<PAGE>
As filed with the Securities and Exchange Commission on , 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
DDi CORP.
(Exact name of registrant as specified in its charter)
California 3672 95-3253877
(State or other (Primary Standard (I.R.S. Employer
jurisdiction Industrial Identification No.)
of incorporation or Classification Code
organization) Number)
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 Officer
DDi Corp. DDi Corp.
1220 Simon Circle 1220 Simon Circle
Anaheim, California 92806 Anaheim, California 92806
(714) 688-7200 (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 & Flom
One International Place 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. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed Maximum Proposed Maximum
Title of Each Class of Amount to be Offering Price Per Aggregate Offering Amount of
Securities to be Registered Registered Share(1) Price(1) Registration Fee
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<S> <C> <C> <C> <C>
Common Stock, par value
$.01 per share........ $ $150,000,000 $39,600
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</TABLE>
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) under the Securities Act of 1933, as amended.
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 or legal. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION DATED , 2000
Shares
[DDi LOGO APPEARS HERE]
DDi Corp.
Common Stock
--------
Prior to this offering, there has been no public market for our common stock.
The initial public offering price of common stock is expected to be between
$ and $ per share. We have applied to list our common stock on The Nasdaq
Stock Market's National Market under the symbol "DDIC."
The underwriters have an option to purchase a maximum of additional shares
from some of our stockholders to cover over-allotments of shares. We will not
receive any of the proceeds from the shares of common stock sold by the selling
stockholders.
Investing in our common stock involves risk. See "Risk Factors" on page 7.
<TABLE>
<CAPTION>
Price Underwriting
to Discounts and Proceeds to
Public Commissions DDi Corp.
------ ------------- -----------
<S> <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
The date of this prospectus is , 2000.
<PAGE>
Description of cover art: photographs of operations and products surrounding
"DDi is a leading provider of time-critical, technologically advanced design,
development and manufacturing services to original equipment manufacturers and
electronics manufacturing services providers. DDi targets the fast-growing
communications and networking industries, and its customers include Alcatel,
Cisco Systems, GEC Marconi, IBM, Intel, Motorola & Nokia. DDi's design and
manufacturing expertise and its leading edge process technology provide its
customers with the flexibility to shorten product development cycles and reduce
their time to market in a marketplace demanding increasingly rapid product
introduction."
<PAGE>
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TABLE OF CONTENTS
<TABLE>
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Page
----
<S> <C>
Prospectus Summary.................. 1
Risk Factors........................ 7
Cautionary Note Regarding Forward-
Looking Statements................. 13
Use of Proceeds..................... 13
The Reclassification................ 14
Dividend Policy..................... 15
Capitalization...................... 15
Dilution............................ 16
Unaudited Pro Forma Consolidated
Financial Data..................... 17
Selected Consolidated Financial and
Other Data......................... 25
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 28
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Business........................... 37
Management......................... 45
Certain Relationships and Related
Transactions...................... 56
Principal and Selling
Stockholders...................... 58
Description of Indebtedness........ 61
Description of Capital Stock....... 63
Shares Eligible for Future Sale.... 66
Underwriting....................... 68
Legal Matters...................... 70
Experts............................ 70
Changes in Accountants............. 71
Additional Information............. 71
F-1
Index to Financial Statements......
</TABLE>
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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, certain statistical data relating to us presented in
this prospectus have been compiled from our internal surveys and schedules,
which, while believed by us to be reliable, have not been verified by any
independent sources.
Dynamic Details is a trademark of our subsidiary. We have applied for
trademark protection of DDi and the DDi logo.
Dealer Prospectus Delivery Obligations
Until , 2000 (25 days after the commencement of the offering), all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
requirement is in addition to the dealers' obligation to deliver a prospectus
when acting as an underwriter and with respect to unsold allotments or
subscriptions.
i
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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. As used in this
prospectus, "EBITDA" means earnings before income taxes, depreciation,
amortization, net interest expense and certain non-cash charges. "Adjusted
EBITDA" means EBITDA adjusted to exclude certain items of a non-recurring
nature. See note (f) to "Summary Consolidated Historical, Pro Forma and Other
Data."
DDi Corp.
We are a leading provider of time-critical, technologically advanced design,
development and manufacturing services to original equipment manufacturers and
electronics manufacturing services providers. We target the fast-growing
communications and networking equipment industries, which are characterized by
aggressive new product development programs demanding the rapid application of
advanced technology and design. 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;
. quick-turn and pre-production fabrication of complex printed circuit
boards;
. time-critical assembly of backpanels, printed circuit boards, card
cages and wire harnesses; and
. total system assembly and integration.
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 such as hubs, routers and switches. The time-critical
segment of the electronics manufacturing services, or EMS, industry in which we
operate is characterized by high margins, rapid growth and significant customer
diversity. Our adjusted EBITDA for the twelve-month period ended September 30,
1999 of $61.1 million represents an adjusted EBITDA margin of 22.4%, which we
believe is among the highest in the EMS industry.
Our design 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 quick-turn services enable our customers to
shorten product development cycles and reduce their time to market for new
products. We distinguish ourselves from other EMS companies by focusing on
direct relationships with research and development personnel at original
equipment manufacturers, or OEMs. This focus makes us a strategic partner in
our customers' new product initiatives and gives us access to emerging
providers of next-generation technology, such as Applied Microsystems,
Broadcom, Efficient Networks and Gadzoox. 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. OEMs in these industries are increasingly outsourcing
product design and manufacturing to EMS providers, such as ourselves, and are
focusing instead on their core strengths, such as product development, sales,
marketing and customer service. The EMS 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. Industry sources
1
<PAGE>
forecast that the EMS industry will continue to grow at this rate, with
industry revenues projected to be approximately $149 billion in 2003.
Communications equipment OEMs are at a relatively early stage of the
outsourcing trend. We believe we are well-positioned to capitalize on the
combined effect of the growth in the EMS and communications industries both
internally and by strategic acquisitions. Our net sales increased from $67.5
million in 1996 to $272.9 million in the twelve months ended September 30,
1999, a compound annual growth rate of 66%.
Our diverse base of over 1,400 customers includes such large, established
OEMs as Alcatel, Cisco Systems, IBM, Intel, Marconi Communications, Motorola
and Nokia and such EMS providers as Celestica, Flextronics, Jabil and
Solectron. We achieved a net increase of approximately 150 customers in 1999.
In the nine months ended September 30, 1999, our ten largest customers, in the
aggregate, accounted for approximately 40% of our net sales, and our largest
customer accounted for only 8% of net sales. The fast-growing communications
and networking equipment industries represented approximately 55% of our net
sales during the same period.
Our Strategy
Our goal is to be the leading provider of time-critical, technologically
advanced 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 technological leadership in the time-critical segment of
the EMS industry and continue to improve quality and delivery times by
incorporating emerging technologies and consistently refining our
manufacturing processes;
. Leverage our leadership in quick-turn design 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 and manufacturing
activities; and
. Pursue selected acquisition opportunities, including asset divestitures
by OEMs.
Recent Developments
In December 1999, we implemented our plan to consolidate our Colorado
operations into our Texas facility and to close our Colorado facility. We
expect to complete this consolidation and closure by March 31, 2000. We are
currently serving the majority of the customers who were serviced by our
Colorado facility out of our Texas facility. By combining our Texas and
Colorado operations, we are eliminating lower-margin product lines and
decreasing our overhead costs, and we expect to gain efficiency through better
capacity utilization and streamlined management. If the closure of the Colorado
facility had been fully implemented on January 1, 1999, we believe our EBITDA
would have increased by approximately $3.6 million for the nine months ended
September 30, 1999.
----------------
We are a California corporation organized in 1978. Prior to the completion of
our initial public offering, we plan to reincorporate in Delaware. 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.
2
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The Offering
Common stock offered...... shares of common stock by DDi Corp.
Over-allotment option..... Up to shares of common stock offered by several
selling stockholders.
Common stock to be
outstanding after the
offering.................
shares of common stock. See "The
Reclassification." In calculating the number of
shares of common stock, we did not include
shares issuable upon exercise of stock options
outstanding on the date of the offering with a
weighted average exercise price of $ . We also did
not include shares of common stock available
for future grant under our stock option plans on
that date.
Use of proceeds........... We intend to use the approximately $133.1 million
that we estimate we will receive from this offering
to repay a portion of our indebtedness. We will not
receive any of the proceeds from the shares of
common stock sold by the selling stockholders if
the underwriters exercise their over-allotment
option. See "Use of Proceeds."
Proposed Nasdaq National
Market symbol............
DDIC
3
<PAGE>
Summary Consolidated Historical, Pro Forma 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 consolidated balance sheet data as of September 30,
1999, the consolidated statement of operations data for the nine months ended
September 30, 1998 and 1999 and the pro forma data summarized below are
unaudited. The summary unaudited pro forma financial data set forth below give
effect to: (1) our 1998 merger with Dynamic Circuits, Inc., or DCI, (2) the
reclassification, as described under "The Reclassification," and (3) the
consummation of the offering and the application of the net proceeds therefrom,
as described under "Use of Proceeds," as if each had occurred on Janaury 1,
1998 in the case of the unaudited pro forma consolidated statements of
operations data and as of September 30, 1999 in the case of the unaudited pro
forma balance sheet data. The unaudited pro forma consolidated statements of
operations do 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>
Nine Months Pro Forma
Year Ended Pro Forma Ended Nine Months
December 31, Year Ended September 30, Ended
-------------- December 31, -------------- September 30,
1997 1998 1998 1998 1999 1999
------ ------ ------------ ------ ------ -------------
(in millions, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Net sales............... $ 78.8 $174.9 $261.5 $115.7 $213.8 $213.8
Cost of goods sold...... 38.7 119.6 181.5 74.0 149.8 149.8
------ ------ ------ ------ ------ ------
Gross profit.......... 40.1 55.3 80.0 41.7 64.0 64.0
Operating expenses:
Sales and marketing... 7.3 12.8 18.1 8.4 16.6 16.6
General and
administration....... 2.1 8.4 16.0 4.6 11.2 10.4
Amortization of
intangibles.......... -- 10.9 23.5 4.3 17.8 17.8
Stock compensation and
related bonuses(a)... 31.3 -- -- -- -- --
Compensation to the
former CEO .......... 2.1 -- -- -- -- --
Write-off of acquired
in-process research
and development(b)... -- 39.0 -- -- -- --
------ ------ ------ ------ ------ ------
Operating income
(loss)................. (2.7) (15.8) 22.4 24.4 18.4 19.2
Interest expense, net... 25.2 37.4 33.5 25.1 35.0 25.0
------ ------ ------ ------ ------ ------
Loss before taxes and
extraordinary loss (27.9) (53.2) (11.1) (0.7) (16.6) (5.8)
Income tax benefit
(expense).............. 10.9 3.5 (1.2) 0.3 4.4 0.1
------ ------ ------ ------ ------ ------
Loss before
extraordinary loss..... (17.0) (49.7) (12.3) (0.4) (12.2) (5.7)
Extraordinary loss...... 1.6 2.4 2.4 2.3 -- --
------ ------ ------ ------ ------ ------
Net loss................ $(18.6) $(52.1) $(14.7) $ (2.7) $(12.2) $ (5.7)
====== ====== ====== ====== ====== ======
Pro forma loss per
common and common
equivalent shares(c):
Basic................. $
======
Diluted............... $
======
Pro forma weighted
average number of
common and common
equivalent shares
outstanding(c):
Basic.................
======
Diluted...............
======
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Nine Months Pro Forma
Year Ended Pro Forma Ended Nine Months
December 31, Year Ended September 30, Ended
--------------- December 31, --------------- September 30,
1997 1998 1998 1998 1999 1999
------ ------- ------------ ------- ------ -------------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Other Financial Data:
Depreciation............ $ 2.6 $ 9.2 $13.0 $ 5.6 $ 10.7 $10.7
Amortization of deferred
financing costs........ 1.4 1.8 1.8 1.1 1.5 1.5
Capital expenditures.... 6.6 18.0 18.0 12.4 14.2 14.2
Supplemental Data(d):
EBITDA(e)............... $ (0.1) $ 43.3 $59.7 $ 34.3 $ 46.9 $47.7
Adjusted EBITDA(f)...... 33.3 44.1 60.3 34.3 51.3 51.3
Net cash from operating
activities............. 9.1 16.7 -- 6.1 15.2 --
Net cash used in
investing activities... (44.9) (194.8) -- (184.6) (14.5) --
Net cash from (used in)
financing activities... 41.1 174.9 -- 175.4 (2.2) --
</TABLE>
<TABLE>
<CAPTION>
As of
September 30,
1999
---------------
Pro
Actual Forma
------- ------
(in millions)
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents...................................... $ 0.6 $ 0.6
Working capital................................................ 19.4 21.2
Total assets................................................... 371.5 371.8
Total debt, including current maturities....................... 477.9 351.2
Stockholders' deficit.......................................... (181.8) (58.0)
</TABLE>
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(a) Represents the charge for stock compensation and related bonuses recorded
for vested stock options under the 1996 stock option plan exchanged in
conjunction with the recapitalization.
(b) 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.
(c) Pro forma net loss per share and pro forma weighted average number of
common shares outstanding include all outstanding common stock equivalents
and have been adjusted to give effect to the reclassification assuming
that this offering closes on and that the initial public offering
price is $ .
(d) Due to the subjectivity inherent in the assumptions concerning the timing
and nature of the uses of cash generated by the pro forma interest and
other adjustments, cash flows from operating, investing and financing
activities are not presented for the pro forma periods.
(e) "EBITDA" means earnings before income taxes, depreciation, amortization,
net interest expense and certain non-cash charges. DCI recorded $0.8 of
non-cash charges in 1998 prior to its merger with us, and as a result this
amount is included in pro forma EBITDA for the year ended December 31,
1998. EBITDA is presented because we believe it is a widely accepted
financial indicator of an entity's ability to incur and service debt and
is used by our lenders in determining compliance with financial covenants.
However, 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.
5
<PAGE>
(f) 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>
Nine Months Pro Forma
Year Ended Pro Forma Ended Nine Months
December 31, Year Ended September 30, Ended
-------------- December 31, ------------- September 30,
1997 1998 1998 1998 1999 1999
------ ------ ------------ ------ ------ -------------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
EBITDA.................. $ (0.1) $ 43.3 $59.7 $ 34.3 $ 46.9 $47.7
Former CEO
compensation(1) ....... 2.1 -- -- -- -- --
Management fee(2)....... -- -- -- -- 0.8 --
Executive severance(3).. -- 0.8 0.6 -- -- --
Stock compensation and
bonuses(4)............. 31.3 -- -- -- -- --
Colorado operations
consolidation(5)....... -- -- -- -- 3.6 3.6
------ ------ ----- ------ ------ -----
Adjusted EBITDA......... $ 33.3 $ 44.1 $60.3 $ 34.3 $ 51.3 $51.3
====== ====== ===== ====== ====== =====
</TABLE>
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(1) Reflects elimination of compensation to the former CEO whose employment
agreement was terminated in connection with the recapitalization.
(2) Reflects elimination of the Bain management fee incurred under our Bain
Capital management agreement, which will be terminated in connection
with the offering. The management fee has been added to pro forma
EBITDA for the nine months ended September 30, 1999.
(3) Reflects one-time severance payments to two executives of the Company
who were terminated as a result of redundancies created by the DCI
merger. The severance costs of $0.2 for a former DCI executive are
included in pro forma EBITDA in the year ended December 31, 1998, the
remaining $0.6 is included in adjusted EBITDA.
(4) Reflects elimination of the charge for stock compensation and related
bonuses recorded for vested stock options under the 1996 Stock Option
Plan exchanged in conjunction with the recapitalization.
(5) 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 the first nine months of 1999. We are
currently serving a majority of the customers who were serviced by our
Colorado facility out of our Texas facility, and we expect to retain a
substantial portion of the revenue stream that we have historically
serviced from our Colorado facility. The capacity of the Texas facility
would have been sufficient to service this portion of the revenue
stream in 1999. Our adjusted pro forma EBITDA for the nine months ended
September 30, 1999 (a) does not include $7.0 of one-time charges
expected to be incurred in the fourth quarter of 1999 in connection
with closing this facility (consisting of $4.5 for severance and exit
costs and $2.5 of costs related to the disposition of net property,
plant and equipment) and (b) does include $3.6 of adjustments to show
our estimate of the recurring effect of closing this facility. Based on
our customer-by-customer analysis, we believe that we will retain
approximately 75% of our Colorado facility's net sales. The $3.6
adjustment reflects the additional EBITDA that we would have expected
to achieve during the first nine months of 1999 if we had serviced this
revenue stream in our Texas facility with our Texas facility's cost
structure. Based on those assumptions, (i) our Colorado net sales would
have decreased from $22.6 to $17.0, (ii) the cost of goods sold related
to those sales would have decreased from $23.6 (the actual cost of
goods sold of our Colorado facility) to $14.9 (the product of $17.0 and
the cost of goods sold ratio achieved in our Texas facility), (iii) the
operating expenses associated with those sales would have decreased
from $2.6 to $1.5 (the product of $17.0 and the operating expense ratio
achieved in our Texas facility), and (iv) depreciation and amortization
(which are included in operating expenses and cost of goods sold) would
have decreased by $0.6. As a result, operating income and EBITDA
associated with those sales would have increased by $4.2 and $3.6,
respectively. There can be no assurance that our actual results would
have been, or that our future results will be, consistent with the
foregoing assumptions.
6
<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. While these are the risks and
uncertainties we believe are most important for you to consider, you should
know that they are not the only risks and uncertainties facing us or which may
adversely affect our business. 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.
Risks Relating to Our Business and Industry
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 have a material adverse effect on
our business, financial condition and results of operations.
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. In addition, the EMS 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
capital will be available for these purposes in the future or that investments
in new technologies will result in commercially viable technological processes.
We expect to use the net proceeds of this offering to repay indebtedness and,
as a result, we may be unable to meet our future capital and liquidity
requirements.
We expect to use all of the net proceeds of this offering to repay
indebtedness. As a result, a limited amount of resources will be available to
fund future operations. We expect that our principal sources of funds following
this offering will be cash generated from operating activities and borrowings
under the senior credit facility of our operating subsidiary, Dynamic Details,
Incorporated. The Dynamic Details senior credit facility contains restrictions
on our ability to borrow additional funds. See "Description of Indebtedness--
Dynamic Details Senior Credit Facility." No assurance can be given that these
funds will provide us with sufficient liquidity and capital resources for us to
meet our current and future financial obligations, as well as to provide funds
for our working capital, capital expenditures and other needs. We may require
additional equity or debt financing to meet our working capital requirements,
to fund our research and development efforts or to finance acquisitions. 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.
7
<PAGE>
We may experience variability in our operating results, which could negatively
impact our revenues and the price of our common stock.
Our operating results have fluctuated in the past and may vary significantly
depending on various factors, many of which are beyond our control. These
factors include:
. variations in the timing and volume of customer orders relative to our
capacity;
. customer introduction and market acceptance of new products;
. the timing of our expenditures in anticipation of future sales;
. our effectiveness in managing manufacturing processes;
. changes in competitive and economic conditions generally or in the
electronics industry;
. the timing of, and the price we pay for, acquisitions and related
integration costs; and
. the impact of any accounting issues arising in connection with past or
future mergers or acquisitions, including the amortization or write-off
of goodwill.
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 shortfall can have a disproportionate effect on our 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 trading price of our
common stock to decline.
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, scrap
and excess inventory, which can affect our gross profit margins. We are
required to 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 industry is intensely competitive, and we may not be successful if we
cannot compete effectively.
The EMS industry is highly fragmented and characterized by intense
competition. Our principal competitors include other independent, small private
companies as well as integrated subsidiaries of more broadly-based volume
producers. Some of our principal competitors are less leveraged than we and may
have greater financial and operating flexibility. Our basic technology is
generally not subject to significant proprietary protection, and companies with
significant resources or international operations may enter the market. To the
extent our services do not provide timing or technological advantages over
those offered by our competitors, we are likely to experience increased price
competition or loss of market share with respect to those services. Increased
competition could result in price reductions, reduced margins or loss of market
share, any of which could materially adversely affect our business, financial
condition and results of operations.
We may not become profitable.
We have experienced net losses during each of the last two years. We may not
be profitable in future periods. If we are not profitable, the market price of
our common stock may be adversely affected.
Our substantial indebtedness could adversely affect our financial health and
severely limit our ability to plan for or respond to changes in our business.
We are highly leveraged. As of September 30, 1999, on a pro forma basis
giving effect to the use of proceeds from this offering to repay some of our
debt, our total debt would have been $351.2 million, our ratio of total debt to
total capitalization would have been 1.2 to 1 and we would have had
approximately $41.5 million available under the Dynamic Details senior credit
facility for future borrowings, subject to covenant compliance. In addition,
subject to the restrictions under our various debt agreements, we may incur
additional indebtedness in an unrestricted amount from time to time to finance
acquisitions or capital expenditures or for other purposes.
8
<PAGE>
As a result of our level of debt:
. 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 the Dynamic Details senior credit facility in
our ability to borrow additional funds;
. 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.
The terms of our indebtedness agreements impose significant restrictions on our
ability to operate.
The terms of our indebtedness restrict, among other things, the ability of
certain of our subsidiaries to incur additional indebtedness, pay dividends or
make certain other restricted payments, consummate certain asset sales, enter
into certain transactions with affiliates, merge or consolidate with any other
person or sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of our assets. We are also required to maintain specified
financial ratios and satisfy certain financial condition tests, which further
restrict our ability to operate as we choose. See "Description of
Indebtedness."
We have experienced recent significant growth in a short period of time and may
have trouble integrating acquired businesses and managing our expansion.
Since December 1997, we have consummated a merger and an acquisition.
Mergers and acquisitions involve numerous risks, including the following:
. difficulty in integrating operations, technologies, systems, and
products and services of acquired companies;
. diversion of management's attention and disruption of operations;
. increased expenses and working capital requirements;
. entering markets in which we have no or limited prior experience and
where competitors in such markets have stronger market positions;
. potential loss of key employees and customers of acquired companies; and
. financial risks, such as:
-- potential liabilities of the acquired businesses;
-- the dilutive effect of the issuance of additional equity securities;
-- the incurrence of additional debt;
-- the financial impact of transaction expenses and the amortization of
goodwill and other intangible assets involved in any transactions
that are accounted for using the purchase method of accounting; and
-- possible adverse tax and accounting effects.
9
<PAGE>
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
will continue to place a significant strain on management, our financial
resources, and on our information, operating and financial systems. If we are
unable to manage this growth effectively, our operating results and financial
condition may be adversely affected.
Our acquisition strategy may not succeed.
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 business of other companies. Our
failure to execute our acquisition strategy may have a material adverse effect
on our operating results and financial condition.
We may be unable to protect our unpatented proprietary techniques.
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.
The loss of significant customers would adversely affect our business
operations.
Although we have a large number of customers, net sales to our largest
customer accounted for approximately 8% of our net sales during the nine months
ended September 30, 1999. Net sales to our ten largest customers accounted for
approximately 40% of our net sales during the same period. We may depend upon a
core group of customers for a material percentage of our net sales in the
future. Substantially all of our sales are made on the basis of purchase orders
rather than long-term agreements. There can be no assurance that significant
customers will order services from us in the future or that they will not
reduce or delay the amount of services ordered from us. Any reduction or delay
in orders could have a material adverse effect on our business, financial
condition and results of operations. In addition, we generate significant
accounts receivable in connection with providing services to our customers. Our
operating results and financial condition could be adversely affected if one or
more of our significant customers were to become insolvent or otherwise were
unable to pay for the services provided by us.
If the assumptions we made about the consolidation of our Colorado operations
into our Texas facility are inaccurate, our adjusted EBITDA and our future
results would be adversely affected.
In calculating our adjusted EBITDA for the nine months ended September 30,
1999, we made several assumptions regarding the benefits of consolidating our
Colorado operations into our Texas facility. If our assumptions underlying this
adjustment are inaccurate, our adjusted EBITDA for the nine months ended
September 30, 1999 would be lower than the amount we have presented.
Additionally, if we are unable to maintain our current cost structure in the
Texas facility, or if we are unable to continue to serve our former Colorado
customers out of our Texas facility, or if we do not achieve the gains in
efficiency we expect to achieve from this consolidation, our future results
would be negatively affected.
Our business will suffer if we are unable to attract and retain key personnel
and skilled employees.
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. Our business also depends on our ability to
10
<PAGE>
continue to recruit, train and retain skilled employees, particularly
engineering and sales personnel. Recruiting personnel in our industry is highly
competitive. 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. Although we have entered into
employment agreements with certain of our 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.
Risks particular to our international operations could adversely affect our
overall results.
We are expanding into new foreign markets. Entry into foreign markets may
require considerable management time as well as start-up expenses for market
development, hiring and establishing office facilities before any significant
revenues are generated. As a result, operations in a new foreign market may
operate at low margins or may be unprofitable.
Our international operations are subject to inherent risks, including:
. fluctuations in the value of currencies and levels of inflation;
. longer payment cycles and greater difficulty in collecting accounts
receivable;
. unexpected changes in and the burdens and costs of compliance with a
variety of foreign laws;
. greater risk of political and economic instability;
. increases in duties and taxation;
. inability to utilize net operating losses incurred by our foreign
operations to reduce our U.S. income taxes;
. imposition of restrictions on currency conversion or the transfer of
funds; and
. trade restrictions.
We are subject to a variety of environmental laws which expose us to potential
financial liability.
Our operations are regulated under a number of federal, state, local and
foreign environmental and safety 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 us because we use
hazardous materials in our manufacturing process. In addition, because we are a
generator of hazardous wastes, we, along with any other person who arranges for
the disposal of our wastes, may be subject to potential financial exposure for
costs associated with an investigation and 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. In
the event of a violation of environmental laws, we could be held liable for
damages and for the costs of remedial actions and could also be subject to
revocation of its effluent discharge permits. Any such revocations could
require us to cease or limit production at one or more of its facilities,
thereby having a material adverse effect on our operations. Environmental laws
could also become more stringent over time, imposing greater compliance costs
and increasing risks and penalties associated with any violation, which could
have a material adverse effect on us, our financial condition and our results
of operations.
Investment funds affiliated with Bain Capital, Inc. 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, investment funds affiliated with Bain
Capital, Inc. will hold approximately % of our outstanding common stock on a
fully diluted basis. If the underwriters' over-allotment is exercised in full,
these funds will hold approximately % of our outstanding common stock on a
fully diluted basis. In addition, four of the eleven directors who will serve
on our board following this offering
11
<PAGE>
will be representatives of Bain Capital, Inc. By virtue of such stock ownership
and board representation, Bain Capital, Inc. 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
development 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."
Risks Related to this Offering
There may not be an active market for our common stock, making it difficult to
sell the stock you purchase.
Prior to this offering, there has been no public market for our common stock.
We cannot assure you that an active trading market for our common stock will
develop or be sustained after the offering. The initial public offering price
for our common stock will be determined by negotiations between the
underwriters and us. We cannot assure you that the initial public offering
price will correspond to the price at which our common stock will trade in the
public market subsequent to the offering or that the price of our common stock
available in the public market will reflect our actual financial performance.
Our stock price could be volatile and could drop unexpectedly following this
offering.
Historically, stock prices and trading volumes for newly public companies
fluctuate widely for a number of reasons, including some reasons that may be
unrelated to their businesses or results of operations. This type of market
volatility could depress the price of our common stock without regard to our
operating performance. In addition, our operating results may be below the
expectations of public market analysts or investors. If this were to occur, the
market price of our common stock could decrease, perhaps significantly.
Shares eligible for public sale after this offering could adversely affect our
stock price.
The market price of our common stock could decline as a result of sales by
our existing stockholders of shares of our common stock in the market after
this offering, or the perception that these sales could occur. These sales also
might make it difficult for us to sell equity securities in the future at a
time and at a price that we deem appropriate. See "Shares Eligible For Future
Sale." In addition, some existing stockholders have the right to require us to
register their shares. See "Description of Capital Stock."
The initial public offering price is significantly higher than the book value
of our common stock and you will experience immediate and substantial dilution
in the value of your investment.
The initial public offering price per share will significantly exceed the net
tangible book value per share. Accordingly, investors purchasing shares in this
offering will suffer immediate and substantial dilution of their investment.
See "Dilution."
We do not expect to pay dividends.
We are a holding company with no business operations, and our only
significant asset is the outstanding capital stock of our subsidiaries. As we
intend to use substantially all the net proceeds from this offering to repay
indebtedness, we will rely on payments from our subsidiaries to pay cash
dividends on our common stock. However, we expect our subsidiaries to retain
substantially all of their earnings and cash flow to meet
12
<PAGE>
their own obligations and to use in their operations. As a result, and because
some of our subsidiaries are prohibited by terms in their debt instruments from
making payments to us, it is unlikely that we will be able to make dividend
payments in the near future. Even if we decided to pay a dividend on or make a
distribution in respect of our common stock, we cannot assure you that our
subsidiaries will generate sufficient cash flow to pay a dividend or distribute
funds to us or that applicable state law and contractual restrictions,
including restrictions in the debt instruments of our subsidiaries, will permit
such dividends or distributions. See "Dividend Policy."
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
We make forward-looking statements throughout this prospectus. In some cases
you can identify these statements by forward-looking words such as
"anticipate," "believe," "could," "estimate," "expect," "intend," "may,"
"should," "will," and "would" or similar words. You should read statements that
contain these words carefully because they discuss our future expectations,
contain projections of our future results of operations or of our financial
position or state other "forward-looking" information. We believe that it is
important to communicate our future expectations to our investors. However,
there may be events in the future that we are not able to accurately predict or
control. The factors listed above in the section caption "Risk Factors," as
well as any cautionary language in this prospectus, provide examples of risks,
uncertainties and events that may cause our actual result to differ materially
from the expectations we describe in our forward-looking statements. Before you
invest in our common stock, you should be aware that the occurrence of the
events described in these risk factors and elsewhere in this prospectus and in
the documents that we incorporate by reference in this prospectus could have an
adverse effect on our business, results of operations and financial position.
You should read this prospectus completely and with the understanding that
our actual future results may be materially different from what we expect. We
may not update these forward-looking statements after the date of this
prospectus, even though our situation will change in the future. All forward-
looking statements attributable to us are expressly qualified by these
cautionary statements.
USE OF PROCEEDS
We estimate that our net proceeds from the sale of shares of common stock
in this offering will be approximately $133.1 million, assuming an initial
public offering price of $ per share, the midpoint of the range set forth on
the cover page of this prospectus. We will not receive any proceeds from the
sale of the shares being offered by the selling stockholders if the
underwriters exercise their option to purchase these shares to cover over-
allotments. We intend to use:
. approximately $42.1 million of the net proceeds to redeem all of the
senior discount notes issued by our subsidiary, DDi Intermediate
Holdings Corp., and to pay any associated redemption premiums and
accrued and unpaid interest thereon;
. approximately $33.9 million of the net proceeds to redeem a portion of
the senior discount notes issued by our subsidiary, DDi Capital Corp.,
and to pay associated redemption premiums and accrued and unpaid
interest thereon; and
. approximately $57.1 million of the net proceeds to reduce the
indebtedness of our subsidiary, Dynamic Details, Incorporated, under its
senior credit facility.
The amounts stated above are based on outstanding accreted values of these
obligations as of September 30, 1999. The distribution of the net proceeds from
this offering will change to reflect increases in accreted values of these
obligations depending on the date on which this offering closes.
We own 100% of the capital stock of DDi Intermediate Holdings Corp., which
in turn owns 100% of the capital stock of DDi Capital Corp., which in turn owns
100% of the capital stock of Dynamic Details, Incorporated, our primary
operating subsidiary.
13
<PAGE>
Our DDi Intermediate senior discount notes mature on June 30, 2008, and bear
interest at the rate of 13.5% per annum. As of September 30, 1999, the
outstanding accreted value of these senior discount notes was approximately
$39.4 million. Under the terms of the indenture relating to the senior discount
notes, we may use the net proceeds from this offering to redeem all of the DDi
Intermediate senior discount notes outstanding at a price that would provide
the noteholders with a 20% per annum return on the price at which the notes
were issued, plus accrued and unpaid interest thereon. Approximately 50% of the
DDi Intermediate senior discount notes are held by investment funds advised by
Sankaty Advisors, Inc., an affiliate of Bain Capital. See "Certain
Relationships and Related Transactions."
Our DDi Capital senior discount notes mature on November 15, 2007, and bear
interest at the rate of 12.5% per annum. As of September 30, 1999, the accreted
value on these senior discount notes was approximately $75.4 million. Under the
terms of the indenture relating to the senior discount notes, we may use the
net proceeds from this offering to redeem up to 40% of the aggregate principal
amount of the senior discount notes outstanding at a price equal to 112.5% of
the accreted value thereof plus accrued and unpaid interest thereon. See
"Description of Indebtedness--DDi Capital Senior Discount Notes."
