<PAGE>
As filed with the Securities and Exchange Commission on October 10, 2000
Registration No. 333-45648
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 2
To
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
DDi CORP.
(Exact name of registrant as specified in its charter)
Delaware 3672 06-1576013
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction Classification Code Number) Identification No.)
of incorporation or
organization)
1220 Simon Circle, Anaheim, California 92806
(714) 688-7200
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive office)
----------------
Charles D. Dimick Bruce D. McMaster
Chairman President and Chief Executive
DDi Corp. Officer
1220 Simon Circle DDi Corp.
Anaheim, California 92806 1220 Simon Circle
(714) 688-7200 Anaheim, California 92806
(714) 688-7200
(Name, address, including zip code, and telephone number, including area code,
of agents for service)
----------------
Copies of all communications, including communications sent to agents for
service, should be sent to:
Alfred O. Rose, Esq. Stacy J. Kanter, Esq.
Ropes & Gray Skadden, Arps, Slate, Meagher &
One International Place Flom LLP
Boston, Massachusetts 02110-2624 Four Times Square
(617) 951-7000 New York, New York 10036-6572
(212) 735-3000
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
The registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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--------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange +
+Commission is effective. This prospectus is not an offer to sell these +
+securities and it is not soliciting an offer to buy these securities in any +
+state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED OCTOBER 10, 2000
6,000,000 Shares
[DDi LOGO APPEARS HERE]
DDi Corp.
Common Stock
--------
We are selling shares of common stock and the selling stockholders are
selling shares of common stock. We will not receive any of the proceeds
from the sale of shares by the selling stockholders. Our common stock is quoted
on The Nasdaq Stock Market's National Market under the symbol "DDIC." On
October 9, 2000, the last reported sale price of our stock was $33.31 per
share.
The underwriters have an option to purchase from the selling stockholders a
maximum of 900,000 additional shares to cover over-allotments of shares.
Investing in our common stock involves risk. See "Risk Factors" on page 8.
<TABLE>
<CAPTION>
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions DDi Corp. Stockholders
---------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Per Share................... $ $ $ $
Total....................... $ $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about , 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
Thomas Weisel Partners LLC
The date of this prospectus is , 2000.
<PAGE>
[DDi LOGO APPEARS HERE]
<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
Price Range of Common Stock......... 14
Dividend Policy..................... 14
Capitalization...................... 15
Dilution............................ 16
Unaudited Pro Forma Consolidated
Financial Data..................... 17
Selected Consolidated Financial and
Other Data......................... 29
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 31
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Business......................... 42
Management....................... 51
Related Party Transactions....... 62
Principal and Selling
Stockholders.................... 64
Description of Indebtedness...... 68
Description of Capital Stock..... 71
Shares Eligible for
Future Sale..................... 74
Underwriting..................... 76
Notice to Canadian Residents..... 78
Legal Matters.................... 79
Experts.......................... 80
Additional Information........... 80
Index to Consolidated Financial
Statements...................... F-1
</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. DDi and the DDi logo are
trademarks of DDi Corp.
i
<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 grow at this rate with industry revenues projected to be
approximately $149 billion in 2003. Communications equipment
1
<PAGE>
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 original equipment 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.
We have over 1,900 customers. Our largest original equipment manufacturer
customers in terms of net sales are Alcatel, Ericsson, IBM, Intel and Marconi
Communications. 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 100 customers during the first six
months of 2000. In the six months ended June 30, 2000, our ten largest
customers, in the aggregate, accounted for less than 39% of our net sales, and
our largest customer accounted for less than 9% of net sales. The fast-growing
communications and networking equipment industries represented approximately
59% of our net sales during the same period.
Our acquisition of MCM Electronics on April 14, 2000, immediately after the
closing of our initial public offering, substantially expanded our European
operations. MCM Electronics had net sales for the year ended March 31, 2000 of
$59.5 million. On a pro forma basis, 22% of our net sales during the six months
ended June 30, 2000 were to European customers. MCM Electronics has been
combined with our other European operations and conducts business as DDi Europe
Limited. DDi Europe has approximately 400 customers. With this European
platform we believe we will be able to better serve our existing European
customers and gain new customers with our enhanced sales capabilities. Since
the closing of the MCM Electronics acquisition we have expanded our services,
added new customers, improved production yields and profitability and continued
to grow our European business.
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.
2
<PAGE>
Recent Developments
Acquisition of Automata International. On August 4, 2000, we acquired
substantially all the U.S. assets of Automata International, Inc., a Virginia-
based complex printed circuit board manufacturer, for approximately $19.5
million in cash, net of fees and expenses. For the twelve months ended July 1,
2000, these assets generated revenues of $55.6 million and an operating loss of
$5.4 million. The acquisition provides additional capacity for high density,
high layer count printed circuit boards and gives us a significant presence on
the east coast. Since completing the acquisition, we have successfully
increased average selling prices and have streamlined the facility's operations
to increase yields from approximately 50% to almost 90% per panel. In addition,
we have shifted production from our other facilities to the 100,000 square foot
Virginia facility to increase volume and free up capacity at our other
facilities. As a result of the immediate success we have experienced in
integrating the operations, we believe that this facility has significant
profit potential and expect it to positively contribute to our earnings in the
third quarter of 2000.
Acquisition of Golden Manufacturing. On September 15, 2000, we acquired
substantially all the assets of Golden Manufacturing, Inc., a Texas-based
manufacturer of engineered metal enclosures and value-added assembly services
to communications and electronics original equipment manufacturers, for
approximately $14.9 million in cash, net of fees and expenses. For the twelve
months ended December 31, 1999, on an unaudited basis, these assets generated
approximately $13.5 million in revenues and an operating profit of $0.4
million. The acquisition, which provides us with over 70,000 square feet of
production capacity, will complement our existing Texas facilities by providing
metal enclosure assembly capabilities for our customers.
Third Quarter. Throughout the third quarter of 2000, our business continued
to experience strong growth driven by high demand, increases in average selling
prices and the synergies realized from our recent acquisitions.
----------------
We are a Delaware corporation incorporated in 2000 that operates through our
subsidiaries, Dynamic Details, Incorporated and DDi Europe Limited. Our
predecessor corporation was organized in 1978. 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...... 6,000,000 shares of common stock. Of these shares,
DDi Corp. will sell the number of shares necessary
to generate net proceeds of approximately $120.0
million, and the selling stockholders will sell the
balance of the offered shares.
Over-allotment option..... Up to 900,000 shares of common stock offered by the
selling stockholders.
Common stock to be
outstanding after the
offering.................
43,175,431 shares of common stock. In calculating
the number of shares of common stock, we did not
include approximately 4,156,233 shares issuable
upon exercise of stock options and warrants
outstanding on June 30, 2000 with a weighted
average exercise price of $12.16 per share, or
3,596,104 shares of common stock available for
future grant under our stock plans. The number of
shares of common stock offered assumes an offering
price of $33.31 per share, the last reported sale
price of our common stock on the Nasdaq National
Market on October 9, 2000. The number of shares
outstanding after the offering will change based on
the offering price.
Use of proceeds........... We intend to use the approximately $120.0 million
of net proceeds that we estimate we will receive
from this offering to repay a portion of our
existing indebtedness and for general corporate
purposes, including potential acquisitions. See
"Use of Proceeds."
We will not receive any of the proceeds from the
shares of common stock sold by the selling
stockholders. See "Principal and Selling
Stockholders."
Nasdaq National Market DDIC
symbol...................
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 unaudited pro forma combined consolidated statement of
operations data set forth below give effect to our initial public offering in
April 2000, this offering, the application of the net proceeds from both
offerings, and our acquisitions of MCM Electronics and Automata, as if each had
occurred on July 1, 1999. The unaudited pro forma combined consolidated balance
sheet data set forth below give effect to this offering and our acquisition of
Automata as if each had occurred as of June 30, 2000. 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>
Six Months Pro Forma
Year Ended Ended Combined Latest
December 31, June 30, Twelve Months
------------------------ -------------- Ended
1997 1998 1999 1999 2000 June 30, 2000
------ ------- ------- ------ ------ ---------------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Net sales............... $ 78.8 $ 174.9 $ 292.5 $130.9 $176.8 $442.7
Cost of goods sold...... 38.7 119.6 202.4 92.4 115.5 313.8
------ ------- ------- ------ ------ ------
Gross profit.......... 40.1 55.3 90.1 38.5 61.3 128.9
Operating expenses:
Sales and marketing... 7.3 12.8 23.6 10.1 14.8 32.5
General and
administration....... 2.1 8.4 15.3 7.1 10.0 29.0
Amortization of
intangibles.......... -- 10.9 22.3 11.8 10.9 24.3
Restructuring and
related charges(a)... -- -- 7.0 -- -- 7.0
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 9.5 25.6 36.1
Interest expense, net... 25.2 37.4 46.7 23.3 22.7 34.8
------ ------- ------- ------ ------ ------
Income (loss) before
taxes and extraordinary
loss................... (27.9) (53.2) (24.8) (13.8) 2.9 1.3
Income tax benefit
(expense).............. 10.9 3.5 7.4 3.6 (2.5) (3.2)
------ ------- ------- ------ ------ ------
Income (loss) before
extraordinary loss..... (17.0) (49.7) (17.4) (10.2) 0.4 (1.9)
Extraordinary loss...... (1.6) (2.4) -- -- (2.5) --
------ ------- ------- ------ ------ ------
Net loss................ $(18.6) $ (52.1) $ (17.4) $(10.2) $ (2.1) $ (1.9)
====== ======= ======= ====== ====== ======
Other Financial Data:
Depreciation............ $ 2.6 $ 9.2 $ 14.4 $ 7.1 $ 8.5 $ 22.2
Amortization of deferred
financing costs........ 1.4 1.8 2.1 1.0 1.0 2.3
Capital expenditures.... 6.6 18.0 18.2 8.1 10.7 22.3
Supplemental Data:
Adjusted EBITDA(d)...... $ 33.3 $ 44.1 $ 66.7 $ 29.0 $ 45.5 $ 90.1
Net cash from operating
activities(e).......... 9.1 16.7 24.8 13.4 11.8 --
Net cash used in
investing
activities(e).......... (44.9) (194.8) (18.6) (8.3) (12.9) --
Net cash from (used in)
financing
activities(e).......... 41.1 174.9 (7.7) (3.6) 5.1 --
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
As of
June 30, 2000
----------------
Pro
Forma
Actual Combined
------ --------
(in millions)
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents...................................... $ 4.1 $ 62.9
Working capital................................................ 35.0 82.9
Total assets................................................... 466.7 545.4
Total debt, including current maturities....................... 390.4 351.5
Stockholders' equity (deficit)................................. (5.8) 110.9
</TABLE>
--------
(a) The 1999 restructuring and related charges represent the charge recorded
in December 1999 in connection with the consolidation of our Colorado
operations into our Texas facility and the closure of our Colorado
facility. The charge consists of $4.5 million for severance and other exit
costs and $2.5 million 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 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>
Six Months Pro Forma
Year Ended Ended Combined
December 31, June 30, Latest Twelve
------------------ ----------- Months Ended
1997 1998 1999 1999 2000 June 30, 2000
----- ----- ----- ----- ----- -------------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
EBITDA........................ $(0.1) $43.3 $58.6 $28.4 $45.0 $82.6
Former CEO compensation(1) ... 2.1 -- -- -- -- --
Management fee(2)............. -- -- 1.1 0.6 -- --
Executive severance(3)........ -- 0.8 -- -- -- --
Stock compensation and
bonuses(4)................... 31.3 -- -- -- -- --
Restructuring and related
charges(5)................... -- -- 7.0 -- 0.5 7.5
----- ----- ----- ----- ----- -----
Adjusted EBITDA............... $33.3 $44.1 $66.7 $29.0 $45.5 $90.1
===== ===== ===== ===== ===== =====
</TABLE>
--------
(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 was terminated in connection with
our initial public offering.
(3) Reflects one-time severance payments to two of our executives who were
terminated as a result of redundancies created by the DCI merger.
(4) Reflects elimination of the charge for stock compensation and related
bonuses recorded for vested stock options exchanged in conjunction with
the recapitalization.
6
<PAGE>
(5) Reflects, on an actual and pro forma basis, the elimination of the $7.0
million charge recorded for the consolidation and closure of our
Colorado facility in 1999 and an additional charge of $0.5 million
incurred in the six months ended June 30, 2000 in connection with the
consolidation and closure of our Colorado facility. The charge of $0.5
million was recorded in cost of goods sold.
(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 have a substantial amount of indebtedness. As of June 30, 2000, on a pro
forma basis giving effect to the borrowing under the Dynamic Details revolving
credit facility to finance the acquisition of Automata and the use of proceeds
from this offering to repay some of our indebtedness, our total debt would have
been $351.5 million, our ratio of total debt to total capitalization would have
been 0.76 to 1, and we would have had approximately $25.5 million available
under the Dynamic Details senior credit facility for future borrowings subject
to covenant compliance and $62.9 million of cash and cash equivalents. See "Use
of Proceeds." In addition, subject to the restrictions under our various debt
agreements, we may incur additional indebtedness 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 four acquisitions,
including our recent acquisitions of MCM Electronics, Automata and Golden
Manufacturing. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Prospectus Summary--Recent Developments." 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. 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. 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 businesses of other companies.
The attention of our management may be diverted, and our operations may be
otherwise disrupted. Our failure to effectively 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 some of 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 the net proceeds of this offering to repay a portion of our
existing indebtedness. See "Use of Proceeds." We expect that our principal
sources of funds during 2000 and 2001 will be cash generated from this
offering, operating activities and borrowings under the senior credit
facilities of our operating subsidiaries, Dynamic Details, Incorporated and DDi
Europe Limited. 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 may require additional equity or debt financing to
finance future acquisitions. The Dynamic Details and DDi Europe Limited senior
credit facilities contain 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 9% of our net sales during the six months
ended June 30, 2000. Net sales to our ten largest customers accounted for
approximately 39% 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. Though we expect our
executive officers' employment to continue after October 2000, we have not yet
determined whether the expiring employment agreements will be extended. Our
business also depends on our ability to continue to recruit, train and retain
skilled employees, particularly engineering and sales personnel, due to our
focus on the technologically advanced and time-critical segment of the
electronics manufacturing services industry. In addition, our ability to
successfully integrate acquired companies depends in part on our ability to
retain key management and existing employees at the time of the acquisition.
Our international expansion may be more costly or difficult than we expect.
We are expanding into new foreign markets. We completed our acquisition of
MCM Electronics, a United Kingdom company, on April 14, 2000. 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
materials classified as hazardous such as ammoniacal etching solutions, copper
and nickel in our manufacturing processes. 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.
11
<PAGE>
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, assuming the over-allotment option is not
exercised, investment funds affiliated with Bain Capital, Inc., Celerity
Partners, L.L.C. and The Chase Manhattan Bank will together beneficially own
approximately 33% of our outstanding common stock. In addition, seven of the
nine directors who serve on our board are representatives of affiliates of the
Bain Capital funds, The Chase Manhattan Bank and Celerity Partners, L.L.C. By
virtue of such stock ownership and/or 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, the holders of substantially all of the
shares of our common stock not issued in connection with our initial public
offering, other than shares of common stock offered for sale pursuant to this
prospectus by the selling stockholders, have agreed not to sell shares of our
common stock until 90 days following the date of this prospectus without the
consent of Credit Suisse First Boston Corporation. Upon expiration of these 90-
day lock-up agreements and subject to the volume limitations imposed by Rule
144 of the Securities Act, 24,750,000 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.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
We make forward-looking statements, within the meaning of Section 27A of the
Securities Act of 1933, as amended, 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 intend to sell that portion of the 6,000,000 shares offered by this
prospectus necessary to result in net proceeds to us of approximately $120.0
million. We will not receive any of the proceeds from the sale of the remaining
portion of the 6,000,000 shares by the selling stockholders or from the sale of
a maximum of 900,000 shares by the selling stockholders upon exercise of the
over-allotment option. We intend to use:
. approximately $26.2 million of the net proceeds to redeem all of the
outstanding senior discount notes issued by our subsidiary, DDi
Intermediate Holdings Corp., and to pay associated redemption premiums
and accrued and unpaid interest thereon; and
. approximately $93.8 million for general corporate purposes, including
potential acquisitions and debt repayment. Of this amount, we intend to
use approximately $36.7 million of the net proceeds to repurchase a
portion of the outstanding senior discount notes issued by our
subsidiary, DDi Capital Corp.
The amounts stated above are based on expected outstanding accreted values
and expected prepayment costs of these obligations as of October 16, 2000 for
the DDi Intermediate senior discount notes.
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.
Our DDi Intermediate senior discount notes mature on June 30, 2008, and bear
interest at the rate of 13.5% per annum compounded semi-annually. As of June
30, 2000, the outstanding accreted value of these senior discount notes was
approximately $21.8 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. See
"Description of Indebtedness--DDi Intermediate Senior Discount Notes."
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 compounded semi-annually. As of June
30, 2000, the accreted value of these senior discount notes was approximately
$82.6 million. We expect to repurchase DDi Capital senior discount notes from
time to time on the open market. See "Description of Indebtedness--DDi Capital
Senior Discount Notes."
Pending these uses, we will invest the net proceeds in short-term, interest-
bearing, investment-grade securities.
13
<PAGE>
PRICE RANGE OF COMMON STOCK
Our common stock has been quoted on the Nasdaq National Market under the
symbol "DDIC" since April 11, 2000. Prior to that time, there was no public
market for our common stock. The following table sets forth the high and low
sales prices of our common stock for the periods indicated as reported on the
Nasdaq National Market.
<TABLE>
<CAPTION>
Common Stock
Price
-------------
High Low
------ ------
<S> <C> <C>
April 11, 2000 through June 30, 2000.............................. $31.25 $ 9.50
July 1, 2000 through October 9, 2000.............................. $45.94 $21.81
</TABLE>
There were approximately 118 record holders of our common stock as of August
31, 2000. On October 9, 2000, the reported last sale price on the Nasdaq
National Market for our common stock was $33.31 per share.
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 and indentures
restrict our ability to pay dividends. We presently intend to retain earnings
to finance future operations, expansion and capital investment 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 June 30, 2000 on an actual basis; on a pro forma combined
basis to reflect our acquisition of Automata, as described in "Prospectus
Summary--Recent Developments" and "Unaudited Pro Forma Consolidated Financial
Data"; and on a pro forma as adjusted basis to reflect the application of the
estimated net proceeds from this offering to repay some of our existing debt,
as described in "Use of Proceeds." The following table assumes an offering
price of $33.31 per share, the last reported sale price of our common stock on
the Nasdaq National Market on October 9, 2000.
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>
June 30, 2000
-----------------------------------------
Pro Forma Pro Forma
Actual Combined As Adjusted
----------- ----------- -------------
(in millions, except share data)
<S> <C> <C> <C>
Cash and cash equivalents.. $ 4.1 $ 4.1 $ 62.9
=========== ========== ==========
Current maturities of long-
term obligations.......... $ 11.2 $ 11.2 $ 11.2
Revolving credit facility.. 0.5 18.8 18.8
Long-term obligations, net
of current maturities:
Dynamic Details senior
credit facility......... 143.1 143.1 143.1
Dynamic Details senior
subordinated notes...... 100.0 100.0 100.0
DDi Capital senior
discount notes.......... 82.6 82.6 47.2
DDi Intermediate senior
discount notes.......... 21.8 21.8 --
DDi Europe senior credit
facility................ 26.1 26.1 26.1
Other long-term
obligations............. 5.1 5.1 5.1
----------- ---------- ----------
Total long-term
obligations, net of
current maturities and
the revolving credit
facility.............. 378.7 378.7 321.5
Stockholders' (deficit)
equity:
Preferred Stock, $0.01
par value, 5,000,000
shares authorized; no
shares issued on an
actual, pro forma
combined or pro forma as
adjusted basis.......... -- -- --
Common stock, $0.01 par
value, 75,000,000 shares
authorized; 39,320,390
shares issued on an
actual basis and on a
pro forma combined
basis; and 43,175,431
shares issued on a pro
forma as adjusted
basis................... 0.4 0.4 0.4
Additional paid-in
capital and other....... 345.3 345.3 465.3
Accumulated deficit...... (351.5) (351.5) (354.8)
----------- ---------- ----------
Total
stockholders'(deficit)
equity ................... (5.8) (5.8) 110.9
----------- ---------- ----------
Total capitalization....... $ 384.6 $ 402.9 $ 462.4
=========== ========== ==========
</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 June 30, 2000, our net tangible book value was approximately $(282.3)
million, or $(7.18) per share of common stock. Net tangible book value per
share is determined by dividing the amount of our total tangible assets less
total liabilities by the number of shares of common stock outstanding.
After giving effect to the sale of shares of our common stock in this
offering and our acquisition of Automata our pro forma net tangible book value
as of June 30, 2000 would have been approximately $(167.4) million, or $(3.88)
per share. This represents an immediate increase in pro forma net tangible book
value of $3.30 per share to our existing stockholders and an immediate dilution
in pro forma net tangible book value of $37.19 per share to public investors
purchasing shares at the offering price. If the offering price is higher or
lower, the dilution to the public 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 offering price per share............................ $33.31
Pro forma net tangible book value per share at June 30, 2000
........................................................... (7.18)
Increase per share attributable to this offering............ 3.30
-----
Pro forma net tangible book value per share after this
offering................................................... (3.88)
------
Dilution of net tangible book value per share due to this
offering................................................... $37.19
======
</TABLE>
The table below assumes an offering price of $33.31 per share before
deducting underwriting discounts and commissions and estimated offering
expenses payable by us and summarizes, as of June 30, 2000 on a pro forma
basis, the differences between:
. the number of shares of common stock purchased from us by our
existing stockholders since our inception;
. the number of shares of common stock purchased by new investors in
this offering;
. the aggregate cash consideration paid by existing stockholders and to
be paid by new investors; and
. the average purchase price per share paid by the existing
stockholders and to be paid by the new investors.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ -------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 39,320,390 91% $347,492,000 73% $ 8.84
New investors............. 3,855,041 9% $128,400,000 27% 33.31
---------- --- ------------ ---
Total................... 43,175,431 100% 475,892,000 100%
========== === ============ ===
</TABLE>
The above discussion and tables do not assume the exercise of any stock
options or warrants outstanding as of June 30, 2000. As of June 30, 2000, after
giving effect to the offering there were options and other warrants outstanding
to purchase a total of approximately 4,156,233 shares of common stock with a
weighted average exercise price of $12.16 per share. Options and warrants to
purchase 1,831,668 shares were exercisable on June 30, 2000. See
"Capitalization" and "Management."
16
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The unaudited pro forma consolidated balance sheet as of June 30, 2000 gives
pro forma effect to the following, as if each event had occurred as of June 30,
2000:
. in the pro forma combined column, our acquisition of Automata, as
described under "Prospectus Summary--Recent Developments;" and
. the consummation of this offering and the application of the net
proceeds, as described under "Use of Proceeds." We have assumed for
purposes of this presentation that we will repurchase $36.7 million of
our DDi Capital senior discount notes at the accreted value on October
16, 2000. However, we may not repurchase all of these notes on October
16, 2000 and may not be able to repurchase these notes at the accreted
value on the open market.
Our June 30, 2000 historical balance sheet, contained elsewhere in this
prospectus, reflects the MCM Electronics acquisition and the initial public
offering, both of which closed on April 14, 2000.
The unaudited pro forma consolidated statements of operations for the year
ended December 31, 1999, the six months ended June 30, 1999, the six months
ended June 30, 2000 and the latest twelve months ended June 30, 2000 give
effect to each of the following, as if each had occurred on January 1, 1999:
. the consummation of our initial public offering and the application of
its net proceeds;
. our acquisition of MCM Electronics;
. our acquisition of Automata, as described under "Prospectus Summary--
Recent Developments"; and
. the consummation of this offering and the application of the net
proceeds, as described under "Use of Proceeds." We have assumed for
purposes of this presentation that we will repurchase $36.7 million of
our DDi Capital senior discount notes at the accreted value on October
16, 2000. However, we may not repurchase all of these notes on October
16, 2000 and may not be able to repurchase these notes at the accreted
value on the open market.
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 prepayment penalties in
connection with the prepayment of debt upon completion of this offering
estimated at $2.0 million and $3.5 million, respectively. The unaudited pro
forma consolidated balance sheet, however, does reflect such charges and the
related tax benefit of $0.8 million and $1.4 million, respectively.
The unaudited pro forma financial data does not reflect our September 15,
2000 acquisition of Golden Manufacturing.
17
<PAGE>
DDi CORP.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
June 30, 2000
(In millions)
<TABLE>
<CAPTION>
Post
DDi Automata DDi & Automata Offering
Historical Historical Automata Acquisition Pro Forma Offering Pro Forma
June 30, 2000 July 1, 2000 Combined Adjustments Combined Adjustments Combined
------------- ------------ -------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Current assets:
Cash and cash
equivalents........... $ 4.1 $ 2.3 $ 6.4 $ (2.3)(a) $ 4.1 $128.4 (d) $ 62.9
(8.4)(d)
(3.5)(e)
(57.2)(d)
(0.5)(f)
Accounts receivable,
net................... 66.2 4.9 71.1 -- 71.1 -- 71.1
Inventories............ 30.3 2.7 33.0 -- 33.0 -- 33.0
Prepaid expenses and
other................. 4.5 4.2 8.7 (4.2)(a)(b) 3.0 -- 3.0
(1.5)(a)
Deferred tax asset..... 5.2 -- 5.2 -- 5.2 1.4 (e) 7.4
0.8 (g)
------- ------- ------- ------ ------- ------ -------
Total current assets... 110.3 14.1 124.4 (8.0) 116.4 61.0 177.4
Property, plant and
equipment, net......... 77.0 9.7 86.7 -- 86.7 -- 86.7
--
Debt issue costs, net... 11.3 -- 11.3 -- 11.3 0.5 (f) 9.8
(2.0)(g)
Goodwill and other
intangibles, net....... 265.2 -- 265.2 3.3 (a) 268.5 -- 268.5
Other................... 2.9 0.1 3.0 -- 3.0 -- 3.0
------- ------- ------- ------ ------- ------ -------
Total assets........... $ 466.7 $ 23.9 $ 490.6 $ (4.7) $ 485.9 $ 59.5 $ 545.4
======= ======= ======= ====== ======= ====== =======
Liabilities and
stockholders' equity
(deficit):
Current liabilities:
Current maturities of
long-term debt and
capital lease
obligations........... $ 11.2 $ -- $ 11.2 $ -- $ 11.2 -- $ 11.2
Current portion of
deferred interest rate
swap income........... 0.9 -- 0.9 -- 0.9 -- 0.9
Current maturities of
deferred notes
payable............... 1.3 -- 1.3 -- 1.3 -- 1.3
Revolving credit
facility.............. 0.5 -- 0.5 18.3 (a) 18.8 -- 18.8
Accounts payable....... 31.8 0.4 32.2 (0.4)(a) 31.8 -- 31.8
Accrued expenses....... 28.4 -- 28.4 0.9 (a) 29.3 29.3
Income tax payable..... 1.2 -- 1.2 -- 1.2 -- 1.2
Liabilities subject to
compromise under
reorganization
proceedings........... -- 95.1 95.1 (95.1)(a) -- -- --
------- ------- ------- ------ ------- ------ -------
Total current
liabilities........... 75.3 95.5 170.8 (76.3) 94.5 -- 94.5
Long-term debt and
capital lease
obligations............ 378.7 -- 378.7 -- 378.7 (57.2)(d) 321.5
Deferred interest rate
swap income............ 2.6 -- 2.6 -- 2.6 -- 2.6
Deferred notes payable.. 1.4 -- 1.4 -- 1.4 -- 1.4
Deferred tax liability.. 13.8 0.2 14.0 (0.2)(a) 13.8 -- 13.8
Other................... 0.7 -- 0.7 -- 0.7 -- 0.7
------- ------- ------- ------ ------- ------ -------
Total liabilities...... 472.5 95.7 568.2 (76.5) 491.7 (57.2) 434.5
------- ------- ------- ------ ------- ------ -------
Redeemable preferred
stock................... -- 40.1 40.1 (40.1)(c) -- -- --
Warrants outstanding.... -- 0.3 0.3 (0.3)(c) -- -- --
Stockholders' equity
(deficit):
Common stock........... 0.4 1.2 1.6 (1.2)(c) 0.4 -- 0.4
Additional paid-in-
capital and other..... 345.3 (0.8) 344.5 0.8 (c) 345.3 120.0 (d) 465.3
Accumulated deficit.... (351.5) (112.6) (464.1) 112.6 (c) (351.5) (2.1)(e) (354.8)
(1.2)(g)
------- ------- ------- ------ ------- ------ -------
Total stockholders'
equity (deficit)...... (5.8) (112.2) (118.0) 112.2 (5.8) 116.7 110.9
------- ------- ------- ------ ------- ------ -------
$ 466.7 $ 23.9 $ 490.6 $ (4.7) $ 485.9 $ 59.5 $ 545.4
======= ======= ======= ====== ======= ====== =======
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Balance Sheet
18
<PAGE>
DDi CORP.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(In millions, except share data)
(a) Under purchase accounting, the total Automata purchase price will be
allocated to the acquired assets and assumed liabilities based on their
relative fair values as of the closing date of the Automata transaction. We
have undertaken 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 $19.8 represents the
cash consideration and estimated fees and expenses, of which $1.5 was deposited
into escrow and recorded as a prepaid expense prior to June 30, 2000. 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 Automata acquisition had occurred on June 30, 2000 are as follows:
<TABLE>
<S> <C>
Purchase Price:
Cash consideration................................................ $ 19.5
Estimated fees and expenses....................................... 0.3
------
$ 19.8
======
Allocation of Purchase Price:
Automata net liabilities (excluding cash and cash equivalents,
amounts due from the U.K. administrative receiver, redeemable
preferred stock and warrants outstanding) at June 30, 2000....... $(78.3)
Excluded liabilities.............................................. 95.7
Assumed liabilities for employee benefits and warranty............ (0.9)
Estimated goodwill from the Automata acquisition.................. 3.3
------
$ 19.8
======
</TABLE>
(b) Represents the elimination of the amounts due from the administrative
receiver of Automata's U.K. subsidiaries. In accordance with the asset purchase
agreement, any amounts recovered from the liquidation of the U.K. subsidiaries
are excluded assets, as defined.
(c) Reflects the elimination of Automata's historical stockholders' equity
balances in connection with purchase accounting.
(d) Reflects our sale of the portion of the 6,000,000 shares of common stock
generating gross proceeds of $128.4 and the use of the net proceeds of $120.0,
net of the underwriting discount and the offering expenses totaling $8.4:
. to repay the DDi Intermediate senior discount notes with an accreted value
of $21.8 (including $0.9 of cash remaining as of June 30, 2000 to repay the
additional accretion on the notes through October 16, 2000);
. to redeem or repurchase a portion of the DDi Capital senior discount notes
(including $1.3 of cash remaining as of June 30, 2000 to repay the
additional accretion on the notes through October 16, 2000);
. to pay estimated prepayment premiums of $3.5 related to the DDi Intermediate
senior discount notes and the senior credit facility amendment fee of $0.5;
and
. $56.6 for general corporate purposes, including potential acquisitions and
debt repayment.
We have assumed for purposes of this presentation that we will repurchase
$36.7 of our DDi Capital senior discount notes at the accreted value on October
16, 2000. However, we may not repurchase all of these notes on October 16, 2000
and may not be able to repurchase these notes at the accreted value. See "Use
of Proceeds" and "Description of Indebtedness."
(e) Reflects the estimated prepayment premiums of $3.5, before $1.4 of related
income tax benefit (at a 40% effective tax rate), on the DDi Intermediate
senior discount notes resulting from the repayment of the debt in connection
with this offering. Amounts will differ based on the closing date of this
offering.
(f) Reflects the $0.5 payment of the senior credit facility amendment fee.
(g) Represents the write-off of $2.0 in capitalized debt issuance costs, before
$0.8 of related income tax benefit (at a 40% effective tax rate), resulting in
an extraordinary loss of $1.2 in connection with the paydown of outstanding
debt in connection with this offering. Amounts will differ based on the closing
date of this offering.
19
<PAGE>
DDi CORP.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FISCAL YEAR ENDED DECEMBER 31, 1999
(In millions, except share data)
<TABLE>
<CAPTION>
MCM
DDi Year Initial DDi Pro Electronics MCM DDi & MCM Automata
Ended Public Forma Year Ended DDi & MCM Electronics Electronics Year Ended
December 31, Offering December 31, March 31, Electronics Acquisition Pro Forma October 2,
1999 Adjustments 1999 2000 (a) Combined Adjustments Combined 1999
------------ ----------- ------------ ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales........ $292.5 $ -- $292.5 $59.5 $352.0 $ -- $352.0 $ 83.6
Cost of goods
sold............. 202.4 -- 202.4 42.5 244.9 -- 244.9 80.6
------ ------- ------ ----- ------ ----- ------ ------
Gross profit.... 90.1 -- 90.1 17.0 107.1 -- 107.1 3.0
Operating
expenses:
Sales and
marketing....... 23.6 (1.1)(b) 22.5 1.7 24.2 -- 24.2 4.0
General and
administrative.. 15.3 -- 15.3 8.8 24.1 -- 24.1 6.5
Amortization of
intangibles..... 22.3 -- 22.3 1.6 23.9 1.7 (e) 25.6 0.8
Restructuring
and other
related
charges......... 7.0 -- 7.0 -- 7.0 -- 7.0 18.4
------ ------- ------ ----- ------ ----- ------ ------
Net income (loss)
from continuing
operations....... 21.9 1.1 23.0 4.9 27.9 (1.7) 26.2 (26.7)
Interest expense
(net)............ 46.7 (10.8)(c) 35.9 4.2 40.1 (1.7)(f) 38.4 8.5
------ ------- ------ ----- ------ ----- ------ ------
Net income (loss)
from continuing
operations before
provision for
income taxes and
extraordinary
loss............. (24.8) 11.9 (12.9) 0.7 (12.2) -- (12.2) (35.2)
Income tax
benefit
(expense)........ 7.4 (4.8)(d) 2.6 (0.8) 1.8 (0.5)(g) 1.3 0.9
------ ------- ------ ----- ------ ----- ------ ------
Net income (loss)
from continuing
operations before
extraordinary
loss............. $(17.4) $ 7.1 $(10.3) $(0.1) $(10.4) $(0.5) $(10.9) $(34.3)
====== ======= ====== ===== ====== ===== ====== ======
Pro forma loss
per share of
common and common
equivalent stock
(basic and
diluted):
Pro forma weighted average number
of shares of common and common
equivalent stock outstanding (in
thousands) (basic and diluted):
<CAPTION>
Post
Offering
Automata Pro Pro
Acquisition Forma Offering Forma
Adjustments Combined Adjustments Combined
---------------- -------- ------------ ---------
<S> <C> <C> <C> <C>
Net sales........ $(26.2)(h) $409.4 $ -- $ 409.4
Cost of goods
sold............. (25.1)(h) 300.4 -- 300.4
---------------- -------- ------------ ---------
Gross profit.... (1.1) 109.0 -- 109.0
Operating
expenses:
Sales and
marketing....... (1.1)(h) 27.1 -- 27.1
General and
administrative.. (2.9)(h) 27.7 -- 27.7
Amortization of
intangibles..... (0.8)(h) 25.8 -- 25.8
0.2 (i)
Restructuring
and other
related
charges......... (15.1)(h) 10.3 -- 10.3
---------------- -------- ------------ ---------
Net income (loss)
from continuing
operations....... 18.6 18.1 -- 18.1
Interest expense
(net)............ (2.0)(h)(j) 39.8 (5.5)(l) 34.3
(5.1)(j)
---------------- -------- ------------ ---------
Net income (loss)
from continuing
operations before
provision for
income taxes and
extraordinary
loss............. 25.7 (21.7) 5.5 (16.2)
Income tax
benefit
(expense)........ 0.2 (h) 5.9 (2.2)(m) 3.7
3.5 (k)
---------------- -------- ------------ ---------
Net income (loss)
from continuing
operations before
extraordinary
loss............. $ 29.4 $(15.8) $ 3.3 $ (12.5)
================ ======== ============ =========
Pro forma loss
per share of
common and common
equivalent stock
(basic and
diluted): $(0.29)
=========
Pro forma weighted average number
of shares of common and common
equivalent stock outstanding (in
thousands) (basic and diluted): 42,762
=========
</TABLE>
20
<PAGE>
DDi CORP.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999
(In millions, except share data)
<TABLE>
<CAPTION>
MCM
DDi Electronics Automata
Six Months Initial DDi Pro Six Months MCM DDi & MCM Six Months
Ended Public Forma Ended June DDi & MCM Electronics Electronics Ended July Automata
June 30, Offering June 30, 30, Electronics Acquisition Pro Forma 3, 1999 Acquisition
1999 Adjustments 1999 1999 (1) (a) Combined Adjustments Combined (2) Adjustments
---------- ----------- -------- ------------ ----------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales........ $130.9 $-- $130.9 $30.1 $161.0 $ -- $161.0 $ 42.0 $(13.9)(h)
Cost of goods
sold............. 92.4 -- 92.4 21.9 114.3 -- 114.3 42.0 (13.3)(h)
------ ---- ------ ----- ------ ----- ------ ------ ------
Gross profit.... 38.5 -- 38.5 8.2 46.7 -- 46.7 -- (0.6)
Operating
expenses:
Sales and
marketing....... 10.1 (0.6)(b) 9.5 0.6 10.1 -- 10.1 2.4 (0.5)(h)
General and
administrative.. 7.1 -- 7.1 4.0 11.1 -- 11.1 3.4 (1.4)(h)
Amortization of
intangibles..... 11.8 -- 11.8 0.8 12.6 0.9 (e) 13.5 0.4 (0.4)(h)
0.1 (i)
Restructuring
and other
related
charges......... -- -- -- 7.1 7.1 -- 7.1 3.6 (0.3)(h)
------ ---- ------ ----- ------ ----- ------ ------ ------
Net income (loss)
from continuing
operations....... 9.5 0.6 10.1 (4.3) 5.8 (0.9) 4.9 (9.8) 1.9
Interest expense
(net)............ 23.3 (5.4)(c) 17.9 2.3 20.2 (0.9)(f) 19.3 3.7 (1.1)(h)(j)
(1.8)(j)
------ ---- ------ ----- ------ ----- ------ ------ ------
Net income (loss)
from continuing
operations before
provision for
income taxes and
extraordinary
loss............. (13.8) 6.0 (7.8) (6.6) (14.4) -- (14.4) (13.5) 4.8
Income tax
benefit
(expense)........ 3.6 (2.4)(d) 1.2 1.0 2.2 (0.3)(g) 1.9 0.4 3.1 (k)
------ ---- ------ ----- ------ ----- ------ ------ ------
Net income (loss)
from continuing
operations before
extraordinary
loss............. $(10.2) $3.6 $ (6.6) $(5.6) $(12.2) $(0.3) $(12.5) $(13.1) $ 7.9
====== ==== ====== ===== ====== ===== ====== ====== ======
Pro forma loss
per share of
common and common
equivalent stock
(basic and
diluted):
Pro forma weighted average number
of shares of common and
common equivalent stock
outstanding (in thousands) (basic
and diluted):
<CAPTION>
Post
Offering
Pro Pro
Forma Offering Forma
Combined Adjustments Combined
-------- ------------ ---------
<S> <C> <C> <C>
Net sales........ $189.1 $-- $ 189.1
Cost of goods
sold............. 143.0 -- 143.0
-------- ------------ ---------
Gross profit.... 46.1 -- 46.1
Operating
expenses:
Sales and
marketing....... 12.0 -- 12.0
General and
administrative.. 13.1 -- 13.1
Amortization of
intangibles..... 13.6 -- 13.6
Restructuring
and other
related
charges......... 10.4 -- 10.4
-------- ------------ ---------
Net income (loss)
from continuing
operations....... (3.0) -- (3.0)
Interest expense
(net)............ 20.1 (2.6)(l) 17.5
-------- ------------ ---------
Net income (loss)
from continuing
operations before
provision for
income taxes and
extraordinary
loss............. (23.1) 2.6 (20.5)
Income tax
benefit
(expense)........ 5.4 (1.0)(m) 4.4
-------- ------------ ---------
Net income (loss)
from continuing
operations before
extraordinary
loss............. $(17.7) $1.6 $ (16.1)
======== ============ =========
Pro forma loss
per share of
common and common
equivalent stock
(basic and
diluted): $ (0.38)
=========
Pro forma weighted average number
of shares of common and
common equivalent stock
outstanding (in thousands) (basic
and diluted): 42,327
=========
</TABLE>
----
(1) Represents the period from January 1, 1999 through June 30, 1999. Included
in this period is the three-month period beginning April 1, 1999 and
ending June 30, 1999 (MCM Electronics first fiscal quarter). This three-
month period is also included in MCM Electronic's year ended March 31,
2000 data presented as part of the Unaudited Pro Forma Consolidated
Statement of Operations for the year ended December 31, 1999.
