UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 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
DDi CORP.
DDi CAPITAL CORP.
----------------------------------------------------------
(Exact name of registrants as specified in their charters)
Delaware 06-1576013
California 33-0780382
--------------------------------- ----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1220 Simon Circle
Anaheim, California 92806
----------------------------------------------------
(Address of principal executive offices) (Zip code)
(714) 688-7200
----------------------------------------------------
(Registrants' telephone number, including area code)
Not Applicable
--------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
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 registrants were required to file such reports), and (2) have been
subject to such filing requirements for the past 90 days. Yes [X] No [_].
As of November 7, 2001, 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 November 7, 2001, DDi Corp. had 47,898,223 shares of common stock,
par value $0.01 per share, outstanding and DDi Capital Corp. had 1,000 shares of
common stock, par value $0.01 per share, outstanding.
This Quarterly Report on Form 10-Q is a combined quarterly 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 H(1)(a)
and (b) of Form 10-Q and is filing this form with the reduced disclosure format
pursuant to General Instruction H(2).
DDi CORP.
DDi CAPITAL CORP.
FORM 10-Q
TABLE OF CONTENTS
Page No.
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2001
and December 31, 2000 3
Condensed Consolidated Statements of Operations for the three and nine
months ended September 30, 2001 and 2000 4
Consolidated Statements of Comprehensive Income (Loss) for the three and nine
months ended September 30, 2001 and 2000 6
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2001 and 2000 8
Notes to Condensed Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk 26
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 27
Signatures 28
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
DDi CAPITAL CORP. AND DDi CORP.
Condensed Consolidated Balance Sheets
(In thousands)
DDi Capital DDi Corp.
----------------------------- -----------------------------
September 30, December 31, September 30, December 31,
2001 2000 2001 2000
----------------------------- -----------------------------
(Unaudited) (Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 19,199 $ 39,629 $ 25,793 $ 66,874
Marketable securities - available for sale 27,212 - 27,212 -
Accounts receivable, net 35,317 87,860 48,773 99,828
Inventories 20,056 24,824 29,013 30,290
Prepaid expenses and other 1,889 2,349 3,293 3,145
Deferred income taxes 16,849 14,584 13,533 14,584
--------- --------- --------- ---------
Total current assets 120,522 169,246 147,617 214,721
Property, plant and equipment, net 96,842 80,928 126,004 92,726
Debt issuance costs, net 5,721 9,217 9,363 9,217
Goodwill and other intangibles, net 199,945 199,389 278,233 263,456
Other 1,727 1,048 2,004 1,247
--------- --------- --------- ---------
Total assets $ 424,757 $ 459,828 $ 563,221 $ 581,367
========= ========= ========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term debt and capital lease
obligations $ 16,303 $ 13,656 $ 16,550 $ 16,935
Accounts payable 9,428 26,612 22,062 37,099
Accrued expenses and other 15,836 39,559 23,256 44,452
Income taxes payable 3,009 6,099 1,816 8,215
--------- --------- --------- ---------
Total current liabilities 44,576 85,926 63,684 106,701
Long-term debt and capital lease obligations 143,588 291,797 272,851 316,308
Deferred income taxes 16,330 17,971 16,305 20,493
Notes payable and other 9,575 1,468 9,575 1,468
--------- --------- --------- ---------
Total liabilities 214,069 397,162 362,415 444,970
--------- --------- --------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock, additional paid-in-capital and other 544,564 386,298 542,863 468,595
Accumulated other comprehensive loss (545) - (4,581) (3,048)
Accumulated deficit (333,331) (323,632) (337,476) (329,150)
Total stockholders' equity 210,688 62,666 200,806 136,397
--------- --------- --------- ---------
Total liabilities and stockholders' equity $ 424,757 $ 459,828 $ 563,221 $ 581,367
========= ========= ========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
DDi CAPITAL CORP.
Condensed Consolidated Statements of Operations
(In thousands)
(Unaudited)
Three Nine Months
Months Ended Ended
September 30, September 30,
------------------------------------------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net sales $ 53,762 $132,227 $237,609 $294,424
Cost of sales 46,383 83,886 166,040 189,269
------------------------------------------------------
Gross profit 7,379 48,341 71,569 105,155
Operating expenses:
Sales and marketing 5,717 11,189 19,706 25,559
General and administrative 3,010 6,523 11,301 15,147
Amortization of intangibles 4,581 4,719 13,575 14,835
------------------------------------------------------
Operating income (loss) (5,929) 25,910 26,987 49,614
Interest rate swap valuation 8,285 - 8,285 -
Interest expense (net) and other expense (net) 2,806 9,007 12,349 28,739
------------------------------------------------------
Income (loss) before income taxes and extraordinary items (17,020) 16,903 6,353 20,875
Income tax benefit (expense) 6,547 (8,384) (4,103) (11,008)
------------------------------------------------------
Income (loss) before extraordinary items (10,473) 8,519 2,250 9,867
Extraordinary items, net of taxes - - (11,949) (670)
------------------------------------------------------
Net income (loss) $(10,473) $ 8,519 $ (9,699) $ 9,197
======================================================
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
DDi CORP.
Condensed Consolidated Statements of Operations
(In thousands, except share and per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net sales $ 70,583 $ 149,582 $ 297,131 $ 326,400
Cost of sales 59,337 95,132 206,804 210,620
---------------------------------------------------------
Gross profit 11,246 54,450 90,327 115,780
Operating expenses:
Sales and marketing 6,193 11,615 21,488 26,420
General and administrative 4,584 8,486 16,375 18,451
Amortization of intangibles 5,771 5,519 17,288 16,445
---------------------------------------------------------
Operating income (loss) (5,302) 28,830 35,176 54,464
Interest rate swap valuation 8,285 - 8,285 -
Interest expense (net) and other expense (net) 4,644 10,427 17,449 33,115
---------------------------------------------------------
Income (loss) before income taxes (18,231) 18,403 9,442 21,349
Income tax benefit (expense) 6,684 (8,983) (5,819) (11,478)
---------------------------------------------------------
Income (loss) before extraordinary items (11,547) 9,420 3,623 9,871
Extraordinary items, net of taxes - - (11,949) (2,551)
---------------------------------------------------------
Net income (loss) $ (11,547) $ 9,420 $ (8,326) $ 7,320
=========================================================
Income (loss) per share - basic:
Before extraordinary items $ (0.24) $ 0.24 $ 0.07 $ 0.20
Extraordinary items $ - $ - $ (0.25) $ (0.09)
---------------------------------------------------------
Net income (loss) $ (0.24) $ 0.24 $ (0.18) $ 0.11
=========================================================
Income (loss) per share - diluted:
Before extraordinary items $ (0.24) $ 0.22 $ 0.07 $ 0.19
Extraordinary items $ - $ - $ (0.25) $ (0.09)
---------------------------------------------------------
Net income (loss) $ (0.24) $ 0.22 $ (0.18) $ 0.10
=========================================================
Weighted average shares used to compute income
(loss) per share:
Basic 47,863,270 39,320,390 47,206,256 27,904,918
=========================================================
Diluted 47,863,270 42,031,446 48,574,726 29,408,841
=========================================================
- ------------------------------------------------------
Pro forma basic net income per share (unaudited) $ 0.24 $ 0.22
=========== ===========
Pro forma diluted net income per share (unaudited) $ 0.22 $ 0.21
=========== ===========
Pro forma weighted average basic shares outstanding (unaudited) 39,320,390 33,836,658
=========== ===========
Pro forma weighted average diluted shares outstanding (unaudited) 42,031,446 35,340,581
=========== ===========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
DDi CAPITAL CORP.