The Dynamic Details senior credit facility consists of multi-tranche term
loans and a revolving credit facility with a final maturity date in April 2005
and an aggregate principal balance of $256.3 million as of September 30, 1999.
The loans under this facility bear interest at varying rates based, at our
option, on either LIBOR plus 225 to 250 basis points or the bank rate plus 125
to 150 basis points. The overall effective interest rate for the term loans at
September 30, 1999 was 7.78%. See "Description of Indebtedness--Dynamic Details
Senior Credit Facility."
Pending such uses, we will invest the net proceeds in short-term, interest-
bearing, investment-grade securities.
THE RECLASSIFICATION
We currently have two classes of common stock, designated as Class A common
stock and Class L common stock. Each share of Class L common stock is entitled
to a preferential payment upon any distribution by us to holders of our capital
stock (whether by dividend, liquidating distribution or otherwise) equal to the
original cost of such share ($364.0909) plus an amount which accrues from the
date such share was issued on a daily basis at a rate of 12.0% per annum,
compounded quarterly. After payment of this preference amount, each share of
Class A common stock and Class L common stock shares equally in all
distributions by us to holders of our capital stock.
As of September 30, 1999, the preference amount was $ per share of Class L
common stock that were issued at the time of our recapitalization in October
1997. Immediately prior to the completion of this offering, we will, in the
following order:
. convert each of the outstanding shares of Class L common stock 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 by the
value of a share of Class A common stock based on the initial public
offering price; and
. reincorporate in Delaware, in connection with which each share of Class
A common stock will be converted into shares of common stock.
The foregoing is referred to in this prospectus as the "reclassification."
Assuming an initial public offering price of $ per share (the mid-point of
the range set forth on the cover page of this prospectus), and a closing date
of , 2000 for this offering, shares of common stock will be outstanding
immediately after the reclassification but prior to this offering. The actual
number of shares of common stock that will be issued as a result of the
reclassification is subject to change based on the actual offering price and
the closing date of this offering. Fractional shares otherwise issuable as a
result of the reclassification will be rounded to the nearest whole number. See
"Description of Capital Stock."
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<PAGE>
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 in the
foreseeable future. Our existing credit facilities restrict our ability to pay
dividends. We presently intend to retain earnings to finance future operations
and expansion and to reduce indebtedness. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
CAPITALIZATION
The following table sets forth our cash and cash equivalents and our
capitalization as of September 30, 1999:
. on an actual basis; and
. on a pro forma basis to reflect (1) the reclassification as if it had
occurred on September 30, 1999 (assuming that this offering is closed on
, 2000 and that the initial public offering price per share is
$ ) and (2) the application of the estimated net proceeds from the
sale of common stock in this offering as described in "Use of Proceeds,"
assuming an initial public offering price of $ per share and after
deducting the estimated underwriting discounts and commissions and our
estimated offering expenses.
You should read this information together with our consolidated financial
statements and the related notes to those statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in this prospectus.
<TABLE>
<CAPTION>
September 30, 1999
-----------------------------------
Actual Pro Forma
---------------- -----------------
(in millions, except share data)
<S> <C> <C>
Cash and cash equivalents.................. $ 0.6 $ 0.6
================ ================
Current maturities of long-term
obligations, including revolving credit
facility.................................. $ 10.0 $ 10.0
Long-term obligations, net of current
maturities:
Dynamic Details Senior Credit Facility... 247.4 190.3
Dynamic Details Senior Subordinated
Notes................................... 100.0 100.0
DDi Capital Senior Discount Notes........ 75.4 45.2
DDi Intermediate Senior Discount Notes... 39.4 --
Other long-term obligations.............. 5.7 5.7
---------------- ----------------
Total long-term obligations, net of
current maturities.................... 467.9 341.2
Stockholders' deficit:
Preferred Stock, $0.01 par value,
shares authorized; no shares issued on
an actual or pro forma basis............ -- --
Common stock, $0.01 par value, no shares
authorized or issued on an actual basis;
shares authorized and shares
issued and outstanding on a pro forma
basis................................... --
Class L common stock, without par value,
475,000 shares authorized; 396,330
shares issued and outstanding on an
actual basis, and no shares authorized,
issued and outstanding on a pro forma
basis................................... 147.2 --
Class A common stock, without par value,
4,750,000 shares authorized; 3,506,192
shares issued and outstanding on an
actual basis and no shares authorized,
issued and outstanding on a pro forma
basis................................... 15.7 --
Additional paid-in capital............... -- 296.0
Stockholder receivables.................. (0.6) (0.6)
Accumulated deficit...................... (344.1) (353.4)
---------------- ----------------
Total stockholders' deficit................ (181.8) (58.0)
---------------- ----------------
Total capitalization....................... $ 296.1 $ 293.2
================ ================
</TABLE>
15
<PAGE>
DILUTION
As of September 30, 1999, our pro forma net tangible book value was
approximately $ million, or $ per share of common stock. Pro forma net
tangible book value per share is determined by dividing the amount of our total
tangible assets less total liabilities by the pro forma number of shares of
common stock outstanding upon completion of this offering. 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 completion of this
offering.
After giving effect to the sale of shares of our common stock in this
offering, our pro forma net tangible book value as of September 30, 1999 would
have been approximately $ million, or $ per share. This represents an
immediate increase in pro forma net tangible book value of $ per share to our
existing stockholders and an immediate dilution in pro forma net tangible book
value of $ per share to new investors purchasing shares at the initial public
offering price. If the initial public offering price is higher or lower, the
dilution to the new investors will be greater or less, respectively.
The following table illustrates the dilution in pro forma net tangible book
value per share to new investors:
<TABLE>
<S> <C>
Assumed initial public offering price per share........................ $
Pro forma net tangible book value per share at September 30, 1999......
Increase per share attributable to new investors.......................
Pro forma net tangible book value per share after this offering........
----
Dilution per share to new investors.................................... $
====
</TABLE>
The table below assumes an initial public offering price of $ per share
before deducting underwriting discounts and commissions and estimated offering
expenses payable by us and summarizes, as of September 30, 1999 on a pro forma
basis, the difference 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... % $ % $
New investors...........
-------- -------- ---------- --------- ----
Total................. 100% $ 100% $
======== ======== ========== ========= ====
</TABLE>
The above discussion and tables assume the exercise of warrants but no
exercise of any stock options outstanding as of September 30, 1999. As of
September 30, 1999, there were options outstanding to purchase a total of
shares of common stock with a weighted average exercise price of $ per share.
If any of these options or warrants are exercised, there will be further
dilution to new investors. See "Capitalization" and "Management."
The above discussion and tables also assume that this offering closes on ,
2000 and that the initial public offering price per share is $ .
16
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The unaudited pro forma consolidated statements of operations for the year
ended December 31, 1998 and the nine months ended September 30, 1999 give
effect to (1) the DCI merger, (2) the reclassification and (3) the consummation
of the offering and the application of the net proceeds therefrom, as described
under "Use of Proceeds," as if each had occurred on January 1, 1998.
The unaudited pro forma consolidated balance sheet as of September 30, 1999
gives pro forma effect to (1) the reclassification, as described under "The
Reclassification," (2) the consummation of the offering and the application of
the net proceeds therefrom, as described under "Use of Proceeds," and (3) the
restructuring and consolidation of the Colorado operations as if each event had
occurred as of September 30, 1999.
The unaudited pro forma consolidated financial data are provided for
informational purposes only and are not necessarily indicative of the results
of our 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 consolidated 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 consolidated 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 the offering
estimated at $3.5 million and $6.4 million, respectively. The unaudited pro
forma consolidated balance sheet, however, does reflect such charges and the
related tax benefits of $1.4 million and $2.6 million, respectively.
The unaudited pro forma consolidated statements of operations do not reflect
charges associated with the closure and consolidation of the Colorado
operations into our Texas facility estimated at $7.0 million. The unaudited pro
forma consolidated balance sheet, however, does reflect such charges and the
related tax benefit of $2.8 million.
The unaudited pro forma consolidated statements of operations do not reflect
an extraordinary gain resulting from the recognition of deferred swap income
estimated at $1.3 million resulting from the repayment of the Dynamic Details
senior credit facility upon completion of the offering. The unaudited pro forma
consolidated balance sheet, however, reflects the gain and the related tax
liability of $0.5 million.
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 the first nine months of 1999. We are currently serving a
majority of the customers who were serviced by our Colorado facility out of our
Texas facility, and we expect to retain a substantial portion of the revenue
stream that we have historically serviced from our Colorado facility. The
capacity of our Texas facility would have been sufficient to service this
portion of the revenue stream in 1999. Our adjusted pro forma EBITDA for the
nine months ended September 30, 1999 (a) does not include $7.0 million of one-
time charges expected to be incurred in the fourth quarter of 1999 in
connection with closing this facility (consisting of $4.5 million for severance
and exit costs and $2.5 million of costs related to the disposition of net
property, plant and equipment) and (b) does include $3.6 million of adjustments
to show our estimate of the recurring effect of closing this facility. Based on
our customer-by-customer analysis, we believe that we will retain approximately
75% of our Colorado facility's net sales. The $3.6 million adjustment reflects
the additional EBITDA that we would have expected to achieve during the first
nine months of 1999 if we had serviced this revenue stream in our Texas
facility with our Texas facility's cost structure. Based on those assumptions,
(1) our Colorado net sales would have decreased from $22.6 million to $17.0
million, (2) the cost of goods sold related to those sales would have decreased
from $23.6 million (the actual cost of goods sold of our Colorado facility) to
$14.9 million (the product of $17.0 million and the cost of goods sold ratio
achieved in our Texas facility), (3) the operating expenses associated with
those sales would have decreased from $2.6 million to $1.5 million (the product
of $17.0 million and the operating expense ratio achieved in our Texas
facility), and (4) depreciation and amortization (which is included in
operating expenses and cost of goods sold) would have decreased by $0.6
million. As a result, operating income and EBITDA associated with those sales
would have increased by $4.2 million and $3.6 million, respectively. There can
be no assurance that our actual results would have been, or that our future
results will be, consistent with the foregoing assumptions.
17
<PAGE>
DDi CORP.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
September 30, 1999
(dollars in millions)
<TABLE>
<CAPTION>
-
Historical Adjustments Pro Forma
---------- ----------- ---------
<S> <C> <C> <C>
Assets:
Current assets:
Cash and cash equivalents................. $ 0.6 $ 150.0 (a) $ 0.6
(16.9)(a)
(126.7)(a)
(6.4)(b)
Accounts receivable, net.................. 50.9 -- 50.9
Inventories............................... 22.1 -- 22.1
Prepaid expenses and other................ 2.6 -- 2.6
Deferred tax asset........................ 4.8 1.4 (c) 11.1
2.6 (b)
(0.5)(d)
2.8 (e)
------- ------- -------
Total current assets...................... 81.0 6.3 87.3
Property, plant and equipment, net......... 65.4 (2.5)(e) 62.9
Debt issue costs, net...................... 14.4 (3.5)(c) 10.9
Goodwill and other intangibles, net........ 210.0 -- 210.0
Other...................................... 0.7 -- 0.7
------- ------- -------
$ 371.5 $ 0.3 $ 371.8
======= ======= =======
Liabilities and stockholders' deficit:
Current liabilities:
Current maturities of long-term debt and
capital lease obligations................ $ 6.5 $ -- $ 6.5
Current portion of deferred interest rate
swap income.............................. 1.5 -- 1.5
Current maturities of deferred notes
payable.................................. 2.9 -- 2.9
Revolving credit facility................. 3.5 -- 3.5
Accounts payable.......................... 22.9 -- 22.9
Accrued expenses.......................... 24.3 4.5 (e) 28.8
------- ------- -------
Total current liabilities................. 61.6 4.5 66.1
Long-term debt and capital lease
obligations............................... 467.9 (126.7)(a) 341.2
Deferred interest rate swap income......... 4.3 (1.3)(d) 3.0
Deferred notes payable..................... 1.7 -- 1.7
Deferred tax liability..................... 17.1 -- 17.1
Other...................................... 0.7 -- 0.7
------- ------- -------
Total liabilities......................... 553.3 (123.5) 429.8
------- ------- -------
Stockholders' deficit:
Class L common stock...................... 147.2 (147.2) (f) --
Class A common stock...................... 15.7 (15.7) (f) --
Common stock.............................. --
Additional paid-in-capital................ -- 133.1 (a) 296.0
147.2 (f)
15.7 (f)
Stockholder receivables................... (0.6) -- (0.6)
Accumulated deficit....................... (344.1) (2.1)(c) (353.4)
(3.8)(b)
0.8 (d)
(4.2)(e)
------- ------- -------
Total stockholders' deficit............... (181.8) 123.8 (58.0)
------- ------- -------
$ 371.5 $ 0.3 $ 371.8
======= ======= =======
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Balance Sheet.
18
<PAGE>
DDi CORP.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
September 30, 1999
(dollars in millions)
(a) Reflects our sale of shares of common stock generating proceeds of
$150.0 and the use of the estimated net proceeds of $133.1, net of the
estimated underwriting discount and the offering expenses totaling $16.9,
to repay (i) the DDi Intermediate senior discount notes, (ii) 40% of the
DDi Capital senior discount notes, (iii) a portion of the Tranches A and B
outstanding under the Dynamic Details senior credit facility, and (iv)
prepayment premiums of $6.4 related to the DDi Intermediate senior discount
notes and the DDi Capital senior discount notes. See "Use of Proceeds" and
"Description of Indebtedness."
(b) Reflects the prepayment premiums of $6.4, before $2.6 of related income tax
benefit (at a 40% effective tax rate), on the DDi Intermediate senior
discount notes and the DDi Capital senior discount notes resulting from the
repayment of the debt in connection with the offering. Amounts will differ
based on the effective date of the offering.
(c) Represents the write-off of $3.5 in capitalized debt issuance costs, before
$1.4 of related income tax benefit (at a 40% effective tax rate), resulting
in an extraordinary loss of $2.1 in connection with the paydown of
outstanding debt in connection with the offering. Amounts will differ based
on the effective date of the offering.
(d) Reflects the recognition of $1.3 in deferred swap income, before $0.5 of
related income tax (at a 40% effective tax rate), resulting in an
extraordinary gain of $0.8 in connection with the paydown of the Dynamic
Details senior credit facility in connection with the offering. Amounts
will differ based on the closing date of the offering.
(e) In December 1999, we decided to consolidate our Colorado operations into
our Texas facility and to close our Colorado facility. This decision
included the elimination of approximately 275 manufacturing and management
positions. We plan to record a restructuring charge for qualifying
severance and exit costs of approximately $4.5 and plan on disposing of
approximately $2.5 in net property, plant and equipment in connection with
the Colorado facility consolidation and closure. The adjustment reflects
the charges net $2.8 of related income tax (at a 40% effective tax rate).
(f) Adjusted to give effect to the reclassification.
19
<PAGE>
DDi CORP.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
Nine Months Ended September 30, 1999
(dollars in millions, except per share data)
<TABLE>
<CAPTION>
Offering
Historical Adjustments Pro Forma
---------- ----------- ---------
<S> <C> <C> <C>
Net sales................................... $213.8 $ -- $213.8
Cost of goods sold.......................... 149.8 -- 149.8
------ ----- ------
Gross profit.............................. 64.0 -- 64.0
Operating expenses:
Sales and marketing....................... 16.6 -- 16.6
General and administration................ 11.2 (0.8)(a) 10.4
Amortization of intangibles............... 17.8 -- 17.8
------ ----- ------
Operating income............................ 18.4 0.8 19.2
Interest expense (net)...................... 35.0 (10.0)(b) 25.0
------ ----- ------
Income (loss) before provision for income
taxes and extraordinary loss............... (16.6) 10.8 (5.8)
Income tax benefit (expense)................ 4.4 (4.3)(c) 0.1
------ ----- ------
Net income (loss) .......................... $(12.2) $ 6.5 $ (5.7)
====== ===== ======
Pro forma loss per common and common
equivalent share:
Basic..................................... $
======
Diluted................................... $
======
Pro forma weighted average number of common
and common equivalent shares outstanding
(in thousands):
Basic.....................................
======
Diluted...................................
======
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Statement of Operations.
20
<PAGE>
DDi CORP.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 1999
(dollars in millions)
(a) Represents the elimination of management fees incurred in connection with
DDi's management agreement with Bain Capital which will be terminated in
connection with the offering.
(b) Reflects the decrease in interest expense in connection with the use of net
proceeds from the offering to repay outstanding debt as follows:
<TABLE>
<CAPTION>
Nine Months
Ended
September 30,
1999
-------------
<S> <C>
Historical interest expense.................................. $35.0
Elimination of historical and pro forma interest on the DDi
Intermediate senior discount notes.......................... (3.9)
Elimination of 40% historical interest on the DDi Capital
senior discount notes....................................... (2.6)
Elimination of historical and pro forma interest on the
Dynamic Details senior credit facility...................... (3.2)
Elimination of amortization of debt issuance costs........... (0.3)
-----
Net decrease in pro forma interest expense................... (10.0)
-----
Pro forma interest expense after the offering................ $25.0
=====
</TABLE>
(c) Represents the income tax adjustment required to result in a pro forma
income tax provision based on (i) our historical tax provision using
historical amounts and (ii) the direct tax effects of the pro forma
transactions described herein at an estimated 40% effective tax rate.
21
<PAGE>
DDi CORP.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31, 1998
(dollars in millions, except per share data)
<TABLE>
<CAPTION>
DDi DCI
Corp. Statement of
Historical Operations DDi
Year for the period Corp.
Ended from January 1, DCI and DCI
December 31, to July 23, Merger Pro Forma Offering
1998 1998 Adjustments Combined Adjustments Pro Forma
------------ --------------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $174.9 $85.7 $ 0.9 (a) $261.5 $ -- $261.5
Cost of goods sold...... 119.6 61.2 0.7 (b) 181.5 -- 181.5
------ ----- ------ ------ ------ ------
Gross profit........... 55.3 24.5 0.2 80.0 -- 80.0
Operating expenses:
Sales and marketing.... 12.8 5.3 -- 18.1 -- 18.1
General and
administration........ 8.4 17.9 (0.6)(c) 16.0 -- 16.0
0.6 (a)
(10.1)(d)
(0.2)(e)
Amortization of
intangibles........... 10.9 0.2 12.4 (b) 23.5 -- 23.5
Write-off of acquired
in-process research
and development....... 39.0 -- (39.0)(f) -- -- --
------ ----- ------ ------ ------ ------
Operating income........ (15.8) 1.1 37.1 22.4 -- 22.4
Interest expense (net).. 37.4 3.4 5.6 (g) 46.4 (12.9)(g) 33.5
------ ----- ------ ------ ------ ------
Income (loss) before
provision for income
taxes and extraordinary
loss................... (53.2) (2.3) 31.5 (24.0) 12.9 (11.1)
Income tax benefit
(expense).............. 3.5 (1.3) 1.7 (h) 3.9 (5.1)(h) (1.2)
------ ----- ------ ------ ------ ------
Net income (loss)....... $(49.7) $(3.6) $ 33.2 $(20.1) $ 7.8 $(12.3)
====== ===== ====== ====== ====== ======
Pro forma loss per
common and common
equivalent share:
Basic.................. $
======
Diluted................ $
======
Pro forma weighted aver-
age number of common
and common equivalent
shares outstanding (in
thousands):
Basic..................
======
Diluted................
======
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Statement of Operations.
22
<PAGE>
DDi CORP.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1998
(dollars in millions)
(a) Represents the adjustment to reflect revenue and expense from Design Plus,
of which 80% was acquired by DCI on June 24, 1998 and the remaining 20% on
August 5, 1999. DCI's pro rata share of the revenue and expense has been
reflected in the year ended December 31, 1998. The impact on the nine
months ended September 30, 1999 is not material.
(b) Represents the amortization of the intangible assets and goodwill resulting
from the excess of the purchase price over the net book value of DCI, less
the amortization of goodwill included in the DCI historical results of
operations, calculated as though the DCI merger occurred on January 1,
1998. In addition, the depreciation related to the step-up to fair market
value of the fixed assets of DCI in connection with the DCI merger is
presented as a change to cost of goods sold. Intangibles, goodwill, and the
fixed asset step-up are being amortized over lives ranging from four to
twenty years.
(c) Represents the elimination of management fees incurred in connection with
DCI's management agreement with Bain Capital which was terminated in
connection with and as a direct result of the DCI merger.
(d) Reflects the elimination of the non-recurring charges to compensate the
holders of options to purchase DCI common stock immediately prior to the
DCI merger through the payment of $6.9 in cash and the issuance of $3.2 of
notes payable.
(e) Reflects the elimination of severance paid to an executive of DCI who was
terminated as a direct result of the DCI merger.
(f) Reflects the elimination of the non-recurring charge recorded for the
write-off of in-process research and development resulting from the DCI
merger. At the date of the merger, technological feasibility of thein-
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.
23
<PAGE>
DDi CORP.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
STATEMENT OF OPERATIONS--CONTINUED
For the Year Ended December 31, 1998
(dollars in millions)
(g) The change in pro forma interest expense as a result of the DCI merger and
the offering is as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
DCI Merger 1998
---------- ------------
<S> <C>
Combined historical interest expense.......................... $ 40.8
------
Elimination of DCI historical interest expense and fees repaid
in connection with the DCI merger............................ (3.6)
Elimination of DDi historical interest expense and fees repaid
in connection with the DCI merger............................ (5.6)
------
Total eliminations............................................ (9.2)
------
Dynamic Details senior credit facility (assuming LIBOR at
5.27%):
Tranche A-$105 million @ LIBOR plus 2.25%................... 4.5
Tranche B-$150 million @ LIBOR plus 2.50%................... 6.6
DDi Intermediate senior discount notes--$35 million @ 13.5%... 2.7
Unused commitment fee on revolving credit
Facility of $45 million @ 0.5%.............................. 0.1
Amortization of deferred financing fees:
Tranche A................................................... 0.2
Tranche B................................................... 0.3
Revolving credit facility................................... 0.1
DDi Intermediate senior discount notes...................... 0.1
Imputed interest on deferred payments......................... 0.2
------
Total pro forma interest on debt incurred in connection with
the DCI merger............................................... 14.8
------
Net increase in pro forma interest in connection with the DCI
merger....................................................... 5.6
------
Pro forma combined interest expense, before the offering...... $ 46.4
======
<CAPTION>
The Offering
------------
<S> <C>
Pro forma and historical interest expense..................... $ 46.4
Elimination of historical and pro forma interest on the DDi
Intermediate senior discount notes........................... (4.8)
Elimination of 40% historical interest on the DDi Capital
senior discount notes........................................ (3.1)
Elimination of historical and pro forma interest on the Dy-
namic Details senior credit facility......................... (4.6)
Elimination of amortization of debt issuance costs............ (0.4)
------
Net decrease in pro forma interest expense.................... (12.9)
------
Pro forma interest expense after the offering................. $ 33.5
======
</TABLE>
(h) Represents the income tax adjustment required to result in a pro forma
income tax provision based on (i) our historical tax provision using
historical amounts and (ii) the direct tax effects of the pro forma
transactions described herein at an estimated 40% effective tax rate as
adjusted to exclude the adjustments to goodwill and the write-off of in-
process research and development resulting from the DCI merger which
amounts are not deductible for income tax purposes.
24
<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 historical consolidated statements of operations data
for each of the years ended December 31, 1994, 1995 and 1996 were derived from
the historical consolidated financial statements that were audited by McGladrey
& Pullen, LLP, whose report with respect to the year ended December 31, 1996,
appears elsewhere herein. The selected historical consolidated statements of
operations data for the years ended December 31, 1997 and 1998 and the
historical consolidated balance sheet data as of December 31, 1997 and
1998 were derived from the historical consolidated financial statements that
were audited by PricewaterhouseCoopers LLP, whose report appears elsewhere
herein. The consolidated results of operations for the nine months ended
September 30, 1998 and 1999 are derived from unaudited consolidated financial
statements which in the opinion of management include all adjustments necessary
for a fair presentation. The unaudited interim consolidated statements of
operations are not necessarily indicative of our results of operations for the
full year. 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>
Nine Months
Ended
Year Ended December 31, September 30,
-------------------------------------- ---------------
1994 1995 1996 1997 1998 1998 1999
------ ------ ----- ------ ------- ------- ------
(in millions, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Net sales............... $ 44.1 $ 59.4 $67.5 $ 78.8 $ 174.9 $ 115.7 $213.8
Cost of goods sold...... 20.4 25.2 30.5 38.7 119.6 74.0 149.8
------ ------ ----- ------ ------- ------- ------
Gross profit............ 23.7 34.2 37.0 40.1 55.3 41.7 64.0
Operating expenses:
Sales and marketing... 3.6 5.3 6.0 7.3 12.8 8.4 16.6
General and
administration....... 1.4 1.8 1.9 2.1 8.4 4.6 11.2
Amortization of
intangibles.......... -- -- -- -- 10.9 4.3 17.8
Stock compensation and
related bonuses(a)... -- -- -- 31.3 -- -- --
Compensation to the
former CEO........... 0.4 0.4 1.1 2.1 -- -- --
Write-off of acquired
in-process research
and development(b)... -- -- -- -- 39.0 -- --
------ ------ ----- ------ ------- ------- ------
Operating income
(loss)................. 18.3 26.7 28.0 (2.7) (15.8) 24.4 18.4
Interest expense, net... 0.1 0.3 9.4 25.2 37.4 25.1 35.0
------ ------ ----- ------ ------- ------- ------
Income (loss) before
taxes and extraordinary
loss................... 18.2 26.4 18.6 (27.9) (53.2) (0.7) (16.6)
Income tax benefit
(expense).............. (0.3) (0.4) (6.2) 10.9 3.5 0.3 4.4
------ ------ ----- ------ ------- ------- ------
Income (loss) before
extraordinary loss..... 17.9 26.0 12.4 (17.0) (49.7) (0.4) (12.2)
Extraordinary loss...... -- -- -- 1.6 2.4 2.3 --
------ ------ ----- ------ ------- ------- ------
Net income (loss)....... $ 17.9 $ 26.0 $12.4 $(18.6) $ (52.1) $ (2.7) $(12.2)
====== ====== ===== ====== ======= ======= ======
Other Financial Data:
Depreciation............ $ 0.9 $ 1.1 $ 2.0 $ 2.6 $ 9.2 $ 5.6 $ 10.7
Amortization of deferred
financing costs........ -- -- 0.8 1.4 1.8 1.1 1.5
Capital expenditures.... 0.8 2.9 10.2 6.6 18.0 12.4 14.2
Supplemental Data:
EBITDA(c)............... $ 19.3 $ 27.8 $30.1 $ (0.1) $ 43.3 $ 34.3 $ 46.9
Adjusted EBITDA(d)...... 19.7 28.2 31.2 33.3 44.1 34.3 51.3
Net cash from operating
activities............. 18.1 26.1 12.2 9.1 16.7 6.1 15.2
Net cash used in
investing activities... (0.8) (2.9) (3.6) (44.9) (194.8) (184.6) (14.5)
Net cash from (used in)
financing activities... (15.2) (26.4) (8.9) 41.1 174.9 175.4 (2.2)
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------- September 30,
1994 1995 1996 1997 1998 1999
Consolidated Balance Sheet Data: ----- ----- ------ ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents............. $ 3.7 $ 0.5 $ 0.2 $ 5.4 $ 2.1 $ 0.6
Working capital.......... (0.1) (2.3) (3.5) 23.6 15.3 19.4
Total assets............. 12.0 13.1 27.5 108.9 365.0 371.5
Total debt, including
current maturities...... 1.3 2.0 94.1 273.5 473.9 477.9
Stockholders' equity
(deficit)............... 2.8 2.5 (72.7) (191.2) (169.8) (181.8)
</TABLE>
- --------
(a) Represents the charge for stock compensation and related bonuses recorded
for vested stock options under the 1996 stock option plan exchanged in
conjunction with the recapitalization.
(b) 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.
(c) "EBITDA" means earnings before income taxes, depreciation, amortization,
net interest expense and certain non cash charges. EBITDA is presented
because we believe it is a widely accepted financial indicator of an
entity's ability to incur and service debt and is used by our lenders in
determining compliance with financial covenants. However, 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.
(d) 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>
Nine Months
Year Ended Ended
December 31, September 30,
------------------------------ -------------
1994 1995 1996 1997 1998 1998 1999
----- ----- ----- ----- ----- ------ ------
(in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
EBITDA........................... $19.3 $27.8 $30.1 $(0.1) $43.3 $34.3 $ 46.9
Former CEO compensation(1) ...... 0.4 0.4 1.1 2.1 -- -- --
Management fee(2)................ -- -- -- -- -- -- 0.8
Executive severance(3)........... -- -- -- -- 0.8 -- --
Stock compensation and
bonuses(4)...................... -- -- -- 31.3 -- -- --
Colorado operations
consolidation(5)................ -- -- -- -- -- -- 3.6
----- ----- ----- ----- ----- ------ ------
Adjusted EBITDA.................. $19.7 $28.2 $31.2 $33.3 $44.1 $34.3 $ 51.3
===== ===== ===== ===== ===== ====== ======
</TABLE>
- --------
(1) Reflects elimination of compensation to the former CEO whose
employment agreement was terminated in connection with the
recapitalization.
(2) Reflects elimination of the Bain management fee incurred under our
Bain management agreement, which will be terminated in connection
with the offering.
(3) Reflects one-time severance payments to two executives of the
Company 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 under the 1996
stock option plan exchanged in conjunction with the
recapitalization.
(5) 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 the first nine months of 1999.
We are currently serving a majority of the customers who were
serviced by our Colorado facility out of our Texas facility, and we
expect to retain a substantial portion of the revenue stream that we
have historically serviced from our Colorado facility. The capacity
of the Texas facility would have been sufficient to service this
portion of the revenue stream in 1999. Our adjusted pro forma EBITDA
for the nine months ended September 30, 1999 (a) does not include
$7.0 of one-time charges expected to be incurred in the fourth
quarter of 1999 in connection with closing this facility (consisting
of $4.5 for severance and exit costs and $2.5 of costs related to
26
<PAGE>
the disposition of net property, plant and equipment) and (b) does
include $3.6 of adjustments to show our estimate of the recurring
effect of closing this facility. Based on our customer-by-customer
analysis, we believe that we will retain approximately 75% of our
Colorado facility's net sales. The $3.6 adjustment reflects the
additional EBITDA that we would have expected to achieve during the
first nine months of 1999 if we had serviced this revenue stream in
our Texas facility with our Texas facility's cost structure. Based on
those assumptions, (i) our Colorado net sales would have decreased
from $22.6 to $17.0, (ii) the cost of goods sold related to those
sales would have decreased from $23.6 (the actual cost of goods sold
of our Colorado facility) to $14.9 (the product of $17.0 and the cost
of goods sold ratio achieved in our Texas facility), (iii) the
operating expenses associated with those sales would have decreased
from $2.6 to $1.5 (the product of $17.0 and the operating expense
ratio achieved in our Texas facility), and (iv) depreciation and
amortization (which is included in operating expenses and cost of
goods sold) would have decreased by $0.6. As a result, operating
income and EBITDA associated with those sales would have increased by
$4.2 and $3.6, respectively. There can be no assurance that our
actual results would have been, or that our future results will be,
consistent with the foregoing assumptions.
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with the "Selected
Consolidated Financial and Other Data" section of this prospectus and our
Consolidated Financial Statements and notes to those statements included
elsewhere in this prospectus. The forward-looking statements in this discussion
regarding the electronics manufacturing services industry, our expectations
regarding our future performance, liquidity and capital resources and other
non-historical statements in this discussion include numerous risks and
uncertainties, as described in the "Risk Factors" section of this prospectus.
Our actual results may differ materially from those contained in any forward-
looking statements.
Overview
We are a leading provider of time-critical, technologically advanced design,
development and manufacturing services to original equipment manufacturers and
electronics manufacturing services providers. We target the fast-growing
communications and networking equipment industries, which are characterized by
aggressive new product development programs demanding the rapid application of
advanced technology and design. 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;
. quick-turn and pre-production fabrication of complex printed circuit
boards;
. time-critical assembly of backpanels, printed circuit boards, card
cages and wire harnesses; and
. total system assembly and integration.
Time-critical. 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 for the nine months ended
September 30, 1999 were generated from services delivered in 10 days or less.
Technologically advanced. Approximately 55% of our net sales during the same
period involved the design or manufacture of printed circuit boards with at
least eight layers, an industry-accepted measure of complexity. In addition,
many of our lower layer-count boards are technologically complex as a result of
the incorporation of features such as flip chips, multichip module-laminates,
advanced substrates and microvias.
Growth rate. Our net sales have grown at a compound annual growth rate of
47% from $44.1 million for the year ended December 31, 1994 to $272.9 million
for the twelve months ended September 30, 1999, inclusive of the growth
attributable to the acquisition of NTI in 1997 and the merger with Dynamic
Circuits, Inc., in 1998. Prices for our products and services are predominantly
a function of delivery time, complexity and overall market demand. In the first
three quarters of 1999 our average price per printed circuit board panel
increased from the levels achieved in the corresponding quarters of 1998 on a
pro forma basis.
