-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, D4AE2rQMpsk3njcN16YWAcrCvZgY1/Mp+Vm7elv+bAVbUTkyGjsIv25TvrcavMgV kLf4ML/z7qc+4NY0lrD9cQ== 0000927016-98-000524.txt : 19980217 0000927016-98-000524.hdr.sgml : 19980217 ACCESSION NUMBER: 0000927016-98-000524 CONFORMED SUBMISSION TYPE: 424B3 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19980212 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DETAILS INC CENTRAL INDEX KEY: 0001050117 STANDARD INDUSTRIAL CLASSIFICATION: PRINTED CIRCUIT BOARDS [3672] IRS NUMBER: 330779123 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B3 SEC ACT: SEC FILE NUMBER: 333-41211 FILM NUMBER: 98533075 BUSINESS ADDRESS: STREET 1: 1231 SIMON CIRCLE CITY: ANAHEIM STATE: CA ZIP: 92806 BUSINESS PHONE: 7146304077 MAIL ADDRESS: STREET 1: 1231 SIMON CIRCLE CITY: ANAHEIM STATE: CA ZIP: 92806 424B3 1 FINAL PROSPECTUS FILED PURSUANT TO RULE 424(b)(3) REGISTRATION NO. 333-41187 PROSPECTUS DETAILS, INC. OFFER TO EXCHANGE [LOGO OF DETAILS CAPITAL CORP.] SERIES B 10% SENIOR SUBORDINATED NOTES DUE NOVEMBER 15, 2005 WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, FOR AN EQUAL PRINCIPAL AMOUNT OF ITS 10% SENIOR SUBORDINATED NOTES DUE NOVEMBER 15, 2005, WHICH HAVE NOT BEEN SO REGISTERED -------------- THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS THEREUNDER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME, ON MARCH 16, 1998, UNLESS EXTENDED -------------- Details, Inc., a California corporation ("Details"), hereby offers, upon the terms and subject to the conditions set forth in this Prospectus and the accompanying Letter of Transmittal (which together constitute the "Exchange Offer"), to exchange an aggregate principal amount of up to $100,000,000 of its Series B 10% Senior Subordinated Notes due 2005 (the "Exchange Notes"), which have been registered under the Securities Act of 1933, as amended (the "Securities Act"), for a like principal amount of its outstanding 10% Senior Subordinated Notes due 2005 (the "Original Notes" and, together with the Exchange Notes, the "Notes") from the holders (the "Holders") thereof. The terms of the Exchange Notes are identical in all material respects to the Original Notes, except for certain transfer restrictions and registration rights relating to the Original Notes. Details will accept for exchange any and all Original Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on March 16, 1998, unless extended (as so extended, the "Expiration Date"). Tenders of Original Notes may be withdrawn at any time prior to the Expiration Date. The Exchange Offer is not conditioned upon any minimum principal amount of Original Notes being tendered for exchange pursuant to the Exchange Offer. Pursuant to the Registration Rights Agreement (as defined herein), the Exchange Offer will remain open for the longer of 20 business days or 30 days (unless extended if required by applicable law) after the date hereof. The Exchange Offer is subject to certain other customary conditions. See "The Exchange Offer." Interest on the Exchange Notes is payable semi-annually on May 15 and November 15 of each year, commencing on May 15, 1998. Except as described below, Details may not redeem the Exchange Notes prior to November 15, 2001. On or after such date, Details may redeem the Exchange Notes, in whole or in part, at the redemption prices set forth herein together with accrued and unpaid interest, if any, to the redemption date. In addition, at any time on or prior to November 15, 2000, Details may, at its option, redeem up to 40% of the original principal amount of the Exchange Notes at a redemption price of 110% of the principal amount thereof, together with accrued and unpaid interest thereon to the applicable redemption date, with the net proceeds of one or more Equity Offerings (as defined), received by, or invested in, Details so long as there is a Public Market (as defined) at the time of such redemption; provided that at least 60% of the original aggregate principal amount of the Exchange Notes remain outstanding immediately after the occurrence of such redemption. The Exchange Notes will not be subject to any sinking fund requirement. Upon the occurrence of a Change of Control (as defined), (i) Details will have the option, at any time prior to November 15, 2001, to redeem the Exchange Notes, in whole but not in part, at a redemption price equal to 100% of the principal amount thereof plus the Applicable Premium (as defined), together with accrued and unpaid interest, if any, to the date of redemption, and (ii) if Details does not so redeem the Exchange Notes or if the Change of Control occurs after November 15, 2001, each Holder will have the right to require Details to make an offer to repurchase all of the outstanding Exchange Notes at a price equal to 101% of the principal amount thereof, together with accrued and unpaid interest, if any, to the date of repurchase. See "Description of Exchange Notes." The Exchange Notes will be unsecured obligations of Details, subordinated in right of payment to all existing and future Senior Indebtedness (as defined) of Details and will be effectively subordinated to all obligations of the subsidiaries of Details. The Exchange Notes will rank pari passu with all senior subordinated indebtedness of Details and will rank senior to all subordinated indebtedness of Details. On December 31, 1997, the aggregate principal amount of Details' outstanding Senior Indebtedness was approximately $111.2 million. There is currently no indebtedness of Details subordinate to the Notes. The Indenture under which the Exchange Notes will be issued (the "Indenture") will permit Details to incur additional indebtedness, including Senior Indebtedness, subject to certain limitations. See "Description of Exchange Notes." The Exchange Notes are being offered hereunder in order to satisfy certain obligations of Details contained in the Exchange and Registration Rights Agreement dated November 18, 1997, between Details and the other signatory thereto (the "Registration Rights Agreement"). Details believes that based on interpretations by the staff of the Securities and Exchange Commission (the "Commission"), Exchange Notes issued pursuant to the Exchange Offer in exchange for Original Notes may be offered for resale, resold and otherwise transferred by each Holder thereof (other than any Holder which is an "affiliate" of Details within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery requirements of the Securities Act, provided that such Exchange Notes are acquired in the ordinary course of such Holder's business and such Holder has no arrangement with any person to participate in the distribution of such Exchange Notes. Each broker-dealer that receives Exchange Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Exchange Notes received in exchange for Original Notes where such Original Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. Details has agreed that, for a period of 90 days after the Expiration Date (as defined herein), it will make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." Details will not receive any proceeds from the Exchange Offer and will pay all expenses incident to the Exchange Offer. -------------------------------------------------- SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE EXCHANGE NOTES. -------------------------------------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. -------------- The date of this Prospectus is February 12, 1998. The Exchange Offer is not being made to, nor will Details accept surrenders for exchange from, Holders of Original Notes in any jurisdiction in which such Exchange Offer or the acceptance thereof would not be in compliance with the securities or blue sky laws of such jurisdiction. The Exchange Notes will be available initially only in book-entry form. Details expects that the Exchange Notes issued pursuant to this Exchange Offer will be issued in the form of a Global Note (as defined herein), which will be deposited with, or on behalf of, The Depository Trust Company (the "Depositary") and registered in its name or in the name of Cede & Co., its nominee. Beneficial interests in the Global Note representing the Exchange Notes will be shown on, and transfers thereof will be effected through, records maintained by the Depositary and its participants. After the initial issuance of the Global Note, Exchange Notes in certificated form will be issued in exchange for interests in the Global Note only on the terms set forth in the Indenture (the "Indenture") between Details and State Street Bank and Trust Company, as trustee (the "Trustee"), dated as of November 18, 1997. See "Description of Exchange Notes--Book-Entry Transfer." Prior to this Exchange Offer, there has been no public market for the Original Notes. To the extent that Original Notes are tendered and accepted in the Exchange Offer, a Holder's ability to sell untendered Original Notes could be adversely affected. If a market for the Exchange Notes should develop, the Exchange Notes could trade at a discount from their face value. Details does not currently intend to list the Exchange Notes on any securities exchange or to seek approval for quotation through any automated quotation system. Neither Details nor any of its subsidiaries will receive any cash proceeds from the issuance of the Exchange Notes offered hereby. No dealer-manager is being used in connection with this Exchange Offer. See "Use of Proceeds" and "Plan of Distribution." THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT INFORMATION. HOLDERS OF ORIGINAL NOTES ARE URGED TO READ THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO TENDER THEIR ORIGINAL NOTES PURSUANT TO THE EXCHANGE OFFER. DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS WHEN USED IN THIS PROSPECTUS, THE WORDS "BELIEVES," "ANTICIPATES" AND SIMILAR EXPRESSIONS ARE USED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED. THE COMPANY WISHES TO CAUTION READERS THAT ALL STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL FACTS INCLUDED IN THIS PROSPECTUS, INCLUDING WITHOUT LIMITATION, CERTAIN STATEMENTS UNDER "SUMMARY," "THE TRANSACTIONS," "UNAUDITED PRO FORMA FINANCIAL DATA," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS" AND LOCATED ELSEWHERE HEREIN REGARDING THE COMPANY'S FINANCIAL POSITION AND BUSINESS STRATEGY, MAY CONSTITUTE FORWARD- LOOKING STATEMENTS. ALL OF THESE FORWARD-LOOKING STATEMENTS ARE BASED ON ESTIMATES AND ASSUMPTIONS MADE BY MANAGEMENT OF THE COMPANY, WHICH ALTHOUGH BELIEVED TO BE REASONABLE, ARE INHERENTLY UNCERTAIN. THEREFORE, UNDUE RELIANCE SHOULD NOT BE PLACED ON SUCH ESTIMATES AND STATEMENTS. NO ASSURANCE CAN BE GIVEN THAT ANY OF SUCH ESTIMATES OR STATEMENTS WILL BE REALIZED AND IT IS LIKELY THAT ACTUAL RESULTS WILL DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE: (1) INCREASED COMPETITION; (2) INCREASED COSTS; (3) INABILITY TO CONSUMMATE ACQUISITIONS ON i ATTRACTIVE TERMS; (4) LOSS OR RETIREMENT OF KEY MEMBERS OF MANAGEMENT; (5) INCREASES IN THE COMPANY'S COST OF BORROWINGS OR UNAVAILABILITY OF ADDITIONAL DEBT OR EQUITY CAPITAL ON TERMS CONSIDERED REASONABLE BY MANAGEMENT; (6) ADVERSE STATE, FEDERAL OR FOREIGN LEGISLATION OR REGULATION OR ADVERSE DETERMINATIONS BY REGULATORS; (7) CHANGES IN GENERAL ECONOMIC CONDITIONS IN THE MARKETS IN WHICH THE COMPANY MAY COMPETE AND FLUCTUATIONS IN DEMAND IN THE ELECTRONICS INDUSTRY; AND (8) ABILITY TO SUSTAIN HISTORICAL MARGINS AS THE INDUSTRY DEVELOPS. MANY OF SUCH FACTORS WILL BE BEYOND THE CONTROL OF THE COMPANY AND ITS MANAGEMENT. FOR FURTHER INFORMATION OR OTHER FACTORS WHICH COULD AFFECT THE FINANCIAL RESULTS OF THE COMPANY AND SUCH FORWARD-LOOKING STATEMENTS, SEE "RISK FACTORS." INDUSTRY DATA AND FINANCIAL INFORMATION The Company relies on and refers to information it has received from various industry analysts regarding the markets for its principal products, printed circuit boards, which the Company believes to be reliable but the accuracy and completeness of such information is not guaranteed and the Company has not independently verified this market data. Similarly, internal Company surveys, while believed by the Company to be reliable, have not been verified by independent sources. AVAILABLE INFORMATION Details has filed a registration statement on Form S-4 (herein referred to, together with all exhibits and schedules thereto and any amendments thereto, as the "Exchange Offer Registration Statement") under the Securities Act with respect to the Exchange Notes offered hereby. This Prospectus, which forms a part of the Exchange Offer Registration Statement, does not contain all of the information set forth in the Exchange Offer Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. For further information with respect to Details and the Exchange Notes offered hereby, reference is made to the Exchange Offer Registration Statement. Statements made in this Prospectus as to the contents of certain documents are not necessarily complete and, in each instance, reference is made to the copy of the document filed as an exhibit to the Exchange Offer Registration Statement. Details is not currently subject to the periodic reporting and other informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Pursuant to the Indenture, Details has agreed that, whether or not it is required to do so by the rules and regulations of the Commission, for so long as any of the Notes remain outstanding, Details will furnish to the holders of the Notes and will, if permitted, file with the Commission (i) all quarterly and annual financial information that would be required to be contained in a filing with the Commission on Forms 10-Q and 10- K if Details was required to file such forms, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" and, with respect to the annual information only, a report thereon by the Details' certified independent accountants and (ii) all reports that would be required to be filed with the Commission on Form 8-K if Details were required to file such reports. In addition, for so long as any of the Original Notes remain outstanding, Details has agreed to make available to any prospective purchaser of the Original Notes or beneficial owner of the Original Notes in connection with any sale thereof the information required by Rule 144A(d)(4) under the Securities Act. ii Any reports or documents filed by Details with the Commission (including the Exchange Offer Registration Statement) may be inspected and copied at the Public Reference Section of the Commission's office at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices in New York (7 World Trade Center, 13th Floor, New York, New York 10048) and Chicago (Citicorp Center, 14th Floor, 500 West Madison Street, Chicago, Illinois 60661). Copies of such reports or other documents may be obtained at prescribed rates from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, the Commission maintains a Web site that contains reports and other information that is filed through the Commission's Electronic Data Gathering Analysis and Retrieval System. The Web site can be accessed at http://www.sec.gov. iii SUMMARY Unless otherwise stated in this Prospectus or unless the context otherwise requires, references to the "Company" means Details and its wholly-owned subsidiaries. Details is a direct wholly-owned subsidiary of Details Capital Corp. ("Details Capital"), a California corporation. Details Capital is a direct wholly-owned subsidiary of Details Holdings Corp. (f/k/a Details, Inc.) ("Holdings"), a California corporation. On November 3, 1997, Holdings organized the Company and contributed substantially all of its assets, subject to certain liabilities (other than the Holdings Facility (as defined)) to the Company. On November 19, 1997 Holdings organized Details Capital and on February 10, 1998, Holdings contributed substantially all of its assets, subject to certain liabilities, including the Discount Notes (as defined) to Details Capital. The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial data, including the "Unaudited Pro Forma Financial Data," "Selected Historical Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the audited financial statements included elsewhere in this Prospectus. Unless otherwise specified, "pro forma basis" as used in this Summary means pro forma for the Transactions (as defined), the Initial Offering (as defined) and the NTI Acquisition (as defined). Unless otherwise specified, "year-to-date" refers to the nine months ended September 30, 1997. THE COMPANY The Company believes, based on industry data, that it is one of the largest manufacturers and marketers of complex printed circuit boards ("PCBs") for the time critical or "quick-turn" segment of the domestic PCB industry. Printed circuit boards are the basic platforms used to interconnect microprocessors, integrated circuits, and other components essential to the functioning of virtually all electronic products. Quick-turn PCBs, which are defined as printed circuit boards manufactured within 10 days (and as little as 24 hours) in prototype and pre-production quantities, are used in the design, test and launch phases of new electronic products. The quick-turn market is characterized by higher margins, faster growth and greater customer diversity than the long-lead market. Approximately 70% of the Company's year-to-date sales are quick-turn PCBs. Complex PCBs are those employing difficult to manufacture specifications such as high layer counts, dense circuitry designs, and exotic materials. Such boards command escalating pricing premiums the greater the complexity. The Company's advanced engineering capability enables it to produce boards with up to 40 layers employing leading-edge fabrication technologies. The Company supplies over 300 customers in a wide range of end- use markets including the telecommunications, computer, contract manufacturing, industrial instrumentation, and consumer electronics industries. On a pro forma basis for the twelve months ended September 30, 1997, the Company's net sales and EBITDA would have been $103.0 million and $35.6 million, respectively. Since the installation of a new management team in 1992, the Company has successfully increased its sales and profitability and diversified its customer base by strategically focusing on the quick-turn PCB market. As a result of this strategic shift, the Company has grown net sales at a compound annual growth rate ("CAGR") of 25% from $25.8 million in the fiscal year ended December 31, 1992 to $73.9 million for the twelve months ended September 30, 1997. In the same time frame, the Company (excluding NTI (as defined)) has grown pro forma EBITDA at a 27% CAGR from $10.0 million to $31.6 million. As a result of the Recapitalization (as defined), management owns stock and options for approximately 27.5% of the fully-diluted capital stock of Holdings. Such equity ownership represents a significant economic commitment to, and participation in, the Company. The Company's principal executive offices are located at 1231 Simon Circle, Anaheim, California 92806, and its telephone number is (714) 630-4077. 1 INDUSTRY OVERVIEW The Company primarily operates in the domestic market for quick-turn printed circuit boards. The Company believes that the industry has the following characteristics: Large and Rapidly Growing Industry. In 1996, the worldwide market for printed circuit boards was $30.4 billion, of which the U.S. represented 27%, or $8.3 billion. Approximately 87% of the domestic market, or $7.2 billion, was supplied by merchant (i.e., non-captive) fabricators. Of this amount, quick- turn PCBs accounted for 21%, or approximately $1.5 billion. The quick-turn segment has experienced rapid growth, increasing at a 24% CAGR since 1992, twice the rate for the overall domestic PCB industry. The Company believes that the growing demand for quick-turn PCBs is due to a number of favorable trends, including: (i) increasing importance to OEMs of being first to market in the face of shortened product lifecycles; (ii) greater complexity of electronic products which require increased prototyping and testing; (iii) general growth in the number of products containing electronic components; and (iv) ongoing outsourcing by OEMs of PCB design and fabrication. Multiple Value-Added Segments. The customary evolution of an electronic product results in several phases of PCB procurement: initially, in the design and development stage, customers order small lot sizes (1-25 boards) and demand quick-turn delivery ("prototype boards"); in the test-marketing and product introduction stages, they order low to medium quantities (up to 5,000 boards) which may or may not require quick-turn delivery ("pre-production boards"); and in the product roll-out stage, they tend to order large volumes with lead times in excess of three weeks ("production boards"). Prototype and pre-production boards, the segments in which the Company competes, command escalating pricing premiums the shorter the lead time and the greater the board complexity. PCB complexity is determined by layer count, the use of exotic substrates and materials, the fineness of line spaces and traces, the incorporation of buried resistors and capacitors, the use of microvias and numerous other features. By focusing on either time criticality, board complexity, or both, a PCB fabricator can realize significant pricing premiums and commensurately higher profitability per PCB than that attainable in the production segment of the market. Consolidating Industry. The domestic PCB industry is highly fragmented with approximately 600 active fabricators. Although the industry has experienced significant consolidation in the last four years, declining 37% from the approximately 950 manufacturers in 1992, the top eight manufacturers still only accounted for approximately 25% of industry sales in 1996. Consolidation in the industry is being driven by (i) growing demand by electronic OEMs for both increasingly complex PCBs and shortened delivery cycles which mandates sophisticated design, engineering and manufacturing capabilities on the part of PCB fabricators; (ii) ongoing outsourcing by electronic OEMs; and (iii) increasing desire by OEMs to use fewer suppliers. COMPETITIVE STRENGTHS The Company believes that it has several competitive advantages in the PCB industry, including: Quick-Turn Market Leader. Based on industry data, the Company believes that it is one of the largest manufacturers of quick-turn PCBs in the United States, with approximately 70% of its year-to-date sales derived from quick-turn products. The Company routinely completes complex orders (up to 12 layers) in less than 24 hours and believes that its engineering expertise and ability to produce highly complex PCBs are competitive strengths in the quick-turn market. Leading Technological Capabilities. The Company believes that its ability to engineer advanced PCB materials and utilize advanced technologies is a competitive strength in the quick-turn market. 