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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
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
Dynamic Details, Incorporated 333-41211
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DDi CORP.
DDi CAPITAL CORP.
DYNAMIC DETAILS, INCORPORATED
(Exact names of registrants as specified in their charters)
Delaware 06-1576013
California 33-0780382
California 33-0779123
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Nos.)
1220 Simon Circle Anaheim, California 92806
(Address of Principal Executive Offices) (Zip Code)
(714) 688-7200
(Registrants' telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
DDi Corp.-Common Stock, par value $.01 per share
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(Title of class)
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Indicate by check mark whether DDi Corp., DDi Capital Corp. and Dynamic
Details, Incorporated: (1) have filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) have been subject to such filing
requirements for the past 90 days: Yes [X] No [_].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [_].
The aggregate market value of the DDi Corp.'s voting Common Stock held by
non-affiliates of DDi Corp. was approximately $942,278,871 (computed using the
closing price of $25.4375 per share of Common Stock on March 6, 2001, as
reported by The Nasdaq Stock Market, Inc.). On March 6, 2001, all of the
voting stock of Dynamic Details, Incorporated was held by DDi Capital Corp.,
all of the voting stock of DDi Capital Corp. was held by DDi Intermediate
Holdings Corp., and all of the voting stock of DDi Intermediate Holdings Corp.
was held by DDi Corp. As of March 6, 2001, DDi Corp. had outstanding
47,507,942 shares of Common Stock.
As of March 6, 2001, DDi Corp. had 47,507,942 shares of common stock, par
value $0.01 per share, outstanding. As of March 6, 2001, Dynamic Details,
Incorporated had 100 shares of common stock, par value $.01 per share,
outstanding and DDi Capital Corp. had 1,000 shares of common stock, par value
$.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of DDi Corp.'s Proxy Statement prepared in connection with the
Annual Meeting of Stockholders to be held in 2001 are incorporated by
reference into Part III of this Form 10-K.
This Annual Report on Form 10-K is a combined annual report being filed
separately by three registrants: DDi Corp ("DDi Corp." f/k/a DDi Holdings
Corp.), DDi Capital Corp. ("DDi Capital") and Dynamic Details, Incorporated
("Dynamic Details"). Except where the context clearly indicates otherwise, any
references in this report to "DDi Corp." includes all subsidiaries of DDi
Corp. including DDi Capital and Dynamic Details. DDi Capital and Dynamic
Details make no representation as to the information contained in this report
in relation to DDi Corp. and its subsidiaries other than DDi Capital and
Dynamic Details, respectively.
DDi Capital and Dynamic Details meet the conditions set forth in General
Instructions I(1)(a) and (b) of Form 10-K, and are filing this form with the
reduced disclosure format pursuant to General Instruction I(2).
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DDi CORP.
DDi CAPITAL CORP.
DYNAMIC DETAILS, INCORPORATED
FORM 10-K INDEX
Page
----
PART I
Item 1 Business...................................................... 3
Item 1A Executive Officers of the Registrant.......................... 13
Item 2 Properties.................................................... 14
Item 3 Legal Proceedings............................................. 14
Item 4 Submission of Matters to a Vote of Security Holders........... 14
PART II
Item 5 Market for the Registrants' Common Equity and Related
Stockholder Matters........................................... 15
Item 6 Selected Financial Data....................................... 16
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 20
Item 7A Quantitative and Qualitative Disclosures About Market Risk.... 36
Item 8 Financial Statements and Supplementary Data................... 37
Item 9 Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure...................................... 37
PART III
Item 10 Directors and Executive Officers of the Registrant............ 38
Item 11 Executive Compensation........................................ 38
Item 12 Security Ownership of Certain Beneficial Owners and
Management.................................................... 38
Item 13 Certain Relationships and Related Transactions................ 38
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K........................................................... 39
2
Except for the historical information contained herein, this Annual Report
on Form 10-K contains forward-looking statements that involve risks and
uncertainties. Actual results could differ materially from those discussed
here. Readers should pay particular attention to the considerations described
in "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations--Factors that May Affect Future Results."
PART I
ITEM 1. BUSINESS
Overview
DDi Corp., formerly known as DDi Holdings Corp. ("DDi Corp."), provides
technologically advanced, time-critical electronics design, development and
manufacturing services to original equipment manufacturers and other providers
of electronics manufacturing services. Operating through our primary operating
subsidiaries, Dynamic Details, Incorporated ("Dynamic Details") and DDi Europe
Limited ("DDi Europe"), we target the fast-growing communications and
networking equipment industries, which are characterized by aggressive new
product development programs demanding the rapid application of advanced
technology and design.
Our customers use our services to develop and produce a wide variety of end
products, including communications switching and transmission equipment,
wireless base stations, work stations, high-end computing equipment and data
networking equipment. The technologically advanced, time-critical segment of
the electronics manufacturing services industry in which we operate is
characterized by rapid growth, high margins and significant customer
diversity.
DDi Corp's predecessor corporation was incorporated in California in 1978.
In 1991, new management, led by our President and Chief Executive Officer,
Bruce D. McMaster, began to focus primarily on the time-critical segment of
the electronics manufacturing services industry. In January 1996, we were
recapitalized by Chase Manhattan Capital, LLC and its affiliates. In October
1997, we were recapitalized again by investors led by Bain Capital, Inc.,
Celerity Partners, L.L.C. and Chase Capital Partners. DDi Corp. was
reincorporated in Delaware in April 2000.
In October 1997, in connection with our second recapitalization, DDi Corp.
incorporated Dynamic Details as a new, wholly-owned subsidiary, and
contributed substantially all of its assets, subject to certain liabilities,
to Dynamic Details. In November 1997, DDi Corp. organized DDi Capital Corp.
("DDi Capital") as a wholly-owned subsidiary, and in February 1998, DDi Corp.
contributed substantially all of its assets (consisting primarily of all of
the shares of capital stock of Dynamic Details), subject to certain
liabilities, including senior discount notes, to DDi Capital. In July 1998,
DDi Corp. organized DDi Intermediate Holdings Corp. ("Intermediate") as a
wholly-owned subsidiary and contributed its ownership of DDi Capital to
Intermediate.
In December 1997, Dynamic Details acquired all of the outstanding shares of
common stock of Colorado Springs Circuits, Inc., a Colorado corporation d/b/a
Dynamic Details, Inc. - Colorado Springs ("NTI"). The acquisition of NTI is
described in more detail under "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations--Company History and
Significant Transactions--Colorado Facility (formerly NTI)."
In July 1998, Dynamic Details merged with Dynamic Circuits, Inc. ("DCI"), a
Delaware corporation. DCI was primarily a manufacturer of complex printed
circuit boards and related components based in Silicon Valley and with
additional facilities in Texas, Georgia and Massachusetts. The merger with DCI
is described in more detail under "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations--Company History and
Significant Transactions--DCI Merger."
In December 1999, Dynamic Details implemented a plan to consolidate its
Colorado operations into its Texas facility and to close the Colorado
facility. The closure of this facility was effectively complete as of
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March 31, 2000. Dynamic Details is currently serving the majority of the
customers who were serviced by the Colorado facility out of the Texas
facility. By combining Texas and Colorado operations, Dynamic Details
eliminated lower-margin product lines and decreased overhead costs, and gained
efficiency through better capacity utilization and streamlined management.
On April 14, 2000, DDi Corp. completed an initial public offering of
12,000,000 shares of its common stock. The initial public offering is
described in more detail under "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations-Company History and
Significant Transactions-Initial Public Offering of DDi Corp."
Concurrent with the closing of its initial public offering, DDi Corp.
acquired MCM Electronics Limited, ("MCM"), a time-critical electronics
manufacturing service provider based in the United Kingdom. MCM has been
combined with our other European operations and does business as DDi Europe
Limited ("DDi Europe"). The acquisition of MCM is described in more detail
under "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations-Company History and Significant Transactions-MCM
Electronics Acquisition."
On August 4, 2000, Dynamic Details acquired substantially all the U.S.
assets of Automata International, Inc. ("Automata"), a Virgina-based
manufacturer of technologically advanced printed circuit boards. The
acquisition of Automata's assets is described in more detail under "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations-Company History and Significant Transactions-Automata Acquisition."
On September 15, 2000, Dynamic Details acquired substantially all the assets
of Golden Manufacturing, Inc. ("Golden"), a Texas-based manufacturer of
engineered metal enclosures and provider of value-added assembly services to
communications and electronics original equipment manufacturers. The
acquisition of Golden's assets is described in more detail under "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations-Company History and Significant Transactions-Golden Acquisition."
On October 16, 2000, DDi Corp. completed a follow-on 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 follow-on public
offering is described in more detail under "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations-Company History
and Significant Transactions-October 2000 Follow-On Public Offering of DDi
Corp."
This report is a combined annual report filed separately by three
registrants, DDi Corp., DDi Capital and Dynamic Details. Dynamic Details is a
wholly-owned subsidiary of DDi Capital, DDi Capital is a wholly-owned
subsidiary of Intermediate, and Intermediate is a wholly-owned subsidiary of
DDi Corp. Each registrant has its principal executive offices at 1220 Simon
Circle, Anaheim, California and their telephone number is (714) 688-7200.
As used herein, the "Company," "we," or "us" means DDi Corp. and its wholly-
owned subsidiaries, including DDi Capital and Dynamic Details, or their
predecessor entities as the context requires.
Recent Developments
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 to
us of $67.0 million, net of underwriting discounts, commissions and expenses.
Concurrently, DDi Corp. issued 5 1/4% 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 to us of $97.0 million, net of underwriting
discounts,
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commissions and expenses. The net proceeds of both transactions have been used
to repurchase all of the Dynamic Details senior subordinated notes and will be
used to repurchase a portion of the Capital senior discount notes, to repay a
portion of the Dynamic Details senior credit facility or for general corporate
purposes.
On March 5, 2001, DDi Europe completed the acquisition of Thomas Walter
Limited ("Thomas Walter"), a leading printed circuit board manufacturer based
in Marlow, England for approximately $30 million. Thomas Walter is a well-
established provider of complex, quick-turn rigid and rigid-flex printed
circuit boards for the European electronics industry. We believe that Thomas
Walter's core competencies in time-critical delivery and complex technology
will complement our quick-turn manufacturing and assembly operations in the
U.K. In particular, Thomas Walter's leading edge technological expertise
supports our high-end microvia laser technology, which will enhance pre-
production services in our European prototype division.
Industry Background
Electronics manufacturing services, or EMS, companies provide a range of
services to electronics original equipment manufacturers, or OEMs. The EMS
industry is growing rapidly, and industry revenues have increased from
approximately $22 billion in 1993 to approximately $101 billion in 2000.