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
(Unaudited)
Three Months Nine Months
Ended Ended
September 30, September 30,
---------------------------------------------------
2001 2000 2001 2000
-------- ------- -------- -------
Net income (loss) $(10,473) $8,519 $ (9,699) $9,197
Other comprehensive income (loss):
Foreign currency translation adjustments (560) - (359) -
Cumulative effect of adoption of SFAS No. 133 - - (627) -
Unrealized gain on interest rate swaps, net of
unrealized net tax benefit 1,634 - 361 -
Unrealized holding gain on marketable
securities - available for sale 37 - 80 -
--------------------------------------------------
Comprehensive income (loss) $ (9,362) $8,519 $(10,244) $9,197
==================================================
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
DDi CORP.
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- --------------------------
2001 2000 2001 2000
-------- -------- ------- --------
Net income (loss) $(11,547) $ 9,420 $(8,326) $ 7,320
Other comprehensive income (loss):
Foreign currency translation adjustments 2,412 (3,042) (974) (4,208)
Cumulative effect of adoption of SFAS No. 133 - - (1,150) -
Unrealized net gain on interest rate swaps,
net of unrealized net tax benefit 1,490 - 511 -
Unrealized holding gain on marketable
securities - available for sale 37 - 80 -
---------------------------- --------------------------
Comprehensive income (loss) $ (7,608) $ 6,378 $(9,859) $ 3,112
============================ ==========================
The accompanying notes are an integral part of these
condensed consolidated financial statements.
7
DDi CAPITAL CORP. AND DDi CORP.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
DDi Capital DDi Corp.
------------------------------------------------------------------
Nine Months Ended September 30, Nine Months Ended September 30,
2001 2000 2001 2000
-------------- ----------------- --------------- ----------------
Cash flows from operating activities:
Net cash provided by operating activities $ 46,171 $ 40,332 $ 53,360 $ 44,089
-------------- ----------------- --------------- ----------------
Cash flows from investing activities:
Purchases of property, plant and equipment (22,644) (17,395) (33,211) (19,357)
Purchases of short-term investments (44,497) - (44,497) -
Proceeds from sale of short-term investments 17,365 - 17,365 -
Acquisition of MCM, net of cash acquired of $7,794 - - - (2,375)
Acquisition of Thomas Walter - - (24,534) -
Acquisition of Nelco (2,963) - (2,963) -
Acquisition of Olympic (12,684) - (12,684) -
Acquisition of Altatron, net of cash acquired of $81 (4,786) - (4,786) -
Acquisition related expenditures (535) - (601) -
Acquisition of Automata - (19,805) - (19,805)
Acquisition of Golden Manufacturing, net of cash
acquired of $722 - (11,867) - (11,867)
-------------- ----------------- --------------- ----------------
Net cash used in investing activities (70,744) (49,067) (105,911) (53,404)
-------------- ----------------- --------------- ----------------
Cash flows from financing activities:
Net principal payments on long-term debt (147,224) (103,026) (148,941) (146,504)
Net (payments) borrowings on revolving credit facilities (186) 9,500 (186) 9,500
Borrowings on DDi Europe Facilities Agreement - - 2,867 -
Proceeds from issuance of convertible subordinated notes - - 100,000 -
Payments of deferred notes payable (691) (2,365) (691) (2,365)
Principal payments on capital lease obligations (1,350) (891) (2,025) (1,126)
Payment of debt issuance costs (2,820) (742) (6,800) (742)
Capital contribution from Parent, net 158,266 106,645 - -
Due to affiliate (212) 339 - -
Shareholder borrowings - - - (17)
Escrow payable distribution (1,602) (1,267) (1,602) (1,267)
Proceeds from issuance of common stock
through initial public offering - - - 156,660
Net proceeds from issuance of common stock
through follow-on public offering - - 66,975 -
Costs incurred in connection with the issuance of
common stock through initial public offering - - - (4,267)
Costs incurred in connection with the issuance of
common stock through follow-on public offering - - (844) -
Issuance of common stock through Employee Stock
Purchase Plan - - 733 365
Proceeds from exercise of stock options - - 3,161 602
-------------- ----------------- --------------- ----------------
Net cash provided by financing activities 4,181 8,193 12,647 10,839
-------------- ----------------- --------------- ----------------
Effect of exchange rate changes on cash (38) - (1,177) 326
-------------- ----------------- --------------- ----------------
Net increase (decrease) in cash and cash equivalents (20,430) (542) (41,081) 1,850
Cash and cash equivalents, beginning of year 39,629 644 66,874 648
-------------- ----------------- --------------- ----------------
Cash and cash equivalents, end of period $ 19,199 $ 102 $ 25,793 $ 2,498
============== ================= =============== ================
Supplemental disclosure of cash flow information:
Non-cash operating activities:
During the nine months ended September 30, 2001, depreciation and amortization
expense was approximately $26 million for DDi Capital and approximately $33
million for DDi Corp.
During the nine months ended September 30, 2000, depreciation and amortization
expense was approximately $27 million for DDi Capital and $30 million for DDi
Corp.
The accompanying notes are an integral part of these
condensed consolidated financial statements.
8
DDi CAPITAL CORP. AND DDi CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
NOTE 1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
BASIS OF PRESENTATION
The unaudited condensed 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 unaudited condensed
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." The unaudited condensed consolidated financial statements of DDi
Corp. include the results of MCM commencing on April 14, 2000, the date of
acquisition of MCM (see Note 7), Automata International, Inc. ("Automata")
commencing on August 4, 2000, the date of the acquisition of Automata's assets
(see Note 8), Golden Manufacturing, Inc. ("Golden") commencing on September 15,
2000, the date of the acquisition of Golden's assets (see Note 9), Thomas Walter
Limited ("Thomas Walter") commencing on March 5, 2001, the date of acquisition
of Thomas Walter (see Note 10), Nelco Technology, Inc. ("Nelco") commencing on
April 27, 2001, the date of acquisition of Nelco's assets (see Note 11), Olympic
Circuits Canada ("Olympic") commencing on May 9, 2001, the date of acquisition
of Olympic (see Note 12) and Altatron Technology Inc. ("Altatron") commencing on
June 4, 2001, the date of acquisition of Altatron's assets (see Note 13). All
intercompany transactions have been eliminated in consolidation.