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. We are not currently
party to any definitive acquisition agreements.
28
<PAGE>
Company History and Significant Transactions
We were organized in 1978 by James Swenson. In 1991, we installed new
management, headed by Bruce D. McMaster, and began to focus primarily on quick-
turn 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 certain nonrecurring
charges: (1) fees and interest charges on bridge loans (aggregating $14.5
million); (2) $31.3 million for the accelerated vesting of variable employee
stock options and related bonuses; (3) $2.7 million for the early
extinguishment of long-term debt, before income taxes; and (4) $1.2 million for
the buyout of our former CEO's employment contract.
Colorado Facility
In December 1997, we acquired Colorado Circuit Systems, Inc., a/k/a NTI, for
approximately $38.9 million. NTI manufactured printed circuit boards for OEMs,
requiring lead times of twenty days or more. 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 was being amortized
over a period of twenty-five years).
We implemented in December 1999 a plan to consolidate our Colorado
operations into our Texas facility and to close our Colorado facility, which
operated at a loss in the first nine months of 1999. We are currently serving a
majority of the customers who were serviced by our Colorado facility out of our
Texas facility, and we expect to retain a substantial portion of the revenue
stream that we have historically serviced from our Colorado facility. The
capacity of our Texas facility would have been sufficient to service this
portion of the revenue stream in 1999. By combining our Texas and Colorado
operations, we are eliminating lower-margin product lines and decreasing our
overhead costs, and we expect to gain efficiency through better capacity
utilization and streamlined management.
Our adjusted pro forma EBITDA for the nine months ended September 30, 1999
(a) does not include $7.0 million of one-time charges expected to be incurred
in the fourth quarter of 1999 in connection with closing this facility
(consisting of $4.5 million for severance and exit costs and $2.5 million of
costs related to the disposition of net property, plant and equipment) and (b)
does include $3.6 million of adjustments to show our estimate of the recurring
effect of closing this facility. Based on our customer-by-customer analysis, we
believe that we will retain approximately 75% of our Colorado facility's net
sales. The $3.6 million adjustment reflects the additional EBITDA that we would
have expected to achieve during the first nine months of 1999 if we had
serviced this revenue stream in our Texas facility with our Texas facility's
cost structure. Based on those assumptions, (1) our Colorado net sales would
have decreased from $22.6 million to $17.0 million, (2) the cost of goods sold
related to those sales would have decreased from $23.6 million (the actual cost
of goods sold of our Colorado facility) to $14.9 million (the product of $17.0
million and the cost of goods sold ratio achieved in our Texas facility), (3)
the operating expenses associated with those sales would have decreased from
$2.6 million to $1.5 million (the product of $17.0 million and the operating
expense ratio achieved in our Texas facility), and (4) depreciation and
amortization (which is included in operating expenses and cost of goods sold)
would have decreased by $0.6 million. As a result, operating income and EBITDA
associated with those sales would have increased by $4.2 million and $3.6
million, respectively. There can be no assurance that our actual results would
have been, or that our future results will be, consistent with the foregoing
assumptions.
DCI Merger
On July 23, 1998, we merged with Dynamic Circuits, Inc., or DCI, for an
aggregate consideration paid to DCI stockholders of approximately $250 million.
A portion of the consideration was paid in cash, and the balance of the
consideration (approximately $73 million) was paid through the issuance of our
capital stock.
29
<PAGE>
DCI provided design and manufacturing services relating to complex printed
circuit boards, backpanel assemblies and electromechanical interconnect devices
with operations in California, Texas, Georgia and Massachusetts. It was led by
Charles D. Dimick, who became our Chairman following the merger. DCI
experienced a growth in net sales of more than 67% during 1997, and its net
sales for the six months ended June 30, 1998 were more than double its net
sales for the six months ended June 30, 1997.
We accounted for the DCI merger under the purchase method of accounting and
recorded approximately $120 million in goodwill (which is being amortized over
20 years), approximately $60 million of identifiable intangible assets (which
are being amortized over their estimated useful lives of 10 years, using an
accelerated method of amortization, reflecting the relative contribution of
each developed technology in periods following the acquisition date), and
approximately $21 million and $4 million, respectively, of intangible assets
associated with DCI's customer relationships and tradenames and assembled
workforce assets (which are being amortized on a straight-line basis over their
estimated useful lives of 18 years and 4 years, respectively). We also
identified $39 million of acquired in-process research and development
investments, which we expensed in the fourth quarter ended December 31, 1998.
Results of Operations
The following table sets forth income statement data expressed as a
percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
--------------------------- -------------------
1996 1997 1998 1998 1999
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales.................. 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold......... 45.2 49.1 68.4 64.0 70.0
------- ------- ------- -------- --------
Gross profit............... 54.8 50.9 31.6 36.0 30.0
Operating expenses:
Sales, marketing, general
and administration...... 11.7 11.9 12.1 11.2 13.1
Amortization of
intangibles............. -- -- 6.2 3.7 8.3
Stock compensation and
related bonuses......... -- 39.7 -- -- --
Compensation to the
former CEO.............. 1.6 2.7 -- -- --
Write-off of acquired in-
process research and
development............. -- -- 22.3 -- --
------- ------- ------- -------- --------
Operating income (loss).... 41.5 (3.4) (9.0) 21.1 8.6
Interest expense (net)..... 13.9 32.0 21.4 21.6 16.4
------- ------- ------- -------- --------
Income (loss) before income
taxes and extraordinary
loss...................... 27.6 (35.4) (30.4) (0.5) (7.8)
Income tax benefit
(expense)................. (9.3) 13.8 2.0 0.2 2.1
Extraordinary loss, net of
income tax benefit........ -- 2.0 1.4 2.0 --
------- ------- ------- -------- --------
Net income (loss).......... 18.3 % (23.6)% (29.8)% (2.3)% (5.7)%
======= ======= ======= ======== ========
</TABLE>
Nine Months Ended September 30, 1999 Compared to the Nine Months ended
September 30, 1998
Net sales for the nine months ended September 30, 1999 increased $98.1
million (85%) to $213.8 million from $115.7 million for the nine months ended
September 30, 1998. The increase primarily resulted from the merger with DCI,
which contributed $87.3 million to the increase. Also contributing to the
increase in revenues was a higher average panel price obtained by our other
divisions, due to greater demand for more technologically advanced printed
circuit boards, partially offset by a decrease in panel production in those
operations.
Gross profit for the nine months ended September 30, 1999 increased $22.3
million (53%) to $64 million from $41.7 million for the nine months ended
September 30, 1998. The increase resulted from the merger with
30
<PAGE>
DCI, which contributed $25.0 million to the increase. Partially offsetting this
increase was a $1.0 million gross loss in our Colorado facility for the nine
months ended September 30, 1999 due to a decrease in panel production in that
operation, compared to $1.6 million gross profit in the nine months ended
September 30, 1998. We announced our plan to close the Colorado facility in
December 1999. See "--Company History and Significant Transactions--Colorado
Facility." We also 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 through the second and third quarters.
Amortization of intangibles for the nine months ended September 30, 1999
increased $13.5 million to $17.8 million from $4.3 million for the nine months
ended September 30, 1998, resulting primarily from the merger with DCI.
Other operating expenses (consisting of sales, marketing, general and
administration expenses) increased $14.8 million (114%) to $27.8 million for
the nine months ended September 30, 1999 from $13.0 million for the nine months
ended September 30, 1998. The increase in these expenses is primarily due to
the merger with DCI, an increase in expenditures relating to building our
newly-formed design operations, and an increase in fees under the management
agreement with an affiliate of Bain Capital, Inc.
Net interest expense for the nine months ended September 30, 1999 increased
$9.9 million (39%) to $35.0 million from $25.1 million for the nine months
ended September 30, 1998. The increase in net interest expense is primarily
attributable to our increased level of borrowings in connection with the merger
with DCI.
The income tax benefit for the nine months ended September 30, 1999
increased $4.1 million to $4.4 million from $0.3 million for the nine months
ended September 30, 1998. The income tax benefits for each period are based on
our effective income tax rate in each respective year.
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 increase resulted from three factors: (1) the
acquisition of NTI and the merger with DCI, which added $63.1 million and $27.5
million, respectively, to net sales; (2) 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 (3) growth in volume of units shipped primarily attributable to increased
demand from contract manufacturing customers.
Gross profit increased $15.2 million (38%) to $55.3 million in 1998 from
$40.1 million in 1997. The increase is primarily attributable to the merger
with DCI. 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.
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.
Other operating expenses (consisting of sales, marketing, general and
administration expenses) increased $11.8 million (122%) to $21.2 million in
1998 from $9.4 million in 1997. The increase resulted from the acquisition of
NTI and the merger with DCI, which added $8.1 million and $3.3 million,
respectively, to other operating expenses. Included in these increases is
approximately $0.8 million accrued in 1998 for severance-related costs for
certain employees of these divisions. In 1997, we recognized $2.1 million in
compensation expense relating to our former CEO.
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<PAGE>
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
primarily to an increase in the level of borrowings in connection with the
recapitalization and 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 primary 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.
Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996
Net sales increased $11.3 million (17%) to $78.8 million in 1997 from $67.5
million in 1996. The increase was largely due to growth in the volume of panels
shipped primarily attributable to increased demand from customers in the
communications and networking equipment industries. During 1997, our two
largest customers accounted for 13.0% and 10.6% of net sales, respectively.
During 1996, one customer accounted for 15.7% of net sales.
Gross profit increased $3.1 million (8%) to $40.1 million in 1997, from
$37.0 million in 1996. As a percentage of net sales, gross profit decreased to
50.9% in 1997 from 54.8% in 1996. The decrease in gross profit as a percentage
of sales was primarily attributable to increases in engineering, manufacturing
and systems personnel needed to support continued growth in manufacturing
capacity.
During 1997, our board of directors authorized the acceleration of vesting
of all outstanding performance-based stock options under our 1996 Stock Option
Plan in connection with the recapitalization. The stock options were treated as
variable in nature, and accordingly, the measurement date for assessing
compensation attributable to such stock options was made at the time both the
number of shares and the exercise price was known. In connection therewith, we
made a charge to operations totaling $21.3 million. In addition, we paid
bonuses amounting to $10.0 million to certain option holders for income taxes
which were paid upon the exercise of certain of these stock options.
Other operating expenses (consisting of sales, marketing, general and
administration expenses) increased $2.5 million (28%) to $11.5 million in 1997
from $9.0 million in 1996. As a percentage of net sales, other operating
expenses increased to 14.6% in 1997, as compared to 13.3% in 1996. The increase
was due primarily to additional sales and marketing expenses attributable to
increased sales coupled with the start-up costs associated with the January
1997 opening of our sales office in London, as well as the $1.2 million buy-out
of our former CEO's employment contract, which was terminated in connection
with the recapitalization.
Net interest expense increased $15.8 million (168%) to $25.2 million in
1997, from $9.4 million in 1996. The increase in interest expense was primarily
due to (1) fees and expenses of $16.4 million related to a bridge loan and (2)
the increased level of borrowings in connection with the recapitalization and
the NTI acquisition, which resulted in an increase in total debt of $179.4
million as of December 31, 1996 to $273.5 million as of December 31, 1997.
The 1997 income tax benefit was $10.9 million, or 40% of income (loss)
before income taxes. This included a $1.1 million income tax benefit received
in connection with the early extinguishment of debt. Income tax expense in 1996
was $6.2 million or 33.3% of income before income taxes. In 1996, we converted
from an "S" corporation to a "C" corporation.
We incurred an extraordinary net loss of $1.6 million net of income tax
benefit of $1.1 million due to the early extinguishment of long-term debt in
connection with the recapitalization.
32
<PAGE>
Quarterly Financial Information
The following table presents selected quarterly financial information for
each of the seven quarters ended September 30, 1999. This information is
unaudited but, in our opinion, reflects all adjustments, consisting only of
normal recurring adjustments that we consider necessary for a fair presentation
of this information in accordance with generally accepted accounting
principles. These quarterly results are not necessarily indicative of future
results.
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30,
1998 1998 1998 1998 1999 1999 1999
-------- -------- --------- -------- -------- -------- ---------
(in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $28.3 $26.3 $61.2 $59.1 $59.2 $71.7 $82.9
Cost of goods sold...... 16.4 16.1 41.6 45.5 41.4 51.0 57.4
----- ----- ----- ----- ----- ----- -----
Gross profit............ $11.9 $10.2 $19.6 $13.6 $17.8 $20.7 $25.5
===== ===== ===== ===== ===== ===== =====
</TABLE>
The quarterly financial information is presented on an actual historical
basis, not on a pro forma basis for the DCI merger. The decline in gross margin
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 increases in sales and
gross profit in the first three quarters of 1999 reflect volume increases and
increased average sales price.
Liquidity and Capital Resources
Our principal sources of liquidity are cash provided by operations and
borrowings under various debt agreements. Our principal uses of cash have been
to finance mergers and acquisitions, meet debt service requirements, and
finance capital expenditures. We anticipate that these uses, including
acquisition opportunities currently under review, will continue to be our
principal uses of cash in the future.
Net cash provided by operating activities for the nine months ended
September 30, 1999 and 1998 was $15.2 million and $6.1 million, respectively.
Net cash provided by operating activities for the years ended December 31,
1998, 1997 and 1996 was $16.7 million, $9.1 million, and $12.2 million,
respectively. Fluctuations in net cash provided by operating activities are
primarily attributable to increases and decreases in our net income before non-
cash charges. For 1997, 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 the recapitalization. We reported substantial non-
cash charges in 1998, including $39 million for the write-off of acquired in-
process research and development and $10.9 million for the amortization of
intangible assets and goodwill. No comparable non-cash charges were reported in
1997 or 1996.
Net cash used in investing activities for the nine months ended September
30, 1999 and 1998 was $14.5 million and $184.6 million, respectively. Net cash
used in investing activities for the years ended December 31, 1998, 1997 and
1996 was $194.8 million, $44.9 million and $3.6 million, respectively. These
activities consist of capital expenditures in each period and cash used in the
acquisition of NTI and the merger with DCI (see Note 12 to our consolidated
financial statements).
Capital expenditures were $14.2 million for the nine months ended September
30, 1999, compared to $12.4 million for the nine months ended September 30,
1998. Our capital expenditures were $18.0 million, $6.6 million and $10.2
million in 1998, 1997 and 1996, respectively, of which approximately $2.1
million, $0.6 million and $6.6 million were incurred in 1998, 1997 and 1996,
respectively, under capital lease obligations. Our capital expenditures for
1999 were less than $20 million, and we anticipate capital expenditures for
2000 will be consistent with 1999 levels.
Net cash provided by (used in) financing activities for the nine months
ended September 30, 1999 and 1998 was $(2.2) million and $175.4 million,
respectively. Net cash provided by (used in) financing activities
33
<PAGE>
for the years ended December 31, 1998, 1997 and 1996 was $174.9 million, $41.1
million, and $(8.9) million, respectively. Financing activities in 1998
consisted primarily of repayment of existing debt facilities and borrowings on
new debt facilities. Financing activities in 1997 consisted primarily of
increased borrowings, distributions to shareholders and shareholder
transactions in connection with the recapitalization. Financing activities in
1996 primarily consisted of increased distributions to shareholders and
shareholder transactions and increased debt requirements in connection with a
prior recapitalization.
As of September 30, 1999, we had borrowings of approximately $478 million.
We have $45.0 million available for borrowing under the revolving credit
facility (which is part of the Dynamic Details senior credit facility), less
amounts which may be in use from time-to-time. As of September 30, 1999, we had
$3.5 million in borrowings outstanding under our revolving credit facility. The
minimum principal payment obligation under the Dynamic Details senior credit
facility is $5.9 million for 2000. No other debt instruments require minimum
principal repayments during such period. We intend to use the proceeds of this
offering to repay some of our debt.
The Dynamic Details senior credit facility, the Dynamic Details senior
subordinated notes and the DDi Capital senior discount notes are described
below "Description of Indebtedness."
Based upon our current level of operations, we believe that cash generated
from operations, available cash and amounts available under our senior credit
facility will be adequate to meet our debt service requirements, capital
expenditures and working capital needs for at least the next twelve months,
although no assurance can be given in this regard. Accordingly, there can be no
assurance that our business will generate sufficient cash flow from operations
or that future borrowings will be available to enable us to service our
indebtedness. We are highly leveraged and our future operating performance and
ability to service or refinance the DDi Capital senior discount notes, and the
Dynamic Details senior subordinated notes and to extend or refinance the
Dynamic Details senior credit facility will be subject to future economic
conditions and to financial, business and other factors, many of which are
beyond our control.
Quantitative and Qualitative Disclosure Relating to Market Risks
Interest Rate Risk
The Dynamic Details senior credit facility bears interest at a floating
rate; our Dynamic Details senior subordinated notes, DDi Capital senior
discount notes and DDi Intermediate senior discount notes bear interest at
fixed rates. We reduce our exposure to interest rate risks through swap
agreements. In June 1999, we terminated our then existing interest rate swap
agreements and entered into replacement agreements. At that time, we realized
$5.6 million from the termination of the existing swap agreements (which will
be amortized through January 2002 as a reduction to interest expense) and $0.5
million from entering into the new agreements (which will be amortized though
April 2005 as a reduction to interest expense).
Under the terms of our current swap agreements, we pay a maximum annual rate
of interest applied to a notional amount equal to the principal balance of the
term facility portion of the Dynamic Details senior credit facility for the
period June 30, 1999 through August 31, 2001. During this period, our maximum
annual rate is 5.65% for a given month, unless one-month LIBOR for that month
equals or exceeds 7.00%, in which case we pay 7.00% for that month. From
September 1, 2001 through the scheduled maturity of the senior term facility in
2005, we pay a fixed annual rate of 7.35% applied to a notional amount equal to
50% of the principal balance of the senior term facility during that period. As
of September 30, 1999 the one-month LIBOR was 5.38%, and, as a result, we pay
5.65% and receive one-month LIBOR. As a result of our current swap agreements,
a 10% increase in interest rates would decrease our interest expense under the
agreements over the 12 months ending September 30, 2000 by approximately $0.7
million.
The revolving credit facility bears interest at (1) 2.25% per annum plus the
applicable LIBOR or (2) 1.25% per annum plus the federal reserve reported
overnight funds rate plus 0.5% per annum. As of September 30, 1999, we had an
outstanding balance of $3.5 million on our revolving credit facility. We do not
34
<PAGE>
anticipate having a material outstanding balance on this facility over the 12
months ending September 30, 2000. Therefore, a 10% change in interest rates as
of September 30, 1999 is not expected to materially affect the interest
expense to be incurred on this facility during such period.
A change in interest rates would not have an effect on the interest expense
to be incurred on the Dynamic Details senior subordinated notes, DDi Capital
senior discount notes or the DDi Intermediate senior discount notes because
each of these instruments bears a fixed rate of interest.
Foreign Currency Exchange Risk
All of our sales are denominated in U.S. dollars and as a result we have
relatively little exposure to foreign currency exchange risk with respect to
sales made. The Company does not use forward exchange contracts to hedge
exposures denominated in foreign currencies or any other derivative financial
instruments for trading or speculative purposes. Therefore, the effect of a
10% change in exchange rates as of September 30, 1999 would not have an impact
on our operating results over the 12 month period ending September 30, 2000.
Impact of Inflation
We believe that our results of operations are not dependent upon moderate
changes in the inflation rate.
Year 2000 Impact
We have not experienced any problems with our computer systems relating to
distinguishing twenty-first century dates from twentieth century dates, which
generally are referred to as year 2000 problems. We are also not aware of any
material year 2000 problems with our clients or vendors. Accordingly, we do
not anticipate incurring material expenses or experiencing any material
operational disruptions as a result of any year 2000 problems.
Risks Associated with Intangible Assets
As of September 30, 1999, our balance sheet reflected $210 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
September 30, 1999, we have no elements which give rise to reporting
comprehensive income.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 modifies the
disclosure requirements for reportable operating segments. This statement
became effective for our fiscal year ending December 31, 1998.
Reclassification of prior year
35
<PAGE>
financial statements for comparative purposes is required unless deemed
impractical. This pronouncement has had no significant impact on our reporting
practices since its adoption; and until such time that we diversify our
operations, management believes such pronouncement will not be applicable.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. SFAS No 137, issued by the FASB in July 1999,
establishes a new effective date for SFAS No. 133. This statement, as amended
by SFAS No. 137, is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000 and is therefore effective for us beginning with our fiscal
quarter ending March 31, 2001. Based upon the nature of the financial
instruments and hedging activities in effect as of the date of this filing,
this pronouncement would require us to reflect the fair value of our derivative
instruments (see Note 8 to our consolidated financial statements) on the
consolidated balance sheet. Changes in fair value of these instruments will be
reflected as a component of comprehensive income.
36
<PAGE>
BUSINESS
Overview
We are a leading provider of time-critical, technologically advanced design,
development and manufacturing services to original equipment manufacturers and
electronics manufacturing services providers. We target the fast-growing
communications and networking equipment industries, which are characterized by
aggressive new product development programs demanding the rapid application of
advanced technology and design. 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;
. quick-turn and pre-production fabrication of complex printed circuit
boards;
. time-critical assembly of backpanels, printed circuit boards, card
cages and wire harnesses; and
. total system assembly and integration.
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 such as hubs, routers and switches. The time-critical
segment of the electronics manufacturing services, or EMS, industry in which we
operate is characterized by high margins, rapid growth and significant customer
diversity. Our adjusted EBITDA for the twelve-month period ended September 30,
1999 of $61.1 million represents an adjusted EBITDA margin of 22.4%, which we
believe is among the highest in the EMS industry.
Our design 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 quick-turn services enable our customers to
shorten product development cycles and reduce their time to market for new
products. We distinguish ourselves from other EMS companies by focusing on
direct relationships with research and development personnel at original
equipment manufacturers, or OEMs. This focus makes us a strategic partner in
our customers' new product initiatives and gives us access to emerging
providers of next-generation technology, such as Applied Microsystems,
Broadcom, Efficient Networks and Gadzoox. 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.
Industry Background
The EMS industry provides a range of manufacturing services to OEMs in the
electronics equipment industry and is growing rapidly. EMS industry revenues
grew from approximately $22 billion in 1993 to approximately $73 billion in
1999 and are expected to grow at approximately 20% annually to approximately
$149 million in 2003. EMS industry growth is fueled by increases in the rate of
outsourcing combined with steady, underlying growth in the electronics
equipment industry. In 1998, approximately 17% of electronics OEMs' cost of
goods sold was attributable to components and products outsourced to EMS
providers. Industry sources expect 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 include front-end design and product development,
back-end packaging and distribution and overall supply chain management.
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<PAGE>
By using EMS providers, OEMs are able to focus on their core competencies,
including product development, sales, marketing and customer service.
Outsourcing allows OEMs to take advantage of the manufacturing expertise,
advanced technology and capital investment of EMS providers and to achieve
overall cost benefits. OEMs use EMS providers 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 OEMs are at a relatively early state of the
outsourcing trend and are increasingly utilizing EMS providers, such as
ourselves, for product design and manufacturing.
The DDi Customer Solution
We engineer technologically advanced materials for our customers within
extremely short turnaround times, which distinguishes us from traditional EMS
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 for the nine months ended September 30, 1999 were generated from
services delivered in 10 days or less.
. Advanced Technology. Our focus on quick-turn and pre-production design
and manufacturing services requires our engineers to remain on the
cutting edge of electronics technology, and our customers benefit from
the expertise we have developed as they seek to introduce new products.
Approximately 55% of our net sales for the nine months ended September
30, 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 technologically
complex as a result of the incorporation of features such as flip chips,
multichip module-laminates, advanced substrates and microvias.
. Proactive Sales Force. Our knowledgeable and innovative sales force,
based in Silicon Valley, enables our current and prospective customers
to understand and exploit the wide range of services provided by our
facilities across the country. Our salespeople helped us achieve a net
increase of approximately 150 customers in 1999.
. Relationships with Research and Development Personnel. In many cases, we
have design engineers stationed on-site in our customers' product
development divisions. As a result, we help our customers develop
workable technical solutions to their concepts for next generation
products.
. Experienced and Incentivized Management. Our management team, led by
Charles D. Dimick and Bruce D. McMaster, collectively has nearly 100
years of experience in the EMS industry. Our managers will hold % of
our fully diluted stock outstanding after this offering.
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<PAGE>
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 OEMs and EMS providers as customers.
Our Strategy
Our goal is to be the leading provider of time-critical, technologically
advanced 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, targeting established OEMs,
emerging providers of next-generation technology and EMS providers serving
these industries. The communications and networking equipment industries
represented approximately 55% of our net sales during the nine months ended
September 30, 1999.
Capitalize on our Strong Customer Relationships and Design Expertise to
Participate in Future Product Introductions and Further Outsourcing
Programs. We have served established OEMs 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 EMS provider for future product
generations.
Strengthen our Technological Leadership in the Time-Critical Segment of the
EMS Industry and Continue to Improve Quality and Delivery Times by
Incorporating Emerging Technologies and Consistently Refining our Manufacturing
Processes. We have developed process management expertise over time, which
positions us as an industry leader in providing flexible and responsive quick-
turn services. We have helped pioneer advances in some of the most important
areas of printed circuit board design and manufacturing and are continuously
incorporating new technology into our manufacturing processes in order to
further improve quality and reduce delivery times. Our concentration on
cutting-edge methods gives us access to emerging providers of next-generation
technology, such as Applied Microsystems, Broadcom, Efficient Networks and
Gadzoox.
Leverage our Leadership in Quick-Turn Design and Manufacturing Services to
Further Expand Our Assembly Operations and Other Value-Added Services. As an
industry leader in quick-turn design and manufacturing services, we gain early
access to our customers' product development processes, giving us the
opportunity to leverage the provision of our design services to provide other
value-added services including quick-turn and pre-production assembly of
backpanels, printed circuit boards, card cages and wire harnesses and full
system assembly and integration. We predominantly use these additional
capabilities in our customers' new product development programs to enable them
to further reduce their time to market and overall cost.
Expand our International Presence to Better Serve the Needs of Customers
Seeking to Outsource Their Worldwide Design and Manufacturing Activities. We
have a European sales office based in London supporting our growing European
sales effort. We believe that the European market offers significant growth
opportunities as large OEMs are increasing their global distribution and are
seeking EMS providers with the ability to operate in multiple markets. We
currently serve our Asian and European customers from our U.S. facilities, and
we are evaluating the viability of establishing or acquiring a quick-turn
facility in Europe to serve our growing European customer base.
Pursue Selected Acquisition Opportunities, Including Asset Divestitures by
OEMs. We have actively pursued acquisitions to enhance our service offerings,
expand our geographic presence and increase our production capabilities. An
increasing number of OEMs are divesting their production capabilities as an
integral part of their manufacturing strategy. We have completed an acquisition
and a merger since 1997, and we intend to continue to selectively pursue
strategic acquisition opportunities, including OEM divestitures, that we
believe will complement our internal growth.
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<PAGE>
Our Services
We provide a suite of value-added, integrated services, used by our
customers predominantly in the development of new products, including:
On-campus and In-the-field Design of Complex Printed Circuit Boards. We
target our design and development engineering services primarily at the front-
end of the new product development process. We provide design and engineering
assistance in the early stages of 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.
Quick-turn and Pre-production Fabrication of Complex Printed Circuit
Boards. Printed circuit boards are the basic platforms used to interconnect and
mount a broad array of electronic components and can be found in virtually all
electronic products, including consumer electronics, computers and automotive,
telecommunications, industrial, medical, military and aerospace equipment.
Typically, printed circuit boards used in consumer electronic products are 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 multilayer interconnect solutions with advanced materials,
narrow line widths and separations of copper traces and small diameters of vias
and through-holes to connect internal circuitry.
Quick-turn services are used in the design, test and launch (pre-production)
phases of new electronic product development and are delivered within 10 to 20
days and sometimes 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 super-fine line spaces and traces,
buried resistors and capacitors, microvias and a wide range of substrates and
materials. Our ability to provide these services on a quick-turn and longer-
lead delivery basis involves working closely with customers from the initial
design of new products through development and launch.
Time-critical Assembly of Backpanels, Printed Circuit Boards, Card Cages and
Wire Harnesses. We assemble backpanels, printed circuit boards, card cages and
wire harnesses on a low volume, quick-turn basis. Backpanels are used to
connect printed circuit boards and other electrical components, while 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 front-end design
and development capabilities.
Total System Assembly and Integration. We provide full system assembly
services, predominantly for products in development by OEMs. These services
require logistical capabilities and supply chain management to rapidly acquire
source 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 EMS
industry. More than 1,400 OEMs and EMS companies representing a wide range of
end-user markets used our services in 1999, a net increase of approximately 150
customers in 1999. We measure customers as those companies that place at least
two orders in a twelve-month period. Our customers principally consist of
leading communications and networking equipment and computer companies, as well
as medical, automotive, industrial and aerospace equipment manufacturers.
During the nine months ended September 30, 1999, sales to our largest customer,
Alcatel, accounted for only 8% of our net sales, and sales to our ten largest
customers accounted for approximately 40% of our net sales. We have been
successful at retaining customers and have worked with our three largest
customers since 1991.
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Approximately 80% of our net sales are made to OEMs, and the remainder are
to EMS providers. The following table shows, for the periods indicated, the
percentage of our sales in each of the principal end-user markets we served for
the years ended December 31, 1997, 1998 and 1999.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
End-User Markets 1997 1998 1999
- ---------------- ------- ------- -------
<S> <C> <C> <C>
Communications and networking equipment.......... 34% 53% 55%
Computer and peripherals......................... 45 24 21
Medical, automotive, industrial and test
instruments..................................... 6 11 9
Aerospace equipment.............................. 6 3 2
Other............................................ 9 9 13
------- ------- -------
Total.......................................... 100% 100% 100%
======= ======= =======
</TABLE>
The following table indicates, for the nine months ended September 30, 1999,
our largest OEM and 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
Cisco Systems............ Networking equipment
Marconi Communications... Communications switching and transmission equipment,
networking equipment
IBM...................... Network servers
Intel.................... Personal computers
Motorola................. Telecommunications infrastructure equipment, wireless
communications equipment
Nokia.................... Telecommunications infrastructure equipment, wireless
communications equipment
<CAPTION>
EMS Customers End Products
- ------------- ------------
<S> <C>
Celestica................ Communications and computing equipment
Flextronics.............. Communications and computing equipment
Jabil.................... Communications and computing equipment
Solectron................ Communications and computing equipment
</TABLE>
Technology, Development and Processes
We maintain a strong commitment to research and development and focus our
efforts on enhancing existing capabilities as well as developing new
technologies. Our close involvement with our customers in the early stages of
their product development positions us at the leading edge of technical
innovation in the design of quick-turn and complex printed circuit boards. Our
staff of nearly 300 experienced engineers, chemists and laboratory technicians
works in conjunction with our sales staff to identify specific needs and
develop innovative, high performance solutions to customer issues. This method
of product development allows customers to augment their own internal
development teams while providing us with the opportunity to gain an in-depth
understanding of our customers' businesses and enabling us to better anticipate
and serve their future needs.
The market for our products and services is characterized by rapidly
changing technology and continuing process development. In recent years, the
trend in the electronics equipment industry has been to increase speed and
performance of components while at the same time reducing their size. This
trend requires increasingly complex printed circuit boards with higher
densities. The future success of our business will depend in large part upon
our ability to maintain and enhance our technological capabilities, develop and
market products and
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<PAGE>
services that meet changing customer needs, and successfully anticipate or
respond to technological changes on a cost-effective and timely basis. In the
last two years, we have made substantial investments in equipment and
technology to meet these needs and maintain our competitive advantage.
We believe the highly specialized equipment we use is among the most
advanced in our industry. We provide a number of advanced technologies,
including ball grid array, flip chips, multichip module-laminates, advanced
substrates and microvias. We are qualified under various industry standards,
including Bellcore compliance for communications products and UL (Underwriters
Laboratories) approval for electronics. In addition, all of our production
facilities are ISO-9002 certified. These certifications require that we meet
standards related to management, production and quality control, among others.
Manufacturing
We produce highly complex, technologically advanced multi-layer and low-
layer printed circuit boards, backpanel assemblies, printed circuit board
assemblies, card cage and wire harness assemblies and full system assembly and
integration that meet increasingly tight tolerances and specifications demanded
by OEMs. 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. Certain advanced interconnect products require
additional critical steps, including dry film imaging, photoimageable
soldermask processing, computer-controlled laser drilling and routing,
automated plating and process controls and achievement of controlled impedance.
Multi-layering, which involves placing multiple layers of electrical
circuitry on a single printed circuit board or backpanel, expands the number of
circuits and components that can be contained on the interconnect product and
increases the operating speed of the system by reducing the distance that
electrical signals must travel. Increasing the density of the circuitry in each
layer is accomplished by reducing the width of the circuit tracks and placing
them closer together on the printed circuit board or backpanel.