(2) Represents the period from January 1, 1999 through July 3, 1999. This six-
month period (Automata's second and third fiscal quarters) is also
included in Automata's year ended October 2, 1999 data presented as part
of the Unaudited Pro Forma Consolidated Statement of Operations for the
year ended December 31, 1999.
21
<PAGE>
DDi CORP.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000
(In millions, except share data)
<TABLE>
<CAPTION>
MCM Automata
DDi Electronics Six
Six Months Initial DDi Pro January 1, MCM DDi & MCM Months
Ended Public Forma 2000 Through DDi & MCM Electronics Electronics Ended Automata
June 30, Offering June 30, April 14, Electronics Acquisition Pro Forma July 1, Acquisition
2000 Adjustments 2000 2000 (1) (a) Combined Adjustments Combined 2000 Adjustments
---------- ----------- -------- ------------ ----------- ----------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales........ $176.8 $-- $176.8 $20.8 $197.6 $ -- $197.6 $30.6 $(4.7)(h)
Cost of goods
sold............. 115.5 -- 115.5 15.3 130.8 -- 130.8 29.8 (4.3)(h)
------ ---- ------ ----- ------ ----- ------ ----- -----
Gross profit.... 61.3 -- 61.3 5.5 66.8 -- 66.8 0.8 (0.4)
Operating
expenses:
Sales and
marketing....... 14.8 -- 14.8 0.3 15.1 -- 15.1 2.3 (0.1)(h)
General and
administrative.. 10.0 -- 10.0 2.8 12.8 -- 12.8 2.9 (0.6)(h)
Amortization of
intangibles..... 10.9 -- 10.9 0.5 11.4 0.5 (e) 11.9 -- 0.1 (i)
Restructuring
and other
related
charges......... -- -- -- -- -- -- -- -- --
------ ---- ------ ----- ------ ----- ------ ----- -----
Net income (loss)
from continuing
operations....... 25.6 -- 25.6 1.9 27.5 (0.5) 27.0 (4.4) 0.2
Interest expense
(net)............ 22.7 (3.2)(c) 19.5 1.1 20.6 (0.4)(f) 20.2 3.7 (0.2)(h)(j)
(2.7)(j)
------ ---- ------ ----- ------ ----- ------ ----- -----
Net income (loss)
from continuing
operations before
provision for
income taxes and
extraordinary
loss............. 2.9 3.2 6.1 0.8 6.9 (0.1) 6.8 (8.1) 3.1
Income tax
benefit
(expense)........ (2.5) (1.3)(d) (3.8) (0.5) (4.3) (0.1)(g) (4.4) -- 2.0 (k)
------ ---- ------ ----- ------ ----- ------ ----- -----
Net income (loss)
from continuing
operations before
extraordinary
loss............. $ 0.4 $1.9 $ 2.3 $ 0.3 $ 2.6 $(0.2) $ 2.4 $(8.1) $ 5.1
====== ==== ====== ===== ====== ===== ====== ===== =====
Pro forma income
per share of
common and common
equivalent stock:
Basic
Diluted
Pro forma
weighted average
number of shares
of common and
common equivalent
stock outstanding
(in thousands):
Basic
Diluted
<CAPTION>
Post
Offering
Pro Pro
Forma Offering Forma
Combined Adjustments Combined
-------- ------------ --------
<S> <C> <C> <C>
Net sales........ $223.5 $-- $223.5
Cost of goods
sold............. 156.3 -- 156.3
-------- ------------ --------
Gross profit.... 67.2 -- 67.2
Operating
expenses:
Sales and
marketing....... 17.3 -- 17.3
General and
administrative.. 15.1 -- 15.1
Amortization of
intangibles..... 12.0 -- 12.0
Restructuring
and other
related
charges......... -- -- --
-------- ------------ --------
Net income (loss)
from continuing
operations....... 22.8 -- 22.8
Interest expense
(net)............ 21.0 (3.2)(l) 17.8
-------- ------------ --------
Net income (loss)
from continuing
operations before
provision for
income taxes and
extraordinary
loss............. 1.8 3.2 5.0
Income tax
benefit
(expense)........ (2.4) (1.3)(m) (3.7)
-------- ------------ --------
Net income (loss)
from continuing
operations before
extraordinary
loss............. $ (0.6) $1.9 $ 1.3
======== ============ ========
Pro forma income
per share of
common and common
equivalent stock:
Basic $ 0.03
========
Diluted $ 0.03
========
Pro forma
weighted average
number of shares
of common and
common equivalent
stock outstanding
(in thousands):
Basic 42,894
========
Diluted 44,545
========
</TABLE>
----
(1) Represents the period from January 1, 2000 through April 14, 2000.
Included in this period is the three-month period beginning January 1,
2000 and ending March 31, 2000 (MCM Electronics fourth fiscal quarter).
This three-month period is also included in MCM Electronics' year ended
March 31, 2000 data presented as part of the Unaudited Pro Forma
Consolidated Statement of Operations for the year ended December 31,
1999.
22
<PAGE>
DDi CORP.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
LATEST TWELVE MONTHS ENDED JUNE 30, 2000
(In millions, except share data)
<TABLE>
<CAPTION>
MCM
DDi Electronics Automata
Twelve July 1, Twelve
Months Initial DDi 1999 MCM DDi & MCM Months
Ended Public Pro Forma Through DDi & MCM Electronics Electronics Ended Automata
June 30, Offering June 30, April 14, Electronics Acquisition Pro Forma July 1, Acquisition
2000 Adjustments 2000 2000 (a) Combined Adjustments Combined 2000 Adjustments
-------- ----------- --------- ----------- ----------- ----------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales........ $338.4 $ -- $338.4 $48.7 $387.1 $ -- $387.1 $ 73.5 $(17.9)(h)
Cost of goods
sold............. 225.5 -- 225.5 35.0 260.5 -- 260.5 69.4 (16.1)(h)
------ ----- ------ ----- ------ ----- ------ ------ ------
Gross profit.... 112.9 -- 112.9 13.7 126.6 -- 126.6 4.1 (1.8)
Operating
expenses:
Sales and
marketing....... 28.3 (0.5)(b) 27.8 1.3 29.1 -- 29.1 4.0 (0.6)(h)
General and
administrative.. 18.2 -- 18.2 6.5 24.7 -- 24.7 7.0 (2.7)(h)
Amortization of
intangibles..... 21.4 -- 21.4 1.3 22.7 1.4 (e) 24.1 0.2 (0.2)(h)
0.2 (i)
Restructuring
and other
related
charges......... 7.0 -- 7.0 -- 7.0 -- 7.0 14.8 (14.8)(h)
------ ----- ------ ----- ------ ----- ------ ------ ------
Net income (loss)
from continuing
operations....... 38.0 0.5 38.5 4.6 43.1 (1.4) 41.7 (21.9) 16.3
Interest expense
(net)............ 46.1 (8.6)(c) 37.5 3.0 40.5 (1.2)(f) 39.3 8.8 (1.3)(h)(j)
(5.9)(j)
------ ----- ------ ----- ------ ----- ------ ------ ------
Net income (loss)
from continuing
operations before
provision for
income taxes and
extraordinary
loss............. (8.1) 9.1 1.0 1.6 2.6 (0.2) 2.4 (30.7) 23.5
Income tax
benefit
(expense)........ 1.3 (3.7)(d) (2.4) (1.0) (3.4) (0.4)(g) (3.8) 0.4 0.2 (h)
2.5 (k)
------ ----- ------ ----- ------ ----- ------ ------ ------
Net income (loss)
from continuing
operations before
extraordinary
loss............. $ (6.8) $ 5.4 $ (1.4) $ 0.6 $ (0.8) $(0.6) $ (1.4) $(30.3) $ 26.2
====== ===== ====== ===== ====== ===== ====== ====== ======
Pro forma loss per share of
common and common
equivalent stock (basic and
diluted):
Pro forma weighted average
number of shares of common
and common equivalent stock
outstanding (in thousands)
(basic and diluted):
<CAPTION>
Post
Offering
Pro
Pro Forma Offering Forma
Combined (n) Adjustments Combined
------------ ------------ --------
<S> <C> <C> <C>
Net sales........ $442.7 $ -- $442.7
Cost of goods
sold............. 313.8 -- 313.8
------------ ------------ --------
Gross profit.... 128.9 -- 128.9
Operating
expenses:
Sales and
marketing....... 32.5 -- 32.5
General and
administrative.. 29.0 -- 29.0
Amortization of
intangibles..... 24.3 -- 24.3
Restructuring
and other
related
charges......... 7.0 -- 7.0
------------ ------------ --------
Net income (loss)
from continuing
operations....... 36.1 -- 36.1
Interest expense
(net)............ 40.9 (6.1)(l) 34.8
------------ ------------ --------
Net income (loss)
from continuing
operations before
provision for
income taxes and
extraordinary
loss............. (4.8) 6.1 1.3
Income tax
benefit
(expense)........ (0.7) (2.5)(m) (3.2)
------------ ------------ --------
Net income (loss)
from continuing
operations before
extraordinary
loss............. $ (5.5) $ 3.6 $ (1.9)
============ ============ ========
Pro forma loss per share of
common and common
equivalent stock (basic and
diluted): $(0.04)
========
Pro forma weighted average
number of shares of common
and common equivalent stock
outstanding (in thousands)
(basic and diluted): 42,629
========
</TABLE>
----
(1) Represents the period from July 1, 1999 through April 14, 2000. Included
in this period is the nine-month period beginning on July 1, 1999 and
ending March 31, 2000 (MCM Electronics' second, third and fourth
quarters). This nine-month period is also included in MCM Electronics'
year ended March 31, 2000 data presented as part of the Unaudited Pro
Forma Consolidated Statement of Operations for the year ended December 31,
1999.
(2) Represents the period from July 4, 1999 through July 1, 2000. Included in
this period is the three-month period beginning July 4, 1999 and ending
October 2, 1999 (Automata's fourth fiscal quarter). This three-month
period is also included in Automata's year ended October 2, 1999 data
presented as part of the Unaudited Pro Forma Consolidated Statement of
Operations for the year ended December 31, 1999.
23
<PAGE>
DDi CORP.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(In millions)
(a) Represents historical MCM Electronics financial data for each respective
period after the following:
. conversion from U.K. GAAP to U.S. GAAP;
. conversion to U.S. dollars utilizing an average monthly exchange rate of
$1.6114 to (Pounds)1.00;
. pro forma interest and related tax benefit recorded to reflect MCM
Electronics' management-led buyout of Symonds Limited as if it had occurred
as of January 1, 1999; and
. pro forma elimination of seller advisory costs related to the management-led
buyout of Symonds Limited as if it had occurred as of January 1, 1999.
MCM Electronics (the successor) completed a management-led buyout on July 5,
1999 of Symonds Limited (the predecessor). The periods ended prior to June 30,
1999 (as a proxy for the period ended July 5, 1999), as presented below,
represent the operations as presented by the predecessor. All periods ended
post June 30, 1999 represent the operations as presented by the successor.
The following table reconciles MCM Electronics' net income (loss) in
accordance with U.K. GAAP to U.S. GAAP.
<TABLE>
<CAPTION>
Predecessor Successor Combined
-------------------------- ----------------------------------------------------- ------------
Three Months Six Months Nine Months Three Months April 1, January 1,
Ended Ended Ended Ended Through Through Year Ended
June 30, June 30, March 31, March 31, April 14, April 14, March 31,
1999 1999 2000 2000 2000 2000 2000
------------ ------------ ------------ ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net income (loss) in
accordance with U.K.
GAAP.................. (Pounds) 0.2 (Pounds)(5.9) (Pounds)(0.8) (Pounds) (0.8) (Pounds)0.1 (Pounds)(0.7) (Pounds)(0.6)
Discontinued
operations:
Operating loss from
discontinued
operations........... -- 0.8 -- -- -- -- --
Loss on disposal of a
business.............. -- 2.4 -- -- -- -- --
------------ ------------ ------------ ------------- ----------- ------------ ------------
Net income (loss) from
continuing operations
in accordance with
U.K. GAAP............. (Pounds) 0.2 (Pounds)(2.7) (Pounds)(0.8) (Pounds) (0.8) (Pounds)0.1 (Pounds)(0.7) (Pounds)(0.6)
U.S. GAAP adjustments:
Amortization of
goodwill............. (0.2) (0.3) -- -- -- -- (0.2)
Provision for
termination
of a business......... (0.6) -- -- -- -- -- (0.6)
Interest expense...... -- -- 1.4 1.1 -- 1.1 1.4
Tax expense........... 0.2 -- (0.3) (0.2) -- (0.2) (0.1)
------------ ------------ ------------ ------------- ----------- ------------ ------------
Net income (loss) from
continuing operations
in accordance with
U.S. GAAP............. (Pounds)(0.4) (Pounds)(3.0) (Pounds) 0.3 (Pounds) 0.1 (Pounds)0.1 (Pounds) 0.2 (Pounds)(0.1)
Pro forma interest
related to management
buyout (net of income
tax).................. (0.5) (1.0) -- -- -- -- (0.5)
Pro forma elimination
of seller advisory
costs related to the
management-led
buyout................ 0.5 0.5 -- -- -- -- 0.5
------------ ------------ ------------ ------------- ----------- ------------ ------------
(Pounds)(0.4) (Pounds)(3.5) (Pounds) 0.3 (Pounds) 0.1 (Pounds)0.1 (Pounds) 0.2 (Pounds)(0.1)
Foreign currency
exchange rate: 1.6114 1.6114 1.6114 1.6114 1.6114 1.6114 1.6114
------------ ------------ ------------ ------------- ----------- ------------ ------------
Net income (loss) from
continuing operations
in accordance with
U.S. GAAP............. $ (0.6) $ (5.6) $ 0.5 $ 0.2 $ 0.1 $ 0.3 $ (0.1)
============ ============ ============ ============= =========== ============ ============
</TABLE>
24
<PAGE>
(b) Represents the elimination of management fees incurred in connection with
our management agreement with Bain Capital, which was terminated in connection
with the initial public offering.
(c) Reflects the decrease in interest expense in connection with the use of net
proceeds from our initial public offering to repay outstanding debt as follows:
<TABLE>
<CAPTION>
Six Months Six Months Latest Twelve
Year Ended Ended Ended Months Ended
December 31, June 30, June 30, June 30,
1999 1999 2000 (1) 2000 (2)
------------ ---------- ---------- -------------
<S> <C> <C> <C> <C>
DDi historical interest
expense................... $ 46.7 $23.3 $22.7 $46.1
Initial Public Offering:
Elimination of
approximately 40% of the
historical interest on
the Dynamic Details
senior credit facility.. (7.6) (3.7) (2.2) (6.1)
Elimination of
approximately 50% of the
historical interest on
the DDi Intermediate
senior discount notes... (2.7) (1.4) (0.8) (2.1)
Elimination of
amortization of debt
issuance costs.......... (0.5) (0.3) (0.2) (0.4)
------ ----- ----- -----
Net decrease in historical
interest expense from the
initial public offering... (10.8) (5.4) (3.2) (8.6)
------ ----- ----- -----
Pro forma interest expense
after the initial public
offering.................. $ 35.9 $17.9 $19.5 $37.5
====== ===== ===== =====
</TABLE>
--------
(1) Represents pro forma interest expense adjustment for the period from
January 1, 2000 through April 14, 2000, the date of our initial public
offering.
(2) Represents pro forma interest expense adjustment for the period from
July 1, 1999 through April 14, 2000, the date of our initial public
offering.
(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 resulting from the excess of
the purchase price over the net book value of MCM Electronics, less the
amortization of goodwill 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. We are in the
process of evaluating MCM Electronics' intangible assets to finalize the
allocation of the total purchase price. Accordingly, the final allocations and
resulting increases in amortization expense will be different from the amounts
reflected herein and such differences may be significant.
25
<PAGE>
(f) Reflects the decrease in interest expense in connection with the use of the
initial public offering proceeds to repay the MCM Electronics' investor loans
as follows:
<TABLE>
<CAPTION>
Six Months January 1, July 1,
Year Ended Ended Through Through
March 31, June 30, April 14, April 14,
2000 1999 2000 2000
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Pro forma interest expense after
the initial public offering..... $35.9 $17.9 $19.5 $37.5
MCM Electronics' interest expense
additions:
MCM Electronics' historical
interest expense.............. 3.1 0.2 1.1 3.0
MCM Electronics' pro forma
interest expense related to
the management buyout......... 1.1 2.1 -- --
----- ----- ----- -----
4.2 2.3 1.1 3.0
MCM Electronics' acquisition
adjustments:
Elimination of historical
interest expense on MCM
Electronics' investor loans... (1.3) -- (0.4) (1.2)
Elimination of pro forma
interest expense on the MCM
Electronics' investor loans... (0.4) (0.9) -- --
----- ----- ----- -----
(1.7) (0.9) (0.4) (1.2)
----- ----- ----- -----
Pro forma interest expense after
the initial public offering and
acquisition of MCM Electronics.. $38.4 $19.3 $20.2 $39.3
===== ===== ===== =====
</TABLE>
(g) Represents the income tax adjustment required to result in a pro forma
income tax provision based on the 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 transaction, which amounts are not deductible for income tax
purposes.
(h) On August 4, 2000, we completed the acquisition of substantially all of the
U.S. assets of Automata. We purchased these assets in a sale approved by the
United States Bankruptcy Court for the District of Delaware following
Automata's petition under Chapter 11 filed in June 2000. As part of the asset
purchase agreement, the stock of Automata's subsidiaries located in the United
Kingdom was excluded from the transaction. The pro forma adjustment represents
the exclusion of the revenues and expenses generated by these subsidiaries.
(i) Represents the amortization of the goodwill resulting from the excess of
the purchase price over the net book value of Automata. 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
Automata based on their relative fair values as of the closing date of the
Automata acquisition. We are in the process of evaluating its intangible assets
to finalize the allocation of the total purchase price. Accordingly, the final
allocations and resulting increases in amortization expense could be different
from the amounts reflected herein and such differences may be significant.
26
<PAGE>
(j) Reflects the net decrease in interest expense in connection with the
acquisition of Automata as follows:
<TABLE>
<CAPTION>
Year Ended Six Months Six Months Latest Twelve
October 2, Ended July Ended July Months Ended
1999 3, 1999 1, 2000 July 1, 2000
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Pro forma interest expense
after the initial public
offering and the MCM
Electronics' acquisition.. $38.4 $19.3 $20.2 $39.3
Automata historical
interest expense, net..... 8.5 3.7 3.7 8.8
Automata acquisition
adjustments:
Elimination of Automata
historical interest
expense related to the
UK operations........... (2.0) (1.1) (0.2) (1.3)
Elimination of Automata
historical interest
expense related to the
US operations........... (6.7) (2.6) (3.5) (7.5)
Increase in pro forma
interest related to the
$18.3 increase in the
Dynamic Details
revolving credit
facility (8.64% annual
interest) .............. 1.6 0.8 0.8 1.6
----- ----- ----- -----
Net decrease in interest
expense................... (7.1) (2.9) (2.9) (7.2)
----- ----- ----- -----
Pro forma interest expense
after the initial public
offering, the MCM
Electronics' acquisition
and the Automata
acquisition............... $39.8 $20.1 $21.0 $40.9
===== ===== ===== =====
</TABLE>
(k) Represents the income tax adjustment required to result in a pro forma
income tax provision based on Automata's historical tax provision using
historical amounts and the direct tax effects of the pro forma transactions
described herein to arrive at our estimated 40% effective tax rate.
27
<PAGE>
(l) Reflects the decrease in interest expense in connection with the amendment
of the senior credit facility and the use of net proceeds from this offering to
repay outstanding debt as follows:
<TABLE>
<CAPTION>
Six Months Six Months
Year Ended Ended Ended Latest Twelve
December 31, June 30, June 30, Months Ended
1999 1999 2000 June 30, 2000
------------ ---------- ---------- -------------
<S> <C> <C> <C> <C>
Pro forma interest expense
after the initial public
offering, the MCM
Electronics' acquisition,
and the Automata
acquisition ............. $39.8 $20.1 $21.0 $40.9
Increase in pro forma
interest and amortization
of debt issuance costs
related to the amendment
of the senior credit
facility................. 0.9 0.4 0.4 0.9
This offering:
Elimination of a portion
of historical interest
on the DDi Capital
senior discount notes.. (3.8) (1.9) (2.2) (4.1)
Elimination of the
remaining historical
interest on the DDi
Intermediate senior
discount notes......... (2.5) (1.1) (1.4) (2.8)
Elimination of
amortization of debt
issuance costs......... (0.1) -- -- (0.1)
----- ----- ----- -----
Net decrease in historical
interest expense from
this offering, net of the
increase resulting from
the amendment to the
senior credit facility... (5.5) (2.6) (3.2) (6.1)
----- ----- ----- -----
Pro forma interest expense
after the initial public
offering, the MCM
Electronics' acquisition,
the Automata acquisition,
the senior credit
facility amendment, and
this offering............ $34.3 $17.5 $17.8 $34.8
===== ===== ===== =====
</TABLE>
We have assumed for purposes of this presentation that we will repurchase
$36.7 of our DDi Capital senior discount notes at the accreted value on October
16, 2000. However, we may not purchase all of these notes on October 16, 2000
and may not be able to repurchase these notes at the accreted value on the open
market. See "Use of Proceeds" and "Description of Indebtedness."
(m) 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.
28
<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. The selected historical
financial data as of June 30, 2000 and for the six-month periods ended June 30,
1999 and 2000 have been derived from our unaudited consolidated financial
statements included elsewhere in this prospectus, which, in the opinion of
management, reflect all adjustments (consisting of normal recurring
adjustments) necessary for the fair presentation of the financial condition and
results of operations for such periods. 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>
Six Months Ended
Year Ended December 31, June 30,
---------------------------------------------------------- ----------------------
1995 1996 1997 1998 1999 1999 2000
---------- ---------- ---------- ---------- ---------- ---------- ----------
(in millions, except share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Net sales............... $ 59.4 $ 67.5 $ 78.8 $ 174.9 $ 292.5 $ 130.9 $ 176.8
Cost of goods sold...... 25.2 30.5 38.7 119.6 202.4 92.4 115.5
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit............ 34.2 37.0 40.1 55.3 90.1 38.5 61.3
Operating expenses:
Sales and marketing... 5.3 6.0 7.3 12.8 23.6 10.1 14.8
General and
administration....... 1.8 1.9 2.1 8.4 15.3 7.1 10.0
Amortization of
intangibles.......... -- -- -- 10.9 22.3 11.8 10.9
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 9.5 25.6
Interest expense, net... 0.3 9.4 25.2 37.4 46.7 23.3 22.7
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before
taxes and extraordinary
loss................... 26.4 18.6 (27.9) (53.2) (24.8) (13.8) 2.9
Income tax benefit
(expense).............. (0.4) (6.2) 10.9 3.5 7.4 3.6 (2.5)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before
extraordinary loss..... 26.0 12.4 (17.0) (49.7) (17.4) (10.2) 0.4
Extraordinary loss...... -- -- (1.6) (2.4) -- -- (2.5)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)....... $ 26.0 $ 12.4 $ (18.6) $ (52.1) $ (17.4) $ (10.2) $ (2.1)
========== ========== ========== ========== ========== ========== ==========
Net loss allocable to
common stock........... -- -- $ (19.7) $ (58.4) $ (31.5) $ (17.1) $ (6.5)
Net loss per share of
common stock (basic and
diluted)............... -- -- $ (3.71) $ (7.68) $ (3.21) $ (1.75) $ (0.29)
Weighted average shares
outstanding (basic and
diluted)............... -- -- 5,299,600 7,607,024 9,831,042 9,774,179 22,197,156
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 $ 7.1 $ 8.5
Amortization of deferred
financing costs........ -- 0.8 1.4 1.8 2.1 1.0 1.0
Capital expenditures.... 2.9 10.2 6.6 18.0 18.2 8.1 10.7
Supplemental Data:
Adjusted EBITDA(e)...... $ 28.2 $ 31.2 $ 33.3 $ 44.1 $ 66.7 $ 29.0 $ 45.5
Net cash from operating
activities............. 26.1 12.2 9.1 16.7 24.8 13.4 11.8
Net cash used in
investing activities... (2.9) (3.6) (44.9) (194.8) (18.6) (8.3) (12.9)
Net cash from (used in)
financing activities... (26.4) (8.9) 41.1 174.9 (7.7) (3.6) 5.1
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
December 31, June 30,
---------------------------------------- --------
1995 1996 1997 1998 1999 2000
Consolidated Balance Sheet Data: ----- ------ ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents... $ 0.5 $ 0.2 $ 5.4 $ 2.1 $ 0.6 $ 4.1
Working capital............. (2.3) (3.5) 23.6 15.3 19.1 35.0
Total assets................ 13.1 27.5 108.9 365.0 354.3 466.7
Total debt, including
current maturities......... 2.0 94.1 273.5 466.9 476.7 390.4
Stockholders' equity
(deficit).................. 2.5 (72.7) (191.2) (169.8) (187.1) (5.8)
</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>
Six Months
Year Ended Ended
December 31, June 30,
------------------------------ -----------
1995 1996 1997 1998 1999 1999 2000
----- ----- ----- ----- ----- ----- -----
(in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
EBITDA.......................... $27.8 $30.1 $(0.1) $43.3 $58.6 $28.4 $45.0
Former CEO compensation(1) ..... 0.4 1.1 2.1 -- -- -- --
Management fee(2)............... -- -- -- -- 1.1 0.6 --
Executive severance(3).......... -- -- -- 0.8 -- -- --
Stock compensation and
bonuses(4)..................... -- -- 31.3 -- -- -- --
Restructuring and related
charges(5)..................... -- -- -- -- 7.0 -- 0.5
----- ----- ----- ----- ----- ----- -----
Adjusted EBITDA................. $28.2 $31.2 $33.3 $44.1 $66.7 $29.0 $45.5
===== ===== ===== ===== ===== ===== =====
</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 was terminated in connection with our
initial public offering.
(3) Reflects one-time severance payments to two of our executives who were
terminated as a result of redundancies created by the DCI merger.
(4) Reflects elimination of the charge for stock compensation and related
bonuses recorded for vested stock options exchanged in conjunction
with the recapitalization.
(5) Reflects elimination of the charges recorded for the consolidation and
closure of our Colorado facility. See note (a) above. The charge of
$0.5 incurred in the six months ended June 30, 2000 was recorded in
cost of goods sold.
30
<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
subsidiaries, Dynamic Details, Incorporated and DDi Europe Limited, 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
72% from $34.8 million for the six months ended June 30, 1997 to $176.8 million
for the six months ended June 30, 2000, inclusive of the growth attributable to
the acquisition of Colorado Springs Circuits, Inc., or NTI, in 1997, the merger
with Dynamic Circuits, Inc., or DCI, in 1998 and the acquisition of MCM
Electronics in 2000. 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. Since
December 31, 1999, our average price per printed circuit board panel has
increased by 27%.
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. Our net interest expense decreased slightly due to the repayment of a
portion of our indebtedness using the net proceeds of our initial public
offering in April 2000. Beginning in 1998, our results of operations have also
been impacted by the amortization of intangibles resulting from the NTI
acquisition and the DCI merger. 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.
For the six months ended June 30, 2000, our income before extraordinary loss of
$0.4 million reflected $22.7 million of net interest expense and $10.9 million
of amortization of intangibles. 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.
31
<PAGE>
Company History and Significant Transactions
Our predecessor corporation was organized in 1978. In 1991, we installed new
management, headed by Bruce D. McMaster, and began to focus primarily on time-
critical electronics manufacturing services.
Recapitalization
In October 1997, we were recapitalized by investors led by Bain Capital,
Celerity Partners and Chase Capital Partners, which collectively invested $62.4
million. After completing the recapitalization, investment funds associated
with these entities owned stock representing approximately 72.5% of 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 25 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.
By combining our Texas and Colorado operations, we eliminated lower-margin
product lines and decreased our overhead costs, and we have gained efficiency
through better capacity utilization and streamlined management. We completed
the consolidation of the operations on March 31, 2000.
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.
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.
32
<PAGE>
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.
Initial Public Offering
On April 14, 2000, we completed the initial public offering of our common
stock. We used net proceeds of approximately $156.6 million to repay a portion
of our debt and finance a portion of the MCM Electronics acquisition.
MCM Electronics Acquisition
On April 14, 2000, we acquired MCM Electronics Limited, headquartered in the
United Kingdom, for total consideration of approximately $84 million in our
common stock and cash, including repayment of some of MCM Electronics' debt and
the assumption of the remainder of its debt. MCM Electronics, which has been
combined with our other European operations and renamed DDi Europe Limited,
focuses on the technologically advanced, time-critical segment of the
electronics manufacturing industry. See "Unaudited Pro Forma Consolidated
Financial Data."
We accounted for the MCM Electronics acquisition under the purchase method
of accounting. The total purchase price will be allocated to the acquired
assets and assumed liabilities based upon their relative fair values at the
date of acquisition. We are in the process of evaluating MCM Electronics'
intangible assets to finalize the allocation of the total purchase price. We
intend to allocate a portion of the purchase price to acquired in-process
research and development, developed technologies, customer
relationships/tradenames and assembled workforce. These intangibles will be
amortized over their estimated useful lives. The residual value will be
allocated to goodwill and will be amortized over its estimated useful life of
20 years.
Based upon the status of our valuation efforts, a final valuation of the
intangible assets has not been reflected in the accompanying consolidated
financial statements. The excess of the purchase price over the fair value of
MCM Electronics' tangible net assets is currently reflected as goodwill and is
being amortized over its estimated useful life of 20 years.
Automata Acquisition
On August 4, 2000, we acquired substantially all the U.S. assets of Automata
International, Inc., a Virginia-based complex printed circuit boards
manufacturer, for approximately $19.5 million in cash, net of fees and
expenses. For the twelve months ended July 1, 2000, these assets generated
revenues of $55.6 million and an operating loss of $5.4 million. The
acquisition provides additional capacity for high density, high layer count
printed circuit boards and gives us a significant presence on the east coast.
Since completing the acquisition, we have successfully increased average
selling prices and have streamlined its operations to increase yields from
approximately 50% to almost 90% per panel. In addition, we have shifted
products from our other facilities to the 100,000 square foot Virginia facility
to increase volume and free up capacity at our other facilities. As a result of
the immediate success we have experienced in integrating the operations, we
believe that this facility has significant profit potential and expect it to
positively contribute to our earnings in the third quarter of 2000.
Under purchase accounting, the total purchase price will be allocated to the
acquired assets on Automata based on their relative fair values as of the
closing date. See "Prospectus Summary--Recent Developments" and "Unaudited Pro
Forma Consolidated Financial Data."
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<PAGE>
Acquisition of Golden Manufacturing
On September 15, 2000, we acquired substantially all of the assets of Golden
Manufacturing, Inc., a Texas-based manufacturer of engineered metal enclosures
and value-added assembly services to communications and electronics original
equipment manufacturers, for approximately $14.9 million in cash, net of fees
and expenses. For the twelve months ended December 31, 1999, on an unaudited
basis, these assets generated approximately $13.5 million in revenues and an
operating profit of $0.4 million. The acquisition, which provides us with over
70,000 square feet of production capacity, will complement our existing Texas
facilities by providing metal enclosure assembly capabilities for our
customers.
Results of Operations
The following table sets forth income statement data expressed as a
percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
--------------------------- -----------------
1997 1998 1999 1999 2000
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net sales.................... 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold........... 49.1 68.4 69.2 70.6 65.3
------- ------- ------- ------- -------
Gross profit................. 50.9 31.6 30.8 29.4 34.7
Operating expenses:
Sales and marketing........ 9.2 7.3 8.1 7.7 8.4
General and
administration............ 2.7 4.8 5.2 5.4 5.6
Amortization of
intangibles............... -- 6.2 7.6 9.0 6.2
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 7.3 14.5
Interest expense (net)....... 32.0 21.4 16.0 17.8 12.8
------- ------- ------- ------- -------
Income (loss) before income
taxes and extraordinary
loss........................ (35.4) (30.4) (8.5) (10.5) 1.7
Income tax benefit
(expense)................... 13.8 2.0 2.5 2.7 (1.4)
Extraordinary loss, net of
income tax benefit.......... (2.0) (1.4) -- -- (1.4)
------- ------- ------- ------- -------
Net loss..................... (23.6)% (29.8)% (6.0)% (7.8)% (1.1)%
======= ======= ======= ======= =======
</TABLE>
Six Months Ended June 30, 2000 Compared to the Six Months Ended June 30, 1999
Net sales increased $45.9 million (35%) to $176.8 million for the six months
ended June 30, 2000, from $130.9 million for the same period in 1999. Of this
increase, $31.3 million resulted from the production of more complex and larger
panels, which increased the average sales price per panel. The balance resulted
from the acquisition of MCM Electronics in April 2000. On a pro forma basis
giving effect to the MCM Electronics acquisition as if it had occurred on
January 1, 1999, our sales increased $36.6 million (23%) for the six months
ended June 30, 2000 from $161.0 million in the same period in 1999.
Gross profit increased $22.8 million (59%) to $61.3 million for the six
months ended June 30, 2000, from $38.5 million for the same period in 1999. The
increase resulted from the acquisition of MCM Electronics, which contributed
$4.5 million to the increase. The balance resulted from the higher level of
sales and an improvement in manufacturing yields in our pre-production
operations.
Sales and marketing expenses increased $4.7 million (47%) to $14.8 million
for the six months ended June 30, 2000, from $10.1 million for the same time
period in 1999. The increase is due to the inclusion of MCM Electronics'
results for part of the period ($0.4 million), the growth in our sales force to
accomodate
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<PAGE>
existing and anticipated near-term increases in customer demand and related
variable expenses due to our increased sales volume.
General and administrative expenses increased $2.9 million (41%) to $10.0
million for the six months ended June 30, 2000, from $7.1 million for the same
period in 1999. The increase in expenses is attributable to the inclusion of
MCM Electronics' expenses ($1.3 million), higher staffing costs and other back-
office expenditures to support our growth, offset by the elimination of
management fees in connection with the termination of a management agreement at
the time of our initial public offering.
