s public offerings will be sufficient to meet our
operating expenses and to service our debt requirements as they become due. If
we are unable to service our indebtedness, we will be forced to take actions
such as reducing or delaying capital expenditures, selling assets,
restructuring or refinancing our indebtedness, or seeking additional equity
capital. There is no assurance that we can effect any of these remedies on
satisfactory terms, or at all.
Business Cycles of the End Markets We Serve
The end markets into which we sell printed circuit boards and electronic
manufacturing services (including communications and networking equipment;
computers and peripherals; medical, automotive, industrial and test equipment;
and aerospace equipment) have their own business cycles. Some of these cycles
show predictability from year to year. However, other cycles, are unpredictable
in commencement, depth and duration. The communications industry entered into a
significant downturn in late 2000, which continues as of this date. This has
had a negative impact on our revenues and operating performance for the year
ended December 31, 2001 and has continued to have a negative impact on our
revenues and operating performance during the first quarter of 2002. The
failure of such industries to recover, a worsening of the downturn, or any
other event leading to additional excess capacity will negatively impact our
revenues, gross margins and operating margins.
If our revenues and our operating performance do not improve significantly,
there is significant risk that DDi Europe and Dynamic Details will not be able
to meet specified financial ratios and satisfy certain financial condition
tests, including a minimum EBITDA covenant contained in the Dynamic Details
senior credit facility.
As a result of the foregoing, we may be required to commence discussions
with our lenders regarding forbearance agreements, additional amendments or
waivers under, or a potential restructuring of, the Dynamic Details senior
credit facility and our other indebtedness. We do not currently have any
agreement with any lenders with respect to any such forbearance, amendments,
waivers or restructuring, and there can be no assurance that any such agreement
could be obtained.
Any increase in our debt service requirements or any reduction in amounts
available for borrowing under the Dynamic Details senior credit facility or our
other indebtedness could significantly affect our ability to meet debt service
requirements, to fund capital expenditures, acquisitions, and working capital.
There can be no assurance that the Dynamic Details senior credit facility or
our other indebtedness would be renegotiated on terms acceptable to us.
If we are not able to comply with the current financial covenant levels, we
will not be able to borrow under the Dynamic Details senior credit facility,
and the lenders under this facility will have the right to declare the
outstanding borrowings under the facility to be immediately due and payable and
the exercise of all or any of their other rights and remedies, including
foreclosing on the collateral pledged to secure the facility, which consists of
substantially all of the assets of Dynamic Details and its subsidiaries.
Restrictions Imposed by Terms of Indebtedness
The terms of our indebtedness restrict, among other things, our ability to
incur additional indebtedness, pay dividends or make certain other restricted
payments, consummate certain asset sales, enter into certain transactions with
affiliates, merge or consolidate with any other person or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of our
assets. DDi Europe, DDi Capital and Dynamic Details are also
33
required to maintain specified financial ratios and satisfy certain financial
condition tests. Our subsidiaries' ability to meet those financial ratios and
tests can be affected by events beyond our subsidiaries' control, and there can
be no assurance that they will meet those tests. Depending on the specific
circumstances, breach of any of these covenants may result in a default under
some or all of our indebtedness agreements. Upon the occurrence of an event of
default, lenders under such indebtedness could elect to declare all amounts
outstanding together with accrued interest, to be immediately due and payable.
If we were unable to repay such amounts, the lenders could proceed against the
collateral granted to them to secure that indebtedness. Substantially all the
assets of Dynamic Details and its subsidiaries are pledged as security under
the Dynamic Details senior credit facility. Substantially all the assets of DDi
Europe are pledged as security under the DDi Europe facilities agreement.
Technological Change and Process Development
The market for our products and services is characterized by rapidly
changing technology and continuing process development. The future success of
our business will depend in large part upon our ability to maintain and enhance
our technological capabilities, to develop and market products and services
that meet changing customer needs, and to successfully anticipate or respond to
technological changes on a cost-effective and timely basis. Research and
development expenses are expected to increase as manufacturers make demands for
products and services requiring more advanced technology on a quicker
turnaround basis. We are more leveraged than some of our principal competitors,
and therefore may not be able to respond to technological changes as quickly as
these competitors.
In addition, the electronics manufacturing services industry could in the
future encounter competition from new or revised technologies that render
existing technology less competitive or obsolete or that reduce the demand for
our services. We cannot assure you that we will effectively respond to the
technological requirements of the changing market. To the extent we determine
that new technologies and equipment are required to remain competitive, the
development, acquisition and implementation of such technologies and equipment
may require us to make significant capital investments. We cannot assure you
that we will be able to obtain capital for these purposes in the future or that
any investments in new technologies will result in commercially viable
technological processes.
Dependence on a Core Group of Significant Customers
Although we have a large number of customers, net sales to our largest
customer accounted for approximately 7% of our net sales in 2001. Net sales to
our ten largest customers accounted for approximately 34% of our net sales
during the same period. We may depend upon a core group of customers for a
material percentage of our net sales in the future. Substantially all of our
sales are made on the basis of purchase orders rather than long-term
agreements. We cannot assure you that significant customers will order services
from us in the future or that they will not reduce or delay the amount of
services ordered. Any reduction or delay in orders could negatively impact our
revenues. In addition, we generate significant accounts receivable in
connection with providing services to our customers. If one or more of our
significant customers were to become insolvent or otherwise were unable to pay
us for the services provided, our results of operations would be adversely
affected.
Variability of Orders
Our operating results fluctuate because we sell on a purchase-order basis
rather than pursuant to long-term contracts and we expect these fluctuations to
continue in the future. We are therefore sensitive to variability in demand by
our customers. Because we time our expenditures in anticipation of future
sales, our operating results may be less than we estimate if the timing and
volume of customer orders do not match our expectations. Furthermore, we may
not be able to capture all potential revenue in a given period if our
customers' demand for quick-turnaround services exceeds our capacity during
that period. Because of these factors, you should not rely on
quarter-to-quarter comparisons of our results of operations as an indication of
our future performance. Because a significant portion of our operating expenses
are fixed, even a small revenue shortfall can have a
34
disproportionate effect on our operating results. It is possible that, in
future periods, our results may be below the expectations of public market
analysts and investors. This could cause the market price of DDi Corp.'s common
stock to decline.
Competition
The printed circuit board industry is highly fragmented and characterized by
intense competition. We principally compete with independent and captive
manufacturers of complex quick-turn and longer-lead printed circuit boards. Our
principal competitors include other independent small private companies and
integrated subsidiaries of more broadly based volume producers that also
manufacture multilayer printed circuit boards and other electronic assemblies.
Some of our principal competitors are less highly-leveraged than us and may
have greater financial and operating flexibility.
Competition in the complex quick-turn and longer-lead printed circuit board
industry has increased due to the consolidation trend in the industry, which
results in potentially better capitalized and more effective competitors. Our
basic technology is generally not subject to significant proprietary
protection, and companies with significant resources or international
operations may enter the market. Increased competition could result in price
reductions, reduced margins or loss of market share, any of which could
materially adversely affect our business, financial condition and results of
operations.
Dependence on Acquisition Strategy
As part of our business strategy, we expect that we will continue to grow by
pursuing acquisitions of other companies, assets or product lines that
complement or expand our existing business. Competition for attractive
companies in our industry is substantial. We cannot assure you that we will be
able to identify suitable acquisition candidates or to finance and complete
transactions that we select. In addition, existing credit facilities restrict
our ability to acquire the assets or business of other companies. The attention
of our management may be diverted, and operations may be otherwise disrupted.
If we fail to effectively execute this acquisition strategy, the growth of our
revenues may suffer and the price of DDi Corp.'s common stock may decline.
Ability to Integrate Acquired Businesses and Manage Expansion
Since December 1997, we have completed a merger and acquired eight
companies. We have a limited history of owning and operating our businesses on
a consolidated basis. We cannot assure that we will be able to meet performance
expectations without disrupting the quality and reliability of service to
customers or diverting management resources. Our expected growth has placed and
may continue to place a significant strain on our management, financial
resources and information, operating and financial systems. If we are unable to
manage this growth effectively, our rate of growth and revenues may be
adversely affected.
Ability to Process Transferred Orders at Current Margins
During the fourth quarter of 2001, we closed two of our manufacturing
facilities which required us to transfer associated orders to other facilities.
This transfer has had a negative impact on our expected margins for these
orders in the first quarter of 2002 and has negatively impacted our financial
performance. We can provide no assurance that this will not occur in the future
if we pursue additional restructuring.
Costs of International Expansion
We have expanded into new foreign markets and intend to continue our
international expansion. We completed our acquisitions of MCM Electronics, a
United Kingdom company, and Thomas Walter limited, based in Marlow, England, on
April 14, 2000 and March 5, 2001, respectively. We also acquired Olympic
Circuits Canada, based in Canada, in May 2001. In addition, in April 2001, we
established Dynamic Details Japan as a
35
sales office in Tokyo, Japan. Entry into foreign markets may require
considerable management time as well as, in the case of new operations,
start-up expenses for market development, hiring and establishing office
facilities before any significant revenues are generated. As a result,
operations in new foreign markets may achieve low margins or may be
unprofitable. We will be unable to utilize net operating losses incurred by
foreign operations to reduce our U.S. income taxes. Therefore, as we continue
to expand internationally, we may not generate operating results consistent
with historical performance, and the market price of DDi Corp.'s common stock
price may decline.
Intellectual Property
Our success depends in part on proprietary technology and manufacturing
techniques. Currently, we do not rely on patent protection to safeguard these
proprietary techniques but rely primarily on trade secret protection.
Litigation may be necessary to protect our technology and determine the
validity and scope of the proprietary rights of competitors. Intellectual
property litigation could result in substantial costs and diversion of our
management and other resources. If any infringement claim is asserted against
us, we may seek to obtain a license of the other party's intellectual property
rights. We cannot assure you that a license would be available on reasonable
terms or at all.
Environmental Matters
Our operations are regulated under a number of federal, state, local and
foreign environmental and safety laws and regulations that govern, among other
things, the discharge of hazardous materials into the air and water, as well as
the handling, storage and disposal of such materials. These laws and
regulations include the Clean Air Act, the Clean Water Act, the Resource
Conservation and Recovery Act, and the Comprehensive Environmental Response,
Compensation and Liability Act, as well as analogous state and foreign laws.
Compliance with these environmental laws is a major consideration for us
because we use in our manufacturing process materials classified as hazardous
such as ammoniacal etching solutions, copper and nickel. In addition, because
we are a generator of hazardous wastes, we may be subject to potential
financial liability for costs associated with an investigation and any
remediation of sites at which we have arranged for the disposal of hazardous
wastes if such sites become contaminated. Even if we fully comply with
applicable environmental laws and are not directly at fault for the
contamination, we may still be liable. The wastes we generate include spent
ammoniacal etching solutions, solder stripping solutions and hydrochloric acid
solution containing palladium; waste water which contains heavy metals, acids,
cleaners and conditioners; and filter cake from equipment used for on-site
waste treatment. Violations of environmental laws could subject us to
revocation of its effluent discharge permits. Any such revocations could
require us to cease or limit production at one or more of our facilities,
thereby negatively impacting revenues and potentially causing the market price
of DDi Corp.'s common stock to decline.
Dependence on Key Management
We depend on the services of our senior executives, including Bruce D.
McMaster, President and Chief Executive Officer. We cannot assure that we will
be able to retain him and other executive officers and key personnel or attract
additional qualified management in the future. Mr. McMaster is not a party to
an employment agreement with us. Our business also depends on our ability to
continue to recruit, train and retain skilled employees, particularly
engineering and sales personnel, due to our focus on the technologically
advanced and time-critical segment of the electronics manufacturing services
industry. In addition, our ability to successfully integrate acquired companies
depends in part on our ability to retain key management and existing employees
at the time of the acquisition.
Charter Documents and State Law Provisions
Provisions in our charter and bylaws may have the effect of delaying or
preventing a change of control or changes in our management that stockholders
consider favorable or beneficial. If a change of control or change in
management is delayed or prevented, the market price of our common stock could
suffer.
36
Controlling Stockholders
Investment funds affiliated with Bain Capital, Inc. beneficially own
approximately 6% of the outstanding common stock of DDi Corp. In addition, of
the nine directors who serve on our board, three are current representatives of
Bain Capital, Inc. and two are former representatives of Bain Capital, Inc. By
virtue of such stock ownership and board representation, these entities will
continue to have a significant influence over all matters submitted to our
stockholders, including the election of our directors, and to exercise
significant control over our business, policies and affairs. Such concentration
of voting power could have the effect of delaying, deterring or preventing a
change of control or other business combination that might otherwise be
beneficial to our stockholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The DDi Europe facilities agreement and the Dynamic Details senior credit
facility bear interest at a floating rate; the DDi Capital senior discount
notes and DDi Corp. convertible subordinated notes bear interest at fixed
rates. We reduce our exposure to interest rate risks through swap agreements.
The Dynamic Details revolving credit facility bears interest at (a) 3.00%
per annum plus the applicable LIBOR or (b) 2.00% per annum plus the federal
reserve reported overnight funds rate plus 0.5% per annum. As of December 31,
2001, we had no amount outstanding under our revolving credit facility. Based
upon our anticipated utilization of the Dynamic Details revolving credit
facility through the year ending December 31, 2002, a 10% change in interest
rates is not expected to materially affect the interest expense to be incurred
on this facility during such period.
Under the terms of the current swap agreement, we pay a maximum annual rate
of interest applied to a notional amount equal to the principal balance of the
term facility portion of the Dynamic Details senior credit facility. From
January 1, 2002 through December 31, 2002 we pay a fixed annual rate of 5.99%,
from January 1, 2003 through December 31, 2003, we pay a fixed annual rate of
6.49% and from January 1, 2004 through the scheduled maturity of the Tranche B
term facility under the Dynamic Details senior credit facility in 2005 we pay a
fixed annual rate of 6.99%. The term loan facility portion of the Dynamic
Details senior credit facility bears interest based on one-month LIBOR. As of
December 31, 2001, one-month LIBOR was 1.88%. If one-month LIBOR increased by
10% to 2.07%, interest expense related to the term loan facility portion would
not increase over the year ending December 31, 2002 due to the fixed rates
under the swap agreements. The overall effective interest rate for the term
loans, after giving effect to the interest rate swap agreement, as of December
31, 2001, was 8.05%.
Under the terms of the current swap agreement, DDi Europe pays a fixed
annual rate of interest equal to 6.92% applied to fixed amounts of debt per the
agreement, through September 2002. As of December 31, 2001, the swap covers
approximately 100% of the outstanding debt under the facilities agreement.
Based upon our anticipated utilization of the DDi Europe revolving credit
facility through the year ending December 31, 2002, a 10% change in interest
rates is not expected to materially affect the interest expense to be incurred
on this facility during such period. The DDi Europe facilities agreement bears
interest based on three-month LIBOR. As of December 31, 2001, three-month LIBOR
was 1.88%. If three-month LIBOR increased by 10% to 2.07%, interest expense
related to the term loan facility would not increase due to the fixed rate of
6.92% under the swap agreement. The overall effective interest rate for the DDi
Europe term loan facilities, after giving effect to the interest rate swap
agreement, as of December 31, 2001, was 8.42%.
A change in interest rates would not have an effect on our interest expense
on the DDi Capital senior discount notes or DDi Corp. convertible subordinated
notes because these instruments bear a fixed rate of interest.
37
Foreign Currency Exchange Risk
The sales and expenses and financial results of DDi Europe and of our
Canadian operations are denominated in British pounds and Canadian dollars,
respectively. We have foreign currency translation risk equal to our net
investment in those operations. However, since nearly all of our sales are
denominated in local currency or in U.S. dollars, we have relatively little
exposure to foreign currency transaction risk with respect to sales made. Based
on our fiscal 2002 forecast, the effect of an immediate 10% change in exchange
rates would not have an impact on our operating results over the year ending
December 31, 2002. We do not use forward exchange contracts to hedge exposures
to foreign currency denominated transactions and do not utilize any other
derivative financial instruments for trading or speculative purposes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statement information, including the report of independent
accountants, required by this Item 8 is set forth on pages F-1 to F-40 of this
Annual Report on Form 10-K and is hereby incorporated into this Item 8 by
reference. The Quarterly Financial Information required by this Item 8 is set
forth in Item 7 of this Annual Report on Form 10-K and is hereby incorporated
into this Item 8 by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
38
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) DDi Corp.
The information set forth under the captions "ELECTION OF DIRECTORS" and
"TRANSACTIONS WITH MANAGEMENT AND OTHERS--Section 16(a) Beneficial Ownership
Reporting Compliance" in DDi Corp.'s definitive proxy statement (the "Proxy
Statement") for the Annual Meeting of Stockholders scheduled to be held in May
2002, is incorporated herein by reference. The Proxy Statement will be filed
with the U.S. Securities and Exchange Commission (the "Commission") not later
than 120 days after the close of Fiscal 2001. Information regarding DDi Corp.'s
executive officers is included in Part I of this Annual Report on Form 10-K
under the caption "Executive Officers of DDi Corp."
(b) DDi Capital.
The information called for by this Item 10 with respect to DDi Capital is
omitted under the reduced disclosure format pursuant to General Instruction
I(2)(c) of Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
(a) DDi Corp.
Except as specifically provided, the information set forth under the
captions "COMPENSATION OF EXECUTIVE OFFICERS" and "INFORMATION ABOUT THE BOARD
OF DIRECTORS AND COMMITTEES OF THE BOARD--Compensation of Directors" in the
Proxy Statement is incorporated herein by reference. The Proxy Statement will
be filed with the Commission not later than 120 days after the close of Fiscal
2001. The Performance Graph and the Report on Executive Compensation set forth
under the caption "COMPENSATION OF EXECUTIVE OFFICERS" in the Proxy Statement
shall not be deemed incorporated by reference herein and shall not otherwise be
deemed "filed" as part of this Annual Report on Form 10-K.
(b) DDi Capital.
The information called for by this Item 11 with respect to DDi Capital is
omitted under the reduced disclosure format pursuant to General Instruction
I(2)(c) of Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) DDi Corp.
The information set forth under the caption "SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT" in the Proxy Statement is incorporated herein
by reference. The Proxy Statement will be filed with the Commission not later
than 120 days after the close of Fiscal 2001.
(b) DDi Capital
The information called for by this Item 12 with respect to DDi Capital is
omitted under the reduced disclosure format pursuant to General Instruction
I(2)(c) of Form 10-K.
39
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) DDi Corp.
The information set forth under the caption "TRANSACTIONS WITH MANAGEMENT
AND OTHERS" in the Proxy Statement is incorporated herein by reference. The
Proxy Statement will be filed with the Commission not later than 120 days after
the close of Fiscal 2001.