Technology Forecasters, Inc. expects industry revenues to grow at
approximately 27% annually to approximately $260 million in 2004. Industry
growth is fueled by increases in the rate of outsourcing combined with steady,
underlying growth in the electronics equipment industry. In 2000,
approximately 13.1% of the cost of goods sold by electronics OEMs was
attributable to components and products outsourced to EMS providers.
Technology Forecasters, Inc. expects this percentage to reach 25.9% by 2004.
Electronics manufacturing services were historically labor-intensive
functions outsourced by OEMs to obtain additional capacity during periods of
high demand and initially consisted mainly of printed circuit board assembly.
Early EMS providers acted essentially as subcontractors, providing production
capacity on a transactional basis. With advances in process technology, EMS
providers developed additional capabilities and were able both to improve
quality and to reduce OEMs' costs. Over time, OEMs came to rely on EMS
providers to perform a broader array of manufacturing services, including
design and development activities. In recent years, EMS providers have
expanded their range of services to encompass design, product development,
packaging and distribution and overall supply chain management.
By using EMS providers, OEMs are able to focus on their core competencies,
including product development, sales, marketing and customer service.
Outsourcing allows OEMs to take advantage of the manufacturing expertise,
advanced technology and capital investment of EMS providers, to achieve
overall cost benefits and to enhance their competitive position by:
. reducing time to market and time to volume production;
. reducing operating costs and invested capital;
. improving supply chain management;
. focusing their resources on core competencies;
. accessing advanced manufacturing capabilities and process technologies;
and
. improving access to global markets.
The fast-growing communications and networking equipment industries
represent large and attractive markets for electronic manufacturing services.
These industries are characterized by increasingly rapid product introductions
driven by, among other factors, the demand for network infrastructure to
handle increased voice and data traffic created by the Internet.
Communications equipment manufacturers are at a relatively early stage of the
outsourcing trend, and Technology Forecasters, Inc. predicts these
manufacturers will double their use of EMS providers, such as ourselves,
between 2000 and 2004 for design, development and manufacturing services.
5
The DDi Customer Solution
We engineer technologically advanced materials for customers within
extremely short turnaround times, which distinguishes us from traditional
electronics manufacturing service providers, and provides our customers with a
competitive advantage in delivering their new products to market quickly. Our
customers benefit from the following components of the DDi customer solution:
. Time-critical Service. Based on industry data, we believe we are one of
the largest providers of quick-turn complex printed circuit boards in
the United States. We can deliver highly complex printed circuit boards
to customers in as little as 24 hours. Approximately 50% of our net
sales in 2000 were generated from services delivered in 10 days or less.
. Advanced Technology. The focus on time-critical design, development and
manufacturing services requires our engineers to remain on the cutting
edge of electronics technology, and our customers benefit from the
expertise we have developed as they seek to introduce new products.
Approximately 60% of our net sales in 2000 involved the design or
manufacture of printed circuit boards with at least eight layers, an
industry-accepted measure of complexity. In addition, many of our lower
layer-count boards are complex as a result of the incorporation of other
technologically advanced features.
. Proactive Sales Force. Our knowledgeable and innovative sales force,
based in Silicon Valley, enables current and prospective customers to
understand and exploit a wide range of services provided by our
facilities across the country and in Europe. Our salespeople helped to
add approximately 375 customers in 2000, exclusive of acquisitions.
. Relationships with Research and Development Personnel. In many cases, we
have design engineers stationed on-site in customers' product
development divisions. As a result, we help customers develop workable
technical solutions to their concepts for next generation products.
. Experienced and Incentivized Management. Our management team, led by
Charles D. Dimick and Bruce D. McMaster, collectively has more than 100
years of experience in the electronics manufacturing services industry.
We believe that these attributes allow us to consistently meet and exceed
our customers' expectations and that, as a result, we will continue to attract
leading original equipment manufacturers and other providers of electronics
manufacturing services as customers.
Our Strategy
Our goal is to be the leading provider of technologically advanced, time-
critical electronics manufacturing services. To achieve this goal, we will:
Continue the Focus on the Fast-Growing Communications and Networking
Equipment Industries. We focus marketing efforts on the fast-growing
communications and networking equipment industries, and target established
original equipment manufacturers, emerging providers of next-generation
technology and electronics manufacturing service providers serving these
industries. The communications and networking equipment industries represented
approximately 61% of our net sales for the year ended December 31, 2000.
Capitalize on Strong Customer Relationships and Design Expertise to
Participate in Future Product Introductions and Further Outsourcing
Programs. We have served established original equipment manufacturers for many
years, through multiple product generations. We have positioned ourselves as a
strategic partner in our customers' new product initiatives by focusing on
direct relationships with our customers' research and development personnel.
As a result, we have developed expertise and gained knowledge of our
customers' new product design programs, all of which position us as a
preferred service provider for future product generations.
Strengthen Technology and Process Management Leadership in the Time-Critical
Segment of the Electronics Manufacturing Services Industry and Continue to
Improve Quality and Delivery Times by Incorporating Emerging Technologies and
Consistently Refining Manufacturing Processes. We have
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consistently been among the earliest users of new developments in printed
circuit board design, development and manufacturing and are continuously
incorporating new technology into our manufacturing processes in order to
further improve quality and reduce delivery times. Because we concentrate on
cutting-edge methods, we have the ability to service emerging providers of
next-generation technology. This ability allows us to build customer
relationships with companies with the potential for significant growth and
enables us to provide these cutting-edge methods to customers accustomed to
more traditional methods. We have developed process management expertise over
time and are continuously enhancing our ability to quickly adapt design and
production facilities on demand to serve time-critical customer needs. We
believe this expertise and ability position us as an industry leader in
providing flexible and responsive technologically advanced, time-critical
services.
Pursue Selected Acquisition Opportunities, Including Asset Divestitures by
Original Equipment Manufacturers. We have actively pursued acquisitions to
enhance service offerings, expand geographic presence and increase production
capabilities. An increasing number of original equipment manufacturers are
divesting their production capabilities as an integral part of their
manufacturing strategy. We have completed three acquisitions in 2000: MCM,
Automata and Golden. On March 5, 2001, we completed the acquisition of Thomas
Walter. We intend to continue to pursue strategic acquisition opportunities,
including asset divestitures by original equipment manufacturers, that we
believe will complement internal growth.
Leverage Leadership in Quick-Turn Design and Manufacturing Services to
Further Expand Assembly Operations and Other Value-Added Services. As a quick-
turn design and manufacturing service provider, we gain early access to our
customers' product development processes, giving us the opportunity to
leverage the provision of design services into providing other value-added
services including assembly of printed circuit boards and other electronic
components and total system assembly and integration of electronics products.
We predominantly use these additional capabilities in our customers' new
product development programs to enable them to further reduce their time to
market and overall cost.
Expand International Presence to Better Serve the Needs of Customers Seeking
to Outsource Their Worldwide Design and Manufacturing Activities. We have
served a growing number of European customers from DDi Europe's four U.K.
facilities. On March 5, 2001, DDi Europe completed the acquisition of
Thomas Walter, a leading printed circuit board manufacturer based in Marlow,
England. Thomas Walter is a recognized technology leader in manufacturing
complex quick-turn interconnect products for the European electronics
industry. We believe European markets offer significant growth opportunities
as large electronics equipment manufacturers are increasing their global
distribution and are seeking electronics manufacturing service providers with
the ability to operate in multiple markets. We are actively pursuing other
acquisition possibilities in Europe and targeting opportunities for geographic
expansion in Japan and other Asian markets, increasing our capability to serve
customers in these geographic areas.
Services
We provide a suite of value-added, integrated services, used by our
customers predominantly in the development of their new products, including:
On-campus and In-the-field Design of Complex Printed Circuit Boards. We
target design and development engineering services primarily at the earliest
stages of the new product development process. We provide design and
engineering assistance early in new product development to ensure that both
mechanical and electrical considerations are integrated into a cost-effective
manufacturing solution. We design and develop printed circuit boards that meet
or exceed established operating parameters for new products. In doing so, we
often recommend and assist in implementing design changes to reduce
manufacturing costs and lead times, increase manufacturing yields and improve
the quality of the finished product.
Printed circuit boards are the basic platforms used to interconnect
electronic components and can be found in virtually all electronic products,
including consumer electronics, computers and automotive, telecommunications,
industrial, medical, military and aerospace equipment. Printed circuit boards
used in
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consumer electronic products are generally less technologically sophisticated,
employing lower layer counts and requiring less manufacturing sophistication
than printed circuit boards used in high-end commercial equipment.
Communications and networking equipment manufacturers require more complex
multi-layer interconnections with advanced materials.
Time-critical Development and Fabrication of Prototype Complex Printed
Circuit Boards. Our time-critical, or quick-turn, services are used in the
design, test and launch phases of new electronics product development and are
generally delivered within 10 to 20 days or in as little as 24 hours. Larger
volumes of printed circuit boards are needed as a product progresses past the
testing, design and pre-production phases. The advanced design, development
and manufacturing technologies we employ facilitate quick-turn production of
complex, multi-layered printed circuit boards utilizing technologically-
advanced methods. See "Technology, Development and Processes." Our ability to
provide these services on a quick-turn and longer lead-time delivery basis
involves working closely with customers from the initial design of new
products through development and launch.
Assembly of Printed Circuit Boards, Backpanels and Other Components of
Electronics Products. We assemble printed circuit boards, backpanels, card
cages and wire harnesses on a low volume, quick-turn basis. Backpanels are
large printed circuit boards, and card cages and wire harnesses integrate
wires with connectors and terminals to transmit electricity between two or
more points. As the electronics industry has worked to increase component
speed and performance, the design of these components has become more
integrated. We have responded to this trend and provide these additional
assembly services to complement design and development capabilities.
Assembly and Integration of Customers' Complete Systems and Products. We
provide full system assembly services, predominantly for products in
development by original equipment manufacturers. These services require
logistical capabilities and supply chain management to rapidly acquire
components, assemble prototype products, perform complex testing and deliver
products to the customer.
Our Customers and Markets
We believe that we have one of the broadest customer bases in the
electronics manufacturing services industry. As of December 31, 2000, we had
more than 2,000 original equipment manufacturers and electronics manufacturing
services customers representing a wide range of end-user markets. We have
added over 375 customers in 2000, excluding increases resulting from
acquisitions. Our customers principally consist of leading communications and
networking equipment and computer manufacturers, as well as medical,
automotive, industrial and aerospace equipment manufacturers. During 2000,
sales to our largest customer, Alcatel, accounted for approximately 10% of net
sales, and sales to our ten largest customers accounted for approximately 42%
of our net sales. We have been successful at retaining customers and have
worked with our three largest customers since 1991.
Approximately 76% of our net sales are made to original equipment
manufacturers, and the remainder are to electronics manufacturing service
providers. The following table shows, for the periods indicated, the
percentage of our sales in each of the principal end-user markets we served
for the years ended December 31, 1998, 1999 and 2000.