Amortization of intangibles decreased $0.9 million (8%) to $10.9 million for
the six months ended June 30, 2000, from $11.8 million for the same period in
1999. The decrease is due to the use of accelerated amortization methods with
regard to certain identifiable intangibles ($1.7 million), partially offset by
amortization attributable to the acquisition of MCM Electronics ($0.8 million).
Net interest expense decreased $0.6 million to $22.7 million for the six
months ended June 30, 2000, from $23.3 million for the same period in 1999. The
decrease is due to the repayment of a portion of our subsidiaries' indebtedness
in connection with our initial public offering in April 2000, offset by
increased interest expenses due to the assumption of debt in connection with
the acquisition of MCM Electronics, the impact of discount accretion on the DDi
Capital senior discount notes and an increase in interest rates applicable to
the Dynamic Details senior credit facility.
Income taxes increased $6.1 million to $2.5 million for the sixth months
ended June 30, 2000, from a tax benefit of $3.6 million for the same period in
1999. The increase reflects a higher level of taxable income earned in the
first half of 2000 and the acquisition of MCM Electronics, which generated $0.8
million in tax expense for the six months ended June 30, 2000. Provisions for
income taxes are based upon our expected effective tax rate in the respective
fiscal year.
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
35
<PAGE>
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 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
36
<PAGE>
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.
Quarterly Financial Information
The following table presents selected quarterly financial information for
each of the ten quarters ended June 30, 2000. This information is unaudited
but, in our opinion, reflects all adjustments, consisting only of normal
recurring adjustments that we consider necessary for a fair presentation of
this information in accordance with generally accepted accounting principles.
These quarterly results are not necessarily indicative of future results.
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30,
1998 1998 1998 1998 1999 1999 1999 1999 2000 2000
-------- -------- --------- -------- -------- -------- --------- -------- -------- --------
(in millions)
<S> <C> <C> <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 $75.3 $101.5
Cost of goods sold...... 16.4 16.1 41.6 45.5 42.0 50.4 57.4 52.6 49.0 66.5
----- ----- ----- ----- ----- ----- ----- ----- ----- ------
Gross profit............ $11.9 $10.2 $19.6 $13.6 $17.2 $21.3 $25.5 $26.1 $26.3 $ 35.0
===== ===== ===== ===== ===== ===== ===== ===== ===== ======
</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, or the MCM Electronics acquisition, which closed on April 14, 2000. 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.
37
<PAGE>
Liquidity and Capital Resources
As of June 30, 2000, cash and cash equivalents were $4.1 million, compared
to $0.6 million as of December 31, 1999. 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. Net cash provided by operating activities for the six months
ended June 30, 2000 and 1999 was $11.8 million and $13.4 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. Net cash used in investing activities for the six months ended
June 30, 2000 and 1999 was $12.9 million and $8.3 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, $178.7 million used in the
merger with DCI in 1998 and $2.3 million used in the acquisition of MCM
Electronics (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 and $10.7 million and $8.1 million for the
six months ended June 30, 2000 and 1999, 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. Net cash provided by (used in) financing activities for
the six months ended June 30, 2000 and 1999 was $5.1 million and $(3.6)
million. 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.
As of June 30, 2000, we had long-term borrowings of approximately $378.7
million. Our principal U.S. operating subsidiary, Dynamic Details Incorporated,
has a $45.0 million revolving credit facility. As of September 30, 2000, we had
borrowings of $9.5 million outstanding under the revolving credit facility and
had $0.7 million reserved against the facility for a letter of credit.
The minimum principal payment obligation under the Dynamic Details senior
credit facility is $1.9 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. We intend to amend the terms of the
Dynamic Details senior credit facility prior to this offering in order to
permit the use of proceeds of this offering.
The Dynamic Details senior credit facility, the Dynamic Details senior
subordinated notes, the DDi Capital senior discount notes, the DDi Intermediate
senior discount notes and the DDi Europe Facilities Agreement are described
below in "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,
38
<PAGE>
although no assurance can be given in this regard. 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 Dynamic Details senior subordinated notes and to extend or
refinance the Dynamic Details senior credit facility or the DDi Europe
Facilities Agreement 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 December 31, 2001. During this period, our maximum
annual rate is 5.65% for a given month through December 31, 2000 and is 5.75%
for a given month from January 1, 2001 through December 31, 2001, unless one-
month LIBOR for that month equals or exceeds 7.00%, in which case we pay 7.00%
for that month. From January 1, 2002 through the scheduled maturity of the
senior term facility in 2005, 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
June 30, 2000, one-month LIBOR was 6.64%. If one-month LIBOR increased by 10%
to 7.30%, interest expense related to the term loan facility portion would
increase by approximately $1.0 million over the twelve months ending June 30,
2001. Since the increased rate would exceed 7.00%, that increase in interest
expense would be offset by approximately $0.4 million in payments we would be
entitled to receive under the Dynamic Details swap agreement.
The Dynamic Details revolving credit facility bears interest at 2.00% per
annum plus the applicable LIBOR or 1.25% per annum plus the federal reserve
reported overnight funds rate plus 0.5% per annum. We intend to amend the terms
of the Dynamic Details senior credit facility prior to this offering. After the
completion of this offering, the Dynamic Details revolving credit facility will
bear interest at 2.25% per annum plus the applicable LIBOR or 1.25% per annum
plus the federal reserve reported overnight funds rate plus 0.5% per annum. As
of September 30, 2000, we had an outstanding balance of $9.5 million under our
Dynamic Details revolving credit facility. Based upon our anticipated
utilization of our revolving credit facility through the year ending December
31, 2000, a 10% change in interest rates as of June 30, 2000 is not expected to
materially affect our interest expense to be incurred on this facility.
Under the terms of our current swap agreements, we pay a maximum annual rate
of interest equal to 6.92% applied to fixed amounts of debt under the DDi
Europe swap agreement through September 2002. As of June 30, 2000, the swap
covers approximately 80% of the outstanding debt under the DDi Europe
facilities agreement. If we were to borrow the full amount available on the DDi
Europe facilities agreement, the fixed amounts of debt per the swap agreement
would cover approximately 70% of the outstanding debt. The DDi Europe
facilities agreement bears interest based on three-month LIBOR. As of June 30,
2000, three-month LIBOR was 6.77%. If three-month LIBOR increased by 10% to
7.45%, interest expense related to the term loan facility would increase by
approximately $0.2 million. That increase in interest expense, however, would
be offset by approximately $0.1 million in payments we would be entitled to
receive under the DDi Europe swap agreement.
39
<PAGE>
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.
Foreign Currency Exchange Risk
With our acquisition of MCM Electronics, we now have operations in the
United Kingdom. The sales and expenses and financial results of those
operations are denominated in British pounds. We have foreign currency
translation risk equal to our net investment in those operations. However,
since nearly all of our sales are denominated in each operation's local
currency, we have relatively little exposure to foreign currency transaction
risk with respect to sales made. Therefore, the effect of an immediate 10%
change in exchange rates would not have an impact on our operating results
over the 12 month period ending June 30, 2001. We do not use forward exchange
contracts to hedge exposures to foreign currency denominated transactions and
do not utilize any other derivative financial instruments for trading or
speculative purposes.
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 June 30, 2000, our consolidated balance sheet reflected $265.2
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. For the six months ended June 30, 2000, we reported
comprehensive loss which consisted of net loss plus foreign currency
translation adjustment of $1.2 million.
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
40
<PAGE>
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.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Hedging Activities--an amendment of FASB Statement No. 133."
SFAS No. 138 addresses a limited number of issues causing implementation
difficulties for SFAS No. 133. SFAS No. 138 is required to be adopted
concurrently with SFAS No. 133 and is therefore effective for us beginning with
our fiscal quarter ending March 31, 2001.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"),"Revenue Recognition," which
outlines the basic criteria that must be met to recognize revenue and provides
guidance for presentation of revenue and for disclosure related to revenue
recognition policies in financial statements filed with the SEC. We believe
that adopting SAB 101 will not have a material impact on our financial position
or results of operations.
In March 2000, the FASB issued Interpretation No. 44, or FIN 44, "Accounting
for Certain Transactions Involving Stock Compensation," which is an
interpretation of Accounting Principal Board No. 25. This interpretation
clarifies:
. the definition of employee for purposes of applying Opinion 25, which
deals with stock compensation issues;
. the criteria for determining whether a plan qualifies as a
noncompensatory plan;
. the accounting consequence of various modifications to the terms of
previously fixed stock options or awards; and
. the accounting for an exchange of stock compensation awards in a
business combination
This interpretation is effective July 1, 2000, but certain conclusions in
this interpretation cover specific events that occur after either December 15,
1998, or January 12, 2000. To the extent that this interpretation covers events
occurring during the period after December 15, 1998, or January 12, 2000, but
before the effective date of July 1, 2000, the effects of applying this
interpretation are recognized on a prospective basis from July 1, 2000. We
believe that the adoption of FIN 44 will not have a material impact on our
financial statement position or results of operations.
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<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
primary operating subsidiaries, Dynamic Details, Incorporated and DDi Europe
Limited, 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.
Our predecessor corporation was 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 April 14, 2000, we closed our initial public offering and acquired MCM
Electronics Limited, based in the United Kingdom. MCM Electronics has been
combined with our other European operations and does business as DDi Europe
Limited. On August 4, 2000, we acquired substantially all of the assets of
Automata International, Inc., located in northern Virginia. On September 15,
2000, we acquired substantially all the assets of Golden Manufacturing, Inc.,
located in Garland, Texas. 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 billion in 2003. Industry growth is fueled
by increases in the rate of outsourcing combined with steady, underlying growth
in the electronics equipment industry. In 1999, approximately 19.5% of the cost
of goods sold by electronics OEMs was attributable to components and products
outsourced to EMS providers. Technology Forecasters 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
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<PAGE>
manufacturing expertise, advanced technology and capital investment of EMS
providers, to achieve overall cost benefits and to enhance their competitive
position by:
. reducing time to market and time to volume production;
. reducing operating costs and invested capital;
. improving supply chain management;
. focusing their resources on core competencies;
. accessing advanced manufacturing capabilities and process technologies;
and
. improving access to global markets.
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 Technology 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 100 customers during the six months ended June
30, 2000.
. 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.
Assuming the over-allotment option is not exercised, our executive
officers will beneficially own approximately 9% of our common stock
outstanding after this offering.
We believe that these attributes allow us to consistently meet and exceed
our customers' expectations and that, as a result, we will continue to attract
leading original equipment manufacturers and other providers of electronics
manufacturing services as customers.
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<PAGE>
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, 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 59% of our net sales for the six months ended June 30, 2000.
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
serve a growing number of European customers from DDi Europe's four U.K.
facilities. We have a European sales office based in London supporting our
growing European sales effort. 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.
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<PAGE>
We have completed four acquisitions and a merger since 1997, including our
recent acquisitions of MCM Electronics, Automata and Golden Manufacturing. 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.
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 customers representing a
wide range of end-user markets used our services in 1999. Since January 1, 2000
we have
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experienced a net increase of approximately 500 customers, including 400
customers added through our acquisition of MCM Electronics. Our customers
principally consist of leading communications and networking equipment and
computer companies, as well as medical, automotive, industrial and aerospace
equipment manufacturers. During the six months ended June 30, 2000, sales to
our largest customer, Alcatel, accounted for less than 9% of our net sales, and
sales to our ten largest customers accounted for less than 39% of our net
sales. We have been successful at retaining customers and have worked with our
three largest customers since 1991.
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 and for the six months ended June 30,
2000.
<TABLE>
<CAPTION>
Year Ended
December 31, Six Months
---------------- Ended
End-User Markets 1997 1998 1999 June 30, 2000
---------------- ---- ---- ---- -------------
<S> <C> <C> <C> <C>
Communications and networking equipment....... 34% 53% 55% 59%
Computer and peripherals...................... 45 24 21 25
Medical, automotive, industrial and test
instruments.................................. 6 11 9 4
Aerospace equipment........................... 6 3 2 2
Other......................................... 9 9 13 10
--- --- --- ---
Total....................................... 100% 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
Ericsson.................. Communications equipment
IBM....................... Network servers
Intel..................... Personal computers
Marconi Communications.... Communications switching and transmission equipment,
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 approximately 300 experienced engineers, chemists and laboratory
technicians works in conjunction with our sales staff to identify specific
needs and develop innovative, high performance solutions to customer issues.
This method of product development allows customers to augment their own
internal development teams while providing us with the opportunity to gain an
in-depth understanding of our customers' businesses and enabling us to better
anticipate and serve their future needs.
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<PAGE>
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 and one-half years we have made substantial
investments in equipment and technology to meet these needs and maintain our
competitive advantage.
We believe the highly specialized equipment we use is among the most
advanced in our industry. We provide a number of advanced technologies,
including:
. Laser Direct Imaging. Laser direct imaging is a new process that allows
us to increase board density through the use of increasingly small and
accurate laser technology.
. Microvias. Microvias are small holes, or vias, generally created with
lasers employing depth control rather than mechanical drills, through
which printed circuit board layers are interconnected. Microvias
generally have diameters between .001 and .005 inches.
. Blind or Buried Vias. Blind or buried vias are small holes which
interconnect inner layers of high layer-count printed circuit boards.
. Ball Grid Arrays. A ball grid array is a method of mounting an
integrated circuit or other component to a printed circuit board. Rather
than using pins, also called leads, the component is attached with small
balls of solder at each contact. This method allows for greater
component density and is used in printed circuit boards with higher
layer counts.
. Flip Chips. Flip chips are structures that house circuits which are
interconnected without leads. They are utilized to minimize printed
circuit board surface area when compact packaging is required.
. Multichip Module-Laminates. Multichip module-laminates are a type of
printed circuit board design that allows for the placement of multiple
integrated circuits or other components in a limited surface area.
. Advanced Substrates. Advanced substrates are a recent generation of
printed circuit board materials that enable the use of ball grid arrays,
flip chips and multichip module laminates. They are used for products
requiring high-frequency transmission and have thermal properties
superior to standard materials.
We are qualified under various industry standards, including Bellcore
compliance for communications products and UL (Underwriters Laboratories)
approval for electronics products. In addition, all of our production
facilities are ISO-9002 certified. These certifications require that we meet
standards related to management, production and quality control, among others.
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
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<PAGE>
product and increases the operating speed of the system by reducing the
distance that electrical signals must travel. Increasing the density of the
circuitry in each layer is accomplished by reducing the width of the circuit
tracks and placing them closer together on the printed circuit board or
backpanel.
Interconnect products having narrow, closely spaced circuit tracks are known
as fine line products. The manufacture of complex multi-layer interconnect
products often requires the use of sophisticated circuit interconnections,
called blind or buried vias, between printed circuit board layers and adherence
to strict electrical characteristics to maintain consistent circuit
transmission speeds, referred to as controlled impedance. These technologies
require very tight lamination and etching tolerances and are especially
critical for printed circuit boards with ten or more layers.
Manufacture of printed circuit boards used in backpanel assemblies requires
specialized expertise and equipment because of the larger size of the backpanel
relative to other printed circuit boards and the increased number of holes for
component mounting. We have no patents for these proprietary techniques and
rely primarily on trade secret protection.
Accomplishing these operations in time-critical situations, as we do,
requires the attention of highly-qualified personnel. Furthermore, our
manufacturing systems are managed to maximize flexibility to accommodate widely
varying projects for different customers with minimal or no turnover time. We
seek to maximize the use of our production and manufacturing capacity through
the efficient management of time-critical production schedules.
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
Tewkesbury, England Quick-turn printed circuit boards 30,000
Sterling, Virginia Quick-turn printed circuit boards 100,000
Garland, Texas* Longer lead-time printed circuit 86,000
boards
Tolworth, England Longer lead-time printed circuit 35,000
boards
Milpitas, California Design and assembly 41,000
Dallas, Texas Assembly 49,000
Marlborough, Massachusetts Assembly 32,500
La Grange, Georgia Assembly 30,000
Calne, England Assembly 70,000
Hoddesdon, England Assembly 22,000
Garland, Texas Assembly 70,000
-------
735,500
</TABLE>
* We own this facility. All other facilities are leased.
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
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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 and 100 customers since January 1, 2000, excluding the
400 customers added through our acquisition of MCM Electronics.
We market our design, development and manufacturing services through an
internal sales force of approximately 125 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. We are
integrating the MCM Electronics sales force into our pre-existing European
staff, and we plan to continue expanding our international sales efforts.
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.
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Governmental Regulation
Our operations are subject to certain federal, state and local regulatory
requirements relating to environmental compliance and site cleanups, waste
management and health and safety matters. In particular, we are subject to
regulations promulgated by:
. the Occupational Safety and Health Administration pertaining to health
and safety in the workplace;
. the Environmental Protection Agency pertaining to the use, storage,
discharge and disposal of hazardous chemicals used in the manufacturing
processes; and
. corresponding state agencies.
To date the costs of compliance and environmental remediation have not been
material to us. Nevertheless, additional or modified requirements may be
imposed in the future. If such additional or modified requirements are imposed
on us, or if conditions requiring remediation were found to exist, we may be
required to incur substantial additional expenditures.
Employees
As of June 30, 2000, we had approximately 2,300 employees, none of whom are
represented by unions. Of these employees, approximately 1,950 were involved in
manufacturing and engineering, 125 worked in sales and marketing and 225 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 September 15, 2000, 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.................... 44 Chairman and Director
Vice President and Chief Financial
Joseph P. Gisch...................... 44 Officer
John Peters.......................... 46 Vice President, Sales and Marketing
Greg Halvorson....................... 38 Vice President, Operations
Terry L. Wright...................... 40 Vice President, Engineering
David Dominik........................ 44 Director
Edward W. Conard..................... 43 Director
Stephen G. Pagliuca.................. 45 Director
Prescott Ashe........................ 33 Director
Stephen M. Zide...................... 40 Director
Mark R. Benham....................... 49 Director
Christopher Behrens.................. 39 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 and as
a Vice President since 1997. From 1986 to 1995, Mr. Gisch was a partner at the
accounting firm of McGladrey & Pullen, LLP where he was responsible for the
audit, accounting and information systems for a variety of manufacturing
clients. Mr. Gisch was responsible for our general accounting and income tax
matters. Mr. Gisch has not been responsible for any of our audit services since
1991.
John Peters joined us in 1998 upon our merger with DCI. He has been our Vice
President, Sales and Marketing, since 1999. He was the senior vice president of
sales and marketing of our subsidiary, Dynamic Details Incorporated, Silicon
Valley from 1998 to 1999. Mr. Peters served as vice president of sales and
marketing of DCI from 1992 to 1998.
Greg Halvorson joined us in 1998 upon our merger with DCI as our Vice
President, Operations, and the Senior Vice President of Operations of our
subsidiary, Dynamic Details Incorporated, Silicon Valley. Prior to joining us,
Mr. Halvorson served as vice president of operations of DCI from 1995 to 1998.
Mr. Halvorson spent six years at Pacific Circuits as plant manager and head of
engineering before which he was manager of computer-aided manufacturing at
Sigma Circuits.
Terry L. Wright joined us in 1991 and has served as our Vice President,
Engineering since 1995. 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 Golden Gate Capital 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 is a co-founder
and managing director of Golden Gate Capital. He was principal at Bain Capital,
Inc. from June 1998 until May 2000 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
principal at Bain Capital, Inc. since September 2000. Previously he was a
managing director at Pacific Equity Partners from 1998 to 2000 and an associate
at Bain Capital, Inc. from 1997 to 1998. Prior to that he was a partner at the
law firm of Kirkland & Ellis.
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. Mr. Behrens has indicated to us that he is
contemplating resigning his directorship in the near future.
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.
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Our board is divided into three classes 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 are in the class of directors
whose term expires at the 2001 annual meeting of our stockholders. Messrs.
Behrens, McMaster and Zide are in the class of directors whose term expires at
the 2002 annual meeting of our stockholders. Messrs. Benham, Conard, and
Pagliuca are 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
Our board of directors has two primary 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. The audit committee is 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 is comprised of Messrs. Ashe, Benham, Conard
and Pagliuca.
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
Termination Agreement" and "--Other Related Party Payments."
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<PAGE>
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."
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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<PAGE>
(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 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.
(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
55
<PAGE>
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. On April
14, 2000, we granted our named executive officers options to purchase an
aggregate of 180,000 shares of common stock at $14.00 per share. On April 25,
2000, we granted our named executive officers options to purchase an aggregate
of 165,900 shares of common stock at $12.00 per share.
Option Exercises in Last Year and Year-End Option Values
The following table sets forth information for the named executive officers
concerning stock option exercises during the year ended December 31, 1999 and
options outstanding on December 31, 1999.
AGGREGATE OPTION EXERCISES IN 1999
AND YEAR-END OPTIONS VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money Options At
Shares Acquired Options At Fiscal Year-End Fiscal Year-End
On Exercise Value Realized (Exercisable/Unexercisable) (Exercisable/Unexercisable)
Name (#) ($)(2) (#) ($)(2)
---- --------------- -------------- --------------------------- ---------------------------
<S> <C> <C> <C> <C>
Bruce D. McMaster....... -- -- 61,753/52,252(3) 0/0
121,129/0(4) 0/0
Charles D. Dimick....... 9,280(1) 11,322 13,920/10,916(5) 16,982/13,317
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) 0/0
John Peters............. 2,519(1) 3,073 5,044/12,612(5) 6,153/15,387
11,108/688(6) 0/0
34,395/16,436(7) 0/0
Greg Halvorson.......... 10,442(1) 12,739 10,326/33,740(5) 12,598/41,163
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) 0/0
</TABLE>
--------
(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.
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<PAGE>
(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.
Mr. Gisch is currently employed as a Vice President and 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.
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<PAGE>
Mr. Peters is currently employed as Vice President, Sales and Marketing, and
as the Senior Vice President of Sales of Dynamic Details Incorporated, Silicon
Valley pursuant to an agreement dated July 23, 1998 which expires on October
28, 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 Vice President, Operations and as
Senior Vice President of Operations of Dynamic Details Incorporated, Silicon
Valley pursuant to an agreement dated July 23, 1998 which expires on October
28, 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
aggregate of 659,786 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
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<PAGE>
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).
On July 23, 1998, in connection with the DCI merger, we adopted the Details
Holdings Corp. Bonus Plan. Under this plan, awards of "Cash Bonus Units" were
granted to selected former DCI employees, which have the effect of reducing the
net amount payable by such employees upon exercise of options. Our board of
directors determined the terms of the grants. Payments of the awards are made
in connection with the exercise of options and are subject to the participant's
continued employment with us. Our board of directors or the compensation
committee may suspend or terminate the plan or any portion of the plan at any
time and may amend the plan with stockholder approval. Unless sooner
terminated, the plan will continue in effect until July 23, 2008.
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," was adopted by our board
of directors and approved by stockholder vote on April 6, 2000. Since the
closing of our initial public offering on April 14, 2000, we have granted to
some of our executive officers and employees options to purchase a total of
approximately 1,923,580 shares of our common stock with an exercise price equal
to the market price on the date of grant. No future grants will be made under
any plan existing before April 6, 2000.
The 2000 Plan provides for the grant of incentive stock options to our U.S.
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.
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, are 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;
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<PAGE>
. 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.
Employee Stock Purchase Plans
Our Employee Stock Purchase Plan, or ESPP, was adopted by our board of
directors and approved by our stockholders on April 6, 2000. The ESPP was
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. Our board of
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directors approved on September 11, 2000 a plan offering equivalent rights to
employees of non-U.S. subsidiaries. Employees of Dynamic Details, Incorporated,
Virginia, our subsidiary that purchased substantially all the U.S. assets of
Automata, will be eligible to participate in the plan beginning January 1,
2001.
A total of 1,450,000 shares of our common stock are reserved for issuance
under the ESPP and the non-U.S. ESPP, which is intended to qualify under
Section 423 of the Internal Revenue Code, and the non-U.S. plan. The plans
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 plans are administered by
our board of directors or by the compensation committee.
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 plans if they have completed at least three
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 plans
permit 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 the event
of specified changes in capitalization described in the plans, 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 plans ends automatically upon termination of employment
with us. Unless terminated earlier by our board of directors, the plans will
have a term of ten years.
Registration of Employee Plans
On May 18, 2000, we filed a registration statement on Form S-8 with the
Securities and Exchange Commission registering a total of 7,598,588 shares
issuable under our stock option plans and our ESPP.
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RELATED PARTY TRANSACTIONS
The following summaries of the Stockholders Agreement and the Management
Termination Agreement are descriptions of the material provisions of those
agreements and are subject to, and qualified in their entirety by reference to,
those agreements, each of which has been previously filed with the Securities
and Exchange Commission.
Stockholders Agreement
All persons who were stockholders and optionholders prior to April 11, 2000
are parties to a stockholders agreement dated March 31, 2000, as amended from
time to time, that, among other things, provides for registration rights.
Management Termination Agreement
In connection with our initial public offering on April 14, 2000, a
management agreement among Bain Capital Partners V, L.P. ("Bain"), us and our
operating subsidiary was terminated by mutual consent of the parties. In
addition, Bain was paid a fee of approximately $3 million in connection with
the MCM Electronics acquisition and related matters. 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 and in connection with the exercise
of certain options in 2000, 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, Mr. Halvorson and Mr. Wright had outstanding
loan balances, excluding accrued interest, at June 30, 2000 of approximately
$197,615, $88,905, $155,412, $100,000 and $65,976, 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, will 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." Sankaty also received a portion of the net proceeds from our
initial public offering due to the redemption of some of the DDi Intermediate
senior discount notes.
Chase Manhattan Capital, LLC, one of our principal 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.
Chase Manhattan Bank and Sankaty will receive an amendment fee of 25 basis
points of their lending commitment under the Dynamic Details senior credit
facility in connection with the amendment of the facility prior to this
offering. See "Description of Indebtedness."
Celerity Partners, Inc., an affiliate of Celerity Funds, will receive a fee
of $199,000 in connection with Golden Manufacturing acquisition.
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<PAGE>
Directors' Relationships with Principal Stockholders
All 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, Stephen M.
Zide and Prescott Ashe are affiliated with the Bain Capital funds. Mark R.
Benham is a partner in Celerity Partners, L.L.C. 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 approximately $1.9 million or
approximately 1% of our net sales during the six months ended June 30, 2000,
are on terms equivalent to those made available to our other customers.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth, as of September 30, 2000, information
regarding beneficial ownership of our common stock. The table sets forth the
number of shares beneficially owned and the percentage ownership before the
offering, the number of shares, if any, offered under this prospectus, and the
number of shares beneficially owned and the percentage ownership after the
completion of the offering 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;
. all executive officers and directors as a group; and
. all selling stockholders.
As of September 30, 2000, our outstanding equity securities consisted of
39,320,390 shares of common stock. The following table assumes an offering
price of $33.31 the last reported sale price of our common stock on the Nasdaq
National Market on October 9, 2000. The number of shares offered by the selling
stockholders and the total number of shares outstanding after the offering will
change based on the offering price and requested participation by selling
stockholders.
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 September 30, 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>
Shares Beneficially Shares Beneficially
Owned Before Owned After
Offering(**) Offering (**)
--------------------- ---------------------
Name and Address Number Percentage Shares Offered Number Percentage
---------------- ---------- ---------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Principal Stockholders:
Bain Capital Funds (1)
c/o Bain Capital, Inc.
Two Copley Place
Boston, Massachusetts
02116.................. 10,301,028 26.16% 877,153 9,423,875 21.80%
Celerity Partners,
L.L.C. (2)
11111 Santa Monica
Boulevard
Suite 1111
Los Angeles, California
90025.................. 2,037,612 5.18% 173,507 1,864,105 4.31%
Chase Manhattan Entities
(3)
c/o Chase Manhattan
Capital, LLC
380 Madison Avenue
12th Floor
New York, New York
10017.................. 3,328,351 8.46% 283,416 3,044,935 7.05%
Directors and Executive
Officers:
Bruce D. McMaster (4)... 1,293,820 3.27% -- 1,293,820 2.98%
Charles D. Dimick (5)... 1,513,702 3.83% 128,584 1,385,118 3.19%
Joseph P. Gisch (6)..... 240,404 * 16,179 224,225 *
John Peters (7)......... 556,845 1.41% 47,340 509,505 1.18%
Gregory Halvorson (8)... 375,795 * 32,000 343,795 *
Lee W. Muse, Jr. (9) ... 920,847 2.33% -- 920,847 2.12%
Christopher Behrens
(10)................... 3,043,819 7.74% 259,187 2,784,632 6.45%
Edward W. Conard (11)... 2,707,131 6.88% 230,518 2,476,613 5.74%
David Dominik (11)...... 2,707,131 6.88% 230,518 2,476,613 5.74%
Stephen G. Pagliuca
(11)................... 2,707,131 6.88% 230,518 2,476,613 5.74%
Prescott Ashe (12)...... 2,707,131 6.88% 230,518 2,476,613 5.74%
Stephen M. Zide (12).... 2,707,131 6.88% 230,518 2,476,613 5.74%
Mark R. Benham (13)..... 2,037,612 5.18% 173,507 1,864,105 4.31%
All Directors and
Executive Officers
as a group (13
persons)............... 12,689,975 30.65% 887,315 11,802,660 25.98%
Other Selling
Stockholders:
Henry Banks............. 1,716 * 146 1,570 *
Olive Banks............. 1,716 * 146 1,570 *
Ronald Bartlett......... 1,606 * 137 1,469 *
Karen Bolton............ 2,262 * 193 2,069 *
Bridgepoint Capital
Nominees Ltd........... 1,502,495 3.82% 127,940 1,374,555 3.18%
John Calvert............ 57,028 * 1,703 55,325 *
Katherine Calvert....... 7,801 * 170 7,631 *
Mark Campbell........... 7,801 * 664 7,137 *
Brian Chappell.......... 1,606 * 137 1,469 *
Churchill ESOP Capital
Partners (14).......... 1,022,957 2.60% 85,297 937,660 2.17%
Diarmuid Cullinane...... 2,262 * 193 2,069 *
Paul Dickson............ 2,262 * 170 2,092 *
Ulf Dige................ 2,262 * 193 2,069 *
Brent Dimick............ 2,665 * 227 2,438 *
Dyanna Dimick........... 2,665 * 227 2,438 *
Richard Enroth (15)..... 1,489 * 11 1,478 *
Paul Fowler............. 2,279 * 194 2,085 *
Richard Galatian........ 18,728 * 1,595 17,133 *
Bryonie Glanfield....... 21,844 * 1,860 19,984 *
Jeanne Glanfield........ 3,354 * 286 3,068 *
</TABLE>
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<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Before Owned After
Offering(**) Offering (**)
-------------------- --------------------
Name and Address Number Percentage Shares Offered Number Percentage
---------------- --------- ---------- -------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Leslie Glanfield........ 3,354 * 286 3,068 *
Martin Glanfield (16)... 150,048 * 12,777 137,271 *
Gordon Holden........... 2,262 * 193 2,069 *
Indosuez DCI Partners
(17)................... 473,110 1.20% 39,449 433,661 1.00%
Phillip Jackson......... 41,607 * 3,406 38,201 *
Tom Johnston............ 10,401 * 886 9,515 *
KB Mezzanine Fund II
(18)................... 1,496,067 3.80% 124,746 1,371,321 3.17%
Chris Lea............... 20,803 * 1,703 19,100 *
Vinesh Makwana.......... 2,262 * 193 2,069 *
Darren Malone........... 1,560 * 128 1,432 *
Martin H.G. Malone
(19)................... 334,940 * 25,546 309,394 *
Ryan Malone............. 1,560 * 85 1,475 *
James Marcelli.......... 264,634 * 22,534 242,100 *
Neil McLaren............ 10,401 * 886 9,515 *
Larry Peiper (20)....... 318,170 * 27,093 291,077 *
PMI Mezzanine Fund LP... 462,987 1.18% 39,424 423,563 *
Bonafacio Ramirez, Jr.
(21)................... 159,963 * 13,621 146,342 *
Cheryl Reilly........... 10,401 * 886 9,515 *
RGIP, L.L.C............. 66,318 * 5,647 60,671 *
Alan Rogers............. 10,401 * 886 9,515 *
Jeffrey Ryno (22)....... 54,101 * 4,607 49,494 *
Ronald Ryno (23)........ 72,663 * 6,187 66,476 *
Peter Stoneham.......... 2,262 * 193 2,069 *
Gary Sullivan (24)...... 296,287 * 25,229 271,058 *
Mark Woore.............. 2,262 * 193 2,069 *
Terry Wright (25)....... 243,588 * 8,515 235,073 *
</TABLE>
--------
* Indicates beneficial ownership of less than 1% of the issued and
outstanding common stock.
** The number of shares of common stock deemed beneficially owned on September
30, 2000, includes (a) shares of common stock issued and outstanding on
such date and (b) all options or warrants that are currently exercisable or
will become exercisable within 60 days of September 30, 2000 by the person
or group in question.
(1) Beneficial ownership includes 10,251,866 shares of common stock, and
warrants to purchase 49,162 shares of common stock, owned by Bain Capital
Fund V, L.P.; Bain Capital Fund V-B, L.P.; BCIP Associates; and BCIP Trust
Associates, L.P. Certain partners and other employees of the Bain Capital
Funds may make a contribution of shares of our common stock to one or more
charities, including the Combined Jewish Philanthropies, Brigham Young
University, the Church of Jesus Christ of Latter-day Saints, Fidelity
Charitable Gifts Fund and The Webster Charitable Trust, prior to this
offering. In such a case, a recipient charity, if it chooses to participate
in the offering, will be the selling stockholder with respect to the
donated shares.
(2) Beneficial ownership consists of 2,010,771 shares of common stock, and
warrants to purchase 26,841 shares of common stock, owned by Celerity
Dynamo, L.L.C., Celerity Details, L.L.C. and Celerity Liquids, L.L.C.
Celerity Partners, L.L.C. and its managing members who control each of such
entities, each of which disclaim beneficial ownership of any such shares in
which it does not have a pecuniary interest.
(3) Beneficial ownership consists of shares owned by Chase Manhattan Capital,
L.P., Chase Securities Inc. and DI Investors, LLC., all of which are
affiliates of The Chase Manhattan Bank. 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) Beneficial ownership includes options to purchase 201,880 shares of common
stock.
(5) Beneficial ownership and shares offered include options to purchase 152,950
shares of common stock, a warrant to purchase 26,575 shares of common stock
and 11,230 shares of common stock held by Mr. Dimick's minor child.
(6) Beneficial ownership includes options to purchase 53,134 shares of common
stock.
(7) Beneficial ownership includes options to purchase 59,830 shares of common
stock, a warrant to purchase 9,668 shares of common stock and 900 shares of
common stock held by Mr. Peters's minor child.
(8) Beneficial ownership includes options to purchase 145,371 shares of common
stock.
(9) Beneficial ownership includes options to purchase 164,217 shares of common
stock.
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(10) 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, L.P.
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, 280 Madison Avenue, 12th
Floor, New York, New York 10017.
(11) The shares of common stock, options and warrants included in the table
represent shares held by BCIP Associates and BCIP Trust Associates, L.P.
Messrs. Conard and Pagliuca are each Managing Directors of Bain Capital,
Inc. and general partners of BCIP Associates and BCIP Trust Associates,
L.P., and Mr. Dominik is a former Managing Director of Bain Capital, Inc.
and a general partner of BCIP Associates and BCIP Trust Associates, L.P.
Accordingly, each of Messrs. Conard, Pagliuca and Dominik may be deemed
to beneficially own shares, options and warrants owned by such entities.
Each of Messr. Conard, Pagliuca and Dominik disclaims beneficial
ownership of any such shares, options and warrants in which they do not
have a pecuniary interest.
(12) The shares of common stock, options and warrants included in the table
represent shares held by BCIP Associates and BCIP Trust Associates, L.P.
Mr. Zide and Mr. Ashe are each a partner of BCIP Associates and BCIP
Trust Associates, L.P. and, accordingly, may be deemed to beneficially
own shares owned by such entities. Each of Messrs. Zide and Ashe
disclaims beneficial ownership of any such shares, options and warrants
in which he does not have a pecuniary interest.
(13) Mr. Benham is a managing member of Celerity Partners, L.L.C., which
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, options and warrants 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, options and warrants in which he
does not have a pecuniary interest. The address of Mr. Benham is c/o
Celerity Partners, 11111 Santa Monica Boulevard, Suite 1127, Los Angeles,
California 90025.
(14) Beneficial ownership includes warrants to purchase 21,260 shares of
common stock.
(15) Beneficial ownership includes options to purchase 1,363 shares of common
stock.
(16) Mr. Glanfield is Senior Vice President, Finance, DDi Europe.
(17) Beneficial ownership includes warrants to purchase 9,832 shares of common
stock.
(18) Beneficial ownership includes warrants to purchase 31,092 shares of
common stock.
(19) Mr. Malone is President and CEO, DDi Europe.
(20) Beneficial ownership includes options to purchase 59,810 shares of common
stock, and a warrant to purchase 4,820 shares of common stock.
(21) Beneficial ownership includes options to purchase 99,239 shares of common
stock.
(22) Mr. Jeffrey Ryno is Vice President, Dynamic Details Incorporated, Texas.
(23) Mr. Ronald Ryno is President, Dynamic Details Incorporated, Texas.
(24) Beneficial ownership includes options to purchase 41,878 shares of common
stock, and a warrant to purchase 4,903 shares of common stock.
(25) Beneficial ownership includes options to purchase 52,751 shares of common
stock. Mr. Wright is our Vice President, Engineering.