2 Customers utilize the technological expertise of Details' 66 front-end engineers throughout the product development effort to achieve an integrated cost-effective manufacturing solution. The Company has the ability to produce boards with up to 40 layers, and approximately 40% of its sales year-to-date included boards with layer counts of 8 or more. Diverse and Loyal Customer Base. The Company believes that it has one of the broadest customer bases in the industry, with more than 300 customers serving a wide range of end-use markets. Year-to-date, the Company's largest customer accounted for less than 11% of revenue. In addition, the Company has been successful at retaining customers. For example, the Company has maintained a relationship with its top three year-to-date customers--Motorola, Intel and IBM--since at least 1993. The Company believes that its ability to rapidly respond to changes in demand for new or modified board designs with consistent high quality is a major factor in its success at creating customer partnerships. The Company's customer list includes leading manufacturers of telecommunications equipment, such as Motorola and Qualcomm; computer workstations and servers, such as IBM and Silicon Graphics; semi-conductor fabrication such as Intel; industrial products, such as Caterpillar and Delco; computer assemblers, such as Dell and Compaq; and contract manufacturing firms such as SCI and Jabil. Experienced Management Team with Significant Equity Ownership. The Company's President, Bruce McMaster, has a total of 16 years of experience in the PCB industry. Mr. McMaster, together with the other members of his senior management team--Lee Muse (Vice President of Sales and Marketing), Joseph Gisch (Chief Financial Officer), Terry Wright (Vice President of Engineering), Michael Moisan (Vice President of Operations), and James S. Marcelli (Vice President)--have over 70 years of industry experience and approximately 30 years with the Company. Since 1992, management has successfully developed and implemented manufacturing and marketing strategies which have resulted in a compound annual growth rate in net sales of 25% from the fiscal year ended December 31, 1992 to the twelve months ended September 30, 1997. As a result of the Recapitalization, management owns stock and options for approximately 27.5% of the fully-diluted capital stock of Holdings. Such equity ownership represents a significant economic commitment to, and participation in, the Company. BUSINESS STRATEGY The Company's goal is to maintain its growth rate in sales and profitability by leveraging its quick-turnaround capability, its market leading technology, and its large customer base to increase its penetration of value-added market segments. In order to accomplish its goal, the Company intends to: Increase Technical Leadership in Quick-Turn Segment. The Company intends to extend its leadership in the quick-turn segment by continuing to provide consistent, rapid delivery through leading-edge processes and technology. Currently, the Company is capable of delivering 12-layer boards in as little as 24 hours and had a less than 1% product return rate for the nine months ended September 30, 1997. Such performance is largely due to the technology and processes employed by the Company coupled with its engineering expertise and customized design and development services. The Company intends to maintain its focus on improving quality and delivery times by incorporating emerging technologies and by continuously improving its manufacturing processes. Cross-Sell Pre-Production to Quick-Turn Customers. The Company believes there are substantial opportunities to leverage its strong customer relations in the quick-turn segment by cross-selling 10 to 20 day pre-production volume to its existing customers utilizing the additional production capacity 3 obtained through the recent acquisition (the "NTI Acquisition") of Colorado Springs Circuits, Inc., a Colorado corporation and a subsidiary of NTI, d/b/a NTI ("NTI"). NTI, a California corporation ("Parent"), was the parent company of NTI prior to the NTI Acquisition. See "Recent Developments." The Company recognizes OEMs' desire to continue to use the same supplier through several stages of the product development process and thereby reduce the number of suppliers used. Through the acquisition of NTI, the Company intends to expand its services to the longer lead 10 to 20 day pre-production phase of product development in addition to servicing the quick-turn prototype phase, which the Company believes can thereby enhance the efficiency of its customers' production process. Specifically, the Company believes that by servicing a larger portion of its customers' production needs, it can: (i) reduce customers' tooling costs, (ii) eliminate supplier switching risk, and (iii) shorten customers' "time-to-market." In furtherance of this initiative, the Company continues to make investments in capital equipment, engineering capability and systems infrastructure. Achieve International Presence. The Company believes there are substantial opportunities to satisfy international demand for time-critical, complex PCBs. Year-to-date, approximately 94% of the Company's revenues were generated domestically despite the fact that the U.S. accounts for only 27% of the worldwide market. In particular, the Company has established a sales office in the United Kingdom to service existing European customers' needs and to broaden the Company's European presence. The Company is currently developing a manufacturers' representative arrangement in Singapore as an entry into the Asian market. Pursue Selective Acquisitions. The Company is currently pursuing selective acquisitions to complement its organic growth. Due to the high degree of fragmentation in the PCB industry, the Company believes substantial consolidation opportunities exist. Consequently, the Company is actively seeking acquisitions which will: (i) increase its 10 to 20 day pre-production capacity, (ii) expand its international geographic coverage, (iii) strengthen its position in existing markets, (iv) provide significant profit improvement opportunities through the application of the Company's superior operating capabilities, and (v) enhance its technology base. On December 22, 1997, the Company acquired all of the outstanding shares of common stock of NTI. See "Recent Developments." THE TRANSACTIONS On or about October 4, 1997, Holdings and Holdings' stockholders entered into a recapitalization agreement (as amended to date, the "Recapitalization Agreement") with DI Acquisition Corp. ("DIA") which provided for the recapitalization (the "Recapitalization") by means of a merger (the "Merger") of DIA with and into Holdings. On October 28, 1997, the Merger was consummated. In connection with the Recapitalization, (i) certain stockholders and optionholders of Holdings received an aggregate amount of cash equal to approximately $184.3 million, (ii) Chase Manhattan Capital, L.P. ("CMC"), an affiliate of the Initial Purchaser (as defined), retained a portion of its investment in Holdings representing approximately 7.7%, and certain other stockholders of Holdings retained a portion of their investments in Holdings representing approximately 2.8%, of the fully-diluted equity of Holdings (in each case after giving effect to the Recapitalization and related transactions) (collectively, the "Existing Owner Rollover"), and (iii) management retained certain shares representing approximately 11.3%, and certain options to acquire shares of common stock of Holdings representing approximately 5.8%, of the fully-diluted equity of Holdings (after giving effect to the Recapitalization and related transactions) (collectively the "Management Rollover Equity"). In addition, in connection with the Recapitalization, management acquired additional shares and options to acquire additional shares representing 10.4% of the fully-diluted equity of Holdings (after giving effect to the Recapitalization and related transactions). After the Recapitalization, management held shares and options representing approximately 27.5% of the fully diluted equity of Holdings. 4 Financing for the Recapitalization, and the related fees and expenses, consisted of (i) $46.3 million of equity capital provided by investment funds associated with Bain Capital, Inc. (the "Bain Capital Funds"); (ii) $11.2 million of equity capital provided by an affiliate of CMC; (iii) $4.9 million of equity capital provided by certain other investors (the "Other Investors"); (iv) the $16.1 million Management Rollover Equity; (v) the $10.5 million Existing Owner Rollover; (v) a senior subordinated loan facility of $85 million (the "Senior Subordinated Facility"); (vi) a senior unsecured credit facility of $55 million of Holdings (the "Holdings Facility"); and (vii) a syndicated senior secured Tranche A term loan facility of $41.4 million as of the Recapitalization closing date (the "Tranche A Facility"), a syndicated senior secured Tranche B term loan facility of $50 million (the "Tranche B Facility" and, together with the Tranche A Facility, the "Term Loan Facilities") and a senior secured revolving credit facility of up to $30 million (the "Revolving Credit Facility" and, together with the Term Loan Facilities, the "Senior Credit Facilities"). The Recapitalization, the Merger, the Senior Subordinated Facility, the Holdings Facility and the Senior Credit Facilities are referred to herein as the "Transactions." For a more detailed discussion of the Transactions see also Note 10 of the Notes to the Consolidated Financial Statements contained elsewhere in this Prospectus. The following table sets forth the sources and uses of funds in connection with the Recapitalization as of October 28, 1997:
DOLLARS IN MILLIONS ----------- SOURCES: Senior Credit Facilities: Revolving Credit Facility(1)................................... $ -- Term Loan Facilities(2)........................................ 91.4 Senior Subordinated Facility..................................... 85.0 Holdings Facility................................................ 55.0 Equity Investment(3)............................................. 62.4 Existing Owner Rollover.......................................... 10.5 Management Rollover Equity....................................... 16.1 ------ Total Sources................................................ $320.4 ====== USES: Redemption of stock and distribution to shareholders............. $184.3 Repayment of Existing Indebtedness(4)............................ 96.4 Management Rollover Equity....................................... 16.1 Existing Owner Rollover.......................................... 10.5 Transaction Fees and Expenses(5)................................. 13.1 ------ Total Uses................................................... $320.4 ======
- -------- (1) Under the Revolving Credit Facility the Company had, as of October 28, 1997, availability of $30 million. See "Description of Senior Credit Facilities." (2) Following the Recapitalization, there was an additional $25 million available for borrowing under the Term Loan Facilities for future acquisitions, subject to certain conditions and restrictions. See "Description of Senior Credit Facilities." (3) Represents $46.3 million provided by Bain Capital Funds, $11.2 million provided by an affiliate of CMC and $4.9 million provided by Other Investors. (4) Includes the repayment of bank indebtedness as well as other obligations of the Company paid in connection with the Recapitalization. See "Management." (5) Includes underwriting fees, financial advisory fees, and legal, accounting and other professional fees. See "Certain Relationships and Related Transactions." On November 3, 1997, Holdings formed the Company, as a new wholly-owned subsidiary, and contributed substantially all of its assets, subject to certain liabilities (other than the Holdings Facility) to the Company. On November 18, 1997, the Company consummated the sale of the Original Notes in a transaction exempt from the registration requirements of the Securities Act (the "Initial Offering"). Concurrently with the Initial Offering, Holdings conducted the offering (the "Discount Note Offering") of its 12 1/2% Senior Discount Notes due 2007 (the "Discount Notes") with an aggregate discount value of approximately $60.1 million. The Company used the net proceeds (after deduction of related fees and expenses) from the Initial Offering of approximately $96.4 million to repay (i) the $85.0 million of indebtedness represented by the Senior Subordinated Facility, plus accrued interest and related fees and expenses, (ii) a portion of the Holdings Facility, and (iii) indebtedness under the Term Loan Facilities of approximately $10.3 million. In connection with the Initial Offering, the Company entered into the Registration Rights 5 Agreement pursuant to which it agreed to register the Exchange Notes under the Securities Act and offer them in exchange for the Original Notes. The proceeds of the Discount Note Offering were used to repay the Holdings Facility, plus accrued interest and related fees and expenses. On November 19, 1997, Holdings formed Details Capital and on February 10, 1998 Holdings contributed substantially all of its assets, subject to certain liabilities, including the Discount Notes, to Details Capital. RECENT DEVELOPMENTS On December 22, 1997, the Company acquired all of the outstanding shares of common stock of NTI for approximately $38.5 million. The purchase price includes the assumption of approximately $7.4 million of NTI's debt without giving effect to the final purchase price adjustment. The acquisition was funded in part through the issuance of additional equity interests in Holdings 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 from Holdings and a $25 million term loan borrowing under the Company's Term Loan Facilities. NTI manufactures complex PCBs for OEMs in the electronics industry and focuses primarily on pre-production market opportunities with lead times of 10 to 20 days. NTI currently manufactures all of its products at two leased facilities located in Colorado Springs, Colorado, occupying 84,000 square feet (which also include its executive offices). NTI is operated as a wholly-owned subsidiary of the Company and is currently headed by James S. Marcelli. Mr. Marcelli, who has run NTI since 1991, is now a Vice President of the Company and President of NTI. As of September 30, 1997, NTI employed approximately 325 employees, all of whom are non-union employees. THE EXCHANGE OFFER The Exchange Offer............ Up to $100,000,000 aggregate principal amount of Exchange Notes are being offered in exchange for a like aggregate principal amount of Original Notes. Details is making the Exchange Offer in order to satisfy its obligations under the Registration Rights Agreement relating to the Original Notes. For a description of the procedures for tendering Original Notes, see "The Exchange Offer--Procedures for Tendering." Expiration Date............... 5:00 p.m., New York City time, on March 16, 1998, unless the Exchange Offer is extended (in which case the Expiration Date will be the latest date and time to which the Exchange Offer is extended). See "The Exchange Offer-- Terms of the Exchange Offer." Conditions to the Exchange Offer........................ The Exchange Offer is subject to the condition that the Exchange Offer does not violate applicable law or SEC staff interpretation. If Details determines that the Exchange Offer is not permitted by applicable federal law, it may terminate the Exchange Offer. The Exchange Offer is not conditioned upon any minimum principal amount of Original Notes being tendered. See "The Exchange Offer--Conditions of the Exchange Offer." 6 Resale of the Exchange Notes.. Based on an interpretation by the staff of the Commission set forth in no-action letters issued to third parties, Details believes that Exchange Notes issued pursuant to the Exchange Offer in exchange for Original Notes may be offered for resale, resold and otherwise transferred by any holder thereof (other than (i) a broker-dealer who purchased such Original Notes directly from Details for resale pursuant to Rule 144A or any other available exemption under the Securities Act or (ii) a person that is an "affiliate" of Details within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act provided that the Holder is acquiring the Exchange Notes in its ordinary course of business and is not participating, and has no arrangement or understanding with any person to participate, in the distribution of the Exchange Notes. Holders of Original Notes wishing to accept the Exchange Offer must represent to Details that such conditions have been met. In the event that Details' belief is inaccurate, Holders of Exchange Notes who transfer Exchange Notes in violation of the prospectus delivery provisions of the Securities Act and without an exemption from registration thereunder may incur liability under the Securities Act. Details does not assume or indemnify Holders against such liability, although Details does not believe that any such liability should exist. A broker-dealer that receives Exchange Notes in exchange for Original Notes held for its own account, as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. Although such broker-dealer may be an "underwriter" within the meaning of the Securities Act, the Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. See "Plan of Distribution." All resales must be made in compliance with applicable state securities or "blue sky" laws. Such compliance may require that the Exchange Notes be registered or qualified in a particular state or that the resales be made by or through a licensed broker-dealer, unless exemptions from these requirements are available. Details assumes no responsibility with regard to compliance with such requirements. The Exchange Offer is not being made to, nor will Details accept surrenders for exchange from, Holders of Original Notes in any jurisdiction in which the Exchange Offer or the 7 acceptance thereof would not be in compliance with the securities or blue sky laws of such jurisdiction. Procedures for Tendering Notes......................... Each Holder of Original Notes wishing to accept the Exchange Offer must complete, sign and date the accompanying Letter of Transmittal, as the case may be, or a facsimile thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver such Letter of Transmittal, or such facsimile, together with the Original Notes and any other required documentation to the Exchange Agent (as defined herein) at the address set forth herein. By executing a Letter of Transmittal, each Holder will represent to Details conducting the Exchange Offer that, among other things, (i) the Exchange Notes acquired pursuant to such Exchange Offer are being obtained in the ordinary course of business of the person receiving such Exchange Notes, whether or not such person is the Holder, (ii) neither the Holder nor any such other person has any arrangement or understanding with any person to participate in the distribution of such Exchange Notes and that such Holder is not engaged in, and does not intend to engage in, a distribution of Exchange Notes, and (iii) that neither the Holder nor any such other person is an "affiliate," as defined under Rule 405 of the Securities Act, of Details. See "The Exchange Offer--Procedures for Tendering." Special Procedures for Beneficial Owners............ Any beneficial owner whose Original Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender should contact such registered Holder promptly and instruct such registered Holder to tender on such beneficial owner's behalf. See "The Exchange Offer--Procedures for Tendering." Guaranteed Delivery Procedures.................... Holders of Original Notes who wish to tender their Original Notes and whose Original Notes are not immediately available or who cannot deliver their Original Notes, the Letter of Transmittal, as the case may be, or any other documents required by such Letter of Transmittal to the Exchange Agent (as defined herein) (or comply with the procedures for book-entry transfer) prior to the Expiration Date must tender their Original Notes according to the guaranteed delivery procedures set forth in "The Exchange Offer--Guaranteed Delivery Procedures." Untendered Notes.............. Following the consummation of the Exchange Offer, Holders of Original Notes eligible to participate but who do not tender their Original Notes will not have any further exchange rights and such Original Notes will continue to be 8 subject to certain restrictions on transfer. Accordingly, the liquidity of the market for such Original Notes could be adversely affected by the Exchange Offer. Consequences of Failure to Exchange..................... The Original Notes that are not exchanged pursuant to the Exchange Offer will remain restricted securities. Accordingly, such Original Notes may be resold only (i) to Details, (ii) pursuant to Rule 144A or Rule 144 under the Securities Act or pursuant to some other exemption under the Securities Act, (iii) outside the United States to a foreign person pursuant to the requirements of Rule 904 under the Securities Act, or (iv) pursuant to an effective registration statement under the Securities Act. See "The Exchange Offer-- Consequences of Failure to Exchange." Shelf Registration Statement.. If (i) because of any change in law or applicable interpretations thereof by the staff of the Commission, Details is not permitted to effect the Exchange Offer as contemplated hereby, (ii) any Securities (as defined) validly tendered pursuant to the Exchange Offer are not exchanged for Exchange Securities (as defined) within 210 days after the Issue Date (as defined), (iii) Chase Securities Inc. (the "Initial Purchaser") so requests with respect to Original Notes not eligible to be exchanged for Exchange Notes in the Exchange Offer, (iv) any applicable law or interpretations do not permit any holder of Original Notes to participate in the Exchange Offer, (v) any Holder of Original Notes that participates in the Exchange Offer does not receive freely transferable Exchange Notes in exchange for tendered Original Notes, or (vi) Details so elects, Details has agreed pursuant to the Registration Rights Agreement to register the Original Notes issued by it on a shelf registration statement (the "Shelf Registration Statement") and use its best efforts to cause it to be declared effective by the Commission, as promptly as practicable after the filing thereof, and if applicable, use its reasonable best efforts to keep the Shelf Registration Statement effective for a period of two years from the Issue Date. Withdrawal Rights............. Tenders may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. Acceptance of Original Notes and Delivery of Exchange Notes........................ Details will accept for exchange any and all Original Notes which are properly tendered in the Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The Exchange Notes issued pursuant to the Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offer--Terms of the Exchange Offer." Federal Income Tax Consequences.................. The exchange pursuant to the Exchange Offer will generally not be a taxable event for federal income tax purposes. See "Certain Federal Income Tax Consequences." 9 Use of Proceeds............... There will be no cash proceeds to Details from the exchange pursuant to the Exchange Offer. Exchange Agent................ State Street Bank and Trust Company. THE EXCHANGE NOTES Issuer........................ Details, Inc. Securities Offered............ $100,000,000 aggregate principal amount of Series B 10% Senior Subordinated Notes due 2005. Maturity Date................. November 15, 2005. Interest Payment Dates........ May 15 and November 15, commencing May 15, 1998. Sinking Fund.................. None. Optional Redemption........... Except as described below, Details may not redeem the Exchange Notes prior to November 15, 2001. On or after such date, Details may redeem the Exchange Notes, in whole or in part, at the redemption prices set forth herein together with accrued and unpaid interest, if any, to the date of redemption. In addition, at any time prior to November 15, 2000, Details may, at its option, redeem up to 40% of the original aggregate principal amount of the Exchange Notes with the net proceeds of one or more Equity Offerings (as defined), received by, or invested in, Details so long as there is a Public Market (as defined) at the time of such redemption, at a redemption price equal to 110% of the principal amount to be redeemed, together with accrued and unpaid interest, if any, to the date of redemption; provided that at least 60% of the original aggregate principal amount of the Exchange Notes remains outstanding immediately after each such redemption. See "Description of Exchange Notes--Optional Redemption." Change of Control............. Upon a Change of Control (as defined), (i) Details will have the option, at any time prior to November 15, 2001, to redeem the Exchange Notes, in whole but not in part, at a redemption price equal to 100% of the principal amount thereof plus the Applicable Premium (as defined), together with accrued and unpaid interest, if any, to the date of redemption, and (ii) if Details does not so redeem the Exchange Notes or if the Change of Control occurs after November 15, 2001, each Holder will have the right to require Details to make an offer to repurchase the Exchange Notes at a price equal to 101% of the principal amount thereof, together with accrued and unpaid interest, if any, to the date of repurchase. See "Description of Exchange Notes--Change of Control." 10 Future Guarantees............. The Indenture will provide that any Subsidiary Guarantor (as defined) which guarantees Details' Indebtedness under the Senior Credit Facilities will guarantee the Exchange Notes on an unsecured, senior subordinated basis. See "Description of Exchange Notes--Certain Covenants--Future Subsidiary Guarantors." Ranking....................... The Exchange Notes will be unsecured and will be subordinated in right of payment to all existing and future Senior Indebtedness of Details and will be effectively subordinated to all obligations of the subsidiaries of Details. The Exchange Notes will rank pari passu with any future senior subordinated indebtedness of Details and will rank senior to all other subordinated indebtedness of Details. On December 31, 1997, (i) the aggregate amount of the outstanding Senior Indebtedness of Details was approximately $111.2 million, (ii) there was no indebtedness outstanding at the Company's subsidiaries, and (iii) the Company had no senior subordinated indebtedness outstanding other than the Notes and no indebtedness that is subordinate or junior in right of repayment to the indebtedness represented by the Exchange Notes. See "Description of Exchange Notes--Ranking and Subordination." Restrictive Covenants......... The Indenture limits: (i) the incurrence of additional indebtedness by Details and its Restricted Subsidiaries, (ii) the layering of indebtedness, (iii) the payment of dividends on, and redemption of, capital stock of Details and its Restricted Subsidiaries and the redemption of certain subordinated obligations of Details and its Restricted Subsidiaries, (iv) investments, (v) sales of assets and Subsidiary stock, (vi) certain transactions with affiliates, (vii) the creation and existence of liens, (viii) the types of businesses that Details and its Restricted Subsidiaries may operate, and (ix) consolidations, mergers and transfers of all or substantially all Details' assets. The Indenture also prohibits certain restrictions on distributions from Restricted Subsidiaries. However, all of these limitations and prohibitions are subject to a number of important qualifications and exceptions. See "Description of Exchange Notes--Certain Covenants." RISK FACTORS See "Risk Factors" for a discussion of certain factors that should be considered in evaluating an investment in the Exchange Notes. 11 SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA The following summary unaudited pro forma financial data of the Company set forth below give effect in the manner described under "Unaudited Pro Forma Financial Data" and the notes thereto to the Transactions, the Initial Offering and the NTI Acquisition as if they had occurred on January 1, 1996 in the case of the pro forma statements of income data, and as of September 30, 1997 in the case of the unaudited pro forma balance sheet data. The unaudited pro forma consolidated statements of income do not purport to represent what the Company's results of operations would have been if the Transactions, the Initial Offering and the NTI Acquisition had occurred as of the date indicated or what such results will be for future periods. The information contained in this table should be read in conjunction with "Unaudited Pro Forma Financial Data," "Selected Historical Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the audited consolidated financial statements and the accompanying notes thereto included elsewhere in this Prospectus.
NINE MONTHS LATEST ENDED TWELVE MONTHS YEAR ENDED SEPTEMBER 30, ENDED DECEMBER 31, ------------------ SEPTEMBER 30, 1996(1) 1996(1) 1997(1) 1997(1) ------------ -------- -------- ------------- (DOLLARS IN THOUSANDS) STATEMENT OF INCOME DATA: Net sales...................... $ 94,500 $ 71,047 $ 78,857 $103,041 Cost of goods sold............. 53,606 40,007 46,630 60,312 -------- -------- -------- -------- Gross profit................. 40,894 31,040 32,227 42,729 Operating expenses: General and administration... 4,064 3,080 3,281 4,337 Sales and marketing.......... 7,213 5,501 6,478 8,217 -------- -------- -------- -------- Operating income............... 29,617 22,459 22,468 30,175 Interest expense............... (21,157) (15,899) (15,888) (21,146) Interest income................ 132 134 68 101 -------- -------- -------- -------- Income before provision for income taxes.................. 8,592 6,694 6,648 9,130 Provision for income taxes..... 3,957 3,069 3,051 4,178 -------- -------- -------- -------- Net income..................... $ 4,635 $ 3,625 $ 3,597 $ 4,952 ======== ======== ======== ======== OTHER FINANCIAL DATA: EBITDA (2)..................... $ 34,745 $ 26,040 $ 26,566 $ 35,603 EBITDA margin (3).............. 37% 37% 34% 35% Depreciation amortization...... 5,128 3,581 4,098 5,428 Capital expenditures........... 10,007 8,007 4,386 6,114 Cash interest expense.......... 20,070 15,084 15,073 20,059 Ratio of EBITDA to cash inter- est expense................... 1.7x 1.7x 1.8x 1.8x Ratio of earnings to fixed charges (4)................... 1.4x 1.4x 1.4x 1.4x
PRO FORMA SEPTEMBER 30, 1997 ------------------ BALANCE SHEET DATA (END OF PERIOD): Cash....................................................... $ 405 Working capital............................................ 9,438 Total assets............................................... 94,318 Total debt................................................. 212,656 Equity (net capital deficiency)............................ (140,297)
- -------- (1) See "Unaudited Pro Forma Financial Data." (2) "EBITDA" is defined herein as income before provision for income taxes, depreciation, amortization and net interest expense. EBITDA is presented because the Company believes its is frequently used by security analysts in the evaluation of companies. However, EBITDA should not be considered as an alternative to net income as a measure of operating results or to cash flows as a measure of liquidity in accordance with generally accepted accounting principles. (3) Represents EBITDA as a percentage of net sales. (4) For purposes of computing this ratio, earnings consists of income before income taxes plus fixed charges. Fixed charges consist of interest expense and the estimated interest portion of rent expense. 12 SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA Set forth below are summary historical consolidated financial data of the Company at the dates and for the periods indicated. The summary historical consolidated statements of income data of the Company for the years ended December 31, 1994, 1995 and 1996 and the summary historical consolidated balance sheet data as of December 31, 1995 and 1996 were derived from the historical consolidated financial statements of the Company that were audited by McGladrey & Pullen, LLP, whose reports appear elsewhere in this Prospectus. The summary historical consolidated financial data of the Company for the year ended December 31, 1992 and for the nine month periods ended September 30, 1996 and 1997 are derived from unaudited consolidated financial statements of the Company which, in the opinion of management, include all adjustments necessary for a fair presentation. The summary historical consolidated financial data set forth below should be read in conjunction with, and is qualified by reference to, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the audited consolidated financial statements and accompanying notes thereto included elsewhere in this Prospectus.
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------------------- ---------------- 1992 1993 1994 1995 1996 1996 1997 ------- ------- ------- ------- ------- ------- ------- (DOLLARS IN THOUSANDS) STATEMENT OF INCOME DA- TA: Net sales.............. $25,759 $32,394 $44,086 $59,370 $67,515 $49,086 $55,421 Cost of goods sold..... 13,142 16,480 20,415 25,156 30,505 21,899 27,019 ------- ------- ------- ------- ------- ------- ------- Gross profit........... 12,617 15,914 23,671 34,214 37,010 27,187 28,402 Operating expenses: Compensation to CEO (1)................... 9,414 11,513 412 418 1,055 836 811 General and administra- tion ................. 690 1,136 1,385 1,789 1,929 1,377 1,625 Sales and marketing.... 2,672 3,074 3,542 5,293 5,989 4,503 5,338 Stock compensation and related bonuses (2)... -- -- -- -- -- -- 5,283 ------- ------- ------- ------- ------- ------- ------- Operating income (loss)................ (159) 191 18,332 26,714 28,037 20,471 15,345 Interest expense....... (57) (167) (181) (371) (9,518) (6,974) (7,427) Interest income........ 21 10 13 42 102 71 56 ------- ------- ------- ------- ------- ------- ------- Income (loss) before income taxes.......... (195) 34 18,164 26,385 18,621 13,568 7,974 Provision for (benefit from) income taxes (3)................... (18) 221 273 396 6,265 4,270 3,400 ------- ------- ------- ------- ------- ------- ------- Net income (loss)...... $ (177) $ (187) $17,891 $25,989 $12,356 $ 9,298 $ 4,574 ======= ======= ======= ======= ======= ======= ======= OTHER FINANCIAL DATA: EBITDA (4)............. $ 567 $ 1,047 $19,214 $27,768 $30,084 $21,966 $17,174 Adjusted EBITDA (5).... 9,981 12,560 19,626 28,186 31,139 22,802 23,268 Adjusted EBITDA margin (6)................... 39% 39% 45% 47% 46% 46% 42% Depreciation........... 726 856 882 1,054 2,047 1,495 1,829 Capital expenditures... 1,428 1,254 844 2,946 3,666 2,720 3,267 Ratio of earnings to fixed charges (7)..... -- 1.1x 51.5x 46.6x 3.0x 2.9x 2.1x BALANCE SHEET DATA (END OF PERIOD): Cash................... $ 175 $ 1,592 $ 3,686 $ 472 $ 169 $ 1,856 $ 942 Working capital (defi- cit).................. 1,170 (74) (96) (2,264) (3,514) (884) (5,892) Total assets........... 6,164 9,097 12,015 13,081 27,503 26,930 31,686 Total debt............. 1,434 3,446 1,316 1,982 94,101 96,157 87,410 Equity (net capital de- ficiency) (8)......... 2,993 2,806 2,806 2,500 (72,674) (75,732) (65,177)
See Notes to Summary Historical Consolidated Financial Data. 13 NOTES TO SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA (1) Represents compensation paid to the Company's former CEO, who also was the sole shareholder since the Company's inception through the Initial Recapitalization (as defined) and whose employment terminated on October 28, 1997. (2) Represents stock compensation and related bonuses under the Company's 1996 Stock Option Plan. (3) Prior to February 1996, the Company elected to be taxed as an "S" corporation and paid income taxes at a reduced rate. On a pro forma basis, income tax expense would have been higher by the following amounts: 1994-- $7,175; 1995--$10,425; 1996--$1,295 and September 30, 1996--$1,295. (4) "EBITDA" is defined herein as income before income taxes, plus depreciation, amortization and net interest expense. EBITDA is presented because the Company believes it is frequently used by security analysts in the evaluation of companies. However, EBITDA should not be considered as an alternative to net income as a measure of operating results or to cash flows as a measure of liquidity in accordance with generally accepted accounting principles. (5) "Adjusted EBITDA" is defined herein as EBITDA adjusted for certain items of income which are not expected to be incurred by the Company subsequent to the Transactions. These items consist of the compensation paid to the Company's former CEO whose employment terminated on October 28, 1997 and stock compensation and related bonuses under the Company's 1996 Stock Option Plan. (6) Represents adjusted EBITDA as a percentage of net sales. (7) For purposes of computing this ratio, earnings consists of income before income taxes plus fixed charges. Fixed charges consist of interest expense and the estimated interest portion of rent expense. Earnings were not sufficient to cover fixed charges by $195 for the year ended December 31, 1992. (8) The net capital deficiency as of December 31, 1996 reflects the effects of the Initial Recapitalization of the Company that took place in January of 1996 and which reduced stockholders' equity by $86.2 million. 14 RISK FACTORS Prospective investors should carefully consider the following factors in addition to the other information set forth in this Prospectus before making an investment in the Exchange Notes offered hereby. This Prospectus contains certain forward looking statements within the meaning of Section 27A of the Securities Act. Actual results could differ materially from those projected in the forward looking statements as a result of certain factors and uncertainties set forth below and elsewhere in this Prospectus. SUBSTANTIAL LEVERAGE; STOCKHOLDER'S DEFICIT As a result of the Transactions, the Initial Offering and the NTI Acquisition, the Company is highly leveraged. As of December 31, 1997, the Company's indebtedness was approximately $211.2 million, of which $111.2 million was Senior Indebtedness, and there was approximately $30 million available under the Senior Credit Facilities for future borrowings for general corporate purposes and working capital needs. On a pro forma basis after giving effect to the Transactions, the Initial Offering and the NTI Acquisition, the Company's ratio of earnings to fixed charges for the fiscal year ended December 31, 1996 and for the nine months ended September 30, 1997 would have been 1.4 to 1.0 in both periods. On the same pro forma basis, the Company had a stockholder's deficit as of September 30, 1997 of approximately $140.3 million. In addition, subject to the restrictions in the Senior Credit Facilities, the Indenture and the Discount Note Indenture, the Company and its subsidiaries may incur additional indebtedness (including additional Senior Indebtedness) from time to time to finance acquisitions or capital expenditures or for other purposes. See "--Restrictions Imposed by the Terms of the Company's Indebtedness," "Capitalization" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company's high degree of leverage could have important consequences to holders of the Notes, including: (i) a substantial portion of the Company's cash flow from operations must be dedicated to debt service and will not be available for other purposes; (ii) the Company's ability to obtain additional debt financing in the future for working capital, capital expenditures, research and development or acquisitions may be limited; (iii) the Company's leveraged position and the covenants that will be contained in the Indenture and the Senior Credit Facilities could limit the Company's ability to compete, as well as its ability to expand, including through acquisitions, and to make capital improvements; (iv) the Company may be more leveraged than certain of its competitors, which may place the Company at a competitive disadvantage; and (v) the Company's ability to refinance the Notes in order to pay the principal of the Notes at maturity or upon a Change of Control may be adversely affected. See "Description of Senior Credit Facilities" and "Description of Notes." The Company's ability to pay principal and interest on the Notes and to satisfy its other debt obligations will depend upon its future operating performance, which will be affected by prevailing economic conditions and financial, business and other factors, certain of which are beyond its control, as well as the availability of revolving credit borrowings under the Senior Credit Facilities or successor facilities. The Company anticipates that its operating cash flow, together with borrowings under the Senior Credit Facilities, will be sufficient to meet its operating expenses and to service its debt requirements as they become due. If the Company is unable to service its indebtedness, it will be forced to take actions such as reducing or delaying capital expenditures, selling assets, restructuring or refinancing its indebtedness (which could include the Notes), or seeking additional equity capital. There is no assurance that any of these remedies can be effected on satisfactory terms, if at all. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and "Description of Senior Credit Facilities." 