UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): February 27, 2003
DDi Corp.
DDi Capital Corp.
(Exact Name of registrant as specified in its charter)
Delaware California | 000-30241 333-41187 | 06-1576013 33-0780382 | ||
(State or other jurisdiction of | (Commission File Number) | (IRS Employer Identification No.) |
1220 Simon Circle Anaheim, California | 92806 | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (714) 688-7200
Not Applicable
(Former name or former address, if changed since last report)
Item 5. Other Events
On February 27, 2003, DDi Corp. (the “Company”) announced financial results for the fourth quarter and year ended December 31, 2002.
Fourth Quarter Operating Results
The Company reported net sales for the fourth quarter of 2002 of $63.9 million, nearly flat compared with sales of $64.5 million for the fourth quarter of 2001. Net sales for the fourth quarter of 2002 increased 6% from $60.3 million reported in the third quarter of 2002. The growth in revenues compared to the immediately preceding quarter was primarily due to the year-end completion of several programs at the Company’s Fasttrack assembly plant in San Jose, CA and the acquisition of U.K.-based Kamtronics, which procures offshore, volume production services for the Company customers throughout Europe.
A shift in the mix of orders toward the low-margin assembly business, pricing pressures, and a soft European market, however, negatively impacted earnings in the fourth quarter. In addition, the Company incurred restructuring and reorganization costs of $5.4 million and recorded a $33.1 million valuation allowance against U.S. federal and state deferred tax assets in the quarter. The tax valuation allowance was based upon management’s expectation that such assets would not likely be realized.
On the basis of generally accepted accounting principles (GAAP), the Company reported a net loss of $46.2 million, or $(0.95) per diluted share, for the fourth quarter of 2002 compared to a net loss of $76.7 million, or $(1.60) per diluted share, for the fourth quarter of 2001. The Company reported an adjusted net loss (defined in the Condensed Consolidated Statements of Operations set forth below under the caption “Supplemental Financial Information”) of $7.7 million, or $(0.16) per diluted share, for the fourth quarter ended December 31, 2002 versus an adjusted net loss of $3.6 million, or $(0.08) per diluted share, for the comparable period of 2001.
Year-end Operating Results
For the year ended December 31, 2002, the Company reported net sales of $248.8 million compared to net sales of $361.6 million for the year ended December 31, 2001. On the basis of GAAP, the Company reported a net loss of $161.1 million, or $(3.34) per diluted share, for 2002 compared to a net loss of $85.1 million, or $(1.79) per diluted share, for 2001. The Company reported an adjusted net loss for 2002 of $25.4 million, or $(0.53) per diluted share, compared to adjusted net income of $19.9 million, or $0.41 per diluted share, for 2001.
Operational Restructuring
During the fourth quarter 2002, the Company implemented further restructuring and reorganization initiatives resulting in total charges of $5.4 million, primarily comprised of personnel reduction and retention costs, professional fees and residual plant closure costs. As part of these initiatives, the Company scaled down its Anaheim facility in late December and reallocated production to facilities with lower cost structures in order to improve operating cash
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flow. In January 2003, the Company implemented a reduction in force at its San Jose assembly operation anticipating reduced order fulfillment requirements in the near term. These workforce reductions are anticipated to yield cost savings of approximately $6.5 million annually.
Financial Restructuring
The Company’s financial performance in the fourth quarter of 2002 has resulted in covenant defaults under the U.S. senior credit facility of the Company’s principal operating subsidiary, specifically related to minimum EBITDA requirements for that quarter and continuing liquidity requirements since December 31, 2002. Accordingly, the Company has entered into a forbearance agreement with its senior lenders that is intended to facilitate the restructuring of its U.S. debt. The term of the forbearance agreement expires March 25, 2003, but may be extended until May 9, 2003 if certain conditions are met, including that forbearance agreements, which are satisfactory to the U.S. senior lenders, are entered into with the holders of the Company’s 5.25% and 6.25% subordinated notes. As a result of the defaults on the Company’s U.S. senior credit facility, interest payments under the subordinated notes, which payments are scheduled to come due in March and April 2003, respectively, will not be made on their respective due dates. Failure to make interest payments under the 5.25% and 6.25% subordinated notes within 30 days after the respective due date will amount in a default under the subordinated debt and will result in the reclassification of the subordinated debt as a current liability at that time.