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<PAGE>
DESCRIPTION OF INDEBTEDNESS
After giving effect to this offering, we and our subsidiaries will have
outstanding debt under the DDi Europe facilities agreement, the Dynamic Details
senior credit facility and the Dynamic Details senior subordinated notes. We
intend to use some of the proceeds we receive from this offering to repurchase
some of the DDi Capital senior discount notes and to redeem all of the DDi
Intermediate 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, one of our primary
operating subsidiaries. We own 100% of the capital stock of DDi Europe Limited,
our other 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. We intend to amend the terms of the
Dynamic Details senior credit facility effective upon the closing of this
offering. 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 June 30, 2000 consists of:
. Tranche A term facility of up to approximately $60.4 million;
. Tranche B term facility of up to $89.3 million; and
. a revolving line of credit of up to $45.0 million, including revolving
credit loans, letters of credit and swing line loans.
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 domestic 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.
Following the closing of this offering, our borrowings under the Dynamic
Details senior credit facility will 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 the revolving credit facility),
LIBOR plus 300 basis points or the bank rate plus 200 basis points (in the case
of Tranche B). The overall effective interest rate at June 30, 2000 was 8.9%.
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. We
may be able to extend the revolving credit facility by $30 million in the
future. 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. We are paying our lenders a fee equal to 25 basis
points of each lenders commitment in connection with the amendment.
This summary of the material provisions of the Dynamic Details senior credit
facility, as amended, is qualified in its entirety by reference to all of its
provisions, which has been incorporated by reference as an exhibit to the
registration statement of which this prospectus forms a part. See "Additional
Information."
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
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<PAGE>
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 incorporated
by reference 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 DDi Capital 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, if we provide notice to holders any time on or prior to October
16, 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 currently intend to use some of the
proceeds of this offering to repurchase a portion 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 DDi Capital senior discount notes, which has been
incorporated by reference 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, compounded semiannually, and an original
stated principal amount at maturity of approximately $67 million. In connection
with our initial public offering, we repaid approximately 50% of the current
accreted balance of these senior discount notes. Approximately 50% of the
original 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
June 30, 2000, the
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<PAGE>
outstanding accreted value of these senior discount notes was $21.8 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 to DDi Intermediate, DDi Capital and
Dynamic Details, Incorporated.
Under the terms of the indenture relating to the DDi Intermediate senior
discount notes, we may 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. We used
a portion of the net proceeds of our initial public offering to redeem some of
these notes. Approximately 50% of the Intermediate senior discount notes are
held by investment funds advised by Sankaty Advisors, Inc., an affiliate of
Bain Capital. We currently intend to use some of the proceeds of this offering
to redeem the remainder of these notes.
This summary of the material provisions of the DDi Intermediate senior
discount notes is qualified in its entirety by reference to all of the
provisions of the indenture governing the DDi Intermediate senior discount
notes, which has been incorporated by reference as an exhibit to the
registration statement of which this prospectus forms a part. See "Additional
Information."
DDi Europe Facilities Agreement
In connection with our acquisition of MCM Electronics, we assumed 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. MCM
Electronics has been combined with our other European operations to form DDi
Europe Limited. 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 DDi Europe to meet financial ratios and to
comply with other restrictive covenants.
As of June 30, 2000, an aggregate of (Pounds)19.2 million, or $29.1
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 DDi Europe to make interest hedging arrangements and consequently DDi
Europe has entered into an interest rate swap agreement covering approximately
80% of its borrowings under these facilities.
DDi Europe is required to pay non-utilization fees on the average unused
portion of each of the facilities.
This summary of the material provisions of the DDi Europe facilities
agreement is qualified in its entirety by reference to all of the provisions
of the agreement, which has been incorporated by reference as an exhibit to
the registration statement of which this prospectus forms a part. See
"Additional Information."
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DESCRIPTION OF CAPITAL STOCK
General Matters
As of the date of this offering, the total amount of our authorized capital
stock consists of 75,000,000 shares of common stock and 5,000,000 shares of one
or more series of preferred stock.
After giving effect to this offering, assuming an offering price of $33.31
per share, the last reported sale price of our common stock on the Nasdaq
National Market on October 9, 2000, we will have 43,175,431 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 certificate of incorporation and our 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 certificate of incorporation 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 is quoted 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 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.
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<PAGE>
Registration Rights
As a result of the stockholders agreement dated March 31, 2000 between us
and some of our stockholders, some of our stockholders are 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 between October 11,
2000 and April 11, 2005, subject to the lock-up agreements described in "Shares
Available for Future Sale," 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 between April 6, 2001 and
April 11, 2005, 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 October 11, 2000 and April
11, 2001, subject to the lock-up agreements described in "Shares Available for
Future Sale," 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 is triggered by this offering, and the
holders of our common stock who are party to our stockholders agreement are
being given an opportunity to participate in this offering subject to the terms
of the agreement. 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 Our Certificate of Incorporation and By-laws
Our 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.
Our 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 certificate of incorporation 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.
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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 certificate of incorporation 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 certificate of incorporation 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 are 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 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.
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Limitations on Liability and Indemnification of Officers and Directors
Our certificate of incorporation limits the liability of directors to the
fullest extent permitted by the Delaware General Corporation Law. In addition,
our certificate of incorporation provides that we will indemnify our directors
and officers to the fullest extent permitted by such law.
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, we expect to have outstanding an aggregate
of 43,175,431 shares of our common stock, assuming no exercise of outstanding
options and an offering price of $33.31 per share, the last reported sale price
of our common stock on the Nasdaq National Market on October 9, 2000. Of these
shares, all of the shares sold in this offering initially registered and issued
in our initial public offering and issued pursuant to exercises of options
after May 18, 2000 or pursuant to our ESPP may be freely traded 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 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 24,750,000
will be available for sale in the public market 90 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, the holders of substantially all
of the shares of our common stock not issued in connection with our initial
public offering, other than shares of common stock offered for sale pursuant to
this prospectus by the selling stockholders 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 90 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 lock-up:
. 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.
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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 431,754 shares of common stock
immediately after this offering; 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 have filed a registration statement under the Securities Act covering
7,598,588 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.
All options to purchase shares outstanding under our 2000 Equity Incentive
Plan 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 , 2000, we and the selling stockholders 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..............................
Robertson Stephens, Inc.............................................
Chase Securities Inc................................................
Lehman Brothers Inc.................................................
Thomas Weisel Partners LLC..........................................
---------
Total........................................................... 6,000,000
=========
</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 may be terminated.
The selling stockholders have granted to the underwriters a 30-day option to
purchase on a pro rata basis up to an aggregate of 900,000 additional shares
from the selling stockholders at the offering price less the underwriting
discounts and commissions. The option may be exercised only to cover any over-
allotments 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 selling concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share on
sales to other broker/dealers. After the offering, the public offering price
and concession and discount to broker/dealers may be changed by the
representative.
The following table summarizes the compensation and estimated expenses we
and the selling stockholders 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..................... $ $ $ $
Expenses payable by us.. $ $ $ $
Underwriting Discounts
and Commissions paid by
selling stockholders... $ $ $ $
</TABLE>
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.
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 additional 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
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Corporation for a period of 90 days after the date of this prospectus, except
grants of employee stock options pursuant to the terms of a plan in effect on
the date hereof, issuances pursuant to the exercise of employee stock options
outstanding on the date hereof.
Our officers and directors, the holders of substantially all of our common
stock not issued in connection with our initial public offering, except for
shares offered for sale by this prospectus, 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 such
transaction, swap, hedge or other arrangement, without, in each case, the prior
written consent of Credit Suisse First Boston Corporation for a period of 90
days after the date of this prospectus.
We and the selling stockholders have agreed to indemnify the underwriters
against specified liabilities under the Securities Act, or contribute to
payments which the underwriters may be required to make in that respect.
In connection with a recapitalization in October 1997, affiliates of Chase
Securities Inc. that, in the aggregate, beneficially own 8.46% of our shares of
common stock prior to this offering, and Chase Securities Inc. were paid fees
aggregating approximately $16 million and received common stock warrants valued
at approximately $3.4 million.
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 Dynamic Details
senior credit facility, The Chase Manhattan Bank received $2.4 million in fees
and additional fees when we amended the terms of the Dynamic Details senior
credit facility on March 22, 2000. 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. Banking
affiliates of Robertson Stephens, Inc. are also lenders under the Dynamic
Details senior credit facility and counterparties to some of our interest rate
exchange agreements. Each lender under the Dynamic Details senior credit
facility will receive a fee of 25 basis points of the lender's commitment in
connection with the amendment to this facility, which will become effective
upon the closing of this offering.
We intend to use a portion of the net proceeds from the sale of common stock
to repay indebtedness, including some of the DDi Capital senior discount notes.
Chase affiliates hold some of these notes.
We are currently in material compliance with the terms of our Dynamic
Details senior credit facility and the DDi Capital Senior discount notes. The
decision of Chase Securities Inc. to participate in the offering was made
independent of its affiliates that hold our securities and of The Chase
Manhattan Bank. The decision of Robertson Stephens, Inc. to participate in the
offering was made independent of its banking affiliates. 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
Robertson Stephens, Inc. will not receive, exclusive of their affiliates that
may 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.
In connection with the offering the underwriters may engage in stabilizing
transactions, over-allotment transactions, syndicate covering transactions,
penalty bids and passive market making in accordance with Regulation M under
the Securities Exchange Act of 1934.
. Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
. Over-allotment involves sales by the underwriters of shares in excess of
the number of shares the underwriters are obligated to purchase, which
creates a syndicate short position. The short position may be either a
covered short position or a naked short position. In a covered short
position, the number of shares over-allotted by the underwriters is not
greater than the number of shares that they may purchase in the over-
allotment option. In a naked short position, the number of shares
involved
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is greater than the number of shares in the over-allotment option. The
underwriters may close out any short position by either exercising their
over-allotment option and/or purchasing shares in the open market.
. 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. In determining the source of shares to
close out the short position, the underwriters will consider, among
other things, the price of shares available for purchase in the open
market as compared to the price at which they may purchase shares
through the over-allotment option. If the underwriters sell more shares
than could be covered by the over-allotment option, a naked short
position, that position can only be closed out by buying shares in the
open market. A naked short position is more likely to be created if the
underwriters are concerned that there may be downward pressure on the
price of the shares in the open market after pricing that could
adversely affect investors who purchase in the offering.
. 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.
. In passive market making, market makers in the common stock who are
underwriters or prospective underwriters may, subject to limitations,
make bids for or purchases of the common stock until the time, if any,
at which a stabilizing bid is made.
These stabilizing transactions, syndicate covering transactions and penalty
bids may have the effect of raising or maintaining the market price of the
common stock or preventing or retarding a decline in the market price of the
common stock. As a result the price of the common stock may be higher than the
price that might otherwise exist in the open market. These transactions may be
effected on The Nasdaq National Market 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 underwriters that will make Internet distributions on
the same basis as other allocations.
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since
December 1998, Thomas Weisel Partners has acted as lead or co-manager on
numerous public offerings of equity securities. Thomas Weisel Partners does
not have any material relationship with us or any of our officers, directors
or other controlling persons, except with respect to its contractual
relationship with us pursuant to the underwriting agreement entered into in
connection with this offering.
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 and the selling
shareholders 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, the selling shareholders and
the dealer from whom such purchase confirmation is received that
78
<PAGE>
(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 and the selling shareholders 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.
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, L.L.C., which owned 66,318 shares
of common stock as of June 30, 2000. RGIP, L.L.C. is also an investor in the
Bain Capital funds. RGIP, L.L.C. is a selling stockholder participating in this
offering. 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.
79
<PAGE>
EXPERTS
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 MCM Electronics Limited as of 31
March 2000 and for the nine months then ended and the consolidated financial
statements of Symonds Limited for the three months ended 30 June 1999 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.
The consolidated financial statements of Automata International, Inc. and
subsidiaries as of September 30, 1998 and for each of the two years in the
period ended September 30, 1998 have been audited by Arthur Andersen LLP,
independent public accountants as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in accounting and auditing in giving said report.
The consolidated financial statements of Automata International, Inc. and
subsidiaries as of October 2, 1999 and for the year then ended have been
included herein and in the registration statement in reliance upon the report
of KPMG LLP, independent certified public accountants, appearing elsewhere
herein upon the authority of said firm as experts in accounting and auditing.
The report of KPMG LLP covering the October 2, 1999 financial statements
contains an explanatory paragraph that states that Automata filed a voluntary
petition for relief under Chapter 11 of the United States Bankruptcy Code. The
uncertainties inherent in the Bankruptcy process raised substantial doubt about
Automata's ability to continue as a going concern. The Automata consolidated
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
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.
We and our subsidiaries DDi Capital Corp. and Dynamic Details, Incorporated
have filed 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.
80
<PAGE>
DDi CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
DDi Corp.:
Report of Independent Accountants........................................ F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998 and as of
June 30, 2000 (unaudited)............................................... F-3
Consolidated Statements of Operations for the Years Ended December 31,
1999, 1998 and 1997 and the Six Months Ended June 30, 2000 and 1999
(unaudited) ............................................................ F-4
Consolidated Statements of Comprehensive Loss for the Years Ended
December 31, 1999, 1998 and 1997 and the Six Months Ended June 30, 2000
and 1999 (unaudited).................................................... F-5
Consolidated Statements of Stockholders' Deficit for the Years Ended
December 31, 1999, 1998 and 1997 and the Six Months Ended June 30, 2000
(unaudited)............................................................. F-6
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997 and the Six Months Ended June 30, 2000 and 1999
(unaudited)............................................................. F-8
Notes to Consolidated Financial Statements............................... F-9
Dynamic Circuits Inc.:
Report of Independent Accountants........................................ F-38
Consolidated Statements of Income for the Year Ended December 31, 1997
and for the Six Months Ended June 30, 1998 and 1997 (unaudited)......... F-39
Consolidated Statements of Shareholders' Deficit for the Year Ended
December 31, 1997 and the Six Months Ended June 30, 1998 (unaudited).... F-40
Consolidated Statements of Cash Flows for the Year Ended December 31,
1997 and the Six Months Ended June 30, 1998 and 1997 (unaudited)........ F-41
Notes to Consolidated Financial Statements............................... F-42
MCM Electronics Limited/Symonds Limited:
Report of Independent Public Accountants................................. F-52
Consolidated profit and loss accounts.................................... F-53
Reconciliations of movements in consolidated shareholders' funds......... F-54
Consolidated balance sheets.............................................. F-55
Consolidated cash flow statements........................................ F-56
Accounting policies...................................................... F-57
Notes to the financial statements........................................ F-60
Automata International, Inc. and Subsidiaries
Independent Auditors' Report............................................. F-81
Report of Independent Public Accountants................................. F-82
Consolidated Balance Sheets as of October 2, 1999 and September 30, 1998
........................................................................ F-83
Consolidated Statements of Operations and Comprehensive Income (loss) for
the Years Ended October 2, 1999, and September 30, 1998 and 1997 ....... F-84
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for
the Years Ended October 2, 1999, and September 30, 1998 and 1997 ....... F-85
Consolidated Statements of Cash Flows for the Years Ended October 2,
1999, and September 30, 1998 and 1997 .................................. F-86
Notes to Consolidated Financial Statements............................... F-87
Consolidated Balance Sheets as of July 1, 2000 (unaudited) and October 2,
1999.................................................................... F-105
Consolidated Statements of Operations and for the nine months ended July
1, 2000 and July 3, 1999 (unaudited).................................... F-106
Consolidated Statements of Cash Flows for the nine months ended July 1,
2000 and July 3, 1999 (unaudited)....................................... F-107
Notes to Unaudited Consolidated Financial Statements..................... F-108
</TABLE>
F-1
<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
Orange County, California
February 14, 2000, except for the sixth paragraph
of Note 1 as to which the date is April 14, 2000
F-2
<PAGE>
DDi CORP.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31, June 30,
-------------------- -----------
1998 1999 2000
--------- --------- -----------
(unaudited)
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.................. $ 2,109 $ 648 $ 4,081
Accounts receivable, net................... 34,764 42,774 66,178
Income tax receivable...................... 3,793 -- --
Inventories................................ 12,615 20,209 30,306
Prepaid expenses and other................. 3,110 2,499 4,480
Deferred tax asset......................... 4,816 5,215 5,215
--------- --------- ---------
Total current assets..................... 61,207 71,345 110,260
--------- --------- ---------
Property, plant and equipment, net........... 61,018 63,209 77,043
Debt issue costs, net........................ 15,929 13,833 11,264
Goodwill and other intangibles, net.......... 226,286 205,462 265,179
Other........................................ 566 486 2,905
--------- --------- ---------
$ 365,006 $354,335 $ 466,651
========= ========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current maturities of long-term debt and
capital lease obligations................. $ 4,390 $ 7,035 $ 11,203
Current portion of deferred interest rate
swap income............................... -- 1,458 881
Current maturities of deferred notes
payable................................... 2,788 2,514 1,337
Revolving credit facility.................. 7,000 -- 500
Accounts payable........................... 14,612 18,055 31,845
Accrued expenses .......................... 17,151 22,311 28,394
Income tax payable......................... -- 894 1,159
--------- --------- ---------
Total current liabilities................ 45,941 52,267 75,319
--------- --------- ---------
Long-term debt and capital lease obliga-
tions....................................... 462,498 469,703 378,748
Deferred interest rate swap income........... -- 3,881 2,636
Deferred notes payable....................... 3,743 1,448 1,342
Deferred tax liability....................... 21,913 13,420 13,722
Other........................................ 686 731 713
--------- --------- ---------
Total liabilities........................ 534,781 541,450 472,480
--------- --------- ---------
Commitments and contingencies (Note 13)
Stockholders' deficit:
Common stock, $0.01 par value, 75,000,000
shares authorized, 24,182,636 and
24,302,831 shares issued and outstanding
at December 31, 1998 and 1999,
respectively and 39,320,390 shares issued
and outstanding at June 30, 2000.......... 242 243 393
Additional paid in capital................. 162,552 162,662 347,099
Accumulated other comprehensive income..... -- -- (1,166)
Stockholder receivables.................... (648) (666) (701)
Accumulated deficit........................ (331,921) (349,354) (351,454)
--------- --------- ---------
Total stockholders' deficit.............. (169,775) (187,115) (5,829)
--------- --------- ---------
$ 365,006 $354,335 $ 466,651
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
DDi CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
---------------------------- --------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net sales................. $ 78,756 $174,853 $292,493 $130,919 $ 176,818
Cost of goods sold........ 38,675 119,559 202,387 92,445 115,488
-------- -------- -------- -------- ----------
Gross profit............ 40,081 55,294 90,106 38,474 61,330
Operating expenses:
Sales and marketing..... 7,278 12,801 23,613 10,070 14,805
General and
administration......... 2,057 8,442 15,362 7,073 9,965
Amortization of
intangibles............ -- 10,899 22,262 11,826 10,925
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 9,505 25,635
Interest expense (net),
including interest paid
to former stockholder of
$756, $781 and $723 in
1997, 1998 and 1999,
respectively, and $370
and $355 during the six
months ended June 30,
1999 and 2000,
respectively............. 25,196 37,416 46,717 23,301 22,689
-------- -------- -------- -------- ----------
Income (loss) before
income taxes and
extraordinary loss..... (27,870) (53,264) (24,848) (13,796) 2,946
Income tax benefit
(expense)................ 10,858 3,566 7,415 3,576 (2,495)
-------- -------- -------- -------- ----------
Income (loss) before
extraordinary loss....... (17,012) (49,698) (17,433) (10,220) 451
Extraordinary loss--early
extinguishment of debt,
net of income tax benefit
of $1,104 and $1,480 in
1997 and 1998,
respectively and $1,631
during the six months
ended June 30, 2000...... (1,588) (2,414) -- -- (2,551)
-------- -------- -------- -------- ----------
Net loss.................. (18,600) (52,112) (17,433) (10,220) (2,100)
Priority distribution due
shares of Class L common
stock.................... (1,075) (6,272) (14,112) (6,816) (4,356)
-------- -------- -------- -------- ----------
Net loss allocable to
common stock............. $(19,675) $(58,384) $(31,545) $(17,106) $ (6,456)
======== ======== ======== ======== ==========
Income (loss) per share
(basic and diluted):
Before extraordinary
item................... $ (3.41) $ (7.36) $ (3.21) $ (1.75) $ (0.18)
Extraordinary item...... $ (0.30) $ (0.32) $ -- $ -- $ (0.11)
Net loss................ $ (3.71) $ (7.68) $ (3.21) $ (1.75) $ (0.29)
Supplemental pro forma net loss per share--
basic and diluted (unaudited).............. $ (0.01)
==========
Supplemental pro forma weighted average
shares outstanding--basic and diluted
(unaudited)................................ 23,916,270
==========
</TABLE>
--------
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
DDi CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
---------------------------- -------------------
1997 1998 1999 1999 2000
-------- -------- -------- --------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net loss..................... $(18,600) $(52,112) $(17,433) $ (10,220) $ (2,100)
Other comprehensive loss:
Foreign currency
translation adjustments... -- -- -- -- (1,166)
======== -------- -------- --------- --------
Comprehensive loss........... $(18,600) $(52,112) $(17,433) $ (10,220) $ (3,266)
======== ======== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
DDi CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Convertible Old Common
Preferred Stock Stock Common Stock Additional
---------------- --------------- ----------------- Paid-In Stockholder Accumulated
Shares Amount Shares Amount Shares Amount Capital Receivables Deficit
------ -------- ------ ------- ---------- ------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December
31, 1996......... 6,601 $ 13,532 2,758 $ 5,301 $ -- $ -- $ -- $ (133,612)
Accretion of
temporary equity
to fair value... -- -- -- -- -- -- -- -- (41,244)
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) -- (86,353)
Recapitalization
(net of fees of
$1,130)......... -- -- -- -- 13,122,407 131 78,887 (634) --
Issuance of
common stock in
NTI
acquisition..... -- -- -- -- 1,505,498 15 10,185 -- --
Net loss........ -- -- -- -- -- -- -- -- (18,600)
------ -------- ------ ------- ---------- ----- ------- ----- ----------
Balance, December
31, 1997......... -- -- -- -- 14,627,905 146 89,072 (634) (279,809)
Issuance of common stock in
DCI merger...... -- -- -- -- 9,188,221 92 73,154 -- --
Issuance of
common stock
upon exercise of
stock options... -- -- -- -- 328,357 3 111 -- --
Issuance of
common stock.... -- -- -- -- 38,153 1 215 -- --
Accrued interest
on stockholder
receivables..... -- -- -- -- -- -- -- (41) --
Repayment of
stockholder
receivables .... -- -- -- -- -- -- -- 27 --
Net loss ....... -- -- -- -- -- -- -- -- (52,112)
------ -------- ------ ------- ---------- ----- ------- ----- ----------
<CAPTION>
Temporary Stockholders'
Equity
Accumulated ------------------------------
Other Redeemable Common
Comprehensive Common Stock
Loss Total Stock Warrants Total
------------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance, December
31, 1996......... $ -- $(114,779) $ 38,906 $ 3,200 $ 42,106
Accretion of
temporary equity
to fair value... -- (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)......... -- (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) -- -- --
------------- ---------- ---------- --------- ---------
Balance, December
31, 1997......... -- (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) -- -- --
------------- ---------- ---------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
DDi CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Convertible
Preferred Old Common Accumulated
Stock Stock Common Stock Additional Other
------------- ------------- ----------------- Paid-In Stockholder Accumulated Comprehensive
Shares Amount Shares Amount Shares Amount Capital Receivables Deficit Loss Total
------ ------ ------ ------ ---------- ------ ---------- ----------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December
31, 1998......... -- -- -- -- 24,182,636 242 162,552 (648) (331,921) -- (169,775)
Issuance of
common stock
upon exercise of
stock options... -- -- -- -- 110,774 1 44 -- -- -- 45
Issuance of
common stock.... -- -- -- -- 9,421 -- 66 -- -- -- 66
Accrued interest
on stockholder
receivables..... -- -- -- -- -- -- -- (34) -- -- (34)
Repayment of
stockholder
receivables..... -- -- -- -- -- -- -- 16 -- -- 16
Net loss........ -- -- -- -- -- -- -- -- (17,433) -- (17,433)
--- ---- --- ---- ---------- ---- -------- ----- --------- ------- ---------
Balance, December
31, 1999......... -- -- -- -- 24,302,831 243 162,662 (666) (349,354) -- (187,115)
Issuance of
common stock
upon exercise of
stock options
(unaudited). -- -- -- -- 309,325 3 599 -- -- -- 602
Issuance of
common stock in
initial public
offering, net of
offering costs
of $15,607
(unaudited)..... -- -- -- -- 12,000,000 120 152,273 -- -- -- 152,393
Issuance of
common stock in
MCM acquisition
(unaudited)..... -- -- -- -- 2,230,619 22 31,206 -- -- -- 31,228
Issuance of
common stock
upon exercise of
warrants
(unaudited)..... -- -- -- -- 447,123 5 -- -- -- -- 5
Issuance of
common stock
through Employee
Stock Purchase
Plan
(unaudited)..... -- -- -- -- 30,492 -- 359 -- -- -- 359
Foreign currency
translation
adjustment
(unaudited)..... -- -- -- -- -- -- -- -- -- (1,166) (1,166)
Accrued interest
on stockholder
receivables
(unaudited)..... -- -- -- -- -- -- -- (18) -- -- (18)
Repayment
(borrowings) of
stockholder
receivables
(unaudited)..... -- -- -- -- -- -- -- (17) -- -- (17)
Net loss
(unaudited)..... -- -- -- -- -- -- -- -- (2,100) -- (2,100)
--- ---- --- ---- ---------- ---- -------- ----- --------- ------- ---------
Balance, June 30,
2000
(unaudited)...... -- $-- -- $-- 39,320,390 $393 $347,099 $(701) $(351,454) $(1,166) $ (5,829)
=== ==== === ==== ========== ==== ======== ===== ========= ======= =========
<CAPTION>
Temporary Stockholders' Equity
--------------------------------------
Common
Redeemable Stock
Common Stock Warrants Total
------------- ------------ -----------
<S> <C> <C> <C>
Balance, December
31, 1998......... -- -- --
Issuance of
common stock
upon exercise of
stock options... -- -- --
Issuance of
common stock.... -- -- --
Accrued interest
on stockholder
receivables..... -- -- --
Repayment of
stockholder
receivables..... -- -- --
Net loss........ -- -- --
------------- ------------ -----------
Balance, December
31, 1999......... -- -- --
Issuance of
common stock
upon exercise of
stock options
(unaudited). -- -- --
Issuance of
common stock in
initial public
offering, net of
offering costs
of $15,607
(unaudited)..... -- -- --
Issuance of
common stock in
MCM acquisition
(unaudited)..... -- -- --
Issuance of
common stock
upon exercise of
warrants
(unaudited)..... -- -- --
Issuance of
common stock
through Employee
Stock Purchase
Plan
(unaudited)..... -- -- --
Foreign currency
translation
adjustment
(unaudited)..... -- -- --
Accrued interest
on stockholder
receivables
(unaudited)..... -- -- --
Repayment
(borrowings) of
stockholder
receivables
(unaudited)..... -- -- --
Net loss
(unaudited)..... -- -- --
------------- ------------ -----------
Balance, June 30,
2000
(unaudited)...... $ -- $ -- $ --
============= ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
DDi CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
------------------------------ -------------------
1997 1998 1999 1999 2000
--------- --------- -------- -------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss................ $ (18,600) $ (52,112) $(17,433) $(10,220) $ (2,100)
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 7,046 8,469
Amortization of debt
issuance costs and
discount............. 13,972 15,678 16,226 7,872 10,492
Amortization of
goodwill and
intangible assets.... -- 10,899 22,262 11,826 10,925
Amortization of
deferred interest
rate swap income..... -- -- (724) -- (1,820)
Deferred income
taxes................ (3,834) (4,478) (8,892) (3,617) --
Interest income on
stockholder
receivables.......... -- (41) (34) (18) (18)
Stock compensation
expense.............. 21,271 -- -- -- --
Change in operating
assets and
liabilities, net of
acquisitions:
(Increase) decrease in
accounts receivable.. (2,249) 196 (7,703) (9,211) (11,053)
(Increase) decrease in
inventories.......... (397) 5 (9,813) (6,892) (5,587)
(Increase) decrease in
prepaid expenses and
other................ (905) 2,422 (1,066) (919) (2,867)
Increase (decrease) in
current income
taxes................ (8,757) 4,744 4,687 4,568 (1,699)
Increase (decrease) in
accounts payable..... 1,106 (3,943) 3,227 11,025 4,399
Increase (decrease) in
accrued expenses..... 4,924 (4,887) 2,662 1,899 2,708
--------- --------- -------- -------- ---------
Net cash provided by
operating
activities......... 9,099 16,695 24,812 13,359 11,849
--------- --------- -------- -------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of equipment
and leasehold
improvements........... (6,000) (15,925) (18,225) (8,064) (10,664)
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) (212) --
Costs incurred in
connection with the
acquisition of MCM,
net of cash acquired
of $7,794.............. -- -- -- -- (2,263)
--------- --------- -------- -------- ---------
Net cash used in
investing
activities......... (44,948) (194,813) (18,548) (8,276) (12,927)
--------- --------- -------- -------- ---------
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) (1,088) (144,772)
Net borrowings
(repayments) on the
revolving credit
facility............... -- 7,000 (7,000) (7,000) 500
Payments of debt
issuance and capital
costs.................. (19,469) (8,324) -- -- --
Payments of deferred
note payable........... -- (1,611) (2,569) (1,138) (1,284)
Principal payments on
capital lease
obligations............ (459) (809) (1,016) (484) (674)
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) -- -- (1,267)
Repayment (borrowings)
of stockholder
receivables............ -- 27 16 16 (17)
Proceeds from interest
rate swaps............. -- -- 6,062 6,062 --
Payments of loan
financing fees......... -- -- -- -- (742)
Proceeds from issuance
of common stock
through initial public
offering............... -- -- -- -- 156,660
Costs incurred in
connection with the
issuance of common
stock through initial
public offering........ -- -- -- -- (4,267)
Issuance of common
stock through Employee
Stock Purchase Plan.... -- -- -- -- 359
Proceeds from exercise
of stock options....... -- 114 45 35 602
--------- --------- -------- -------- ---------
Net cash provided by
(used in) financing
activities......... 41,057 174,850 (7,725) (3,597) 5,098
--------- --------- -------- -------- ---------
Effect of exchange rate
changes on cash........ -- -- -- -- (587)
--------- --------- -------- -------- ---------
Net increase
(decrease) in cash
and cash
equivalents........ 5,208 (3,268) (1,461) 1,486 3,433
--------- --------- -------- -------- ---------
Cash and cash
equivalents, beginning
of period............... 169 5,377 2,109 2,109 648
--------- --------- -------- -------- ---------
Cash and cash
equivalents, end of year
period.................. $ 5,377 $ 2,109 $ 648 $ 3,595 $ 4,081
========= ========= ======== ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<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.
("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 ("Dynamic Details")) as a wholly-owned subsidiary and
contributed substantially all of its assets, subject to certain liabilities, to
Dynamic 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 Dynamic 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. In April 2000, Holdings acquired MCM
Electronics Limited ("MCM"), (see Note 14) and has subsequently combined MCM
with its other European operations to form DDi Europe Limited ("DDi Europe").
DDi Europe, Dynamic Details and 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), Dynamic Circuits, Inc. ("DCI") (d/b/a Dynamic Details, Inc.-
Silicon Valley) commencing on July 23, 1998 (date of merger) and DDi Europe
commencing on April 14, 2000 (date of acquisition of MCM). All intercompany
transactions have been eliminated in consolidation.
The financial information presented as of and for the periods ending June
30, 2000 and 1999 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 consolidated financial statement related to
the interim period is also unaudited.
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 the
Dynamic Details 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
F-9
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
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.
Initial Public Offering--Concurrent with the closing of DDi Corp.'s initial
public offering on April 14, 2000 (see Note 18), each share of Class L common
stock was reclassified into one share of Class A common stock plus an
additional number of shares of Class A common stock (determined by dividing the
preference amount of such per share by the initial public offering price of
$14.00 per share). Class A and Class L common stock share ratably in the net
income (loss) remaining after giving effect to the 12% yield on the Class L
common stock. Each share of Class A common stock was then converted into 2.8076
shares of new common stock ("Common Stock") when DDi Corp. reincorporated in
the state of Delaware. All periods presented have been retroactively adjusted
for the effect of the reclassification and stock split.
Nature of Business
The Company is a leading provider of time-critical, technologically advanced
design, development and manufacturing services to original equipment
manufacturers and other electronics manufacturing service providers. The
Company serves over 1,900 customers primarily 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
F-10
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
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.
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
F-11
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
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.
Foreign currency translation--The Company has designated local currency as
the functional currency for its foreign subsidiaries. Accordingly, the assets
and liabilities of foreign subsidiaries are translated at the rates of exchange
at the balance sheet date. The income and expense items of these subsidiaries
are translated at average monthly rates of exchange. The resulting translation
gains and losses are included as a component of stockholders' equity on the
consolidated balance sheet. The impact of these translation gains and losses on
comprehensive income are included on the consolidated statement of
comprehensive income.
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).
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," which 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 stock that were contingently convertible into common
stock upon certain events, and diluted net income (loss) per share, which is
based on the weighted average number of common shares outstanding and dilutive
potential common shares outstanding.
Prior to the initial public offering (see Note 1 and Note 18), the Company
had two classes of common stock, Class A common stock ("Class A common") and
Class L common stock ("Class L common"). Class L common was identical to Class
A common, except that each share of Class L common was 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
F-12
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
quarterly. After payment of this preference amount, each share of Class A
common and Class L common would then share equally in all distributions.
There were 233,594, 396,153 and 396,330 Class L common shares issued and
outstanding at December 31, 1997, 1998 and 1999, respectively, and 396,153
(unaudited) shares issued and outstanding at June 30, 1999. The stated values
for Class L common was $76,146, $147,157 and $147,216 at December 31, 1997,
1998 and 1999, respectively, and $147,157 (unaudited) at June 30, 1999. The
Class L common liquidation preference was $159,024 and $179,996 at December 31,
1998 and 1999, respectively.
<TABLE>
<CAPTION>
Six Months Ended June
Year Ended December 31 30,
---------------------------------- -----------------------
1997 1998 1999 1999 2000
---------- ---------- ---------- ---------- -----------
(unaudited) ---
<S> <C> <C> <C> <C> <C> <C>
Numerator:
Income (loss) before
extraordinary item..... $ (17,012) $ (49,698) $ (17,433) $ (10,220) $ 451
Priority distribution
due shares of Class L
common stock........... (1,075) (6,272) (14,112) (6,886) (4,356)
---------- ---------- ---------- ---------- -----------
Income (loss) allocable
to common stock........ (18,087) (55,970) (31,545) (17,106) (3,905)
Extraordinary item...... (1,588) (2,414) -- -- (2,551)
---------- ---------- ---------- ---------- -----------
Net loss allocable to
common stock........... $ (19,675) $ (58,384) $ (31,545) $ (17,106) $ (6,456)
========== ========== ========== ========== ===========
Denominator:
Weighted average shares
of common stock
outstanding............ 5,299,600 7,607,024 9,831,042 9,774,179 22,197,156
========== ========== ========== ========== ===========
</TABLE>
As a result of the loss before extraordinary item, after deducting priority
distributions of Class L common stock, incurred during the years ended December
31, 1997, 1998 and 1999 and the six months ended June 30, 2000 and 1999, all
potential common shares were anti-dilutive and excluded from the diluted net
loss per share calculation for those periods.
Unaudited supplemental pro forma loss per share--Some of the net proceeds to
the Company from an anticipated public offering of common stock (at an
estimated offering price of $33.31 per share) will be used to retire
indebtedness under its Intermediate Senior Discount Notes and Capital Senior
Discount Notes (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 $1,913 for the
six months ended June 30, 2000. The pro forma weighted average shares
outstanding assumes that the proceeds of the sale of 1,719,114 shares of common
stock were used to retire debt.
Reclassifications--Certain prior year amounts have been reclassified to
conform with the 1999 presentation. Certain amounts for the six months ended
June 30, 2000 have been reclassified to conform with the six months ended June
30, 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. For the six months ended June 30, 2000, the Company reported
comprehensive loss which consisted of net loss plus foreign currency
translation adjustment of $(1,166).
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.
F-13
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
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. In June 2000, the FASB issued SFAS No. 138, "Accounting
for Certain Derivative Instruments and Hedging Activities--an amendment of FASB
Statement No. 133." SFAS No. 138 addresses a limited number of issues causing
implementation difficulties for SFAS No. 133. SFAS No. 138 is required to be
adopted concurrently with SFAS No. 133 and is therefore effective for the
Company beginning with its fiscal quarter ending March 31, 2001.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition," which
outlines the basic criteria that must be met to recognize revenue and provides
guidance for presentation of revenue and for disclosure related to revenue
recognition policies in financial statements filed with the SEC. The Company
believes that adopting SAB 101 will not have a material impact on its financial
position or results of operations.
In March 2000, the FASB issued Interpretation No. 44, or FIN 44, "Accounting
for Certain Transactions Involving Stock Compensation," which is an
interpretation of Accounting Principal Board No. 25 This interpretation
clarifies:
. the definition of employee for purposes of applying Opinion 25, which
deals with stock compensation issues;
. the criteria for determining whether a plan qualifies as a
noncompensatory plan;
. the accounting consequence of various modifications to the terms of
previously fixed stock options or awards; and
. the accounting for an exchange of stock compensation awards in a
business combination.
This interpretation is effective July 1, 2000, but certain conclusions in
this interpretation cover specific events that occur after either December 15,
1998, or January 12, 2000. To the extent that this interpretation covers events
occurring during the period after December 15, 1998, or January 12, 2000, but
before the effective date of July 1, 2000, the effects of applying this
interpretation are recognized on a prospective basis from July 1, 2000. The
Company believes that the adoption of FIN 44 will not have a material impact on
its financial position or results of operations.