Interconnect products having narrow, closely spaced circuit tracks are known
as fine line products. The manufacture of complex multi-layer interconnect
products often requires the use of sophisticated circuit interconnections
between certain layers, called blind or buried vias, 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 stituations, 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.
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<PAGE>
Excluding our Colorado facility, which we decided to close in December 1999,
we conduct our operations in several buildings that we own or lease. We believe
our facilities are currently adequate for our operating needs. Our principal
manufacturing facilities are as follows:
<TABLE>
<CAPTION>
Location Function Square Feet
-------- -------- -----------
<C> <S> <C>
Anaheim, California Quick-turn printed circuit boards 108,000
Milpitas, California Quick-turn printed circuit boards 86,000
Garland, Texas Pre-production printed circuit boards 86,000
Dallas, Texas Assembly 49,000
Marlborough, Massachusetts Assembly 32,500
La Grange, Georgia Assembly 5,000
</TABLE>
We lease all of the above facilities except the Garland, Texas facility.
Sales and Marketing
Our marketing strategy focuses on developing close working relationships
with our customers early in the design phase and throughout the lifecycle of
the product. Accordingly, our senior management personnel and engineering staff
advise customers with respect to applicable technology, manufacturing
feasibility of designs and cost implications through on-line computer technical
support and direct customer communication. We have focused our marketing
efforts on developing long-term relationships with research and development
personnel at key customers in high-growth segments of the electronics equipment
industry.
We employ a targeted sales effort to help optimize our market share at the
customer level. In particular, we have implemented individual accountability
for each client for all services across all facilities, developed a
comprehensive database and allocation process to control our calling and cross-
selling effort, and have a global account program for coordinating sales to our
top 20 customers. The success of our sales strategy is demonstrated by the net
addition of over approximately 150 customers during the year ended December 31,
1999.
We market our design, development and manufacturing services through an
internal sales force of approximately 100 individuals and an expansive sales
network consisting of 14 organizations comprised of approximately 80
manufacturers' representatives across the United States. Approximately half of
our net sales in the year ended December 31, 1998 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, and 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 prefer certain 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.
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<PAGE>
Competition
The EMS industry is highly fragmented and characterized by intense
competition. We principally compete in the time-critical segment of the EMS
industry against independent, small private companies and integrated
subsidiaries of large, broadly based volume producers, as well as the internal
capacity of OEMs. We believe that competition in the market segment we serve,
unlike in the EMS industry generally, is based less on price than on product
quality and reliability, design capabilities, quick-turn delivery and support.
In addition, we do not compete in the high volume production manufacturing
aspect of the industry and as a result are less exposed to low cost
manufacturers who compete on price in the commodity segment of this market.
Competition in the complex and time-critical segment of our industry has
increased due to consolidation, resulting in potentially better capitalized
competitors. Our basic technology is generally not subject to significant
proprietary protection, and companies with significant resources or
international operations may enter the market.
Backlog
Although we obtain firm purchase orders from our customers, our customers
typically do not make firm orders for delivery of products more than 30 to 90
days in advance. We do not believe that the backlog of expected product sales
covered by firm purchase orders is a meaningful measure of future sales since
orders may be rescheduled or canceled.
Governmental Regulation
Our operations are subject to certain federal, state and local regulatory
requirements relating to environmental compliance and site cleanups, waste
management and health and safety matters. In particular, we are subject to
regulations promulgated by:
. the Occupational Safety and Health Administration pertaining to health
and safety in the workplace;
. the Environmental Protection Agency pertaining to the use, storage,
discharge and disposal of hazardous chemicals used in the manufacturing
processes; and
. corresponding state agencies.
To date the costs of compliance and environmental remediation have not been
material to us. Nevertheless, additional or modified requirements may be
imposed in the future. If such additional or modified requirements are imposed
on us, or if conditions requiring remediation were found to exist, we may be
required to incur substantial additional expenditures.
Employees
As of December 31, 1999, after giving effect to the consolidation of our
Colorado operations into our Texas facility, we had approximately 1,800
employees, none of whom are represented by unions. Of these employees,
approximately 1,550 were involved in manufacturing and engineering, 100 worked
in sales and marketing and 150 worked in accounting, systems and other support
capacities. We have not experienced any labor problems resulting in a work
stoppage and believe we have good relations with our employees.
Legal Proceedings
We are a party to various legal actions arising in the ordinary course of
our business. We believe that the resolution of these legal actions will not
have a material adverse effect on our financial position or results of
operations.
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MANAGEMENT
Directors, Executive Officers and Key Employees
The following table sets forth our directors and executive officers, their
ages as of December 31, 1999, and the positions currently held by each person:
<TABLE>
<CAPTION>
Name Age Office
- ---- --- ------
<S> <C> <C>
President, Chief Executive Officer and
Bruce D. McMaster.................... 38 Director
Charles D. Dimick.................... 43 Chairman and Director
Joseph P. Gisch...................... 43 Chief Financial Officer
John Peters.......................... 45 Vice President, Sales and Marketing
Greg Halvorson....................... 38 Vice President, Operations
Terry L. Wright...................... 40 Vice President, Engineering
David Dominik........................ 43 Director
Edward W. Conard..................... 43 Director
Stephen G. Pagliuca.................. 44 Director
Prescott Ashe........................ 32 Director
Stephen M. Zide...................... 39 Director
Mark R. Benham....................... 48 Director
Christopher Behrens.................. 38 Director
</TABLE>
We anticipate that two additional directors not otherwise affiliated with us
or any of our stockholders will be elected to the board of directors following
the completion of this offering.
Bruce D. McMaster joined us in 1985 and has served as our President since
1991 and as a Director and our Chief Executive Officer since 1997. He has over
21 years of experience in the EMS industry. Before becoming our President, Mr.
McMaster worked in various management capacities in our engineering and
manufacturing departments.
Charles D. Dimick joined us in 1998 upon our merger with DCI. He is our
Chairman, a Director and the President of our subsidiary, Dynamic Details
Incorporated, Silicon Valley. He has over 21 years of experience in the EMS
industry. Mr. Dimick founded DCI in 1991 and served as its president and chief
executive officer until the merger. Previously, he was a senior vice president
of sales and marketing at Sigma Circuits.
Joseph P. Gisch has served as our Chief Financial Officer since 1995. From
1986 to 1995, Mr. Gisch was a partner at the accounting firm of McGladrey &
Pullen, LLP where he was responsible for the audit, accounting and information
systems for a variety of manufacturing clients. Mr. Gisch was responsible for
our general accounting and income tax matters. Mr. Gisch has not been
responsible for any of our audit services since 1991.
John Peters joined us in 1998 upon our merger with DCI. He has been our Vice
President, Sales and Marketing, since 1999. He was the senior vice president of
sales and marketing of our subsidiary, Dynamic Details Incorporated, Silicon
Valley from 1998 to 1999. Mr. Peters served as vice president of sales and
marketing of DCI from 1992 to 1998.
Greg Halvorson joined us in 1998 upon our merger with DCI. He is a Vice
President and the Senior Vice President of Operations of our subsidiary,
Dynamic Details Incorporated, Silicon Valley. Prior to joining us, Mr.
Halvorson served as vice president of operations of DCI from 1995 to 1998. Mr.
Halvorson spent six years at Pacific Circuits as plant manager and head of
engineering before which he was manager of computer-aided manufacturing at
Sigma Circuits.
Terry L. Wright joined us in 1991 and has served as Vice President,
Engineering since 1995. Prior to joining us, Mr. Wright was a general manager
at Applied Circuit Solutions and a quality assurance manager at Sigma Circuits.
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David Dominik has served as a Director since November 1998. Mr. Dominik has
been a managing director of Bain Capital, Inc. since 1990. Previously, Mr.
Dominik was a general partner of Zero Stage Capital, a venture capital firm
focused on early-stage companies, and assistant to the chairman of Genzyme
Corporation, a biotechnology firm. From 1982 to 1984, he worked as a management
consultant at Bain & Company. Mr. Dominik was elected as a director of DCI in
1996. Mr. Dominik also serves as a director of ChipPAC, Inc., Integrated
Circuit Systems, Inc. and OneSource.
Edward W. Conard has served as a Director since 1997. He has been a managing
director of Bain Capital, Inc. since March 1993. From 1990 to 1992, Mr. Conard
was a director of Wasserstein Perella, an investment banking firm that
specializes in mergers and acquisitions. Prior to that, he was a vice president
at Bain & Company, where he headed the firm's operations practice area. Mr.
Conard also serves as a director of Waters Corporation, Cambridge Industries,
Alliance Corp., ChipPAC, Inc., Medical Specialties, Inc. and U.S. Synthetic.
Stephen G. Pagliuca has served as a Director since January 2000. Mr.
Pagliuca has been a managing director of Bain Capital, Inc. since May 1993 and
a general partner of Bain Venture Capital, Inc. since 1989. Prior to joining
Bain Capital, Mr. Pagliuca was a partner at Bain & Company. Mr. Pagliuca also
worked as a senior accountant and international tax specialist for Peat Marwick
Mitchell & Company in the Netherlands. He is also a director of Gartner Group,
Coram Healthcare, Epoch Senior Living, Wesley Jessen Visioncare, Dade Behring
Inc. and Vivra Specialty Partners.
Prescott Ashe has served as a Director since 1997. Mr. Ashe has been a
principal at Bain Capital, Inc. since June 1998 and was an associate at Bain
Capital, Inc. from December 1992 to June 1998. Prior to that, he was an analyst
at Bain Capital, Inc. and a consultant at Bain & Company. Mr. Ashe also serves
as a director of ChipPAC, Inc., Integrated Circuit Systems, Inc., and SMTC
Corporation.
Stephen M. Zide has served as a Director since 1997. Mr. Zide has been a
managing director at Pacific Equity Partners since 1998. Previously he was an
associate at Bain Capital, Inc., and prior to that he was a partner at the law
firm of Kirkland & Ellis. Mr. Zide is also a director of Alliance Laundry
Systems, L.L.C.
Mark R. Benham has served as a Director since November 1998. Mr. Benham was
a co-founder of Celerity Partners, L.L.C. and has been a partner since 1992.
Previously he was a senior investment officer of Citicorp Venture Capital,
Ltd., and prior to that he was an advisor to Yamaichi UniVen Co., Ltd., the
venture capital subsidiary of Yamaichi Securities International. Mr. Benham is
a director of SubMicron Systems Corporation, Rapid Design Service, Inc., SMTC
Corporation and Starcom Holdings, Inc.
Christopher Behrens has served as a Director since 1997. He has been a
principal of Chase Capital Partners since 1994 and a general partner since
January 1999. Prior to joining Chase Capital Partners, Mr. Behrens was a vice
president in the Merchant Banking Group of The Chase Manhattan Bank from 1990
to 1994. Mr. Behrens is a director of Case Swayne, Covenant Care, Erickson Air
Crane, Haddington Energy Partners, Independent Propane Company, Patina Oil &
Gas, Vinings, Portola Packaging and The Pantry.
Board Composition
All directors are elected and serve until a successor is duly elected and
qualified or until the earlier of his death, resignation or removal. All
members of our board of directors set forth herein were elected by class vote
pursuant to our Articles of Incorporation. There are no family relationships
between any of our directors or executive officers. Our executive officers are
elected by and serve at the discretion of the board of directors.
Prior to the completion of this offering, our board will be divided into
three classes, as nearly equal in number as possible, with each director
serving a three-year term and one class being elected at each year's annual
meeting of stockholders. 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.
46
<PAGE>
Director Compensation
We currently pay no compensation to our non-employee directors, and pay no
additional remuneration to our employees or executives for their service as
directors.
Committees of the Board of Directors
Prior to this offering, our board of directors had two committees, the audit
committee and the compensation committee. The board may also establish other
committees to assist in the discharge of its responsibilities.
The audit committee makes recommendations to the board of directors
regarding the independent auditors to be approved by the stockholders, reviews
the independence of the independent auditors, approves the scope of the annual
audit activities of the independent auditors, approves the audit fee payable to
the independent auditors and reviews such audit results with the independent
auditors. The audit committee is currently comprised of Messrs. Dominik, Ashe
and Zide and, following this offering, will be comprised of a majority of
directors not otherwise affiliated with us or any of our principal
stockholders. 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
(1) compensation of our officers other than Mr. McMaster and Mr. Dimick and (2)
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. Conard, Dominick and Ashe.
Compensation Committee Interlocks and Insider Participation
The members of our compensation committee do not receive compensation for
their services as directors. See "Certain Relationships and Related
Transactions--Management Agreement" and "--Other Related Party Payments."
47
<PAGE>
Executive Compensation
The following table sets forth information concerning the compensation for
the years ended December 31, 1998, 1997 and 1996 for our chief executive
officer and our four 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....... 1998 432,423 69,694 -- (1) -- -- --
President and Chief 1997 379,326 356,188 4,580,153(2) 241,026(7) 48,205.1(8) 1,088,558(14)
Executive Officer 23,735(3)
3,808(4)
1996 331,250 300,000 -- (1) -- 781.0(9) --
Charles D. Dimick....... 1998 190,076 31,281 3,000(4) -- 39,008.0(10) 852,490(15)
Chairman, President of 39,684(5) 11,592.5(11) 1,820,887(16)
Dynamic Details 816,721(6) 4,953.3(12)
Incorporated, 1997 -- -- -- -- -- --
Silicon Valley 1996 -- -- -- -- -- --
Joseph P. Gisch......... 1998 269,346 18,967 -- (1) 10,000(13) -- 155,198(14)
Chief Financial 1997 262,847 62,077 651,791(2) 40,171(7) 8,034.2(8)
Officer 3,384(3)
2,195(4)
1996 246,693 50,286 -- (1) -- 111.0(9) --
Lee W. Muse, Jr......... 1998 355,981 69,694 -- (1) -- -- --
Vice President 1997 314,769 356,188 3,810,922(2) 187,464(7) 37,492.8(8) 905,802(14)
19,750(3)
891(4)
1996 254,807 300,000 -- (1) -- 649.0(9) --
Terry L. Wright......... 1998 158,519 14,111 -- (1) -- -- --
Vice President, 1997 147,208 99,126 957,134(2) 66,952(7) 13,390.3(8) 227,720(14)
Engineering 4,965(3)
1,227(4)
1996 127,502 75,000 -- (1) -- 162.0(9) --
</TABLE>
- --------
(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 certain
tax obligations incurred in connection with the exercise of options to
purchase shares of common stock in connection with the recapitalization.
(3) Reflects the grant of 4,747.0, 676.8, 3,950.0, and 993.1 shares of Class A
common stock to Mr. McMaster, Mr. Gisch, Mr. Muse, and Mr. Wright,
respectively, as compensation for services rendered.
(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 25,236.2 shares of Class A common stock.
(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 Class A common stock and Class L common stock in
connection with the DCI merger.
48
<PAGE>
(7) Reflects the purchase of 50,620.2, 8,436.7, 39,371.3 and 14,061.2 shares
of restricted Class A common stock by Mr. McMaster, Mr. Gisch, Mr. Muse
and Mr. Wright, respectively, at a purchase price of $5.00 per share and
the subsequent repurchase by us from each of Mr. McMaster, Mr. Gisch, Mr.
Muse and Mr. Wright of 2,415.2, 402.5, 1,878.5 and 670.9 shares of
restricted Class A common stock, respectively, at a purchase price of
$5.00 per share in connection with the NTI acquisition. These named
executive officers purchased these shares by issuing an interest bearing
note to us. The outstanding principal amounts of the interest bearing
notes of such named executive officers were reduced by approximately
$12,076, $2,013, $9,392 and $3,354, respectively, to reflect the
repurchase by us of the shares of restricted Class A common stock, as
described above, in connection with the NTI acquisition. In 1998, each of
Mr. McMaster and Mr. Muse agreed to forfeit 1,900 and 1,300 shares,
respectively, of restricted Class A common stock, which shares were
subsequently issued to certain of our employees, and the outstanding
principal amounts of the interest bearing notes of such named executive
officers were reduced by approximately $9,500 and $6,500, respectively, to
reflect the forfeiture. Additionally, each of Mr. McMaster and Mr. Muse
agreed to transfer 5,700 and 4,300 shares, respectively, of restricted
Class A common stock, to Mr. Gisch and the outstanding principal amounts
of the interest bearing notes of Mr. McMaster and Mr. Muse were reduced by
approximately, $28,500 and $21,500, respectively, and the outstanding
principal amount of the interest bearing note of Mr. Gisch was increased
by approximately $50,000 to reflect the transfer. See "Certain
Relationships and Related Transactions--Certain Loans and Payments to
Named Executive Officers." The restricted stock vests in 48 equal monthly
installments beginning November 28, 1997. We have the right to repurchase
the unvested restricted shares of Class A common stock held by a named
executive officer for the original purchase price in the event that the
named executive officer ceases to be employed by us.
(8) The options represent the net number of options to purchase shares of
Class A common stock at an exercise price of $61.17 per share,
substantially above the then fair market value of the Class A common stock
($5.00 per share), issued in connection with the recapitalization 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, Mr. Muse and Mr. Wright agreed
to permit us to cancel options to purchase 2,415.2, 402.5, 1,878.5 and
670.9 shares of Class A common stock, respectively, at an exercise price
of $61.17 per share. Additionally, in 1998 each of Mr. McMaster and Mr.
Muse agreed to permit us to cancel options to purchase 1,900 and 1,300
shares, respectively, of Class A common stock at an exercise price of
$61.17 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 5,700 and 4,300 shares
of Class A common stock, respectively, at an exercise price of $61.17 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 of $2,179 per share. In connection with the
recapitalization: (i) unvested options to purchase approximately 630.6,
89.6, 523.5, and 130.7 shares of common stock at an exercise price of
$2,179 held by Mr. McMaster, Mr. Gisch, Mr. Muse, and Mr. Wright,
respectively, became vested and were exercised, and (ii) as part of the
management rollover equity, unvested options to purchase approximately
150.5, 21.4, 125.2 and 31.5 shares of common stock at an exercise price of
$2,179 held by Mr. McMaster, Mr. Gisch, Mr. Muse and Mr. Wright,
respectively, became vested and converted into options to purchase
approximately 34,012.3, 4,849.2, 28,302.0 and 7,115.2 shares of Class A
common stock, respectively, at an exercise price of $0.96 per share and
options to purchase approximately 4,203.8, 599.3, 3,498.0 and 879.4 shares
of Class L common stock, respectively, at an exercise price of $70.19 per
share. The fair market value of the common stock on the date of the
recapitalization was $11,800 per share.
(10) The options represent options to purchase shares of Class A common stock
at an exercise price equal to $1.58 per share issued to replace options to
purchase shares of DCI common stock in connection with the DCI merger.
(11) The options represent options to purchase shares of Class A common stock
at an exercise price equal to $61.17 per share issued to replace options
to purchase shares of DCI common stock in connection with the DCI merger.
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<PAGE>
(12) The options represent options to purchase shares of Class L common stock
at an exercise price equal to $364.09 per share issued to replace options
to purchase shares of DCI common stock in connection with the DCI merger.
(13) The options represent options to purchase shares of Class A common stock
at an exercise price of $61.17 issued to Mr. Gisch after each of Mr.
McMaster and Mr. Muse agreed to permit us to cancel options to purchase
5,700 and 4,300 shares of Class A common stock, respectively, at an
exercise price of $61.17 per share.
(14) Reflects bonuses earned by certain of the named executive officers in
connection with the recapitalization that are payable on the third
anniversary of the recapitalization whether or not such named executive
officer is still employed by us.
(15) Reflects deferred cash distributions payable in connection with the
exchange of options to purchase shares of common stock of DCI for options
to purchase shares of Class A common stock and Class L common stock in
connection with the DCI merger.
(16) Represents amounts payable under our cash bonus plan in connection with
the exercise of outstanding options to purchase shares of Class A common
stock and Class L common stock.
Option Grants in Last Year
The following table sets forth information concerning grants of options to
purchase shares of our common stock made to the named executive officers during
the year ended December 31, 1998.
OPTION GRANTS IN 1998
<TABLE>
<CAPTION>
Individual Grants
-----------------------------------------------
Percent
of Total Potential Realizable Value at
Number of Options Assumed Annual Rates of Stock
Securities Granted to Exercise Price Appreciation for Option
Underlying Employees in Price Per Term(7)
Options Fiscal 1998 Share Expiration ---------------------------------
Name Granted (#) (%)(6) ($) Date 5% ($) 10% ($) X% ($)
---- ----------- ------------ --------- ---------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Bruce D. McMaster....... -- -- -- -- -- -- --
Charles D. Dimick(1).... 39,008.0(2) 15.7 1.58 8/19/2006 226,530 356,453 --
11,592.5(3) 4.7 61.17 8/19/2006 -- -- 0(8)
4,953.3(4) 12.9 364.09 8/19/2006 861,066 2,062,402 --
Joseph P. Gisch......... 10,000.0(5) 4.1 61.17 10/28/2007 -- -- 0(9)
Lee W. Muse, Jr......... -- -- -- -- -- -- --
Terry L. Wright......... -- -- -- -- -- -- --
</TABLE>
- --------
(1) In connection with the DCI merger, options to purchase 213,200 shares of
common stock of DCI at an exercise price of $0.05 per share held by Mr.
Dimick were converted, as part of the management rollover equity, into the
right to receive a cash payment equal to $2,743,901, options to purchase
approximately 39,008.0 shares of Class A common stock at an exercise price
of $1.58 per share, options to purchase approximately 2,127.3 shares of
Class A common stock at an exercise price of $61.17 per share and options
to purchase approximately 4,953.3 shares of Class L common stock at an
exercise price of $364.09 per share. Under Mr. Dimick's employment
agreement, Mr. Dimick is entitled to receive a cash bonus equal to
approximately $1,860,571 that vests in accordance with the vesting schedule
for the options described above and becomes payable under certain
circumstances set forth in our cash bonus plan.
(2) Represents shares of Class A common stock. Of this total, approximately
26,888.8 were vested as of December 31, 1998. The remaining approximately
12,119.2 options vest in 22 equal monthly installments beginning January
28, 1999.
(3) Represents shares of Class A common stock. Of this total, approximately
10,931.6 were vested as of December 31, 1998. The remaining approximately
660.9 options vest in 22 equal monthly installments beginning January 28,
1999.
50
<PAGE>
(4) Represents shares of Class L common stock. Of this total, approximately
3,414.4 were vested as of December 31, 1998. The remaining approximately
1,538.9 options vest in 22 equal monthly installments beginning January 28,
1999.
(5) Represents shares of Class A common stock. Of this total, approximately
2,916.7 were vested as of December 31, 1998. The remaining approximately
7,083.3 options vest in 34 equal monthly installments beginning January 28,
1999.
(6) Percentages are based upon the total number of options to purchase shares
of Class A common stock or Class L common stock, as the case may be,
granted to employees in 1998.
(7) At the time of the grant, there was no market for our common stock. For
purposes of the calculations in this table, the fair market value of the
Class A common stock ($5.00 per share) and the Class L common stock
($364.09 per share) was determined by our board of directors based upon
arms length sales of shares of Class A common stock and shares of Class L
common stock. There have been no arms length sales of the Class A common
stock or the Class L common stock since October 28, 1998. In accordance
with the rules of the Securities and Exchange Commission, the amounts shown
on this table represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock appreciation of 5% and 10% compounded
annually from the date the respective options were granted to their
expiration date. The gains shown are net of the option exercise price, but
do not include deductions for taxes or other expenses associated with the
exercise. Actual gains, if any, on stock option exercises will depend on
the future performance of our common stock, the optionholder's continued
employment through the option period, and the date on which the options are
exercised.
(8) 36.8% reflects the percentage appreciation, compounded annually from the
date of grant to the expiration date, by which the exercise price exceeded
the fair market value at the date of grant.
(9) 32.1% reflects the percentage appreciation, compounded annually from the
date of grant to the expiration date, by which the exercise price exceeded
the fair market value at the date of grant.
Option Exercises in Last Year and Year End Option Values
The following table sets forth information for the named executive officers
concerning stock option exercises during our last fiscal year and options
outstanding at the end of the last fiscal year.
AGGREGATED OPTION EXERCISES IN FISCAL 1998
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....... -- -- 11,843.2/28,761.9(3) --
4,203.8/0(4) 1,235,497/0
Charles D. Dimick....... 25,236.2(1) 86,308 1,652.6/12,119.2(5) 5,652/41,448
10,931.6/660.9(6) --
3,414.4/1,538.9(7) --
Joseph P. Gisch......... -- -- 5,260.0/12,774.2(3) --
599.3/0(4) 176,134/0
Lee W. Muse, Jr......... -- -- 9,229.1/22,413.7(3) --
3,498.0/0(4) 1,028,062/0
Terry L. Wright......... -- -- 3,905.5/9,484.8(3) --
879.4/0(4) 258,456/0
</TABLE>
- --------
(1) Represents shares of Class A common stock purchased at an exercise price of
$1.58 per share.
(2) Value is based on the difference between the option exercise price and the
fair market value at December 31, 1998. The fair market value of the Class
A common stock ($5.00 per share) and the Class L
51
<PAGE>
common stock ($364.09 per share) was determined by the board of directors
based upon arms length sales of shares of Class A common stock and shares
of Class L common stock. There were no arms length sales of the Class A
common stock or the Class L common stock between October 28, 1998 and
December 31, 1998.
(3) Represents options to purchase shares of Class A common stock at an
exercise price of $61.17 per share. The options vest in 48 equal monthly
installments beginning November 28, 1997.
(4) Represents options to purchase shares of Class L common stock at an
exercise price of $70.19 per share. The options to purchase such shares of
Class L common stock replaced 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 Class A common stock and shares of Class L common stock.
(5) Represents options to purchase shares of Class A common stock at an
exercise price of $1.58 per share. The options to purchase such shares of
Class A 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 Class A common stock and
shares of Class L common stock.
(6) Represents options to purchase shares of Class A common stock at an
exercise price of $61.17 per share. The unvested options vest in 22 equal
monthly installments beginning January 28, 1999. The options to purchase
such shares of Class A 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 Class A common stock and shares of Class L common stock.
(7) Represents options to purchase shares of Class L common stock at an
exercise price of $364.09 per share. The options to purchase such shares
of Class L 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 Class A common stock and
shares of Class L 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 salary of $375,000 in 1997, $425,000 in 1998 and $450,000 in 1999.
We are negotiating his 2000 base salary. 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 4,747.0 shares of Class A 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, Mr. McMaster will be
entitled to receive an additional bonus of $1,088,558 in consideration of
prior services 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 salary at an annual rate of $420,000 in 1998 and approximately
$444,700 in 1999. We are negotiating his 2000 base salary. 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 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, which Cash Bonus Units vest on the same
schedule applicable to the vesting of the options to purchase shares of Class
A common stock and shares of Class L 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 our Chief Financial Officer pursuant to
an agreement dated September 1, 1995, as amended, effective until October 28,
2000. Under this agreement, Mr. Gisch received an annual salary of $252,000 in
1997, $265,000 in 1998 and $275,000 in 1999. We are negotiating his 2000 base
52
<PAGE>
salary. 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 676.8 shares of Class A common stock on October 28, 1997. Mr. Gisch's
employment agreement contains customary confidentiality provisions. In
addition, Mr. Gisch will be entitled to receive an additional bonus of $155,198
in consideration of prior services which will be payable on October 28, 2000,
whether or not he is still employed by us.
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 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 3,950.0 shares of Class A 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, Mr. Muse will be entitled to receive
an additional bonus of $905,802 in consideration of prior services which will
be payable on October 28, 2000, whether or not he is still employed by us.
Mr. Wright is currently employed as our Vice President, Engineering pursuant
to an agreement dated September 1, 1995, as amended, effective until October
28, 2000. Under this agreement, Mr. Wright received an annual salary of
$140,000 in 1997, $155,000 in 1998 and $170,000 in 1999. His 2000 base salary
is $225,000. In addition, Mr. Wright is eligible for an annual bonus based upon
the achievement of EBITDA targets and received an award, pursuant to the
agreement, of 993.1 shares of Class A common stock on October 28, 1997. Mr.
Wright's employment agreement contains customary confidentiality provisions and
a non-compete clause effective for the duration of the term of the agreement.
In addition, Mr. Wright will be entitled to receive an additional bonus of
$227,720 in consideration of prior services 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 Stock Option Plan, which authorized the granting of stock
options and the sale of Class A common stock to our current or future
employees, directors, consultants or advisors. Our board of directors is
authorized to sell or otherwise issue Class A common stock at any time prior to
the termination of the 1997 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 235,000 shares of Class A 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 Class A common stock available for
grant under the 1997 Stock Option 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 Class A common stock and Class L common stock in
connection with the DCI merger. The terms applicable to options issued under
the DCI Stock Option Plans are substantially similar to the terms applicable to
the options to purchase shares of DCI outstanding immediate prior to the DCI
acquisition. These terms include vesting from the date of acquisition through
2002. An optionholder's scheduled vesting is dependent upon continued
employment with us. Upon termination of employment, any unvested options as of
the termination date are forfeited.
In connection with the DCI merger, we converted each DCI stock option award
into the right to receive a cash payment and an option to purchase shares of
Class A common stock and shares of Class L common stock. The options granted
bear exercise prices of either $1.58 ($1.58 Options) or $61.17 ($61 Options)
for the purchase of Class A shares or $364.09 for Class L Shares. Our board of
directors is authorized to sell or otherwise issue Class A common stock and
Class L common stock at any time prior to the termination of the
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<PAGE>
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
222,600 shares of Class A common stock and 28,300 shares of Class L common
stock, in the case of the Details Holdings Corp.- Dynamic Circuits 1996 Stock
Option Plan, and 46,000 shares of Class A common stock and 5,850 shares of
Class L common stock in the case of the Details Holdings Corp.-Dynamic Circuits
1997 Stock Option 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).
Under the terms of the DCI Stock Option Plans, however, no options may be
granted after the DCI merger date. Accordingly, there are currently no options
to purchase shares of Class A common stock and no options to purchase shares of
Class L common stock available for grant under the DCI Stock Option Plans. As
of December 31, 1998, the options outstanding under the DCI Stock Option Plans
had weighted average remaining contractual lives of approximately eight years.
In 1998, each of Mr. McMaster and Mr. Muse agreed to permit us to cancel
options to purchase 7,600 and 5,600 shares, respectively, of Class A common
stock at an exercise price of $61.17 per share, which options were subsequently
granted by us to certain other employees of us and our subsidiaries.
2000 Equity Incentive Plan
The 2000 Equity Incentive Plan, or the "2000 Plan," is expected to be
adopted by our board of directors and approved by our stockholders prior to the
completion of this offering. As of the date of this prospectus, no awards have
been made under the 2000 Plan. No future grants will be made under existing
plans upon the effectiveness of the 2000 Plan.
The 2000 Plan provides for the grant of incentive stock options to our
employees (including officers and employee directors) and for the grant of
nonstatutory stock options to our employees, directors and consultants. A total
of (1) shares of common stock, (2) any shares returned to existing plans as
a result of termination of options and (3) annual increases to be added on the
date of each annual meeting of our stockholders commencing in 2001 equal to
1.0% of the outstanding shares of common stock, or such lesser amounts as may
be determined by the board of directors, will be reserved for issuance pursuant
to the 2000 Plan.
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.
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 18 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 may not exceed ten
years.
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<PAGE>
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. 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.
55
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following summary of the Stock Contribution and Merger Agreement, the
Stockholders Agreement and the Management Agreement is a description of the
material provisions of those agreements and is subject to, and qualified in its
entirety by reference to, those agreements, each of which has been previously
filed with the Securities and Exchange Commission.
Stock Contribution and Merger Agreement
The Stock Contribution and Merger Agreement relating to the July 1998 merger
with DCI contains indemnification provisions binding on us. Specifically, we
have agreed to indemnify: (a) each of the former DCI stockholders and their
agents and affiliates against any and all liabilities resulting from (1) any
misrepresentation or breach of warranty made by us or any of our subsidiaries
in the Stock Contribution and Merger Agreement and (2) any breach or default in
performance by us or any of our subsidiaries of any covenant or agreement
contained in the Stock Contribution and Merger Agreement, prior to the DCI
merger and (b) each of our stockholders immediately prior to the DCI merger
closing and their agents and affiliates against any and all liabilities
resulting from (1) any misrepresentation or breach of warranty by DCI in the
Stock Contribution and Merger Agreement and (2) any breach or default in
performance by DCI or any of its subsidiaries of any covenant or agreement
contained in the Stock Contribution and Merger Agreement, prior to the DCI
merger.
Immediately prior to the consummation of the DCI merger, certain of our
stockholders, including Mr. Dimick and Celerity Partners, owned approximately
20% of the outstanding common stock of DCI on a fully diluted basis.
Stockholders Agreement
All of our current stockholders and optionholders are parties to a
stockholders agreement that, among other things, provides for tag-along rights,
drag-along rights, registration rights and restrictions on the transfer of
shares held by some parties to the stockholders agreement. The stockholders
agreement contains voting agreements that will terminate immediately prior to
this offering.