Beyond addressing issues relating to covenants under the senior credit facility, the Company and its financial advisor, Houlihan Lokey Howard & Zukin, have initiated discussions with the Company’s U.S. senior lenders and convertible subordinated noteholders towards achieving an overall deleveraging, which the Company believes is in the best interest of the Company and its stakeholders and is intended to improve the Company’s financial health. The Company intends to pursue this objective through a consensual restructuring of its obligations through negotiations with its U.S. senior lenders, convertible noteholders and other stakeholders. On February 19, 2003, a group of subordinated noteholders held their first organizational meeting and began the process of retaining financial and legal advisors. There can be no assurance that the Company’s restructuring efforts will be successful.
Liquidity
The Company ended 2002 with $38.4 million in cash, cash equivalents and investments (including $9.4 million in restricted funds). Because it has not completed negotiations with U.S. senior lenders on long-term modifications to its U.S. term loans, the Company has classified the full $68.5 million principal balance of its U.S. senior credit facility as a current obligation in the accompanying Condensed Consolidated Balance Sheet and expects to receive an opinion from its independent accountants containing a going concern qualification. On the basis of GAAP, total current liabilities are $135 million and net working capital is $(25.5) million. Excluding the impact of the reclassification of the U.S. term loan principal as a current obligation, total current liabilities are $77.5 million and net working capital is $32 million.
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Condensed Consolidated Financial Statements
The following information is summary in nature and should not be considered complete financial statements.
DDi Corp.
Condensed Consolidated Statements of Operations
(in thousands, except for per share amounts)
(unaudited)
Three Months Ended December 31, | Twelve Months Ended December 31, | |||||||||||||||
2002 | 2001 | 2002 | 2001 | |||||||||||||
Net sales | $ | 63,878 |
| $ | 64,507 |
| $ | 248,826 |
| $ | 361,638 |
| ||||
Cost of goods sold: | ||||||||||||||||
Cost of goods sold |
| 63,653 |
|
| 56,759 |
|
| 229,653 |
|
| 263,563 |
| ||||
Restructuring-related inventory impairment |
| — |
|
| 3,747 |
|
| 3,465 |
|
| 3,747 |
| ||||
Total cost of goods sold |
| 63,653 |
|
| 60,506 |
|
| 233,118 |
|
| 267,310 |
| ||||
Gross profit |
| 225 |
|
| 4,001 |
|
| 15,708 |
|
| 94,328 |
| ||||
Operating expenses: | ||||||||||||||||
Sales and marketing |
| 5,312 |
|
| 6,139 |
|
| 22,988 |
|
| 27,627 |
| ||||
General and administration |
| 3,581 |
|
| 4,655 |
|
| 16,521 |
|
| 21,030 |
| ||||
Goodwill impairment |
| — |
|
| — |
|
| 72,000 |
|
| — |
| ||||
Restructuring and reorganization charges |
| 5,356 |
|
| 76,089 |
|
| 28,841 |
|
| 76,089 |
| ||||
Amortization of intangibles |
| — |
|
| 5,280 |
|
| — |
|
| 22,568 |
| ||||
Operating loss |
| (14,024 | ) |
| (88,162 | ) |
| (124,642 | ) |
| (52,986 | ) | ||||
Interest rate swap valuation |
| — |
|
| 1,696 |
|
| — |
|
| 9,981 |
| ||||
Interest expense (net) and other expense (net) |
| 6,180 |
|
| 4,666 |
|
| 22,148 |
|
| 41,704 |
| ||||
Loss before income taxes |
| (20,204 | ) |
| (94,524 | ) |
| (146,790 | ) |
| (104,671 | ) | ||||
Income tax benefit (expense) |
| (25,971 | ) |
| 17,800 |
|
| (14,303 | ) |
| 19,621 |
| ||||
Net loss | $ | (46,175 | ) | $ | (76,724 | ) | $ | (161,093 | ) | $ | (85,050 | ) | ||||
Basic net loss per share—GAAP Basis | $ | (0.95 | ) | $ | (1.60 | ) | $ | (3.34 | ) | $ | (1.79 | ) | ||||
Diluted net loss per share—GAAP Basis | $ | (0.95 | ) | $ | (1.60 | ) | $ | (3.34 | ) | $ | (1.79 | ) | ||||
Weighted average basic shares outstanding |
| 48,382 |
|
| 47,898 |
|
| 48,175 |
|
| 47,382 |
| ||||
Weighted average diluted shares outstanding |
| 48,382 |
|
| 47,898 |
|
| 48,175 |
|
| 47,382 |
| ||||
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DDi Corp.
