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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2001
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______________ to ______________
Commission file numbers:
DDi Corp. 000-30241
DDi Capital Corp. 333-41187
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DDi CORP.
DDi CAPITAL CORP.
(Exact names of registrants as specified in their charters)
Delaware 06-1576013
California 33-0780382
(State or other jurisdiction
of incorporation or organization) (I.R.S. Employer Identification Nos.)
1220 Simon Circle Anaheim, California 92806
(Address of Principal Executive Offices) (Zip Code)
(714) 688-7200
(Registrants' telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
DDi Corp.-Common Stock, par value $.01 per share
(Title of class)
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Indicate by check mark whether DDi Corp. and DDi Capital Corp.: (1) have
filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) have been
subject to such filing requirements for the past 90 days: Yes [X] No [_] .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [_] .
The aggregate market value of the DDi Corp.'s voting Common Stock held by
non-affiliates of DDi Corp. was approximately $518,246,064 (computed using the
closing price of $12.27 per share of Common Stock on March 11, 2002, as
reported by The Nasdaq Stock Market, Inc.). On March 11, 2002, all of the
voting stock of DDi Capital Corp. was held by DDi Intermediate Holdings Corp.,
and all of the voting stock of DDi Intermediate Holdings Corp. was held by DDi
Corp.
As of March 11, 2002, DDi Corp. had 47,975,106 shares of common stock, par
value $0.01 per share, outstanding. As of March 11, 2002, DDi Capital Corp. had
1,000 shares of common stock, par value $.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of DDi Corp.'s Proxy Statement prepared in connection with the
Annual Meeting of Stockholders to be held in 2002 are incorporated by reference
into Part III of this Form 10-K.
This Annual Report on Form 10-K is a combined annual report being filed
separately by two registrants: DDi Corp ("DDi Corp." f/k/a DDi Holdings Corp.)
and DDi Capital Corp. ("DDi Capital"). Except where the context clearly
indicates otherwise, any references in this report to "DDi Corp." includes all
subsidiaries of DDi Corp. including DDi Capital. DDi Capital makes no
representation as to the information contained in this report in relation to
DDi Corp. and its subsidiaries other than DDi Capital.
DDi Capital meets the conditions set forth in General Instructions I(1)(a)
and (b) of Form 10-K, and are filing this form with the reduced disclosure
format pursuant to General Instruction I(2).
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DDi CORP.
DDi CAPITAL CORP.
FORM 10-K INDEX
Page
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PART I
Item 1 Business............................................................................. 3
Item 1A Executive Officers of DDi Corp....................................................... 12
Item 2 Properties........................................................................... 13
Item 3 Legal Proceedings.................................................................... 13
Item 4 Submission of Matters to a Vote of Security Holders.................................. 13
PART II
Item 5 Market for the Registrants' Common Equity and Related Stockholder Matters............ 14
Item 6 Selected Financial Data.............................................................. 15
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 18
Item 7A Quantitative and Qualitative Disclosures About Market Risk........................... 37
Item 8 Financial Statements and Supplementary Data.......................................... 38
Item 9 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. 38
PART III
Item 10 Directors and Executive Officers of the Registrant................................... 39
Item 11 Executive Compensation............................................................... 39
Item 12 Security Ownership of Certain Beneficial Owners and Management....................... 39
Item 13 Certain Relationships and Related Transactions....................................... 40
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K..................... 41
2
Except for the historical information contained herein, this Annual Report
on Form 10-K contains forward-looking statements that involve risks and
uncertainties. Actual results could differ materially from those discussed
here. Readers should pay particular attention to the considerations described
in "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations--Factors that May Affect Future Results."
PART I
ITEM 1. BUSINESS
Overview
DDi Corp., formerly known as DDi Holdings Corp. ("DDi Corp."), provides
technologically advanced, time-critical electronics design, development and
manufacturing services to original equipment manufacturers and other providers
of electronics manufacturing services. Operating through our primary operating
subsidiaries, Dynamic Details, Incorporated ("Dynamic Details") and DDi Europe
Limited ("DDi Europe"), we target customers that are characterized by new
product development programs demanding the rapid application of advanced
technology and design. The technologically advanced, time-critical segment of
the electronics manufacturing services industry in which we operate is
characterized by high margins and significant customer diversity.
Our customers use our services to develop and produce a wide variety of end
products, including communications switching and transmission equipment,
wireless base stations, wireless telephone handsets, computer work stations,
high-end computing equipment, data networking equipment, medical devices,
automotive components, industrial and test equipment, and various aerospace
products.
DDi Corp.'s predecessor corporation was incorporated in California in 1978.
In 1991, new management, led by our President and Chief Executive Officer,
Bruce D. McMaster, began to focus primarily on the time-critical segment of the
electronics manufacturing services industry. In January 1996, we were
recapitalized by Chase Manhattan Capital, LLC and its affiliates. In October
1997, we were recapitalized again by investors led by Bain Capital, Inc.,
Celerity Partners, L.L.C. and Chase Capital Partners. In April 2000, in
conjunction with the closing of DDI Corp.'s initial public offering, DDi Corp.
was reincorporated in Delaware.
In October 1997, in connection with a second recapitalization, DDi Corp.
incorporated Dynamic Details as a new, wholly-owned subsidiary, and contributed
substantially all of its assets, subject to certain liabilities, to Dynamic
Details. In November 1997, DDi Corp. organized DDi Capital Corp., a California
corporation ("DDi Capital"), as a wholly-owned subsidiary, and in February
1998, DDi Corp. contributed substantially all of its assets (consisting
primarily of all of the shares of capital stock of Dynamic Details), subject to
certain liabilities, including senior discount notes, to DDi Capital. In July
1998, DDi Corp. organized DDi Intermediate Holdings Corp. ("Intermediate") as a
wholly-owned subsidiary and contributed its ownership of DDi Capital to
Intermediate.
Acquisitions have been important to our growth. Set forth below is a summary
of our acquisitions:
. In December 1997, Dynamic Details acquired all of the outstanding shares
of common stock of Colorado Springs Circuits, Inc., a Colorado
corporation d/b/a Dynamic Details, Inc.--Colorado Springs.
. In July 1998, Dynamic Details merged with Dynamic Circuits, Inc., a
Delaware corporation. DCI was primarily a manufacturer of complex
printed circuit boards and related components based in Silicon Valley
and with additional facilities in Texas, Georgia and Massachusetts.
. In December 1999, Dynamic Details implemented a plan to consolidate its
Colorado operations into its Texas facility and to close the Colorado
facility. The closure of this facility was effectively complete as of
March 31, 2000. By combining the Texas and Colorado operations, Dynamic
Details eliminated lower-margin product lines and decreased overhead
costs, and gained efficiency through better capacity utilization and
streamlined management.
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. In April 2000, DDi Corp. acquired MCM Electronics Limited, a
time-critical electronics manufacturing service provider based in the
United Kingdom. MCM Electronics has been combined with our other
European operations and does business as DDi Europe.
. In August 2000, Dynamic Details acquired substantially all the U.S.
assets of Automata International, Inc., a Virginia-based manufacturer of
technologically advanced printed circuit boards.
. In September 2000, Dynamic Details acquired substantially all the assets
of Golden Manufacturing, Inc., a Texas-based manufacturer of engineered
metal enclosures and provider of value-added assembly services to
communications and electronics original equipment manufacturers.
. In March 2001, DDi Europe completed the acquisition of Thomas Walter
Limited, a leading circuit board manufacturer based in Marlow, England.
Thomas Walter is a well-established provider of complex, quick-turn
rigid and rigid-flex printed circuit boards for the European electronics
industry.
. In April 2001, Dynamic Details, through its wholly-owned subsidiary, DDi
Sales Corp., formed Kabushiki Kaisha DDJ, a Japanese corporation, to
serve as a sales office in Tokyo, Japan.
. In April 2001, Dynamic Details completed the acquisition of the assets
of Nelco Technology, a wholly owned subsidiary of Park Electrochemical
Corp. Nelco is an Arizona-based manufacturer of semi-finished printed
wiring boards, commonly known as mass lamination.
. In May 2001, Dynamic Details completed the acquisition of Olympic
Circuits Canada, a Canada-based time-critical electronics manufacturing
service provider specializing in quick-turn prototype printed circuit
boards.
. In June 2001, Dynamic Details completed the acquisition of the assets of
Altatron, a Southern California based provider of value-add assembly
services to electronics original equipment manufacturers.
In October 2001, our management and Board of Directors approved a plan to
close our Garland, Texas and Marlborough, Massachusetts facilities. Prior to
its closure, the Garland plant had manufactured our lowest technology
pre-production volume printed circuit boards. The Marlborough plant provided
electronic interconnect products to selected customers in the New England area.
Our decision to close these facilities was based on their contribution to our
financial objectives in 2001 as well as their expected contribution going
forward. The closure of the facilities is estimated to be completed by June 30,
2002.
This report is a combined annual report filed separately by two registrants,
DDi Corp. and DDi Capital. DDi Capital is a wholly-owned subsidiary of
Intermediate, and Intermediate is a wholly-owned subsidiary of DDi Corp. Each
registrant has its principal executive offices at 1220 Simon Circle, Anaheim,
California and their telephone number is (714) 688-7200.
As used herein, the "Company," "we," "us" or "our" means DDi Corp. and its
wholly-owned subsidiaries, including DDi Capital, or their predecessor entities
as the context requires.
Industry Background
Electronics manufacturing services, or EMS, companies provide a range of
services to electronics original equipment manufacturers, or OEMs. EMS industry
revenues have increased from approximately $22 billion in 1993 to approximately
$104 billion in 2001. In 2001, approximately 13.7% of the cost of goods sold by
electronics OEMs was attributable to components and products outsourced to EMS
providers.
Electronics manufacturing services were historically labor-intensive
functions outsourced by OEMs to obtain additional capacity during periods of
high demand and initially consisted mainly of printed circuit board assembly.
Early EMS providers acted essentially as subcontractors, providing production
capacity on a
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transactional basis. With advances in process technology, EMS providers
developed additional capabilities and were able both to improve quality and to
reduce OEMs' costs. Over time, OEMs came to rely on EMS providers to perform a
broader array of manufacturing services, including design and development
activities. In recent years, EMS providers have expanded their range of
services to encompass design, product development, packaging and distribution
and overall supply chain management.
By using EMS providers, OEMs are able to focus on their core competencies,
including product development, sales, marketing and customer service.
Outsourcing allows OEMs to take advantage of the manufacturing expertise,
advanced technology and capital investment of EMS providers, to achieve overall
cost benefits and to enhance their competitive position by:
. reducing time to market and time to volume production;
. reducing operating costs and invested capital;
. improving supply chain management;
. focusing their resources on core competencies;
. accessing advanced manufacturing capabilities and process technologies;
and
. improving access to global markets.
