10-Q 1 d10q.txt DYNAMIC DETAILS CORP - FORM 10-Q 2ND QUARTER UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from________ to_________ Commission File Numbers: DDi Corp. 000-30241 DDi Capital Corp. 333-41187 DDi CORP. DDi CAPITAL CORP. __________________________________________________________ (Exact name of registrants as specified in their charters) Delaware 06-1576013 California 33-0780382 --------------------------------- ------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 1220 Simon Circle Anaheim, California 92806 --------------------------------------------------------- (Address of principal executive offices) (Zip code) (714) 688-7200 --------------------------------------------------- (Registrants' telephone number, including area code) Not Applicable -------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether DDi Corp. and DDi Capital Corp.: (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days: Yes [X] No [_]. As of August 6, 2001, all of the voting stock of DDi Capital Corp. was held by DDi Intermediate Holdings Corp., and all of the voting stock of DDi Intermediate Holdings Corp. was held by DDi Corp. As of August 6, 2001, DDi Corp. had 47,864,494 shares of common stock, par value $0.01 per share, outstanding and DDi Capital Corp. had 1,000 shares of common stock, par value $0.01 per share, outstanding. This Quarterly Report on Form 10-Q is a combined quarterly report being filed separately by two registrants: DDi Corp. ("DDi Corp." f/k/a DDi Holdings Corp.) and DDi Capital Corp. ("DDi Capital"). Except where the context clearly indicates otherwise, any references in this report to "DDi Corp." includes all subsidiaries of DDi Corp. including DDi Capital. DDi Capital makes no representation as to the information contained in this report in relation to DDi Corp. and its subsidiaries other than DDi Capital. DDi Capital meets the conditions set forth in General Instructions H(1)(a) and (b) of Form 10-Q, and is filing this form with the reduced disclosure format pursuant to General Instruction H(2). DDi CORP. DDi CAPITAL CORP. FORM 10-Q TABLE OF CONTENTS

2 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DDi CAPITAL CORP. AND DDi CORP. Condensed Consolidated Balance Sheets (In thousands)

The accompanying notes are an integral part of these condensed consolidated financial statements. 3 DDi CAPITAL CORP. Condensed Consolidated Statements of Operations (In thousands) (Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements. 4 DDi CORP. Condensed Consolidated Statements of Operations (In thousands, except share and per share amounts) (Unaudited)

5 The accompanying notes are an integral part of these condensed consolidated financial statements. DDi CAPITAL CORP. Consolidated Statements of Comprehensive Income (Loss) (In thousands) (Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements. 6 DDi CORP. Consolidated Statements of Comprehensive Loss (In thousands) (Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements. 7 DDi CAPITAL CORP. AND DDi CORP. Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited)

Supplemental disclosure of cash flow information: Non-cash operating activities: During the six months ended June 30, 2001 depreciation and amortization expense was approximately $18 million for DDi Capital and approximately $22 million for DDi Corp. During the six months ended June 30, 2000, depreciation and amortization expense approximately $18 million for DDi Capital and $19 million for DDi Corp. The accompanying notes are an integral part of these condensed consolidated financial statements. 8 DDi CAPITAL CORP. AND DDi CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- NOTE 1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS BASIS OF PRESENTATION The unaudited condensed consolidated financial statements for DDi Corp. ("DDi Corp.") include the accounts of its wholly-owned subsidiaries, DDi Intermediate Holdings Corp. ("Intermediate") and its subsidiaries and DDi Europe Limited ("DDi Europe" f/k/a MCM Electronics Limited ("MCM")). The unaudited condensed consolidated financial statements for DDi Capital Corp. ("DDi Capital"), a wholly-owned subsidiary of Intermediate, includes the accounts of its wholly- owned subsidiary Dynamic Details, Incorporated and its subsidiaries ("Dynamic Details"). Collectively, DDi Corp. and its subsidiaries are referred to as the "Company." The unaudited condensed consolidated financial statements of DDi Corp. include the results of MCM commencing on April 14, 2000, the date of acquisition of MCM (see Note 7), Automata International, Inc. ("Automata") commencing on August 4, 2000, the date of the acquisition of Automata's assets (see Note 8), Golden Manufacturing, Inc. ("Golden") commencing on September 15, 2000, the date of the acquisition of Golden's assets (see Note 9), Thomas Walter Limited ("Thomas Walter") commencing on March 5, 2001, the date of acquisition of Thomas Walter (see Note 10), Nelco Technology, Inc. ("Nelco") commencing on April 27, 2001, the date of acquisition of Nelco's assets (see Note 11), Olympic Circuits Canada ("Olympic") commencing on May 9, 2001, the date of acquisition of Olympic (see Note 12) and Altatron Technology Inc. ("Altatron") commencing on June 4, 2001, the date of acquisition of Altatron's assets (see Note 13). All intercompany transactions have been eliminated in consolidation. In October 1997, the predecessor of DDi Corp. incorporated Dynamic Details as a wholly-owned subsidiary and contributed substantially all of its assets, subject to certain liabilities, to Dynamic Details. In November 1997, the predecessor of DDi Corp. incorporated DDi Capital as a wholly-owned subsidiary and, in February 1998, contributed substantially all its assets (including the shares of common stock of Dynamic Details), subject to certain liabilities, including senior discount notes to DDi Capital. In July 1998, the predecessor of DDi Corp. incorporated Intermediate as a wholly-owned subsidiary and contributed all of the shares of common stock of DDi Capital to Intermediate. In April 2000, DDi Corp. acquired MCM (see Note 7) and subsequently combined MCM with its other European operations to form DDi Europe. DDi Europe, Dynamic Details and Dynamic Details Design, LLC, a wholly-owned subsidiary of Intermediate formed in 1998, represent the operating subsidiaries of DDi Corp. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary (consisting only of normal recurring adjustments) to present fairly the financial position of DDi Capital and DDi Corp. as of June 30, 2001, and the results of operations for the three and six months ended June 30, 2001 and 2000 and cash flows for the six months ended June 30, 2001 and 2000. The results of operations for such interim periods are not necessarily indicative of results of operations to be expected for the full year. These financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such regulations, although the Company believes the disclosures provided are adequate to prevent the information presented from being misleading. This report on Form 10-Q for the quarter ended June 30, 2001 should be read in conjunction with the audited financial statements presented in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. Concurrent with DDi Corp.'s initial public offering on April 14, 2000 (see Note 6), each share of Class L common stock was reclassified into one share of Class A common stock plus an additional number of shares of Class A common stock (determined by dividing the preference amount of such per share by the initial public offering price of $14.00 per share). Class A and Class L common stock shared ratably in the net income (loss) remaining after giving effect to the 12% yield on the Class L common stock. Each share of Class A common stock was then converted into 2.8076 shares of new common stock when DDi Corp. reincorporated in the state of Delaware. DESCRIPTION OF BUSINESS The Company is a leading provider of time-critical, technologically advanced design, development and manufacturing services to original equipment manufacturers and other electronics manufacturing service providers. The Company serves over 2,000 customers, primarily in the telecommunications, computer and networking industries. 9 DDi CAPITAL CORP. AND DDi CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- NOTE 2. INVENTORIES Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market and consist of the following (in thousands):

NOTE 3. LONG-TERM DEBT AND CAPITAL LEASES Long-term debt and capital lease obligations consist of the following (in thousands):