Year Ended
December 31,
----------------
End-User Markets 1998 1999 2000
- ---------------- ---- ---- ----
Communications and networking equipment....................... 53% 55% 61%
Computer and peripherals...................................... 24 21 25
Medical, automotive, industrial and test instruments.......... 11 9 9
Aerospace equipment........................................... 3 2 2
Other......................................................... 9 13 3
--- --- ---
Total....................................................... 100% 100% 100%
=== === ===
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The following table indicates, for the year ended December 31, 2000, our
largest original equipment manufacturers, or OEMs, and electronics
manufacturing services, or EMS, customers in terms of net sales, in
alphabetical order, and the primary end products for which we provided our
services.
OEM Customers End Products
- ------------- ------------
Alcatel................... Communications switching and transmission equipment,
networking equipment
Ericsson.................. Communications Equipment
IBM....................... Network servers
Intel..................... Personal computers
Marconi Communications.... Communications switching and transmission equipment,
networking equipment
EMS Customers End Products
- ------------- ------------
Celestica................. Communications and computing equipment
Jabil..................... Communications and computing equipment
Solectron................. Communications and computing equipment
Technology, Development and Processes
We maintain a strong commitment to research and development and focus our
efforts on enhancing existing capabilities as well as developing new
technologies. Our close involvement with our customers in the early stages of
their product development positions us at the leading edge of technical
innovation in the design of quick-turn and complex printed circuit boards. Our
staff of approximately 300 experienced engineers, chemists and laboratory
technicians works in conjunction with our sales staff to identify specific
needs and develop innovative, high performance solutions to customer issues.
This method of product development allows customers to augment their own
internal development teams while providing us with the opportunity to gain an
in-depth understanding of our customers' businesses and enabling us to better
anticipate and serve our customers' future needs.
The market for our products and services is characterized by rapidly
changing technology and continuing process development. In recent years, the
trend in the electronics equipment industry has been to increase speed and
performance of components while at the same time reducing their size. This
trend requires increasingly complex printed circuit boards with higher
densities. The future success of our business will depend in large part upon
our ability to maintain and enhance our technological capabilities, develop
and market products and services that meet changing customer needs, and
successfully anticipate or respond to technological changes on a cost-
effective and timely basis. In the last three years, we have made substantial
investments in equipment and technology to meet these needs and maintain our
competitive advantage.
We believe the highly specialized equipment we use is among the most
advanced in the industry. We provide a number of advanced technologies,
including:
. Laser Direct Imaging. Laser direct imaging is a new process that allows
us to increase board density through the use of increasingly small and
accurate laser technology.
. Microvias. Microvias are small holes, or vias, generally created with
lasers employing depth control rather than mechanical drills, through
which printed circuit board layers are interconnected. Microvias
generally have diameters between .001 and .005 inches.
. Blind or Buried Vias. Blind or buried vias are small holes which
interconnect inner layers of high layer-count printed circuit boards.
. Ball Grid Arrays. A ball grid array is a method of mounting an
integrated circuit or other component to a printed circuit board. Rather
than using pins, also called leads, the component is attached with small
balls of solder at each contact. This method allows for greater
component density and is used in printed circuit boards with higher
layer counts.
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. Flip Chips. Flip chips are structures that house circuits which are
interconnected without leads. They are utilized to minimize printed
circuit board surface area when compact packaging is required.
. Multichip Module-Laminates. Multichip module-laminates are a type of
printed circuit board design that allows for the placement of multiple
integrated circuits or other components in a limited surface area.
. Advanced Substrates. Advanced substrates are a recent generation of
printed circuit board materials that enable the use of ball grid arrays,
flip chips and multichip module laminates. They are used for products
requiring high-frequency transmission and have thermal properties
superior to standard materials.
We are qualified under various industry standards, including Bellcore
compliance for communications products and UL (Underwriters Laboratories)
approval for electronics products. In addition, all of our production
facilities are ISO-9002 certified. These certifications require that we meet
standards related to management, production and quality control, among others.
Manufacturing
We produce highly complex, technologically advanced multi-layer and low-
layer printed circuit boards, backpanel assemblies, printed circuit board
assemblies, card cage and wire harness assemblies and full system assembly and
integration that meet increasingly tight tolerances and specifications
demanded by original equipment manufacturers. The manufacture of printed
circuit boards involves several steps: etching the circuit image on copper-
clad epoxy laminate, pressing the laminates together to form a panel, drilling
holes and depositing copper or other conducive material to form the inter-
layer electrical connections and, lastly, cutting the panels to shape. Our
advanced interconnect products require additional critical steps, including
dry film imaging, photoimageable soldermask processing, computer-controlled
laser drilling and routing, automated plating and process controls and
achievement of controlled impedance.
Multi-layering, which involves placing multiple layers of electrical
circuitry on a single printed circuit board or backpanel, expands the number
of circuits and components that can be contained on the interconnect product
and increases the operating speed of the system by reducing the distance that
electrical signals must travel. Increasing the density of the circuitry in
each layer is accomplished by reducing the width of the circuit tracks and
placing them closer together on the printed circuit board or backpanel.
Interconnect products having narrow, closely spaced circuit tracks are known
as fine line products. The manufacture of complex multi-layer interconnect
products often requires the use of sophisticated circuit interconnections,
called blind or buried vias, between printed circuit board layers and
adherence to strict electrical characteristics to maintain consistent circuit
transmission speeds, referred to as controlled impedance. These technologies
require very tight lamination and etching tolerances and are especially
critical for printed circuit boards with ten or more layers.
Manufacture of printed circuit boards used in backpanel assemblies requires
specialized expertise and equipment because of the larger size of the
backpanel relative to other printed circuit boards and the increased number of
holes for component mounting. We have no patents for these proprietary
techniques and rely primarily on trade secret protection.
Accomplishing these operations in time-critical situations, as we do,
requires the attention of highly-qualified personnel. Furthermore, our
manufacturing systems are managed to maximize flexibility to accommodate
widely varying projects for different customers with minimal or no turnover
time. We seek to maximize the use of our production and manufacturing capacity
through the efficient management of time-critical production schedules.
10
Sales and Marketing
Our marketing strategy focuses on developing close working relationships
with customers early in the design phase and throughout the lifecycle of the
product. Accordingly, our senior management personnel and engineering staff
advise our customers with respect to applicable technology, manufacturing
feasibility of designs and cost implications through on-line computer
technical support and direct customer communication. We have focused our
marketing efforts on developing long-term relationships with research and
development personnel at key customers in high-growth segments of the
electronics equipment industry.
We employ a targeted sales effort to help optimize our market share at the
customer level. In order to establish individual salesperson accountability
for each client, each customer is assigned one member of the sales staff for
all services across all facilities. We have developed a comprehensive database
and allocation process to control calling and cross-selling effort, and have a
global account program for coordinating sales to our top 20 customers. The
success of our sales strategy is demonstrated by the addition of over 350
customers in 2000, excluding the 400 customers added through the acquisition
of MCM.
We market our design, development and manufacturing services through an
internal sales force of approximately 200 individuals and an expansive sales
network consisting of 14 organizations comprised of approximately 70
manufacturers' representatives across the United States. Approximately 37% of
our net sales in 2000 were generated through manufacturers' representatives.
For many of these manufacturers' representatives, we are the largest revenue
source and the exclusive supplier of quick-turn and pre-production printed
circuit boards. In 1997, we opened a sales office in London, England.
Following our acquisition of MCM, we integrated MCM's sales force into our
pre-existing European staff and we plan to continue expanding our
international sales efforts. The financial information for geographic areas is
included in Note 2 to the Consolidated Financial Statements under the caption
"Segment Reporting."
Our Suppliers
Our raw materials inventory is small relative to sales and must be regularly
and rapidly replenished. We use just-in-time procurement practices to maintain
raw materials inventory at low levels, and work closely with our suppliers to
incorporate technological advances in the raw materials we purchase. Because
we provide primarily lower-volume quick-turn services, this inventory policy
does not hamper our ability to complete customer orders. Although we have
preferred suppliers for some raw materials, multiple sources exist for all
materials. Adequate amounts of all raw materials have been available in the
past and we believe this will continue in the foreseeable future.
The primary raw materials that we use in production are core materials
(copperclad layers of fiberglass of varying thickness impregnated with bonding
materials) and chemical solutions (copper, gold, etc.) for plating operations,
photographic film and carbide drill bits.
Competition
The electronics manufacturing services industry is highly fragmented and
characterized by intense competition. We principally compete in the time-
critical segment of the industry against independent, small private companies
and integrated subsidiaries of large, broadly based volume producers, as well
as the internal capacity of original equipment manufacturers. Competition in
the market segment we serve, unlike in the electronics manufacturing services
industry, generally is not driven by price. Instead, because customers are
willing to pay a premium for a responsive, broad-reaching capability to
produce customized complex products in a very short time, we compete primarily
on the basis of quick turnaround, product quality and customer service. In
addition, we do not compete in the high volume production manufacturing aspect
of the industry and as a result are less exposed to competition from low cost
manufacturers who compete on price in the commodity segment of this market.
Competition in the complex and time-critical segment of our industry has
increased due to consolidation, resulting in potentially better capitalized
competitors. Our basic technology is generally not subject to significant
proprietary protection, and companies with significant resources or
international operations may enter the market.
11
Backlog
Although we obtain firm purchase orders from our customers, our customers
typically do not make firm orders for delivery of products more than 30 to 90
days in advance. We do not believe the backlog of expected product sales
covered by firm purchase orders is a meaningful measure of future sales since
orders may be rescheduled or canceled.
Governmental Regulation
Our operations are subject to certain federal, state and local regulatory
requirements relating to environmental compliance and site cleanups, waste
management and health and safety matters. In particular, we are subject to
regulations promulgated by:
. the Occupational Safety and Health Administration pertaining to health
and safety in the workplace;
. the Environmental Protection Agency pertaining to the use, storage,
discharge and disposal of hazardous chemicals used in the manufacturing
processes; and
. corresponding state agencies.
To date the costs of compliance and environmental remediation have not been
material to us. Nevertheless, additional or modified requirements may be
imposed in the future. If such additional or modified requirements are imposed
on us, or if conditions requiring remediation were found to exist, we may be
required to incur substantial additional expenditures.
Employees
As of December 31, 2000, we had approximately 3,200 employees, none of whom
are represented by unions. Of these employees, approximately 2,600 were
involved in manufacturing and engineering, 200 worked in sales and marketing
and 400 worked in accounting, systems and other support capacities. We have
not experienced any labor problems resulting in a work stoppage and believe we
have good relations with our employees.
12
Item 1A. EXECUTIVE OFFICERS OF DDi CORP.