The DDi Customer Solution
We engineer technologically advanced materials for customers within
extremely short turnaround times, which distinguishes us from traditional
electronics manufacturing service providers, and provides our customers with a
competitive advantage in delivering their new products to market quickly. Our
customers benefit from the following components of the DDi customer solution:
. Time-critical Service. Based on industry data, we believe we are one of
the largest providers of quick-turn complex printed circuit boards in
the United States. We can deliver highly complex printed circuit boards
to customers in as little as 24 hours. Approximately 45% of our net
sales in 2001 were generated from services delivered in 10 days or less.
. Advanced Technology. The focus on time-critical design, development and
manufacturing services requires our engineers to remain on the cutting
edge of electronics technology, and our customers benefit from the
expertise we have developed as they seek to introduce new products.
Approximately 55% of our net sales in 2001 involved the design or
manufacture of printed circuit boards with at least eight layers, an
industry-accepted measure of complexity. In addition, many of our lower
layer-count boards are complex as a result of the incorporation of other
technologically advanced features.
. Proactive Sales Force. Our knowledgeable and innovative sales force
enables current and prospective customers to understand and exploit a
wide range of services provided by our facilities across the country and
in Europe.
. Relationships with Research and Development Personnel. In many cases,
we have design engineers stationed on-site in customers' product
development divisions. As a result, we help customers develop workable
technical solutions to their concepts for next generation products.
. Experienced Management. Our management team, led by Bruce D. McMaster,
collectively has more than 75 years of experience in the electronics
manufacturing services industry.
We believe that these attributes allow us to consistently meet and exceed
our customers' expectations and that, as a result, we will continue to attract
leading original equipment manufacturers and other providers of electronics
manufacturing services as customers.
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Our Strategy
Our goal is to be the leading provider of technologically advanced,
time-critical electronics manufacturing services. To achieve this goal, we will:
Strengthen Technology and Process Management Leadership in the Time-Critical
Segment of the Electronics Manufacturing Services Industry and Continue to
Improve Quality and Delivery Times by Incorporating Emerging Technologies and
Consistently Refining Manufacturing Processes. We have consistently been among
the earliest users of new developments in printed circuit board design,
development and manufacturing and are continuously incorporating new technology
into our manufacturing processes in order to further improve quality and reduce
delivery times. Because we concentrate on cutting-edge methods, we have the
ability to service emerging providers of next-generation technology. This
ability allows us to build customer relationships with companies with the
potential for significant growth and enables us to provide these cutting-edge
methods to customers accustomed to more traditional methods. We have developed
process management expertise over time and are continuously enhancing our
ability to quickly adapt design and production facilities on demand to serve
time-critical customer needs. We believe this expertise and ability position us
as an industry leader in providing flexible and responsive technologically
advanced, time-critical services.
Leverage Leadership in Quick-Turn Design and Manufacturing Services to
Further Expand Assembly Operations and Other Value-Added Services. As a
quick-turn design and manufacturing service provider, we gain early access to
our customers' product development processes, giving us the opportunity to
leverage the provision of design services into providing other value-added
services including assembly of printed circuit boards and other electronic
components and total system assembly and integration of electronics products.
We predominantly use these additional capabilities in our customers' new
product development programs to enable them to further reduce their time to
market and overall cost.
Pursue Customers with Significant New Product Development Activity. Our
marketing efforts focus on customers having new product development programs
that require the rapid application of advanced technology and design. These
customers include original equipment manufacturers, emerging providers of
next-generation technology, and providers of electronics manufacturing services
that serve similar customers.
Capitalize on Strong Customer Relationships and Design Expertise to
Participate in Future Product Introductions and Further Outsourcing
Programs. We have served established original equipment manufacturers for many
years, through multiple product generations. We have positioned ourselves as a
strategic partner in our customers' new product initiatives by focusing on
direct relationships with our customers' research and development personnel. As
a result, we have developed expertise and gained knowledge of our customers'
new product design programs, all of which position us as a preferred service
provider for future product generations.
Pursue Selected Acquisition Opportunities, Including Asset Divestitures by
Original Equipment Manufacturers. We have actively pursued acquisitions to
enhance service offerings, expand geographic presence and increase production
capabilities. An increasing number of original equipment manufacturers are
divesting their production capabilities as an integral part of their
manufacturing strategy. We completed four acquisitions in 2001: Thomas Walter,
Nelco Technology, Olympic Circuits Canada and Altatron Technology. We intend to
continue to pursue strategic acquisition opportunities, including asset
divestitures by original equipment manufacturers, that we believe will
complement internal growth.
Further Expand International Operations to Better Serve the Needs of
Customers Seeking to Outsource Their Worldwide Design and Manufacturing
Activities. We are serving a growing number of European customers from DDi
Europe's four U.K. facilities. We believe European markets offer significant
growth opportunities as large electronics equipment manufacturers are
increasing their global distribution and are seeking electronics manufacturing
service providers with the ability to operate in multiple markets. We are
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actively pursuing other acquisition possibilities in Europe. In addition, in
2001 we acquired a facility in Canada increasing our capability to serve
customers in that geographic area. We also opened a sales office in Tokyo,
Japan, which we are using to target opportunities for geographic expansion in
Japan and other Asian markets.
Our Services
We provide a suite of value-added, integrated services, used by our
customers predominantly in the development of their new products, including:
On-campus and In-the-field Design of Complex Printed Circuit Boards. We
target our design and development engineering services primarily at the
earliest stages of the new product development process. We provide design and
engineering assistance early in new product development to ensure that both
mechanical and electrical considerations are integrated into a cost-effective
manufacturing solution. We design and develop printed circuit boards that meet
or exceed established operating parameters for new products. In doing so, we
often recommend and assist in implementing design changes to reduce
manufacturing costs and lead times, increase manufacturing yields and improve
the quality of the finished product.
Time-critical Development and Fabrication of Prototype Complex Printed
Circuit Boards. Our time-critical, or quick-turn, services are used in the
design, test and launch phases of new electronics product development and are
generally delivered within 10 to 20 days or in as little as 24 hours. Larger
volumes of printed circuit boards are needed as a product progresses past the
testing, design and pre-production phases. The advanced design, development and
manufacturing technologies we employ facilitate quick-turn production of
complex, multi-layered printed circuit boards utilizing
technologically-advanced methods. See "Technology, Development and Processes."
Our ability to provide these services on a quick-turn and longer lead-time
delivery basis involves working closely with customers from the initial design
of new products through development and launch.
Assembly of Printed Circuit Boards, Backpanels and Other Components of
Electronics Products. We assemble printed circuit boards, backpanels, card
cages and wire harnesses on a low volume, quick-turn basis. Backpanels are
large printed circuit boards, and card cages and wire harnesses integrate wires
with connectors and terminals to transmit electricity between two or more
points. As the electronics industry has worked to increase component speed and
performance, the design of these components has become more integrated. We have
responded to this trend and provide these additional assembly services to
complement design and development capabilities.
Assembly and Integration of Customers' Complete Systems and Products. We
provide full system assembly services, predominantly for products in
development by original equipment manufacturers. These services require
logistical capabilities and supply chain management to rapidly acquire
components, assemble prototype products, perform complex testing and deliver
products to the customer.
Our Customers and Markets
We believe that we have one of the broadest customer bases in the
electronics manufacturing services industry. As of December 31, 2001, we had
more than 2,000 customers, comprised of original equipment manufacturers and
electronics manufacturing services providers representing a wide range of
end-user markets. Our customers principally consist of leading communications
and networking equipment and computer manufacturers, as well as medical,
automotive, industrial and aerospace equipment manufacturers. During 2001,
sales to our largest customer accounted for approximately 7% of net sales. We
expect that sales to this customer will decline materially in the future
because of circumstances in the communications industry. During 2001, sales to
our ten largest customers accounted for approximately 34% of our net sales. We
have been successful at retaining customers and have worked with our three
largest customers since 1991.
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Approximately 80% of our net sales are made to original equipment
manufacturers, and the remainder are to electronics manufacturing service
providers. The following table shows, for the periods indicated, the percentage
of our sales in each of the principal end-user markets we served for the years
ended December 31, 1999, 2000 and 2001.
Year Ended December 31,
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End-User Markets 1999 2000 2001
- ---------------- ---- ---- ----
Communications and networking equipment.................... 55% 61% 55%
Computer and peripherals................................... 21 25 18
Medical, automotive, industrial and test instruments....... 9 9 14
Aerospace equipment........................................ 2 2 5
Other...................................................... 13 3 8
--- --- ---
Total................................................... 100% 100% 100%
=== === ===
The following table indicates, for the year ended December 31, 2001, our
largest original equipment manufacturers, or OEMs, and electronics
manufacturing services, or EMS, customers in terms of net sales, in
alphabetical order, and the primary end products for which we provided our
services.
OEM Customers End Products
- ------------- ------------
Alcatel...................... Communications switching and transmission equipment, networking and
optical networking equipment
IBM.......................... Network servers; high-end computers; memory, storage and personal
computer products
Intel........................ Personal computers and peripherals; mid- to high-end computers;
semicondutor test equipment servers; memory
Marconi Communications....... Communications switching and transmission equipment, networking and
optical networking equipment
Motorola..................... Wireless base station and handset products; two-way radio communication
equipment; semiconductor test equipment
EMS Customers End Products
- ------------- ------------
Celestica.................... Communications equipment; mid- to high-end computers; servers; storage
and memory products
Jabil........................ Communications and computing equipment; optical networking products
Solectron.................... Communications equipment; mid- to high-end computers; servers;
printers; memory and storage products
Technology, Development and Processes
We maintain a strong commitment to research and development and focus our
efforts on enhancing existing capabilities as well as developing new
technologies. Our close involvement with our customers in the early stages of
their product development positions us at the leading edge of technical
innovation in the design of quick-turn and complex printed circuit boards. Our
staff of approximately 300 experienced engineers, chemists and laboratory
technicians works in conjunction with our sales staff to identify specific
needs and develop innovative, high performance solutions to customer issues.
This method of product development allows customers to augment their own
internal development teams while providing us with the opportunity to gain an
in-depth understanding of our customers' businesses and enabling us to better
anticipate and serve our customers' future needs.
The market for our products and services is characterized by rapidly
changing technology and continuing process development. In recent years, the
trend in the electronics equipment industry has been to increase speed
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and performance of components while at the same time reducing their size. This
trend requires increasingly complex printed circuit boards with higher
densities. The future success of our business will depend in large part upon
our ability to maintain and enhance our technological capabilities, develop and
market products and services that meet changing customer needs, and
successfully anticipate or respond to technological changes on a cost-effective
and timely basis. In the last three years, we have made substantial investments
in equipment and technology to meet these needs and maintain our competitive
advantage.
We believe the highly specialized equipment we use is among the most
advanced in the industry. We provide a number of advanced technologies,
including:
. Laser Direct Imaging. Laser direct imaging is a new process that allows
us to increase board density through the use of increasingly small and
accurate laser technology.
. Microvias. Microvias are small holes, or vias, generally created with
lasers employing depth control rather than mechanical drills, through
which printed circuit board layers are interconnected. Microvias
generally have diameters between .001 and .005 inches.