(b) DDi Capital
The information called for by this Item 13 with respect to DDi Capital is
omitted under the reduced disclosure format pursuant to General Instruction
I(2)(c) of Form 10-K.
40
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants.................................................................... F-1
Consolidated Balance Sheets as of December 31, 2001 and 2000......................................... F-2
Consolidated Statements of Operations for the Years Ended December 31, 2001, 2000 and 1999........... F-3
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2001, 2000
and 1999........................................................................................... F-5
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended December 31, 2001, 2000
and 1999........................................................................................... F-7
Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999........... F-9
Notes to Consolidated Financial Statements........................................................... F-11
(a)(2) Financial Statement Schedules.
Schedule II--Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the
required information is shown in the Financial Statements or the notes thereto.
(a)(3) Exhibits.
The exhibits listed below are hereby filed with the Commission as part of
this Annual Report on Form 10-K. Certain of the following exhibits have been
previously filed with the Commission pursuant to the requirements of the
Securities Act or the Exchange Act. Such exhibits are identified by the
parenthetical references following the listing of each such exhibit and are
incorporated herein by reference. We will furnish a copy of any exhibit upon
request, but a reasonable fee will be charged to cover our expense in
furnishing such exhibit.
Exhibit Description
- ------- -----------
3.1 Certificate of Incorporation of DDi Merger Co. (Previously filed with Commission on March 30, 2001
as Exhibit 3.1 to DDi Corp.'s, DDi Capital's and Dynamic Details' combined Annual Report on
Form 10-K.)
3.2 Amended and Restated By-laws of DDi Corp. (Previously filed with the Commission on March 30, 2001
as Exhibit 3.2 to DDi Corp.'s, DDi Capital's and Dynamic Details' combined Annual Report on
Form 10-K.)
3.3 Certificate of Merger of DDi Corp., a California corporation, with and into DDi Merger Co., a Delaware
corporation. (Previously filed with the Commission on March 30, 2001 as Exhibit 3.3 to DDi Corp.'s,
DDi Capital's and Dynamic Details' combined Annual Report on Form 10-K.)
3.4 DDi Capital Corp. Articles of Incorporation, as amended. (Previously filed with the Commission on
November 26, 1997 as Exhibit 3.1 to DDi Capital's Registration Statement on Form S-4, Registration
No. 333-41187.)
3.5 Amendment to the Articles of Incorporation of DDi Capital Corp. dated December 15, 1998. (Previously
filed with the Commission on March 31, 1999 as Exhibit 3.1.1 to DDi Capital's and Dynamic Details'
combined Annual Report on Form 10-K.)
3.6 DDi Capital Corp. By-laws. (Previously filed with the Commission on November 26, 1997 as
Exhibit 3.2 to DDi Capital's Registration Statement on Form S-4, Registration No. 333-41187.)
41
Exhibit Description
- ------- -----------
4.1 Stockholders Agreement dated as of March 31, 2000. (Previously filed with the Commission on
March 30, 2001 as Exhibit 4.1 to DDi Corp.'s, DDi Capital's and Dynamic Details' combined Annual
Report on Form 10-K.)
4.2 Amendment, dated as of October 2, 2000, to the Stockholders Agreement dated as of March 31, 2000.
(Previously filed with the Commission on March 30, 2001 as Exhibit 4.2 to DDi Corp.'s, DDi Capital's
and Dynamic Details' combined Annual Report on Form 10-K.)
4.3 Amendment, dated as of January 29, 2001, to the Stockholders Agreement dated as of March 31, 2000.
(Previously filed with the Commission on March 30, 2001 as Exhibit 4.3 to DDi Corp.'s, DDi Capital's
and Dynamic Details' combined Annual Report on Form 10-K.)
4.4 Form of certificate representing shares of Common Stock. (Previously filed with the Commission on
April 6, 2000 as Exhibit 4.2 to Amendment No. 3 to DDi Corp.'s Registration Statement on Form S-1,
Registration No. 333-95623.)
4.5 Subordinated Indenture dated February 20, 2001 between DDi Corp. and State Street Bank and
Trust Company Relating to Subordinated Debt Securities. (Previously filed with the Commission on
March 30, 2001 as Exhibit 4.5 to DDi Corp.'s, DDi Capital's and Dynamic Details' combined Annual
Report on Form 10-K.)
4.6 Supplemental Indenture dated February 20, 2001 between DDi Corp. and State Street Bank and
Trust Company Relating to 5 1/4% Convertible Subordinated Notes due 2008. (Previously filed with the
Commission on March 30, 2001 as Exhibit 4.6 to DDi Corp.'s, DDi Capital's and Dynamic Details'
combined Annual Report on Form 10-K.)
4.7 Indenture dated as of November 18, 1997 between Details Holdings Corp. and State Street Bank and
Trust Company Relating to 12 1/2% Senior Discount Notes due 2007. (Previously filed with the
Commission on November 26, 1997 as Exhibit 4.1 to DDi Capital's Registration Statement on
Form S-4, Registration No. 333-41187.)
4.8 Exchange and Registration Rights Agreement dated as of November 18, 1997, regarding Details
Holdings Corp. 12 1/2% Senior Discount Notes due 2007. (Previously filed with the Commission on
November 26, 1997 as Exhibit 4.3 to DDi Capital's Registration Statement on Form S-4, Registration
No. 333-41187.
4.9 First Supplemental Indenture dated February 10, 1998 between Details Holdings Corp. and State Street
Bank and Trust Company. (Previously filed with the Commission on March 30, 2001 as Exhibit 4.9 to DDi
Corp.'s, DDi Capital's and Dynamic Details' combined Annual Report on Form 10-K.)
42
Exhibit Description
- ------- -----------
Material Contracts Relating to Management Compensation Plans or Arrangements
10.1 Details Holdings Corp.-Dynamic Circuits 1996 Stock Option Plan dated as of July 23, 1998.
(Previously filed with the Commission on March 31, 1999 as Exhibit 10.6 to DDi Capital's and
Dynamic Details' combined Annual Report on Form 10-K.)
10.2 Details Holdings Corp.-Dynamic Circuits 1997 Stock Option Plan dated as of July 23, 1998.
(Previously filed with the Commission on March 31, 1999 as Exhibit 10.7 to DDi Capital's and
Dynamic Details' combined Annual Report on Form 10-K.)
10.3 Details Holdings Corp. Bonus Plan dated as of July 23, 1998. (Previously filed with the Commission on
March 31, 1999 as Exhibit 10.8 to DDi Capital's and Dynamic Details' combined Annual Report on
Form 10-K.)
10.4 DDi Corp. 2000 Equity Incentive Plan. (Previously filed with the Commission on March 22, 2000 as
Exhibit 10.8 to Amendment No. 2 to DDi Corp.'s Registration Statement on Form S-1, Registration
No. 333-95623.)
10.5 The 1997 Details, Inc. Equity Incentive Plan. (Previously filed with the Commission on November 26,
1997 as Exhibit 10.7 to DDi Capital's Registration Statement on Form S-4, Registration
No. 333-41187.)
10.6 Details, Inc. 1996 Employee Stock Option Plan. (Previously filed with the Commission on
November 26, 1997 as Exhibit 10.8 to DDi Capital's Registration Statement on Form S-4,
Registration No. 333-41187.)
10.7 Details, Inc. 1996 Performance Stock Option Plan. (Previously filed with the Commission on
November 26, 1997 as Exhibit 10.9 to DDi Capital's Registration Statement on Form S-4, Registration
No. 333-41187.)
Other Material Contracts
10.9 DDi Corp. Employee Stock Purchase Plan. (Previously filed with the Commission on March 22, 2000 as
Exhibit 10.37 to Amendment No. 2 to DDi Corp.'s Registration Statement on Form S-1, Registration
No. 333-95623).
10.10 DDi Corp. Employee Stock Purchase Plan for Employees of Non-U.S. Subsidiaries. (Previously filed
with the Commission on September 12, 2000 as Exhibit 10.40 to DDi Corp.'s Registration Statement on
Form S-1, Registration No. 333- 45648).
10.11 Credit Agreement, dated as of July 23, 1998 (and as amended and restated as of August 28, 1998), among
Details Capital Corp., Details, Inc., Dynamic Circuits, Inc., the several banks and other financial
institutions or entities from time to time parties to this Agreement, Bankers Trust Company, and The Chase
Manhattan Bank. (Previously filed with the Commission on March 2, 2000 as Exhibit 10.3.1 to
Amendment No. 1 to DDi Corp.'s Registration Statement on Form S-1, Registration No. 333-95623.)
10.12 First Amendment, dated as of March 10, 1999, to the Credit Agreement, dated as of July 23, 1998,
among (i) DDi Capital Corp., formerly known as Details Capital Corp.; (ii) Dynamic Details,
Incorporated, formerly known as Details, Inc.; (iii) Dynamic Details Incorporated, Silicon Valley,
formerly known as Dynamic Circuits, Inc.; (iv) the several banks and other financial institutions from
time to time parties thereto; (v) Bankers Trust Company.; and (vi) The Chase Manhattan Bank.
(Previously filed with the Commission on March 2, 2000 as Exhibit 10.3.2 to Amendment No. 1 to DDi
Corp.'s Registration Statement on Form S-1, Registration No. 333-95623.)
43
Exhibit Description
- ------- -----------
10.13 Second Amendment, dated as of March 22, 2000, to the Credit Agreement, dated as of July 23, 1998,
among (i) DDi Capital Corp., formerly known as Details Capital Corp.; (ii) Dynamic Details,
Incorporated, formerly known as Details, Inc.; (iii) Dynamic Details Incorporated, Silicon Valley,
formerly known as Dynamic Circuits, Inc.; (iv) the several banks and other financial institutions from
time to time parties thereto; (v) Bankers Trust Company; and (vi) The Chase Manhattan Bank.
(Previously filed with the Commission on March 30, 2001 as Exhibit 10.14 to DDi Corp.'s, DDi
Capital's and Dynamic Details' combined Annual Report on Form 10-K.)
10.14 Third Amendment, dated as of October 10, 2000, to the Credit Agreement, dated as of July 23, 1998,
among (i) DDi Capital Corp., formerly known as Details Capital Corp.; (ii) Dynamic Details,
Incorporated, formerly known as Details, Inc.; (iii) Dynamic Details Incorporated, Silicon Valley,
formerly known as Dynamic Circuits, Inc.; (iv) the several banks and other financial institutions from
time to time parties thereto; (v) Bankers Trust Company; and (vi) The Chase Manhattan Bank.
(Previously filed with the Commission on March 30, 2001 as Exhibit 10.15 to DDi Corp.'s, DDi
Capital's and Dynamic Details' combined Annual Report on Form 10-K.)
10.15 Fourth Amendment, dated as of February 13, 2001, to the Credit Agreement, dated as of July 23, 1998,
among (i) DDi Capital Corp., formerly known as Details Capital Corp.; (ii) Dynamic Details,
Incorporated, formerly known as Details, Inc.; (iii) Dynamic Details Incorporated, Silicon Valley,
formerly known as Dynamic Circuits, Inc.; (iv) the several banks and other financial institutions from
time to time parties thereto; (v) Bankers Trust Company; and (vi) The Chase Manhattan Bank.
(Previously filed with the Commission on March 30, 2001 as Exhibit 10.16 to DDi Corp.'s, DDi
Capital's and Dynamic Details' combined Annual Report on Form 10-K.)
10.16 Fifth Amendment, dated as of December 31, 2001, to the Credit Agreement, dated as of July 23, 1998,
among (i) DDi Capital Corp., formerly known as Details, Capital Corp.; (ii) Dynamic Details,
Incorporated, formerly known as Details, Inc.; (iii) Dynamic Details Incorporated, Silicon Valley,
formerly known as Dynamic Circuits, Inc.; (iv) the several banks and other financial institutions from
time to time parties thereto; (v) Bankers Trust Company; and (vi) The Chase Manhattan Bank.
10.17 Amendment and Restatement Deed, dated November 15, 2001, relating to a Facilities Agreement dated
27 May 1999, among (i) DDi Europe Limited, formerly known as MCM Electronics Limited, (ii) the
additional borrowers named therein, (iii) the other charging parties named therein, and (iv) the Governor
and Company of the Bank of Scotland.
10.18 Working Capital Letter, dated November 15, 2001, among (i) DDi Europe Limited, (ii) the additional
borrowers named therein, and (iii) the Governor and Company of the Bank of Scotland.
10.19 Composite Guarantee and Debenture, dated November 15, 2001, among (i) DDi Europe Limited and the
additional charging companies named therein, and (ii) the Governor and Company of the Bank of
Scotland.
10.20 Management Agreement dated October 28, 1997 by and between Details, Inc. and Bain Capital Partners
V, L.P. (Previously filed with the Commission on January 20, 1998 as Exhibit 10.6 to Amendment No. 1
to DDi Capital's Registration Statement on Form S-4, Registration No. 333-41187).
10.21 Termination and Fee Agreement dated April 14, 2000 by and between DDi Corp. and Bain Capital
Partners V, L.P. (Previously filed with the Commission on March 30, 2001 as Exhibit 10.18 to DDi
Corp.'s, DDi Capital's and Dynamic Details' combined Annual Report on Form 10-K.)
10.22 Real Property Master Lease Agreement dated January 1, 1996 between James I. Swenson and Susan G.
Swenson, as Trustees of the Swenson Family Trust, and Details, Inc. (Previously filed with the
Commission on November 26, 1997 as Exhibit 10.4 to DDi Capital's Registration Statement on
Form S-4, Registration No. 333-41187.)
44
Exhibit Description
- ------- -----------
10.23 Personal Property Master Lease Agreement dated January 1, 1996 between James I. Swenson and Susan
G. Swenson, as Trustees of the Swenson Family Trust, and Details, Inc. (Previously filed with the
Commission on November 26, 1997 as Exhibit 10.5 to DDi Capital's Registration Statement on Form
S-4, Registration No. 333-41187.)
10.24 Amendment Number One to Real Property Master Lease Agreement dated January 1, 1997 between
James I. Swenson and Susan G. Swenson, as trustees of the Swenson Family Trust and Details, Inc.
(Previously filed with the Commission on March 30, 2001 as Exhibit 10.38 to DDi Corp.'s, DDi
Capital's and Dynamic Details' combined Annual Report on Form 10-K.)
10.25 Lease dated June 15, 1994, by and between Michael J. Irvin, Trustee of the Davila Living Trust dated
March 13, 1989 and Colorado Springs Circuits, Inc., regarding 6031-6035 Galley Road, Colorado
Springs, Colorado (Previously filed with the Commission on January 20, 1998 as Exhibit 10.16 to
Amendment No. 1 to DDi Capital's Registration Statement on Form S-4, Registration No. 333-41187.)
10.26 Lease dated June 15, 1994, by and between Michael J. Irvin, Trustee of the Davila Living Trust dated
March 13, 1989 and Colorado Springs Circuits, Inc., regarding 2115 Victor Place, Colorado Springs,
Colorado (Previously filed with the Commission on January 20, 1998 as Exhibit 10.17 to Amendment
No. 1 to DDi Capital's Registration Statement on Form S-4, Registration No. 333-41187.)
10.27 Lease dated June 15, 1994, by and between Michael J. Irvin, Trustee of the Davila Living Trust dated
March 13, 1989 and Colorado Springs Circuits, Inc., regarding 980 Technology Court, Colorado
Springs, Colorado. (Previously filed with the Commission on January 20, 1998 as Exhibit 10.18 to
Amendment No. 1 to DDi Capital's Registration Statement on Form S-4, Registration No. 333-41187.)
10.28 Lease Agreement dated July 22, 1991 between Geomax and Dynamic Circuits, Inc. (Previously filed
with the Commission on March 31, 1999 as Exhibit 10.30 to DDi Capital's and Dynamic Details'
combined Annual Report on Form 10-K.)
10.29 Lease dated March 20, 1997 by and between Mercury Partners 30, Inc. and Dynamic Circuits, Inc.
(Previously filed with the Commission on March 31, 1999 as Exhibit 10.31 to DDi Capital's and
Dynamic Details' combined Annual Report on Form 10-K.)
10.30 Amendment to Lease Agreement, dated as of November 9, 2001 by and between D & D Tarob
Properties, LLC and Dynamic Details Incorporated Silicon Valley.
10.31 Lease dated November 12, 1997 by and between Miller and Associates and Dynamic Circuits Inc.
(Previously filed with the Commission on March 30, 2001 as Exhibit 10.27 to DDi Corp.'s, DDi
Capital's and Dynamic Details' combined Annual Report on Form 10-K.)
10.32 Lease dated August 18 ,1998, by and between Mrs. Alberta M. Talley, Trustee and Dynamic Circuits,
Inc. (Previously filed with the Commission on March 31, 1999 as Exhibit 10.33 to DDi Capital's and
Dynamic Details' combined Annual Report on Form 10-K.)
10.33 Lease Agreement dated April 14, 1998 by and between Continental Electric Contractors and Cuplex,
Inc. (Previously filed with the Commission on March 31, 1999 as Exhibit 10.34 to DDi Capital's and
Dynamic Details' combined Annual Report on Form 10-K.)
10.34 Lease Agreement dated as of May 13, 1996, as amended by a First Lease Amendment dated August 7,
1996, between 410 Forest Street Realty Trust and Cuplex, Inc. (Previously filed with the Commission on
March 31, 1999 as Exhibit 10.35 to DDi Capital's and Dynamic Details' combined Annual Report on
Form 10-K.)
10.35 Lease Agreement dated as of November 2, 1995, between Trammell Crow International Partners and
Cuplex, Inc. (Previously filed with the Commission on March 30, 2001 as Exhibit 10.31 to DDi Corp.'s,
DDi Capital's and Dynamic Details' combined Annual Report on Form 10-K.)
45
Exhibit Description
- ------- -----------
10.36 Asset Purchase Agreement dated June 26, 2000, by and between Dynamic Details, Incorporated,
Virginia, and Automata International, Inc., successor by merger to Automata, Inc., Debtor and Debtor in
Possession under Case No. 00-2845 (MFW) in the United States Bankruptcy Court for the District of
Delaware. (Previously filed with the Commission on September 12, 2000 as Exhibit 10.41 to
DDi Corp.'s Registration Statement on Form S-1, Registration No. 333- 45648).
10.37 Amendment No. 1, dated August 1, 2000, to the Asset Purchase Agreement dated June 26, 2000, by and
between Dynamic Details, Incorporated, Virginia, and Automata International, Inc., successor by merger
to Automata, Inc., Debtor and Debtor in Possession under Case No. 00-2845 (MFW) in the United
States Bankruptcy Court for the District of Delaware. (Previously filed with the Commission on
September 12, 2000 as Exhibit 10.41.1 to DDi Corp.'s Registration Statement on Form S-1, Registration
No. 333-45648).