(a) The Senior Term Facility, together with the Revolving Credit Facility, which had no amounts outstanding as of June 30, 2001 and December 31, 2000, comprise the Senior Credit Facility. Interest rates are LIBOR-based and range from 6.05% to 7.05% as of June 30, 2001. (b) Face amount of $16,000 and $63,000 at June 30, 2001 and December 31, 2000, respectively, net of unamortized discount of $2,336 and $12,689 at June 30, 2001 and December 31, 2000, respectively. (c) Interest rates are LIBOR-based and range from 6.94% to 8.44% at June 30, 2001. NOTE 4. DERIVATIVES Pursuant to its interest rate risk management strategy and to certain requirements imposed by the Dynamic Details Senior Credit Facility, the Company has entered into interest rate exchange agreements ("Swap Agreements"). The Swap Agreements represent an effective cash flow hedge of the variable rate of interest (1-month LIBOR) paid under the Senior Term Facility, minimizing exposure to increases in interest rates related to this debt over its scheduled term. Under the Swap Agreements, the Company received a variable rate of interest (1-month LIBOR) and pays a maximum annual rate of interest applied to a notional amount equal to the principal balance of the term facility portion of the Senior Term Facility for the period January 1, 2001 through December 31, 2001. During this period, the Company's maximum annual rate is 5.75% for a given month, unless 1-month LIBOR for that month equals or exceeds 7.00%, in which case the Company pays 7.00% for that month. From January 1, 2002 through the scheduled maturity of the Senior Term Facility in 2005, the Company pays a fixed annual rate of 5.72% applied to a notional amount equal to the principal balance of the Senior Term Facility (from January 1, 2002 to December 31, 2002) and a fixed annual rate of 6.58% applied to a notional amount equal to 50% of the principal balance from January 1, 2003 to April 2005. 10 DDi CAPITAL CORP. AND DDi CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- On January 1, 2001, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities." In accordance with the transition provisions of SFAS No. 133, DDi Capital and DDi Corp. recorded a cumulative-effect-type adjustment to accumulated other comprehensive loss for the initial difference between the book value and fair value of interest rate swap agreements as of January 1, 2001. The initial difference amounted to approximately $0.6 million for DDi Capital and approximately $1.2 million for DDi Corp. The fair value of interest rate swaps at June 30, 2001 is included in current and long-term liabilities in the Condensed Consolidated Balance Sheets. NOTE 5. EARNINGS PER SHARE Basic and diluted earnings per share - DDi Corp. has adopted the provisions of SFAS No. 128 "Earnings Per Share." SFAS No. 128 requires DDi Corp. to report both basic net income (loss) per share, which is based on the weighted average number of common shares outstanding, excluding contingently issuable shares such as the Class L common stock that were contingently convertible into common stock upon certain events, and diluted net income (loss) per share, which is based on the weighted average number of common shares outstanding and dilutive potential common shares outstanding.

As a result of the loss before extraordinary item, after deducting priority distributions of Class L common stock, incurred by DDi Corp. during the six months ended June 30, 2000, all potential common shares were anti-dilutive and excluded from the diluted net loss per share calculation for that period. 11 DDi CAPITAL CORP. AND DDi CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- Pro forma loss per share (unaudited) - Pro forma basic and diluted net loss per share for the three and six months ended June 30, 2000 have been calculated based on the net loss applicable to common stock assuming the reclassification of DDi Corp.'s Class A and L common stock (see Note 1), which occurred immediately prior to the completion of the initial public offering (see Note 6), had occurred at the beginning of the period. NOTE 6. PUBLIC OFFERINGS On April 14, 2000, DDi Corp. completed an initial public offering of 12,000,000 shares of its common stock at $14.00 per share with proceeds of $156.7 million, net of underwriting discounts and commissions. The net proceeds were used to reduce the indebtedness of the Dynamic Details senior term loans, redeem a portion of the senior discount notes issued by DDi Intermediate, pay associated redemption premiums and accrued and unpaid interest thereon, finance a portion of the acquisition of MCM (see Note 7) and pay offering expenses. In conjunction with the redemption of debt, the Company recorded net extraordinary losses (see Note 17). On October 16, 2000, DDi Corp. completed a secondary public offering of 6,000,000 shares of its common stock, with 4,608,121 shares issued by DDi Corp. and the remainder offered by selling shareholders. The shares were offered at $27.875 per share, generating proceeds to DDi Corp. of $120.0 million, net of underwriting discounts, commissions and expenses. The net proceeds were used to redeem the remaining $17.5 million of the Intermediate Senior Discount Notes, pay associated redemption premiums of $3.6 million and accrued and unpaid interest thereon of $5.2 million, and repurchase a portion of the Capital Senior Discount Notes, with an accreted balance of $36.5 million, for $37.6 million. The remaining net proceeds of approximately $56 million are being used for general corporate purposes, including potential future acquisitions. DDi Corp. contributed approximately $35 million of the $56 million to Dynamic Details. On February 14, 2001, DDi Corp. and some of its shareholders completed a follow- on public offering of 6,000,000 shares of its common stock, with 3,000,000 shares issued by the DDi Corp. and the remainder sold by selling shareholders. The shares were sold at $23.50 per share, generating proceeds of $67.0 million, net of underwriting discounts, commissions and expenses. Concurrently, DDi Corp. issued 5.25% Convertible Subordinated Notes due March 1, 2008 with an aggregate principal of $100.0 million. These notes are convertible at any time prior to maturity into shares of common stock at a conversion price of $30.00 per share, subject to certain adjustments. These notes generated proceeds of $97.0 million, net of underwriting discounts, commissions and expenses. The net proceeds of both transactions have been used to repurchase a portion of the Capital Senior Discount Notes (see Note 17) and all of the Dynamic Details Senior Subordinated Notes. NOTE 7. ACQUISITION OF MCM ELECTRONICS On April 14, 2000, DDi Corp. completed the acquisition of MCM, a time-critical electronics manufacturing service provider based in the United Kingdom, for a total purchase price of approximately $82 million, excluding acquisition expenses of approximately $4 million, paid in a combination of cash of approximately $10 million, the issuance of 2,230,619 shares of common stock valued at approximately $29 million, the repayment of outstanding indebtedness of MCM of approximately $24 million, and the assumption of approximately $23 million of MCM's remaining outstanding indebtedness (net of cash acquired of approximately $8 million). The acquisition of MCM was accounted for as a purchase in accordance with Accounting Principles Board Opinion No.16 ("APB 16"), and accordingly, the results of operations of MCM since the date of acquisition are included in the accompanying condensed consolidated financial statements for DDi Corp. The total purchase price has been allocated to the underlying assets and liabilities based upon their estimated respective fair values at the date of acquisition. The Company has allocated to tangible assets (aggregating approximately $30 million) acquired and liabilities assumed (aggregating approximately $46 million), with the remaining consideration consisting of goodwill and identifiable intangible assets. NOTE 8. ACQUISITION OF AUTOMATA INTERNATIONAL On August 4, 2000, Dynamic Details completed the acquisition of substantially all the U.S. assets of Automata, a Virginia-based manufacturer of technologically advanced printed circuit boards. Dynamic Details acquired substantially all the U.S. assets of Automata for total cash consideration of approximately $19.5 million, plus expenses of $0.5 million. 