. Blind or Buried Vias. Blind or buried vias are small holes which
interconnect inner layers of high layer-count printed circuit boards.
. Ball Grid Arrays. A ball grid array is a method of mounting an
integrated circuit or other component to a printed circuit board. Rather
than using pins, also called leads, the component is attached with small
balls of solder at each contact. This method allows for greater
component density and is used in printed circuit boards with higher
layer counts.
. Flip Chips. Flip chips are structures that house circuits which are
interconnected without leads. They are utilized to minimize printed
circuit board surface area when compact packaging is required.
. Multichip Module-Laminates. Multichip module-laminates are a type of
printed circuit board design that allows for the placement of multiple
integrated circuits or other components in a limited surface area.
. Advanced Substrates. Advanced substrates are a recent generation of
printed circuit board materials that enable the use of ball grid arrays,
flip chips and multichip module laminates. They are used for products
requiring high-frequency transmission and have thermal properties
superior to standard materials.
We are qualified under various industry standards, including Bellcore
compliance for communications products and UL (Underwriters Laboratories)
approval for electronics products. In addition, all of our production
facilities are ISO-9002 certified. These certifications require that we meet
standards related to management, production and quality control, among others.
On December 17, 2001, we announced that we will participate in collaborative
sponsorship of a printed circuit board technology project that both (a)
benefits the high technology and electronics engineering academia of two
leading Virginia universities, and (b) serves as a commercial printed circuit
board design/manufacturing facility. DDi will oversee the operations of the
Center for Advanced Printed Circuit Board Design and Manufacturing Technology.
The Center will be funded and supported in collaboration with Virginia
Commonwealth University and the University of Virginia and three other industry
sponsors, DuPont, Panasonic and Zuken. The State of Virginia has indicated a
willingness to fund one half of the costs incurred by the sponsors up to $0.5
million in the first year of operations and up to $1.2 million in the second
year of operations, pending final approval from state procurement and budget
officials. At this stage, we are working with the universities to establish the
specific terms and conditions of the project and a budget for the Center.
Manufacturing
We produce highly complex, technologically advanced multi-layer and
low-layer printed circuit boards, backpanel assemblies, printed circuit board
assemblies, card cage and wire harness assemblies and full system
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assembly and integration that meet increasingly tight tolerances and
specifications demanded by original equipment manufacturers. The manufacture of
printed circuit boards involves several steps: etching the circuit image on
copper-clad epoxy laminate, pressing the laminates together to form a panel,
drilling holes and depositing copper or other conducive material to form the
inter-layer electrical connections and, lastly, cutting the panels to shape.
Our advanced interconnect products require additional critical steps, including
dry film imaging, photoimageable soldermask processing, computer-controlled
laser drilling and routing, automated plating and process controls and
achievement of controlled impedance.
Multi-layering, which involves placing multiple layers of electrical
circuitry on a single printed circuit board or backpanel, expands the number of
circuits and components that can be contained on the interconnect product and
increases the operating speed of the system by reducing the distance that
electrical signals must travel. Increasing the density of the circuitry in each
layer is accomplished by reducing the width of the circuit tracks and placing
them closer together on the printed circuit board or backpanel.
Interconnect products having narrow, closely spaced circuit tracks are known
as fine line products. The manufacture of complex multi-layer interconnect
products often requires the use of sophisticated circuit interconnections,
called blind or buried vias, between printed circuit board layers and adherence
to strict electrical characteristics to maintain consistent circuit
transmission speeds, referred to as controlled impedance. These technologies
require very tight lamination and etching tolerances and are especially
critical for printed circuit boards with ten or more layers.
Manufacture of printed circuit boards used in backpanel assemblies requires
specialized expertise and equipment because of the larger size of the backpanel
relative to other printed circuit boards and the increased number of holes for
component mounting. We have no patents for these proprietary techniques and
rely primarily on trade secret protection.
Accomplishing these operations in time-critical situations, as we do,
requires the attention of highly-qualified personnel. Furthermore, our
manufacturing systems are managed to maximize flexibility to accommodate widely
varying projects for different customers with minimal or no turnover time. We
seek to maximize the use of our production and manufacturing capacity through
the efficient management of time-critical production schedules.
Sales and Marketing
Our marketing strategy focuses on developing close working relationships
with customers early in the design phase and throughout the lifecycle of the
product. Accordingly, our senior management personnel and engineering staff
advise our customers with respect to applicable technology, manufacturing
feasibility of designs and cost implications through on-line computer technical
support and direct customer communication. We have focused our marketing
efforts on developing long-term relationships with research and development
personnel at key customers in high-growth segments of the electronics equipment
industry.
In order to establish individual salesperson accountability for each client,
each customer is assigned one member of the sales staff for all services across
all facilities. We have developed a comprehensive database and allocation
process to control calling and cross-selling effort, and have a global account
program for coordinating sales to our top 20 customers.
We market our design, development and manufacturing services through an
internal sales force of approximately 150 individuals and an expansive sales
network consisting of 10 organizations comprised of approximately 44
manufacturers' representatives across the United States. Approximately 44% of
our net sales in 2001 were generated through manufacturers' representatives.
For many of these manufacturers' representatives, we are the largest revenue
source and the exclusive supplier of quick-turn and pre-production printed
circuit boards. In 1997, we opened a sales office in London, England. Following
our acquisition of MCM, we integrated MCM's sales force into our pre-existing
European staff and we plan to continue expanding our international sales
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efforts. In April 2001, we opened a sales office in Tokyo, Japan. The financial
information for geographic areas is included in Note 2 to the Consolidated
Financial Statements under the caption "Segment Reporting."
Our Suppliers
Our raw materials inventory is small relative to sales and must be regularly
and rapidly replenished. We use just-in-time procurement practices to maintain
raw materials inventory at low levels, and work closely with our suppliers to
incorporate technological advances in the raw materials we purchase. Because we
provide primarily lower-volume quick-turn services, this inventory policy does
not hamper our ability to complete customer orders. Although we have preferred
suppliers for some raw materials, multiple sources exist for all materials.
Adequate amounts of all raw materials have been available in the past and we
believe this will continue in the foreseeable future.
The primary raw materials that we use in production are core materials
(copperclad layers of fiberglass of varying thickness impregnated with bonding
materials) and chemical solutions (copper, gold, etc.) for plating operations,
photographic film and carbide drill bits.
Competition
The electronics manufacturing services industry is highly fragmented and
characterized by intense competition. We principally compete in the
time-critical segment of the industry against independent, small private
companies and integrated subsidiaries of large, broadly based volume producers,
as well as the internal capacity of original equipment manufacturers. We
believe that competition in the market segment we serve, unlike in the
electronics manufacturing services industry, generally is not driven by price.
Instead, because customers are willing to pay a premium for a responsive,
broad-reaching capability to produce customized complex products in a very
short time, we compete primarily on the basis of quick turnaround, product
quality and customer service. In addition, we do not compete in the high volume
production manufacturing aspect of the industry and as a result are less
exposed to competition from low cost manufacturers who compete on price in the
commodity segment of this market.
Competition in the complex and time-critical segment of our industry has
increased due to consolidation, resulting in potentially better capitalized
competitors. Our basic technology is generally not subject to significant
proprietary protection, and companies with significant resources, international
operations or a sufficiently large customer base may enter the market.
Backlog
Although we obtain firm purchase orders from our customers, our customers
typically do not make firm orders for delivery of products more than 30 to 90
days in advance. We do not believe the backlog of expected product sales
covered by firm purchase orders is a meaningful measure of future sales since
orders may be rescheduled or canceled.
Governmental Regulation
Our operations are subject to certain federal, state and local laws and
regulatory requirements relating to environmental compliance and site cleanups,
waste management and health and safety matters. Among others, we are subject to
regulations promulgated by:
. the Occupational Safety and Health Administration pertaining to health
and safety in the workplace;
. the Environmental Protection Agency pertaining to the use, storage,
discharge and disposal of hazardous chemicals used in the manufacturing
processes; and
. corresponding state and local agencies.
11
To date the costs of compliance and environmental remediation have not been
material to us. Nevertheless, additional or modified requirements may be
imposed in the future. If such additional or modified requirements are imposed
on us, or if conditions requiring remediation were found to exist, we may be
required to incur substantial additional expenditures.
Employees
As of December 31, 2001, we had approximately 2,300 employees, none of whom
are represented by unions. Of these employees, approximately 1,800 were
involved in manufacturing and engineering, 150 worked in sales and marketing
and 350 worked in other support capacities. We have not experienced any labor
problems resulting in a work stoppage and believe we have good relations with
our employees.
ITEM 1A. EXECUTIVE OFFICERS OF DDi CORP.
The following table sets forth the executive officers of DDi Corp., their
ages as of March 11, 2002, and the positions currently held by each person:
Name Age Office
---- --- ------
Bruce D. McMaster 40 President, Chief Executive Officer and Director
Joseph P. Gisch 45 Chief Financial Officer, Secretary and Treasurer
Thomas Ingham 46 Vice President, Sales and Marketing
Terry L. Wright 42 Vice President and Chief Technology Officer
Kevin McClelland 43 Vice President, Operations - West Coast
Michael Moisan 47 Vice President, Operations - East Coast
The President, Chief Executive Officer, Chief Financial Officer, Secretary
and Treasurer are elected annually by the Board of Directors at its first
meeting following the annual meeting of stockholders. Other executive officers
may be appointed by the Board of Directors at such meeting or at any other
meeting. All executive officers serve at the pleasure of the Board of Directors.
Bruce D. McMaster has served as our President since 1991 and as a Director
and our Chief Executive Officer since 1997. Before becoming our President,
Mr. McMaster worked in various management capacities in our engineering and
manufacturing departments. Mr. McMaster also serves as President and Chief
Executive Officer of DDi Capital and Dynamic Details and serves as an executive
officer of our other subsidiaries.
Joseph P. Gisch has served as our Chief Financial Officer since 1995. Mr.
Gisch also serves as Vice President, Chief Financial Officer and Treasurer of
Dynamic Details. From 1986 to 1995, Mr. Gisch was a partner at the accounting
firm of McGladrey & Pullen, LLP where he was responsible for the audit,
accounting and information systems for a variety of manufacturing clients. Mr.
Gisch was responsible for our general accounting and income tax matters. Mr.
Gisch has not been responsible for any of our audit services since 1991.
Thomas Ingham has served as our Vice President of Sales and Marketing since
September 2001. Mr. Ingham has served Dynamic Details in various positions in
sales and marketing over the last five years, starting as Regional Manager.
Prior to joining Dynamic Details, Mr. Ingham worked for 12 years at Insulectro,
a supplier of PCB materials and laminates, in various positions, most recently
as Vice President, Sales and Marketing.
Terry L. Wright joined us in 1991 and has served as our Vice President,
Engineering from 1995 through 2000 and Chief Technology Officer since 2000.