In October 1997, the predecessor of DDi Corp. 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, the predecessor
of DDi Corp. incorporated DDi Capital as a wholly-owned subsidiary and, in
February 1998, contributed substantially all its assets (including the shares of
common stock of Dynamic Details), subject to certain liabilities, including
senior discount notes to DDi Capital. In July 1998, the predecessor of DDi
Corp. incorporated 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 7) and subsequently combined MCM with its other
European operations to form DDi Europe. DDi Europe, Dynamic Details and Dynamic
Details Design, LLC, a wholly-owned subsidiary of Intermediate formed in 1998,
represent the operating subsidiaries of DDi Corp.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments necessary (consisting only of
normal recurring adjustments) to present fairly the financial position of DDi
Capital and DDi Corp. as of September 30, 2001, and the results of operations
for the three and nine months ended September 30, 2001 and 2000 and cash flows
for the nine months ended September 30, 2001 and 2000. The results of
operations for such interim periods are not necessarily indicative of results of
operations to be expected for the full year.
These financial statements have been prepared by the Company pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such regulations, although the Company believes the
disclosures provided are adequate to prevent the information presented from
being misleading.
This report on Form 10-Q for the quarter ended September 30, 2001 should be read
in conjunction with the audited financial statements presented in the DDi
Capital Corp.'s and DDi Corp.'s Annual Report on Form 10-K for the year ended
December 31, 2000.
Concurrent with DDi Corp.'s initial public offering on April 14, 2000 (see Note
6), 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 a share of Class L common stock
by the initial public offering price of $14.00 per share). Class A and Class L
common stock shared 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.
DESCRIPTION OF BUSINESS
The Company is a leading provider of time-critical, technologically advanced
design, development and manufacturing services to original equipment
manufacturers and other electronics manufacturing service providers. The
Company serves over 2,000 customers, primarily in the telecommunications,
computer and networking industries.
9
DDi CAPITAL CORP. AND DDi CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
NOTE 2. INVENTORIES
Inventories are stated at the lower of cost (determined on a first-in, first-out
basis) or market and consist of the following (in thousands):
DDi Capital DDi Corp.
-----------------------------------------------------------------------
September 30, December 31, September 30, December 31,
2001 2000 2001 2000
-----------------------------------------------------------------------
Raw materials $13,766 $ 9,970 $16,476 $12,561
Work-in-process 4,639 12,117 10,233 14,667
Finished goods 1,651 2,737 2,304 3,062
-----------------------------------------------------------------------
Total $20,056 $24,824 $29,013 $30,290
=======================================================================
NOTE 3. LONG-TERM DEBT AND CAPITAL LEASES
Long-term debt and capital lease obligations consist of the following
(in thousands):
DDi Capital DDi Corp.
---------------------------------------------------------------------
September 30, December 31, September 30, December 31,
2001 2000 2001 2000
---------------------------------------------------------------------
Senior Term Facility (a) $139,471 $147,743 $139,471 $147,743
10.0% Senior Subordinated Notes - 100,000 - 100,000
5.25% Convertible Subordinated Notes - - 100,000 -
12.5% Capital Senior Discount Notes (b) 14,092 50,311 14,092 50,311
DDi Europe Facilities Agreement (c) - - 28,372 27,249
Capital lease obligations 6,328 7,399 7,466 7,940
---------------------------------------------------------------------
Sub-total 159,891 305,453 289,401 333,243
Less current maturities (16,303) (13,656) (16,550) (16,935)
---------------------------------------------------------------------
Total $143,588 $291,797 $272,851 $316,308
=====================================================================
(a) The Senior Term Facility, together with the Revolving Credit Facility, which
had no amounts outstanding as of September 30, 2001 and December 31, 2000,
comprise the Senior Credit Facility. Interest rates are LIBOR-based and
range from 4.67% to 5.67% as of September 30, 2001.
(b) Face amount of $16,090 and $63,000 at September 30, 2001 and December 31,
2000, respectively, net of unamortized discount of $1,998 and $12,689 at
September 30, 2001 and December 31, 2000, respectively.
(c) Interest rates are LIBOR-based and range from 4.65% to 6.15% at September
30, 2001.
NOTE 4. DERIVATIVES
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards ("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 loss for the initial difference between the book
value and fair value of interest rate swap agreements as of January 1, 2001.
The initial difference amounted to approximately $0.6 million for DDi Capital
and approximately $1.2 million for DDi Corp. The fair value of interest rate
swaps at September 30, 2001 is included in current and long-term liabilities in
the Condensed Consolidated Balance Sheets.
10
DDi CAPITAL CORP. AND DDi CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
In July 2001, the Company elected to terminate and concurrently replace its
existing interest rate exchange agreements ("Swap Agreements" or "Swap
Agreement"). The modified Swap Agreements fix the rate of interest to be paid
on 100% of the principal balance of the Senior Term Facility through the
scheduled maturity in 2005. Under the terms of one of the two modified Swap
Agreements, the fixed rate to be paid ranges from 3.80% to 4.40% for the period
July 1, 2001 through December 31, 2002. The change in the fair value of this
modified Swap Agreement was recorded on the Consolidated Statement of
Comprehensive Loss for the quarter ended September 30, 2001. Under the terms of
the other modified Swap Agreement, the fixed rate to be paid is 5.99% from
January 1, 2002 through December 31, 2002 and is 6.49% from January 1, 2003
through the scheduled maturity of the Senior Term Facility in 2005. In
addition, this modified Swap Agreement contains a feature that does not qualify
it as an effective cash flow hedge pursuant to SFAS No. 133 if interest rates
exceed 7.00%. Accordingly, under SFAS No. 133, the change in the fair value of
this modified Swap Agreement of $8.3 million was recorded on the Condensed
Consolidated Statements of Operations for the quarter ended September 30, 2001.
NOTE 5. EARNINGS PER SHARE
Basic and diluted earnings per share - DDi Corp. has adopted the provisions of
SFAS No. 128 "Earnings Per Share." SFAS No. 128 requires DDi Corp. 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.
DDi Corp.