15 RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS The Indenture restricts, among other things, the Company's ability to incur additional indebtedness, incur liens, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any Senior Indebtedness and senior in right of payment to the Notes, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. However, subject to compliance with debt incurrence tests and the other restrictions in the Senior Credit Facilities and the Indenture, the Company and its subsidiaries may incur additional indebtedness in an unrestricted amount (including additional Senior Indebtedness) from time to time to finance acquisitions or capital expenditures or for other purposes. See "Capitalization" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." In addition, the Senior Credit Facilities contain other and more restrictive covenants and prohibit the Company and its subsidiaries from prepaying other indebtedness (including the Notes). The Senior Credit Facilities also require the Company to maintain specified financial ratios and satisfy certain financial condition tests. The Company's ability to meet those financial ratios and tests can be affected by events beyond its control, and there can be no assurance that the Company will meet those tests. A breach of any of these covenants could result in a default under the Senior Credit Facilities and/or the Indenture. Upon the occurrence of an event of default under the Senior Credit Facilities, the lenders could elect to declare all amounts outstanding under the Senior Credit Facilities, together with accrued interest, to be immediately due and payable. If the Company were unable to repay those amounts, the lenders could proceed against the collateral granted to them to secure that indebtedness. If the Senior Indebtedness were to be accelerated, there can be no assurance that the assets of the Company would be sufficient to repay in full that indebtedness and the other indebtedness of the Company, including the Notes. Substantially all the assets of the Company and its subsidiaries are pledged as security under the Senior Credit Facilities. See "Description of Senior Credit Facilities" and "Description of Exchange Notes--Certain Covenants." SUBORDINATION The Notes will be subordinated in right of payment to all existing and future Senior Indebtedness, including the principal of (and premium, if any) and interest on and all other amounts due on or payable in connection with Senior Indebtedness. As of December 31,1997 there was outstanding approximately $111.2 million of Senior Indebtedness, $105.2 million of which was fully secured borrowings under the Senior Credit Facilities. By reason of such subordination, in the event of the insolvency, liquidation, reorganization, dissolution or other winding-up of the Company or upon a default in payment with respect to, or the acceleration of, any Senior Indebtedness, the holders of such Senior Indebtedness and any other creditors who are holders of Senior Indebtedness, and creditors of subsidiaries must be paid in full before the holders of the Notes may be paid. If the Company incurs any additional pari passu debt, the holders of such debt would be entitled to share ratably with the holders of the Notes in any proceeds distributed in connection with any insolvency, liquidation, reorganization, dissolution or other winding-up of the Company. This may have the effect of reducing the amount of proceeds paid to holders of the Notes. In addition, certain holders of Senior Indebtedness may prevent cash payments with respect to the principal of (and premium, if any) or interest or liquidated damages, if any, on the Notes for a period of up to 179 days following a non-payment default with respect to Senior Indebtedness. In addition, the Indenture permits the subsidiaries of the Company to incur debt under certain circumstances. Any such debt incurred by a subsidiary of the Company could be structurally senior to the Notes. See "Description of Exchange Notes." In addition to being subordinated to all existing and future Senior Indebtedness of the Company, the Notes will not be secured by any assets of the Company or its subsidiaries; however, obligations under the Senior Credit Facilities are secured by a pledge of all the capital stock of the Company's subsidiaries, and the tangible and intangible assets of the Company and its subsidiaries. If the Company becomes insolvent or is liquidated, or if payment under any of the Senior Credit Facilities is accelerated, the lenders under the Senior Credit Facilities will be entitled to exercise the remedies available to a secured lender under applicable law pursuant to the Senior Credit Facilities. Accordingly, 16 such lenders will have a prior claim with respect to such assets. See "Description of Senior Credit Facilities." LIMITATIONS ON ABILITY TO REPAY UPON CHANGE OF CONTROL Upon the occurrence of a Change of Control, each Holder of Notes may require the Company to repurchase all or a portion of such Holder's Notes at 101% of the principal amount of the Notes together with accrued and unpaid interest, if any, to the date of repurchase. See "Description of Notes--Change of Control" for the definition of "Change of Control". The occurrence of certain of the events that would constitute a Change of Control would constitute a default under the Senior Credit Facilities. Future Senior Indebtedness of the Company and its subsidiaries may also contain prohibitions of certain events that would constitute a Change of Control. Moreover, the exercise by the Holders of their right to require the Company to repurchase the Notes could cause a default under such Senior Indebtedness, even if the Change of Control itself does not, due to the financial effect of such repurchase on the Company. Finally, the Company's ability to pay cash to the Holders upon a repurchase may be limited by the Company's then existing financial resources. There can be no assurance that sufficient funds will be available when necessary to make any required repurchases. Even if sufficient funds were otherwise available, the terms of the Senior Credit Facilities will (and other Senior Indebtedness may) prohibit the Company's prepayment of Exchange Notes prior to their scheduled maturity. Consequently, if the Company is not able to prepay the indebtedness under the Senior Credit Facilities and any other Senior Indebtedness containing similar restrictions or obtain requisite consents, as described above, the Company will be unable to fulfill its repurchase obligations if Holders of Notes exercise their repurchase rights following a Change of Control, thereby resulting in a default under the Indenture. FRAUDULENT CONVEYANCE CONSIDERATIONS If under applicable provisions of federal bankruptcy law and comparable provisions of state and federal fraudulent conveyance laws it were found that the Company had (a) incurred the indebtedness represented by the Notes with the intent of hindering, delaying or defrauding creditors or (b) had received less than reasonably equivalent value or consideration for incurring such indebtedness and (i) was insolvent or was rendered insolvent by reason of such transactions, (ii) was engaged in a business or transaction for which its remaining assets constituted unreasonably small capital to carry on its business, or (iii) intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they matured, the obligations of the Company on the Notes could be subordinated to all other indebtedness of the Company. The measure of insolvency for purposes of determining whether a transfer is avoidable as a fraudulent transfer varies depending upon the law of the jurisdiction which is being applied. Generally, however, a debtor would be considered insolvent if the sum of all its liabilities, including contingent liabilities were greater than the fair saleable value of the debtor's assets at a fair valuation, or if the present fair saleable value of the debtor's assets were less than the amount required to repay its probable liabilities on its existing debts, including contingent liabilities, as they become absolute and matured. There can be no assurance as to what standard a court would apply in order to determine solvency. The Company believes (i) that it did not enter into the Initial Offering with fraudulent intent, (ii) that circumstances constituting constructive fraud will not have arisen with respect to the Company as a result of, and after giving effect to, the Initial Offering and (iii) that, accordingly, the property transferred to the Company as part of the Initial Offering and the obligations of the Company with respect to the Notes would not be subject to such detrimental action. These beliefs are based on the Company's operating history and analysis of internal cash flow projections and estimated values of assets and liabilities of the Company at the time of the offering of the Notes. Since each of the components of the question of whether the incurrence of the debt represented by the DIscount Notes constitutes a fraudulent conveyance is inherently fact-based are fact-specific, there can be no assurance that a court passing on such questions would agree with the Company. 17 TECHNOLOGICAL CHANGE AND PROCESS DEVELOPMENT The market for the Company's products and services is characterized by rapidly changing technology and continuing process development. The future success of the Company's business will depend in large part upon its ability to maintain and enhance its technological capabilities, develop and market products and services that meet changing customer needs, and successfully anticipate or respond to technological changes on a cost-effective and timely basis. Research and development expenses are expected to increase as manufacturers make demands for higher technology and smaller PCBs. In addition, the PCB industry could in the future encounter competition from new or revised technologies that render existing electronic interconnect technology less competitive or obsolete or technologies that may reduce the number of PCBs required in electronic components. There can be no assurance that the Company will effectively respond to the technological requirements of the changing market. To the extent the Company determines that new technologies and equipment are required to remain competitive, the development, acquisition and implementation of such technologies and equipment may require significant capital investment by the Company. 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. The loss of revenue and earnings to the Company from such a technological change or process development could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Technology, Development and Processes." DEPENDENCE ON A LIMITED NUMBER OF CUSTOMERS During the fiscal year ended December 31, 1996, sales to the Company's largest customer, IBM, accounted for 15.9% of the Company's net revenues. Sales to the Company's two largest customers accounted for approximately 24.6% of the Company's net revenues and sales to the Company's ten largest customers accounted for 51.8% of the Company's net revenues during the same period. During the nine months ended September 30, 1997, sales to the Company's largest customer, Motorola, accounted for 10.9% of the Company's net revenues. Sales to the Company's two largest customers accounted for approximately 20.4% of the Company's net revenues during the nine months ended September 30, 1997 and sales to the Company's ten largest customers accounted for 48.4% of the Company's net revenues during the same period. There can be no assurance that the Company will not depend upon a relatively small number of customers for a significant percentage of its net revenues in the future. There can be no assurance that present or future customers will not terminate their manufacturing arrangements with the Company or significantly change, reduce or delay the amount of manufacturing services ordered from the Company. Any such termination of a manufacturing relationship or change, reduction or delay in orders could have an adverse effect on the Company's results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--Markets and Customers." DEPENDENCE ON ELECTRONIC INDUSTRY The electronics industry, which encompasses the Company's principal customers, is characterized by intense competition, relatively short product life-cycles and significant fluctuations in product demand. In addition, the electronics industry is generally subject to rapid technological change and product obsolescence. Furthermore, the electronics industry is subject to economic cycles and has in the past experienced, and is likely in the future to experience, recessionary periods. A recession or any other event leading to excess capacity or a downturn in the electronics industry would likely have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "The Industry--Technical Overview," "Business--Markets and Customers." 18 ABILITY TO IMPLEMENT THE COMPANY'S OPERATING AND ACQUISITION STRATEGY No assurances can be given that the Company or its management team will be able to implement successfully the operating strategy described herein, including the ability to identify, negotiate and consummate future acquisitions on terms management considers favorable. The Company may from time to time pursue the acquisitions of other companies, assets or product lines that complement or expand its existing business. Acquisitions involve a number of risks that could adversely affect the Company's operating results, including the diversion of management's attention, the costs of assimilating the operations and personnel of the acquired companies, and the potential loss of employees of the acquired companies. No assurance can be given that any acquisition by the Company will not materially and adversely affect the Company or that any such acquisition will enhance the Company's business. The ability of the Company to implement its operating strategy and to consummate future acquisitions may require significant additional debt and/or equity capital, and no assurance can be given as to whether, and on what terms, such additional debt and/or equity capital will be available. The Company's efforts to increase international sales may be adversely affected by, among other things, changes in foreign import restrictions and regulations, taxes, currency exchange rates, currency and monetary transfer restrictions and regulations and economic and political changes in the foreign nations to which the Company's products are exported. There can be no assurance that one or more of these factors will not have a material adverse effect on the Company's financial position or results of operations. See "Business--Business Strategy" and "--Markets and Customers." VARIABILITY OF ORDERS The level and timing of orders placed by the Company's customers vary due to a number of factors, including customer attempts to manage inventory, changes in the customer's manufacturing strategies and variation in demand for customer products due to, among other things, technological change, new product introductions, product life-cycles, competitive conditions or general economic conditions. Because the Company generally does not obtain long-term production orders or advance commitments from its customers, it must attempt to anticipate the future volume of orders based on discussions with its customers. A substantial portion of sales in a given quarter may depend on obtaining orders for products to be manufactured and shipped in the same quarter in which those orders are received. The Company relies on its estimate of anticipated future volumes when making commitments regarding the level of business that it will seek and accept, the mix of products that it intends to manufacture, the timing of production schedules and the levels and utilization of personnel and other resources. A variety of conditions, both specific to the individual customer and generally affecting the customer's industry, may cause customers to cancel, reduce or delay orders that were previously made or anticipated. The Company cannot assure the timely replacement of canceled, delayed or reduced orders. Significant or numerous cancellations, reductions or delays in orders by a group of customers could materially adversely affect the Company's business, financial condition and results of operation. INTELLECTUAL PROPERTY The Company's success depends in part on proprietary technology and manufacturing techniques. The Company has no patents for these proprietary techniques and chooses to rely primarily on trade secret protection. Litigation may be necessary to protect the Company's technology, to determine the validity and scope of the proprietary rights of others. The Company is not aware of any pending or threatened claims that affect any of the Company's intellectual property rights. If any infringement claim is asserted against the Company, the Company may seek to obtain a license of the other party's 19 intellectual property rights. There is no assurance that a license would be available on reasonable terms or at all. Litigation with respect to patents or other intellectual property matters could result in substantial costs and diversion of management and other resources and could have a material adverse effect on the Company. RISKS ASSOCIATED WITH A SINGLE MANUFACTURING FACILITY The Company produces all of its quick-turn products and most of its other products in its manufacturing facility located in Anaheim, California, other than research and development and longer term manufacturing jobs. The Company's manufacturing processes are highly complex and require sophisticated and costly equipment. As a result, any prolonged disruption in the operations of the Company's manufacturing facility, whether due to technical or labor difficulties, destruction of or damage to this facility or other reasons, including as a result of a natural disaster such as an earthquake, fire or flood, could have a material adverse effect on the Company's financial condition or results of operations. See "Business--Facilities." ENVIRONMENTAL MATTERS The Company's operations are regulated under a number of federal, state, local and foreign 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 PCB 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. Although the Company believes that its facilities are currently in material compliance with applicable environmental laws, and it monitors its operations to avoid violations arising from human error or equipment failures, there can be no assurances that violations will not occur. In the event of a violation of environmental laws, the Company 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 the Company to cease or limit production at one or more of its facilities, thereby having a material adverse effect on the Company's 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 the Company, its results of operations, prospects or debt service ability. See "Business--Environmental Matters." COMPETITION The PCB industry is highly fragmented and characterized by intense competition. The Company principally competes with independent and captive manufacturers of complex and quick-turn PCBs. The Company's principal competitors include other independent small private companies and integrated subsidiaries of more broadly based volume producers, that also manufacture multilayer PCBs and other electronic assemblies. Some of the Company's principal competitors are less highly-leveraged than the Company and may have greater financial and operating flexibility. Moreover, the Company may face additional competitive pressures as a result of changes in technology. Competition in the complex and quick-turn PCB industry has increased due to the consolidation trend in the industry, which results in potentially better capitalized and more effective competitors. The Company's basic technology is generally not subject to significant proprietary protection, and companies with significant resources or international operations may enter the market. Increased 20 competition could result in price reductions, reduced margins or loss of market share, any of which could materially adversely affect the Company's business, financial condition and results of operations. See "Business-- Competition." DEPENDENCE ON KEY MANAGEMENT The Company's success will continue to depend to a significant extent on its executive and other key management personnel. Although the Company has entered into employment agreements with certain of its executive officers, there can be no assurance that the Company will be able to retain its executive officers and key personnel or attract additional qualified management in the future. CONTROLLING STOCKHOLDERS The Bain Capital Funds hold approximately 50.3% of the outstanding voting stock of Holdings, the sole stockholder of the Company's parent, Details Capital. In addition, the Bain Capital Funds and all of Holdings' other stockholders have entered into a stockholders agreement regarding, among other things, the voting of such stock. By virtue of such stock ownership and these agreements, the Bain Capital Funds have the power to control all matters submitted to stockholders of Holdings, Details Capital and the Company, to elect a majority of the directors of Holdings and its subsidiaries, including the Company, and to exercise control over the business, policies and affairs of Holdings, Details Capital and the Company. The interests of the Bain Capital Funds as equity holders may differ from the interests of holders of the Exchange Notes. See "Certain Relationships and Related Transactions-- Stockholders Agreement." ABSENCE OF PUBLIC MARKET; RESTRICTIONS ON TRANSFER There is currently no established market for the Exchange Notes and, although the Exchange Notes are expected to be eligible for trading in the PORTAL market, there can be no assurance as to the liquidity of any markets that may develop for the Exchange Notes, the ability of Holders of the Exchange Notes to sell their Exchange Notes or the price at which Holders would be able to sell their Exchange Notes. Future trading prices of the Exchange Notes will depend on many factors, including, among other things, prevailing interest rates, the Company's operating results and the market for similar securities. The Company does not intend to apply for listing of the Notes on any securities exchange or on any automated dealer quotation system. 21 USE OF PROCEEDS The Company will receive no proceeds from the issuance of the Exchange Notes. The Company used the net proceeds (after deduction of related fees and expenses) from the Initial Offering of approximately $96.4 million to repay (i) the $85.0 million of indebtedness represented by the Senior Subordinated Facility, plus accrued interest and related fees and expenses, (ii) a portion of the Holdings Facility and (iii) indebtedness under the Term Loan Facilities of approximately $10.3 million. The proceeds of the Senior Subordinated Facility, the Holdings Facility and the Senior Credit Facilities were used to finance, in part, the Recapitalization and related fees and expenses. See "Summary--The Transactions". 22 CAPITALIZATION The following table sets forth (i) the historical capitalization of Holdings at September 30, 1997, (ii) the capitalization of Holdings as adjusted to give effect to the Transactions (iii) the capitalization of Details as adjusted to give effect to the Transactions and the Initial Offering and application of the net proceeds therefrom, as if such transactions had occurred on that date and (iv) the capitalization of Details as adjusted to give effect to the NTI Acquisition. This table should be read in conjunction with the Selected Historical Consolidated Financial Data and Unaudited Pro Forma Financial Data and the audited consolidated financial statements included elsewhere in this Prospectus.