During 2001, Mr. Wright assumed the role of Vice President, Operations -
Anaheim. Prior to joining us, Mr. Wright was a general manager at Applied
Circuit Solutions and a quality assurance manager at Sigma Circuits.
Kevin McClelland has served as our Vice President, Operations - West Coast
since October 2001. He has more than two decades of experience in electronics
manufacturing services including electronics engineering,
12
operations and business development. Before joining Dynamic Details, he was
Vice President of Business Development for Multek, an EMS provider, from 1980
to 2001, where he was involved extensively in acquisitions and transition
management domestically and in Europe and Mexico.
Michael Moisan has served as our Vice President, Operations - East Coast
since October 2001. Mr. Moisan has over two decades of experience in the
EMS/PCB industry. Mr. Moisan oversaw our Anaheim operation from 1996 to October
2001. Prior to joining DDi, he was Director of Engineering at Circuitwise, an
automotive printed circuit board supplier, from 1995 to 1996. He served as
Director of Operations at AMP AKZO, a printed circuit board company, from 1990
to 1996 and as Director of Research at PCK Technology, an electronics research
and development company, from 1982 to 1990.
There are no arrangements or understandings pursuant to which any of the
persons listed in the table above was selected as executive officers.
ITEM 2. PROPERTIES
We conduct our operations within approximately 981,000 square feet of
building space. Our significant facilities are as follows:
Square
Location Function Feet Remaining Lease Term
- -------- -------- ------- --------------------
Anaheim, California Quick-turn printed circuit boards 150,000 1 to 5 years (a)
Milpitas, California Quick-turn printed circuit boards 41,000 0.5 to 1.5 years (a)
Milpitas, California Quick-turn printed circuit boards 40,000 10 years
Marlow, England Quick-turn printed circuit boards 29,000 7 years
Tewkesbury, England Quick-turn printed circuit boards 60,000 7 years
Sterling, Virginia Quick-turn printed circuit boards 100,000 8 years
Toronto, Canada Quick-turn printed circuit boards 52,000 8.5 years
Tolworth, England Longer lead-time printed circuit boards 35,000 0.5 years
Tempe, Arizona Longer lead-time printed circuit boards 68,000 1 to 4 years
San Jose, California Assembly 62,000 4.5 years
Dallas, Texas Assembly 49,000 0.5 year (a)
Calne, England Assembly 90,000 21.5 years
Hertford, England Assembly 40,000 16.5 years
Dallas, Texas Assembly 90,000 1.75 years
Moorpark, California Assembly 54,000 2 years
-------
960,000
- --------
(a) All of these leases have an option to renew or to purchase the property at
fair market value after a specified date during the lease term.
In addition to the facilities listed above, we also occupy space for our
design operations in various states aggregating approximately 21,000 square
feet. We lease our executive office space, which comprises approximately 20,000
square feet (including corporate administration, sales, finance and accounting,
and engineering.) Our executive office space is located at 1220 Simon Circle in
Anaheim, California and is included in the 150,000 square foot Anaheim,
California location. We believe our facilities are currently adequate for our
operating needs.
ITEM 3. LEGAL PROCEEDINGS
We are a party to various legal actions arising in the ordinary course of
our business. We believe that the resolution of these legal actions will not
have a material adverse effect on our financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
13
PART II
ITEM 5. MARKET FOR THE REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
DDi Corp.'s common stock has been quoted on the Nasdaq National Market under
the symbol "DDIC" since April 11, 2000. Prior to that time, there was no public
market for DDi Corp.'s common stock. The following table sets forth the high
and low sales prices of DDi Corp.'s common stock for the periods indicated as
reported on the Nasdaq National Market.
Common Stock
Price
-------------
High Low
------ ------
2001
Fourth Quarter................................................ $13.40 $ 5.71
Third Quarter................................................. $21.48 $ 7.30
Second Quarter................................................ $27.74 $12.40
First Quarter................................................. $33.63 $10.88
2000
Fourth Quarter................................................ $45.87 $19.25
Third Quarter................................................. $45.94 $21.81
Second Quarter................................................ $31.25 $ 9.50
We presently intend to retain earnings to finance future operations,
expansion and capital investment and to reduce indebtedness. There were
approximately 151 record holders of our common stock as of March 11, 2002.
There is no established trading market for the common stock of DDi Capital.
As of December 31, 2001, DDi Capital had 1,000 shares of common stock, par
value $.01 per share outstanding, all of which were held by Intermediate, which
is a wholly-owned subsidiary of DDi Corp.
We have not declared or paid a cash dividend on common stock since January
1996, and we do not anticipate paying any cash dividends for the foreseeable
future. Our existing debt instruments restrict our ability to pay dividends and
restrict our subsidiaries' ability to pay dividends to us. Dynamic Details'
ability to pay dividends is limited under its senior credit facility. DDi
Capital's ability to pay dividends is limited under an indenture dated November
18, 1997, as supplemented by a supplemental indenture dated February 10, 1998
among DDi Corp., DDi Capital and State Street Bank & Trust Co. as trustee. DDi
Corp.'s 5 1/4% Convertible Subordinated Notes due March 1, 2008 does not
restrict its ability to pay dividends; however, the conversion price on these
notes may be adjusted if dividends exceed certain amounts. We presently intend
to retain earnings to finance future operations, expansion and capital
investment and to reduce indebtedness. See "Description of Indebtedness" within
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
14
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data as of and for the dates and periods
indicated have been derived from the consolidated financial statements of DDi
Capital and DDi Corp. The selected financial data with respect to the
consolidated statement of operations data for the years ended December 31, 1997
and 1998 and the consolidated balance sheet data as of December 31, 1997, 1998
and 1999 were derived from our audited consolidated financial statements that
are not included herein. The selected historical consolidated statement of
operations data for the years ended December 31, 1999, 2000 and 2001 and the
historical consolidated balance sheet data as of December 31, 2000 and
2001 were derived from the audited historical consolidated financial statements
of DDi Capital and DDi Corp. included elsewhere herein. You should read the
data set forth below in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the consolidated
financial statements and the related notes thereto appearing elsewhere herein.
Year Ended December 31,
-----------------------------------------------------------------------
DDi
Corp.
& DDi DDi DDi DDi DDi DDi DDi DDi DDi
Capital Capital Corp. Capital Corp. Capital Corp. Capital Corp.
1997 1998 1998 1999 1999 2000 2000 2001 2001
------- ------- ------ ------- ------ ------- ------ ------- -------
(in millions)
Consolidated Statement of Operations Data:
Net sales......................................... $ 78.8 $174.9 $174.9 $292.5 $292.5 $448.4 $497.7 $284.7 $ 361.6
Cost of goods sold................................ 38.7 119.3 119.6 201.4 202.4 274.7 306.2 209.3 263.6
Restructuring--related inventory impairment(a).... -- -- -- 1.9 1.9 -- -- 3.7 3.7
------ ------ ------ ------ ------ ------ ------ ------ -------
Gross profit...................................... 40.1 55.6 55.3 89.2 88.2 173.7 191.5 71.7 94.3
Operating expenses:
Sales and marketing.............................. 7.3 12.8 12.8 23.6 23.6 38.7 39.7 25.4 27.6
General and administration....................... 2.1 8.5 8.4 16.1 15.3 30.4 36.2 14.3 21.0
Amortization of intangibles...................... -- 10.9 10.9 22.3 22.3 19.5 22.8 17.7 22.6
Restructuring and related charges(a)............. -- -- -- 5.1 5.1 -- -- 75.7 76.1
Stock compensation and related bonuses(b)........ 31.3 -- -- -- -- -- -- -- --
Compensation to the former CEO................... 2.1 -- -- -- -- -- -- -- --
Write-off of acquired in-process research and
development(c)................................... -- 39.0 39.0 -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ -------
Operating income (loss)........................... (2.7) (15.6) (15.8) 22.1 21.9 85.1 92.8 (61.4) (53.0)
Interest rate swap valuation...................... -- -- -- -- -- -- -- 10.0 10.0
Interest expense, net............................. 25.2 35.3 37.4 41.4 46.7 36.3 41.2 14.8 22.1
------ ------ ------ ------ ------ ------ ------ ------ -------
Income (loss) before taxes and extraordinary loss. (27.9) (50.9) (53.2) (19.3) (24.8) 48.8 51.6 (86.2) (85.1)
Income tax benefit (expense)...................... 10.9 2.6 3.5 5.2 7.4 (23.4) (25.0) 13.2 12.0
------ ------ ------ ------ ------ ------ ------ ------ -------
Income (loss) before extraordinary loss........... (17.0) (48.3) (49.7) (14.1) (17.4) 25.4 26.6 (73.0) (73.1)
Extraordinary loss................................ (1.6) (2.4) (2.4) -- -- (2.2) (6.4) (12.0) (12.0)
------ ------ ------ ------ ------ ------ ------ ------ -------
Net income (loss)................................. $(18.6) $(50.7) $(52.1) $(14.1) $(17.4) $ 23.2 $ 20.2 $(85.0) $ (85.1)
====== ====== ====== ====== ====== ====== ====== ====== =======
15
Year Ended December 31,
--------------------------------------------------------------------------
DDi
Corp. &
DDi DDi DDi DDi DDi DDi DDi
Capital Capital Corp. Capital Corp. Capital Corp.
1997 1998 1998 1999 1999 2000 2000
---------- ------- ---------- ------- ---------- ------- -----------
(in millions, except share and per share data)
Consolidated Statement of Operations Data
(continued):
Net income (loss) allocable to common stock...... $ (19.7) n/a $ (58.4) n/a $ (31.5) n/a $ 15.8
Net income (loss) per share of common stock
(basic)......................................... $ (3.71) n/a $ (7.68) n/a $ (3.21) n/a $ 0.50
Net income (loss) per share of common stock
(diluted)....................................... $ (3.71) n/a $ (7.68) n/a $ (3.21) n/a $ 0.47
Weighted average shares outstanding (basic)...... 5,299,600 n/a 7,607,024 n/a 9,831,042 n/a 31,781,536
Weighted average shares outstanding (diluted).... 5,299,600 n/a 7,607,024 n/a 9,831,042 n/a 33,520,447
Other Financial Data:
Depreciation..................................... $ 2.6 $ 9.2 $ 9.2 $ 14.4 $ 14.4 $ 16.7 $ 18.7
Capital expenditures............................. 6.6 18.0 18.0 18.2 18.2 24.0 27.2
Supplemental Data:
Adjusted EBITDA(d)............................... $ 33.3 $ 45.4 $ 44.1 $ 68.8 $ 66.7 $121.7 $ 134.8
Net cash from operating activities............... 9.1 18.9 16.7 24.8 24.8 61.1 64.8
Net cash used in investing activities............ (44.9) (194.8) (194.8) (18.5) (18.6) (56.2) (62.0)
Net cash from (used in) financing activities..... 41.1 172.4 174.9 (7.5) (7.7) 34.1 61.2
Ratio of earnings to fixed charges(e)............ -- -- -- -- -- 2.3x 2.2x
Consolidated Balance Sheet Data:
Cash, cash equivalents and marketable securities. $ 5.4 $ 1.9 $ 2.1 $ 0.6 $ 0.6 $ 39.6 $ 66.9
Working capital (deficit)........................ 23.6 13.2 15.3 19.1 19.1 83.3 108.0
Total assets..................................... 108.9 362.2 365.0 353.6 354.3 459.8 581.4
Total debt, including current maturities......... 273.5 444.9 473.4 439.9 480.7 306.9 334.7
Stockholders' equity (deficit)................... (191.2) (138.0) (169.8) (147.0) (187.1) 62.7 136.4
DDi DDi
Capital Corp.
