<PAGE>
Filed pursuant to Rule 424(b)(1)
Registration No. 333-95623
12,000,000 Shares
[DDi LOGO APPEARS HERE]
DDi Corp.
Common Stock
------------
Prior to this offering, there has been no public market for our common
stock. Our common stock has been approved for listing on The Nasdaq Stock
Market's National Market under the symbol "DDIC."
The underwriters have an option to purchase a maximum of 1,800,000
additional shares from us to cover over-allotments of shares.
Investing in our common stock involves risk. See "Risk Factors" on page 8.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions DDi Corp.
------------ ------------- ------------
<S> <C> <C> <C>
Per Share.................................. $14.00 $0.945 $13.055
Total...................................... $168,000,000 $11,340,000 $156,660,000
</TABLE>
Delivery of the shares of common stock will be made on or about April 14,
2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Credit Suisse First Boston___________________________ Robertson Stephens
Chase H&Q_______________________________________________Lehman Brothers
The date of this prospectus is April 11, 2000.
<PAGE>
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................. 1
Risk Factors........................ 8
Cautionary Note Regarding Forward-
Looking Statements................. 12
Use of Proceeds..................... 13
The Reclassification................ 14
Dividend Policy..................... 14
Capitalization...................... 15
Dilution............................ 16
Unaudited Pro Forma Consolidated
Financial Data..................... 18
Selected Consolidated Financial and
Other Data......................... 26
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 28
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Business......................... 36
Management....................... 45
Related Party Transactions....... 56
Principal Stockholders........... 57
Description of Indebtedness...... 60
Description of Capital Stock..... 63
Shares Eligible for Future Sale.. 66
Underwriting..................... 69
Notice to Canadian Residents..... 72
Legal Matters.................... 73
Experts.......................... 73
Additional Information........... 73
Index to Consolidated Financial F-1
Statements......................
</TABLE>
------------
You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.
The industry statistical data presented in this prospectus, except where
otherwise noted, have been compiled from an electronics manufacturing services
industry report, "Contract Manufacturing from a Global Perspective, 1999
Update," prepared by Technology Forecasters, Inc., a California-based
management consulting firm specializing in the electronics manufacturing
industry. Although we have not independently verified the data, we believe that
the information provided by Technology Forecasters in this prospectus is
reliable. In addition, statistical data relating to us presented in this
prospectus have been compiled from our internal surveys and schedules, which,
while believed by us to be reliable, have not been verified by any independent
sources.
Dynamic Details is a trademark of our subsidiary. We have applied for
trademark protection of DDi and the DDi logo.
Dealer Prospectus Delivery Obligations
Until May 6, 2000 (25 days after the commencement of the offering), all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
requirement is in addition to the dealers' obligation to deliver a prospectus
when acting as an underwriter and with respect to unsold allotments or
subscriptions.
<PAGE>
Description of cover art: photographs of operations and products surrounding
"DDi targets the fast-growing communications and networking industries. DDi's
electronics design, development and manufacturing expertise and its leading
edge process technology provide its customers with the flexibility to shorten
product development cycles and reduce their time to market in a marketplace
demanding increasingly rapid product introduction."
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information we present more fully elsewhere in this
prospectus. This prospectus contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
discussed in the forward-looking statements as a result of factors described
under "Risk Factors" and elsewhere in this prospectus.
DDi Corp.
We provide electronics design, development and manufacturing services to
original equipment manufacturers and to other providers of electronics
manufacturing services. We specialize in providing technologically advanced
services to our customers on a short turnaround basis, and we are one of the
few companies that focus on this segment of the electronics manufacturing
services industry. We target the fast-growing communications and networking
equipment industries, which are characterized by aggressive new product
development programs demanding the rapid application of advanced technology and
design. We offer a suite of value-added, integrated services in support of our
customers' new product development, including:
. on-campus and in-the-field design of complex printed circuit boards,
the basic platforms used to interconnect electronic components in
virtually all electronic products;
. time-critical development and fabrication of complex printed circuit
boards predominantly for use in the pre-launch phase of new product
development;
. assembly of printed circuit boards including large printed circuit
boards called backpanels, which involves mounting electronic
components on the boards; and
. assembly and integration of our customers' complete systems and
products.
Our customers use our services to develop and produce a wide variety of end
products, including communications switching and transmission equipment,
wireless base stations, work stations, high-end computing equipment and data
networking equipment. The technologically advanced, time-critical segment of
the electronics manufacturing services industry in which we operate is
characterized by rapid growth, high margins and significant customer diversity.
Our design, development and manufacturing expertise and our leading-edge
process technology allow us to provide our customers with a broad array of
time-critical services and make us integral to their product development and
manufacturing strategies. Our services are referred to as "quick-turn" because
we provide limited numbers of custom-designed printed circuit boards to our
customers in as little as 24 hours. As a result, we enable our customers to
shorten product development cycles and reduce their time to market for new
products. We distinguish ourselves from other electronics manufacturing
services companies by focusing on direct relationships with research and
development personnel at original equipment manufacturers. This focus makes us
a strategic partner in our customers' new product initiatives and gives us
access to emerging providers of next-generation technology. We believe our core
strengths in the design, test and launch phases of new electronic product
development give us a competitive advantage in providing services to selected
industries characterized by rapid product introductions and strong growth.
We believe the fast-growing communications and networking equipment
industries represent large and attractive markets for our electronics
manufacturing services. Original equipment manufacturers in these industries
are increasingly outsourcing component design and development and product
manufacturing services to electronics manufacturing service providers, such as
ourselves, and are focusing instead on their core strengths, such as product
development, sales, marketing and customer service. The electronics
manufacturing services industry grew at a compound annual growth rate of 20%
from 1993 to 1999, fueled by increases in the rate of outsourcing combined with
steady, underlying growth in the electronics equipment industry. Technology
Forecasters, Inc. forecasts that the electronics manufacturing services
industry will continue to grow at this rate,
1
<PAGE>
with industry revenues projected to be approximately $149 billion in 2003.
Communications equipment manufacturers represent a particularly attractive
market for our services because they have historically outsourced a smaller
portion of their cost of goods sold than other electronics manufacturers.
Technology Forecasters, Inc. predicts that communications equipment
manufacturers will increase their outsourcing significantly between now and
2003. We believe we are well-positioned to capitalize on the combined effect of
the growth in the electronics manufacturing services and communications
industries, both internally and by strategic acquisitions.
Our diverse customer base includes over 1,400 companies. Our largest original
equipment manufacturer customers in terms of net sales are Alcatel, IBM, Intel,
Marconi Communications and 3Com. Our customers also include other electronics
manufacturing service providers such as Celestica, Jabil and Solectron, our
largest electronics manufacturing service provider customers in terms of net
sales. These providers benefit from our strengths in the technologically
advanced, time-critical segment of the electronics manufacturing services
industry. We achieved a net increase of approximately 150 customers in 1999. In
1999, our ten largest customers, in the aggregate, accounted for less than 40%
of our net sales, and our largest customer accounted for less than 8% of net
sales. The fast-growing communications and networking equipment industries
represented approximately 55% of our net sales during the same period.
Our Strategy
Our goal is to be the leading provider of technologically advanced, time-
critical electronics manufacturing services. To achieve this goal, we will:
. Continue our focus on the fast-growing communications and networking
equipment industries;
. Capitalize on our strong customer relationships and design expertise to
participate in future product introductions and further outsourcing
programs;
. Strengthen our process management and technological leadership in our
segment of the electronics manufacturing services industry and continue
to improve quality and delivery times by incorporating emerging
technologies;
. Leverage our leadership in quick-turn design, development and
manufacturing services to further expand our assembly operations and
other value-added services;
. Expand our international presence to better serve the needs of customers
seeking to outsource their worldwide design, development and
manufacturing activities; and
. Pursue selected acquisition opportunities, including asset divestitures
by original equipment manufacturers.
Recent Developments
MCM Electronics Acquisition. On March 22, 2000, we entered into an agreement
to acquire MCM Electronics Limited, a time-critical electronics manufacturing
service provider based in the United Kingdom. We expect to consummate this
acquisition on the closing date of this offering. We will pay the current
investors in MCM Electronics a combination of our common stock and cash, and
assume some of its debt. See "Use of Proceeds" and "Unaudited Pro Forma
Consolidated Financial Data."
Like DDi, MCM Electronics primarily focuses on technologically advanced,
time-critical design, manufacturing and assembly of printed circuit boards. MCM
Electronics' management currently owns approximately 35% of the company. Its
chief executive officer, Martin H.G. Malone, has over 24 years of industry
experience focused on technologically advanced, time-critical services. MCM
Electronics operates out of four facilities in southern England. It has
approximately 450 customers and net sales for the twelve months ended December
31, 1999 of more than $58 million. For the ten months ended January 31, 2000,
approximately 32% of its net sales were to customers in the communications
industry. MCM Electronics' top
2
<PAGE>
five customers in terms of net sales included Alcatel, Raychem, Rotork Controls
and Soundcraft/BSS, and they together accounted for approximately 38% of total
net sales during the 12 months ended December 31, 1999.
We believe our acquisition of MCM Electronics is a critical step in our
strategy to expand our international service offering. With its focus on
technologically advanced, time-critical services, MCM Electronics complements
our core strengths. The acquisition builds on our growing sales in Europe and
will enable us to better service our global accounts. We expect to achieve cost
savings by combining our marketing efforts and through volume purchases of raw
materials and capital equipment.
Domestic Facility Consolidation. In December 1999, we implemented our plan to
consolidate our Colorado operations into our Texas facility and to close our
Colorado facility. This consolidation and closure was substantially completed
on March 31, 2000. We are currently serving the majority of the customers who
were serviced by our Colorado facility out of our Texas facility. By combining
our Texas and Colorado operations, we are eliminating lower-margin product
lines and decreasing our overhead costs, and we expect to gain efficiency
through better capacity utilization and streamlined management.
----------------
We are a California corporation organized in 1978 and operate through our
subsidiary, Dynamic Details, Incorporated. Prior to the completion of our
initial public offering, we plan to reincorporate in Delaware. See "The
Reclassification." Our principal executive office is located at 1220 Simon
Circle, Anaheim, California 92806 and our telephone number is (714) 688-7200.
We maintain a website on the Internet at www.ddiglobal.com. Our website, and
the information contained therein, is not a part of this prospectus.
3
<PAGE>
The Offering
Common stock offered...... 12,000,000 shares of common stock by DDi Corp.
Over-allotment option..... Up to 1,800,000 shares of common stock offered by
DDi Corp.
Common stock to be
outstanding after the
offering................. 38,957,143 shares of common stock. See "The
Reclassification." In calculating the number of
shares of common stock, we included 2,207,143
shares of common stock we will issue in connection
with our acquisition of MCM Electronics. In
calculating the number of shares of common stock,
we did not include approximately 2,300,000 shares
issuable upon exercise of stock options and
warrants outstanding on December 31, 1999 with a
weighted average exercise price of $10.97 per
share, approximately 1,400,000 shares of common
stock issuable upon exercise of stock options that
will be granted at the closing of this offering
with an exercise price equal to the public offering
price or 4,255,948 shares of common stock available
for future grant under our stock plans.
Use of proceeds........... We intend to use the approximately $153.8 million
that we estimate we will receive from this offering
to repay a portion of our existing indebtedness and
indebtedness assumed in connection with our
acquisition of MCM Electronics and to make cash
payments associated with this acquisition. See "Use
of Proceeds."
Nasdaq National Market
symbol................... DDIC
4
<PAGE>
Summary Consolidated Financial and Other Data
The summary consolidated financial data set forth below is only a summary.
You should read it together with "Unaudited Pro Forma Consolidated Financial
Data," "Selected Consolidated Financial and Other Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and the related notes appearing elsewhere
in this prospectus. The pro forma combined financial data set forth below give
effect to the reclassification, as described under "The Reclassification," the
consummation of the offering and the application of the net proceeds as
described under "Use of Proceeds," and our acquisition of MCM Electronics, as
described under "Prospectus Summary--Recent Developments," as if each had
occurred on January 1, 1999 in the case of the unaudited pro forma consolidated
statements of operations data and as of December 31, 1999 in the case of the
unaudited pro forma balance sheet data. The unaudited pro forma consolidated
statement of operations does not purport to represent what our results of
operations would have been if the foregoing transactions had occurrred as of
the date indicated or what such results will be for future periods.
<TABLE>
<CAPTION>
Pro Forma
Year Ended Combined
December 31, Year Ended
----------------------- December 31,
1997 1998 1999 1999
------ ------- ------ ------------
(in millions)
<S> <C> <C> <C> <C>
Consolidated Statement of Operations
Data:
Net sales................................ $ 78.8 $ 174.9 $292.5 $350.7
Cost of goods sold....................... 38.7 119.6 202.4 244.1
------ ------- ------ ------
Gross profit........................... 40.1 55.3 90.1 106.6
Operating expenses:
Sales and marketing.................... 7.3 12.8 23.6 24.1
General and administration............. 2.1 8.4 15.3 23.1
Amortization of intangibles............ -- 10.9 22.3 25.6
Restructuring and related charges(a)... -- -- 7.0 14.1
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 -- --
------ ------- ------ ------
Operating income (loss).................. (2.7) (15.8) 21.9 19.7
Interest expense, net.................... 25.2 37.4 46.7 38.8
------ ------- ------ ------
Loss before taxes and extraordinary
loss.................................... (27.9) (53.2) (24.8) (19.1)
Income tax benefit....................... 10.9 3.5 7.4 3.6
------ ------- ------ ------
Loss before extraordinary loss........... (17.0) (49.7) (17.4) (15.5)
Extraordinary loss....................... (1.6) (2.4) -- --
------ ------- ------ ------
Net loss................................. $(18.6) $ (52.1) $(17.4) $(15.5)
====== ======= ====== ======
Other Financial Data:
Depreciation............................. $ 2.6 $ 9.2 $ 14.4 $ 17.3
Amortization of deferred financing
costs................................... 1.4 1.8 2.1 2.3
Capital expenditures..................... 6.6 18.0 18.2 23.6
Supplemental Data:
Adjusted EBITDA(d)....................... $ 33.3 $ 44.1 $ 66.7 $ 76.7
Net cash from operating activities(e).... 9.1 16.7 24.8 --
Net cash used in investing
activities(e)........................... (44.9) (194.8) (18.6) --
Net cash from (used in) financing
activities(e)........................... 41.1 174.9 (7.7) --
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
As of
December 31,
1999
-----------------
Pro
Forma
Actual Combined
------- --------
(in millions)
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents..................................... $ 0.6 $ 7.2
Working capital............................................... 19.1 27.5
Total assets.................................................. 354.3 463.5
Total debt, including current maturities...................... 476.7 390.0
Stockholders' deficit......................................... (187.1) (6.6)
</TABLE>
- --------
(a) The 1999 restructuring and related charges represent the charge recorded
in December 1999 in connection with our announced consolidation of our
Colorado operations into our Texas facility and the closure of our
Colorado facility. The charge consists of $4.5 for severance and other
exit costs and $2.5 related to the impairment of net property, plant and
equipment. The pro forma restructuring and related charges also include a
charge of $3.6 recorded by MCM Electronics for the closure of its facility
in Newbury, England, a charge of $2.6 related to a write-off of goodwill
associated with the closure and a loss of $0.9 recorded in connection with
a vacated leased facility.
(b) Represents the charge for stock compensation and related bonuses recorded
for vested stock options exchanged in conjunction with a recapitalization.
(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 purchase price 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 we
believe 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.
The following table sets forth a reconciliation of EBITDA to adjusted
EBITDA for each period included herein:
<TABLE>
<CAPTION>
Pro Forma
Year Ended Combined
December 31, Year Ended
------------------ December 31,
1997 1998 1999 1999
----- ----- ----- ------------
(in millions)
<S> <C> <C> <C> <C>
EBITDA...................................... $(0.1) $43.3 $58.6 $65.2
Former CEO compensation(1) ................. 2.1 -- -- --
Management fee(2)........................... -- -- 1.1 --
Executive severance(3)...................... -- 0.8 -- --
Stock compensation and bonuses(4)........... 31.3 -- -- --
Restructuring and related charges(5)(6)..... -- -- 7.0 11.5
----- ----- ----- -----
Adjusted EBITDA............................. $33.3 $44.1 $66.7 $76.7
===== ===== ===== =====
</TABLE>
6
<PAGE>
--------
(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
Capital management agreement, which will be terminated in connection
with the 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, on a pro forma basis, the elimination of a $3.6 charge
recorded by MCM Electronics for the closure of its facility in Newbury,
England and a loss of $0.9 recorded by MCM Electronics in connection
with a vacated leased facility and, on an actual and pro forma basis,
the elimination of the $7.0 charge recorded for the consolidation and
closure of our Colorado facility. See note (a) above.
(6) We implemented in December 1999 a plan to consolidate our Colorado
operations into our Texas facility and to close our Colorado facility,
which operated at a loss in 1999. We are currently serving a majority
of the customers who were serviced by our Colorado facility out of our
Texas facility, and based on our detailed customer-by-customer
analysis, we believe that we will retain customers and accounts
representing approximately 75% of our Colorado facility's net sales.
The capacity of the Texas facility would have been sufficient to
service this portion of the revenue stream in 1999. If we had serviced
this revenue stream in our Texas facility with our Texas facility's
cost structure:
. our Colorado net sales would have decreased from $30.2 to $22.7;
. the cost of goods sold related to those sales would have decreased from
$30.8 (the actual cost of goods sold of our Colorado facility) to $19.1
(the product of $22.7 and the cost of goods sold ratio achieved in our
Texas facility);
. the operating expenses associated with those sales would have decreased
from $3.7 to $2.3 (the product of $22.7 and the operating expense ratio
achieved in our Texas facility); and
. depreciation and amortization (which are included in operating expenses
and cost of goods sold) would have decreased by $0.7.
As a result, 1999 operating income and EBITDA associated with those sales
would have increased by $5.6 and $4.9, respectively. The $4.9 increase is
not reflected in the above table. There can be no assurance that our
actual results would have been, or that our future results will be,
consistent with the foregoing assumptions.
(e) Because of the subjectivity inherent in the assumptions concerning the
timing and nature of the uses of cash generated by the pro forma interest
and other expenses, cash flows from operating, investing and financing
activities are not presented for the pro forma periods.
7
<PAGE>
RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks described below and the other information in this prospectus before
deciding to invest in shares of our common stock. If any of the following risks
or uncertainties actually occur, our business, financial condition and
operating results would likely suffer. In that event, the market price of our
common stock could decline, and you could lose all or part of the money you
paid to buy our common stock.
A downturn in the communications or networking equipment industries would
likely negatively impact our revenues.
A majority of our customers are in the communications and networking
equipment industries, which are characterized by intense competition,
relatively short product life-cycles and significant fluctuations in product
demand. In addition, these industries are generally subject to rapid
technological change and product obsolescence. Furthermore, these industries
are subject to economic cycles and have in the past experienced, and are likely
in the future to experience, recessionary periods. A recession or any other
event leading to excess capacity or a downturn in the communications or
networking equipment industries would likely negatively impact our revenues.
If we are unable to respond to rapidly changing technology and process
development, we may not be able to compete effectively.
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 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 we 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. There can be no assurance 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.
Because we sell on a purchase-order basis, we may experience variability in our
operating results, which could negatively impact the price of our common stock.
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
our 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
our 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 our future performance. Because a significant portion of
our operating expenses are fixed, even a small revenue shortfall can have a
disproportionate effect on our operating results. It is possible that, in
future periods, our results may be below the expectations of public market
analysts and investors. This could cause the market price of our common stock
to decline.
8
<PAGE>
Because we provide materials for our quick-turn services, inaccuracies in
forecasting our supply needs could negatively impact our results of operations.
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 our gross
profit margins. We forecast our 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.
Our substantial indebtedness could adversely affect our financial health and
the restrictions imposed by the terms of our debt instruments may severely
limit our ability to plan for or respond to changes in our business.
We are highly leveraged. As of December 31, 1999, on a pro forma basis
giving effect to the use of proceeds from this offering to repay some of our
debt and the assumption of debt in our acquisition of MCM Electronics, our
total debt would have been $390.0 million, our ratio of total debt to total
capitalization would have been 1.02 to 1 and we would have had approximately
$40.5 million available under the Dynamic Details senior credit facility for
future borrowings subject to covenant compliance. In addition, subject to the
restrictions under our various debt agreements, 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.
There can be no assurance that our leverage and such restrictions will not
materially and adversely affect our ability to finance our future operations or
capital needs or to engage in other business activities.
We have experienced recent significant growth in a short period of time and may
have trouble integrating acquired businesses and managing our expansion.
Since December 1997, we have consummated a merger and an acquisition. We
have a limited history of owning and operating our businesses on a consolidated
basis. There can be no assurance that we will be able to meet performance
expectations or successfully integrate our acquired businesses on a timely
basis without disrupting the quality and reliability of service to our
customers or diverting management resources. We expect to complete our
acquisition of MCM Electronics on or after the completion of this offering. See
"Prospectus Summary--Recent Developments." Our rapid growth has placed and may
continue to place a significant strain on management, our financial resources
and our information, operating and financial systems. If we are unable to
manage this growth effectively, our rate of growth and our revenues may be
adversely affected.
9
<PAGE>
If we fail to execute our acquisition strategy effectively, our revenue growth
may be adversely affected and our common stock price may decline.
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. We expect to complete our
acquisition of MCM Electronics on or after the completion of this offering. See
"Prospectus Summary--Recent Developments." 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, our existing credit facilities
restrict our ability to acquire the assets or business of other companies. The
attention of our management may be diverted, and our operations may be
otherwise disrupted. Our failure effectively to execute our acquisition
strategy may cause the growth of our revenues to suffer and the price of our
common stock to decline.
We expect to use the net proceeds of this offering to repay indebtedness and,
as a result, we may be unable to finance changes required by unexpected
economic or business conditions or to finance acquisitions.
We expect to use most of the net proceeds of this offering to repay a
portion of our existing indebtedness and investor loans assumed in connection
with our acquisition of MCM Electronics. See "Use of Proceeds" and "Prospectus
Summary--Recent Developments." We expect that our principal sources of funds
during 2000 will be cash generated from operating activities and borrowings
under the senior credit facility of our operating subsidiary, Dynamic Details,
Incorporated. We can give no assurance, however, that these funds will be
sufficient if changes in economic conditions or our industry occur that are
beyond our control. We would require additional equity or debt financing to
finance acquisitions. The Dynamic Details senior credit facility contains
restrictions on our ability to borrow additional funds. See "Description of
Indebtedness--Dynamic Details Senior Credit Facility." There can be no
assurance that additional financing will be available when required or, if
available, will be on terms satisfactory to us. In addition, we may be required
to use proceeds from debt and equity financings to repay a portion of our debt.
If we are unable to protect our unpatented proprietary techniques, we may be
unable to compete effectively.
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 our competitors. Intellectual property litigation could result in
substantial costs and diversion of 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. There is no assurance that a
license would be available on reasonable terms or at all.
Because we depend on a core group of significant customers, our results of
operations may be negatively impacted if key customers discontinue the use of
our services.
Although we have a large number of customers, net sales to our largest
customer accounted for approximately 8% of our net sales in 1999. Net sales to
our ten largest customers accounted for approximately 40% of our net sales
during the same period. We may depend upon a core group of customers for a
material percentage of our net sales in the future. Substantially all of our
sales are made on the basis of purchase orders rather than long-term
agreements. There can be no assurance that significant customers will order
services from us in the future or that they will not reduce or delay the amount
of services ordered from us. Any reduction or delay in orders could negatively
impact our revenues. In addition, we generate significant accounts receivable
in connection with providing services to our customers. If one or more of our
significant customers were to become insolvent or otherwise were unable to pay
for the services provided by us, our results of operations would be adversely
affected.
10
<PAGE>
Our business will suffer if either of our two senior executives discontinues
his employment with us or if we are unable to recruit and retain highly skilled
engineering and sales staff.
We depend on the services of our senior executives, including Charles D.
Dimick, our Chairman, and Bruce D. McMaster, our President and Chief Executive
Officer. Although we have entered into employment agreements with these and
other executive officers, there can be no assurance that we will be able to
retain our executive officers and key personnel or attract additional qualified
management in the future. Mr. Dimick's and Mr. McMaster's employment agreements
expire in July 2001 and October 2000, respectively. 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. 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.
Our international expansion may be more costly or difficult than we expect.
We are expanding into new foreign markets. We expect to complete our
acquisition of MCM Electronics, a United Kingdom company, on or after the
completion of this offering. See "Prospectus Summary--Recent Developments."
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 will be unable to utilize net operating
losses incurred by our foreign operations to reduce our U.S. income taxes.
Therefore, as we expand internationally, we may not experience the operating
margins we expect, and our revenues may be negatively impacted and our common
stock price may decline.
The Resource Conservation and Recovery Act, the Comprehensive Environmental
Response, Compensation and Liability Act and other environmental laws create
potential financial liability because we use hazardous materials and generate
hazardous wastes in our manufacturing processes. If any site at which our
wastes are disposed becomes contaminated, we could be held liable for damages
and clean-up costs. If we fail to comply with federal, state and foreign
environmental laws, we can be assessed fines and be subject to revocation of
permits necessary to our manufacturing processes.
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 our revenues and potentially causing
our common stock price to decline.
Our current principal stockholders will continue to have significant influence
over our business after this offering, and could delay, deter or prevent a
change of control or other business combination.
Upon completion of this offering and the MCM Electronics acquisition,
investment funds affiliated with Bain Capital, Inc., Celerity Partners, L.L.C.
and The Chase Manhattan Bank will together hold approximately
11
<PAGE>
38.0% of our outstanding common stock on a fully diluted basis. In addition,
six of the nine directors who will serve on our board following this offering
will be representatives of affiliates of the Bain Capital funds, Celerity
Partners, L.L.C. and affiliates of The Chase Manhattan Bank. 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.
Provisions in our charter documents and state law may make it harder for others
to obtain control of us even though some stockholders might consider such a
change of control to be favorable.
Provisions in our charter and bylaws may have the effect of delaying or
preventing a change of control or changes in our management that stockholders
consider favorable or beneficial. If a change of control or change in
management is delayed or prevented, the market price of our common stock could
suffer. See "Description of Capital Stock."
Shares eligible for public sale after this offering could adversely affect our
stock price.
We, our officers and directors, and the holders of substantially all of the
shares of our common stock have agreed not to sell shares of our common stock
until 180 days following the date of this prospectus without the consent of
Credit Suisse First Boston Corporation. Upon expiration of these 180-day lock-
up agreements and subject to the volume limitations imposed by Rule 144 of the
Securities Act, 24,705,106 shares will be available for resale in the public
market. See "Shares Eligible for Future Sale." The market price of our common
stock could decline as a result of these sales or the perception that these
sales could occur.
The initial public offering price is significantly higher than the book value
of our common stock and you will experience immediate and substantial dilution
in the value of your investment.
The initial public offering price per share will significantly exceed the net
tangible book value per share. Accordingly, investors purchasing shares in this
offering will suffer immediate and substantial dilution of their investment.
See "Dilution."
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
We make forward-looking statements throughout this prospectus. In some cases
you can identify these statements by forward-looking words such as
"anticipate," "believe," "could," "estimate," "expect," "intend," "may,"
"should," "will," and "would" or similar words. You should read statements that
contain these words carefully because they discuss our future expectations,
contain projections of our future results of operations or of our financial
position or state other "forward-looking" information. We believe that it is
important to communicate our future expectations to our investors. However,
there may be events in the future that we are not able to accurately predict or
control. The factors listed above in the section caption "Risk Factors," as
well as any cautionary language in this prospectus, provide examples of risks,
uncertainties and events that may cause our actual result to differ materially
from the expectations we describe in our forward-looking statements. Before you
invest in our common stock, you should be aware that the occurrence of the
events described in these risk factors and elsewhere in this prospectus and in
the documents that we incorporate by reference in this prospectus could have an
adverse effect on our business, results of operations and financial position.
You should read this prospectus completely and with the understanding that
our actual future results may be materially different from what we expect. We
may not update these forward-looking statements after the date of this
prospectus, even though our situation will change in the future. All forward-
looking statements attributable to us are expressly qualified by these
cautionary statements.
12
<PAGE>
USE OF PROCEEDS
We estimate that our net proceeds from the sale of 12,000,000 shares of
common stock in this offering will be approximately $153.8 million. We intend
to use:
. approximately $24.7 million of the net proceeds to redeem a portion of
the senior discount notes issued by our subsidiary, DDi Intermediate
Holdings Corp., or to redeem a portion of the senior discount notes
issued by our subsidiary, DDi Capital Corp., and to pay associated
redemption premiums and accrued and unpaid interest thereon, and/or to
repurchase some of the DDi capital senior discount notes on the open
market;
. approximately $100.0 million of the net proceeds to reduce the
indebtedness of our subsidiary, Dynamic Details, Incorporated, under its
senior credit facility;
. approximately $23.9 million of the net proceeds to repay the MCM
Electronics investor loans, including accrued interest assumed in
connection with our acquisition of MCM Electronics. See "Prospectus
Summary--Recent Developments;" and
. approximately $5.2 million of the net proceeds to pay cash
consideration, including fees and expenses, in connection with our
acquisition of MCM Electronics.
The amounts stated above are based on expected outstanding accreted values
of these obligations as of April 14, 2000 for the DDi Intermediate senior
discount notes, the Dynamic Details senior credit facility and the MCM
Electronics investor loans and as of May 14, 2000 for the DDi Capital senior
discount notes. The distribution of the net proceeds from this offering will
change to reflect increases in accreted values of these obligations depending
on the date on which this offering closes.
We own 100% of the capital stock of DDi Intermediate Holdings Corp., which
in turn owns 100% of the capital stock of DDi Capital Corp., which in turn owns
100% of the capital stock of Dynamic Details, Incorporated, our primary
operating subsidiary.
Our DDi Intermediate senior discount notes mature on June 30, 2008, and bear
interest at the rate of 13.5% per annum. As of December 31, 1999, the
outstanding accreted value of these senior discount notes was approximately
$40.8 million. Under the terms of the indenture relating to the senior discount
notes, we may use the net proceeds from this offering to redeem all of the DDi
Intermediate senior discount notes outstanding at a price that would provide
the noteholders with a 20% per annum return on the price at which the notes
were issued, plus accrued and unpaid interest thereon. Approximately 50% of the
DDi Intermediate senior discount notes are held by investment funds advised by
Sankaty Advisors, Inc., an affiliate of Bain Capital. See "Related Party
Transactions."
Our DDi Capital senior discount notes mature on November 15, 2007, and bear
interest at the rate of 12.5% per annum. As of December 31, 1999, the accreted
value on these senior discount notes was approximately $77.7 million. Under the
terms of the indenture relating to the senior discount notes, we may use the
net proceeds from this offering to redeem up to 40% of the aggregate principal
amount of the senior discount notes outstanding at a price equal to 112.5% of
the accreted value thereof plus accrued and unpaid interest thereon. See
"Description of Indebtedness--DDi Capital Senior Discount Notes."
The Dynamic Details senior credit facility consists of multi-tranche term
loans and a revolving credit facility with a final maturity date in April 2005
and an aggregate principal balance of $251.7 million as of December 31, 1999.
The loans under this facility bear interest at varying rates based, at our
option, on either LIBOR plus 225 to 250 basis points or the bank rate plus 125
to 150 basis points. The overall effective interest rate for the term loans at
December 31, 1999 was 8.90%. See "Description of Indebtedness--Dynamic Details
Senior Credit Facility."
The MCM Electronics investor loans mature on June 30, 2001. During the year
ending June 30, 2000, interest accrues on the outstanding principal at 6.5% per
annum. The loans must be repaid upon a change of control of MCM Electronics.
Pending these uses, we will invest the net proceeds in short-term, interest-
bearing, investment-grade securities.
13
<PAGE>
THE RECLASSIFICATION
We currently have two classes of common stock, designated as Class A common
stock and Class L common stock. Each share of Class L common stock is entitled
to a preferential payment upon any distribution by us to holders of our capital
stock (whether by dividend, liquidating distribution or otherwise) equal to the
original cost of such share ($364.0909) plus an amount which accrues from the
date such share was issued on a daily basis at a rate of 12.0% per annum,
compounded quarterly. After payment of this preference amount, each share of
Class A common stock and Class L common stock shares equally in all
distributions by us to holders of our capital stock.
As of April 14, 2000, the expected closing date of this offering, the
preference amount will be $487.12 per share of Class L common stock issued at
the time of our recapitalization in October 1997. Immediately prior to the
completion of this offering, we will reincorporate in Delaware. At the time of
the reincorporation, each of the outstanding shares of Class A common stock
will be converted into 2.8076 shares of common stock. Each of the outstanding
shares of Class L common stock will be converted into a number of shares of
common stock equal to 2.8076 multiplied by the number of shares of Class A
common stock into which the share of Class L common stock is convertible, based
on its preference amount.
The foregoing is referred to in this prospectus as the "reclassification."
None of these newly converted shares will be sold at the time of the offering.
As of April 14, 2000, the shares of Class A common stock and Class L common
stock outstanding on December 31, 1999 will be reclassified into 24,750,000
shares of common stock outstanding immediately after the reclassification but
prior to this offering. The actual number of shares of common stock that will
be issued as a result of the reclassification is subject to change based on the
actual offering price and the fact that fractional shares otherwise issuable as
a result of the reclassification will be redeemed for cash. See "Description of
Capital Stock."
DIVIDEND POLICY
We have not declared or paid a cash dividend on our common stock since
January 1996, and we do not anticipate paying any cash dividends during at
least the next five years. Our existing credit facilities restrict our ability
to pay dividends. We presently intend to retain earnings to finance future
operations and expansion and to reduce indebtedness. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
14
<PAGE>
CAPITALIZATION
The following table sets forth our cash and cash equivalents and our
capitalization as of December 31, 1999 on an actual basis, on a pro forma basis
to reflect:
. the cashless exercise of outstanding warrants held by Chase Manhattan
Capital, LLC and Chase Securities Inc., which will occur automatically
as a result of this offering;
. the reclassification as if it had occurred on December 31, 1999
(assuming that this offering is closed on April 14, 2000 and that the
initial public offering price per share is $14.00); and
. the application of the estimated net proceeds from this offering to
repay some of our existing debt as described in "Use of Proceeds,"
assuming that we apply $24.7 million to redeem DDi Capital senior
discount notes and assuming December 31, 1999 debt balances and an
initial public offering price of $14.00 per share;
and on a pro forma, combined basis to reflect our acquisition of MCM
Electronics, as described in "Prospectus Summary--Recent Developments" and
"Unaudited Pro Forma Consolidated Financial Data."
You should read this information together with our consolidated financial
statements and the related notes to those statements included in this
prospectus and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
December 31, 1999
---------------------------------------
Pro Forma
Actual Pro Forma Combined
----------- ----------- -----------
(in millions, except share data)
<S> <C> <C> <C>
Cash and cash equivalents.............. $ 0.6 $ 29.3 $ 7.2
=========== =========== ==========
Current maturities of long-term
obligations........................... $ 7.0 $ 10.8 $ 12.2
Long-term obligations, net of current
maturities:
Dynamic Details senior credit
facility............................ 245.8 145.8 145.8
Dynamic Details senior subordinated
notes............................... 100.0 100.0 100.0
DDi Capital senior discount notes.... 77.7 55.4 55.4
DDi Intermediate senior discount
notes............................... 40.8 40.8 40.8
MCM Electronics senior credit
facility............................ -- -- 29.8
Other long-term obligations.......... 5.4 5.4 6.0
----------- ----------- ----------
Total long-term obligations, net of
current maturities................ 469.7 347.4 377.8
Stockholders' (deficit) equity:
Preferred Stock, $0.01 par value,
5,000,000 shares authorized; no
shares issued on an actual, pro
forma or pro forma combined basis... -- -- --
Common stock, $0.01 par value, no
shares authorized or issued on an
actual basis; 75,000,000 shares
authorized and 36,750,000 shares
issued and outstanding on a
pro forma basis; 75,000,000 shares
authorized and 38,957,143 shares
issued and outstanding on a pro
forma combined basis................ -- 0.4 0.4
Class L common stock, no par value,
475,000 shares authorized; 396,330.2
shares issued and outstanding on an
actual basis, and no shares
authorized, issued and outstanding
on a pro forma or a pro forma
combined basis...................... 147.2 -- --
Class A common stock, no par value,
5,175,000 shares authorized;
3,522,183.0 shares issued and
outstanding on an actual basis and
no shares authorized, issued and
outstanding on a pro forma or a pro
forma combined basis................ 15.7 -- --
Additional paid-in capital........... -- 316.3 347.2
Stockholder receivables.............. (0.6) (0.6) (0.6)
Accumulated deficit.................. (349.4) (353.6) (353.6)
----------- ----------- ----------
Total stockholders'(deficit) equity ... (187.1) (37.5) (6.6)
----------- ----------- ----------
Total capitalization................... $ 289.6 $ 320.7 $ 383.4
=========== =========== ==========
</TABLE>
15
<PAGE>
DILUTION
Dilution in net tangible book value per share represents the difference
between the amount per share paid by purchasers of common stock in this
offering and the net tangible book value per share of common stock immediately
after the offering.
As of December 31, 1999, our pro forma net tangible book value was
approximately $(406.4) million, or $(16.42) per share of common stock assuming
the reclassification. Pro forma net tangible book value per share is determined
by dividing the amount of our total tangible assets less total liabilities by
the pro forma number of shares of common stock outstanding upon completion of
the reclassification.
After giving effect to the sale of shares of our common stock in this
offering and our acquisition of MCM Electronics, our pro forma net tangible
book value as of December 31, 1999 would have been approximately $(291.8)
million, or $(7.49) per share. This represents an immediate increase in pro
forma net tangible book value of $8.93 per share to our existing stockholders
and an immediate dilution in pro forma net tangible book value of $21.49 per
share to public investors purchasing shares at the initial public offering
price and to MCM Electronics investors issued shares in connection with the
acquisition. If the initial public offering price is higher or lower, the
dilution to the public and MCM Electronics investors will be greater or less,
respectively.
The following table illustrates the dilution in pro forma net tangible book
value per share to new investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share........... $14.00
Pro forma net tangible book value per share at December
31, 1999 ................................................ (16.42)
Increase per share attributable to public and MCM
Electronics investors.................................... 8.93
-------
Pro forma net tangible book value per share after this
offering and our acquisition of MCM Electronics.......... (7.49)
------
Dilution of net tangible book value per share to public
and MCM Electronics investors............................ $21.49
======
</TABLE>
The table below assumes an initial public offering price of $14.00 per share
before deducting underwriting discounts and commissions and estimated offering
expenses payable by us and summarizes, as of December 31, 1999 on a pro forma
basis, the differences among:
Shares Purchased
. the number of shares of common stock purchased from us by our
existing stockholders since our inception, as described under "The
Reclassification;"
. the number of shares of common stock purchased by public investors in
this offering; and
. the number of shares of common stock issued to MCM Electronics
shareholders, assuming consummation of the MCM Electronics
acquisition on December 31, 1999, the date of its most recent balance
sheet, which number will increase or decrease depending on the date
that the MCM acquisition is consummated (see "Unaudited Pro Forma
Consolidated Financial Data")
Total Consideration
. the aggregate cash consideration paid by existing stockholders;
. the aggregate cash consideration paid by public investors; and
. the aggregate cash value ascribed to the shares issued to MCM
Electronics investors
Average Price Per Share
. the average purchase price per share paid by the existing
stockholders;
. the average purchase price per share paid by the public investors;
and
. the average purchase price per share ascribed to the shares issued to
MCM Electronics investors.
16
<PAGE>
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ -------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 24,750,000 60% $162,900,000 45% $6.58
Public investors........ 12,000,000 35% 168,000,000 46% 14.00
MCM Electronics
investors.............. 2,207,143 5% 30,900,000 9% 14.00
---------- --- ------------ ---
Total................. 38,957,143 100% $361,800,000 100%
========== === ============ ===
</TABLE>
The above discussion and tables assume the exercise of outstanding warrants
held by Chase Manhattan Capital, LLC and Chase Securities Inc. (which will
occur automatically as a result of this offering) but no exercise of any stock
options or other warrants outstanding as of December 31, 1999. As of December
31, 1999, after giving effect to the offering there were options and other
warrants outstanding to purchase a total of approximately 2,300,000 shares of
common stock with a weighted average exercise price of $10.97 per share and
options to purchase a total of approximately 1,400,000 shares of common stock
which will be granted on the date of this prospectus with an exercise price
equal to the initial public offering price. Options and warrants to purchase
1,654,037 shares were exercisable on December 31, 1999. If all of the
exercisable in-the-money options and other warrants were exercised, the effect
to public and MCM investors would be anti-dilutive. See "Capitalization" and
"Management."
17
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The unaudited pro forma consolidated statements of operations for the year
ended December 31, 1999 give effect to each of the following, as if each had
occurred on January 1, 1999:
. the reclassification, as described under "The Reclassification;"
. the consummation of the offering and the application of the net
proceeds, as described under "Use of Proceeds assuming that $24.7
million is applied to redeem DDi Capital senior discount notes;" and
. in the pro forma combined column, our acquisition of MCM Electronics, as
described under "Prospectus Summary--Recent Developments."
The unaudited pro forma consolidated balance sheet as of December 31, 1999
gives pro forma effect to the following, as if each event had occurred as of
December 31, 1999:
. the reclassification, as described under "The Reclassification;"
. the consummation of the offering and the application of the net
proceeds, as described under "Use of Proceeds assuming that $24.7
million is applied to redeem DDi Capital senior discount notes;" and
. in the pro forma combined column, our acquisition of MCM Electronics, as
described under "Prospectus Summary--Recent Developments."
The unaudited pro forma financial data are provided for informational
purposes only and are not necessarily indicative of the results of operations
or financial position had the transactions assumed therein occurred, nor are
they necessarily indicative of the results of operations which may be expected
to occur in the future. Furthermore, the unaudited pro forma financial data are
based upon assumptions that we believe are reasonable and should be read in
conjunction with the consolidated financial statements and the accompanying
notes thereto included elsewhere in this prospectus.
The unaudited pro forma statements of operations do not reflect
extraordinary losses on the early extinguishment of debt resulting from the
write-off of debt issuance costs and the incurrence of a prepayment penalty in
connection with the prepayment of debt upon completion of the offering
estimated at $2.5 million and $2.8 million, respectively. The unaudited pro
forma consolidated balance sheet, however, does reflect such charges and the
related tax benefit of $1.0 million and $1.1 million, respectively.
The unaudited pro forma consolidated statements of operations do not reflect
a loss of $3.8 million resulting from the final payment of the Bain management
fee associated with the termination of the management agreement and the bank
amendment fee due upon completion of the offering. The unaudited pro forma
consolidated balance sheet, however, does reflect this loss and the related tax
asset of $1.5 million.
The unaudited pro forma consolidated statements of operations do not reflect
an extraordinary gain resulting from the recognition of deferred swap income
estimated at $2.1 million resulting from the partial repayment of the Dynamic
Details senior credit facility upon completion of the offering. The unaudited
pro forma consolidated balance sheet, however, reflects the gain and the
related tax liability of $0.8 million.
As discussed further in note (h) to the unaudited pro forma balance sheet,
we entered into an agreement to acquire MCM Electronics Limited. The financial
statements of MCM Electronics presented elsewhere in this prospectus are
prepared in accordance with generally accepted accounting principles in the
United Kingdom ("U.K. GAAP") and are presented in British pounds. MCM
Electronics' fiscal year ends on March 31. In July 1999, the management of
Symonds Limited formed MCM Electronics and completed a management-led buyout of
Symonds. As a result, MCM Electronics is the successor company to Symonds. The
following pro forma consolidated financial data for MCM Electronics has been
prepared after:
. converting U.K. GAAP to generally accepted accounting principles in the
United States (U.S. GAAP);
. converting British pounds to U.S. dollars; and
. making other adjustments explained in the notes to the pro forma
consolidated financial data.
The unaudited pro forma consolidated statement of operations does not
reflect the extraordinary loss on the early extinguishment of debt resulting
from the write-off of MCM Electronics debt issuance costs estimated at $1.3
million. The unaudited pro forma consolidated balance sheet, however, does
reflect this charge and the related tax benefit of $0.4 million.