F-14
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
3. ACCOUNTS RECEIVABLE
Accounts receivable, net consist of the following:
<TABLE>
<CAPTION>
December 31, June 30,
---------------- -----------
1998 1999 2000
------- ------- -----------
(unaudited)
<S> <C> <C> <C>
Accounts receivable.......................... $36,192 $44,358 $69,012
Less: Allowance for doubtful accounts........ (1,428) (1,584) (2,834)
------- ------- -------
$34,764 $42,774 $66,178
======= ======= =======
</TABLE>
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, June 30,
--------------- -----------
1998 1999 2000
------- ------- -----------
(unaudited)
<S> <C> <C> <C>
Raw materials.................................. $ 6,628 $11,828 $14,491
Work-in-process................................ 4,406 5,601 11,263
Finished goods................................. 1,581 2,780 4,552
------- ------- -------
$12,615 $20,209 $30,306
======= ======= =======
</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, June 30,
------------------ ---------------
1998 1999 2000
-------- -------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Senior Term Facility.................... $255,000 $251,738 $149,681
10.0% Senior Subordinated Notes......... 100,000 100,000 100,000
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 and $27,381 at
June 30, 2000 (unaudited).............. 68,805 77,717 82,619
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 and face amount $33,405
net of unamortized discount of $11,581
at June 30, 2000 (unaudited)........... 35,543 40,759 21,824
MCM Facilities Agreement................ -- -- 29,112
Capital lease obligations............... 7,540 6,524 6,715
-------- -------- --------
466,888 476,738 389,951
Less: current maturities................ (4,390) (7,035) (11,203)
-------- -------- --------
$462,498 $469,703 $378,748
======== ======== ========
</TABLE>
Senior Credit Facility
In connection with the merger with DCI (see Note 14), Dynamic Details
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, Dynamic Details must comply with certain restrictive covenants,
which include the requirement that Dynamic Details meet certain financial
tests. In addition, Dynamic Details 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 Dynamic
Details 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 Dynamic Details 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 Dynamic Details'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
F-16
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
non-recurring expenses). As of December 31, 1999, the Company elected the LIBOR
rate (6.5% at December 31, 1999), reset monthly.
Revolving Credit Facility
Dynamic Details 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
Dynamic Details'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,
Dynamic Details 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,
Dynamic Details had borrowings outstanding of $7.0 million on this Revolving
Credit Facility. At December 31, 1999, Dynamic Details 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, Dynamic Details 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 Dynamic Details'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 Dynamic Details, 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.
F-17
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
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 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.
MCM Facilities Agreement (Unaudited)
In connection with the acquisition of MCM (see Note 14), the Company assumed
MCM's remaining outstanding indebtedness under a facilities agreement dated May
27, 1999 between MCM and the Governor of the Bank of Scotland as arranger,
agent, security trustee, term loan bank and working capital bank ("the MCM
Facilities Agreement"). The MCM Facilities Agreement consists of (1) a Tranche
A term loan facility of approximately $26 million; (2) a Tranche B term loan
facility of approximately $4 million; (3) a Tranche C term loan facility of up
to an aggregate principal amount of approximately $5 million; and (4) a working
capital facility of up an aggregate maximum principal amount of approximately
$6 million.
The MCM Facilities Agreement expires in June 30, 2007 and requires MCM to
meet financial ratios and to comply with other restrictive covenants.
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.
F-18
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
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 2.06% for Tranche A, 3.56% for Tranche B, and 2.06% for
Tranche C and 2.06% for the working capital facility. Interest payments are due
quarterly.
The MCM Facilities Agreement requires payments of non-utilization fees on
the average unused portion of each of the facilities.
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, Dynamic Details 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 Capital Senior Discount
Notes may require Dynamic Details 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).
F-19
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
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).
Pursuant to the management agreement with Bain, and in connection with the
MCM transaction (see Note 14) and related matters, Bain was paid a fee of
approximately $3 million (unaudited). The management agreement with Bain was
terminated by mutual consent of the parties in connection with the Company's
initial public offering which closed on April 14, 2000 (see Note 18).
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>
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
F-20
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
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.
Unaudited -- In April 2000, due to the repayment of a portion of the
principal of the Senior Term Facility funded from the proceeds of the initial
public offering (see Note 18), the Company modified the New Swap Agreements.
Under the terms of the modified New Swap Agreements, the application of the
interest rate caps of 5.65% and 7.00% has been extended until December 31, 2001
(from August 31, 2001) and the notional amount of the swap through December 31,
2001 was reduced in proportion to the reduction in Senior Term Facility
principal. The interest rate cap of 5.65%, however, is now only effective
through December 31, 2000 when it becomes 5.75% which is effective from January
1, 2001 through the end of the swap term on December 31, 2001. In addition, the
application of the fixed annual rate of 7.35% has been deferred until January
1, 2002 (from September 1, 2001).
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.
Unaudited -- MCM entered into an interest rate swap agreement effective
January 12, 2000 which represents an effective cash flow hedge of the variable
rate of interest (3-month LIBOR) paid under the MCM facilities agreement,
minimizing exposure to increases in interest rates related to this debt over
the scheduled term of the swap through September 2002. Under the swap terms,
MCM pays a fixed rate of interest, an annual rate of 6.92%. This rate is
applied to fixed amounts of debt per the agreement, which approximate 80% of
the outstanding balance at June 30, 2000.
F-21
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
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-22
<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 3,267,726 shares of
Common Stock and (iv) converted the remaining approximately 513 unexercised
options to purchase shares of Old Common into options to purchase approximately
739,810 shares of Common Stock. 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
F-23
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
Common. At December 31, 1999, approximately 117,405 options to purchase shares
of Common Stock at $0.34 per share and approximately 413,685 options to
purchase shares of Common Stock at $2.44 per share remain outstanding and fully
vested.
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 447,174
shares of Common Stock. In connection with the initial public offering (see
Note 18), these affiliates of The Chase Manhattan Bank received 447,123
(unaudited) shares of Common Stock through a cashless exercise of their
outstanding warrants. A fair value of $3,420 was ascribed to the warrants and
recorded as a debt discount. In connection with the initial public offering,
these warrants were exercised.
In connection with the DCI merger (Note 14), warrants were granted to
purchase 195,406 shares of Common Stock at $21.79 per share. Such warrants are
exercisable through July 22, 2008.
Common Stock
The Company has one authorized class of Common Stock with a par value of
$0.01.
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 659,786 shares of 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 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 (329,893) have an exercise price of $1.78 ("$1.78 Options"),
with the other half having an exercise price of $21.79 ("$21.79 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.
F-24
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
Stock option activity under the 1997 Employee Stock Option Plan is:
<TABLE>
<CAPTION>
$1.78 Options $21.79 Options
----------------- ----------------
Number Number
Exercise of Exercise of
Price Shares Price Shares
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Granted............................... $1.78 326,089 $21.79 326,089
Exercised............................. $1.78 (326,089) -- --
Forfeited............................. -- -- -- --
-------- -------
Balance at December 31, 1997.......... -- -- $21.79 326,089
Granted............................... -- -- -- --
Exercised............................. -- -- -- --
Forfeited............................. -- -- -- --
-------- -------
Balance at December 31, 1998.......... -- -- $21.79 326,089
Granted............................... $1.78 27,444 $21.79 33,778
Exercised............................. -- -- -- --
Forfeited............................. -- -- $21.79 (25,333)
-------- -------
Balance at December 31, 1999.......... $1.78 27,444 $21.79 334,534
Granted (unaudited)................... -- -- -- --
Exercised (unaudited)................. $1.78 (1,520) -- --
Forfeited (unaudited)................. $1.78 (4,093) $21.79 (5,615)
-------- -------
Balance at June 30, 2000 (unaudited).. $1.78 21,831 $21.79 328,919
======== =======
Exercisable at December 31, 1999...... 4,562 158,043
======== =======
Exercisable at June 30, 2000
(unaudited).......................... 6,462 194,517
======== =======
</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 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-25
<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 Common Stock. The options granted in 1998 bear exercise prices of
either $0.56 ("$0.56 Options"), $21.79 ("$21.79 Options") or $12.64 ("$12.64
Options"). During 1999, options to purchase shares of Common Stock were also
granted with an exercise price of $1.78. The Board 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 the Board up to an aggregate
of 1,440,412 shares of Common Stock, in the case of the DCI 1996 Plan, and
297,712 shares of 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 105,948 shares of Common Stock and 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>
$0.56 Options $21.79 Options $1.78 Options $12.64 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................... $0.56 718,122 $21.79 39,160 -- -- $12.64 935,855
Granted................. -- -- -- -- -- -- -- --
Exercised............... $0.56 (328,357) -- -- -- -- -- --
Forfeited............... $0.56 (9,316) $21.79 (533) -- -- $12.64 (12,736)
----- -------- ------ ------ ----- ------ ------ --------
Balance at December 31,
1998................... $0.56 380,449 $21.79 38,627 -- -- $12.64 923,119
Granted................. $0.56 4,551 $21.79 247 $1.78 25,268 $12.64 5,936
Exercised............... $0.56 (110,774) -- -- -- -- -- --
Forfeited............... $0.56 (31,355) $21.79 (1,727) -- -- $12.64 (41,291)
----- -------- ------ ------ ----- ------ ------ --------
Balance at December 31,
1999................... $0.56 242,871 $21.79 37,147 $1.78 25,268 $12.64 887,764
Granted (unaudited)..... -- -- -- -- -- -- -- --
Exercised (unaudited)... $0.56 (86,788) -- -- $1.78 (962) $12.64 (220,055)
Forfeited (unaudited)... $0.56 (792) $21.79 (109) $1.78 (3,597) $12.64 (2,651)
----- -------- ------ ------ ----- ------ ------ --------
Balance at June 30, 2000
(unaudited)............ $0.56 155,291 $21.79 37,038 $1.78 20,709 $12.64 665,058
===== ======== ====== ====== ===== ====== ====== ========
Exercisable at
December 31, 1999...... 68,446 27,658 1,581 660,938
======== ====== ====== ========
Exercisable at June 30,
2000 (unaudited)....... 33,183 29,741 3,597 532,485
======== ====== ====== ========
</TABLE>
F-26
<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 $0.56 Options and $1.78 Options
or two years for both $21.79 Options and $12.64 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>
$0.56 Options................................................ Nil Nil
$1.78 Options................................................ -- $0.04
$21.79 Options............................................... Nil Nil
$12.64 Options............................................... $1.35 $1.42
</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>
Unaudited -- During 2000, the Company adopted the 2000 Equity Incentive Plan
(the "2000 Plan"). No future grants will be made under existing plans as of the
effective date of the 2000 Plan. A total of (a) 4,100,000 shares of Common
Stock, (b) any shares returned to existing plans as a result of termination of
options and (c) annual increases of 1.0% of outstanding Common Stock to be
added on the date of each annual meeting of the Company's stockholders
commencing in 2001, or such lesser amounts as may be determined by the Company,
will be reserved for issuance pursuant to the 2000 Plan. The 2000 Plan provides
for the grant of incentive stock options to employees (including officers and
employee directors) and for the grant of nonstatutory stock options to
employees, directors and consultants. 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 the Company
determines. The Company has granted 1,923,580 options with a weighted average
exercise price of $13.18 to purchase shares of Common Stock under the 2000
Plan. These options have an average life of 4 years and vest in yearly
installments for the first 2 years and quarterly installments thereafter. As of
June 30, 2000, 32,270 options had been forfeited, leaving 1,891,210 options to
purchase shares of Common Stock outstanding as of that date.
Unaudited -- During 2000, the Company's Board of Directors adopted the
Employee Stock Purchase Plan ("ESPP") and the non-U.S. Employee Stock Purchase
Plan ("non-U.S. ESPP") (collectively the "Plans"). The Plans allow eligible
employees to purchase shares of Common Stock through payroll deductions at a
discounted price. A total of 1,450,000 shares of Common Stock are reserved for
issuance under the Plans, 1,250,000 shares under the ESPP, which is intended to
qualify under Section 423 of the Internal Revenue Code and 200,000 shares under
the non-U.S. ESPP. The Plans 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 commenced on April 14, 2000, the date of the initial
public offering. Unless terminated earlier by the Company's Board of Directors,
the plans have a term of ten years. As of June 30, 2000, 30,492 shares of
Common Stock were purchased through the ESPP.
F-27
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
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.
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.
F-28
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
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 believes 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.
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
F-29
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
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 2000, Bain was paid a fee of approximately $3 million
(unaudited) in connection with the MCM transaction and related matters. In
1999, Bain was paid fees of approximately $1.1 million for advisory services.
This Management Agreement was terminated by mutual consent of the parties in
connection with the closing of the intial public offering on April 14, 2000.
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.
F-30
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
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.
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
F-31
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
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.
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.
F-32
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
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 through 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.
MCM (unaudited)
On April 14, 2000, DDi Corp. completed the acquisition of MCM Electronics
("MCM"), a time-critical electronics manufacturing service provider based in
the United Kingdom, for a total purchase price of approximately $84 million,
excluding acquisition expenses of approximately $4 million, paid in a
combination of cash of approximately $10 million, the issuance of 2,230,619
shares of DDi Corp. common stock valued at approximately $31 million, the
repayment of outstanding indebtedness of MCM of approximately $24 million, and
the assumption of approximately $23 million of MCM's remaining outstanding
indebtedness (net of cash acquired of approximately $8 million).
The acquisition of MCM was accounted for as a purchase in accordance with
Accounting Principles Board Opinion No. 16, and accordingly, the results of
operations of MCM since the date of acquisition are included in the
accompanying consolidated financial statements of DDi Corp. The total purchase
price has been allocated to the underlying assets and liabilities based upon
their estimated respective fair values at the date of acquisition. The Company
is in the process of evaluating its intangible assets to finalize the
allocation of the total purchase price. The Company intends to allocate a
portion of the purchase price to acquired in-process research and development
("in-process R&D"), developed technologies, customer relationships/tradenames
and assembled workforce. These intangibles will be amortized over their
estimated useful lives. The residual value will be allocated to goodwill and
will be amortized over its estimated useful life of 20 years.
Based upon the status of the Company's valuation efforts as of the date of
this filing, a final valuation of the intangible assets has not been reflected
in the accompanying consolidated financial statements. The excess of the
purchase price over the fair value of MCM's tangible net assets is currently
reflected as goodwill and is being amortized over its estimated useful life of
20 years.
F-33
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
The accompanying consolidated statements of operations include the accounts
of MCM for the period April 14, 2000 through June 30, 2000. The following pro
forma information for the six months ended June 30, 2000 and 1999 presents net
sales, income (loss) before extraordinary item and net loss for each of these
periods as if this transaction was consummated at the beginning of each period.
Management is assessing purchase price allocation adjustments to assets
acquired (including identifiable intangibles and in-process research and
development efforts) and to liabilities assumed in the MCM acquisition based on
fair values. The following pro forma information does not reflect final
purchase price allocation results. These results may have a material effect on
the reported results of operations.
<TABLE>
<CAPTION>
Pro Forma Pro Forma
June 30, 2000 June 30, 1999
------------- -------------
(unaudited) (unaudited)
<S> <C> <C>
Net Sales........................................ $197,600 $161,000
Income (Loss) Before Extraordinary Item.......... $ 500 $(16,100)
Net Loss......................................... $ (2,000) $(16,100)
Net loss per share of common stock--basic and
diluted....................................... $ (0.09) $ (1.65)
</TABLE>
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. 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 closure of the facility was
effectively complete as of March 31, 2000. The accrued exit costs remaining as
of June 30, 2000 are approximately $0.2 million, representing expenses related
to net rental payments through scheduled maturities of real property operating
leases.
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
F-34
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
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. The sale or other disposition of impaired
assets has occurred by June 30, 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.
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,
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
F-35
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
severally, by Dynamic Details (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.
SUPPLEMENTAL DYNAMIC DETAILS, INCORPORATED CONDENSED FINANCIAL DATA
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
------------------ --------
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Current assets.................................... $ 20,755 $ 22,472 $ 32,721
Non-current assets................................ 287,619 329,490 306,845
-------- -------- --------
Total assets.................................... $308,374 $351,962 $339,566
======== ======== ========
Current liabilities............................... $ 37,372 $ 29,089 $ 27,465
Non-current liabilities........................... 348,950 354,397 243,942
-------- -------- --------
Total liabilities............................... $386,322 $383,486 $271,407
-------- -------- --------
Total stockholders' equity (deficit)............ $(77,948) $(31,524) $ 68,159
-------- -------- --------
Total liabilities and stockholders' equity
(deficit)...................................... $308,374 $351,962 $339,566
======== ======== ========
</TABLE>
F-36
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
---------------------------- ----------------
1997 1998 1999 1999 2000
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Net sales..................... $ 77,988 $ 83,560 $ 96,441 $42,913 $64,131
Cost of sales................. 37,929 43,759 50,879 23,085 34,401
-------- -------- -------- ------- -------
Gross profit.................. 40,059 39,801 45,562 19,828 29,730
Operating expenses............ 42,770 9,682 16,250 5,119 9,213
-------- -------- -------- ------- -------
Income (loss) from
operations................... (2,711) 30,119 29,312 14,709 20,517
Interest expense, net......... (17,738) (27,216) (32,414) (16,809) (14,752)
-------- -------- -------- ------- -------
Income (loss) before taxes and
extraordinary loss........... (20,449) 2,903 (3,102) (2,100) 5,765
Income tax benefit (expense).. 8,030 280 1,260 757 (861)
-------- -------- -------- ------- -------
Income (loss) before
extraordinary loss........... (12,419) 3,183 (1,842) (1,343) 4,904
Extraordinary loss, net of
income tax benefit........... (1,588) (2,414) -- -- (670)
Equity in loss of
subsidiaries................. (77) (46,714) (6,637) (4,649) (586)
-------- -------- -------- ------- -------
Net income (loss)........... $(14,084) $(45,945) $ (8,479) $(5,992) $ 3,648
======== ======== ======== ======= =======
</TABLE>
18. INITIAL PUBLIC OFFERING (UNAUDITED)
On April 14, 2000, DDi Corp. completed an initial public offering of
12,000,000 shares of its common stock at $14.00 per share generating proceeds
of $156,660, net of underwriting discounts and commissions. The net proceeds
were used to repay $100,000 of the Senior Term Facility, redeem $21,214
accreted balance of the Intermediate Senior Discount Notes, pay associated
redemption premiums and accrued and unpaid interest thereon, finance a portion
of the acquisition of MCM (see Note 14) and pay offering expenses. In
conjunction with the redemption of debt, the Company recorded net extraordinary
losses (see Note 19).
19. EXTRAORDINARY ITEM (UNAUDITED)
During the quarter ended June 30, 2000, the Company recorded extraordinary
items of approximately $2,551, net of related taxes of $1,631. The
extraordinary items consisted of write-offs of deferred financing fees and
deferred swap income related to the Senior Term Facility principal repayments
funded from the net proceeds of the Company's initial public offering (see Note
18) and the redemption premium and write-off of deferred financing fees related
to the Intermediate Senior Discount Notes principal repayments funded from the
net proceeds of the Company's initial public offering.
20. SUBSEQUENT EVENTS (UNAUDITED)
On August 4, 2000, the Company completed the acquisition of the assets of
Automata International, Inc. ("Automata"), a Virginia-based manufacturer of
technologically advanced printed circuit boards. The Company acquired the
rights to the manufacturing facility, fixed assets and other assets of Automata
for total cash consideration of approximately $19.5 million (net of fees and
expenses). In addition, on September 15, 2000, the Company completed the
acquisition of the assets of Golden Manufacturing, Inc. ("Golden"), a Texas-
based manufacturer of engineered metal enclosures and value-added assembly
services to communications and electronics original equipment manufacturers for
approximately $14.9 million in cash, net of fees and expenses. These
transactions will be accounted for under the purchase method of accounting and
the purchase price will be allocated to the underlying assets acquired and
liabilities assumed based upon their respective fair market values at the
respective dates of acquisition. No adjustments have been made to the
accompanying historical consolidated financial statements for these
transactions.
F-37
<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-38
<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-39
<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-40
<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-41
<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-42
<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-43
<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-44
<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-45
<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-46
<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-47
<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-48
<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-49
<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-50
<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-51
<PAGE>
Report of Independent Public Accountants
To the shareholders
We have audited the accompanying consolidated balance sheets of MCM
Electronics Limited as of 31 March 2000 and of its predecessor, Symonds
Limited, as of 30 June 1999 (not separately presented herein), and the related
consolidated profit and loss accounts, reconciliations of movements in
consolidated shareholders' funds and consolidated cash flow statements for the
nine months and three months then ended, respectively. 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 MCM Electronics Limited as of 31 March 2000, and the consolidated results of
its operations and its consolidated cash flows for the nine months ended 31
March 2000, and the consolidated results of operations and consolidated cash
flows of Symonds Limited for the three months ended 30 June 1999, in conformity
with generally accepted accounting principles in the United Kingdom.
Accounting principles generally accepted in the United Kingdom vary in
certain significant respects from accounting principles generally accepted in
the United States. Application of accounting principles generally accepted in
the United States would have affected results of operations for the nine month
period ended 31 March 2000 and three month period ended 30 June 1999 and
shareholders' funds as of 31 March 2000, to the extent summarised in note 31 to
the consolidated financial statements.
KPMG Audit Plc /s/ KPMG Audit Plc
Chartered Accountants KPMG Audit Plc
Birmingham, England
11 September 2000
F-52
<PAGE>
MCM ELECTRONICS LIMITED/SYMONDS LIMITED
CONSOLIDATED PROFIT AND LOSS ACCOUNTS
<TABLE>
<CAPTION>
Nine months Three months
ended ended
Notes 31 March 2000 30 June 1999
----- ------------- ------------
(Pounds)000 (Pounds)000
<S> <C> <C> <C>
Turnover..................................... 1
Continuing operations........................ 28,315 8,636
Discontinued operations...................... -- 160
------- ------
28,315 8,796
Operating costs.............................. 2 (25,448) (8,361)
------- ------
Operating profit before goodwill and
exceptional items:
Continuing operations........................ 4,017 957
Discontinued operations...................... -- (4)
------- ------
4,017 953
------- ------
Operating exceptional items:
Continuing operations........................ 1 (378) (518)
------- ------
Goodwill amortisation........................ (772) --
------- ------
Operating profit............................. 1
Continuing operations........................ 2,867 439
Discontinued operations...................... -- (4)
------- ------
Total operating profit................... 2,867 435
Exceptional items............................ 3
Discontinued operations:
Profit on disposal of a business............. -- 48
------- ------
Profit on ordinary activities before
interest.................................... 2,867 483
Interest receivable.......................... 354 25
Interest payable and similar charges......... 5 (3,699) (65)
------- ------
(Loss)/profit on ordinary activities before
taxation.................................... (478) 443
Tax on (loss)/profit on ordinary activities.. 6 (323) (278)
------- ------
Retained (loss)/profit for the period........ 19 (801) 165
======= ======
(Loss)/earnings per share.................... 7 (63p) 0.2p
======= ======
</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.
The nine months ended 31 March 2000 results are of MCM Electronics Limited
whilst the three months ended 30 June 1999 are of Symonds Limited--see
Accounting Policies--Basis of Consolidation.
See accompanying notes to the financial statements.
F-53
<PAGE>
MCM ELECTRONICS LIMITED/SYMONDS LIMITED
RECONCILIATIONS OF MOVEMENTS IN CONSOLIDATED SHAREHOLDERS' FUNDS
<TABLE>
<CAPTION>
Nine months Three months
ended ended
31 March 30 June
2000 1999
----------- ------------
(Pounds)000 (Pounds)000
<S> <C> <C>
(Loss)/profit for the period.......................... (801) 165
Issue of shares....................................... 1,333 --
Goodwill written back on disposal of a business....... -- 281
----- -----
Net movement in shareholders' funds................... 532 446
Equity shareholders' funds at beginning of period..... -- 9,106
----- -----
Equity shareholders' funds at end of period........... 532 9,552
===== =====
</TABLE>
The nine months ended 31 March 2000 results are of MCM Electronics Limited
whilst the three months ended 30 June 1999 are of Symonds Limited--see
Accounting Policies--Basis of Consolidation.
See accompanying notes to the financial statements.
F-54
<PAGE>
MCM ELECTRONICS LIMITED/SYMONDS LIMITED
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
31 March
Notes 2000
----- -----------
(Pounds)000
<S> <C> <C>
Fixed assets
Tangible assets.............................................. 8 7,545
Intangible fixed assets...................................... 9 19,805
-------
27,350
Current assets
Stocks....................................................... 11 3,363
Debtors...................................................... 12 9,416
Cash at bank and short term deposits......................... 4,969
-------
17,748
-------
Creditors: amounts falling due within one year............... 13 (43,825)
-------
Net current liabilities...................................... (26,077)
-------
Total assets less current liabilities........................ 1,273
-------
Creditors: amounts falling due after more than one year...... 14 (297)
Provisions for liabilities and charges....................... 16 (444)
-------
Net assets................................................... 532
=======
Capital and reserves
Called up share capital...................................... 18 13
Share premium account........................................ 18 1,320
Profit and loss account...................................... 19 (801)
-------
Equity shareholders' funds................................... 532
=======
</TABLE>
The above relates to MCM Electronics Limited--see Accounting Policies--Basis
of Consolidation.
See accompanying notes to the financial statements.
F-55
<PAGE>
MCM ELECTRONICS LIMITED/SYMONDS LIMITED
CONSOLIDATED CASH FLOW STATEMENTS
<TABLE>
<CAPTION>
Nine months Three months
ended ended
31 March 30 June
Notes 2000 1999
----- ----------- ------------
(Pounds)000 (Pounds)000
<S> <C> <C> <C>
Net cash flow from operating activities........ 20 4,078 (446)
------- ------
Returns on investments and servicing of finance
Interest received.............................. 354 25
Interest paid.................................. (1,387) (45)
Interest element of finance lease payments..... (26) (20)
------- ------
(1,059) (40)
------- ------
Tax paid....................................... (108) (108)
------- ------
Capital expenditure
Purchase of tangible fixed assets.............. (219) (876)
Sale of tangible fixed assets.................. 10 33
------- ------
(209) (843)
------- ------
Acquisitions and disposals
Net cash payable in respect of acquisitions.... 25 (30,665) --
Net cash consideration in respect of subsidiary
disposals..................................... 24 1,042 249
------- ------
(29,623) 249
------- ------
Cash flow before financing and management of
liquid resources.............................. (26,921) (1,188)
------- ------
Financing and management of liquid resources
Issue of shares................................ 21 1,333 --
Movement in debt............................... 21 28,471 (319)
Movement in liquid resources................... 21 (2,300) 624
------- ------
27,504 305
------- ------
Increase/(decrease) in cash in the period...... 22 583 (883)
======= ======
</TABLE>
The nine months ended 31 March 2000 results are of MCM Electronics Limited
whilst the three months ended 30 June 1999 are of Symonds Limited--see
Accounting Policies--Basis of Consolidation.
See accompanying notes to the financial statements.
F-56
<PAGE>
MCM ELECTRONICS LIMITED/SYMONDS LIMITED
ACCOUNTING POLICIES
The accompanying consolidated financial statements for the nine months
ended 31 March 2000 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 MCM Electronics Limited statutory accounts for the nine months
to 31 March 2000 upon which an unqualified audit report has been given.
Statutory accounts have not been prepared for Symonds Limited for the three
months ended 30 June 1999.
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 31 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 financial statements for the three months to 30 June 1999 consolidate
the financial statements of Symonds Limited and all its subsidiary
undertakings made up to that date. The results of businesses acquired or sold
during the period are included in the Group financial statements from the date
of acquisition or to the date of disposal.
The financial statements for the nine months ended 31 March 2000 and as at
31 March 2000 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. Prior to its sale on 14 April 2000, MCM Electronics
Limited was a company owned by the executive directors of Symonds Limited
together with external investors (see note 30). MCM Electronics Limited was
incorporated on 11 March 1999 and commenced trading on the acquisition of
Symonds Limited.
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. The recoverability of the
intangible asset is assessed and any impairment in value taken into account.
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.
F-57
<PAGE>
MCM ELECTRONICS LIMITED/SYMONDS LIMITED
ACCOUNTING POLICIES--(Continued)
Tangible fixed assets and depreciation
Tangible fixed assets are stated at cost, less depreciation. Deprecation is
provided on all tangible fixed assets, other than freehold land, at rates
calculated to write off the cost, less residual value, over the estimated
useful life in each company of each asset as follows:
<TABLE>
<C> <C> <S>
Freehold buildings.............. 2% On straight line
Leasehold property.............. Over the term of the lease
On straight line or reducing
Plant and equipment............. 10-25% balance
On straight line or reducing
Computer equipment.............. 17-25% balance
On straight line or reducing
Office furniture and equipment.. 15-25% balance
On straight line or reducing
Motor vehicles.................. 25% 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)4,386,000 at
31 March 2000, 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.
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.
F-58
<PAGE>
MCM ELECTRONICS LIMITED/SYMONDS LIMITED
ACCOUNTING POLICIES--(Continued)
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-59
<PAGE>
MCM ELECTRONICS LIMITED/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>
Nine months Three months
ended ended
31 March 30 June
2000 1999
----------- ------------
(Pounds)000 (Pounds)000
<S> <C> <C>
United Kingdom...................................... 24,673 8,104
Europe.............................................. 3,626 672
Rest of World....................................... 16 20
------ -----
28,315 8,796
====== =====
</TABLE>
The Group's turnover, operating profit, and net operating assets for the
nine months ended 31 March 2000 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........................ 17,432 4,084 4,349
Electronic manufacturing services...... 11,297 303 3,436
Group.................................. -- (1,520) 21,658
------ ------ -------
28,729 2,867 29,443
Less: inter-segmental turnover......... (414)
------
28,315
======
Net interest........................... (3,345)
------
Loss on ordinary activities before
taxation.............................. (478)
======
Net indebtedness....................... (28,911)
-------
Net assets............................. 532
=======
</TABLE>
Group operating profit is stated after charging goodwill amortisation of
(Pounds)772,000.
The exceptional operating item of (Pounds)378,000 in the period to 31 March
2000 is a material bad debt incurred in this period in the electronic
manufacturing services segment.
F-60
<PAGE>
MCM ELECTRONICS LIMITED/SYMONDS LIMITED
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
The Group's turnover, operating profit and net operating assets for the
three months ended 30 June 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........................ 5,046 1,011 5,223
Electronic manufacturing services...... 3,756 230 609
Group.................................. -- (802) 5,024
----- ----- ------
8,802 439 10,856
Discontinued operations:
Process Technology..................... 160 (4) --
----- ----- ------
8,962 435 10,856
Less: inter-segmental turnover......... (166)
-----
8,796
=====
Profit on disposal of a business (see
note 3)............................... 48
Net interest........................... (40)
-----
Profit on ordinary activities before
taxation.............................. 443
=====
Net indebtedness....................... (1,304)
------
Net assets............................. 9,552
======
</TABLE>
Discontinued operations comprise Finishing Technology Limited disposed of in
June 1999. The disposal of Finishing Technology Limited is analysed in Note 24.
The exceptional operating items totalling (Pounds)518,000 incurred by
Symonds Limited in the period to 30 June 1999 and included in the Group segment
were acquisition advisory costs incurred by the company in respect of its
acquisition by MCM Electronics Limited.
2. OPERATING PROFIT
<TABLE>
<CAPTION>
Nine months Three months
ended ended
31 March 30 June
2000 1999
----------- ------------
(Pounds)000 (Pounds)000
<S> <C> <C>
Operating profit is stated after
charging/(crediting):
Auditors' remuneration--audit.................. 50 --
--other services......................... 295 55
Depreciation--owned fixed assets............... 1,182 489
--finance leased assets................... 124 25
Operating lease rentals--plant and machinery... 399 110
--land and buildings.................... 800 220
Loss on sale of fixed assets..................... 7 --
Gain on foreign exchange......................... (16) --
===== ===
</TABLE>
F-61
<PAGE>
MCM ELECTRONICS LIMITED/SYMONDS LIMITED
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Operating costs are analysed as follows:
<TABLE>
<CAPTION>
Nine months
ended
31 March
2000
-----------
(Pounds)000
<S> <C>
Change in work in progress and finished goods.................... (441)
Raw materials and consumables.................................... 11,227
Other external charges........................................... 2,957
Staff costs...................................................... 7,398
Depreciation..................................................... 1,306
Other operating charges.......................................... 2,229
Goodwill amortisation............................................ 772
------
25,448
======
</TABLE>
<TABLE>
<CAPTION>
Three months ended 30 June 1999
------------------------------------
Continuing Discontinued
operations operations Total
----------- ------------ -----------
(Pounds)000 (Pounds)000 (Pounds)000
<S> <C> <C> <C>
Change in work in progress and
finished goods...................... 151 -- 151
Raw materials and consumables........ 3,252 112 3,364
Other external charges............... 944 8 952
Staff costs.......................... 2,453 26 2,479
Depreciation......................... 514 -- 514
Other operating charges.............. 883 18 901
----- --- -----
8,197 164 8,361
===== === =====
</TABLE>
3. EXCEPTIONAL ITEMS
Nine months ended 31 March 2000
In October 1999 Garner Osborne Circuits Limited was disposed of and Osborne
Precision Sheetmetal Limited was also disposed of in November 1999. Total
goodwill eliminated on disposal of these subsidiaries was (Pounds)426,000 with
these disposals resulting in neither a loss nor gain to the group.
Three months ended 30 June 1999
<TABLE>
<CAPTION>
(Pounds)000
<S> <C>
Discontinued business:
Profit on disposal of a business................................. 48
===
</TABLE>
The profit on disposal of a business represents the profit on sale of
Finishing Technology Limited of (Pounds)48,000 (after charging (Pounds)281,000
of goodwill previously eliminated).
F-62
<PAGE>
MCM ELECTRONICS LIMITED/SYMONDS LIMITED
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
4. EMPLOYEES
(a) Number of employees
The average number of persons employed during the period was as follows:
<TABLE>
<CAPTION>
Nine months Three months
ended ended
31 March 30 June
2000 1999
----------- ------------
Number Number
<S> <C> <C>
Production.......................................... 413 450
Sales and administration............................ 78 89
--- ---
491 539
=== ===
</TABLE>
(b) Staff costs
<TABLE>
<CAPTION>
Nine months Three months
ended ended
31 March 30 June
2000 1999
----------- ------------
(Pounds)000 (Pounds)000
<S> <C> <C>
Wages and salaries.................................. 6,643 2,218
Social security..................................... 591 200
Other pension costs................................. 164 61
----- -----
7,398 2,479
===== =====
</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.
5. INTEREST PAYABLE AND SIMILAR CHARGES
<TABLE>
<CAPTION>
Nine months Three months
ended ended
31 March 30 June
2000 1999
----------- ------------
(Pounds)000 (Pounds)000
<S> <C> <C>
On bank loans and overdrafts........................ 1,365 41
On finance leases................................... 26 15
On loan notes....................................... 22 9
On other loans...................................... 663 --
----- ---
2,076 65
Debt issue costs written off........................ 1,623 --
----- ---
3,699 65
===== ===
</TABLE>
The debt issue costs have been written off in anticipation of the early
repayment of the debt arising on the acquisition of Symonds Limited (see note
15).
F-63
<PAGE>
MCM ELECTRONICS LIMITED/SYMONDS LIMITED
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
6. TAXATION
<TABLE>
<CAPTION>
Nine months Three months
ended ended
31 March 30 June
2000 1999
----------- ------------
(Pounds)000 (Pounds)000
<S> <C> <C>
UK corporation tax payable at 30%................... (15) 278
Deferred tax........................................ 338 --
--- ---
323 278
=== ===
</TABLE>
The high effective tax charge in the period to 31 March 2000 is principally
a result of the disallowable goodwill charge in the period.
7. (LOSS)/EARNINGS PER SHARE
The loss per ordinary share for the period to 31 March 2000 has been
calculated by reference to the weighted average 1,271,111 (30 June 1999:
69,472,208) ordinary shares in issue during the period and the Group loss after
taxation for the financial period of (Pounds)801,000 (30 June 1999: profit
(Pounds)165,000).
8. 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
Acquisition of subsidiary
undertakings.............. 1,772 13,214 2,316 17,302
Additions.................. 73 382 243 698
Disposals.................. (103) (904) (35) (1,042)
Sale of subsidiaries....... (41) (1,009) (175) (1,225)
----- ------ ----- ------
31 March 2000............ 1,701 11,683 2,349 15,733
===== ====== ===== ======
Depreciation
Acquisition of subsidiary
undertakings.............. 441 6,786 1,133 8,360
Charge for the period...... 139 923 244 1,306
Disposals.................. (99) (733) (20) (852)
Sale of subsidiaries....... (31) (521) (74) (626)
----- ------ ----- ------
31 March 2000............ 450 6,455 1,283 8,188
===== ====== ===== ======
Net book value
31 March 2000............ 1,251 5,228 1,066 7,545
===== ====== ===== ======
</TABLE>
Analysis of land and buildings
<TABLE>
<CAPTION>
31 March
2000
-----------
(Pounds)000
<S> <C>
Freehold......................................................... 297
Short leasehold.................................................. 954
-----
Net book value................................................... 1,251
=====
</TABLE>
F-64
<PAGE>
MCM ELECTRONICS LIMITED/SYMONDS LIMITED
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Hire purchase and finance leased assets
Plant, equipment and motor vehicles include assets with a net book value of
(Pounds)843,000 which are subject to finance leases.