Condensed Consolidated Statements of Operations
Supplemental Financial Information
(in thousands, except for per share amounts)
Three Months Ended December 31, | Twelve Months Ended December 31, | |||||||||||||||
2002 | 2001 | 2002 | 2001 | |||||||||||||
Adjusted EBITDA ** | $ | (2,773 | ) | $ | 2,148 |
| $ | 942 |
| $ | 70,575 |
| ||||
Interest rate swap valuation |
| — |
|
| 1,696 |
|
| — |
|
| 9,981 |
| ||||
Interest expense (net) |
| 6,180 |
|
| 4,666 |
|
| 22,148 |
|
| 41,704 |
| ||||
Amortization of intangibles |
| — |
|
| 5,280 |
|
| — |
|
| 22,568 |
| ||||
Depreciation |
| 5,895 |
|
| 5,194 |
|
| 21,278 |
|
| 21,157 |
| ||||
Amortization of deferred debt issue costs |
| — |
|
| — |
| ||||||||||
Management fees to majority owner |
| — |
|
| — |
| ||||||||||
Restructuring and reorganization charges |
| 5,356 |
|
| 79,836 |
|
| 32,306 |
|
| 79,836 |
| ||||
Goodwill impairment |
| — |
|
| — |
|
| 72,000 |
|
| — |
| ||||
Income tax expense (benefit) |
| 25,971 |
|
| (17,800 | ) |
| 14,303 |
|
| (19,621 | ) | ||||
Net loss |
| (46,175 | ) |
| (76,724 | ) |
| (161,093 | ) |
| (85,050 | ) | ||||
Adjustments, net of tax: | ||||||||||||||||
Restructuring and reorganization charges |
| 3,481 |
|
| 67,761 |
|
| 20,998 |
|
| 67,761 |
| ||||
Goodwill impairment |
| — |
|
| — |
|
| 72,000 |
|
| — |
| ||||
Tax valuation and other tax charges |
| 33,124 |
|
| — |
|
| 41,824 |
|
| — |
| ||||
Debt retirement expense (benefit) |
| — |
|
| — |
|
| (920 | ) |
| 11,949 |
| ||||
Amortization of intangibles and other non-cash costs |
| 1,831 |
|
| 5,363 |
|
| 1,831 |
|
| 25,284 |
| ||||
Total adjustments |
| 38,436 |
|
| 73,124 |
|
| 135,733 |
|
| 104,994 |
| ||||
Adjusted net income (loss) | $ | (7,739 | ) | $ | (3,600 | ) | $ | (25,360 | ) | $ | 19,944 |
| ||||
Basic adjusted net income (loss) per share | $ | (0.16 | ) | $ | (0.08 | ) | $ | (0.53 | ) | $ | 0.42 |
| ||||
Diluted adjusted net income (loss) per share | $ | (0.16 | ) | $ | (0.08 | ) | $ | (0.53 | ) | $ | 0.41 |
| ||||
Weighted average basic shares outstanding |
| 48,382 |
|
| 47,898 |
|
| 48,175 |
|
| 47,382 |
| ||||
Weighted average diluted shares outstanding and impairment charges |
| 48,382 |
|
| 47,898 |
|
| 48,175 |
|
| 48,642 |
| ||||
| ** | Earnings before income taxes, depreciation, amortization, net interest expense, restructuring, reorganization and impairment charges. |
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DDi Corp.