18
<PAGE>
DDi CORP.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
December 31, 1999
(dollars in millions)
<TABLE>
<CAPTION>
MCM
DDi Offering DDi Electronics Acquisition Pro Forma
Historical Adjustments Pro Forma Historical (g) Combined Adjustments Combined
---------- ----------- --------- -------------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Current assets:
Cash and cash
equivalents........... $ 0.6 $ 168.0 (a) $ 29.3 $ 6.6 $ 35.9 $ (5.1)(a)(h) $ 7.2
(14.2)(a) (23.6)(a)(h)
(122.3)(a)
(2.8)(b)
Accounts receivable,
net................... 42.8 -- 42.8 12.7 55.5 -- 55.5
Inventories............ 20.2 -- 20.2 6.1 26.3 -- 26.3
Prepaid expenses and
other................. 2.5 -- 2.5 2.0 4.5 -- 4.5
Deferred tax asset..... 5.2 1.1 (b) 8.0 -- 8.0 0.4 (i) 8.4
1.0 (c) --
(0.8)(d) --
1.5 (e)
------- ------- ------ ----- ------ ------ ------
Total current assets... 71.3 31.5 102.8 27.4 130.2 (28.3) 101.9
Property, plant and
equipment, net......... 63.2 -- 63.2 12.7 75.9 -- 75.9
Debt issue costs, net... 13.8 (2.5)(c) 11.3 2.4 13.7 (1.3)(i) 12.4
Goodwill and other
intangible, net........ 205.5 -- 205.5 32.0 237.5 67.3 (h) 272.8
-- (32.0)(h)
Other................... 0.5 -- 0.5 -- 0.5 -- 0.5
------- ------- ------ ----- ------ ------ ------
Total assets........... $ 354.3 $ 29.0 $383.3 $74.5 $457.8 $ 5.7 $463.5
======= ======= ====== ===== ====== ====== ======
Liabilities and
stockholders' (deficit)
equity:
Current liabilities:
Current maturities of
long-term debt and
capital lease
obligations........... $ 7.0 $ 3.8 (e) $ 10.8 $ 1.4 $ 12.2 $ -- $ 12.2
Current portion of
deferred interest rate
swap income........... 1.5 -- 1.5 -- 1.5 -- 1.5
Current maturities of
deferred notes
payable............... 2.5 -- 2.5 -- 2.5 -- 2.5
Accounts payable....... 18.1 -- 18.1 10.1 28.2 -- 28.2
Accrued expenses....... 22.3 -- 22.3 4.6 26.9 (0.7)(a)(h) 26.2
Income tax payable..... 0.9 -- 0.9 2.9 3.8 -- 3.8
------- ------- ------ ----- ------ ------ ------
Total current
liabilities........... 52.3 3.8 56.1 19.0 75.1 (0.7) 74.4
Long-term debt and
capital lease
obligations............ 469.7 (122.3)(a) 347.4 53.3 400.7 (22.9)(a)(h) 377.8
Deferred interest rate
swap income............ 3.9 (2.1)(d) 1.8 -- 1.8 -- 1.8
Deferred notes payable.. 1.4 -- 1.4 -- 1.4 -- 1.4
Deferred tax liability.. 13.4 -- 13.4 0.6 14.0 -- 14.0
Other................... 0.7 -- 0.7 -- 0.7 -- 0.7
------- ------- ------ ----- ------ ------ ------
Total liabilities...... $ 541.4 $(120.6) $420.8 $72.9 $493.7 $(23.6) $470.1
------- ------- ------ ----- ------ ------ ------
Stockholders' (deficit)
equity:
Class L common stock... 147.2 (147.2)(f) -- -- -- -- --
Class A common stock... 15.7 (15.7)(f) -- -- -- -- --
Common stock........... -- 0.4 (f) 0.4 -- 0.4 -- 0.4
Additional paid-in-
capital............... -- 153.8 (a) 316.3 2.0 318.3 30.9 (h) 347.2
147.2 (f) (2.0)(j)
15.7 (f) --
(0.4)(f) --
Stockholder
receivables........... (0.6) -- (0.6) -- (0.6) -- (0.6)
Accumulated deficit.... (349.4) (1.7)(b) (353.6) (0.4) (354.0) 1.3 (j) (353.6)
(1.5)(c) (0.9)(i)
1.3 (d) --
(2.3)(e)
------- ------- ------ ----- ------ ------ ------
Total stockholders'
(deficit) equity...... (187.1) 149.6 (37.5) 1.6 (35.9) 29.3 (6.6)
------- ------- ------ ----- ------ ------ ------
$ 354.3 $ 29.0 $383.3 $74.5 $457.8 $ 5.7 $463.5
======= ======= ====== ===== ====== ====== ======
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Balance Sheet.
19
<PAGE>
DDi CORP.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(dollars and pounds in millions, except share data)
(a) Reflects our sale of 12,000,000 shares of common stock generating gross
proceeds of $168.0 and the use of the estimated net proceeds of $153.8,
net of the estimated underwriting discount and the offering expenses
totaling $14.2, to repay:
. a portion of the DDi Capital senior discount notes;
. a portion of the Tranches A and B term facilities outstanding under the
Dynamic Details senior credit facility;
. prepayment premium of $2.8 related to the DDi Capital senior discount
notes;
. the MCM Electronics investor loans of $23.6 including accrued interest
of $0.7; and
to pay the cash consideration of $5.1, including fees and expenses, payable
in connection with the MCM Electronics acquisition. See "Use of Proceeds"
and "Description of Indebtedness."
In the event that we apply $24.7 to redeem a portion of the DDi
Intermediate senior discount notes instead of a portion of the DDi Capital
senior discount notes, the prepayment penalty would decrease to $1.9,
before $0.7 of related income tax benefit (at a 40% effective rate). The
resulting gross repayment of debt would be $123.2.
(b) Reflects the prepayment premium of $2.8, before $1.1 of related income
tax benefit (at a 40% effective tax rate), on the DDi Capital senior
discount notes resulting from the partial repayment of the debt in
connection with the offering. Amounts will differ based on the closing
date of the offering.
(c) Represents the write-off of $2.5 in capitalized debt issuance costs,
before $1.0 of related income tax benefit (at a 40% effective tax rate),
resulting in an extraordinary loss of $1.5 in connection with the paydown
of outstanding debt in connection with the offering. Amounts will differ
based on the closing date of the offering.
(d) Reflects the recognition of $2.1 in deferred swap income, before $0.8 of
related income tax (at a 40% effective tax rate), resulting in an
extraordinary gain of $1.3 in connection with the paydown of the Dynamic
Details senior credit facility in connection with the offering. Amounts
will differ based on the closing date of the offering.
(e) Represents an increase in debt necessary to make the final payment of the
Bain management fee associated with the termination of the management
agreement and the bank amendment fee totalling $3.8 before $1.5 of
related income tax benefit (at a 40% effective tax rate).
(f) Adjusted to give effect to the reclassification.
(g) Historical MCM Electronics, formerly Symonds Limited, financial data
included in the accompanying pro forma consolidated balance sheet has
been adjusted to reflect the conversion from U.K. GAAP to U.S. GAAP and
the conversion to U.S. Dollars at an exchange rate on December 31, 1999
of $1.6117 to (Pounds)1.00.
The following table reconciles MCM Electronics' assets, liabilities and
stockholders' equity, stated in accordance with U.K. GAAP, to U.S. GAAP as
of December 31, 1999:
<TABLE>
<CAPTION>
Stockholders'
Assets Liabilities Equity
------------ ------------ -------------
<S> <C> <C> <C>
As reported in accordance with U.K.
GAAP (in (Pounds))................. (Pounds)44.9 (Pounds)43.6 (Pounds)1.3
U.S. GAAP adjustments:
Debt issuance costs................. 1.5 1.2 .3
Goodwill............................ .3 -- .3
Valuation of interests in leveraged
buyout transactions................ (.5) -- (.5)
Sale leaseback...................... -- .4 (.4)
------------ ------------ -----------
As reported adjusted to U.S. GAAP
(in (Pounds))...................... (Pounds)46.2 (Pounds)45.2 (Pounds)1.0
Foreign currency exchange rate...... 1.6117 1.6117 1.6117
------------ ------------ -----------
As reported, adjusted to U.S. GAAP
and U.S. $......................... $ 74.5 $ 72.9 $ 1.6
============ ============ ===========
</TABLE>
20
<PAGE>
DDi CORP.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(dollars and pounds in millions, except share data)
(h) Under purchase accounting, the total purchase price will be allocated to
the acquired assets and liabilities of MCM Electronics based on their
relative fair values as of the closing date of the MCM Electronics
acquisition. We intend to undertake a study to determine the allocation of
the total purchase price to the various assets acquired, and the
liabilities assumed. Accordingly, the final allocations could be different
from the amounts reflected herein, and such differences may be
significant. The purchase price of $85.9 represents the total of the cash
consideration, the estimated value of our shares exchanged for the
remaining shares of MCM Electronics (2,207,143 shares at $14.00 per
share), the value of assumed and repaid liabilities (net of cash acquired)
and estimated fees and expenses. The amount and components of the
estimated purchase price along with the allocation of the estimated
purchase price to assets purchased and liabilities assumed as though the
MCM Electronics acquisition had occurred on December 31, 1999 are as
follows:
<TABLE>
<S> <C>
Purchase Price (1):
Cash consideration (2)........................................ $ 2.1
Estimated value of DDi equity issued (2)...................... 30.9
Assumption of MCM Electronics senior credit facility and
accrued interest, net of cash acquired of $6.6............... 24.3
Assumption of certain capitalized leases...................... 1.1
Assumption of other notes payable............................. 0.9
Repayment of investor loans and accrued interest.............. 23.6
Estimated fees and expenses................................... 3.0
------
$ 85.9
======
Allocation of Purchase Price:
MCM Electronics net assets at December 31, 1999 (net of cash
acquired).................................................... $ (5.9)
Elimination of historical goodwill at December 31, 1999....... (32.0)
Assumption of MCM Electronics debt, other notes payable and
capitalized leases........................................... 32.9
Redemption of investor loans and accrued interest............. 23.6
Estimated goodwill from the MCM Electronics acquisition....... 67.3
------
$ 85.9
======
</TABLE>
(1) The purchase price will be calculated based on an enterprise value for
MCM Electronics of (Pounds)52.8. The purchase price that we will pay
for all of the common stock of MCM Electronics will equal the
(Pounds)52.8 enterprise value, minus the sum of:
. amounts outstanding under MCM Electronics' senior credit
facility, plus accrued interest (net of cash);
. (Pounds)0.3 in respect of MCM Electronics' capitalized leases;
. MCM Electronics' other notes payable;
. MCM Electronics' investor loans including accrued interest; and
. (Pounds)1.7 in respect of MCM Electronics' transaction expenses.
21
<PAGE>
DDi CORP.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(dollars and pounds in millions, except share data)
The purchase price for the common stock of MCM Electronics will be
paid 6.7% in cash and 93.3% in newly-issued shares of our common
stock, which will be valued at $14.00 per share, the price at which
shares are being sold to the public in this offering.
If we had acquired MCM Electronics on December 31, 1999, the cash
portion of the purchase price for the common stock of MCM
Electronics would have been $2.1, the value of the shares of our
common stock issued to MCM Electronics stockholders would have been
$30.9, and the number of shares of our common stock issued to MCM
Electronics investors would have been 2,207,143 at $14.00 per
share.
(2) The purchase price was calculated based on the December 31, 1999
debt levels of MCM Electronics. If these debt levels were to
increase or decrease by $1.0 between December 31, 1999 and the
close of the acquisition, the actual amount of cash paid and the
value of our common stock issued to MCM Electronics shareholders
would increase or decrease by approximately $0.067 and $0.933
(66,643 shares), respectively.
The MCM Electronics acquisition is subject to an acquisition audit, which
could result in a purchase price adjustment. This adjustment, if any, could
increase or decrease the purchase price and will be recorded upon
completion of the audit.
(i) Represents the write-off of $1.3 of MCM Electronics capitalized debt
issuance costs, before $0.4 of related income tax benefit (at a 30%
effective tax rate), resulting in an extraordinary loss of $0.9 in
connection with the repayment of the MCM Electronics investor loans in
connection with the offering. Amounts will differ based on the closing
date of the offering.
(j) Reflects the elimination of MCM Electronics' historical stockholders'
equity balance in connection with purchase accounting.
22
<PAGE>
DDi CORP.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(dollars in millions, except share data)
<TABLE>
<CAPTION>
MCM Electronics
DDi DDi Twelve Months
Year Ended Pro Forma ended
December 31, Offering December 31, December 31, Acquisition Pro Forma
1999 Adjustments 1999 1999(a) Combined Adjustments Combined
------------ ----------- ------------ --------------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $292.5 $ -- $292.5 $58.2 $350.7 $-- $350.7
Cost of goods sold...... 202.4 -- 202.4 41.7 244.1 -- 244.1
------ ----- ------ ----- ------ ---- ------
Gross profit........... 90.1 90.1 16.5 106.6 106.6
Operating expenses:
Sales and marketing.... 23.6 (1.1)(b) 22.5 1.6 24.1 -- 24.1
General and
administrative........ 15.3 -- 15.3 7.8 23.1 -- 23.1
Amortization of
intangibles........... 22.3 -- 22.3 1.6 23.9 1.7 (e) 25.6
Restructuring and other
related charges....... 7.0 -- 7.0 7.1 14.1 -- 14.1
------ ----- ------ ----- ------ ---- ------
Income from continuing
operations............. 21.9 1.1 23.0 (1.6) 21.4 (1.7) 19.7
Interest expense (net).. 46.7 (10.6)(c) 36.1 4.2 40.3 (1.5)(f) 38.8
------ ----- ------ ----- ------ ---- ------
Income (loss) from
continuing operations
before provision for
income taxes and
extraordinary loss..... (24.8) 11.7 (13.1) (5.8) (18.9) (0.2) (19.1)
Income tax benefit
(expense).............. 7.4 (4.7)(d) 2.7 0.5 3.2 0.4 (g) 3.6
------ ----- ------ ----- ------ ---- ------
Net income (loss) from
continuing operations.. $(17.4) $ 7.0 $(10.4) $(5.3) $(15.7) $0.2 $(15.5)
====== ===== ====== ===== ====== ==== ======
Pro forma loss per share
of common and common
equivalent stock (basic
and diluted): $(0.40)
======
Pro forma weighted
average number of
shares of common and
common equivalent stock
outstanding (in
thousands) (basic and
diluted): 38,885
======
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Statement of Operations.
23
<PAGE>
DDi CORP.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(dollars and pounds in millions)
(a) Represents historical MCM Electronics financial data for the last twelve
months ended December 31, 1999 after the following:
. conversion from U.K. GAAP to U.S. GAAP;
. conversion to U.S. dollars utilizing an average monthly exchange rate of
$1.6179 to (Pounds)1.00;
. pro forma interest of $2.1 and related tax benefit of $0.5 recorded to
reflect MCM Electronics' management-led buyout of Symonds Limited as if
it had occurred on January 1, 1999; and
. pro forma elimination of $0.8 of seller advisory costs related to the
management-led buyout of Symonds Limited as if it had occurred on
January 1, 1999.
MCM Electronics (the successor) completed a management-led buyout on July 5,
1999 of Symonds Limited (the predecessor). Included in this twelve-month
period is the three-month period ended March 31, 1999 (which is the fourth
quarter of Symonds Limited audited financial statements for the year ended
March 31, 1999), the three-month period ended June 30, 1999 of the
predecessor (as a proxy for the period ended July 5, 1999), and the six-
month period ended December 31, 1999 of MCM Electronics (the successor).
The following table reconciles MCM Electronics net income (loss) in
accordance with U.K. GAAP to U.S. GAAP:
<TABLE>
<CAPTION>
Nine Months Three Months Six Months Twelve Months
Year Ended Ended Ended Ended Ended
March 31, December 31, June 30, December 31, December 31,
1999 1998 1999 1999 1999
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Net income (loss) in
accordance with U.K.
GAAP................... (Pounds)(4.3) (Pounds)1.8 (Pounds) 0.2 (Pounds)-- (Pounds)(5.9)
Discontinued operations:
Operating loss from
discontinued
operations............ 0.8 -- -- -- 0.8
Loss on disposal of a
business............... 2.4 -- -- -- 2.4
------------ ----------- ------------ ----------- ------------
Net income (loss) from
continuing operations
in accordance with U.K.
GAAP................... (1.1) 1.8 0.2 -- (2.7)
U.S. GAAP adjustments:
Amortization of
goodwill.............. (0.9) (0.8) (0.2) -- (0.3)
Provision for
termination of a
business.............. 0.6 -- (0.6) -- --
Interest expense....... -- -- -- 0.3 0.3
Tax expense............ (0.2) -- 0.2 (0.1) (0.1)
------------ ----------- ------------ ----------- ------------
Net income (loss) from
continuing operations
in accordance with U.S.
GAAP................... (Pounds)(1.6) (Pounds)1.0 (Pounds)(0.4) (Pounds)0.2 (Pounds)(2.8)
Pro forma interest
related to management
buyout (net of income
tax)................... (0.5) -- (0.5) -- (1.0)
Pro forma elimination of
seller advisory costs
related to the
management-led buyout.. -- -- 0.5 -- 0.5
------------ ----------- ------------ ----------- ------------
(Pounds)(2.1) (Pounds)1.0 (Pounds)(0.4) (Pounds)0.2 (Pounds)(3.3)
Foreign currency
exchange rate: 1.6179 1.6179 1.6179 1.6179 1.6179
------------ ----------- ------------ ----------- ------------
Net income (loss) from
continuing operations
in accordance with U.S.
GAAP................... $ (3.4) $ 1.6 $ (0.6) $ 0.3 $ (5.3)
============ =========== ============ =========== ============
</TABLE>
24
<PAGE>
DDi CORP.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(dollars in millions)
(b) Represents the elimination of management fees incurred in connection with
our management agreement with Bain Capital, which was terminated in
connection with the offering.
(c) Reflects the decrease in interest expense in connection with the use of
net proceeds from the offering to repay outstanding debt as follows:
<TABLE>
<CAPTION>
Year Ended
December 31, 1999
-----------------
<S> <C>
DDi historical interest expense.......................... $46.7
-----
Elimination of a portion of the historical interest on
the DDi Capital senior discount notes................... (2.6)
Elimination of historical interest on the Dynamic Details
senior credit facility.................................. (7.5)
Elimination of amortization of debt issuance costs....... (0.5)
-----
Net decrease in historical interest expense from the
offering................................................ (10.6)
-----
Pro forma interest expense after the offering............ $36.1
=====
</TABLE>
In the event that we apply $24.7 to redeem a portion of the DDi Intermediate
senior discount notes instead of a portion of the DDi Capital senior
discount notes, the net decrease in historical interest expense from the
offering would be $11.0, instead of the $10.6 presented above.
(d) Represents the income tax adjustment required to result in a pro forma
income tax provision based on our historical tax provision using
historical amounts and the direct tax effects of the pro forma
transactions described herein at an estimated 40% effective tax rate.
(e) Represents the amortization of the goodwill of $3.3 resulting from the
excess of the purchase price over the net book value of MCM Electronics,
less the amortization of goodwill of $1.6 originating from the MCM
Electronics management-led buyout, calculated as though the MCM
Electronics acquisition occurred on January 1, 1999. Goodwill is being
amortized over twenty years. Under purchase accounting, the total purchase
price will be allocated to the acquired assets and assumed liabilities of
MCM Electronics based on their relative fair values as of the closing date
of the MCM Electronics acquisition. Accordingly, the final allocations and
resulting increases in amortization expense will be different from the
amounts reflected herein and such differences may be significant.
(f) Reflects the decrease in interest expense in connection with the use of
offering proceeds to repay the MCM Electronics investor loans.
(g) Represents the income tax adjustment required to result in a pro forma
income tax provision based on MCM Electronics' historical tax provision
using historical amounts and the direct tax effects of the pro forma
transactions described herein at an estimated 30% effective tax rate as
adjusted to exclude the adjustments to goodwill resulting from the MCM
Electronics transactions, which amounts are not deductible for income tax
purposes.
25
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following selected consolidated financial data as of and for the dates
and periods indicated have been derived from our consolidated financial
statements. The selected consolidated statement of operations data for the
years ended December 31, 1995 and 1996 and the selected consolidated balance
sheet data as of December 31, 1995, 1996 and 1997 were derived from our audited
consolidated financial statements that are not included in this prospectus. The
selected historical consolidated statement of operations data for the years
ended December 31, 1997, 1998 and 1999 and the historical consolidated balance
sheet data as of December 31, 1998 and 1999 were derived from the historical
consolidated financial statements that were audited by PricewaterhouseCoopers
LLP, whose report appears elsewhere in this prospectus. You should read the
data set forth below in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and our consolidated
financial statements and the related notes thereto appearing elsewhere in this
prospectus.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- ----------
(in millions, except share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Net sales............... $ 59.4 $ 67.5 $ 78.8 $ 174.9 $ 292.5
Cost of goods sold...... 25.2 30.5 38.7 119.6 202.4
---------- ---------- ---------- ---------- ----------
Gross profit............ 34.2 37.0 40.1 55.3 90.1
Operating expenses:
Sales and marketing... 5.3 6.0 7.3 12.8 23.6
General and
administration....... 1.8 1.9 2.1 8.4 15.3
Amortization of
intangibles.......... -- -- -- 10.9 22.3
Restructuring and
related charges(a)... -- -- -- -- 7.0
Stock compensation and
related bonuses(b)... -- -- 31.3 -- --
Compensation to the
former CEO........... 0.4 1.1 2.1 -- --
Write-off of acquired
in-process research
and development(c)... -- -- -- 39.0 --
---------- ---------- ---------- ---------- ----------
Operating income
(loss)................. 26.7 28.0 (2.7) (15.8) 21.9
Interest expense, net... 0.3 9.4 25.2 37.4 46.7
---------- ---------- ---------- ---------- ----------
Income (loss) before
taxes and extraordinary
loss................... 26.4 18.6 (27.9) (53.2) (24.8)
Income tax benefit
(expense).............. (0.4) (6.2) 10.9 3.5 7.4
---------- ---------- ---------- ---------- ----------
Income (loss) before
extraordinary loss..... 26.0 12.4 (17.0) (49.7) (17.4)
Extraordinary loss...... -- -- (1.6) (2.4) --
---------- ---------- ---------- ---------- ----------
Net income (loss)....... $ 26.0 $ 12.4 $ (18.6) $ (52.1) $ (17.4)
========== ========== ========== ========== ==========
Net loss allocable to
shares of Class A
common stock........... -- -- $ (19.7) $ (58.4) $ (31.5)
Net loss per share of
Class A common stock
(basic and diluted).... -- -- $ (10.42) $ (21.55) $ (9.01)
Weighted average shares
outstanding (basic and
diluted)............... -- -- 1,887,591 2,709,440 3,501,582
Net income per common
share (basic)(d)....... $ 1,699 $ 1,254 -- -- --
Net income per common
share (diluted)(d)..... $ 1,699 $ 1,228 -- -- --
Weighted average shares
outstanding
(basic)(d)............. 15,300,000 9,854,000 -- -- --
Weighted average shares
outstanding
(diluted)(d)........... 15,300,000 10,059,000 -- -- --
Other Financial Data:
Depreciation............ $ 1.1 $ 2.0 $ 2.6 $ 9.2 $ 14.4
Amortization of deferred
financing costs........ -- 0.8 1.4 1.8 2.1
Capital expenditures.... 2.9 10.2 6.6 18.0 18.2
Supplemental Data:
Adjusted EBITDA(e)...... $ 28.2 $ 31.2 $ 33.3 $ 44.1 $ 66.7
Net cash from operating
activities............. 26.1 12.2 9.1 16.7 24.8
Net cash used in
investing activities... (2.9) (3.6) (44.9) (194.8) (18.6)
Net cash from (used in)
financing activities... (26.4) (8.9) 41.1 174.9 (7.7)
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1995 1996 1997 1998 1999
Consolidated Balance Sheet Data: ----- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents............ $ 0.5 $ 0.2 $ 5.4 $ 2.1 $ 0.6
Working capital...................... (2.3) (3.5) 23.6 15.3 19.1
Total assets......................... 13.1 27.5 108.9 365.0 354.3
Total debt, including current
maturities.......................... 2.0 94.1 273.5 466.9 476.7
Stockholders' equity (deficit)....... 2.5 (72.7) (191.2) (169.8) (187.1)
</TABLE>
- --------
(a) The 1999 restructuring and related charges represent the charge recorded
in December 1999 in connection with our announced consolidation of our
Colorado operations into our Texas facility and the closure of our
Colorado facility. The charge consists of $4.5 for severance and other
exit costs and $2.5 related to the impairment of net property, plant and
equipment.
(b) Represents the charge for stock compensation and related bonuses recorded
for vested stock options exchanged in conjunction with the
recapitalization.
(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 purchase price allocated
to in-process research and development.
(d) Given the changes in our capital structure in connection with our
recapitalization in 1997, historical earnings per share of common stock
for the years ended December 31, 1995 and 1996 are not comparable to
subsequent years.
(e) EBITDA means earnings before net interest expense, income taxes,
depreciation and amortization. Adjusted EBITDA is presented because we
believe 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.
The following table sets forth a reconciliation of EBITDA to adjusted
EBITDA for each period included herein:
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------------------
1995 1996 1997 1998 1999
----- ----- ----- ----- -----
(in millions)
<S> <C> <C> <C> <C> <C>
EBITDA....................................... $27.8 $30.1 $(0.1) $43.3 $58.6
Former CEO compensation(1) .................. 0.4 1.1 2.1 -- --
Management fee(2)............................ -- -- -- -- 1.1
Executive severance(3)....................... -- -- -- 0.8 --
Stock compensation and bonuses(4)............ -- -- 31.3 -- --
Restructuring and related charges(5)(6)...... -- -- -- -- 7.0
----- ----- ----- ----- -----
Adjusted EBITDA.............................. $28.2 $31.2 $33.3 $44.1 $66.7
===== ===== ===== ===== =====
</TABLE>
--------
(1) Reflects elimination of compensation to the former CEO whose
employment agreement was terminated in October 1997.
(2) Reflects elimination of the Bain management fee incurred under our
Bain management agreement, which will be terminated in connection with
the 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 charge recorded for the consolidation and
closure of our Colorado facility. See note (a) above.
(6) We implemented in December 1999 a plan to consolidate our Colorado
operations into our Texas facility and to close our Colorado facility,
which operated at a loss in 1999. We are currently serving a majority
of the customers who were serviced by our Colorado facility out of our
Texas facility, and based on our detailed customer-by-customer
analysis, we believe that we will retain customers and accounts
representing approximately 75% of our Colorado facility's net sales.
The capacity of the Texas facility would have been sufficient to
service this portion of the revenue stream in 1999. See note (6)
within note (d) to "Summary Consolidated Financial and Other Data" for
a detailed explanation of the expected economic impact of this
consolidation.
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with the "Selected
Consolidated Financial and Other Data" section of this prospectus and our
Consolidated Financial Statements and notes to those statements included
elsewhere in this prospectus. The forward-looking statements in this discussion
regarding the electronics manufacturing services industry, our expectations
regarding our future performance, liquidity and capital resources and other
non-historical statements in this discussion include numerous risks and
uncertainties, as described in the "Risk Factors" section of this prospectus.
Our actual results may differ materially from those contained in any forward-
looking statements.
Overview
We provide technologically advanced, time-critical electronics design,
development and manufacturing services to original equipment manufacturers and
other electronics manufacturing service providers. Operating through our
subsidiary, Dynamic Details, Incorporated, we target the fast-growing
communications and networking equipment industries, which are characterized by
aggressive new product development programs demanding the rapid application of
advanced technology and design.
Time-critical. We can deliver highly complex printed circuit boards to our
customers in as little as 24 hours. Approximately 50% of our net sales for the
year ended December 31, 1999 were generated from services delivered in 10 days
or less.
Technologically advanced. Approximately 50% 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 of our 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
63% from $67.5 million for the year ended December 31, 1996 to $292.5 million
for the year ended December 31, 1999, inclusive of the growth attributable to
the acquisition of Colorado Springs Circuits, Inc., or NTI, in 1997 and the
merger with Dynamic Circuits, Inc., or DCI, in 1998. Prices for our products
and services are predominantly a function of delivery time, complexity and
overall market demand. In 1999 our average price per printed circuit board
panel increased from the levels achieved in 1998 assuming the DCI merger had
occurred on January 1, 1998.
Due to our use of debt to finance recapitalizations, the acquisition of NTI
and the merger with DCI, our net interest expense has increased from 1995 to
1999. Beginning in 1998, our results of operations have also been impacted by
the amortization of intangibles resulting from the acquisition and the merger.
In 1999, our net loss of $17.4 million reflected $46.7 million of net interest
expense, $22.3 million of amortization of intangibles and a $7.0 million charge
related to the Colorado consolidation. See "Unaudited Pro Forma Consolidated
Financial Data."
We recognize revenue upon shipment or, in the case of services, at the time
the service is performed. Substantially all of our sales are made on the basis
of purchase orders rather than long-term agreements.
From time to time, we engage in discussions concerning prospective
acquisitions. On March 22, 2000, we agreed to acquire MCM Electronics Limited,
headquartered in the United Kingdom, for total consideration of approximately
$85.9 million, including assumed debt. MCM Electronics focuses on the
technologically advanced, time-critical segment of the electronics
manufacturing industry. See "Prospectus Summary--Recent Developments" and
"Unaudited Pro Forma Consolidated Financial Data."
Company History and Significant Transactions
We were 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.
28
<PAGE>
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 our fully-
diluted equity; and our management owned stock and options representing
approximately 27.5% of our 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, we acquired Colorado Springs Circuits, Inc., or NTI, for
approximately $38.9 million. NTI manufactured printed circuit boards requiring
lead times of twenty days or more for original equipment manufacturers. At that
time, the acquisition provided us with additional capacity and access to new
customers.
We accounted for the NTI acquisition under the purchase method of accounting
and recorded approximately $27 million in goodwill (which is being amortized
over a period of twenty-five years).
We implemented in December 1999 a plan to consolidate our Colorado
operations into our Texas facility and to close our Colorado facility, which
operated at a loss in 1999. We are currently serving a majority of the
customers who were serviced by our Colorado facility out of our Texas facility,
and based on our detailed customer-by-customer analysis, we believe that we
will retain customers and accounts representing approximately 75% of our
Colorado facility's net sales. The capacity of our Texas facility would have
been sufficient to service this portion of the revenue stream in 1999. By
combining our Texas and Colorado operations, we are eliminating lower-margin
product lines and decreasing our overhead costs, and we expect to gain
efficiency through better capacity utilization and streamlined management.
If we had serviced this revenue stream in our Texas facility with our Texas
facility's cost structure:
. our Colorado net sales would have decreased from $30.2 million to $22.7
million;
. the cost of goods sold related to those sales would have decreased from
$30.8 million (the actual cost of goods sold of our Colorado facility)
to $19.1 million (the product of $22.7 million and the cost of goods
sold ratio achieved in our Texas facility);
. the operating expenses associated with those sales would have decreased
from $3.7 million to $2.3 million (the product of $22.7 million and the
operating expense ratio achieved in our Texas facility); and
. depreciation and amortization (which is included in operating expenses
and cost of goods sold) would have decreased by $0.7 million.
As a result, 1999 operating income and EBITDA associated with those sales would
have increased by $5.6 million and $4.9 million, respectively. There can be no
assurance that our actual results would have been, or that our future results
will be, consistent with the foregoing assumptions.
DCI Merger
On July 23, 1998, we 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 our
capital stock.
29
<PAGE>
DCI provided design and manufacturing services relating to complex printed
circuit boards, backpanel assemblies and electromechanical interconnect devices
with operations in California, Texas, Georgia and Massachusetts. It was led by
Charles D. Dimick, who became our Chairman following the merger. DCI
experienced a growth in net sales of more than 67% during 1997, and its net
sales for the six months ended June 30, 1998 were more than double its net
sales for the six months ended June 30, 1997.
We accounted for the DCI merger under the purchase method of accounting and
recorded approximately $120 million in goodwill (which is being amortized over
20 years), approximately $60 million of identifiable intangible assets (which
are being amortized over their estimated useful lives of 10 years, using an
accelerated method of amortization, reflecting the relative contribution of
each developed technology in periods following the acquisition date), and
approximately $21 million and $4 million, respectively, of intangible assets
associated with DCI's customer relationships and tradenames and assembled
workforce assets (which are being amortized on a straight-line basis over their
estimated useful lives of 18 years and 4 years, respectively). We also
identified $39 million of acquired in-process research and development
investments, which we 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, given the
inherent uncertainties involved in estimating the technological hurdles of
developing next-generation technologies. Approximately 70% of the $2.1 million
planned total cost to complete the projects had been incurred as of December
31, 1999. This investment has 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.
Results of Operations
The following table sets forth income statement data expressed as a
percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Net sales........................................ 100.0 % 100.0 % 100.0 %
Cost of goods sold............................... 49.1 68.4 69.2
------- ------- -------
Gross profit..................................... 50.9 31.6 30.8
Operating expenses:
Sales and marketing............................ 9.2 7.3 8.1
General and administration..................... 2.7 4.8 5.2
Amortization of intangibles.................... -- 6.2 7.6
Restructuring and related charges.............. -- -- 2.4
Stock compensation and related bonuses......... 39.7 -- --
Compensation to the former CEO................. 2.7 -- --
Write-off of acquired in-process research and
development................................... -- 22.3 --
------- ------- -------
Operating income (loss).......................... (3.4) (9.0) 7.5
Interest expense (net)........................... 32.0 21.4 16.0
------- ------- -------
Loss before income taxes and extraordinary loss.. 35.4 30.4 8.5
Income tax benefit............................... 13.8 2.0 2.5
Extraordinary loss, net of income tax benefit.... (2.0) (1.4) --
------- ------- -------
Loss............................................. 23.6% 29.8% 6.0%
======= ======= =======
</TABLE>
30
<PAGE>
Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998
Net sales increased $117.6 million (67%) to $292.5 million in 1999, from
$174.9 million in 1998. Of this increase, $31.0 million resulted from internal
sales growth. The balance resulted from the inclusion in 1999 of a full year of
DCI sales. Sales growth accelerated in the second half of 1999 as our
production of more complex and larger panels increased average sales price per
panel. On a pro forma basis giving effect to the DCI merger, net sales
increased by over 25% for the six months ended December 31, 1999 as compared to
the corresponding six months in 1998.
Gross profit increased $34.8 million (63%) to $90.1 million in 1999, from
$55.3 million in 1998. The increase resulted from the merger with DCI, which
contributed $32.8 million to the increase. Partially offsetting this increase
was a $0.6 million gross loss in our Colorado facility in 1999 due to a
decrease in panel production in that operation, compared to a $1.6 million
gross profit in that facility in 1998. We announced our plan to close the
Colorado facility in December 1999. See "--Company History and Significant
Transactions--Colorado Facility (formerly NTI)." We experienced increased
pricing pressure early in the first quarter of 1999, with increased competition
following the slowdown in Asian markets in late 1998. Pricing stabilized late
in the first quarter of 1999 and has recovered strongly through the remainder
of 1999.
Sales and marketing expenses increased $10.8 million (84%) to $23.6 million
in 1999, from $12.8 million in 1998. The increase is due to the inclusion of
DCI's results for the full year ended December 31, 1999 (approximately $5.9
million), growth in our sales force to accommodate existing and anticipated
near-term increases in customer demand (approximately $3.5 million), and an
increase in commissions and other variable expenses relating to our increased
sales volume (approximately $1.4 million).
General and administration expenses increased $6.9 million (82%) to $15.3
million in 1999, from $8.4 million in 1998. The increase is due to the
inclusion of DCI's results for the full year ended December 31, 1999
(approximately $4.9 million), an increase in staffing and other back-office
expenditures to support growth in our design operations and the company as a
whole (approximately $1.7 million) and an increase in fees under the management
agreement with an affiliate of Bain Capital, Inc. (approximately $1.1 million).
Partially offsetting these increases was a non-recurring charge of
approximately $0.8 million recorded in 1998, representing severance-related
costs for executives terminated as a result of the DCI merger.
Amortization of intangibles increased $11.4 million (105%) to $22.3 million
in 1999, from $10.9 million in 1998. The merger with DCI accounts for $11.2
million of this increase.
Restructuring and related charges were $7.0 million in 1999, representing
one-time costs incurred in connection with our decision to close our Colorado
facility. These charges consist of $4.5 million for severance and other exit
costs and $2.5 million of costs related to the impairment of net property,
plant and equipment. See Note 15 to our consolidated financial statements for
further information about these charges.
Write-off of acquired in-process research and development totaled $39.0
million in 1998. This charge represents the appraised value of the in-process
research and development component of the total purchase price paid in the DCI
merger. See Note 14 to our consolidated financial statements for further
information about this charge. There was no comparable expense in 1999.
Net interest expense increased $9.3 million (25%) to $46.7 million, from
$37.4 million in 1998. The increase in net interest expense is attributable to
the increased level of borrowings in connection with the merger with DCI.
The income tax benefit was $7.4 million in 1999, as compared to a benefit of
$3.5 million in 1998. The difference between the effective tax rate and the
statutory federal tax rate of 35% is attributable to the acquired in-process
research and development charge recorded in 1998 and goodwill amortization in
each period. As these expenses are non-deductible, no related income tax
benefit is recorded. Due to the consolidation of our Colorado and Texas
operations and the closure of our Colorado facility in December 1999, we
believe that a portion of our Colorado net operating loss carryforwards may not
be realized. Accordingly, a valuation allowance was established in 1999 for
deferred income tax benefits related to these carryforwards. See Note 12
31
<PAGE>
to our consolidated financial statements for a reconciliation of the tax
benefit recorded in each period to the corresponding amount of income tax
determined by applying the U.S. Federal income tax rate to the loss before
income taxes and for additional information relating to our Colorado net
operating loss carryforwards.
Year Ended December 31, 1998 Compared to the Year Ended December 31, 1997
Net sales increased $96.1 million (122%) to $174.9 million in 1998 from
$78.8 million in 1997. The facilities that we and our predecessors operated
achieved internal sales growth of approximately $8 million, caused by a 13%
increase in the average panel selling price realized at our Anaheim facility
which was driven by a demand for higher layer count and more technologically
advanced printed circuit boards; and growth in volume of units shipped
attributable to increased demand from contract manufacturing customers. The
balance of the sales growth resulted from the acquisition of NTI and the merger
with DCI.
Gross profit increased $15.2 million (38%) to $55.3 million in 1998 from
$40.1 million in 1997. The increase resulted from the acquisition of NTI and
the merger with DCI, which added $1.6 million and $14.2 million, respectively,
to gross profit. Partially offsetting these increases were costs of $0.7
million incurred in 1998 related to our newly formed design centers. The
decline in gross profit as a percent of net sales to 32% in 1998 from 51% in
1997 resulted from the acquisition of the pre-production and assembly
facilities attributable to the DCI merger and NTI acquisition. NTI historically
had lower margins than our other operations.
Sales and marketing expenses increased $5.5 million (75%) to $12.8 million
in 1998, from $7.3 million in 1997. The increase is due to the acquisition of
NTI and the merger with DCI, which added $1.4 million and $4.2 million,
respectively, to sales and marketing expenses. Such increases reflect the
inclusion of NTI's results for the full year ended December 31, 1998 and DCI's
results following the date of the DCI merger.
General and administration expenses increased $6.3 million (300%) to $8.4
million in 1998, from $2.1 million in 1997. The increase is due to the
acquisition of NTI and the merger with DCI, which added $1.9 million and $3.9
million, respectively, to general and administration expenses. Included in
these increases is approximately $0.8 million accrued in 1998 for severance-
related costs for certain employees of these divisions. Such increases reflect
the inclusion of NTI's results for the full year ended December 31, 1998 and
DCI's results following the date of the DCI merger.
Amortization of intangibles of $10.9 million in 1998 resulted from the
acquisition of NTI in December 1997 and the merger with DCI in July 1998. The
amortization of goodwill from the acquisition of NTI in 1997 was immaterial.
Write-off of acquired in-process research and development totaled $39.0
million in 1998. This charge represents the appraised value of the in-process
research and development component of the total purchase price paid in the DCI
merger. See Note 14 to our consolidated financial statements for further
information about this charge.
Interest expense (net) increased $12.2 million (48%) to $37.4 million in
1998, from $25.2 million in 1997. The increase in interest expense was due to
an increase in the level of borrowings in connection with the recapitalization,
the acquisition of NTI and the merger with DCI.
The income tax benefit was $3.5 million in 1998 as compared to a benefit of
$10.9 million in 1997. In 1998, the difference between the effective tax rate
and the statutory federal income tax rate of 35% is attributable to the non-
deductible acquired in-process research and development charge, for which no
income tax benefit is recorded. See Note 12 to our consolidated financial
statements for a reconciliation of the tax provision (benefit) recorded in each
period to the corresponding amount of income tax determined by applying the
U.S. Federal income tax rate to income (loss) before income taxes.
In both 1998 and 1997, we recorded losses on the early extinguishment of
debt resulting from the write-off of unamortized debt issue costs. The early
extinguishment of debt in 1997 resulted from the recapitalization and the NTI
acquisition. The extinguishment in 1998 resulted from the DCI merger. These
losses are presented as extraordinary losses, net of related income tax
benefit.
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<PAGE>
Quarterly Financial Information
The following table presents selected quarterly financial information for
each of the eight quarters ended December 31, 1999. 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.
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- --------- -------- -------- -------- --------- --------
(in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $28.3 $26.3 $61.2 $59.1 $59.2 $71.7 $82.9 $78.7
Cost of goods sold...... 16.4 16.1 41.6 45.5 41.4 51.0 57.4 52.6
----- ----- ----- ----- ----- ----- ----- -----
Gross profit............ $11.9 $10.2 $19.6 $13.6 $17.8 $20.7 $25.5 $26.1
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
The quarterly financial information is presented on an actual historical
basis, not on a pro forma basis for the DCI merger, which closed on July 23,
1998. The decline in net sales and gross profit in the three months ended
December 31, 1998 compared with the previous three months is the result of a
decrease in average sales price per printed circuit board panel resulting from
a decline in international demand caused by the Asian financial crisis in the
second half of 1998. The decline in net sales for the three months ended
December 31, 1999 compared to the three months ended September 30, 1999 is the
result of seasonality and a slowdown in purchase orders related to concerns
about the Year 2000 issue. Gross profit in the same period increased due to an
increase in the average price per panel.
Liquidity and Capital Resources
Our principal sources of liquidity are cash provided by operations and
borrowings under various debt agreements. Our principal uses of cash have been
to finance mergers and acquisitions, meet debt service requirements, and
finance capital expenditures. We anticipate that these uses, including
acquisition opportunities currently under review, will continue to be our
principal uses of cash in the future.
Net cash provided by operating activities for the years ended December 31,
1999, 1998 and 1997 was $24.8 million, $16.7 million and $9.1 million,
respectively. Fluctuations in net cash provided by operating activities are
attributable to increases and decreases in our net income before non-cash
charges and normal fluctuations in working capital. In 1997, however, net cash
provided by operating activities was reduced by a $10.0 million cash bonus paid
as part of the stock compensation expenses incurred in connection with a
recapitalization.
Net cash used in investing activities for the years ended December 31, 1999,
1998 and 1997 was $18.6 million, $194.8 million and $44.9 million,
respectively. These activities consist of capital expenditures in each period
and cash of $38.9 million used in the acquisition of NTI in 1987 and $178.7
million used in the merger with DCI in 1998 (see Note 14 to our consolidated
financial statements).
Our capital expenditures were $18.2 million, $18.0 million and $6.6 million
in 1999, 1998 and 1997, respectively. Of these amounts, approximately $2.1
million and $0.6 million were incurred in 1998 and 1997, respectively, under
capital lease obligations. We anticipate capital expenditures for 2000 will be
consistent with 1999 levels.
Net cash provided by (used in) financing activities for the years ended
December 31, 1999, 1998 and 1997 was $(7.7) million, $174.9 million and $41.1
million, respectively. Our principal financing activities in 1999 included
payments of debt, capital lease and note obligations and the generation of net
proceeds from the restructuring of our interest rate exchange agreements (see
Note 8 to our consolidated financial statements). Our principal financing
activities in 1998 included repayment of existing debt facilities and
borrowings on new debt facilities in connection with the merger with DCI. Our
principal financing activities in 1997 included increased borrowings,
distributions to shareholders and shareholder transactions in connection with a
recapitalization.
33
<PAGE>
As of December 31, 1999, we had borrowings of approximately $477 million. We
have a $45.0 million revolving credit facility. As of December 31, 1999, we had
no borrowings outstanding under the revolving credit facility. The minimum
principal payment obligation under the Dynamic Details senior credit facility
is $5.9 million for 2000. No other debt instruments require minimum principal
repayments during such period. We intend to use the proceeds of this offering
to repay some of our debt.