12.1 Statement re: computation of ratio of earnings to fixed charges.
21.1 Subsidiaries of DDi Corp.
23.1 Consent of PricewaterhouseCoopers LLP.
24.1 Power of Attorney.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of the fiscal
year covered by this report.
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, DDi Corp. has duly caused this report to be signed on its
behalf by the undersigned, thereto duly authorized, in the city of Anaheim,
state of California, on the 25th day of March, 2002.
DDi CORP.
/s/ JOSEPH P. GISCH
By: _______________________________
Joseph P. Gisch
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of DDi Corp. and in
the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
* President, Chief Executive
- ----------------------------- Officer and Director
Bruce D. McMaster (Principal Executive Officer)
/s/ JOSEPH P. GISCH Chief Financial Officer, March 25, 2002
- ----------------------------- Secretary and Treasurer
Joseph P. Gisch (Principal Financial Officer)
* Controller (Principal
- ----------------------------- Accounting Officer)
John Stumpf
* Director
- -----------------------------
Prescott Ashe
* Director
- -----------------------------
Mark Benham
* Director
- -----------------------------
Edward Conard
* Director
- -----------------------------
David Dominik
* Director
- -----------------------------
Robert Guezuraga
* Director
- -----------------------------
Murray Kenney
* Director
- -----------------------------
Stephen Pagliuca
* Director
- -----------------------------
Stephen Zide
*By: /s/ JOSEPH P. GISCH
-------------------------
Joseph P. Gisch
as Attorney-in-fact
March 25, 2002
47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, DDi Capital Corp. has duly caused this report to be
signed on its behalf by the undersigned, thereto duly authorized, in the city
of Anaheim, state of California, on the 25th day of March, 2002.
DDi CAPITAL CORP.
/s/ JOSEPH P. GISCH
By: _______________________________
Joseph P. Gisch
Vice President, Chief Financial
Officer and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of DDi Capital Corp.
and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
* President, Chief Executive
- ----------------------------- Officer and Director
Bruce D. McMaster (Principal Executive
Officer)
/s/ JOSEPH P. GISCH Chief Financial Officer, March 25, 2002
- ----------------------------- Secretary and Treasurer
Joseph P. Gisch (Principal Financial and
Accounting Officer)
* Director
- -----------------------------
Prescott Ashe
* Director
- -----------------------------
David Dominik
*By: /s/ JOSEPH P. GISCH
-------------------------
Joseph P. Gisch
as Attorney-in-fact
March 25, 2002
48
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
DDi Corp. and DDi Capital Corp.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 42 present fairly, in all material
respects, the financial position of DDi Corp. and subsidiaries and DDi Capital
Corp. and its subsidiary (collectively, the "Company") at December 31, 2001 and
2000, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed under Item
14(a)(2) on page 42 presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide reasonable basis for our opinion.
As disclosed in Notes 2 and 8 to the consolidated financial statements,
effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities."
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Orange County, California
January 29, 2002
F-1
DDi CORP. AND DDi CAPITAL CORP.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
December 31,
-------------------------------------------
2000 2000 2001 2001
----------- --------- ----------- ----------
DDi Capital DDi Corp. DDi Capital DDi Corp.
----------- --------- ----------- ----------
ASSETS
Current assets:
Cash and cash equivalents............................................. $ 39,629 $ 66,874 $ 17,569 $ 23,629
Marketable securities--available for sale............................. -- -- 21,886 21,886
Accounts receivable, net.............................................. 87,860 99,828 30,385 42,548
Inventories........................................................... 24,824 30,290 15,196 24,030
Prepaid expenses and other............................................ 2,349 3,145 1,766 3,178
Income tax receivable................................................. -- -- 5,291 5,290
Deferred tax asset.................................................... 14,584 14,584 12,241 12,241
-------- -------- -------- --------
Total current assets............................................... 169,246 214,721 104,334 132,802
Property, plant and equipment, net....................................... 80,928 92,726 79,134 106,869
Debt issuance costs, net................................................. 9,217 9,217 6,280 9,778
Goodwill and other intangibles, net...................................... 199,389 263,456 144,577 218,984
Other.................................................................... 1,048 1,247 1,824 2,384
-------- -------- -------- --------
$459,828 $581,367 $336,149 $470,817
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and capital lease
obligations......................................................... $ 13,656 $ 16,935 $ 17,184 $ 17,845
Current portion of deferred interest rate swap income................. 1,017 1,017 95 96
Current maturities of other notes payable............................. 895 895 441 441
Revolving credit facilities........................................... -- -- -- 2,975
Accounts payable...................................................... 26,612 37,099 14,470 26,767
Accrued expenses...................................................... 37,647 42,540 17,698 27,582
Income tax payable.................................................... 6,099 8,215 188 2,369
-------- -------- -------- --------
Total current liabilities.......................................... 85,926 106,701 50,076 78,075
Long-term debt and capital lease obligations............................. 291,797 316,308 138,982 260,977
Other notes payable...................................................... 594 594 20 20
Deferred tax liability................................................... 17,971 20,493 784 1,628
Other.................................................................... 874 874 7,645 7,645
-------- -------- -------- --------
Total liabilities.................................................. 397,162 444,970 197,507 348,345
-------- -------- -------- --------
Commitments and contingencies (Note 13)
Stockholders' equity:
Common stock for DDi Corp. - $0.01 par value,
75,000,000 shares authorized, 44,328,371 and 47,950,886
shares issued and outstanding at December 31, 2000 and 2001,
respectively, and for DDi Capital - $0.01 par value, 1,000 shares
issued and outstanding at December 31, 2000 and 2001................ 1 443 1 480
Additional paid-in capital............................................ 386,297 468,256 546,710 541,215
Accumulated other comprehensive income (loss)......................... -- (3,048) 565 (4,311)
Stockholder receivables............................................... -- (104) -- (712)
Accumulated deficit................................................... (323,632) (329,150) (408,634) (414,200)
-------- -------- -------- --------
Total stockholders' equity......................................... 62,666 136,397 138,642 122,472
-------- -------- -------- --------
$459,828 $581,367 $336,149 $470,817
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
DDi CAPITAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
Year Ended December 31,
----------------------------
1999 2000 2001
-------- -------- --------
Net sales.................................................................. $292,493 $448,357 $284,700
Cost of goods sold......................................................... 201,368 274,659 209,235
Restructuring-related inventory impairment................................. 1,900 -- 3,747
-------- -------- --------
Gross profit............................................................ 89,225 173,698 71,718
Operating expenses:
Sales and marketing..................................................... 23,609 38,713 25,447
General and administration.............................................. 16,135 30,426 14,378
Amortization of intangibles............................................. 22,262 19,474 17,681
Restructuring and other related charges................................. 5,100 -- 75,713
-------- -------- --------
Operating income (loss)................................................. 22,119 85,085 (61,501)
Interest rate swap valuation............................................... -- -- 9,981
Interest expense (net) and other expense (net)............................. 41,450 36,271 14,797
-------- -------- --------
Income (loss) before income taxes and extraordinary loss................ (19,331) 48,814 (86,279)
Income tax benefit (expense)............................................... 5,215 (23,433) 13,226
-------- -------- --------
Income (loss) before extraordinary loss.................................... (14,116) 25,381 (73,053)
Extraordinary loss--early extinguishment of debt, net of income tax benefit
of $1,437 and $7,640 in 2000 and 2001, respectively...................... -- (2,189) (11,949)
-------- -------- --------
Net income (loss).......................................................... $(14,116) $ 23,192 $(85,002)
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
DDi CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
Year Ended December 31,
----------------------------
1999 2000 2001
-------- -------- --------
Net sales.................................................................. $292,493 $497,665 $361,638
Cost of goods sold......................................................... 202,387 306,193 263,563
Restructuring-related inventory impairment................................. 1,900 -- 3,747
-------- -------- --------
Gross profit............................................................ 88,206 191,472 94,328
Operating expenses:
Sales and marketing..................................................... 23,613 39,723 27,627
General and administration.............................................. 15,362 36,147 21,030
Amortization of intangibles............................................. 22,262 22,806 22,568
Restructuring and other related charges................................. 5,100 -- 76,089
-------- -------- --------
Operating income (loss)................................................. 21,869 92,796 (52,986)
Interest rate swap valuation............................................... -- -- 9,981
Interest expense (net) and other expense (net)............................. 46,717 41,225 22,115
-------- -------- --------
Income (loss) before income taxes and extraordinary loss................ (24,848) 51,571 (85,082)
Income tax benefit (expense)............................................... 7,415 (25,000) 11,981
-------- -------- --------
Income (loss) before extraordinary loss.................................... (17,433) 26,571 (73,101)
Extraordinary loss--early extinguishment of debt, net of income tax benefit
of $4,207 and $7,640 in 2000 and 2001, respectively...................... -- (6,367) (11,949)
-------- -------- --------
Net income (loss).......................................................... (17,433) 20,204 (85,050)
Priority distribution due shares of Class L common stock................... (14,112) (4,356) --
-------- -------- --------
Net income (loss) allocable to common stock................................ $(31,545) $ 15,848 $(85,050)
======== ======== ========
Income (loss) per share--basic:
Before extraordinary item................................................ $ (3.21) $ 0.70 $ (1.54)
Extraordinary item....................................................... $ -- $ (0.20) $ (0.25)
Net income (loss)........................................................ $ (3.21) $ 0.50 $ (1.79)
Income (loss) per share--diluted:
Before extraordinary item................................................ $ (3.21) $ 0.66 $ (1.54)
Extraordinary item....................................................... $ -- $ (0.19) $ (0.25)
Net income (loss)........................................................ $ (3.21) $ 0.47 $ (1.79)
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
DDi CAPITAL CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
Year Ended December 31,
--------------------------
1999 2000 2001
-------- ------- --------
Net income (loss)................................................. $(14,116) $23,192 $(85,002)
Other comprehensive income (loss):
Foreign currency translation adjustments....................... -- -- (433 )
Cumulative effect of adoption of SFAS No. 133.................. -- -- (627)
Unrealized gain on inerest rate swap agreements, net of income
tax effect................................................... -- -- 1,575
Unrealized holding gain on marketable securities--available
for sale..................................................... -- -- 50
-------- ------- --------
Comprehensive income (loss)....................................... $(14,116) $23,192 $(84,437)
======== ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
DDi CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
Year Ended December 31,
---------------------------
1999 2000 2001
-------- ------- --------
Net income (loss)................................................ $(17,433) $20,204 $(85,050)
Other comprehensive income (loss):
Foreign currency translation adjustments...................... -- (3,048) (5,021)
Cumulative effect of adoption of SFAS No. 133................. -- -- (1,150)
Unrealized gain on interest rate swap agreements, net of
income
tax effect.................................................. -- -- 1,810
Unrealized holding gain on marketable securities--available
for sale.................................................... -- -- 50
-------- ------- --------
Comprehensive income (loss)...................................... $(17,433) $17,156 $(89,361)
======== ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
DDi CAPITAL CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands, except share amounts)
Accumulated
Common Stock Additional Other
------------- Paid-In Comprehensive Accumulated
Shares Amount Capital Income Deficit Total
------ ------ ---------- ------------- ----------- ---------
Balance, December 31, 1998................. 1,000 $ 1 $194,737 $ -- $(332,708) $(137,970)
Capital contribution from parent, net... -- -- 5,092 -- -- 5,092
Net loss................................ -- -- -- -- (14,116) (14,116)
----- --- -------- ------ --------- ---------
Balance, December 31, 1999................. 1,000 1 199,829 -- (346,824) (146,994)
Capital contribution from parent, net... -- -- 186,468 -- -- 186,468
Net income.............................. -- -- -- -- 23,192 23,192
----- --- -------- ------ --------- ---------
Balance, December 31, 2000................. 1,000 1 386,297 -- (323,632) 62,666
Capital contribution from parent, net... -- -- 160,413 -- -- 160,413
Foreign currency translation
adjustment............................ -- -- -- (433) -- (433)
Cumulative adjustment to reflect
adoption of SFAS No. 133.............. -- -- -- (627) -- (627)
Unrealized gain on interest rate
swap agreements, net of income
tax effect............................ -- -- -- 1,575 -- 1,575
Unrealized holding gain on
marketable securities................. -- -- -- 50 -- 50
Net loss................................ -- -- -- -- (85,002) (85,002)
----- --- -------- ------ --------- ---------
Balance, December 31, 2001................. 1,000 $ 1 $546,710 $ 565 $(408,634) $ 138,642
===== === ======== ====== ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
DDi CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands, except share and per share amounts)
Accumulated
Common Stock Additional Other
----------------- Paid-In Stockholder Accumulated Comprehensive
Shares Amount Capital Receivables Deficit Loss Total
---------- ------ ---------- ----------- ----------- ------------- ---------
Balance, December 31, 1998........................ 24,182,636 $242 $162,552 $(648) $(331,921) $ -- $(169,775)
Issuance of common stock upon exercise of
stock options.................................. 110,774 1 44 -- -- -- 45
Issuance of common stock........................ 9,421 -- 66 -- -- -- 66
Accrued interest on stockholder receivables..... -- -- -- (34) -- -- (34)
Repayment of stockholder receivables............ -- -- -- 16 -- -- 16
Net loss........................................ -- -- -- -- (17,433) -- (17,433)
---------- ---- -------- ----- --------- ------- ---------
Balance, December 31, 1999........................ 24,302,831 243 162,662 (666) (349,354) -- (187,115)
Issuance of common stock upon exercise of
stock options.................................. 665,376 7 1,261 -- -- -- 1,268
Issuance of common stock in initial public
offering, net of offering costs of $14,977..... 12,000,000 120 152,903 -- -- -- 153,023
Issuance of common stock in MCM acquisition..... 2,230,619 22 29,040 -- -- -- 29,062
Issuance of common stock in follow-on
offering, net of offering costs of $7,557...... 4,608,121 46 120,848 -- -- -- 120,894
Issuance of common stock upon exercise of
warrants....................................... 451,782 5 102 -- -- -- 107
Issuance of common stock through Employee
Stock Purchase Plan............................ 69,642 -- 1,269 -- -- -- 1,269
Income tax benefit of disqualified dispositions
of stock options............................... -- -- 171 -- -- -- 171
Foreign currency translation adjustment......... -- -- -- -- -- (3,048) (3,048)
Accrued interest on stockholder receivables..... -- -- -- (33) -- -- (33)
Repayment, net, of stockholder receivables...... -- -- -- 595 -- -- 595
Net income...................................... -- -- -- -- 20,204 -- 20,204
---------- ---- -------- ----- --------- ------- ---------
Balance, December 31, 2000........................ 44,328,371 443 468,256 (104) (329,150) (3,048) 136,397
Issuance of common stock upon exercise of
stock options.................................. 531,743 6 3,132 -- -- -- 3,138
Issuance of common stock in follow-on
offering, net of offering costs of $4,369...... 3,000,000 30 66,101 -- -- -- 66,131
Issuance of common stock through Employee
Stock Purchase Plan............................ 90,772 1 1,131 -- -- -- 1,132
Foreign currency translation adjustment......... -- -- -- -- -- (1,973) (1,973)
Accrued interest on stockholder receivables..... -- -- -- (8) -- -- (8)
Increase in stockholders receivable............. -- -- -- (600) -- -- (600)
Cumulative adjustment to reflect adoption of
SFAS No. 133................................... -- -- -- -- -- (1,150) (1,150)
Unrealized gain on interest rate swap
agreements, net of income tax effect........... -- -- -- -- -- 1,810 1,810
Unrealized holding gain on marketable
securities..................................... -- -- -- -- -- 50 50
Income tax benefit of disqualified dispositions
of stock options............................... -- -- 2,391 -- -- -- 2,391
Compensation charge for stock option
modification................................... -- -- 204 -- -- -- 204
Net loss........................................ -- -- -- -- (85,050) -- (85,050)
---------- ---- -------- ----- --------- ------- ---------
Balance, December 31, 2001........................ 47,950,886 $480 $541,215 $(712) $(414,200) $(4,311) $ 122,472
========== ==== ======== ===== ========= ======= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
DDi CAPITAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
-------------------------------
1999 2000 2001
-------- --------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................................................... $(14,116) $ 23,192 $ (85,002)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Restructuring and other related charges................................................. 7,000 -- 77,018
Depreciation............................................................................ 14,413 16,690 17,088
Amortization of debt issuance costs and discount........................................ 10,931 11,073 5,186
Amortization of goodwill and intangible assets.......................................... 22,262 19,474 17,681
Amortization of deferred interest rate swap income...................................... (724) (1,020) (1,351)
Write-off of debt issuance costs........................................................ -- 3,524 4,788
Write-off of deferred swap income....................................................... -- (1,190) --
Deferred income taxes................................................................... (6,462) (10,829) (17,370)
Interest rate swap valuation........................................................... -- -- 9,981
Gain on sale of fixed assets........................................................... -- -- (32)
Change in operating assets and liabilities, net of acquisitions:
(Increase) decrease in accounts receivable.............................................. (7,703) (36,368) 59,325
(Increase) decrease in inventories...................................................... (9,813) (564) 7,815
(Increase) decrease in prepaid expenses and other....................................... (1,497) (883) 262
Increase (decrease) in current income taxes............................................. 4,687 15,361 (6,913)
Increase (decrease) in accounts payable................................................. 3,227 6,630 (15,320)
Increase (decrease) in accrued expenses and other accrued liabilities................... 2,607 15,961 (25,519)
-------- --------- ----------
Net cash provided by operating activities............................................ 24,812 61,051 47,637
-------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements......................................... (18,225) (24,016) (24,670)
Proceeds from sale of fixed assets........................................................ -- -- 142
Purchase of marketable securities--available for sale..................................... -- -- (51,758)
Proceeds from sale of marketable securities--available for sale........................... -- -- 29,922
Merger and acquisition-related expenditures............................................... (323) -- (535)
Acquisition of Automata................................................................... -- (19,676) --
Acquisition of Golden, net of cash acquired of $722....................................... -- (12,473) --
Acquisition of Olympic.................................................................... -- -- (12,757)
Acquisition of Nelco...................................................................... -- -- (2,963)
Acquisition of Altatron, net of cash acquired of $81...................................... -- -- (4,786)
-------- --------- ----------
Net cash used in investing activities................................................ (18,548) (56,165) (67,405)
-------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt................................................................ (3,263) (140,588) (150,875)
Net repayments on revolving credit facility............................................... (7,000) -- (186)
Payments of debt issuance and capital costs............................................... -- (742) (3,915)
Payments of other notes payable........................................................... (2,569) (2,473) (1,028)
Principal payments on capital lease obligations........................................... (1,016) (1,553) (1,810)
Capital contribution from parent, net..................................................... 261 182,759 157,623
Payments of escrow payable to redeemed stockholders....................................... -- (1,267) (1,602)
Proceeds from (payments for) interest rate swaps.......................................... 6,062 (2,037) --
Payments from stockholder receivables..................................................... -- -- (487)
-------- --------- ----------
Net cash provided by (used in) financing activities.................................. (7,525) 34,099 (2,280)
-------- --------- ----------
Effect of exchange rate changes on cash................................................... -- -- (12)
-------- --------- ----------
Net increase (decrease) in cash and cash equivalents......................................... (1,261) 38,985 (22,060)
Cash and cash equivalents, beginning of year................................................. 1,905 644 39,629
-------- --------- ----------
Cash and cash equivalents, end of year....................................................... $ 644 $ 39,629 $ 17,569
======== ========= ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
DDi CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
------------------------------
1999 2000 2001
-------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................................... $(17,433) $ 20,204 $ (85,050)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Restructuring and other related charges....................................... 7,000 -- 77,328
Depreciation.................................................................. 14,413 18,730 21,156
Amortization of debt issuance costs and discount.............................. 16,226 14,298 5,668
Amortization of goodwill and intangible assets................................ 22,262 22,806 22,568
Amortization of deferred interest rate swap income............................ (724) (1,020) (1,351)
Write-off of debt issuance costs.............................................. -- 4,165 4,788
Write-off of deferred swap income............................................. -- (1,190) --
Deferred income taxes......................................................... (8,892) (12,673) (18,298)
Interest income on stockholder receivables.................................... (34) (33) (8)
Interest rate swap valuation.................................................. -- -- 9,981
Gain on sale of fixed assets.................................................. -- -- (26)
Change in operating assets and liabilities, net of acquisitions:
(Increase) decrease in accounts receivable.................................... (7,703) (34,953) 61,954
(Increase) decrease in inventories............................................ (9,813) (1,212) 5,972
Increase in prepaid expenses and other........................................ (1,066) (936) (668)
Increase (decrease) in current income taxes................................... 4,687 12,171 (7,582)
Increase (decrease) in accounts payable....................................... 3,227 8,021 (16,754)
Increase (decrease) in accrued expenses and other accrued liabilities......... 2,662 16,453 (23,854)
-------- --------- ---------
Net cash provided by operating activities.................................... 24,812 64,831 55,824
-------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements............................... (18,225) (27,214) (35,158)
Proceeds from sale of fixed assets.............................................. -- -- 142
Purchase of marketable securities--available for sale........................... -- -- (51,758)
Proceeds from sale of marketable securities--available for sale................. -- -- 29,922
Merger and acquisition-related expenditures..................................... (323) -- (535)
Acquisition of MCM, net of cash acquired of $7,794.............................. -- (2,599) (89)
Acquisition of Automata......................................................... -- (19,676) --
Acquisition of Golden, net of cash acquired of $722............................. -- (12,473) --
Acquisition of Olympic.......................................................... -- -- (12,757)
Acquisition of Nelco............................................................ -- -- (2,963)
Acquisition of Altatron, net of cash acquired of $81............................ -- -- (4,786)
Acquisition of Thomas Walter.................................................... -- -- (24,787)
-------- --------- ---------
Net cash used in investing activities........................................ (18,548) (61,962) (102,769)
-------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt........................................ -- -- 100,000
Payments on long-term debt...................................................... (3,263) (207,536) (155,547)
Net borrowings (repayments) on revolving credit facilities...................... (7,000) -- 2,750
Payments of debt issuance and capital costs..................................... -- (742) (7,896)
Payments of other notes payable................................................. (2,569) (2,473) (1,028)
Principal payments on capital lease obligations................................. (1,016) (1,902) (2,789)
Payments of escrow payable to redeemed stockholders............................. -- (1,267) (1,602)
Repayment/(borrowing) of stockholder receivables................................ 16 595 (600)
Proceeds from (payments for) interest rate swaps................................ 6,062 (2,037) --
Net proceeds from issuance of common stock through initial public offering...... -- 156,660 --
Costs incurred in connection with the issuance of common stock through initial
public offering............................................................... -- (3,638) --
Net proceeds from issuance of common stock through follow-on public offerings... -- 122,000 66,975
Costs incurred in connection with the issuance of common stock through follow-on
public offerings.............................................................. -- (1,106) (844)
Issuance of common stock through Employee Stock Purchase Plan................... -- 1,270 1,132
Proceeds from exercise of stock options......................................... 45 1,375 3,138
-------- --------- ---------
Net cash provided by (used in) financing activities.......................... (7,725) 61,199 3,689
-------- --------- ---------
Effect of exchange rate changes on cash......................................... -- 2,158 11
-------- --------- ---------
Net increase (decrease) in cash and cash equivalents......................... (1,461) 66,226 (43,245)
Cash and cash equivalents, beginning of year..................................... 2,109 648 66,874
-------- --------- ---------
Cash and cash equivalents, end of year........................................... $ 648 $ 66,874 $ 23,629
======== ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
DDi CORP. AND DDi CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
Basis of Presentation
The consolidated financial statements for DDi Corp. ("DDi Corp.") include
the accounts of its wholly-owned subsidiaries, DDi Intermediate Holdings Corp.