9. INTANGIBLE FIXED ASSETS
<TABLE>
<CAPTION>
Goodwill
-----------
(Pounds)000
<S> <C>
Cost
Acquisition of subsidiary undertakings........................... 21,003
Eliminated on disposal of subsidiaries........................... (426)
------
31 March 2000.................................................. 20,577
======
Amortisation
Charge for the period............................................ 772
------
31 March 2000.................................................. 772
======
Net book value
31 March 2000.................................................. 19,805
======
</TABLE>
Goodwill eliminated relates to the disposals of Garner Osborne Circuits
Limited and Osborne Precision Sheetmetal Limited, which occurred in October
1999 and November 1999 respectively.
10. INVESTMENTS
Principal subsidiaries at 31 March 2000
<TABLE>
<CAPTION>
Company Principal activity % equity held
------- ------------------ -------------
<S> <C> <C>
Symonds Limited Intermediate holding company *100
Zlin Electronics Limited Manufacture of printed circuit boards 100
Classical Circuits Manufacture of printed circuit boards 100
Limited
Zlin International Supply of high volume printed circuit boards 100
Limited
Calne Electronics Manufacture and assembly of electronic and electrical equipment 100
Limited
Pretan Limited Sheet metal fabrication 100
Integrated Designs & Design of electronic and electrical equipment 100
Systems Limited
Symonds Precision Precision sheet metal fabrication 100
Limited
</TABLE>
All of the company's subsidiary undertakings are incorporated and operate in
Great Britain.
Shareholdings marked * are directly owned by MCM Electronics Limited and the
remainder are held through subsidiary undertakings.
F-65
<PAGE>
MCM ELECTRONICS LIMITED/SYMONDS LIMITED
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
11. STOCKS
<TABLE>
<CAPTION>
31 March
2000
-----------
(Pounds)000
<S> <C>
Raw materials and consumables.................................... 852
Work in progress................................................. 2,119
Finished goods................................................... 392
-----
3,363
=====
12. DEBTORS
<CAPTION>
31 March
2000
-----------
(Pounds)000
<S> <C>
Trade debtors.................................................... 8,050
Other debtors.................................................... 699
Prepayments and accrued income................................... 667
-----
9,416
=====
</TABLE>
Included within other debtors above are amounts totalling (Pounds)255,000
which fall due after more than one year.
13. CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
<TABLE>
<CAPTION>
31 March
2000
-----------
(Pounds)000
<S> <C>
Bank overdrafts and loans........................................ 18,500
Other loans...................................................... 14,205
Obligations under finance leases................................. 305
Trade creditors.................................................. 5,211
Corporation tax.................................................. 518
Other creditors.................................................. 647
Other taxation and social security............................... 1,163
Accruals and deferred income..................................... 2,703
Loan notes....................................................... 573
------
43,825
======
</TABLE>
14. CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
<TABLE>
<CAPTION>
31 March
2000
-----------
(Pounds)000
<S> <C>
Obligations under finance leases................................. 297
===
</TABLE>
F-66
<PAGE>
MCM ELECTRONICS LIMITED/SYMONDS LIMITED
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
15. BORROWINGS
<TABLE>
<CAPTION>
31 March
2000
-----------
(Pounds)000
<S> <C>
Bank loans....................................................... 18,500
Other loans...................................................... 14,205
Loan notes....................................................... 573
Obligations under finance leases................................. 602
------
33,880
======
Due within one year.............................................. 33,583
Due after more than one year..................................... 297
------
33,880
======
Analysis of repayments:
Bank loans
Within one year................................................ 18,500
Other loans
Within one year................................................ 14,205
Loan notes
Within one year................................................ 573
Finance leases
Within one year................................................ 305
Within one to two years........................................ 213
Within two to five years....................................... 84
------
33,880
======
</TABLE>
Amounts due under finance leases are secured on the related items of plant
and equipment.
Bank loans
As at 31 March 2000 the company had an aggregate of (Pounds)18.5 million
bank loans outstanding under the existing facilities--this is disclosed as a
short term creditor in the balance sheet as it is probable that it will be
repaid within 12 months of the balance sheet date. These loans would be
normally repayable between June 2000 and June 2007.
Borrowings under the agreement bear interest at varying rates, comprising
LIBOR, at the dates of commencement of the relevant quarterly interest period
plus a margin of 2% in the case of Tranche A, 3.5% in the case of Tranche B, 2%
in the case of Tranche C and 2% in the case of the working capital facility.
The agreement requires MCM Electronics to make interest-hedging arrangements
and consequently MCM Electronics entered into an interest rate swap agreement
effective 12 January 2000 and represents a hedge of the variable rate of
interest (3 month LIBOR) paid under the MCM Electronics facilities agreement,
minimising exposure to increases in interest rates related to this debt over
the scheduled term of the swap, through September 2002. Under the swap terms,
MCM Electronics pays a fixed rate of interest, an annual rate of 6.92% rather
than the variable rates set out above. This rate is applied to fixed notional
amounts of debt per the agreement, which approximate 80% of the outstanding
loan balance at 31 March 2000.
F-67
<PAGE>
MCM ELECTRONICS LIMITED/SYMONDS LIMITED
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Borrowings under the agreement are secured on the assets of the Group.
Other loans
On 13 July 1999 the company borrowed (Pounds)14.205 million under the terms
of an Investment Agreement dated 27 May 1999. These loans were repaid in full
on 17 April 2000.
Loan notes
At 31 March 2000, loan notes consist of loan notes previously issued by
Symonds Limited to the vendors of Calne Electronics. These are repayable at the
holders' option and are secured by a bank guarantee. 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
within twelve months of the balance sheet date.
16. PROVISIONS FOR LIABILITIES AND CHARGES
Movements in provisions were as follows:
<TABLE>
<CAPTION>
Deferred
tax
-----------
(Pounds)000
<S> <C>
Acquisition of subsidiary undertakings........................... 140
Transfer to the profit and loss account.......................... 338
Sale of subsidiary............................................... (34)
---
At 31 March 2000............................................... 444
===
</TABLE>
17. DEFERRED TAX
Deferred tax provided and unprovided at a rate of 30% are as follows:
<TABLE>
<CAPTION>
Provided Unprovided
31 March 31 March
2000 2000
----------- -----------
(Pounds)000 (Pounds)000
<S> <C> <C>
Accelerated capital allowances....................... 489 (28)
Other timing differences............................. (120) (6)
Held over gain....................................... 75 --
---- ---
Total.............................................. 444 (34)
==== ===
</TABLE>
F-68
<PAGE>
MCM ELECTRONICS LIMITED/SYMONDS LIMITED
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
18. SHARE CAPITAL
<TABLE>
<CAPTION>
Increases
On during At 31 March
incorporation the period 2000
------------- ----------- -----------
(Pounds)000 (Pounds)000 (Pounds)000
<S> <C> <C> <C>
Authorised
373,333 ordinary shares of 1p each... -- 4 4
907,904 "A" ordinary shares of 1p
each................................ -- 9 9
93,334 "B" ordinary shares of 1p
each................................ -- 1 1
--- --- ---
-- 14 14
=== === ===
Allotted, called up and fully paid
373,333 ordinary shares of 1p each... -- 4 4
866,667 "A" ordinary shares of 1p
each................................ -- 8 8
93,334 "B" ordinary shares of 1p
each................................ -- 1 1
--- --- ---
-- 13 13
=== === ===
</TABLE>
MCM Electronics Limited was incorporated on 11 March 1999 as Linksweld
Limited, with authorised share capital of 1,000 ordinary shares with a nominal
value of (Pounds)1 each. On the same date the company issued and allotted 1
ordinary share at par to the nominee shareholder.
On 24 May 1999, 2 further ordinary shares of (Pounds)1 each were issued at
par.
On 27 May 1999, the ordinary shares of (Pounds)1 each were subdivided into
100 ordinary shares of 1p each.
Ordinary shares of 1p each
On 27 May 1999, the authorised ordinary share capital was increased by
(Pounds)3,730.33 by the creation of 373,033 ordinary shares of 1p each. On the
same date, 373,033 ordinary shares were issued at a premium of 99p each.
"A" ordinary shares of 1p each
On 27 May 1999 the authorised "A" ordinary share capital was increased by
(Pounds)907.90 by the creation of 907,904 "A" ordinary shares of 1p each. On
the same date, 886,667 "A" ordinary shares were issued at a premium of 99p
each.
The "A" ordinary shares carry certain preferred rights, including the right
to a cumulative preferential net cash dividend of a defined percentage of post
tax profits of the Group, also enhanced voting rights in the event that the
company is in arrears with any payment of capital or interest on investor
loans, or of Participating Dividend, or is in breach of its financial
covenants.
If the holders of not less than 75% of the "A" ordinary shares wish to
accept an offer made for the purchase of the entire issued share capital of
the company, the remaining shareholders can be compelled to transfer their
shares on the same terms.
On a winding up, surplus assets shall be distributed to the holders of "A"
ordinary shares to cover any arrears of or accrued preferential dividends.
On 14 April 2000 41,237 "A" ordinary shares were issued at a premium of 99p
each.
F-69
<PAGE>
MCM ELECTRONICS LIMITED/SYMONDS LIMITED
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
MCM Electronics commenced trading on 5 July 1999. The cash inflow in respect
of these share issues were received prior to this commencement of trading. The
consolidated cash flow statement for the nine months ended 31 March 2000
includes the above cash flow to reflect all cash flows since the incorporation
of MCM Electronics.
"B" ordinary shares of 1p each
On 27 May 1999, the authorised "B" ordinary share capital was increased by
(Pounds)933.34 by the creation of 93,334 "B" ordinary shares of 1p each which
were subsequently issued at a premium of 99p each.
19. RESERVES
<TABLE>
<CAPTION>
Profit and
Share loss
premium account
----------- -----------
(Pounds)000 (Pounds)000
<S> <C> <C>
Issue of shares...................................... 1,320 --
Retained loss for the period......................... -- (801)
----- ----
At 31 March 2000..................................... 1,320 (801)
===== ====
</TABLE>
20. RECONCILIATION OF OPERATING PROFIT TO NET CASH INFLOW FROM OPERATING
ACTIVITIES
<TABLE>
<CAPTION>
Nine months Three months
ended ended
31 March 2000 30 June 1999
------------- ------------
(Pounds)000 (Pounds)000
<S> <C> <C>
Operating profit................................ 2,867 435
Amortisation of goodwill........................ 772 --
Depreciation.................................... 1,306 516
Movement in stocks.............................. 312 (30)
Movement in debtors............................. (298) (344)
Movement in creditors........................... (881) (1,023)
----- ------
Net cash inflow/(outflow) from operating
activities..................................... 4,078 (446)
===== ======
</TABLE>
F-70
<PAGE>
MCM ELECTRONICS LIMITED/SYMONDS LIMITED
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
21. ANALYSIS OF CASH FLOWS FROM FINANCING AND MANAGEMENT OF LIQUID RESOURCES
<TABLE>
<CAPTION>
Nine months Three months
ended ended
31 March 30 June
2000 1999
----------- ------------
(Pounds)000 (Pounds)000
<S> <C> <C>
Issue of ordinary share capital................... 1,333 --
------ ----
Investors loans................................... 14,205 --
New bank loans.................................... 18,500 --
Less:
Debt issue costs................................ (1,623) --
Bank loans repaid................................. (2,099) (96)
Other loans repaid................................ -- (93)
Loan notes repaid................................. (195) (34)
Capital element of finance lease rentals.......... (317) (96)
------ ----
28,471 (319)
------ ----
Net cash flow from financing...................... 29,804 (319)
------ ----
Movement in liquid resources...................... (2,300) 624
------ ----
Net cash outflow from management of liquid
resources........................................ (2,300) 624
------ ----
Net cash inflow from financing and management of
liquid resources................................. 27,504 305
====== ====
</TABLE>
22. ANALYSIS OF NET DEBT
<TABLE>
<CAPTION>
At
31 March Non-cash At 30 June
1999 Cash flow changes 1999
--------------- ----------- ----------- -----------
(Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000
<S> <C> <C> <C> <C>
Cash at bank and in
hand/overdrafts........ 858 (883) -- (25)
Liquid resources........ 2,710 (624) -- 2,086
Debt due within one
year................... (1,560) 223 (1,530) (2,867)
Debt due after more than
one year............... (1,530) -- 1,530 --
Finance leases.......... (644) 96 52 (496)
------ ------- ------ -------
(166) (1,188) 52 (1,302)
====== ======= ====== =======
<CAPTION>
Acquisition of
Symonds Limited Other
(excluding cash Non-cash At 31 March
and overdrafts) Cash flow changes 2000
--------------- ----------- ----------- -----------
(Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000
<S> <C> <C> <C> <C>
Cash at bank and in
hand................... -- 583 -- 583
Liquid resources........ 2,086 2,300 -- 4,386
Debt due within one
year................... (2,867) (28,788) (1,623) (33,278)
Finance leases.......... (496) 317 (423) (602)
------ ------- ------ -------
(1,277) (25,588) (2,046) (28,911)
====== ======= ====== =======
</TABLE>
F-71
<PAGE>
MCM ELECTRONICS LIMITED/SYMONDS LIMITED
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
23. RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
<TABLE>
<CAPTION>
Nine months Three months
ended ended
31 March 2000 30 June 1999
------------- ------------
(Pounds)000 (Pounds)000
<S> <C> <C>
Increase/(decrease) in cash in the period....... 583 (883)
Cash inflow/(outflow) from movement in debt and
lease financing................................ (28,471) 319
Cash inflow/(outflow) from management of liquid
resources...................................... 2,300 (624)
------- ------
Change in net debt resulting from cash flows.... (25,588) (1,188)
Loans, liquid resources and finance leases
acquired with subsidiary undertakings.......... (1,277) --
Loans and finance leases sold with disposals.... 56 52
New finance leases.............................. (479) --
Write off of debt issue costs................... (1,623) --
------- ------
Increase in net debt in the period.............. (28,911) (1,136)
Opening net debt................................ -- (166)
------- ------
Closing net debt................................ (28,911) (1,302)
======= ======
</TABLE>
24. DISPOSALS DURING THE FINANCIAL PERIODS
Finishing Technology Limited was disposed of in the period to 30 June 1999.
Osborne Precision Sheetmetal Limited and Garner Osborne Circuits Limited were
disposed of in the period to 31 March 2000. These transactions can be
summarised as follows:
<TABLE>
<CAPTION>
Nine months Three months
ended ended
31 March 30 June
2000 1999
----------- ------------
(Pounds)000 (Pounds)000
<S> <C> <C>
Net assets disposed of:
Tangible fixed assets............................. 599 56
Stocks............................................ 103 32
Debtors........................................... 381 292
Creditors......................................... (434) (460)
Deferred tax...................................... (33) --
----- ----
616 (80)
Goodwill adjusted on disposal..................... 426 281
Profit on disposal................................ -- 48
----- ----
1,042 249
===== ====
Satisfied by: Net cash proceeds (net of disposal
costs)........................................... 1,042 249
===== ====
</TABLE>
25. ACQUISITIONS DURING THE PERIOD
On 5 July 1999 MCM Electronics Limited acquired the entire issued share
capital of Symonds Limited for a consideration of (Pounds)30,640,000 including
costs.
F-72
<PAGE>
MCM ELECTRONICS LIMITED/SYMONDS LIMITED
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Goodwill arising from this acquisition has been capitalised in accordance
with Financial Reporting Standard 10 and is being amortised over the directors'
estimate of its useful economic life of 20 years.
The investment in Symonds Limited has been included in the company's balance
sheet at its fair value at the date of acquisition.
Analysis of the acquisition of Symonds Limited
Net assets at date of acquisition:
<TABLE>
<CAPTION>
Book value
and fair value
to group
--------------
(Pounds)000
<S> <C>
Tangible fixed assets....................................... 8,942
Stocks...................................................... 3,778
Debtors..................................................... 9,499
Liquid resources less overdrafts............................ 2,061
Creditors and deferred liabilities.......................... (11,140)
Bank loans.................................................. (2,099)
Loan notes.................................................. (768)
Finance leases and hire purchase agreements................. (496)
Deferred tax................................................ (140)
-------
Net assets.................................................. 9,637
=======
Fair value of assets acquired............................... 9,637
Goodwill arising on acquisition............................. 21,003
-------
Fair value of consideration payable......................... 30,640
=======
Satisfied by:
Cash acquisition of 69,746,208 Symonds plc ordinary shares
of 43p each................................................ 29,991
Costs associated with the acquisition....................... 649
-------
30,640
=======
</TABLE>
The acquisition contributed (Pounds)3,296,000 to the Group's net operating
cash flows, paid (Pounds)51,000 in respect of net returns on investments and
servicing of finance, paid (Pounds)Nil in respect of taxation, utilised
(Pounds)Nil for capital expenditure and financial investment and paid
(Pounds)2,611,000 in financing.
Symonds Limited incurred a loss after tax of (Pounds)4,338,000 during the
year to 31 March 1999. The summarised profit and loss account for the period
from 1 April 1999 to the effective date of acquisition is as follows:
<TABLE>
<CAPTION>
(Pounds)000
<S> <C>
Turnover....................................................... 8,796
-----
Operating profit, including operating exceptional costs of
(Pounds)518,000............................................... 435
Gain on disposal of business................................... 48
Interest payable and similar charges........................... (40)
-----
Profit on ordinary activities before taxation.................. 443
Tax on profit on ordinary activities........................... (278)
-----
Retained loss for the period................................... 165
=====
</TABLE>
F-73
<PAGE>
MCM ELECTRONICS LIMITED/SYMONDS LIMITED
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
The exceptional operating costs of (Pounds)518,000 represent professional
and legal fees incurred in relation to the sale of Symonds Limited"s shares to
the company.
There were no recognised gains or losses during the period other than those
shown in the summarised profit and loss account above.
Cash outflow in respect of acquisitions
<TABLE>
<CAPTION>
(Pounds)000
<S> <C>
Consideration.................................................... 30,640
Bank overdraft acquired.......................................... 25
------
30,665
======
</TABLE>
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. MCM Electronics Limited's contingent liability under this
composite cross-guarantee at 31 March 2000 was (Pounds)1,595,000.
27. FINANCIAL COMMITMENTS
Operating leases
At 31 March 2000 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...................................... -- 101
Between one and two years............................ 111 220
Between two and five years........................... 132 138
In over five years................................... 794 --
----- ---
1,037 459
===== ===
</TABLE>
Capital commitments
At 31 March 2000 the directors had authorised capital expenditure as
follows:
<TABLE>
<CAPTION>
(Pounds)000
<S> <C>
Contracted but not provided for.................................. 65
===
</TABLE>
F-74
<PAGE>
MCM ELECTRONICS LIMITED/SYMONDS LIMITED
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
28 DIRECTORS' EMOLUMENTS
(a) Emoluments of the directors were:
<TABLE>
<CAPTION>
Nine months Three months
ended ended
31 March 2000 30 June 1999
------------- ------------
(Pounds)000 (Pounds)000
<S> <C> <C>
Fees............................................ -- 18
Remuneration.................................... 244 81
Pension contributions........................... 36 12
Bonuses......................................... 35 85
Benefits in kind................................ 28 9
--- ---
343 205
=== ===
The emoluments of the highest paid director were:
<CAPTION>
(Pounds)000 (Pounds)000
------------- ------------
<S> <C> <C>
Remuneration.................................... 113 33
Pension contributions........................... 15 5
--- ---
128 38
=== ===
Number of directors who were members of a
defined contribution pension scheme............ 3 3
=== ===
</TABLE>
Three months ended 30 June 1999
(b) Share options
Symonds Limited operated 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 under the
company's Executive Share Option Scheme are as follows:
<TABLE>
<CAPTION>
At 31 Granted Exercised Lapsed At 30
Expiry date of Exercise March during during during June
Date of grant exercise period price 1999 period period period 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 at the agreed bid
price of 43p.
F-75
<PAGE>
MCM ELECTRONICS LIMITED/SYMONDS LIMITED
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
29. RELATED PARTY TRANSACTIONS
During the nine months ended 31 March 2000 the group entered into the
following transactions, in the ordinary course of business, with related
parties:
<TABLE>
<CAPTION>
Total amount
owed at
Interest 31 March
payable 2000
----------- ------------
(Pounds)000 (Pounds)000
<S> <C> <C>
NatWest Equity Partners Limited (former shareholder
in MCM
Electronics Limited).............................. 657 14,735
Directors:
MHG Malone......................................... 4 87
MJ Glanfield....................................... 1 24
JA Calvert......................................... 1 29
=== ======
</TABLE>
Professional and arrangement fees paid to members of the NatWest Group
amounted to (Pounds)428,000 during the period. The entire amount related to the
acquisition of Symonds Limited.
Messrs. Malone, Glanfield and Calvert held shares in Symonds Limited until
they were acquired by MCM Electronics Limited.
30. POST BALANCE SHEET EVENTS
On 14 April 2000, following the listing on NASDAQ of DDi Corp., the sale of
the entire issued share capital of MCM Electronics Limited to DDi Corp. was
completed and the latter became the ultimate parent undertaking of MCM
Electronics Limited.
31. 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 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 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
F-76
<PAGE>
MCM ELECTRONICS LIMITED/SYMONDS LIMITED
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
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 MCM Electronics Limited, 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 March 2000 period
reflects the reduced goodwill amortisation of (Pounds)19,000 and the adjustment
((Pounds)477,000) 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-77
<PAGE>
MCM ELECTRONICS LIMITED/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.
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.
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.
F-78
<PAGE>
MCM ELECTRONICS LIMITED/SYMONDS LIMITED
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
(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.
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>
Nine months
ended Three months
31 March ended
2000 30 June 1999
----------- ------------
(Pounds)000 (Pounds)000
<S> <C> <C>
(Loss)/profit attributable to shareholders as re-
ported in the consolidated profit and loss account
in accordance with UK GAAP........................ (801) 165
Adjustments to conform to US GAAP
Amortisation of goodwill........................... -- (221)
Valuation of interests in leveraged buyout
transaction....................................... 19 --
Provision for termination of a business............ -- (550)
Finance set up costs written off under UK GAAP..... 1,448 --
Sale and leaseback................................. -- 4
Deferred income tax................................ (311) 155
----- ----
Net profit/(loss) in accordance with US GAAP....... 355 (447)
===== ====
</TABLE>
The nine months ended 31 March 2000 results are of MCM Electronics Limited
whilst the three months ended 30 June 1999 are of Symonds Limited -- see
Accounting Policies -- Basis of Consolidation.
<TABLE>
<CAPTION>
Nine months Three months
ended ended
31 March 30 June
2000 1999
----------- ------------
(Pounds)000 (Pounds)000
<S> <C> <C>
Shareholders' funds as reported in the
consolidated balance sheet in accordance with UK
GAAP............................................ 532 9,552
Adjustments to conform with US GAAP
Goodwill......................................... -- 14,904
Valuation of interests in leveraged buyout
transaction..................................... (477) --
Finance set up costs written off under UK GAAP... 1,448 --
Sale and leaseback............................... -- (369)
Deferred income tax.............................. (311) 64
----- ------
Shareholders' equity in accordance with US GAAP.. 1,192 24,151
===== ======
</TABLE>
F-79
<PAGE>
MCM ELECTRONICS LIMITED/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>
Nine months Three months
ended ended
31 March 30 June
2000 1999
----------- ------------
(Pounds)000 (Pounds)000
<S> <C> <C>
Net cash provided by/(used in) operating
activities....................................... 2,911 (594)
Net cash used in investing activities............. (29,832) (594)
Net cash provided by/(used in) financing
activities....................................... 29,804 (319)
------- ------
Net increase/(decrease) in cash and cash
equivalents...................................... 2,883 (1,507)
Cash and cash equivalents under US GAAP at
beginning of period.............................. -- 3,568
Cash and cash equivalents under US GAAP acquired.. 2,086 --
------- ------
Cash and cash equivalents under US GAAP at end of
period........................................... 4,969 2,061
======= ======
</TABLE>
The nine months ended 31 March 2000 results are of MCM Electronics Limited
whilst the three months ended 30 June 1999 are of Symonds Limited -- see
Accounting Policies -- Basis of Consolidation.
F-80
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Automata International, Inc, and DDi Corp.:
We have audited the accompanying consolidated balance sheet of Automata
International, Inc. and subsidiaries as of October 2, 1999, and the related
consolidated statements of operations and comprehensive income (loss),
stockholders' equity (deficit) and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Automata
International, Inc. as of October 2, 1999 and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 1, the Company filed a voluntary petition for relief under Chapter 11 of
the United States Bankruptcy Code on June 23, 2000. The uncertainties inherent
in the bankruptcy process raise substantial doubt about the Company's ability
to continue as a going concern. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
As explained in Note 2, to the financial statements, in 1999 the Company
changed its fiscal year to a 52-53 week fiscal year ending on the Saturday
nearest the end of the month of September.
/s/ KPMG LLP
KPMG LLP
KPMG LLP
McLean, Virginia
August 18, 2000
F-81
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Automata International, Inc.:
We have audited the accompanying consolidated balance sheet of Automata
International, Inc. (a Delaware corporation) and subsidiaries as of September
30, 1998, and the related consolidated statements of operations and
comprehensive income (loss), stockholders' equity (deficit) and cash flows for
each of the two years in the period ended September 30, 1998. These
consolidated 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 in accordance 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 consolidated
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
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Automata International,
Inc., and subsidiaries as of September 30, 1998, and the results of their
operations and their cash flows for each of the two years in the period ended
September 30, 1998, in conformity with accounting principles generally accepted
in the United States.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Vienna, Virginia
November 9, 1998 (except with respect to the matters occurring in 1999 and 2000
discussed in Note 1 as to which the date isAugust 4, 2000).
F-82
<PAGE>
AUTOMATA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Years ended October 2, 1999 and September 30, 1998
(in thousands, except for share data)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents................................ $ 4,207 $ 3,746
Accounts receivable, net of allowances of $730 and $596,
respectively............................................ 10,849 10,790
Income tax receivable.................................... 1,179 1,194
Inventory................................................ 5,312 5,382
Prepaid expenses and other assets........................ 595 515
Deferred income taxes.................................... -- 395
-------- --------
Total current assets................................. 22,142 22,022
Property and equipment, net................................ 20,546 28,443
Deferred debt issuance costs, net.......................... 586 2,148
Deposits and other assets.................................. 79 559
Developed technologies..................................... -- 3,528
Goodwill................................................... -- 10,470
-------- --------
Total assets......................................... $ 43,353 $ 67,170
======== ========
Liabilities and Stockholders' Deficit
Current liabilities:
Current portion of long-term debt........................ $ 73,823 $ 2,597
Accounts payable......................................... 10,220 11,569
Accrued liabilities...................................... 6,987 4,682
-------- --------
Total current liabilities............................ 91,030 18,848
Long-term debt, net of current portion..................... -- 65,105
Deferred income taxes...................................... 152 557
Preferred dividends payable................................ 7,081 3,226
Other long-term liabilities................................ 1,229 2,114
-------- --------
Total liabilities.................................... 99,492 89,850
-------- --------
Redeemable preferred stock:
Series A preferred stock, $0.01 par value, 294,000 shares
authorized, 290,000 issued and outstanding, liquidation
preference of $14,900, at October 2, 1999 and September
30, 1998, respectively.................................. 14,706 14,665
Series B preferred stock, $0.01 par value, 513,105 shares
authorized, 513,105 and 413,105 issued and outstanding,
liquidation preference of $32,750 and $23,881, at
October 2, 1999 and September 30, 1998, respectively.... 25,372 20,328
Warrants outstanding....................................... 261 261
Stockholders' deficit:
Common stock, no par value, 4,607,975 shares authorized,
155,430 and 130,000 shares issued and outstanding, at
October 2, 1999 and September 30, 1998, respectively.... 1,156 1,131
Additional paid-in capital............................... 109 --
Accumulated other comprehensive income (loss) net of
taxes:
Foreign currency translation........................... (248) 567
Minimum pension liability adjustment................... -- (402)
Retained deficit......................................... (97,495) (59,230)
-------- --------
Total stockholders' deficit.......................... (96,478) (57,934)
-------- --------
Total liabilities and stockholders' deficit.......... $ 43,353 $ 67,170
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-83
<PAGE>
AUTOMATA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
Years ended October 2, 1999 and September 30, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Net sales......................................... $ 83,645 $ 80,896 $60,815
Cost of sales..................................... 80,648 69,222 48,535
-------- -------- -------
Gross profit.................................. 2,997 11,674 12,280
-------- -------- -------
Selling, general and administrative expenses...... 11,273 8,287 5,603
Facility closing and restructuring costs (note
4)............................................... 18,440 -- --
-------- -------- -------
Income (loss) from operations................. (26,716) 3,387 6,677
-------- -------- -------
Other income and (expense):
In process research and development writeoff.... -- (6,476) --
Interest expense, net........................... (8,687) (5,100) (995)
Other (expense) income.......................... 193 (329) 846
-------- -------- -------
Total other income and (expense).............. (8,494) (11,905) (149)
-------- -------- -------
(Loss) income from continuing operations
before income taxes and extraordinary item... (35,210) (8,518) 6,528
Income tax provision (benefit).................... (897) (234) 2,388
-------- -------- -------
(Loss) income from continuing operations before
extraordinary item............................. (34,313) (8,284) 4,140
Extraordinary item, net of tax.................... -- (308) --
-------- -------- -------
Net (loss) income............................. (34,313) (8,592) 4,140
Other comprehensive income (loss), net of tax:
Foreign currency translation.................... (815) 567 --
Minimum pension liability adjustment............ 402 (402) --
-------- -------- -------
Comprehensive income (loss)................... $(34,726) $ (8,427) $ 4,140
======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-84
<PAGE>
AUTOMATA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
Years ended October 2, 1999 and September 30, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
Accumulated Total
Common Stock Additional Retained Other Stockholders'
--------------- Paid-In Earnings Comprehensive Equity
Shares Amount Capital (Deficit) Income (Loss) (Deficit)
------- ------ ---------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30,
1996................... 10,848 $ 15 $-- $ 5,245 $ -- $ 5,260
Repurchase of common
shares............... (81) -- -- (163) -- (163)
Stock redemption,
net.................. (10,667) 85 -- (56,517) -- (56,432)
Preferred stock
dividends............ -- -- -- (517) -- (517)
Tax benefit for the
exercise of
nonqualified
options.............. -- 990 -- -- -- 990
Accretion of preferred
stock to redemption
value................ -- -- -- (20) -- (20)
Net income............ -- -- -- 4,140 -- 4,140
------- ------ ---- -------- ----- --------
Balance, September 30,
1997................... 100 1,090 -- (47,832) -- (46,742)
Exercise of stock
options.............. 30 41 -- -- -- 41
Preferred stock
dividends............ -- -- -- (2,709) -- (2,709)
Accretion of preferred
stock to redemption
value................ -- -- -- (97) -- (97)
Net loss.............. -- -- -- (8,592) -- (8,592)
Other comprehensive
income (loss):
Foreign currency
translation........ -- -- -- -- 567 567
Minimum pension
liability
adjustment......... -- -- -- -- (402) (402)
------- ------ ---- -------- ----- --------
Balance, September 30,
1998................... 130 1,131 -- (59,230) 165 (57,934)
Exercise of stock
options.............. 25 25 -- -- -- 25
Preferred stock
dividends............ -- -- -- (3,855) -- (3,855)
Accretion of preferred
stock to redemption
value................ -- -- -- (97) -- (97)
Warrants issued as
part of subordinated
debt transaction..... -- -- 109 -- -- 109
Net loss.............. -- -- -- (34,313) -- (34,313)
Other comprehensive
income (loss) net of
tax:
Foreign currency
translation........ -- -- -- -- (815) (815)
Minimum pension
liability
adjustment......... -- -- -- -- 402 402
------- ------ ---- -------- ----- --------
Balance, October 2,
1999................... 155 $1,156 $109 $(97,495) $(248) $(96,478)
======= ====== ==== ======== ===== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-85
<PAGE>
AUTOMATA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended October 2, 1999 and September 30, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................... $(34,313) $ (8,592) $ 4,140
Reconciliation to cash provided by (used in)
operating activities:
Facility closing and restructuring costs........ 18,440 -- --
Acquired in process R&D write-off............... -- 6,476 --
Extraordinary loss on debt retirement........... -- 485 --
Depreciation and amortization................... 10,005 5,774 2,653
Loss (gain) on sale of property and equipment... -- (149) 4
Debt accretion.................................. 97 52 --
Deferred credits recognized..................... (67) (38) (27)
Deferred income taxes........................... (10) 478 78
Changes in operating assets and liabilities,
net of acquisition:
Accounts receivable............................ (59) 1,211 (3,021)
Prepaid expenses and other assets.............. (80) 345 (91)
Inventory...................................... 70 347 (712)
Income tax receivable.......................... 15 (1,194) --
Accounts payable and accrued expenses.......... 107 1,423 1,510
Other liabilities.............................. (885) (210) 18
-------- -------- --------
Net cash provided by (used in) operating
activities................................... (6,680) 6,408 4,552
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment............. (3,188) (12,550) (4,232)
Deposits and other assets....................... 480 (483) 311
Proceeds from sale of property and equipment.... -- 407 --
Purchase of Kode, net of cash acquired.......... -- (25,114) --
-------- -------- --------
Net cash used in investing activities......... (2,708) (37,740) (3,921)
-------- -------- --------
Cash flows from financing activities:
Net borrowings under bank line of credit........ 2,900 936 965
Principal payments on long-term debt............ (1,175) (14,911) (154)
Increase in long-term debt...................... 5,063 51,345 23,096
Principal payments on capital lease obligation.. (667) (506) (3,330)
Repurchase of common stock...................... -- -- (163)
Income tax benefit of deduction for income tax
purposes on exercise of stock options.......... -- -- 990
Issuance of Series A preferred stock............ -- -- 14,900
Issuance of Series B preferred stock............ 4,988 -- 20,655
Issuance of common stock........................ 25 41 --
Payment of debt issuance costs.................. -- (2,074) (1,295)
Repurchase of common stock...................... -- -- (56,432)
-------- -------- --------
Net cash provided by (used in) financing
activities................................... 11,134 34,831 (768)
-------- -------- --------
Effect of exchange rates on cash................. $ (1,285) $ (77) $ --
-------- -------- --------
Net increase (decrease) in cash.................. 461 3,422 (137)
Cash and cash equivalents, beginning of year..... 3,746 324 461
-------- -------- --------
Cash and cash equivalents, end of year........... $ 4,207 $ 3,746 $ 324
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest.......................... $ 6,281 $ 4,852 $ 526
Cash paid (received) for taxes.................. (1,194) 1,144 1,270
Supplemental disclosure of noncash transactions:
Declaration of dividend on preferred stock...... 3,855 2,709 517
Accretion of preferred stock to liquidation
value.......................................... 97 97 20
Accretion of original issue discount on
subordinated debt.............................. 52 52 11
Minimum pension liability adjustment............ 402 (402) --
Issuance of warrants as original discount on
subordinated debt.............................. 109 -- 261
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-86
<PAGE>
AUTOMATA INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended October 2, 1999 and September 30, 1998 and 1997
(1) Organization and Going Concern
Automata International, Inc. and subsidiaries (collectively, the "Company",
a Delaware corporation) manufacture high performance printed circuit boards for
use in data communications, computers and telecommunications. The principal
markets of the Company are the United States ("U.S.") and Europe.
In July 1998, the Company reincorporated in the state of Delaware as
Automata International, Inc. It was previously incorporated as Automata, Inc.
in the state of Virginia. The consolidated financial statements include United
States (U.S.) operations, a foreign sales corporation, a United Kingdom
("U.K.") subsidiary holding company, and Kode International, Plc. ("Kode"), a
U.K. company.
During 1999 and 1998 the Company incurred significant net losses, primarily
due to its U.K. operations, its Frederick, Maryland facility in the U.S. and
its high level of interest expense. Management has taken actions to reduce
these losses including disposing of the U.K. operations during fiscal 2000,
suspending operations of the Frederick Maryland facility in June 1999 (see Note
4) and implementing cost reduction measures at its remaining U.S. facility.
The Company's net losses have continued into fiscal 2000. Beginning in
January 2000, the Company's U.S. lenders did not renew or extend waivers for
the violation of certain covenants under debt agreements and on January 15,
2000, the Company did not make scheduled principal payments totaling $812,500
on two term loans. The U.S. lenders informed the Company that they were
reserving all rights and remedies under the debt agreements as a result of
these events. The U.S. lenders took no action to accelerate any of the amounts
outstanding under the debt agreements. Management continued to negotiate with
the lenders to obtain a waiver of previous debt covenant violations and the
deferral of principal and interest payments, however, these negotiations were
ultimately unsuccessful.
On February 18, 2000, after unsuccessful negotiations with a potential
buyer, Kode and one subsidiary, Kam Circuits Limited ("Kam") were placed into
administrative receivership in the U.K. A second subsidiary, Kamtronics Limited
("Kamtronics") continued operations. On March 13, 2000, the Kamtronics
operation was sold for cash. On March 23, 2000 substantially all production
related assets of Kode and Kam were sold for cash. Certain real property of
Kode has been licensed for a cash fee with an option to purchase. The
administrative receiver is in the process of converting all other assets of
Kode and Kam to cash. The Company intends to apply the estimated net proceeds
available from these activities of approximately $4,000,000 to reduce amounts
outstanding under specific debt agreements. The amounts the Company may
ultimately realize could differ from these estimated net proceeds based on the
result of the real property option and the final determination of the costs and
fees of the receivership.
On June 23, 2000, the Company filed a petition with the Bankruptcy Court for
relief under Chapter 11 of the United States Bankruptcy Code ("Chapter 11").
Under the plan of reorganization filed by the Company, all remaining U.S.
assets were to be sold with the proceeds used to discharge claims by creditors.