HOLDINGS DETAILS ------------------------------- -------------------------------- AS ADJUSTED AS ADJUSTED AS ADJUSTED FOR THE TRANSACTIONS FOR THE NTI ACTUAL FOR THE TRANSACTIONS AND THE OFFERING ACQUISITION --------- -------------------- -------------------- ----------- (DOLLARS IN THOUSANDS) Cash.................... $ 942 $ 3,891 $ 4,992 $ 405 Debt: Senior Credit Facilities(1)........ -- 91,400 81,100 106,100 Existing Indebtedness. 87,410 6,556 6,556 6,556 Senior Subordinated Facility............. -- 85,000 -- -- Notes................. -- -- 100,000 100,000 Holdings Facility(2).. -- 51,580 -- (5) -- --------- --------- --------- --------- Total debt.......... 87,410 234,536 187,656 212,656 Temporary equity(3)..... 83,350 -- -- -- Total stockholder's eq- uity (deficit)(4)...... (148,527) (196,222) -- -- Contributed capital (deficit)(4)(5)........ -- -- (150,497) (140,297) --------- --------- --------- --------- Total capitalization.... $ 23,175 $ 42,205 $ 42,151 $ 72,764 ========= ========= ========= =========
- -------- (1) The Company's $30 million Revolving Credit Facility was undrawn at December 31, 1997. (2) Concurrently with the Initial Offering, Holdings conducted the Discount Note Offering, the proceeds of which were used to repay the Holdings Facility. (3) Temporary equity represents the fair value at September 30, 1997 of the Company stock and warrants subject to a put at the option of the holders thereof which were issued in 1996 in connection with the Initial Recapitalization and exercised in connection with the Transactions. (4) As a result of the Initial Recapitalization and subsequent increases in temporary equity, Holdings had a stockholder's deficit. As a result of the Recapitalization, Holdings' total stockholders' deficit increased by $47.7 million. In the Recapitalization, the Bain Capital Funds, an affiliate of CMC and the Other Investors received common stock representing 62.0% of Holdings for an aggregate consideration of $62.4 million. Existing Owners and management retained 10.5% and 17.1% of Holdings, respectively, which, based on the price of the stock received by the Bain Capital Funds, an affiliate of CMC and the Other Investors, had a value of $26.6 million. The total value of the common stock purchased and retained in the Recapitalization was $89.0 million. (5) Subsequent to the Recapitalization, Holdings incorporated Details, Inc. as a wholly-owned subsidiary with a $1 capital contribution and contributed substantially all of its assets, subject to certain liabilities (other than the Holdings Facility) to Details. 23 UNAUDITED PRO FORMA FINANCIAL DATA The following Unaudited Pro Forma Consolidated Balance Sheet as of September 30, 1997 gives effect to the Transactions, the Initial Offering and the NTI Acquisition as if they had occurred on such date. The following Unaudited Pro Forma Consolidated Statements of Income for the year ended December 31, 1996, the nine months ended September 30, 1996 and 1997 and the last twelve months ended September 30, 1997 give effect to the Transactions, the Initial Offering and the NTI Acquisition as if they had occurred on January 1, 1996. See "The Transactions." The Unaudited Pro Forma Consolidated Statements of Income reflect the pro forma adjustment for the elimination of the $5,283 charge recorded for stock options vested under the Company's 1996 Stock Option Plan. The Unaudited Pro Forma Consolidated Statements of Income do not purport to represent what the Company's results of operations would have been if the Transactions, the Initial Offering and the NTI Acquisition had occurred as of the dates indicated or what such results will be for any future periods. The unaudited pro forma financial data are based on the historical consolidated financial statements of the Company and the assumptions and adjustments described in the accompanying notes. The unaudited pro forma balance sheet also includes the following non- recurring charges related to the Transactions: (i) approximately $6 million from the write-off of deferred financing fees; (ii) approximately $1.2 million from the early extinguishment of the Company's long term debt; (iii) approximately $1.2 million related to the buyout of the CEO's employment contract; and (iv) approximately $30.6 million of stock compensation and related bonuses under the Company's 1996 Stock Option Plan. Such charges aggregate $39.0 million and result in a net charge to earnings of $23.0 million (net of tax benefit of $16.0 million, assuming an estimated 41% tax rate). 24 UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
HOLDINGS DETAILS, INC. --------------------------------------------- ---------------------------------------- SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1997 PRO FORMA 1997 1997 OTHER HISTORICAL ADJUSTMENTS PRO FORMA PRO FORMA* ADJUSTMENTS PRO FORMA** ------------- ----------- ------------- ------------- ----------- ----------- (DOLLARS IN THOUSANDS) ASSETS Current assets: Cash................... $ 942 $ 3,130 (a) $ 3,891 $ 3,892 $ 1,100 (i) $ 4,992 (1)(b) (180)(c) Trade receivables, net................... 10,148 -- 10,148 10,148 -- 10,148 Inventories............ 2,414 -- 2,414 2,414 -- 2,414 Other.................. 1,047 -- 1,047 1,047 -- 1,047 --------- -------- --------- --------- -------- --------- Total current assets... 14,551 2,949 17,500 17,501 1,100 18,601 Investment in Details, Inc. .................. -- 1 (b) 1 -- -- Property and equipment, net.................... 14,931 -- 14,931 14,931 -- 14,931 Other assets............ 662 -- 662 662 -- 662 Deferred tax assets..... -- 8,333 (a) 11,957 11,957 1,845 (j) 13,802 1,596 (e) 2,028 (f) Debt issue costs, net... 1,542 11,600 (c) 11,600 8,400 3,600 (i) 7,500 (1,542)(e) (4,500)(j) --------- -------- --------- --------- -------- --------- Total assets............ $ 31,686 $ 24,965 $ 56,651 $ 53,451 $ 2,045 $ 55,496 ========= ======== ========= ========= ======== ========= LIABILITIES AND EQUITY Current liabilities: Current portion long- term debt............. $ 10,990 $ 10,000 (a) $ 365 $ 365 $ -- $ 365 1,200 (e) 3,400 (g) (25,225)(c) Accounts payable....... 3,505 -- 3,505 3,505 -- 3,505 Accrued expenses....... 2,989 -- 2,989 2,989 -- 2,989 Accrued bonuses ....... 2,959 (593)(a) 2,366 2,366 -- 2,366 --------- -------- --------- --------- -------- --------- Total current liabilities........... 20,443 (11,218) 9,225 9,225 -- 9,225 Other long-term liabilities............ -- 9,477 (d)(g) 9,477 9,477 -- 9,477 Long-term debt.......... 76,420 (70,229)(c) 6,191 6,191 -- 6,191 Senior Credit Facilities............. -- 91,400 (c) 91,400 91,400 (10,300)(i) 81,100 Senior Subordinated Facility............... -- 85,000 (c) 85,000 85,000 (85,000)(i) -- Notes................... -- -- -- -- 100,000 (i) 100,000 Holdings Facility....... -- 51,580 (c) 51,580 Temporary equity........ 83,350 (83,350)(g) -- -- -- -- Stockholders' equity (deficit): Common stock........... 5,301 (5,301)(g) -- -- -- -- Convertible preferred stock................. 13,532 (13,532)(g) -- -- -- -- Class A Common, Class L Common................ -- 60,895 (c) 67,325 -- -- -- 5,867 (c) 563 (h) Additional paid in capital............... 2,922 14,048 (a) 8,367 -- -- -- (16,970)(g) 4,947 (f) 3,420 (c) Receivables from stockholders.......... -- (563)(h) (563) -- -- -- Retained earnings (deficit)............. (170,282) (11,992)(a) (271,351) -- -- -- (83,862)(g) (2,296)(e) (2,919)(f) --------- -------- --------- --------- -------- --------- Total stockholders' equity (deficit)...... (148,527) (47,695) (196,222) -- -- -- Contributed capital (deficit).............. -- -- -- (147,842) (2,655)(j) (150,497) --------- -------- --------- --------- -------- --------- Total liabilities and equity................. $ 31,686 $ 24,965 $ 56,651 $ 53,451 $ 2,045 $ 55,496 ========= ======== ========= ========= ======== =========
- -------- * Subsequent to the Recapitalization, Holdings incorporated Details, Inc. as a wholly-owned subsidiary with a $1 capital contribution and contributed substantially all of its assets, subject to certain liabilities (other than the Holdings Facility) to Details. ** The unaudited pro forma consolidated balance sheet continues on page 26. See Notes to Unaudited Pro Forma Consolidated Balance Sheet 25 UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
DETAILS INC. NTI COMBINED SEPTEMBER 30, HISTORICAL SEPTEMBER 30, 1997 SEPTEMBER 29, ACQUISITION 1997 PRO FORMA* 1997 COMBINED ADJUSTMENTS PRO FORMA ------------- ------------- --------- ----------- ------------- ASSETS Current Assets: Cash................... $ 4,992 $ 1,409 $ 6,401 $(5,996)(k) $ 405 Trade receivables, net. 10,148 4,667 14,815 -- 14,815 Inventories............ 2,414 2,172 4,586 200 (l) 4,786 Other.................. 1,047 541 1,588 -- 1,588 --------- ------- --------- ------- --------- Total current assets... 18,601 8,789 27,390 (5,796) 21,594 Property and equipment, net.................... 14,931 9,184 24,115 -- 24,115 Other assets............ 662 28 690 -- 690 Deferred tax assets..... 13,802 175 13,977 -- 13,977 Debt issue costs, net... 7,500 -- 7,500 7,500 Goodwill................ -- -- -- 26,442 (l) 26,442 --------- ------- --------- ------- --------- Total assets............ $ 55,496 $18,176 $ 73,672 $20,646 $ 94,318 ========= ======= ========= ======= ========= LIABILITIES AND EQUITY Current liabilities: Current portion long- term debt............. $ 365 $ 2,960 $ 3,325 $(2,960)(k) $ 365 Accounts payable....... 3,505 2,056 5,561 -- 5,561 Accrued expenses....... 2,989 875 3,864 -- 3,864 Accrued bonuses........ 2,366 -- 2,366 -- 2,366 --------- ------- --------- ------- --------- Total current liabili- ties.................. 9,225 5,891 15,116 (2,960) 12,156 Deferred tax liability.. -- 691 691 -- 691 Other long-term liabili- ties................... 9,477 6,529 16,006 (6,529)(k) 9,477 Long-term capital leases................. 6,191 -- 6,191 -- 6,191 Senior Credit Facili- ties................... 81,100 -- 81,100 25,000 (k) 106,100 Notes................... 100,000 -- 100,000 -- 100,000 Holdings Facility....... -- -- -- -- -- Temporary equity........ -- -- -- -- -- Stockholders' equity (deficit): Common stock........... -- -- -- -- -- Convertible preferred stock................. -- -- -- -- -- Class A Common, Class L Common................ -- -- -- -- -- Additional paid in cap- ital.................. -- -- -- -- -- Receivables from stock- holders............... -- -- -- -- -- Retained earnings (def- icit)................. -- -- -- -- -- --------- ------- --------- ------- --------- Total stockholders' eq- uity (deficit)........ -- -- -- -- -- Contributed capital (deficit)/NTI equity... (150,497) 5,065 (145,432) (5,065)(m) (140,297) 10,200 (k) --------- ------- --------- ------- --------- Total liabilities and equity $ 55,496 $18,176 $ 73,672 $20,646 $ 94,318 ========= ======= ========= ======= =========
- -------- * Continued from unaudited pro forma consolidated balanced sheet on page 25. See Notes to Unaudited Pro Forma Consolidated Balance Sheet 26 NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 1997 (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (a) Reflects: (i) the compensation expense of $13,840 (recorded net of the estimated tax benefit of $5,675 assuming a 41% effective tax rate) related to the accelerated vesting of 1,437 options that were outstanding under the Company's variable stock plan at an exercise price of approximately $2,179 per share and an estimated fair market value of the Company of approximately $11,810 per share(I); (ii) the exercise of these options immediately prior to the Recapitalization, resulting in cash proceeds to the Company of $3,130 and an increase in additional paid in capital of $16,970; (iii) the compensation expense attributable to the bonuses payable to cover employee taxes on these options of $11,768 (recorded net of the estimated tax benefit of $4,825 assuming a 41% effective tax rate); and (iv) the increase in the Company's short-term debt in connection with paying $10,000 of these bonuses prior to the Recapitalization. The net pro forma adjustment recorded has been calculated as the total amount required to be recorded less the amount already recorded in the Company's September 30, 1997 historical financial statements, summarized as follows:
TOTAL CALCULATED RECORDED AS OF NET PRO FORMA ADJUSTMENT SEPTEMBER 30, 1997 ADJUSTMENT ---------------- ------------------ ------------- DEBIT(CREDIT) Cash...................... 3,130 -- 3,130 Deferred tax asset........ 10,500 2,167 8,333 Retained earnings......... 15,108 3,116 11,992 Additional paid-in capital ("APIC")................. (16,970) (2,922) (14,048) Accrued bonuses........... (1,768) (2,361) 593 Short-term debt........... (10,000) -- (10,000)
(I) The estimated fair market value per share of approximately $11,810 was determined based upon the aggregate merger consideration paid in connection with the Recapitalization divided by the total number of shares of common stock and common stock equivalents outstanding immediately prior to the Recapitalization (equal to $11,308 per share and hereafter defined as "Per Share Merger Consideration") plus the total deferred purchase obligation (see footnote (d)) divided by the total number of shares of common stock and common stock equivalents outstanding immediately prior to the Recapitalization (equal to $502 per share). (b) Represents Holdings' initial capital contribution of $1 to Details, Inc. subsequent to the Recapitalization. (c) Reflects the incurrence of debt relating to the Senior Credit Facilities, the Senior Subordinated Facility, the Notes, the Holdings Facility and the uses of cash for the purposes of effecting the Recapitalization. SOURCES OF CASH: Cash............................................................. $ 180 Senior Credit Facilities......................................... 91,400 Senior Subordinated Facility..................................... 85,000 Holdings Facility(I)............................................. 55,000 Class L Common and Class A Common (net of fees and expenses of $1,500)(II).................................................. 60,895 Common stock and common stock equivalents(III)................... 26,605 -------- Total Sources.................................................. $319,080 ========
27 USES OF CASH: Payment of deferred financing fees............................... 11,600 Payment of existing indebtedness(IV)............................. 96,604 Continuing equity interest(III).................................. 26,605 Redemption of stock and distribution to shareholders(V).......... 184,271 -------- Total Uses..................................................... $319,080 ========
(I) A portion of the proceeds received from the Holdings Facility of $55,000 was allocated to the estimated fair market value of the Class L Common and Class A Common warrants of $3,420. (II) Reflects the issuance of approximately 154,234 shares of CLass L Common and 1,247,896 shares of Class A Common at an estimated fair market value per share of approximately $364.09 and $5.00, respectively. The per share fair market value of the Class A Common and Class L Common was determined based upon the per share issuance price paid by Bain Capital and other outside investors in connection with the Recapitalization (hereafter defined as the "Class L and A Common Issuance Price"). (III) As part of the Recapitalization certain common stock and common stock options were exchanged at their carryover basis of $5,867 and $4,689, respectively, for Class L Common and Class A Common and options to purchase Class L Common and Class A Common. This exchange can be summarized as follows:
FAIR MARKET TOTAL FAIR MARKET SHARES VALUE PER SHARE VALUE ------- --------------- ----------------- CONSIDERATION GIVEN Common stock(1)................ 1,938 $11,308(1) $21,916 Common stock options(2)........ 514 9,128(2) 4,689 ------- Total fair market value...... $26,605 ======= CONSIDERATION RECEIVED Class L Common(3).............. 54,175 364(3) 19,725 Class A Common(3).............. 438,325 5(3) 2,191 Class L Common options(4)...... 14,357 294(4) 4,220 Class A Common options(4) ..... 116,158 4(4) 469 ------- Total fair market value...... $26,605 =======
(1) The estimated fair market value of common stock is determined based upon the Per Share Merger Consideration. (2) The estimated fair market value of common stock options is determined based upon the Per Share Merger Consideration of $11,308 less the option exercise price of $2,179. (3) The estimated fair market value of Class L Common and Class A Common is determined based upon the Class L and A Common Issuance Price. (4) The estimated fair market value of options to acquire Class L Common and Class A Common was determined based upon the Class L and A Common Issuance Price less the exercise price of the Class L Common and Class A Common of $70.15 and $.96, respectively. (IV) Includes $15,000 payment on the Company's existing subordinated debt which has a carrying value at September 30, 1997 of $13,850, the difference has been recorded as a non-recurring charge of $1,150 (see Note (e) below). (V) In connection with the Recapitalization, the Company redeemed approximately 16,296 shares of common stock for approximately $11,308 per share. The value ascribed to each share redeemed was determined based upon the Per Share Merger Consideration. 28 (d) Represents a deferred purchase price obligation, contingent upon the Company's ability to utilize the deferred tax benefit recorded in connection with the exercise of options prior to the Recapitalization (See Note (a)). Management believes that it is probable that the Company will utilize these tax benefits in the near future. (e) Represents the balance sheet impact for the following non-recurring charges related to the Transactions. Write-off of deferred financing fees................................. $1,542 Early extinguishment of long term debt............................... 1,150 Buy out of CEO's employment contract................................. 1,200 ------ 3,892 Net deferred tax benefit (assuming 41% effective rate)........... (1,596) ------ Net charge to equity............................................. $2,296 ======