12 DDi CAPITAL CORP. AND DDi CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- This transaction was accounted for under the purchase method of accounting in accordance with APB 16 and accordingly, the results of operations of Automata since the date of the transaction are included in the accompanying condensed consolidated financial statements of DDi Capital and DDi Corp. The total purchase price has been allocated to the underlying assets acquired and liabilities assumed based upon their respective fair market values at the date of acquisition. The excess of the purchase price was allocated to goodwill and is being amortized over its estimated useful life of 20 years. NOTE 9. ACQUISITION OF GOLDEN MANUFACTURING On September 15, 2000, Dynamic Details completed the acquisition of the assets of Golden, a Texas-based manufacturer of engineered metal enclosures and provider of value-added assembly services to communications and electronics original equipment manufacturers, for approximately $14.4 million paid in combination of cash of approximately $12.6 million and the assumption of approximately $1.8 million of Golden's outstanding capital lease liabilities (net of cash acquired of approximately $0.7 million). This transaction was accounted for under the purchase method of accounting in accordance with APB 16 and accordingly, the results of operations of Golden since the date of the transaction are included in the accompanying condensed consolidated financial statements of DDi Capital and DDi Corp. The total purchase price has been allocated to the underlying assets acquired and liabilities assumed based upon their respective fair market values at the date of acquisition. The excess of the purchase price was allocated to goodwill and is being amortized over its estimated useful life of 20 years. NOTE 10. ACQUISITION OF THOMAS WALTER On March 5, 2001, DDi Europe completed the acquisition of Thomas Walter, a leading circuit board manufacturer based in Marlow, England for approximately $24.2 million plus contingent consideration of approximately $3.5 million plus expenses of $0.3 million. Thomas Walter is a well-established provider of complex, quick-turn rigid and rigid-flex printed circuit boards for the European electronics industry. The acquisition of Thomas Walter was accounted for as a purchase in accordance with APB 16 and accordingly, the results of operations of Thomas Walter since the date of acquisition are included in the accompanying condensed consolidated financial statements of DDi Corp. The purchase price of $24.5 million has been allocated to the underlying assets and liabilities based upon their estimated respective fair values at the date of acquisition. As of the filing of this report, management is assessing fair value adjustments to the intangible assets acquired (including identifiable intangibles such as developed technologies, customer relationships/tradenames and assembled workforce). These intangibles will be amortized over their estimated useful lives. The residual value will be allocated to goodwill and will be amortized over its estimated useful life of 20 years. Based upon the status of the Company's valuation efforts as of the date of this filing, a final valuation of the intangible assets has not been reflected in the accompanying condensed consolidated financial statements. The Company anticipates making a final purchase price allocation in the third quarter of 2001 based upon completion of management's assessment. The excess of the purchase price over the fair value of Thomas Walter's tangible net assets is currently reflected as goodwill and is being amortized over its estimated useful life of 20 years. NOTE 11. ACQUISITION OF NELCO TECHNOLOGY On April 27, 2001, Dynamic Details completed the acquisition of the assets of Nelco, a wholly owned subsidiary of Park Electrochemical Corp., for total cash consideration of approximately $3.0 million. Nelco is an Arizona-based manufacturer of semi-finished printed wiring boards, commonly known as mass lamination. The transaction of Nelco was accounted for as a purchase in accordance with APB 16 and accordingly, the results of operations of Nelco since the date of the transaction are included in the accompanying condensed consolidated financial statements of DDi Capital and DDi Corp. The total purchase price has been allocated to the underlying assets and liabilities based upon their estimated respective fair values at the date of the transaction. 13 DDi CAPITAL CORP. AND DDi CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- NOTE 12. ACQUISITION OF OLYMPIC CIRCUITS CANADA On May 9, 2001, Dynamic Details completed the acquisition of Olympic, a Canada- based time-critical electronics manufacturing service provider specializing in quick-turn prototype printed circuit boards for total cash consideration of approximately $12.8 million plus contingent consideration based on earnings in each of the 3 years following the date of acquisition plus expenses of $0.1 million. The acquisition of Olympic was accounted for as a purchase in accordance with APB 16 and accordingly, the results of operations of Olympic since the date of acquisition are included in the accompanying condensed consolidated financial statements of DDi Capital and DDi Corp. The total purchase price has been allocated to the underlying assets and liabilities based upon their estimated respective fair values at the date of acquisition. As of the filing of this report, management is assessing fair value adjustments to the intangible assets acquired. These intangibles will be amortized over their estimated useful lives. The residual value will be allocated to goodwill and will be amortized over its estimated useful life of 20 years. NOTE 13. ACQUISITION OF ALTATRON TECHNOLOGY On June 4, 2001 Dynamic Details completed the acquisition of the assets of Altatron, a Southern California-based provider of value-add assembly services to electronics original equipment manufacturers for approximately $4.8 million plus contingent consideration based on earnings in each of the 2 years following the date of acquisition. This transaction was accounted for as a purchase in accordance with APB 16 and accordingly, the results of operations of Altatron since the date of the transaction are included in the accompanying condensed consolidated financial statements of DDi Capital and DDi Corp. The total purchase price has been allocated to the underlying assets and liabilities based upon their estimated respective fair values at the date of the transaction. As of the filing of this report, management is assessing fair value adjustments to the intangible assets acquired. These intangibles will be amortized over their estimated useful lives. The residual value will be allocated to goodwill and will be amortized over its estimated useful life of 20 years. 14 DDi CAPITAL CORP. AND DDi CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- NOTE 14. UNAUDITED PRO FORMA INFORMATION The accompanying condensed consolidated statements of operations include the accounts of MCM, Automata and Golden for the period January 1, 2001 through June 30, 2001 and includes the accounts of Thomas Walter for the period March 5, 2001 through June 30, 2001, the accounts of Nelco for the period April 27, 2001 through June 30, 2001, the accounts of Olympic for the period May 9, 2001 through June 30, 2001 and the accounts of Altatron for the period June 4, 2001 through June 30, 2001. The following pro forma information for the six months ended June 30, 2001 and 2000 presents net sales, income (loss) before extraordinary item, and net income (loss) for each of these periods as if the MCM, Automata, Thomas Walter, Nelco, Olympic and Altatron transactions were consummated at the beginning of each period. The unaudited pro forma financial information does not reflect Golden's pre-acquisition results. As of the filing of this report, management is assessing purchase price allocation adjustments to the intangible assets acquired and to liabilities assumed in the Thomas Walter, Nelco, Olympic, and Altatron acquisitions based on fair values. The following pro forma information does not reflect final purchase price allocation results. These results may have a material effect on the reported results of operations.

NOTE 15. SEGMENT REPORTING The Company has adopted the provisions of SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 established standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports issued to stockholders. It also established standards for related disclosures about products and services, geographic areas and major customers. Operating segments are defined as components of an enterprise that engage in business activities from which it may earn revenues and incur expenses whose separate financial information is available and is evaluated regularly by the Company's chief operating decision makers, or decision making group, to perform resource allocations and performance assessments. The Company's chief operating decision makers are the Chairman and Chief Executive Officer. Based on the evaluation of the Company's financial information, management believes that the Company operates in one reportable segment which designs, develops, manufactures, assembles and tests complex printed circuit boards, back panels and related electronic products. The Company operates in two geographical areas, domestic (U.S.A.) and international. Revenues are attributed to the country to which the product is sold. Revenues by product and service are not reported as it is impracticable to do so. During the three and six months ended June 30, 2001 there were no material assets or revenues from any individual foreign country. 15 DDi CAPITAL CORP. AND DDi CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- The following summarizes financial information for DDi Corp. by geographic area:

Net sales by geographic area for DDi Capital for the three and six months ended June 30, 2001 and 2000 were the same as DDi Corp. except the sales to Europe were $1,324 for the three months ended June 30, 2001 and $5,147 for the six months ended June 30, 2001.