The Dynamic Details senior credit facility, the Dynamic Details senior
subordinated notes and the DDi Capital senior discount notes are described
below "Description of Indebtedness."
Based on our current level of operations, we believe that cash generated
from operations, available cash and amounts available under our senior credit
facility will be adequate to meet the debt service requirements, capital
expenditures and working capital needs of our current operations for at least
the next twelve months, although no assurance can be given in this regard. We
may be required to borrow under our revolving credit facility to make the final
payment under our management agreement with Bain Capital. We will require
additional financing if we decide to consummate additional acquisitions. We are
highly leveraged and our future operating performance and ability to service or
refinance the DDi Capital senior discount notes, and the Dynamic Details senior
subordinated notes and to extend or refinance the Dynamic Details senior credit
facility will be subject to future economic conditions and to financial,
business and other factors, many of which are beyond our control.
Quantitative and Qualitative Disclosure Relating to Market Risks
Interest Rate Risk
The Dynamic Details senior credit facility bears interest at a floating
rate; our Dynamic Details senior subordinated notes, DDi Capital senior
discount notes and DDi Intermediate senior discount notes bear interest at
fixed rates. We reduce our exposure to interest rate risks through swap
agreements. In June 1999, we terminated our then existing interest rate swap
agreements and entered into replacement agreements. At that time, we realized
$5.6 million from the termination of the existing swap agreements (which will
be amortized through January 2002 as a reduction to interest expense) and $0.5
million from entering into the new agreements (which will be amortized though
April 2005 as a reduction to interest expense). In conjunction with this
offering, we intend to evaluate our interest rate exposure from our remaining
debt and will modify the terms of our interest rate exchange agreements to
ensure they remain an effective cash flow hedge for our variable rate debt.
Under the terms of our 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 for the
period June 30, 1999 through August 31, 2001. During this period, our maximum
annual rate is 5.65% 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
September 1, 2001 through the scheduled maturity of the senior term facility in
2005, we pay a fixed annual rate of 7.35% applied to a notional amount equal to
50% of the principal balance of the senior term facility during that period.
The term loan facility portion of the Dynamic Details senior credit facility
bears interest based on one-month LIBOR. As of December 31, 1999, one-month
LIBOR was 6.50%. If one-month LIBOR increased by 10% to 7.15%, interest expense
related to the term loan facility portion would increase by approximately $1.6
million in 2000. Moreover, because the increased rate would exceed the 7.00%
cap, that increase in interest expense would be offset by approximately $0.4
million in payments we would be entitled to receive under the swap agreement.
The revolving credit facility bears interest at (1) 2.25% per annum plus the
applicable LIBOR or (2) 1.25% per annum plus the federal reserve reported
overnight funds rate plus 0.5% per annum. As of December 31, 1999, we had no
outstanding balance under our revolving credit facility. We do not anticipate
having a material outstanding balance on this facility during the year ending
December 31, 2000. Therefore, a 10% change in interest rates as of December 31,
1999 is not expected to materially affect the interest expense to be incurred
on this facility during such period.
A change in interest rates would not have an effect on the interest expense
to be incurred on the Dynamic Details senior subordinated notes, DDi Capital
senior discount notes or the DDi Intermediate senior discount notes because
each of these instruments bears a fixed rate of interest.
34
<PAGE>
Foreign Currency Exchange Risk
All of our sales are denominated in U.S. dollars, and as a result we have
relatively little exposure to foreign currency exchange risk with respect to
sales made. We do not use forward exchange contracts to hedge exposures
denominated in foreign currencies or any other derivative financial
instruments for trading or speculative purposes. Therefore, the effect of a
10% change in exchange rates as of December 31, 1999 would not have an impact
on our operating results for the year ending December 31, 2000. The actual
amount of shares issued to current investors in MCM Electronics by us in
connection with that acquisition will vary based on the exchange rate of U.S.
dollars to British pounds on or after the closing date of the acquisition,
which is expected to occur on or after the closing of this offering. Following
our planned acquisition of MCM Electronics, some of our net sales will be
denominated in British pounds, and we will consider available options to hedge
foreign currency exchange rate exposure.
Impact of Inflation
We believe that our results of operations are not dependent upon moderate
changes in the inflation rate.
Risks Associated with Intangible Assets
As of December 31, 1999, our consolidated balance sheet reflected $205.5
million of intangible assets, a substantial portion of our total assets at
such date. The intangible assets consist of goodwill and other identifiable
intangibles relating to our recent merger and our recent acquisition. The
balances of these intangible assets may increase in future periods,
principally from the consummation of further acquisitions. Amortization of
these additional intangibles would, 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.
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes requirements for reporting and
disclosure of comprehensive income and its components. This statement became
effective for our fiscal year ending December 31, 1998. Reclassification of
prior year financial statements for comparative purposes is required. Through
December 31, 1999, we have no elements which give rise to reporting
comprehensive income.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 modifies the
disclosure requirements for reportable operating segments. This statement
became effective for our fiscal year ending December 31, 1998.
Reclassification of prior year financial statements for comparative purposes
is required unless deemed impractical. This pronouncement has had no
significant impact on our reporting practices since its adoption; and until
such time that we diversify our operations, management believes such
pronouncement will not be applicable.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. SFAS No 137, issued by the FASB in July 1999,
establishes a new effective date for SFAS No. 133. This statement, as amended
by SFAS No. 137, is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000 and is therefore effective for us beginning with
our fiscal quarter ending March 31, 2001. Based upon the nature of the
financial instruments and hedging activities in effect as of the date of this
filing, this pronouncement would require us to reflect the fair value of our
derivative instruments (see Note 8 to our consolidated financial statements)
on the consolidated balance sheet. Changes in fair value of these instruments
will be reflected as a component of comprehensive income.
35
<PAGE>
BUSINESS
Overview
We provide technologically advanced, time-critical electronics design,
development and manufacturing services to original equipment manufacturers and
other providers of electronics manufacturing services. Operating through our
subsidiary, Dynamic Details, Incorporated, we target the fast-growing
communications and networking equipment industries, which are characterized by
aggressive new product development programs demanding the rapid application of
advanced technology and design.
Our customers use our services to develop and produce a wide variety of end
products, including communications switching and transmission equipment,
wireless base stations, work stations, high-end computing equipment and data
networking equipment. The technologically advanced, time-critical segment of
the electronics manufacturing services industry in which we operate is
characterized by rapid growth, high margins and significant customer diversity.
We were established 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 July 1998, we merged with Dynamic Circuits, Inc., or DCI. DCI, led by our
current Chairman, Charles D. Dimick, 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.
On or after the completion of this offering, we expect to complete our
acquisition of MCM Electronics Limited, based in the United Kingdom. See
"Prospectus Summary--Recent Developments."
Industry Background
Electronics manufacturing services, or EMS, companies provide a range of
services to electronics original equipment manufacturers, or OEMs. The EMS
industry is growing rapidly, and industry revenues have increased from
approximately $22 billion in 1993 to approximately $73 billion in 1999.
Technology Forecasters, Inc. expects industry revenues to grow at approximately
20% annually to approximately $149 million in 2003. Industry growth is fueled
by increases in the rate of outsourcing combined with steady, underlying growth
in the electronics equipment industry. In 1998, approximately 17% of the cost
of goods sold by electronics OEMs was attributable to components and products
outsourced to EMS providers. Technology Forecasters, Inc. expects this
percentage to reach 33% by 2003.
Electronics manufacturing services were historically labor-intensive
functions outsourced by OEMs to obtain additional capacity during periods of
high demand and initially consisted mainly of printed circuit board assembly.
Early EMS providers acted essentially as subcontractors, providing production
capacity on a transactional basis. With advances in process technology, EMS
providers developed additional capabilities and were able both to improve
quality and to reduce OEMs' costs. Over time, OEMs came to rely on EMS
providers to perform a broader array of manufacturing services, including
design and development activities. In recent years, EMS providers have expanded
their range of services to encompass design, product development, packaging and
distribution and overall supply chain management.
By using EMS providers, OEMs are able to focus on their core competencies,
including product development, sales, marketing and customer service.
Outsourcing allows OEMs to take advantage of the manufacturing expertise,
advanced technology and capital investment of EMS providers, to achieve overall
cost benefits and to enhance their competitive position by:
. reducing time to market and time to volume production;
36
<PAGE>
. 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.
We believe the fast-growing communications and networking equipment
industries represent large and attractive markets for electronic manufacturing
services. These industries are characterized by increasingly rapid product
introductions driven by, among other factors, the demand for network
infrastructure to handle increased voice and data traffic created by the
Internet. Communications equipment manufacturers are at a relatively early
stage of the outsourcing trend, and Techology Forecasters, Inc. predicts these
manufacturers will increasingly utilize EMS providers, such as ourselves, for
design, development and manufacturing services.
The DDi Customer Solution
We engineer technologically advanced materials for our 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 our customers in as little as 24 hours. Approximately 50% of our net
sales in 1999 were generated from services delivered in 10 days or less.
. Advanced Technology. Our 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 50% of our net sales in 1999 involved the design or
manufacture of printed circuit boards with at least eight layers, an
industry-accepted measure of complexity. In addition, many of our lower
layer-count boards are complex as a result of the incorporation of other
technologically advanced features.
. Proactive Sales Force. Our knowledgeable and innovative sales force,
based in Silicon Valley, enables our current and prospective customers
to understand and exploit the wide range of services provided by our
facilities across the country. Our salespeople helped us achieve a net
increase of approximately 150 customers in 1999.
. Relationships with Research and Development Personnel. In many cases, we
have design engineers stationed on-site in our customers' product
development divisions. As a result, we help our customers develop
workable technical solutions to their concepts for next generation
products.
. Experienced and Incentivized Management. Our management team, led by
Charles D. Dimick and Bruce D. McMaster, collectively has nearly 100
years of experience in the electronics manufacturing services industry.
Our executive officers will hold approximately 10.2% of our fully
diluted stock outstanding after this offering and the completion of the
MCM Electronics acquisition.
We believe that these attributes allow us to consistently meet and exceed
our customers' expectations and that, as a result, we will continue to attract
leading original equipment manufacturers and other providers of electronics
manufacturing services as customers.
Our Strategy
Our goal is to be the leading provider of technologically advanced, time-
critical electronics manufacturing services. To achieve this goal, we will:
Continue our Focus on the Fast-Growing Communications and Networking
Equipment Industries. We focus our marketing efforts on the fast-growing
communications and networking equipment industries,
37
<PAGE>
and target established original equipment manufacturers, emerging providers of
next-generation technology and electronics manufacturing service providers
serving these industries. The communications and networking equipment
industries represented approximately 55% of our net sales for the year ended
December 31, 1999.
Capitalize on our Strong Customer Relationships and Design Expertise to
Participate in Future Product Introductions and Further Outsourcing
Programs. We have served established original equipment manufacturers for many
years, through multiple product generations. We have positioned ourselves as a
strategic partner in our customers' new product initiatives by focusing on
direct relationships with our customers' research and development personnel. As
a result, we have developed expertise and gained knowledge of our customers'
new product design programs, all of which position us as a preferred service
provider for future product generations.
Strengthen our 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 our 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 our Leadership in Quick-Turn Design and Manufacturing Services to
Further Expand Our 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 our design services into providing other value-added
services including assembly of printed circuit boards and other electronic
components and total system assembly and integration of electronics products.
We predominantly use these additional capabilities in our customers' new
product development programs to enable them to further reduce their time to
market and overall cost.
Expand our International Presence to Better Serve the Needs of Customers
Seeking to Outsource Their Worldwide Design and Manufacturing Activities. We
have a European sales office based in London supporting our growing European
sales effort. Following the completion of our acquisition of MCM Electronics,
we will be able to serve a growing number of European customers from MCM
Electronics' four U.K. facilities. We believe that the European market offers
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 will continue to serve our Asian customers from our U.S.
facilities.
Pursue Selected Acquisition Opportunities, Including Asset Divestitures by
Original Equipment Manufacturers. We have actively pursued acquisitions to
enhance our service offerings, expand our geographic presence and increase our
production capabilities. An increasing number of original equipment
manufacturers are divesting their production capabilities as an integral part
of their manufacturing strategy. We have completed an acquisition and a merger
since 1997, and we expect to complete the acquisition of MCM Electronics on or
after the completion of this offering. We intend to continue to selectively
pursue strategic acquisition opportunities, including asset divestitures by
original equipment manufacturers, that we believe will complement our internal
growth.
38
<PAGE>
Our Services
We provide a suite of value-added, integrated services, used by our
customers predominantly in the development of 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.
Printed circuit boards are the basic platforms used to interconnect
electronic components and can be found in virtually all electronic products,
including consumer electronics, computers and automotive, telecommunications,
industrial, medical, military and aerospace equipment. Printed circuit boards
used in consumer electronic products are generally less technologically
sophisticated, employing lower layer counts and requiring less manufacturing
sophistication than printed circuit boards used in high-end commercial
equipment. Communications and networking equipment manufacturers require more
complex multi-layer interconnections with advanced materials.
Time-critical Development and Fabrication of Prototype Complex Printed
Circuit Boards. Our time-critical, or quick-turn, services are used in the
design, test and launch phases of new electronics product development and are
generally delivered within 10 to 20 days or in as little as 24 hours. Larger
volumes of printed circuit boards are needed as a product progresses past the
testing, design and pre-production phases. The advanced design, development and
manufacturing technologies we employ facilitate quick-turn production of
complex, multi-layered printed circuit boards utilizing technologically-
advanced methods. See "Technology, Development and Processes." Our ability to
provide these services on a quick-turn and longer lead-time delivery basis
involves working closely with customers from the initial design of new products
through development and launch.
Assembly of Printed Circuit Boards, Backpanels and Other Components of
Electronics Products. We assemble printed circuit boards, backpanels, card
cages and wire harnesses on a low volume, quick-turn basis. Backpanels are
large printed circuit boards, and card cages and wire harnesses integrate wires
with connectors and terminals to transmit electricity between two or more
points. As the electronics industry has worked to increase component speed and
performance, the design of these components has become more integrated. We have
responded to this trend and provide these additional assembly services to
complement our design and development capabilities.
Assembly and Integration of Our 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. More than 1,400 original equipment
manufacturers and electronics manufacturing services companies representing a
wide range of end-user markets used our services in 1999, a net increase of
approximately 150 customers in 1999. We measure customers as those companies
that place at least two orders in a twelve-month period. Our customers
principally consist of leading communications and networking equipment and
computer companies, as well as medical, automotive, industrial and aerospace
equipment manufacturers. During 1999, sales to our largest customer, Alcatel,
accounted for less than 8% of our net sales, and sales to our ten largest
customers accounted for less than 40% of our net sales. We have been successful
at retaining customers and have worked with our three largest customers since
1991.
39
<PAGE>
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, 1997, 1998 and 1999.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
End-User Markets 1997 1998 1999
- ---------------- ------- ------- -------
<S> <C> <C> <C>
Communications and networking equipment.......... 34% 53% 55%
Computer and peripherals......................... 45 24 21
Medical, automotive, industrial and test
instruments..................................... 6 11 9
Aerospace equipment.............................. 6 3 2
Other............................................ 9 9 13
------- ------- -------
Total.......................................... 100% 100% 100%
======= ======= =======
</TABLE>
The following table indicates, for the year ended December 31, 1999, 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.
<TABLE>
<CAPTION>
OEM Customers End Products
- ------------- ------------
<S> <C>
Alcatel................... Communications switching and transmission equipment,
networking equipment
Marconi Communications.... Communications switching and transmission equipment,
networking equipment
IBM....................... Network servers
Intel..................... Personal computers
3Com...................... Networking equipment
<CAPTION>
EMS Customers End Products
- ------------- ------------
<S> <C>
Celestica................. Communications and computing equipment
Jabil..................... Communications and computing equipment
Solectron................. Communications and computing equipment
</TABLE>
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 nearly 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 their future needs.
The market for our products and services is characterized by rapidly
changing technology and continuing process development. In recent years, the
trend in the electronics equipment industry has been to increase speed and
performance of components while at the same time reducing their size. This
trend requires increasingly complex printed circuit boards with higher
densities. The future success of our business will depend in large part upon
our ability to maintain and enhance our technological capabilities, develop and
market products and services that meet changing customer needs, and
successfully anticipate or respond to technological changes on a cost-effective
and timely basis. In the last two years, we have made substantial investments
in equipment and technology to meet these needs and maintain our competitive
advantage.
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We believe the highly specialized equipment we use is among the most
advanced in our industry. We provide a number of advanced technologies,
including:
. 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. In addition, all of our production facilities are
ISO-9002 certified. These certifications require that we meet standards related
to management, production and quality control, among others.
Manufacturing
We produce highly complex, technologically advanced multi-layer and low-
layer printed circuit boards, backpanel assemblies, printed circuit board
assemblies, card cage and wire harness assemblies and full system assembly and
integration that meet increasingly tight tolerances and specifications demanded
by original equipment manufacturers. The manufacture of printed circuit boards
involves several steps: etching the circuit image on copper-clad epoxy
laminate, pressing the laminates together to form a panel, drilling holes and
depositing copper or other conducive material to form the inter-layer
electrical connections and, lastly, cutting the panels to shape. Our advanced
interconnect products require additional critical steps, including dry film
imaging, photoimageable soldermask processing, computer-controlled laser
drilling and routing, automated plating and process controls and achievement of
controlled impedance.
Multi-layering, which involves placing multiple layers of electrical
circuitry on a single printed circuit board or backpanel, expands the number of
circuits and components that can be contained on the interconnect product and
increases the operating speed of the system by reducing the distance that
electrical signals must travel. Increasing the density of the circuitry in each
layer is accomplished by reducing the width of the circuit tracks and placing
them closer together on the printed circuit board or backpanel.
Interconnect products having narrow, closely spaced circuit tracks are known
as fine line products. The manufacture of complex multi-layer interconnect
products often requires the use of sophisticated circuit interconnections,
called blind or buried vias, between printed circuit board layers and adherence
to strict electrical characteristics to maintain consistent circuit
transmission speeds, referred to as controlled impedance. These technologies
require very tight lamination and etching tolerances and are especially
critical for printed circuit boards with ten or more layers.
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<PAGE>
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.
Excluding our Colorado facility, which we decided to close in December 1999,
we conduct our operations in several buildings that we own or lease. We believe
our facilities are currently adequate for our operating needs. Our principal
manufacturing facilities are as follows:
<TABLE>
<CAPTION>
Location Function Square Feet
-------- -------- -----------
<C> <S> <C> <C>
Anaheim, California Quick-turn printed circuit boards 125,000
Milpitas, California Quick-turn printed circuit boards 45,000
Milpitas, California Design and assembly 41,000
Garland, Texas Longer lead-time printed circuit 86,000
boards
Dallas, Texas Assembly 49,000
Marlborough, Massachusetts Assembly 32,500
La Grange, Georgia Assembly 30,000
</TABLE>
We lease all of the above facilities except the Garland, Texas facility.
Sales and Marketing
Our marketing strategy focuses on developing close working relationships
with our customers early in the design phase and throughout the lifecycle of
the product. Accordingly, our senior management personnel and engineering staff
advise customers with respect to applicable technology, manufacturing
feasibility of designs and cost implications through on-line computer technical
support and direct customer communication. We have focused our marketing
efforts on developing long-term relationships with research and development
personnel at key customers in high-growth segments of the electronics equipment
industry.
We employ a targeted sales effort to help optimize our market share at the
customer level. In order to establish individual salesperson accountability for
each client, each customer is assigned one member of our staff for all services
across all facilities. We have developed a comprehensive database and
allocation process to control our calling and cross-selling effort, and have a
global account program for coordinating sales to our top 20 customers. The
success of our sales strategy is demonstrated by the net addition of over
approximately 150 customers in 1999.
We market our design, development and manufacturing services through an
internal sales force of approximately 100 individuals and an expansive sales
network consisting of 14 organizations comprised of approximately 80
manufacturers' representatives across the United States. Approximately half of
our net sales in 1999 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. On or
after the completion of this offering, we expect to complete the acquisition of
MCM Electronics. In addition to integrating the MCM Electronics sales force, we
plan to continue expanding our international sales efforts.
42
<PAGE>
Our Suppliers
Our raw materials inventory is small relative to our sales and must be
regularly and rapidly replenished. We use just-in-time procurement practices to
maintain our raw materials inventory at low levels, and we 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 or
international operations 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 that the backlog of expected product sales
covered by firm purchase orders is a meaningful measure of future sales since
orders may be rescheduled or canceled.
Governmental Regulation
Our operations are subject to certain federal, state and local regulatory
requirements relating to environmental compliance and site cleanups, waste
management and health and safety matters. In particular, we are subject to
regulations promulgated by:
. the Occupational Safety and Health Administration pertaining to health
and safety in the workplace;
. the Environmental Protection Agency pertaining to the use, storage,
discharge and disposal of hazardous chemicals used in the manufacturing
processes; and
. corresponding state agencies.
To date the costs of compliance and environmental remediation have not been
material to us. Nevertheless, additional or modified requirements may be
imposed in the future. If such additional or modified requirements are imposed
on us, or if conditions requiring remediation were found to exist, we may be
required to incur substantial additional expenditures.
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<PAGE>
Employees
As of December 31, 1999, after giving effect to the consolidation of our
Colorado operations into our Texas facility, we had approximately 1,800
employees, none of whom are represented by unions. Of these employees,
approximately 1,550 were involved in manufacturing and engineering, 100 worked
in sales and marketing and 150 worked in accounting, systems and other support
capacities. We have not experienced any labor problems resulting in a work
stoppage and believe we have good relations with our employees.
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.
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MANAGEMENT
Directors, Executive Officers and Key Employees
The following table sets forth our directors and executive officers, their
ages as of December 31, 1999, and the positions currently held by each person:
<TABLE>
<CAPTION>
Name Age Office
- ---- --- ------
<S> <C> <C>
President, Chief Executive Officer and
Bruce D. McMaster.................... 38 Director
Charles D. Dimick.................... 43 Chairman and Director
Joseph P. Gisch...................... 43 Chief Financial Officer
John Peters.......................... 45 Vice President, Sales and Marketing
Greg Halvorson....................... 38 Vice President, Operations
Terry L. Wright...................... 40 Vice President, Engineering
David Dominik........................ 43 Director
Edward W. Conard..................... 43 Director
Stephen G. Pagliuca.................. 44 Director
Prescott Ashe........................ 32 Director
Stephen M. Zide...................... 39 Director
Mark R. Benham....................... 48 Director
Christopher Behrens.................. 38 Director
</TABLE>
Bruce D. McMaster joined us in 1985 and has served as our President since
1991 and as a Director and our Chief Executive Officer since 1997. He has over
21 years of experience in the EMS industry. Before becoming our President, Mr.
McMaster worked in various management capacities in our engineering and
manufacturing departments.
Charles D. Dimick joined us in 1998 upon our merger with DCI. He is our
Chairman, a Director and the President of our subsidiary, Dynamic Details
Incorporated, Silicon Valley. He has over 21 years of experience in the EMS
industry. Mr. Dimick founded DCI in 1991 and served as its president and chief
executive officer until the merger. Previously, he was a senior vice president
of sales and marketing at Sigma Circuits.
Joseph P. Gisch has served as our Chief Financial Officer since 1995. From
1986 to 1995, Mr. Gisch was a partner at the accounting firm of McGladrey &
Pullen, LLP where he was responsible for the audit, accounting and information
systems for a variety of manufacturing clients. Mr. Gisch was responsible for
our general accounting and income tax matters. Mr. Gisch has not been
responsible for any of our audit services since 1991.
John Peters joined us in 1998 upon our merger with DCI. He has been our Vice
President, Sales and Marketing, since 1999. He was the senior vice president of
sales and marketing of our subsidiary, Dynamic Details Incorporated, Silicon
Valley from 1998 to 1999. Mr. Peters served as vice president of sales and
marketing of DCI from 1992 to 1998.
Greg Halvorson joined us in 1998 upon our merger with DCI. He is a Vice
President and the Senior Vice President of Operations of our subsidiary,
Dynamic Details Incorporated, Silicon Valley. Prior to joining us, Mr.
Halvorson served as vice president of operations of DCI from 1995 to 1998. Mr.
Halvorson spent six years at Pacific Circuits as plant manager and head of
engineering before which he was manager of computer-aided manufacturing at
Sigma Circuits.
Terry L. Wright joined us in 1991 and has served as Vice President,
Engineering since 1995. Prior to joining us, Mr. Wright was a general manager
at Applied Circuit Solutions and a quality assurance manager at Sigma Circuits.
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<PAGE>
David Dominik has served as a Director since November 1998. Mr. Dominik is a
co-founder and managing director of Convergence Capital Group and a special
limited partner of Bain Capital, Inc. He was a managing director of Bain
Capital, Inc. from 1990 until March 2000. Previously, Mr. Dominik was a general
partner of Zero Stage Capital, a venture capital firm focused on early-stage
companies, and assistant to the chairman of Genzyme Corporation, a
biotechnology firm. From 1982 to 1984, he worked as a management consultant at
Bain & Company. Mr. Dominik was elected as a director of DCI in 1996. Mr.
Dominik also serves as a director of ChipPAC, Inc., Integrated Circuit Systems,
Inc. and OneSource.
Edward W. Conard has served as a Director since 1997. He has been a managing
director of Bain Capital, Inc. since March 1993. From 1990 to 1992, Mr. Conard
was a director of Wasserstein Perella, an investment banking firm that
specializes in mergers and acquisitions. Prior to that, he was a vice president
at Bain & Company, where he headed the firm's operations practice area. Mr.
Conard also serves as a director of Waters Corporation, Cambridge Industries,
Alliance Corp., ChipPAC, Inc., Medical Specialties, Inc. and U.S. Synthetic.
Stephen G. Pagliuca has served as a Director since January 2000. Mr.
Pagliuca has been a managing director of Bain Capital, Inc. since May 1993 and
a general partner of Bain Venture Capital, Inc. since 1989. Prior to joining
Bain Capital, Mr. Pagliuca was a partner at Bain & Company. Mr. Pagliuca also
worked as a senior accountant and international tax specialist for Peat Marwick
Mitchell & Company in the Netherlands. He is also a director of Gartner Group,
Coram Healthcare, Epoch Senior Living, Wesley Jessen Visioncare, Dade Behring
Inc. and Vivra Specialty Partners.
Prescott Ashe has served as a Director since 1997. Mr. Ashe has been a
principal at Bain Capital, Inc. since June 1998 and was an associate at Bain
Capital, Inc. from December 1992 to June 1998. Prior to that, he was an analyst
at Bain Capital, Inc. and a consultant at Bain & Company. Mr. Ashe also serves
as a director of ChipPAC, Inc., Integrated Circuit Systems, Inc., and SMTC
Corporation.
Stephen M. Zide has served as a Director since 1997. Mr. Zide has been a
managing director at Pacific Equity Partners since 1998. Previously he was an
associate at Bain Capital, Inc., and prior to that he was a partner at the law
firm of Kirkland & Ellis. Mr. Zide is also a director of Alliance Laundry
Systems, L.L.C.
Mark R. Benham has served as a Director since November 1998. Mr. Benham was
a co-founder of Celerity Partners, L.L.C. and has been a partner since 1992.
Previously he was a senior investment officer of Citicorp Venture Capital,
Ltd., and prior to that he was an advisor to Yamaichi UniVen Co., Ltd., the
venture capital subsidiary of Yamaichi Securities International. Mr. Benham is
a director of SubMicron Systems Corporation, Rapid Design Service, Inc., SMTC
Corporation and Starcom Holdings, Inc.
Christopher Behrens has served as a Director since 1997. He has been a
principal of Chase Capital Partners since 1994 and a general partner since
January 1999. Prior to joining Chase Capital Partners, Mr. Behrens was a vice
president in the Merchant Banking Group of The Chase Manhattan Bank from 1990
to 1994. Mr. Behrens is a director of Patina Oil & Gas, Portola Packaging and a
number of other private companies.
Board Composition
All directors are elected and serve until a successor is duly elected and
qualified or until the earlier of his death, resignation or removal. All
members of our board of directors set forth herein were elected by class vote
pursuant to our articles of incorporation. There are no family relationships
between any of our directors or executive officers. Our executive officers are
elected by and serve at the discretion of the board of directors.
Prior to the completion of this offering, our board will be divided into
three classes, as nearly equal in number as possible, with each director
serving a three-year term and one class being elected at each year's annual
meeting of stockholders. Messrs. Ashe, Dimick and Dominik will be in the class
of directors whose
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term expires at the 2001 annual meeting of our stockholders. Messrs. Behrens,
McMaster and Zide will be in the class of directors whose term expires at the
2002 annual meeting of our stockholders. Messrs. Benham, Conard, and Pagliuca
will be in the class of directors whose term expires at the 2003 annual meeting
of our stockholders. At each annual meeting of our stockholders, successors to
the class of directors whose term expires at such meeting will be elected to
serve for three-year terms or until their respective successors are elected and
qualified.
Director Compensation
We currently pay no compensation to our non-employee directors, and pay no
additional remuneration to our employees or executives for their service as
directors.
Committees of the Board of Directors
Prior to this offering, our board of directors had two committees, the audit
committee and the compensation committee. The board may also establish other
committees to assist in the discharge of its responsibilities.
The audit committee makes recommendations to the board of directors
regarding the independent auditors to be approved by the stockholders, reviews
the independence of the independent auditors, approves the scope of the annual
audit activities of the independent auditors, approves the audit fee payable to
the independent auditors and reviews such audit results with the independent
auditors. Following this offering, the audit committee will be comprised of
Messrs. Behrens, Benham and Dominik. PricewaterhouseCoopers LLP presently
serves as our independent auditors.
The compensation committee provides a general review of our compensation and
benefit plans to ensure that they meet corporate objectives. In addition, the
compensation committee reviews the chief executive officer's recommendations on
compensation of our officers and adopting and changing major compensation
policies and practices, and reports its recommendations to the whole board of
directors for approval and authorization. The compensation committee
administers our stock plans and will be comprised of Messrs. Ashe, Conard and
Dominik following this offering.
Compensation Committee Interlocks and Insider Participation
The members of our compensation committee do not receive compensation for
their services as directors. See "Related Party Transactions--Management
Agreement" and "--Other Related Party Payments."
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Executive Compensation
The following table sets forth information concerning the compensation for
the years ended December 31, 1999, 1998 and 1997 for our chief executive
officer and our five other most highly compensated executive officers at the
end of our last fiscal year. For ease of reference, we collectively refer to
these executive officers throughout this section as our "named executive
officers." Shares listed are shares of common stock after giving effect to the
reclassification, assuming an offering price of $14.00 per share and a closing
date of April 14, 2000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
---------------------------- ---------------------------------------
Other Restricted Securities
Annual Stock Underlying All Other
Salary Bonus Compensation Awards Options Compensation
Name and Principal Position Year ($) ($) ($) ($) (#) ($)
- --------------------------- ---- ------- ------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Bruce D. McMaster....... 1999 451,737 42,500 -- (1) -- -- --
President and Chief 1998 432,423 69,694 -- (1) -- -- --
Executive Officer 1997 379,326 356,188 4,580,153(2) 241,026(7) 135,343(8) 1,088,558(13)
23,735(3)
3,808(4)
Charles D. Dimick....... 1999 447,408 42,500 6,000(4) -- -- --
Chairman 5,197(5)
464,994(6)
1998 190,076 31,281 3,000(4) -- 109,521(9) 387,496(14)
39,684(5) 5,972(10) 1,815,690(15)
816,721(6) 142,725(11)
1997 -- -- -- -- -- --
Joseph P. Gisch......... 1999 272,057 20,000 -- (1) -- -- --
Chief Financial 1998 269,346 18,967 -- (1) -- 28,077(12) --
Officer 1997 262,847 62,077 651,791(2) 40,171(7) 22,557(8) 155,198(13)
3,384(3)
2,195(4)
John Peters............. 1999 329,926 42,500 6,000(4) -- -- --
Vice President, 1,411(5)
Sales and Marketing 168,439(6)
1998 126,539 22,104 3,000(4) -- 39,006(9) 315,778(14)
10,547(5) 2,127(10) 650,688(15)
126,363(6) 50,831(11)
1997 -- -- -- -- -- --
Greg Halvorson.......... 1999 271,287 20,000 6,000(4) -- -- --
Vice President, 5,848(5)
Operations 313,663(6)
1998 112,692 22,104 3,000(4) -- 145,849(9) 1,523,861(14)
48,460(5) 7,954(10) 1,992,703(15)
198,975(6) 190,067(11)
1997 -- -- -- -- -- --
Lee W. Muse, Jr*........ 1999 376,442 42,500 -- (1) -- -- --
1998 355,981 69,694 -- (1) -- -- --
1997 314,769 356,188 3,810,922(2) 187,464(7) 105,267(8) 905,802(13)
19,750(3)
891(4)
</TABLE>
- --------
* We do not expect Mr. Muse to continue his employment with us after the
expiration of his employment contract on October 28, 2000.
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(1) The perquisites and other benefits paid did not exceed the lesser of
$50,000 or 10% of the total annual salary and bonus of such named
executive officer.
(2) Reflects amounts paid to such named executive officers to satisfy tax
obligations incurred in connection with the exercise of options to
purchase shares of common stock on October 28, 1997 in connection with a
recapitalization.
(3) Reflects the grant of 13,328 shares, 1,900 shares and 11,090 shares of
common stock to Mr. McMaster, Mr. Gisch and Mr. Muse, respectively, as
compensation for services rendered in their executive capacity.
(4) Reflects payments made in connection with the use of a personal
automobile.
(5) Represents payments under our cash bonus plan made at the time of the
exercise of options to purchase shares of common stock which were issued
in connection with the DCI merger.
(6) Reflects deferred cash distributions made in connection with the exchange
of options to purchase shares of common stock of DCI for options to
purchase shares of common stock.
(7) Reflects the grants of rights to purchase 142,124 shares, 23,687 shares
and 110,541 shares of restricted common stock by Mr. McMaster, Mr. Gisch
and Mr. Muse, respectively, at a purchase price of $1.78 per share in
connection with our October 28, 1997 recapitalization. These officers
purchased these shares by issuing interest-bearing notes to us. The
number of shares reflected in the table has been adjusted to reflect the
subsequent repurchase of some of the shares in 1998 in connection with
our acquisition of NTI and to reflect the subsequent forfeiture of some
of the shares by Mr. McMaster and Mr. Muse and their reissuance to other
employees, including Mr. Gisch. The outstanding notes have been adjusted
in each case to reflect the adjustment in the number of shares of
restricted stock held by these named executive officers. The restricted
stock vests in 48 equal monthly installments beginning November 28, 1997.
We have the right to repurchase any unvested restricted shares of common
stock for the original purchase price if the named executive officer
holding the shares ceases to be employed by us.
(8) The options represent the net number of options to purchase shares of
common stock at an exercise price of $21.79 per share, substantially
above the current fair market value of the common stock ($1.78 per
share), issued October 28, 1997 after accounting for the reduction in the
number of shares available upon exercise of the options as described
below. The options vest in 48 equal monthly installments beginning
November 28, 1997. In connection with the NTI acquisition, Mr. McMaster,
Mr. Gisch and Mr. Muse agreed to permit us to cancel options to purchase
6,781 shares, 1,130 shares and 5,274 shares of common stock,
respectively, at an exercise price of $21.79 per share. Additionally, in
1998 each of Mr. McMaster and Mr. Muse agreed to permit us to cancel
options to purchase 5,335 and 3,650 shares, respectively, of common stock
at an exercise price of $21.79 per share, which options were subsequently
granted by us to certain of our other employees. Additionally, each of
Mr. McMaster and Mr. Muse agreed to permit us to cancel options to
purchase 16,004 and 12,073 shares of common stock, respectively, at an
exercise price of $21.79 per share, which options were subsequently
granted by us to Mr. Gisch.
(9) The options represent options to purchase shares of common stock at an
exercise price equal to $0.56 per share issued in connection with the DCI
merger to replace options to purchase shares of DCI common stock.
(10) The options represent options to purchase shares of common stock at an
exercise price equal to $21.79 per share issued in connection with the
DCI merger to replace options to purchase shares of DCI common stock.
(11) The options represent options to purchase shares of common stock at an
exercise price equal to $12.64 per share issued in connection with the
DCI merger to replace options to purchase shares of DCI common stock.
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(12) The options represent options to purchase shares of common stock at an
exercise price of $21.79 issued to Mr. Gisch after each of Mr. McMaster
and Mr. Muse agreed to permit us to cancel options to purchase 16,004 and
12,073 shares of common stock, respectively, at an exercise price of
$21.79 per share.
(13) Reflects compensation earned by the named executive officer on October
28, 1997 for services rendered in their executive capacity prior to that
date that are payable on October 28, 2000 whether or not such named
executive officer is still employed by us.
(14) Reflects deferred cash distributions payable in connection with the
exchange of options to purchase shares of common stock of DCI for options
to purchase shares of common stock and common stock in connection with
the DCI merger. Each amount listed excludes the amounts of deferred
compensation actually paid to the named executive officer in 1998 and
1999. See note 6 to this table.
(15) Represents amounts payable under our cash bonus plan in connection with
the exercise of outstanding options to purchase shares of common stock
issued in connection with the DCI merger. Each amount listed excludes
amounts actually paid to the named executive officer under our cash bonus
plan in 1998 and 1999. See note 5 to this table.
Option Grants in Last Year
None of our named executive officers were granted options to purchase shares
of our common stock during the year ended December 31, 1999. We intend to grant
options to purchase 50,000 shares of our common stock to each of Messrs. Dimick
and McMaster and options to purchase 30,000 shares to each of Messrs. Gisch,
Peters and Halvorson at the closing of this offering with an exercise price
equal to the initial public offering price.
Option Exercises in Last Year and Year-End Option Values
The following table sets forth information for the named executive officers
concerning stock option exercises during our last year and options outstanding
at the end of the last year after giving effect to the reclassification,
assuming an offering price of $14.00 per share and a closing date of April 14,
2000.
AGGREGATE OPTION EXERCISES IN 1999
AND YEAR-END OPTIONS VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money Options At
Shares Acquired Options At Fiscal Year-End Fiscal Year-End
On Exercise Value Realized (Exercisable/Unexercisable) (Exercisable/Unexercisable)
Name (#) ($)(2) (#) ($)(2)
---- --------------- -------------- --------------------------- ---------------------------
<S> <C> <C> <C> <C>
Bruce D. McMaster....... -- -- 61,753/52,252(3) 0/0
121,129/0(4) 79,353/0
Charles D. Dimick....... 9,280(1) 11,304 13,920/10,916(5) 16,956/13,297
31,704/843(6) 0/0
128,586/20,155(7) 0/0
Joseph P. Gisch......... -- -- 27,427/23,207(3) 0/0
17,268/0(4) 11,313/0
John Peters............. 2,519(1) 3,068 5,044/12,612(5) 6,144/15,363
11,108/688(6) 0/0
34,395/16,436(7) 0/0
Greg Halvorson.......... 10,442(1) 12,719 10,326/33,740(5) 12,578/41,098
6,114/1,840(6) 0/0
146,099/43,968(7) 0/0
Lee W. Muse, Jr......... -- -- 48,503/41,041(3) 0/0
100,792/0(4) 66,030/0
</TABLE>
50
<PAGE>
- --------
(1) Represents shares of common stock purchased at an exercise price of $0.56
per share.
(2) Value is based on the difference between the option exercise price and
the fair market value as of December 31, 1999. The fair market value of
the common stock ($1.78 per share) was determined by the board of
directors.
(3) Represents options to purchase shares of common stock at an exercise
price of $21.79 per share. The options vest in 48 equal monthly
installments beginning November 28, 1997.
(4) Represents options to purchase shares of common stock at an exercise
price of $2.44 per share. The options to purchase such shares of common
stock replaced other options to purchase shares of common stock that were
rolled over in connection with the recapitalization as part of the
management rollover equity and converted into options to purchase shares
of our common stock.
(5) Represents options to purchase shares of common stock at an exercise
price of $0.56 per share. The options to purchase such shares of common
stock replaced options to purchase shares of common stock of DCI that
were rolled over in connection with the DCI merger and converted into
options to purchase shares of common stock. During 1999, Mr. Dimick
agreed to permit us to cancel options to purchase 4,550 shares of common
stock with an exercise price of $0.56, options to purchase 5,930 shares
of common stock with an exercise price of $12.64 and options to purchase
248 shares of common stock with an exercise price of $21.79 which options
were subsequently granted to another of our employees.
(6) Represents options to purchase shares of common stock at an exercise
price of $21.79 per share. The unvested options vest in 22 equal monthly
installments beginning January 28, 1999. The options to purchase such
shares of common stock replaced shares and options to purchase shares of
common stock of DCI that were rolled over in connection with the DCI
merger and converted into shares and options to purchase shares of common
stock.
(7) Represents options to purchase shares of common stock at an exercise
price of $12.64 per share. The options to purchase such shares of common
stock replaced options to purchase shares of common stock of DCI that
were rolled over in connection with the DCI merger and converted into
options to purchase shares of common stock.
Employment Contracts, Termination of Employment and Change of Control
Arrangements
Mr. McMaster is currently employed as our President and Chief Executive
Officer pursuant to an agreement dated September 1, 1995, as amended, effective
until October 28, 2000. Under this agreement, Mr. McMaster received an annual
base salary of $375,000 in 1997, $425,000 in 1998 and $450,000 in 1999. His
2000 base salary is $475,000. In addition, Mr. McMaster is eligible for an
annual bonus based upon the achievement of EBITDA targets and received an
award, pursuant to the agreement, of 13,328 shares of common stock, on October
28, 1997. Mr. McMaster's employment agreement contains customary
confidentiality provisions and a non-compete clause effective for the duration
of the term of the agreement. In addition, pursuant to an agreement entered
into at the time of our October 1997 recapitalization, Mr. McMaster will be
entitled to receive an additional bonus of $1,088,558 in consideration of his
services prior to October 28, 1997, which will be payable on October 28, 2000
whether or not he is still employed by us.
Mr. Dimick is currently employed as our Chairman and as President of Dynamic
Details Incorporated, Silicon Valley pursuant to an agreement dated July 23,
1998 which expires in July 2001. Under this agreement, Mr. Dimick received an
annual base salary at an annual rate of $420,000 in 1998, subject to increases
during the remainder of the contract. His 2000 base salary is $475,000. In
addition, Mr. Dimick is eligible for an annual bonus based upon the achievement
of EBITDA targets and received an award, pursuant to the agreement, of 109,521
Series A cash bonus units valued at $0.5601 per unit and 142,725 Series L cash
bonus units valued at $12.6062 per unit, which cash bonus units vest on the
same schedule applicable to the vesting of the options to purchase shares of
common stock granted in connection with the DCI merger and are payable in
accordance with the terms of the cash bonus plan. Mr. Dimick also entered into
a non-compete agreement with us which contains customary confidentiality
provisions and a non-compete clause effective for the duration of the term of
the agreement.
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<PAGE>
Mr. Gisch is currently employed as our Chief Financial Officer pursuant to
an agreement dated September 19, 1995, as amended, effective until October 28,
2000. Under this agreement, Mr. Gisch received an annual base salary of
$252,000 in 1997, $265,000 in 1998 and $275,000 in 1999. His 2000 base salary
is $287,500. In addition, Mr. Gisch is eligible for an annual bonus based upon
the achievement of EBITDA targets and received an award, pursuant to the
agreement, of 1,900 shares of common stock on October 28, 1997. Mr. Gisch's
employment agreement contains customary confidentiality provisions. In
addition, pursuant to an agreement entered into at the time of our October 1997
recapitalization, Mr. Gisch will be entitled to receive an additional bonus of
$155,198 in consideration of his services prior to October 28, 1997, which will
be payable on October 28, 2000, whether or not he is still employed by us.
Mr. Peters is currently employed as a Vice President and as the Senior Vice
President of Sales of Dynamic Details Incorporated, Silicon Valley pursuant to
an agreement dated July 23, 1998 which expires in October 2000. Under this
agreement, Mr. Peters received an annual base salary at an annual rate of
$280,000 in 1998, subject to increases during the remainder of the contract. In
addition, Mr. Peters is eligible for an annual bonus based upon the achievement
of EBITDA targets and received an award, pursuant to the agreement, of 39,006
Series A cash bonus units valued at $0.5601 per unit and 50,832 Series L cash
bonus units valued at $12.6062 per unit, which cash bonus units vest on the
same schedule applicable to the vesting of the options to purchase shares of
common stock granted in connection with the DCI merger and are payable in
accordance with the terms of the cash bonus plan. Mr. Peters also entered into
a non-compete agreement with us which contains customary confidentiality
provisions and a non-compete clause effective for the duration of the term of
the agreement.