Management Agreement
Pursuant to a management agreement among Bain Capital Partners V, L.P.
("Bain"), us and our subsidiary, Dynamic Details, Incorporated, Bain was paid
fees of approximately $2.7 million in 1998 in connection with the DCI merger.
The management agreement will be terminated by mutual consent of the parties in
connection with this offering, and Bain will receive a fee of approximately $
million. The management agreement includes customary indemnification provisions
in favor of Bain. Investment funds associated with Bain are our largest
stockholders.
Certain Loans and Payments to Named Executive Officers
In connection with the exercise of certain options and the purchase of
certain shares of restricted stock in 1997, we accepted as payment from each
named executive officer purchasing such shares a note bearing interest at 5.57%
per annum. Mr. McMaster, Mr. Gisch, Mr. Muse and Mr. Wright had outstanding
loan balances, excluding accrued interest, at December 31, 1999 of
approximately $273,806, $44,844, $214,742, and $73,810, respectively. We have
agreed to permit these executive officers to repay their respective loan
obligations with proceeds received from the sale of stock. In addition, in
connection with the exercise of options to purchase shares of Class L common
stock, we have agreed to pay an executive officer an amount sufficient to
satisfy certain of his tax obligations arising out of the exercise of such
options and the receipt of such payment from us.
In 1998, each of Mr. McMaster and Mr. Muse agreed to forfeit 1,900 and 1,300
shares, respectively, of restricted Class A common stock, which shares were
subsequently issued to certain of our employees and the
56
<PAGE>
outstanding principal amounts of their interest bearing notes were reduced by
approximately $9,500 and $6,500, respectively, to reflect the forfeiture.
Additionally, each of Mr. McMaster and Mr. Muse agreed to transfer 5,700 and
4,300 shares, respectively, of restricted Class A common stock, to Mr. Gisch,
and the outstanding principal amounts of the interest bearing notes of Mr.
McMaster and Mr. Muse were reduced by approximately, $28,500 and $21,500,
respectively, and the outstanding principal amount of the interest bearing note
of Mr. Gisch was increased by approximately $50,000 to reflect the transfer.
Other Related Party Payments
The Bain Capital Funds, our controlling stockholders, were shareholders of
DCI prior to our merger of DCI. In conjunction with the merger, the Bain
Capital Funds received approximately $22.9 million for the redemption of
certain shares of DCI common stock held prior to consummation of the merger.
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."
Celerity Partners was a stockholder of DCI prior to our merger with DCI. In
connection with the merger, funds affiliated with Celerity Partners received
approximately $10.9 million for the redemption of shares of DCI common stock
held prior to consummation of the merger. Additionally, Celerity Partners and
its affiliates were paid fees and expenses aggregating approximately $1.7
million in connection with the merger.
Chase Manhattan Capital, L.P., one of our stockholders, is an affiliate of
The Chase Manhattan Bank. In conjunction with our merger with DCI, The Chase
Manhattan Bank acted as collateral, co-syndication and administrative agent
with regard to the establishment of the senior credit facility. In this
capacity, The Chase Manhattan Bank received approximately $2.4 million in fees.
The Chase Manhattan Bank also participates as a lender under the Dynamic
Details senior credit facility, and is a counterparty to one of our interest
rate exchange agreements, under terms similar to those of the other
participants and counterparties. Some of the net proceeds of this offering will
be used to repay a portion of the indebtedness under the Dynamic Details senior
credit facility.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of each class of our common stock as of December 31, 1999 and as
adjusted to reflect the sale of the shares offered by us in this 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; and
. all executive officers and directors as a group.
The following table also sets forth the number of shares that will be sold
by our stockholders if the underwriters exercise their option in full to
purchase shares to cover over-allotments. See "Underwriting."
As of December 31, 1999, our outstanding equity securities consisted of
3,522,183.0 shares of Class A common stock and 396,330.2 shares of Class L
common stock. The Class A common stock consists of seven separate classes (A-1
through A-7), which have different rights with respect to the election of
directors. All of the shares of Class A common stock entitle the holder to one
vote per share on all matters to be voted upon by our stockholders except for
Class A-7, which is nonvoting. The Class L common stock is identical to the
Class A common stock except that the Class L common stock is entitled to a
preference over the Class A common stock with respect to any distribution by us
to holders of its capital stock equal to the original cost of such shares
($364.09) plus an amount which accrues on a daily basis at a rate of 12% per
annum, compounded quarterly. The Class L common stock is convertible into Class
A common stock upon a vote of a majority of the holders of the outstanding
Class L common stock at any time.
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 December 31, 1999 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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<PAGE>
<TABLE>
<CAPTION>
Shares Beneficially Owned (**)
------------------------------------------------------------------------- Percentage
Class A Common Stock Class L Common Stock of Shares
-------------------------------------- --------------------------------- Beneficially Shares
Warrants Warrants Owned Offered in
and and After Over-
Name and Address Shares Options Total % Shares Options Total % Offering Allotment
- ---------------- ----------- --------- ----------- ---- --------- -------- --------- ---- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Principal
Stockholders:
Bain Capital 1,386,596.0 17,510.5 1,404,106.5 36.8% 172,464.4 -- 172,464.4 39.8%
Funds (1)......
c/o Bain
Capital, Inc.
Two Copley
Place
Boston,
Massachusetts
02116
Celerity 275,491.5 9,560.2 285,051.7 7.5 34,643.2 -- 34,643.2 8.0
Partners,
L.L.C. (2).....
11111 Santa
Monica
Boulevard;
Suite 1111
Los Angeles,
California
90025
Chase Manhattan 386,912.0 70,210.8 457,122.8 12.2 47,820.6 8,677.8 6,498.3 12.8
Entities (3)...
c/o Chase
Manhattan
Capital, L.P.
380 Madison
Avenue
12th Floor
New York, New
York 10017
KB Mezzanine 203,075.1 11,074.3 214,149.4 5.6 25,786.9 -- 25,786.9 5.9
Fund II,
L.P....
c/o Equinox
Investment
Partners LLC
19 Olde Kings
Highways South
Darien, CT
06820
Directors and Executive
Officers:
Bruce D.
McMaster....... 178,252.8 40,522.6 218,775.4 5.7 14,290.7 4,203.8 18,494.5 4.3
Charles D.
Dimick......... 195,523.9 17,323.4 212,847.3 5.6 21,711.7 4,393.7 26,105.4 6.0
Joseph P.
Gisch.......... 31,868.4 18,034.2 49,902.6 1.3 1,955.6 599.3 2,554.9 *
Lee W. Muse,
Jr. ........... 127,440.3 31,892.9 159,331.1 4.2 9,465.4 3,498.0 12,963.5 3.0
Terry L.
Wright......... 33,211.0 13,390.3 46,601.3 1.2 2,137.2 879.4 3,016.6 *
Christopher
Behrens (4).... 386,912.0 25,531.2 412,443.2 10.9 47,820.6 3,155.6 50,976.1 11.1
Edward W. Conard
(5)............ 364,032.5 2,748.4 366,780.9 9.6 45,163.5 -- 45,163.5 10.4
David Dominik
(5)............ 364,032.5 2,748.4 366,780.9 9.6 45,163.5 -- 45,163.5 10.4
Stephen G.
Pagliuca (5)... 364,032.5 2,748.4 366,780.9 9.6 45,163.5 -- 45,163.5 10.4
Prescott Ashe
(6)............ 364,032.5 2,748.4 366,780.9 9.6 45,163.5 -- 45,163.5 10.4
Stephen Zide
(6)............ 364,032.5 2,748.4 366,780.9 9.6 45,163.5 -- 45,163.5 10.4
Mark R. Benham
(7)............ 275,491.5 9,560.2 285,051.7 7.5 34,643.2 -- 34,643.2 8.0
All Directors
and executive
officers as a
group (14
persons) (5)(6)(7).. 1,699,738.0 171,241.9 1,870,979.9 49.2 185,206.7 35,764.7 220,971.4 47.9
</TABLE>
- --------
* Indicates beneficial ownership of less than 1% of the issued and outstanding
Class A common stock or Class L common stock.
** The number of shares of Class A common stock and Class L common stock deemed
outstanding on December 31, 1999 with respect to a person or group includes
(a) 3,522,183.0 shares of Class A common stock and 396,330.2 shares of Class
L common stock outstanding on such date and (b) all options and warrants
that are currently exercisable or will become exercisable within 60 days of
December 31, 1999 by the person or group in question.
(1) Includes shares of Class A common stock and Class L common stock held by
Bain Capital Fund V, L.P., ("Fund V"); Bain Capital Fund V-B, L.P. ("Fund
V-B"); BCIP Associates ("BCIP"); and BCIP Trust Associates, L.P. ("BCIP
Trust" and collectively with Fund V, Fund V-B and BCIP, the "Bain Capital
Funds"). Does not include shares owned by other stockholders that are
subject to the Stockholders Agreement. See "Certain Relationships and
Related Transactions--Stockholders Agreement."
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<PAGE>
(2) Consists of shares owned by Celerity Dynamo, L.L.C., Celerity Liquids,
L.L.C. and Celerity Details, L.L.C., Celerity Partners, L.L.C. and its
managing members control each of such entities, which disclaim beneficial
ownership of any such shares in which it does not have a pecuniary
interest.
(3) Consists of shares owned by Chase Manhattan Capital, L.P., Chase Securities
Inc. and DI Investors, L.L.C., all of which are affiliates of The Chase
Manhattan Corporation. Chase Manhattan Capital, L.P. is the managing member
of DI Investors, L.L.C. and owns a majority of the interests therein.
Accordingly, Chase Manhattan Capital, L.P. may be deemed to beneficially
own shares owned by DI Investors, L.L.C. Each of Chase Manhattan Capital,
L.P., DI Investors, LLC and Chase Securities Inc. disclaims beneficial
ownership of any such shares in which it does not have a pecuniary
interest.
(4) Mr. Behrens is a general partner of Chase Capital Partners, which is a non-
managing member of Chase Manhattan Capital, LLC and which manages the
investments of Chase Manhattan Capital, LLC and, accordingly, may be deemed
to beneficially own shares owned by Chase Manhattan Capital, LLC and DI
Investors, LLC. Mr. Behrens disclaims beneficial ownership of any such
shares in which he does not have a pecuniary interest. The address of Mr.
Behrens is c/o Chase Capital Partners, 380 Madison Avenue, 12th Floor, New
York, New York 10017.
(5) The shares of Class A common stock and Class L common stock included in the
table represent shares held by BCIP and BCIP Trust. Messrs. Conard,
Pagliuca and Dominik are each Managing Directors of Bain Capital, Inc. and
are each general partners of BCIP and BCIP Trust and, accordingly, may be
deemed to beneficially own shares owned by such funds. Each such person
disclaims beneficial ownership of any such shares in which he does not have
a pecuniary interest. The address of each such person is c/o Bain Capital,
Inc., Two Copley Place, Boston, Massachusetts 02116.
(6) The shares of Class A common stock and Class L common stock included in the
table represent shares held by BCIP and BCIP Trust. Mr. Zide is a managing
director of Pacific Equity Partners and was formerly an associate of Bain
Capital, Inc. Mr. Ashe is a principal of Bain Capital, Inc. Each such
person is a partner of BCIP and BCIP Trust and, accordingly, may be deemed
to beneficially own shares owned by such funds. Each such person disclaims
beneficial ownership of any such shares in which he does not have a
pecuniary interest. The address of each such person is c/o Bain Capital,
Inc., Two Copley Place, Boston, Massachusetts 02116.
(7) Mr. Benham is a Managing Member of Celerity Partners, L.L.C., and controls
each of Celerity Details, L.L.C., Celerity Liquids, L.L.C. and Celerity
Dynamo, L.L.C. and, accordingly, may be deemed to beneficially own shares
owned by Celerity Details, L.L.C., Celerity Liquids, L.L.C. and Celerity
Dynamo, L.L.C. Mr. Benham disclaims beneficial ownership of any such shares
in which he does not have a pecuniary interest. The address of Mr. Benham
is c/o Celerity Partners, 11111 Santa Monica Boulevard, Suite 1111, Los
Angeles, California 90025.
60
<PAGE>
DESCRIPTION OF INDEBTEDNESS
After giving effect to this offering, we and our subsidiaries will have
outstanding debt under the Dynamic Details senior credit facilities, the
Dynamic Details senior subordinated notes and the DDi Capital senior discount
notes.
We own 100% of the capital stock of DDi Intermediate Holdings Corp., which
in turn owns 100% ofthe capital stock of DDi Capital Corp., which in turn owns
100% of the capital stock of Dynamic Details, Incorporated, our primary
operating subsidiary.
Dynamic Details Senior Credit Facility
Our subsidiary, Dynamic Details, Incorporated, has entered into an agreement
with various banks and financial institutions, including The Chase Manhattan
Bank as a bank lender and as agent for other bank lenders providing for the
senior credit facilities, which currently consist of:
. a Tranche A facility of up to approximately $103.4 million in term
loans;
. a Tranche B facility of up to $149.4 million in term loans; and
. a revolving credit facility of up to $45.0 million in revolving credit
loans, letters of credit and swing line loans.
We intend to use some of the proceeds of this offering to reduce the
indebtedness under this facility, which was $256.3 million as of September 30,
1999.
The senior credit facility is jointly and severally guaranteed by and
secured by the assets of our subsidiaries, and future domestic subsidiaries of
Dynamic Details will guarantee the senior credit facility and secure that
guarantee with their assets. The senior credit facility requires Dynamic
Details to meet financial ratios and benchmarks and to comply with other
restrictive covenants.
The Tranche A facility matures in quarterly installments from June 1999
until July 2004. The Tranche B facility matures in quarterly installments from
June 1999 until September 2004 at which time the remaining outstanding loans
under the Tranche B facility become repayable in three equal quarterly
installments with a final payment in April 2005. The revolving credit facility
terminates in July 2004.
Our borrowings under the Dynamic Details senior credit facility bear
interest at varying rates based, at our option, on either LIBOR plus 225 basis
points or the bank rate plus 125 basis points (in the case of Tranche A) and
LIBOR plus 250 basis points or the bank rate plus 150 basis points (in the case
of Tranche B). The overall effective interest rate at September 30, 1999 was
7.78%. Dynamic Details is required to pay to the lenders under the senior
credit facility a commitment on the average unused portion of the revolving
credit facility and a letter of credit fee on each letter of credit
outstanding. It must apply proceeds of sales of debt, equity or material assets
to prepayment on its senior credit facility, subject to some exceptions, and
must also, in some circumstances, pay excess cash flow to the lenders under its
senior credit facility.
This summary of the material provisions of the Dynamic Details senior credit
facility, is qualified in its entirety by reference to all of its provisions,
which has been filed as an exhibit to the registration statement of which this
prospectus forms a part. See "Additional Information."
Dynamic Details Senior Subordinated Notes
The Dynamic Details senior subordinated notes were issued in an aggregate
principal amount of $100,000,000 and will mature on November 15, 2005. The
senior subordinated notes were issued under an indenture dated as of November
18, 1997 between Dynamic Details, Incorporated, as issuer, and State Street
Bank and Trust Company, as trustee, and are senior subordinated unsecured
obligations of Dynamic Details, Incorporated. Cash interest on the senior
subordinated notes accrues at the rate of 10% per annum and is payable semi-
annually in arrears on each May 15 and November 15 of each year.
On or after November 15, 2001, the 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.
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<PAGE>
Additionally, at any time on or prior to November 15, 2000, Dynamic Details,
Incorporated may use the net proceeds of one or more equity offerings to redeem
up to 40% of the senior subordinated notes at a redemption price equal to 110%
of the principal amount thereof plus accrued and unpaid interest, if any, to
the redemption date, subject to some restrictions.
This summary of the material provisions of the Dynamic Details senior
subordinated notes is qualified in its entirety by reference to all of the
provisions of the indenture governing these notes, which has been filed as an
exhibit to the registration statement of which this prospectus forms a part.
See "Additional Information."
DDi Capital Senior Discount Notes
The DDi Capital senior discount notes were issued in an aggregate principal
amount at maturity of $110,000,000 and will mature on November 15, 2007. The
senior discount notes were issued under an indenture dated as of November 18,
1997 between us, as issuer, and State Street Bank and Trust Company, as
trustee, as supplemented by the supplemental indenture dated as of February 10,
1998 between our subsidiary, DDi Capital Corp., and the trustee. The senior
discount notes are senior unsecured obligations of DDi Capital Corp. The senior
discount notes were issued at a discount to their aggregate principal amount at
maturity and will accrete in value until November 15, 2002 at a rate per annum
equal to 12.5%, compounded semi-annually. Cash interest on the senior discount
notes will not accrue prior to November 15, 2002. Thereafter, interest will
accrue at the rate of 12.5% per annum and will be payable semi-annually in
arrears on each May 15 and November 15 of each year, commencing May 15, 1998 to
the holders of record on the immediately preceding May 1 and November 1,
respectively.
On or after November 15, 2002, the senior discount notes may be redeemed at
the option of DDi Capital, in whole at any time or in part from time to time,
at a redemption price that is greater than the accreted value of the notes,
plus accrued and unpaid interest, if any, to the redemption date. Additionally,
at any time on or prior to November 15, 2000, DDi Capital may use the net
proceeds of one or more of our equity offerings to redeem up to 40% of the
senior discount notes at a redemption price (expressed as a percentage of the
accreted value thereof) equal to 112.5%, subject to some restrictions. We will
use some of the proceeds of this offering to redeem 40% of these notes. See
"Use of Proceeds."
This summary of the material provisions of the DDi Capital senior discount
notes is qualified in its entirety by reference to all of the provisions of the
indenture governing the senior discount notes, which has been filed as an
exhibit to the registration statement of which this prospectus forms a part.
See "Additional Information."
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
General Matters
Upon completion of this offering, the total amount of our authorized capital
stock will consist of shares of common stock and shares of one or more
series of preferred stock. As of December 31, 1999, we had outstanding
3,522,183.0 shares of Class A common stock and 396,330.2 shares of Class L
common stock. Prior to the effectiveness of the registration statement, we will
reincorporate in Delaware and all of the outstanding shares of Class A common
stock and Class L common stock will be reclassified into a single class of
common stock in the reclassification. See "The Reclassification." As of
December 31, 1999, we had 123 stockholders of record with respect to our Class
A common stock and Class L common stock.
After giving effect to this offering, assuming an offering price of $ per
share (the mid-point of the range set forth on the cover page of this
prospectus) and a closing date of , 2000, we will have shares of common
stock and no other shares of any series of preferred stock outstanding. The
following summary of provisions of our capital stock describes all material
provisions of, but does not purport to be complete and is subject to, and
qualified in its entirety by, our Delaware certificate of incorporation and our
Delaware by-laws, which are included as exhibits to the registration statement
of which this prospectus forms a part, and by the provisions of applicable law.
The Delaware certificate and by-laws contain provisions that are intended to
enhance the likelihood of continuity and stability in the composition of the
board of directors and which may have the effect of delaying, deferring or
preventing a future takeover or change in control of our company unless such
takeover or change in control is approved by our board of directors.
Common Stock
The issued and outstanding shares of common stock are, and the shares of
common stock to be issued by us in connection with the offering will be,
validly issued, fully paid and nonassessable. Subject to the prior rights of
the holders of any series of preferred stock, the holders of outstanding shares
of common stock are entitled to receive dividends out of assets legally
available therefor at such time and in such amounts as the board of directors
may from time to time determine. Please see "Dividend Policy." The shares of
common stock are not convertible and the holders thereof have no preemptive or
subscription rights to purchase any of our securities. Upon liquidation,
dissolution or winding up of our company, the holders of common stock are
entitled to receive pro rata our assets which are legally available for
distribution, after payment of all debts and other liabilities and subject to
the prior rights of any holders of any series of preferred stock then
outstanding. Each outstanding share of common stock is entitled to one vote on
all matters submitted to a vote of stockholders. There is no cumulative voting.
Except as otherwise required by law or the restated certificate, the holders of
common stock vote together as a single class on all matters submitted to a vote
of stockholders.
We have applied to have our common stock approved for quotation on The
Nasdaq National Market under the symbol "DDIC."
Preferred Stock
Our board of directors may, without further action by our stockholders, from
time to time, direct the issuance of shares of preferred stock in a series and
may, at the time of issuance, determine the rights, preferences and limitations
of each series. Satisfaction of any dividend preferences of outstanding shares
of preferred stock would reduce the amount of funds available for the payment
of dividends on shares of common stock. Holders of shares of preferred stock
may be entitled to receive a preference payment in the event of any
liquidation, dissolution or winding-up of our company before any payment is
made to the holders of shares of common stock. The issuance of shares of
preferred stock may render more difficult or tend to discourage a merger,
tender offer or proxy contest, the assumption of control by a holder of a large
block of our securities or the removal of incumbent management. Upon the
affirmative vote of a majority of the total number of directors
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<PAGE>
then in office, the board of directors, without stockholder approval, may issue
shares of preferred stock with voting and conversion rights which could
adversely affect the holders of shares of common stock.
There are no shares of preferred stock outstanding, and we have no current
intention to issue any of our unissued, authorized shares of preferred stock.
However, the issuance of any shares of preferred stock in the future could
adversely affect the rights of the holders of common stock.
Registration Rights
As a result of the amended and restated stockholders agreement dated July
23, 1998 between us and some of our stockholders, some of our stockholders will
be entitled to rights with respect to the registration of some or all of their
shares of common stock under the Securities Act as described below.
Bain Capital Demand Registration Rights. At any time after 180 days
following this offering until five years from the date of this offering, the
holders of at least 25% of the aggregate number of shares of common stock held
by Bain Capital Funds and their affiliates can request that we register all or
a portion of their shares. We will only be required to file five 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. The Bain Capital Funds will sell some of their shares in this
offering if the underwriters exercise their over-allotment option.
Other Demand Registration Rights. At any time after 360 days following this
offering until five years from the date of this offering, DI Investors, LLC, or
any of its affiliates that hold at least 50% of the shares of common stock
originally issued to DI Investors, LLC, can request that we register all or a
portion of their shares. We will only be required to file two registration
statements in response to their demand registration rights. We will not be
required to file a registration 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.
Piggyback Registration Rights. If we register any securities for public
sale, the holders of shares of our common stock will have the right to include
their shares in the registration statement. This right will be triggered by the
sale of common stock by the Bain Capital Funds in this offering if the
underwriters exercise their over-allotment option. 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.
Holders of these registration rights have agreed not to exercise these
registration rights for 180 days following the date of this prospectus, other
than with respect to the underwriters' over-allotment option.
Other Provisions of the Delaware Certificate of Incorporation and By-laws
Our Delaware certificate of incorporation provides for the board to be
divided into three classes, as nearly equal in number as possible, serving
staggered terms. Approximately one-third of the board will be elected each
year. See "Management." Under the Delaware General Corporation Law, directors
serving on a classified board can only be removed for cause. The provision for
a classified board could prevent a party who acquires control of a majority of
the outstanding voting stock from obtaining control of the board until the
second annual stockholders meeting following the date the acquiror obtains the
controlling stock interest. The classified board provision could have the
effect of discouraging a potential acquiror from making a tender offer or
otherwise attempting to obtain control of us and could increase the likelihood
that incumbent directors will retain their positions.
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<PAGE>
Our Delaware certificate of incorporation provides that stockholder action
can be taken only at an annual or special meeting of stockholders and cannot be
taken by written consent in lieu of a meeting. The Delaware certificate and the
by-laws provide that, except as otherwise required by law, special meetings of
the stockholders can only be called pursuant to a resolution adopted by a
majority of the board of directors or by our chief executive officer.
Stockholders will not be permitted to call a special meeting or to require the
board to call a special meeting.
The by-laws establish an advance notice procedure for stockholder proposals
to be brought before an annual meeting of our stockholders, including proposed
nominations of persons for election to the board. Stockholders at an annual
meeting may only consider proposals or nominations specified in the notice of
meeting or brought before the meeting by or at the direction of the board or by
a stockholder who was a stockholder of record on the record date for the
meeting, who is entitled to vote at the meeting and who has given to our
secretary timely written notice, in proper form, of such stockholder's
intention to bring that business before the meeting. Although the by-laws do
not give the board the power to approve or disapprove stockholder nominations
of candidates or proposals regarding other business to be conducted at a
special or annual meeting, the by-laws may have the effect of precluding the
conduct of business at a meeting if the proper procedures are not followed or
may discourage or defer a potential acquiror from conducting a solicitation of
proxies to elect its own slate of directors or otherwise attempting to obtain
control of us.
The Delaware certificate and by-laws provide that the affirmative vote of
holders of at least 66 2/3% 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 the directors not affiliated or associated with any person or
entity holding 20% or more of the voting power of our outstanding capital
stock, other than the Bain Capital Funds. This requirement of a super-majority
vote to approve amendments to the Delaware certificate and by-laws could enable
a minority of our stockholders to exercise veto power over any such amendments.
Provisions of Delaware Law Governing Business Combinations
Following the consummation of this offering, we will be subject to the
"business combination" provisions of the Delaware General Corporation Law. In
general, such provisions prohibit a publicly held Delaware corporation from
engaging in various "business combination" transactions with any "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an "interested stockholder," unless:
. the transaction is approved by the board of directors prior to the date
the "interested stockholder" obtained such status;
. upon consummation of the transaction which resulted in the stockholder
becoming an "interested stockholder," the "interested stockholder" owned
at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding for purposes of determining
the number of shares outstanding those shares owned by (a) persons who
are directors and also officers and (b) employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or
. on or subsequent to such date the "business combination" is approved by
the board of directors and authorized at an annual or special meeting of
stockholders by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the "interested
stockholder."
A "business combination" is defined to include mergers, asset sales and
other transactions resulting in financial benefit to a stockholder. In general,
an "interested stockholder" is a person who, together with affiliates and
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. 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 Delaware certificate of incorporation limits the liability of directors
to the fullest extent permitted by the Delaware General Corporation Law. In
addition, our Delaware certificate of incorporation provides that we will
indemnify our directors and officers to the fullest extent permitted by such
law. We expect to enter into indemnification agreements with our current
directors and executive officers prior to the completion of the offering and
expect to enter into a similar agreement with any new directors or executive
officers.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is .
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 will have outstanding an aggregate of
shares of our common stock, assuming no exercise of the underwriters' over-
allotment option and no exercise of outstanding options and warrants. Of these
shares, all of the shares sold in this offering will be freely tradable without
restriction or further registration under the Securities Act, unless the shares
are purchased by "affiliates" as that term is defined in Rule 144 under the
Securities Act. Any shares purchased by an affiliate may not be resold except
pursuant to an effective registration statement or an applicable exemption from
registration, including an exemption under Rule 144 of the Securities Act. The
remaining shares of common stock held by existing stockholders are "restricted
securities" as that term is defined in Rule 144 under the Securities Act. These
restricted securities may be sold in the public market only if they are
registered or if they qualify for an exemption from registration under Rule 144
or Rule 701 under the Securities Act. These rules are summarized below.
Upon the expiration of the lock-up agreements described below and subject to
the provisions of Rule 144 and Rule 701, restricted shares totaling will be
available for sale in the public market 180 days after the date of this
prospectus. The sale of these restricted securities is subject, in the case of
shares held by affiliates, to the volume restrictions contained in those rules.
Lock-up Agreements
We, our directors and executive officers and some of our stockholders, who
own in the aggregate shares of our common stock, have entered into lock-up
agreements with the underwriters. Under those agreements, neither we nor any of
our directors or executive officers nor any of those stockholders may dispose
of or hedge any shares of common stock or securities convertible into or
exchangeable or exercisable for shares of common stock. These restrictions will
be in effect for a period of 180 days after the date of this prospectus. At any
time and without notice, Credit Suisse First Boston Corporation may, in its
sole discretion, release all or some of the securities from these lock-up
agreements. Transfers or dispositions can be made sooner, provided the
transferee becomes bound to the terms of the lockup:
. with the prior written consent of Credit Suisse First Boston
Corporation;
. as a bona fide gift; or
. to any trust.
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<PAGE>
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 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 intend to file a registration statement under the Securities Act covering
shares of common stock reserved for issuance under our 2000 Equity Incentive
Plan. This registration statement is expected to be filed as soon as
practicable after the effective date of this offering.
Currently, there are options to purchase shares outstanding under our
2000 Equity Incentive Plan and otherwise. All of these shares will be eligible
for sale in the public market from time to time, subject to vesting provisions,
Rule 144 volume limitations applicable to our affiliates and, in the case of
some of the options, the expiration of lock-up agreements.
Registration Rights under Stockholders Agreement
Following this offering, some of our stockholders will, under some
circumstances, have the right to require us to register their shares for future
sale. See "Description of Capital Stock--Registration Rights."
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UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 2000, we have agreed to sell to the underwriters named
below, for whom Credit Suisse First Boston Corporation is acting as
representative, the following respective numbers of shares of common stock:
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation................................
FleetBoston Robertson Stephens Inc....................................
Hambrecht & Quist LLC.................................................
Lehman Brothers Inc...................................................
---
Total...............................................................
===
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
Several of our stockholders have granted to the underwriters a 30-day option
to purchase on a pro rata basis up to additional shares at the initial
public offering price less the underwriting discounts and commissions. The
option may be exercised only to cover any over-allotment of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The underwriters
and selling group members may allow a discount of $ per share on sales to
other broker/dealers. After the initial public offering, the public offering
price and concession and discount to broker/dealers may be changed by the
representatives.
The following table summarizes the compensation and estimated expenses we
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... $ $ $ $
Expenses payable by
selling stockholders... $ $ $ $
</TABLE>
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
Hambrecht & Quist LLC, one of the underwriters, may be deemed to be our
affiliate. The offering therefore is being conducted in accordance with the
applicable provisions of Rule 2720 of the National Association of Securities
Dealers, Inc. Conduct Rules. Rule 2720 requires that the initial public
offering price of the shares of common stock not be higher than that
recommended by a "qualified independent underwriter" meeting certain standards.
Accordingly, Credit Suisse First Boston Corporation is assuming the
responsibilities of acting as the qualified independent underwriter in pricing
the offering and conducting due diligence. The initial public offering price of
the shares of common stock is no higher than the price recommended by Credit
Suisse First Boston Corporation.
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<PAGE>
We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act of 1933
relating to, any shares of our common stock or securities convertible into or
exchangeable or exercisable for any shares of our common stock, or publicly
disclose the intention to make any such offer, sale, pledge, disposition or
filing, without the prior written consent of Credit Suisse First Boston
Corporation for a period of 180 days after the date of this prospectus, except
issuances pursuant to the exercise of employee stock options outstanding on the
date hereof.
Our officers and directors and substantially all of our stockholders have
agreed that they will not offer, sell, contract to sell, pledge or otherwise
dispose of, directly or indirectly, any shares of our common stock or
securities convertible into or exchangeable or exercisable for any shares of
our common stock, enter into a transaction which would have the same effect, or
enter into any swap, hedge or other arrangement that transfers, in whole or in
part, any of the economic consequences of ownership of our common stock,
whether any such aforementioned transaction is to be settled by delivery of our
common stock or such other securities, in cash or otherwise, or publicly
disclose the intention to make any such offer, sale, pledge or disposition, or
to enter into any transaction, swap, hedge or other arrangement, without, in
each case, the prior written consent of Credit Suisse First Boston Corporation
for a period of 180 days after the date of this prospectus.
The underwriters have reserved for sale, at the initial public offering
price up to shares of the common stock being offered by this prospectus
for employees, directors and certain other persons associated with us who have
expressed an interest in purchasing common stock in the offering. The number of
shares available for sale to the general public in the offering will be reduced
to the extent these persons purchase these reserved shares. Any reserved shares
not so purchased will be offered by the underwriters to the general public on
the same terms as the other shares.
We and the selling stockholders have agreed to indemnify the underwriters
against liabilities under the Securities Act, or contribute to payments which
the underwriters may be required to make in that respect.
We have applied to list the shares of common stock on The Nasdaq Stock
Market's National Market under the symbol "DDIC."
In connection with the recapitalization, affiliates of Hambrecht & Quist LLC
that, in the aggregate, hold approximately 12% of our securities prior to the
offering and other affiliates of Hambrecht & Quist LLC were paid fees and
expenses aggregating approximately $16 million and received common stock
warrants valued at approximately $3.4 million. Pursuant to the terms of our
stockholders agreement, an affiliate of Hambrecht & Quist LLC that holds some
of our securities has the right to designate one of the members of our board of
directors. Accordingly, Christopher Behrens, a general partner of Chase Capital
Partners, has been elected to and is a member of our board of directors.
Also, The Chase Manhattan Bank, an affiliate of Hambrecht & Quist LLC, is a
lender and the agent for the other lending banks under the Dynamic Details
senior credit facility, and is a counterparty to one of our interest rate
exchange agreements. In its role as collateral, co-syndication and
administrative agent with regard to the establishment of the senior credit
facility, Chase received $2.4 million in fees. Further, Chase Securities Inc.,
an affiliate of Hambrecht & Quist LLC, acted as the initial purchaser
(underwriter) for the sale of the Dynamic Details senior subordinated notes and
the DDi Capital senior discount notes.