("Intermediate") and its subsidiaries and DDi Europe Limited ("DDi Europe"
f/k/a MCM Electronics Limited ("MCM")). The consolidated financial statements
for DDi Capital Corp. ("DDi Capital"), a wholly-owned subsidiary of
Intermediate, includes the accounts of its wholly-owned subsidiary Dynamic
Details, Incorporated and its subsidiaries ("Dynamic Details"). Collectively,
DDi Corp. and its subsidiaries are referred to as the "Company."
As more fully described in Note 14, the consolidated financial statements of
DDi Corp. include the results of MCM commencing on April 14, 2000, the date of
acquisition of MCM, Automata International, Inc. ("Automata") commencing on
August 4, 2000, the date of the acquisition of Automata's assets, Golden
Manufacturing, Inc. ("Golden") commencing on September 15, 2000, the date of
the acquisition of Golden's assets, Thomas Walter Limited ("Thomas Walter")
commencing on March 5, 2001, the date of acquisition of Thomas Walter, Nelco
Technology, Inc. ("Nelco") commencing on April 27, 2001, the date of
acquisition of Nelco's assets, Olympic Circuits Canada ("Olympic") commencing
on May 9, 2001, the date of acquisition of Olympic and Altatron Technology Inc.
("Altatron") commencing on June 4, 2001, the date of acquisition of Altatron's
assets. All intercompany transactions have been eliminated in consolidation.
Recapitalization--In October 1997, the Company completed a recapitalization
transaction with a group of investors. The historical bases of the Company's
assets and liabilities were not affected.
In connection with the recapitalization, DDi Corp. incorporated Dynamic
Details, Incorporated ("Dynamic Details") as a wholly-owned subsidiary and
contributed substantially all of its assets, subject to certain liabilities, to
Dynamic Details. In November 1997, DDi Corp. organized DDi Capital Corp. ("DDi
Capital") as a wholly-owned subsidiary, and in February 1998, contributed
substantially all its assets (including all of the shares of common stock of
Dynamic Details), subject to certain liabilities, including discount notes (as
described in Note 6, the "Capital Senior Discount Notes"), to DDi Capital. In
July 1998, DDi Corp. organized Intermediate as a wholly-owned subsidiary and
contributed all of the shares of common stock of DDi Capital to Intermediate.
In April 2000, DDi Corp. acquired MCM, (see Note 14) and has subsequently
combined MCM with its other European operations to form DDi Europe Limited
("DDi Europe"). DDi Europe, Dynamic Details and Dynamic Details Design LLC, a
wholly-owned subsidiary of Intermediate formed in 1998, represent the operating
divisions of DDi Corp.
Reclassification--Concurrent with the closing of DDi Corp.'s initial public
offering on April 14, 2000 (see Note 18), each share of Class L common stock
was reclassified into one share of Class A common stock plus an additional
number of shares of Class A common stock (determined by dividing the preference
amount of such per share by the initial public offering price of $14.00 per
share). Class A and Class L common stock share ratably in the net income (loss)
remaining after giving effect to the 12% yield on the Class L common stock.
Each share of Class A common stock was then converted into 2.8076 shares of new
common stock when DDi Corp. reincorporated in the state of Delaware. All
periods presented have been retroactively adjusted for the effect of the
reclassification and stock split.
Liquidity--Based on the Company's current level of operations, management
believes that cash, cash equivalents, marketable securities, cash generated
from operations and amounts available under its Senior Credit Facility (as
defined in Note 6) will be adequate to meet its debt service requirements,
capital expenditures and working capital needs for the foreseeable future.
F-11
DDi CORP. AND DDi CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
Nature of Business
The Company provides technologically advanced, time-critical electronics
design, development and manufacturing services to original equipment
manufacturers and other providers of electronics manufacturing services. The
Company serves over 2,000 customers in the communications, networking,
computer, medical, automotive industrial and aerospace industries.
2. SIGNIFICANT ACCOUNTING POLICIES
The preparation of the Company's consolidated financial statements, in
accordance with accounting principles generally accepted in the United States
of America, requires the Company to make estimates and judgments that affect
the reported amount of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amount of revenues and expenses for each period. The Company bases its
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions.
Cash and cash equivalents--Management defines cash and cash equivalents as
highly liquid deposits with maturities of 90 days or less when purchased. The
Company maintains cash and cash equivalents balances at certain financial
institutions in excess of amounts insured by federal agencies. Management does
not believe that as a result of this concentration it is subject to any unusual
financial risk beyond the normal risk associated with commercial banking
relationships.
Marketable securities--The Company classifies its existing marketable equity
securities as available-for-sale in accordance with the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." These securities, consisting of
government and agency bonds and corporate bonds, are carried at fair market
value, with unrealized gains and losses reported in stockholders' equity as a
component of accumulated other comprehensive income (loss). Realized gains or
losses on securities sold are based on the specific identification method.
Inventories--Inventories include freight-in, materials, labor and
manufacturing overhead costs and are stated at the lower of cost or market.
Cost is determined using the first-in, first-out (FIFO) method.
Property, plant and equipment--Property, plant and equipment are stated at
cost or in the case of property, plant and equipment acquired through business
combinations, at fair value based upon allocated purchase price at the
acquisition date. Depreciation is provided over the estimated useful lives of
the assets using both the straight-line and accelerated methods. For leasehold
improvements, amortization is provided over the shorter of the estimated useful
lives of the assets or the lease term and included in the caption depreciation
expense.
Debt issuance costs and debt discounts--The Company defers certain debt
issuance costs relating to the establishment of its various debt facilities and
the issuance of its debt instruments (see Note 6). These costs are capitalized
and amortized over the expected term of the related indebtedness using the
effective interest method.
The Company issued the Capital Senior Discount Notes (as defined in Note 6)
at a discount. Discounts are reflected in the accompanying balance sheets as a
reduction of face value and are amortized over the expected term of the related
indebtedness using the effective interest method. Amortization included as
interest expense
F-12
DDi CORP. AND DDi CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
for DDi Capital amounted to approximately $8.9 million, $9.2 million and $3.1
million for the years ended December 31, 1999, 2000 and 2001, respectively.
Amortization included as interest expense for DDi Corp. amounted to
approximately $14.1 million, $12.4 million and $3.1 million for the years ended
December 31, 1999, 2000 and 2001, respectively.
Business combinations--The Company has accounted for all business
combinations through December 31, 2001 as purchases in accordance with
Accounting Principles Board Opinion No. 16, and accordingly, the results of
operations since the date of acquisition are included in the consolidated
financial statements.
Goodwill and identifiable intangibles--The Company amortizes the goodwill
recorded as a result of its business combinations on a straight-line basis
ranging from 20 years to 25 years, from the date of each transaction.
Management believes that the estimated useful lives established at the dates of
each transaction were reasonable based on the economic factors applicable to
each of the businesses. Identifiable intangibles represent assets acquired
through business combinations, and are stated at their fair values based upon
purchase price allocations as of the transaction date. At December 31, 2000 and
2001, these assets are primarily comprised of developed technologies, customer
relationships/tradenames, and assembled workforce. The developed technology
assets are being charged to income over their estimated useful lives ranging
from 5 to 10 years, using straight-line and accelerated methods of
amortization, reflective of the relative contribution of each developed
technology in periods following the acquisition date. The customer
relationships/tradenames assets are being amortized on a straight-line basis
over their estimated useful lives of 18 years. The assembled workforce assets
are being amortized on a straight-line basis over their estimated useful lives
ranging from 4 to 5 years. As of December 31, 2000 and 2001, the accumulated
amortization related to goodwill and identifiable intangibles for DDi Capital
was approximately $52.6 million and $59.6 million, respectively. As of December
31, 2000 and 2001, the accumulated amortization related to goodwill and
identifiable intangibles for DDi Corp. was approximately $55.9 million and
$67.7 million, respectively.
Revenue recognition--The Company recognizes revenue when there is persuasive
evidence of an arrangement with the customer which states a fixed and
determinable sales price and terms, delivery of the product has occurred in
accordance with the terms of the sale and collectibility of the sale is
reasonably assured. The Company provides a normal warranty on its products and
accrues an estimated amount for this expense at the time of the sale.
Comprehensive Income--SFAS No. 130 "Reporting Comprehensive Income"
establishes requirements for reporting and disclosure of comprehensive income
(loss) and its components. Comprehensive income (loss) includes unrealized
holding gains and losses and other items that have previously been excluded
from net income and reflected instead in stockholders' equity. Comprehensive
income (loss) for DDi Capital and DDi Corp. consists of net income (loss) plus
the effect of foreign currency translation adjustments, unrealized holding
gains on marketable securities classified as available-for-sale and unrealized
net gains (losses) on interest rate swaps and related unrealized net tax impact.
The Company adopted SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities" on January 1, 2001 (see Note 8). In accordance with the
transition provisions of SFAS No. 133, DDi Capital and DDi Corp. recorded a
cumulative-effect-type adjustment to accumulated other comprehensive income
(loss) for the initial difference between the book value and fair value of
interest rate swap agreements as of January 1, 2001.
Concentration of credit risk--Financial instruments which potentially expose
the Company to concentration of credit risk consist principally of trade
accounts receivable. To minimize this risk, the Company performs
F-13
DDi CORP. AND DDi CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
ongoing credit evaluations of customers' financial condition and maintains
contacts with its customers which allows the Company to monitor current changes
in business operations so it can respond as needed; the Company, however,
generally does not require collateral. In 2001, no individual customer
accounted for 10% or more of the Company's net sales and no individual customer
accounted for 10% or more of the Company's total receivables. In 2000, one
individual customer accounted for 11% of DDi Corp.'s net sales. As of December
31, 2000, one individual customer accounted for 17% of the Company's total
receivables.
Environmental matters--The Company expenses environmental expenditures
related to existing conditions resulting from past or current operations and
from which no current or future benefit is discernible. Expenditures which
extend the life of the related property or mitigate or prevent future
environmental contamination are capitalized. The Company determines its
liability on a site-by-site basis and records a liability at the time when it
is probable and can be reasonably estimated. To date, such costs have not been
material (see Note 13).
Income taxes--The Company records on its balance sheet deferred tax assets
and liabilities for expected future tax consequences of events that have been
recognized in different periods for financial statement purposes versus tax
return purposes. Management provides a valuation allowance for net deferred tax
assets when it is more likely than not that a portion of such net deferred tax
assets will not be recovered through future operations (see Note 12). DDi
Capital is included as part of the consolidated tax return filed by DDi Corp.
For financial statement purposes, DDi Capital has provided for income taxes as
if it were filing separately throughout each year.
Long-lived assets--The Company follows SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
SFAS No. 121 requires that long-lived assets, including goodwill, be reviewed
for impairment whenever events or circumstances indicate that the carrying
amount of an asset may not be recoverable. The Company evaluates potential
impairment by comparing the carrying amount of the assets with the estimated
undiscounted cash flows associated with them. If an impairment exists, the
Company measures the impairment utilizing discounted cash flows.
During the year ended December 31, 2001, pursuant to an evaluation under
SFAS No. 121, the Company determined that the intangibles associated with the
two facilities to be closed in connection with the Company's 2001 restructuring
plan (see Note 15) have a fair value of zero. The Company estimated the amount
of the impairment by comparing the discounted cash flows expected to be
generated from the assets of the closed facilities to their carrying value. As
a result, the Company recorded an adjustment to the carrying value of these
intangible assets of $51.4 million to restructuring and related charges in the
fourth quarter of 2001.
Foreign currency translation--The Company has designated local currency as
the functional currency for its foreign subsidiaries. Accordingly, the assets
and liabilities of foreign subsidiaries are translated at the rates of exchange
at the balance sheet date. The income and expense items of these subsidiaries
are translated at average monthly rates of exchange. The resulting translation
gains and losses are included as a component of stockholders' equity on the
consolidated balance sheet. The impact of these translation gains and losses on
comprehensive income loss are included on the consolidated statement of
comprehensive income (loss).
Derivative financial instruments--The Company has only limited involvement
with derivative financial instruments. From October 1998 through December 31,
2001 the Company utilized interest rate exchange agreements ("Swap Agreements")
(see Note 8) to reduce the risk of fluctuations in interest rates applicable to
its Senior Term Facility (see Note 6).
F-14
DDi CORP. AND DDi CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
On January 1, 2001, the Company adopted SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities." In accordance with the
transition provisions of SFAS No. 133, DDi Capital and DDi Corp. recorded a
cumulative-effect-type adjustment to accumulated other comprehensive income
(loss) of approximately $0.6 million and $1.2 million, respectively, for the
initial difference between the book value and fair value of interest rate swap
agreements as of January 1, 2001. The fair value of interest rate swaps at
December 31, 2001 is included in accrued expenses and other long-term
liabilities in the consolidated balance sheets.
Stock options--The Company has adopted SFAS No. 123, "Accounting for
Stock-Based Compensation," which establishes a fair value based method of
accounting for compensation cost related to stock option plans and other forms
of stock-based compensation plans. The Company has elected to provide the pro
forma disclosures as if the fair value based method had been applied. In
accordance with SFAS No. 123, the Company applies the intrinsic value based
method of accounting defined under Accounting Principles Board Opinion No. 25
("APB Opinion No. 25"), and accordingly, does not recognize compensation
expense for its plans to the extent employee options are issued at exercise
prices equal to or greater than the fair market value at the date of grant.