Condensed Consolidated Balance Sheets
(in thousands)
December 31, 2002 | December 31, 2001 | |||||||
(Unaudited) | ||||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 28,934 |
| $ | 23,629 |
| ||
Marketable securities—available for sale |
| 115 |
|
| 21,886 |
| ||
Cash, cash equivalents and marketable securities — restricted |
| 6,250 |
|
| — |
| ||
Accounts receivable, net |
| 41,986 |
|
| 42,548 |
| ||
Inventories |
| 28,240 |
|
| 24,030 |
| ||
Prepaid expenses and other |
| 3,963 |
|
| 3,178 |
| ||
Income tax receivable |
| — |
|
| 9,000 |
| ||
Deferred tax asset | �� |
| — |
|
| 12,241 |
| |
Total current assets |
| 109,488 |
|
| 136,512 |
| ||
Property, plant and equipment, net |
| 83,139 |
|
| 106,869 |
| ||
Debt issuance costs, net |
| 10,141 |
|
| 9,778 |
| ||
Goodwill and other intangibles, net |
| 140,982 |
|
| 218,984 |
| ||
Cash, cash equivalents and marketable securities — restricted |
| 3,142 |
|
| — |
| ||
Other |
| 1,300 |
|
| 2,384 |
| ||
Total Assets | $ | 348,192 |
| $ | 474,527 |
| ||
Liabilities and Stockholders’ Equity (Deficit) | ||||||||
Current liabilities: | ||||||||
Current maturities of long-term debt and capital lease obligations | $ | 75,137 |
| $ | 17,845 |
| ||
Revolving credit facilities |
| 4,246 |
|
| 2,975 |
| ||
Accounts payable |
| 27,457 |
|
| 26,767 |
| ||
Accrued expenses and other |
| 28,093 |
|
| 28,119 |
| ||
Income tax payable |
| 68 |
|
| 2,369 |
| ||
Total current liabilities |
| 135,001 |
|
| 78,075 |
| ||
Long-term debt and capital lease obligations |
| 238,509 |
|
| 260,977 |
| ||
Deferred tax liability |
| 2,464 |
|
| 1,628 |
| ||
Notes payable and other |
| 9,078 |
|
| 11,375 |
| ||
Total liabilities |
| 385,052 |
|
| 352,055 |
| ||
Stockholders’ equity (deficit): | ||||||||
Common stock, additional paid-in-capital and other |
| 541,649 |
|
| 540,983 |
| ||
Accumulated other comprehensive loss |
| (3,216 | ) |
| (4,311 | ) | ||
Accumulated deficit |
| (575,293 | ) |
| (414,200 | ) | ||
Total stockholders’ equity (deficit) |
| (36,860 | ) |
| 122,472 |
| ||
Total Liabilities and Stockholders’ Equity (Deficit) | $ | 348,192 |
| $ | 474,527 |
| ||
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Item 7. Exhibits.
Exhibit No. | Description | |
99.1 | Forbearance Agreement, dated as of February 26, 2003. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, DDi Corp. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: February 27, 2003
DDi CORP. | ||
By: | /S/ JOSEPH P. GISCH | |
Joseph P. Gisch Chief Financial Officer, Secretary and Treasurer | ||
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Pursuant to the requirements of the Securities Exchange Act of 1934, DDi Capital Corp. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: February 27, 2003
DDi CAPITAL CORP. | ||
By: | /S/ JOSEPH P. GISCH | |
Joseph P. Gisch Chief Financial Officer, Vice President and Treasurer | ||
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