-------------------------------------------------------------
Three Months Ended Three Months Ended
(in thousands, except share amounts) September 30, 2001 September 30, 2000
-------------------------------------------------------------
Numerator: Basic Diluted Basic Diluted
---------------- ------------ -------------- ------------
Income (loss) before extraordinary item $ (11,547) $ (11,547) $ 9,420 $ 9,420
Priority distribution due shares of Class L common stock - - - -
---------------- ------------ -------------- -----------
Income (loss) allocable to common stock (11,547) (11,547) 9,420 9,420
Extraordinary item - - - -
---------------- ------------ -------------- -----------
Net income (loss) allocable to common stock $ (11,547) $ (11,547) $ 9,420 $ 9,420
================ ============ ============== ===========
Denominator:
Weighted average shares of common stock outstanding (basic) 47,863,270 47,863,270 39,320,390 39,320,390
Dilutive potential common shares:
Stock options and warrants - - - 2,711,056
---------------- ------------ -------------- -----------
Shares used in computing diluted income (loss) per share 47,863,270 47,863,270 39,320,390 42,031,446
================ ============ ============== ===========
DDi Corp.
-------------------------------------------------------------
Three Months Ended Three Months Ended
(in thousands, except share amounts) September 30, 2001 September 30, 2000
----------------------------- ---------------------------
Numerator: Basic Diluted Basic Diluted
---------------- ----------- -------------- ------------
--------------- ----------- ------------- -----------
Income before extraordinary item $ 3,623 $ 3,623 $ 9,871 $ 9,871
Priority distribution due shares of Class L common stock - - (4,356) (4,356)
--------------- ----------- ------------- -----------
Income allocable to common stock 3,623 3,623 5,515 5,515
Extraordinary item (11,949) (11,949) (2,551) (2,551)
--------------- ----------- ------------- -----------
Net income (loss) allocable to common stock $ (8,326) $ (8,326) $ 2,964 $ 2,964
=============== =========== ============= ===========
Denominator:
Weighted average shares of common stock outstanding (basic) 47,206,256 47,206,256 27,904,918 27,904,918
Dilutive potential common shares:
Stock options and warrants - 1,368,471 - 1,503,923
--------------- ----------- ------------- -----------
Shares used in computing diluted income (loss) per share 47,206,256 48,574,727 27,904,918 29,408,841
=============== =========== ============= ===========
11
DDi CAPITAL CORP. AND DDi CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
Pro forma loss per share (unaudited) - Pro forma basic and diluted net income
per share for the three and nine months ended September 30, 2000 have been
calculated based on the net loss applicable to common stock assuming the
reclassification of DDi Corp.'s Class A and L common stock (see Note 1), which
occurred immediately prior to the completion of the initial public offering (see
Note 6), had occurred at the beginning of the period.
NOTE 6. 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 with proceeds of $156.7 million,
net of underwriting discounts, commissions and expenses. The net proceeds were
used to reduce the indebtedness of the Dynamic Details senior term loans, redeem
a portion of the senior discount notes issued by DDi Intermediate, pay
associated redemption premiums and accrued and unpaid interest thereon, finance
a portion of the acquisition of MCM (see Note 7) and pay offering expenses. In
conjunction with the redemption of debt, the Company recorded net extraordinary
losses (see Note 17).
On October 16, 2000, DDi Corp. completed a secondary public offering of
6,000,000 shares of its common stock, with 4,608,121 shares issued by DDi Corp.
and the remainder offered by selling shareholders. The shares were offered at
$27.875 per share, generating proceeds to DDi Corp. of $120.0 million, net of
underwriting discounts, commissions and expenses. The net proceeds were used to
redeem the remaining $17.5 million of the Intermediate Senior Discount Notes,
pay associated redemption premiums of $3.6 million and accrued and unpaid
interest thereon of $5.2 million, and repurchase a portion of the Capital Senior
Discount Notes, with an accreted balance of $36.5 million, for $37.6 million.
The remaining net proceeds of approximately $56 million are being used for
general corporate purposes, including potential future acquisitions. DDi Corp.
contributed approximately $35 million of the $56 million to Dynamic Details.
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 (see Note 17) and all of the Dynamic Details
Senior Subordinated Notes.
NOTE 7. ACQUISITION OF MCM ELECTRONICS
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 acquisition of MCM was accounted for as a purchase in accordance with
Accounting Principles Board Opinion No.16 ("APB 16"), and accordingly, the
results of operations of MCM since the date of acquisition are included in the
accompanying condensed consolidated financial statements for DDi Corp. 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 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.
NOTE 8. ACQUISITION OF AUTOMATA INTERNATIONAL
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. Dynamic Details acquired
substantially all the U.S. assets of Automata for a total cash consideration of
approximately $19.5 million, plus expenses of $0.5 million.
12
DDi CAPITAL CORP. AND DDi CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
This transaction was accounted for under the purchase method of accounting in
accordance with APB 16 and accordingly, the results of operations of Automata
since the date of the transaction are included in the accompanying condensed
consolidated financial statements of DDi Capital and DDi Corp. 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.
NOTE 9. ACQUISITION OF GOLDEN MANUFACTURING
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).
This transaction was accounted for under the purchase method of accounting in
accordance with APB 16 and accordingly, the results of operations of Golden
since the date of the transaction are included in the accompanying condensed
consolidated financial statements of DDi Capital and DDi Corp. 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.
NOTE 10. ACQUISITION OF 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
$24.2 million plus contingent consideration of approximately $3.5 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 acquisition of Thomas Walter was accounted for as a purchase in accordance
with APB 16 and accordingly, the results of operations of Thomas Walter since
the date of acquisition are included in the accompanying condensed consolidated
financial statements of DDi Corp. The purchase price of $24.5 million has been
allocated to the underlying assets and liabilities based upon their estimated
respective fair values at the date of acquisition. As of the filing of this
report, management is assessing fair value adjustments to the intangible assets
acquired (including identifiable intangibles such as developed technologies and
assembled workforce). These intangibles will be amortized over their estimated
useful lives. The residual value will be allocated to goodwill and will be
amortized over its estimated useful life of 20 years. The Company anticipates
making a final purchase price allocation in the fourth quarter of 2001 based
upon completion of management's assessment.
NOTE 11. ACQUISITION OF 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.
The transaction of Nelco was accounted for as a purchase in accordance with APB
16 and accordingly, the results of operations of Nelco since the date of the
transaction are included in the accompanying condensed consolidated financial
statements of DDi Capital and DDi Corp. 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.
13
DDi CAPITAL CORP. AND DDi CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
NOTE 12. ACQUISITION OF 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 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
September 30, 2001.
The acquisition of Olympic was accounted for as a purchase in accordance with
APB 16 and accordingly, the results of operations of Olympic since the date of
acquisition are included in the accompanying condensed consolidated financial
statements of DDi Capital and DDi Corp. 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. As of the filing of this
report, management is assessing fair value adjustments to the intangible assets
acquired. These intangibles will be amortized over their estimated useful
lives. The residual value will be allocated to goodwill and will be amortized
over its estimated useful life of 20 years.
NOTE 13. ACQUISITION OF 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 September 30, 2001.