Long-lived assets for DDi Capital as of June 30, 2001 consisted of $293,199 domestic and $13,162 international and as of December 31, 2000 consisted only of domestic long-lived assets. NOTE 16. COMPREHENSIVE INCOME (LOSS) SFAS No. 130 "Reporting Comprehensive Income" establishes requirements for reporting and disclosure of comprehensive income (loss) and its components. Comprehensive income (loss) includes unrealized holding gains and losses and other items that have previously been excluded from net income and reflected instead in stockholders' equity. Comprehensive income (loss) for DDi Capital and DDi Corp. consists of net income (loss) plus the effect of foreign currency translation adjustments, unrealized holding gains on marketable securities classified as available-for-sale and unrealized net gains (losses) on interest rate swaps and related unrealized net tax benefit. The Company adopted SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" on January 1, 2001 (see Note 4). In accordance with the transition provisions of SFAS No. 133, DDi Capital and DDi Corp. recorded a cumulative-effect-type adjustment to accumulated other comprehensive loss for the initial difference between the book value and fair value of interest rate swap agreements as of January 1, 2001. The initial difference amounted to approximately $0.6 million for DDi Capital and approximately $1.2 million for DDi Corp. 16 DDi CAPITAL CORP. AND DDi CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- NOTE 17. EXTRAORDINARY ITEMS During the quarter ended June 30, 2000, Dynamic Details recorded, as extraordinary items, write-offs of debt issuance costs and deferred swap income of approximately $0.7 million, net of related taxes of $0.4 million, related to the Senior Term Facility principal repayments funded from the net proceeds of DDi Corp.'s initial public offering (see Note 6). In addition, Intermediate recorded, as extraordinary items, the redemption premium and write-off of debt issuance costs of approximately $1.9 million, net of related taxes of $1.2 million related to the Intermediate Senior Discount Notes principal repayments funded from the net proceeds of DDi Corp.'s initial public offering. During the quarter ended March 31, 2001, Dynamic Details recorded, as extraordinary items, the write-off of unamortized debt issuance costs of approximately $3.3 million, the payment of repurchase premium of approximately $7.8 million, and direct transaction costs of approximately $0.4 million, net of related income taxes of $4.5 million, related to the repurchase of the Dynamic Details Senior Subordinated Notes funded from the net proceeds of DDi Corp.'s February 14, 2001 follow-on public offering (see Note 6). During the quarter ended June 30, 2001, DDi Capital recorded, as extraordinary items, the write-off of unamortized debt issuance costs of approximately $1.5 million, the payment of repurchase premium of approximately $6.5 million, net of related income taxes of $3.1 million, related to the repurchase of the DDi Capital Senior Discount Notes funded from the net proceeds of DDi Corp.'s February 14, 2001 follow-on public offering (see Note 6). NOTE 18. RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board issued SFAS No. 141 and No. 142. SFAS No. 141 "Business Combinations" requires that the purchase method of accounting be used for all business combinations, establishes specific criteria for recognizing intangible assets separately from goodwill and requires certain disclosures regarding reasons for a business combination and the allocation of the purchase price paid. SFAS No. 141 is effective for all business combinations initiated after June 30, 2001 and for all business combinations accounted for using the purchase accounting method for which the date of acquisition is after June 30, 2001. SFAS No. 142 "Goodwill and Other Intangible Assets" establishes that goodwill and certain intangible assets will not be amortized and the amortization period of certain intangible assets will no longer be limited to forty years. In addition, SFAS No. 142 requires that goodwill and intangible assets that are not amortized be tested for impairment at least annually. SFAS No. 142 is effective in fiscal years beginning after December 15, 2001. For acquisitions effective before June 30, 2001, the Company will adopt both SFAS No. 141 and No. 142 on January 1, 2002. The Company will implement SFAS No. 141 and No. 142 for any acquisitions occurring after June 30, 2001 at the date of closing. The Company is currently evaluating the impact of the adoption of SFAS No. 141 and No. 142 on its consolidated financial statements. NOTE 19. SUBSEQUENT EVENT In July 2001, the Company elected to terminate and concurrently replace its existing swap agreements. The new agreement modifies the fixed rate to be paid, to a range of 3.80% to 5.99%, for the period July 1, 2002 through December 31, 2002, and to 6.49% for the period January 1, 2003 through the scheduled maturity of the Senior Term Facility in 2005. In addition, the new agreement fixes the rate of interest to be paid on 100% of the principal balance of the Senior Term Facility through the scheduled maturity in 2005. 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS -------------------------------------------------------------------------------- OF OPERATIONS. -------------- OVERVIEW DDi Corp., formerly known as DDi Holdings Corp. ("DDi Corp."), provides technologically advanced, time-critical electronics design, development and manufacturing services to original equipment manufacturers and other electronics manufacturing service providers. Operating through our primary operating subsidiaries, DDi Europe Limited ("DDi Europe") and Dynamic Details, Incorporated ("Dynamic Details"), we target the communications and networking equipment industries, which are characterized by aggressive new product development programs demanding the rapid application of advanced technology and design. As used herein, the "Company," "we," or "us" means DDi Corp. and its wholly- owned subsidiaries, including DDi Capital Corp. ("DDi Capital"), DDi Europe and Dynamic Details. This discussion and analysis should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations set forth in DDi Capital Corp.'s and DDi Corp.'s Annual Report on Form 10-K for the year ended December 31, 2000. RESULTS OF OPERATIONS Three Months Ended June 30, 2001 Compared to the Three Months Ended June 30, 2000 Net Sales --------- DDi Capital net sales decreased $21.7 million (25%) to $65.2 million for the three months ended June 30, 2001, from $86.9 million for the same period in 2000. Such decrease in net sales is attributable to a reduction in panels produced, reflecting softened economic conditions, partially offset by the impact of acquisitions. Specifically, the acquisition of Automata International, Inc. ("Automata") in August 2000 contributed $8.6 million to our net sales and the acquisition of Golden Manufacturing, Inc. ("Golden") in September 2000 contributed $3.4 million to our net sales. Further, the acquisitions of Olympic Circuits Canada, Inc. ("Olympic"), Nelco Technology, Inc. ("Nelco"), Altatron Technology, Inc. ("Altatron") in 2001 contributed a combined $2.3 million to our net sales. DDi Corp. net sales decreased $15.7 million (15%) to $85.8 for the three months ended June 30, 2001, from $101.5 million for the same period in 2000. Such decrease reflects the lower level of sales from DDi Capital, partially offset by the impact of the acquisition of Thomas Walter Limited ("Thomas Walter") in March 2001, which contributed $4.1 million to net sales. Gross Profit ------------ DDi Capital gross profit decreased $10.3 million (34%) to $20.3 million for the three months ended June 30, 2001, from $30.6 million for the same period in 2000. Such decrease in gross profit resulted from the lower level of sales experienced in the current period. DDi Corp. gross profit decreased $8.6 million (25%) to $26.5 million for the three months ended June 30, 2001, from $35.1 million for the same period in 2000. Such decrease in gross profit reflects the lower sales experienced by DDi Capital, partially offset by the impact of the acquisition of Thomas Walter. Sales and Marketing Expenses ---------------------------- DDi Capital sales and marketing expenses decreased $2.3 million (31%) to $5.2 million for the three months ended June 30, 2001, from $7.5 million for the same period in 2000. Such decrease in sales and marketing expenses is primarily due to the lower level of sales experienced in the current period. Additionally, sales and marketing expenses declined as a percentage of net sales, due to effective cost control. DDi Corp. sales and marketing expenses decreased $2.0 million (25%) to $5.9 million for the three months ended June 30, 2001, from $7.9 million for the same period in 2000. Such decrease in sales and marketing expenses reflects the decrease in expense incurred by DDi Capital, partially offset by the impact of the acquisition of Thomas Walter. General and Administrative Expenses ----------------------------------- DDi Capital general and administrative expenses decreased $1.7 million (36%) to $3.0 million for the three months ended June 30, 2001, from $4.7 million for the same period in 2000. Such decrease in general and administrative expenses is primarily due to the lower level of sales experienced in the current period. Additionally, general and administrative expenses declined as a percentage of net sales, due to effective cost control. DDi Corp. general and administrative expenses decreased $1.3 million (22%) to $4.7 million for the three months ended June 30, 2001, from $6.0 million for the same period in 2000. Such decease in general and administrative expenses reflects the decrease in expense incurred by DDi Capital, partially offset by the impact of the acquisition of Thomas Walter. 