We intend to use a portion of the net proceeds from the sale of common stock
to repay indebtedness owed by us to The Chase Manhattan Bank, an affiliate of
Hambrecht & Quist LLC, and Fleet Bank and BankBoston, affiliates of FleetBoston
Robertson Stephens Inc.
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Prior to this offering, there was no established public trading market for
the common stock. The initial public offering price for the common stock will
be determined by negotiation between Credit Suisse First Boston Corporation and
us. The primary factors to be considered in determining the initial public
offering price include:
. the history of and the prospects of the industry in which we compete;
. the ability of our management;
. our past and present operations;
. our prospects for future earnings;
. the general condition of the securities markets at the time of this
offering; and
. the recent market prices of securities of generally comparable
companies.
Credit Suisse First Boston Corporation may engage in over-allotment,
stabilizing transactions, syndicate covering transactions, and penalty bids in
accordance with Regulation M under the Securities Exchange Act of 1934.
. Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
. Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
. Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
. Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a stabilizing or syndicate covering
transaction to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on The Nasdaq National Market, subject to official notice of issuance,
or otherwise and, if commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the shares of common stock to be issued in this offering
will be passed upon for us by Ropes & Gray, Boston, Massachusetts. Some
partners of Ropes & Gray are members in RGIP LLC, which owns 8,904.9 shares of
Class A common stock and 1,100.6 shares of Class L common stock. RGIP LLC is
also an investor in certain of the Bain Capital Funds. Legal matters in
connection with this offering will be passed upon for the underwriters by
Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York. Ropes & Gray,
Boston, Massachusetts 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 certain legal matters.
EXPERTS
The consolidated financial statements as of December 31, 1998 and 1997 and
for each of the two years in the period ended December 31, 1998 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.
Our consolidated financial statements for the year ended December 31, 1996
included in this prospectus have been audited by McGladrey & Pullen, LLP,
independent auditors, as stated in its report appearing in this prospectus, and
are included in reliance upon the report of such firm given upon the authority
of said firm as experts in accounting and auditing.
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The consolidated financial statements of Dynamic Circuits, Inc., as of
December 31, 1997 and for each of the two years in the period 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.
CHANGES IN ACCOUNTANTS
On December 16, 1997, we notified McGladrey & Pullen, LLP that it would be
dismissed as our independent accountants effective December 31, 1997. On
January 1, 1998, we notified PricewaterhouseCoopers LLP that it would be
engaged as our new principal independent accountant to audit our financial
statements. We and our board of directors selected PricewaterhouseCoopers LLP
based primarily on the fact that PricewaterhouseCoopers LLP typically serves as
independent accountants for portfolio companies of certain of our shareholders.
Our former accountants, McGladrey & Pullen, LLP, were considered for the
engagement but were not selected.
In connection with the audit of the fiscal year ended December 31, 1996,
there were no disagreements with McGladrey & Pullen, LLP on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedures, which disagreements if not resolved to their satisfaction
would have caused them to make reference in their opinion to the subject matter
of the disagreement. The audit report of McGladrey & Pullen, LLP on our
consolidated financial statements for the year ended December 31, 1996, did not
contain any adverse opinion or disclaimer of opinion, nor was it qualified or
modified as to uncertainty, audit scope, or accounting principles. A letter
from McGladrey & Pullen, LLP to that effect is included as Exhibit 16.1 to the
registration statement, of which this prospectus forms a part.
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. This
prospectus, which constitutes a part of the registration statement, does not
contain all of the information set forth in the registration statement or the
exhibits and schedules which are part of the registration statement. For
further information about us and our common stock, you should refer to the
registration statement. Any statements made in this prospectus as to the
contents of any contract, agreement or other document are necessarily
incomplete. With respect to each such contract, agreement or other document
filed as an exhibit to the registration statement we refer you to the exhibit
for a more complete description of the matter involved, and each statement in
this prospectus shall be deemed qualified in its entirety by this reference.
You may read and copy all or any portion of the registration statement or
any reports, statements or other information in the files at the public
reference facilities of the SEC at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C., 20549 and at the regional offices of the SEC
located at Seven World Trade Center, 13th Floor, New York, New York 10048 and
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You can request
copies of these documents upon payment of a duplicating fee by writing to the
SEC. You may call the SEC at 1-800-SEC-0330 for further information on the
operation of its public reference rooms. Our filings, including the
registration statement, will also be available to you on the Internet site
maintained by the SEC at http://www.sec.gov.
Our subsidiaries DDi Capital Corp. and Dynamic Details, Incorporated have,
and we will, file annual, quarterly and current reports and other information
with the SEC. You can request copies of these documents, for a copying fee, by
writing to the SEC. We intend to furnish our stockholders with annual reports
containing financial statements audited by our independent auditors.
71
<PAGE>
DDi CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
DDi Corp:
Report of Independent Accountants......................................... F-2
Independent Auditor's Report.............................................. F-3
Consolidated Balance Sheets as of December 31, 1998 and 1997 and as of
September 30, 1999 (unaudited)........................................... F-4
Consolidated Statements of Operations for the Years Ended December 31,
1998, 1997 and 1996 and for the Nine Months Ended September 30, 1999 and
1998 (unaudited)......................................................... F-5
Consolidated Statements of Stockholders' Equity (Deficit) for the Years
Ended December 31, 1998, 1997 and 1996 and for the Nine Months Ended
September 30, 1999 (unaudited)........................................... F-6
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996 and for the Nine Months Ended September 30, 1999 and
1998 (unaudited)......................................................... F-7
Notes to Consolidated Financial Statements................................ F-8
Dynamic Circuits Inc.:
Report of Independent Accountants......................................... F-32
Consolidated Balance Sheet as of December 31, 1997........................ F-33
Consolidated Statements of Income for the Years Ended December 31, 1997
and 1996 and for the Six Months Ended June 30, 1998 and 1997
(unaudited).............................................................. F-34
Consolidated Statements of Stockholders' Equity (Deficit) for the Years
Ended December 31, 1997 and 1996, and the Six Months Ended June 30, 1998
and 1997 (unaudited)..................................................... F-35
Consolidated Statements of Cash Flows for the Year Ended December 31, 1997
and 1996 and the Six Months Ended June 30, 1998 and 1997 (unaudited)..... F-36
Notes to Consolidated Financial Statements................................ F-37
</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' equity (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, 1998 and 1997, and the results of their operations, changes in
stockholders' equity (deficit) and their cash flows for each of the two years
in the period ended December 31, 1998, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Costa Mesa, California
January 25, 2000
F-2
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Details, Inc.
Anaheim, California
We have audited the accompanying consolidated statements of operations,
stockholders' equity (deficit) and cash flows of Details, Inc. and subsidiaries
for the year ended December 31, 1996. 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 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 results of operations and cash
flows of Details, Inc. and subsidiaries for the year ended December 31, 1996,
in conformity with generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
McGladrey & Pullen, LLP
Anaheim, California
February 14, 1997
F-3
<PAGE>
DDi CORP.
CONSOLIDATED BALANCE SHEETS
(In thousands except share and per share amounts)
<TABLE>
<CAPTION>
Pro Forma
December 31, September 30, As Adjusted
-------------------- ------------- Equity (unaudited)
1997 1998 1999 (Note 2)
--------- --------- ------------- ------------------
(unaudited)
ASSETS
------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents.......... $ 5,377 $ 2,109 $ 613
Accounts receivable,
net.................. 15,643 34,764 50,856
Income tax
receivable........... 9,363 3,793 --
Inventories........... 4,330 12,615 22,148
Prepaid expenses and
other................ 525 3,110 2,637
Deferred tax asset.... 8,240 4,816 4,816
--------- --------- ---------
Total current
assets............. 43,478 61,207 81,070
--------- --------- ---------
Property, plant and
equipment, net......... 26,132 61,018 65,399
Debt issue costs, net... 13,083 15,929 14,362
Goodwill and other
intangibles, net....... 26,071 226,286 209,961
Other................... 98 566 673
--------- --------- ---------
$ 108,862 $ 365,006 $ 371,465
========= ========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current maturities of
long-term debt and
capital lease
obligations.......... $ 2,450 $ 4,390 $ 6,487
Current portion of
deferred interest
rate swap income..... -- -- 1,454
Current maturities of
deferred notes
payable.............. -- 2,788 2,944
Revolving credit
facility............. -- 7,000 3,500
Accounts payable...... 7,609 14,612 22,955
Accrued expenses ..... 9,830 17,151 24,272
--------- --------- ---------
Total current
liabilities........ 19,889 45,941 61,612
--------- --------- ---------
Escrow payable to re-
deemed stockholders.... 8,600 -- --
Long-term debt and capi-
tal lease obligations.. 271,068 462,498 467,918
Deferred interest rate
swap income............ -- -- 4,247
Deferred notes payable.. -- 3,743 1,690
Deferred tax liability.. 530 21,913 17,102
Other................... -- 686 731
--------- --------- ---------
Total liabilities... 300,087 534,781 553,300
--------- --------- ---------
Commitments and
contingencies (Note 13)
Stockholders' deficit:
Class L common stock,
no par value,
cumulative yield of
12% per annum
compounded quarterly,
liquidation
preference of
$159,024 and $174,709
at December 31, 1998
and September 30,
1999, respectively.
475,000 shares
authorized, 233,594
and 396,153 shares
issued and
outstanding at
December 31, 1997 and
1998, respectively,
396,330 shares issued
and outstanding at
September 30, 1999... 76,146 147,157 147,216 $
Class A common stock,
no par value,
4,750,000 shares
authorized, 2,087,120
and 3,481,329 shares
issued and
outstanding at
December 31, 1997 and
1998, respectively,
3,506,192 shares
issued and
outstanding at
September 30, 1999... 13,072 15,637 15,683
Common stock, $0.01
par value,
shares authorized,
shares issued
and outstanding after
giving effect to the
reclassification on
an as adjusted
basis................ -- -- --
Additional paid in
capital.............. -- -- --
Less: Stockholder
receivables.......... (634) (648) (656)
Accumulated deficit... (279,809) (331,921) (344,078)
--------- --------- --------- ----
Total stockholders'
deficit............ (191,225) (169,775) (181,835) $
--------- --------- --------- ====
$ 108,862 $ 365,006 $ 371,465
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
DDi CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
--------------------------- ------------------
1996 1997 1998 1998 1999
------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net sales..................... $67,515 $ 78,756 $174,853 $115,727 $213,838
Cost of goods sold............ 30,505 38,675 119,559 74,079 149,849
------- -------- -------- -------- --------
Gross profit................ 37,010 40,081 55,294 41,648 63,989
Operating expenses:
Sales and marketing......... 5,989 7,278 12,801 8,361 16,648
General and administration.. 1,929 2,057 8,442 4,638 11,171
Amortization of
intangibles................ -- -- 10,899 4,282 17,763
Stock compensation and
related bonuses............ -- 31,271 -- -- --
Compensation to former CEO.. 1,055 2,149 -- -- --
Write-off of acquired in-
process research and
development................ -- -- 39,000 -- --
------- -------- -------- -------- --------
Operating income (loss)..... 28,037 (2,674) (15,848) 24,367 18,407
Interest expense (net),
including interest paid to
former stockholder of $774,
$756 and $781 in 1996, 1997
and 1998 years,
respectively................. 9,416 25,196 37,416 25,051 35,021
------- -------- -------- -------- --------
Income (loss) before income
taxes and extraordinary
loss....................... 18,621 (27,870) (53,264) (684) (16,614)
Income tax benefit (expense).. (6,265) 10,858 3,566 280 4,457
------- -------- -------- -------- --------
Income (loss) before
extraordinary loss........... 12,356 (17,012) (49,698) (404) (12,157)
Extraordinary loss--early
extinguishment of debt, net
of income tax benefit of
$1,104 and $1,480 in 1997 and
1998, respectively........... -- (1,588) (2,414) (2,297) --
------- -------- -------- -------- --------
Net income (loss)............. $12,356 $(18,600) $(52,112) $ (2,701) $(12,157)
======= ======== ======== ======== ========
Pro forma income tax expense
adjustment................... $(1,295)
=======
Pro forma net income.......... $11,061
=======
Pro forma net loss per share (unaudited)......................... $
--------
Pro forma weighted average shares outstanding (unaudited)........
--------
Supplemental pro forma net income (loss) per share (unaudited)... $
--------
Supplemental pro forma weighted average shares outstanding
(unaudited).....................................................
--------
</TABLE>
- --------
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
DDi CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Convertible Old Common Class L Class A
Preferred Stock Stock Common Stock Common Stock Additional
---------------- --------------- ---------------- ----------------- Paid-In Stockholder
Shares Amount Shares Amount Shares Amount Shares Amount Capital Receivables
------ -------- ------ ------- ------- -------- --------- ------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December
31, 1995 -- $ -- 15,300 $ 15 -- -- -- $ -- $ -- $ --
Retirement of
common stock.... -- -- (8,162) (8) -- -- -- -- -- --
Transfer of
common stock
subject to put
option.......... -- -- (6,959) (7) -- -- -- -- -- --
Issuance of
common stock.... -- -- 2,509 5,148 -- -- -- -- -- --
Issuance of
preferred
stock........... 6,671 13,685 -- -- -- -- -- -- -- --
Transfer of
preferred stock
to common
stock........... (70) (153) 70 153 -- -- -- -- -- --
Issuance of
redeemable
common stock
warrants........ -- -- -- -- -- -- -- -- -- --
Net income...... -- -- -- -- -- -- -- -- -- --
Accretion of
temporary
stockholders'
equity to
estimated fair
value........... -- -- -- -- -- -- -- -- -- --
Dividends
declared........ -- -- -- -- -- -- -- -- -- --
------ -------- ------ ------- ------- -------- --------- ------- ------- -----
Balance, December
31, 1996......... 6,601 13,532 2,758 5,301 -- -- -- -- -- --
------ -------- ------ ------- ------- -------- --------- ------- ------- -----
Accretion of
temporary equity
to fair value... -- -- -- -- -- -- -- -- -- --
Compensation
expense on
vesting of
options......... -- -- -- -- -- -- -- -- 21,220 --
Equity
exchanges,
cancellations
and
distributions to
stockholders
(net of fees of
$3,499)......... (6,601) (13,532) (2,758) (5,301) -- -- -- -- (21,220) --
Recapitalization
(net of fees of
$1,130)......... -- -- -- -- 208,381 66,966 1,883,120 12,052 -- (634)
Issuance of
common stock in
NTI
acquisition..... -- -- -- -- 25,213 9,180 204,000 1,020 -- --
Net loss........ -- -- -- -- -- -- -- -- -- --
------ -------- ------ ------- ------- -------- --------- ------- ------- -----
Balance, December
31, 1997......... -- -- -- -- 233,594 76,146 2,087,120 13,072 -- (634)
Issuance of common stock in
DCI merger...... -- -- -- -- 162,065 70,831 1,269,600 2,415 -- --
Issuance of
common stock
upon exercise of
stock options... -- -- -- -- -- -- 116,953 114 -- --
Issuance of
common stock.... -- -- -- -- 494 180 7,656 36 -- --
Accrued interest
on stockholder
receivables..... -- -- -- -- -- -- -- -- -- (41)
Repayment of
stockholder
receivables .... -- -- -- -- -- -- -- -- -- 27
Net loss ....... -- -- -- -- -- -- -- -- -- --
------ -------- ------ ------- ------- -------- --------- ------- ------- -----
Balance, December
31, 1998......... -- -- -- -- 396,153 147,157 3,481,329 15,637 -- (648)
Issuance of
common stock
upon exercise of
stock options
(unaudited)..... -- -- -- -- -- -- 23,464 39 -- --
Issuance of
common stock
(unaudited)..... -- -- -- -- 177 59 1,399 7 -- --
Accrued interest
on stockholder
receivables
(unaudited)..... -- -- -- -- -- -- -- -- -- (24)
Repayment of
stockholder
receivables
(unaudited)..... -- -- -- -- -- -- -- -- -- 16
Net loss
(unaudited)..... -- -- -- -- -- -- -- -- -- --
------ -------- ------ ------- ------- -------- --------- ------- ------- -----
Balance,
September 30,
1999 (unaudited).. -- $ -- -- $ -- 396,330 $147,216 3,506,192 $15,683 $ -- $(656)
====== ======== ====== ======= ======= ======== ========= ======= ======= =====
<CAPTION>
Temporary Stockholders'
Equity
Retained ------------------------------
Earnings Redeemable Common
(Accumulated Common Stock
Deficit) Total Stock Warrants Total
------------ ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance, December
31, 1995 $ 2,485 $ 2,500 $ -- $ -- $ --
Retirement of
common stock.... (104,992) (105,000) -- -- --
Transfer of
common stock
subject to put
option.......... (14,967) (14,974) 14,974 -- 14,974
Issuance of
common stock.... -- 5,148 -- -- --
Issuance of
preferred
stock........... -- 13,685 -- -- --
Transfer of
preferred stock
to common
stock........... -- -- -- -- --
Issuance of
redeemable
common stock
warrants........ -- -- -- 1,300 1,300
Net income...... 12,356 12,356 -- -- --
Accretion of
temporary
stockholders'
equity to
estimated fair
value........... (25,832) (25,832) 23,932 1,900 25,832
Dividends
declared........ (2,662) (2,662) -- -- --
------------ ---------- ---------- --------- ---------
Balance, December
31, 1996......... (133,612) (114,779) 38,906 3,200 42,106
------------ ---------- ---------- --------- ---------
Accretion of
temporary equity
to fair value... (41,244) (41,244) 38,094 3,150 41,244
Compensation
expense on
vesting of
options......... -- 21,220 -- -- --
Equity
exchanges,
cancellations
and
distributions to
stockholders
(net of fees of
$3,499)......... (86,353) (126,406) (77,000) (6,350) (83,350)
Recapitalization
(net of fees of
$1,130)......... -- 78,384 -- -- --
Issuance of
common stock in
NTI
acquisition..... -- 10,200 -- -- --
Net loss........ (18,600) (18,600) -- -- --
------------ ---------- ---------- --------- ---------
Balance, December
31, 1997......... (279,809) (191,225) -- -- --
Issuance of common stock in
DCI merger...... -- 73,246 -- -- --
Issuance of
common stock
upon exercise of
stock options... -- 114 -- -- --
Issuance of
common stock.... -- 216 -- -- --
Accrued interest
on stockholder
receivables..... -- (41) -- -- --
Repayment of
stockholder
receivables .... -- 27 -- -- --
Net loss ....... (52,112) (52,112) -- -- --
------------ ---------- ---------- --------- ---------
Balance, December
31, 1998......... (331,921) (169,775) -- -- --
Issuance of
common stock
upon exercise of
stock options
(unaudited)..... -- 39 -- -- --
Issuance of
common stock
(unaudited)..... -- 66 -- -- --
Accrued interest
on stockholder
receivables
(unaudited)..... -- (24) -- -- --
Repayment of
stockholder
receivables
(unaudited)..... -- 16 -- -- --
Net loss
(unaudited)..... (12,157) (12,157) -- -- --
------------ ---------- ---------- --------- ---------
Balance,
September 30,
1999 (unaudited).. $(344,078) $(181,835) $ -- $ -- $ --
============ ========== ========== ========= =========
</TABLE>
F-6
<PAGE>
DDi CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
------------------------------- -------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)....... $ 12,356 $ (18,600) $ (52,112) $ (2,701) $(12,157)
Adjustments to
reconcile net income
(loss) to net cash
provided by operating
activities:
Write-off of acquired
in-process research
and development...... -- -- 39,000 -- --
Depreciation.......... 2,047 2,568 9,212 5,624 10,687
Amortization of debt
issuance costs and
discount............. 845 13,972 15,678 11,339 12,010
Amortization of
goodwill and
intangible assets.... -- -- 10,899 4,282 17,763
Amortization of
deferred swap
income............... -- -- -- -- (361)
Deferred income
taxes................ (690) (3,834) (4,478) (2,866) (4,581)
Interest income on
stockholder
receivables.......... -- -- (41) (33) (24)
Stock compensation
expense.............. -- 21,271 -- -- --
Change in operating
assets and
liabilities, net of
acquisitions:
(Increase) decrease in
accounts receivable.. (2,589) (2,249) 196 (11,179) (15,785)
(Increase) decrease in
inventories.......... (363) (397) 5 (3,114) (9,853)
(Increase) decrease in
prepaid expenses and
other................ (880) (905) 2,422 (2,389) (1,650)
Increase (decrease) in
current income
taxes................ -- (8,757) 4,744 -- --
Increase (decrease) in
accounts payable..... 280 1,106 (3,943) 689 8,127
Increase (decrease) in
accrued expenses..... 1,152 4,924 (4,887) 6,400 11,016
--------- --------- --------- --------- --------
Net cash provided by
operating
activities......... 12,158 9,099 16,695 6,052 15,192
--------- --------- --------- --------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of
equipment.............. (3,576) (6,000) (15,925) (10,277) (14,159)
Acquisition of NTI,
less cash acquired..... -- (38,948) -- -- --
NTI acquisition-related
expenditures........... -- -- (218) -- --
Merger with DCI, less
cash acquired.......... -- -- (178,670) (174,276) --
DCI merger-related
expenditures........... -- -- -- -- (323)
--------- --------- --------- --------- --------
Net cash used in
investing
activities......... (3,576) (44,948) (194,813) (184,553) (14,482)
--------- --------- --------- --------- --------
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...... 95,000 276,455 288,425 288,425 --
Payments on long-term
debt................... (7,982) (99,300) (106,089) (106,089) (2,175)
Net borrowings
(repayments) on the
revolving credit
facility............... -- -- 7,000 6,000 (3,500)
Payments of debt
issuance and capital
costs.................. (3,920) (19,469) (8,324) (8,252) --
Payments of deferred
note payable........... -- -- (1,611) -- (1,896)
Principal payments on
capital lease
obligations............ (365) (459) (809) (662) (752)
Cash dividends paid..... (6,618) (128) -- -- --
Proceeds from issuance
of Old Common Stock
and convertible
preferred stock........ 20,000 -- -- -- --
Redemption of Old
Common Stock........... (105,000) (188,143) -- -- --
Issuance of common
stock.................. -- 72,101 217 -- --
Payments of escrow
payable to redeemed
stockholders........... -- -- (4,100) (4,100) --
Repayment of
stockholder
receivables............ -- -- 27 -- 16
Proceeds from interest
rate swaps............. -- -- -- -- 6,062
Proceeds from exercise
of stock options....... -- -- 114 45 39
--------- --------- --------- --------- --------
Net cash provided by
(used in) financing
activities......... (8,885) 41,057 174,850 175,367 (2,206)
--------- --------- --------- --------- --------
Net increase (decrease)
in cash................. (303) 5,208 (3,268) (3,134) (1,496)
Cash and cash
equivalents, beginning
of period............... 472 169 5,377 5,377 2,109
--------- --------- --------- --------- --------
Cash and cash
equivalents, end of
period.................. $ 169 $ 5,377 $ 2,109 $ 2,243 $ 613
========= ========= ========= ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
Basis of Presentation
The consolidated financial statements include the accounts of DDi Corp.
(formerly known as Details Holdings Corp.) ("Holdings" or "Parent") and
subsidiaries. As used herein, the "Company" means Holdings and its subsidiaries
and "Pre-Recapitalization Company" means Holdings for the period prior to the
Recapitalization (as defined below).
In connection with the Recapitalization, Holdings changed its name to
Details Holdings Corp., incorporated Details, Inc. (now Dynamic Details,
Incorporated ("Details" or "DDi")) as a wholly-owned subsidiary and contributed
substantially all of its assets, subject to certain liabilities, to Details. In
November 1997, Holdings organized Details Capital Corp. (now DDi Capital Corp.)
("DDi Capital") as a wholly-owned subsidiary and, in February 1998, contributed
substantially all its assets (including the shares of common stock of Details),
subject to certain liabilities, including discount notes (as described in Note
6, the "Capital Senior Discount Notes"), to Details Capital. In July 1998,
Holdings organized Details Intermediate Holdings Corp. (now DDi Intermediate
Holdings Corp.) ("Intermediate") as a wholly-owned subsidiary and contributed
all of the shares of common stock of Details Capital to Intermediate. Other
than the Intermediate Senior Discount Notes (as described in Note 6) and the
Capital Senior Discount Notes, related debt issue costs and deferred tax
balances, all significant assets and liabilities of Holdings are those of DDi.
DDi, in conjunction with Dynamic Details Design, LLC, a wholly-owned subsidiary
of Intermediate formed in 1998, represent the operating divisions of Holdings.
The consolidated financial statements include the accounts of Holdings'
wholly-owned subsidiaries Colorado Springs Circuits Inc. ("NTI") (d/b/a Dynamic
Details, Inc.-Colorado Springs) commencing on December 22, 1997 (date of
acquisition) and Dynamic Circuits, Inc. ("DCI") (d/b/a Dynamic Details, Inc.-
Silicon Valley) commencing on July 23, 1998 (date of merger). All intercompany
transactions have been eliminated in consolidation.
The financial information presented as of and for the periods ending
September 30, 1999 and 1998 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.
Initial Recapitalization--On January 31, 1996, the Company was initially
recapitalized (the "Initial Recapitalization") through the redemption of 53% of
its common stock for $105 million. The Company funded the redemption through
the issuance of $95 million in debt and $20 million in equity securities. Chase
Manhattan Capital, L.P. and its affiliates ("CMC") was a significant
shareholder immediately after the Initial Recapitalization.
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) 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
F-8
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
approximately 7.7% of the fully-diluted equity of Holdings, and certain other
stockholders of Holdings retained approximately 2.8% of the fully-diluted
equity of Holdings (in each case after giving effect to the Recapitalization
and related transactions); (v) management retained approximately 17.1%
(including certain options to acquire shares of common stock of Holdings) of
the fully-diluted equity of Holdings and acquired additional shares and options
to acquire additional shares representing 10.4% of the fully-diluted equity of
Holdings (in each case after giving effect to the Recapitalization and related
transactions); (vi) the Company obtained $140 million of bridge loans; and
(vii) the Company obtained borrowings under DDi's senior term facility (as
described in Note 6, the "Senior Term Facility") of $91.4 million. The existing
shareholders prior to the Recapitalization retained in excess of 20% of the
fully diluted common stock of Holdings after the Recapitalization and,
accordingly, push-down accounting was not reflected in the accompanying
consolidated financial statements as permitted by Staff Accounting Bulletin No.
54 of the Securities and Exchange Commission. The merger of DIA referred to
above was reflected in the accompanying consolidated financial statements as a
Recapitalization and, accordingly, the historical bases of the Company's assets
and liabilities were not affected.
Nature of Business
The Company is a leading provider of time-critical, technologically advanced
design, development and manufacturing services to original equipment
manufacturers and electronics manufacturing service providers, primarily
involving complex printed circuit boards. The Company serves over 1,400
customers, primarily in the United States, in the telecommunications, computer
and networking industries.
2. SIGNIFICANT ACCOUNTING POLICIES
Cash and cash equivalents--Management defines cash and cash equivalents as
highly liquid deposits with a remaining maturity of 90 days or less. The
Company maintains cash and cash equivalents balances at certain financial
institutions in excess of amounts insured by federal agencies. Management does
not believe that as a result of this concentration it is subject to any unusual
financial risk beyond the normal risk associated with commercial banking
relationships.
Inventories--Inventories include freight-in, materials, labor and
manufacturing overhead costs and are stated at the lower of cost or market.
Cost is determined using the first-in, first-out (FIFO) method.
Property, plant and equipment--Property, plant and equipment are stated at
cost or in the case of property, plant and equipment acquired through business
combinations, at fair value based upon allocated purchase price at the
acquisition date. Depreciation is provided over the estimated useful lives of
the assets, generally not exceeding 10 years, 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.
Debt issue costs and debt discounts--The Company deferred certain debt issue
costs relating to the establishment of its various debt facilities and the
issuance of its debt instruments (see Note 6). These costs are capitalized and
amortized over the expected term of the related indebtedness using the
effective interest method.
The Company issued both the Capital Senior Discount Notes and the
Intermediate Senior Discount Notes (both as defined in Note 6) at a discount.
Discounts are reflected in the accompanying balance sheets as a reduction of
face value and are amortized over the expected term of the related indebtedness
using the effective interest method. Amortization included as interest expense
amounted to approximately $0.9 million and $9.9 million for the years ended
December 31, 1997 and 1998, respectively.
F-9
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
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, 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, the accumulated amortization
related to goodwill and identifiable intangibles was approximately
$10.9 million.
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. 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
and 1996, 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%. For 1996, the same
customers accounted for 16% and 9%, respectively, of the Company's total sales.
Accounts receivable from these two customers (on a combined basis) accounted
for approximately 35% of the Company's total accounts receivable at December
31, 1997.
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 accounts for income taxes utilizing the asset and
liability method (see Note 12). The asset and liability method requires the
Company to record in its balance sheet deferred tax assets and liabilities for
expected future tax consequences of events that have been recognized in
different periods for financial statements versus tax returns. 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.
Long-lived assets--The Company follows Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of." SFAS No. 121 requires that long-
lived assets, including goodwill, be reviewed for impairment whenever events or
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company
F-10
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
evaluates potential impairment by comparing the carrying amount of the assets
with the estimated undiscounted cash flows associated with them. If an
impairment exists, the Company measures the impairment utilizing discounted
cash flows.
Derivative financial instruments--The Company has only limited involvement
with derivative financial instruments. As of December 31, 1998, the Company had
entered into interest rate exchange agreements ("Swap Agreements") to reduce
the risk of fluctuations in interest rates applicable to its New 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.
Unaudited as adjusted equity--The as adjusted equity at September 30, 1999
adjusts the historical equity at September 30, 1999 to give effect to the
anticipated Reclassification (defined below) based on an initial public
offering price of $ per share to be effective prior to the closing of the
anticipated initial public offering and an assumed closing date of , 2000.
Unaudited pro forma income (loss) per share--Given the changes in the
Company's capital structure to be effected in conjunction with the anticipated
initial public offering, historical income (loss) per common share amounts are
not presented in the consolidated financial statements as they are not
considered to be meaningful.
The calculation of pro forma basic and diluted loss per share was determined
by dividing net loss by the pro forma weighted average common and common
equivalent shares outstanding after giving retroactive effect to the conversion
of Class L common stock into shares of new common stock and the conversion
of Class A common stock into shares of new common stock upon the anticipated
effectiveness of the stock split and Registration Statement on Form S-1
(collectively, the "Reclassification").
Some of the proceeds of the Company's anticipated public offering will be
used to retire indebtedness existing under its Intermediate Senior Discount
Notes, Capital Senior Discount Notes, and New Senior Term Facility (see Note
6). Accordingly, supplemental pro forma income (loss) per share is $ per
share for
F-11
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
, and is $ per share for . The number of shares of common stock whose
proceeds are to be used to retire debt is and , respectively. This
calculation assumes the debt retirement had taken place on . The amount of
interest expense eliminated, net of income tax effects, is $ for and $
for .
Reclassifications--Certain prior year amounts have been reclassified to
conform with the 1998 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. Through September 30, 1999,
the Company has no elements which give rise to reporting comprehensive income.
In June 1997, the FASB also issued SFAS No. 131 "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 modifies the disclosure
requirements for reportable operating segments. This statement became effective
for the Company's fiscal year ending December 31, 1998. This pronouncement
has had no significant impact on the reporting practices of the Company since
its adoption; and until such time as the Company diversifies its operations,
management believes such pronouncement will not be applicable.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. SFAS No. 137, issued by the FASB in July 1999,
establishes a new effective date for SFAS No. 133. This statement, as amended
by SFAS No. 137, is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000 and is therefore effective for the Company beginning with
its fiscal quarter ending March 31, 2001. Based upon the nature of the
financial instruments and hedging activities in effect as of the date of this
filing, this pronouncement would require the Company to reflect the fair value
of its derivative instruments (see Note 8) on the consolidated balance sheet.
Changes in fair value of these instruments will be reflected as a component of
comprehensive income. The Company will adopt SFAS No. 133 effective January 1,
2001.