The following table sets forth the executive officers of DDi Corp., their
ages as of March 6, 2001, and the positions currently held by each person:
Name Age Office
---- --- ------
Bruce D. McMaster 39 President, Chief Executive Officer and Director
Charles D. Dimick 44 Chairman and Director
Joseph P. Gisch 44 Chief Financial Officer, Secretary and Treasurer
John Peters 46 Vice President, Sales and Marketing
Greg Halvorson 38 Vice President, Operations
Terry L. Wright 41 Vice President and Chief Technology Officer
The President, Chief Executive Officer, Chief Financial Officer, Secretary
and Treasurer are elected annually by the Board of Directors at its first
meeting following the annual meeting of stockholders. Other executive officers
may be appointed by the Board of Directors at such meeting or at any other
meeting. All executive officers serve at the pleasure of the Board of
Directors.
Bruce D. McMaster joined us in 1985 and has served as our President since
1991 and as a Director and our Chief Executive Officer since 1997. Mr.
McMaster also serves as President and Chief Executive Officer of Dynamic
Details. He has over 21 years of experience in the EMS industry. Before
becoming our President, Mr. McMaster worked in various management capacities
in our engineering and manufacturing departments.
Charles D. Dimick joined us in 1998 upon our merger with DCI. He is our
Chairman, a Director and the President of our subsidiary, Dynamic Details
Incorporated, Silicon Valley. He has over 21 years of experience in the EMS
industry. Mr. Dimick founded DCI in 1991 and served as its president and chief
executive officer until the merger. Previously, he was a senior vice president
of sales and marketing at Sigma Circuits.
Joseph P. Gisch has served as our Chief Financial Officer since 1995. Mr.
Gisch also serves as Vice President, Chief Financial Officer and Treasurer of
Dynamic Details. From 1986 to 1995, Mr. Gisch was a partner at the accounting
firm of McGladrey & Pullen, LLP where he was responsible for the audit,
accounting and information systems for a variety of manufacturing clients. Mr.
Gisch was responsible for our general accounting and income tax matters. Mr.
Gisch has not been responsible for any of our audit services since 1991.
John Peters joined us in 1998 upon our merger with DCI. He has been our Vice
President, Sales and Marketing, since 1999. He was the senior vice president
of sales and marketing of our subsidiary, Dynamic Details Incorporated,
Silicon Valley from 1998 to 1999. Mr. Peters served as vice president of sales
and marketing of DCI from 1992 to 1998.
Greg Halvorson joined us in 1998 upon our merger with DCI as our Vice
President, Operations, and the Senior Vice President of Operations of our
subsidiary, Dynamic Details Incorporated, Silicon Valley. Prior to joining us,
Mr. Halvorson served as vice president of operations of DCI from 1995 to 1998.
Mr. Halvorson spent six years at Pacific Circuits as plant manager and head of
engineering before which he was manager of computer-aided manufacturing at
Sigma Circuits.
Terry L. Wright joined us in 1991 and has served as our Vice President,
Engineering since 1995 and Chief Technology Officer since 2000. Prior to
joining us, Mr. Wright was a general manager at Applied Circuit Solutions and
a quality assurance manager at Sigma Circuits.
There are no arrangements or understandings pursuant to which any of the
persons listed in the table above were selected as executive officers.
13
ITEM 2. PROPERTIES
We conduct our operations within approximately 828,500 square feet of
building space. Our significant facilities are as follows:
Remaining
Location Function Square Feet Lease Term
- -------- -------- ----------- ----------------
Anaheim, California Quick-turn printed circuit boards 150,000 1 to 5 years (a)
Milpitas, California Quick-turn printed circuit boards 45,000 1 year (b)
Tewkesbury, England Quick-turn printed circuit boards 30,000 18 years
Sterling, Virginia Quick-turn printed circuit boards 100,000 2 years
Garland, Texas Longer lead-time printed circuit boards 93,000 N/A (c)
Tolworth, England Longer lead-time printed circuit boards 35,000 11.5 years
Milpitas, California Design and assembly 41,000 2.5 years
Dallas, Texas Assembly 49,000 1.3 years
Marlborough, Massachusetts Assembly 32,500 5.5 years
La Grange, Georgia Assembly 30,000 1 month (b)
Calne, England Assembly 90,000 22.5 years
Hoddesdon, England Assembly 22,000 1 year
Dallas, Texas Assembly 90,000 2.75 years
-------
807,500
- --------
(a) All of these leases have an option to renew or to purchase the property at
fair market value after a specified date during the lease term.
(b) All of these leases have an option to renew for a period ranging from one
to ten years.
(c) The Company owns this facility.
In addition to the facilities listed above, we also occupy space for our
design operations in various states aggregating approximately 21,000 square
feet.
We believe our facilities are currently adequate for our operating needs.
ITEM 3. LEGAL PROCEEDINGS
We are a party to various legal actions arising in the ordinary course of
our business. We believe that the resolution of these legal actions will not
have a material adverse effect on our financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
14
PART II
ITEM 5. MARKET FOR THE REGISTRANTS' COMMON STOCK
DDi Corp.'s common stock has been quoted on the Nasdaq National Market under
the symbol "DDIC" since April 11, 2000. Prior to that time, there was no
public market for DDi Corp.'s common stock. The following table sets forth the
high and low sales prices of DDi Corp.'s common stock for the periods
indicated as reported on the Nasdaq National Market.
Common Stock
Price
-------------
High Low
------ ------
April 11, 2000 through June 30, 2000............................. $31.25 $ 9.50
July 1, 2000 through September 30, 2000.......................... $45.94 $21.81
October 1, 2000 through December 31, 2000........................ $45.87 $19.13
We presently intend to retain earnings to finance future operations,
expansion and capital investment and to reduce indebtedness. There were
approximately 171 record holders of our common stock as of March 6, 2001.
There is no established trading market for the common stock of Dynamic
Details or DDi Capital. As of December 31, 2000, Dynamic Details had 100
shares of common stock, par value $.01 per share, outstanding, all of which
were held by DDi Capital, and DDi Capital had 1,000 shares of common stock,
par value $.01 per share outstanding, all of which were held by Intermediate,
which is a wholly-owned subsidiary of DDi Corp.
We have not declared or paid a cash dividend on common stock since January
1996 and do not anticipate paying any cash dividends during at least the next
five years. Our existing debt instruments restrict our ability to pay
dividends. Dynamic Details' ability to pay dividends is limited under its
senior credit facilities and was limited under an indenture dated as of
November 18, 1997 between Dynamic Details and State Street Bank & Trust Co. as
trustee (the "Senior Subordinated Note Indenture") through March 9, 2001 when
we completed the tender offer to repurchase all of these notes. DDi Capital's
ability to pay dividends is limited under an indenture dated November 18,
1997, as supplemented by a supplemental indenture dated February 10, 1998
among DDi Corp., DDi Capital and State Street Bank & Trust Co. as trustee (the
"Indenture"). DDi Corp.'s 5 1/4% Convertible Subordinated Notes, issued
February 14, 2001, does not restrict their ability to pay dividends, however,
the conversion price on these notes may be adjusted if dividends exceed
certain amounts. See "Description of Indebtedness" within Managements'
Discussion and Analysis of Financial Condition and Results of Operations.
15
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data as of and for the dates and periods
indicated have been derived from the consolidated financial statements of
Dynamic Details, DDi Capital and DDi Corp. The Pre-Recapitalization Company in
1996 represents the predecessor corporation to both DDi Capital and Dynamic
Details, as described in "Company History and Significant Transactions" within
Management's Discussion and Analysis of Financial Condition and Results of
Operations. The selected financial data with respect to the consolidated
statement of operations data for the years ended December 31, 1996 and 1997
and the consolidated balance sheet data as of December 31, 1996, 1997 and 1998
is not included herein. The selected historical consolidated statement of
operations data for the years ended December 31, 1998, 1999 and 2000 and the
historical consolidated balance sheet data as of December 31, 1999 and
2000 were derived from the audited historical consolidated financial
statements of Dynamic Details, DDi Capital and DDi Corp. included elsewhere
herein. You should read the data set forth below in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and the related notes
thereto appearing elsewhere herein.
Year Ended December 31,
-------------------------------------------------------------------------------------------------------
Pre- DDi
Recapitalization Corp. &
Company Dynamic DDi Dynamic DDi DDi Dynamic DDi DDi Dynamic DDi
---------------- Details Capital Details Capital Corp. Details Capital Corp. Details Capital
1996 1997 1997 1998 1998 1998 1999 1999 1999 2000 2000
---------------- ------- -------- ------- ------- ------ ------- ------- ------ ------- -------
(in millions, except share data)
Consolidated
Statement of
Operations Data:
Net sales........ $67.5 $ 78.8 $ 78.8 $174.9 $174.9 $174.9 $292.5 $292.5 $292.5 $448.4 $448.4
Cost of goods
sold............ 30.5 38.7 38.7 119.3 119.3 119.6 201.4 201.4 202.4 274.7 274.7
----- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Gross profit..... 37.0 40.1 40.1 55.6 55.6 55.3 91.1 91.1 90.1 173.7 173.7
Operating
expenses:
Sales and
marketing...... 6.0 7.3 7.3 12.8 12.8 12.8 23.6 23.6 23.6 38.7 38.7
General and
administration.. 1.9 2.1 2.1 8.5 8.5 8.4 16.1 16.1 15.3 30.4 30.4
Amortization of
intangibles.... -- -- -- 10.9 10.9 10.9 22.3 22.3 22.3 19.5 19.5
Restructuring
and related
charges(a)..... -- -- -- -- -- -- 7.0 7.0 7.0 -- --
Stock
compensation
and related
bonuses(b)..... -- 31.3 31.3 -- -- -- -- -- -- -- --
Compensation to
the former
CEO............ 1.1 2.1 2.1 -- -- -- -- -- -- -- --
Write-off of
acquired in-
process
research and
development(c).. -- -- -- 39.0 39.0 39.0 -- -- -- -- --
----- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Operating income
(loss).......... 28.0 (2.7) (2.7) (15.6) (15.6) (15.8) 22.1 22.1 21.9 85.1 85.1
Interest expense,
net............. 9.4 17.8 25.2 27.5 35.3 37.4 32.5 41.4 46.7 27.0 36.3
----- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income (loss)
before taxes and
extraordinary
loss............ 18.6 (20.5) (27.9) (43.1) (50.9) (53.2) (10.4) (19.3) (24.8) 58.1 48.8
Income tax
benefit
(expense)....... (6.2) 8.0 10.9 (0.4) 2.6 3.5 1.9 5.2 7.4 (27.2) (23.4)
----- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income (loss)
before
extraordinary
loss............ 12.4 (12.5) (17.0) (43.5) (48.3) (49.7) (8.5) (14.1) (17.4) 30.9 25.4
Extraordinary
loss............ -- (1.6) (1.6) (2.4) (2.4) (2.4) -- -- -- (0.7) (2.2)
----- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net income
(loss).......... $12.4 $(14.1) $(18.6) $(45.9) $(50.7) $(52.1) $ (8.5) $(14.1) $(17.4) $ 30.2 $ 23.2
===== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
DDi
Corp.