2001 2001
------- -----------
Consolidated Statement of Operations Data
(continued):
Net income (loss) allocable to common stock...... n/a $ (85.1)
Net income (loss) per share of common stock
(basic)......................................... n/a $ (1.79)
Net income (loss) per share of common stock
(diluted)....................................... n/a $ (1.79)
Weighted average shares outstanding (basic)...... n/a 47,381,516
Weighted average shares outstanding (diluted).... n/a 47,381,516
Other Financial Data:
Depreciation..................................... $ 17.1 $ 21.2
Capital expenditures............................. 24.7 35.2
Supplemental Data:
Adjusted EBITDA(d)............................... $ 52.7 $ 70.6
Net cash from operating activities............... 47.6 55.8
Net cash used in investing activities............ (67.4) (102.8)
Net cash from (used in) financing activities..... (2.3) 3.7
Ratio of earnings to fixed charges(e)............ -- --
Consolidated Balance Sheet Data:
Cash, cash equivalents and marketable securities. $ 39.5 $ 45.5
Working capital (deficit)........................ 54.3 54.7
Total assets..................................... 336.1 470.8
Total debt, including current maturities......... 156.6 282.2
Stockholders' equity (deficit)................... 138.6 122.5
- --------
(a) The 1999 restructuring and related charges represent the charge recorded in
December 1999 in connection with the announced consolidation of the
Colorado operation into the Texas facility and the closure of the Colorado
facility. The charge consists of $1.9 million related to the impairment of
inventory, $2.6 million for severance and other exit costs and $2.5 million
related to the impairment of net property, plant and equipment. The 2001
restructuring and related charges represent the charge recorded in the
fourth quarter of 2001 in connection with the approved plan to downsize and
consolidate facilities and to effect changes in senior management. The
charge consists of $3.7 million related to the impairment of inventory,
$8.8 million and $9.2 million for severance and other exit costs for DDi
Capital and DDi Corp, respectively $15.5 million related to the impairment
of net property, plant and equipment, and $51.4 million related to the
impairment of intangible assets.
(b) Represents the charge for stock compensation and related bonuses recorded
for vested stock options exchanged in conjunction with the recapitalization
in 1997.
(c) Represents the allocation of a portion of the purchase price in the DCI
merger to in-process research and development. At the date of the merger,
technological feasibility of the in-process research and development
projects had not been reached and the technology had no alternative future
uses. Accordingly, we expensed the portion of the merger consideration
allocated to in-process research and development.
(d) EBITDA means earnings before net interest expense, income taxes,
depreciation and amortization. Adjusted EBITDA is presented because
management believes it is an indicator of our ability to incur and service
debt and is used by our lenders in determining compliance with financial
covenants. However, adjusted EBITDA should not be considered as an
alternative to cash flow from operating activities, as a measure of
liquidity or as an alternative to net income as a measure of operating
results in accordance with generally accepted accounting principles. Our
definition of adjusted EBITDA may differ from definitions of adjusted
EBITDA used by other companies.
16
The following table sets forth a reconciliation of EBITDA to adjusted EBITDA
for each period included herein:
Year Ended December 31,
---------------------------------------------------------------
DDi DDi DDi DDi DDi DDi DDi DDi
Capital Corp. Capital Corp. Capital Corp. Capital Corp.
------- ----- ------- ----- ------- ------ ------- -----
1997** 1998 1998 1999 1999 2000 2000 2001 2001
------ ------- ----- ------- ----- ------- ------ ------- -----
(in millions)
EBITDA................................................ $(0.1) $43.5 $43.3 $58.8 $58.6 $121.2 $134.3 $(26.7) $(9.2)
Former CEO compensation(1)............................ 2.1 -- -- -- -- -- -- -- --
Management fee(2)..................................... -- -- -- 1.1 1.1 -- -- -- --
Executive severance(3)................................ -- 0.8 0.8 -- -- -- -- -- --
Stock compensation and bonuses(4)..................... 31.3 -- -- -- -- -- -- -- --
Restructuring and related charges(5).................. -- -- -- 7.0 7.0 0.5 0.5 79.4 79.8
Non-cash expense allocations and other(6)............. -- 1.1 -- 1.9 -- -- -- -- --
----- ----- ----- ----- ----- ------ ------ ------ -----
Adjusted EBITDA....................................... $33.3 $45.4 $44.1 $68.8 $66.7 $121.7 $134.8 $ 52.7 $70.6
===== ===== ===== ===== ===== ====== ====== ====== =====
-----
** DDi Capital and DDi Corp.
(1)Reflects elimination of compensation to the former CEO whose employment
agreement was terminated in October 1997.
(2)Reflects elimination of the management fee incurred under our Bain
management agreement, which was terminated in connection with our
initial public offering.
(3)Reflects one-time severance payments to two of our executives who were
terminated as a result of redundancies created by the DCI merger.
(4)Reflects elimination of the charge for stock compensation and related
bonuses recorded for vested stock options exchanged in conjunction with
the recapitalization.
(5)Reflects elimination of the restructuring and related charges: (a) for
the 1999 consolidation and closure of the Colorado facility, (b) an
additional $0.5 million recorded in 2000 which was recorded to cost of
goods sold and (c) for the 2001 closure of two facilities and changes in
senior management.
(6)Reflects non-cash expense allocations to DDi Capital by its parent,
Intermediate, of $0.8 and $1.9 million in 1998 and 1999, respectively,
and approximately $0.3 million of non-operating income adjustments
recorded in 1998.
(e) For purposes of calculating the ratio of earnings to fixed charges,
earnings represent income before income taxes plus fixed charges. Fixed
charges consist of interest expense (net) and the portion of the operating
rental expense which management believes is representative of the interest
component of rental expense. Historical earnings were deficient in covering
fixed charges for DDi Capital and DDi Corp. by $27.9 million in 1997, $50.9
and $53.2 million, respectively, in 1998, $19.3 million and $24.8 million,
respectively, in 1999 and $86.3 million and $85.1 million, respectively, in
2001. On a pro forma basis, assuming the Dynamic Details senior
subordinated notes and the DDi Capital senior discount notes were
outstanding on January 1, 1997 and after eliminating the non-recurring
stock compensation and related bonuses, the ratio of earnings to fixed
charges would have been 2.4x in 1997. On a pro forma basis, assuming the
merger with DCI was consummated on January 1, 1998 and after eliminating
the non-recurring $39 million write off of acquired in-process research and
development related to the merger with DCI, the deficiency would have been
reduced to $15.1 million for DDi Capital and $17.5 million for DDi Corp. in
1998. On a pro forma basis, after eliminating the non-recurring $1.9
million in restructuring-related inventory impairment and $5.1 million in
restructuring and related charges related to the closure of the Colorado
facility, the deficiency would have been reduced to $12.3 million for DDi
Capital and $17.8 million for DDi Corp. in 1999. On pro forma basis, after
eliminating the non-recurring $3.7 million in restructuring-related
inventory impairment and $76.1 million in restructuring and related charges
related to the 2001 closure of two facilities and changes in senior
management, the deficiency would have been reduced to $6.8 million for DDi
Capital and $5.3 million for DDi Corp. in 2001.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
We provide electronics design, development and manufacturing services to
original equipment manufacturers and other electronics manufacturing service
providers. We target customers that are characterized by new product
development programs demanding the rapid application of advanced technology and
design.
Time-critical. We can deliver highly complex printed circuit boards to
customers in as little as 24 hours. Approximately 45% of our net sales for the
year ended December 31, 2001 were generated from services delivered in 10 days
or less.
Technologically advanced. Approximately 55% of our net sales during the
same period involved the design or manufacture of printed circuit boards with
at least eight layers, an industry-accepted measure of complexity. In addition,
many lower layer-count boards are complex as a result of the incorporation of
technologically advanced features.
Growth rate. Our net sales have grown at a compound annual growth rate of
37.9% for DDi Capital and 46.4% for DDi Corp. from $78.8 million for the year
ended December 31, 1997 to $284.7 million for DDi Capital and $361.6 million
for DDi Corp. for the year ended December 31, 2001, inclusive of the growth
attributable to the acquisition of Colorado Springs Circuits, Inc., or NTI, in
1997, the merger with Dynamic Circuits, Inc., or DCI, in 1998 and the
acquisitions of MCM Electronics (by DDi Corp.), Automata and Golden
Manufacturing in 2000 and the acquisitions of Thomas Walter, Nelco Technology,
Olympic Circuits Canada and Altatron Technology in 2001.
Company History and Significant Transactions
Our predecessor corporation was organized in 1978. In 1991, we installed new
management, headed by Bruce D. McMaster, and began to focus primarily on
time-critical electronics manufacturing services.
Recapitalization
In October 1997, we were recapitalized by investors led by Bain Capital,
Celerity Partners and Chase Capital Partners, which collectively invested $62.4
million. After completing the recapitalization, investment funds associated
with these entities owned stock representing approximately 72.5% of DDi Corp.'s
fully-diluted equity; and management owned stock and options representing
approximately 27.5% of DDi Corp.'s fully-diluted equity.
In connection with the recapitalization, we incurred the following
nonrecurring charges:
. fees and interest charges on bridge loans aggregating $14.5 million;
. $31.3 million for the accelerated vesting of variable employee stock
options and related bonuses;
. $2.7 million for the early extinguishment of long-term debt, before
income taxes; and
. $1.2 million for the buyout of our former CEO's employment contract.
Colorado Facility (formerly NTI)
In December 1997, Dynamic Details acquired Colorado Springs Circuits, Inc.,
or NTI, for approximately $38.9 million. NTI manufactured printed circuit
boards requiring lead times of twenty days or more for original equipment
manufacturers. At that time, the acquisition provided us with additional
capacity and access to new customers.
We accounted for the NTI acquisition under the purchase method of accounting
and recorded approximately $27 million in goodwill. This goodwill was
originally scheduled to be amortized over a period of 25 years. The unamortized
balance as of October 2001 was reduced to zero, however, in connection with the
closure of our Texas facility.
18
From December 1999 through March 2000, we implemented a plan to consolidate
our Colorado operations into our Texas facility and to close our Colorado
facility, which operated at a loss in 1999.