(f) Reflects compensation expense of approximately $4,947 (recorded net of the estimated tax benefit of $2,028 assuming a 41% effective tax rate) related to the vesting of 514 options with an exercise price of approximately $2,179 per share and an estimated fair market value per share of approximately $11,810 (see note (a) for discussion of fair market value of options). Additionally, reflects the exchange of these 514 options for the following; (i) approximately 14,357 options to acquire Class L Common (estimated fair market value per share of $293.94); (ii) approximately 116,158 options to acquire Class A Common (estimated fair market value per share of $4.04) and (iii) the right to receive a pro rata portion of the deferred obligation (see note (d)) of up to $258. (g) Represents the net change in retained earnings (deficit) as a result of the redemption and subsequent retirement of existing common and common stock equivalents and preferred stock in conjunction with the Recapitalization. Redemption of stock and distribution to shareholders (see note (c) above)........................................................... $(184,271) Estimated fees and expenses of Recapitalization................... (3,400) Deferred purchase obligation...................................... (9,477) Retire common stock and APIC(I)................................... 16,404 Retire 6,601 shares of convertible preferred stock................ 13,532 Retire temporary equity........................................... 83,350 --------- $ (83,862) =========
(I) Represents 2,758 shares of common stock with a carrying value of $5,301 and 1,437 shares of common stock issued as a result of options that were exercised prior to the Recapitalization (carrying value of $16,970, as discussed in Note (a) above), less 1,938 shares of common stock converted into Class L Common and Class A Common at their historical carrying value ($5,867) (see note (c) (III). (h) Represents the Company's issuance of 112,508 shares of restricted Class A Common (valued at $5 per share which equals the Class L and A Common Issuance Price) to management in exchange for a recourse note. 29 (i) Reflects the incurrence of debt related to the Notes and the use of proceeds therefrom to retire the existing Senior Subordinated Facility and a portion of the Senior Credit Facilities. SOURCES OF CASH: Notes............................................................ $100,000 ======== USES OF CASH: Payment of Senior Subordinated Facility.......................... $ 85,000 Payment of Senior Credit Facilities.............................. 10,300 Payment of deferred financing fees............................... 3,600 Cash(I).......................................................... 1,100 -------- $100,000 ========
(I) A portion of the cash proceeds from the Original Notes was used to repay the accrued interest on the Holdings Facility and the Senior Subordinated Facility. (j) Reflects the write-off of deferred financing fees of $4,500 in conjunction with the retirement of the Senior Subordinated Facility. The charge to equity for the write-off of deferred financing fees of $2,655 is net of a tax benefit of $1,845 (assuming estimated 41% effective tax rate). (k) Reflects the draw down of debt and the issuance of common stock and the uses therefrom to finance the NTI Acquisition as if the NTI Acquisition had occurred on September 30, 1997 (actual purchase price at December 22, 1997 was approximately $38.5 million, including the assumption of approximately $7.4 million of debt (net of cash), before fees and expenses): SOURCES Cash.............................................................. $ 5,996 Senior Credit Facility............................................ 25,000 Equity Contribution............................................... 10,200 ------- Total........................................................... $41,196 ======= USES Purchase price consideration...................................... $31,164 Pay down of NTI debt.............................................. 9,489 Fees and expenses................................................. 543 ------- Total........................................................... $41,196 =======
(l) Reflects the preliminary allocation of the estimated total acquisition cost incurred in connection with the purchase of NTI to the estimated fair value of tangible and intangible assets acquired and liabilities assumed as if the NTI Acquisition occurred on September 30, 1997. The preliminary allocation of the total acquisition cost represents management's best estimate based upon available information. The final cost allocation will be based upon appraisals and other studies, which are not yet completed. The preliminary allocation is as follows: PURCHASE PRICE Purchase price consideration...................................... $31,164 Acquisition fees and expenses..................................... 543 ------- Total........................................................... $31,707 ======= ALLOCATED AS FOLLOWS Historical book value of NTI...................................... $ 5,065 Estimated step-up of inventory.................................... 200 Goodwill.......................................................... 26,442 ------- Total........................................................... $31,707 =======
(m) Represents the elimination of NTI's historical net equity balances in connection with purchase accounting. 30 DETAILS, INC. UNAUDITED PRO FORMA STATEMENT OF INCOME (DOLLARS IN THOUSANDS)
PRO FORMA ADJUSTMENTS -------------------------- NTI STATEMENT OF HISTORICAL OPERATIONS PRO FORMA TWELVE TWELVE TWELVE MONTHS MONTHS MONTHS ENDED ENDED ENDED SEPTEMBER SEPTEMBER TRANSACTIONS NTI SEPTEMBER 30, 1997 29, 1997(A) COMBINED AND OFFERING ACQUISITION 30, 1997 ---------- ------------ -------- ------------ ----------- --------- Net sales............... $73,850 $29,191 $103,041 $ -- $ -- $103,041 Cost of goods sold...... 35,625 24,687 60,312 -- -- 60,312 ------- ------- -------- ------- ------- -------- Gross profit............ 38,225 4,504 42,729 -- -- 42,729 Operating expenses: Compensation to CEO.... 1,030 -- 1,030 (1,030)(b) -- -- General and administration........ 2,177 1,102 3,279 -- 1,058 (e) 4,337 Sales and marketing.... 6,824 1,393 8,217 -- -- 8,217 Stock compensation and related bonuses....... 5,283 -- 5,283 (5,283)(g) -- -- ------- ------- -------- ------- ------- -------- Operating income........ 22,911 2,009 24,920 6,313 (1,058) 30,175 Interest expense........ (9,971) (769) (10,740) (9,100)(c) (1,306)(f) (21,146) Other income............ 87 14 101 -- -- 101 ------- ------- -------- ------- ------- -------- Income before income taxes.................. 13,027 1,254 14,281 (2,787) (2,364) 9,130 Provision for (benefit from) income taxes..... 5,395 368 5,763 (1,196)(d) (389)(d) 4,178 ------- ------- -------- ------- ------- -------- Net income.............. $ 7,632 $ 886 $ 8,518 $(1,591) $(1,975) $ 4,952 ======= ======= ======== ======= ======= ======== OTHER DATA: EBITDA (h).............. $25,292 $ 3,998 $ 29,290 $ 6,313 $ -- $ 35,603 EBITDA margin........... 34% 14% 28% -- -- 35% Depreciation and amortization........... 2,381 1,989 4,370 -- 1,058 5,428 Capital expenditures.... 4,213 1,901 6,114 -- -- 6,114
See Notes to Unaudited Pro Forma Consolidated Statement of Income 31 DETAILS, INC. UNAUDITED PRO FORMA STATEMENT OF INCOME (DOLLARS IN THOUSANDS)
PRO FORMA ADJUSTMENTS -------------------------- NTI HISTORICAL STATEMENT OF TWELVE OPERATIONS PRO FORMA MONTHS TWELVE TWELVE ENDED MONTHS MONTHS ENDED DECEMBER ENDED TRANSACTIONS NTI DECEMBER 31, 31, 1996 APRIL 1, 1997 COMBINED AND OFFERING ACQUISITION 1996 ---------- ------------- -------- ------------ ----------- ------------ Net sales............... $67,515 $26,985 $ 94,500 $ -- $ -- $94,500 Cost of goods sold...... 30,505 23,101 53,606 -- -- 53,606 ------- ------- -------- ------- ------- -------- Gross profit............ 37,010 3,884 40,894 -- -- 40,894 Operating expenses: Compensation to CEO.... 1,055 -- 1,055 (1,055)(b) -- -- General and administration........ 1,929 1,077 3,006 -- 1,058 (e) 4,064 Sales and marketing.... 5,989 1,224 7,213 -- -- 7,213 ------- ------- -------- ------- ------- -------- Operating income........ 28,037 1,583 29,620 1,055 (1,058) 29,617 Interest expense........ (9,518) (618) (10,136) (9,564)(c) (1,457)(f) (21,157) Other income............ 102 30 132 -- -- 132 ------- ------- -------- ------- ------- -------- Income before income taxes.................. 18,621 995 19,616 (8,509) (2,515) 8,592 Provision for (benefit from) income taxes..... 6,265 240 6,505 (2,119)(d) (429)(d) 3,957 ------- ------- -------- ------- ------- -------- Net income.............. $12,356 $ 755 $ 13,111 $(6,390) $(2,086) $ 4,635 ======= ======= ======== ======= ======= ======== OTHER DATA: EBITDA (h).............. $30,084 $ 3,606 $ 33,690 $ 1,055 $ -- $ 34,745 EBITDA margin........... 45% 13% 36% -- -- 37% Depreciation and amortization........... 2,047 2,023 4,070 -- 1,058 5,128 Capital expenditures.... 3,666 6,341 10,007 -- -- 10,007
See Notes to Unaudited Pro Forma Consolidated Statement of Income 32 DETAILS, INC. UNAUDITED PRO FORMA STATEMENT OF INCOME (DOLLARS IN THOUSANDS)
PRO FORMA ADJUSTMENTS -------------------------- NTI STATEMENT OF HISTORICAL OPERATIONS PRO FORMA NINE NINE NINE MONTHS MONTHS MONTHS ENDED ENDED ENDED SEPTEMBER SEPTEMBER TRANSACTIONS NTI SEPTEMBER 30, 1996 30, 1996 COMBINED AND OFFERING ACQUISITION 30, 1996 ---------- ------------ -------- ------------ ----------- --------- Net sales............... $49,086 $21,961 $71,047 $ -- $ -- $ 71,047 Cost of goods sold...... 21,899 18,108 40,007 -- -- 40,007 ------- ------- ------- ------- ------- -------- Gross profit............ 27,187 3,853 31,040 -- -- 31,040 Operating expenses: Compensation to CEO.... 836 -- 836 (836)(b) -- -- General and administration........ 1,377 910 2,287 -- 793 (e) 3,080 Sales and marketing.... 4,503 998 5,501 -- -- 5,501 ------- ------- ------- ------- ------- -------- Operating income........ 20,471 1,945 22,416 836 (793) 22,459 Interest expense........ (6,974) (376) (7,350) (7,369)(c) (1,180)(f) (15,899) Other income............ 71 63 134 -- -- 134 ------- ------- ------- ------- ------- -------- Income before provision for income taxes....... 13,568 1,632 15,200 (6,533) (1,973) 6,694 Provision for (benefit from) income taxes..... 4,270 512 4,782 (1,386)(d) (327)(d) 3,069 ------- ------- ------- ------- ------- -------- Net income.............. $ 9,298 $ 1,120 $10,418 $(5,147) $(1,646) $ 3,625 ======= ======= ======= ======= ======= ======== OTHER DATA: EBITDA (h).............. $21,966 $ 3,238 $25,204 $ 836 $ -- $ 26,040 EBITDA margin........... 45% 15% 35% -- -- 37% Depreciation and amortization........... 1,495 1,293 2,788 -- 793 3,581 Capital expenditures.... 2,720 5,287 8,007 -- -- 8,007
See Notes to Unaudited Pro Forma Consolidated Statement of Income 33 DETAILS, INC. UNAUDITED PRO FORMA STATEMENT OF INCOME (DOLLARS IN THOUSANDS)
PRO FORMA ADJUSTMENTS ------------------------- NTI STATEMENT OF HISTORICAL OPERATIONS PRO FORMA NINE NINE NINE MONTHS MONTHS MONTHS ENDED ENDED ENDED SEPTEMBER SEPTEMBER TRANSACTIONS NTI SEPTEMBER 30, 1997 29, 1997 COMBINED AND OFFERING ACQUISITION 30, 1997 ---------- ------------ -------- ------------ ----------- --------- Net sales............... $55,421 $23,436 $78,857 $ -- $ -- $ 78,857 Cost of goods sold...... 27,019 19,611 46,630 -- -- 46,630 ------- ------- ------- ------ ------- -------- Gross profit............ 28,402 3,825 32,227 -- -- 32,227 Operating expenses: Compensation to CEO.... 811 -- 811 (811)(b) -- -- General and administration........ 1,625 863 2,488 -- 793 (e) 3,281 Sales and marketing.... 5,338 1,140 6,478 -- -- 6,478 Stock compensation and related bonuses....... 5,283 -- 5,283 (5,283)(g) -- -- ------- ------- ------- ------ ------- -------- Operating income........ 15,345 1,822 17,167 6,094 (793) 22,468 Interest expense........ (7,427) (598) (8,025) (6,905)(c) (958)(f) (15,888) Other income............ 56 12 68 -- -- 68 ------- ------- ------- ------ ------- -------- Income before income taxes.................. 7,974 1,236 9,210 (811) (1,751) 6,648 Provision for (benefit from) income taxes..... 3,400 366 3,766 (463)(d) (252)(d) 3,051 ------- ------- ------- ------ ------- -------- Net income.............. $ 4,574 $ 870 $ 5,444 $ (348) $(1,499) $ 3,597 ======= ======= ======= ====== ======= ======== OTHER DATA: EBITDA (h).............. $17,174 $ 3,298 $20,472 $6,094 $ -- $ 26,566 EBITDA margin........... 31% 14% 26% -- -- 34% Depreciation and amortization........... 1,829 1,476 3,305 -- 793 4,098 Capital expenditures.... 3,267 1,119 4,386 -- -- 4,386
See Notes to Unaudited Pro Forma Consolidated Statement of Income 34 NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME YEAR ENDED DECEMBER 31, 1996 AND SEPTEMBER 30, 1997 AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 (DOLLARS IN THOUSANDS) (a) Information for the latest twelve months ended April 1, 1997 represents the summation of the pro forma year ended December 31, 1996 and pro forma six months ended September 29, 1997 information, less the pro forma six months ended September 30, 1996. (b) Reflects cost savings as a result of the cancellation of the employment agreement with the Company's CEO as a direct result of the Recapitalization. The CEO's employment was terminated on October 28, 1997. (c) The increase to pro forma interest expense as a result of the Recapitalization is as follows:
LATEST TWELVE MONTHS YEAR ENDED NINE MONTHS NINE MONTHS SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, 1997 1996 1996 1997 ------------- ------------ ------------- ------------- Elimination of Details historical interest expense and fees....... $(9,971) $(9,518) $ (6,974) $(7,427) ------- ------- -------- ------- Senior Credit Facilities (assuming LIBOR at 5.8%) Term Loan A--LIBOR plus 2.50%........... 2,581 2,581 1,936 1,936 Term Loan B--LIBOR plus 2.75%........... 4,289 4,289 3,217 3,217 Notes................... 10,000 10,000 7,500 7,500 Other bank fees and unused commitment fee on the Revolving Credit Facility............... 150 150 113 113 Capital leases.......... 764 775 612 601 Other................... 200 200 150 150 ------- ------- -------- ------- Cash interest expense............ 17,984 17,995 13,528 13,517 Amortization of deferred financing fees ($7,500 over average 6.9 years).... 1,087 1,087 815 815 ------- ------- -------- ------- Total interest from recapitalization debt requirements.. 19,071 19,082 14,343 14,332 ------- ------- -------- ------- Net increase in interest......... $ 9,100 $ 9,564 $ 7,369 $ 6,905 ======= ======= ======== =======
An increase or decrease in the assumed weighted average interest rate on the Senior Credit Facilities of 0.125% would change pro forma interest expense by $102, $102, $77, and $77 for the latest twelve months ended September 30, 1997, for the year ended December 31, 1996, and the nine months ended September 30, 1996 and 1997, respectively. (d) Represents the income tax adjustment required to result in a pro forma income tax provision based on: (i) the Company's historical tax provision using historical amounts, (ii) the direct tax effects of the pro forma transactions and offering adjustments described herein at an estimated 41% effective tax rate; and (iii) the direct tax effects of the pro forma NTI Acquisition adjustments described herein at an estimated 41% effective tax rate plus the income tax effect of the non-deductibility of the NTI goodwill for income tax purposes. (e) Represents the adjustment to reflect ongoing goodwill amortization resulting from the NTI acquisition. The acquisition will result in goodwill of approximately $26,442, which is to be amortized over a twenty- five year period. 35 (f) The increase to pro forma interest expense as a result of the Company's draw down on its acquisition line under the Senior Credit Facility in connection with the NTI acquisition is as follows:
LATEST TWELVE MONTHS YEAR ENDED NINE MONTHS NINE MONTHS SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, 1997 1996 1996 1997 ------------- ------------ ------------- ------------- Elimination of NTI historical interest expense................ $ (769) $ (618) $ (376) $ (598) Senior Credit Facility Acquisition Facility-- 5.8% LIBOR plus 2.5%. 2,075 2,075 1,556 1,556 ------ ------ ------ ------ Net increase in interest........... $1,306 $1,457 $1,180 $ 958 ====== ====== ====== ======
An increase or decrease in the assumed weighted average interest rate on the Acquisition Facility of 0.125% would change pro forma interest expense by $31, $31, $23 and $23 for the latest twelve months ended September 30, 1997, for the year ended December 31, 1996, and the nine months ended September 30, 1996 and 1997, respectively. (g) Reflects the elimination of the charge recorded for stock options vested under the Company's 1996 Stock Option Plan. In conjunction with the Recapitalization, all remaining options under the 1996 Stock Option Plan were exchanged for options to purchase Class A Common and Class L Common. All options to purchase Class A Common and Class L Common under the Company's Stock Option Plans qualify for fixed plan accounting treatment. Under fixed plan accounting, changes in the fair value of the Company's common stock relative to the exercise price of the underlying options will not result in additional charges (or credits) to the Company's statement of income. (h) "EBITDA" is defined herein as income before provision for income taxes, plus depreciation, amortization and net interest expense. 36 SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA Set forth below are selected historical consolidated financial data of the Company at the dates and for the periods indicated. The selected historical consolidated statements of income data of the Company for each of the three years ended December 31, 1996 and the selected historical consolidated balance sheet data as of December 31, 1995 and 1996 were derived from the historical consolidated financial statements of the Company that were audited by McGladrey & Pullen, LLP, whose report appears elsewhere in this Prospectus. The selected historical consolidated financial data of the Company for the year ended December 31, 1992 and the nine month periods ended September 30, 1996 and 1997 are derived from unaudited consolidated financial statements of the Company which, in the opinion of management, include all adjustments necessary for a fair presentation. The selected historical consolidated financial data set forth below should be read in conjunction with, and is qualified by reference to, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the audited consolidated financial statements and accompanying notes thereto included elsewhere in this Prospectus.