Mr. Halvorson is currently employed as a Vice President and as Senior Vice
President of Operations of Dynamic Details Incorporated, Silicon Valley
pursuant to an agreement dated July 23, 1998 which expires in October 2000.
Under this agreement, Mr. Halvorson received an annual base salary at an annual
rate of $250,000 in 1998, subject to increases during the remainer of the
contract. In addition, Mr. Halvorson is eligible for an annual bonus based upon
achievement of EBITDA targets and received an award, pursuant to the agreement,
of 103,594 Tranche A Series A cash bonus units valued at $0.5601 per unit,
42,255 Tranche B Series A cash bonus units valued at $0.2195 per unit, 135,002
Tranche A Series L cash bonus units valued at $12.6062 per unit and 55,066
Tranche B Series L cash bonus units valued at $4.3162 per unit, which cash
bonus units vest on the same schedule applicable to the vesting of the options
to purchase shares of common stock granted in connection with the DCI merger
and are payable in accordance with the terms of the cash bonus plan. Mr.
Halvorson also entered into a non-compete agreement with us which contains
customary confidentiality and a non-compete clause effective for the duration
of the term of the agreement.
Mr. Muse is currently employed as a Vice President pursuant to an agreement
dated September 1, 1995, as amended, effective until October 28, 2000. Under
this agreement, Mr. Muse received an annual base salary of $300,000 in 1997,
$350,000 in 1998 and $375,000 in 1999. In addition, Mr. Muse is eligible for an
annual bonus based upon the achievement of EBITDA targets and received an
award, pursuant to the agreement, of 11,090 shares of common stock on October
28, 1997. Mr. Muse's employment agreement contains customary confidentiality
provisions and a non-compete clause effective for the duration of the term of
the agreement. In addition, pursuant to an agreement entered into at the time
of our October 1997 recapitalization, Mr. Muse will be entitled to receive an
additional bonus of $905,802 in consideration of his services prior to October
28, 1997, which will be payable on October 28, 2000, whether or not he is still
employed by us.
Stock Plans and Related Transactions
On October 28, 1997, the board of directors adopted, and our stockholders
approved, our 1997 Details, Inc. Equity Incentive Plan, or the 1997 Plan, which
authorized the granting of stock options and the sale of common stock to our
current or future employees, directors, consultants or advisors. Our board of
directors is authorized to sell or otherwise issue common stock at any time
prior to the termination of the 1997 Plan in such quantity, at such price, on
such terms and subject to such conditions as established by it up to an
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<PAGE>
aggregate of 659,799 shares of common stock, subject to adjustment upon the
occurrence of certain events to prevent any dilution or expansion of the rights
of participants that might otherwise result from the occurrence of such events.
Currently there are no shares of common stock available for grant under the
1997 Plan.
In connection with the DCI merger, the board of directors adopted, and our
stockholders approved, the Details Holdings Corp.-Dynamic Circuits 1996 Stock
Option Plan and the Details Holdings Corp.-Dynamic Circuits 1997 Stock Option
Plan (together the "DCI Stock Option Plans"), which authorized the granting of
stock options and the sale of common stock in connection with the DCI merger.
The terms applicable to options issued under the DCI Stock Option Plans are
substantially similar to the terms applicable to the options to purchase shares
of DCI outstanding immediate prior to the DCI acquisition. These terms include
vesting from the date of acquisition through 2002. An optionholder's scheduled
vesting is dependent upon continued employment with us. Upon termination of
employment, any unvested options as of the termination date are forfeited.
In connection with the DCI merger, we converted each DCI stock option award
into the right to receive a cash payment and an option to purchase shares of
common stock. The options granted bear exercise prices of either $0.56, $12.64
or $21.79. Our board of directors is authorized to sell or otherwise issue
common stock at any time prior to the termination of the applicable DCI Stock
Option Plan in such quantity, at such price, on such terms and subject to such
conditions as established by it up to an aggregate of 1,440,425 shares of
common stock, in the case of the Details Holdings Corp.- Dynamic Circuits 1996
Stock Option Plan, and 297,715 shares of common stock in the case of the
Details Holdings Corp.-Dynamic Circuits 1997 Stock Option Plan (in each case,
subject to adjustment to prevent any dilution or expansion of the rights of
participants that might otherwise result from the occurrence of specified
events). There are currently 105,948 options to purchase shares of common stock
available for grant under the DCI Stock Option Plans. As of December 31, 1998,
the options outstanding under the DCI Stock Option Plans had weighted average
remaining contractual lives of approximately seven years.
In 1998, each of Mr. McMaster and Mr. Muse agreed to permit us to cancel
options to purchase 21,338 and 15,723 shares, respectively, of common stock at
an exercise price of $21.79 per share, which options were subsequently granted
by us to another of our other employees. In 1999, Mr. Dimick agreed to permit
us to cancel options to purchase 4,550 shares of common stock at an exercise
price of $0.56 per share, 5,930 shares of common stock at an exercise price of
$12.64 per share and 248 shares of common stock at an exercise price of $21.79
per share, which options were subsequently granted by us to another of our
employees.
2000 Equity Incentive Plan
The 2000 Equity Incentive Plan, or the "2000 Plan," is expected to be
adopted by our board of directors and approved by our stockholders prior to the
completion of this offering. As of the date of this prospectus, no awards have
been made under the 2000 Plan. We intend to grant to some of our executive
officers and employees options to purchase a total of approximately 1,400,000
shares of our common stock with an exercise price equal to the initial public
offering price at the closing of this offering. We also intend to grant to some
of our executive officers additional options with an exercise price equal to
the market price on the date of grant during 2000. No future grants will be
made under existing plans upon the effectiveness of the 2000 Plan.
The 2000 Plan provides for the grant of incentive stock options to our
employees (including officers and employee directors) and for the grant of
nonstatutory stock options to our employees, directors and consultants. A
nonstatutory stock option is a stock option that is not intended to qualify as
an incentive stock option under Section 422 of the Internal Revenue Code. The
holder of a nonstatutory stock option generally is taxed on the difference
between the exercise price and the fair market value when exercised. The 2000
Plan also provides for the grant of stock appreciation rights, restricted
stock, unrestricted stock, deferred stock, and securities (other than stock
options) which are convertible into or exchangeable for common stock on such
terms and conditions as our board determines.
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A total of (1) 4,100,000 shares of common stock, (2) any shares returned to
existing plans as a result of termination of options and (3) annual increases
of 1.0% of our outstanding common stock to be added on the date of each annual
meeting of our stockholders commencing in 2001, or such lesser amounts as may
be determined by the board of directors, will be reserved for issuance pursuant
to the 2000 Plan. For purposes of the preceding sentence, the following will
not be considered to have been delivered under the 2000 Plan:
. shares remaining under an award that terminates without having been
exercised in full;
. shares subject to an award, where cash is delivered to a participant in
lieu of such shares;
. shares of restricted stock that have been forfeited in accordance with
the terms of the applicable award; and
. shares held back, in satisfaction of the exercise price or tax
withholding requirements, from shares that would otherwise have been
delivered pursuant to an award.
The number of shares of stock delivered under an award shall be determined
net of any previously acquired shares tendered by the participant in payment of
the exercise price or of withholding taxes. The maximum number of incentive
stock options that may be issued pursuant to the 2000 Plan is 6,600,000.
The administrator of the 2000 Plan has the power to determine the terms of
the options granted, including the exercise price of the option, the number of
shares subject to each option, the exercisability thereof, and the form of
consideration payable upon such exercise. In addition, our board of directors
has the authority to amend, suspend or terminate the 2000 Plan, provided that
no such action may affect any share of common stock previously issued and sold
or any option previously granted under the 2000 Plan. Cash performance grants,
intended to qualify as "performance-based compensation," may be issued under
the plan, subject to shareholder approval as required by Section 162(m) of the
Internal Revenue Code.
Options granted under the 2000 Plan are generally not transferable by the
optionee, and each option is exercisable during the lifetime of the optionee
and only by such optionee. Options granted under the 2000 Plan must generally
be exercised within 3 months after the end of an optionee's status as an
employee, director or consultant of DDi, or within 12 months after such
optionee's termination by death or disability, but in no event later than the
expiration of the option term.
The exercise price of all incentive stock options granted under the 2000
Plan must be at least equal to the fair market value of the common stock on the
date of grant. The exercise price of nonstatutory stock options granted under
the 2000 Plan is determined by the administrator, but with respect to
nonstatutory stock options intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Internal Revenue
Code, the exercise price must be at least equal to the fair market value of the
common stock on the date of grant. With respect to any participant who owns
stock possessing more than 10% of the voting power of all classes of our
outstanding capital stock, the exercise price of any incentive stock option
granted must be at least equal to 110% of the fair market value on the grant
date and the term of such incentive stock option must not exceed five years.
The term of all other options granted under the 2000 Plan shall be determined
by the administrator.
The 2000 Plan provides that in the event of our merger with or into another
corporation, or a sale of substantially all of our assets, each option shall be
assumed or an equivalent option substituted for by the successor corporation.
If the outstanding options are not assumed or substituted for by the successor
corporation, the administrator shall provide for the optionee to have the right
to exercise the option as to all of the optioned stock, including shares as to
which it would not otherwise be exercisable. This may have the effect of
discouraging a potential acquiror from making a tender offer or otherwise
attempting to gain control of us because our employees might have a reduced
incentive to remain with us following a merger or sale. If the administrator
makes an option exercisable in full in the event of a merger or sale of assets,
the administrator shall notify the optionee that the option shall be fully
exercisable for a period of fifteen days from the date of such notice, and the
option will terminate upon the expiration of such period.
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Employee Stock Purchase Plan
Our Employee Stock Purchase Plan, or ESPP, is expected to be adopted by our
board of directors and approved by our stockholders prior to the completion of
this offering. The ESPP will be established to give eligible employees a
convenient means of purchasing shares of common stock through payroll
deductions at a discounted price. We believe ownership of stock by employees
fosters greater employee interest in our success, growth and development.
A total of 1,450,000 shares of our common stock will be reserved for
issuance under the ESPP, which is intended to qualify under Section 423 of the
Internal Revenue Code. The ESPP will allow for purchases in a series of
offering periods, each six months in duration, with new offering periods (other
than the initial offering period) commencing on January 1 and July 1 of each
year. The initial offering period is expected to commence on the date of this
offering. The ESPP will be administered by our board of directors or by a
committee appointed by the board.
Our employees, including officers and employee directors, and the employees
of any majority-owned subsidiary designated by our board of directors, are
eligible to participate in the ESPP if they have completed at least six months
of employment and are employed by us or any such designated subsidiary for at
least 20 hours per week and more than five months per year. The ESPP permits
eligible employees to purchase shares of our common stock through payroll
deductions, which may not exceed 10% of an employee's compensation, at a price
equal to 85% of the lower of the fair market value of our common stock at the
beginning or at the end of each applicable purchase period. In event of
specified changes in capitalization described in the ESPP, the purchase price
may be adjusted during an offering period. Employees may end their
participation in the offering at any time during the offering period, and
participation in the ESPP ends automatically upon termination of employment
with us. Unless terminated earlier by our board of directors, the ESPP will
have a term of ten years.
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RELATED PARTY TRANSACTIONS
The following summary of the Stockholders Agreement and the Management
Agreement is a description of the material provisions of those agreements and
is subject to, and qualified in its entirety by reference to, those agreements,
each of which has been previously filed with the Securities and Exchange
Commission.
Stockholders Agreement
All of our current stockholders and optionholders will be parties to a
stockholders agreement to be dated before the effectiveness of the registration
statement that, among other things, provides for registration rights.
Management Agreement
A management agreement among Bain Capital Partners V, L.P. ("Bain"), us and
our subsidiaries, DDi Capital Corp. and Dynamic Details, Incorporated, will be
terminated by mutual consent of the parties in connection with this offering,
and we will use some of the proceeds of this offering to pay Bain a fee of
approximately $3 million. We paid Bain a fee of $1.1 million in 1999. The
management agreement includes customary indemnification provisions in favor of
Bain. Investment funds associated with Bain are our largest stockholders.
Loans and Payments to Named Executive Officers
In connection with the exercise of certain options and the purchase of
certain shares of restricted stock in 1997, we accepted as payment from each
named executive officer purchasing such shares a note bearing interest at 5.57%
per annum. Mr. McMaster, Mr. Gisch, Mr. Muse and Mr. Wright had outstanding
loan balances, excluding accrued interest, at December 31, 1999 of
approximately $273,806, $44,844, $214,742, and $73,810, respectively. We have
agreed to permit these executive officers to repay their respective loan
obligations with proceeds received from the sale of stock.
Other Related Party Payments
Sankaty High Yield Asset Partners, L.P., an affiliate of the Bain Capital
funds, may receive a portion of the net proceeds from this offering from the
redemption of the DDi Intermediate senior discount notes and the repayment of
some of our indebtedness under the Dynamic Details senior credit facility. See
"Use of Proceeds."
Chase Manhattan Capital, LLC, one of our stockholders, is an affiliate of
The Chase Manhattan Bank, which serves as the administrative agent and
participates as a lender under the Dynamic Details senior credit facility and
is a counterparty to one of our interest rate exchange agreements, under terms
similar to those of the other participants and counterparties. Some of the net
proceeds of this offering will be used to repay a portion of the indebtedness
under the Dynamic Details senior credit facility.
Directors' Relationships with Principal Stockholders
Eight of our directors are affiliated with our principal stockholders.
Charles D. Dimick and Bruce D. McMaster are executive officers, stockholders
and directors. David Dominik, Edward W. Conard, Stephen G. Pagliuca and
Prescott Ashe are affiliated with the Bain Capital funds. Mark R. Benham is a
partner in Celerity Partners, L.L.C., and Christopher Behrens is a general
partner of Chase Capital Partners, an affiliate of The Chase Manhattan Bank.
Sales to Affiliate of Major Stockholders
Investment funds associated with Bain Capital, Inc. and Celerity Partners,
L.L.C. are also stockholders of SMTC Corporation, one of our customers. Our
sales to SMTC Corporation, which totaled less than $2.5 million or less than 1%
of our net sales in 1999, are on terms equivalent to those made available to
our other customers.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of January 31, 2000, information
regarding the beneficial ownership after giving effect to the reclassification,
assuming an offering price of $14.00 per share and a closing date of April 14,
2000. The table sets forth the number of shares beneficially owned, and the
percentage ownership before the offering and after the completion of the
offering and the MCM Electronics acquisition, for:
. each person who is known by us to own beneficially more than 5% of our
outstanding shares of common stock;
. each executive officer named in our summary compensation table and each
director; and
. all executive officers and directors as a group.
The actual number of shares of common stock to be issued to each holder of
Class L common stock in the reclassification is subject to change based on the
initial public offering price and the completion date of this offering. See
"The Reclassification." The percentage ownership may change based on the final
number of shares issued to holders of MCM Electronics shares in consideration
for the acquisition of MCM Electronics. See "Prospectus Summary--Recent
Developments" and "Unaudited Pro Forma Consolidated Financial Data."
As of January 31, 2000, our outstanding equity securities consisted of
24,750,000 shares of common stock after giving effect to the reclassification,
assuming an offering price of $14.00 per share and a closing date of April 14,
2000.
Unless otherwise indicated below, to our knowledge, all persons listed below
have sole voting and investment power with respect to their shares of common
stock, except to the extent authority is shared by spouses under applicable
law. Unless otherwise indicated below, each entity or person listed below
maintains a mailing address of c/o DDi Corp., 1220 Simon Circle, Anaheim,
California 92806.
The number of shares beneficially owned by each stockholder is determined
under rules promulgated by the Securities and Exchange Commission and assumes
the underwriters do not exercise their over-allotment option. The information
is not necessarily indicative of beneficial ownership for any other purpose.
Under these rules, beneficial ownership includes any shares as to which the
individual or entity has sole or shared voting or investment power and any
shares as to which the individual or entity has the right to acquire beneficial
ownership within 60 days after January 31, 2000 through the exercise of any
stock option, warrant or other right. The inclusion in the following table of
those shares, however, does not constitute an admission that the named
stockholder is a direct or indirect beneficial owner.
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<TABLE>
<CAPTION>
Percentage of Shares
Shares Beneficially Owned (**) Beneficially Owned
---------------------------------- --------------------
After
Offering
Options Before and MCM
Name and Address Shares and Warrants Total Offering Acquisition
---------------- ---------- ------------ ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Principal Stockholders:
Bain Capital Funds (1).. 10,251,866 49,162 10,301,028 41.6% 26.4%
c/o Bain Capital, Inc.
Two Copley Place
Boston, Massachusetts
02116
Celerity Partners, 2,010,771 26,841 2,037,612 8.2 5.2
L.L.C. (2).............
11111 Santa Monica
Boulevard; Suite 1111
Los Angeles, California
90025
Chase Manhattan 3,328,351 -- 3,328,351 13.4 8.5
Entities (3)...........
c/o Chase Manhattan
Capital, LLC
380 Madison Avenue
12th Floor
New York, New York
10017
KB Mezzanine Fund II, 1,464,975 31,092 1,496,067 6.0 3.8
L.P. ..................
c/o Equinox Investment
Partners LLC
19 Olde Kings Highway
South Darien, CT 06820
Directors and Executive Officers:
Bruce D. McMaster....... 1,084,815 190,005 1,274,820 4.8 3.1
Charles D. Dimick (4)... 1,324,824 174,582 1,488,176 5.9 3.8
Joseph P. Gisch......... 184,106 47,860 231,966 * *
John Peters............. 476,903 52,526 529,429 2.1 1.4
Greg Halvorson.......... 101,784 170,777 272,561 1.1 *
Lee W. Muse, Jr. ....... 751,034 154,890 905,924 3.4 2.2
Christopher Behrens
(5).................... 3,043,819 -- 3,043,819 12.3 7.8
Edward W. Conard (6).... 2,669,415 7,716 2,707,131 10.9 6.9
David Dominik (6)....... 2,669,415 7,716 2,707,131 10.9 6.9
Stephen G. Pagliuca
(6).................... 2,669,415 7,716 2,707,131 10.9 6.9
Prescott Ashe (7)....... 2,669,415 7,716 2,707,131 10.9 6.9
Stephen Zide (7)........ 2,669,415 7,716 2,707,131 10.9 6.9
Mark R. Benham (8)...... 2,010,771 26,841 2,037,612 8.2 5.2
All Directors and execu-
tive officers
as a group (13 per-
sons) (6)(7)(8)........ 11,085,708 718,359 11,804,067 46.7 29.9
</TABLE>
- --------
* Indicates beneficial ownership of less than 1% of the issued and
outstanding common stock.
** The number of shares of common stock deemed outstanding on January 31,
2000, after giving effect to the reclassification with respect to a person
or group includes (a) shares of common stock outstanding on such date and
(b) all options and warrants that are currently exercisable or will become
exercisable within 60 days of January 31, 2000 by the person or group in
question.
(1) Includes shares of common stock held by Bain Capital Fund V, L.P., ("Fund
V"); Bain Capital Fund V-B, L.P. ("Fund V-B"); BCIP Associates ("BCIP");
and BCIP Trust Associates, L.P. ("BCIP Trust" and collectively with Fund
V, Fund V-B and BCIP, the "Bain Capital Funds"). Does not include shares
owned by other stockholders that are subject to the stockholders
agreement. See "Related Party Transactions--Stockholders Agreement."
(2) Consists of shares owned by Celerity Dynamo, L.L.C., Celerity Liquids,
L.L.C. and Celerity Details, L.L.C. Celerity Partners, L.L.C. and its
managing members control each of such entities, which disclaim beneficial
ownership of any such shares in which it does not have a pecuniary
interest.
(3) Consists of shares owned by Chase Manhattan Capital, LLC, Chase Securities
Inc. and DI Investors, LLC, all of which are affiliates of The Chase
Manhattan Corporation. Chase Manhattan Capital, LLC is the managing member
of DI Investors, LLC and owns a majority of the interests therein.
Accordingly, Chase Manhattan Capital, LLC may be deemed to beneficially
own shares owned by DI Investors, LLC. Each of Chase Manhattan Capital,
LLC, DI Investors, LLC and Chase Securities Inc. disclaims beneficial
ownership of any such shares in which it does not have a pecuniary
interest.
(4) Includes 11,230 shares of common stock held by Mr. Dimick's minor child.
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<PAGE>
(5) Mr. Behrens is a general partner of Chase Capital Partners, which is a
non-managing member of Chase Manhattan Capital, LLC and which manages the
investments of Chase Manhattan Capital, LLC and, accordingly, may be
deemed to beneficially own shares owned by Chase Manhattan Capital, LLC
and DI Investors, LLC. Mr. Behrens disclaims beneficial ownership of any
such shares in which he does not have a pecuniary interest. The address of
Mr. Behrens is c/o Chase Capital Partners, 380 Madison Avenue, 12th Floor,
New York, New York 10017.
(6) The shares of common stock included in the table represent shares held by
BCIP and BCIP Trust. Messrs. Conard and Pagliuca are each Managing
Directors of Bain Capital, Inc. and are each general partners of BCIP and
BCIP Trust and Mr. Dominik is a general partner of BCIP and BCIP Trust and
accordingly may be deemed to beneficially own shares owned by such funds.
Each such person disclaims beneficial ownership of any such shares in
which he does not have a pecuniary interest. The address of Messrs.
Conard, Dominik and Pagliuca is c/o Bain Capital, Inc., Two Copley Place,
Boston, Massachusetts 02116.
(7) The shares of common stock included in the table represent shares held by
BCIP and BCIP Trust. Mr. Zide is a managing director of Pacific Equity
Partners and was formerly an associate of Bain Capital, Inc. Mr. Ashe is a
principal of Bain Capital, Inc. Each such person is a partner of BCIP and
BCIP Trust and, accordingly, may be deemed to beneficially own shares
owned by such funds. Each such person disclaims beneficial ownership of
any such shares in which he does not have a pecuniary interest. The
address of Mr. Ashe is c/o Bain Capital, Inc., Two Copley Place, Boston,
Massachusetts 02116.
(8) Mr. Benham is a Managing Member of Celerity Partners, L.L.C., and controls
each of Celerity Details, L.L.C., Celerity Liquids, L.L.C. and Celerity
Dynamo, L.L.C. and, accordingly, may be deemed to beneficially own shares
owned by Celerity Details, L.L.C., Celerity Liquids, L.L.C. and Celerity
Dynamo, L.L.C. Mr. Benham disclaims beneficial ownership of any such
shares in which he does not have a pecuniary interest. The address of Mr.
Benham is c/o Celerity Partners, 11111 Santa Monica Boulevard, Suite 1111,
Los Angeles, California 90025.
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<PAGE>
DESCRIPTION OF INDEBTEDNESS
After giving effect to this offering, we and our subsidiaries will have
outstanding debt under the Dynamic Details senior credit facility, the Dynamic
Details senior subordinated notes and the DDi Capital senior discount notes.
We own 100% of the capital stock of DDi Intermediate Holdings Corp., which
in turn owns 100% ofthe capital stock of DDi Capital Corp., which in turn owns
100% of the capital stock of Dynamic Details, Incorporated, our primary
operating subsidiary.
Dynamic Details Senior Credit Facility
Our subsidiary, Dynamic Details, Incorporated, has entered into a credit
agreement, for which The Chase Manhattan Bank is the collateral, co-syndication
and administrative agent and for which Bankers Trust Company is the
documentation and co-syndication agent. The lenders are a syndicate comprised
of various banks, financial institutions or other entities which hold
transferable interests in the Dynamic Details senior credit facility. The
Dynamic Details senior credit facility, as of December 31, 1999 consists of:
. Tranche A term facility of up to approximately $102.6 million;
. Tranche B term facility of up to $149.1 million; and
. a revolving line of credit of up to $45.0 million, including revolving
credit loans, letters of credit and swing line loans.
We intend to use some of the proceeds of this offering to reduce the
indebtedness under the Dynamic Details senior credit facility, which was $251.7
million as of December 31, 1999.
The Dynamic Details senior credit facility is jointly and severally
guaranteed by DDi Capital and its subsidiaries and secured by the assets of all
of our subsidiaries, and future domestic subsidiaries of Dynamic Details will
guarantee the senior credit facility and secure that guarantee with their
assets. The senior credit facility requires Dynamic Details to meet financial
ratios and benchmarks and to comply with other restrictive covenants.
The Tranche A term facility amortizes in quarterly installments from June
1999 until July 2004. The Tranche B term facility amortizes in quarterly
installments from June 1999 until September 2004 at which time the remaining
outstanding loans under the Tranche B term facility becomes repayable in two
equal quarterly installments with a final payment in April 2005. The revolving
line of credit terminates in July 2004.
Our borrowings under the Dynamic Details senior credit facility bear
interest at varying rates based, at our option, on either LIBOR plus 225 basis
points or the bank rate plus 125 basis points (in the case of Tranche A) and
LIBOR plus 250 basis points or the bank rate plus 150 basis points (in the case
of Tranche B). The overall effective interest rate at December 31, 1999 was
8.90%. Dynamic Details is required to pay to the lenders under the senior
credit facility a commitment on the average unused portion of the revolving
credit facility and a letter of credit fee on each letter of credit
outstanding. It must apply proceeds of sales of debt, equity or material assets
to prepayment on its senior credit facility, subject to some exceptions, and
must also, in some circumstances, pay excess cash flow to the lenders under its
senior credit facility.
This summary of the material provisions of the Dynamic Details senior credit
facility, is qualified in its entirety by reference to all of its provisions,
which has been filed as an exhibit to the registration statement of which this
prospectus forms a part. See "Additional Information." We will enter into an
amendment to the credit agreement governing the Dynamic Details senior credit
facility prior to the effectiveness of this offering. In connection with the
amendment, we will pay our lenders a fee of 25 basis points on the outstanding
balance of borrowings under the credit agreement. The amendment will permit the
uses of proceeds described herein and will also provide that future prepayments
of the Tranche B term facility will require a premium of up to 2%, declining to
par within two years.
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<PAGE>
Dynamic Details Senior Subordinated Notes
The Dynamic Details senior subordinated notes were issued in an aggregate
principal amount of $100,000,000 and will mature on November 15, 2005. The
senior subordinated notes were issued under an indenture dated as of November
18, 1997 between Dynamic Details, Incorporated, as issuer, and State Street
Bank and Trust Company, as trustee, and are senior subordinated unsecured
obligations of Dynamic Details, Incorporated. Cash interest on the senior
subordinated notes accrues at the rate of 10% per annum and is payable semi-
annually in arrears on each May 15 and November 15 of each year.
On or after November 15, 2001, the Dynamic Details senior subordinated notes
may be redeemed at the option of Dynamic Details, Incorporated, in whole at any
time or in part from time to time, at a redemption price that is greater than
the accreted value of the notes, plus accrued and unpaid interest, if any, to
the redemption date. Additionally, at any time on or prior to November 15,
2000, Dynamic Details, Incorporated may use the net proceeds of one or more
equity offerings to redeem up to 40% of the senior subordinated notes at a
redemption price equal to 110% of the principal amount thereof plus accrued and
unpaid interest, if any, to the redemption date, subject to some restrictions.
This summary of the material provisions of the Dynamic Details senior
subordinated notes is qualified in its entirety by reference to all of the
provisions of the indenture governing these notes, which has been filed as an
exhibit to the registration statement of which this prospectus forms a part.
See "Additional Information."
DDi Capital Senior Discount Notes
The DDi Capital senior discount notes were issued in an aggregate principal
amount at maturity of $110,000,000 and will mature on November 15, 2007. The
senior discount notes were issued under an indenture dated as of November 18,
1997 between us, as issuer, and State Street Bank and Trust Company, as
trustee, as supplemented by the supplemental indenture dated as of February 10,
1998 between our subsidiary, DDi Capital Corp., and the trustee. The senior
discount notes are senior unsecured obligations of DDi Capital Corp. The senior
discount notes were issued at a discount to their aggregate principal amount at
maturity and will accrete in value until November 15, 2002 at a rate per annum
equal to 12.5%, compounded semi-annually. Cash interest on the senior discount
notes will not accrue prior to November 15, 2002. Thereafter, interest will
accrue at the rate of 12.5% per annum, payable semi-annually in arrears on each
May 15 and November 15 of each year commencing May 15, 2003 to the holders of
record on the immediately preceding May 1 and November 1, respectively.
On or after November 15, 2002, the senior discount notes may be redeemed at
the option of DDi Capital, in whole at any time or in part from time to time,
at a redemption price that is greater than the accreted value of the notes,
plus accrued and unpaid interest, if any, to the redemption date. Additionally,
at any time on or prior to November 15, 2000, DDi Capital may use the net
proceeds of one or more of our equity offerings to redeem up to 40% of the
senior discount notes at a redemption price (expressed as a percentage of the
accreted value thereof) equal to 112.5%, subject to some restrictions. We will
use some of the proceeds of this offering to redeem up to 40% of these notes.
See "Use of Proceeds."
This summary of the material provisions of the DDi Capital senior discount
notes is qualified in its entirety by reference to all of the provisions of the
indenture governing the senior discount notes, which has been filed as an
exhibit to the registration statement of which this prospectus forms a part.
See "Additional Information."
DDi Intermediate Senior Discount Notes
In July 1998, DDi Intermediate issued senior discount notes due 2008. The
DDi Intermediate senior discount notes have a stated maturity of June 30, 2008,
an interest rate of 13.5% per annum and a stated principal amount at maturity
of approximately $67 million, although approximately 43% of the stated
principal amount of the debt is due December 2003. The debt is redeemable at
DDi Intermediate's option at specified redemption prices. As of December 31,
1999, the outstanding accreted value of these senior discount notes
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<PAGE>
was $40.8 million. The DDi Intermediate senior discount notes impose
restrictions on the incurrence of indebtedness by DDi Intermediate, DDi Capital
and Dynamic Details, Incorporated. The note purchase agreement contains
covenants limiting, among other things, dividends, asset sales, and
transactions with affiliates. These restrictions apply both to Intermediate,
DDi Capital and Dynamic Details, Incorporated.
Under the terms of the indenture relating to the DDi Intermediate senior
discount notes, we may be required to use the net proceeds of equity offerings
to redeem a portion of the DDi Intermediate senior discount notes outstanding
at a price that would provide the noteholders with a 20% per annum return on
the price at which the notes were issued, plus accrued and unpaid interest
thereon. Approximately 50% of the Intermediate senior discount notes are held
by investment funds advised by Sankaty Advisors, Inc., an affiliate of Bain
Capital.
MCM Electronics Facilities Agreement
In connection with our acquisition of MCM Electronics, we will assume MCM
Electronics' debt obligations under a facilities agreement dated May 27, 1999
between MCM Electronics and the Governor of the Bank of Scotland, as arranger,
agent, security trustee, term loan bank and working capital bank. This facility
consists of:
. Tranche A term loan facility of up to an aggregate principal amount of
(Pounds)17.25 million;
. Tranche B term loan facility of up to an aggregate principal amount of
(Pounds)2.5 million;
. Tranche C term loan facility of up to an aggregate principal amount of
(Pounds)3.0 million; and
. working capital facilities of an aggregate maximum principal amount of
(Pounds)4.0 million.
The term loan facilities require MCM Electronics to meet financial ratios
and to comply with other restrictive covenants.
As of December 31, 1999, an aggregate of (Pounds)18.5 million, or $29.8
million, was outstanding under the facilities.
The Tranche A term loan facility is repayable in increasing quarterly
installments beginning in June 2000 with the final payment payable in September
2006. The Tranche B term loan facility is repayable in full in June 2007. The
Tranche C term loan facility is repayable in annual installments between March
2001 and March 2006. The working capital facility is available until July 2002.
Borrowings under the facilities bear interest at varying rates, comprising
LIBOR at the dates of commencement of the relevant quarterly interest period
plus a margin of 200 basis points in the case of Tranche A, 350 basis points in
the case of Tranche B, 200 basis points in the case of Tranche C and 200 basis
points in the case of the working capital facility. The agreement requires MCM
Electronics to make interest hedging arrangements and consequently MCM
Electronics has entered into an interest rate swap agreement covering
approximately 80% of its borrowings under these facilities.
MCM Electronics is required to pay non-utilization fees on the average
unused portion of each of the facilities.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
General Matters
Upon completion of this offering, the total amount of our authorized capital
stock will consist of 75,000,000 shares of common stock and 5,000,000 shares of
one or more series of preferred stock. As of December 31, 1999, we had
outstanding 3,522,183.0 shares of Class A common stock and 396,330.2 shares of
Class L common stock. Prior to the completion of this offering, we will
reincorporate in Delaware, and all of the outstanding shares of Class A common
stock and Class L common stock will be reclassified into a single class of
common stock. See "The Reclassification." As of December 31, 1999, we had 123
stockholders of record with respect to our Class A common stock and Class L
common stock.
After giving effect to this offering, assuming an offering price of $14.00
per share, a closing date of April 14, 2000 and our acquisition of MCM
Electronics as of December 31, 1999, we will have 38,957,143 shares of common
stock and no shares of preferred stock outstanding. The following summary of
provisions of our capital stock describes all material provisions of, but does
not purport to be complete and is subject to, and qualified in its entirety by,
our Delaware certificate of incorporation and our Delaware by-laws, which are
included as exhibits to the registration statement of which this prospectus
forms a part, and by the provisions of applicable law.
The Delaware certificate and by-laws contain provisions that are intended to
enhance the likelihood of continuity and stability in the composition of the
board of directors and which may have the effect of delaying, deferring or
preventing a future takeover or change in control of our company unless such
takeover or change in control is approved by our board of directors.
Common Stock
The issued and outstanding shares of common stock are, and the shares of
common stock to be issued by us in connection with the offering will be,
validly issued, fully paid and nonassessable. Subject to the prior rights of
the holders of any series of preferred stock, the holders of outstanding shares
of common stock are entitled to receive dividends out of assets legally
available therefor at such time and in such amounts as the board of directors
may from time to time determine. Please see "Dividend Policy." The shares of
common stock are not convertible and the holders thereof have no preemptive or
subscription rights to purchase any of our securities. Upon liquidation,
dissolution or winding up of our company, the holders of common stock are
entitled to receive pro rata our assets which are legally available for
distribution, after payment of all debts and other liabilities and subject to
the prior rights of any holders of any series of preferred stock then
outstanding. Each outstanding share of common stock is entitled to one vote on
all matters submitted to a vote of stockholders. There is no cumulative voting.
Except as otherwise required by law or the restated certificate, the holders of
common stock vote together as a single class on all matters submitted to a vote
of stockholders.
Our common stock has been approved for quotation on The Nasdaq National
Market under the symbol "DDIC."
Preferred Stock
Our board of directors may, without further action by our stockholders, from
time to time, direct the issuance of shares of preferred stock in a series and
may, at the time of issuance, determine the rights, preferences and limitations
of each series. Satisfaction of any dividend preferences of outstanding shares
of preferred stock would reduce the amount of funds available for the payment
of dividends on shares of common stock. Holders of shares of preferred stock
may be entitled to receive a preference payment in the event of any
liquidation, dissolution or winding-up of our company before any payment is
made to the holders of shares of common stock. The issuance of shares of
preferred stock may render more difficult or tend to discourage a merger,
tender offer or proxy contest, the assumption of control by a holder of a large
block of our securities or the removal of incumbent management. Upon the
affirmative vote of a majority of the total number of directors
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then in office, the board of directors, without stockholder approval, may issue
shares of preferred stock with voting and conversion rights which could
adversely affect the holders of shares of common stock.
There are no shares of preferred stock outstanding, and we have no current
intention to issue any of our unissued, authorized shares of preferred stock.
However, the issuance of any shares of preferred stock in the future could
adversely affect the rights of the holders of common stock.
Registration Rights
As a result of the stockholders agreement to be dated prior to the
effectiveness of the registration statement between us and some of our
stockholders, some of our stockholders will be entitled to rights with respect
to the registration of some or all of their shares of common stock under the
Securities Act as described below.
Bain Capital Demand Registration Rights. At any time after 180 days
following this offering until five years from the date of this offering, the
holders of at least 25% of the aggregate number of shares of common stock held
by Bain Capital funds and their affiliates can request that we register all or
a portion of their shares. We will be required to file registration statements
in response to their demand registration rights. We may postpone the filing of
a registration statement for up to 60 days once in a 12-month period if we
determine that the filing would be seriously detrimental to us and our
stockholders.
Other Demand Registration Rights. At any time after 360 days following this
offering until five years from the date of this offering, DI Investors, LLC, or
any of its affiliates that hold at least 50% of the shares of common stock
originally issued to DI Investors, LLC, can request that we register all or a
portion of their shares. We will only be required to file two registration
statements in response to their demand registration rights. We will not be
required to file a registration statement in response to their demand
registration rights within 180 days following the effective date of any
registration statement made by us for our own account. We may postpone the
filing of a registration statement for up to 60 days once in a 12-month period
if we determine that the filing would be seriously detrimental to us and our
stockholders. Additionally, between the date that is 180 days after this
offering and the date that is one year after this offering, some of the former
shareholders of MCM Electronics may demand to register up to one-half of their
shares of our common stock in a non-underwritten offering.
Piggyback Registration Rights. If we register any securities for public
sale, some of our executive officers and other holders of shares of our common
stock will have the right to include their shares of common stock in the
registration statement. This right does not apply to a registration statement
relating to any of our employee benefit plans or a corporate reorganization.
The managing underwriter of any underwritten offering will have the right to
limit the number of shares registered by these holders due to marketing
reasons.
We will pay all expenses incurred in connection with the registrations
described above, except for underwriters' and brokers' discounts and
commissions, which will be paid by the selling stockholders.
Other Provisions of the Delaware Certificate of Incorporation and By-laws
Our Delaware certificate of incorporation provides for the board to be
divided into three classes, as nearly equal in number as possible, serving
staggered terms. Approximately one-third of the board will be elected each
year. See "Management--Board Composition." Under the Delaware General
Corporation Law, directors serving on a classified board can only be removed
for cause. The provision for a classified board could prevent a party who
acquires control of a majority of the outstanding voting stock from obtaining
control of the board until the second annual stockholders meeting following the
date the acquiror obtains the controlling stock interest. The classified board
provision could have the effect of discouraging a potential acquiror from
making a tender offer or otherwise attempting to obtain control of us and could
increase the likelihood that incumbent directors will retain their positions.
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Our Delaware certificate of incorporation provides that stockholder action
can be taken only at an annual or special meeting of stockholders and cannot be
taken by written consent in lieu of a meeting. The Delaware certificate and the
by-laws provide that, except as otherwise required by law, special meetings of
the stockholders can only be called pursuant to a resolution adopted by a
majority of the board of directors or by our chief executive officer.
Stockholders will not be permitted to call a special meeting or to require the
board to call a special meeting.
The by-laws establish an advance notice procedure for stockholder proposals
to be brought before an annual meeting of our stockholders, including proposed
nominations of persons for election to the board. Stockholders at an annual
meeting may only consider proposals or nominations specified in the notice of
meeting or brought before the meeting by or at the direction of the board or by
a stockholder who was a stockholder of record on the record date for the
meeting, who is entitled to vote at the meeting and who has given to our
secretary timely written notice, in proper form, of such stockholder's
intention to bring that business before the meeting. Although the by-laws do
not give the board the power to approve or disapprove stockholder nominations
of candidates or proposals regarding other business to be conducted at a
special or annual meeting, the by-laws may have the effect of precluding the
conduct of business at a meeting if the proper procedures are not followed or
may discourage or defer a potential acquiror from conducting a solicitation of
proxies to elect its own slate of directors or otherwise attempting to obtain
control of us.
The Delaware certificate and by-laws provide that the affirmative vote of
holders of at least 75% of the total votes eligible to be cast in the election
of directors is required to amend, alter, change or repeal some of their
provisions, unless such amendment or change has been approved by a majority of
those directors who are not affiliated or associated with any person or entity
holding 10% or more of the voting power of our outstanding capital stock other
than those directors who are affiliated or associated with the Bain Capital
funds. This requirement of a super-majority vote to approve amendments to the
Delaware certificate and by-laws could enable a minority of our stockholders to
exercise veto power over any such amendments.
Provisions of Delaware Law Governing Business Combinations
Following the consummation of this offering, we will be subject to the
"business combination" provisions of the Delaware General Corporation Law. In
general such provisions prohibit a publicly held Delaware corporation from
engaging in various "business combination" transactions with any "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an "interested stockholder" unless:
. the transaction is approved by the board of directors prior to the date
the "interested stockholder" obtained such status;
. upon consummation of the transaction which resulted in the stockholder
becoming an "interested stockholder," the "interested stockholder" owned
at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding for purposes of determining
the number of shares outstanding those shares owned by (a) persons who
are directors and also officers and (b) employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or
. on or subsequent to such date the "business combination" is approved by
the board of directors and authorized at an annual or special meeting of
stockholders by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the "interested
stockholder."
A "business combination" is defined to include mergers, asset sales and
other transactions resulting in financial benefit to a stockholder. In general,
an "interested stockholder" is a person who, together with affiliates or
associates, owns 15% or more of a corporation's voting stock or within three
years did own 15% or
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more of a corporation's voting stock. However, our Certificate of Incorporation
provides that a stockholder affiliated or associated with the Bain Capital
funds will not be considered an "interested stockholder," notwithstanding that
stockholder's percentage ownership of our voting stock. The statute could
prohibit or delay mergers or other takeover or change in control attempts with
respect to us and, accordingly, may discourage attempts to acquire us.
Limitations on Liability and Indemnification of Officers and Directors
Our Delaware certificate of incorporation limits the liability of directors
to the fullest extent permitted by the Delaware General Corporation Law. In
addition, our Delaware certificate of incorporation provides that we will
indemnify our directors and officers to the fullest extent permitted by such
law. We expect to enter into indemnification agreements with our current
directors and executive officers prior to the completion of the offering and
expect to enter into a similar agreement with any new directors or executive
officers.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services, L.L.C.
SHARES ELIGIBLE FOR FUTURE SALE
The sale of a substantial amount of our common stock in the public market
after this offering could adversely affect the prevailing market price of our
common stock. Furthermore, because no shares will be available for sale shortly
after this offering due to the contractual and legal restrictions on resale
described below, the sale of a substantial amount of common stock in the public
market after these restrictions lapse could adversely affect the prevailing
market price of our common stock and our ability to raise equity capital in the
future.
Upon completion of this offering and our acquisition of MCM Electronics, we
expect to have outstanding an aggregate of 38,957,143 shares of our common
stock, assuming no exercise of the underwriters' over-allotment option and no
exercise of outstanding options. Of these shares, all of the shares sold in
this offering will be freely tradable without restriction or further
registration under the Securities Act, unless the shares are purchased by
"affiliates" as that term is defined in Rule 144 under the Securities Act. Any
shares purchased by an affiliate may not be resold except pursuant to an
effective registration statement or an applicable exemption from registration,
including an exemption under Rule 144 of the Securities Act. The remaining
shares of common stock held by existing stockholders are "restricted
securities" as that term is defined in Rule 144 under the Securities Act. These
restricted securities may be sold in the public market only if they are
registered or if they qualify for an exemption from registration under Rule 144
or Rule 701 under the Securities Act. These rules are summarized below.
Upon the expiration of the lock-up agreements described below and subject to
the provisions of Rule 144 and Rule 701, restricted shares totaling 24,705,106
will be available for sale in the public market 180 days after the date of this
prospectus. The sale of these restricted securities is subject, in the case of
shares held by affiliates, to the volume restrictions contained in those rules.
Lock-up Agreements
We, our directors and executive officers and the holders of substantially
all of our common stock will enter into lock-up agreements with the
underwriters prior to the effectiveness of this registration statement. Under
those agreements, neither we nor any of our directors or executive officers nor
any of those stockholders may dispose of or hedge any shares of common stock or
securities convertible into or exchangeable or exercisable for shares of common
stock. These restrictions will be in effect for a period of 180 days after the
date of this prospectus. At any time and without notice, Credit Suisse First
Boston Corporation may, in its sole discretion, release all or some of the
securities from these lock-up agreements. Transfers or dispositions can be made
sooner, provided the transferee becomes bound to the terms of the lockup:
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. with the prior written consent of Credit Suisse First Boston
Corporation;
. as a bona fide gift;
. to a family member or affiliate; or
. to any trust.