3. ACCOUNTS RECEIVABLE
Accounts receivable, net consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------
September 30,
1997 1998 1999
------- ------- -------------
(unaudited)
<S> <C> <C> <C>
Accounts receivable....................... $16,042 $36,192 $52,495
Less: Allowance for doubtful accounts..... (399) (1,428) (1,639)
------- ------- -------
$15,643 $34,764 $50,856
======= ======= =======
</TABLE>
F-12
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------- September 30,
1997 1998 1999
------ ------- -------------
(unaudited)
<S> <C> <C> <C>
Raw materials................................. $1,440 $ 6,628 $11,693
Work-in-process............................... 2,674 4,406 8,266
Finished goods................................ 216 1,581 2,189
------ ------- -------
$4,330 $12,615 $22,148
====== ======= =======
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net consists of the following:
<TABLE>
<CAPTION>
December 31,
------------------
1997 1998
-------- --------
<S> <C> <C>
Building and leasehold improvements.................... $ 7,611 $ 15,712
Machinery and equipment................................ 24,859 61,441
Office furniture and equipment......................... 3,795 8,352
Vehicles............................................... 156 240
Land................................................... -- 3,778
Deposits on equipment.................................. -- 2,712
-------- --------
36,421 92,235
Less: accumulated depreciation......................... (10,289) (31,217)
-------- --------
$ 26,132 $ 61,018
======== ========
</TABLE>
Buildings and leasehold improvements include capital leases of approximately
$5.1 million with related accumulated depreciation of approximately $1.0
million and $1.5 million at December 31, 1997 and 1998, respectively. Machinery
and equipment includes capital leases of approximately $2.1 million and $4.2
million with related accumulated depreciation of approximately $0.4 million and
$1.1 million at December 31, 1997 and 1998, respectively.
F-13
<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,
------------------ September 30,
1997 1998 1999
-------- -------- -------------
(unaudited)
<S> <C> <C> <C>
Senior Term Facility...................... $ 81,089 $ -- $ --
Senior Acquisition Facility............... 25,000 -- --
New Senior Term Facility.................. -- 255,000 252,825
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 $49,032 and $41,195 at
December 31, 1997 and 1998, respectively
and $34,619 at September 30, 1999........ 60,968 68,805 75,381
13.5% Intermediate Senior Discount Notes,
face amount $66,810 net of unamortized
discount of $31,267 at December 31, 1998
and $27,399 at September 30, 1999........ -- 35,543 39,411
Capital lease obligations................. 6,438 7,540 6,788
Other..................................... 23 -- --
-------- -------- --------
273,518 466,888 474,405
Less: current maturities.................. (2,450) (4,390) (6,487)
-------- -------- --------
$271,068 $462,498 $467,918
======== ======== ========
</TABLE>
Senior Term Facility
Under the Senior Term Facility, $91.4 million was advanced to the Company in
connection with the Recapitalization on October 28, 1997. In November 1997,
$10.3 million was repaid with a portion of the proceeds from the Senior
Subordinated Notes. In July 1998, this facility was retired in connection with
the merger with DCI (see Note 14).
Senior Acquisition Facility
Under the Senior Acquisition Facility, $25.0 million was advanced to the
Company in connection with the NTI acquisition (see Note 14) on December 22,
1997. In July 1998, this facility was retired in connection with the merger
with DCI (see Note 14).
New Senior Credit Facility
In connection with the merger with DCI (see Note 14), DDi entered into an
agreement with a co-syndication of banks, including Chase Manhattan Bank, N.A.
and Bankers Trust Company. Borrowings under this agreement consist of the New
Senior Term Facility and the Revolving Credit Facility (collectively, the "New
Senior Credit Facility"). Under the terms of this agreement, DDi must comply
with certain restrictive covenants, which include the requirement that DDi meet
certain financial tests. In addition, DDi is restricted from making certain
payments, including dividend payments to its stockholders. The New Senior
Credit Facility is jointly and severally guaranteed by Intermediate and DDi
Capital, and is collateralized by a pledge of substantially all of the capital
stock of DDi and certain of its subsidiaries. The New Senior Credit Facility
expires in April 2005.
F-14
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
New Senior Term Facility
Under the New Senior Term Facility, $255 million ($105 million under Tranche
A and $150 million under Tranche B) was advanced to DDi in connection with the
merger with DCI (see Note 14) on July 23, 1998. Scheduled principal and
interest payments are due quarterly beginning June 30, 1999 (other than with
respect to the last installment, which is due on July 22, 2004 and April 22,
2005 for Tranche A and Tranche B, respectively). Borrowings under the New
Senior Term Facility bear interest at a floating rate at DDi's option at a rate
equal to either (1) 2.25%, for Tranche A, and 2.50%, for Tranche B, per annum
plus the applicable LIBOR rate or (2) 1.25%, for Tranche A, and 1.50%, for
Tranche B, per annum plus the higher of (a) the applicable prime lending rate
of The Chase Manhattan Bank (8.5% at December 31, 1998) or (b) the federal
reserve reported overnight funds rate plus 1/2 of 1% per annum (the "Index
Rate"). The applicable margin of 2.25% for Tranche A is subject to reduction in
accordance with an agreed upon pricing grid based on decreases in the Company's
consolidated leverage ratio, defined as consolidated total debt to consolidated
EBITDA (earnings before net interest expense, income taxes, depreciation,
amortization and extraordinary or non-recurring expenses). As of December 31,
1998, the Company elected the LIBOR rate (5.6% at December 31, 1998), reset
monthly.
Revolving Credit Facility
DDi also has a $45.0 million Revolving Credit Facility which expires on July
22, 2004. Advances under the Revolving Credit Facility bear interest at DDi's
option at a rate equal to either (1) 2.25% per annum plus the applicable LIBOR
rate or (2) 1.25% per annum plus the Index Rate. In addition, DDi is required
to pay a fee of 1/2 of 1% per annum on the average unused commitment under the
Revolving Credit Facility. At December 31, 1998, DDi had borrowings outstanding
of $7.0 million on this Revolving Credit Facility. 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, 1998, the
Company elected the LIBOR rate (5.6% at December 31, 1998), reset monthly.
Senior Subordinated Notes
Subsequent to the Recapitalization, on November 18, 1997, DDi issued $100
million of Senior Subordinated Notes. The Senior Subordinated Notes bear
interest at 10% per annum, payable semi-annually in arrears on each May 15 and
November 15 of each year, through the maturity date on November 15, 2005.
Except as described below, DDi may not redeem the Senior Subordinated Notes
prior to November 15, 2001. Prior to November 15, 2000, however, up to 40% of
the Senior Subordinated Notes, at a redemption price of 110% of the principal
amount thereof, plus accrued and unpaid interest, may be redeemed at DDi's
option with the net proceeds of the sale in public offerings of common stock of
Holdings (provided that at least 60% of the original principal amount of the
Subordinated Notes remains outstanding immediately after such redemption). On
or after November 15, 2001, the Senior Subordinated Notes may be redeemed at
the option of DDi, in whole or in part from time to time, at redemption prices
ranging from 105% of principal amount in the year ended November 15, 2001 to
100% of principal amount subsequent to November 15, 2004, plus accrued and
unpaid interest.
The Senior Subordinated Notes are guaranteed, on a senior subordinated
basis, jointly and severally, by DDi Capital and its wholly-owned subsidiaries
(the "Guarantors"). The Senior Subordinated Note indenture also contains
covenants that restrict the Guarantors from incurring additional indebtedness
and from making certain payments, including dividend payments to its
stockholders.
F-15
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
Capital Senior Discount Notes
In 1997, subsequent to the Recapitalization, Holdings issued $110 million
face amount at maturity (net proceeds of $60.1 million) of Senior Discount
Notes ("Capital Senior Discount Notes"), and DDi Capital later succeeded to
Holdings obligations under the Capital Senior Discount Notes. The Capital
Senior Discount Notes are unsecured, senior obligations and will be effectively
subordinated to all future indebtedness and liabilities of DDi Capital's
subsidiaries. The Capital Senior Discount Notes begin bearing cash interest of
12.5% at November 15, 2002, payable each May 15 and November 15 in arrears,
through the maturity date of November 15, 2007.
Except as described below, DDi Capital may not redeem the Capital Senior
Discount Notes prior to November 15, 2002. Prior to November 15, 2000, however,
up to 40% of the Capital Senior Discount Notes, at a redemption price of 112.5%
of the accreted principal amount thereof, plus accrued and unpaid interest, may
be redeemed at DDi Capital's option with the net proceeds of the sale in public
offerings of common stock of Holdings (provided that at least 60% of the
original principal amount of the Capital Senior Discount Notes remains
outstanding immediately after such redemption). On or after November 15, 2002,
the Capital Senior Discount Notes may be redeemed at the option of DDi Capital,
in whole or in part from time to time, at redemption prices ranging from
106.25% of accreted principal amount in the year ended November 15, 2002 to
100% of accreted principal amount subsequent to November 15, 2005, plus accrued
and unpaid interest.
The Capital Senior Discount Note indenture also contains covenants that
restrict the Company from incurring additional indebtedness and from making
certain payments, including dividend payments to its stockholders.
Intermediate Senior Discount Notes
In July 1998, Intermediate issued senior discount notes ("Intermediate
Senior Discount Notes") in conjunction with the merger with DCI (see Note 14),
the proceeds of which amounted to approximately $33 million. The Intermediate
Senior Discount Notes are unsecured, senior obligations and will be effectively
subordinated to all future indebtedness and liabilities of Intermediate's
subsidiaries. These notes accrete in value at a rate of 13.5%, compounded
semi-annually and have a stated maturity of June 30, 2008. These notes have a
stated principal at maturity of approximately $67 million, although
approximately 43% of the stated principal amount of the debt is due December
2003. Cash interest begins accruing as of June 30, 2003 and will be payable
each June 30 and December 31, in arrears, commencing December 31, 2003 through
the maturity date. This debt is redeemable at Intermediate's option, in whole
or in part, at any time, at redemption prices which decrease throughout the
life of the debt. Prior to June 30, 2003, the redemption price is an amount
sufficient to generate, to the holders of this debt, an internal rate of return
per annum on the initial offering price ranging from 18% to 20%. Subsequent to
June 30, 2003, the redemption prices range from 106.75% of accreted principal,
decreasing 2.25% per annum to 100% of accreted principal subsequent to June 30,
2006, plus accrued but unpaid interest.
The Intermediate Senior Discount Note indenture also contains covenants
limiting, among other things, dividends, asset sales, and transactions with
affiliates. These restrictions apply both to Intermediate and its subsidiaries.
Debt Issue Costs
In connection with establishing its various debt facilities and the issuance
of its debt instruments, the Company incurred approximately $17.1 million in
fees which have been capitalized as debt issue costs. Accumulated amortization
as of December 31, 1998 and 1997 was approximately $1.2 million and $0.2
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 taxes of $1.1
million. During 1998, the Senior Term Facility and the Senior Acquisition
Facility were retired and the net
F-16
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
carrying amount of the related debt issue costs were written off, resulting in
an extraordinary loss of $2.4 million, net of related income taxes of $1.5
million.
Change of Control
Upon a change in control, as defined in the Senior Subordinated Note and the
Capital Senior Discount Note indentures, DDi or DDi Capital may redeem the
Senior Subordinated Notes or the Capital Senior Discount Notes, respectively,
in whole, but not in part, before November 15, 2002 at 100% of principal in the
case of the Senior Subordinated Notes, or 100% of the accreted value in the
case of the Capital Senior Discount Notes, plus the applicable premium, as
defined in the Senior Subordinated Note and the Capital Senior Discount Note
indentures, and accrued and unpaid interest as of the date of redemption. In
the event the Company does not elect to redeem the notes prior to such date,
each holder of the Subordinated Notes and Capital Senior Discount Notes may
require DDi or DDi Capital, respectively, to repurchase all or a portion of
such holder's notes at a cash purchase price equal to 101% of the principal
amount or the accreted value, plus accrued and unpaid interest if any, to the
date of repurchase. The Intermediate Senior Discount Note indenture provides
that in the event of such a change in control, each holder of the Intermediate
Senior Discount Notes will have the right to have Intermediate redeem all or
any part of the portion of the Intermediate Senior Discount Notes then
outstanding, at a purchase price equal to 101% of the principal amount thereof
plus accrued and unpaid interest (or accreted value), if any to the date of
purchase. The New 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 New Senior Credit Facility.
Exchange Offer
On March 24, 1998, the Company consummated exchange offers of previously
unregistered Capital Senior Discount Notes and Senior Subordinated Notes for
registered notes (with terms identical in all material respects) on Form S-4
under the Securities Act of 1933, as amended.
Related Party Transactions
In connection with the Recapitalization and related transactions subsequent
thereto, CMC, a shareholder, and its affiliates The Chase Manhattan Bank, N.A.
("Chase") and Chase Securities Inc. were paid fees and expenses aggregating
approximately $16 million and CMC and Chase received common stock warrants
valued at approximately $3.4 million (see Note 11).
In conjunction with the merger with DCI, Chase acted as collateral, co-
syndication, and administrative agent with regard to the establishment of the
New 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).
F-17
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
Future Payments
As of December 31, 1998, the scheduled future annual principal payments of
long-term debt are as follows:
<TABLE>
<S> <C>
Year Ending December 31,
1999............................................................ $ 3,263
2000............................................................ 5,925
2001............................................................ 19,838
2002............................................................ 25,875
2003............................................................ 60,713
Thereafter...................................................... 416,196
--------
$531,810
========
</TABLE>
7. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------
September 30,
1997 1998 1999
------ ------- -------------
(unaudited)
<S> <C> <C> <C>
Accrued salaries and related benefits........ $1,671 $ 2,929 $ 6,233
Accrued interest payable..................... 1,760 1,438 3,803
Accrued expenses............................. 6,399 8,884 10,336
Escrow payable to redeemed stockholders...... -- 3,900 3,900
------ ------- -------
$9,830 $17,151 $24,272
====== ======= =======
</TABLE>
8. DERIVATIVES
Pursuant to its interest rate risk management strategy and to certain
requirements imposed by the Company's New 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 New Senior Term Facility, minimizing exposure to increases in
interest rates related to this debt over its scheduled term. Under the Swap
Agreements, the Company received a variable rate of interest (1-month LIBOR)
and paid a fixed rate of interest (blended annual rate of 5.27%). These rates
were applied to a notional amount ($255 million from October 1 through December
31, 1998) which decreases at such times, and in such amounts, as to conform
with the principle outstanding under the New 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.
F-18
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
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 New 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
New 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 New
Senior Term Facility during that period.
As a result of the termination and replacement of the Swap Agreements, the
maximum rate of interest to be paid has increased through January 31, 2002. The
New Swap Agreements, however, provide the Company with greater protection
against increases in interest rates from January 31, 2002 through the maturity
of the New Senior Term Facility in 2005, since the New Swap Agreements do not
contain an option, which was available to the counterparties of the Swap
Agreements, to terminate the agreements on January 31, 2002. Counterparty risk
is limited to amounts to be reflected in the Company's consolidated balance
sheet. This risk is minimized and is expected to be immaterial to the Company's
consolidated results of operations as the New Swap Agreements provide for
monthly settlement of the net interest owing. Further, each counterparty to the
New Swap Agreements carries at least a "single-A" credit rating. The impact of
the interest rate exchange agreements on the Company's interest expense was not
material.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments including cash, accounts receivable,
accounts payable, accrued liabilities and variable rate debt approximate book
value as of December 31, 1997 and 1998. The carrying value for the fixed rate
Senior Subordinated Notes and the Capital Senior Discount Notes was established
based on market conditions at the time the debt was issued and through December
31, 1997, such market conditions had not changed significantly. Similarly, 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, 1998, 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 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.
F-19
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1998
----------------- -----------------
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..................... $ 81,089 $ 81,089 $ -- $ --
Senior Acquisition Facility.............. $ 25,000 $ 25,000 $ -- $ --
New Senior Term Facility................. $ -- $ -- $255,000 $255,000
Fixed rate debt:
10% Senior Subordinated Notes............ $100,000 $100,000 $100,000 $ 96,000
Capital Senior Discount Notes............ $ 60,968 $ 60,968 $ 68,805 $ 61,600
Intermediate Senior Discount Notes....... $ -- $ -- $ 35,544 $ 35,544
Swap Agreements.......................... $ -- $ -- $ -- $ (1,081)
</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, 1998. 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.
Future Payments
Aggregate annual maturities of capital lease obligations (for periods
subsequent to December 31, 1998) 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,
1999.............................. $ 1,831 $ 704 $1,127
2000.............................. 1,831 723 1,108
2001.............................. 1,831 582 1,249
2002.............................. 1,520 616 904
2003.............................. 1,298 475 823
Thereafter........................ 2,719 390 2,329
------- ------ ------
$11,030 $3,490 $7,540
======= ====== ======
</TABLE>
The present value of net minimum lease payments as of September 30, 1999 is
$6,788.
11. STOCKHOLDERS' EQUITY
Old Common Stock, Preferred Stock and Additional Paid-in Capital of Pre-
Recapitalization Company
On January 31, 1996, the Company redeemed 8,162 shares of its common stock
("Old Common") from its sole stockholder for $105 million in connection with
its Initial Recapitalization. The Company funded this redemption through the
issuance of $95 million of senior debt, the issuance of 6,671 shares of
convertible
F-20
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
preferred stock and 2,509 shares of Old Common. As part of the senior debt
issuance, $15 million of subordinated debt and warrants to acquire 706.3 shares
of Old Common at a nominal price were issued (the warrants were valued at $1.3
million at the time of issuance and recorded as a discount on the subordinated
debt). The warrants contained a "clawback" provision which required the holders
of the warrants to surrender up to 282 shares of common stock underlying the
warrants upon the attainment of certain earnings targets by the Company in 1996
and 1997. The Company met the earnings target in 1996 and canceled warrants to
purchase 141 shares of Old Common stock. After five years, the warrant holders
had the right to have the Company redeem shares of common stock underlying the
warrants at fair value. In addition, the sole stockholder had the right to put
back to the Company, for cash, his remaining 6,959 shares of Old Common at fair
value upon the earlier of January 2002 or 90 days after the full payment of the
senior debt. Due to the existence of the put option, for both the common shares
and common stock purchase warrants, the estimated fair value of these shares
was accreted to estimated fair value and was classified as temporary
stockholders' equity. On January 31, 1996, the estimated fair value of the Old
Common was approximately $2,179 per share, at December 31, 1996 was
approximately $5,590 per share and at the date of the Recapitalization was
approximately $11,308.
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 Old Common with approximately 9,717 shares
outstanding (includes 6,959 redeemable Old Common shares classified as
temporary stockholders' equity); (ii) 100,000 authorized shares of no par value
convertible preferred stock with approximately 6,601 shares outstanding. The
Old Common, preferred stock and common stock purchase warrants were canceled as
part of the Recapitalization.
Common Stock
The Company has seven authorized classes of no par Class A common stock,
Class A-1 to Class A-7, which aggregate 4,750,000 authorized shares. The
separate classes of Class A common have different rights with respect to
election of directors. All Class A shares are voting, except for Class A-7,
which is nonvoting. The Company also has 475,000 authorized shares of no par
Class L common stock.
The Class L common stock is identical to the Class A common stock, except
that each share of Class L common stock is entitled to a preferential payment
upon any distribution by the Company equal to the original cost of such share
($364.09) plus an amount which accrues from the original issuance date on a
daily basis at 12% per annum, compounded quarterly. After payment of this
preference amount, each share of Class A common stock and Class L common stock
shares equally in all distributions. The Class L common stock is convertible
into Class A common stock upon a majority vote of the holders of the
outstanding Class L common stock at any time.
Stock Options
Prior to the Recapitalization, the Company had two stock option plans, the
1996 Performance Stock Option Plan (the "1996 Stock Option Plan") and the 1996
Employee Stock Option Plan (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. All stock options issued under these plans were
accounted for as variable awards. Accordingly, the difference between the
exercise price and the estimated market price of the stock was recorded as
compensation when the number of shares was known. Although there was no
established market for the Company's stock, management estimated that the
exercise price was at or above the estimated market price for the common stock
of the Company for the options earned in 1996, and no compensation expense was
recorded. Immediately prior to the Recapitalization, the Company accelerated
the vesting of all outstanding options (totaling approximately 1,950 shares) to
purchase shares of its
F-21
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
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 and 1998, 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, 1998, the options outstanding under both of
these plans had remaining weighted-average contractual terms of approximately
eight years.
In 1997, Holdings adopted its 1997 Details, Inc. Equity Incentive Plan (the
"1997 Employee Stock Option Plan"), authorizing the grant of options to certain
management of the Company to purchase 235,000 shares of Class A common stock.
The term of the options under this plan is ten years from the date of grant.
Options granted under this plan vest in equal monthly amounts over four years,
with immediate vesting upon a change in control or sale of all of the assets of
the Company. Of the total authorized shares, 117,500 options have an exercise
price of $5.00 ("$5 Options"), with the remaining 117,500 options having an
exercise price of $61.17 ("$61 Options"). For all options granted under this
plan in 1997, the exercise prices were in excess of estimated fair value. As
of December 31, 1998, 1,355 of the $5 Options and the $61 Options each remained
available for future grant. As of December 31, 1998, the options outstanding
under this plan had a remaining weighted-average contractual term of
approximately nine years and are exercisable.
Stock option activity under the 1997 Employee Stock Option Plan is:
<TABLE>
<CAPTION>
$5 Options $61 Options
----------------- ----------------
Number Number
Exercise of Exercise of
Price Shares Price Shares
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Granted..................................... $5.00 116,145 $61.17 116,145
Exercised................................... $5.00 (116,145) -- --
Forfeited................................... -- -- -- --
-------- -------
Balance at December 31, 1997................ -- -- $61.17 116,145
Granted..................................... -- -- -- --
Exercised................................... -- -- -- --
Forefeited.................................. -- -- -- --
-------- -------
Balance at December 31, 1998................ -- $61.17 116,145
======== =======
</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
income (loss) for the periods presented. Fair value was estimated using the
minimum-value method, a risk-free interest rate of 7.1% and 6.5% for 1996 and
1997, respectively, and an expected life of five years. No dividends were
assumed to be declared. The weighted average fair value per option (computed
using the minimum-value method) of the stock options granted in 1996 and 1997
was nil.
In connection with the DCI merger (see Note 14), the Board of Directors
adopted, and the stockholders of Holdings approved, the Details Holdings Corp.-
Dynamic Circuits 1996 Stock Option Plan ("DCI 1996 Plan") and the Details
Holdings Corp.-Dynamic Circuits 1997 Stock Option Plan ("DCI 1997 Plan"),
together the "DCI Stock Option Plans", which authorized the granting of stock
options and the sale of Class A common stock and Class L common stock in
connection with the merger with DCI. The terms applicable to options
F-22
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
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
acquisition through 2002. 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. During 1998, the
Company recorded no compensation expense relating to the granting of options
under the DCI Stock Option Plans.
In connection with the DCI merger, the Company converted each DCI stock
option award into the right to receive a cash payment and an option to purchase
shares of Class A common stock and shares of Class L common stock. The options
granted bear exercise prices of either $1.58 ("$1.58 Options") or $61.17
("$61 Options") for the purchase of Class A shares, and $364.09 for Class L
Shares ("Class L Options"). The Board is authorized to sell or otherwise issue
Class A common stock and Class L common stock at any time prior to the
termination of the applicable DCI Stock Option Plan in such quantity, at such
price, on such terms and subject to such conditions as established by the Board
up to an aggregate of 222,600 shares of Class A common stock and 28,300 shares
of Class L common stock, in the case of the DCI 1996 Plan, and 46,000 shares of
Class A common stock and 5,850 shares of Class L common stock in the case of
the DCI 1997 Plan (in each case, subject to adjustment upon the occurrence of
certain events to prevent any dilution or expansion of the rights of
participants that might otherwise result from the occurrence of such events).
Under the terms of the DCI Stock Option Plans, however, no options may be
granted after the acquisition date. Accordingly, there are currently no options
to purchase shares of Class A common stock and no options to purchase shares of
Class L common stock available for grant under the DCI Stock Option Plans. The
maximum term of the options under the DCI 1996 Plan is August 2006 and under
the DCI 1997 Plan is March 2008. As of December 31, 1998, all options
outstanding under the DCI Stock Option Plans had weighted average remaining
contractual lives of approximately eight years.
Stock option activity since July 23, 1998 (date of DCI merger) is as
follows:
<TABLE>
<CAPTION>
$1.58 Options $61 Options Class L Options
----------------- ------------------ ------------------
Number
Exercise of Exercise Number of Exercise Number of
Price Shares Price Shares Price Shares
-------- -------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at July 23,
1998................... $1.58 255,778 $61.17 13,948 $364.09 32,479
Granted................. -- -- -- -- -- --
Exercised............... $1.58 (116,953) -- -- -- --
Forfeited............... $1.58 (3,318) $61.17 (190) $364.09 (442)
-------- ------ ------
Balance at December 31,
1998................... $1.58 135,507 $61.17 13,758 $364.09 32,037
======== ====== ======
Options exercisable as
of December 31, 1998... 14,770 7,183 16,726
======== ====== ======
</TABLE>
Pro forma information regarding net income or 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, a risk-free interest
rate of 5.6% and an expected life of 3 months for $1.58 Options or two years
for both $61 Options and Class L Options. No dividends were assumed to be
declared. The weighted-average fair value per option of the stock options
granted under the DCI Stock Option Plans in 1998 was as follows:
<TABLE>
<CAPTION>
Value per
Option category Option
--------------- ---------
<S> <C>
$1.58 Options.................................................. $ 0.18
$61 Options.................................................... Nil
Class L Options................................................ $38.58
</TABLE>
F-23
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
The Company's 1998 pro forma loss before extraordinary items is as follows
(amounts in millions):
<TABLE>
<S> <C>
As reported...................................................... $(49.7)
Pro forma........................................................ $(50.1)
</TABLE>
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 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 1996 Employee Plan at a redemption price of
approximately $11,308 per share, plus future escrow payments estimated at $508
per share or $8.6 million in the aggregate at December 31, 1997, payable by
March 31, 1999; (ii) canceled all remaining options authorized but ungranted
under the 1996 option plans; (iii) converted the remaining approximately 1,938
shares of Old Common into approximately 438,326 shares and approximately 54,175
shares of Class A common and Class L common, respectively, and (iv) converted
the remaining approximately 513 unexercised options to purchase shares of Old
Common into options to purchase approximately 116,158 shares and approximately
14,357 shares of Class A common and Class L common, respectively. The escrow
payment described above represents the distribution by the Company to all
shareholders of record as of the Recapitalization date, of the income tax
benefit received by the Company as a result of the compensation expense
recorded for the accelerated vesting of options to purchase shares of Old
Common.
Common Stock Warrants
As part of the financing associated with the Recapitalization, warrants were
granted to related parties (Note 6) to purchase 70,211 shares of Class A common
stock and 8,678 shares of Class L common stock. Each warrant entitled the
holder thereof to purchase a unit, at $.09 per unit, consisting of 8.09 shares
of Class A common stock and one share of Class L common stock. Such warrants
are exercisable through October 2007. A fair value of $3,420 was ascribed to
the warrants and recorded as a debt discount.
12. INCOME TAX MATTERS AND CHANGE IN TAX STATUS
For the year ended December 31, 1995 and prior years, the Company, with the
consent of its stockholder, elected to be taxed under sections of Federal and
state income tax law, which provide that, in lieu of corporation income taxes,
the stockholder separately accounts for his pro rata share of the Company's
income, deductions, losses and credits. An additional state income tax was
imposed at a 1.5% rate. The Company's stockholder terminated this election
effective on February 1, 1996.
As a result of this termination, the Company recorded a net deferred tax
asset of $297,000 on February 1, 1996 by a credit against income tax expense,
for temporary differences between the financial reporting and the income tax
basis of assets and liabilities.
F-24
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands, Except Share and Per Share Amounts)
The provision (benefit) for income taxes in 1996, 1997 and 1998 consists of
the following:
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Current:
Federal............................. $6,955 $ (5,224) $ --
State............................... -- -- 666
Foreign............................. -- 150 --
------ -------- -------
6,955 (5,074) 666
------ -------- -------
Deferred:
Federal............................. (690) (3,657) (3,288)
State............................... -- (2,127) (944)
Foreign............................. -- -- --
------ -------- -------
(690) (5,784) (4,232)
------ -------- -------
$6,265 $(10,858) $(3,566)
====== ======== =======
</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,
1997 1998
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................. $4,060 $ 5,243
Trade receivables................................ 159 1,930
Deferred compensation............................ 3,007 5,485
AMT credits...................................... 327 327
Accrued liabilities.............................. 268 6,347
Amortization..................................... 357 27
Other............................................ 62 174
------ --------
8,240 19,533
Deferred tax liabilities--
Property, plant and equipment.................... (530) (2,289)
Intangible assets................................ -- (34,341)
------ --------
(530) (36,630)
------ --------
Net deferred tax assets/(liabilities).......... $7,710 $(17,097)
====== ========
</TABLE>
The tax effect related to the extraordinary item (see Note 14) is deferred
U.S. tax and it approximates the U.S. Statutory tax rate.
F-25
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
The income tax provision (benefit) differs from the amount of income tax
determined by applying the U.S. Federal income tax rate to income (loss) before
income taxes due to the following:
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Computed "expected" tax expense
(benefit)............................. $6,517 $ (9,476) $(18,639)
Increase (decrease) in income taxes
resulting from:
State taxes, net of credits.......... 981 (1,591) (181)
Effect of change in tax status....... (297) -- --
Income not subject to Federal
corporate tax....................... (996) -- --
Goodwill amortization................ -- -- 1,320
In-process research and development
write-off........................... -- -- 13,650
Other................................ 60 209 284
------ -------- --------
$6,265 $(10,858) $ (3,566)
====== ======== ========
</TABLE>
The Company has Federal, California and Colorado net operating loss ("NOL")
carryforwards of approximately $10.2 million, $16 million and $5.3 million,
respectively, at December 31, 1998. 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. 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 are entitled to receive future annual base
salaries in the aggregate amount of $1.3 million in 1999. The base salaries on
or after January 1, 2000 will be established by the Company at a level that
equals or exceeds base salaries for 1999. These employees are eligible for
annual bonuses based upon the achievement of EBITDA targets. These employees
also received an aggregate of 10,367 shares of Class A common stock on the
Recapitalization closing date. In connection with this stock bonus, the Company
recorded compensation expense of approximately $52 based upon a fair market
value per share of Class A common stock of $5 per share. In addition, these
employees will be entitled to receive an additional bonus in the aggregate
amounts of $2.4 million in consideration of prior services which will be
payable on the third anniversary of the Recapitalization 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.
F-26
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
In addition, pursuant to an employment agreement dated July 23, 1998, a
certain key employee is entitled to receive a 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. The Management Agreement continues until terminated by mutual
consent of the parties, or until terminated as a result of a breach of the
Management Agreement. The Management Agreement includes customary
indemnification provisions in favor of Bain.
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, 1998
<TABLE>
<S> <C>
Year Ending December 31,
1999............................................................. $2,145
2000............................................................. 2,146
2001............................................................. 1,972
2002............................................................. 1,344
2003............................................................. 914
Thereafter....................................................... 976
------
Future minimum lease payments...................................... $9,497
======
</TABLE>
Rent expense for 1998 was approximately $1.5 million and was not significant
in 1997 and 1996.
Litigation--The Company is a party to various legal actions arising in the
ordinary course of its business. The Company believes that the resolution of
these legal actions will not have a material adverse effect on the Company's
financial position, results of operations or cash flows.
Retirement plans--The Company has adopted a 401(k) plan which became
effective January 1997. All employees of the Company over the age of 21 and
having at least one year of service, are eligible to participate in the plan.
The eligible employees may contribute 1% to 15% of their annual compensation.
In 1997, no employer matching contributions were required to be made by the
Company. In 1998, the Company amended the plan to match employee contributions
at $0.25 per $1.00 contributed, subject to a maximum per employee participant.
For plan year ended December 31, 1998, employer contributions totaled $145.
F-27
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
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, 1997 and 1998 was $25 and
$1.1 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 and options 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 (New
Senior Credit Facility) and by $33 million of newly issued Intermediate Senior
Discount Notes. In connection with the new financing, the Company used $106
million of the proceeds to retire all of its existing senior term debt, which
resulted in an extraordinary loss of $2.4 million, net of related income taxes
of $1.5 million.
The DCI merger consideration was allocated to tangible assets (aggregating
approximately $65 million) acquired and liabilities assumed (aggregating
approximately $30 million), with the remaining merger consideration consisting
primarily of goodwill, identifiable intangible assets, and acquired in-process
research and development ("in-process R&D").
Significant portions of the DCI merger consideration were identified as
intangible assets. Valuation techniques were employed which reflect recent
guidance from the Securities and Exchange Commission on approaches and
procedures to be followed in developing allocations to in-process R&D. At the
date of the merger, technological feasibility of the in-process R&D projects
had not been reached and the technology had no alternative future uses.
Accordingly, the Company expensed the portion of the purchase price allocated
to in-process R&D of $39 million, in accordance with generally accepted
accounting principles, in the year ended December 31, 1998.
The in-process R&D is comprised of a number individual technological
development efforts, focusing on the discovery of new, technologically advanced
knowledge and more complete solutions to customer needs, the conceptual
formulation and design of possible alternatives, as well as the testing of
process and product cost improvements. Specifically, these technologies include
efforts to: increase maximum printed circuit board layer count, reduce line and
space tolerances, develop specialty surface finishes and materials, use new and
innovative applications of micro blind vias, embedded circuitry, and flexible
circuit applications, develop "intelligent" (active) backpanels, and develop
automation to integrate and automate the entire workflow process.