Basic and diluted earnings per share--The Company has adopted the provisions
of SFAS No. 128 "Earnings Per Share," which requires the Company to report both
basic net income (loss) per share, which is based on the weighted average
number of common shares outstanding, excluding contingently issuable shares
such as the Class L common stock that were contingently convertible into common
stock upon certain events, and diluted net income (loss) per share, which is
based on the weighted average number of common shares outstanding and dilutive
potential common shares outstanding.
Prior to the initial public offering (see Note 1 and Note 18), the Company
had two classes of common stock, Class A common stock ("Class A common") and
Class L common stock ("Class L common"). Class L common was identical to Class
A common, except that each share of Class L common was entitled to a
preferential payment upon any distribution by the Company equal to the original
cost of such share ($364.09) plus an amount which accrues from the original
issuance date on a daily basis at 12% per annum, compounded quarterly. After
payment of this preference amount, each share of Class A common and Class L
common would then share equally in all distributions.
There were 396,330 Class L common shares issued and outstanding at December
31, 1999. The stated values for Class L common was $147,216 at December 31,
1999. The Class L common liquidation preference was $179,996 at December 31,
1999.
F-15
DDi CORP. AND DDi CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
The following is a reconciliation of the numerator and denominator used in
the primary and diluted income (loss) per share calculation:
Year Ended December 31,
------------------------------------
1999 2000 2001
---------- ----------- -----------
Numerator:
Income (loss) before extraordinary item......................... $ (17,433) $ 26,571 $ (73,101)
Priority distribution due shares of Class L common stock........ (14,112) (4,356) --
---------- ----------- -----------
Income (loss) allocable to common stock......................... (31,545) 22,215 (73,101)
Extraordinary item.............................................. -- (6,367) (11,949)
---------- ----------- -----------
Net income (loss) allocable to common stock..................... $ (31,545) $ 15,848 $ (85,050)
========== =========== ===========
Denominator:
Weighted average shares of common stock outstanding (basic)..... 9,831,042 31,781,536 47,381,516
Dilutive potential common shares:
Stock options and warrants...................................... -- 1,738,911 --
---------- ----------- -----------
Shares used in computing diluted income (loss) per share........ 9,831,042 33,520,447 47,381,516
========== =========== ===========
As a result of the loss before extraordinary item, after deducting priority
distributions of Class L common stock, incurred during the years ended December
31, 1999 and 2001 all potential common shares were anti-dilutive and excluded
from the diluted net loss per share calculation for those periods.
Segment reporting--The Company has adopted the provisions of SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 established standards for reporting information about operating segments in
annual financial statements and requires selected information about operating
segments in interim financial reports issued to stockholders. It also
established standards for related disclosures about products and services,
geographic areas and major customers. Operating segments are defined as
components of an enterprise that engages in business activities from which it
may earn revenues and incur expenses whose separate financial information is
available and is evaluated regularly by the Company's chief operating decision
makers, or decision making group, to perform resource allocations and
performance assessments.
The Company's chief operating decision maker is the Chief Executive Officer.
Based on the evaluation of the Company's financial information, management
believes that the Company operates in one reportable segment which designs,
develops, manufactures, assembles and tests complex printed circuit boards,
back panels and related electronic products. The Company operates in two
geographical areas, domestic (U.S.A.) and international. Revenues are
attributed to the country to which the product is sold. Revenues by product and
service are not reported as it is impracticable to do so. During the years
ended December 31, 1999, 2000 and 2001 there were no material assets in or
revenues realized from any individual foreign country.
F-16
DDi CORP. AND DDi CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
The following summarizes financial information by geographic area for DDi
Corp.:
Year ended December 31,
--------------------------
1999 2000 2001
-------- -------- --------
Net sales:
Domestic............................ $275,406 $408,151 $262,938
Europe.............................. 9,161 67,503 84,433
Other............................... 7,926 22,011 14,267
-------- -------- --------
Total........................... $292,493 $497,665 $361,638
======== ======== ========
Net sales by geographic area for DDi Capital for the years ended December
31, 1999, 2000 and 2001 are the same except the sales to Europe were $18,195
and $7,495 for the years ended December 31, 2000 and 2001, respectively.
December 31,
-----------------
2000 2001
-------- --------
Long-lived assets:
Domestic...................................... $290,582 $222,101
International................................. 76,064 115,914
-------- --------
Total..................................... $366,646 $338,015
======== ========
Long-lived assets for DDi Capital at December 31, 2000 consist only of the
domestic long-lived assets. Long-lived assets for DDi Capital at December 31,
2001 consist of $218,603 in domestic long-lived assets and $13,212 in
international long-lived assets.
Reclassifications--Certain prior year amounts have been reclassified to
conform with the 2001 presentation.
Recently issued accounting standards--In June 2001, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 141 and No. 142. SFAS No. 141
"Business Combinations" requires that the purchase method of accounting be used
for all business combinations, establishes specific criteria for recognizing
intangible assets separately from goodwill and requires certain disclosures
regarding reasons for a business combination and the allocation of the purchase
price paid. SFAS No. 141 is effective for all business combinations initiated
after June 30, 2001 and for all business combinations accounted for using the
purchase accounting method for which the date of acquisition is after June 30,
2001. SFAS No. 142 "Goodwill and Other Intangible Assets" establishes that
goodwill and certain intangible assets will not be amortized and the
amortization period of certain other intangible assets will no longer be
limited to forty years. In addition, SFAS No. 142 requires that goodwill and
intangible assets that are not amortized be tested for impairment at least
annually. SFAS No. 142 is effective in fiscal years beginning after December
15, 2001. For acquisitions effective before June 30, 2001, the Company will
adopt both SFAS No. 141 and No. 142 on January 1, 2002. The Company will
implement SFAS No. 141 and SFAS No. 142 for any acquisitions occurring after
June 30, 2001. As part of the adoption of SFAS No. 142 on January 1, 2002, the
Company will no longer amortize goodwill or intangible assets with indefinite
lives related to existing goodwill and intangible assets. The Company is
currently evaluating the impact of the adoption of SFAS No. 142 on its
consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting
and reporting for the impairment or disposal of
F-17
DDi CORP. AND DDi CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
long-lived assets. SFAS No. 144 develops one accounting model for long-lived
assets that are to be disposed of by sale, requires that long-lived assets that
are to be disposed by sale be measured at the lower of book value or fair value
less cost to sell and expands the scope of discontinued operations to include
all components of an entity with operations that (1) can be distinguished from
the rest of the entity and (2) will be eliminated from the ongoing operations
of the entity in a disposal transaction. SFAS No. 144 is effective for all
fiscal years beginning after December 15, 2001 and is therefore effective for
the Company beginning with its fiscal quarter ending March 31, 2002. The
Company is currently evaluating the impact of the adoption of SFAS No. 144 on
its consolidated financial statements.
3. ACCOUNTS RECEIVABLE
Accounts receivable, net consist of the following:
DDi Capital DDi Corp.
------------------------ ------------------------
December 31, December 31, December 31, December 31,
2000 2001 2000 2001
------------ ------------ ------------ ------------
Accounts receivable........................... $ 99,734 $34,662 $112,705 $47,549
Less: Allowance for doubtful accounts......... (11,874) (4,277) (12,877) (5,001)
-------- ------- -------- -------
$ 87,860 $30,385 $ 99,828 $42,548
======== ======= ======== =======
4. INVENTORIES
Inventories consist of the following:
DDi Capital DDi Corp.
------------------------- -------------------------
December 31, December 31, December 31, December 31,
2000 2001 2000 2001
------------ ------------ ------------ ------------
Raw materials................................. $ 9,970 $ 9,868 $12,561 $14,325
Work-in-process............................... 12,117 3,493 14,667 6,840
Finished goods................................ 2,737 1,835 3,062 2,865
------- ------- ------- -------
$24,824 $15,196 $30,290 $24,030
======= ======= ======= =======
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
DDi Capital DDi Corp.
------------------------ ------------------------
December 31, December 31, December 31, December 31,
2000 2001 2000 2001
------------ ------------ ------------ ------------
Buildings and leasehold improvements... $ 18,497 $ 23,557 $ 20,644 $ 28,695
Machinery and equipment................ 101,141 93,810 120,253 138,428
Office furniture and equipment......... 16,179 17,043 19,535 21,494
Vehicles............................... 334 269 1,157 878
Land................................... 2,235 2,235 2,235 2,235
Deposits on equipment.................. 2,336 554 2,390 554
-------- -------- -------- --------
140,722 137,468 166,214 192,284
Less: Accumulated depreciation......... (59,794) (58,334) (73,488) (85,415)
-------- -------- -------- --------
$ 80,928 $ 79,134 $ 92,726 $106,869
======== ======== ======== ========
F-18
DDi CORP. AND DDi CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
The depreciable lives assigned to buildings are 30-40 years. Existing
leasehold improvements are depreciated over 7-15 years. Machinery, office
furniture, equipment and vehicles are each depreciated over 3-7 years. Deposits
are not depreciated as the related asset has not been placed into service.
Buildings and leasehold improvements include capital leases of approximately
$5.1 million with related accumulated depreciation of $2.5 million and $3.0
million at December 31, 2000 and 2001, respectively. DDi Capital machinery and
equipment includes capital leases of approximately $6.5 million and
$4.9 million, with related accumulated depreciation of $2.3 million and $2.7
million at December 31, 2000 and 2001, respectively. DDi Corp. machinery and
equipment includes capital leases of approximately $7.2 million and $7.8
million, with related accumulated depreciation of $2.8 million and $3.6 million
at December 31, 2000 and 2001, respectively.
The land and building associated with the closure of the Garland, Texas
facility (see Note 15) held for sale by the Company has a book value of
approximately $6.4 million with related accumulated depreciation of
$0.3 million. Depreciation of the building was discontinued in October 2001.
6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consist of the following:
December 31, 2000 December 31, 2001
------------------ ------------------
DDi DDi DDi DDi
Capital Corp. Capital Corp.
-------- -------- -------- --------
Senior Term Facility...................................................... $147,743 $147,743 $135,819 135,819
10.0% Senior Subordinated Notes........................................... 100,000 100,000 -- --
5.25% Convertible Subordinated Notes...................................... -- -- -- 100,000
12.5% Capital Senior Discount Notes, face amount of $63,000 and $16,090 at
December 31, 2000 and 2001, respectively, net of unamortized discount of
$12,689 and $1,612 at December 31, 2000 and 2001, respectively........... 50,311 50,311 14,478 14,478
DDi Europe Facilities Agreement........................................... -- 27,249 -- 21,840
Capital lease obligations................................................. 7,399 7,940 5,869 6,685
-------- -------- -------- --------
Sub-total............................................................ 305,453 333,243 156,166 278,822
Less current maturities................................................... (13,656) (16,935) (17,184) (17,845)
-------- -------- -------- --------
Total................................................................ $291,797 $316,308 $138,982 $260,977
======== ======== ======== ========
Senior Credit Facility
In connection with the merger with Dynamic Circuits, Inc. ("DCI") (see Note
14), Dynamic Details entered into an agreement with a co-syndication of banks,
including JPMorgan Chase Bank (formerly Chase Manhattan Bank, N.A.) and Bankers
Trust Company. Borrowings under this agreement consist of the Senior Term
Facility and the Revolving Credit Facility (collectively, the "Senior Credit
Facility"). Under the terms of this agreement, Dynamic Details must comply with
certain restrictive covenants, which include the requirement that Dynamic
Details meet certain financial tests. In addition, Dynamic Details is
restricted from making certain payments, including dividend payments to its
stockholders. The Senior Credit Facility is jointly and severally guaranteed by
Intermediate and DDi Capital, and is collateralized by a pledge of
substantially all of the capital stock of Dynamic Details and certain of its
subsidiaries. The Senior Credit Facility expires in April 2005.
F-19
DDi CORP. AND DDi CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
Senior Term Facility
Under the Senior Term Facility, $255.0 million ($105.0 million under Tranche
A and $150.0 million under Tranche B) was advanced to Dynamic Details in
connection with the merger with DCI (see Note 14) on July 23, 1998. Scheduled
principal and interest payments are due quarterly beginning June 30, 1999
(other than with respect to the last installment, which is due on July 22, 2004
and April 22, 2005 for Tranche A and Tranche B, respectively). Borrowings under
the Senior Term Facility bear interest at a floating rate at the Company's
option at a rate equal to either (1) 3.00%, for Tranche A, and 4.00%, for
Tranche B, per annum plus the applicable LIBOR rate or (2) 2.00%, for Tranche
A, and 3.00%, for Tranche B, per annum plus the higher of (a) the applicable
prime lending rate of JPMorgan Chase Bank (4.75% at December 31, 2001) or (b)
the federal reserve reported overnight funds rate plus 1/2 of 1% per annum
(the "Index Rate"). The applicable margin of 3.00% for Tranche A is subject to
reduction in accordance with an agreed upon pricing grid based on decreases in
the Company's consolidated leverage ratio, defined as consolidated total debt
to consolidated EBITDA (earnings before net interest expense, income taxes,
depreciation, amortization and extraordinary or non-recurring expenses). As of
December 31, 2001, the Company elected the LIBOR rate (1.9% at December 31,
2001), reset monthly. The overall effective interest rate for the Senior Term
Facility, after giving effect to the interest rate swap agreement (see Note 8),
as of December 31, 2001, was 8.05%.
In April 2000, the Company used a portion of the proceeds from DDi Corp.'s
initial public offering (see Note 18) to repay $100.0 million of the Senior
Term Facility. The balance at December 31, 2000 and 2001 was $147.7 million and
$135.8 million, respectively.
Revolving Credit Facility
Dynamic Details also has a $75.0 million Revolving Credit Facility for
revolving credit loans, letters of credit and swing line loans which expires on
July 22, 2004. Advances under the Revolving Credit Facility bear interest at
the Company's option at a rate equal to either (1) 3.00% per annum plus the
applicable LIBOR rate or (2) 2.00% per annum plus the Index Rate. In addition,
Dynamic Details is required to pay a fee of 1/2 of 1% per annum on the average
unused commitment under the Revolving Credit Facility. Access to the full
amount of the Revolving Credit Facility is subject to conditions set forth in
the agreement and is currently limited to $37.5 million until mid-2003. At
December 31, 1999 and 2000, Dynamic Details had no borrowings outstanding on
this Revolving Credit Facility and had $0.7 million reserved against the
Revolving Credit Facility for a letter of credit, leaving $36.8 million
available for borrowings. As of December 31, 2001, the Company elected the
LIBOR rate (1.9% at December 31, 2001), reset monthly.
Senior Subordinated Notes
On November 18, 1997, Dynamic Details issued $100 million of Senior
Subordinated Notes. The Senior Subordinated Notes bear interest at 10% per
annum, payable semi-annually in arrears on each May 15 and November 15 of each
year, through the maturity date on November 15, 2005.
On February 14, 2001, DDi Corp. and some of its shareholders completed a
follow-on public offering of 6,000,000 shares of its common stock, with
3,000,000 shares issued by DDi Corp. and the remainder sold by selling
shareholders. Concurrently, DDi Corp. issued 5.25% Convertible Subordinated
Notes due March 1, 2008 with an aggregate principal of $100.0 million. The net
proceeds of both transactions were used to repurchase all of the Dynamic
Details Senior Subordinated Notes.
Convertible Subordinated Notes
On February 14, 2001, DDi Corp. issued 5.25% Convertible Subordinated Notes
due March 1, 2008 with an aggregate principal of $100.0 million. These notes
are convertible at any time prior to maturity into shares of
F-20
DDi CORP. AND DDi CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
common stock at a conversion price of $30.00 per share, subject to certain
adjustments. These notes generated proceeds of $97.0 million, net of
underwriting discounts. The net proceeds of this transaction were used to
repurchase a portion of the Capital Senior Discount Notes and the Dynamic
Details Senior Subordinated Notes.
Capital Senior Discount Notes
In November 1997, DDi Capital issued $110.0 million face amount at maturity
(net proceeds of $60.1 million) of senior discount notes ("Capital Senior
Discount Notes"), and DDi Capital later succeeded to DDi Corp. obligations
under the Capital Senior Discount Notes. The Capital Senior Discount Notes are
unsecured, senior obligations and will be effectively subordinated to all
future indebtedness and liabilities of DDi Capital's subsidiaries. The Capital
Senior Discount Notes begin bearing cash interest of 12.5% on November 15,
2002, payable each May 15 and November 15 in arrears, through the maturity date
of November 15, 2007.
Except as described below, DDi Capital may not redeem the Capital Senior
Discount Notes prior to November 15, 2002. On or after November 15, 2002, the
Capital Senior Discount Notes may be redeemed at the option of DDi Capital, in
whole or in part from time to time, at redemption prices ranging from 106.25%
of accreted principal amount in the year ended November 15, 2002 to 100% of
accreted principal amount subsequent to November 15, 2005, plus accrued and
unpaid interest.
The Capital Senior Discount Note indenture also contains covenants that
restrict the Company from incurring additional indebtedness and from making
certain payments, including dividend payments to its stockholders.
The Company repurchased a portion of the Capital Senior Discount Notes with
an aggregate principal amount at maturity of $47.0 million with a portion of
the proceeds from DDi Corp.'s October 2000 follow-on public offering (see Note
18). In April and June 2001, the Company repurchased a portion of the Capital
Senior Discount Notes, with an accreted balance of $46.9 million, for $45.5
million, using a portion of the proceeds from DDi Corp's February 2001
follow-on public offering (see Note 18). The balance at December 31, 2000 and
2001 was $50.3 million and $14.5 million, respectively.
DDi Europe Facilities Agreement
In connection with the acquisition of MCM (see Note 14), the Company assumed
MCM's remaining outstanding indebtedness under a facilities agreement dated May
27, 1999 between MCM and the Governor of the Bank of Scotland as arranger,
agent, security trustee, term loan bank and working capital bank ("the DDi
Europe Facilities Agreement"). The DDi Europe Facilities Agreement expires on
September 30, 2007 and requires DDi Europe to meet financial ratios and to
comply with other restrictive covenants. All the assets of DDi Europe are
pledged as collateral under the DDi Europe facilities agreement.
Term Loans
The DDi Europe Facilities Agreement consists of a Tranche A term loan
facility of approximately $26 million and a Tranche B term loan facility of
approximately $1 million. The Tranche A term loan facility is repayable in
quarterly installments beginning in June 2000 with the final payment payable in
September 2007. Pursuant to an amendment in November 2001, no payments are due
on the Tranche A term loan facility from October 2001 through February 2003.
The Tranche B term loan facility is repayable in full in December 2007.