This transaction was accounted for as a purchase in accordance with APB 16 and
accordingly, the results of operations of Altatron since the date of the
transaction are included in the accompanying condensed consolidated financial
statements of DDi Capital and DDi Corp. 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. As of the filing of this
report, management is assessing fair value adjustments to the intangible assets
acquired. These intangibles will be amortized over their estimated useful
lives. The residual value will be allocated to goodwill and will be amortized
over its estimated useful life of 20 years.
14
DDi CAPITAL CORP. AND DDi CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
NOTE 14. UNAUDITED PRO FORMA INFORMATION
The accompanying condensed consolidated statements of operations include the
accounts of MCM, Automata and Golden for the period January 1, 2001 through
September 30, 2001 and includes the accounts of Thomas Walter for the period
March 5, 2001 through September 30, 2001, the accounts of Nelco for the period
April 27, 2001 through September 30, 2001, the accounts of Olympic for the
period May 9, 2001 through September 30, 2001 and the accounts of Altatron for
the period June 4, 2001 through September 30, 2001. The following pro forma
information for the nine months ended September 30, 2001 and 2000 presents net
sales, income before extraordinary item, and net income (loss) for each of these
periods as if the MCM, Automata, Thomas Walter, Nelco, Olympic and Altatron
transactions were consummated at the beginning of each period. The unaudited
pro forma financial information does not reflect Golden's pre-acquisition
results. As of the filing of this report, management is assessing purchase
price allocation adjustments to the intangible assets acquired and to
liabilities assumed in the Thomas Walter, Nelco, Olympic, and Altatron
acquisitions based on fair values. The following pro forma information does
not reflect final purchase price allocation results. These results may have a
material effect on the reported results of operations.
Pro Forma Pro Forma
--------- ---------
Nine months ended
September 30, 2001 September 30, 2000
------------------ ------------------
(in millions, except per share data)
Net Sales:
DDi Capital $ 249.4 $ 367.2
DDi Corp. $ 312.4 $ 432.4
Income Before Extraordinary Item:
DDi Capital $ 0.9 $ 6.9
DDi Corp. $ 2.3 $ 7.0
Net Income (Loss):
DDi Capital $ (11.1) $ 6.4
DDi Corp. $ (9.6) $ 4.4
DDi Corp. net income (loss) per share of common stock--basic $ (0.20) $ 0.16
DDi Corp. net income (loss) per share of common stock--diluted $ (0.20) $ 0.15
NOTE 15. 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
engage 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 makers are the Chairman and 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 three and nine months ended September 30, 2001 there were no material assets
or revenues from any individual foreign country.
15
DDi CAPITAL CORP. AND DDi CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
The following summarizes financial information for DDi Corp. by geographic area:
Three months ended September 30, Nine months ended September 30,
(in thousands) 2001 2000 2001 2000
----------- ------------ ----------- -------------
Net sales:
Domestic $ 51,331 $ 123,605 $ 218,336 $ 275,381
Europe 17,747 19,797 65,595 41,368
Other 1,505 6,180 13,200 9,651
-------- --------- --------- ---------
Total $ 70,583 $ 149,582 $ 297,131 $ 326,400
======== ========= ========= =========
Net sales by geographic area for DDi Capital for the three and nine months ended
September 30, 2001 and 2000 were the same as DDi Corp. except the sales to
Europe were $927 for the three months ended September 30, 2001 and $6,074 for
the nine months ended September 30, 2001.
September 30, December 31,
(in thousands) 2001 2000
------------ ------------
Long-lived assets:
Domestic $ 295,315 $ 290,582
International 120,289 76,064
--------- ---------
Total $ 415,604 $ 366,646
========= =========
Long-lived assets for DDi Capital as of September 30, 2001 consisted of $291,672
domestic and $12,563 international and as of December 31, 2000 consisted only of
domestic long-lived assets.
NOTE 16. COMPREHENSIVE INCOME (LOSS)
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 4). 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 loss for
the initial difference between the book value and fair value of interest rate
swap agreements as of January 1, 2001. The initial difference amounted to
approximately $0.6 million for DDi Capital and approximately $1.2 million for
DDi Corp.
NOTE 17. EXTRAORDINARY ITEMS
During the quarter ended June 30, 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 6). In addition, Intermediate
recorded, as extraordinary items, the redemption premium and write-off of debt
issuance costs of approximately $1.9 million, net of related taxes of $1.2
million related to the Intermediate Senior Discount Notes principal repayments
funded from the net proceeds of DDi Corp.'s initial public offering.
During the quarter ended March 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 Dynamic
Details Senior Subordinated Notes funded from the net proceeds of DDi Corp.'s
February 14, 2001 follow-on public offering (see Note 6).
16
DDi CAPITAL CORP. AND DDi CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
During the quarter ended June 30, 2001, 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 (see Note 6).
NOTE 18. RECENT ACCOUNTING PRONOUNCEMENTS
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, 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 at the date of closing. The Company is currently evaluating the
impact of the adoption of SFAS No. 141 and 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 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.
NOTE 19. SUBSEQUENT EVENTS
In October 2001, the management and the Company's Board of Directors approved a
restructuring plan to downsize and consolidate facilities. As a result, DDi
Corp. will record in the fourth quarter of 2001, a pre-tax restructuring charge
of approximately $60 million to $80 million, primarily related to capacity
reduction, equipment write-offs and impairment of intangible assets.
In November 2001, the Company elected to amend its modified Swap Agreements (see
Note 4). Under the terms of the amended Swap Agreements, the Company pays a
maximum annual rate of interest applied to 100% of the principal balance of the
Senior Term Facility. The fixed rate to be paid is 4.40% from October 1, 2001
to December 31, 2001, is 5.99% from January 1, 2002 to December 31, 2002 is
6.49% from January 1, 2003 to December 31, 2003 and is 6.99% from January 1,
2004 to the scheduled maturity of the Senior Term Facility in 2005.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS.
- -------------
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 electronics
manufacturing service providers. Operating through our primary operating
subsidiaries, DDi Europe Limited ("DDi Europe") and Dynamic Details,
Incorporated ("Dynamic Details"), we target the communications and networking
equipment industries which are characterized by aggressive new product
development programs demanding the rapid application of advanced technology and
design.
As used herein, the "Company," "we," or "us" means DDi Corp. and its wholly-
owned subsidiaries, including DDi Capital Corp. ("DDi Capital"), DDi Europe and
Dynamic Details.