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year from the later of the date those shares of
common stock were acquired from us or from an affiliate of ours would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of:
. one percent of the number of shares of common stock then outstanding,
which will equal approximately 389,571 shares of common stock
immediately after this offering and our acquisition of MCM Electronics;
or
. the average weekly trading volume of the common stock on The Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale of any shares of common
stock.
The sales of any shares of common stock under Rule 144 are also subject to
manner of sale provisions and notice requirements and to the availability of
current public information about us.
Rule 144(k)
Under Rule 144(k), a person who is not one of our affiliates at any time
during the three months preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years from the later of the date
such shares of common stock were acquired from us or from an affiliate of ours,
including the holding period of any prior owner other than an affiliate, is
entitled to sell those shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted pursuant to the lock-up agreements or otherwise,
those shares may be sold immediately upon the completion of this offering.
Rule 701
In general, under Rule 701 of the Securities Act as currently in effect,
each of our employees, consultants or advisors who purchased shares from us in
connection with a compensatory stock plan or other written agreement is
eligible to resell those shares 90 days after the effective date of this
offering in reliance on Rule 144, but without compliance with some of the
restrictions, including the holding period, contained in Rule 144.
No precise prediction can be made as to the effect, if any, that market
sales of shares or the availability of shares for sale will have on the market
price of our common stock prevailing from time to time. We are unable to
estimate the number of our shares that may be sold in the public market
pursuant to Rule 144 or Rule 701 because this will depend on the market price
of our common stock, the personal circumstances of the sellers and other
factors. Nevertheless, sales of significant amounts of our common stock in the
public market could adversely affect the market price of our common stock.
Stock Plans
We intend to file a registration statement under the Securities Act covering
5,655,948 shares of common stock both reserved for issuance under our 2000
Equity Incentive Plan, our Employee Stock Purchase Plan and pursuant to all
previous option grants. This registration statement is expected to be filed as
soon as practicable after the closing date of this offering.
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Currently, there are no options to purchase shares outstanding under our
2000 Equity Incentive Plan. All of these shares will be eligible for sale in
the public market from time to time, subject to vesting provisions, Rule 144
volume limitations applicable to our affiliates and, in the case of some of the
options, the expiration of lock-up agreements.
Registration Rights under Stockholders Agreement
Following this offering, some of our stockholders will, under some
circumstances, have the right to require us to register their shares for future
sale. See "Description of Capital Stock--Registration Rights."
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UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated April 11, 2000, we have agreed to sell to the underwriters
named below, for whom Credit Suisse First Boston Corporation is acting as
representative, the following respective numbers of shares of common stock:
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ----------
<S> <C>
Credit Suisse First Boston Corporation............................... 4,885,277
FleetBoston Robertson Stephens Inc................................... 2,714,043
Chase Securities Inc................................................. 1,628,426
Lehman Brothers Inc.................................................. 1,628,426
Deutsche Bank Securities Inc......................................... 163,404
Donaldson, Lufkin & Jenrette Securities Corporation.................. 163,404
E*Offering Corp...................................................... 163,404
Invemed Associates LLC............................................... 163,404
Needham & Company, Inc............................................... 163,404
Tucker Anthony Incorporated.......................................... 163,404
Thomas Weisel Partners LLC........................................... 163,404
----------
Total.............................................................. 12,000,000
==========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to 1,800,000 additional shares at the initial public offering
price less the underwriting discounts and commissions. The option may be
exercised only to cover any over-allotment of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $0.565 per share. The
underwriters and selling group members may allow a discount of $0.10 per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
Per Share Total
----------------------------- -----------------------------
Without With Without With
Over-allotment Over-allotment Over-allotment Over-allotment
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts
and commissions paid by
us..................... $0.945 $0.945 $11,340,000 $13,041,000
Expenses payable by us.. $0.240 $0.208 $ 2,875,000 $ 2,875,000
</TABLE>
The underwriters do not intend to confirm sales to any account over which
they exercise discretionary authority.
Chase Securities Inc., one of the underwriters, may be deemed to be our
affiliate. The offering therefore is being conducted in accordance with the
applicable provisions of Rule 2720 of the National Association of Securities
Dealers, Inc. Conduct Rules. Rule 2720 requires that the initial public
offering price of the shares of common stock not be higher than that
recommended by a "qualified independent underwriter" meeting standards set
forth in the rule. Accordingly, Credit Suisse First Boston Corporation is
assuming the
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responsibilities of acting as the qualified independent underwriter in pricing
the offering and conducting due diligence. Credit Suisse First Boston
Corporation will be paid a fee of $10,000 for its service as qualified
independent underwriter. The initial public offering price of the shares of
common stock is no higher than the price recommended by Credit Suisse First
Boston Corporation.
We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act of 1933
relating to, any shares of our common stock or securities convertible into or
exchangeable or exercisable for any shares of our common stock, or publicly
disclose the intention to make any such offer, sale, pledge, disposition or
filing, without the prior written consent of Credit Suisse First Boston
Corporation for a period of 180 days after the date of this prospectus, except
issuances pursuant to the exercise of employee stock options outstanding on the
date hereof.
Our officers and directors and the holders of substantially all of our
common stock have agreed that they will not offer, sell, contract to sell,
pledge or otherwise dispose of, directly or indirectly, any shares of our
common stock or securities convertible into or exchangeable or exercisable for
any shares of our common stock, enter into a transaction which would have the
same effect, or enter into any swap, hedge or other arrangement that transfers,
in whole or in part, any of the economic consequences of ownership of our
common stock, whether any such aforementioned transaction is to be settled by
delivery of our common stock or such other securities, in cash or otherwise, or
publicly disclose the intention to make any such offer, sale, pledge or
disposition, or to enter into any transaction, swap, hedge or other
arrangement, without, in each case, the prior written consent of Credit Suisse
First Boston Corporation for a period of 180 days after the date of this
prospectus.
The underwriters have reserved for sale, at the initial public offering
price up to 600,000 shares of the common stock being offered by this prospectus
for employees, directors and other persons associated with us who have
expressed an interest in purchasing common stock in the offering. The number of
shares available for sale to the general public in the offering will be reduced
to the extent these persons purchase these reserved shares. Any reserved shares
not so purchased will be offered by the underwriters to the general public on
the same terms as the other shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be
required to make in that respect.
The shares of common stock have been approved for listing on The Nasdaq
Stock Market's National Market under the symbol "DDIC."
In connection with the recapitalization, affiliates of Chase Securities Inc.
that, in the aggregate, hold approximately 12% of our securities prior to the
offering and Chase Securities Inc. were paid fees aggregating approximately $16
million and received common stock warrants valued at approximately
$3.4 million. Pursuant to the terms of our stockholders agreement, an affiliate
of Chase Securities Inc. that holds some of our securities has the right to
designate one of the members of our board of directors. Accordingly,
Christopher Behrens, a general partner of Chase Capital Partners, has been
elected to and is a member of our board of directors.
Also, The Chase Manhattan Bank, an affiliate of Chase Securities Inc., is a
lender and the agent for the other lending banks under the Dynamic Details
senior credit facility, and is a counterparty to one of our interest rate
exchange agreements. In its role as collateral, co-syndication and
administrative agent with regard to the establishment of the senior credit
facility, The Chase Manhattan Bank received $2.4 million in fees. Further,
Chase Securities Inc. acted as the initial purchaser (underwriter) for the sale
of the Dynamic Details senior subordinated notes and the DDi Capital senior
discount notes.
We intend to use a portion of the net proceeds from the sale of common stock
to repay indebtedness owed by us to The Chase Manhattan Bank, an affiliate of
Chase Securities Inc., and Fleet Bank and BankBoston, affiliates of FleetBoston
Robertson Stephens Inc.
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We are currently in material compliance with the terms of our Dynamic
Details senior credit facility. The decision of Chase Securities Inc. to
participate in the offering was made independent of its affiliates that hold
approximately 12% of our securities and of The Chase Manhattan Bank. The
decision of FleetBoston Robertson Stephens Inc. to participate in the offering
was made independent of its affiliates, Fleet Bank and BankBoston. These
affiliates had no involvement in determining whether or when to distribute our
common stock under this offering or the terms of this offering. Chase
Securities Inc. and FleetBoston Robertson Stephens Inc. will not receive,
exclusive of their affiliates that will receive proceeds from this offering as
described herein, any benefit from this offering other than their portion of
the underwriting commissions as paid by us.
Prior to this offering, there was no established public trading market for
the common stock. The initial public offering price for the common stock will
be determined by negotiation between Credit Suisse First Boston Corporation and
us. The primary factors to be considered in determining the initial public
offering price include:
. the history of and the prospects of the industry in which we compete;
. the ability of our management;
. our past and present operations;
. our prospects for future earnings;
. the general condition of the securities markets at the time of this
offering; and
. the recent market prices of securities of generally comparable
companies.
Credit Suisse First Boston Corporation may engage in over-allotment,
stabilizing transactions, syndicate covering transactions, and penalty bids in
accordance with Regulation M under the Securities Exchange Act of 1934.
. Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
. Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
. Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
. Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a stabilizing or syndicate covering
transaction to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on The Nasdaq National Market, subject to official notice of issuance,
or otherwise and, if commenced, may be discontinued at any time.
A prospectus in electronic format may be made available on web sites
maintained by one or more of the underwriters participating in this offering.
The representatives may agree to allocate a number of shares to underwriters
for sale to their online brokerage account holders. Internet distributions will
be allocated by the representatives of the underwriters on the same basis as
other allocations.
Other than the prospectus in electronic format, the information contained on
any underwriter's web site and any information contained on any other web site
maintained by an underwriter is not part of this prospectus or the registration
statement of which this prospectus forms a part, has not been approved or
endorsed by us or any underwriter in its capacity as an underwriter, and should
not be relied upon by investors.
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NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common
stock in Canada must be made in accordance with applicable securities laws
which will vary depending on the relevant jurisdiction, and which may require
resales to be made in accordance with available statutory exemptions or
pursuant to a discretionary exemption granted by the applicable Canadian
securities regulatory authority. Purchasers are advised to seek legal advice
prior to any resale of the common stock.
Representations of Purchasers
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that (i) such purchaser is entitled under
applicable provincial securities laws to purchase such common stock without the
benefit of a prospectus qualified under such securities laws, (ii) where
required by law, that such purchaser is purchasing as principal and not as
agent, and (iii) such purchaser has reviewed the text above under "Resale
Restrictions."
Rights of Action (Ontario Purchasers)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
Enforcement of Legal Rights
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer or such persons. All or a substantial portion of the assets of
the issuer and such persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or such persons
in Canada or to enforce a judgment obtained in Canadian courts against such
issuer or persons outside of Canada.
Notice to British Columbia Residents
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from us. Only one such report
must be filed in respect of common stock acquired on the same date and under
the same prospectus exemption.
Taxation and Eligibility for Investment
Canadian purchasers of common stock should consult their own legal and tax
advisers with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
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LEGAL MATTERS
The validity of the shares of common stock to be issued in this offering
will be passed upon for us by Ropes & Gray, Boston, Massachusetts. Some
partners of Ropes & Gray are members in RGIP LLC, which owned 66,318 shares of
common stock as of December 31, 1999. RGIP LLC is also an investor in the Bain
Capital funds. Legal matters in connection with this offering will be passed
upon for the underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, New
York, New York. Some partners of Skadden, Arps, Slate, Meagher & Flom LLP,
through their investment in Project Capital 1995 LLC, have a limited
partnership interest in Bain Capital Fund V, L.P. Such partners do not have the
power to vote or dispose of the shares owned by such fund. Ropes & Gray has,
from time to time, represented, and may continue to represent, some of the
underwriters in connection with various legal matters and the Bain Capital
funds and some of their affiliates, including us, in connection with various
legal matters.
EXPERTS
The financial statement of DDi Merger Co. as of April 6, 2000 included in
this prospectus has been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The consolidated financial statements of DDi Corp. as of December 31, 1999
and 1998 and for each of the three years in the period ended December 31, 1999
included in this prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The consolidated financial statements of Dynamic Circuits, Inc., for the
year ended December 31, 1997 included in this prospectus have been so included
in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The consolidated financial statements of Symonds Limited as of March 31,
1999 and for the year then ended included in this prospectus have been so
included in reliance on the report of KPMG Audit Plc, independent accountants,
appearing elsewhere in this prospectus, and upon the authority of said firm as
experts in auditing and accounting.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1, including exhibits and schedules, under the Securities
Act with respect to the common stock to be sold in this offering. With respect
to each contract, agreement or other document filed as an exhibit to the
registration statement, we refer you to the exhibit for a more complete
description of the matter involved, and each statement in this prospectus shall
be deemed qualified in its entirety by this reference.
You may read and copy all or any portion of the registration statement or
any reports, statements or other information in the files at the public
reference facilities of the SEC at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C., 20549 and at the regional offices of the SEC
located at Seven World Trade Center, 13th Floor, New York, New York 10048 and
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You can request
copies of these documents upon payment of a duplicating fee by writing to the
SEC. You may call the SEC at 1-800-SEC-0330 for further information on the
operation of its public reference rooms. Our filings, including the
registration statement, will also be available to you on the Internet site
maintained by the SEC at http://www.sec.gov.
Our subsidiaries DDi Capital Corp. and Dynamic Details, Incorporated have,
and we will, file annual, quarterly and current reports and other information
with the SEC. You can request copies of these documents, for a copying fee, by
writing to the SEC. We intend to furnish our stockholders with annual reports
containing financial statements audited by our independent accountants.
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DDi CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
DDi Merger Co.:
Report of Independent Accountants........................................ F-2
Balance Sheet as of April 6, 2000 ....................................... F-3
Notes to Financial Statement............................................. F-4
DDi Corp:
Report of Independent Accountants........................................ F-5
Consolidated Balance Sheets as of December 31, 1999 and 1998 ............ F-6
Consolidated Statements of Operations for the Years Ended December 31,
1999, 1998 and 1997..................................................... F-7
Consolidated Statements of Stockholders' Deficit for the Years Ended
December 31, 1999, 1998 and 1997........................................ F-8
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997..................................................... F-9
Notes to Consolidated Financial Statements............................... F-10
Dynamic Circuits Inc.:
Report of Independent Accountants........................................ F-35
Consolidated Statements of Income for the Year Ended December 31, 1997
and for the Six Months Ended June 30, 1998 and 1997 (unaudited)......... F-36
Consolidated Statements of Shareholders' Deficit for the Year Ended
December 31, 1997 and the Six Months Ended June 30, 1998 (unaudited).... F-37
Consolidated Statements of Cash Flows for the Year Ended December 31,
1997 and the Six Months Ended June 30, 1998 and 1997 (unaudited)........ F-38
Notes to Consolidated Financial Statements............................... F-39
Symonds Limited/MCM Electronics Limited:
Report of Independent Public Accountants................................. F-49
Consolidated profit and loss accounts.................................... F-50
Reconciliation of movements in consolidated shareholders' funds.......... F-51
Consolidated balance sheets.............................................. F-52
Consolidated cash flow statements........................................ F-53
Accounting policies...................................................... F-54
Notes to the financial statements........................................ F-57
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
DDi Merger Co.
In our opinion, the accompanying balance sheet presents fairly, in all material
respects, the financial position of DDi Merger Co. at April 6, 2000, in
conformity with accounting principles generally accepted in the United States.
This financial statement is the responsibility of the Company's management; our
responsibility is to express an opinion on this financial statement based on
our audit. We conducted our audit of this statement in accordance with auditing
standards generally accepted in the United States which require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statement is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statement, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Costa Mesa, California
April 6, 2000
F-2
<PAGE>
DDI MERGER CO.
BALANCE SHEET
April 6, 2000
ASSETS
<TABLE>
<S> <C>
Current Assets:
Cash.................................................................... $1,000
------
Total Assets............................................................ $1,000
======
</TABLE>
LIABILITIES AND STOCKHOLDER'S EQUITY
<TABLE>
<S> <C>
Stockholder's Equity:
Preferred stock, $.01 par, 5,000,000 shares authorized, no shares
issued and outstanding................................................ $ --
Common Stock, $.001 par, 75,000,000 shares authorized, 100 shares
issued and outstanding................................................ --
Additional paid in capital............................................. 1,000
------
Total Liabilities and Stockholder's Equity............................ $1,000
======
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-3
<PAGE>
DDI MERGER CO.
NOTES TO FINANCIAL STATEMENT
DDi Merger Co., (the "Company"), a Delaware corporation, was formed on March
22, 2000 and capitalized on April 6, 2000. Currently, the Company's only asset
is the $1,000 cash received from DDi Corp. as consideration for the issuance of
100 shares of the Company's common stock.
Immediately prior to the consummation of the initial public offering of the
Company, DDi Corp. will merge with and into the Company, with the Company being
the surviving corporation. At the time of the merger each holder of DDi Corp.
common stock will receive a percentage of the Company's common stock equal to
the percentage of DDi Corp. common stock owned by such holder immediately prior
to the merger. At the time of the merger, the Company will change its name to
DDi Corp.
F-4
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
DDi Corp.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' deficit and cash flows
present fairly, in all material respects, the financial position of DDi Corp.
("Holdings") and its subsidiaries (collectively, the "Company") at December 31,
1999 and 1998, and the results of their operations, changes in stockholders'
deficit and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Costa Mesa, California
February 14, 2000
F-5
<PAGE>
DDi CORP.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Pro Forma
December 31, As Adjusted
-------------------- Equity (unaudited)
1998 1999 (Note 2)
--------- --------- ------------------
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents........... $ 2,109 $ 648
Accounts receivable, net............ 34,764 42,774
Income tax receivable............... 3,793 --
Inventories......................... 12,615 20,209
Prepaid expenses and other.......... 3,110 2,499
Deferred tax asset.................. 4,816 5,215
--------- ---------
Total current assets.............. 61,207 71,345
--------- ---------
Property, plant and equipment, net.... 61,018 63,209
Debt issue costs, net................. 15,929 13,833
Goodwill and other intangibles, net... 226,286 205,462
Other................................. 566 486
--------- ---------
$ 365,006 $354,335
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current maturities of long-term debt
and capital lease obligations...... $ 4,390 $ 7,035
Current portion of deferred interest
rate swap income................... -- 1,458
Current maturities of deferred notes
payable............................ 2,788 2,514
Revolving credit facility........... 7,000 --
Accounts payable.................... 14,612 18,055
Accrued expenses ................... 17,151 22,311
Income tax payable.................. -- 894
--------- ---------
Total current liabilities......... 45,941 52,267
--------- ---------
Long-term debt and capital lease obli-
gations.............................. 462,498 469,703
Deferred interest rate swap income.... -- 3,881
Deferred notes payable................ 3,743 1,448
Deferred tax liability................ 21,913 13,420
Other................................. 686 731
--------- ---------
Total liabilities................. 534,781 541,450
--------- ---------
Commitments and contingencies (Note
13)
Stockholders' deficit:
Class L common stock, no par value,
cumulative yield of 12% per annum
compounded quarterly, liquidation
preference of $159,024 and $179,996
at December 31, 1998 and 1999,
respectively. 475,000 shares
authorized, 396,153 and 396,330
shares issued and outstanding at
December 31, 1998 and 1999,
respectively, no shares authorized,
issued or outstanding on a pro
forma basis........................ 147,157 147,216 $ --
Class A common stock, no par value,
5,175,000 shares authorized,
3,481,329 and 3,522,183 shares
issued and outstanding at
December 31, 1998 and 1999,
respectively, no shares authorized,
issued or outstanding on a pro
forma basis........................ 15,637 15,689 --
Common stock, $0.01 par value,
75,000,000 shares authorized,
24,750,000 shares issued and
outstanding after giving effect to
the reclassification on an as
adjusted basis..................... -- -- 247
Additional paid in capital.......... -- -- 162,658
Less: Stockholder receivables....... (648) (666) (666)
Accumulated deficit................. (331,921) (349,354) (349,354)
--------- --------- ---------
Total stockholders' deficit....... (169,775) (187,115) $(187,115)
--------- --------- =========
$ 365,006 $354,335
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
DDi CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1997 1998 1999
---------------------------------
<S> <C> <C> <C>
Net sales.................................. $ 78,756 $ 174,853 $ 292,493
Cost of goods sold......................... 38,675 119,559 202,387
--------- --------- -----------
Gross profit............................. 40,081 55,294 90,106
Operating expenses:
Sales and marketing...................... 7,278 12,801 23,613
General and administration............... 2,057 8,442 15,362
Amortization of intangibles.............. -- 10,899 22,262
Restructuring and other related charges.. -- -- 7,000
Stock compensation and related bonuses... 31,271 -- --
Compensation to former CEO............... 2,149 -- --
Write-off of acquired in-process research
and development......................... -- 39,000 --
--------- --------- -----------
Operating income (loss).................. (2,674) (15,848) 21,869
Interest expense (net), including interest
paid to former stockholder of $756, $781
and $723 in 1997, 1998 and 1999,
respectively.............................. 25,196 37,416 46,717
--------- --------- -----------
Loss before income taxes and
extraordinary loss...................... (27,870) (53,264) (24,848)
Income tax benefit......................... 10,858 3,566 7,415
--------- --------- -----------
Loss before extraordinary loss............. (17,012) (49,698) (17,433)
Extraordinary loss--early extinguishment of
debt, net of income tax benefit of $1,104
and $1,480 in 1997 and 1998,
respectively.............................. (1,588) (2,414) --
--------- --------- -----------
Net loss................................... (18,600) (52,112) (17,433)
Priority distribution due shares of Class L
common stock.............................. (1,075) (6,272) (14,112)
--------- --------- -----------
Net loss allocable to shares of Class A
common stock.............................. $ (19,675) $ (58,384) $ (31,545)
========= ========= ===========
Net loss per share of Class A common stock
(basic and diluted)....................... $ (10.42) $ (21.55) $ (9.01)
========= ========= ===========
Pro forma basic and diluted net loss per share (unaudited)..... $ (0.71)
===========
Pro forma weighted average shares outstanding (unaudited)...... 24,677,563
===========
Supplemental pro forma basic and diluted net loss per share
(unaudited)................................................... $ (0.33)
===========
Supplemental pro forma weighted average shares outstanding
(unaudited)................................................... 33,413,277
===========
</TABLE>
- --------
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
DDi CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Convertible Old Common Class L Class A
Preferred Stock Stock Common Stock Common Stock Additional
---------------- --------------- ---------------- ----------------- Paid-In Stockholder
Shares Amount Shares Amount Shares Amount Shares Amount Capital Receivables
------ -------- ------ ------- ------- -------- --------- ------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December
31, 1996......... 6,601 $ 13,532 2,758 $ 5,301 -- $ -- -- $ -- $ -- $ --
Accretion of
temporary equity
to fair value... -- -- -- -- -- -- -- -- -- --
Compensation
expense on
vesting of
options......... -- -- -- -- -- -- -- -- 21,220 --
Equity
exchanges,
cancellations
and
distributions to
stockholders
(net of fees of
$3,499)......... (6,601) (13,532) (2,758) (5,301) -- -- -- -- (21,220) --
Recapitalization
(net of fees of
$1,130)......... -- -- -- -- 208,381 66,966 1,883,120 12,052 -- (634)
Issuance of
common stock in
NTI
acquisition..... -- -- -- -- 25,213 9,180 204,000 1,020 -- --
Net loss........ -- -- -- -- -- -- -- -- -- --
------ -------- ------ ------- ------- -------- --------- ------- ------- -----
Balance, December
31, 1997......... -- -- -- -- 233,594 76,146 2,087,120 13,072 -- (634)
Issuance of common stock in
DCI merger...... -- -- -- -- 162,065 70,831 1,269,600 2,415 -- --
Issuance of
common stock
upon exercise of
stock options... -- -- -- -- -- -- 116,953 114 -- --
Issuance of
common stock.... -- -- -- -- 494 180 7,656 36 -- --
Accrued interest
on stockholder
receivables..... -- -- -- -- -- -- -- -- -- (41)
Repayment of
stockholder
receivables .... -- -- -- -- -- -- -- -- -- 27
Net loss ....... -- -- -- -- -- -- -- -- -- --
------ -------- ------ ------- ------- -------- --------- ------- ------- -----
Balance, December
31, 1998......... -- -- -- -- 396,153 147,157 3,481,329 15,637 -- (648)
Issuance of
common stock
upon exercise of
stock options... -- -- -- -- -- -- 39,455 45 -- --
Issuance of
common stock.... -- -- -- -- 177 59 1,399 7 -- --
Accrued interest
on stockholder
receivables..... -- -- -- -- -- -- -- -- -- (34)
Repayment of
stockholder
receivables..... -- -- -- -- -- -- -- -- -- 16
Net loss........ -- -- -- -- -- -- -- -- -- --
------ -------- ------ ------- ------- -------- --------- ------- ------- -----
Balance, December
31, 1999......... -- $ -- -- $ -- 396,330 $147,216 3,522,183 $15,689 $ -- $(666)
====== ======== ====== ======= ======= ======== ========= ======= ======= =====
<CAPTION>
Temporary Stockholders'
Equity
------------------------------
Redeemable Common
Accumulated Common Stock
Deficit Total Stock Warrants Total
----------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance, December
31, 1996......... $(133,612) $(114,779) $ 38,906 $ 3,200 $ 42,106
Accretion of
temporary equity
to fair value... (41,244) (41,244) 38,094 3,150 41,244
Compensation
expense on
vesting of
options......... -- 21,220 -- -- --
Equity
exchanges,
cancellations
and
distributions to
stockholders
(net of fees of
$3,499)......... (86,353) (126,406) (77,000) (6,350) (83,350)
Recapitalization
(net of fees of
$1,130)......... -- 78,384 -- -- --
Issuance of
common stock in
NTI
acquisition..... -- 10,200 -- -- --
Net loss........ (18,600) (18,600) -- -- --
----------- ---------- ---------- --------- ---------
Balance, December
31, 1997......... (279,809) (191,225) -- -- --
Issuance of common stock in
DCI merger...... -- 73,246 -- -- --
Issuance of
common stock
upon exercise of
stock options... -- 114 -- -- --
Issuance of
common stock.... -- 216 -- -- --
Accrued interest
on stockholder
receivables..... -- (41) -- -- --
Repayment of
stockholder
receivables .... -- 27 -- -- --
Net loss ....... (52,112) (52,112) -- -- --
----------- ---------- ---------- --------- ---------
Balance, December
31, 1998......... (331,921) (169,775) -- -- --
Issuance of
common stock
upon exercise of
stock options... -- 45 -- -- --
Issuance of
common stock.... -- 66 -- -- --
Accrued interest
on stockholder
receivables..... -- (34) -- -- --
Repayment of
stockholder
receivables..... -- 16 -- -- --
Net loss........ (17,433) (17,433) -- -- --
----------- ---------- ---------- --------- ---------
Balance, December
31, 1999......... $(349,354) $(187,115) $ -- $ -- $ --
=========== ========== ========== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
DDi CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1997 1998 1999
--------- --------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss...................................... $ (18,600) $ (52,112) $(17,433)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Write-off of acquired in-process research
and development............................ -- 39,000 --
Restructuring and other related charges..... -- -- 7,000
Depreciation................................ 2,568 9,212 14,413
Amortization of debt issuance costs and
discount................................... 13,972 15,678 16,226
Amortization of goodwill and intangible
assets..................................... -- 10,899 22,262
Amortization of deferred interest rate swap
income..................................... -- -- (724)
Deferred income taxes....................... (3,834) (4,478) (8,892)
Interest income on stockholder receivables.. -- (41) (34)
Stock compensation expense.................. 21,271 -- --
Change in operating assets and liabilities,
net of acquisitions:
(Increase) decrease in accounts receivable.. (2,249) 196 (7,703)
(Increase) decrease in inventories.......... (397) 5 (9,813)
(Increase) decrease in prepaid expenses and
other...................................... (905) 2,422 (1,066)
Increase (decrease) in current income
taxes...................................... (8,757) 4,744 4,687
Increase (decrease) in accounts payable..... 1,106 (3,943) 3,227
Increase (decrease) in accrued expenses..... 4,924 (4,887) 2,662
--------- --------- --------
Net cash provided by operating
activities............................... 9,099 16,695 24,812
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment........................ (6,000) (15,925) (18,225)
Acquisition of NTI, less cash acquired........ (38,948) -- --
NTI acquisition-related expenditures.......... -- (218) --
Merger with DCI, less cash acquired........... -- (178,670) --
DCI merger-related expenditures............... -- -- (323)
--------- --------- --------
Net cash used in investing activities..... (44,948) (194,813) (18,548)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of Bridge Loans.... 140,000 -- --
Repayment of Bridge Loans..................... (140,000) -- --
Proceeds from issuance of long-term debt...... 276,455 288,425 --
Payments on long-term debt.................... (99,300) (106,089) (3,263)
Net borrowings (repayments) on the revolving
credit facility.............................. -- 7,000 (7,000)
Payments of debt issuance and capital costs... (19,469) (8,324) --
Payments of deferred note payable............. -- (1,611) (2,569)
Principal payments on capital lease
obligations.................................. (459) (809) (1,016)
Cash dividends paid........................... (128) -- --
Redemption of Old Common Stock................ (188,143) -- --
Issuance of common stock...................... 72,101 217 --
Payments of escrow payable to redeemed
stockholders................................. -- (4,100) --
Repayment of stockholder receivables.......... -- 27 16
Proceeds from interest rate swaps............. -- -- 6,062
Proceeds from exercise of stock options....... -- 114 45
--------- --------- --------
Net cash provided by (used in) financing
activities............................... 41,057 174,850 (7,725)
--------- --------- --------
Net increase (decrease) in cash and cash
equivalents................................... 5,208 (3,268) (1,461)
Cash and cash equivalents, beginning of year... 169 5,377 2,109
--------- --------- --------
Cash and cash equivalents, end of year......... $ 5,377 $ 2,109 $ 648
========= ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
Basis of Presentation
The consolidated financial statements include the accounts of DDi Corp.
(formerly known as Details Holdings Corp.) ("Holdings" or "Parent") and
subsidiaries. As used herein, the "Company" means Holdings and its
subsidiaries.
In connection with the Recapitalization (as defined below), Holdings changed
its name to Details Holdings Corp., incorporated Details, Inc. (now Dynamic
Details, Incorporated ("Details" or "DDi")) as a wholly-owned subsidiary and
contributed substantially all of its assets, subject to certain liabilities, to
Details. In November 1997, Holdings organized Details Capital Corp. (now DDi
Capital Corp.) ("DDi Capital") as a wholly-owned subsidiary and, in February
1998, contributed substantially all its assets (including the shares of common
stock of Details), subject to certain liabilities, including discount notes (as
described in Note 6, the "Capital Senior Discount Notes"), to Details Capital.
In July 1998, Holdings organized Details Intermediate Holdings Corp. (now DDi
Intermediate Holdings Corp.) ("Intermediate") as a wholly-owned subsidiary and
contributed all of the shares of common stock of Details Capital to
Intermediate. Other than the Intermediate Senior Discount Notes (as described
in Note 6) and the Capital Senior Discount Notes, related debt issue costs and
deferred tax balances, all significant assets and liabilities of Holdings are
those of DDi. DDi, in conjunction with Dynamic Details Design, LLC, a wholly-
owned subsidiary of Intermediate formed in 1998, represent the operating
divisions of Holdings.
The consolidated financial statements include the accounts of Holdings'
wholly-owned subsidiaries Colorado Springs Circuits Inc. ("NTI") (d/b/a Dynamic
Details, Inc.-Colorado Springs) commencing on December 22, 1997 (date of
acquisition) and Dynamic Circuits, Inc. ("DCI") (d/b/a Dynamic Details, Inc.-
Silicon Valley) commencing on July 23, 1998 (date of merger). All intercompany
transactions have been eliminated in consolidation.
Recapitalization--On October 28, 1997, the Recapitalization of Holdings took
place as follows: (i) DI Acquisition Corp. ("DIA"), a transitory merger
corporation, was capitalized with a $62.4 million investment from (a)
investment funds associated with Bain Capital, Inc. ($46.3 million), (b) Chase
Manhattan Capital, L.P. and its affiliates ("CMC") ($11.2 million) and
(c) other investors ($4.9 million); (ii) DIA, which had no operations and was
formed solely for the purpose of effecting the Recapitalization, merged with
and into Holdings with Holdings surviving the merger; (iii) certain
stockholders and option holders of Holdings received an aggregate amount of
cash equal to approximately $184.3 million (plus future escrow payments of
approximately $8.6 million); (iv) CMC retained approximately 7.7% of the fully-
diluted equity of Holdings, and certain other stockholders of Holdings retained
approximately 2.8% of the fully-diluted equity of Holdings (in each case after
giving effect to the Recapitalization and related transactions); (v) management
retained approximately 17.1% (including certain options to acquire shares of
common stock of Holdings) of the fully-diluted equity of Holdings and acquired
additional shares and options to acquire additional shares representing 10.4%
of the fully-diluted equity of Holdings (in each case after giving effect to
the Recapitalization and related transactions); (vi) the Company obtained $140
million of bridge loans; and (vii) the Company obtained borrowings under DDi's
senior term facility (as described in Note 6, the "Senior Term Facility") of
$91.4 million. The existing shareholders prior to the Recapitalization retained
in excess of 20% of the fully diluted common stock of Holdings after the
Recapitalization and, accordingly, push-down accounting was not reflected in
the accompanying consolidated financial statements as permitted by Staff
Accounting Bulletin No. 54 of the Securities and Exchange Commission. The
merger of DIA referred to above was reflected in the accompanying consolidated
financial statements as a Recapitalization and, accordingly, the historical
bases of the Company's assets and liabilities were not affected.
F-10
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
Nature of Business
The Company is a leading provider of time-critical, technologically advanced
design, development and manufacturing services to original equipment
manufacturers and electronics manufacturing service providers, primarily
involving complex printed circuit boards. The Company serves over 1,400
customers, primarily in the United States, in the telecommunications, computer
and networking industries.
2. SIGNIFICANT ACCOUNTING POLICIES
Cash and cash equivalents--Management defines cash and cash equivalents as
highly liquid deposits with a remaining maturity of 90 days or less. The
Company maintains cash and cash equivalents balances at certain financial
institutions in excess of amounts insured by federal agencies. Management does
not believe that as a result of this concentration it is subject to any unusual
financial risk beyond the normal risk associated with commercial banking
relationships.
Inventories--Inventories include freight-in, materials, labor and
manufacturing overhead costs and are stated at the lower of cost or market.
Cost is determined using the first-in, first-out (FIFO) method.
Property, plant and equipment--Property, plant and equipment are stated at
cost or in the case of property, plant and equipment acquired through business
combinations, at fair value based upon allocated purchase price at the
acquisition date. Depreciation is provided over the estimated useful lives of
the assets using both the straight-line and accelerated methods. For leasehold
improvements, amortization is provided over the shorter of the estimated useful
lives of the assets or the lease term and included in the caption depreciation
expense. See Note 5 for additional information.
Debt issue costs and debt discounts--The Company deferred certain debt issue
costs relating to the establishment of its various debt facilities and the
issuance of its debt instruments (see Note 6). These costs are capitalized and
amortized over the expected term of the related indebtedness using the
effective interest method.
The Company issued both the Capital Senior Discount Notes and the
Intermediate Senior Discount Notes (both as defined in Note 6) at a discount.
Discounts are reflected in the accompanying balance sheets as a reduction of
face value and are amortized over the expected term of the related indebtedness
using the effective interest method. Amortization included as interest expense
amounted to approximately $0.9 million, $9.9 million and $14.1 million for the
years ended December 31, 1997, 1998 and 1999, respectively.
Goodwill and identifiable intangibles--The Company amortizes the goodwill
recorded as a result of the acquisition of NTI and the merger with DCI (see
Note 14) on a straight-line basis over 25 years and 20 years, respectively,
from the date of each transaction. Management believes that the estimated
useful lives established at the dates of each transaction were reasonable based
on the economic factors applicable to each of the businesses. Identifiable
intangibles represent assets acquired through business combinations, and are
stated at their fair values based upon purchase price allocations as of the
transaction date. At December 31, 1998 and 1999, these assets are primarily
comprised of developed technologies, customer relationships/tradenames, and
assembled workforce. The developed technology assets are being charged to
income over their estimated useful lives of 10 years, using an accelerated
method of amortization, reflective of the relative contribution of each
developed technology in periods following the transaction date. The customer
relationships/tradenames and assembled workforce assets are being amortized on
a straight-line basis over their estimated useful lives of 18 years and 4
years, respectively. As of December 31, 1998 and 1999, the accumulated
amortization related to goodwill and identifiable intangibles was approximately
$10.9 million and $33.1 million, respectively.
F-11
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
Revenue recognition--The Company recognizes revenue from the sale of its
products upon shipment to its customers. The Company provides a normal warranty
on its products and accrues an estimated amount for this expense at the time of
the sale.
Concentration of credit risk--Financial instruments which potentially expose
the Company to concentration of credit risk consist principally of trade
accounts receivable. To minimize this risk, the Company performs ongoing credit
evaluations of customers' financial condition and maintains reserves; the
Company, however, generally does not require collateral. In 1999, no individual
customer accounted for 10% or more of the Company's net sales. As of December
31, 1999, one individual customer accounted for 10% of the Company's total
receivables. On a pro forma basis (assuming the merger with DCI occurred at the
beginning of 1998) for the year ended December 31, 1998, no individual customer
accounted for 10% or more of the Company's net sales; and as of December 31,
1998, no individual customer accounted for 10% or more of the Company's total
accounts receivable. In 1997, a significant portion of the Company's sales were
made to two customers. One of these customers accounted for 13% of the
Company's total sales in 1997, with the second customer accounting for 10%.
Environmental matters--The Company expenses environmental expenditures
related to existing conditions resulting from past or current operations and
from which no current or future benefit is discernible. Expenditures which
extend the life of the related property or mitigate or prevent future
environmental contamination are capitalized. The Company determines its
liability on a site by site basis and records a liability at the time when it
is probable and can be reasonably estimated. To date, such costs have not been
material (see Note 13).
Income taxes--The Company records on its balance sheet deferred tax assets
and liabilities for expected future tax consequences of events that have been
recognized in different periods for financial statement purposes versus tax
return purposes. Management provides a valuation allowance for net deferred tax
assets when it is more likely than not that a portion of such net deferred tax
assets will not be recovered through future operations (see Note 12).
Long-lived assets--The Company follows Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of." SFAS No. 121 requires that long-
lived assets, including goodwill, be reviewed for impairment whenever events or
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company evaluates potential impairment by comparing the
carrying amount of the assets with the estimated undiscounted cash flows
associated with them. If an impairment exists, the Company measures the
impairment utilizing discounted cash flows.
Derivative financial instruments--The Company has only limited involvement
with derivative financial instruments. As of December 31, 1998, the Company had
entered into interest rate exchange agreements ("Swap Agreements") to reduce
the risk of fluctuations in interest rates applicable to its Senior Term
Facility (see Note 6). In January 1999, the Company elected to modify the terms
of its Swap Agreements, resulting in no gain or loss. In June 1999, the Company
elected to terminate and concurrently replace its Swap Agreements (as
modified). The gain recognized from the termination of the Swap Agreements,
along with the proceeds received from the execution of the new interest rate
exchange agreements ("New Swap Agreements") will be amortized over the term of
the respective Swap Agreements using the effective interest method. Amounts to
be paid to/(received from) counterparties under its interest rate exchange
agreements are reflected as increases/(decreases) to periodic interest expense
(see Note 8).
F-12
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
Stock options--The Company has adopted SFAS No. 123, "Accounting for Stock-
Based Compensation," which establishes a fair value based method of accounting
for compensation cost related to stock option plans and other forms of stock-
based compensation plans. The Company has elected to provide the pro forma
disclosures as if the fair value based method had been applied. In accordance
with SFAS No. 123, the Company applies the intrinsic value based method of
accounting defined under Accounting Principles Board Opinion No. 25 ("APB
Opinion No. 25"), and accordingly, does not recognize compensation expense for
its plans to the extent employee options are issued at exercise prices equal to
or greater than the fair market value at the date of grant.
Use of estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and their reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Basic and diluted earnings per share--The Company has adopted the provisions
of SFAS No. 128 "Earnings Per Share." SFAS 128 requires the Company 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 shares that contingently convert 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. Class A and Class L common stock share ratably in
the net income (loss) remaining after giving effect to the 12% yield on the
Class L common stock. As a result of the losses incurred by the Company during
1997, 1998 and 1999, all potential common shares were anti-dilutive and
excluded from the diluted net income (loss) per share calculation. For the
years ended December 31, 1997, 1998 and 1999, contingently issuable shares of
353,000, 3,015,000, and 3,914,000 and options of 116,000, 216,000, and 273,000,
respectively, were excluded from the calculation as their effect is anti-
dilutive.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Numerator:
Net loss per share of Class A common
stock.................................. $(18,600) $(52,112) $(17,433)
Priority distribution due shares of
Class L common stock................... (1,075) (6,272) (14,112)
--------- --------- ---------
Net loss allocable to shares of Class A
common stock........................... $(19,675) $(58,384) $(31,545)
========= ========= =========
Denominator:
Weighted average shares of Class A
common stock outstanding............... 1,887,591 2,709,440 3,501,582
========= ========= =========
</TABLE>
Unaudited as adjusted equity--The as adjusted equity at December 31, 1999
adjusts the historical equity at December 31, 1999 to give effect to the
anticipated Reclassification (defined below) based on an initial public
offering price of $14.00 per share to be effective prior to the closing of the
anticipated initial public offering.
Unaudited pro forma loss per share--Unaudited pro forma basic and diluted
net loss per share for the year ended December 31, 1999 have been calculated
based on net loss allocable to all classes of common stock and assuming the
reclassification of the Company's Class A and L common stock prior to the
completion of this
F-13
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
offering, as if such reclassification had occurred at the beginning of the
period or the date of issuance of the stock, if later. Each share of Class L
common stock will be converted 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 share by the initial public offering price of $14.00
per share). Each share of Class A common stock will then convert into shares of
new common stock. These events are herein defined as the "Reclassification".
Unaudited supplemental pro forma loss per share--Some of the proceeds of the
Company's anticipated public offering will be used to retire indebtedness under
its Intermediate Senior Discount Notes, Capital Senior Discount Notes, and
Senior Term Facility (see Note 6). Accordingly, the supplemental pro forma net
loss assumes these retirements had taken place at the beginning of the period,
and the amount of interest expense eliminated, net of income tax, is $6,360 for
the year ended December 31, 1999. The pro forma weighted average shares
outstanding assumes that the proceeds of the sale of 8,735,714 shares of common
stock were used to retire debt.
Reclassifications--Certain prior year amounts have been reclassified to
conform with the 1999 presentation.
Recently issued accounting standards-- In June 1997, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes requirements for reporting and
disclosure of comprehensive income and its components. This statement became
effective for the Company's fiscal year ending December 31, 1998. For 1998 and
1999, the Company has no elements which give rise to reporting comprehensive
income.
In June 1997, the FASB also issued SFAS No. 131 "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 modifies the disclosure
requirements for reportable operating segments. This statement became effective
for the Company's fiscal year ending December 31, 1998. This pronouncement
currently has had no significant impact on the reporting practices of the
Company since its adoption. Until such time as the Company diversifies its
operations, management believes such pronouncement will not be applicable.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. SFAS No. 137, issued by the FASB in July 1999,
establishes a new effective date for SFAS No. 133. This statement, as amended
by SFAS No. 137, is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000 and is therefore effective for the Company beginning with
its fiscal quarter ending March 31, 2001. Based upon the nature of the
financial instruments and hedging activities in effect as of the date of this
filing, this pronouncement would require the Company to reflect the fair value
of its derivative instruments (see Note 8) on the consolidated balance sheet.
Changes in fair value of these instruments will be reflected as a component of
comprehensive income. The Company will adopt SFAS No. 133 effective January 1,
2001.