Borrowings under the term loans bear interest at varying rates, comprising
LIBOR at the dates of commencement
F-21
DDi CORP. AND DDi CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
of the relevant quarterly interest period plus a margin of 1.50%. Interest
payments are due quarterly. In addition, the DDi Europe Facilities Agreement
requires payments of non-utilization fees on the average unused portion of each
of the facilities. The overall effective interest rate for the DDi Europe term
loan facilities, after giving effect to the interest rate swap agreement (see
Note 8), as of December 31, 2001, was 8.42%.
Revolving Credit Facility
The DDi Europe Facilities Agreement also contains a Revolving Credit
Facility of up to an aggregate maximum principal amount of approximately $14.6
million. The revolving credit facility is available until November 2002 and
bears interest at varying rates, comprising LIBOR at the dates of commencement
of the relevant quarterly interest period plus a margin of 1.50%. Interest
payments are due quarterly. In addition, the DDi Europe Facilities Agreement
requires payments of non-utilization fees on the average unused portion of this
facility. At December 31, 2001, DDi Europe had $3.0 million outstanding on the
DDi Europe Revolving Credit Facility leaving $11.6 million available for
borrowings.
Debt Issuance Costs
In connection with the amendments made to the Senior Credit Facility during
2000 and 2001, to allow for the use of proceeds pursuant to DDi Corp.'s public
offerings (see Note 18), DDi Capital incurred approximately $1.5 million and
$3.9 million, respectively, in fees which have been capitalized as debt
issuance costs. Accumulated amortization as of December 31, 2000 and 2001 for
DDi Capital was approximately $5.2 million and $4.8 million, respectively, and
for DDi Corp. was approximately $5.2 million and $5.4 million, respectively.
During 2000 and 2001, certain debt was retired and the net carrying amount of
the related debt issuance costs were written off, resulting in an extraordinary
loss of $2,189 and $11,949 (net of related income taxes of $1,437 and $7,640)
for DDi Capital and an extraordinary loss of $6,367 and $11,949 (net of related
income taxes of $4,207 and $7,640) for DDi Corp., respectively (see Note19).
Change of Control
Upon a change in control, as defined in the Capital Senior Discount Note
indentures, DDi Capital may redeem the Capital Senior Discount Notes, in whole,
but not in part, before November 15, 2002 at 100% of the accreted value in the
case of the Capital Senior Discount Notes, plus the applicable premium, as
defined in the Capital Senior Discount Note indentures, and accrued and unpaid
interest as of the date of redemption. In the event the Company does not elect
to redeem the notes prior to such date, each holder of the Capital Senior
Discount Notes may require DDi Capital, respectively, to repurchase all or a
portion of such holder's notes at a cash purchase price equal to 101% of the
principal amount or the accreted value, plus accrued and unpaid interest if
any, to the date of repurchase. The Senior Credit Facility provides that the
occurrence of such a change in control constitutes an event of default, which
could require the immediate repayment of Senior Credit Facility.
F-22
DDi CORP. AND DDi CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
Future Payments
As of December 31, 2001, the scheduled future annual principal payments of
long-term debt, excluding capital lease obligations (see Note 10), are as
follows:
DDi Capital DDi Corp.
----------- ---------
Year Ending December 31,
2002......................... $ 15,552 $ 15,552
2003......................... 19,338 23,706
2004......................... 43,410 47,778
2005......................... 57,519 61,887
2006......................... -- 4,368
Thereafter...................... 16,090 120,458
-------- --------
$151,909 $273,749
======== ========
7. ACCRUED EXPENSES
Accrued expenses consist of the following:
DDi Capital DDi Corp.
------------------------- -------------------------
December 31, December 31, December 31, December 31,
2000 2001 2000 2001
------------ ------------ ------------ ------------
Accrued salaries and related benefits............ $21,512 $ 6,667 $21,470 $ 6,893
Accrued interest payable......................... 1,319 54 1,319 1,862
Accrued restructuring charges.................... 475 6,092 475 6,402
Other accrued expenses........................... 11,708 4,885 16,643 12,425
Escrow payable to redeemed stockholders.......... 2,633 -- 2,633 --
------- ------- ------- -------
$37,647 $17,698 $42,540 $27,582
======= ======= ======= =======
8. DERIVATIVES
Pursuant to its interest rate risk management strategy and to certain
requirements imposed by the Company's Senior Credit Facility (see Note 6), the
Company entered into various interest rate exchange agreements ("Swap
Agreements"), effective October 1, 1998. Such agreements represented an
effective cash flow hedge of the variable rate of interest (1-month LIBOR) paid
under the Senior Term Facility, mitigating exposure to increases in interest
rates related to this debt. Under the Swap Agreements, the Company received a
variable rate of interest (1-month LIBOR) and paid a fixed rate of interest.
These rates were applied to a notional amount that resulted in the hedging of
the full principal balance under the Senior Term Facility from October 1998
through September 2000. From October 2000 through June 2001, the hedge had a
notional amount equal to 50% of the principal balance then outstanding. The
annual fixed rate of interest paid was 5.27% for October 1998 through December
1998, 4.96% for January 1999 through May 1999, 5.65% for June 1999 through
September 2000, and 6.58% from October 2000 through June 2001.
In July 2001, the Company elected to terminate and replace the Swap
Agreements then in effect. From July 2001 through October 2001, the new Swap
Agreements fixed the rate of interest to be paid on 100% of the principal
balance of the Senior Term Facility through its scheduled maturity in 2005. One
of these agreements
F-23
DDi CORP. AND DDi CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
contained a feature that precluded the agreement from being treated as an
effective cash flow hedge pursuant to SFAS No. 133. Accordingly, the change in
the fair value of such agreement of $10 million was included in the
consolidated statement of operations ("Interest rate swap valuation"). In
November 2001, the Company elected to modify its new Swap Agreements. The
agreements, as amended, qualify as effective hedges under SFAS No. 133. The
initial fair value of the amended swaps will be recognized as reductions to
periodic interest expense over their remaining term, in accordance with SFAS
No. 133. The annual fixed rate of interest paid under the Swap Agreements in
effect from July 2001 through December 2001 ranged from 3.80% to 4.40%. The
annual fixed rate of interest to be paid under the amended Swap Agreements is
5.99% for 2002, is 6.49% for 2003, and is 6.99% from January 2004 through the
scheduled maturity of the Senior Term Facility in 2005. The overall effective
interest rate for the Senior Term Facility, after giving effect to the interest
rate swap agreement, as of December 31, 2001, was 8.05%.
Counterparty risk is limited to amounts to be reflected in the Company's
consolidated balance sheet. This risk is minimized and is expected to be
immaterial to the Company's consolidated results of operations as the amended
Swap Agreements provide for monthly settlement of the net interest owing.
Further, each counterparty to the Swap Agreements carries at least a "single-A"
credit rating. The impact of the interest rate exchange agreements on the
Company's interest expense was not material.
MCM entered into an interest rate swap agreement ("DDi Europe Swap
Agreement") effective January 12, 2000 which represents an effective cash flow
hedge of the variable rate of interest (3-month LIBOR) paid under the DDi
Europe Facilities Agreement, minimizing exposure to increases in interest rates
related to this debt over the scheduled term of the DDi Europe Swap Agreement
through September 2002. Under the DDi Europe Swap Agreement, DDi Europe pays a
fixed rate of interest at an annual rate of 6.92%. This rate is applied to
fixed amounts of debt per the agreement, which is 100% of the outstanding
balance at December 31, 2001. The overall effective interest rate for the DDi
Europe term loan facilities, after giving effect to the interest rate swap
agreement, as of December 31, 2001 was 8.42%.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments including cash, accounts receivable,
accounts payable, accrued liabilities and variable rate debt approximate book
value as of December 31, 2000 and 2001. As of December 31, 2000 and 2001, the
fair value of the Company's Senior Subordinated Notes, Convertible Subordinated
Notes and Capital Senior Discount Notes were different from their carrying
values. The fair values of the Company's Senior Subordinated Notes, Convertible
Subordinated Notes and Capital Senior Discount Notes are estimated based on
their quoted market prices.
The estimated fair values of the Company's financial instruments are as
follows:
DDi Capital DDi Corp. DDi Capital DDi Corp.
December 31, 2000 December 31, 2000 December 31, 2001 December 31, 2001
----------------- ----------------- ----------------- -----------------
Carrying Fair Carrying Fair Carrying Fair Carrying Fair
Amount Value Amount Value Amount Value Amount Value
-------- ------- -------- ------- -------- ------- -------- -------
Fixed rate debt:
10% Senior Subordinated Notes......... $100,000 $92,000 $100,000 $92,000 $ -- $ -- $ -- $ --
5.25% Convertible Subordinated Notes.. $ -- $ -- $ -- $ -- $ -- $ -- $100,000 $68,875
12.5% Capital Senior Discount Notes... $ 50,311 $49,140 $ 50,311 $49,140 $14,478 $14,803 $ 14,478 $14,803
10. CAPITAL LEASE OBLIGATIONS
DDi Capital leases certain facilities and equipment under capital lease
obligations bearing implicit interest rates ranging from 7% to 12%. The terms
of the leases require monthly payments of approximately $195 including interest
at December 31, 2001. Certain leases contain an option for an additional term
at the end of the
F-24
DDi CORP. AND DDi CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
initial term and an option to purchase the facilities and equipment at their
fair values at the end of the initial term and at the end of the second term.
DDi Corp. leases certain facilities and equipment under capital lease
obligations bearing implicit interest rates ranging from 7% to 13%. The terms
of the leases require monthly payments of approximately $250 including interest
at December 31, 2001. Certain leases contain an option for an additional term
at the end of the initial term and an option to purchase the facilities and
equipment at their fair values at the end of the initial term and at the end of
the second term.
Future Payments
Aggregate annual maturities of capital lease obligations (for periods
subsequent to December 31, 2001) are as follows:
DDi Capital DDi Corp.
------------------------------------------ ------------------------------------------
Less Present Less Present
Amounts Value of Net Amounts Value of Net
Total Minimum Representing Minimum Total Minimum Representing Minimum
Lease Payments Interest Lease Payments Lease Payments Interest Lease Payments
-------------- ------------ -------------- -------------- ------------ --------------
Year ending December 31,
2002................. $2,319 $ 694 $1,625 $3,022 $ 717 $2,305
2003................. 2,022 524 1,498 2,168 533 1,635
2004................. 1,796 363 1,433 1,796 363 1,433
2005................. 1,515 203 1,312 1,515 203 1,312
------ ------ ------ ------ ------ ------
$7,652 $1,784 $5,868 $8,501 $1,816 $6,685
====== ====== ====== ====== ====== ======
11. STOCKHOLDERS' EQUITY
Common Stock
At December 31, 2000 and 2001, DDi Capital had 1,000 shares of $0.01 par
value common stock, authorized, issued and outstanding. DDi Corp. had
75,000,000 shares authorized, 44,328,371 and 47,950,886 shares of $0.01 par
value common stock issued and outstanding at December 31, 2000 and 2001,
respectively.
Stockholder Receivables
DDi. Corp. has notes receivable from certain executive officers which are
collateralized by the Company's common stock (see Note 17).
Additional Paid-In Capital
In connection with the changes in senior management undertaken in the fourth
quarter of 2001 (see Note 15), the Company modified stock option agreements
which resulted in a compensation charge of $0.2 million.
Common Stock Warrants
As part of the financing associated with the recapitalization of the Company
in November 1997, warrants were granted to affiliates of JPMorgan Chase Bank
(formerly The Chase Manhattan Bank) to purchase 447,174 shares of DDi Corp.
common stock. In connection with the initial public offering (see Note 18),
these affiliates of JPMorgan Chase Bank received 447,123 shares of common stock
through a cashless exercise of their outstanding warrants. A fair value of
$3,420 was ascribed to the warrants and recorded as a debt discount.
F-25
DDi CORP. AND DDi CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
In connection with the DCI Merger (see Note 14), warrants were granted to
purchase 195,406 shares of DDi Corp. common stock at $21.79 per share. As of
December 31, 2001, 4,659 shares were exercised, leaving 190,747 outstanding.
Such warrants are exercisable through July 22, 2008.
Stock Options
Prior to 1997, the Company had two stock option plans, the 1996 Performance
Stock Option Plan and the 1996 Employee Stock Option Plan. The term of the
options under these plans is ten years from the date of grant. The options
under these plans were fully vested as of December 31, 2001. During 1999 there
were no grants, exercises, forfeitures, or expirations of options under either
of these plans. During 2000, there were no grants or forfeitures under either
of these plans and 256,273 options were exercised, leaving 274,566 vested
options outstanding at December 31, 2000. During 2001, there were no grants or
forfeitures under either of these plans and 101,720 options were exercised,
leaving 172,846 vested options outstanding at December 31, 2001 at exercise
prices ranging from $0.34 to $2.44 per share. As of December 31, 2001, the
options outstanding under these plans had remaining weighted-average
contractual terms of approximately five years.
In 1997, DDi Corp. adopted its 1997 Details, Inc. Equity Incentive Plan (the
"1997 Employee Stock Option Plan"), authorizing the grant of options to certain
management of the Company to purchase 659,786 shares of common stock. The term
of the options under this plan is ten years from the date of grant. Options
granted under this plan vest in equal monthly amounts over four years, with
immediate vesting upon a change in control or sale of all of the assets of the
Company. For all options granted under this plan, the exercise prices
approximated the estimated fair value at the date of grant, resulting in no
compensation expense. As of December 31, 2001, the options outstanding under
this plan had a remaining weighted-average contractual term of approximately
eight years.
Stock option activity under the 1997 Employee Stock Option Plan is:
$1.78 Options $21.79 Options
--------------- ----------------
Number Number
Exercise of Exercise of
Price Shares Price Shares
-------- ------ -------- -------
Balance at December 31, 1998................ -- -- $ 21.79 326,089
Granted..................................... $ 1.78 27,444 $ 21.79 33,778
Exercised................................... -- -- -- --
Forfeited................................... -- -- $ 21.79 (25,333)
------ ------ ------- -------
Balance at December 31, 1999................ $ 1.78 27,444 $ 21.79 334,534
Granted..................................... -- -- -- --
Exercised................................... $ 1.78 (2,891) $ 21.79 (1,051)
Forfeited................................... $ 1.78 (6,908) $ 21.79 (30,059)
------ ------ ------- -------
Balance at December 31, 2000................ $1.78 17,645 $21.79 303,424
Granted..................................... -- -- -- --
Exercised................................... $ 1.78 (131) $ 21.79 (67,157)
Forfeited................................... -- -- $ 21.79 (5,477)
------ -------
Balance at December 31, 2001................ 17,514 230,790
====== =======
Options exercisable at December 31, 2001.... 12,680 219,023
====== =======
The weighted average fair value per option (computed using the minimum-value
method as the Company was a non-public entity when the options were granted) of
the stock options granted in 1999 was nil. Fair value was estimated using the
minimum-value method, a risk-free interest rate of 6.0% and an expected life of
3 months for the grants in 1999. No dividends were assumed to be declared.
F-26
DDi CORP. AND DDi CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
In connection with the DCI Merger (see Note 14), the Board of Directors
adopted, and the stockholders of DDi Corp. approved, the Details Holdings
Corp.-Dynamic Circuits 1996 Stock Option Plan ("DCI 1996 Plan") and the Details
Holdings Corp.-Dynamic Circuits 1997 Stock Option Plan ("DCI 1997 Plan"),
together the "DCI Stock Option Plans", which authorized the granting of stock
options and the sale of common stock in connection with the merger with DCI.
The terms applicable to options issued under the DCI Stock Option Plans are
substantially similar to the terms applicable to the options to purchase shares
of DCI outstanding immediately prior to the merger with DCI. These terms
include vesting from the date of merger through 2002 for those options
outstanding as of the date of the merger with DCI. Options granted under these
plans subsequent to the merger will typically vest in equal monthly amounts
over four years. An optionholder's scheduled vesting is dependent upon
continued employment with the Company. Upon termination of employment, any
unvested options as of the termination date are forfeited.
In connection with the DCI Merger, DDi Corp. converted each DCI stock option
award into the right to receive a cash payment and an option to purchase shares
of common stock. The options granted in 1998 bear exercise prices of either
$0.56 ("$0.56 Options") or $21.79 ("$21.79 Options") or $12.64 ("$12.64
Options"). During 1999, options to purchase shares of common stock were also
granted with an exercise price of $1.78 ("$1.78 Options").
As of December 31, 2001, there are no options available for grant under the
DCI Stock Option Plans. The maximum term of the options under the DCI 1996 Plan
is August 2006 and under the DCI 1997 Plan is March 2008. As of December 31,
2001, all options outstanding under the DCI Stock Option Plans had weighted
average remaining contractual lives of approximately seven years.
Stock option activity under the DCI Stock Option Plans is:
$0.56 Options $21.79 Options $1.78 Options $12.64 Options
----------------- --------------- ---------------- -----------------
Number Number Number Number
Exercise of Exercise of Exercise of Exercise of
Price Shares Price Shares Price Shares Price Shares
-------- -------- -------- ------ -------- ------- -------- --------
Balance at December 31, 1998...... $0.56 380,449 $21.79 38,627 -- -- $12.64 923,119
Granted........................... $0.56 4,551 $21.79 247 $1.78 25,268 $12.64 5,936
Exercised......................... $0.56 (110,774) -- -- -- -- -- --
Forfeited......................... $0.56 (31,355) $21.79 (1,727) -- -- $12.64 (15,700)
----- -------- ------ ------ ----- ------- ------ --------
Balance at December 31, 1999...... $0.56 242,871 $21.79 37,147 $1.78 25,268 $12.64 913,355
Granted........................... -- -- -- -- -- -- -- --
Exercised......................... $0.56 (93,394) $21.79 (6,264) $1.78 (2,889) $12.64 (302,614)
Forfeited......................... $0.56 (1,764) $21.79 (215) $1.78 (3,607) $12.64 (3,838)
----- -------- ------ ------ ----- ------- ------ --------
Balance at December 31, 2000...... $0.56 147,713 $21.79 30,668 $1.78 18,772 $12.64 606,903
Granted........................... -- -- -- -- -- -- -- --
Exercised......................... $0.56 (59,041) $21.79 (112) $1.78 (4,149) $12.64 (215,407)
Forfeited......................... $0.56 (4,715) $21.79 (2,338) $1.78 (11,057) $12.64 (6,140)
-------- ------ ------- --------
Balance at December 31, 2001...... 83,957 28,218 3,566 385,356
======== ====== ======= ========
Options exercisable at
December 31, 2001............... 78,163 27,983 1,898 379,291
======== ====== ======= ========
F-27
DDi CORP. AND DDi CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
For all options granted under the DCI Stock Option Plans in 1999, the
exercise prices approximated the estimated fair value at the date of grant,
resulting in no compensation expense. Fair value was estimated using the
minimum-value method as the Company was a non-public entity when the options
were granted, a risk-free interest rate of 6.0% for 1999 and an expected life
of 3 months for both $0.56 Options and $1.78 Options or two years for both
$21.79 Options and $12.64 Options. No dividends were assumed to be declared.