2000
-------
Consolidated
Statement of
Operations Data:
Net sales........ $497.7
Cost of goods
sold............ 306.2
-------
Gross profit..... 191.5
Operating
expenses:
Sales and
marketing...... 39.7
General and
administration.. 36.2
Amortization of
intangibles.... 22.8
Restructuring
and related
charges(a)..... --
Stock
compensation
and related
bonuses(b)..... --
Compensation to
the former
CEO............ --
Write-off of
acquired in-
process
research and
development(c).. --
-------
Operating income
(loss).......... 92.8
Interest expense,
net............. 41.2
-------
Income (loss)
before taxes and
extraordinary
loss............ 51.6
Income tax
benefit
(expense)....... (25.0)
-------
Income (loss)
before
extraordinary
loss............ 26.6
Extraordinary
loss............ (6.4)
-------
Net income
(loss).......... $ 20.2
=======
16
Year Ended December 31,
--------------------------------------------------------------------------------------------------------
Pre- DDi
Recapitalization Corp. &
Company Dynamic DDi Dynamic DDi DDi Dynamic DDi
---------------- Details Capital Details Capital Corp. Details Capital
1996 1997 1997 1998 1998 1998 1999 1999
---------------- ------- --------- ------- ------- --------- ------- -------
(in millions, except share data)
Consolidated
Statement of
Operations Data
(continued):
Net income
(loss)
allocable to
common stock... -- $ (19.7) $ (58.4)
Net income
(loss) per
share of common
stock (basic).. -- $ (3.71) $ (7.68)
Net income
(loss) per
share of common
stock
(diluted)...... -- $ (3.71) $ (7.68)
Weighted average
shares
outstanding
(basic)........ -- 5,299,600 7,607,024
Weighted average
shares
outstanding
(diluted)...... -- 5,299,600 7,607,024
Net income per
common share
(basic)(d)..... $ 1,254 -- --
Net income per
common share
(diluted)(d)... $ 1,228 -- --
Weighted average
shares
outstanding
(basic)(d)..... 9,854,000 -- --
Weighted average
shares
outstanding
(diluted)(d)... 10,059,000 -- --
Other Financial
Data:
Depreciation.... $ 2.0 $ 2.6 $ 2.6 $ 9.2 $ 9.2 $ 9.2 $ 14.4 $ 14.4
Capital
expenditures... 10.2 6.6 6.6 18.0 18.0 18.0 18.2 18.2
Supplemental
Data:
Adjusted
EBITDA(e)...... 31.2 33.3 33.3 45.4 45.4 44.1 68.8 68.8
Net cash from
operating
activities..... 12.2 9.1 9.1 18.9 18.9 16.7 24.8 24.8
Net cash used in
investing
activities..... (3.6) (44.9) (44.9) (194.8) (194.8) (194.8) (18.5) (18.5)
Net cash from
(used in)
financing
activities..... (8.9) 41.1 41.1 172.4 172.4 174.9 (7.5) (7.5)
Ratio of
earnings to
fixed
charges(f)..... 3.0x -- (g) -- (g) -- (g) -- (g) -- (g) -- (g) -- (g)
Consolidated
Balance Sheet
Data:
Cash and cash
equivalents.... $ 0.2 $ 5.4 $ 5.4 $ 1.9 $ 1.9 $ 2.1 $ 0.6 $ 0.6
Working capital
(deficit)...... (3.5) 20.8 23.6 13.2 13.2 15.3 19.1 19.1
Total assets.... 27.5 102.6 108.9 358.5 362.2 365.0 350.0 353.6
Total debt,
including
current
maturities..... 94.1 212.6 273.5 369.5 438.3 466.9 358.3 436.0
Stockholders'
equity
(deficit)(h)... (72.7) (136.5) (191.2) (77.9) (138.0) (169.8) (80.0) (147.0)
DDi Dynamic DDi DDi
Corp. Details Capital Corp.
1999 2000 2000 2000
------------- -------- -------- -----------
Consolidated
Statement of
Operations Data
(continued):
Net income
(loss)
allocable to
common stock... $ (31.5) $ 15.8
Net income
(loss) per
share of common
stock (basic).. $ (3.21) $ 0.50
Net income
(loss) per
share of common
stock
(diluted)...... $ (3.21) $ 0.47
Weighted average
shares
outstanding
(basic)........ 9,831,042 31,781,536
Weighted average
shares
outstanding
(diluted)...... 9,831,042 33,520,447
Net income per
common share
(basic)(d)..... -- --
Net income per
common share
(diluted)(d)... -- --
Weighted average
shares
outstanding
(basic)(d)..... -- --
Weighted average
shares
outstanding
(diluted)(d)... -- --
Other Financial
Data:
Depreciation.... $ 14.4 $ 16.7 $ 16.7 $ 18.7
Capital
expenditures... 18.2 24.0 24.0 27.2
Supplemental
Data:
Adjusted
EBITDA(e)...... 66.7 121.7 121.7 134.8
Net cash from
operating
activities..... 24.8 62.1 61.1 64.8
Net cash used in
investing
activities..... (18.6) (56.2) (56.2) (62.0)
Net cash from
(used in)
financing
activities..... (7.7) 33.1 34.1 61.2
Ratio of
earnings to
fixed
charges(f)..... -- (g) 3.1x 2.3x 2.2x
Consolidated
Balance Sheet
Data:
Cash and cash
equivalents.... $ 0.6 $ 39.6 $ 39.6 $ 66.9
Working capital
(deficit)...... 19.1 83.3 83.3 108.0
Total assets.... 354.3 457.8 459.8 581.4
Total debt,
including
current
maturities..... 476.7 255.1 305.5 333.2
Stockholders'
equity
(deficit)(h)... (187.1) 105.1 62.7 136.4
- -------
(a) The 1999 restructuring and related charges represent the charge recorded
in December 1999 in connection with the announced consolidation of the
Colorado operations into the Texas facility and the closure of the
Colorado facility. The charge consists of $4.5 for severance and other
exit costs and $2.5 related to the impairment of net property, plant and
equipment.
(b) Represents the charge for stock compensation and related bonuses recorded
for vested stock options exchanged in conjunction with the
recapitalization in 1997.
17
(c) Represents the allocation of a portion of the purchase price in the DCI
merger to in-process research and development. At the date of the merger,
technological feasibility of the in-process research and development
projects had not been reached and the technology had no alternative future
uses. Accordingly, Dynamic Details expensed the portion of the merger
consideration allocated to in-process research and development.
(d) Given the changes in DDi Corp.'s capital structure in connection with its
recapitalization in 1997, historical earnings per share of common stock
for the year ended December 31, 1996 is not comparable to subsequent
years.
(e) EBITDA means earnings before net interest expense, income taxes,
depreciation and amortization. Adjusted EBITDA is presented because
management believes it is an indicator of the ability to incur and service
debt and is used by the Company's lenders in determining compliance with
financial covenants. However, adjusted EBITDA should not be considered as
an alternative to cash flow from operating activities, as a measure of
liquidity or as an alternative to net income as a measure of operating
results in accordance with generally accepted accounting principles. The
definition of adjusted EBITDA may differ from definitions of adjusted
EBITDA used by other companies.
The following table sets forth a reconciliation of EBITDA to adjusted
EBITDA for each period included herein:
Year Ended December 31,
--------------------------------------------------------------
Dynamic Dynamic Dynamic
Details & Details & Details &
DDi DDi DDi DDi DDi DDi
Capital Corp. Capital Corp. Capital Corp.
--------- ----- --------- ----- --------- ------
1996* 1997** 1998 1998 1999 1999 2000 2000
----- ------ --------- ----- --------- ----- --------- ------
(in millions)
EBITDA.................. $30.1 $(0.1) $43.5 $43.3 $58.8 $58.6 $121.2 $134.3
Former CEO
compensation(1) ....... 1.1 2.1 -- -- -- -- -- --
Management fee(2)....... -- -- -- -- 1.1 1.1 -- --
Executive severance(3).. -- -- 0.8 0.8 -- -- -- --
Stock compensation and
bonuses(4)............. -- 31.3 -- -- -- -- -- --
Restructuring and
related charges(5)..... -- -- -- -- 7.0 7.0 0.5 0.5
Non-cash expense
allocations and
other(6)............... -- -- 1.1 -- 1.9 -- -- --
----- ----- ----- ----- ----- ----- ------ ------
Adjusted EBITDA......... $31.2 $33.3 $45.4 $44.1 $68.8 $66.7 $121.7 $134.8
===== ===== ===== ===== ===== ===== ====== ======
--------
* Pre-Recapitalization Company
** Dynamic Details, DDi Capital and DDi Corp.
(1) Reflects elimination of compensation to the former CEO whose
employment agreement was terminated in October 1997.
(2) Reflects elimination of the Bain management fee incurred under the
Bain management agreement, which was terminated in connection with the
closing of DDi Corp.'s initial public offering.
(3) Reflects one-time severance payments to two executives who were
terminated as a result of redundancies created by the DCI merger.
(4) Reflects elimination of the charge for stock compensation and related
bonuses recorded for vested stock options exchanged in conjunction
with the recapitalization.
(5) Reflects elimination of the charges recorded for the consolidation and
closure of the Colorado facility. See note (a) above. The charge of
$0.5 incurred in 2000 was recorded in cost of goods sold.
(6) Reflects non-cash expense allocations to Dynamic Details and DDi
Capital by its parent, Intermediate, of $0.8 and $1.9 million in 1998
and 1999, respectively, and approximately $0.3 million of non-operating
income adjustments recorded in 1998.
(f) For purposes of computing this ratio, earnings consist of income before
income taxes plus fixed charges. Fixed charges consist of interest
expense and the estimated interest portion of rent expense.
(g) Historical earnings were deficient in covering fixed charges for Dynamic
Details, DDi Capital and DDi Corp. by $20.5 million, $27.9 million and
$27.9 million, respectively, in 1997, by $43.1 million, $50.9 million and
$53.3 million, respectively, in 1998 and by $10.4 million, $19.3 million
and
18
$24.8 million, respectively, in 1999. On a pro forma basis, assuming the
DDi Capital senior subordinated notes and senior discount notes were
outstanding at the beginning of 1997 and after eliminating the non
recurring stock compensation and related bonuses, the ratio of earnings to
fixed charges would have been 3.2x for Dynamic Details and 2.4x for both
DDi Capital and DDi Corp. in 1997. On a pro forma basis, assuming the
merger with DCI was consummated at the beginning of 1998 and after
eliminating the non-recurring $39 million write off of acquired in-process
research and development related to the merger with DCI, the ratio of
earnings to fixed charges would have been 0.8x for Dynamic Details and 0.6x
for both DDi Capital and DDi Corp. in 1998. On a pro forma basis, after
eliminating the non-recurring $7 million restructuring and related charges
related to the closure of the Colorado facility, the ratio of earnings to
fixed charges would have been 0.9x, 0.7x and 0.6x for Dynamic Details, DDi
Capital and DDi Corp., respectively, in 1999.