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ---------------------------------------------- ------------------- 1992 1993 1994 1995 1996 1996 1997 ------- ------- -------- -------- -------- -------- --------- (DOLLARS IN THOUSANDS) STATEMENT OF INCOME DATA: Net sales.............. $25,759 $32,394 $ 44,086 $ 59,370 $ 67,515 $ 49,086 $ 55,421 Cost of goods sold..... 13,142 16,480 20,415 25,156 30,505 21,899 27,019 ------- ------- -------- -------- -------- -------- --------- Gross profit........... 12,617 15,914 23,671 34,214 37,010 27,187 28,402 Operating expenses: Compensation to CEO (1)................... 9,414 11,513 412 418 1,055 836 811 General and administration........ 690 1,136 1,385 1,789 1,929 1,377 1,625 Sales and marketing.... 2,672 3,074 3,542 5,293 5,989 4,503 5,338 Stock compensation and related bonuses (2)... -- -- -- -- -- -- 5,283 ------- ------- -------- -------- -------- -------- --------- Operating income (loss)................ (159) 191 18,332 26,714 28,037 20,471 15,345 Interest expense....... (57) (167) (181) (371) (9,518) (6,974) (7,427) Interest income........ 21 10 13 42 102 71 56 ------- ------- -------- -------- -------- -------- --------- Income (loss) before income taxes.......... (195) 34 18,164 26,385 18,621 13,568 7,974 Provision for (benefit from) income taxes (3)................... (18) 221 273 396 6,265 4,270 3,400 ------- ------- -------- -------- -------- -------- --------- Net income (loss)...... $ (177) $ (187) $ 17,891 $ 25,989 $ 12,356 $ 9,298 4,574 ======= ======= ======== ======== ======== ======== ========= OTHER FINANCIAL DATA: EBITDA (4)............. $ 567 $ 1,047 $ 19,214 $ 27,768 $ 30,084 $ 21,966 $ 17,174 Adjusted EBITDA (5).... 9,981 12,560 19,626 28,186 31,139 22,802 23,268 Depreciation........... 726 856 882 1,054 2,047 1,495 1,829 Cash provided by operating activities.. 298 395 18,094 26,141 12,158 10,882 11,506 Cash flow (used in) investing activities.. (1,273) (1,254) (844) (2,946) (3,577) (2,712) (3,267) Cash provided by (used in) financing activities............ 786 2,277 (15,156) (26,409) (8,885) (6,786) (7,466) Cash dividends on common stock.......... -- -- 13,026 27,076 6,618 6,618 -- Ratio of earnings to fixed charges (6)..... -- 1.1x 51.5x 46.6x 3.0x 2.9x 2.1x BALANCE SHEET DATA (END OF PERIOD): Working capital........ $ 1,170 $ (74) $ (96) $ (2,264) $ (3,514) $ (884) $ (5,892) Total assets........... 6,164 9,097 12,015 13,081 27,503 26,930 31,686 Total debt............. 1,434 3,446 1,316 1,982 94,101 96,157 87,410 Equity (net capital deficiency) (7)........ 2,993 2,806 2,806 2,500 (72,674) (75,732) (65,177)
- -------- (1) Represents compensation paid to the Company's former CEO, who also was the sole shareholder since the Company's inception through the Initial Recapitalization and whose employment terminated on October 28, 1997. (2) Represents stock compensation and related bonuses under the Company's 1996 Stock Option Plan. (3) Prior to February 1996, the Company elected to be taxed as an "S" corporation and paid income taxes at a reduced rate. On a pro forma basis, income tax expense would have been higher by the following amounts: 1994- $7,175; 1995-$10,425; 1996-$1,295 and September 30, 1996-$1,295. (4) "EBITDA" is defined herein as income before income taxes, depreciation, amortization and net interest expense. EBITDA is presented because the Company believes it is frequently used by security analysts in the evaluation of companies. However, EBITDA should not be considered as an alternative to net income as a measure of operating results or to cash flows as a measure of liquidity in accordance with generally accepted accounting principles. (5) "Adjusted EBITDA" is defined herein as EBITDA adjusted for certain items of income which are not expected to be incurred by the Company subsequent to the Transactions. These items consist of the compensation paid to the Company's former CEO whose employment terminated on October 28, 1997 and stock compensation and related bonuses under the Company's 1996 Stock Option Plan. (6) For purposes of computing this ratio, earnings consists of income before income taxes plus fixed charges. Fixed charges consist of interest expense and the estimated interest portion of rent expense. Earnings were not sufficient to cover fixed charges by $195 for the year ended December 31, 1992. (7) The net capital deficiency as of December 31, 1996 reflects the Initial Recapitalization of the Company that took place in January of 1996. 37 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of the financial condition and results of operations covers periods before completion of the Transactions. In connection with the Transactions, the Company entered into financing arrangements and altered its capital structure. Accordingly, the results of operations for periods subsequent to the consummation of the Transactions will not necessarily be comparable to prior periods. See "The Transactions," "Capitalization," "Description of Senior Credit Facilities," "Selected Historical Consolidated Financial Data," "Unaudited Pro Forma Consolidated Financial Data," and the audited and unaudited consolidated financial statements and notes thereto included elsewhere in this Prospectus. OVERVIEW The Company believes, based on industry data, that it is one of the largest domestic manufacturers and marketers of PCBs for the quick-turn segment of the PCB industry. The Company produces PCBs for over 300 customers across a wide range of end-use markets including the telecommunications, computer, contract manufacturing, industrial instrumentation and consumer electronics industries. For the nine months ended September 30, 1997, approximately 70% of the Company's sales were quick-turn PCBs. The Company's net sales of PCB panels, which consist of multiple individual printed circuit boards, have grown at a compound annual growth rate of 25% from $25.8 million in fiscal year ended December 31, 1992 to $73.9 million in the twelve months ended September 30, 1997. SIGNIFICANT TRANSACTIONS The Company was established in 1978 by James Swenson. In 1992, the Company installed new management, headed by Bruce McMaster, and began to focus primarily on quick-turn products. In late January 1996, CMC and its affiliates acquired approximately 40% of the outstanding stock of the Company in a recapitalization (the "Initial Recapitalization"). On October 4, 1997, Holdings and its stockholders entered into the Recapitalization Agreement pursuant to which the Merger was consummated on October 28, 1997. See "The Transactions." The Company incurred a non-recurring charge of approximately $39.0 million (net of estimated income tax benefits of $16.0 million) as a result of the following events in connection with the Transactions: (i) the write-off of deferred financing fees; (ii) the early extinguishment of the Company's long-term debt; (iii) the buyout of the CEO's employment contract; and (iv) the compensation expense attributable to the accelerated vesting of the outstanding options under the Company's variable stock plan in conjunction with the Recapitalization. Because the Merger has been accounted for as a recapitalization, the historical cost basis of the Company's assets and liabilities was not affected. RESULTS OF OPERATIONS The following table sets forth certain condensed historical financial data for the Company expressed as a percentage of net sales for the periods set forth below:
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------- ------------------ 1994 1995 1996 1996 1997 ------- ------- ------- -------- -------- Net sales....................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of goods sold.............. 46.3 42.4 45.2 44.6 48.8 ------- ------- ------- -------- -------- Gross profit.................... 53.7 57.6 54.8 55.4 51.2 Operating expenses: Stock compensation and related bonuses...................... 0 0 0 0 9.5 Other operating expenses...... 12.1 12.6 13.3 13.7 14.0 ------- ------- ------- -------- -------- Operating income................ 41.6 45.0 41.5 41.7 27.7 Net interest expense............ (0.4) (0.5) (13.9) (14.1) (13.3) ------- ------- ------- -------- -------- Income before income taxes...... 41.2 44.5 27.6 27.6 14.4 Income tax expense.............. (0.6) (0.7) (9.3) (8.7) (6.1) ------- ------- ------- -------- -------- Net income...................... 40.6 43.8 18.3 18.9 8.3 ======= ======= ======= ======== ========
38 NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1996 Net Sales. Net sales for the nine months ended September 30, 1997, increased $6.3 million or 12.9% to $55.4 million from $49.1 million for the nine months ended September 30, 1996. The increase was largely due to growth in the volume of units shipped primarily attributable to increased demand from telecommunications customers. During the nine months ended September 30, 1997, the Company's largest customer accounted for 10.9% of net sales. During the nine months ended September 30, 1996, the Company's largest customer accounted for 17.5% of net sales. Gross Profit. Gross profit for the nine months ended September 30, 1997, increased $1.2 million to $28.4 million from $27.2 million for the nine months ended September 30, 1996. As a percentage of net sales, gross profit decreased 4.2% from 55.4% for the nine months ended September 30, 1996, to 51.2% for the nine months ended September 30, 1997. 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. Stock Compensation. During the nine months ended September 30, 1997, stock compensation and related bonuses increased $5.3 million from the nine months ended September 30, 1996, due primarily to non-cash expense for the vesting of employee stock options granted in 1996. Other Operating Expenses. Other operating expenses increased $1.1 million or 15.8% to $7.8 million for the nine months ended September 30, 1997, as compared to $6.7 million for the nine months ended September 30, 1996. As a percentage of net sales, other operating expenses increased to 14.0% for the nine months ended September 30, 1997, as compared to 13.7% for the nine months ended September 30, 1996. The increase was due to additional sales and marketing expenses attributable to increased sales coupled with the start-up costs associated with the January 1997 opening of the Company's sales office in London. The Company anticipates operating expenses will continue to increase in proportion to revenue as the Company expands. Net Interest Expense. Net interest expense for the nine months ended September 30, 1997, increased $469,000 to $7.4 million from $6.9 million for the nine months ended September 30, 1996. The increase in interest expense is primarily due to the nine months ended September 30, 1996 containing only 8 months of interest from the Initial Recapitalization which occurred in late January 1996. In connection with the Initial Recapitalization, the Company incurred approximately $95.0 million in bank indebtedness. If the Initial Recapitalization would have been entered into on January 1, 1996, interest expense for the nine months ended September 30, 1996, would have been higher by approximately $770,000 for a total of $7.6 million. At September 30, 1997, the Company's total debt is approximately $87.4 million resulting in a corresponding decrease in interest expense for the nine months ended September 30, 1997. On a pro forma basis, after giving effect to the Transactions, the Initial Offering and the NTI Acquisition, the Company anticipates that interest expense will increase to approximately $1.8 million per month beginning in the fourth quarter of 1997. Income Tax Expense. Income tax expense for the nine months ended September 30, 1997, was $3.4 million or 42.6% of income before income taxes. Income tax expense for the nine months ended September 30, 1996, was $4.3 million or 31.5% of income before income taxes. Prior to the Initial Recapitalization, the Company was taxed as an "S" corporation for income tax purposes. As an "S" corporation, the Company paid reduced income taxes and all income was passed through to the stockholder of the Company. On a pro forma basis, the Company's effective tax rate would have been 41% had the "S" corporation election not been in effect. The Company anticipates a combined tax rate of approximately 41% in the future under the current federal and state income tax rate structure. Net Income. For the reasons discussed above, net income for the nine months ended September 30, 1997, decreased $4.7 million to $4.6 million from $9.3 million for the nine months ended September 30, 1996. 39 1996 COMPARED TO 1995 Net Sales. Net sales increased $8.1 million or 13.7% to $67.5 million in 1996 from $59.4 million in 1995. The increase was due primarily to a change in the product sales mix resulting in an increase in average panel price partially offset by a decrease in total panels shipped. The overall increase in average price per panel was a result of the Company's increased emphasis on prototype and premium products. During 1996, the Company had sales to two customers totaling $16.6 million or 24.6% of net sales. During 1995, the Company had sales to these two customers totaling $16.4 million or 27.7% of net sales. Gross Profit. Gross profit increased $2.8 million to $37.0 million in 1996 from $34.2 million for 1995. As a percentage of net sales, gross profit decreased 2.8% to 54.8% in 1996 from 57.6% in 1995. The decrease in gross profit as a percentage of sales was primarily the result of an increase in the Company's investment in engineering, manufacturing and systems personnel to support continued growth in manufacturing capacity, combined with increased manufacturing costs incurred on more complex, high density PCBs. Other Operating Expenses. Other operating expenses increased $1.5 million or 19.6% to $9.0 million in 1996 from $7.5 million in 1995. As a percentage of net sales, other operating expenses increased to 13.3% in 1996 from 12.6% in 1995. Of these totals, compensation to the CEO increased $637,000 to $1.1 million in 1996 from $418,000 in 1995. This increase was due to a new employment contract signed in January 1996 in connection with the Initial Recapitalization. In connection with the Recapitalization, the Company negotiated a termination of the CEO's current contract and anticipates an elimination of annual compensation expense to this individual of $1.1 million beginning in November 1997. Net Interest Expense. Net interest expense increased $9.1 million to $9.4 million from $329,000 in 1995. The increase in interest expense is primarily due to the debt incurred of approximately $95.0 million and $6.6 million in capital lease transactions in connection with the Initial Recapitalization. Prior to 1996, the Company had incurred only nominal amounts of debt for the purchase of equipment. Income Tax Expense. Income tax expense was $6.3 million or 33.6% of income before income taxes in 1996. Income tax expense was $396,000 or 1.5% of income before income taxes in 1995. The income tax rates were lower than the statutory income tax rate since the Company changed from an "S" corporation to a "C" corporation in late January 1996. On a pro forma basis, the income tax rate of the Company if it were taxable as a "C" corporation for all of 1996 would have been 41%. Net Income. For the reasons discussed above, net income decreased $13.6 million to $12.4 million in 1996 from $26.0 million in 1995. 1995 COMPARED TO 1994 Net Sales. Net sales increased $15.3 million or 34.7% to $59.4 million in 1995 from $44.1 million in 1994. The increase was due primarily to a change in the product sales mix resulting in an increase in the average panel price combined with an increase in total panels shipped. The overall increase in average price per panel was a result of the Company's increased emphasis on prototype and premium products. The increase in panels shipped is the result of the Company's focus on obtaining larger quantity orders for quick-turn PCB business as well as increases in prototype and premium units produced. Increased capacity utilization experienced at standard lead-time PCB production houses also resulted in extended lead times for production orders and less capacity available for quick-turn services, and as a result, the Company experienced increased orders to fill this shortage of quick-turn capacity. During 1995, two customers accounted for $16.4 million or 27.7% of net sales. During 1994, two customers accounted for sales of $17.3 million or 39.3% of net sales. 40 Gross Profit. Gross profit increased $10.5 million to $34.2 million in 1995 from $23.7 million for 1994. As a percentage of net sales, gross profit increased 3.9% to 57.6% in 1995 from 53.7% in 1994. The increase in gross profit was primarily attributable to the increase in prototype and premium units produced and sold in 1995 as compared to 1994 and a decrease in manufacturing expenses. Other Operating Expenses. Other operating expenses increased $2.2 million or 40.5% to $7.5 million in 1995 from $5.3 million in 1994. As a percentage of net sales, other operating expenses increased 0.5% to 12.6% in 1995 from 12.1% in 1994. The increase was due to a $1.7 million increase in sales and marketing expense due to higher variable costs directly attributable to increased sales. In addition, general and administrative expenses increased by $404,000 as a result of an increase in fixed costs associated with the administration of a larger organization. Net Interest Expense. Net interest expense increased $161,000 to $329,000 in 1995 from $168,000 in 1994 due to an increase in debt outstanding used in the purchase of production equipment. Income Tax Expenses. Income tax expense was $396,000 or 1.5% of income before income taxes in 1995. Income tax expense was $273,000 or 1.5% of income before income taxes in 1994. The income tax rates were lower than the statutory income tax rate since the Company was an "S" corporation for income tax purposes. Net Income. For the reasons discussed above, net income increased $8.1 million to $26.0 million in 1995 from $17.9 million in 1994. LIQUIDITY AND CAPITAL RESOURCES The Company's principal sources of liquidity are cash provided by operations and borrowings under various debt instruments. The Company's principal uses of cash have been to finance capital expenditures and meet debt service requirements. The Company anticipates that it will also use cash in the future to finance possible acquisitions. Net cash provided by operating activities was $11.5 million and $10.9 million for the nine months ended September 30, 1997 and 1996, respectively. Net cash provided by operating activities was $12.2 million, $26.1 million and $18.1 million for the fiscal years ended 1996, 1995 and 1994, respectively. Fluctuations in net cash provided by operating activities is primarily attributable to increases and decreases in the Company's net income before non-cash charges. Financing activities in 1996 primarily consisted of distributions to shareholders and shareholder transactions and increased debt requirements in connection with the Initial Recapitalization. Net cash used in financing activities was $15.2 million, $26.4 million and $8.9 million for the fiscal years ended December 31, 1994, 1995 and 1996, respectively. Financing activities in 1994 and 1995 primarily consisted of distributions to shareholders. The Company's capital expenditures were $0.8 million, $2.9 million, $3.7 million and $3.3 million in 1994, 1995, 1996 and the nine months ended September 30, 1997, respectively. The Company