The weighted-average fair value per option of the stock options granted under
the DCI Stock Option Plans in 1999 was as follows:
Fair Value per Option
---------------------
Option category 1999 2000 2001
--------------- ----- ---- ----
$0.56 Options.......................... Nil N/A N/A
$1.78 Options.......................... $0.04 N/A N/A
$21.79 Options......................... Nil N/A N/A
$12.64 Options......................... $1.35 N/A N/A
During 2000, the Company adopted the 2000 Equity Incentive Plan (the "2000
Plan"). No future grants will be made under existing plans as of the effective
date of the 2000 Plan. A total of (a) 4,100,000 shares of common stock, (b) any
shares returned to existing plans as a result of termination of options and (c)
annual increases of 1.0% of outstanding common stock to be added on the date of
each annual meeting of the Company's stockholders commencing in 2001, or such
lesser amounts as may be determined by the Company, will be reserved for
issuance pursuant to the 2000 Plan. The 2000 Plan provides for the grant of
incentive stock options to employees (including officers and employee
directors) and for the grant of nonstatutory stock options to employees,
directors and consultants. The 2000 Plan also provides for the grant of stock
appreciation rights, restricted stock, unrestricted stock, deferred stock, and
securities (other than stock options) which are convertible into or
exchangeable for common stock on such terms and conditions as the Company
determines. The weighted-average fair value per option of the stock options
granted under the 2000 Plan was $10.40 and $8.70 for shares granted in 2000 and
2001, respectively, calculated using the Black-Scholes option pricing model,
assuming that no dividends were to be declared, a volatility of 100% and a risk
free interest rate of 6.22% in 2000 and 4.11% in 2001. These options have an
average life of 4 years and vest in yearly installments for the first 2 years
and quarterly installments thereafter.
Stock option activity under the 2000 Plan since the Company's initial public
offering on April 14, 2000 is as follows:
Number of
Exercise Price Shares
-------------- ---------
Balance at April 14, 2000........................ --
Granted.......................................... $12.00-$38.31 2,138,930
Exercised........................................ -- --
Forfeited........................................ $12.00-$14.00 (72,050)
---------
Balance at December 31, 2000..................... $12.00-$38.31 2,066,880
Granted.......................................... $ 7.02-$28.81 2,692,985
Exercised........................................ $12.00-$14.00 (84,026)
Forfeited........................................ $ 7.02-$26.38 (502,269)
---------
Balance at December 31, 2001..................... $ 7.02-$38.31 4,173,570
=========
Options exercisable as of December 31, 2001...... 401,336
=========
F-28
DDi CORP. AND DDi CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
The following table summarizes information regarding stock options
outstanding under the 2000 Plan at December 31, 2001:
Options Outstanding
---------------------------------------------
Number Weighted-Average
Range of Outstanding Remaining Weighted-Average
Exercise Prices at 12/31/01 Contractual Life Exercise Price
--------------- ----------- ---------------- ----------------
$ 7.02 - 10.28 1,344,600 9.8 $ 7.16
$12.00 - 17.66 2,567,320 8.5 $14.91
$18.53 - 25.23 146,150 9.1 $21.03
$28.81 - 38.31 115,500 8.8 $29.38
-------------- --------- --- ------
$ 7.02 - 38.31 4,173,570 8.9 $13.03
During 2000, the Company's Board of Directors adopted the Employee Stock
Purchase Plan ("ESPP") and the non-U.S. Employee Stock Purchase Plan ("non-U.S.
ESPP") (collectively the "Plans"). The Plans allow eligible employees to
purchase shares of common stock through payroll deductions at a discounted
price. A total of 1,450,000 shares of common stock are reserved for issuance
under the Plans, 1,250,000 shares under the ESPP, which are intended to qualify
under Section 423 of the Internal Revenue Code and 200,000 shares under the
non-U.S. ESPP. The Plans allow for purchases in a series of offering periods,
each six months in duration, with new offering periods (other than the initial
offering period) commencing on January 1 and July 1 of each year. The initial
offering period commenced on April 14, 2000, the date of the initial public
offering. Unless terminated earlier by the Company's Board of Directors, the
plans have a term of ten years. The net weighted-average fair value per share
granted under the Plans was $8.42 and $8.69 for shares granted in 2000 and
2001, respectively, calculated using the Black-Scholes option pricing model,
assuming that no dividends were to be declared, a volatility of 100% and a risk
free interest rate of 6.10% in 2000 and 4.73% in 2001. As of the years ended
December 31, 2000 and 2001, 69,642 shares and 160,414 shares, respectively, of
common stock were purchased through the ESPP.
Had compensation cost for all stock-based compensation plans been determined
consistent with SFAS No. 123, DDi Corp.'s net income (loss) allocable to common
stock and net income (loss) per share allocable to common stock would have been
the following (amounts in millions, except per share data):
Year Ended December 31,
----------------------
1999 2000 2001
------ ----- ------
Net income (loss) allocable to common stock:
As reported............................................. $(31.5) $15.8 $(85.1)
Pro forma............................................... $(31.6) $11.5 $(92.8)
Income (loss) per share allocable to common stock--basic:
As reported............................................. $(3.21) $0.50 $(1.79)
Pro forma............................................... $(3.22) $0.36 $(1.96)
Income (loss) per share allocable to common stock--diluted:
As reported............................................. $(3.21) $0.47 $(1.79)
Pro forma............................................... $(3.22) $0.34 $(1.96)
F-29
DDi CORP. AND DDi CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
12. INCOME TAX MATTERS
The provision (benefit) for income taxes before extraordinary items in 1999,
2000 and 2001 consists of the following:
Year Ended
------------------------------------------------------
December 31, 1999 December 31, 2000 December 31, 2001
---------------- ---------------- ------------------
DDi DDi DDi DDi DDi DDi
Capital Corp. Capital Corp. Capital Corp.
------- ------- ------- ------- -------- --------
Current:
Federal... $ 4,210 $ 1,302 $25,159 $24,147 $ (3,570) $ (5,178)
State..... 358 158 3,092 2,896 -- --
Foreign... -- 17 -- 2,118 345 3,694
------- ------- ------- ------- -------- --------
4,568 1,477 28,251 29,161 (3,225) (1,484)
------- ------- ------- ------- -------- --------
Deferred:
Federal... (8,355) (7,391) (4,513) (4,540) (8,201) (8,112)
State..... (1,428) (1,501) (305) (301) (1,750) (1,730)
Foreign... -- -- -- 680 (50) (655)
------- ------- ------- ------- -------- --------
(9,783) (8,892) (4,818) (4,161) (10,001) (10,497)
------- ------- ------- ------- -------- --------
$(5,215) $(7,415) $23,433 $25,000 $(13,226) $(11,981)
======= ======= ======= ======= ======== ========
Deferred income tax assets and liabilities consist of the following:
December 31, 2000 December 31, 2001
------------------ ------------------
DDi DDi DDi DDi
Capital Corp. Capital Corp.
-------- -------- -------- --------
Deferred tax assets:
Net operating loss carryforwards.............. $ 774 $ 774 $ 7,016 $ 8,640
Trade receivables............................. 4,996 4,996 1,310 1,310
Deferred compensation......................... 2,275 2,275 557 557
Tax credits................................... 1,100 1,100 6,265 6,265
Accrued liabilities........................... 11,566 11,566 10,527 10,527
Amortization.................................. 411 411 -- --
Asset impairment.............................. -- -- 7,125 7,125
Other......................................... 177 177 384 384
-------- -------- -------- --------
21,299 21,299 33,184 34,808
-------- -------- -------- --------
Deferred tax liabilities:
Property, plant and equipment................. (1,726) (1,786) (4,928) (7,396)
Intangible assets............................. (22,186) (24,648) (16,025) (16,025)
-------- -------- -------- --------
(23,912) (26,434) (20,953) (23,421)
-------- -------- -------- --------
Valuation allowance............................... (774) (774) (774) (774)
-------- -------- -------- --------
Net deferred tax assets (liabilities)...... $ (3,387) $ (5,909) $ 11,457 $ 10,613
======== ======== ======== ========
In connection with the acquisitions of MCM, Thomas Walter and Olympic
Circuits, the Company acquired certain net deferred tax liabilities of
approximately $1.9 million, approximately $0.6 million and approximately $0.2
million, respectively.
The tax effect related to the extraordinary items (see Notes 6 and 19) is
current U.S. federal and state taxes for 2000 and deferred U.S. federal and
state taxes for 2001.
F-30
DDi CORP. AND DDi CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
The income tax provision (benefit) before the extraordinary items differs
from the amount of income tax determined by applying the U.S. federal statutory
income tax rate to the income (loss) before income taxes and the extraordinary
items due to the following:
Year Ended
------------------------------------------------------
December 31, 1999 December 31, 2000 December 31, 2001
---------------- ---------------- ------------------
DDi DDi DDi DDi DDi DDi
Capital Corp. Capital Corp. Capital Corp.
------- ------- ------- ------- -------- --------
Computed "expected" tax expense (benefit)............... $(6,766) $(8,697) $17,085 $18,050 $(30,194) $(29,774)
Increase (decrease) in income taxes resulting from:
State taxes, net of credits and federal tax benefit.. (1,070) (1,343) 2,787 2,595 (1,424) (1,404)
Goodwill amortization................................ 2,456 2,456 2,515 3,289 19,884 21,168
Foreign tax differential............................. -- -- -- (418) -- (506)
Research tax credits................................. -- -- -- -- (1,513) (1,513)
Other................................................ 165 169 1,046 1,484 21 48
------- ------- ------- ------- -------- --------
$(5,215) $(7,415) $23,433 $25,000 $(13,226) $(11,981)
======= ======= ======= ======= ======== ========
At December 31, 2001, the Company has federal and various state net
operating loss ("NOL") carryforwards, exclusive of Colorado, of approximately
$18.0 million and $18.0 million, respectively. The federal and state NOLs begin
expiring in 2021 and 2002, respectively. In addition, the Company has Colorado
NOL carryforwards of approximately $12.0 million at December 31, 2001. The
Colorado NOL carryforwards begin to expire in 2012. A valuation allowance has
been established for deferred income tax benefits related to the Colorado NOL
carryforwards. Management believes it is more likely than not that these NOL
carryforwards may not be realized as a result of the closure of the Colorado
facility in December 1999 (see Note 15). The Company also has tax research
credit carryforwards of $3.0 million which begin expiring in 2018, alternative
minimum tax (AMT) credit carryforwards of $1.3 million, which do not expire and
state investment tax credits of $1.9 million which begin expiring in 2005. If
certain substantial changes in the Company's ownership should occur, there
would be an annual limitation on the amount of the NOL and other tax attribute
carryforwards which can be utilized.
U.S. income taxes have not been provided on approximately $3.0 million of
undistributed earnings of foreign subsidiaries since management considers these
earnings to be invested indefinitely or substantially offset by foreign tax
credits. It is not practicable to estimate the amount of unrecognized deferred
U.S. taxes on these undistributed earnings.
13. COMMITMENTS AND CONTINGENCIES
Environmental matters--The Company's operations are regulated under a number
of federal, state, and local environmental laws and regulations, which govern,
among other things, the discharge of hazardous materials into the air and water
as well as the handling, storage and disposal of such materials. Compliance
with these environmental laws are major considerations for all printed circuit
board manufacturers because metals and other hazardous materials are used in
the manufacturing process. In addition, because the Company is a generator of
hazardous wastes, the Company, along with any other person who arranges for the
disposal of such wastes, may be subject to potential financial exposure for
costs associated with an investigation and remediation of sites at which it has
arranged for the disposal of hazardous wastes, if such sites become
contaminated. This is true even if the Company fully complies with applicable
environmental laws. In addition, it is possible that in the future new or more
stringent requirements could be imposed. Management believes it has complied
with all applicable environmental laws and regulations. There have been no
claims asserted nor is management aware of any unasserted claims for
environmental matters.
F-31
DDi CORP. AND DDi CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
Employment agreements--Pursuant to certain employment agreements dated
September 1, 1995, as amended, effective until October 28, 2000, certain
members of senior management received base salaries in the aggregate amount of
$1.3 million in both 1999 and 2000, respectively. The base salaries on or after
January 1, 2001 have been established by the Compensation Committee of the
Company's Board of Directors at a level that equals or exceeds base salaries
for 2000. These employees are eligible for annual bonuses based upon the
achievement of EBITDA targets. These employees received a bonus in the
aggregate amounts of $2.4 million in consideration of prior services which were
paid in October 2000.
In addition, pursuant to an employment agreement dated July 23, 1998, and
effective until July 23, 2001 a certain key employee received a base salary of
approximately $445, $474 and $290 in 1999, 2000 and 2001, respectively. In
addition, this key employee is eligible to receive an annual bonus based upon
achievement of EBITDA targets. Post-merger salary and other compensation were
recorded as period costs.
Operating leases--The Company has entered into various operating leases
principally for office space and equipment that expire at various dates through
2022. Future annual minimum lease payments under all non-cancelable operating
leases with initial or remaining terms of one year or more consist of the
following at December 31, 2001:
DDi DDi
Capital Corp.
------- -------
Year Ending December 31,
2002........................ $ 6,738 $ 8,985
2003........................ 5,814 7,779
2004........................ 5,055 6,832
2005........................ 4,987 6,720
2006........................ 3,740 5,473
Thereafter.................. 12,274 29,601
------- -------
Future minimum lease payments... $38,608 $65,390
======= =======
The above future minimum lease payments include $2.1 million of accrued
restructuring expenses for minimum lease payments of non-cancelable leases (see
Note 15).
Rent expense for 1999 was approximately $3.0 million. Rent expense for 2000
and 2001 was approximately $3.7 million and $6.2 million, respectively, for DDi
Capital. Rent expense for 2000 and 2001 was approximately $5.8 million and $7.5
million, respectively, for DDi Corp.
Litigation--The Company is a party to various legal actions arising in the
ordinary course of its business. The Company believes that the resolution of
these legal actions will not have a material adverse effect on the Company's
financial position, results of operations or cash flows.
Retirement plans--The Company has various retirement plans available to
eligible employees. Participants can elect to contribute 1% to 15% of their
annual compensation to the retirement plans. For domestic employees, these
contributions are made under Section 401(k) of the Internal Revenue Code.
Depending on the plan, the Company matches employee contributions at $0.25 per
$1.00 contributed, subject to a maximum per employee participant, or the
Company contributes from 3% to 10% of the eligible employee's annual
compensation. For the plan years ended December 31, 1999, 2000 and 2001,
employer contributions totaled $394, $683 and $501, respectively.
F-32
DDi CORP. AND DDi CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
14. BUSINESS COMBINATIONS
DCI
In July 1998, Dynamic Details consummated the merger with DCI. DCI provided
design and manufacturing services relating to complex printed circuit boards,
backpanel assemblies and electromechanical interconnect devices with operations
in California, Texas, Georgia and Massachusetts.
The DCI merger consideration, aggregating approximately $250 million, was
allocated to tangible assets (aggregating approximately $65 million) acquired
and liabilities assumed (aggregating approximately $30 million), with the
remaining merger consideration consisting primarily of identifiable intangible
assets, goodwill, and acquired in-process research and development ("in-process
R&D"). The identifiable intangibles consist primarily of developed
technologies, customer relationships/tradenames, and assembled workforce. The
fair value of the developed technology assets at the date of merger was $60
million and represents the aggregate fair value of individually identified
technologies that were fully developed at the time of merger. The customer
relationships/tradenames and assembled workforce assets were assigned values as
of the merger date of approximately $21 million and $4 million, respectively.
Goodwill generated in the merger with DCI has an assigned value of
approximately $120 million. The Company expensed the portion of merger
consideration allocated to in-process R&D of $39 million in the year ended
December 31, 1998. As of December 31, 2000 and 2001, the accumulated
amortization related to this goodwill and identifiable intangibles acquired in
the merger with DCI was approximately $48.9 million and $57.7 million,
respectively.
Due to the closure of two facilities in connection with Company's 2001
restructuring plan (see Note 15), the Company determined that a portion of the
DCI goodwill and identifiable intangibles which related to these facilities
have a fair value of zero. As a result, the Company recorded an adjustment of
$25.8 million and $2.6 million to the carrying value of goodwill and
identifiable intangibles, respectively.
MCM
On April 14, 2000, DDi Corp. completed the acquisition of MCM, a
time-critical electronics manufacturing service provider based in the United
Kingdom, for a total purchase price of approximately $82 million, excluding
acquisition expenses of approximately $4 million, paid in a combination of cash
of approximately $10 million, the issuance of 2,230,619 shares of common stock
valued at approximately $29 million, the repayment of outstanding indebtedness
of MCM of approximately $24 million, and the assumption of approximately
$23 million of MCM's remaining outstanding indebtedness (net of cash acquired
of approximately $8 million).
The total purchase price has been allocated to the underlying assets and
liabilities based upon their estimated respective fair values at the date of
acquisition. The Company has allocated the total purchase price to tangible
assets acquired (aggregating approximately $30 million), and liabilities
assumed (aggregating approximately $46 million), with the remaining
consideration consisting of goodwill and identifiable intangible assets.
The identifiable intangibles consist of developed technologies, non-compete
agreements, and assembled workforce. The fair value of the developed technology
assets at the date of acquisition was $1 million and represents the aggregate
fair value of individually identified technologies that were fully developed at
the time of acquisition. The non-compete agreements and assembled workforce
assets were assigned values as of the acquisition date of approximately $1
million and $2 million, respectively.
Goodwill generated in the acquisition of MCM has an assigned value of
approximately $65 million. As of December 31, 2000 and 2001, the accumulated
amortization related to this goodwill and identifiable intangibles acquired in
the acquisition of MCM was approximately $3.3 million and $7.2 million,
respectively.
F-33
DDi CORP. AND DDi CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
Automata
On August 4, 2000, Dynamic Details completed the acquisition of
substantially all the U.S. assets of Automata, a Virginia-based manufacturer of
technologically advanced printed circuit boards for total cash consideration of
approximately $19.5 million, plus fees and expenses of $0.5 million.
The total purchase price has been allocated to the underlying assets
acquired and liabilities assumed based upon their respective fair market values
at the date of acquisition. The excess of the purchase price was allocated to
goodwill and is being amortized over its estimated useful life of 20 years.