18 Amortization of Intangibles --------------------------- DDi Capital amortization of intangibles decreased $0.4 million (8%) to $4.5 million for the three months ended June 30, 2001, from $4.9 million for the same period in 2000. The decrease is due to the use of accelerated amortization methods with regard to certain identifiable intangibles, partially offset by the additional amortization resulting from acquisitions (aggregating approximately $0.2 million). DDi Corp. amortization of intangibles was $5.8 million for the three months ended June 30, 2001, consistent with the expense incurred for the same period in 2000. Such results reflect the decrease in amortization of intangibles incurred by DDi Capital, partially offset by amortization attributable to the acquisition of Thomas Walter. Net Interest Expense -------------------- DDi Capital net interest expense decreased $5.5 million (61%) to $3.5 million for the three months ended June 30, 2001, from $9.0 million for the same period in 2000. Such decrease in net interest expense is due primarily to the redemption of a portion of the DDi Capital Senior Discount Notes in October 2000 and in the current period, and the redemption of the Dynamic Details Senior Subordinated Notes in February 2001. Cash generated from equity offerings funded these redemptions. DDi Corp. net interest expense decreased $4.9 million (47%) to $5.6 million for the three months ended June 30, 2001, from $10.5 million for the same period in 2000. Such decrease in net interest expense reflects the decrease in expense incurred by DDi Capital and the redemption of the Intermediate Senior Discount Notes in October 2000. These decreases were partially offset by interest incurred from the issuance of the DDi Corp. Convertible Subordinated Notes (approximately $1.5 million) in February 2001. Income Taxes ------------ DDi Capital income taxes decreased $0.2 million to $1.8 million for the three months ended June 30, 2001, from $2.0 million for the same period in 2000, reflecting a lower level of taxable income earned in the current period. DDi Corp. income taxes decreased $0.2 million to $2.2 million for the three months ended June 30, 2001, from $2.4 million for the same period in 2000. Such decrease primarily reflects the decreased DDi Capital provision. The provisions for income taxes are based upon our expected effective tax rate in the respective fiscal year. Six Months Ended June 30, 2001 Compared to the Six Months Ended June 30, 2000 Net Sales --------- DDi Capital net sales increased $21.6 million (13%) to $183.8 million for the six months ended June 30, 2001, from $162.2 million for the same period in 2000. Such increase in net sales is attributable to the production of more complex and larger panels, which increased the average sales price per panel, and the impact of acquisitions. Specifically, the acquisition of Automata contributed $32.5 million to our net sales and the acquisition of Golden contributed $8.4 million to our net sales. Further, the acquisitions of Olympic, Nelco and Altatron in 2001 contributed a combined $2.3 million to our net sales. DDi Corp. net sales increased $49.7 million (28%) to $226.5 million for the six months ended June 30, 2001, from $176.8 million for the same period in 2000. Such increase in net sales reflects the higher level of sales achieved by DDi Capital and the impact of the acquisitions of MCM Electronics Limited ("MCM") in April 2000 and of Thomas Walter in February 2001. Gross Profit ------------ DDi Capital gross profit increased $7.4 million (13%) to $64.2 million for the six months ended June 30, 2001, from $56.8 million for the same period in 2000. Such increase in gross profit resulted from improved pricing and the impact of the acquisitions. DDi Corp. gross profit increased $17.8 million (29%) to $79.1 million for the six months ended June 30, 2001, from $61.3 million for the same period in 2000. Such increase in gross profit reflects the improvements in gross profit achieved by DDi Capital and the impact of the acquisitions of MCM and Thomas Walter. Sales and Marketing Expenses ---------------------------- DDi Capital sales and marketing expenses decreased $0.4 million (3%) to $14.0 million for the six months ended June 30, 2001, from $14.4 million for the same period in 2000. Such decrease in sales and marketing expenses is due to effective cost control, partially offset by the effect of a higher level of sales. DDi Corp. sales and marketing expenses increased $0.5 million (3.4%) to $15.3 million for the six months ended June 30, 2001, from $14.8 million for the same period in 2000. Such increase in sales and marketing expenses is due to the higher level of sales. General and Administrative Expenses ----------------------------------- DDi Capital general and administrative expenses decreased $0.3 million (4%) to $8.3 million for the six months ended June 30, 2001, from $8.6 million for the same period in 2000. Such decrease in general and administrative expenses is due to effective cost control, partially offset by the effect of a higher level of sales. DDi Corp. general and administrative expenses increased $1.8 million (18%) to $11.8 million for the six months ended June 30, 2001, from $10.0 million for the same period in 2000. Such increase in general and administrative expenses reflects the decrease in expense incurred by DDi Capital, offset by the impact of the acquisitions of MCM and Thomas Walter. 19 Amortization of Intangibles --------------------------- DDi Capital amortization of intangibles decreased $1.1 million (11%) to $9.0 million for the six months ended June 30, 2001, from $10.1 million for the same period in 2000. Such decrease in amortization of intangibles is due to the use of accelerated amortization methods with regard to certain identifiable intangibles, partially offset by the additional amortization resulting from acquisitions (approximately $0.3 million). DDi Corp. amortization of intangibles increased $0.6 million (6%) to $11.5 million for the six months ended June 30, 2001, from $10.9 million for the same period in 2000. Such decrease in amortization of intangibles reflects the decrease in expense incurred by DDi Capital, partially offset by amortization attributable to the acquisitions of MCM and Thomas Walter. Net Interest Expense -------------------- DDi Capital net interest expense decreased $10.2 million (52%) to $9.5 million for the six months ended June 30, 2001, from $19.7 million for the same period in 2000. Such decrease in net interest expense is due primarily to the redemption of a portion of the Dynamic Details Senior Term Facility principal in April 2000, the redemption of a portion of the DDi Capital Senior Discount Notes in October 2000 and in the 2nd quarter of 2001, and the redemption of the Dynamic Details Senior Subordinated Notes in February 2001. Cash generated from equity offerings funded these redemptions. DDi Corp. net interest expense decreased $9.9 (44%) to $12.8 million for the six months ended June 30, 2001, from $22.7 million for the same period in 2000. Such decrease in net interest expense reflects the decrease in net interest expense incurred by DDi Capital and the redemption of the Intermediate Senior Discount Notes in April and October 2000. These decreases were partially offset by interest incurred from the acquisition of MCM and from the issuance of the DDi Corp. Convertible Subordinated Notes (approximately $2.0 million) in February 2001. Income Taxes ------------ DDi Capital income taxes increased $8.1 million to $10.7 million for the six months ended June 30, 2001, from $2.6 million for the same period in 2000, reflecting a higher level of taxable income earned in the current period. DDi Corp. income taxes increased $10.0 million to $12.5 million for the six months ended June 30, 2001, from $2.5 million for the same period in 2000. Such increase in income tax expense reflects the increased DDi Capital provision, the impact of the acquisitions of MCM and Thomas Walter, and interest deductions relating to the Convertible Subordinated Notes. The provisions for income taxes are based upon our expected effective tax rate in the respective fiscal year. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 2001, cash, cash equivalents and marketable securities were $68.4 million for DDi Capital and $77.9 million for DDi Corp., compared to $39.6 million for DDi Capital and $66.9 million for DDi Corp. as of December 31, 2000. The principal source of liquidity to fund ongoing operations for the six months ended June 30, 2001 was cash provided by operations. Net cash provided by operating activities for the six months ended June 30, 2001 was $52.2 million for DDi Capital and $61.4 million for DDi Corp., compared to $11.8 million for both DDi Capital and DDi Corp. for the six months ended June 30, 2000. Capital expenditures for the six months ended June 30, 2001 were $14.2 million for DDi Capital and $21.0 million for DDi Corp., compared to $10.2 million for DDi Capital and $10.7 million for DDi Corp. for the six months ended June 30, 2000. As of June 30, 2001, DDi Capital and DDi Corp. had long-term borrowings of $147.2 million and $274.1 million, respectively. We have $75.0 million available for borrowing under our revolving credit facility for revolving credit loans, letters of credit and swing line loans, less amounts that may be in use from time-to-time. At June 30, 2001, we had no amounts outstanding under this revolving credit facility and had $0.7 million reserved against the facility for a letter of credit. In addition, at June 30, 2001, we had available a $50 million uncommitted incremental borrowing facility. On February 14, 2001, DDi Corp. and some of its shareholders completed a follow-on public offering of 6,000,000 shares of its common stock, with 3,000,000 shares issued by DDi Corp. and the remainder sold by selling shareholders. The shares were sold at $23.50 per share, generating proceeds of $67.0 million, net of underwriting discounts, commissions and expenses. Concurrently, DDi Corp. issued 5.25% Convertible Subordinated Notes due March 1, 2008 with an aggregate principal of $100.0 million. These notes are convertible at any time prior to maturity into shares of common stock at a conversion price of $30.00 per share, subject to certain adjustments. These notes generated proceeds of $97.0 million, net of underwriting discounts, commissions and expenses. The net proceeds of both transactions have been used to repurchase a portion of the DDi Capital senior discount notes and all of the Dynamic Details senior subordinated notes (see Note 6 and Note 17 to the Condensed Consolidated Financial Statements). Based upon the current level of operations, we believe that cash generated from operations, available cash and amounts available under our senior credit facility will be adequate to meet our debt service requirements, capital expenditures and 20 working capital needs for the remainder of the year, although no assurance can be given in this regard. Accordingly, there can be no assurance that our business will generate sufficient cash flow from operations or that future borrowings will be available to enable us to service our indebtedness. We remain leveraged and our future operating performance and ability to service or refinance our indebtedness will be subject to future economic conditions and to financial, business and other factors, certain of which are beyond our control. COLORADO FACILITY In December 1999, we implemented a plan to consolidate our Colorado operations into our Texas facility, resulting in the closure of the Colorado facility. In conjunction with the closure of the Colorado facility, we recorded charges in the fourth quarter of 1999 totaling $7.0 million, consisting of $4.5 million for severance and other exit costs and $2.5 million related to the impairment of net property, plant and equipment. The exit costs were accrued for as of December 31, 1999. The closure of the facility was effectively complete as of March 31, 2000. The accrued exit costs remaining as of June 30, 2001 are approximately $0.5 million, representing expenses principally related to net rental payments through scheduled maturities of real property operating leases. RISKS ASSOCIATED WITH INTANGIBLE ASSETS At June 30, 2001, intangible assets were $204.9 million for DDi Capital and $281.5 million for DDi Corp. These amounts represented a significant portion of each company's total assets at that date. The intangible assets consist of goodwill and other identifiable intangibles relating to acquisitions. Additional intangible assets may be added in future periods, principally from the consummation of further acquisitions. Amortization of these additional intangibles may, in turn, have a negative impact on earnings. In addition, we continuously evaluate whether events and circumstances have occurred that indicate the remaining balance of intangible assets may not be recoverable. When factors indicate that assets should be evaluated for possible impairment, we may be required to reduce the carrying value of our intangible assets, which could have a material adverse effect on our results during the periods in which such a reduction is recognized. There can be no assurance that we will not be required to write down intangible assets in future periods. FORWARD-LOOKING STATEMENTS A number of the matters and subject areas discussed in this Form 10-Q are forward-looking in nature. The discussion of such matters and subject areas is qualified by the inherent risks and uncertainties surrounding future expectations generally, and also may differ materially from our actual future experience involving any one or more of such matters and subject areas. We wish to caution readers that all statements other than statements of historical facts included in this quarterly report on Form 10-Q regarding our financial position and business strategy may constitute forward-looking statements. All of these forward-looking statements are based upon estimates and assumptions made by our management, which although believed to be reasonable, are inherently uncertain. Therefore, undue reliance should not be placed on such estimates and statements. No assurance can be given that any of such estimates or statements will be realized and it is likely that actual results will differ materially from those contemplated by such forward-looking statements. Factors that may cause such differences include: (1) increased competition; (2) increased costs; (3) inability to consummate acquisitions on attractive terms; (4) loss or retirement of key members of management; (5) increases in our cost of borrowings or unavailability of additional debt or equity capital on terms considered reasonable by management; (6) adverse state, federal or foreign legislation or regulation or adverse determinations by regulators; (7) changes in general economic conditions in the markets in which we may compete and fluctuations in demand in the electronics industry; and (8) the ability to sustain historical margins as the industry develops. We have attempted to identify, in context, certain of the factors that we currently believe may cause actual future experiences to differ from our current expectations regarding the relevant matter or subject area. In addition to the items specifically discussed in the foregoing, our business and results of operations are subject to the risks and uncertainties described herein under the headings "Risks Associated With Intangible Assets" and "Factors That May Affect Future Results" contained herein, however, the operations and results of our business also may be subject to the effect of other risks and uncertainties. Such risks and uncertainties include, but are not limited to, items described from time-to-time in our registration statements and periodic reports filed with the Securities and Exchange Commission. 21 FACTORS THAT MAY AFFECT FUTURE RESULTS SUBSTANTIAL INDEBTEDNESS We have a substantial amount of indebtedness. As of June 30, 2001, our total debt was approximately $163.5 million for DDi Capital and $290.7 million for DDi Corp. As of June 30, 2001, we had $74.3 million available under the Dynamic Details senior credit facility for future borrowings for general corporate purposes and working capital needs. In addition, subject to the restrictions in the DDi Corp. convertible subordinated notes, DDi Capital senior discount notes and Dynamic Details senior credit facility, we may incur additional indebtedness in an unrestricted amount from time to time to finance acquisitions or capital expenditures or for other purposes. As a result of our level of debt and the terms of our debt instruments: . our vulnerability to adverse general economic conditions is heightened; . we will be required to dedicate a substantial portion of our cash flow from operations to repayment of debt, limiting the availability of cash for other purposes; . we are and will continue to be limited by financial and other restrictive covenants in our ability to borrow additional funds, consummate asset sales, enter into transactions with affiliates or conduct mergers and acquisitions; . our flexibility in planning for, or reacting to, changes in our business and industry will be limited; . we are sensitive to fluctuations in interest rates because some of our debt obligations are subject to variable interest rates; and . our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes may be impaired. Our ability to pay principal and interest on our indebtedness and to satisfy our other debt obligations will depend upon our future operating performance, which will be affected by prevailing economic conditions and financial, business and other factors, some of which are beyond our control, as well as the availability of revolving credit borrowings under our senior credit facility or successor facilities. We anticipate that our operating cash flow, together with borrowings under our senior credit facility and the proceeds of DDi Corp.'s public offerings, will be sufficient to meet our operating expenses and to service our debt requirements as they become due. If we are unable to service our indebtedness, we will be forced to take actions such as reducing or delaying capital expenditures, selling assets, restructuring or refinancing our indebtedness (which could include the DDi Capital senior discount notes), or seeking additional equity capital. There is no assurance that we can effect any of these remedies on satisfactory terms, or at all. RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS The terms of our indebtedness restrict, among other things, our ability to incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of our assets. DDi Europe, DDi Capital and Dynamic Details are also required to maintain specified financial ratios and satisfy certain financial condition tests. Their ability to meet those financial ratios and tests can be affected by events beyond their control, and there can be no assurance that they will meet those tests. A breach of any of these covenants could result in a default under some or all of our indebtedness agreements. Upon the occurrence of