DCI Merger
On July 23, 1998, Dynamic Details merged with Dynamic Circuits, Inc., or
DCI, for an aggregate consideration paid to DCI stockholders of approximately
$250 million. A portion of the consideration was paid in cash, and the balance
of the consideration (approximately $73 million) was paid through the issuance
of DDi Corp. capital stock. Concurrent with this transaction, DDi Corp.
contributed its investment in DCI through Intermediate and through DDi Capital
to Dynamic Details.
DCI provided design and manufacturing services relating to complex printed
circuit boards, backpanel assemblies and electromechanical interconnect devices
with operations in California, Texas, Georgia and Massachusetts. DCI
experienced a growth in net sales of more than 67% during 1997, and its net
sales for the six months ended June 30, 1998 were more than double its net
sales for the six months ended June 30, 1997.
We accounted for the DCI merger under the purchase method of accounting and
recorded approximately $120 million in goodwill, approximately $60 million of
identifiable intangible assets (which are being amortized over their estimated
useful lives of 10 years, using an accelerated method of amortization,
reflecting the relative contribution of each developed technology in periods
following the acquisition date), and approximately $21 million and $4 million,
respectively, of intangible assets associated with DCI's customer relationships
and tradenames and assembled workforce assets (which are being amortized on a
straight-line basis over their estimated useful lives of 18 years and 4 years,
respectively). Dynamic Details also identified $39 million of acquired
in-process research and development investments, which was expensed in the
fourth quarter ended December 31, 1998.
Since the DCI merger, we have continued to invest in the development of the
various in-process research and development technologies that existed at DCI at
the time of the merger. We believe that our research and development efforts
are reasonably consistent with DCI's plans at the time of the merger, inclusive
of the expected post-merger total costs to complete the projects and related
project development time frames, given the inherent uncertainties involved in
estimating the technological hurdles of developing next-generation
technologies. These investments have enabled us to market products
incorporating some of the technologies included in DCI's plan. No significant
adjustments have been made in the economic assumptions or expectations on which
we based our merger decision.
In October 2001, we approved a plan to close our Garland, Texas and
Marlborough, Massachusetts facilities (see Note 15 to the Consolidated
Financial Statements). Prior to its closure, the Garland plant had manufactured
our lowest technology pre-production volume printed circuit boards. The
Marlborough plant provided electronic interconnect products to selected
customers in the New England area. Each of the facilities closed was acquired
in the DCI merger. In connection with our decision to close these facilities,
we reduced to zero the value of goodwill and other intangibles acquired in the
DCI merger that relate to the closed facilities. Such intangibles consist of
$25.8 million of goodwill and $2.6 million of identifiable intangibles
(customer relationships and assembled workforce).
Initial Public Offering of DDi Corp.
On April 14, 2000, DDi Corp. completed the initial public offering of its
common stock. We used net proceeds of approximately $156.6 million to repay a
portion of our debt and finance a portion of the MCM Electronics acquisition.
MCM Electronics Acquisition
On April 14, 2000, DDi Corp. acquired MCM Electronics Limited, headquartered
in the United Kingdom, for total consideration of approximately $82 million in
DDi Corp.'s common stock and cash, including repayment of some of MCM
Electronics' debt and the assumption of the remainder of its debt. MCM
19
Electronics, which has been combined with other European operations and renamed
DDi Europe Limited, focuses on the technologically advanced, time-critical
segment of the electronics manufacturing industry.
Under purchase accounting, the total purchase price has been allocated to
the underlying assets and liabilities assumed based upon their respective fair
values at the date of acquisition. We have allocated the total purchase price
to tangible assets acquired (aggregating approximately $30 million), and
liabilities assumed (aggregating approximately $46 million), with the remaining
consideration consisting primarily of goodwill and identifiable intangible
assets.
The identifiable intangibles consist of developed technologies, non-compete
agreements, and assembled workforce. The fair value of the developed technology
assets at the date of acquisition was $1 million and represents the aggregate
fair value of individually identified technologies that were fully developed at
the time of acquisition. Developed technology assets are being amortized over
an estimated useful life of 5 years. The non-compete agreement and assembled
workforce assets were assigned values as of the acquisition date of
approximately $1 million and $2 million, respectively, and are being amortized
over their estimated useful lives of 1 year and 5 years, respectively. Goodwill
generated in the acquisition of MCM has an assigned value of approximately $65
million and is being amortized over its estimated useful life of 20 years.
Automata Acquisition
On August 4, 2000, Dynamic Details acquired substantially all the U.S.
assets of Automata International, Inc., a Virginia-based complex printed
circuit boards manufacturer, for approximately $19.5 million in cash, plus fees
and expenses. The acquisition provides additional capacity for high density,
high layer count printed circuit boards and gives us a significant presence on
the east coast. Since completing the acquisition, we have successfully
increased average selling prices and have streamlined its operations to
increase yields from approximately 50% to almost 90% per panel. In addition, we
have shifted products from our other facilities to the 100,000 square foot
Virginia facility to increase volume and free up capacity at our other
facilities.
Under purchase accounting, the total purchase price has been allocated to
the underlying assets acquired and liabilities assumed based upon their
respective fair market values at the date of acquisition. The excess of the
purchase price was allocated to goodwill and is being amortized over its
estimated useful life of 20 years.
Golden Acquisition
On September 15, 2000, Dynamic Details acquired substantially all of the
assets of Golden Manufacturing, Inc., a Texas-based manufacturer of engineered
metal enclosures and value-added assembly services to communications and
electronics original equipment manufacturers, for approximately $14.4 million,
plus expenses of $0.5 million. The acquisition, which provides us with over
70,000 square feet of production capacity, complements our existing Texas
facilities by providing metal enclosure assembly capabilities for our customers.
Under purchase accounting, the total purchase price has been allocated to
the underlying assets acquired and liabilities assumed based upon their
respective fair market values at the date of acquisition. The excess of the
purchase price was allocated to goodwill and is being amortized over its
estimated useful life of 20 years.
October 2000 Common Stock Public Offering of DDi Corp.
On October 16, 2000, DDi Corp. completed a public offering of 4,608,121
shares of its common stock. We used net proceeds of approximately $122.0
million to repay a portion of our debt and for general corporate purposes.
During 2001, we used a portion of the proceeds for the acquisitions of Thomas
Walter Limited, Olympic Circuits Canada and Altatron Technology (see Note 14 to
the Consolidated Financial Statements).
February 2001 Common Stock and Convertible Subordinated Notes Public
Offerings of DDi Corp.
On February 20, 2001, DDi Corp. and some of its shareholders completed a
follow-on public offering of 6,000,000 shares of its common stock. Three
million shares were sold by DDi Corp. and 3,000,000 shares were sold by selling
shareholders. The shares were sold at $23.50 per share, generating proceeds to
us of
20
approximately $67.0 million, net of underwriting discounts, commissions and
expenses. Concurrently, DDi Corp. issued $100.0 million in aggregate principal
amount of 5 1/4% convertible subordinated notes due March 1, 2008. These notes
are convertible at any time prior to maturity into shares of common stock at a
conversion price of $30.00 per share, subject to certain adjustments. These
notes generated proceeds to us of $97.0 million, net of underwriting discounts,
commissions and expenses. The net proceeds of both transactions were used to
repurchase all of the Dynamic Details senior subordinated notes, repurchase a
portion of the Capital senior discount notes, repay a portion of the Dynamic
Details senior credit facility and for general corporate purposes.
Thomas Walter Acquisition
On March 5, 2001, DDi Europe completed the acquisition of Thomas Walter
Limited, a leading printed circuit board manufacturer based in Marlow, England
for total cash consideration of approximately $24.5 million, plus expenses of
$0.3 million. Thomas Walter's core competencies in time-critical delivery and
complex technology (including its high-end microvia laser technology) have
helped to make DDi Europe the leading provider of quick-turn electronic
manufacturing services in the U.K.
Under purchase accounting, the total purchase price has been allocated to
the underlying assets acquired and liabilities assumed based upon their
respective fair market values at the date of acquisition. The excess of the
purchase price was allocated to goodwill and identifiable intangibles.
Goodwill generated in the acquisition of Thomas Walter has an assigned value
of approximately $17.0 million and is being amortized over its estimated useful
life of 20 years. The identifiable intangibles consist of developed
technologies and assembled workforce. The fair value of the developed
technology assets at the date of acquisition was approximately $0.5 million and
represents the aggregate fair value of individually identified technologies
that were fully developed at the time of acquisition. The assembled workforce
asset was assigned a fair value of approximately $0.8 million at the date of
acquisition.
Nelco Technology Acquisition
On April 27, 2001, Dynamic Details completed the acquisition of the assets
of Nelco, a wholly owned subsidiary of Park Electrochemical Corp., for total
cash consideration of approximately $3.0 million. Nelco is an Arizona-based
manufacturer of semi-finished printed wiring boards, commonly known as mass
lamination. Under purchase accounting, the total purchase price has been
allocated to the underlying assets acquired and liabilities assumed based on
their respective fair values at the date of acquisition.
Olympic Circuits Canada Acquisition
On May 9, 2001, Dynamic Details completed the acquisition of Olympic
Circuits Canada, a Canada-based, time-critical electronics manufacturing
service provider specializing in quick-turn prototype printed circuit boards
for a total cash consideration of approximately $12.8 million, plus contingent
consideration based on earnings in each of the three years following the date
of acquisition plus expenses of $0.1 million. No contingent consideration has
been earned or recorded as of December 31, 2001. If contingent consideration is
earned and paid, it will be capitalized as additional purchase price.
Under purchase accounting, the total purchase price has been allocated to
the underlying assets acquired and liabilities assumed based upon their
respective fair market values at the date of acquisition. The excess of the
purchase price was allocated to goodwill and is being amortized over its
estimated useful life of 20 years.
Altatron Technology Acquisition
On June 4, 2001, Dynamic Details completed the acquisition of the assets of
Altatron, a Southern California-based provider of value-add assembly services
to electronics original equipment manufacturers for a total cash consideration
of approximately $4.8 million, plus contingent consideration based on earnings
in each of the two years following the date of acquisition. No contingent
consideration has been earned or recorded as of December 31, 2001. If
contingent consideration is earned and paid, it will be capitalized as
additional purchase price.
21
Under purchase accounting, the total purchase price has been allocated to
the underlying assets acquired and liabilities assumed based upon their
respective fair market values at the date of acquisition. The excess of the
purchase price was allocated to goodwill and is being amortized over its
estimated useful life of 20 years.
Garland, Texas and Marlborough, Massachusetts Facilities
In October 2001, our management and Board of Directors approved a plan to
close our Garland, Texas and Marlborough, Massachusetts facilities (see Note 15
to the Consolidated Financial Statements). Prior to its closure, the Garland
plant had manufactured our lowest technology pre-production volume printed
circuit boards. The Marlborough plant provided electronic interconnect products
to selected customers in the New England area. Our decision to close these
facilities was based on their contribution to our financial objectives in 2001
as well as their expected contribution going forward. Accordingly, the plant
closures are not expected to adversely impact our results of operations in
future periods. The closure of the facilities is estimated to be effectively
completed by June 30, 2002.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenues and expenses for
each period.