This discussion and analysis should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations set
forth in DDi Capital Corp.'s and DDi Corp.'s Annual Report on Form 10-K for the
year ended December 31, 2000.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2001 Compared to the Three Months Ended
September 30, 2000
Net Sales
- ---------
DDi Capital net sales decreased $78.4 million (59%) to $53.8 million for the
three months ended September 30, 2001, from $132.2 million for the same period
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 for the three months ended September 30, 2001 relating to
acquisitions in 2001 were $5.4 million. DDi Corp. net sales decreased $79.0
million (53%) to $70.6 for the three months ended September 30, 2001, from
$149.6 million for the same period in 2000. Such decrease reflects the lower
level of sales generated in the current period, partially offset by the impact
of the acquisition of Thomas Walter Limited ("Thomas Walter") in March 2001,
which contributed $3.2 million to net sales.
Gross Profit
- ------------
DDi Capital gross profit decreased $40.9 million (85%) to $7.4 million for the
three months ended September 30, 2001, from $48.3 million for the same period in
2000. Such decrease in gross profit resulted from the lower level of sales
generated in the current period. DDi Corp. gross profit decreased $43.3
million (79%) to $11.2 million for the three months ended September 30, 2001,
from $54.5 million for the same period in 2000. The decrease in DDi Corp. gross
profit primarily reflects the lower level of sales generated in the current
period. The impact of the decrease in sales on the Company's 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 $5.5 million (49%) to $5.7
million for the three months ended September 30, 2001, from $11.2 million for
the same period in 2000. DDi Corp. sales and marketing expenses decreased $5.4
million (47%) to $6.2 million for the three months ended September 30, 2001,
from $11.6 million for the same period in 2000. Such decreases in sales and
marketing expenses are due to the lower level of sales generated in the current
period, as well as cost control measures.
General and Administration Expenses
- -----------------------------------
DDi Capital general and administration expenses decreased $3.5 million (54%) to
$3.0 million for the three months ended September 30, 2001, from $6.5 million
for the same period in 2000. DDi Corp. general and administration expenses
decreased $3.9 million (46%) to $4.6 million for the three months ended
September 30, 2001, from $8.5 million for the same period in 2000. Such
decreases in general and administrative expenses are primarily due to the lower
level of sales generated in the current period, as well as cost control
measures.
Amortization of Intangibles
- ---------------------------
DDi Capital amortization of intangibles decreased $0.1 million (2%) to $4.6
million for the three months ended September 30, 2001, from $4.7 million for the
same period in 2000. 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 acquisitions (aggregating
approximately $0.3 million). DDi Corp. amortization of intangibles increased
$0.3 million (5%) to $5.8 million for the three months ended September 30, 2001,
from $5.5 million for the same period in 2000. Such
18
increase is due to the amortization attributable to the acquisition of Thomas
Walter, partially offset by the decrease in amortization of intangibles incurred
by DDi Capital.
Interest Rate Swap Valuation
- ----------------------------
DDi Capital and DDi Corp. interest rate swap valuation represents the change in
the fair value of an interest rate swap agreement as of September 30, 2001 (see
Note 4 to the Condensed Consolidated Financial Statements).
Net Interest Expense
- --------------------
DDi Capital net interest expense decreased $6.2 million (69%) to $2.8 million
for the three months ended September 30, 2001, from $9.0 million for the same
period in 2000. Such decrease in net interest expense is due primarily to the
redemption of a portion of the Capital Senior Discount Notes in October 2000 and
during the second quarter of 2001, and the redemption of the Senior Subordinated
Notes in February 2001. Cash generated from equity offerings funded these
redemptions. DDi Corp. net interest expense decreased $5.8 million (56%) to
$4.6 million for the three months ended September 30, 2001, from $10.4 million
for the same period in 2000. Such decrease in net interest expense reflects the
decrease in expense incurred by DDi Capital and the redemption of the
Intermediate Senior Discount Notes in October 2000. These decreases were
partially offset by $1.3 million in interest expense incurred relating to the
Convertible Subordinated Notes issued in February 2001.
Income Taxes
- ------------
DDi Capital income taxes decreased $14.9 million to a $6.5 million benefit for
the three months ended September 30, 2001, from an $8.4 million expense for the
same period in 2000. DDi Corp. income taxes decreased $12.5 million to a $6.7
million benefit for the three months ended September 30, 2001, from a $9.0
million expense for the same period in 2000. Such decreases in tax provisions
reflect the lower taxable income generated in the current period. The
provisions for income taxes are based upon the Company's expected effective tax
rate in the respective fiscal year.
Nine Months Ended September 30, 2001 Compared to the Nine Months Ended September
30, 2000
Net Sales
- ---------
DDi Capital net sales decreased $56.8 million (19%) to $237.6 million for the
nine months ended September 30, 2001, from $294.4 million for the same period 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 for the nine months ended September 30, 2001 relating to
acquisitions in 2001 were $7.7 million. DDi Corp. net sales decreased $29.3
million (9%) to $297.1 million for the nine months ended September 30, 2001,
from $326.4 million for the same period 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 nine months ended September
2001 relating to acquisitions in 2001 were $16.7 million.
Gross Profit
- ------------
DDi Capital gross profit decreased $33.6 million (32%) to $71.6 million for the
nine months ended September 30, 2001, from $105.2 million for the same period in
2000. DDi Corp. gross profit decreased $25.5 million (22%) to $90.3 million for
the nine months ended September 30, 2001, from $115.8 million for the same
period in 2000. Such decrease in gross profit resulted from the lower level of
sales generated in the nine months ended September 30, 2001. The impact of the
decrease in sales on the Company's 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 $5.9 million (23%) to $19.7
million for the nine months ended September 30, 2001, from $25.6 million for the
same period in 2000. DDi Corp. sales and marketing expenses decreased $4.9
million (19%) to $21.5 million for the nine months ended September 30, 2001,
from $26.4 million for the same period in 2000. Such decrease in sales and
marketing expenses is primarily due to the lower level of sales generated in the
nine months ended September 30, 2001, as well as cost control measures.
General and Administration Expenses
- -----------------------------------
DDi Capital general and administration expenses decreased $3.8 million (25%) to
$11.3 million for the nine months ended September 30, 2001, from $15.1 million
for the same period in 2000. DDi Corp. general and administration expenses
decreased $2.1 million (11%) to $16.4 million for the nine months ended
September 30, 2001, from $18.5 million for the same period in 2000. Such
decreases in general and administrative expenses are due to the lower level of
sales generated in the nine months ended September 30, 2001, as well as cost
control measures.
19
Amortization of Intangibles
- ---------------------------
DDi Capital amortization of intangibles decreased $1.2 million (8%) to $13.6
million for the nine months ended September 30, 2001, from $14.8 million for the
same period in 2000. Such decrease in amortization of intangibles is due to
the use of accelerated amortization methods with regard to certain identifiable
intangibles, partially offset by the additional amortization resulting from
acquisitions (aggregating approximately $0.7 million). DDi Corp. amortization
of intangibles increased $0.9 million (5%) to $17.3 million for the nine months
ended September 30, 2001, from $16.4 million for the same period in 2000. Such
increase in amortization of intangibles reflects the impact of the acquisitions
of MCM and Thomas Walter, partially offset by the decrease in expense incurred
by DDi Capital.