The plan was approved by the Bankruptcy Court and on August 4, 2000 the sale of
the assets of the Company to DDi Corp. for approximately $19.5 million was
completed.
(2) Summary of Significant Accounting Policies
(a) Fiscal Year
In 1999, the Company changed its year end from September 30 to the Saturday
nearest September 30. This change added two days to the current fiscal year.
This change did not have a material effect on the Company's financial
condition, cash flows and results from operations. The Company uses a 52-53
week fiscal
F-87
<PAGE>
AUTOMATA INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended October 2, 1999 and September 30, 1998 and 1997
year ending on the Saturday nearest the end of the month of September. The
fiscal years ended October 2, 1999, September 30, 1998 and September 30, 1997
each consisted of 52 weeks.
(b) Consolidation
All significant intercompany transactions and accounts have been eliminated.
(c) Use of Estimates
The Company's management has made certain estimates and assumptions relating
to the reporting of assets, liabilities, revenues and expenses as well as the
disclosure of contingent assets and liabilities to prepare its consolidated
financial statements in conformity with generally accepted accounting
principals. Actual results could differ from those estimates.
(d) Foreign Currency Translation
The assets and liabilities of non-U.S. companies are translated at the
exchange rate prevailing at the balance sheet date. Revenue and expense
accounts are translated using the average exchange rate during the period.
Foreign currency translation adjustments are disclosed as a separate item in
stockholders' deficit.
(e) Reclassification
Certain reclassifications have been made to the prior years' financial
statements to conform with the current year's presentation. The
reclassification of these amounts had no effect on the results of operations or
retained deficit.
(f) Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. The carrying amount of
these investments approximated fair value as of October 2, 1999 and September
30, 1998.
(g) Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of trade accounts receivable.
The Company has developed and maintained credit policies and procedures to
reflect its industry's growth, as well as its inherent risk. Additionally, the
Company performs ongoing credit evaluations of its customers' financial
condition and generally does not require collateral, such as letters of credit
or security agreements.
(h) Inventory
Inventory is stated at the lower of cost (first-in, first-out basis) or
market. Work-in-process and finished goods inventory are comprised of direct
material, labor and allocated overhead costs.
(i) Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Machinery and equipment is depreciated over the estimated useful
life of the underlying assets and generally range from three
F-88
<PAGE>
AUTOMATA INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended October 2, 1999 and September 30, 1998 and 1997
to seven years for equipment. Improvements are amortized over the shorter of
the estimated useful lives of the underlying property or the contractual lives
of the applicable leases. Depreciation is computed on the straight-line method
for financial reporting purposes and the various accelerated methods, as
required by law for income tax purposes.
Long-lived assets and identifiable assets to be held and used are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount should be evaluated. Impairment is measured by comparing the
carrying value to the estimated undiscounted future cash flows expected to
result from the use of the assets and their eventual disposition. The Company
has determined that as of October 2, 1999, the Company had an impairment of
certain assets that were utilized in its North American and European
operations. See Note 4. At September 30, 1998, the Company's managements
believed there was no impairment in the carrying values of long-lived assets.
(j) Goodwill and Other Intangibles
Goodwill and other intangible (primarily developed technologies) are
amortized over their estimated useful lives, 20 and 12 years, respectively,
using the straight line method.
(k) Deferred Debt Issuance Costs
Costs incurred related to the issuance of debt are primarily deferred and
amortized over the life of the related debt. The amortization of deferred
financing and debt issuance costs included in interest expense was
approximately $894,000, $282,000 and $29,000 in 1999, 1998 and 1997,
respectively. As further discussed in Note 9, at October 2, 1999 the Company
wrote off all deferred debt issuance costs related to the U.S. debt.
(l) Other Long-Term Liabilities
Other long-term liabilities consist primarily of deferred gain on the sale
and leaseback of the Sterling, Virginia facility, and deferred rent.
(m) Income Taxes
The Company uses the asset and liability method of accounting for income
taxes under Statement of Financial Accounting Standard ("SFAS") No. 109,
Accounting for Income Taxes. Under the asset and liability method, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases as
well as for operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes
the enactment date. Under the provisions of SFAS No. 109, a valuation allowance
is provided when it is more likely than not that some portion or all of the
deferred tax assets recorded will not be recognized.
(n) Revenue Recognition
The Company recognizes revenue when its products are shipped to the
customer.
F-89
<PAGE>
AUTOMATA INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended October 2, 1999 and September 30, 1998 and 1997
(o) Comprehensive Income
The Company adopted SFAS No. 130, Reporting Comprehensive Income during the
first quarter of fiscal year 1999. This statement requires that components of
comprehensive income and the accumulated balance of other comprehensive income
be separately displayed in the financial statements. Components of
comprehensive income include foreign currency translation adjustments and
minimum pension liability adjustments. Prior year financial statements have
been reclassified to conform to the standard's requirements and there were no
components of comprehensive income during fiscal year 1997.
(p) Stock Options
As described in note 10, the Company has elected to follow the accounting
provisions of Accounting Principals Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees and related interpretations in accounting for its
stock based compensation and to provide disclosures required under SFAS No.
123, Accounting for Stock Based Compensation. The Company generally grants
options at fair market value at the date of grant.
(q) Environmental Compliance and Remediation
Environmental compliance costs include ongoing maintenance, monitoring and
similar costs and relate to current operations or conditions caused by past
operations. These costs are expensed as incurred. Environmental remediation
costs are accrued, except to the extent costs can be capitalized, when
environmental assessments and/or remedial efforts are probable, and the costs
can be reasonably estimated. These liabilities are determined on a site by site
basis and are not discounted. Environmental costs which improve the condition
or extend the life of related property or prevent future environmental
contamination are capitalized.
(r) Segment Information
The Company operates under one business segment manufacturing printed
circuit boards.
(s) New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. This
statement establishes new accounting and reporting standards for derivative
financial instruments and for hedging activities. The pronouncement requires
the Company to measure all derivatives at fair value and to recognize them in
the balance sheet as an asset or liability, depending on the Company's rights
or obligations under the applicable derivative contract. In June 1999, the FASB
issued SFAS No. 137, which deferred the effective date of adoption of SFAS No.
133 no later than the first quarter of fiscal year 2001. In June 2000, the FASB
issued SFAS No. 138 which amended SFAS No. 133. The adoption of SFAS No. 133 is
not expected to have a material impact on the Company's financial condition,
cash flows or results from operations.
(3) Acquisitions
On February 28, 1998, the Company acquired substantially all of the
outstanding common stock of Kode International Plc. ("Kode") and was financed
by a new bank credit facility consisting of $50,000,000 in term loans and a
$15,000,000 revolving credit facility (see Note 9). The acquisition was
accounted for as a purchase in accordance with APB Opinion No. 16, and
accordingly, Kode's results from February 28, 1998 are included in the
accompanying consolidated financial statements.
F-90
<PAGE>
AUTOMATA INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended October 2, 1999 and September 30, 1998 and 1997
In accordance with APB No. 16, the Company has allocated the purchase price
based on the fair value of assets acquired and liabilities assumed. A
significant portion of the purchase price, as described below, has been
identified in an independent appraisal as intangible assets using proven
valuation procedures and techniques, including approximately $6,476,000 of in-
process research and development ("in-process R&D"). Other acquired intangibles
include developed technology and goodwill, which are being amortized over
periods of 12 and 20 years, respectively. Goodwill amortization for the years
ended October 2, 1999 and September 30, 1998 was approximately $495,000 and
$300,000, respectively. As further discussed in Note 4, the remaining balance
of goodwill was written off at October 2, 1999.
The portion of the purchase allocated to the in-process R&D projects that
did not have a future alternative use totaled approximately $6,476,000 and was
charged to expense, but not deducted for income tax purposes, as of the
acquisition date. Due to a difference in the bases of certain assets for
financial statement and income tax purposes, deferred income taxes of
approximately $199,000 have been provided as part of the purchase price
allocation in accordance with SFAS No. 109.
Kode's in-process R&D value is comprised of various R&D programs relating to
the introduction of certain new technologies. At the acquisition date, these
programs were incomplete and total continuing R&D commitments to complete the
projects were expected to be significant. There is risk associated with the
completion of the projects, and there is no assurance that each will meet with
either technological or commercial success. The value assigned to the in-
process technology was determined by an independent appraisal. The appraisal
was based on the estimated costs to develop the purchased in-process technology
into commercially viable products and the estimated net cash flows resulting
from the projects, discounted to their present value. The revenue projection
used to value the in-process research and development was based on estimates of
relevant market sizes and growth factors, expected trends in technology and the
nature and expected timing of new product introductions by the Company and its
competitors. The rates utilized to discount the net cash flows to their present
value were based on the cost of Kode's weighted average cost of capital,
corporate maturity and the uncertainties in the economic estimates.
The forecasts used in valuing in-process R&D were based upon assumptions the
Company believes to be reasonable but which are inherently uncertain and
unpredictable. The Company's assumptions may be incomplete or inaccurate, and
unanticipated events and circumstances are likely to occur. For these reasons,
actual results may vary from the projected results.
The aggregate purchase price of $25,491,000 including acquisition costs, was
allocated as follows (in thousands):
<TABLE>
<CAPTION>
1998
--------
<S> <C>
Current assets (including cash of $377)............................ $ 8,638
Property, plant and equipment...................................... 11,037
Developed technology............................................... 3,600
In-process R&D..................................................... 6,476
Goodwill........................................................... 10,472
Liabilities assumed................................................ (14,732)
--------
$ 25,491
========
</TABLE>
F-91
<PAGE>
AUTOMATA INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended October 2, 1999 and September 30, 1998 and 1997
Unaudited pro forma operating results for the Company, assuming the
acquisition of Kode occurred on October 1, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
Years ended
September 30,
----------------
1998 1997
------- -------
<S> <C> <C>
Net sales.................................................. $95,822 $91,980
Income (loss) before extraordinary item.................... (1,519) 3,344
Net income (loss).......................................... (1,827) 3,344
</TABLE>
For the purpose of these pro forma operating results, the in-process R&D was
assumed to have been written off prior to October 1, 1996, so that the
operating results presented include only recurring costs. Interest expenses on
debt used to finance the Kode acquisition and additional amortization on
goodwill and purchased intangibles are reflected in the pro forma operating
results. Revenues of Kode for the period from February 28, 1998 to September
30, 1998 were approximately $16,404,000.
Distributions from Kode to Automata International, Inc. may be restricted.
U.S. taxes have not been provided on Kode earnings since management does not
intend to distribute earnings which would be taxable in the U.S. To date, Kode
has incurred net losses and no amounts have been available for distribution for
Automata. The Company records the impact of foreign currency translation as
other comprehensive income.
In May 1998, the Company acquired certain assets of P.A.M. Engineering, Inc.
("PAM") for approximately $3 million. This transaction was accounted for as an
asset purchase. The Company did not assume any liabilities in connection with
the asset purchase agreement. The assets acquired approximate fair value. In
connection with the asset purchase agreement, the Company entered into a five-
year renewable operating lease on the land and building previously occupied by
PAM.
(4) Facility Closing and Restructuring
During the quarters ended July 3, 1999 and October 2, 1999, the Company
recorded facility closing and restructuring costs, related to the closing of
its Maryland facility and its integration into its Virginia facility. The costs
included equipment impairment charges of approximately $3,358,000 ($2,015,000
after tax). The Company started its Maryland operations in May 1998 by
acquiring certain assets of PAM. In connection with the asset purchase
agreement, the Company entered into a five-year renewable operating lease on
the land and building previously occupied by PAM. The Company closed its
Maryland facility in June 1999 and certain initiatives were put into place that
would streamline and reduce costs in its Virginia operations. These initiatives
included workforce reductions, as well as redeployment of certain assets. In
September 1999, the Company evaluated the recoverability of long-lived assets,
including its intangible assets as required by SFAS No. 121. The total facility
closing and restructuring costs include write-downs of redundant property and
equipment, equipment relocation, as well as cancellation of various purchase
commitments of equipment totaling $1,525,000. Additionally, the costs include
lease commitments and related property taxes of $863,000, severance for
approximately 25 manufacturing employees and other related costs of $479,000,
environmental cleanup and site restoration of $189,000, as well as
approximately $302,000 of other costs. At October 2, 1999, accrued liabilities
of $849,000 remained for closing costs.
During the quarter ended October 2, 1999, due to continuing operating
losses, the Company made the decision to sell its U.K. operations. The Company
evaluated the recoverability of long-lived assets, including intangible assets
of Kode as required under SFAS No. 121. Accordingly, all of the goodwill and
developed
F-92
<PAGE>
AUTOMATA INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended October 2, 1999 and September 30, 1998 and 1997
technologies were written off and equipment was written down by $2,162,000. A
charge of $15,082,000 is recorded as a facility closing and restructuring cost.
(5) Redeemable Preferred Stock
On July 16, 1997, the Company entered into a Recapitalization Agreement (the
"Recapitalization") with a third party investor. The following events occurred
simultaneously with the Recapitalization: The Company redeemed all issued and
outstanding shares of Common Stock which were subsequently cancelled by the
Company. The Company issued 100,000 shares of Common Stock, 290,000 shares of
Series A Preferred Stock (the "Series A Preferred Stock"), and 413,105 shares
of Series B Preferred Stock (the "Series B Preferred Stock"). The Company also
entered into loan agreements with two financial institutions and a stockholder.
Included in the redeemed shares were all shares of Common Stock owned by the
ESOP (as defined in Note 10). A limited amount of each stockholder's proceeds
from the Recapitalization were placed in escrow by the Company pending final
settlement of all costs related to the Recapitalization and claims resulting
from any misrepresentations regarding the Recapitalization. A portion of this
escrow was released for payment to the former stockholders in October 1998 and
the residual will be paid upon the earlier of a change in control, an initial
public offering or five years from the closing.
The Series A Preferred Stock has the same voting rights as Common Stock and
maintains equal dividend participation in the event of declared dividends. Each
share of Series A Preferred Stock has a liquidation preference senior to the
Common Stock and other equity securities (other than Series B Preferred Stock)
equal to the price paid per share of Series A Preferred Stock, plus accrued and
unpaid dividends on the Series A Preferred Stock. Upon a merger, sale of all or
sale of substantially all of the Company's assets, or a change in control of
the Company, the Series A Preferred Stock will be redeemable at $51.38 per
share ($14,900,000) at the election of the holders of a majority of the Series
A Preferred Stock. The Series A Preferred Stock will be convertible into Common
Stock at a ratio of one share of Series A Preferred Stock into ten shares of
Common Stock at the holders option. The Company has authorized and reserved a
sufficient number of shares of Common Stock to allow for the conversion. The
Series A Preferred Stock is subject to certain anti-dilution provisions and
certain non-financial covenants as defined.
The Series B Preferred Stock has no voting or conversion rights, but does
have a liquidation preference senior to the Series A Preferred Stock, Common
Stock and other equity securities equal to the price paid per share of Series B
Preferred Stock in the Recapitalization, plus accrued and unpaid dividends on
the Series B Preferred Stock. The dividend rate on Series B Preferred Stock is
equivalent to 12 percent from July 16, 1997 to July 15, 1998, 14 percent from
July 16, 1998 to July 15, 1999, and 18 percent thereafter. The Series B
Preferred Stock is redeemable at $50 per share ($25,655,000) at the earlier of
(1) a merger, sale of all or sale of substantially all of the assets of the
Company, (2) a qualified initial public offering (as defined in the agreement);
(3) a change in control; or (4) the first anniversary following the repayment
of the Subordinated Loan.
Proceeds from Series A Preferred Stock and Series B Preferred Stock are
presented net of issuance costs. The Company is accreting this reduction in the
carrying value of the preferred stock to the redemption value using the
effective interest method and has recorded the accretion as a reduction of
retained earnings.
F-93
<PAGE>
AUTOMATA INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended October 2, 1999 and September 30, 1998 and 1997
<TABLE>
<CAPTION>
Series A Preferred Series B Preferred
Stock Stock
---------------------- ----------------------
Carrying Carrying
Shares Amount Shares Amount
------- -------------- ------- --------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Balance at September 30, 1996... -- $ -- -- $ --
Shares issued net of issuance
costs of $285,000 for Series A
and $935,000 for Series B...... 290,000 14,615 413,105 20,260
Accretion of issuance costs..... -- 9 -- 12
------- ------- ------- -------
Balance, September 30, 1997..... 290,000 14,624 413,105 20,272
Accretion of issuance costs..... -- 41 -- 56
------- ------- ------- -------
Balance, September 30, 1998..... 290,000 14,665 413,105 20,328
Shares issued net of issuance
costs of $12,000............... -- -- 100,000 4,988
Accretion of issuance costs..... -- 41 -- 56
------- ------- ------- -------
Balance, October 2, 1999........ 290,000 $14,706 513,105 $25,372
======= ======= ======= =======
</TABLE>
(6) Inventory
Inventory consists of (in thousands):
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Raw materials.................................................. $2,391 $3,417
Work-in-process................................................ 2,231 1,358
Finished goods................................................. 690 607
------ ------
Inventory, net............................................... $5,312 $5,382
====== ======
</TABLE>
(7) Property and Equipment
Property and equipment consists of (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Land and leasehold improvements.......................... $ 4,342 $ 4,358
Machinery and equipment.................................. 43,923 46,915
-------- --------
48,625 51,273
Accumulated depreciation and amortization................ (27,719) (22,830)
-------- --------
Property and equipment, net............................ $ 20,546 $ 28,443
======== ========
</TABLE>
(8) Accrued Liabilities
Accrued liabilities consist of (in thousands):
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Accrued compensation and related liabilities.................. $1,276 $1,559
Accrued facility closing costs................................ 849 --
Accrued interest expense...................................... 499 500
Other accrued expenses and deferred income.................... 4,363 2,623
------ ------
Accrued liabilities......................................... $6,987 $4,682
====== ======
</TABLE>
F-94
<PAGE>
AUTOMATA INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended October 2, 1999 and September 30, 1998 and 1997
(9) Long Term Debt
As a result of the violation of debt covenants and missed principal and
interest payments discussed in Note 1, all long-term debt can be called by the
lenders and has, therefore, been reclassified as a current liability at October
2, 1999. Because the loans were due and payable, unamortized debt issuance
costs of $1,183,000 were written off at October 2, 1999.
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Revolving line of credit.................................. $ 8,000 $ 5,100
Incremental revolving line of credit...................... 3,000 --
Term loans:
Term Loan A............................................. 24,250 25,000
Term Loan B............................................. 24,688 24,875
Subordinated loan......................................... 9,996 8,000
Junior subordinated loan payable to a stockholder......... 1,567 1,500
Capital lease obligations and equipment loans............. 2,322 3,227
-------- -------
73,823 67,702
Less--current portion..................................... (73,823) (2,597)
-------- -------
$ -- $65,105
======== =======
</TABLE>
(a) Senior Credit Agreement
On January 29, 1998 the Company entered into a Senior Credit Agreement (the
"Senior Credit Agreement") with a bank. The Senior Credit Agreement is secured
by a first priority security interest in (i) all stock of each direct and
indirect subsidiary of the Company (limited to 65 percent of the stock of any
foreign subsidiary), and (ii) all other tangible and intangible assets of the
Company, subject to limitations defined in the Senior Credit Agreement. The
Senior Credit Agreement requires the Company to maintain certain financial
covenants, including minimum consolidated earnings before interest, taxes,
depreciation and amortization ("EBITDA"), interest coverage ratio, and leverage
ratios, as defined the Senior Credit Agreement. In connection with the Senior
Credit Agreement, the Company wrote off deferred debt issuance costs related to
the previous term loan of approximately $513,000, which has been recorded as an
extraordinary item, net of taxes of $205,000, in the accompanying consolidated
financial statements.
Under the terms of the Senior Credit Agreement, as amended, the Company
borrowed $50,000,000, consisting of two term loans of $25,000,000 each ("Term
Loan A" and "Term Loan B") in order to fund the Kode acquisition and repay
debt, including the previous revolving line of credit, a 9.5 percent term loan
and the equipment loans. Borrowings under Term Loan A and Term Loan B may be
either Base Rate Loans (loans which bear interest at the Base Rate (as defined
below)), or Eurodollar Loans as requested by the Company. Base Rate Loans under
the Term Loan A bear interest at 2.5 percent over the Base Rate and Eurodollar
Loans bear interest at 3.5 percent over the Eurodollar rate. The Base Rate is
defined as the higher of: (i) 0.5 percent in excess of the federal funds rate
or (ii) the bank's prime rate. Principal payments under Term Loan A are payable
beginning in 1999 and continuing through 2003. Base Rate Loans under Term Loan
B bears interest at 2.5 percent over the Base Rate and Eurodollar loans bear
interest at 3.5 percent over the Eurodollar rate. Principal payments under Term
Loan B are payable beginning 1998 and continuing through 2004.
F-95
<PAGE>
AUTOMATA INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended October 2, 1999 and September 30, 1998 and 1997
The revolving line of credit (the "Revolving LOC") provides for direct
borrowings or letters of credit for up to $8,000,000 during fiscal year 1999
and up to $15,000,000 thereafter through February 28, 2003. Borrowings under
the Revolving LOC may be, at the Company's request, either Base Rate Loans
which bear interest at 2.5 percent over the Base Rate or Eurodollar Loans which
bear interest at 3.5 percent over the Eurodollar rate. The Company is required
to pay a commitment fee of 0.5 percent on the unused balance of the Revolving
LOC. As of October 2, 1999 and September 30, 1998, the Company has borrowings
of $8,000,000 and $5,100,000, under the Revolving LOC, respectively.
The Company negotiated with its bank, effective September 30, 1998, an
amendment to the Senior Credit Agreement that modified certain financial
covenants (the "New Covenants"), increased interest rates on borrowings, and
provided for the issuance of $5,000,000 in additional Series B Preferred Stock
to certain of the Company's stockholders. Proceeds from the additional Series B
Preferred Stock were applied to reduce amounts outstanding under the Senior
Credit Agreement's secured Revolving LOC in October 1998.
During fiscal 1999, the Company's Senior Credit Agreement was amended
several times. The effects of the amendments were as follows:
The EBITDA, interest coverage ratio and leverage ratio covenant requirements
have been waived through December 31, 1999. In their place, a "Trade Payable"
covenant was agreed upon requiring that the number of days in the Company's
accounts payable aging may not exceed a certain number of days.
The principal payments due in July 1999 and October 1999 under Term Loan A
and Term Loan B were not required to be paid on those dates. Those payments
were instead added to the remaining payments due under the Senior Credit
Agreement.
The Revolving LOC's maximum commitment was permanently reduced to $8,000,000
(see Subordinated Loan Amount, below) and the commitment fee of 0.5 percent on
the unused balance of the line of credit was removed from the agreement.
(b) Incremental Revolving Note
During July 1999, the Company entered into an incremental revolving note
agreement (the "Incremental LOC") that provides for borrowings up to a maximum
amount of $3,000,000 through February 28, 2003. Borrowings under the
Incremental LOC may be, at the Company's request, either Base Rate Loans which
bear interest at 2.5 percent over the Base Rate or Eurodollar loans which bear
interest at 3.5 over the Eurodollar rate. The Base Rate and Eurodollar rate
Loans are defined as they are under the Senior Credit Agreement's Revolving
LOC.
(c) Subordinated Loan Agreement
The Company has a subordinated loan agreement (the "Subordinated Loan") with
a face value of $8,000,000 and a stated interest rate of 12 percent. Interest
on the unpaid principal balance is payable semi-annually in arrears commencing
on January 15, 1998. The principal is payable in three equal annual payments of
$2,666,667 commencing on July 15, 2004. In connection with the Subordinated
Loan, the financial institution was granted 26,087 Warrants (the "Warrants")
convertible to common stock at ten to one with an exercise price of $0.01 per
warrant. The Company estimated the fair value of the Warrants to be
approximately $261,000, which has been recorded as an original issue discount
on the Subordinated Loan. The discount is
F-96
<PAGE>
AUTOMATA INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended October 2, 1999 and September 30, 1998 and 1997
being amortized into interest expense over the term of the Subordinated Loan.
As of October 2, 1999 and September 30, 1998, approximately $115,000 and
$63,000 of this discount has been amortized, respectively.
The Warrants contain a put feature which would become effective if the
Company does not consummate a public offering by January 28, 2003. Accordingly,
the Company has classified the Warrants outstanding as a liability in the
accompanying financial statements at fair market value.
On June 30, 1999, the Subordinated Loan was amended so that interest would
be paid quarterly in arrears commencing on April 15, 2000. Additionally, the
interest due and payable on July 15, 1999 and January 15, 2000 would be added
to the outstanding principal balance and divided equally among the three annual
principal payments commencing August 15, 2004. Accordingly, all interest due
and payable under the Subordinated Loan, was added to and included the
principal amount outstanding.
During March 1999, the Company entered into a second subordinated loan
agreement (the "Second Subordinated Loan") with a face value of $1,300,000 and
a stated interest rate of 12 percent. Interest on the unpaid principal balance
is payable semi-annually in arrears commencing on July 15, 1999. The principal
balance is payable in three equal annual payments of $433,333 commencing on
August 15, 2004. In connection with the Second Subordinated Loan, the lender
was granted 162,781 warrants (the "Second Warrants") convertible to common
stock at one to one with an exercise price of $1.00 per warrant. The Second
Warrants contain no put or call features and expire on July 16, 2007. The
Company estimated the fair value of the warrants to be approximately $109,000
which has been recorded as a deferred debt issuance cost and additional paid-
in-capital.
(d) Junior Subordinated Note
The Company has a junior subordinated note (the "Junior Subordinated Note"),
with a stockholder, with a face value of $1,500,000 and a stated rate of
interest of 8 percent. Interest on the unpaid principal is payable quarterly
commencing on September 15, 1997, the principal is payable subsequent to
payment of the borrowings under the Senior Credit Agreement and the
Subordinated loan. Interest of $123,000 and $120,000 on the Junior Subordinated
Note was recorded as expense in the year ended October 2, 1999 and September
30, 1998, respectively.
On March 31, 1999, the Junior Subordinated Note was amended so that no
principal payments can be made until all principal payments under the Senior
Credit Agreement, the Subordinated Loan and the Second Subordinated Loans were
satisfied or the agreements terminated. Additionally, no interest payments can
be made until all interest due and payable under the Senior Credit Agreement,
the Subordinated Loan and the Second Subordinated Loan has been paid or during
the one year period from March 31, 1999 to March 31, 2000. Accordingly, all
interest due and payable under the Junior Subordinated Note, was added to and
included the principal amount outstanding.
(10) Employee Benefit Plans
(a) Incentive Compensation Plans
Effective May 1990, the Company adopted a Stock Appreciation Rights ("SAR")
Plan. The terms of the SAR Plan provided that officers and other key employees
could be granted rights to the appreciation in the market value of the common
stock of the Company which would generally vest over a three year term. During
1996, the Company granted 10,000 rights to an officer of the Company at $20.04,
which represented the fair
F-97
<PAGE>
AUTOMATA INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended October 2, 1999 and September 30, 1998 and 1997
value of the stock based upon an independent appraisal as of September 30,
1995. No amounts were paid to any employee under the SAR Plan and $250,000 was
recorded in the September 30, 1996 statements of operations to recognize the
increase in the value of the Company's common stock, to $24.79, which
represents the fair value of the stock based upon an independent appraisal as
of September 30, 1996.
The terms of the 1995 Stock Option Plan (the "1995 Plan") provided that
officers and other key employees could be granted rights to purchase stock
options at specified exercise prices, rights to the appreciation in the fair
value of the Company, or rights to restricted stock. There were 200,000 shares
of Company stock reserved for issuance under the plan.
In connection with the Recapitalization discussed in Note 5, all issued and
outstanding options were exercised and included in the repurchase of common
stock. Additionally, the company redeemed all issued and outstanding SARs for
approximately $500,000, of which approximately $250,000 was expensed in 1997,
the remaining $250,000 was expensed in prior years. The 1995 Plan and the SAR
Plan were terminated in conjunction with the Recapitalization.
Effective July 16, 1997, the Company adopted the 1997 Stock Option Plan (the
"1997 Plan"). The terms of the 1997 Plan provide that officers and other key
employees may be granted incentive stock options based on the fair value of
Common Stock at the date of issue. Such options generally vest and become
exercisable (at prices which range from $1.00 to $1.35 per share) over
specified time periods, generally four to seven years, or upon reaching
financial performance targets if achieved earlier.
The Company has the following option activity relating to the 1997 Plan:
<TABLE>
<CAPTION>
Weighted--
Weighted-- Average
Average Remaining
Exercise Contractual
Options Price Life
-------- ---------- -----------
<S> <C> <C> <C>
Outstanding, September 30, 1996............. -- $ --
Granted................................... 150,000 1.00
-------- -----
Outstanding, September 30, 1997............. 150,000 1.00 9.8
Granted................................... 475,365 1.13
Exercised................................. (30,000) 1.00
Cancelled................................. (31,784) 1.03
-------- -----
Outstanding, September 30, 1998............. 563,581 1.11 9.2
Granted................................... 420,086 1.00
Exercised................................. (24,899) 1.00
Cancelled................................. (377,622) 1.13
-------- -----
Outstanding, October 2, 1999................ 581,146 $1.04 8.9
======== =====
Exercisable, October 2, 1999................ 68,314 $1.07
======== =====
</TABLE>
The Company has elected to follow APB Opinion No. 25 and related
interpretations in accounting for stock-based compensation and to provide the
disclosures required under SFAS No. 123. APB Opinion No. 25 requires no
recognition of compensation expense when the option exercise price is equal to
the fair value of the stock in the date of grant. Because options have been
granted under the 1997 Plan at an exercise price equal to the fair value of the
Company's common stock, no compensation cost has been recognized for this plan.
Had
F-98
<PAGE>
AUTOMATA INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended October 2, 1999 and September 30, 1998 and 1997
compensation costs for the 1997 Plan been determined based on the fair value of
the option awards consistent with the method of SFAS No. 123, Accounting for
Stock-Based Compensation, the Company's net income (loss) for the years ended
October 2, 1999 and September 30, 1998 and 1997, respectively, would have been
as indicated by the following pro forma amounts (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- ------
<S> <C> <C> <C>
Net income (loss), as reported.................... $(34,313) $(8,592) $4,140
Net income (loss), pro forma...................... (34,365) (8,641) 4,140
</TABLE>
The fair values of the option grants used in preparing the above pro forma
amounts were estimated using the Black-Scholes option pricing model assuming
(i) an historical dividend yield of zero percent, (ii) zero volatility, (iii) a
risk-free rate of return equivalent to the yield on a ten year Treasury note.
Options which have been cancelled for terminated employees have been excluded
from the above pro forma amounts. The weighted average fair value for options
issued during the years ended October 2, 1999 and September 30, 1998 was and
$0.42 and $0.45, respectively.
(b) Defined Benefit Plans'
The Company adopted SFAS No. 132, Employers' Disclosures about Pensions and
Other Postretirement Benefits during the first quarter of fiscal year 1999.
This statement standardizes the disclosure requirements for pensions and other
postretirement benefits. All prior years' information has been restated to
conform to the requirements of the new standard.
The Company's U.K. subsidiary has a defined benefit pension plan (the
"Pension Plan") covering substantially all of its permanent full-time
employees. All paid contributions to the Pension Plan are done in accordance
with recommendations of independent actuaries hired by the Company.
The benefit obligation, fair value of plan assets and funded status, as well
as amounts recognized are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated and vested benefit obligation............ $ 14,920 $ 13,987
======== ========
Projected benefit obligation for services rendered to
date.................................................. $(16,666) $(15,624)
Plan assets at fair value.............................. 15,527 13,462
-------- --------
Projected benefit obligation in excess of plan
assets............................................ (1,139) (2,162)
Unrecognized transition amount......................... (513) (568)
Unrecognized actuarial losses.......................... 1,263 2,607
Adjustment required to recognize minimum liability..... -- (402)
-------- --------
Accrued pension cost included in other
liabilities....................................... $ (389) $ (525)
======== ========
</TABLE>
F-99
<PAGE>
AUTOMATA INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended October 2, 1999 and September 30, 1998 and 1997
The change in the benefit obligation and plan assets during the fiscal year
was as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Change in benefit obligations:
Projected benefit obligation at beginning of year........ $15,624 $13,213
Service cost............................................. 718 430
Interest cost............................................ 990 531
Participants contributions............................... 161 76
Actuarial gain........................................... 10 1,672
Benefits paid............................................ (455) (326)
Foreign currency exchange rates.......................... (382) 28
------- -------
Projected benefit obligation at end of year............ $16,666 $15,624
======= =======
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Change in plan assets:
Fair value of plan assets at beginning of year........... $13,462 $13,805
Actual return (loss) on plan assets...................... 1,791 (362)
Employer's contributions................................. 568 269
Plan participants' contributions......................... 161 76
Benefits paid............................................ (455) (326)
------- -------
Fair value of plan assets at end of year............... $15,527 $13,462
======= =======
The components of net pension costs are as follows (in thousands):
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Service cost--benefits earned.............................. $ 718 $ 430
Interest cost on projected benefit obligation.............. 990 531
Actual (return) loss on plan assets........................ (1,791) 362
Net amortization and deferral.............................. 907 (940)
------- -------
Net periodic pension cost.............................. $ 824 $ 383
======= =======
The following assumptions, based upon a weighted-average basis, were used
in accounting for the Pension Plan (weighted average basis):
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Assumed discount rate...................................... 6.5% 6.5%
Rate of compensation increase.............................. 5.5 5.5
Expected long-term rate of return on plan assets........... 7.0 7.0
</TABLE>
(c) Defined Contribution Plans
The company established a 401(k) plan effective January 1, 1996, covering
its U.S. employees. To be eligible to participate in the plan, an employee
must have completed at least six months of service and attained the age of 21.
Employer matching contributions made into the plan for the years ended October
2, 1999 and September 30, 1998 and 1997 were $228,448 and $191,989 and
$149,577, respectively.
F-100
<PAGE>
AUTOMATA INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended October 2, 1999 and September 30, 1998 and 1997
(d) Employee Stock Ownership Plan
In October 1989, the Company established the Automata, Inc., Employee Stock
Ownership Plan ("ESOP"). Terms of the ESOP require the Company or the ESOP to
purchase shares of stock from participants who may receive a distribution from
the ESOP. The Company repurchased 81,150 shares from the ESOP for $162,624
during the year ended September 30, 1997.
In connection with the Recapitalization, the ESOP was terminated and all of
the ESOP's 416,647 shares were repurchased.
(11) Major Customers and Concentrations of Credit Risk
The Company derived 52, 45 and 57 percent of its sales from two customers
for the years ended October 2, 1999, September 30, 1998 and 1997, respectively.
Trade receivables are concentrated in a few significant customers since the
Company derives a significant percentage of its sales from a few customers.
(12) Income Taxes
The components of the income tax provision included in the statements of
operations consist of the following (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- ------
<S> <C> <C> <C>
Current provision (benefit)
Federal.............................................. $(907) $(259) $2,173
State................................................ -- (30) 137
Deferred tax provision................................. 10 55 78
----- ----- ------
Income tax provision (benefit)..................... $(897) $(234) $2,388
===== ===== ======
</TABLE>
F-101
<PAGE>
AUTOMATA INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended October 2, 1999 and September 30, 1998 and 1997
The following table is a summary of the significant components of the
deferred tax assets and liabilities (in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -----
<S> <C> <C>
Current:
Deferred tax asset:
Vacation accrual....................................... $ 115 $ 67
Warranties............................................. -- 90
Facility closing reserve............................... 561 --
Inventory reserves..................................... 74 93
Bad debt reserves...................................... 163 83
Net operating loss/other tax attribute carryovers...... 4,371 --
Other.................................................. 250 62
------- -----
5,534 395
Noncurrent:
Deferred tax asset (liability):
Deferred credits....................................... -- 146
Operating losses and other tax attribute carryovers--
non U.S. ............................................. 2,348 608
Asset basis differences--fixed assets.................. (658) (878)
Other.................................................. (4) --
------- -----
1,686 (124)
------- -----
Deferred tax asset, net.................................... 7,220 271
Less--valuation allowance.................................. (7,372) (433)
------- -----
Net deferred tax liability........................... $ (152) $(162)
======= =====
</TABLE>
The provisions for income taxes results in effective rates for the years
ending October 2, 1999, September 30, 1998 and 1997, which differ from the
Federal statutory rate as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate....................... (34)% (34)% 34 %
State income taxes, net of federal tax benefit.......... -- -- 4
Foreign operations:
In process research and development................... -- 26 --
Goodwill amortization and writeoff.................... 13 3 --
Operating loss carryforwards.......................... -- 2 --
Change in valuation allowance........................... 19 -- (3)
Other................................................... (1) -- 2
--- --- ---
Effective rate...................................... (3)% (3)% 37 %
=== === ===
</TABLE>
Kode has operating loss carryforwards of approximately (Pounds)1,100,000
which may be carried forward indefinitely if not utilized; however,
approximately (Pounds)821,000 of such losses may only be used to offset taxable
income of a specific subsidiary of the Kode Group. A valuation allowance was
previously established to offset a portion of the tax benefits associated with
these loss carryforwards.
F-102
<PAGE>
AUTOMATA INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended October 2, 1999 and September 30, 1998 and 1997
(13) Commitments and Contingencies
(a) Operating Leases
The Company leases its manufacturing facility, office space and certain
equipment for periods ranging from 3 to 10 years under operating leases. Future
minimum lease payments under these operating leases are as follows (in
thousands):
<TABLE>
<CAPTION>
Fiscal year ending
<S> <C>
2000............................................... $ 2,197
2001............................................... 2,201
2002............................................... 1,933
2003............................................... 788
2004............................................... 520
Thereafter......................................... 23,490
--------
Total............................................. $ 31,129
========
</TABLE>
Rental expense for all operating leases totaled $1,928,000, $1,171,932 and
$802,609, for the years ended October 2, 1999, September 30, 1998 and 1997,
respectively.