The following represents a summary of our critical accounting policies,
defined as those policies that we believe are: (a) the most important to the
portrayal of our financial condition and results of operations, and (b) that
require management's most difficult, subjective or complex judgments, often as
a result of the need to make estimates about the effects of matters that are
inherently uncertain.
. Valuation of long-lived assets--We assess the potential impairment of
long-lived tangible and intangible assets whenever events or changes in
circumstances indicate that the carrying value may not be recoverable.
Changes in our operating strategy, such as the closure of a facility,
can significantly reduce the estimated useful life of such assets. In
our 1999 and 2001 Consolidated Statements of Operations, we recorded
impairments of long-lived assets resulting from plant closures (see Note
15 to the Consolidated Financial Statements). In addition, under a new
accounting standard effective January 1, 2002, our goodwill and certain
other intangible assets will no longer be subject to periodic
amortization over estimated useful lives. These assets are now
considered to have an indefinite life and their carrying values are
required to be assessed by us for impairment at least annually.
Depending on future market values and other factors, these assessments
could potentially result in impairment reductions of these intangible
assets in the future. (See Note 2 to the Consolidated Financial
Statements regarding recently issued accounting standards).
. Inventory obsolescence--We generally purchase raw materials in
quantities that we anticipate will be fully used in the near term.
Changes in operating strategy, however, such as the closure of a
facility, can limit our ability to effectively utilize all of the raw
materials purchased. In our 1999 and 2001 Consolidated Statement of
Operations, we recorded restructuring-related inventory impairments
resulting from plant closures (see Note 15 to the Consolidated Financial
Statements). In addition to evaluations of the market value in
connection with significant activities, we regularly monitor potential
inventory obsolescence and, when necessary, reduce the carrying amount
of our inventory to its market value.
. Allowance for doubtful accounts--We maintain allowances for doubtful
accounts for estimated losses resulting from the inability of our
customers to make required payments. If the financial condition of our
customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required.
22
. Income taxes--As part of the process of preparing our consolidated
financial statements, we are required to estimate our income taxes in
each of the jurisdictions in which we operate. The process incorporates
an assessment of the current tax exposure together with temporary
differences resulting from different treatment of transactions for tax
and financial statement purposes. Such differences result in deferred
tax assets and liabilities, which are included within the Consolidated
Balance Sheet. The recovery of deferred tax assets from future taxable
income must be assessed and, to the extent that recovery is not likely,
we establish a valuation allowance. Increases in valuation allowances
result in the recording of additional tax expense. Further, if our
ultimate tax liability differs from the periodic tax provision reflected
in the Consolidated Statements of Operations, additional tax expense may
be recorded.
. Litigation and other contingencies--Management regularly evaluates our
exposure to threatened or pending litigation and other business
contingencies. Because of the uncertainties related to the amount of
loss from litigation and other business contingencies, the recording of
losses relating to such exposures requires significant judgment about
the potential range of outcomes. To date, we have not been affected by
any litigation or other contingencies that have had, or are currently
anticipated to have, a material impact on the company's results of
operations or financial position. As additional information about
current or future litigation or other contingencies becomes available,
management will assess whether such information warrants the recording
of additional expense relating to its contingencies. Such additional
expense could potentially have a material impact on our results of
operations and financial position.
We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
Results of Operations
The following table sets forth income statement data expressed as a
percentage of net sales for the periods indicated:
Year Ended December 31,
-----------------------------------------------
DDi DDi DDi DDi DDi DDi
Capital Corp. Capital Corp. Capital Corp.
1999 1999 2000 2000 2001 2001
------- ----- ------- ----- ------- -----
Net sales........................................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold............................... 68.8 69.2 61.3 61.5 73.5 72.9
Restructuring-related inventory impairment....... 0.7 0.6 -- -- 1.3 1.0
----- ----- ----- ----- ----- -----
Gross profit..................................... 30.5 30.2 38.7 38.5 25.2 26.1
Operating expenses:
Sales and marketing........................... 8.1 8.1 8.6 8.0 8.9 7.7
General and administration.................... 5.5 5.3 6.8 7.3 5.1 5.8
Amortization of intangibles................... 7.6 7.6 4.3 4.6 6.2 6.2
Restructuring and related charges............. 1.7 1.7 -- -- 26.6 21.0
----- ----- ----- ----- ----- -----
Operating income (loss).......................... 7.6 7.5 19.0 18.6 (21.6) (14.6)
Interest rate swap valuation..................... -- -- -- -- 3.5 2.8
Interest expense (net)........................... 14.2 16.0 8.1 8.3 5.2 6.1
----- ----- ----- ----- ----- -----
Income (loss) before income taxes and
extraordinary loss............................. (6.6) (8.5) 10.9 10.3 (30.3) (23.5)
Income tax benefit (expense)..................... 1.8 2.5 (5.2) (5.0) 4.6 3.3
Extraordinary loss, net of income tax benefit.... -- -- (0.4) (1.3) (4.2) (3.3)
----- ----- ----- ----- ----- -----
Net income (loss)................................ (4.8)% (6.0)% 5.3% 4.0 % (29.9)% (23.5)%
===== ===== ===== ===== ===== =====
23
Year Ended December 31, 2001 Compared to the Year Ended December 31, 2000
Net Sales
DDi Capital net sales decreased $163.7 million (37%) to $284.7 million in
2001, from $448.4 million in 2000. Such decrease in net sales is attributable
to a reduction in panels produced and the average price per panel, reflecting
softened economic conditions, partially offset by the impact of acquisitions
during 2000 and 2001. DDi Capital net sales in 2001 relating to acquisitions in
this year were $13.7 million. DDi Corp. net sales decreased $136.1 million
(27%) to $361.6 million in 2001, from $497.7 million in 2000. Such decrease in
net sales reflects the lower level of DDi Capital sales, partially offset by
the impact of the acquisitions of MCM Electronics Limited ("MCM") in April 2000
and Thomas Walter in March 2001. DDi Corp. net sales for the twelve months
ended December 2001 relating to acquisitions in 2001 were $26.4 million.
Gross Profit
DDi Capital gross profit decreased $102.0 million (59%) to $71.7 million in
2001, from $173.7 million in 2000. DDi Corp. gross profit decreased $97.2
million (51%) to $94.3 million in 2001, from $191.5 million in 2000. The gross
profit for DDi Capital and DDi Corp. for 2001 includes a $3.7 million one-time
charge for inventory write-downs in connection with our restructuring
initiatives (see the discussion of Restructuring and Other Related Charges for
further information). Excluding the one-time charge, DDi Capital gross profit
was $75.5 million, or 27% of net sales for 2001, down from 39% of net sales for
2000. On the same basis, DDi Corp. gross profit was $98.0 million, or 27% of
net sales for 2001, down from 38% of net sales for 2000. The decreases in the
gross profit for DDi Capital and DDi Corp., excluding the 2001 restructuring
charge, resulted from the lower level of sales generated in 2001. The impact of
the decreases in sales on gross profit was mitigated by various cost control
initiatives relating to materials, production personnel and overhead expenses.
Sales and Marketing Expenses
DDi Capital sales and marketing expenses decreased $13.3 million (34%) to
$25.4 million in 2001, from $38.7 million in 2000. DDi Corp. sales and
marketing expenses decreased $12.1 million (30%) to $27.6 million in 2001, from
$39.7 million in 2000. Such decreases in sales and marketing expenses is
primarily due to the lower level of sales generated in 2001, as well as cost
control measures.
General and Administration Expenses
DDi Capital general and administration expenses decreased $16.1 million
(53%) to $14.3 million in 2001, from $30.4 million in 2000. DDi Corp. general
and administration expenses decreased $15.2 million (42%) to $21.0 million in
2001, from $36.2 million in 2000. Such decreases in general and administrative
expenses are due to the lower level of sales generated in 2001, as well as cost
control measures.
Restructuring and Other Related Charges
Restructuring and related charges in 2001 were $75.7 million for DDi Capital
and $76.1 million for DDi Corp., respectively. Such charges represent one-time
costs incurred in the fourth quarter of 2001 in connection with management's
decision to close various facilities and the separation of certain executives
from the Company (see Note 15 to the Consolidated Financial Statements).
Amortization of Intangibles
DDi Capital amortization of intangibles decreased $1.8 million (9%) to $17.7
million in 2001, from $19.5 million in 2000. Such decrease in amortization of
intangibles is due to the use of accelerated amortization methods with regard
to certain identifiable intangibles and the impact of the impairment of
intangibles in the fourth quarter of 2001 in connection with our restructuring
activities, partially offset by the additional amortization resulting from
acquisitions. DDi Corp. amortization of intangibles decreased $0.2 million (1%)
to $22.6 million in 2001, from $22.8 million in 2000. Such decrease in
amortization of intangibles reflects the decrease in expense incurred by DDi
Capital, which was nearly offset by the impact of the acquisitions of MCM and
Thomas Walter.
24
Interest Rate Swap Valuation
Interest rate swap valuation represents the change in the fair value of an
interest rate swap agreement. (see Note 8 to the Consolidated Financial
Statements). At December 31, 2001, existing interest rate swap agreements for
DDi Capital and DDi Corp. qualify as effective cash flow hedges and,
accordingly, changes in fair value are not charged to operations.
Net Interest Expense
DDi Capital net interest expense decreased $21.5 million (59%) to $14.8
million in 2001, from $36.3 million in 2000. Such decrease in net interest
expense is due primarily to the repayment of a portion of the amounts owed
under the Dynamic Details senior credit facility in April 2000, the redemption
of a portion of the DDi Capital senior discount notes in October 2000 and
during the second quarter of 2001, and the redemption of the Dynamic Details
senior subordinated notes in full in February 2001. Cash generated from equity
offerings funded these redemptions. DDi Corp. net interest expense decreased
$19.1 million (46%) to $22.1 million in 2001, from $41.2 million in 2000. Such
decrease in net interest expense reflects the decrease in net interest expense
incurred by DDi Capital and the redemption of the DDi Intermediate senior
discount notes in full in April and October 2000. These decreases were
partially offset by interest expense incurred from the acquisition of MCM and
$5 million in interest expense relating to the issuance in February 2001 of the
5 1/4% convertible subordinated notes due March 1, 2008.
Income Taxes
DDi Capital income taxes decreased $36.6 million to a benefit of $13.2
million in 2001, from a $23.4 million expense in 2000, reflecting a lower level
of taxable income earned in the current period. DDi Corp. income taxes
decreased $37 million to a benefit of $12 million in 2001, from a $25 million
expense in 2000. Such decrease in income tax expense reflects the decreased DDi
Capital provision, the impact of the acquisitions of MCM and Thomas Walter, and
interest deductions relating to the DDi Corp. 5 1/4% convertible subordinated
notes due March 1, 2008. See Note 12 to the Consolidated Financial Statements
for a reconciliation of the tax expense or benefit recorded in each period to
the corresponding amount of income tax determined by applying the U.S. Federal
income tax rate to the earnings or loss before income taxes.