Interest Rate Swap Valuation
- ----------------------------
DDi Capital and DDi Corp. interest rate swap valuation represents the change in
the fair value of an interest rate swap agreement as of September 30, 2001 (see
Note 4 to the Condensed Consolidated Financial Statements).
Net Interest Expense
- --------------------
DDi Capital net interest expense decreased $16.4 million (57%) to $12.3 million
for the nine months ended September 30, 2001, from $28.7 million for the same
period in 2000. Such decrease in net interest expense is due primarily to the
redemption of a portion of the Senior Term Facility principal in April 2000, the
redemption of a portion of the Capital Senior Discount Notes in October 2000 and
during the second quarter of 2001, and the redemption of the Senior Subordinated
Notes in February 2001. Cash generated from equity offerings funded these
redemptions. DDi Corp. net interest expense decreased $15.7 million (47%) to
$17.4 million for the nine months ended September 30, 2001, from $33.1 million
for the same period in 2000. Such decrease in net interest expense reflects the
decrease in net interest expense incurred by DDi Capital and the redemption of
the Intermediate Senior Discount Notes in April and October 2000. These
decreases were partially offset by interest expense incurred from the
acquisition of MCM and $3.1 million in interest expense relating to the issuance
of the Convertible Subordinated Notes in February 2001.
Income Taxes
- ------------
DDi Capital income taxes decreased $6.9 million to $4.1 million for the nine
months ended September 30, 2001, from $11.0 million for the same period in 2000,
reflecting a lower level of taxable income earned in the current period. DDi
Corp. income taxes decreased $5.7 million to $5.8 million for the nine months
ended September 30, 2001, from $11.5 million for the same period 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 Convertible Subordinated Notes. The provisions for income
taxes are based upon the Company's expected effective tax rate in the respective
fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2001, cash, cash equivalents and marketable securities were
$46.4 million for DDi Capital and $53.0 million for DDi Corp., compared to $39.6
million for DDi Capital and $66.9 million for DDi Corp. as of December 31, 2000.
The principal source of liquidity to fund ongoing operations for the nine months
ended September 30, 2001 was cash provided by operations.
Net cash provided by operating activities for the nine months ended September
30, 2001 was $46.2 million for DDi Capital and $53.4 million for DDi Corp.,
compared to $40.3 million for DDi Capital and $44.1 million for DDi Corp. for
the nine months ended September 30, 2000.
Capital expenditures for the nine months ended September 30, 2001 were $22.6
million for DDi Capital and $33.2 million for DDi Corp., compared to $17.4
million for DDi Capital and $19.4 million for DDi Corp. for the nine months
ended September 30, 2000.
As of September 30, 2001, DDi Capital and DDi Corp. had long-term borrowings of
$143.6 million and $272.9 million, respectively. We have $75.0 million
available for borrowing under our revolving credit facility for revolving credit
loans, letters of credit and swing line loans, less amounts that may be in use
from time-to-time. At September 30, 2001, we had no amounts outstanding under
this revolving credit facility and had $0.7 million reserved against the
facility for a letter of credit. In addition, at September 30, 2001, we had
available a $50 million uncommitted incremental borrowing facility.
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
20
of underwriting discounts, commissions and expenses. The net proceeds of both
transactions have been used to repurchase a portion of the DDi Capital senior
discount notes and all of the Dynamic Details senior subordinated notes (see
Note 6 and Note 17 to the Condensed Consolidated Financial Statements).
Based upon the current level of operations, we believe that cash generated from
operations, available cash and amounts available under our senior credit
facility will be adequate to meet our debt service requirements, capital
expenditures and working capital needs for the foreseeable future, although no
assurance can be given in this regard. Accordingly, there can be 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 remain leveraged and our future operating performance and ability to service
or refinance our indebtedness will be subject to future economic conditions and
to financial, business and other factors, certain of which are beyond our
control.
COLORADO FACILITY
In December 1999, we implemented a plan to consolidate our Colorado operations
into our Texas facility, resulting in the closure of the Colorado facility. In
conjunction with the closure of the Colorado facility, we recorded charges in
the fourth quarter of 1999 totaling $7.0 million, consisting of $4.5 million for
severance and other exit costs and $2.5 million related to the impairment of net
property, plant and equipment. The exit costs were accrued for as of December
31, 1999. The closure of the facility was effectively complete as of March 31,
2000. The accrued exit costs remaining as of September 30, 2001 are minor,
representing expenses principally related to net rental payments through
scheduled maturities of real property operating leases.
RISKS ASSOCIATED WITH INTANGIBLE ASSETS
At September 30, 2001, intangible assets were $199.9 million for DDi Capital and
$278.2 million for DDi Corp. These amounts represented a significant portion of
each company's total assets at that date. The intangible assets consist of
goodwill and other identifiable intangibles relating to acquisitions.
Additional intangible assets may be added in future periods, principally from
the consummation of further acquisitions. Amortization of these additional
intangibles may, in turn, have a negative impact on earnings. Beginning on
January 1, 2002, the Company will adopt SFAS No. 142 which establishes that
goodwill and certain intangible assets will no longer be amortized. In
addition, we continuously evaluate whether events and circumstances have
occurred that indicate the remaining balance of intangible assets may not be
recoverable. When factors indicate that assets should be evaluated for possible
impairment, we may be required to reduce the carrying value of our intangible
assets, which could have a material adverse effect on our results during the
periods in which such a reduction is recognized. There can be no assurance that
we will not be required to write down intangible assets in future periods.
FORWARD-LOOKING STATEMENTS
A number of the matters and subject areas discussed in this Form 10-Q 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 quarterly report on Form 10-Q regarding our financial
position and business strategy may constitute forward-looking statements. All
of these forward-looking statements are based upon 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: (i) increased competition; (ii) increased costs;
(iii) inability to consummate acquisitions on attractive terms; (iv) loss or
retirement of key members of management; (v) increases in our cost of borrowings
or unavailability of additional debt or equity capital on terms considered
reasonable by management; (vi) adverse state, federal or foreign legislation or
regulation or adverse determinations by regulators; (vii) changes in general
economic conditions in the markets in which we may compete and fluctuations in
demand in the electronics industry; and (viii) the ability to sustain historical
margins as the industry develops. We have attempted to identify, in context,
certain of the factors that we currently believe may cause actual future
experiences to differ from our current expectations regarding the relevant
matter or subject area. In addition to the items specifically discussed above,
our business and results of operations are subject to the risks and
uncertainties described herein under the headings "Risks Associated With
Intangible Assets" and "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
registration statements and periodic reports filed with the Securities and
Exchange Commission.