an event of default, lenders under such indebtedness could elect to declare all amounts outstanding together with accrued interest, to be immediately due and payable. If we were unable to repay such amounts, the lenders could proceed against the collateral granted to them to secure that indebtedness. Substantially all the assets of Dynamic Details and its subsidiaries are pledged as security under the Dynamic Details senior credit facility. All the assets of DDi Europe are pledged as security under the DDi Europe facilities agreement. TECHNOLOGICAL CHANGE AND PROCESS DEVELOPMENT The market for our products and services is characterized by rapidly changing technology and continuing process development. The future success of our business will depend in large part upon our ability to maintain and enhance our technological capabilities, to develop and market products and services that meet changing customer needs, and to successfully anticipate or respond to technological changes on a cost-effective and timely basis. Research and development 22 expenses are expected to increase as manufacturers make demands for products and services requiring more advanced technology on a quicker turnaround basis. We are more leveraged than some of our principal competitors, and therefore may not be able to respond to technological changes as quickly as these competitors. In addition, the electronics manufacturing services industry could in the future encounter competition from new or revised technologies that render existing technology less competitive or obsolete or that reduce the demand for our services. We cannot assure you that we will effectively respond to the technological requirements of the changing market. To the extent we determine that new technologies and equipment are required to remain competitive, the development, acquisition and implementation of such technologies and equipment may require us to make significant capital investments. There can be no assurance that we will be able to obtain capital for these purposes in the future or that any investments in new technologies will result in commercially viable technological processes. DEPENDENCE ON A CORE GROUP OF SIGNIFICANT CUSTOMERS Net sales to the ten largest customers accounted for approximately 39.7% of net sales for DDi Capital and 55.5% of net sales for DDi Corp. during the six months ended June 30, 2001. We may depend upon a core group of customers for a material percentage of our net sales in the future. Substantially all sales are made on the basis of purchase orders rather than long-term agreements. We cannot assure you that significant customers will order services from us in the future or that they will not reduce or delay the amount of services ordered. Any reduction or delay in orders could negatively impact revenues. In addition, we generate significant accounts receivable in connection with providing services to customers. If one or more significant customers were to become insolvent or otherwise were unable to pay us for the services provided; results of operations would be adversely affected. DEPENDENCE ON ACQUISTION STRATEGY As part of our business strategy, we expect that we will continue to grow by pursuing acquisitions of other companies, assets or product lines that complement or expand our existing business. Competition for attractive companies in our industry is substantial. We cannot assure you that we will be able to identify suitable acquisition candidates or to finance and complete transactions that we select. In addition, existing credit facilities restrict our ability to acquire the assets or business of other companies. The attention of our management may be diverted, and operations may be otherwise disrupted. If we fail to effectively execute this acquisition strategy, the growth of our revenues may suffer and the price of DDi Corp.'s common stock may decline. ABILITY TO INTEGRATE ACQUIRED BUSINESSES AND MANAGE EXPANSION Since December 1997, we have completed a merger with one company and acquired eight other companies. We have a limited history of owning and operating our businesses on a consolidated basis. We cannot assure that we will be able to successfully integrate these companies and meet performance expectations without disrupting the quality and reliability of service to customers or diverting management resources. The integration of these acquired companies and our expected growth has placed and may continue to place a significant strain on our management, financial resources and information, operating and financial systems. If we are unable to successfully integrate these companies and manage this growth effectively, our rate of growth and revenues may be adversely affected. COSTS OF INTERNATIONAL EXPANSION We have expanded into new foreign markets and intend to continue our international expansion. We completed our acquisition of MCM and Thomas Walter, both United Kingdom companies, on April 14, 2000 and March 5, 2001, respectively. In addition, we completed our acquisition of Olympic, a Canadian company, on April 9, 2001. Entry into foreign markets may require considerable management time as well as, in the case of new operations, start-up expenses for market development, hiring and establishing office facilities before any significant revenues are generated. As a result, operations in new foreign markets may achieve low margins or may be unprofitable. We may not be able to utilize net operating losses incurred by foreign operations to reduce our U.S. income taxes. Therefore, as we continue to expand internationally, we may not generate the revenues we expect, and our operating margins may be negatively impacted and DDi Corp.'s common stock price may decline. 23 VARIABILITY OF ORDERS Our operating results have fluctuated in the past because we sell on a purchase- order basis rather than pursuant to long-term contracts. We are therefore sensitive to variability in demand by our customers. Because we time expenditures in anticipation of future sales, our operating results may be less than we estimate if the timing and volume of customer orders do not match expectations. Furthermore, we may not be able to capture all potential revenue in a given period if our customers' demand for quick-turnaround services exceeds our capacity during that period. Because of these factors, you should not rely on quarter-to-quarter comparisons of our results of operations as an indication of future performance. Because a significant portion of our operating expenses are fixed, even a small revenue shortfall can have a disproportionate effect on operating results. It is possible that, in future periods, results may be below the expectations of public market analysts and investors. This could cause the market price of DDi Corp.'s common stock to decline. A substantial portion of our net sales are derived from quick-turn services for which we provide both the materials and the manufacturing services. As a result, we often bear the risk of fluctuations in the cost of materials, and the risk of generating scrap and excess inventory, which can affect gross profit margins. We forecast future inventory needs based upon the anticipated demands of our customers. Inaccuracies in making these forecasts or estimates could result in a shortage or an excess of materials, either of which could negatively affect production schedules and margins. INTELLECTUAL PROPERTY Our success depends in part on proprietary technology and manufacturing techniques. We have no patents for these proprietary techniques and rely primarily on trade secret protection. Litigation may be necessary to protect our technology and determine the validity and scope of the proprietary rights of competitors. Intellectual property litigation could result in substantial costs and diversion of our management and other resources. If any infringement claim is asserted against us, we may seek to obtain a license of the other party's intellectual property rights. We cannot assure you that a license would be available on reasonable terms or at all. ENVIRONMENTAL MATTERS Our operations are regulated under a number of federal, state and foreign environmental and safety laws and regulations that govern, among other things, the discharge of hazardous materials into the air and water, as well as the handling, storage and disposal of such materials. These laws and regulations include the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, and the Comprehensive Environmental Response, Compensation and Liability Act, as well as analogous state and foreign laws. Compliance with these environmental laws is a major consideration for us because we use in our manufacturing process materials classified as hazardous such as ammoniacal etching solutions, copper and nickel. In addition, because we are a generator of hazardous wastes, we may be subject to potential financial liability for costs associated with an investigation and any remediation of sites at which we have arranged for the disposal of hazardous wastes if such sites become contaminated. Even if we fully comply with applicable environmental laws and are not directly at fault for the contamination, we may still be liable. The wastes we generate include spent ammoniacal etching solutions, solder stripping solutions and hydrochloric acid solution containing palladium; waste water which contains heavy metals, acids, cleaners and conditioners; and filter cake from equipment used for on-site waste treatment. Violations of environmental laws could subject us to revocation of our effluent discharge permits. Any such revocations could require us to cease or limit production at one or more of our facilities, thereby negatively impacting revenues and potentially causing the market price of DDi Corp.'s common stock to decline. COMPETITION The printed circuit board industry is highly fragmented and characterized by intense competition. We principally compete with independent and captive manufacturers of complex quick-turn and longer-lead printed circuit boards. Our principal competitors include independent small private companies and integrated subsidiaries of more broadly based volume producers that also manufacture multilayer printed circuit boards and other electronic assemblies. Some of our principal competitors are less highly-leveraged than us and may have greater financial and operating flexibility. Moreover, we may face additional competitive pressures as a result of changes in technology. Competition in the complex quick-turn and longer-lead printed circuit board industry has increased due to the consolidation trend in the industry, which results in potentially better capitalized and more effective competitors. Our basic technology is generally not subject to significant proprietary protection, and companies with significant resources or international operations may enter the market. Increased competition could result in price reductions, reduced margins or loss of market share, any of which could materially adversely affect our business, financial condition and results of operations. 