(b) Environmental Matters
The Company's past and present operations include activities which require
them to dispose of waste to various storage and recycling entities. These
entities are subject to scrutiny on an ongoing basis by the U.S. Environmental
Protection Agency and/or other responsible state agencies. Under applicable
U.S. laws, anyone contributing waste to a site is jointly and severally liable
for all cost to remedy a site. The Company has accrued and paid for sites in
which they have been named as a potentially responsible party, however, because
of uncertainties associated with environmental assessment and remediation
activities, as well as sites which could be identified in the future for
cleanup, additional future liabilities may be incurred. Management reevaluates
its exposure periodically and will record liabilities for all sites where it is
probable that losses will be incurred and where the minimum liability can be
reasonably estimated.
In addition, the Company is involved in certain other legal actions and
claims arising in the normal course of business. It is the opinion of
management that all legal and environmental matters will be resolved without
material effect on the Company's consolidated financial statements.
(14) Fair Value of Financial Instruments
The fair values of certain financial liabilities are shown below (in
thousands):
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
Carrying Fair Carrying Fair
amount value amount value
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Current portion of long-term debt........ $73,823 $73,823 $ 2,597 $ 2,597
Long-term debt, net...................... -- -- 65,105 65,105
</TABLE>
The fair values of all other financial assets and liabilities are estimated
to be equal to their fair market value.
F-103
<PAGE>
AUTOMATA INTERNATIONAL, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended October 2, 1999 and September 30, 1998 and 1997
(15) Foreign Operations
As discussed in note 1, beginning in fiscal 1998, the Company owned a
foreign sales corporation and a subsidiary which operates in the United
Kingdom. Losses and income tax provisions from foreign operations are as
follows (in thousands):
<TABLE>
<CAPTION>
Fiscal year
ended
--------------
1999 1998
------- ------
<S> <C> <C>
Loss before income taxes.................................... $20,434 $7,664
Income tax provision........................................ 282 27
------- ------
Net loss.................................................. $20,716 $7,691
======= ======
</TABLE>
F-104
<PAGE>
AUTOMATA INTERNATIONAL, INC.
(Debtor-in-Possession)
Condensed Consolidated Balance Sheet
(In thousnads)
<TABLE>
<CAPTION>
July 1, 2000 October 2,
(Unaudited) 1999
------------ ----------
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents............................. $ 2,318 $ 4,207
Accounts receivable, net.............................. 4,933 10,849
Due from administrative receiver...................... 4,170 --
Income tax receivable................................. -- 1,179
Inventories........................................... 2,677 5,312
Prepaid expenses and other............................ -- 595
--------- -------
Total current assets................................ 14,098 22,142
Property, plant and equipment, net..................... 9,700 20,546
Deferred debt issuance cost, net....................... -- 586
Deposits and other assets.............................. 75 79
--------- -------
Total assets........................................ $ 23,873 $43,353
========= =======
<CAPTION>
Liabilities and Stockholders' Deficit
<S> <C> <C>
Current liabilities:
Accrued liabilities................................... $ -- $ 6,987
Accounts payable...................................... 441 10,220
Current portion of long-term debt..................... -- 73,823
Liabilities subject to compromise under reorganization
proceedings.......................................... 95,090 --
--------- -------
Total current liabilities........................... 95,531 91,030
Deferred income taxes.................................. 152 152
Preferred dividends payable............................ -- 7,081
Other long-term liabilities............................ -- 1,229
--------- -------
Total liabilities................................... 95,683 99,492
--------- -------
Redeemable preferred stock:
Series A redeemable preferred stock................... 14,736 14,706
Series B redeemable preferred stock................... 25,414 25,372
Warrants outstanding................................... 261 261
Stockholder's deficit:
Common stock.......................................... 1,156 1,156
Additional paid-in-capital............................ 109 109
Foreign currency translation adjustment............... (903) (248)
Retained deficit...................................... (112,583) (97,495)
--------- -------
Total stockholders' deficit......................... (112,221) (96,478)
--------- -------
Total liabilities and stockholders' deficit......... $ 23,873 $43,353
========= =======
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
F-105
<PAGE>
AUTOMATA INTERNATIONAL, INC.
(Debtor-in-Possession)
Condensed Consolidated Statements of Operations
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
-------------------------
July 1, 2000 July 3, 1999
------------ ------------
<S> <C> <C>
Net sales............................................. $ 51,893 61,962
Cost of sales......................................... 49,194 60,428
-------- -------
Gross profit....................................... 2,699 1,534
-------- -------
Selling, general and administrative................... 8,500 8,777
Facility closing and restructuring costs.............. 13 3,599
Reorganization items--professional fees............... 236 --
-------- -------
Loss from operations............................... (6,050) (10,842)
-------- -------
Other income and (expense):
Interest expense (net)............................... (5,706) (5,522)
Other (expense) income............................... 56 158
-------- -------
Total other expense................................ (5,650) (5,364)
-------- -------
Loss before income taxes........................... (11,700) (16,206)
Income tax provision (benefit)........................ 26 (487)
-------- -------
Net loss........................................... $(11,726) (15,719)
======== =======
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
F-106
<PAGE>
AUTOMATA INTERNATIONAL, INC. AND SUBSIDIARIES
(Debtor-in-Possession)
Condensed Consolidated Statement of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months
ended
-----------------
July 1, July 3,
2000 1999
-------- -------
<S> <C> <C>
Cash flows provided by operating activities:
Net loss................................................... $(11,726) (15,719)
Reconciliation to cash provided by (used in) operating
activities:
Facility closing and restructuring cost................... 13 3,599
Depreciation and amortization............................. 3,955 6,582
Debt accretion............................................ 73 73
Deferred credits.......................................... (40) (100)
Deferred taxes............................................ -- 775
Changes in operating assets and liabilities:
Accounts receivable..................................... 142 (375)
Prepaid expenses and other assets....................... 581 (164)
Inventory............................................... 732 (384)
Income tax receivable................................... 1,179 15
Accounts payable and accrued expenses................... 441 (725)
Other liabilities....................................... (126) (857)
Operating payables subject to compromise under
Reorganization proceedings............................. 4,354 --
-------- -------
Net cash used in operating activities................. (422) (7,280)
-------- -------
Cash flows from investing activities:
Purchases of property and equipment........................ (770) (2,766)
Deposits and other assets.................................. -- 525
-------- -------
Net cash used in investing activities................. (770) (2,241)
-------- -------
Cash flows from financing activities:
Line of credit, net........................................ -- 2,900
Principal payments on long-term debt....................... -- (1,125)
Long-term debt borrowing................................... -- 1,745
Principal payments on capital lease obligation............. (229) (599)
Issuance of preferred stock................................ -- 4,987
Issuance of common stock................................... -- 25
-------- -------
Net cash provided by (used in) financing activities... (229) 7,933
-------- -------
Effect of exchange rate changes on cash..................... (468) (303)
-------- -------
Net decrease in cash and cash equivalents............. (1,889) (1,891)
Cash and cash equivalents, beginning of year................ 4,207 3,746
-------- -------
Cash and cash equivalents, end of year...................... $ 2,318 1,855
======== =======
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
F-107
<PAGE>
AUTOMATA INTERNATIONAL, INC., AND SUBSIDIARIES
(Debtor-in-Possession)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements as of
and for the nine-month period ended July 1, 2000 include the accounts of
Automata International, Inc. (the "Company"), and its subsidiaries and have
been prepared in accordance with generally accepted accounting principles. All
intercompany balances and transactions have been eliminated. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation of the Company's financial
position, results of operations and cash flows at the date and for the period
indicated have been included.
The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the full fiscal year.
Because all of the disclosures required by generally accepted accounting
principles are not included in the accompanying condensed consolidated
financial statements and related notes, they should be read in conjunction with
the audited consolidated financial statements and related notes for the fiscal
year ended October 2, 1999.
(2) Bankruptcy and Plans of Sale
During 1999 and 1998, the Company incurred significant net losses, primarily
due to its U.K. operations, its Frederick, Maryland facility in the U.S. and
its high level of interest expense.
The Company's net losses have continued in fiscal 2000. In January 2000, the
Company's lenders did not renew or extend waivers for the violation of certain
covenants under debt agreements and on January 15, 2000, the Company did not
make scheduled principal payments totaling $812,500 on two term loans. The
lenders informed the Company that they were reserving all rights and remedies
under the debt agreements as a result of these events. The lenders took no
action to accelerate any of the amounts outstanding under the debt agreements.
Management continued to negotiate with the lenders to obtain a waiver of
previous debt covenant violations and the deferral of principal and interest
payments, however, these negotiations were ultimately unsuccessful.
On February 18, 2000, after unsuccessful negotiations with a potential
buyer. Kode International, Plc. ("Kode") and one subsidiary, Kam Circuits
Limited ("Kam") were placed into administrative receivership. The second
subsidiary, Kamtronics Limited ("Kamtronics") continued operations. On March
13, 2000, the Kamtronics operation was sold for cash. On March 23, 2000
substantially all production related assets of Kode and Kam were sold for cash.
Certain real property of Kode has been licensed for a cash fee with an option
to purchase. The administrative receiver is in the process of converting all
other assets of Kode and Kam to cash. The Company intends to apply the
estimated net proceeds available from these activities of approximately
$4,000,000 to reduce amounts outstanding under the respective debt agreements.
The amounts the Company may ultimately realized could differ from these
estimated net proceeds based on the results of the real property option and the
final determination of the costs and fees of the receivership.
On June 23, 2000, the Company filed a petition with the Bankruptcy Court for
relief under Chapter 11 of the United States Bankruptcy Code. Under the plan of
reorganization filed by the Company, all remaining U.S. assets were to be sold
with the proceeds used to discharge claims by creditors. The plan was approved
by the bankruptcy court on August 2, 2000. The sale of the assets of the
Company (excluding the $4.2 million due from the U.K. Administrative Receiver)
to DDi Corp. for approximately $19.5 million in cash was approved by the
Bankruptcy Court and the sale was subsequently completed on August 4, 2000.
From the filing date, the Company has operated as a debtor-in-possession
subject to the jurisdiction of the Bankruptcy Court. During such time, all
claims against the Company in existence prior to the filing date were stayed
and have been
F-108
<PAGE>
AUTOMATA INTERNATIONAL, INC., AND SUBSIDIARIES
(Debtor-in-Possession)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
classified as "liabilities subject to compromise" in the consolidated balance
sheet. At July 1, 2000, the "liabilities subject to compromise" were comprised
of the following (in thousands):
<TABLE>
<CAPTION>
July 1,
2000
-------
<S> <C>
Secured loans payable to a bank..................................... $59,938
Subordinated loan payable to a bank................................. 9,996
Subordinated loan payable to a stockholder.......................... 1,567
Accounts payble to unsecured creditors.............................. 5,620
Preferred dividends payable......................................... 10,371
Other accrued liabilities........................................... 7,598
-------
Total............................................................. $95,090
=======
</TABLE>
The approved sale agreement allows DDi Corp. 60 days from the date the sale
closes to assume or reject executory contracts related to the assets purchased
subject to the approval of the Bankruptcy Court. As of July 1, the Court has
not approved any assumptions or rejections of executory contracts.
(3) Inventories
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market. Work-in-process and finished goods inventory are
comprised of direct material, labor and allocated overhead costs.
<TABLE>
<CAPTION>
July
1, October 2,
2000 1999
------ ----------
<S> <C> <C>
Raw materials.............................................. $1,332 2,391
Work-in-process............................................ 1,020 2,231
Finished goods............................................. 325 690
------ -----
Total.................................................... $2,677 5,312
====== =====
</TABLE>
F-109
<PAGE>
[DDi LOGO APPEARS HERE]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than the
underwriting discounts and commissions. All amounts shown are estimates, except
the Securities and Exchange Commission registration fee and the National
Association of Securities Dealers, Inc. filing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration fee.............. $ 63,082
National Association of Securities Dealers, Inc. filing fee...... 24,609
Printing and engraving expenses.................................. 200,000
Legal fees and expenses.......................................... 400,000
Accounting fees and expenses..................................... 750,000
Blue sky fees and expenses....................................... 5,000
Transfer agent and Registrar fees................................ 3,500
Miscellaneous.................................................... 553,809
----------
Total.......................................................... $2,000,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers.
The Registrant's Certificate of Incorporation provides that the Registrant's
directors shall not be liable to the Registrant or its stockholders for
monetary damages for breach of fiduciary duty as a director, except to the
extent that the exculpation from liabilities is not permitted under the
Delaware General Corporation Law as in effect at the time such liability is
determined. The By-Laws provide that the Registrant shall indemnify its
directors to the full extent permitted by the laws of the State of Delaware.
Item 15. Recent Sales of Unregistered Securities.
During the last three years, DDi Corp. has issued the following securities
without registration under the Securities Act of 1933, as amended (the
"Securities Act"):
(1) On April 14, 2000 the Company, formerly a California corporation,
was reincorporated as a Delaware corporation. In connection with this
reincorporation, shareholders of the former California corporation, in
proportion to their ownership in such California corporation, were granted
an aggregate of 24,809,520 shares of common stock. These shares were exempt
from registration under the Securities Act pursuant to (S)3(a)(9) thereof.
(2) On April 14, 2000, the Company issued an aggregate of 2,230,619
shares of common stock to former shareholders of MCM Electronics Ltd. as
partial consideration for the Company's acquisition of MCM Electronics.
These shares were exempt from registration under the Securities Act
pursuant to Regulation S thereof.
II-1
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits:
Some of the following exhibits have been previously filed with the
Securities and Exchange Commission pursuant to the requirements of the
Securities Act or the Securities Exchange Act. Such exhibits are identified by
the parenthetical references following the listing of each such exhibit and are
incorporated herein by reference.
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 DDi Corp. Delaware Certificate of Incorporation. (Previously filed
as Exhibit 3.1 to Registration Statement No. 333-95623, as amended).
3.2 DDi Corp. Delaware By-laws. (Previously filed as Exhibit 3.2 to
Registration Statement No. 333-95623, as amended).
4.1 Stockholders Agreement dated as of March 31, 2000. (Previously filed
as Exhibit 4.1 to Registration Statement No. 333-95623, as amended).
4.1.1 Amendment, dated as of October 2, 2000, to the Stockholders
Agreement dated as of March 31, 2000.
4.2 Form of certificate representing shares of Common Stock. (Previously
filed as Exhibit 4.2 to Registration Statement No. 333-95623, as
amended).
5.1 Opinion of Ropes & Gray.
10.1 Amended and Restated Recapitalization Agreement dated as of October
4, 1997. (Previously filed as Exhibit 10.1 to Registration Statement
No. 333-95623, as amended).
10.2 Stock Contribution and Merger Agreement dated July 23, 1998 by and
among Details Holding Corp. and Dynamic Circuits Inc. and the
Stockholders of Dynamic Circuits Inc. (Previously filed as Exhibit
2.1 to Form 8-K dated July 23, 1998).
10.2.1 Form of Amendment dated as of March 31, 2000, to the Stock
Contribution and Merger Agreement dated July 23, 1998 by and among
Details Holdings Corp. and Dynamic Circuits Inc. and the
Stockholders of Dynamic Circuits Inc. (Previously filed as Exhibit
10.2.1 to Registration Statement No. 333-95623, as amended).
10.3.1 Credit Agreement dated as of July 23, 1998, as Amended and Restated
as of August 28, 1998. (Previously filed as Exhibit 10.3.1 to
Registration Statement No. 333-95623, as amended).
10.3.2 First Amendment dated as of March 10, 1999, to the Credit Agreement
dated as of July 23, 1998, as Amended and Restated as of August 28,
1998. (Previously filed as Exhibit 10.3.2 to Registration Statement
No. 333-95623, as amended).
10.3.3 Second Amendment dated as of March 22, 2000 to the Credit Agreement
dated as of July 23, 1998, as Amended and Restated as of August 28,
1998. (Previously filed as Exhibit 10.3.3 to Registration Statement
No. 333-95623, as amended).
10.3.4 Form of Third Amendment dated as of October 6, 2000 to the Credit
Agreement dated as of July 23, 1998, as Amended and Restated as of
August 28, 1998.
10.4 Details Holdings Corp.--Dynamic Circuits 1996 Stock Option Plan
dated as of July 23, 1998. (Previously filed as Exhibit 10.6 to the
Annual Report on Form 10-K for the fiscal year ended December 31,
1998 File No. 333-41187 and 333-41211).
10.5 Details Holdings Corp.--Dynamic Circuits 1997 Stock Options Plan
dated as of July 23, 1998. (Previously filed as Exhibit 10.7 to the
Annual Report on Form 10-K for the fiscal year ended December 31,
1998 File No. 333-41187 and 333-41211).
10.6 Details Holdings Corp. Bonus Plan dated as of July 23, 1998.
(Previously filed as Exhibit 10.8 to the Annual Report on Form 10-K
for the fiscal year ended December 31, 1998 File No. 333-41187 and
333-41211).
10.7 Management Agreement dated October 28, 1997. (Previously filed as
Exhibit 10.6 to Registration Statement No. 333-41187, as amended).
10.7.1* Management Termination Agreement dated April 14, 2000.
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
10.8 2000 DDi Corp. Equity Incentive Plan. (Previously filed as Exhibit
10.8 to Registration Statement No. 333-95623, as amended).
10.9 1997 Details, Inc. Equity Incentive Plan. (Previously filed as
Exhibit 10.7 to Registration Statement No. 333-41187, as amended).
10.10 1996 Employee Stock Option Plan dated December 31, 1996. (Previously
filed as Exhibit 10.8 to Registration Statement No. 333-41187, as
amended).
10.11 1996 Performance Stock Option Plan dated December 31, 1996.
(Previously filed as Exhibit 10.9 to Registration Statement No. 333-
41187, as amended).
10.12 Real Property Master Lease Agreement dated January 1, 1996.
(Previously filed as Exhibit 10.4 to Registration Statement No. 333-
41187, as amended).
10.13 Personal Property Master Lease Agreement dated January 1, 1996.
(Previously filed as Exhibit 10.5 to Registration Statement No. 333-
41187, as amended).
10.14 McMaster Employment Agreement dated September 1, 1995, as amended
October 28, 1997. (Previously filed as Exhibit 10.10 to Registration
Statement No. 333-41187, as amended).
10.15 Gisch Employment Agreement dated September 19, 1995 as amended
October 28, 1997. (Previously filed as Exhibit 10.11 to Registration
Statement No. 333-41187, as amended).
10.16 Muse Employment Agreement dated September 1, 1995, as amended
October 28, 1997. (Previously filed as Exhibit 10.12 to Registration
Statement No. 333-41187, as amended).
10.17 Wright Employment Agreement dated September 1, 1995, as amended
October 28, 1997. (Previously filed as Exhibit 10.13 to Registration
Statement No. 333-41187, as amended).
10.18 Dimick Employment Agreement dated July 23, 1998. (Previously filed
as Exhibit 10.21 to the Annual Report on Form 10-K for the fiscal
year ended December 31, 1998 File No. 333-41187 and 333-41211).
10.19 Halvorson Employment Agreement dated July 23, 1998. (Previously
filed as Exhibit 10.22 to the Annual Report on Form 10-K for the
fiscal year ended December 31, 1998 File No. 333-41187 and 333-
41211).
10.20 Peters Employment Agreement dated July 23, 1998. (Previously filed
as Exhibit 10.23 to the Annual Report on Form 10-K for the fiscal
year ended December 31, 1998 File No. 333-41187 and 333-41211).
10.21 NTI Stock Purchase Agreement dated December 19, 1997. (Previously
filed as Exhibit 10.4 to Registration Statement No. 333-41187, as
amended).
10.22 NTI Real Property Lease Agreement dated as of June 15, 1994.
(Previously filed as Exhibit 10.16 to Registration Statement No.
333-41187, as amended).
10.23 NTI Real Property Lease Agreement dated as of June 15, 1994.
(Previously filed as Exhibit 10.17 to Registration Statement No.
333-41187, as amended).
10.24 NTI Real Property Lease Agreement dated as of June 15, 1994.
(Previously filed as Exhibit 10.18 to Registration Statement No.
333-41187, as amended).
10.25 DCI Real Property Lease Agreement dated as of July 22, 1991.
(Previously filed as Exhibit 10.30 to the Annual Report on Form 10-K
for the fiscal year ended December 31, 1998 File No. 333-41187 and
333-41211).
10.26 DCI Real Property Lease Agreement dated as of March 20, 1997.
(Previously filed as Exhibit 10.31 to the Annual Report on Form 10-K
for the fiscal year ended December 31, 1998 File No. 333-41187 and
333-41211).
10.27 DCI Real Property Lease Agreement dated as of November 12, 1997.
(Previously filed as Exhibit 10.32 to the Annual Report on Form 10-K
for the fiscal year ended December 31, 1998 File No. 333-41187 and
333-41211).
10.28 DCI Real Property Lease Agreement dated as of August 18, 1998.
(Previously filed as Exhibit 10.33 to the Annual Report on Form 10-K
for the fiscal year ended December 31, 1998 File No. 333-41187 and
333-41211).
10.29 Cuplex Real Property Lease Agreement dated as of April 14, 1998.
(Previously filed as Exhibit 10.34 to the Annual Report on Form 10-K
for the fiscal year ended December 31, 1998 File No. 333-41187 and
333-41211).
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
10.30 Cuplex Real Property Lease Agreement dated as of May 13, 1996.
(Previously filed as Exhibit 10.35 to the Annual Report on Form 10-
K for the fiscal year ended December 31, 1998 File No. 333-41187
and 333-41211).
10.31 Cuplex Real Property Lease Agreement dated as of November 2, 1995.
(Previously filed as Exhibit 10.36 to the Annual Report on Form 10-
K for the fiscal year ended December 31, 1998 File No. 333-41187
and 333-41211).
10.32 Indenture dated as of November 18, 1997. (Previously filed as
Exhibit 4.1 to Registration Statement No. 333-41187, as amended).
10.33 Supplemental Indenture dated as of February 10, 1998. (Previously
filed as Exhibit 4.2 to Registration Statement No. 333-41187, as
amended).
10.34 Indenture dated as of November 18, 1997. (Previously filed as
Exhibit 4.1 to Registration Statement No. 333-41211).
10.35 First Supplemental Indenture dated as of July 23, 1998. (Previously
filed as Exhibit 10.35 to Registration Statement No. 333-95623, as
amended).
10.36 Form of Merger Agreement between DDi Corp., a California
corporation, and DDi Merger Co., a Delaware corporation.
(Previously filed as Exhibit 10.36 to Registration Statement No.
333-95623, as amended).
10.37 DDi Corp. Employee Stock Purchase Plan, as amended. (Previously
filed as Exhibit 10.37 to Registration Statement No. 333-95623, as
amended).
10.38 Share Purchase Agreement between the shareholders of MCM
Electronics Limited and DDi Corp. dated as of March 22, 2000.
(Previously filed as Exhibit 10.38 to Registration Statement No.
333-95623, as amended).
10.39.1 Note Purchase Agreement dated as of July 23, 1998 between Details
Intermediate Holdings Corp. and Sankaty High Asset Partners, L.P.
(Previously filed as Exhibit 10.39.1 to Registration Statement No.
333-95623, as amended).
10.39.2 Form of Indenture. (Previously filed as Exhibit 10.39.2 to
Registration Statement No. 333-95623, as amended).
10.40* Form of DDi Corp. Non-U.S. Subsidiary Employee Stock Purchase Plan.
10.41* Asset Purchase Agreement dated June 26, 2000 among Dynamic Details,
Incorporated, Virginia and Automata International, Inc.
10.41.1* Amendment No. 1, dated August 1, 2000, to Asset Purchase Agreement.
21.1* Subsidiaries of the registrant.
23.1 Consent of PricewaterhouseCoopers LLP regarding DDi Corp.
23.2 Consent of PricewaterhouseCoopers LLP regarding Dynamic Circuits
Inc.
23.3 Consent of Ropes & Gray (included in the opinion filed as Exhibit
5.1).
23.4 Consent of KPMG Audit Plc regarding MCM Electronics Limited/Symonds
Limited.
23.5 Consent of KPMG LLP regarding Automata International, Inc.
23.6 Consent of Arthur Andersen LLP regarding Automata International,
Inc.
24.1 Power of attorney pursuant to which amendments to this registration
statement may be filed (included on the signature page in Part II
hereof).
27.1* DDi Corp. Financial Data Schedule.
</TABLE>
--------
* Previously filed.
(b) Financial Statement Schedules.
The schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions, are inapplicable or not material, or the information
called for thereby is otherwise included in the financial statements and
therefore has been omitted.
II-4
<PAGE>
Item 17. Undertakings.
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such manner as requested by the underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under "Item 14--Indemnification
of Directors and Officers" above, or otherwise, the Registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, DDi
Corp. has duly caused this Registration Statement on Form S-1 to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Anaheim, State of California, on this 10th day of October, 2000.
DDi Corp.
By: /s/ Bruce D. McMaster
----------------------------------
Name: Bruce D. McMaster
Title: Chief Executive Officer
* * * *
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement on Form S-1 has been signed by the following persons in
the capacities and on the dates indicated:
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<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Bruce D. McMaster President, Chief Executive October 10, 2000
______________________________________ Officer (Principal
Bruce D. McMaster Executive Officer) and
Director
/s/ Joseph P. Gisch Vice President and Chief October 10, 2000
______________________________________ Financial Officer
Joseph P. Gisch (Principal Financial and
Accounting Officer)
* Director September 12, 2000
______________________________________
Charles D. Dimick
* Director September 12, 2000
______________________________________
David Dominik
Director
______________________________________
Edward W. Conard
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II-6
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<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Director
______________________________________
Stephen G. Pagliuca
* Director September 12, 2000
______________________________________
Prescott Ashe
Director
______________________________________
Stephen M. Zide
* Director September 12, 2000
______________________________________
Mark R. Benham
* Director September 12, 2000
______________________________________
Christopher Behrens
</TABLE>
* See Power of Attorney executed by each such officer and/or director on the
Registration Statement on Form S-1 previously filed with the SEC on
September 12, 2000, appointing Bruce D. McMaster and Joseph P. Gisch, and
each of them singly, as true and lawful attorney-in-fact and agent with
full power to sign this and any and all amendments (including post-
effective amendments) to this Registration Statement.
II-7
<PAGE>
Exhibits:
Some of the following exhibits have been previously filed with the
Securities and Exchange Commission pursuant to the requirements of the
Securities Act or the Securities Exchange Act. Such exhibits are identified by
the parenthetical references following the listing of each such exhibit and are
incorporated herein by reference.
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1.1 Form of Underwriting Agreement.
3.1 DDi Corp. Delaware Certificate of Incorporation. (Previously filed
as Exhibit 3.1 to Registration Statement No. 333-95623, as amended).
3.2 DDi Corp. Delaware By-laws. (Previously filed as Exhibit 3.2 to
Registration Statement No. 333-95623, as amended).
4.1 Stockholders Agreement dated as of March 31, 2000. (Previously filed
as Exhibit 4.1 to Registration Statement No. 333-95623, as amended).
4.1.1 Amendment, dated as of October 2, 2000, to the Stockholders
Agreement dated as of March 31, 2000.
4.2 Form of certificate representing shares of Common Stock. (Previously
filed as Exhibit 4.2 to Registration Statement No. 333-95623, as
amended).
5.1 Opinion of Ropes & Gray.
10.1 Amended and Restated Recapitalization Agreement dated as of October
4, 1997. (Previously filed as Exhibit 10.1 to Registration Statement
No. 333-95623, as amended).
10.2 Stock Contribution and Merger Agreement dated July 23, 1998 by and
among Details Holding Corp. and Dynamic Circuits Inc. and the
Stockholders of Dynamic Circuits Inc. (Previously filed as Exhibit
2.1 to Form 8-K dated July 23, 1998).
10.2.1 Form of Amendment dated as of March 31, 2000, to the Stock
Contribution and Merger Agreement dated July 23, 1998 by and among
Details Holdings Corp. and Dynamic Circuits Inc. and the
Stockholders of Dynamic Circuits Inc. (Previously filed as Exhibit
10.2.1 to Registration Statement No. 333-95623, as amended).
10.3.1 Credit Agreement dated as of July 23, 1998, as Amended and Restated
as of August 28, 1998. (Previously filed as Exhibit 10.3.1 to
Registration Statement No. 333-95623, as amended).
10.3.2 First Amendment dated as of March 10, 1999, to the Credit Agreement
dated as of July 23, 1998, as Amended and Restated as of August 28,
1998. (Previously filed as Exhibit 10.3.2 to Registration Statement
No. 333-95623, as amended).
10.3.3 Second Amendment dated as of March 22, 2000 to the Credit Agreement
dated as of July 23, 1998, as Amended and Restated as of August 28,
1998. (Previously filed as Exhibit 10.3.3 to Registration Statement
No. 333-95623, as amended).
10.3.4 Form of Third Amendment dated as of October 6, 2000 to the Credit
Agreement dated as of July 23, 1998, as Amended and Restated as of
August 28, 1998.
10.4 Details Holdings Corp.--Dynamic Circuits 1996 Stock Option Plan
dated as of July 23, 1998. (Previously filed as Exhibit 10.6 to the
Annual Report on Form 10-K for the fiscal year ended December 31,
1998 File No. 333-41187 and 333-41211).
10.5 Details Holdings Corp.--Dynamic Circuits 1997 Stock Options Plan
dated as of July 23, 1998. (Previously filed as Exhibit 10.7 to the
Annual Report on Form 10-K for the fiscal year ended December 31,
1998 File No. 333-41187 and 333-41211).
10.6 Details Holdings Corp. Bonus Plan dated as of July 23, 1998.
(Previously filed as Exhibit 10.8 to the Annual Report on Form 10-K
for the fiscal year ended December 31, 1998 File No. 333-41187 and
333-41211).
10.7 Management Agreement dated October 28, 1997. (Previously filed as
Exhibit 10.6 to Registration Statement No. 333-41187, as amended).
10.7.1* Management Termination Agreement dated April 14, 2000.
10.8 2000 DDi Corp. Equity Incentive Plan. (Previously filed as Exhibit
10.8 to Registration Statement No. 333-95623, as amended).
10.9 1997 Details, Inc. Equity Incentive Plan. (Previously filed as
Exhibit 10.7 to Registration Statement No. 333-41187, as amended).
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10.10 1996 Employee Stock Option Plan dated December 31, 1996. (Previously
filed as Exhibit 10.8 to Registration Statement No. 333-41187, as
amended).
10.11 1996 Performance Stock Option Plan dated December 31, 1996.
(Previously filed as Exhibit 10.9 to Registration Statement No. 333-
41187, as amended).
10.12 Real Property Master Lease Agreement dated January 1, 1996.
(Previously filed as Exhibit 10.4 to Registration Statement No. 333-
41187, as amended).
10.13 Personal Property Master Lease Agreement dated January 1, 1996.
(Previously filed as Exhibit 10.5 to Registration Statement No. 333-
41187, as amended).
10.14 McMaster Employment Agreement dated September 1, 1995, as amended
October 28, 1997. (Previously filed as Exhibit 10.10 to Registration
Statement No. 333-41187, as amended).
10.15 Gisch Employment Agreement dated September 19, 1995 as amended
October 28, 1997. (Previously filed as Exhibit 10.11 to Registration
Statement No. 333-41187, as amended).
10.16 Muse Employment Agreement dated September 1, 1995, as amended
October 28, 1997. (Previously filed as Exhibit 10.12 to Registration
Statement No. 333-41187, as amended).
10.17 Wright Employment Agreement dated September 1, 1995, as amended
October 28, 1997. (Previously filed as Exhibit 10.13 to Registration
Statement No. 333-41187, as amended).
10.18 Dimick Employment Agreement dated July 23, 1998. (Previously filed
as Exhibit 10.21 to the Annual Report on Form 10-K for the fiscal
year ended December 31, 1998 File No. 333-41187 and 333-41211).
10.19 Halvorson Employment Agreement dated July 23, 1998. (Previously
filed as Exhibit 10.22 to the Annual Report on Form 10-K for the
fiscal year ended December 31, 1998 File No. 333-41187 and 333-
41211).
10.20 Peters Employment Agreement dated July 23, 1998. (Previously filed
as Exhibit 10.23 to the Annual Report on Form 10-K for the fiscal
year ended December 31, 1998 File No. 333-41187 and 333-41211).
10.21 NTI Stock Purchase Agreement dated December 19, 1997. (Previously
filed as Exhibit 10.4 to Registration Statement No. 333-41187, as
amended).
10.22 NTI Real Property Lease Agreement dated as of June 15, 1994.
(Previously filed as Exhibit 10.16 to Registration Statement No.
333-41187, as amended).
10.23 NTI Real Property Lease Agreement dated as of June 15, 1994.
(Previously filed as Exhibit 10.17 to Registration Statement No.
333-41187, as amended).
10.24 NTI Real Property Lease Agreement dated as of June 15, 1994.
(Previously filed as Exhibit 10.18 to Registration Statement No.
333-41187, as amended).
10.25 DCI Real Property Lease Agreement dated as of July 22, 1991.
(Previously filed as Exhibit 10.30 to the Annual Report on Form 10-K
for the fiscal year ended December 31, 1998 File No. 333-41187 and
333-41211).
10.26 DCI Real Property Lease Agreement dated as of March 20, 1997.
(Previously filed as Exhibit 10.31 to the Annual Report on Form 10-K
for the fiscal year ended December 31, 1998 File No. 333-41187 and
333-41211).
10.27 DCI Real Property Lease Agreement dated as of November 12, 1997.
(Previously filed as Exhibit 10.32 to the Annual Report on Form 10-K
for the fiscal year ended December 31, 1998 File No. 333-41187 and
333-41211).
10.28 DCI Real Property Lease Agreement dated as of August 18, 1998.
(Previously filed as Exhibit 10.33 to the Annual Report on Form 10-K
for the fiscal year ended December 31, 1998 File No. 333-41187 and
333-41211).
10.29 Cuplex Real Property Lease Agreement dated as of April 14, 1998.
(Previously filed as Exhibit 10.34 to the Annual Report on Form 10-K
for the fiscal year ended December 31, 1998 File No. 333-41187 and
333-41211).
10.30 Cuplex Real Property Lease Agreement dated as of May 13, 1996.
(Previously filed as Exhibit 10.35 to the Annual Report on Form 10-K
for the fiscal year ended December 31, 1998 File No. 333-41187 and
333-41211).
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10.31 Cuplex Real Property Lease Agreement dated as of November 2, 1995.
(Previously filed as Exhibit 10.36 to the Annual Report on Form 10-
K for the fiscal year ended December 31, 1998 File No. 333-41187
and 333-41211).
10.32 Indenture dated as of November 18, 1997. (Previously filed as
Exhibit 4.1 to Registration Statement No. 333-41187, as amended).
10.33 Supplemental Indenture dated as of February 10, 1998. (Previously
filed as Exhibit 4.2 to Registration Statement No. 333-41187, as
amended).
10.34 Indenture dated as of November 18, 1997. (Previously filed as
Exhibit 4.1 to Registration Statement No. 333-41211).
10.35 First Supplemental Indenture dated as of July 23, 1998. (Previously
filed as Exhibit 10.35 to Registration Statement No. 333-95623, as
amended).
10.36 Form of Merger Agreement between DDi Corp., a California
corporation, and DDi Merger Co., a Delaware corporation.
(Previously filed as Exhibit 10.36 to Registration Statement No.
333-95623, as amended).
10.37 DDi Corp. Employee Stock Purchase Plan, as amended. (Previously
filed as Exhibit 10.37 to Registration Statement No. 333-95623, as
amended).
10.38 Share Purchase Agreement between the shareholders of MCM
Electronics Limited and DDi Corp. dated as of March 22, 2000.
(Previously filed as Exhibit 10.38 to Registration Statement No.
333-95623, as amended).
10.39.1 Note Purchase Agreement dated as of July 23, 1998 between Details
Intermediate Holdings Corp. and Sankaty High Asset Partners, L.P.
(Previously filed as Exhibit 10.39.1 to Registration Statement No.
333-95623, as amended).
10.39.2 Form of Indenture. (Previously filed as Exhibit 10.39.2 to
Registration Statement No. 333-95623, as amended).
10.40* Form of DDi Corp. Non-U.S. Subsidiary Employee Stock Purchase Plan.
10.41* Asset Purchase Agreement dated June 26, 2000 among Dynamic Details,
Incorporated, Virginia and Automata International, Inc.
10.41.1* Amendment No. 1, dated August 1, 2000, to Asset Purchase Agreement.
21.1* Subsidiaries of the registrant.
23.1 Consent of PricewaterhouseCoopers LLP regarding DDi Corp.
23.2 Consent of PricewaterhouseCoopers LLP regarding Dynamic Circuits
Inc.
23.3 Consent of Ropes & Gray (included in the opinion filed as Exhibit
5.1).
23.4 Consent of KPMG Audit Plc regarding MCM Electronics Limited/Symonds
Limited.
23.5 Consent of KPMG LLP regarding Automata International, Inc.
23.6 Consent of Arthur Andersen LLP regarding Automata International,
Inc.
24.1 Power of attorney pursuant to which amendments to this registration
statement may be filed (included on the signature page in Part II
hereof).
27.1* DDi Corp. Financial Data Schedule.
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* Previously filed.