F-28
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
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, the accumulated
amortization related to this goodwill and identifiable intangibles acquired in
the merger with DCI was approximately $9.8 million.
Certain investment funds associated with Bain Capital Funds, the controlling
shareholders, were shareholders of DCI prior to the Company's July 1998 merger
with of DCI. In conjunction with the merger, the Bain Capital Funds received
$22.9 million for the redemption of the DCI common stock they held prior to
consummation of the merger.
In connection with the DCI Merger and related transactions, Celerity
Partners, L.L.C. and its affiliates were paid fees and expenses aggregating
approximately $1.7 million. Celerity Partners, L.L.C. is the general partner of
Celerity Partners I, L.P., which is the managing member of Celerity Details,
L.L.C., Celerity Liquids, L.L.C. and Celerity Circuits, L.L.C., which are each
stockholders of Holdings.
The accompanying unaudited condensed consolidated statements of operations
include: (a) the accounts of NTI which was acquired in December 1997, and the
effects of the Recapitalization for the year ended December 31, 1997 and (b)
the accounts of DCI for the period July 24, 1998 thorugh December 31, 1998. The
following unaudited pro forma information for the years ended December 31, 1998
and 1997 presents net sales and net loss before extraordinary item for each of
these periods as if these transactions were consummated at the beginning of
each period. In addition, the actual results of operations for the year ended
December 31, 1998 include a $39 million write-off of acquired in-process
research and development related to the merger with DCI. This one-time charge
has been excluded from the unaudited pro forma results.
F-29
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
December 31, December 31,
1998 1997
------------ ------------
(unaudited)
<S> <C> <C>
Net Sales............................................. $261,500 $254,000
Loss Before Extraordinary Item........................ $(16,000) $(14,000)
</TABLE>
The unaudited pro forma results are not necessarily indicative of the actual
results which have been realized had the transactions actually occurred at the
beginning of each respective periods.
15. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1997 1998
------ ------- -------
<S> <C> <C> <C>
CASH PAYMENTS FOR:
Income taxes.......................................... $7,639 $ -- $ 1,743
====== ======= =======
Interest.............................................. $7,774 $11,552 $25,773
====== ======= =======
SUPPLEMENTAL SCHEDULE OF INVESTING AND FINANCING
ACTIVITIES:
Capital lease obligations incurred for acquisition of
property and equipment............................... $6,615 $ 646 $ 1,864
------ ------- -------
Value of warrants issued in connection with debt
financing............................................ $1,300 $ 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).
16. SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATED FINANCIAL DATA
Subsequent to the Recapitalization, on November 15, 1997, Dynamic Details,
Incorporated, issued $100 million aggregate principal amount of 10% Senior
Subordinated Notes due in 2005 (see Note 6). The Senior Subordinated Notes are
fully and unconditionally guaranteed on a senior subordinated basis, jointly
and severally, by Dynamic Details, Incorporated (the "Issuer") and all of its
wholly-owned subsidiaries (the "Subsidiary Guarantors"). As the Issuer is a
wholly-owned subsidiary of Holdings, the accounts of the Issuer are included in
the consolidated financial statements of Holdings.
The condensed financial data of the Issuer is presented below. Separate
financial data of the Subsidiary Guarantors are not presented because (i) the
Guarantors are wholly-owned and have fully and unconditionally guaranteed the
Notes on a joint and several basis and (ii) the Company's management has
determined such separate financial data are not material to investors and
believes the condensed financial data of the Issuer presented is more
meaningful in understanding the financial position of the Company.
F-30
<PAGE>
DDi CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
SUPPLEMENTAL DYNAMIC DETAILS, INCORPORATED CONDENSED FINANCIAL DATA
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1998 September 30, 1999
----------------- ----------------- ------------------
(unaudited)
<S> <C> <C> <C>
Current assets.......... $ 39,357 $ 20,755 $ 23,718
Non-current assets...... 58,302 287,619 302,336
--------- -------- --------
Total assets.......... $ 97,659 $308,374 $326,054
========= ======== ========
Current liabilities..... $ 15,507 $ 37,372 $ 57,414
Non-current
liabilities............ 218,700 348,950 350,820
--------- -------- --------
Total liabilities..... $ 234,207 $386,322 $408,234
--------- -------- --------
Total stockholders'
deficit.............. $(136,548) $(77,948) $(82,180)
--------- -------- --------
Total liabilities and
stockholders'
deficit.............. $ 97,659 $308,374 $326,054
========= ======== ========
</TABLE>
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30,
------------------ ------------------
1997 1998 1998 1999
-------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C>
Net sales............................. $ 77,988 $ 83,560 $ 62,945 $ 70,825
Cost of sales......................... 37,929 43,759 31,650 37,341
-------- -------- -------- --------
Gross profit.......................... 40,059 39,801 31,295 33,484
Operating expenses.................... 42,770 9,682 7,160 9,646
-------- -------- -------- --------
Income (loss) from operations......... (2,711) 30,119 24,135 23,838
Interest expense, net................. (17,738) (27,216) (18,437) (24,367)
-------- -------- -------- --------
Income (loss) before taxes and
extraordinary loss................... (20,449) 2,903 5,698 (529)
Income tax benefit (expense).......... 8,030 280 (1,756) 149
-------- -------- -------- --------
Income (loss) before extraordinary
loss................................. (12,419) 3,183 3,942 (380)
Extraordinary loss, net of income tax
benefit.............................. (1,588) (2,414) (2,297) --
Equity in loss of subsidiaries........ (77) (46,714) (325) (5,371)
-------- -------- -------- --------
Net income (loss)................... $(14,084) $(45,945) $ 1,320 $ (5,751)
======== ======== ======== ========
</TABLE>
17. SUBSEQUENT EVENT
In December 1999, management and the Company's Board of Directors approved a
plan to consolidate Colorado Springs facility. The plan will result in the
consolidation of the Colorado Springs operations principally into the Company's
Texas operation. This consolidation provides an opportunity to more effectively
deploy certain manufacturing assets. The Company anticipates that the closure
of the facility will result in non-recurring fourth-quarter charges of
approximately $7 million, consisting of $4.5 million for severance and exit
costs and $2.5 million related to the disposition of net property, plant and
equipment.
F-31
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
Dynamic Circuits Inc.:
We have audited the accompanying consolidated balance sheet of Dynamic
Circuits Inc. and subsidiary as of December 31, 1997, and the related
consolidated statements of income, shareholders' deficit and cash flows for
each of the two years in the period 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 audits.
We conducted our audits 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 audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above presents fairly,
in all material respects, the financial position of Dynamic Circuits Inc. as of
December 31, 1997, and the consolidated results of their operations and their
cash flows for each of the two years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
San Jose, California
February 20, 1998
F-32
<PAGE>
DYNAMIC CIRCUITS INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1997
------------
ASSETS
------
<S> <C>
Current assets:
Cash and cash equivalents...................................... $ 566,750
Restricted cash................................................ 50,000
Trade accounts receivable, net of allowance for doubtful
accounts of $675,103.......................................... 21,488,036
Inventories.................................................... 9,163,985
Prepaid expenses and other current assets...................... 1,354,762
Deferred taxes................................................. 961,629
------------
Total current assets......................................... 33,585,162
------------
Property and equipment, net...................................... 20,113,740
Other assets..................................................... 5,402,292
Goodwill, net.................................................... 8,595,050
------------
Total assets............................................... $ 67,696,244
============
<CAPTION>
LIABILITIES, PUT WARRANTS, MANDATORILY
--------------------------------------
REDEEMABLE PREFERRED STOCK, AND
-------------------------------
SHAREHOLDERS' DEFICIT
---------------------
<S> <C>
Current liabilities:
Book overdraft................................................. $ 3,224,677
Accounts payable............................................... 8,595,700
Accrued liabilities............................................ 5,825,385
Long-term debt, current portion................................ 2,850,000
------------
Total current liabilities.................................... 20,495,762
Long-term debt, net of current portion........................... 64,050,000
------------
Total liabilities............................................ 84,545,762
------------
Commitments and contingencies (Note 8)
Put warrants..................................................... 2,626,406
Mandatorily redeemable preferred stock Authorized:
Series A:
Issued and outstanding: 120,000 shares (Liquidation value of
$12,088,000)................................................ 10,506,006
Series B:
Issued and outstanding: 124,465 shares (Liquidation value of
$1,224,650)................................................. 1,072,379
------------
14,204,791
------------
Common stock, $0.001 par value
Authorized: 1,000,000 shares
Issued and outstanding: 53,854 shares.......................... 54
Additional paid-in capital....................................... 6,542,512
Note receivable from shareholder................................. (202,124)
Deferred compensation............................................ (656,888)
Distribution in excess of net book value (see Note 1)............ (36,877,611)
Retained earnings................................................ 139,748
------------
Total shareholders' deficit.................................. (31,054,309)
------------
Total liabilities, put warrants, mandatorily redeemable
preferred stock and shareholders' deficit................. $ 67,696,244
============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-33
<PAGE>
DYNAMIC CIRCUITS INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Six Months Ended June
Year Ended December 31, 30,
------------------------ ------------------------
1996 1997 1997 1998
----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Sales..................... $51,431,668 $86,098,472 $33,027,588 $77,220,707
Cost of sales............. 28,069,279 54,201,347 18,800,664 54,232,387
----------- ----------- ----------- -----------
Gross profit............ 23,362,389 31,897,125 14,226,924 22,988,320
----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing..... 2,349,327 4,431,214 2,346,215 4,704,663
General and
administrative......... 8,659,053 13,839,364 5,108,248 6,270,853
Non-recurring charges... 4,441,352 -- -- --
----------- ----------- ----------- -----------
15,449,732 18,270,578 7,454,463 10,975,516
----------- ----------- ----------- -----------
Operating income........ 7,912,657 13,626,547 6,772,461 12,012,804
Other income.............. -- 63,151 55,608 176,045
Interest expense, net..... (1,455,740) (3,872,450) (1,585,356) (3,138,375)
----------- ----------- ----------- -----------
Income before taxes and
extraordinary item..... 6,456,917 9,817,248 5,242,713 9,050,474
Income tax expense........ 1,416,577 4,112,315 2,206,903 4,280,782
----------- ----------- ----------- -----------
Income before
extraordinary item....... 5,040,340 5,704,933 3,035,810 4,769,692
Extraordinary gain (loss)
on retirement of debt,
net of tax............... -- (633,013) -- --
----------- ----------- ----------- -----------
Net income before
accretion................ 5,040,340 5,071,920 3,035,810 4,769,692
Accretion of mandatorily
redeemable preferred
stock and put warrants... 536,000 2,800,318 1,042,723 2,584,269
----------- ----------- ----------- -----------
Net income available to
common shareholders...... $ 4,504,340 $ 2,271,602 $ 1,993,087 $ 2,185,423
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-34
<PAGE>
DYNAMIC CIRCUITS INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
For the years ended December 31, 1997 and 1996, and the six months ended June
30, 1998
<TABLE>
<CAPTION>
Notes Distribution Retained
Common Stock Additional Receivable in Excess Earnings Shareholders'
------------------- Paid-In from Deferred of Net (Accumulated) Equity
Shares Amount Capital Shareholder Compensation Book Value (Deficit) (Deficit)
-------- --------- ---------- ----------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1,
1996.................. 202,750 $ 534,593 $ -- $ (22,230) $ -- $ -- $ 6,820,112 $ 7,332,475
Options exercised.... 2,962 14,810 -- -- -- -- -- 14,810
Shareholder
distribution to
common stockholders.. -- -- -- -- -- -- (5,186,411) (5,186,411)
Compensation expense
relating to
redemption of
outstanding option
for cash............. -- -- 308,219 -- -- -- -- 308,219
Compensation expense
relating to transfer
of shares to
employees............ -- -- 1,049,910 -- -- -- -- 1,049,910
Deferred compensation
related to stock
option grants........ -- -- 2,056,478 -- (2,056,478) -- -- --
Amortization of
deferred
compensation......... -- -- -- -- 1,358,541 -- -- 1,358,541
Repayment of
shareholder note..... -- -- -- 22,230 -- -- -- 22,230
Issuance of common
stock................ 15,482 34,654 2,222,734 -- -- -- -- 2,257,388
Recapitalization and
distribution to
shareholders......... (170,911) (584,007) (265,735) -- -- (36,877,611) (8,269,895) (45,997,248)
Accretion of
mandatorily
redeemable preferred
stock................ -- -- -- -- -- -- (536,000) (536,000)
Net income........... -- -- -- -- -- -- 5,040,340 5,040,340
-------- --------- ---------- --------- ----------- ------------ ----------- ------------
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
deferred
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
deferred compensation
(unaudited).......... -- -- -- -- 114,492 -- -- 114,492
Options exercised
(unaudited).......... 1,496 1 1,289,991 -- -- -- -- 1,289,992
Accretion of
mandatorily
redeemable preferred
stock (unaudited).... -- -- -- -- -- -- (872,904) (872,904)
Accretion of put
warrants
(unaudited).......... -- -- -- -- -- -- (1,711,364) (1,711,364)
Net income
(unaudited).......... -- -- -- -- -- -- 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-35
<PAGE>
DYNAMIC CIRCUITS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
-------------------------- ------------------------
1996 1997 1997 1998
------------ ------------ ----------- -----------
(unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income.............. $ 5,040,340 $ 5,071,920 $ 3,035,810 $ 4,769,692
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation.......... 2,128,500 3,510,940 1,222,474 2,527,972
Amortization.......... 84,333 388,816 117,639 614,479
Allowance for
(recovery of)
doubtful accounts.... (5,923) 235,051 363,096 142,072
Allowance for
(recovery of) excess
and obsolete
inventory............ -- (76,090) -- --
Deferred compensation
expense.............. 2,716,670 239,286 124,794 114,492
Gain on disposal of
fixed asset.......... -- (47,123) (47,123) --
Extraordinary loss,
gross................ -- 1,055,023 -- --
Changes in current
assets and
liabilities:
Accounts receivable... (2,053,180) (2,696,804) (2,682,898) 234,191
Inventories........... (219,767) 58,031 (100,000) (1,307,172)
Prepaid expenses and
other assets......... (65,987) (1,706,091) (611,679) 865,903
Deferred taxes........ (359,285) (364,568) -- --
Book overdrafts....... -- 2,524,984 84,051 (3,224,677)
Accounts payable...... (30,700) (3,809,862) 3,647 293,415
Accrued liabilities... 903,339 1,188,639 175,293 506,447
------------ ------------ ----------- -----------
Net cash provided by
operating
activities......... 8,138,340 5,572,152 1,685,104 5,536,814
------------ ------------ ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of property
and equipment.......... (3,135,662) (6,523,064) (3,782,823) (3,465,141)
Disposal of property
and equipment.......... -- 193,544 193,544 --
Acquisition of other
assets................. (115,300) -- (116,465) 675,364
Acquisition of
subsidiary, net of
cash acquired.......... -- (28,902,494) -- (660,000)
------------ ------------ ----------- -----------
Net cash used in
investing
activities......... (3,250,962) (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 mandatorily
redeemable preferred
stock.................. 11,000,400 -- -- --
Proceeds from issuance
of put warrants, net
of issuance costs...... 714,600 -- -- --
Proceeds from issuance
of common stock........ 2,272,198 7,400 3,700,000 857,508
Distribution to
shareholders........... (5,186,411) -- -- --
Proceeds from long-term
debt................... 35,100,000 67,400,000 (1,750,000) 200,000
Repayment of notes
payable, long-term
debt and capital
leases................. (4,930,602) (33,712,492) -- (1,175,000)
Proceeds from repayment
of shareholder note.... 22,230 -- -- --
Distribution relating
to reorganization...... (45,577,611) -- -- --
Payment of financing
costs.................. (1,304,000) (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......... (7,889,196) 30,101,301 1,900,000 (1,992,992)
------------ ------------ ----------- -----------
Net increase (decrease)
in cash................. (3,001,818) 441,439 (120,640) 94,045
Cash and cash
equivalents, beginning
of period............... 3,127,129 125,311 125,311 566,750
------------ ------------ ----------- -----------
Cash and cash
equivalents, end of
period.................. $ 125,311 $ 566,750 $ 4,671 $ 660,795
============ ============ =========== ===========
Supplemental cash flows
information
Cash payments for:
Interest.............. $ 1,455,740 $ 3,619,625
Taxes................. $ 1,066,640 $ 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........ $ 536,000 $ 1,812,912
Accretion of put
warrants............... $ -- $ 987,406
Adjustment to common
stock purchase price... $ $419,637 $ --
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-36
<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.
Inventories:
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market value.
F-37
<PAGE>
DYNAMIC CIRCUITS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. As of December 31, 1997, the Company's cash and cash equivalents
were maintained with two financial institutions.
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.
Current Liabilities:
Under the Company's cash management program, which includes a controlled
disbursement account, checks issued but not presented to banks may result in
overdraft balances for accounting purposes and are classified as "Book
overdrafts" in the Balance Sheet.
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-38
<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-39
<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. INVENTORIES:
Inventories consist of the following at December 31, 1997:
<TABLE>
<S> <C>
Raw materials.................................................. $ 6,077,870
Work in progress............................................... 2,291,565
Finished goods................................................. 794,550
------------
$ 9,163,985
============
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following at December 31, 1997:
Machinery and equipment........................................ $ 30,944,815
Land........................................................... 2,234,759
Building....................................................... 3,379,047
Computer hardware and software................................. 2,079,499
Leasehold improvements......................................... 2,125,556
Furniture and fixtures......................................... 765,075
Transportation equipment....................................... 142,240
Waste treatment equipment...................................... 941,509
------------
42,612,500
Less accumulated depreciation and amortization................. (22,498,760)
------------
$ 20,113,740
============
</TABLE>
Depreciation expense amounted to $3,510,940 and $2,128,500 for the years
ended December 31, 1997 and 1996, respectively and $1,222,474 and $2,527,972
for the six months ended June 30, 1998 and 1997, respectively.
5. 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.
F-40
<PAGE>
DYNAMIC CIRCUITS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. 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
Less current portion............................................ (2,850,000)
-----------
$64,050,000
===========
</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, 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.
F-41
<PAGE>
DYNAMIC CIRCUITS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future minimum principal payments under the credit agreement are summarized
as follows:
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
1998......................................................... $ 2,850,000
1999......................................................... 4,850,000
2000......................................................... 6,850,000
2001......................................................... 8,850,000
2002......................................................... 7,850,000
Thereafter................................................... 35,650,000
-----------
$66,900,000
===========
</TABLE>
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.
7. 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.
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
F-42
<PAGE>
DYNAMIC CIRCUITS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, January 1, 1996
Warrants issued.................................... 15,392 $0.01 $154
------ ----- ----
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, 1995..................... 4,442 $5.00 $ 22,210
Options granted.............................. 13,402 $5.00 67,010
Options exercised............................ (2,962) $5.00 (14,810)
Options redeemed............................. (4,557) $5.00 (22,785)
------ ----- --------
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.
F-43
<PAGE>
DYNAMIC CIRCUITS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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 and 1996 consistent with the provisions of SFAS
No. 123, the Company's net income for the years ended December 31, 1997 and
1996 would have been reduced to the pro forma amounts indicated below (in
thousands):
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Net income-as reported..................................... $5,040 $5,072
Net income-pro forma....................................... $5,037 $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.
F-44
<PAGE>
DYNAMIC CIRCUITS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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>
8. 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 and $338,280 for the years ended December
31, 1997 and 1996, respectively.
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-45
<PAGE>
DYNAMIC CIRCUITS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. INCOME TAXES:
The provisions for income taxes included the following:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1996 1997
----------- -----------
<S> <C> <C>
Federal:
Current.......................................... $ 1,309,994 $ 3,680,401
Deferred......................................... (304,406) (101,103)
----------- -----------
1,005,588 3,579,298
----------- -----------
State:
Current.......................................... 465,868 631,092
Deferred......................................... (54,879) (98,075)
----------- -----------
410,989 533,017
----------- -----------
$ 1,416,577 $ 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.
The significant components of deferred tax assets consist of the following:
<TABLE>
<CAPTION>
1997
----------
<S> <C>
Deferred tax assets and liabilities:
Allowance for doubtful accounts................................ $ 269,232
Receivable from Cumex.......................................... 381,150
Accruals....................................................... 474,386
State tax...................................................... 41,893
Deferred compensation.......................................... 271,705
Depreciation and amortization.................................. (331,817)
Inventory reserves............................................. 501,117
Capital loss................................................... 250,000
Valuation allowance............................................ (250,000)
----------
Total........................................................ $1,607,666
==========
</TABLE>
The non-current portion of deferred tax assets, which totaled $646,037 at
December 31, 1997, is included in other assets.
The Company has provided a valuation allowance for its deferred tax assets
relating to capital loss to the extent it does not expect such amounts to be
realized through taxable income from future operations, or by carrybacks to
prior years taxable income.
F-46
<PAGE>
DYNAMIC CIRCUITS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. 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 the Recapitalization in 1996 and 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
agreements amounted to approximately $359,272 and $78,033, in December 31, 1997
and 1996, respectively. Specific advisory fees amounted to approximately
$706,092 and $1,182,033, for the years ended December 31, 1997 and 1996,
respectively. 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 million. At
December 31, 1997, the gross and net amounts receivable from Cumex are $3.6
million and $2.5 million, respectively. The net amount is included in the
Balance Sheet caption other assets.
11. NON-RECURRING CHARGES:
The non-recurring charges incurred in 1996 as a result of the
recapitalization consist of the following:
<TABLE>
<S> <C>
Compensation expense............................................. $2,340,593
Professional and legal fees...................................... 2,100,759
----------
$4,441,352
==========
</TABLE>
12. 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 years ended December 31, 1997 or 1996.
13. 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-47
<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................. $39,600
National Association of Securities Dealers, Inc. filing fee......... *
Nasdaq National Market listing fee.................................. *
Printing and engraving expenses..................................... *
Legal fees and expenses............................................. *
Accounting fees and expenses........................................ *
Blue sky fees and expenses.......................................... *
Transfer agent and Registrar fees................................... *
Miscellaneous....................................................... *
-------
Total............................................................. $ *
=======
</TABLE>
- --------
* To be included by amendment.
Item 14. Indemnification of Directors and Officers.
The Registrant's Delaware 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 Delaware By-Laws provide that the Registrant shall
indemnify its directors to the full extent permitted by the laws of the State
of Delaware.
Prior to the consummation of this offering, the Company will enter into
indemnification agreements with each of its directors and executive officers
that provide for indemnification and expense advancement to the fullest extent
permitted under the Delaware General Corporation Law.
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) Between October 4 and December 31, 1997, DDi Corp. completed the
recapitalization and the NTI acquisition. In connection with these
transactions, DDi Corp. issued an aggregate of 1,996,143.5408 shares of
Class A common stock and an aggregate of 233,503.6897 shares of Class L
common stock to affiliates of Bain Capital, Inc., affiliates of Celerity
Partners, L.L.C., affiliates of The Chase Manhattan Corporation, pre-
recapitalization shareholders, pre-acquisition NTI shareholders, certain
NTI employees and other investors for pre-recapitalization retained shares
and an aggregate of approximately $62.4 million.
(2) DDi Corp. completed the DCI merger on July 23, 1998. In connection
with the DCI merger, DDi Corp. issued an aggregate of 1,276,279.1690 shares
of Class A common stock and an aggregate of 162,064.5076 shares of Class L
common stock to pre-acquisition DCI shareholders in exchange for pre-
acquisition shares and vested options for pre-acquisition shares of DCI.
(3) Between September 30, 1998 and December 31, 1999, DDi Corp. sold an
aggregate of 157,804.8675 shares of Class A common stock and an aggregate
of 672.0093 shares of Class L common stock to employees and other persons
with business relationships to DDi, and to holders of Class A common stock
options for an aggregate of approximately $1.0 million.
II-1
<PAGE>
(4) Pursuant to employee equity incentive and stock option plans,
between October 1997 and December 31, 1999 DDi Corp. issued an aggregate of
352,306.8508 options to purchase Class A common stock and an aggregate of
46,299.5379 options to purchase Class L common stock.
(5) Affiliates of The Chase Manhattan Corporation were granted Class A
and Class L common stock warrants in connection with temporary financing
associated with the October 1997 recapitalization.
All such shares were exempt from registration under the Securities Act of
1933, as Amended, pursuant to (S)4(2) thereof.
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* Form of DDi Corp. Delaware Articles of Incorporation, as amended.
3.2* Form of DDi Corp. Delaware Certificate of Incorporation.
3.3* Form of DDi Corp. Delaware By-laws.
4.1* Amended and Restated Stockholders Agreement dated as of July 28, 1998.
4.2* Form of Warrant Agreement dated as of October , 1997.
4.3* Amendment to Warrant Agreement dated as of July 17, 1998.
4.5* Senior Subordinated Credit Agreement and Company Interim Credit
Agreement dated as of October 28, 1997.
4.6* Form of certificate representing shares of Common Stock.
5.1* Opinion of Ropes & Gray.
10.1 Amended and Restated Recapitalization Agreement dated as of October 4,
1997. (Previously filed as Exhibit 10.2 to Registration Statement No.
333-41187, 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).
10.3* Credit Agreement dated as of July 23, 1998, as Amended and Restated as
of August 28, 1998, and as further amended by the First Amendment
thereto dated March 10, 1999.
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).
10.8* 2000 DDi Corp. Equity Incentive Plan
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).
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
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).
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).
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
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.
16.1* Letter of McGladrey & Pullen LLP re: change of accountant. (Previously
filed as Exhibit 16.1 to Registration Statement No. 333-41187, as
amended)
21.1* Subsidiaries of the registrant.
23.1 Consent of PricewaterhouseCoopers LLP regarding DDi Corp.
23.2 Consent of McGladrey & Pullen LLP.
23.3 Consent of PricewaterhouseCoopers LLP regarding Dynamic Circuits Inc.
23.4* Consent of Ropes & Gray (included in the opinion filed as Exhibit 5.1).
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>
- --------
* To be filed by amendment.
II-4
<PAGE>
(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.
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 day of , 2000.
DDi Corp.
/s/ Bruce D. McMaster
By:
----------------------------------
Name: Bruce D. McMaster
Title: President and Chief Executive
Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Bruce D.
McMaster and Joseph P. Gisch, and each of them singly, his or her true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement on Form S-1 to be filed by DDi
Corp., and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents full power and authority to be done in
and about the premises, as fully to all intents and purposes as he or she might
or could do in person, hereby ratifying and confirming all that said attorneys-
in-fact and agents, or their substitutes, may lawfully do or cause to be done
by virtue hereof.
* * * *
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:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Bruce D. McMaster President, Chief Executive January 28, 2000
______________________________________ Officer (Principal
Bruce D. McMaster Executive Officer) and
Director
/s/ Joseph P. Gisch Chief Financial Officer January 28, 2000
______________________________________ (Principal Financial and
Joseph P. Gisch Accounting Officer)
/s/ Charles D. Dimick Director January 28, 2000
______________________________________
Charles D. Dimick
/s/ David Dominik Director January 28, 2000
______________________________________
David Dominik
/s/ Edward W. Conard Director January 28, 2000
______________________________________
Edward W. Conard
</TABLE>
II-6
<PAGE>
<TABLE>
<S> <C> <C>
/s/ Stephen G. Pagliuca Director January 28, 2000
______________________________________
Stephen G. Pagliuca
/s/ Prescott Ashe Director January 28, 2000
______________________________________
Prescott Ashe
/s/ Stephen M. Zide Director January 28, 2000
______________________________________
Stephen M. Zide
/s/ Mark R. Benham Director January 28, 2000
______________________________________
Mark R. Benham
/s/ Christopher Behrens Director January 28, 2000
______________________________________
Christopher Behrens
</TABLE>
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.
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement.
3.1* Form of DDi Corp. Delaware Articles of Incorporation, as amended.
3.2* Form of DDi Corp. Delaware Certificate of Incorporation.
3.3* Form of DDi Corp. Delaware By-laws.
4.1* Amended and Restated Stockholders Agreement dated as of July 28, 1998.
4.2* Form of Warrant Agreement dated as of October , 1997.
4.3* Amendment to Warrant Agreement dated as of July 17, 1998.
4.5* Senior Subordinated Credit Agreement and Company Interim Credit
Agreement dated as of October 28, 1997.
4.6* Form of certificate representing shares of Common Stock.
5.1* Opinion of Ropes & Gray.
10.1 Amended and Restated Recapitalization Agreement dated as of October 4,
1997. (Previously filed as Exhibit 10.2 to Registration Statement No.
333-41187, 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).
10.3* Credit Agreement dated as of July 23, 1998, as Amended and Restated as
of August 28, 1998, and as further amended by the First Amendment
thereto dated March 10, 1999.
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).
10.8* 2000 DDi Corp. Equity Incentive Plan
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).
</TABLE>
<PAGE>
<TABLE>
<C> <S>
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).
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.
16.1* Letter of McGladrey & Pullen LLP re: change of accountant. (Previously
filed as Exhibit 16.1 to Registration Statement No. 333-41187, as
amended)
21.1* Subsidiaries of the registrant.
23.1 Consent of PricewaterhouseCoopers LLP regarding DDi Corp.
23.2 Consent of McGladrey & Pullen LLP.
</TABLE>
<PAGE>
<TABLE>
<C> <S>
23.3 Consent of PricewaterhouseCoopers LLP regarding Dynamic Circuits Inc.
23.4* Consent of Ropes & Gray (included in the opinion filed as Exhibit 5.1).
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>
- --------
* To be filed by amendment.
<PAGE>
Exhibit 23.1
Consent of Independent Accountants
We hereby consent to the use in this Registration Statement on Form S-1 of
our reports dated January , 2000 relating to the consolidated financial
statements of DDi Corp., which appear in such Registration Statement. We also
consent to the reference to us under the headings "Experts" and "Selected
Consolidated Financial and Other Data" in such Registration Statement.
PricewaterhouseCoopers LLP
Costa Mesa, California
January 26, 2000
<PAGE>
Exhibit 23.2
Consent of Independent Accountants
We hereby consent to the use in this Registration Statement on Form S-1
filed on or about January 28, 2000 by DDi Corp. of our report dated February
14, 1997 relating to the consolidated financial statements of Details, Inc. and
subsidiaries. We also consent to the reference to our Firm under the caption
"Experts" in the Prospectus.
McGLADREY & PULLEN, LLP
Anaheim, California
January 26, 2000
<PAGE>
Exhibit 23.3
Consent of Independent Accountants
We hereby consent to the use in this Registration Statement on Form S-1 of
our reports dated February 20, 1998 relating to the consolidated financial
statements of Dynamic Circuits Inc. which appear in such Registration
Statement. We also consent to the reference to us under the heading "Experts"
in such Registration Statement.
PricewaterhouseCoopers LLP
San Jose, California
January 26, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997 DEC-31-1998 DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1996 JAN-01-1997 JAN-01-1998 JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1996 DEC-31-1997 DEC-31-1998 SEP-30-1998 SEP-30-1999
<CASH> 0 5,377 2,109 0 613
<SECURITIES> 0 0 0 0 0
<RECEIVABLES> 0 16,042 36,192 0 52,495
<ALLOWANCES> 0 (399) (1,428) 0 (1,639)
<INVENTORY> 0 4,330 12,615 0 22,148
<CURRENT-ASSETS> 0 43,478 61,207 0 81,070
<PP&E> 0 36,421 92,235 0 107,583
<DEPRECIATION> 0 (10,289) (31,217) 0 42,184
<TOTAL-ASSETS> 0 108,862 365,006 0 371,465
<CURRENT-LIABILITIES> 0 19,889 45,941 0 61,612
<BONDS> 0 271,068 462,498 0 467,918
0 0 0 0 0
0 0 0 0 0
<COMMON> 0 89,218 162,794 0 162,899
<OTHER-SE> 0 (280,443) (332,569) 0 (344,734)
<TOTAL-LIABILITY-AND-EQUITY> 0 108,862 365,006 0 371,465
<SALES> 67,515 78,756 174,853 115,727 213,838
<TOTAL-REVENUES> 67,515 78,756 174,853 115,727 213,838
<CGS> 30,505 38,675 119,559 74,079 149,849
<TOTAL-COSTS> 30,505 38,675 119,559 74,079 149,849
<OTHER-EXPENSES> 8,973 42,755 71,142 17,281 45,582
<LOSS-PROVISION> 0 0 0 0 0
<INTEREST-EXPENSE> 9,416 25,196 37,416 25,051 35,021
<INCOME-PRETAX> 18,621 (27,870) (53,264) (684) (16,614)
<INCOME-TAX> 6,265 (10,858) (3,566) (280) (4,457)
<INCOME-CONTINUING> 12,356 (17,012) (49,698) (404) (12,157)
<DISCONTINUED> 0 0 0 0 0
<EXTRAORDINARY> 0 (1,588) (2,414) (2,297) 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> 12,356 (18,600) (52,112) (2,701) (12,157)
<EPS-BASIC> 0 0 0 0 0
<EPS-DILUTED> 0 0 0 0 0
</TABLE>