Golden
On September 15, 2000, Dynamic Details completed the acquisition of the
assets of Golden, a Texas-based manufacturer of engineered metal enclosures and
provider of value-added assembly services to communications and electronics
original equipment manufacturers, for approximately $14.4 million paid in
combination of cash of approximately $12.6 million and the assumption of
approximately $1.8 million of Golden's outstanding capital lease liabilities
(net of cash acquired of approximately $0.7 million), plus expenses of $0.5
million.
The total purchase price has been allocated to the underlying assets
acquired and liabilities assumed based upon their respective fair market values
at the date of acquisition. The excess of the purchase price was allocated to
goodwill and is being amortized over its estimated useful life of 20 years.
Thomas Walter
On March 5, 2001, DDi Europe completed the acquisition of Thomas Walter, a
leading circuit board manufacturer based in Marlow, England for approximately
$24.5 million, plus expenses of $0.3 million. Thomas Walter is a
well-established provider of complex, quick-turn rigid and rigid-flex printed
circuit boards for the European electronics industry.
The total purchase price has been allocated to the underlying assets and
liabilities based upon their estimated respective fair values at the date of
acquisition. The excess of the purchase price was allocated to goodwill and
identifiable intangible assets.
Goodwill generated in the acquisition of Thomas Walter has an assigned value
of approximately $17.0 million and is being amortized over its estimated useful
life of 20 years. The identifiable intangibles consist of developed
technologies and assembled workforce. The fair value of the developed
technology assets at the date of acquisition was approximately $0.5 million and
represents the aggregate fair value of individually identified technologies
that were fully developed at the time of acquisition. The assembled workforce
asset was assigned a fair value of approximately $0.8 million at the date of
acquisition.
As of December 31, 2001, the accumulated amortization related to the
goodwill and identifiable intangibles acquired in the acquisition of Thomas
Walter was approximately $0.9 million.
Nelco Technology
On April 27, 2001, Dynamic Details completed the acquisition of the assets
of Nelco, a wholly owned subsidiary of Park Electrochemical Corp., for total
cash consideration of approximately $3.0 million. Nelco is an Arizona-based
manufacturer of semi-finished printed wiring boards, commonly known as mass
lamination.
F-34
DDi CORP. AND DDi CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
The total purchase price has been allocated to the underlying assets and
liabilities based upon their estimated respective fair values at the date of
the transaction.
Olympic Circuits Canada
On May 9, 2001, Dynamic Details completed the acquisition of Olympic, a
Canada-based, time-critical electronics manufacturing service provider
specializing in quick-turn prototype printed circuit boards for a total cash
consideration of approximately $12.8 million plus contingent consideration, of
up to $4.5 million based on earnings in each of the three years following the
date of acquisition, plus expenses of $0.1 million. No contingent consideration
has been earned or recorded as of December 31, 2001. If contingent
consideration is earned and paid, it will be capitalized as additional purchase
price.
The total purchase price has been allocated to the underlying assets and
liabilities based upon their estimated respective fair values at the date of
acquisition. The excess of the purchase price was allocated to goodwill and is
being amortized over its estimated useful life of 20 years.
Altatron Technology
On June 4, 2001, Dynamic Details completed the acquisition of the assets of
Altatron, a Southern California-based provider of value-add assembly services
to electronics original equipment manufacturers for a total cash consideration
of approximately $4.8 million, plus contingent consideration based on earnings
in each of the two years following the date of acquisition. No contingent
consideration has been earned or recorded as of December 31, 2001. If
contingent consideration is earned and paid, it will be capitalized as
additional purchase price.
The total purchase price has been allocated to the underlying assets and
liabilities based upon their estimated respective fair values at the date of
the transaction. The excess of the purchase price was allocated to goodwill and
is being amortized over its estimated useful life of 20 years.
F-35
DDi CORP. AND DDi CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
Pro Forma Financial Information
The accompanying consolidated statements of operations include the accounts
of MCM for the period April 15, 2000 through December 31, 2001, Automata for
the period August 5, 2000 through December 31, 2001, and Golden for the period
September 16, 2000 through December 31, 2001. Also included are the accounts of
Thomas Walter for the period March 6, 2001 through December 31, 2001, Nelco
Technology for the period April 28, 2001 through December 31, 2001, Olympic
Circuits Canada for the period May 10, 2001 through December 31, 2001 and
Altatron Technology for the period June 5, 2001 through December 31, 2001. The
following pro forma information for the years ended December 31, 2000 and 2001
presents net sales, income (loss) before extraordinary loss, and net income
(loss) for each of these periods as if the MCM, Automata Thomas Walter, Nelco
Technology, Olympic Circuits Canada, and Altatron Technology transactions were
consummated at the beginning of each respective period. The unaudited pro forma
financial information does not reflect Golden's pre-acquisition results.
Pro Forma Pro Forma
Year Ended Year Ended
December 31, December 31,
2000 2001
------------ ------------
(in millions, except per share
data)
Net sales:
--DDi Capital........................................... $537.3 $296.5
--DDi Corp.............................................. $623.7 $376.9
Income (loss) before extraordinary loss:
--DDi Capital........................................... $ 25.2 $(74.1)
--DDi Corp.............................................. $ 26.6 $(74.1)
Net income (loss):
--DDi Capital........................................... $23. 0 $(86.1)
--DDi Corp.............................................. $ 20.2 $(86.0)
Net income (loss) per share of common stock--basic......... $ 0.64 $(1.81)
Net income (loss) per share of common stock--diluted....... $ 0.60 $(1.81)
15. RESTRUCTURING AND OTHER RELATED CHARGES
1999 Charges
In December 1999, management and the Company's Board of Directors approved a
plan to consolidate its Colorado operations into its Garland, Texas facility,
resulting in the closure of the Colorado facility. By combining its Colorado
and Texas operations, the Company has eliminated its lowest-margin product
lines and decreased its overhead costs, gaining efficiency through better
capital utilization and streamlined management. Revenues and EBITDA (earnings
before income taxes, depreciation, amortization and net interest expense) for
the Colorado facility were approximately $30 million and $(1.7) million,
respectively, for the year ended December 31, 1999. Net income/(loss) for this
facility is not readily determinable. The closure of this facility was
effectively complete as of March 31, 2000.
In conjunction with the closure of the Colorado facility, the Company
recorded charges in the fourth quarter of 1999 totaling $7.0 million. Of this
amount, $1.9 million represents restructuring-related inventory impairments and
is therefore reflected as a component of gross profit. The remaining $5.1
million of charges are classified as
F-36
DDi CORP. AND DDi CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
"Restructuring and other related charges" and consists of $2.6 million for
accrued restructuring expenses and $2.5 million related to the impairment of
net property, plant and equipment.
Of the $2.6 million recorded as accrued restructuring expenses,
approximately $2.0 million relates to severance and related expenses associated
with the involuntary termination of the 275 staff and management employees of
this plant. The remainder represents expenses principally related to minimum
lease payments through the scheduled maturities of the non-cancelable real
property operating leases. No amounts related to the accrual for either the
$2.0 million in severance and related expenses or the $0.6 million related to
the operating leases were expended as of December 31, 1999. As of December 31,
2000, the accrued exit cost remaining was $0.5 million, representing expenses
principally related to net rental payments through scheduled maturities of real
property operating leases.
The calculated impairment of net property, plant and equipment was
determined in accordance with SFAS No. 121, based upon a detailed review of the
individual long-lived assets in the Colorado facility. Management determined
that most of these assets would be utilized by the Company's other operations
and are not impaired. Other assets, however, were transferred to the Company's
other operations, from where they were sold or otherwise disposed, as in the
case of obsolete or redundant equipment. The carrying amount of such assets was
reduced to estimated fair value, less estimated selling costs. Some assets were
neither utilized in the Company's other operations, nor were they saleable.
Accordingly, these assets were written-down to zero value. The impairment to
assets to be sold or otherwise disposed comprises approximately $1.7 million of
the total write-down of net property, plant and equipment. The remaining $0.8
million charge represents the loss on assets possessing no remaining value. The
impact of the disposition of these assets was not significant to the Company's
results of operations.
2001 Charges
In October 2001, management and the Company's Board of Directors approved a
plan to close its Garland, Texas and Marlborough, Massachusetts facilities.
Prior to its closure, the Garland plant had manufactured the Company's lowest
technology pre-production volume printed circuit boards. The Marlborough plant
provided electronic interconnect products to selected customers in the New
England area. The decision to close these facilities was based upon their
contribution to the Company's financial objectives in 2001 as well as their
expected contribution going forward. Combined revenues for the two facilities
were approximately $28 million for the year ended December 31, 2001 and EBITDA
(earnings before income taxes, depreciation, amortization and net interest
expense) for these entities was approximately zero during the same period. Net
income/(loss) for these facilities is not readily determinable. The closure of
the facilities is estimated to be effectively complete by June 30, 2002.
In conjunction with the closure of the Garland and Marlborough facilities,
DDi Corp. and DDi Capital recorded charges in the fourth quarter of 2001
totaling $79.8 million and $79.4 million, respectively. Of these amounts, $3.7
million represents restructuring related inventory impairments and are
therefore reflected as a component of gross profit. The remaining $76.1 million
of charges are classified as "Restructuring and other related charges" and
consists of $51.4 million relating to impairments of intangible assets, $15.5
million relating to impairments of net property, plant and equipment, and $9.2
million for DDi Corp. and $8.8 million for DDi Capital in accrued restructuring
expenses. Such accrued restructuring expenses represent $4.4 million in
estimated facilities closure costs such as minimum lease payments through the
scheduled maturities of the non-cancelable real property operating leases and
the estimated costs of readying facilities for lease or sale, $3.5 million for
DDi Corp. and $3.1 million for DDi Capital in severance and related expenses
associated with the
F-37
DDi CORP. AND DDi CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
involuntary termination of the 208 staff and management employees from the
plant closures and changes in senior management undertaken in the fourth
quarter of 2001, and $1.3 million in other exit costs. Of the total accrued
restructuring expenses, approximately $2.6 million and $2.5 million for DDi
Corp. and DDi Capital, respectively, was expended in cash, and $0.2 million was
credited to additional paid-in capital (see Note 11), leaving a balance at
December 31, 2001 of $6.4 million and $6.1 million for DDi Corp. and DDi
Capital, respectively.
The calculated impairment of $15.5 million in net property, plant and
equipment was made in accordance with SFAS No. 121, based upon a detailed
review of the individual long-lived assets in the closed facilities. Management
determined that certain of these assets would be utilized by the Company's
other operations and are not impaired. Most of the assets, however, were
determined to be either obsolete or redundant equipment with no residual value,
after consideration of estimated disposal costs. Accordingly, these assets were
written down to zero value. Further, the Company owns the land and building
associated with the Garland facility. The Company intends to market this
property for sale subsequent to the completion of the plant closure. Based upon
information available at this time, the Company believes proceeds from such
sale would likely exceed the net book value of the property (approximately $6.1
million), plus expected selling costs. As of December 31, 2001, the Company's
Consolidated Balance Sheet reflects the historical cost of the land and
building. Depreciation of the building was discontinued in October 2001.
In connection with the calculation of the impairment of tangible assets
described above, the Company determined that the intangibles associated with
the facilities to be closed have a fair value of zero. The Company estimated
the amount of the impairment by comparing the discounted cash flows expected to
be generated from the assets to their carrying value. Of the $51.4 million of
restructuring charges relating to the impairment of intangible assets, $23.0
million represents goodwill relating to business transferred from the Company's
former Colorado plant with the remainder representing the portion of the
intangibles acquired in conjunction with the merger with DCI (see Note 14) that
relate to the Garland and Marlborough facilities. The latter is comprised of
$25.8 million of goodwill and $2.6 million of identifiable intangibles
(customer relationships and assembled work-force).
16. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Year Ended Year Ended Year Ended
December 31, 1999 December 31, 2000 December 31, 2001
--------------------- --------------------- ---------------------
DDi Capital DDi Corp. DDi Capital DDi Corp. DDi Capital DDi Corp.
----------- --------- ----------- --------- ----------- ---------
CASH PAYMENTS FOR:
Income taxes................. $ 1,141 $ 1,141 $17,461 $21,294 $3,965 $ 6,906
======= ======= ======= ======= ====== =======
Interest..................... $30,603 $30,603 $31,583 $44,992 $ 857 $6,301
======= ======= ======= ======= ====== =======
SUPPLEMENTAL SCHEDULE OF
NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Equity issued in mergers and
acquisitions (see Note 14). $ -- $ -- $ -- $29,062 $ -- $ --
------- ------- ------- ------- ------ -------
17. RELATED PARTY TRANSACTIONS
The Company leases a facility used for design and assembly from D&D Tarob
Properties, LLC ("D&D"), an entity owned or controlled by the Company's former
Chairman and Director. During the year ended December 31, 2001, the Company
paid $0.5 million to D&D under this lease agreement.
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DDi CORP. AND DDi CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
On June 1, 2000, in connection with the exercise of certain options, the
Company accepted as payment from a certain executive officer purchasing such
shares, a note in the amount of $0.1 million bearing interest at a rate of
6.46% per annum, compounded quarterly. The note is collateralized by shares of
the Company's common stock.
On November 30, 2001, pursuant to the terms of a Secured Promissory Note and
Pledge Agreement, the Company loaned a certain executive officer a note in the
amount of $0.6 million bearing interest at a rate of 2.7% per annum, compounded
quarterly. The note is collateralized by shares of the Company's common stock.
18. PUBLIC OFFERINGS
On April 14, 2000, DDi Corp. completed an initial public offering of
12,000,000 shares of its common stock at $14.00 per share generating proceeds
of $156.7 million, net of underwriting discounts and commissions. The net
proceeds were used to repay $100 million of the Senior Term Facility, redeem
$21.2 million accreted balance of the Intermediate senior discount notes, pay
associated redemption premiums and accrued and unpaid interest thereon, finance
a portion of the acquisition of MCM (see Note 14) and pay offering expenses.
On October 16, 2000, the Company and some of its shareholders completed a
follow-on public offering of 6,000,000 shares of the Company's common stock,
with 4,608,121 shares issued by the Company and the remainder sold by selling
shareholders. The shares were sold at $27.875 per share, generating proceeds to
the Company of $122.0 million, net of underwriting discounts and commissions.
The net proceeds were used to redeem all outstanding Intermediate senior
discount notes aggregating $17.5 million in principal amount, pay associated
redemption premiums of $3.6 million and accrued and unpaid interest thereon of
$5.2 million, repurchase a portion of the Capital Senior Discount Notes, with
an accreted balance of $36.5 million, for $37.6 million and pay offering
expenses. The remaining net proceeds of approximately $58.1 million are to be
used for general corporate purposes, including potential future acquisitions.
On February 14, 2001, DDi Corp. and some of its shareholders completed a
follow-on public offering of 6,000,000 shares of its common stock, with
3,000,000 shares issued by DDi Corp. and the remainder sold by selling
shareholders. The shares were sold at $23.50 per share, generating proceeds of
$67.0 million, net of underwriting discounts, commissions and expenses.
Concurrently, DDi Corp. issued 5.25% Convertible Subordinated Notes due March
1, 2008 with an aggregate principal of $100.0 million. These notes are
convertible at any time prior to maturity into shares of common stock at a
conversion price of $30.00 per share, subject to certain adjustments. These
notes generated proceeds of $97.0 million, net of underwriting discounts,
commissions and expenses. The net proceeds of both transactions have been used
to repurchase a portion of the Capital Senior Discount Notes and all of the
Senior Subordinated Notes.
19. EXTRAORDINARY ITEMS
During the year ended December 31, 2000, Dynamic Details recorded, as
extraordinary items, write-offs of debt issuance costs and deferred swap income
of approximately $0.7 million, net of related taxes of $0.4 million, related to
the Senior Term Facility principal repayments funded from the net proceeds of
DDi Corp.'s initial public offering (see Note 18). In addition, Intermediate
recorded, as extraordinary items, the redemption premium and write-off of debt
issuance costs of approximately $4.2 million, net of related taxes of $2.8
million related to the Intermediate Senior Discount Notes principal repayments
funded from the net proceeds of DDi Corp.'s initial public offering and
secondary offering (see Note 18). DDi Capital recorded, as extraordinary items,
the purchase premium and write-off of debt issuance costs of approximately $1.5
million, net of related
F-39
DDi CORP. AND DDi CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
taxes of $1.0 million related to the Capital Senior Discount Notes repurchase
funded from the net proceeds of DDi Corp.'s secondary offering.
During the year ended December 31, 2001, Dynamic Details recorded, as
extraordinary items, the write-off of unamortized debt issuance costs of
approximately $3.3 million, the payment of repurchase premium of approximately
$7.8 million, and direct transaction costs of approximately $0.4 million, net
of related income taxes of $4.5 million, related to the repurchase of the
Senior Subordinated Notes funded from the net proceeds of DDi Corp.'s February
14, 2001 follow-on public offering (see Note 18). In addition, DDi Capital
recorded, as extraordinary items, the write-off of unamortized debt issuance
costs of approximately $1.5 million, the payment of repurchase premium of
approximately $6.5 million, net of related income taxes of $3.1 million,
related to the repurchase of the DDi Capital Senior Discount Notes funded from
the net proceeds of DDi Corp.'s February 14, 2001 follow-on public offering.
20. SUBSEQUENT EVENT
On January 3, 2002, Dynamic Details repaid $9.2 million of the Senior Term
Facility.
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FINANCIAL STATEMENT SCHEDULE
The financial statement Schedule II--VALUATION AND QUALIFYING ACCOUNTS is
filed as part of this Form 10-K.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
DDi CORP.
Balance Increase
at Charged attributable Balance at
beginning to to end of
of year income acquisitions Deductions year
--------- ------- ------------ ---------- ----------
Allowance for Doubtful Accounts
Year ended December 31, 1999... $ 1,428 $ 435 $ -- $ (279) $ 1,584
Year ended December 31, 2000... $ 1,584 $12,462 $1,445 $(2,614) $12,877
Year ended December 31, 2001... $12,877 $ 131 $ 469 $(8,476) $ 5,001
DDi CAPITAL CORP.
Balance Increase
at Charged attributable Balance at
beginning to to end of
of year income acquisitions Deductions year
--------- ------- ------------ ---------- ----------
Allowance for Doubtful Accounts
Year ended December 31, 1999... $ 1,428 $ 435 $ -- $ (279) $ 1,584
Year ended December 31, 2000... $ 1,584 $12,122 $ 621 $(2,453) $11,874
Year ended December 31, 2001... $11,874 $ 79 $ 371 $(8,047) $ 4,277
F-41