3. ACCOUNTS RECEIVABLE
Accounts receivable, net consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------
1998 1999
------- -------
<S> <C> <C>
Accounts receivable...................................... $36,192 $44,358
Less: Allowance for doubtful accounts.................... (1,428) (1,584)
------- -------
$34,764 $42,774
======= =======
</TABLE>
F-14
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------
1998 1999
------- -------
<S> <C> <C>
Raw materials.............................................. $ 6,628 $11,828
Work-in-process............................................ 4,406 5,601
Finished goods............................................. 1,581 2,780
------- -------
$12,615 $20,209
======= =======
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net consists of the following:
<TABLE>
<CAPTION>
December 31,
------------------
1998 1999
-------- --------
<S> <C> <C>
Buildings and leasehold improvements................... $ 17,255 $ 18,245
Machinery and equipment................................ 61,441 73,092
Office furniture and equipment......................... 8,352 11,538
Vehicles............................................... 240 250
Land................................................... 2,235 2,235
Deposits on equipment.................................. 2,712 3,902
-------- --------
92,235 109,262
Less: Accumulated depreciation......................... (31,217) (46,053)
-------- --------
$ 61,018 $ 63,209
======== ========
</TABLE>
The depreciable lives assigned to buildings are 30-40 years. Existing
leaseholds are depreciated over 7-15 years. Machinery, office furniture,
equipment and vehicles are each depreciated over 3-7 years. Deposits are not
depreciated as the related asset has not been placed into service.
Buildings and leasehold improvements include capital leases of approximately
$5.1 million with related accumulated depreciation of approximately $1.5
million and $2.0 million at December 31, 1998 and 1999, respectively. Machinery
and equipment includes capital leases of approximately $4.2 million with
related accumulated depreciation of approximately $1.1 million and $1.6 million
at December 31, 1998 and 1999, respectively.
F-15
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------
1998 1999
-------- --------
<S> <C> <C>
Senior Term Facility.................................... $255,000 $251,738
10.0% Senior Subordinated Notes......................... 100,000 100,000
12.5% Capital Senior Discount Notes, face amount
$110,000 net of unamortized discount of $41,195 and
$32,283 at December 31, 1998 and 1999, respectively.... 68,805 77,717
13.5% Intermediate Senior Discount Notes, face amount
$66,810 net of unamortized discount of $31,267 and
$26,051 at December 31, 1998 and 1999, respectively.... 35,543 40,759
Capital lease obligations............................... 7,540 6,524
-------- --------
466,888 476,738
Less: current maturities................................ (4,390) (7,035)
-------- --------
$462,498 $469,703
======== ========
</TABLE>
Senior Credit Facility
In connection with the merger with DCI (see Note 14), DDi entered into an
agreement with a co-syndication of banks, including Chase Manhattan Bank, N.A.
and Bankers Trust Company. Borrowings under this agreement consist of the
Senior Term Facility and the Revolving Credit Facility (collectively, the
"Senior Credit Facility"). Under the terms of this agreement, DDi must comply
with certain restrictive covenants, which include the requirement that DDi meet
certain financial tests. In addition, DDi is restricted from making certain
payments, including dividend payments to its stockholders. The Senior Credit
Facility is jointly and severally guaranteed by Intermediate and DDi Capital,
and is collateralized by a pledge of substantially all of the capital stock of
DDi and certain of its subsidiaries. The Senior Credit Facility expires in
April 2005.
Senior Term Facility
Under the Senior Term Facility, $255 million ($105 million under Tranche A
and $150 million under Tranche B) was advanced to DDi in connection with the
merger with DCI (see Note 14) on July 23, 1998. Scheduled principal and
interest payments are due quarterly beginning June 30, 1999 (other than with
respect to the last installment, which is due on July 22, 2004 and April 22,
2005 for Tranche A and Tranche B, respectively). Borrowings under the Senior
Term Facility bear interest at a floating rate at DDi's option at a rate equal
to either (1) 2.25%, for Tranche A, and 2.50%, for Tranche B, per annum plus
the applicable LIBOR rate or (2) 1.25%, for Tranche A, and 1.50%, for Tranche
B, per annum plus the higher of (a) the applicable prime lending rate of The
Chase Manhattan Bank (8.5% at December 31, 1999) or (b) the federal reserve
reported overnight funds rate plus 1/2 of 1% per annum (the "Index Rate"). The
applicable margin of 2.25% for Tranche A is subject to reduction in accordance
with an agreed upon pricing grid based on decreases in the Company's
consolidated leverage ratio, defined as consolidated total debt to consolidated
EBITDA (earnings before net interest expense, income taxes, depreciation,
amortization and extraordinary or non-recurring expenses). As of December 31,
1999, the Company elected the LIBOR rate (6.5% at December 31, 1999), reset
monthly.
F-16
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
Revolving Credit Facility
DDi also has a $45.0 million Revolving Credit Facility for revolving credit
loans, letters of credit and swing line loans which expires on July 22, 2004.
Advances under the Revolving Credit Facility bear interest at DDi's option at a
rate equal to either (1) 2.25% per annum plus the applicable LIBOR rate or (2)
1.25% per annum plus the Index Rate. In addition, DDi is required to pay a fee
of 1/2 of 1% per annum on the average unused commitment under the Revolving
Credit Facility. At December 31, 1998, DDi had borrowings outstanding of $7.0
million on this Revolving Credit Facility. At December 31, 1999, DDi had no
borrowings outstanding on this Revolving Credit Facility and had $0.7 million
reserved against the Revolving Credit Facility for a letter of credit. The
Company intends to paydown the balance from time-to-time, therefore it is
classified as current in the accompanying consolidated balance sheets. As of
December 31, 1999, the Company elected the LIBOR rate (6.5% at December 31,
1999), reset monthly.
Senior Subordinated Notes
Subsequent to the Recapitalization, on November 18, 1997, DDi issued $100
million of Senior Subordinated Notes. The Senior Subordinated Notes bear
interest at 10% per annum, payable semi-annually in arrears on each May 15 and
November 15 of each year, through the maturity date on November 15, 2005.
Except as described below, DDi may not redeem the Senior Subordinated Notes
prior to November 15, 2001. Prior to November 15, 2000, however, up to 40% of
the Senior Subordinated Notes, at a redemption price of 110% of the principal
amount thereof, plus accrued and unpaid interest, may be redeemed at DDi's
option with the net proceeds of the sale in public offerings of common stock of
Holdings (provided that at least 60% of the original principal amount of the
Subordinated Notes remains outstanding immediately after such redemption). On
or after November 15, 2001, the Senior Subordinated Notes may be redeemed at
the option of DDi, in whole or in part from time to time, at redemption prices
ranging from 105% of principal amount in the year ended November 15, 2001 to
100% of principal amount subsequent to November 15, 2004, plus accrued and
unpaid interest.
The Senior Subordinated Notes are guaranteed, on a senior subordinated
basis, jointly and severally, by DDi Capital and its wholly-owned subsidiaries
(the "Guarantors"). The Senior Subordinated Note indenture also contains
covenants that restrict the Guarantors from incurring additional indebtedness
and from making certain payments, including dividend payments to its
stockholders.
Capital Senior Discount Notes
In 1997, subsequent to the Recapitalization, Holdings issued $110 million
face amount at maturity (net proceeds of $60.1 million) of senior discount
notes ("Capital Senior Discount Notes"), and DDi Capital later succeeded to
Holdings obligations under the Capital Senior Discount Notes. The Capital
Senior Discount Notes are unsecured, senior obligations and will be effectively
subordinated to all future indebtedness and liabilities of DDi Capital's
subsidiaries. The Capital Senior Discount Notes begin bearing cash interest of
12.5% at November 15, 2002, payable each May 15 and November 15 in arrears,
through the maturity date of November 15, 2007.
Except as described below, DDi Capital may not redeem the Capital Senior
Discount Notes prior to November 15, 2002. Prior to November 15, 2000, however,
up to 40% of the Capital Senior Discount Notes, at a redemption price of 112.5%
of the accreted principal amount thereof, plus accrued and unpaid interest, may
be redeemed at DDi Capital's option with the net proceeds of the sale in public
offerings of common stock of Holdings (provided that at least 60% of the
original principal amount of the Capital Senior Discount Notes
F-17
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
remains outstanding immediately after such redemption). On or after November
15, 2002, the Capital Senior Discount Notes may be redeemed at the option of
DDi Capital, in whole or in part from time to time, at redemption prices
ranging from 106.25% of accreted principal amount in the year ended November
15, 2002 to 100% of accreted principal amount subsequent to November 15, 2005,
plus accrued and unpaid interest.
The Capital Senior Discount Note indenture also contains covenants that
restrict the Company from incurring additional indebtedness and from making
certain payments, including dividend payments to its stockholders.
Intermediate Senior Discount Notes
In July 1998, Intermediate issued senior discount notes ("Intermediate
Senior Discount Notes") in conjunction with the merger with DCI (see Note 14),
the proceeds of which amounted to approximately $33 million. The Intermediate
Senior Discount Notes are unsecured, senior obligations and will be effectively
subordinated to all future indebtedness and liabilities of Intermediate's
subsidiaries. These notes accrete in value at a rate of 13.5%, compounded
semi-annually and have a stated maturity of June 30, 2008. These notes have a
stated principal at maturity of approximately $67 million, although
approximately 43% of the stated principal amount of the debt is due December
2003. Cash interest begins accruing as of June 30, 2003 and will be payable
each June 30 and December 31, in arrears, commencing December 31, 2003 through
the maturity date. This debt is redeemable at Intermediate's option, in whole
or in part, at any time, at redemption prices which decrease throughout the
life of the debt. Prior to June 30, 2003, the redemption price is an amount
sufficient to generate, to the holders of this debt, an internal rate of return
per annum on the initial offering price ranging from 18% to 20%. Subsequent to
June 30, 2003, the redemption prices range from 106.75% of accreted principal,
decreasing 2.25% per annum to 100% of accreted principal subsequent to June 30,
2006, plus accrued but unpaid interest.
The Intermediate Senior Discount Note indenture also contains covenants
limiting, among other things, dividends, asset sales, and transactions with
affiliates. These restrictions apply both to Intermediate and its subsidiaries.
Debt Issue Costs
In connection with establishing its various debt facilities and the issuance
of its debt instruments, the Company incurred approximately $17.3 million in
fees which have been capitalized as debt issue costs. Accumulated amortization
as of December 31, 1998 and 1999 was approximately $1.4 million and $3.5
million, respectively. During 1997, certain debt was retired and the net
carrying amount of the related debt issue costs was written off, resulting in
an extraordinary loss of $1.6 million, net of related income tax of $1.1
million. During 1998, certain debt was retired and the net carrying amount of
the related debt issue costs was written off, resulting in an extraordinary
loss of $2.4 million, net of related income taxes of $1.5 million.
Change of Control
Upon a change in control, as defined in the Senior Subordinated Note and the
Capital Senior Discount Note indentures, DDi or DDi Capital may redeem the
Senior Subordinated Notes or the Capital Senior Discount Notes, respectively,
in whole, but not in part, before November 15, 2002 at 100% of principal in the
case of the Senior Subordinated Notes, or 100% of the accreted value in the
case of the Capital Senior Discount Notes, plus the applicable premium, as
defined in the Senior Subordinated Note and the Capital Senior Discount Note
indentures, and accrued and unpaid interest as of the date of redemption. In
the event the Company does not elect to redeem the notes prior to such date,
each holder of the Subordinated Notes and
F-18
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
Capital Senior Discount Notes may require DDi or DDi Capital, respectively, to
repurchase all or a portion of such holder's notes at a cash purchase price
equal to 101% of the principal amount or the accreted value, plus accrued and
unpaid interest if any, to the date of repurchase. The Intermediate Senior
Discount Note indenture provides that in the event of such a change in control,
each holder of the Intermediate Senior Discount Notes will have the right to
have Intermediate redeem all or any part of the portion of the Intermediate
Senior Discount Notes then outstanding, at a purchase price equal to 101% of
the principal amount thereof plus accrued and unpaid interest (or accreted
value), if any to the date of purchase. The Senior Credit Facility provides
that the occurrence of such a change in control constitutes an event of
default, which could require the immediate repayment of the Senior Credit
Facility.
Exchange Offer
On March 24, 1998, the Company consummated exchange offers of previously
unregistered Capital Senior Discount Notes and Senior Subordinated Notes for
registered notes (with terms identical in all material respects) on Form S-4
under the Securities Act of 1933, as amended.
Related Party Transactions
In connection with the Recapitalization and related transactions subsequent
thereto, CMC, a shareholder, and its affiliates The Chase Manhattan Bank, N.A.
("Chase") and Chase Securities Inc. were paid fees and expenses aggregating
approximately $16 million and CMC and Chase received common stock warrants
valued at approximately $3.4 million (see Note 11).
In conjunction with the merger with DCI in 1998 (see Note 14), Chase acted
as collateral, co-syndication, and administrative agent with regard to the
establishment of the Senior Credit Facility. In this capacity, Chase received
$2.4 million in fees. Chase also participates as a lender in the syndication,
and is a counterparty to one of the Company's interest rate exchange
agreements, under terms similar to those of the other participants and
counterparties.
The Company has a management agreement with Bain Capital Partners V, L.P.
("Bain"), an affiliate of Bain Capital Funds, the controlling shareholders,
under which Bain is entitled to management fees (see Note 13).
Future Payments
As of December 31, 1999, the scheduled future annual principal payments of
long-term debt are as follows:
<TABLE>
<S> <C>
Year Ending December 31,
2000............................................................ $ 5,925
2001............................................................ 19,838
2002............................................................ 25,875
2003............................................................ 60,713
2004............................................................ 72,225
Thereafter...................................................... 343,972
--------
$528,548
========
</TABLE>
F-19
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
7. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------
1998 1999
------- -------
<S> <C> <C>
Accrued salaries and related benefits..................... $ 4,253 $ 7,347
Accrued interest payable.................................. 1,438 1,307
Accrued restructuring charges............................. -- 2,600
Other accrued expenses.................................... 7,560 7,157
Escrow payable to redeemed stockholders................... 3,900 3,900
------- -------
$17,151 $22,311
======= =======
</TABLE>
8. DERIVATIVES
Pursuant to its interest rate risk management strategy and to certain
requirements imposed by the Company's Senior Credit Facility (see Note 6), the
Company entered into two interest rate exchange agreements ("Swap Agreements"),
effective October 1, 1998. Together these agreements represented 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 paid a fixed
rate of interest (blended annual rate of 5.27%). These rates were applied to a
notional amount ($255 million from October 1 through December 31, 1998) which
decreases at such times, and in such amounts, as to conform with the principle
outstanding under the Senior Term Facility through its scheduled maturity in
2005. In January 1999, the Company and each counterparty agreed to modify
certain features of the Swap Agreements. In return for a reduction in the
blended fixed rate of interest paid by the Company (to 4.96% per annum), the
counterparties were granted the option to terminate their respective agreements
on January 31, 2002.
In June 1999, the Company elected to terminate and concurrently replace the
Swap Agreements. The Company received cash proceeds of approximately $6.1
million from these transactions which will be recognized as a reduction to
interest expense. Of this amount, approximately $5.6 million represents the
gain from the termination of the Swap Agreements and will therefore be
amortized using the effective interest method through January 2002, the
original scheduled maturity of the Swap Agreements. The remaining $0.5 million
represents proceeds from the execution of the new interest rate exchange
agreements ("New Swap Agreements") and will be amortized into interest expense
using the effective interest method through April 2005, over the term of the
New Swap Agreements. It is anticipated that the impact of this amortization
will not materially affect interest expense in any period.
The New Swap Agreements represent an effective cash flow hedge, consistent
with the nature of the Swap Agreements. Under the terms of the New Swap
Agreements, the Company pays a maximum annual rate of interest applied to a
notional amount equal to the principal balance of the Senior Term Facility for
the period June 30, 1999 through August 31, 2001. During this period, the
Company's maximum annual rate is 5.65% 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 September 1, 2001 through the scheduled maturity of the
Senior Term Facility in 2005, the Company pays a fixed annual rate of 7.35%
applied to a notional amount equal to 50% of the principal balance of the
Senior Term Facility during that period.
As a result of the termination and replacement of the Swap Agreements, the
maximum rate of interest to be paid has increased through January 31, 2002. The
New Swap Agreements, however, provide the Company
F-20
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
with greater protection against increases in interest rates from January 31,
2002 through the maturity of the Senior Term Facility in 2005, since the New
Swap Agreements do not contain an option, which was available to the
counterparties of the Swap Agreements, to terminate the agreements on January
31, 2002. Counterparty risk is limited to amounts to be reflected in the
Company's consolidated balance sheet. This risk is minimized and is expected to
be immaterial to the Company's consolidated results of operations as the New
Swap Agreements provide for monthly settlement of the net interest owing.
Further, each counterparty to the New Swap Agreements carries at least a
"single-A" credit rating. The impact of the interest rate exchange agreements
on the Company's interest expense was not material.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments including cash, accounts
receivable, accounts payable, accrued liabilities and variable rate debt
approximate book value as of December 31, 1998 and 1999. The carrying value for
the fixed rate Intermediate Senior Discount Notes was established based upon
market conditions at the time the debt was issued and through December 31,
1998, such market conditions had not changed significantly. As of December 31,
1999, the fair value of the Intermediate Senior Discount Notes is based on the
calculated premium to redeem the debt in accordance with the Intermediate
Senior Discount Notes indenture. Use of this basis reflects the Company's
anticipated redemption of the Intermediate Senior Discount Notes in connection
with the initial public offering of the Company's common stock during 2000. As
of December 31, 1998 and 1999, the fair value of the Company's Senior
Subordinated Notes, Capital Senior Discount Notes and Swap Agreements were
different from their carrying values. The fair values of the Company's Senior
Subordinated Notes and Capital Senior Discount Notes are estimated based on
their quoted market prices. The fair value of the Company's Swap Agreements as
of December 31, 1998 and 1999 is based on the difference between the Company's
interest rate as determined by the Swap Agreements and the market interest rate
for swaps with the same contractual terms as of December 31, 1998 and 1999,
respectively.
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1999
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Variable rate debt:
Revolving Credit Facility................ $ 7,000 $ 7,000 $ -- $ --
Senior Term Facility..................... $255,000 $255,000 $251,738 $251,738
Fixed rate debt:
10% Senior Subordinated Notes............ $100,000 $ 96,000 $100,000 $ 92,500
Capital Senior Discount Notes............ $ 68,805 $ 61,600 $ 77,717 $ 57,200
Intermediate Senior Discount Notes....... $ 35,544 $ 35,544 $ 40,759 $ 43,408
Swap Agreements.......................... $ -- $ (1,081) $ -- $ 1,346
</TABLE>
10. CAPITAL LEASE OBLIGATIONS
The Company leases certain facilities and equipment under capital lease
obligations bearing implicit interest rates ranging from 8% to 12%. The terms
of the lease require monthly payments of approximately $152 including interest
at December 31, 1999. Certain leases contain an option for the Company to renew
for an additional term at the end of the initial term and an option to purchase
the facilities and equipment at their fair values at the end of the initial
term and at the end of the second term.
F-21
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
Future Payments
Aggregate annual maturities of capital lease obligations (for periods
subsequent to December 31, 1999) are as follows:
<TABLE>
<CAPTION>
Present
Total Less Amount Value of Net
Minimum Lease Representing Minimum Lease
Payments Interest Payments
------------- ------------ -------------
<S> <C> <C> <C>
Year Ending December 31,
2000.............................. $1,835 $ 726 $1,109
2001.............................. 1,831 606 1,225
2002.............................. 1,522 481 1,041
2003.............................. 1,298 371 927
2004.............................. 1,298 253 1,045
Thereafter........................ 1,298 121 1,177
------ ------ ------
$9,082 $2,558 $6,524
====== ====== ======
</TABLE>
11. STOCKHOLDERS' EQUITY
Old Common Stock, Preferred Stock and Additional Paid-in Capital
At December 31, 1996 and immediately prior to the Recapitalization, the
Company's stockholders' equity consisted of the following: (i) 100,000
authorized shares of no par value common stock ("Old Common") with
approximately 9,717 shares outstanding; (ii) 100,000 authorized shares of no
par value convertible preferred stock with approximately 6,601 shares
outstanding. Due to the existence of a put option for 6,959 common shares, the
estimated fair value of these shares was accreted to estimated fair value and
was classified as temporary stockholders' equity. The estimated fair value of
the Old Common at December 31, 1996 was approximately $5,590 per share and at
the date of the Recapitalization was approximately $11,308. The Old Common,
preferred stock and common stock purchase warrants were canceled as part of the
Recapitalization.
Recapitalization
In connection with the Recapitalization, the Company accelerated the vesting
of all outstanding options to purchase shares of its Old Common and made such
options immediately exercisable. Certain members of management then exercised
approximately 1,374 options granted under the Company's 1996 Performance Stock
Option Plan (the "1996 Stock Option Plan"), to purchase an equal number of
shares of Old Common. In addition, the convertible preferred stock and the Old
Common purchase warrants were converted into 565 shares of Old Common. Holdings
then: (i) redeemed and canceled approximately 16,232 shares of Old Common and
options to purchase 64 shares of Old Common options granted under the Company's
1996 Employee Stock Option Plan (the "1996 Employee Plan") at a redemption
price of approximately $11,308 per share, plus future escrow payments estimated
at $508 per share or $8.6 million in the aggregate at December 31, 1997,
payable by March 31, 1999; (ii) canceled all remaining options authorized but
ungranted under the 1996 option plans; (iii) converted the remaining
approximately 1,938 shares of Old Common into approximately 438,326 shares and
approximately 54,175 shares of Class A common and Class L common, respectively,
and (iv) converted the remaining approximately 513 unexercised options to
purchase shares of Old Common into options to purchase approximately 116,158
shares and approximately 14,357 shares of Class A common and Class L common,
respectively. The escrow payment described above represents the distribution by
the Company to all shareholders of record as of the Recapitalization date, of
the income tax benefit received by the Company as a result of the compensation
expense recorded for the accelerated vesting of options to purchase shares of
Old Common. At December 31, 1999, approximately 41,817 options to purchase
shares of Class A common stock at $0.96 per share and approximately 14,357
options to purchase shares of Class L common stock at $70.19 per share remain
outstanding and fully vested.
F-22
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
Common Stock Warrants
As part of the financing associated with the Recapitalization, warrants were
granted to affiliates of The Chase Manhattan Bank (Note 6) to purchase 70,211
shares of Class A common stock and 8,678 shares of Class L common stock. Each
warrant entitled the holder thereof to purchase a unit, at $.09 per unit,
consisting of 8.09 shares of Class A common stock and one share of Class L
common stock. Such warrants are exercisable through October 2007. A fair value
of $3,420 was ascribed to the warrants and recorded as a debt discount.
In connection with the DCI merger (Note 14), warrants were granted to
purchase 69,599 shares of Class A common stock at $61.17 per share. Such
warrants are exercisable through July 22, 2008.
Common Stock
The Company has seven authorized classes of no par Class A common stock,
Class A-1 to Class A-7, which aggregate 5,175,000 authorized shares. The
separate classes of Class A common have different rights with respect to
election of directors. All Class A shares are voting, except for Class A-7,
which is nonvoting. The Company also has 475,000 authorized shares of no par
Class L common stock.
The Class L common stock is identical to the Class A common stock, except
that each share of Class L common stock is entitled to a preferential payment
upon any distribution by the Company equal to the original cost of such share
($364.09) plus an amount which accrues from the original issuance date on a
daily basis at 12% per annum, compounded quarterly. After payment of this
preference amount, each share of Class A common stock and Class L common stock
shares equally in all distributions. The Class L common stock is convertible
into Class A common stock upon a majority vote of the holders of the
outstanding Class L common stock at the time of our initial public offering or
other specified realization events.
Each outstanding share of Class L common stock is convertible 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 share of Class L
common stock by the value of a share of Class A common stock.
Stock Options
Prior to the Recapitalization, the Company had two stock option plans, the
1996 Stock Option Plan and the 1996 Employee Plan together the "1996 Option
Plans." The term of the options under these plans is ten years from the date of
grant. Under the 1996 Option Plans, the Board granted options to acquire
approximately 1,950 shares of Old Common, at an exercise price of approximately
$2,179 per share. Immediately prior to the Recapitalization, the Company
accelerated the vesting of all outstanding options (totaling approximately
1,950 shares) to purchase shares of its Old Common making all such options
immediately exercisable. In connection therewith, the Company recorded $21.3
million of compensation expense in 1997 based on the difference between the
estimated fair value of underlying Old Common and the option exercise price and
$10 million of compensation expense for bonuses payable to employees to cover
the employees' taxes upon the exercise of these options in conjunction with the
Recapitalization.
During 1997, 1998 and 1999 there were no grants, exercises, forfeitures, or
expirations of options under either the 1996 Stock Option Plan or the 1996
Employee Plan. As of December 31, 1999, the options outstanding under both of
these plans had remaining weighted-average contractual terms of approximately
seven years.
In 1997, Holdings adopted its 1997 Details, Inc. Equity Incentive Plan (the
"1997 Employee Stock Option Plan"), authorizing the grant of options to certain
management of the Company to purchase 235,000 shares of Class A common stock.
The term of the options under this plan is ten years from the date of grant.
Options granted under this plan vest in equal monthly amounts over four years,
with immediate vesting upon a change
F-23
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
in control or sale of all of the assets of the Company. Of the total shares
authorized under the plan, options to purchase half of the shares (117,500)
have an exercise price of $5.00 ("$5 Options"), with the other half having an
exercise price of $61.17 ("$61 Options"). For all options granted under this
plan, the exercise prices approximated the estimated fair value at the date of
grant, resulting in no compensation expense. As of December 31, 1999, the
options outstanding under this plan had a remaining weighted-average
contractual term of approximately eight years.
Stock option activity under the 1997 Employee Stock Option Plan is:
<TABLE>
<CAPTION>
$5 Options $61 Options
----------------- ----------------
Number Number
Exercise of Exercise of
Price Shares Price Shares
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Granted............................... $5.00 116,145 $61.17 116,145
Exercised............................. $5.00 (116,145) -- --
Forfeited............................. -- -- -- --
-------- -------
Balance at December 31, 1997.......... -- -- $61.17 116,145
Granted............................... -- -- -- --
Exercised............................. -- -- -- --
Forfeited............................. -- -- -- --
-------- -------
Balance at December 31, 1998.......... -- -- $61.17 116,145
Granted............................... $5.00 9,775 $61.17 12,031
Exercised............................. -- -- -- --
Forfeited............................. $5.00 (6,767) $61.17 (9,023)
-------- -------
Balance at December 31, 1999.......... $5.00 3,008 $61.17 119,153
======== =======
Options exercisable as of December 31,
1999................................. 1,625 58,547
======== =======
</TABLE>
Had compensation costs for the stock options issued under the 1996 Stock
Option Plan, 1996 Employee Plan and the 1997 Employee Stock Option Plan been
determined based on the grant date fair values as required by SFAS No. 123,
there would have been no significant effect on the Company's reported net loss
for the periods presented. Fair value was estimated using the minimum-value
method, a risk-free interest rate of 6.5% and 6.0% for 1997 and 1999,
respectively, and an expected life of five years for the grants in 1997 and
3 months for the grants in 1999. No dividends were assumed to be declared. The
weighted average fair value per option (computed using the minimum-value method
as the Company was a non-public entity when the options were granted) of the
stock options granted in 1997 and 1999 was nil.
In connection with the DCI merger (see Note 14), the Board of Directors
adopted, and the stockholders of Holdings approved, the Details Holdings Corp.-
Dynamic Circuits 1996 Stock Option Plan ("DCI 1996 Plan") and the Details
Holdings Corp.-Dynamic Circuits 1997 Stock Option Plan ("DCI 1997 Plan"),
together the "DCI Stock Option Plans", which authorized the granting of stock
options and the sale of Class A common stock and Class L common stock in
connection with the merger with DCI. The terms applicable to options issued
under the DCI Stock Option Plans are substantially similar to the terms
applicable to the options to purchase shares of DCI outstanding immediately
prior to the merger with DCI. These terms include vesting from the date of
merger through 2002 for those options outstanding as of the date of the merger
with DCI. Options granted under these plans subsequent to the merger will
typically vest in equal monthly amounts over four years. An optionholder's
scheduled vesting is dependent upon continued employment with the Company. Upon
termination of employment, any unvested options as of the termination date are
forfeited.
F-24
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
In connection with the DCI merger, the Company converted each DCI stock
option award into the right to receive a cash payment and an option to purchase
shares of Class A common stock and shares of Class L common stock. The options
granted in 1998 bear exercise prices of either $1.58 ("$1.58 Options") or
$61.17 ("$61 Options") for the purchase of Class A shares, and $364.09 for
Class L Shares ("Class L Options"). During 1999, options to purchase shares of
Class A common stock were also granted with an exercise price of $5.00 ("$5
Options"). The Board is authorized to sell or otherwise issue Class A common
stock and Class L common stock at any time prior to the termination of the
applicable DCI Stock Option Plan in such quantity, at such price, on such terms
and subject to such conditions as established by the Board up to an aggregate
of 222,600 shares of Class A common stock and 28,300 shares of Class L common
stock, in the case of the DCI 1996 Plan, and 46,000 shares of Class A common
stock and 5,850 shares of Class L common stock in the case of the DCI 1997 Plan
(in each case, subject to adjustment upon the occurrence of certain events to
prevent any dilution or expansion of the rights of participants that might
otherwise result from the occurrence of such events). As of December 31, 1999,
there are options to purchase 3,458 shares of Class A common stock and 3,340
shares of Class L common stock available for grant under the DCI Stock Option
Plans. The maximum term of the options under the DCI 1996 Plan is August 2006
and under the DCI 1997 Plan is March 2008. As of December 31, 1999, all options
outstanding under the DCI Stock Option Plans had weighted average remaining
contractual lives of approximately seven years.
Stock option activity since July 23, 1998 (date of DCI merger) is as
follows:
<TABLE>
<CAPTION>
$1.58 Options $61 Options $5 Options Class L Options
------------------ ------------------ ------------------ ------------------
Exercise Number of Exercise Number of Exercise Number of Exercise Number of
Price Shares Price Shares Price Shares Price Shares
-------- --------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at July 23,
1998................... $1.58 255,778 $61.17 13,948 -- -- $364.09 32,479
Granted................. -- -- -- -- -- -- -- --
Exercised............... $1.58 (116,953) -- -- -- -- -- --
Forfeited............... $1.58 (3,318) $61.17 (190) -- -- $364.09 (442)
-------- ------ ----- ------
Balance at December 31,
1998................... $1.58 135,507 $61.17 13,758 -- -- $364.09 32,037
Granted................. $1.58 1,621 $61.17 88 $5.00 9,000 $364.09 206
Exercised............... $1.58 (39,455) -- -- -- -- -- --
Forfeited............... $1.58 (11,168) $61.17 (615) -- -- $364.09 (1,433)
-------- ------ ----- ------
Balance at December 31,
1999................... $1.58 86,505 $61.17 13,231 $5.00 9,000 $364.09 30,810
======== ====== ===== ======
Options exercisable as
of December 31, 1999... 24,379 9,851 563 22,938
======== ====== ===== ======
</TABLE>
F-25
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
For all options granted under the DCI Stock Option Plans in 1998 and 1999,
the exercise prices approximated the estimated fair value at the date of grant,
resulting in no compensation expense. Pro forma information regarding net loss
has been determined for the Company as if compensation costs for the stock
options issued under the DCI Stock Option Plans had been determined based upon
the grant date fair values. Fair value was estimated using the minimum-value
method as the Company was a non-public entity when the options were granted, a
risk-free interest rate of 5.6% for 1998 and 6.0% for 1999 and an expected life
of 3 months for both $1.58 Options and $5 Options or two years for both $61
Options and Class L Options. No dividends were assumed to be declared. The
weighted-average fair value per option of the stock options granted under the
DCI Stock Option Plans in 1998 and 1999 were as follows:
<TABLE>
<CAPTION>
Value per
Option
----------
Option category 1998 1999
--------------- ---- -----
<S> <C> <C>
$1.58 Options................................................. Nil Nil
$5 Options.................................................... -- $0.10
$61 Options................................................... Nil Nil
Class L Options............................................... $39 $ 41
</TABLE>
The Company's 1998 and 1999 pro forma loss before extraordinary items is as
follows (amounts in millions):
<TABLE>
<CAPTION>
1998 1999
------ ------
<S> <C> <C>
As reported.............................................. $(49.7) $(17.4)
Pro forma................................................ $(50.1) $(17.5)
</TABLE>
12. INCOME TAX
The provision (benefit) for income taxes in 1997, 1998 and 1999 consists of
the following:
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Current:
Federal............................. $ (5,224) $ -- $ 1,302
State............................... -- 666 158
Foreign............................. 150 -- 17
-------- ------- -------
(5,074) 666 1,477
-------- ------- -------
Deferred:
Federal............................. (3,657) (3,288) (7,391)
State............................... (2,127) (944) (1,501)
Foreign............................. -- -- --
-------- ------- -------
(5,784) (4,232) (8,892)
-------- ------- -------
$(10,858) $(3,566) $(7,415)
======== ======= =======
</TABLE>
In connection with the acquisition of NTI and the merger with DCI, the
Company acquired certain net deferred tax assets of approximately $1.2 and $1.3
million, respectively.
F-26
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
Deferred income tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................. $ 5,243 $ 1,098
Trade receivables................................ 1,930 1,859
Deferred compensation............................ 5,485 4,867
Tax credits...................................... 327 956
Accrued liabilities.............................. 6,347 9,628
Amortization..................................... 27 1,726
Other............................................ 174 101
-------- --------
19,533 20,235
Deferred tax liabilities:
Property, plant and equipment.................... (2,289) (1,027)
Intangible assets................................ (34,341) (26,639)
-------- --------
(36,630) (27,666)
Valuation allowance................................ -- (774)
-------- --------
Net deferred tax liabilities................... $(17,097) $ (8,205)
======== ========
</TABLE>
The tax effect related to the extraordinary item (see Notes 6 and 14) is
deferred U.S. and state taxes.
The income tax benefit differs from the amount of income tax determined by
applying the U.S. Federal statutory income tax rate to loss before income taxes
due to the following:
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Computed "expected" tax benefit..... $ (9,476) $(18,639) $(8,697)
Increase (decrease) in income taxes
resulting from:
State taxes, net of credits and
federal tax benefit.............. (1,591) (181) (1,343)
Goodwill amortization............. -- 1,320 2,456
In-process research and
development write-off............ -- 13,650 --
Other............................. 209 284 169
-------- -------- -------
$(10,858) $ (3,566) $(7,415)
======== ======== =======
</TABLE>
The Company has Federal, California and Colorado net operating loss ("NOL")
carryforwards of approximately $0.2 million, $6 million and $12 million,
respectively, at December 31, 1999. The Federal NOL carryforwards begin to
expire in 2012, the California NOL carryforwards begin to expire in 2002, and
the Colorado NOL carryforwards begin to expire in 2012. A valuation allowance
has been established for deferred income tax benefits related to the Colorado
NOL carryforwards. Management belives it is more likely than not that these NOL
carryforwards may not be realized as a result of the closure of the Colorado
facility in December 1999 (see Note 15).
If certain substantial changes in the Company's ownership should occur,
there would be an annual limitation on the amount of the carryforwards which
can be utilized.
F-27
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
13. COMMITMENTS AND CONTINGENCIES
Environmental matters--The Company's operations are regulated under a number
of federal, state, and local environmental laws and regulations, which 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. Compliance
with these environmental laws are major considerations for all printed circuit
board manufacturers because metals and other hazardous materials are used in
the manufacturing process. In addition, because the Company is a generator of
hazardous wastes, the Company, along with any other person who arranges for the
disposal of such wastes, may be subject to potential financial exposure for
costs associated with an investigation and remediation of sites at which it has
arranged for the disposal of hazardous wastes, if such sites become
contaminated. This is true even if the Company fully complies with applicable
environmental laws. In addition, it is possible that in the future new or more
stringent requirements could be imposed. Management believes it has complied
with all applicable environmental laws and regulations. There have been no
claims asserted nor is management aware of any unasserted claims for
environmental matters.
Employment agreements--Pursuant to certain employment agreements dated
September 1, 1995, as amended, effective until October 28, 2000, certain
members of senior management received base salaries in the aggregate amount of
$1.3 million in 1999. The base salaries on or after January 1, 2000 will be
established by the Company at a level that equals or exceeds base salaries for
1999. These employees are eligible for annual bonuses based upon the
achievement of EBITDA targets. These employees also received an aggregate of
10,367 shares of Class A common stock on the Recapitalization closing date. In
connection with this stock bonus, the Company recorded compensation expense of
approximately $52 based upon a fair market value per share of Class A common
stock of $5 per share. In addition, these employees will be entitled to receive
an additional bonus in the aggregate amounts of $2.4 million in consideration
of prior services which will be payable in October 2000, whether or not such
employees are still employed by the Company. The Company accrued these bonuses
at their present value and the charge was included in the results of operations
during the year ended December 31, 1997.
In addition, pursuant to an employment agreement dated July 23, 1998, a
certain key employee received a base salary of approximately $445 in 1999. In
addition, this key employee is eligible to receive an annual bonus based upon
achievement of EBITDA targets. During 1998, this key employee received an
award, pursuant to the agreement, of 39,008 Class A Cash Bonus units valued at
$1.5725 per unit and 4,953.3 Class L Cash Bonus units valued at $363.2381 per
unit. As this award was made to an employee of DCI for services rendered prior
to the merger with DCI (see Note 14), the obligation existed as of the merger
date and was treated as an acquired liability in accordance with purchase
accounting. Post-merger salary and other compensation are recorded as period
costs.
Management agreement--Pursuant to a management agreement between Bain
Capital Partners V, L.P. ("Bain") and the Company (the "Management Agreement"),
Bain is entitled to a management fee when, and if, it provides advisory
services to the Company in connection with potential business acquisitions.
Beginning on the first anniversary of the Recapitalization, Bain may, upon the
request of the Company, perform certain management consulting services at
Bain's customary rates plus reimbursement for reasonable out-of-pocket
expenditures. In addition, Bain is entitled to receive a fee equal to
approximately 1% of the gross purchase price of any senior financing
transaction in connection with an acquisition, recapitalization or refinancing
transaction (including assumed debt). In connection with the Recapitalization,
NTI acquisition and DCI merger, Bain was paid fees of approximately $3.1
million, approximately $0.4 million, and approximately $2.7 million,
respectively. In 1999, Bain was paid fees of approximately $1.1 million for
advisory services. The Management Agreement continues until terminated by
mutual consent of the parties, or until terminated as a result of a breach of
the Management Agreement. The Management Agreement includes customary
indemnification provisions in favor of Bain.
F-28
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
Operating leases--The Company has entered into various operating leases
principally for office space and equipment that expire at various dates through
2006. Future annual minimum lease payments under all non-cancelable operating
leases with initial or remaining terms of one year or more consist of the
following at December 31, 1999:
<TABLE>
<S> <C>
Year Ending December 31,
2000............................................................. $2,109
2001............................................................. 1,808
2002............................................................. 1,084
2003............................................................. 452
2004............................................................. 321
Thereafter....................................................... 389
------
Future minimum lease payments...................................... $6,163
======
</TABLE>
Rent expense for 1998 and 1999 was approximately $1.5 million and $3.0
million, respectively, and was not significant in 1997.
Litigation--The Company is a party to various legal actions arising in the
ordinary course of its business. The Company believes that the resolution of
these legal actions will not have a material adverse effect on the Company's
financial position, results of operations or cash flows.
Retirement plans--The Company has adopted a 401(k) plan which became
effective January 1997. All employees of the Company over the age of 21 and
having at least one year of service, are eligible to participate in the plan.
The eligible employees may contribute 1% to 15% of their annual compensation.
In 1997, no employer matching contributions were required to be made by the
Company. In 1998, the Company amended the plan to match employee contributions
at $0.25 per $1.00 contributed, subject to a maximum per employee participant.
For plan year ended December 31, 1998 and 1999, employer contributions totaled
$145 and $394, respectively.
14. MERGERS AND ACQUISITIONS
On December 22, 1997, the Company acquired all of the outstanding shares of
common stock of NTI and on July 23, 1998, pursuant to a Stock Contribution and
Merger Agreement, the Company consummated the merger with DCI ("DCI Merger").
Both transactions were accounted for as purchases in accordance with Accounting
Principles Board Opinion No. 16 and accordingly, the results of operations
since the dates of acquisition are included in the accompanying consolidated
financial statements.
NTI
NTI was purchased for approximately $38.9 million including the assumption
of approximately $7.4 million of NTI's debt. The acquisition was funded, in
part, through the issuance of additional equity in the aggregate amount of
$10.2 million to certain existing investors in Holdings as well as three new
investors, including an existing investor in NTI. The remainder of the purchase
price was funded with cash and the $25 million Senior Acquisition Facility
borrowing under the Senior Term Facility in place at that time. The outstanding
borrowing under this facility was retired in connection with the DCI Merger.
The NTI purchase price was allocated to assets acquired and liabilities assumed
and the excess purchase price of approximately $27 million was allocated to
goodwill. Accumulated amortization as of December 31, 1998 and 1999 was
$1.1 million and $2.2 million, respectively.
F-29
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
DCI
The DCI Merger was completed for aggregate consideration of approximately
$250 million, including the assumption of approximately $72.3 million of DCI's
debt, and consisted of a partial redemption, by way of a merger, of DCI's
outstanding capital stock for cash with the remaining capital stock being
contributed to Holdings in exchange for shares, options and warrants to
purchase shares of the voting common stock (estimated value of approximately
$73 million). The DCI Merger was financed with a new $300 million senior bank
facility (Senior Credit Facility) and by $33 million of newly issued
Intermediate Senior Discount Notes. In connection with the new financing, the
Company used $106 million of the proceeds to retire all of its existing senior
term debt, which resulted in an extraordinary loss of $2.4 million, net of
related income taxes of $1.5 million.
The DCI merger consideration was allocated to tangible assets (aggregating
approximately $65 million) acquired and liabilities assumed (aggregating
approximately $30 million), with the remaining merger consideration consisting
primarily of goodwill, identifiable intangible assets, and acquired in-process
research and development ("in-process R&D").
Significant portions of the DCI merger consideration were identified as
intangible assets. Valuation techniques were employed which reflect recent
guidance from the Securities and Exchange Commission on approaches and
procedures to be followed in developing allocations to in-process R&D. At the
date of the merger, technological feasibility of the in-process R&D projects
had not been reached and the technology had no alternative future uses.
Accordingly, the Company expensed the portion of the purchase price allocated
to in-process R&D of $39 million, in accordance with generally accepted
accounting principles, in the year ended December 31, 1998.
The in-process R&D is comprised of a number individual technological
development efforts, focusing on the discovery of new, technologically advanced
knowledge and more complete solutions to customer needs, the conceptual
formulation and design of possible alternatives, as well as the testing of
process and product cost improvements. Specifically, these technologies include
efforts to: increase maximum printed circuit board layer count, reduce line and
space tolerances, develop specialty surface finishes and materials, use new and
innovative applications of micro blind vias, embedded circuitry, and flexible
circuit applications, develop "intelligent" (active) backpanels, and develop
automation to integrate and automate the entire workflow process.
The amount of the merger consideration allocated to in-process R&D was
determined by estimating the stage of completion of each in-process R&D project
at the date of the merger, estimating cash flows resulting from the future
release of products employing these technologies, and discounting the net cash
flows back to their present values.
The weighted average stage of completion for all projects, in aggregate, was
approximately 75% as of the merger date. As of that date, the estimated
remaining costs to bring the projects under development to technological
feasibility were over $2 million. The cash flow estimates from sales of
products incorporating those technologies commence in the year 1999, with
revenues increasing for several years following the merger, followed by
declines in subsequent periods as other new products are expected to be
introduced and represent a larger proportion of the total product offering.
Revenues forecasted in each period are reduced by related expenses, capital
expenditures, the cost of working capital, and an assigned contribution to the
core technologies serving as a foundation for the research and development. The
discount rates applied to the individual technology's net cash flows ranged
from 18% to 24%, depending on the level of risk associated with a particular
technology and the current return on investment requirements of the market.
These discount rates reflect "risk premiums" of 20% to 60% over the estimated
weighted average cost of capital of 15% computed for DCI.
F-30
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
As discussed above, a portion of the DCI merger consideration premium was
allocated to identifiable intangibles and goodwill. The identifiable
intangibles consist primarily of developed technologies, customer
relationships/tradenames, and assembled workforce. The fair value of the
developed technology assets at the date of acquisition was $60 million and
represents the aggregate fair value of individually identified technologies
that were fully developed at the time of the merger. As with the in-process
R&D, the developed technologies were valued using a future income approach, in
context of the business enterprise value of DCI. The customer
relationships/tradenames and assembled workforce assets were assigned values as
of the acquisition date of approximately $21 million and $4 million,
respectively.
Goodwill generated in the merger with DCI has an assigned value of
approximately $120 million. As of December 31, 1998 and 1999, the accumulated
amortization related to this goodwill and identifiable intangibles acquired in
the merger with DCI was approximately $9.8 million and $32.9 million,
respectively.