(h) The decrease in net capital deficiency from December 31, 1999 to December
31, 2000 reflects net income earned by Dynamic Details, DDi Capital and
DDi Corp. for the year ended December 31, 2000, as well as the initial and
follow-on offerings of DDi Corp.'s common stock during 2000. The increase
in the net capital deficiency from December 31, 1998 to December 31, 1999
reflects the net losses incurred by Dynamic Details, DDi Capital and DDi
Corp. for the year ended December 31, 1999. The decrease in the net
capital deficiency from December 31, 1997 to December 31, 1998 reflects
capital contributions in connection with the DCI merger (see Note 14 to
the Consolidated Financial Statements), partially offset by the net losses
incurred by Dynamic Details, DDi Capital and DDi Corp. for the year ended
December 31, 1998. The net capital deficiency as of December 31, 1997
reflects the Recapitalization that took place in October of 1997 and the
net capital deficiency as of December 31, 1996 reflects the Initial
Recapitalization that took place in January of 1996.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
We provide technologically advanced, time-critical electronics design,
development and manufacturing services to original equipment manufacturers and
other electronics manufacturing service providers. We target the fast-growing
communications and networking equipment industries, which are characterized by
aggressive new product development programs demanding the rapid application of
advanced technology and design.
Time-critical. We can deliver highly complex printed circuit boards to
customers in as little as 24 hours. Approximately 50% of our net sales for the
year ended December 31, 2000 were generated from services delivered in 10 days
or less.
Technologically advanced. Approximately 60% of our net sales during the same
period involved the design or manufacture of printed circuit boards with at
least eight layers, an industry-accepted measure of complexity. In addition,
many lower layer-count boards are complex as a result of the incorporation of
technologically advanced features.
Growth rate. Our net sales have grown at a compound annual growth rate of
61% for Dynamic Details and DDi Capital and 65% for DDi Corp. from $67.5
million for the year ended December 31, 1996 to $448.4 million for Dynamic
Details and DDi Capital and $497.7 million for DDi Corp. for the year ended
December 31, 2000, inclusive of the growth attributable to the acquisition of
Colorado Springs Circuits, Inc., or NTI, in 1997, the merger with
Dynamic Circuits, Inc., or DCI, in 1998 and the acquisitions of MCM
Electronics (by DDi Corp.), Automata and Golden Manufacturing in 2000.
Due to our use of debt to finance recapitalizations, acquisitions and the
merger with DCI, our net interest expense has increased from 1995 to 1999. In
2000, our net interest expense decreased due to the repayment of a portion of
indebtedness using the net proceeds of DDi Corp.'s initial public offering in
April 2000 and follow-on public offering of common stock in October 2000. In
2000, DDi Corp.'s net income of $20.2 million reflected $41.2 million of net
interest expense, DDi Capital's net income of $23.2 million reflected $36.3
million of net interest expense and Dynamic Details' net income of $30.2
million reflected $27.0 million of net interest expense. In 1999, DDi Corp.'s
net loss of $17.4 million reflected $46.7 million of net interest expense,
DDi Capital's net loss of $14.1 million reflected $41.5 million of net
interest expense and Dynamic Details' net loss of $8.5 million reflected $32.5
million of net interest expense. Beginning in 1998, our results of operations
have also been impacted by the amortization of intangibles resulting from the
NTI acquisition and the DCI merger. Beginning in 2000, results of operations
have also been impacted by the amortization of intangibles resulting from the
acquisitions of MCM, Automata and Golden. Net income in 2000 for DDi Corp.,
DDi Capital and Dynamic Details reflected $22.8 million, $19.5 million and
$19.5 million, respectively, of amortization of intangibles and net losses in
1999 reflected $22.3 million of amortization of intangibles and a $7.0 million
charge related to the Colorado consolidation.
Revenue recognition--We recognize revenue when there is persuasive evidence
of an arrangement with the customer which states a fixed and determinable
sales price and terms, delivery of the product has occurred in accordance with
the terms of the sale and collectibility of the sale is reasonably assured. We
provide a normal warranty on its products and accrues an estimated amount for
this expense at the time of the sale.
From time to time, we engage in discussions concerning prospective
acquisitions.
Company History and Significant Transactions
Our predecessor corporation was organized in 1978. In 1991, we installed new
management, headed by Bruce D. McMaster, and began to focus primarily on time-
critical electronics manufacturing services.
20
Recapitalization
In October 1997, we were recapitalized by investors led by Bain Capital,
Celerity Partners and Chase Capital Partners, which collectively invested
$62.4 million. After completing the recapitalization, investment funds
associated with these entities owned stock representing approximately 72.5% of
DDi Corp.'s fully-diluted equity; and management owned stock and options
representing approximately 27.5% of DDi Corp.'s fully-diluted equity.
In connection with the recapitalization, we incurred the following
nonrecurring charges:
. fees and interest charges on bridge loans (aggregating $14.5 million);
. $31.3 million for the accelerated vesting of variable employee stock
options and related bonuses;
. $2.7 million for the early extinguishment of long-term debt, before
income taxes; and
. $1.2 million for the buyout of our former CEO's employment contract.
Colorado Facility (formerly NTI)
In December 1997, Dynamic Details acquired Colorado Springs Circuits, Inc.,
or NTI, for approximately $38.9 million. NTI manufactured printed circuit
boards requiring lead times of twenty days or more for original equipment
manufacturers. At that time, the acquisition provided us with additional
capacity and access to new customers.
We accounted for the NTI acquisition under the purchase method of accounting
and recorded approximately $27 million in goodwill (which is being amortized
over a period of twenty-five years).
In December 1999, we implemented a plan to consolidate our Colorado
operations into our Texas facility and to close our Colorado facility, which
operated at a loss in 1999. We are currently serving a majority of the
customers who were serviced by our Colorado facility out of our Texas
facility. By combining the Texas and Colorado operations, we eliminated lower-
margin product lines and decreased overhead costs, and we have gained
efficiency through better capacity utilization and streamlined management. We
completed the consolidation of our Colorado and Texas operations on March 31,
2000.
DCI Merger
On July 23, 1998, Dynamic Details merged with Dynamic Circuits, Inc., or
DCI, for an aggregate consideration paid to DCI stockholders of approximately
$250 million. A portion of the consideration was paid in cash, and the balance
of the consideration (approximately $73 million) was paid through the issuance
of DDi Corp. capital stock. Concurrent with this transaction, DDi Corp.
contributed its investment in DCI through Intermediate and through DDi Capital
to Dynamic Details.
DCI provided design and manufacturing services relating to complex printed
circuit boards, backpanel assemblies and electromechanical interconnect
devices with operations in California, Texas, Georgia and Massachusetts. It
was led by Charles D. Dimick, who became DDi Corp.'s Chairman following the
merger. DCI experienced a growth in net sales of more than 67% during 1997,
and its net sales for the six months ended June 30, 1998 were more than double
its net sales for the six months ended June 30, 1997.
We accounted for the DCI merger under the purchase method of accounting and
Dynamic Details recorded approximately $120 million in goodwill (which is
being amortized over 20 years), approximately $60 million of identifiable
intangible assets (which are being amortized over their estimated useful lives
of 10 years, using an accelerated method of amortization, reflecting the
relative contribution of each developed technology in periods following the
acquisition date), and approximately $21 million and $4 million, respectively,
of intangible assets associated with DCI's customer relationships and
tradenames and assembled workforce assets (which are being amortized on a
straight-line basis over their estimated useful lives of 18 years and 4 years,
respectively). Dynamic Details also identified $39 million of acquired in-
process research and development investments, which was expensed in the fourth
quarter ended December 31, 1998.
21
Since the DCI merger, we have continued to invest in the development of the
various in-process research and development technologies that existed at DCI
at the time of the merger. We believe that our research and development
efforts are reasonably consistent with DCI's plans at the time of the merger,
inclusive of the expected post-merger total costs to complete the projects and
related project development time frames, given the inherent uncertainties
involved in estimating the technological hurdles of developing next-generation
technologies. These investments have enabled us to market products
incorporating some of the technologies included in DCI's plan. No significant
adjustments have been made in the economic assumptions or expectations on
which we based our merger decision.
Initial Public Offering of DDi Corp.
On April 14, 2000, DDi Corp. completed the initial public offering of its
common stock. We used net proceeds of approximately $156.6 million to repay a
portion of our debt and finance a portion of the MCM Electronics acquisition.
MCM Electronics Acquisition
On April 14, 2000, DDi Corp. acquired MCM Electronics Limited, headquartered
in the United Kingdom, for total consideration of approximately $82 million in
DDi Corp.'s common stock and cash, including repayment of some of MCM
Electronics' debt and the assumption of the remainder of its debt. MCM
Electronics, which has been combined with other European operations and
renamed DDi Europe Limited, focuses on the technologically advanced, time-
critical segment of the electronics manufacturing industry.
Under purchase accounting, the total purchase price has been allocated to
the underlying assets and liabilities assumed based upon their respective fair
values at the date of acquisition. We have allocated to tangible assets
(aggregating approximately $30 million), acquired and liabilities assumed
(aggregating approximately $46 million), with the remaining consideration
consisting primarily of goodwill and identifiable intangible assets.
The identifiable intangibles consist of developed technologies, non-compete
agreements, and assembled workforce. The fair value of the developed
technology assets at the date of acquisition was $1 million and represents the
aggregate fair value of individually identified technologies that were fully
developed at the time of acquisition. Developed technology assets are being
amortized over an estimated useful life of 5 years. The non-compete agreement
and assembled workforce assets were assigned values as of the acquisition date
of approximately $1 million and $2 million, respectively, and are being
amortized over their estimated useful lives of 1 year and 5 years,
respectively. Goodwill generated in the acquisition of MCM has an assigned
value of approximately $65 million and is being amortized over its estimated
useful life of 20 years.
Automata Acquisition
On August 4, 2000, Dynamic Details acquired substantially all the U.S.
assets of Automata International, Inc., a Virginia-based complex printed
circuit boards manufacturer, for approximately $19.5 million in cash, net of
fees and expenses. For the twelve months ended July 1, 2000, these assets
generated revenues of $55.6 million and an operating loss of $5.4 million. The
acquisition provides additional capacity for high density, high layer count
printed circuit boards and gives us a significant presence on the east coast.
Since completing the acquisition, we have successfully increased average
selling prices and has streamlined its operations to increase yields from
approximately 50% to almost 90% per panel. In addition, we have shifted
products from our other facilities to the 100,000 square foot Virginia
facility to increase volume and free up capacity at our other facilities.
Under purchase accounting, the total purchase price has been allocated to
the underlying assets acquired and liabilities assumed based upon their
respective fair market values at the date of acquisition. The excess of the
purchase price was allocated to goodwill and is being amortized over its
estimated useful life of 20 years.