Year Ended December 31, 2000 Compared to the Year Ended December 31, 1999
Net Sales
DDi Capital net sales increased $155.9 million (53%) to $448.4 million in
2000, from $292.5 million in 1999. Such increase is attributable to: (a) the
production of more complex and larger panels, which increased the average sales
price per panel and (b) the impact of the Automata and Golden acquisitions,
which contributed $60.6 million to our net sales. DDi Corp. net sales increased
$205.2 million (70%) to $497.7 million in 2000, from $292.5 million in 1999.
Such increase reflects the higher level of sales achieved by DDi Capital and
the impact of the acquisition of MCM. In aggregate, the Automata, Golden and
MCM acquisitions contributed $109.9 million to DDi Corp. net sales for 2000.
Excluding the acquisitions, our net sales increased $95.3 million (33%).
Gross Profit
DDi Capital gross profit increased $84.5 million (95%) to $173.7 million in
2000, from $89.2 million in 1999. Gross profit for 1999 includes a $1.9 million
one-time charge for inventory write-downs in connection with our restructuring
initiatives (see the discussion herein of Restructuring and Related Charges for
further information). Excluding the one-time charge, gross profit was $91.1
million for 1999. The increase in gross profit, excluding the 1999
restructuring charge resulted from the higher level of sales, an improvement in
production yields in our pre-production operations, and the impact of the
Automata and Golden acquisitions. DDi
25
Corp. gross profit increased $103.3 million (117%) to $191.5 million in 2000,
from $88.2 million in 1999. Excluding the $1.9 million one-time restructuring
charge, gross profit was $90.1 million for 1999. Such increase, excluding the
1999 restructuring charge reflects the improvements in gross profit achieved by
DDi Capital and the impact of the acquisition of MCM.
Sales and Marketing Expenses
DDi Capital sales and marketing expenses increased $15.1 million (64%) to
$38.7 million in 2000, from $23.6 million in 1999. Such increase is due to: (a)
growth in our sales force to accommodate existing and anticipated near-term
increases in customer demand and related variable expenses due to our increased
sales volume and (b) the impact of the Automata and Golden acquisitions. DDi
Corp. sales and marketing expenses increased $16.1 million (68%) to $39.7
million in 2000, from $23.6 million in 1999. Such increase reflects the
increase in sales and marketing expenses incurred by DDi Capital and the impact
of the acquisition of MCM.
General and Administration Expenses
DDi Capital general and administration expenses increased $14.3 million
(89%) to $30.4 million in 2000, from $16.1 million in 1999. The increase in
expenses is attributable to higher staffing costs and other back-office
expenditures to support our growth (approximately $3.4 million), the impact of
the Automata and Golden acquisitions (approximately $2.1 million), higher
incentive compensation expense (approximately $3 million), and an increase in
bad debt expense (approximately $7.9 million). The increase in credit related
losses resulted from the current economic softening, particularly in the
communications sector. Such increases were partially offset by the elimination
of management fees in connection with the termination of a management agreement
at the time of the initial public offering by DDi Corp. (resulting in a
reduction in expense of $1.1 million). DDi Corp. general and administration
expenses increased $20.9 million (136%) to $36.2 million in 2000, from
$15.3 million in 1999. Such increase reflects the increase in general and
administration expenses incurred by DDi Capital, the impact of the acquisition
of MCM, and approximately $0.7 million in costs incurred in streamlining our
U.K. operations.
Amortization of Intangibles
DDi Capital amortization of intangibles decreased $2.8 million (13%) to
$19.5 million in 2000, from $22.3 million in 1999. The decrease is due to the
use of accelerated amortization methods with regard to certain identifiable
intangibles, partially offset by the additional amortization resulting from the
Automata and Golden acquisitions (approximately $0.2 million). DDi Corp.
amortization of intangibles increased $0.5 million (2%) to $22.8 million in
2000, from $22.3 million in 1999. Such increase reflects the decrease in
amortization of intangibles incurred by DDi Capital, partially offset by
amortization attributable to the acquisition of MCM.
Restructuring and Related Charges
Restructuring and related charges for DDi Capital and DDi Corp. were $5.1
million in 1999, representing one-time costs incurred in connection with
management's decision to close our Colorado facility. These charges consist of
$2.6 million for severance and other exit costs and $2.5 million of costs
related to the impairment of net property, plant and equipment. See Note 15 to
our Consolidated Financial Statements for further information about these
charges.
Net Interest Expense
DDi Capital net interest expense decreased $5.2 (13%) to $36.3 million in
2000, from $41.5 million in 1999. Such decrease is due to the repayment of a
portion of the amounts owed under the Dynamic Details senior credit facility
from part of the proceeds of our initial public offering in April 2000,
partially offset by the impact of discount accretion on the DDi Capital senior
discount notes. DDi Corp. net interest expense decreased $5.5 million (12%) to
$41.2 million in 2000, from $46.7 million in 1999. Such decrease reflects the
decrease in
26
net interest expense incurred by DDi Capital, the redemption of DDi
Intermediate senior discount notes principal resulting from the DDi Corp.
initial public offering in April 2000 and follow-on offering in October 2000
and the repurchase of Capital Senior Discount Notes resulting from the DDi
Corp. follow-on offering in October 2000. These decreases were largely offset
by the impact of the acquisition of MCM. Interest on debt assumed in this
acquisition was $2.0 million in 2000.
Income Taxes
DDi Capital income taxes increased $28.6 million to a tax expense of
$23.4 million in 2000, from a tax benefit of $5.2 million in 1999. The
increased provision reflects a higher level of taxable income earned in the
current period. DDi Corp. income taxes increased $32.4 million to a tax expense
of $25.0 million in 2000, from a tax benefit of $7.4 million in 1999. Such
increase reflects the increased DDi Capital provision and the impact of the
acquisition of MCM, which generated $2.8 million in tax expense in 2000. See
Note 12 to the Consolidated Financial Statements for a reconciliation of the
tax expense or benefit recorded in each period to the corresponding amount of
income tax determined by applying the U.S. Federal income tax rate to the
earnings or loss before income taxes.
Quarterly Financial Information
The following tables present selected quarterly financial information for
each of the twelve quarters ended December 31, 2001. This information is
unaudited but, in our opinion, reflects all adjustments, consisting only of
normal recurring adjustments that we consider necessary for a fair presentation
of this information, in accordance with generally accepted accounting
principles. These quarterly results are not necessarily indicative of future
results.
DDi Capital, Three Months Ended
--------------------------------------------------------------------------
Mar. June Sept. Dec. Mar. June Sept. Dec. Mar. June Sept. Dec.
31, 30, 30, 31, 31, 30, 30, 31, 31, 30, 30, 31,
1999 1999 1999 1999 2000 2000 2000 2000 2001 2001 2001 2001
----- ----- ----- ----- ----- ----- ------ ------ ------ ----- ----- -----
(in millions)
Net sales...................... $59.2 $71.7 $82.9 $78.7 $75.3 $86.9 $132.2 $154.0 $118.7 $65.2 $53.7 $47.1
Cost of goods sold............. 41.8 50.2 57.2 52.2 49.0 55.9 83.9 85.9 74.8 44.9 46.4 43.2
Restructuring-related inventory
impairment.................... -- -- -- 1.9 -- -- -- -- -- -- -- 3.7
----- ----- ----- ----- ----- ----- ------ ------ ------ ----- ----- -----
Gross profit................... $17.4 $21.5 $25.7 $24.6 $26.3 $31.0 $ 48.3 $ 68.1 $ 43.9 $20.3 $ 7.3 $ 0.2
===== ===== ===== ===== ===== ===== ====== ====== ====== ===== ===== =====
DDi Corp., Three Months Ended
---------------------------------------------------------------------------
Mar. June Sept. Dec. Mar. June Sept. Dec. Mar. June Sept. Dec.
31, 30, 30, 31, 31, 30, 30, 31, 31, 30, 30, 31,
1999 1999 1999 1999 2000 2000 2000 2000 2001 2001 2001 2001
----- ----- ----- ----- ----- ------ ------ ------ ------ ----- ----- -----
(in millions)
Net sales...................... $59.2 $71.7 $82.9 $78.7 $75.3 $101.5 $149.6 $171.3 $140.7 $85.8 $70.6 $64.5
Cost of goods sold............. 42.0 50.4 57.4 52.6 49.0 66.5 95.1 95.6 88.1 59.3 59.3 56.9
Restructuring-related inventory
impairment.................... -- -- -- 1.9 -- -- -- -- -- -- -- 3.7
----- ----- ----- ----- ----- ------ ------ ------ ------ ----- ----- -----
Gross profit................... $17.2 $21.3 $25.5 $24.2 $26.3 $ 35.0 $ 54.5 $ 75.7 $ 52.6 $26.5 $11.3 $ 3.9
===== ===== ===== ===== ===== ====== ====== ====== ====== ===== ===== =====
The quarterly financial information provided above does not present income
(loss) before extraordinary items, net income (loss) and related per share
data. Such information is not presented because it does not allow for
meaningful comparisons among quarters; the data fluctuates greatly from quarter
to quarter due to the reclassification of our Class A and Class L common stock
into new common stock in connection with our initial public offering and due to
the changes in our net interest expense (and related tax expense) as a result
of the reduction in debt with the use of proceeds from our debt and equity
offerings. Further quarterly financial information not presented above is
presented in our quarterly reports on Form 10-Q.
27
Liquidity and Capital Resources
As of December 31, 2001, cash, cash equivalents and marketable securities
were $39.5 million for DDi Capital, and $45.5 million for DDi Corp. compared to
$39.6 million for DDi Capital, and $66.9 million for DDi Corp. as of December
31, 2000. Our principal source of liquidity to fund ongoing operations for the
year ended December 31, 2001 was cash provided by operations.
Net cash provided by operating activities for the year ended December 31,
2001 was $47.6 million for DDi Capital and $55.8 million for DDi Corp.,
compared to $61.1 million for DDi Capital and $64.8 million for DDi Corp. for
the year ended December 31, 2000 and $24.8 million for both DDi Capital and DDi
Corp. for the year ended December 31, 1999.
Capital expenditures for the year ended December 31, 2001 were $24.7 million
for DDi Capital, and $35.2 million for DDi Corp., compared to $24.0 million for
DDi Capital and $27.2 million for DDi Corp. for the year ended December 31,
2000 and $18.2 million for both DDi Capital and DDi Corp. during the year ended
December 31, 1999.
As of December 31, 2001, DDi Capital and DDi Corp. had long-term borrowings
of $139.0 million and $261.0 million, respectively. Dynamic Details has a $75.0
million revolving credit facility for revolving credit loans, letters of credit
and swing line loans. Access to the full amount of the revolving credit
facility is subject to conditions set forth in