Certain investment funds associated with Bain Capital Funds, the controlling
shareholders, were shareholders of DCI prior to the Company's July 1998 merger
with of DCI. In conjunction with the merger, the Bain Capital Funds received
$22.9 million for the redemption of the DCI common stock they held prior to
consummation of the merger.
In connection with the DCI Merger and related transactions, Celerity
Partners, L.L.C. and its affiliates were paid fees and expenses aggregating
approximately $1.7 million. Celerity Partners, L.L.C. is the general partner of
Celerity Partners I, L.P., which is the managing member of Celerity Details,
L.L.C., Celerity Liquids, L.L.C. and Celerity Circuits, L.L.C., which are each
stockholders of the Company.
The accompanying unaudited condensed consolidated statements of operations
include: (a) the accounts of NTI which was acquired in December 1997, and the
effects of the Recapitalization for the year ended December 31, 1997 and (b)
the accounts of DCI for the period July 24, 1998 thorugh December 31, 1998. The
following unaudited pro forma information for the years ended December 31, 1998
and 1997 presents net sales and net loss before extraordinary item for each of
these periods as if these transactions were consummated at the beginning of
each period. In addition, the actual results of operations for the year ended
December 31, 1998 include a $39 million write-off of acquired in-process
research and development related to the merger with DCI. This one-time charge
has been excluded from the unaudited pro forma results.
<TABLE>
<CAPTION>
Pro Forma Pro Forma
December 31, December 31,
1998 1997
------------ ------------
(unaudited)
<S> <C> <C>
Net Sales.......................................... $261,000 $254,000
Loss Before Extraordinary Item..................... $(16,000) $(14,000)
</TABLE>
The unaudited pro forma results are not necessarily indicative of the actual
results which have been realized had the transactions actually occurred at the
beginning of each respective periods.
15. RESTRUCTURING AND OTHER RELATED CHARGES
In December 1999, management and the Company's Board of Directors approved a
plan to consolidate its Colorado operations into its Texas facility, resulting
in the closure of the Colorado facility. By combining its Colorado and Texas
operations, the Company anticipates eliminating its lower-margin product lines
and decreasing its overhead costs, gaining efficiency through better capital
utilization and streamlining management.
F-31
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
Accordingly, such decision is not anticipated to adversely impact the Company's
results of operations in future periods. The Company anticipates substantial
completion of this consolidation plan by March 2000. Revenues and EBITDA
(earnings before income taxes, depreciation, amortization and net interest
expense) for the Colorado facility were approximately $30 million and $(1.7)
million, respectively, for the year ended December 31, 1999. Net income/(loss)
for this facility is not readily determinable.
In conjunction with the planned closure of the Colorado facility, the
Company 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. Both the exit
costs and asset impairment costs are classified as "Restructuring and other
related charges" in the 1999 Consolidated Statement of Operations.
Of the $4.5 million recorded as restructuring costs, approximately $2.0
million relates to severance and related expenses associated with the
involuntary termination of the 275 staff and management employees of this
plant. The remaining charges are comprised of $1.9 million of inventory-related
losses and $0.6 million in expenses principally related to minimum lease
payments through the scheduled maturities of the real property operating
leases. No amounts related to the accrual for either the $2.0 million in
severance and related expenses or the $0.6 million related to the operating
leases were expended as of December 31, 1999.
The inventory losses are due entirely to the plan to consolidate the
Colorado facility into the Texas facility. Such losses arose from management's
decision to cease all production operations in Colorado immediately following
the notification to employees of the plant closure in late December 1999. This
decision was primarily made to ensure that the Company's quality standards were
met with respect to work in-process at the Colorado facility. To expedite the
transfer of production from the Colorado facility to the Company's other
facilities, nearly all work in-process was scrapped, as were certain production
materials that could not be utilized in the Company's other operations. All
inventory to be retained and utilized by the Company is reflected at its lower
of cost or market, in accordance with the Company's accounting policies (See
Note 2).
The calculated impairment of net property, plant and equipment was
determined in accordance with SFAS No. 121, based upon a detailed review of the
individual long-lived assets in the Colorado facility. Management determined
that most of these assets would be utilized by the Company's other operations
and are not impaired. Other assets, however, are anticipated to be transferred
to the Company's other operations, from where they will be sold or otherwise
disposed, as in the case of obsolete or redundant equipment. The carrying
amount of such assets was reduced to estimated fair value, less estimated
selling costs. Some assets are neither to be utilized in the Company's other
operations, nor are they saleable. Accordingly, these assets were written-down
to zero value. The impairment to assets to be sold or otherwise disposed
comprises approximately $1.7 million of the total write-down of net property,
plant and equipment. The remaining $0.8 million charge represents the loss on
assets possessing no remaining value. Management anticipates that the sale or
other disposition of impaired assets will have occurred by June 2000. The
impact of suspending depreciation on the assets to be sold or otherwise
disposed through their expected disposition dates is not anticipated to be
significant to the Company's results of operations.
F-32
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
16. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
CASH PAYMENTS FOR:
Income taxes..................................... $ -- $ 1,743 $ 1,141
======= ======= =======
Interest......................................... $11,552 $25,773 $30,603
======= ======= =======
SUPPLEMENTAL SCHEDULE OF INVESTING AND FINANCING
ACTIVITIES:
Capital lease obligations incurred for acquisi-
tion of property and equipment.................. $ 646 $ 1,864 $ --
------- ------- -------
Value of warrants issued in connection with debt
financing....................................... $ 3,420 $ -- $ --
------- ------- -------
Equity issued in mergers and acquisitions (see
Note 14)........................................ $10,200 $73,246 $ --
------- ------- -------
</TABLE>
Recapitalization--As part of the Recapitalization (see Notes 1, 6 and 11): (i)
the existing shareholders of the Pre-Recapitalization Company exchanged their
shares of Old Common (recorded value of $8.0 million) for Class A and L common
stock (aggregate fair value of $21.9 million), and (ii) certain executives of
the Pre-Recapitalization Company exchanged their options to purchase shares of
Old Common (recorded value of $5.0 million) for replacement options to purchase
Class A and L common stock (aggregate fair value of $5.0 million).
17. SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATED FINANCIAL DATA
Subsequent to the Recapitalization, on November 15, 1997, Dynamic Details,
Incorporated, issued $100 million aggregate principal amount of 10% Senior
Subordinated Notes due in 2005 (see Note 6). The Senior Subordinated Notes are
fully and unconditionally guaranteed on a senior subordinated basis, jointly
and severally, by Dynamic Details, Incorporated (the "Issuer") and all of its
wholly-owned subsidiaries (the "Subsidiary Guarantors"). As the Issuer is a
wholly-owned subsidiary of Holdings, the accounts of the Issuer are included in
the consolidated financial statements of Holdings.
The condensed financial data of the Issuer is presented below. Separate
financial data of the Subsidiary Guarantors are not presented because (i) the
Guarantors are wholly-owned and have fully and unconditionally guaranteed the
Notes on a joint and several basis and (ii) the Company's management has
determined such separate financial data are not material to investors and
believes the condensed financial data of the Issuer presented is more
meaningful in understanding the financial position of the Company.
F-33
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
SUPPLEMENTAL DYNAMIC DETAILS, INCORPORATED CONDENSED FINANCIAL DATA
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------
1998 1999
-------- --------
<S> <C> <C>
Current assets............................................. $ 20,755 $ 22,472
Non-current assets......................................... 287,619 329,490
-------- --------
Total assets............................................. $308,374 $351,962
======== ========
Current liabilities........................................ $ 37,372 $ 29,089
Non-current liabilities.................................... 348,950 354,397
-------- --------
Total liabilities........................................ $386,322 $383,486
-------- --------
Total stockholders' deficit.............................. $(77,948) $(31,524)
-------- --------
Total liabilities and stockholders' deficit.............. $308,374 $351,962
======== ========
</TABLE>
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net sales....................................... $ 77,988 $ 83,560 $ 96,441
Cost of sales................................... 37,929 43,759 50,879
-------- -------- --------
Gross profit.................................... 40,059 39,801 45,562
Operating expenses.............................. 42,770 9,682 16,250
-------- -------- --------
Income (loss) from operations................... (2,711) 30,119 29,312
Interest expense, net........................... (17,738) (27,216) (32,414)
-------- -------- --------
Income (loss) before taxes and extraordinary
loss........................................... (20,449) 2,903 (3,102)
Income tax benefit.............................. 8,030 280 1,260
-------- -------- --------
Income (loss) before extraordinary loss......... (12,419) 3,183 (1,842)
Extraordinary loss, net of income tax benefit... (1,588) (2,414) --
Equity in loss of subsidiaries.................. (77) (46,714) (6,637)
-------- -------- --------
Net loss...................................... $(14,084) $(45,945) $ (8,479)
======== ======== ========
</TABLE>
18. SUBSEQUENT EVENT (UNAUDITED)
On March 22, 2000, the Company signed a Share Purchase Agreement to purchase
100% of the outstanding stock of MCM Electronics Limited ("MCM") for total
consideration of approximately $86 million payable in a combination of cash,
common stock, and assumption of outstanding indebtedness of MCM. This
transaction will be accounted for as a purchase and no adjustments have been
made in the accompanying historical consolidated financial statements for this
transaction.
F-34
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
Dynamic Circuits Inc.:
We have audited the accompanying consolidated statements of income,
shareholders' deficit and cash flows of Dynamic Circuits Inc. and subsidiary
for the year ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated results of operations and cash flows
of Dynamic Circuits Inc. for the year ended December 31, 1997, in conformity
with generally accepted accounting principles.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
San Jose, California
February 20, 1998
F-35
<PAGE>
DYNAMIC CIRCUITS INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Six Months Ended June
Year Ended 30,
December 31, ------------------------
1997 1997 1998
------------ ----------- -----------
(unaudited)
<S> <C> <C> <C>
Sales................................. $86,098,472 $33,027,588 $77,220,707
Cost of sales......................... 54,201,347 18,800,664 54,232,387
----------- ----------- -----------
Gross profit........................ 31,897,125 14,226,924 22,988,320
----------- ----------- -----------
Operating expenses:
Sales and marketing................. 4,431,214 2,346,215 4,704,663
General and administrative.......... 13,839,364 5,108,248 6,270,853
----------- ----------- -----------
18,270,578 7,454,463 10,975,516
----------- ----------- -----------
Operating income.................... 13,626,547 6,772,461 12,012,804
Other income.......................... 63,151 55,608 176,045
Interest expense, net................. (3,872,450) (1,585,356) (3,138,375)
----------- ----------- -----------
Income before taxes and
extraordinary item................. 9,817,248 5,242,713 9,050,474
Income tax expense.................... 4,112,315 2,206,903 4,280,782
----------- ----------- -----------
Income before extraordinary item...... 5,704,933 3,035,810 4,769,692
Extraordinary loss on retirement of
debt, net of tax..................... (633,013) -- --
----------- ----------- -----------
Net income before accretion........... 5,071,920 3,035,810 4,769,692
Accretion of mandatorily redeemable
preferred stock and put warrants..... 2,800,318 1,042,723 2,584,269
----------- ----------- -----------
Net income available to common
shareholders......................... $ 2,271,602 $ 1,993,087 $ 2,185,423
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-36
<PAGE>
DYNAMIC CIRCUITS INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
For the year ended December 31, 1997, and the six months ended June 30, 1998
<TABLE>
<CAPTION>
Notes Distribution Retained
Common Stock Additional Receivable in Excess Earnings
------------- Paid-In from Deferred of Net (Accumulated) Shareholders'
Shares Amount Capital Shareholder Compensation Book Value (Deficit) Deficit
------ ------ ---------- ----------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31,
1996................... 50,283 $50 $5,371,606 $ -- $(697,937) $(36,877,611) $(2,131,854) $(34,335,746)
Options exercised...... 1,480 1 7,399 -- -- -- -- 7,400
Deferred compensation.. -- -- 198,237 -- (198,237) -- -- --
Amortization of de-
ferred compensation... -- -- -- -- 239,286 -- -- 239,286
Issuance of common
stock in connection
with acquisition of
Cuplex................ 1,314 2 763,147 -- -- -- -- 763,149
Issuance of restricted
stock................. 777 1 202,123 (202,124) -- -- -- --
Accretion and dividends
on mandatorily
redeemable preferred
stock................. -- -- -- -- -- -- (1,812,912) (1,812,912)
Accretion of put
warrants.............. -- -- -- -- -- -- (987,406) (987,406)
Net income............. -- -- -- -- -- -- 5,071,920 5,071,920
------ --- ---------- --------- --------- ------------ ----------- ------------
Balances, December 31,
1997................... 53,854 54 6,542,512 (202,124) (656,888) (36,877,611) 139,748 (31,054,309)
Amortization of de-
ferred compensation
(unaudited)........... -- -- -- -- 114,492 -- -- 114,492
Options exercised
(unaudited)........... 1,496 1 1,289,991 -- -- -- -- 1,289,992
Accretion of
mandatorily redeemable
preferred stock (unau-
dited)................ -- -- -- -- -- -- (872,904) (872,904)
Accretion of put war-
rants (unaudited)..... -- -- -- -- -- -- (1,711,364) (1,711,364)
Net income (unau-
dited)................ -- -- -- -- -- -- 4,769,692 4,769,692
------ --- ---------- --------- --------- ------------ ----------- ------------
Balance, June 30, 1998
(unaudited)............ 55,350 $55 $7,832,503 $(202,124) $(542,396) $(36,877,611) $ 2,325,172 $(27,464,401)
====== === ========== ========= ========= ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-37
<PAGE>
DYNAMIC CIRCUITS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
Year Ended June 30,
December 31, ------------------------
1997 1997 1998
------------ ----------- -----------
(unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................ $ 5,071,920 $ 3,035,810 $ 4,769,692
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation........................ 3,510,940 1,222,474 2,527,972
Amortization........................ 388,816 117,639 614,479
Allowance for doubtful accounts..... 235,051 363,096 142,072
Recovery of excess and obsolete
inventory.......................... (76,090) -- --
Deferred compensation expense....... 239,286 124,794 114,492
Gain on disposal of fixed asset..... (47,123) (47,123) --
Extraordinary loss, gross........... 1,055,023 -- --
Changes in current assets and
liabilities:
Accounts receivable................. (2,696,804) (2,682,898) 234,191
Inventories......................... 58,031 (100,000) (1,307,172)
Prepaid expenses and other assets... (1,706,091) (611,679) 865,903
Deferred taxes...................... (364,568) -- --
Book overdrafts..................... 2,524,984 84,051 (3,224,677)
Accounts payable.................... (3,809,862) 3,647 293,415
Accrued liabilities................. 1,188,639 175,293 506,447
------------ ----------- -----------
Net cash provided by operating
activities....................... 5,572,152 1,685,104 5,536,814
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and
equipment............................ (6,523,064) (3,782,823) (3,465,141)
Disposal of property and equipment.... 193,544 193,544 --
Acquisition of other assets........... -- (116,465) 675,364
Acquisition of subsidiary, net of
cash acquired........................ (28,902,494) -- (660,000)
------------ ----------- -----------
Net cash used in investing
activities....................... (35,232,014) (3,705,744) (3,449,777)
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in restricted cash........... (50,000) (50,000) --
Proceeds from issuance of common
stock................................ 7,400 3,700,000 857,508
Proceeds from long-term debt.......... 67,400,000 (1,750,000) 200,000
Repayment of notes payable, long-term
debt and capital leases.............. (33,712,492) -- (1,175,000)
Payment of financing costs............ (1,639,127) -- (1,187,500)
Dividends on mandatorily redeemable
preferred stock...................... (1,904,480) -- (688,000)
------------ ----------- -----------
Net cash provided by (used in)
financing activities............. 30,101,301 1,900,000 (1,992,992)
------------ ----------- -----------
Net increase (decrease) in cash........ 441,439 (120,640) 94,045
Cash and cash equivalents, beginning of
period................................ 125,311 125,311 566,750
------------ ----------- -----------
Cash and cash equivalents, end of
period................................ $ 566,750 $ 4,671 $ 660,795
============ =========== ===========
Supplemental cash flows information
Cash payments for:
Interest............................ $ 3,619,625
Taxes............................... $ 6,096,000
Supplemental disclosure of noncash
transactions:
Shares of common stock issued in
exchange for note.................... $ 202,124
Accretion of mandatorily redeemable
preferred stock...................... $ 1,812,912
Accretion of put warrants............. $ 987,406
Issuance of shares for the
acquisition of Cuplex................ $ 763,149
Issuance of mandatorily redeemable
Series B preferred stock for the
acquisition of Cuplex................ $ 1,057,953
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-38
<PAGE>
DYNAMIC CIRCUITS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Dynamic Circuits Inc. (DCI) manufactures double-sided and multi-layer
printed circuit boards to customer specifications and drawings. The Company's
fiscal year-end is December 31.
Recapitalization:
In August 1996 DCI formed a subsidiary, Dynamic Circuits Inc., a Delaware
Corporation (the "Company"). On August 19, 1996, DCI effected a reincorporation
merger (the "merger") with the Company, with the Company surviving the merger.
Contemporaneous with the merger, the Company redeemed 170,911 shares of common
stock and 4,557 options to purchase common stock at a total cost of
$45,997,248. Additionally, 8,553 shares of common stock were issued to an un-
related party for a purchase price of $2,222,743. In connection with the
transaction the Company issued 120,000 shares of mandatorily redeemable
preferred stock, and warrants to purchase 15,392 shares of common stock for
$12,000,000, of which $10,076,000 was allocated to mandatorily redeemable
preferred stock and $1,924,000 was allocated to warrants. In addition, the
Company borrowed $35,100,000 under a term loan.
The transaction was accounted for as a recapitalization, and accordingly, no
change in the accounting basis of DCI's assets was made in the accompanying
financial statements. The amount paid to the stockholders of DCI of $45,997,248
exceeded DCI's net assets of approximately $9,119,637 on the date of the
transaction by $36,877,611. This amount was recorded as a distribution in
excess of net book value.
Principles of Consolidation:
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned operating subsidiary Cuplex, Inc. ("Cuplex")
since its acquisition on October 7, 1997 and its 80% owned subsidiary
DCI/Design Plus L.L.C. ("DCI/Design Plus") since its acquisition on June 24,
1998. All significant intercompany balances and transactions have been
eliminated in consolidation.
Unaudited Interim Information:
The financial information presented as of and for the periods ending June
30, 1998 and 1997 has been prepared from the books and records without audit.
Such financial information does not include all disclosures required by
generally accepted accounting principles. In the opinion of management, all
adjustments, consisting of normal recurring adjustments necessary for a fair
presentation of financial information for any interim periods have been
included. The results of the Company's operations for any interim period are
not necessarily indicative of the results attained for a full fiscal year. The
data disclosed in these notes to financial statements related to the interim
period is also unaudited.
Revenue Recognition:
The Company recognizes revenue upon product shipment.
Use of Estimates:
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles which contemplate the continued
existence of the Company. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions 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 amounts of revenues and expenses
during the reported period. Actual results could differ from those estimates.
F-39
<PAGE>
DYNAMIC CIRCUITS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Inventories:
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market value.
Property and Equipment:
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation and amortization is calculated using the declining balance method
over the assets' useful life.
When property and equipment are retired or otherwise disposed of, the
related cost and accumulated depreciation or amortization are removed and a
gain or loss is recognized in operations. Maintenance, repairs and minor
expenditures are expensed as incurred.
Intangible Assets:
Goodwill recorded in connection with the acquisition of Cuplex (see Note 2)
is amortized on a straight-line basis over 25 years. Debt financing costs are
amortized using the sum of the digits method over the term of the related
loans. Goodwill amortization amounted to $78,897 for the year ended December
31, 1997 and $614,479 for the six months ended June 30, 1998 (unaudited). The
Company periodically evaluates the recoverability of goodwill based upon
estimated discounted cash flows from the acquired business.
Income Taxes:
The Company is organized as a Delaware corporation. Subsequent to the
merger, the Company accounts for taxes using the liability method. Under this
method, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using current tax laws and rates. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts
expected to be realized. Prior to the merger, the Company was organized as a
California Subchapter S corporation and as such was not a tax paying entity for
federal income tax purposes, but was required to pay the state of California a
reduced rate based on taxable income.
Concentration of Credit Risk:
The Company sells printed circuit boards to customers in a wide variety of
industries. The Company's customers are geographically dispersed throughout the
United States.
Financial Instruments:
The Company considers all highly liquid investments with an original or
remaining maturity of three months or less at the date of purchase to be cash
equivalents.
Amounts reported for cash and cash equivalents, accounts receivable,
accounts payable and other accrued liabilities are considered to approximate
fair value primarily due to their short maturities. Based on borrowing rates
currently available to the Company for loans with similar terms, the carrying
value of its long term debt, and mandatorily redeemable preferred stock
approximate fair value.
Stock Split:
In January 1998, the stockholders approved an increase in the Company's
authorized shares of common stock to nine million concurrently with a one-
hundred-for-one stock split. All shares, common stock and capital in excess of
par value have been restated to reflect the effect of this split.
F-40
<PAGE>
DYNAMIC CIRCUITS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Recent Accounting Pronouncements:
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive
Income." This statement establishes requirements for disclosure of
comprehensive income and becomes effective for the Company for fiscal years
beginning after December 15, 1997, with reclassification of earlier financial
statements for comparative purposes. Comprehensive income generally represents
all changes in shareholders' equity except those resulting from investments or
contributions by shareholders. The Company is evaluating alternative formats
for presenting this information, but does not expect this pronouncement to
materially impact the Company's results of operations.
In June 1997, The Financial Standards Board issued Statement of Financial
Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments of an
Enterprise and Related Information." This statement establishes standards for
disclosure about operating segments in annual financial statements and selected
information in interim financial reports. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. This statement supersedes Statement of Financial Accounting
Standards No. 14, "Financial Reporting for Segments of a Business Enterprise."
The new standard becomes effective for fiscal years beginning after December
15, 1997, and requires that comparative information from earlier years be
restated to conform to the requirements of this standard. The Company is
evaluating the requirements of SFAS 131 and the effects, if any, on the
Company's current reporting and disclosures.
2. ACQUISITIONS:
Cuplex:
On October 9, 1997, the Company completed the acquisition of Cuplex Inc., a
Delaware corporation, for a purchase price of $12,470,000. Cuplex, located in
Garland, Texas, with facilities in Dallas and Garland, TX, and in Marlboro, MA,
fabricates advanced high-density multilayer boards and assembles high-density
backpanel and electromechanical systems. The transaction has been accounted for
as a purchase and therefore the results of Cuplex's operations for the period
subsequent to the acquisition date to December 31, 1997 have been included in
the Company's results of operations for the year ended December 31, 1997.
Consideration for the acquisition was allocated as follows:
<TABLE>
<S> <C>
Cash consideration paid....................................... $ 12,470,000
Repayment of debt on acquisition.............................. 15,498,118
Acquisition costs............................................. 934,376
Issuance of common stock...................................... 763,149
Issuance of Series B mandatorily redeemable Preferred Stock... 1,057,953
Fair value of assets acquired................................. (6,551,531)
Debt assumed on acquisition................................... (15,498,118)
------------
Goodwill...................................................... $ 8,673,947
============
</TABLE>
Pro forma information (unaudited)
If the acquisition had occurred on January 1, 1997, the results of operation
of the Company would have been as follows:
<TABLE>
<S> <C>
Revenue........................................................ $145,498,000
============
Income before taxes and extraordinary item..................... $ 12,229,000
============
Net income..................................................... $ 6,613,000
============
</TABLE>
F-41
<PAGE>
DYNAMIC CIRCUITS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DCI/Design Plus:
On June 24, 1998, the Company acquired 80% of a newly formed Company,
DCI/Design Plus. Coincident with the acquisition, Design Plus, a sole
proprietorship which was engaged in printed circuit board design, contributed
all of its assets to DCI/Design Plus for consideration of $660,000 and a 20%
interest in DCI/Design Plus. Goodwill of $533,182 arose on this transaction.
3. EXTRAORDINARY ITEMS:
Early Extinguishment of Debt:
In October 1997, in connection with the acquisition of Cuplex, the Company
entered into a new credit agreement to retire its outstanding term and
revolving credit loans (total of $33,125,000 at December 31, 1996). The
transaction constituted an early retirement of debt, and accordingly the write-
off of unamortized debt financing costs was accounted for as an extraordinary
charge.
4. CREDIT AGREEMENT:
Long Term Debt:
The Company, in connection with the acquisition of Cuplex, entered into a
Credit Agreement which provided for an A term loan facility of $30,000,000, a B
term loan facility of $35,000,000, a revolving loan facility of up to
$30,000,000. The Credit Agreement is collateralized by all assets of the
Company and all outstanding stock of its Subsidiary. The Credit Agreement also
has various restrictive covenants which limit the Company's ability to incur
debt or grant a security interest in its assets, dispose of assets, merge, or
consolidate with another entity, make capital expenditures, enter into
operating leases, or issue or dispose of the Company's capital stock. The
Company is required to meet certain minimum consolidated EBITDA (earnings
before interest, income taxes, depreciation and amortization expense as defined
in the agreement) and financial ratio requirements.
Borrowings under the Credit Agreement as of December 31, 1997 are summarized
as follows:
<TABLE>
<S> <C>
A Term Loan...................................................... $29,500,000
B Term Loan...................................................... 35,000,000
Revolving Loan................................................... 2,400,000
-----------
$66,900,000
===========
</TABLE>
A Term Loan:
The A term loan bears interest at the Base Rate or Eurodollar Rate, as
defined in the agreement, plus 1.25% or 2.25%, respectively, per annum (8.1875%
at December 31, 1997). The loan is due on September 30, 2002 and is payable in
quarterly installments for principal beginning December 31, 1997. Interest is
due monthly. Quarterly installments are $500,000 for quarters one through four,
$1,000,000 for quarters five through eight, $1,500,000 for quarters nine
through twelve, $2,000,000 for quarters thirteen through sixteen and $2,500,000
for quarters seventeen through twenty. In addition, subject to certain
conditions, the Credit Agreement permits optional prepayments without premium
or penalty.
B Term Loan:
The B term loan bears interest at the Base Rate or Eurodollar Rate, as
defined in the agreement, plus 1.50% or 2.25%, respectively, per annum (8.4375%
at December 31, 1997). The loan is due on September 30,
F-42
<PAGE>
DYNAMIC CIRCUITS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2002 and is payable in quarterly installments for principal beginning March 31,
1998. Interest is due monthly. Quarterly installments are $87,500 for quarters
one through twenty, $11,083,333 for quarters twenty-one and twenty-two and
$11,083,334 for quarter twenty-three. In addition, subject to certain
conditions, the Credit Agreement permits optional prepayments without premium
or penalty.
Revolving Loan:
The revolving loan facility permits borrowings up to $30,000,000 at the Base
Rate or Eurodollar Rate, as defined in the agreement, plus 1.25% or 2.25%,
respectively, per annum (9.75% at December 31, 1997). Its collateral
arrangements are the same as the A and B term loans and it matures on September
30, 2002. Interest on borrowings under the revolving loan facility is payable
quarterly with mandatory principal payments to the extent that Borrowings, as
defined in the agreement, exceed the Total Revolving Loan Commitment, as
defined in the agreement. As of December 31, 1997, $2,400,000 was outstanding
under the revolving loan facility.
Under the Credit Agreement, the Company has committed to pay annual fees of
$75,000 and facility fees of $593,500 on January 1, 1998 and April 1, 1998,
provided that the debt has not been refinanced.
5. SHAREHOLDERS EQUITY:
Preferred Stock Series A:
In connection with the merger the Company issued shares of Series A
preferred stock on August 19, 1996. Each share is entitled to a $12 per annum
dividend, which is payable quarterly, in arrears and is cumulative in nature.
Unpaid dividends accrue at 12% per annum until September 1, 1999 after which a
penalty accrual rate applies. Unpaid dividends rank in preference over those of
common shares. The shares of preferred stock have a liquidation preference of
$100 per share plus accrued but unpaid dividends.
The Company may redeem shares of preferred stock at any time after
appropriate notice and must redeem all shares of preferred stock by December
31, 2003. In both cases the redemption value is the liquidation preference plus
any accrued and unpaid dividends.
The holders of Series A preferred stock do not have voting rights except in
the event of Series A preferred stock not being redeemed by December 31, 2003.
In addition, the consent of the holders of at least 51% of Series A preferred
stock is required for certain changes to the Company's capital structure or
raising of additional debt finance.
Preferred Stock Series B:
In connection with acquisition of Cuplex, the Company issued shares of
Series B preferred stock. Each share is entitled to a $0.90 per annum dividend,
which is payable quarterly, in arrears if and when declared by the Board of
Directors. Unpaid dividends rank in preference over those of common shares. The
shares of preferred stock have a liquidation preference of $10 per share plus
accrued and unpaid dividends.
The Company may redeem shares of preferred stock at any time after
appropriate notice and must redeem all shares of preferred stock by October 9,
2000. In both cases the redemption value is the liquidation preference plus
accrued and unpaid dividends.
The holders of Series B preferred stock do not have any voting rights.
F-43
<PAGE>
DYNAMIC CIRCUITS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Warrants:
The Company granted warrants to holders of Series A preferred stock to
purchase common stock as part of the merger on August 19, 1996. Each warrant
entitles the holder to receive from the Company a fully paid common share after
payment of the warrant exercise price of $0.01. The warrant holder may at any
time after the fifth anniversary of the warrant put them to the Company at fair
market value. The put terminates if an Initial Public Offering (IPO) occurs
prior to the put date. The Company accretes the carrying value of the put
warrants over five years such that the carrying value on the fifth anniversary
will be equal to the fair market value of the put on that date. Changes in
estimates of the fair market value are accounted for prospectively on the
remaining term of the put. Stock warrant activity is as follows:
<TABLE>
<CAPTION>
Number
of Exercise Aggregate
Shares Price Price
------ -------- ---------
<S> <C> <C> <C>
Balance, December 31, 1996......................... 15,392 $0.01 $154
------ ----- ----
Balance, December 31, 1997......................... 15,392 $0.01 $154
====== ===== ====
</TABLE>
The Company has reserved 15,392 shares of common stock for the exercise of
warrants.
Stock Option Plans:
1996 Stock Option Plan:
In June 1996, the Company adopted the 1996 Stock Option Plan. Under the
plan, options to purchase common stock may be granted to directors, executive
officers and other key employees of the Company. The Company has reserved 9,805
shares of common stock for issuance under the Plan, at December 31, 1997.
Options generally expire ten years from the date of grant. Options vest over
either a four or eight year period. Certain option grants are subject to
accelerated vesting based upon the achievement of certain specified performance
goals.
Activity under the 1996 plan is as follows:
<TABLE>
<CAPTION>
Number Exercise Aggregate
of Shares Price Price
--------- -------- ---------
<S> <C> <C> <C>
Balance, December 31, 1996...................... 10,325 $5.00 $51,625
Options exercised............................. (1,480) $5.00 (7,400)
------ ----- -------
Balance, December 31, 1997...................... 8,845 $5.00 $44,225
====== ===== =======
</TABLE>
At December 31, 1997, 3,872 options were exercisable.
1997 Stock Option Plan:
In August 1997, the Company adopted the 1997 Stock Option Plan. Under the
plan, options to purchase common stock may be granted to any executive or other
key employee of the Company or of any Subsidiary. The Company has reserved
2,202 shares of common stock for issuance under the Plan. The exercise price
shall not be less than 85% of the fair market value, except that the exercise
price shall be 110% of the fair market value of such share in the case of any
participant who owns stock possessing more than 10% of the total combined
voting power of all classes of stock of the Company or its subsidiaries.
Options vest over five years and expire ten years from the date of grant.
F-44
<PAGE>
DYNAMIC CIRCUITS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Activity under the 1997 stock option plan was as follows:
<TABLE>
<CAPTION>
Outstanding Options
----------------------------------
Weighted
Average
Available Number Aggregate Price
for Grant of Shares Exercise Price Price per Share
--------- --------- -------------- --------- ---------
<S> <C> <C> <C> <C> <C>
Authorized.............. 2,202
Options granted......... (1,152) 1,152 $425-$500 $561,600 $487
------ ----- --------- -------- ----
Balances, December 31,
1997................... 1,050 1,152 $425-$500 $561,600 $487
====== ===== ========= ======== ====
</TABLE>
At December 31, 1997, 230 options were exercisable.
Holders of 960 options under the 1997 option plan are entitled to
participate in the Company's Cash Bonus Plan. Under the Bonus Plan employees
are allocated bonus units which vest on an annual basis over five years. The
bonus is only payable in the event of exercise of options to purchase shares of
the Company's Common Stock. The Company is accruing for the cost of the Bonus
Plan over the vesting period.
In October 1997, the Company granted 4,102 options at an exercise price of
$575 under a new stock option plan. At December 31, 1997, 1,230 such options
were exercisable.
The Company recognized compensation expense of $239,286 and $1,358,541, in
1997 and 1996, respectively, representing the difference between exercise price
and the fair market value of options and restricted stock at the date of grant.
The Company has continued to account for its stock based compensation in
accordance with APB 25 and has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting
for Stock-Based Compensation." Accordingly, no compensation expense has been
recognized under the plans, except for the amounts disclosed in the above
paragraph.
Had compensation cost been determined based on the fair value at the date of
grant date for awards in 1997 consistent with the provisions of SFAS No. 123,
the Company's net income for the year ended December 31, 1997 would have been
reduced to the pro forma amounts indicated below (in thousands):
<TABLE>
<CAPTION>
1997
------
<S> <C>
Net income-as reported............................................ $5,072
Net income-pro forma.............................................. $5,038
</TABLE>
Such pro forma disclosures may not be representative of future compensation
cost because options vest over several years and additional grants are made
each year.
In accordance with the provisions of SFAS 123, the fair value of each option
is estimated using the following assumptions used for option grants during the
years ended December 31, 1996 and 1997; dividend yield of 0%, volatility of 0%,
risk-free interest rates of between 5.42% and 6.00% at the date of grant and an
expected term of three to five years.
The weighted-average grant date fair value of options were $71.12, $0.75 and
$0.30 per option for the years ended December 31, 1997 and 1996, respectively.
F-45
<PAGE>
DYNAMIC CIRCUITS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock options outstanding
at December 31, 1997.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------- -------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Number Contractual Exercise Number Exercise
Price of Shares Life Price of Shares Price
-------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$5.................. 8,845 8.50 years $ 5 3,872 $ 5
$425-$575........... 5,254 9.68 years $556 1,460 $561
------ -----
14,099 8.94 years $210 5,332 $157
====== =====
</TABLE>
6. COMMITMENTS AND CONTINGENCIES:
The Company leases various facilities under non-cancelable operating leases
expiring through 2006.
Total future minimum lease payments under operating leases are as follows:
<TABLE>
<CAPTION>
Year Ending December 31,
<S> <C>
1998........................................................ $1,275,404
1999........................................................ 1,103,030
2000........................................................ 1,090,084
2001........................................................ 1,084,667
2002 and thereafter......................................... 1,604,810
----------
$6,157,995
==========
</TABLE>
Rent expense amounted to $648,136 for the year ended December 31, 1997.
The Company is engaged in certain legal and administrative proceedings
incidental to its normal business activities. While it is not possible to
determine the ultimate outcome of these matters, if any, management believes
that the ultimate outcome of these matters will not have a material adverse
effect on the Company's financial condition, results of operations, or cash
flows.
The Company's operations are regulated under a number of federal, state and
local environmental laws and regulations, which 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. Compliance with these
environmental laws is a major consideration for the Company, and there can be
no assurances that environmental laws and regulations will not become more
stringent in the future or that the Company will not incur significant costs in
the future to comply with such laws and regulations.
F-46
<PAGE>
DYNAMIC CIRCUITS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. INCOME TAXES:
The provision for income taxes for the year ended December 31, 1997 included
the following:
<TABLE>
<S> <C>
Federal:
Current...................................................... $3,680,401
Deferred..................................................... (101,103)
----------
3,579,298
----------
State:
Current...................................................... 631,092
Deferred..................................................... (98,075)
----------
533,017
----------
$4,112,315
==========
</TABLE>
The provision for taxes differed from that expected by applying the basic
rate of federal tax due primarily to the change of tax status of the Company as
a result of the recapitalization (see Note 1) and that certain transaction
related charges are not deductible for tax purposes.
8. RELATED PARTIES:
Management Fees:
The Company has an agreement dated August 19, 1996 for financial advisory
services with Celerity Partners, L.L.C. (Celerity) and Bain Capital, Inc.
(Bain) who hold a partnership interest in Celerity Circuits L.L.C., the
majority shareholder of the Company. The agreement provides for annual
management fees of $150,000 to be paid to Celerity and/or Bain for so long as
Celerity and/or Bain own, either directly or through an affiliated entity, an
equity interest in the Company. The management fees are payable in quarterly
installments. The agreement also provides for the reimbursement of certain
allowed expenses. In connection with entering into the Credit Agreement in
1997, the Company paid specific advisory fees to Celerity and Bain. Management
fees and expense reimbursements under the agreement amounted to approximately
$359,272 in December 31, 1997. Specific advisory fees amounted to approximately
$706,092, for the year ended December 31, 1997. The Company is required to pay
a management fee of $56,250 per quarter to Celerity and Bain, respectively,
effective January 1, 1998.
Receivable from Related Party:
In connection with the Acquisition, Cuplex's 50% interest in Cumex SA de CV,
a Mexican corporation (Cumex) was sold to certain former shareholders of
Cuplex. On October 9, 1997, Cuplex and Cumex signed an Operating Agreement by
which Cuplex agrees to provide management and technical services to Cumex.
Cumex agrees to provide manufacturing services to Cuplex for a period of two
years and a repayment schedule was agreed for the amount due by Cumex to
Cuplex. The balance outstanding at October 9, 1997 was $3.2 million. On October
9, 1997, DCI and the shareholders of Cumex entered into an Option Agreement by
which it was agreed that DCI could purchase 100% of Cumex until termination of
the Operating Agreement.
On the acquisition of Cuplex the receivable from Cumex was valued at its net
present value determined by applying appropriate discount rates. This resulted
in an adjustment in the fair value of the receivable of $1.1
F-47
<PAGE>
DYNAMIC CIRCUITS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
million. At December 31, 1997, the gross and net amounts receivable from Cumex
are $3.6 million and $2.5 million, respectively.
9. EMPLOYEE BENEFIT PLANS:
The Company and its subsidiary have established defined contribution
retirement plans that are intended to qualify under Section 401 of the Internal
Revenue Code ("the Plan"). The Plans cover substantially all officers and
employees of the Company and its subsidiary. Contributions to the Plans are
determined at the discretion of the Board of Directors. No contributions were
made to the Plans for the year ended December 31, 1997.
10. SUBSEQUENT EVENT:
On July 23, 1998, DDi Holdings Corporation and the Company executed a stock
contribution and merger agreement. In connection with this agreement, DDi
Holdings Corporation acquired all of the outstanding capital stock of the
Company for aggregate merger consideration of approximately $247 million.
F-48
<PAGE>
Report of Independent Public Accountants
To the shareholders of
Symonds Limited
We have audited the accompanying consolidated balance sheet of Symonds
Limited as of 31 March 1999, and the related consolidated profit and loss
account, reconciliation of movements in consolidated shareholders' funds and
consolidated cash flow statement for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards in the United Kingdom, which are substantially consistent with
auditing standards generally accepted in the United States. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Symonds Limited as of 31 March 1999, and the consolidated results of its
operations and its consolidated cash flows for the year then ended in
conformity with generally accepted accounting principles in the United Kingdom.
Accounting practices used by the Company in preparing the accompanying
financial statements conform with generally accepted accounting principles in
the United Kingdom, but do not conform with accounting principles generally
accepted in the United States. A description of these differences and a
reconciliation of consolidated net income and shareholders' equity to generally
accepted accounting principles in the United States is set forth in Note 30.
KPMG Audit Plc
Chartered Accountants
Birmingham, England
28 October 1999
(except with respect to the matters
discussed in Note 29 and 30, as to
which the date is 22 March 2000)
F-49
<PAGE>
SYMONDS LIMITED
CONSOLIDATED PROFIT AND LOSS ACCOUNTS
<TABLE>
<CAPTION>
Notes Unaudited Unaudited
(relating to Nine months Unaudited Six months
year ended Year ended ended Three months ended
31 March 31 March 31 December ended 31 December
1999) 1999 1998 30 June 1999 1999
------------ ----------- ----------- ------------ -----------
(Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000
<S> <C> <C> <C> <C> <C>
Turnover 1
Continuing operations... 41,056 30,949 8,636 17,299
Discontinued
operations............. 4,486 3,650 160 --
------- ------- ------ -------
45,542 34,599 8,796 17,299
Operating costs......... 2 (42,627) (31,534) (8,361) (15,590)
------- ------- ------ -------
Operating profit before
goodwill and
exceptional items:
Continuing operations... 4,290 3,019 957 2,601
Discontinued
operations............. (57) 46 (4) --
------- ------- ------ -------
4,233 3,065 953 2,601
------- ------- ------ -------
Operating exceptional
items:
Continuing operations... 1 (570) -- (518) (378)
Discontinued
operations............. (748) -- -- --
------- ------- ------ -------
(1,318) -- (518) (378)
------- ------- ------ -------
Goodwill amortization... -- -- -- (514)
------- ------- ------ -------
Operating profit 1
Continuing operations... 3,720 3,019 439 1,709
Discontinued
operations............. (805) 46 (4) --
------- ------- ------ -------
Total operating
profit............. 2,915 3,065 435 1,709
Exceptional items 3
Continuing operations:
Provision for loss on
termination of a
business............. (4,000) -- -- --
Discontinued operations:
(Loss)/profit on
disposal of a
business............. (2,435) -- 48 --
------- ------- ------ -------
(Loss)/profit on
ordinary activities
before interest........ (3,520) 3,065 483 1,709
Interest receivable..... 119 112 25 54
Interest payable and
similar charges........ 6 (442) (373) (65) (1,553)
------- ------- ------ -------
(Loss)/profit on
ordinary activities
before taxation........ (3,843) 2,804 443 210
Tax on (loss)/profit on
ordinary activities.... 7 (495) (965) (278) (166)
------- ------- ------ -------
(Loss)/profit on
ordinary activities
after taxation......... (4,338) 1,839 165 44
Dividends............... 8 (416) (416) -- --
------- ------- ------ -------
Retained (loss)/profit
for the period......... 20 (4,754) 1,423 165 44
======= ======= ====== =======
(Loss)/earnings per
share.................. 9 (6.2p) 2.6p 0.2p 3.7p
======= ======= ====== =======
</TABLE>
The Group has no recognised gains and losses other than those reflected in
the group profit and loss account.
There is no difference between the result as disclosed in the group profit
and loss account and the result on an unmodified historical cost basis.
All periods presented are of Symonds Limited except at and for the six
months ended 31 December 1999 which are of MCM Electronics Limited--see
Accounting Policies--Interim financial statements.
F-50
<PAGE>
SYMONDS LIMITED
RECONCILIATION OF MOVEMENTS IN CONSOLIDATED SHAREHOLDERS' FUNDS
<TABLE>
<CAPTION>
Unaudited Unaudited
Nine months Three months Unaudited
Year ended ended ended Six months ended
31 March 31 December 30 June 31 December
1999 1998 1999 1999
----------- ----------- ------------ ----------------
(Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000
<S> <C> <C> <C> <C>
(Loss)/profit for the
period................. (4,338) 1,839 165 44
Dividends............... (416) (416) -- --
Issue of shares......... 12 12 -- 1,267
Goodwill written back... 4,537 -- 281 --
------ ------ ----- -----
Net movement in
shareholders' funds.... (205) 1,435 446 1,311
Equity shareholders'
funds at beginning of
period................. 9,311 9,311 9,106 --
------ ------ ----- -----
Equity shareholders'
funds at end of
period................. 9,106 10,746 9,552 1,311
====== ====== ===== =====
</TABLE>
All periods presented are of Symonds Limited except at and for the six
months ended 31 December 1999 which are of MCM Electronics Limited--see
Accounting Policies--Interim financial statements.