22
Golden Acquisition
On September 15, 2000, Dynamic Details acquired substantially all of the
assets of Golden Manufacturing, Inc., a Texas-based manufacturer of engineered
metal enclosures and value-added assembly services to communications and
electronics original equipment manufacturers, for approximately $14.9 million
in cash, net of fees and expenses. For the twelve months ended December 31,
1999, on an unaudited basis, these assets generated approximately $13.5
million in revenues and an operating profit of $0.4 million. The acquisition,
which provides us with over 70,000 square feet of production capacity,
complements our existing Texas facilities by providing metal enclosure
assembly capabilities for our customers.
Under purchase accounting, the total purchase price has been allocated to
the underlying assets acquired and liabilities assumed based upon their
respective fair market values at the date of acquisition. The excess of the
purchase price was allocated to goodwill and is being amortized over its
estimated useful life of 20 years.
October 2000 Follow-On Public Offering of DDi Corp.
On October 16, 2000, DDi Corp. completed a public offering of 4,608,121
shares of its common stock. We used net proceeds of approximately $119.9
million to repay a portion of our debt and for general corporate purposes. We
evaluate acquisition opportunities from time to time, and as of December 31,
2000, we had not yet used any of the net proceeds of the October 2000 offering
for acquisitions. On March 5, 2001, we used a portion of the proceeds for the
acquisition of Thomas Walter Limited (see Note 20 to the Consolidated
Financial Statements).
February 2001 Follow-On Public Offering of DDi Corp.
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 to
us of $67.0 million, net of underwriting discounts, commissions and expenses.
Concurrently, DDi Corp. issued 5 1/4% 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 to us of $97.0 million, net of underwriting
discounts, commissions and expenses. The net proceeds of both transactions
have been used to repurchase all of the Dynamic Details Senior Subordinated
Notes and will be used to repurchase a portion of the Capital Senior Discount
Notes, to repay a portion of the Dynamic Details Senior Credit Facility or for
general corporate purposes.
Thomas Walter Acquisition
On March 5, 2001, DDi Europe completed the acquisition of Thomas Walter
Limited, a leading printed circuit board manufacturer based in Marlow, England
for approximately $30 million. Thomas Walter is a well-established provider of
complex, quick-turn rigid and rigid-flex printed circuit boards for the
European electronics industry. We believe that Thomas Walter's core
competencies in time-critical delivery and complex technology will complement
our quick-turn manufacturing and assembly operations in the U.K. In
particular, Thomas Walter's leading edge technological expertise supports our
high-end microvia laser technology, which will enhance pre-production services
in our European prototype division.
23
Results of Operations
The following table sets forth income statement data expressed as a
percentage of net sales for the periods indicated:
Year Ended December 31,
---------------------------------------------------------------------------
Dynamic DDi DDi Dynamic DDi DDi Dynamic DDi DDi
Details Capital Corp. Details Capital Corp Details Capital Corp.
1998 1998 1998 1999 1999 1999 2000 2000 2000
------- ------- ----- ------- ------- ----- ------- ------- -----
Net sales............... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold...... 68.2 68.2 68.4 68.8 68.8 69.2 61.3 61.3 61.5
----- ----- ----- ----- ----- ----- ----- ----- -----
Gross profit............ 31.8 31.8 31.6 31.2 31.2 30.8 38.7 38.7 38.5
Operating expenses:
Sales and marketing.... 7.3 7.3 7.3 8.1 8.1 8.1 8.6 8.6 8.0
General and
administration........ 4.8 4.8 4.8 5.5 5.5 5.2 6.8 6.8 7.3
Amortization of
intangibles........... 6.3 6.3 6.2 7.6 7.6 7.6 4.3 4.3 4.6
Restructuring and
related charges....... -- -- -- 2.4 2.4 2.4 -- -- --
Write-off of acquired
in-process research
and development....... 22.3 22.3 22.3 -- -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- ----- -----
Operating income
(loss)................. (8.9) (8.9) (9.0) 7.6 7.6 7.5 19.0 19.0 18.6
Interest expense (net).. 15.7 20.2 21.4 11.1 14.2 16.0 6.0 8.1 8.3
----- ----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before
income taxes and
extraordinary loss..... (24.6) (29.1) (30.4) (3.5) (6.6) (8.5) 13.0 10.9 10.3
Income tax benefit
(expense).............. (0.3) 1.5 2.0 0.6 1.8 2.5 (6.1) (5.2) (5.0)
Extraordinary loss, net
of income tax benefit.. (1.4) (1.4) (1.4) -- -- -- (0.1) (0.4) (1.3)
----- ----- ----- ----- ----- ----- ----- ----- -----
Net income (loss)....... (26.3)% (29.0)% (29.8)% (2.9)% (4.8)% (6.0)% 6.8 % 5.3 % 4.0 %
===== ===== ===== ===== ===== ===== ===== ===== =====
Year Ended December 31, 2000 Compared to the Year Ended December 31, 1999
Net Sales
Dynamic Details and DDi Capital net sales increased $155.9 million (53%) to
$448.4 million in 2000, from $292.5 million in 1999. Such increase is
attributable to: (i) the production of more complex and larger panels, which
increased the average sales price per panel and (ii) the impact of the
Automata and Golden acquisitions, which contributed $60.6 million to our net
sales. DDi Corp. net sales increased $205.2 million (70%) to $497.7 million in
2000, from $292.5 million in 1999. Such increase reflects the higher level of
sales achieved by Dynamic Details and the impact of the acquisition of MCM. In
aggregate, the Automata, Golden and MCM acquisitions contributed $109.9
million to DDi Corp. net sales for 2000. Excluding the acquisitions, our net
sales increased $95.3 million (33%).
Gross Profit
Dynamic Details and DDi Capital gross profit increased $82.6 million (91%)
to $173.7 million in 2000, from $91.1 million in 1999. Such increase in gross
profit resulted from the higher level of sales, an improvement in production
yields in our pre-production operations, and the impact of the Automata and
Golden acquisitions. DDi Corp. gross profit increased $101.4 million (113%) to
$191.5 million in 2000, from $90.1 million in 1999. Such increase reflects the
improvements in gross profit achieved by Dynamic Details and the impact of the
acquisition of MCM.
24
Sales and Marketing Expenses
Dynamic Details and DDi Capital sales and marketing expenses increased $15.1
million (64%) to $38.7 million in 2000, from $23.6 million in 1999. Such
increase is due to: (i) growth in our sales force to accommodate existing and
anticipated near-term increases in customer demand and related variable
expenses due to our increased sales volume and (ii) the impact of the Automata
and Golden acquisitions. DDi Corp. sales and marketing expenses increased
$16.1 million (68%) to $39.7 million in 2000, from $23.6 million in 1999. Such
increase reflects the increase in sales and marketing expenses incurred by
Dynamic Details and the impact of the acquisition of MCM.
General and Administration Expenses
Dynamic Details and DDi Capital general and administration expenses
increased $14.3 million (89%) to $30.4 million in 2000, from $16.1 million in
1999. The increase in expenses is attributable to higher staffing costs and
other back-office expenditures to support our growth (approximately $3.4
million), the impact of the Automata and Golden acquisitions (approximately
$2.1 million), higher incentive compensation expense (approximately $3
million), and an increase in bad debt expense (approximately $7.9 million).
The increase in credit related losses resulted from the current economic
softening, particularly in the telecommunications sector. Such increases were
partially offset by the elimination of management fees in connection with the
termination of a management agreement at the time of the initial public
offering by DDi Corp. (resulting in a reduction in expense of $1.1 million).
DDi Corp. general and administration expenses increased $20.7 million (135%)
to $36.1 million in 2000, from $15.4 million in 1999. Such increase reflects
the increase in general and administration expenses incurred by Dynamic
Details, the impact of the acquisition of MCM, and approximately $0.7 million
in costs incurred in streamlining our UK operations.
Amortization of Intangibles
Dynamic Details and DDi Capital amortization of intangibles decreased $2.8
million (13%) to $19.5 million in 2000, from $22.3 million in 1999. The
decrease is due to the use of accelerated amortization methods with regard to
certain identifiable intangibles, partially offset by the additional
amortization resulting from the Automata and Golden acquisitions
(approximately $0.2 million). DDi Corp. amortization of intangibles increased
$0.5 million (2%) to $22.8 million in 2000, from $22.3 million in 1999. Such
decrease reflects the decrease in amortization of intangibles incurred by
Dynamic Details, partially offset by amortization attributable to the
acquisition of MCM.
Restructuring and Related Charges
Restructuring and related charges were $7.0 million in 1999, representing
one-time costs incurred in connection with management's decision to close our
Colorado facility. These charges consist of $4.5 million for severance and
other exit costs and $2.5 million of costs related to the impairment of net
property, plant and equipment. See Note 15 to our Consolidated Financial
Statements for further information about these charges.
Net Interest Expense
Dynamic Details net interest expense decreased $5.5 million (17%) to $27
million in 2000, from $32.5 million in 1999. Such decrease is due to the
redemption of Senior Term Facility principal resulting from the DDi Corp.
equity offering in April 2000, partially offset by an increase in interest
rates. DDi Capital net interest expense decreased $5.2 (13%) to $36.3 million
in 2000, from $41.5 million in 1999. Such decrease reflects the decrease in
net interest expense incurred by Dynamic Details, partially offset by the
impact of discount accretion on the Capital Senior Discount Notes. DDi Corp.
net interest expense decreased $5.5 million (12%) to $41.2 million in 2000,
from $46.7 million in 1999. Such decrease reflects the decrease in net
interest expense incurred by DDi Capital, the redemption of Intermediate
Senior Discount Notes principal resulting from the DDi Corp. initial public
offering in April 2000 and follow-on offering in October 2000 and the
repurchase of
25
Capital Senior Discount Notes resulting from the DDi Corp. follow-on offering
in October 2000. These decreases were largely offset by the impact of the
acquisition of MCM. Interest on debt assumed in this acquisition was
$2.0 million in 2000.
Income Taxes
Dynamic Details income taxes increased $29.1 million to a tax expense of
$27.2 million in 2000, from a tax benefit of $1.9 million in 1999. DDi Capital
income taxes increased $28.6 million to a tax expense of $23.4 million in
2000, from a tax benefit of $5.2 million in 1999. The increased provisions for
both Dynamic Details and DDi Capital reflect a higher level of taxable income
earned in the current period. DDi Corp. income taxes increased $32.4 million
to a tax expense of $25.0 million in 2000, from a tax benefit of $7.4 million
in 1999. Such increase reflects the increased DDi Capital provision and the
impact of the acquisition of MCM, which generated $2.8 million in tax expense
in 2000. See Note 12 to the Consolidated Financial Statements for a
reconciliation of the tax expense or benefit recorded in each period to the
corresponding amount of income tax determined by applying the U.S. Federal
income tax rate to the earnings or loss before income taxes.
Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998
Net Sales
Net sales increased $117.6 million (67%) to $292.5 million in 1999, from
$174.9 million in 1998. Of this increase, $31.0 million resulted from internal
sales growth. The balance resulted from the inclusion in 1999 of a full year
of DCI sales. Sales growth accelerated in the second half of 1999 as
production of more complex and larger panels increased average sales price per
panel. On a pro forma basis giving effect to the DCI merger, net sales
increased by over 25% for the six months ended December 31, 1999 as compared
to the corresponding six months in 1998.
Gross Profit
Dynamic Details and DDi Capital gross profit increased $35.5 million (64%)
to $91.1 million in 1999, from $55.6 million in 1998, and DDi Corp. gross
profit increased $34.8 million (63%) to $90.1 million in 1999, from $55.3
million in 1998. The increase resulted from the merger with DCI, which
contributed $32.8 million to the increase. Partially offsetting this increase
was a $0.6 million gross loss in our Colorado facility in 1999 due to a
decrease in panel production in that operation, compared to a $1.6 million
gross profit in that facility in 1998. We announced our plan to close our
Colorado facility in December 1999. See "--Company History and Significant
Transactions--Colorado Facility (formerly NTI)." Dynamic Details experienced
increased pricing pressure early in the first quarter of 1999, with increased
competition following the slowdown in Asian markets in late 1998. Pricing
stabilized late in the first quarter of 1999 and recovered strongly through
the remainder of 1999.
Sales and Marketing Expenses
Sales and marketing expenses increased $10.8 million (84%) to $23.6 million
in 1999, from $12.8 million in 1998. The increase is due to the inclusion of
DCI's results for the full year ended December 31, 1999 (approximately $5.9
million), growth in sales force to accommodate existing and anticipated near-
term increases in customer demand (approximately $3.5 million), and an
increase in commissions and other variable expenses relating to increased
sales volume (approximately $1.4 million).
General and Administration Expenses
Dynamic Details and DDi Capital general and administration expenses
increased $7.5 million (89%) to $16.1 million in 1999, from $8.5 million in
1998, and DDi Corp. general and administration expenses increased $6.9 million
(82%) to $15.3 million in 1999, from $8.4 million in 1998. The increase is due
to the inclusion of
26
DCI's results for the full year ended December 31, 1999 (approximately $4.9
million), an increase in staffing and other back-office expenditures to
support growth in the design operations and the company as a whole
(approximately $2.4 million for Dynamic Details and DDi Capital and
approximately $1.7 million for DDi Corp.) and an increase in fees under the
management agreement with an affiliate of Bain Capital, Inc. (approximately
$1.1 million). Partially offsetting these increases was a non-recurring charge
of approximately $0.8 million recorded in 1998, representing severance-related
costs for certain executives terminated as a result of the DCI merger.
Amortization of Intangibles
Amortization of intangibles increased $11.4 million (105%) to $22.3 million
in 1999, from $10.9 million in 1998. The merger with DCI accounts for $11.2
million of this increase.
Restructuring and Related Charges
Restructuring and related charges were $7.0 million in 1999, representing
one-time costs incurred in connection with our decision to close our Colorado
facility. These charges consist of $4.5 million for severance and other exit
costs and $2.5 million of costs related to the impairment of net property,
plant and equipment. See Note 15 to the Consolidated Financial Statements for
further information about these charges.
Write-off of acquired in-process research and development totaled $39.0
million in 1998. This charge represents the appraised value of the in-process
research and development component of the total purchase price paid in the DCI
merger. See Note 14 to our Consolidated Financial Statements for further
information about this charge. There was no comparable expense in 1999.
Net Interest Expense
Net interest expense increased $5.0 million (18%) to $32.5 million in 1999
for Dynamic Details, from $27.5 million in 1998. Net interest expense
increased $6.2 million (18%) to $41.5 million in 1999 for DDi Capital, from
$35.3 million in 1998. Net interest expense increased $9.3 million (25%) to
$46.7 million in 1999 for DDi Corp., from $37.4 million in 1998. The increase
in net interest expense is attributable to the increased level of borrowings
in connection with the merger with DCI.
Income Taxes
The income tax benefit was $1.9 million in 1999 for Dynamic Details, as
compared to income tax expense of $0.5 million in 1998. The income tax benefit
was $5.2 million in 1999 for DDi Capital, as compared to a benefit of $2.7
million in 1998. The income tax benefit was $7.4 million in 1999 for DDi
Corp., as compared to a benefit of $3.5 million in 1998. The difference
between the effective tax rate and the statutory federal tax rate of 35% is
attributable to the acquired in-process research and development charge
recorded in 1998 and goodwill amortization in each period. As these expenses
are non-deductible, no related income tax benefit is recorded. Due to the
consolidation of our Colorado and Texas operations and the closure of our
Colorado facility in December 1999, we believe that a portion of our Colorado
net operating loss carryforwards may not be realized. Accordingly, a valuation
allowance was established in 1999 for deferred income tax benefits related to
these carryforwards. See Note 12 to the Consolidated Financial Statements for
a reconciliation of the tax benefit recorded in each period to the
corresponding amount of income tax determined by applying the U.S. Federal
income tax rate to the loss before income taxes and for additional information
relating to our Colorado net operating loss carryforwards.
27
Quarterly Financial Information
The following tables present selected quarterly financial information for
each of the twelve quarters ended December 31, 2000. This information is
unaudited but, in our opinion, reflects all adjustments, consisting only of
normal recurring adjustments that we consider necessary for a fair
presentation of this information, in accordance with generally accepted
accounting principles. These quarterly results are not necessarily indicative
of future results.
Dynamic Details and DDi Capital, Three Months Ended
--------------------------------------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1998 1998 1998 1998 1999 1999 1999 1999 2000 2000 2000 2000
-------- -------- --------- -------- -------- -------- --------- -------- -------- -------- --------- --------
(in millions)
Net sales....... $28.3 $26.3 $61.2 $59.1 $59.2 $71.7 $82.9 $78.7 $75.3 $86.9 $132.2 $154.0
Cost of goods
sold........... 16.4 16.1 41.4 45.4 41.8 50.2 57.2 52.2 49.0 55.9 83.9 85.9
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ------ ------
Gross profit.... $11.9 $10.2 $19.8 $13.7 $17.4 $21.5 $25.7 $26.5 $26.3 $31.0 $ 48.3 $ 68.1
===== ===== ===== ===== ===== ===== ===== ===== ===== ===== ====== ======
DDi Corp., Three Months Ended
--------------------------------------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1998 1998 1998 1998 1999 1999 1999 1999 2000 2000 2000 2000
-------- -------- --------- -------- -------- -------- --------- -------- -------- -------- --------- --------
(in millions)
Net sales....... $28.3 $26.3 $61.2 $59.1 $59.2 $71.7 $82.9 $78.7 $75.3 $101.5 $149.6 $171.3
Cost of goods
sold........... 16.4 16.1 41.6 45.5 42.0 50.4 57.4 52.6 49.0 66.5 95.1 95.6
----- ----- ----- ----- ----- ----- ----- ----- ----- ------ ------ ------
Gross profit.... $11.9 $10.2 $19.6 $13.6 $17.2 $21.3 $25.5 $26.1 $26.3 $ 35.0 $ 54.5 $ 75.7
===== ===== ===== ===== ===== ===== ===== ===== ===== ====== ====== ======
The quarterly financial information provided above does not present income
(loss) before extraordinary items, net income (loss) and related per share
data. Such information is not presented because it does not allow for
meaningful comparisons among quarters; the data fluctuates greatly from
quarter to quarter due the reclassification of our Class A and Class L common
stock in connection with our initial public offering and due to the changes in
our net interest expense ( and related tax expense) as a result of the
reduction in debt with the use of proceeds from our equity offerings. Further
quarterly financial information not presented above is presented in our Form
10-Q's.
Liquidity and Capital Resources
As of December 31, 2000, cash and cash equivalents were $66.9 million for
DDi Corp., and $39.6 million for both DDi Capital and Dynamic Details,
compared to $0.6 million for the Company as of December 31, 1999. Our
principal source of liquidity to fund ongoing operations for the year ended
December 31, 2000 was cash provided by operations.
Net cash provided by operating activities for the year ended December 31,
2000 was $64.8 million for DDi Corp., $61.1 million for DDi Capital and $62.1
million for Dynamic Details, compared to $24.8 million for the Company for the
year ended December 31, 1999.
Capital expenditures for the year ended December 31, 2000 were $27.2 million
for DDi Corp., and $24.0 million for DDi Capital and Dynamic Details, compared
to $18.2 million for the Company for the year ended December 31, 1999.
As of December 31, 2000, DDi Corp., DDi Capital and Dynamic Details had
long-term borrowings of $316.3 million, $291.8 million and $241.5 million,
respectively. Dynamic Details has $45.0 million available for borrowing under
its 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
December 31, 2000, Dynamic Details had no borrowings outstanding under this
revolving credit facility and had $0.7 million reserved against the facility
for a letter of credit. In addition, at December 31, 2000, Dynamic Details had
available a $30.0 million uncommitted incremental borrowing facility (see Note
6 to the Consolidated Financial Statements).
28
On April 14, 2000, DDi Corp. consummated an initial public offering of its
common stock (see Note 18 to the Consolidated Financial Statements). The net
proceeds were used to reduce the indebtedness of the Dynamic Details Senior
Term Facility by $100.0 million, redeem $17.5 million of the Intermediate
Senior Discount Notes, pay associated redemption premiums of $2.8 million and
accrued and unpaid interest thereon of $3.7 million, and to finance a portion
of the acquisition of MCM (see Note 14 to the Consolidated Financial
Statements) and pay offering expenses.
On October 16, 2000, DDi Corp. completed a follow-on public offering of its
common stock (see Note 18 to the Consolidated Financial Statements). The net
proceeds were used to redeem the remaining $17.5 million of the Intermediate
Senior Discount Notes, pay associated redemption premiums of $3.8 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 $56.0
million will be used for general corporate purposes, including potential
future acquisitions. DDi Corp. contributed approximately $35.0 million of the
$56.0 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 the DDi Corp. and the remainder sold by selling
shareholders. The shares were sold at $23.50 per share, generating proceeds to
us of $67.0 million, net of underwriting discounts, commissions and expenses.
Concurrently, DDi Corp. issued 5 1/4% 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 to the Company of $97.0 million, net of underwriting
discounts, commissions and expenses. The net proceeds of both transactions
have been used to repurchase all of the Dynamic Details Senior Subordinated
Notes and will be used to repurchase a portion of the Capital Senior Discount
Notes, to repay a portion of the Dynamic Details Senior Credit Facility or for
general corporate purposes. (See Note 20 to the Consolidated Financial
Statements).
Based on our 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