21
FACTORS THAT MAY AFFECT FUTURE RESULTS
Substantial Indebtedness
- ------------------------
We have a substantial amount of indebtedness. As of September 30, 2001, our
total debt was approximately $159.9 million for DDi Capital and $289.4 million
for DDi Corp. As of September 30, 2001, we had $74.3 million available under
the Dynamic Details senior credit facility for future borrowings for general
corporate purposes and working capital needs. In addition, subject to the
restrictions in the DDi Corp. convertible subordinated notes, DDi Capital senior
discount notes and Dynamic Details senior credit facility, we may incur
additional indebtedness in an unrestricted amount 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 our 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.
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 our senior credit facility or successor
facilities. We anticipate that our operating cash flow, together with
borrowings under our senior credit facility 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 (which could include the DDi Capital senior discount notes), or
seeking additional equity capital. There is no assurance that we can effect any
of these remedies on satisfactory terms, or at all.
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, incur indebtedness, 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 required to maintain specified financial ratios and satisfy certain
financial condition tests. Their ability to meet those financial ratios and
tests can be affected by events beyond their control, and there can be no
assurance that they will meet those tests. A breach of any of these covenants
could 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. 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
22
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. There can be no
assurance 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
- ---------------------------------------------------
Net sales to the ten largest customers accounted for approximately 37% of net
sales for DDi Capital and 36% of net sales for DDi Corp. during the nine months
ended September 30, 2001. We may depend upon a core group of customers for a
material percentage of our net sales in the future. Substantially all 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 revenues. In addition,
we generate significant accounts receivable in connection with providing
services to customers. If one or more significant customers were to become
insolvent or otherwise were unable to pay us for the services provided, results
of operations would be adversely affected.
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 with one company and acquired
eight other companies. We have a limited history of owning and operating our
businesses on a consolidated basis. We cannot assure you that we will be able
to successfully integrate these companies and meet performance expectations
without disrupting the quality and reliability of service to customers or
diverting management resources. The integration of these acquired companies and
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 successfully integrate these companies and manage
this growth effectively, our rate of growth and revenues may be adversely
affected.
Costs of International Expansion
- --------------------------------
We have expanded into new foreign markets and intend to continue our
international expansion. We completed our acquisition of MCM and Thomas Walter,
both United Kingdom companies, on April 14, 2000 and March 5, 2001,
respectively. In addition, we completed our acquisition of Olympic, a Canadian
company, on April 9, 2001. 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 may not be able 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 the revenues we expect, and our operating margins may be negatively
impacted and DDi Corp.'s common stock price may decline.
23
Variability of Orders
- ---------------------
Our operating results have fluctuated in the past because we sell on a purchase-
order basis rather than pursuant to long-term contracts. We are therefore
sensitive to variability in demand by our customers. Because we time
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
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 future performance. Because a significant portion of our operating expenses
are fixed, even a small revenue shortfall can have a disproportionate effect on
operating results. It is possible that, in future periods, 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.
A substantial portion of our net sales are derived from quick-turn services for
which we provide both the materials and the manufacturing services. As a
result, we often bear the risk of fluctuations in the cost of materials, and the
risk of generating scrap and excess inventory, which can affect gross profit
margins. We forecast future inventory needs based upon the anticipated demands
of our customers. Inaccuracies in making these forecasts or estimates could
result in a shortage or an excess of materials, either of which could negatively
affect production schedules and margins.
Intellectual Property
- ---------------------
Our success depends in part on proprietary technology and manufacturing
techniques. We have no patents for these proprietary techniques and 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 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 our 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.
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 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. Moreover, we may face additional
competitive pressures as a result of changes in technology.
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.
24
Dependence on Key Management
- ----------------------------
We depend on the services of our senior executives, including our Chairman,
Charles D. Dimick, and our President and Chief Executive Officer, Bruce D.
McMaster. We cannot assure you that we will be able to retain these and other
executive officers and key personnel or attract additional qualified management
in the future. Neither Mr. Dimick nor Mr. McMaster is 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.
Controlling Stockholders
- ------------------------
Investment funds affiliated with Bain Capital, Inc. beneficially own
approximately 5.8--% of the outstanding common stock of DDi Corp. In addition,
of the ten 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.
25
ITEM 3. 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 (i) 2.00% per
annum plus the applicable LIBOR or (ii) 1.25% per annum plus the federal reserve
reported overnight funds rate plus 0.5% per annum. As of September 30, 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, 2001, 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 agreements, 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. The maximum
annual rate is 4.40% for a given month from October 1, 2001 to December 31,
2001. From January 1, 2002 through December 31, 2002 we pay a fixed annual rate
of 5.99%, from January 1, 2003 through the scheduled maturity of the Senior Term
Facility in 2005 we pay a fixed annual rate of 6.94%. The term loan facility
portion of the Dynamic Details senior credit facility bears interest based on
one-month LIBOR. As of September 30, 2001, one-month LIBOR was 2.63%. If one-
month LIBOR increased by 10% to 2.89%, interest expense related to the term loan
facility portion would not increase over the twelve months ending September 30,
2002 due to the fixed rates under the swap agreements. Under the swap agreement
entered into in November 2001 (see Note 19 to the Condensed Consolidated
Financial Statements), a 10% increase in one-month LIBOR to 2.89% would not
result in additional interest expense.
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 September 30, 2001, the swap covers
approximately 81% of the outstanding debt under the facilities agreement. If
DDi Europe were to borrow the full amount available on its facilities agreement,
the fixed amounts of debt per the swap agreement would still cover approximately
59% of the outstanding debt. The DDi Europe facilities agreement bears interest
based on three-month LIBOR. As of September 30, 2001, three-month LIBOR was
2.59%. If three-month LIBOR increased by 10% to 2.85%, interest expense related
to the term loan facility would not increase due to the fixed rate of 6.92%
under the swap agreement.
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.
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 each
operation's local currency or in U.S. dollars, we have relatively little
exposure to foreign currency transaction risk with respect to sales made.
Therefore, the effect of an immediate 10% change in exchange rates would not
have an impact on our operating results over the 12 month period ending
September 30, 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.
26
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
- -------------------------------------------
(a) Exhibits. None.
--------
(b) Reports on Form 8-K. None.
--------------------
27
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,
thereto duly authorized, in the city of Anaheim, state of California, on the
13th day of November, 2001.
DDi CORP.
By: /s/ JOSEPH P. GISCH
-------------------
Joseph P. Gisch
Chief Financial Officer,
Secretary and Treasurer
(Principal Financial and Accounting Officer)
28
SIGNATURES
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,
thereto duly authorized, in the city of Anaheim, state of California, on the
13th day of November, 2001.
DDi CAPITAL CORP.
By: /s/ JOSEPH P. GISCH
-------------------
Joseph P. Gisch
Vice President, Chief Financial Officer
and Treasurer
(Principal Financial and Accounting
Officer)
29