F-51
<PAGE>
SYMONDS LIMITED
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Unaudited Unaudited Unaudited
31 March 31 December 30 June 31 December
Notes 1999 1998 1999 1999
----- ----------- ----------- ----------- -----------
(Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000
<S> <C> <C> <C> <C> <C>
Fixed assets
Tangible assets......... 10 8,671 8,853 8,944 7,863
Goodwill................ -- -- -- 20,062
------- ------- ------- -------
8,671 8,853 8,944 27,925
Current assets
Stocks.................. 12 3,780 4,303 3,778 3,791
Debtors................. 13 9,385 11,524 9,437 9,159
Cash at bank and short
term deposits.......... 3,568 1,372 2,059 4,066
------- ------- ------- -------
16,733 17,199 15,274 17,016
------- ------- ------- -------
Creditors: amounts
falling due within one
year................... 14 (14,292) (12,792) (14,279) (11,438)
------- ------- ------- -------
Net current assets...... 2,441 4,407 995 5,578
------- ------- ------- -------
Total assets less
current liabilities.... 11,112 13,260 9,939 33,503
------- ------- ------- -------
Creditors: amounts
falling due after more
than one year.......... 15 (1,865) (2,083) (246) (31,852)
Provisions for
liabilities and
charges................ 17 (141) (431) (141) (340)
------- ------- ------- -------
Net assets.............. 9,106 10,746 9,552 1,311
======= ======= ======= =======
Capital and reserves
Called up share
capital................ 19 3,473 3,473 3,473 12
Share premium account... 20 19,887 19,887 19,887 1,255
Capital redemption
reserve................ 20 50 50 50 --
Merger reserve.......... 20 5,474 5,474 5,474 --
Profit and loss
account................ 20 (19,778) (18,138) (19,332) 44
------- ------- ------- -------
Equity shareholders'
funds.................. 9,106 10,746 9,552 1,311
======= ======= ======= =======
</TABLE>
All periods presented are of Symonds Limited except at and for the six
months ended 31 December 1999 which are of MCM Electronics Limited--see
Accounting Policies--Interim financial statements.
F-52
<PAGE>
SYMONDS LIMITED
CONSOLIDATED CASH FLOW STATEMENTS
<TABLE>
<CAPTION>
Unaudited Unaudited Unaudited
Nine months Three months Six months
Year ended ended ended ended
31 March 31 December 30 June 31 December
Notes 1999 1998 1999 1999
----- ----------- ----------- ------------ -----------
(Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000
<S> <C> <C> <C> <C> <C>
Net cash flow from
operating activities... 21 7,882 4,305 (446) 1,884
------ ------ ------ -------
Returns on investments
and servicing of fi-
nance
Interest received....... 119 112 25 54
Interest paid........... (354) (307) (45) (10)
Interest element of
finance lease
payments............... (88) (66) (20) (45)
------ ------ ------ -------
(323) (261) (40) (1)
------ ------ ------ -------
Tax paid................ (643) (232) (108) (66)
------ ------ ------ -------
Capital expenditure
Purchase of tangible
fixed assets........... (3,603) (3,356) (878) (193)
Sale of tangible fixed
assets................. 770 770 33 --
------ ------ ------ -------
(2,833) (2,586) (845) (193)
------ ------ ------ -------
Acquisitions and
disposals
Net cash payable in
respect of
acquisitions........... -- -- -- (30,581)
Net cash consideration
in respect of business
disposals.............. 200 -- 249 1,044
------ ------ ------ -------
200 -- 249 (29,537)
------ ------ ------ -------
Equity dividends paid... (1,249) (833) -- --
------ ------ ------ -------
Cash flow before
financing and
management of liquid
resources.............. 3,034 393 (1,190) (27,913)
------ ------ ------ -------
Financing and management
of liquid resources
Issue of shares......... 22 12 12 -- 1,267
Movement in debt........ (2,288) (1,843) (319) 28,626
Movement in liquid
resources.............. (1,002) 998 624 500
------ ------ ------ -------
(3,278) (833) 305 30,393
------ ------ ------ -------
(Decrease)/increase in
cash in the period 23 (244) (440) (885) 2,480
====== ====== ====== =======
</TABLE>
All periods presented are of Symonds Limited except at and for the six
months ended 31 December 1999 which are of MCM Electronics Limited--see
Accounting Policies--Interim financial statements.
F-53
<PAGE>
SYMONDS LIMITED
ACCOUNTING POLICIES
The accompanying consolidated financial statements for the year ended 31
March 1999 do not comprise statutory accounts within the meaning of Section 240
of the Companies Act 1985 of England and Wales, but have been extracted from
the company's statutory accounts for the fiscal year to 31 March 1999 which
have been delivered to the Registrar of Companies in England and Wales, upon
which an unqualified audit report has been given.
Basis of preparation
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United Kingdom (UK GAAP). UK
GAAP and accounting principles adopted by the Company differ in certain
respects from accounting principles generally accepted in the United States (US
GAAP). See Note 30 for a discussion of the principal differences that would
affect the Company's consolidated net income and shareholders' equity if US
GAAP had been applied instead of UK GAAP in the preparation of the consolidated
financial statements. The financial statements have been prepared under the
historical cost convention and comply with applicable accounting standards.
Under UK GAAP companies are permitted, in certain circumstances, to value their
assets and liabilities using a basis different from original cost. This has not
been the case in these financial statements.
Basis of consolidation
The Group accounts consolidate the accounts of Symonds Limited and all its
subsidiary undertakings made up to 31 March 1999.
The results of businesses acquired or sold during the year are included in
the Group financial statements from the date of acquisition or to the date of
disposal.
Interim financial statements--unaudited
The interim financial statements as of 31 December 1998, 30 June 1999 and 31
December 1999 have been prepared without audit and reflect, in the opinion of
the Group, all adjustments necessary to present fairly the financial
information for the Group. All such adjustments are of a normal recurring
nature.
The interim financial statements have been prepared on a basis which is
consistent with the accounting policies adopted for the year ended 31 March
1999.
Taxation for the interim financial statements has been calculated in line
with the estimated effective tax rate for the relevant financial years.
The exceptional operating items incurred by the Symonds Group in the period
to 30 June 1999 were acquisition advisory costs incurred by the company in
respect of its acquisition by MCM Electronics Limited.
The results for the six months ended 31 December 1999 are those of MCM
Electronics Limited and its subsidiary undertakings. MCM Electronics Limited
acquired Symonds Limited, and its subsidiary undertakings on 5 July 1999. The
accounting period commencing 1 July 1999 has been used to reflect the results
of MCM Electronics Limited and its subsidiary undertakings as there is no
material difference between the results for this period and those for the
period commencing 5 July 1999, the date of acquisition. MCM Electronics Limited
is a company owned by the executive directors of Symonds Limited together with
external investors. No adjustments to the book value of the assets and
liabilities of Symonds Limited at acquisition were necessary to reflect their
fair value for acquisition purposes. At that date MCM Electronics issued
1,200,000 ordinary shares of 1p each and obtained medium term debt to finance
the acquisition of the entire ordinary share capital of Symonds Limited.
Goodwill of (Pounds)21,002,000 arose on the acquisition which has been
capitalised and is being amortised over 20 years. There have been no
significant changes to the Group since that date.
The exceptional operating item in the period to 31 December 1999 is a
material bad debt incurred by a subsidiary of MCM Electronics Limited in this
period.
F-54
<PAGE>
SYMONDS LIMITED
ACCOUNTING POLICIES--(Continued)
Goodwill
UK Financial Reporting Standard 10 was adopted in the Company's consolidated
financial statements effective 1 April 1998. Goodwill arising on acquisition
subsequent to 1 April 1998 has been capitalised and amortised through the
profit and loss account over its useful economic life which is generally not
expected to exceed 20 years. Goodwill related to acquisitions made prior to 31
March 1998 was charged directly to reserves in accordance with UK accounting
standards in effect at that date.
Turnover
Turnover represents the total amount receivable in the ordinary course of
business for goods sold excluding value added tax. Turnover is recognised upon
despatch.
Tangible fixed assets and depreciation
Tangible fixed assets are stated at cost or valuation, less depreciation.
Deprecation is provided on all tangible fixed assets, other than freehold land,
at rates calculated to write off the cost or valuation, less residual value,
over the estimated useful life in each company of each asset as follows:
<TABLE>
<S> <C> <C>
Freehold buildings.......... 2% On straight line
Leasehold property.......... Over the term of the lease
Plant and equipment......... 10-25% On straight line or reducing balance
Computer equipment.......... 17-25% On straight line or reducing balance
Office furniture and
equipment.................. 15-25% On straight line or reducing balance
Motor vehicles.............. 25% On straight line or reducing balance
</TABLE>
Stocks and work in progress
Stocks and work in progress are stated at the lower of cost and net
realisable value on a first-in, first-out basis, including attributable
production overheads.
Net realisable value is based on estimated selling price less further costs
expected to be incurred to completion and disposal.
Trade debtors
Trade debtors are recorded at the invoiced amount, including value added
tax, less a provision for doubtful debts. Management considers current
information and events regarding the debtors' ability to repay their
obligations, and makes a provision against amounts due when it is probable that
the full amount will not be collected. Changes in the level of provision are
charged to the bad debt expense.
Liquid resources
Included within cash balances are liquid resources of (Pounds)2,710,000 at
31 March 1999, consisting of cash deposits to secure loan notes, and treasury
deposits. For the purposes of the group cashflow statement all highly liquid
debt instruments with original maturities of three days or less are considered
to be cash.
Pension costs
The Group operates a number of defined contribution pension schemes. The
assets of the schemes are held separately from those of the Group in
independently administered funds. Contributions are paid to the schemes at the
defined contribution levels and are charged to the profit and loss account in
the year to which they relate.
F-55
<PAGE>
SYMONDS LIMITED
ACCOUNTING POLICIES--(Continued)
Leases
Assets held under finance leases are capitalised at their fair value on the
inception of the leases and depreciated over their estimated useful lives. The
finance charges are allocated over the period of the lease in proportion to
the capital amount outstanding.
Rentals paid under operating leases are charged against income on a
straight line basis over the lease term.
Under UK GAAP, the gain arising on a sale-leaseback transaction may be
recognised in full at the date of the transaction provided that it can be
demonstrated that a market rent is being paid under the lease agreement.
Deferred taxation
Provision is made for deferred taxation using the liability method to take
account of timing differences between the incidence of income and expenditure
for taxation and accounting purposes to the extent that it is probable that a
liability or asset will crystallise in the future.
Foreign currency translation
Transactions in foreign currencies are recorded at the rate ruling at the
date of transaction. Monetary assets and liabilities denominated in foreign
currencies are retranslated at the rate of exchange ruling at the balance
sheet date. All differences are taken to the profit and loss account.
F-56
<PAGE>
SYMONDS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
1. TURNOVER, OPERATING PROFIT AND NET ASSETS
The destination of the Group's turnover by geographical market is:
<TABLE>
<CAPTION>
Year ended
31 March
1999
-----------
(Pounds)000
<S> <C>
United Kingdom................................................... 41,137
Europe........................................................... 2,481
USA.............................................................. 540
Rest of World.................................................... 1,384
------
45,542
======
</TABLE>
The Group's turnover, operating profit, and net operating assets for the
year ended 31 March 1999 can be analysed by business segment as follows:
<TABLE>
<CAPTION>
Net
Operating operating
Turnover profit assets
----------- ----------- -----------
(Pounds)000 (Pounds)000 (Pounds)000
<S> <C> <C> <C>
Continuing operations:
PCB manufacture........................ 19,963 3,580 5,064
Electronic manufacturing services...... 21,999 406 1,730
Group.................................. -- (266) 2,344
------ ------ -----
41,692 3,720 9,138
Discontinued operations................ 4,486 (805) 134
------ ------ -----
46,448 2,915 9,272
Less: inter-segmental turnover......... (906)
------
45,542
======
Exceptional items (note 3)............. (6,435)
Net interest........................... (323)
------
Profit on ordinary activities before
taxation.............................. (3,843)
======
Net indebtedness....................... (166)
-----
Net assets............................. 9,106
=====
</TABLE>
Discontinued operations comprise Finishing Services Limited disposed of in
March 1999, and Finishing Technology Limited disposed of in June 1999. The
operating loss of the discontinued operations includes a provision for
impairment of Finishing Technology Limited's goodwill of (Pounds)748,000. The
disposal of Finishing Services Limited is analysed in Note 25.
The Electronic Manufacturing Services operating profit includes an
exceptional operating loss of (Pounds)570,000. This relates to vacant property
costs recognised in the year. A related tax credit of (Pounds)171,000 has been
recognised in respect of these costs.
F-57
<PAGE>
SYMONDS LIMITED
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
2. OPERATING PROFIT
<TABLE>
<CAPTION>
31 March
1999
-----------
(Pounds)000
<S> <C>
Operating profit is stated after charging/(crediting):
Depreciation--owned fixed assets............................... 1,552
--finance leased assets................................... 248
Operating lease rentals--plant and machinery................... 611
--land and buildings................................. 702
Loss on sale of fixed assets................................... 28
Gain on foreign exchange....................................... (8)
=====
</TABLE>
Operating costs are analysed as follows:
<TABLE>
<CAPTION>
31 March
1999
Continuing Discontinued
operations operations Total
----------- ------------ -----------
(Pounds)000 (Pounds)000 (Pounds)000
<S> <C> <C> <C>
Change in work in progress and
finished goods...................... (363) (54) (417)
Raw materials and consumables........ (17,397) (2,170) (19,567)
Other external charges............... (2,940) (604) (3,544)
Staff costs.......................... (10,907) (1,115) (12,022)
Depreciation......................... (1,732) (68) (1,800)
Other operating charges.............. (3,997) (532) (4,529)
Provision for goodwill impairment.... -- (748) (748)
------- ------ -------
(37,336) (5,291) (42,627)
======= ====== =======
</TABLE>
3. EXCEPTIONAL ITEMS
<TABLE>
<CAPTION>
31 March 1999
-----------------------------------
Gross Tax Net
----------- ----------- -----------
(Pounds)000 (Pounds)000 (Pounds)000
<S> <C> <C> <C> <C>
Continuing operations:
Provision for loss on termination
of a business (a)................. (4,000) 606 (3,394)
Discontinued operations:
Loss on disposal of a business
(b)............................... (2,435) -- (2,435)
------ --- ------
(6,435) 606 (5,829)
====== === ======
</TABLE>
(a) The provision for loss on termination of a business arises following
the decision of the board to close the operations of Osborne
Electronics Limited. The provision includes debtor, stock and fixed
asset write-downs arising from the closure, redundancy costs, and
goodwill of (Pounds)1,800,000 previously eliminated when Osborne
Electronics Limited was acquired.
(b) The loss on disposal of a business represents the loss on sale of
Finishing Services Limited of (Pounds)2,435,000 (after charging
(Pounds)1,989,000 of goodwill previously eliminated).
F-58
<PAGE>
SYMONDS LIMITED
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
4. AUDITORS' REMUNERATION
Amounts payable to the auditors of all Group undertakings in respect of
audit services were (Pounds)60,000. Amounts payable to KPMG Audit Plc and their
associates by the Company and its subsidiary undertakings in respect of non
audit services were (Pounds)112,000.
5. EMPLOYEES
(a) Number of employees
The average number of persons employed during the year was as follows:
<TABLE>
<CAPTION>
31 March
1999
-----------
Number
<S> <C>
Production....................................................... 527
Office and administration........................................ 115
------
642
======
(b) Staff costs
<CAPTION>
31 March
1999
-----------
(Pounds)000
<S> <C>
Wages and salaries............................................... 10,755
Social security.................................................. 1,032
Other pension costs.............................................. 235
------
12,022
======
</TABLE>
The Group operates a number of defined contribution pension schemes. The
assets of the schemes are held in separate trustee administered funds and are
invested with insurance companies. The pension costs shown above represent
contributions payable to these schemes.
6. INTEREST PAYABLE AND SIMILAR CHARGES
<TABLE>
<CAPTION>
31 March
1999
-----------
(Pounds)000
<S> <C>
On bank loans and overdrafts..................................... (277)
On finance leases................................................ (88)
On loan notes.................................................... (77)
----
(442)
====
</TABLE>
F-59
<PAGE>
SYMONDS LIMITED
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
7. TAXATION
<TABLE>
<CAPTION>
31 March
1999
-----------
(Pounds)000
<S> <C>
UK corporation tax payable at 31%............................... (604)
Deferred tax.................................................... 173
Adjustment to prior years' provisions--deferred tax............. (64)
----
(495)
====
The charge includes tax credits on FRS3 exceptional items of (Pounds)606,000
as detailed in Note 3.
8. DIVIDENDS
<CAPTION>
31 March
1999
-----------
(Pounds)000
<S> <C>
Ordinary--interim paid 0.6p per share........................... (416)
--final nil p per share...................................... --
----
Total equity dividends.......................................... (416)
====
</TABLE>
9. LOSS PER SHARE
The loss per ordinary share as at 31 March 1999 has been calculated by
reference to the weighted average of 69,467,222 ordinary shares in issue during
the year and the Group loss after taxation for the financial year of
(Pounds)4,338,000.
10. TANGIBLE FIXED ASSETS
<TABLE>
<CAPTION>
Land and Plant and
buildings machinery Other Total
----------- ----------- ----------- -----------
(Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000
<S> <C> <C> <C> <C>
Cost
1 April 1998................. 1,088 10,644 2,375 14,107
Reclassification............. 361 -- (361) --
Additions.................... 821 2,408 652 3,881
Disposals.................... (506) (379) (131) (1,016)
Sale of subsidiary........... -- (129) (235) (364)
----- ------ ----- ------
31 March 1999.............. 1,764 12,544 2,300 16,608
===== ====== ===== ======
Depreciation
1 April 1998................. 107 5,417 1,122 6,646
Reclassification............. 153 -- (153) --
Charge for the year.......... 161 1,284 355 1,800
Disposals.................... (9) (190) (75) (274)
Sale of subsidiary........... -- (89) (146) (235)
----- ------ ----- ------
31 March 1999.............. 412 6,422 1,103 7,937
===== ====== ===== ======
Net book value
31 March 1999.............. 1,352 6,122 1,197 8,671
===== ====== ===== ======
</TABLE>
F-60
<PAGE>
SYMONDS LIMITED
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Analysis of land and buildings
<TABLE>
<CAPTION>
31 March
1999
-----------
(Pounds)000
<S> <C>
Freehold......................................................... 297
Short leasehold.................................................. 1,055
-----
Net book value................................................... 1,352
=====
</TABLE>
Hire purchase and finance leased assets
Plant, equipment and motor vehicles include assets with a net book value of
(Pounds)1,064,000 which are subject to finance leases.
11. INVESTMENTS
Principal subsidiaries at 31 March 1999
<TABLE>
<CAPTION>
Company Principal activity % equity held
------- ------------------ -------------
<S> <C> <C>
Zlin Manufacture of printed circuit boards *100
Electronics
Limited
Classical Manufacture of printed circuit boards *100
Circuits
Limited
Garner Manufacture of printed circuit boards 100
Osborne
Circuits
Limited
Zlin Supply of high volume printed circuit boards *100
International
Limited
Calne Manufacture and assembly of electronic and electrical equipment *100
Electronics
Limited
Pretan Sheet metal fabrication 100
Limited
Integrated Design of electronic and electrical equipment 100
Designs &
Systems
Limited
Osborne Assembly of printed circuit boards 100
Electronics
Limited
Symonds Precision sheet metal fabrication *100
Precision
Limited
Osborne Precision sheet metal fabrication 100
Precision
Sheetmetals
Limited
Finishing Manufacture of vertical plating systems *100
Technology
Limited
</TABLE>
All of the company's subsidiary undertakings are incorporated and operate in
Great Britain.
Shareholdings marked * are directly owned by Symonds Limited and the
remainder are held through subsidiary undertakings.
12. STOCKS
<TABLE>
<CAPTION>
31 March
1999
-----------
(Pounds)000
<S> <C>
Raw materials and consumables.................................... 1,615
Work in progress................................................. 1,975
Finished goods................................................... 190
-----
3,780
=====
</TABLE>
F-61
<PAGE>
SYMONDS LIMITED
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
13. DEBTORS
<TABLE>
<CAPTION>
31 March
1999
-----------
(Pounds)000
<S> <C>
Trade debtors.................................................... 8,005
Other debtors.................................................... 984
Prepayments and accrued income................................... 396
-----
9,385
=====
</TABLE>
Included within other debtors above are amounts totalling (Pounds)315,000
which fall due after more than one year.
14. CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
<TABLE>
<CAPTION>
31 March
1999
-----------
(Pounds)000
<S> <C>
Bank overdrafts and loans........................................ 730
Other loans...................................................... 28
Obligations under finance leases................................. 309
Trade creditors.................................................. 6,128
Corporation tax.................................................. 507
Advance corporation tax payable.................................. 104
Other creditors.................................................. 650
Other taxation and social security............................... 960
Accruals and deferred income..................................... 4,074
Loan notes....................................................... 802
------
14,292
======
At 31 March 1999, loan notes consist of loan notes previously issued to the
vendors of Calne Electronics and one of the vendors of the Osborne Group. Both
are repayable at the holders' option. The Calne loan notes are secured by a
bank guarantee. All the loan notes carry interest at 0.5% below base rate.
It has been assumed for the purposes of presentation in these financial
statements that the loan notes will be repaid at the earliest possible time.
15. CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
<CAPTION>
31 March
1999
-----------
(Pounds)000
<S> <C>
Bank loans....................................................... 1,465
Other loans...................................................... 65
Obligations under finance leases................................. 335
------
1,865
======
</TABLE>
F-62
<PAGE>
SYMONDS LIMITED
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
16. BORROWINGS
<TABLE>
<CAPTION>
31 March
1999
-----------
(Pounds)000
<S> <C>
Bank loans....................................................... 2,195
Loan notes....................................................... 802
Obligations under finance leases................................. 644
Other loans...................................................... 93
-----
3,734
=====
Due within one year.............................................. 1,869
Due after more than one year..................................... 1,865
-----
3,734
=====
Analysis of repayments:
<CAPTION>
31 March
1999
-----------
(Pounds)000
<S> <C>
Bank loans
Within one year................................................ 730
Within one to two years........................................ 730
Within two to five years....................................... 735
Other loans
Within one year................................................ 28
Within one to two years........................................ 31
Within two to five years....................................... 34
Loan notes
Within one year................................................ 802
Finance leases
Within one year................................................ 309
Within one to two years........................................ 230
Within two to five years....................................... 105
-----
3,734
=====
</TABLE>
Amounts due under finance leases are secured on the related items of plant
and equipment.
Bank loans and overdrafts are secured by fixed and floating charges over the
Group's assets.
Bank loans comprise two loans, one of which is repayable in full by 31
October 2002 by quarterly instalments commencing 31 October 1996 and the other
which is repayable in full by 31 October 2001 by quarterly instalments
commencing 31 January 1997. Both loans carry interest at 1/3///8/% over base
rate.
17. PROVISIONS FOR LIABILITIES AND CHARGES
<TABLE>
<CAPTION>
Deferred Other
tax provisions Total
----------- ----------- -----------
(Pounds)000 (Pounds)000 (Pounds)000
<S> <C> <C> <C>
1 April 1998........................... 259 300 559
Transfer to the profit and loss
account............................... (109) (300) (409)
Sale of subsidiary..................... (9) -- (9)
---- ---- ----
At 31 March 1999..................... 141 -- 141
==== ==== ====
</TABLE>
Other provisions relate to the costs of relocation of Calne Electronics.
F-63
<PAGE>
SYMONDS LIMITED
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
18. DEFERRED TAX
Deferred tax provided and unprovided at a rate of 30% are:
<TABLE>
<CAPTION>
Provided Unprovided
31 March 31 March
1999 1999
----------- -----------
(Pounds)000 (Pounds)000
<S> <C> <C>
Accelerated capital allowances....................... 516 (40)
Other timing differences............................. (453) (34)
Held over gain....................................... 78 --
---- ---
141 (74)
==== ===
</TABLE>
19. SHARE CAPITAL
<TABLE>
<CAPTION>
31 March 31 March
1999 1999
---------- -----------
Number (Pounds)000
<S> <C> <C>
5p ordinary shares
Authorised............................................ 80,000,000 4,000
Allotted, called up and fully paid.................... 69,472,208 3,473
========== =====
</TABLE>
Changes in the year
5p ordinary shares
The authorised share capital remained unchanged during the year. During the
year 40,000 shares were issued under the Executive Share Option Scheme; the
proceeds were (Pounds)11,600.
Share options
At 31 March 1999, options have been granted and remain outstanding under the
Symonds Executive Share Option Scheme to subscribe for 5p ordinary shares of
the Company, as follows:
<TABLE>
<CAPTION>
Date of grant Number Exercise price Exercise period
------------- ------- -------------- ---------------
<S> <C> <C> <C>
20 May 1994............. 274,000 30.5p 20 May 1997 to 20 May 2007
21 May 1996............. 240,000 71.0p 21 May 1999 to 21 May 2009
30 January 1997......... 40,000 59.5p 30 January 2000 to 30 January 2010
27 February 1997........ 75,000 58.5p 27 February 2000 to 27 February 2010
28 July 1997............ 700,000 34.5p 28 July 2000 to 28 July 2010
7 January 1998.......... 250,000 34.0p 7 January 2001 to 7 January 2011
21 July 1998............ 110,000 38.0p 21 July 2001 to 21 July 2011
1 September 1998........ 275,000 31.0p 1 September 2001 to 1 September 2011
</TABLE>
Following the offer for the entire share capital of the Company by MCM
Electronics Limited, these options were either exercised by the holders for a
total payment of (Pounds)84,000, given up by the holders in lieu of cash
cancellation payments totalling (Pounds)120,000, or lapsed. These transactions
occurred subsequent to 30 June 1999, the last date consolidated accounts were
prepared for Symonds Limited and its subsidiary undertakings.
F-64
<PAGE>
SYMONDS LIMITED
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
20. RESERVES
<TABLE>
<CAPTION>
Capital Goodwill Profit and
Share redemption Merger write off loss
premium reserve reserve reserve account
----------- ----------- ----------- ----------- -----------
(Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000
<S> <C> <C> <C> <C> <C>
1 April 1998............ 19,877 50 5,474 (22,505) 2,944
Goodwill adjustments on
disposal/closure of
subsidiary
undertakings........... -- -- -- 3,789 --
Issue of shares......... 10 -- -- -- --
Provision for impairment
of subsidiary
undertaking goodwill... -- -- -- 748 --
Retained loss for the
year................... -- -- -- -- (4,754)
Transfer................ -- -- -- 17,968 (17,968)
------ --- ----- ------- -------
At 31 March 1999........ 19,887 50 5,474 -- (19,778)
====== === ===== ======= =======
</TABLE>
Goodwill movements in the year comprise the write back of goodwill following
the disposal of Finishing Services Limited and the decision to close Osborne
Electronics Limited, and the provision for the anticipated impairment of
goodwill on the sale of Finishing Technology Limited.
Following implementation of FRS10, the goodwill reserve has been offset
against the profit and loss account.
21. RECONCILIATION OF OPERATING PROFIT TO NET CASH INFLOW FROM OPERATING
ACTIVITIES
<TABLE>
<CAPTION>
31 March
1999
-----------
(Pounds)000
<S> <C>
Operating profit................................................. 2,915
Non cash exceptional operating items............................. 1,318
Depreciation..................................................... 1,800
Loss on disposal of tangible fixed assets........................ (28)
Movement in stocks............................................... 899
Movement in debtors.............................................. 2,342
Movement in creditors............................................ (1,064)
Reorganisation costs paid........................................ (300)
------
Net cash inflow from operating activities........................ 7,882
======
</TABLE>
22. ANALYSIS OF CASH FLOWS FROM FINANCING AND MANAGEMENT OF LIQUID RESOURCES
<TABLE>
<CAPTION>
31 March 1999
-----------------------
(Pounds)000 (Pounds)000
<S> <C> <C>
Issue of ordinary share capital..................... 12
Debt due within one year
Bank loans repaid.................................. (730)
Other loans repaid................................. (25)
Loan notes repaid................................... (1,106)
Capital element of finance lease rentals............ (427)
------
Net cash outflow from financing..................... (2,276)
Movement in cash deposits to secure loan notes...... 998
Movement in treasury deposits....................... (2,000)
------
Net cash outflow from management of liquid
resources.......................................... (1,002)
------
Net cash outflow from financing and management of
liquid resources................................... (3,278)
======
</TABLE>
F-65
<PAGE>
SYMONDS LIMITED
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
23. ANALYSIS OF NET DEBT
<TABLE>
<CAPTION>
At Other At
31 March non-cash 31 March
1998 Cash flow changes 1999
----------- ----------- ----------- -----------
(Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000
<S> <C> <C> <C> <C>
Cash at bank and in hand... 1,102 (244) -- 858
Cash deposits to secure
loan notes................ 1,708 (998) -- 710
Treasury deposits.......... -- 2,000 -- 2,000
Debt due within one year... (2,662) 1,861 (759) (1,560)
Debt due after more than
one year.................. (2,289) -- 759 (1,530)
Finance leases............. (841) 427 (230) (644)
------ ----- ---- ------
(2,982) 3,046 (230) (166)
====== ===== ==== ======
</TABLE>
24. RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
<TABLE>
<CAPTION>
31 March
1999
-----------
(Pounds)000
<S> <C>
Decrease in cash in the period................................... (244)
Cash outflow from movement in debt and lease financing........... 2,288
Cash outflow from management of liquid resources................. 1,002
------
Change in net debt resulting from cash flows..................... 3,046
New finance leases............................................... (230)
------
Decrease in net debt in the period............................... 2,816
Net debt 1 April 1998............................................ (2,982)
------
Net debt 31 March 1999........................................... (166)
======
</TABLE>
25. DISPOSALS DURING THE FINANCIAL YEAR
Finishing Services Limited
The whole of the issued share capital of Finishing Services Limited was sold
on 31 March 1999 for (Pounds)200,000.
The transaction can be summarised as follows:
<TABLE>
<CAPTION>
(Pounds)000
<S> <C>
Net assets disposed of:
Tangible assets.................................................. 129
Stocks........................................................... 266
Debtors.......................................................... 658
Creditors........................................................ (528)
------
Net assets disposed of........................................... 525
Goodwill adjusted on disposal.................................... 1,989
Costs of disposal................................................ 121
Loss on disposal................................................. (2,435)
------
200
======
Satisfied by: Cash 200
======
</TABLE>
F-66
<PAGE>
SYMONDS LIMITED
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
26. CONTINGENT LIABILITIES
Bank loans and overdrafts of the Group are secured by fixed and floating
charges over the Group's assets and by a composite cross-guarantee between all
Group companies. The Company's contingent liability under this composite
cross-guarantee at 31 March 1999 was (Pounds)2,712,000.
27. FINANCIAL COMMITMENTS
Operating leases
At 31 March 1999 the Group had annual commitments under non-cancellable
operating leases as follows:
<TABLE>
<CAPTION>
Land and
buildings Other
----------- -----------
(Pounds)000 (Pounds)000
<S> <C> <C>
Expiry date:
Within one year...................................... 74 154
Between one and two years............................ -- 120
Between two and five years........................... 209 349
In over five years................................... 735 7
----- ---
1,018 630
===== ===
</TABLE>
Capital commitments
At 31 March 1999 the directors had authorised capital expenditure as
follows:
<TABLE>
<CAPTION>
(Pounds)000
<S> <C>
Contracted but not provided for................................ 91
===
28. DIRECTORS' EMOLUMENTS
(a) Emoluments of the directors of the company were:
<CAPTION>
31 March
1999
-----------
(Pounds)000
<S> <C>
Fees........................................................... 70
Remuneration................................................... 250
Pension contributions.......................................... 34
Bonuses........................................................ 25
Benefits in kind............................................... 23
---
402
===
The emoluments of the highest paid director were:
<CAPTION>
31 March
1999
-----------
(Pounds)000
<S> <C>
Remuneration................................................... 154
Pension contributions.......................................... 9
---
163
===
Number of directors who were members of a defined contribution
pension scheme................................................ 4
===
</TABLE>
F-67
<PAGE>
SYMONDS LIMITED
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
The fees in respect of SG Mills were paid to Directing Success Limited, a
company controlled by Mr. Mills.
(b) Share options
The company operates a share option scheme for executives. Options issued
under this scheme may be exercised between three and thirteen years after the
date granted. Details of options held by Directors and former Directors under
the company's Executive Share Option Scheme are as follows:
<TABLE>
<CAPTION>
Expiry date At 31 Granted Exercised Lapsed At 31
of exercise Exercise March during during during March
Date of grant period price 1998 year year year 1999
---------------- ---------------- -------- ------- ------- --------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MHG Malone 28 July 1997 28 July 2010 34.5p 250,000 -- -- -- 250,000
MJ Glanfield 1 September 1998 1 September 2011 31.0p -- 250,000 -- -- 250,000
JA Calvert 28 July 1997 28 July 2010 34.5p 250,000 -- -- -- 250,000
</TABLE>
Following the offer for the entire share capital of the Company by MCM
Electronics Limited, these options were either exercised by the holders or
given up by the holders in lieu of cash cancellation payments as detailed in
note 19.
29. POST BALANCE SHEET EVENTS
On 30 June 1999 the whole of the issued share capital of Finishing
Technology Limited was disposed of.
On 5 July 1999 the offer made by MCM Electronics Limited for the entire
issued share capital of the Company was declared unconditional and
consequently MCM Electronics Limited, a company incorporated in Great Britain,
became the ultimate parent company.
On 22 March 2000 an agreement was reached whereby MCM Electronics Limited
would be acquired by DDi Corp.
30. SUMMARY OF RELEVANT DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES IN THE UNITED KINGDOM AND UNITED STATES
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United Kingdom
(UK GAAP) which differ in certain significant respects from those generally
accepted in the United States (US GAAP). Set forth below is a summary of
certain significant differences between UK and US GAAP which management
believes are relevant to the Company.
Goodwill
UK Financial Reporting Standard 10 was adopted in the Company's
consolidated financial statements effective 1 April 1998. Goodwill arising on
acquisitions subsequent to 1 April 1998 has been capitalised and amortised
through the profit and loss account over its useful economic life which is
generally not expected to exceed 20 years. Goodwill related to acquisitions
made prior to 31 March 1998 was charged directly to reserves in accordance
with UK accounting standards in effect at that date. On disposal of a
business, the historic goodwill previously eliminated is charged in
determining the profit or loss arising on disposal. Impairment is recognised
upon a commitment by the Company to dispose of the underlying assets relating
to the goodwill.
Under US GAAP, goodwill, which represents the excess of purchase price over
fair value of net assets acquired, is recorded as an intangible asset and is
amortised on a straight-line basis over the expected periods to
F-68
<PAGE>
SYMONDS LIMITED
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
be benefited, not to exceed 40 years. The Company assesses the recoverability
of this intangible asset by determining whether the amortisation of the
goodwill balance over its remaining life can be recovered through undiscounted
future operating cash flows of the acquired operation. The amount of goodwill
impairment, if any, is measured based on projected discounted future operating
cash flows using a discount rate reflecting the Company's average cost of
funds. The assessment of the recoverability of goodwill will be impacted if
estimated future operating cash flows are not achieved. The Company under both
US and UK GAAP has adopted an estimated life of 20 years.
Valuation of Interests in Leveraged Buyout Transactions
Under UK GAAP, when a leveraged buyout transaction has been completed, a new
basis of accounting for the assets and liabilities of the predecessor company
should be established following the acquisition. The fair value of the
underlying assets and liabilities is used with the excess of purchase price
over fair value of the net assets acquired allocated to goodwill.
Under US GAAP, the acquisition of a company in a leveraged buyout
transaction must be evaluated to determine whether it is (a) a financial
restructuring-recapitalisation for which no change in accounting basis would be
appropriate; (b) a step acquisition for which a partial change in accounting
basis would be appropriate; or (c) a purchase by new controlling investors for
which a partial or complete change in basis based upon the fair value of the
transaction would be appropriate. Key factors to be analysed include a change
in control of voting interest, residual interest in the newly formed company
and the fair value of securities with respect to the monetary consideration
paid. In the case of the Company, a partial change in basis based upon the fair
value of the transaction is appropriate and the acquisition meets the
requirements of EITF 88-16 (Basis in Leveraged Buyout Transactions).
Accordingly, 2.36% (ownership percentage of management in Symonds Limited) was
carried over at the investors' predecessor basis, and the remaining 97.64%
(various institutional and private shareholders) was accounted for under the
purchase method of accounting. In the tables below, the caption "Valuation of
Interest in Leveraged Buyout Transactions" for the 31 December 1999 period
reflects the reduced goodwill amortization of (Pounds)12 and the adjustment
((Pounds)484) attributable to the reduction in goodwill associated with the
acquisition.
Sale-leaseback Transactions
Under UK GAAP, the gain arising on a sale-leaseback transaction may be
recognised in full at the date of the transaction provided that it can be
demonstrated that a market rent is being paid under the lease agreement.
Under US GAAP, such gains are deferred and amortised in proportion to the
related gross rental charged to expense over the term of the lease.
Finance set up costs
Under UK GAAP the costs incurred on obtaining new debt are capitalised, and
amortised over the probable life of the debt.
Under US GAAP these costs are amortised over the term of the debt. Under UK
GAAP the carrying value of this asset is offset against the relevant
borrowings, under US GAAP this asset is shown separately.
Provision for Loss on Termination of a Business
Under UK GAAP, when a decision has been made to restructure part of the
Company's business, provisions are made for the impairment of long-lived and
certain intangible assets together with severance and other costs of closure.
F-69
<PAGE>
SYMONDS LIMITED
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
US GAAP requires that specific criteria have been met before such costs can
be recognised as an expense. Among these is the requirement that all the
significant actions arising from a restructuring plan and their expected
completion dates must be identified by the balance sheet date. Impairment
charges are always recorded as an operating expense and the write down of
stocks is recorded as a component of cost of goods sold.
Income Taxes
Under UK GAAP, deferred taxation is calculated under the liability method to
the extent that it is probable that the liabilities will crystallise in the
foreseeable future.
Under US GAAP, income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognised for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss carryforwards. Deferred tax assets and liabilities are
measured using enacted rates expected to apply to taxable income in the years
in which these temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is
recognised in income in the period that includes the enactment date. Valuation
allowances are provided to the extent that the realisation of deferred tax
assets is not more likely than not.
Dividends
Under UK GAAP, the proposed dividends on ordinary shares, as recommended by
the directors, are deducted from shareholders' equity and shown as a liability
in the balance sheet at the end of the period in which they relate.
Under US GAAP, such dividends are only deducted from shareholders' equity at
the date of declaration of the declared dividend.
Earnings Per Share
Under US and UK GAAP, basic earnings per share are computed using the
weighted average number of ordinary shares in issue during the year. US GAAP
also requires the computation of diluted earnings per share, which includes the
effect of potentially dilutive common stock under the treasury stock method.
Classification Differences Between UK and US GAAP
(i) Exceptional Items
Under UK GAAP, exceptional items generally derive from operations outside
the ordinary course of business and are reflected in a separate section of the
profit and loss account under operating profit and are shown gross of tax.
Under US GAAP, extraordinary and exceptional items are considered both
unusual in nature and infrequent in occurrence. In practice, extraordinary and
exceptional items are rarely presented. Accordingly, exceptional items
presented by the Company would not be classified as such under US GAAP.
(ii) Discontinued Operations
Under both UK and US GAAP, discontinued operations are separately identified
in the profit and loss account and must be attributable to only a significant
business.
F-70
<PAGE>
SYMONDS LIMITED
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Under UK GAAP, operating results from discontinued operations are disclosed
as a separate element within operating profit and any related gain or loss is
disclosed as an exceptional item.
Under US GAAP, a segment of a business is defined as a component of an
enterprise whose activities present a major line of business or class of
customer. The results of discontinued operations and the gain or loss on
disposal shall be reported in the income statement separately from continuing
operations but not as an extraordinary item. Estimated losses are provided at
the measurement date, the date on which the company commits itself to a formal
plan to dispose of a segment of the business. Gains are recognised when
realised, typically the disposal date. Gain or loss from the disposal of a
business segment should not include adjustments, costs and expenses associated
with normal business activities that should have been recognised on a going
concern basis up to the measurement date, such as adjustment of accruals on
long term contracts, or write down or write off of receivables, inventories,
property, plant and equipment used in the business, or intangible assets. The
long-lived assets and certain identifiable intangible assets that are to be
disposed of shall be reported at the lower of carrying amount or fair value
less cost to sell with any loss resulting included in continuing operations.
(iii) Statement of Cash Flows
Under UK GAAP, cash flows are presented for operating activities, returns on
investment and servicing of finance, taxation paid, capital expenditure,
acquisitions, dividends paid and financing activities. Under UK GAAP, cash
includes cash in hand and cash on deposit, net of bank overdrafts.
Under US GAAP, cash flows are reported as operating, investing and financing
activities. Cash flows from taxation and returns and servicing of finance
would, with the exception of ordinary dividends paid, be included as operating
activities. The payment of dividends would be included under financing
activities. Cash and cash equivalents would include cash and short-term
investments with original maturities of three months or less.
F-71
<PAGE>
SYMONDS LIMITED
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Reconciliation to US accounting principles
The following is a summary of the adjustments to net income and
shareholders' equity which would have been required if US GAAP had been applied
instead of UK GAAP.
<TABLE>
<CAPTION>
Unaudited Unaudited Unaudited
Nine months Three months Six months
Year ended ended ended ended
31 March 31 December 30 June 31 December
1999 1998 1999 1999
----------- ----------- ------------ -----------
(Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000
<S> <C> <C> <C> <C>
(Loss)/profit attributable
to shareholders as reported
in the consolidated profit
and loss account in
accordance with UK GAAP.... (4,338) 1,839 165 44
Adjustments to conform to US
GAAP
Amortisation of goodwill.... (1,125) (869) (221) (8)
Impairment of goodwill...... (657) (657) -- --
Goodwill in respect of
subsidiary undertakings
disposed which was
previously written off..... 2,313 -- -- --
Valuation of interests in
leveraged buyout
transactions............... -- -- -- 12
Provision for termination of
a business................. 550 -- (550) --
Finance set up costs........ -- -- -- 290
Sale and leaseback.......... 16 12 4 8
Deferred income tax......... (168) -- 155 (107)
------ ----- ---- ------
Net (loss)/profit in
accordance with US GAAP.. (3,409) 325 (447) 239
------ ----- ---- ------
Analysed:
Continuing operations....... (469) 2,376 (328) 1,721
Discontinued operations..... (1,954) (825) 44 --
Interest.................... (323) (261) (40) (1,209)
Taxation.................... (663) (965) (123) (273)
------ ----- ---- ------
Net (loss)/profit in
accordance with US GAAP.. (3,409) 325 (447) 239
====== ===== ==== ======
</TABLE>
<TABLE>
<CAPTION>
Unaudited Unaudited Unaudited
31 March 31 December 30 June 31 December
1999 1998 1999 1999
----------- ----------- ----------- -----------
(Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000
<S> <C> <C> <C> <C>
Shareholders' funds as
reported in the
consolidated balance sheet
in accordance with UK
GAAP....................... 9,106 10,746 9,552 1,311
Adjustments to conform with
US GAAP
Goodwill.................... 15,407 17,886 14,904 298
Valuation of interests in
leveraged buyout
transactions............... -- -- -- (484)
Provision for termination of
a business................. 550 -- -- --
Finance set up costs........ -- -- -- 290
Sale and leaseback.......... (374) (378) (369) (361)
Deferred income tax......... (91) 77 64 (43)
------ ------ ------ -----
Shareholders' equity in
accordance with US GAAP.... 24,598 28,331 24,151 1,011
====== ====== ====== =====
</TABLE>
F-72
<PAGE>
SYMONDS LIMITED
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Cash flows
The following table summarises the statements of cash flows as if they had
been presented in accordance with US GAAP:
<TABLE>
<CAPTION>
Unaudited Unaudited Unaudited
Nine months Three months Six months
Year ended ended ended ended
31 March 31 December 30 June 31 December
1999 1998 1999 1999
----------- ----------- ------------ -----------
(Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000
<S> <C> <C> <C> <C>
Net cash provided by/(used
in) operating activities.. 6,916 3,812 (594) 1,817
Net cash used in investing
activities................ (2,633) (2,586) (596) (29,730)
Net cash (used in)/provided
by financing activities... (3,525) (2,664) (319) 29,893
------ ------ ------ -------
Net increase/(decrease) in
cash and cash
equivalents............... 758 (1,438) (1,509) 1,980
Cash and cash equivalents
under US GAAP at beginning
of period................. 2,810 2,810 3,568 --
Cash and cash equivalents
under US GAAP acquired.... -- -- -- 2,086
------ ------ ------ -------
Cash and cash equivalents
under US GAAP at end of
period.................. 3,568 1,372 2,059 4,066
====== ====== ====== =======
</TABLE>
F-73
<PAGE>
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