24 DEPENDENCE ON KEY MANAGEMENT We depend on the services of our senior executives, including our Chairman Charles D. Dimick, and our President and Chief Executive Officer, Bruce D. McMaster. We cannot assure that we will be able to retain these and other executive officers and key personnel or attract additional qualified management in the future. Neither Mr. Dimick nor Mr. McMaster is a party to an employment agreement with us. Our business also depends on our ability to continue to recruit, train and retain skilled employees, particularly engineering and sales personnel, due to our focus on the technologically advanced and time-critical segment of the electronics manufacturing services industry. In addition, our ability to successfully integrate acquired companies depends in part on our ability to retain key management and existing employees at the time of the acquisition. CONTROLLING STOCKHOLDERS Investment funds affiliated with Bain Capital, Inc. beneficially own approximately 5.8% of the outstanding common stock of DDi Corp. In addition, of the eight directors who serve on our board, three are current representatives of Bain Capital, Inc. and two are former representatives of Bain Capital, Inc. By virtue of such stock ownership and board representation, these entities will continue to have a significant influence over all matters submitted to our stockholders, including the election of our directors, and to exercise significant control over our business, policies and affairs. Such concentration of voting power could have the effect of delaying, deterring or preventing a change of control or other business combination that might otherwise be beneficial to our stockholders. 25 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. ------------------------------------------------------------------- Interest Rate Risk The DDi Europe facilities agreement and the Dynamic Details senior credit facility bear interest at a floating rate; the DDi Capital senior discount notes and DDi Corp. convertible subordinated notes bear interest at fixed rates. We reduce our exposure to interest rate risks through swap agreements. The Dynamic Details revolving credit facility bears interest at (i) 2.00% per annum plus the applicable LIBOR or (ii) 1.25% per annum plus the federal reserve reported overnight funds rate plus 0.5% per annum. As of June 30, 2001, we had no amount outstanding under our revolving credit facility. Based upon our anticipated utilization of the Dynamic Details revolving credit facility through the year ending December 31, 2001, a 10% change in interest rates is not expected to materially affect the interest expense to be incurred on this facility during such period. Under the terms of the current swap agreements, we pay a maximum annual rate of interest applied to a notional amount equal to the principal balance of the term facility portion of the Dynamic Details senior credit facility through December 31, 2001. The maximum annual rate is 5.75% for a given month, unless one-month LIBOR for that month equals or exceeds 7.00%, in which case we pay 7.00% for that month. From January 1, 2002 through the scheduled maturity of the Senior Term Facility in 2005, the Company pays a fixed annual rate of 5.72% applied to a notional amount equal to the principal balance of the Senior Term Facility (from January 1, 2002 to December 31, 2002) and a fixed annual rate of 6.58% applied to a notional amount equal to 50% of the principal balance from January 1, 2003 to April 2005. The term loan facility portion of the Dynamic Details senior credit facility bears interest based on one-month LIBOR. As of June 30, 2001, one-month LIBOR was 3.79%. If one-month LIBOR increased by 10% to 4.17%, interest expense related to the term loan facility portion would increase by approximately $0.5 million over the twelve months ending June 30, 2002. Since the increased rate would not exceed 5.75%, that increase in interest expense would not be offset by payments under the swap agreement. Under the new swap agreement entered into in July 2001 (see Note 19 to the Condensed Consolidated Financial Statements), a 10% increase in one-month LIBOR to 4.17% would not result in additional interest expense. Under the terms of the current swap agreement, DDi Europe pays a fixed annual rate of interest equal to 6.92% applied to fixed amounts of debt per the agreement, through September 2002. As of June 30, 2001, the swap covers approximately 90% of the outstanding debt under the facilities agreement. If DDi Europe were to borrow the full amount available on its facilities agreement, the fixed amounts of debt per the swap agreement would still cover approximately 57% of the outstanding debt. The DDi Europe facilities agreement bears interest based on three-month LIBOR. As of June 30, 2001, three-month LIBOR was 3.76%. If three-month LIBOR increased by 10% to 4.14%, interest expense related to the term loan facility would not increase due to the fixed rate of 6.92% under the swap agreement. A change in interest rates would not have an effect on our interest expense on the DDi Capital senior discount notes or DDi Corp. convertible subordinated notes because these instruments bear a fixed rate of interest. Foreign Currency Exchange Risk The sales and expenses and financial results of DDi Europe and of our Canadian operations are denominated in British pounds and Canadian dollars, respectively. We have foreign currency translation risk equal to our net investment in those operations. However, since nearly all of our sales are denominated in each operation's local currency or in U.S. dollars, we have relatively little exposure to foreign currency transaction risk with respect to sales made. Therefore, the effect of an immediate 10% change in exchange rates would not have an impact on our operating results over the 12 month period ending June 30, 2002. We do not use forward exchange contracts to hedge exposures to foreign currency denominated transactions and do not utilize any other derivative financial instruments for trading or speculative purposes. 26 PART II OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. ----------------------------------------------------------- The Annual Meeting of Stockholders of DDi Corp. was held on June 1, 2001 for the purpose of (a) electing three Class I Directors to the Board of Directors and (b) voting on a proposal to ratify the appointment of PricewaterhouseCoopers LLP as the Company's independent auditors. Prescott Ashe, Charles D. Dimick and David Dominik were elected to serve as Class I Directors of the Company for three-year terms expiring at the 2004 Annual Meeting of Stockholders. Robert Guezuraga, Murray Kenney, Bruce D. McMaster and Stephen Zide continued in office as Class II Directors and Edward W. Conard, Stephen G. Pagliuca and Mark R. Benham continued in office as Class III Directors. The tabulation of the votes cast for the election of Messrs. Ashe, Dimick and Dominik was as follows:

The proposal to ratify the appointment of PricewaterhouseCoopers LLP as the Company's independent auditors was approved. The tabulation of votes was as follows:

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. ----------------------------------------- (a) Exhibits. None. --------- (b) Reports on Form 8-K. -------------------- On April 5, 2001, DDi Corp. filed a report on Form 8-K dated April 5, 2001 disclosing the date of the annual meeting of stockholders and information regarding the procedures for director nominations and stockholder proposals. 27 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, DDi Corp. has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized, in the city of Anaheim, state of California, on the 14th day of August, 2001. DDi CORP. By: /s/ JOSEPH P. GISCH ------------------- Joseph P. Gisch Chief Financial Officer, Secretary and Treasurer (Principal Financial and Accounting Officer) 28 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, DDi Capital Corp. has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized, in the city of Anaheim, state of California, on the 14th day of August, 2001. DDi CAPITAL CORP. By: /s/ JOSEPH P. GISCH ------------------- Joseph P. Gisch Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) 29

DDI CAPITAL CORP/DYNAMIC DETAILS INC 10-Q