anticipates these expenditures will increase to approximately $4 million for the full year 1997 and $6 million for 1998. Prior to January 1996, the Company was wholly-owned by James Swenson. In January 1996, the Company declared a dividend of $2.7 million payable to James Swenson. On January 31, 1996, the Company redeemed 8,162 shares of its common stock held by James Swenson for $105 million. This represented approximately 60% of the then outstanding stock of the Company. The Company funded this redemption through the issuance of $95 million of debt and the sale of 6,671 shares of convertible 41 preferred stock and 2,509 shares of common stock. Total proceeds from the sale of stock were $20 million. As of October 28, 1997, after giving effect to the Transactions, the Company incurred new indebtedness aggregating $181.4 million. As a result of the Transactions, the Company has significantly increased cash requirements for debt service relating to the Notes and Senior Credit Facilities. On December 22, 1997, the Company incurred additional debt of $25 million under the Term Loan Facilities in connection with the NTI Acquisition. As of December 31, 1997, the Company had borrowings of approximately $211.2 million and up to $30 million available for borrowing under the Revolving Credit Facility. The Company's estimated minimum principal payment obligations under the Senior Credit Facilities are $3.5 million and $7.0 million for fiscal 1998 and fiscal 1999, respectively. This compares to $11.0 million and $12.5 million, which would have been required under its previous facilities. Concurrently with the Initial Offering, Holdings conducted the Discount Notes Offering, the proceeds of which it used to repay the Holdings Facility. On February , 1998, Holdings contributed substantially all of its assets, subject to certain liabilities, including the Discount Notes, to Details Capital. Concurrently with the Exchange Offer, Details Capital is conducting an exchange offer for the Discount Notes. The Discount Notes and the Exchange Discount Notes exchanged therefor are both herein referred to as the "Discount Notes". The Discount Notes require no interest payments for the first five years. Although none of the Company's assets secure the Discount Notes and the Company does not guarantee the Discount Notes, Neither Holdings nor Details Capital currently has any operations or sources of cash flow. The Company expects that, based on current operations, it will be the only source of payment for Details Capital's debt service. See "Description of Exchange Notes--Certain Covenants." The Company's ability to incur additional indebtedness is limited under the Indenture, the Discount Note Indenture and the Senior Credit Facilities. Based upon the current level of operations, the Company believes that cash generated from operations, available cash and amounts available under the Senior Credit Facilities, will be adequate to meet its debt service requirements, capital expenditures and working capital needs for the foreseeable future, although no assurance can be given in this regard. Accordingly, there can be no assurance that the Company's business will generate sufficient cash flow from operations or that future borrowings will be available under the Senior Credit Facilities to enable the Company to service its indebtedness, including the Notes, or make anticipated capital expenditures. The Company's future operating performance and ability to service or refinance the Notes and to extend or refinance the Senior Credit Facilities will be subject to future economic conditions and to financial, business and other factors, many of which are beyond the Company's control. IMPACT OF INFLATION The Company believes that its results of operations are not dependent upon moderate changes in the inflation rate. However, severe increases in inflation could affect the global and United States economy and could have an impact on the Company's profitability. COMPUTER SYSTEMS AND YEAR 2000 The Company is currently developing a plan to insure that its systems and software infrastructure are Year 2000 compliant. The scheduled implementation of all phases of the plan is February 1998. Given the relatively small size of the Company's systems and the predominately new hardware, software and operating systems, management does not anticipate any significant delays in becoming Year 2000 compliant. However, the Company is unable to control whether its customers' and suppliers' systems are Year 2000 compliant. To the extent that customers would be unable to order product or pay invoices or suppliers would be unable to manufacture and ship product, it could affect the 42 Company's operations. However, management does not believe that Year 2000 changes will have a material impact on the operating results or financial condition of the Company. CHANGES IN ACCOUNTING PRINCIPLES FASB has also issued Statement No. 131 "Disclosures about Segments of an Enterprise and Related Information." Statement No. 131 modifies the disclosure requirements for reportable segments and is effective for the Company's year ending December 31, 1998. The Company has not determined if the effect of the adoption of this Statement would require the Company to report industry segments. RECENT DEVELOPMENTS On December 22, 1997, the Company acquired all of the outstanding shares of common stock of NTI for approximately $38.5 million. The purchase price includes the assumption of approximately $7.4 million of NTI's debt without giving effect to the final purchase price adjustment. The acquisition was funded in part through the issuance of additional equity interests in Holdings 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 from Holdings and a $25 million term loan borrowing under the Company's Term Loan Facilities. NTI manufactures complex PCBs for OEMs in the electronics industry and focuses primarily on pre-production market opportunities with lead times of 10 to 20 days. NTI currently manufactures all of its products at two leased facilities located in Colorado Springs, Colorado, occupying 84,000 square feet (which also include its executive offices). NTI is operated as a wholly-owned subsidiary of the Company and is currently headed by James S. Marcelli. Mr. Marcelli, who has run NTI since 1991, is now a Vice President of the Company and President of NTI. As of September 30, 1997, NTI employed approximately 325 employees, all of whom are non-union employees. The NTI Acquisition has been accounted for under the purchase method of accounting. As a result, the total acquisition cost has been allocated to the estimated fair value of tangible and intangible assets acquired and liabilities assumed. Based upon management's preliminary estimate of the fair value of the assets acquired and liabilities assumed, the Company has recorded approximately $26 million in goodwill, which will be amortized over a period of twenty-five years. 43 THE INDUSTRY TECHNICAL OVERVIEW PCBs serve as the foundation of almost all electronic products, providing the circuitry and mounting surfaces necessary to interconnect discrete electronic components, including integrated circuits, capacitors and resistors. PCBs consist of a pattern of electrical circuitry etched from copper and laminated to a board made of insulating material, thereby providing electrical interconnection between the components mounted onto it. PCBs can be designed as single-sided, double-sided, or multi-layer boards, are characterized as rigid or flexible depending on their end-use and are designed to customer specification using computer aided design ("CAD") software. Multi- layer PCBs consist of stacked boards separated by bonding sheets and pressed to form a solid board. Electrical connections between the layers are made using standard plated through-holes (drilled and plated through the whole board), or by vias (plated holes between two or more layers). To meet increasing demand among OEMs and contract manufacturers, PCB manufacturers have developed more complex multi-layer designs with surface mount and other attachment technologies, narrower widths and separations of copper traces, advanced materials (such as Teflon), and small diameters of vias and through- holes to connect internal circuitry. Changes in the industry are predominantly evolutionary rather than revolutionary and many of the production processes and technologies used today were first developed more than 10 years ago. MARKET SEGMENTATION AND GROWTH As electronic products have become smaller and more complex, the manufacture of PCBs has required increasingly sophisticated engineering and manufacturing expertise. These advanced manufacturing processes and technology requirements have caused OEMs to rely increasingly on independent or merchant manufacturers and to reduce dependence on their own internal captive facilities. It is estimated that in 1996 independent or merchant manufacturers served 87% of the domestic PCB market, an increase from 71% in 1992. The worldwide PCB market, including both captive and merchant PCB production, generated approximately $30.4 billion of revenue in 1996. The U.S. accounted for approximately 27% of the worldwide market, or $8.3 billion. As described above, approximately 87% of the domestic market, or $7.2 billion was supplied by merchant (i.e., non-captive) fabricators. The merchant market is divided between quick-turn and long-lead manufacturers. Of the $7.2 billion of domestic merchant production, quick-turn PCBs accounted for 21% or approximately $1.5 billion. Quick-turn PCBs, which are defined as printed circuit boards manufactured within 10 days (and as little as 24 hours) in prototype and pre-production quantities, are used in the design, test and launch phases of new electronic products. The quick-turn market is characterized by higher margins, faster growth and greater customer diversity than the long-lead PCB market. Since 1992, the quick-turn segment has experienced rapid growth, increasing at a 24% CAGR, twice the rate for the overall domestic PCB industry. Long-lead PCBs, defined as those with delivery lead times in excess of ten days (and customarily 3-5 weeks), typically have larger order sizes and are utilized in both the ramp-to-production and full production phases of electronic product development. The following table describes the domestic PCB market. DOMESTIC PCB MARKET SIZE
SHIPMENT VALUE IN BILLIONS OF DOLLARS ----------------------------------------- 1992 1993 1994 1995 1996 CAGR ------ ------ ------ ------ ------ ------ Quick-Turn......................... $ 0.6 $ 0.8 $ 1.0 $ 1.2 $ 1.5 24% Long-Lead.......................... 3.1 3.6 4.2 4.9 5.7 16% ------ ------ ------ ------ ------ ----- Total Merchant................... 3.7 4.4 5.2 6.1 7.2 18% Captive............................ 1.5 1.5 1.5 1.4 1.1 (8%) ------ ------ ------ ------ ------ ----- Total PCB Market................. $ 5.2 $ 5.9 $ 6.7 $ 7.5 $ 8.3 12%
44 The customary evolution of an electronic product results in several phases of PCB procurement: prototype, pre-production and production. Initially, in the design and development stage, customers order small lot sizes (1-25 boards) and demand quick-turn delivery ("prototype boards"); in the test- marketing and product introduction stages, they order low to medium quantities (up to 5,000 boards) which may or may not require quick-turn delivery ("pre- production boards"); and in the product roll-out stage, they tend to order large volumes with lead times in excess of three weeks ("production boards"). Prototype and pre-production boards, the segments in which the Company competes, command escalating pricing premiums the shorter the lead time and the greater the board complexity. PCB complexity is determined by layer count, the use of exotic substrates and materials, the fineness of line spaces and traces, the incorporation of buried resistors and capacitors, the use of microvias and numerous other features. By focusing on either time criticality, board complexity, or both, a PCB fabricator can realize significant pricing premiums and commensurately higher profitability per PCB than that attainable in the production segment of the market. END-USE MARKETS PCBs are customized for specific electronic applications and are sold to OEMs and contract manufacturers in volumes that range from smaller quantities for prototypes and pre-production orders to larger quantities for volume production. PCBs are used in various end-use markets which include (i) telecommunications products such as cellular phones, pagers and switching and transmission equipment; (ii) computers and peripherals such as notebook and desktop computers, high-end workstations, network servers, modems and printers; (iii) automotive systems such as ABS traction control, airbag and electric-powered engines and engine transmission control; (iv) industrial applications such as optical code-readers and test equipment; and (v) basic home appliances such as microwave ovens and remote controls. TRENDS The PCB industry is characterized by the following trends: Increasing Complexity of Electronic Products. The increasing complexity of electronic products has driven technological advancements in PCBs. As this trend continues, fabricators face increasingly more difficult demands on the manufacturing process. For example, modern compact and portable designs feature advanced materials, high layer counts, narrower line widths and spaces and smaller vias to connect internal circuitry. As a result, manufacturers must remain at the forefront of both design and manufacturing technologies in order to be competitive in the prototype and pre-production segments. Accelerating Product Lifecycles. Rapid advances in technology and increasing competitive pressures are shortening product lifecycles and forcing electronic OEMs to develop and bring new products to market faster. This has resulted in OEMs viewing "speed to market" as a key competitive advantage causing them to partner with suppliers that can consistently deliver highly reliable product under demanding time constraints. This trend is a key driver of growth in the quick-turn market. Consolidating Industry. The domestic PCB industry is highly fragmented with approximately 600 active fabricators. Although the industry has experienced significant consolidation in the last four years, declining 37% from the approximately 950 manufacturers in 1992, the top eight manufacturers still only account for approximately 25% of industry sales in 1996. Consolidation in the industry is driven by (i) growing demand by electronic OEMs for both increasingly complex PCBs and shortened delivery cycles which mandates sophisticated design, engineering and manufacturing capabilities; (ii) ongoing outsourcing by electronic OEMs; and (iii) increasing desire by OEMs to use fewer suppliers. 45 BUSINESS GENERAL The Company believes, based on industry data, that it is one of the largest manufacturers and marketers of complex printed circuit boards for the time critical or "quick-turn" segment of the domestic PCB industry. Printed circuit boards are the basic platforms used to interconnect microprocessors, integrated circuits, and other components essential to the functioning of virtually all electronic products. Quick-turn PCBs, which are defined as printed circuit boards manufactured within 10 days (and as little as 24 hours) in prototype and pre-production quantities, are used in the design, test and launch phases of new electronic products. The quick-turn market is characterized by higher margins, faster growth and greater customer diversity than the long-lead market. Approximately 70% of the Company's year-to-date sales are quick-turn PCBs. Complex PCBs are those employing difficult to manufacture specifications such as high layer counts, dense circuitry designs, and exotic materials. Such boards command escalating pricing premiums the greater the complexity. The Company's advanced engineering capability enables it to produce boards with up to 40 layers employing leading edge fabrication technologies. The Company supplies over 300 customers in a wide range of end- use markets including the telecommunications, computer, contract manufacturing, industrial instrumentation, and consumer electronics industries. On a pro forma basis for the twelve months ended September 30, 1997, the Company's net sales and EBITDA would have been $103.0 million and $35.6 million, respectively. Since the installation of a new management team in 1992, the Company has successfully increased its sales and profitability and diversified its customer base by strategically focusing on the quick-turn PCB market. As a result of this strategic shift, the Company has grown net sales at a CAGR of 25% from $25.8 million in the fiscal year ended December 31, 1992 to $73.9 million for the twelve months ended September 30, 1997. In the same time frame, the Company (excluding NTI) has grown pro forma EBITDA at a 27% CAGR from $10.0 million to $31.6 million. As a result of the Recapitalization, management owns stock and options for approximately 27.5% of the fully-diluted capital stock of Holdings. Such equity ownership represents a significant economic commitment to, and participation in, the Company. COMPETITIVE STRENGTHS The Company believes that it has several competitive advantages in the PCB industry, including: Quick-Turn Market Leader. Based on industry data, the Company believes that it is one of the largest manufacturers of quick-turn PCBs in the United States, with approximately 70% of its year-to-date sales derived from quick- turn products. The Company routinely completes complex orders (up to 12 layers) in less than 24 hours and believes that its engineering expertise and ability to produce highly complex PCBs are competitive strengths in the quick- turn market. Leading Technological Capabilities. The Company believes that its ability to engineer advanced PCB materials and utilize advanced technologies is a competitive strength in the quick-turn market. Customers utilize the technological expertise of Details' 66 front-end engineers throughout the product development effort to achieve an integrated cost-effective manufacturing effort. The Company has the ability to produce boards with up to 40 layers, and approximately 40% of its sales year-to-date included boards with layer counts of 8 or more. Diverse and Loyal Customer Base. The Company believes that it has one of the broadest customer bases in the industry, with more than 300 customers serving a wide range of end-use markets. Year-to-date, the Company's largest customer accounted for less than 11% of revenue. In addition, the Company has been successful at retaining customers. For example, the Company has maintained a relationship with its top three year-to-date customers--Motorola, Intel and IBM--since at 46 least 1993. Details believes that its ability to rapidly respond to changes in demand for new or modified board designs with consistent high quality is a major factor in its success at creating customer partnerships. The Company's customer list includes leading manufacturers of telecommunications equipment, such as Motorola and Qualcomm; computer workstations and servers, such as IBM and Silicon Graphics; semi-conductor fabrication such as Intel; industrial products, such as Caterpillar and Delco; computer assemblers, such as Dell and Compaq; and contract manufacturing firms such as SCI and Jabil. Experienced Management Team with Significant Equity Ownership. The Company's President, Bruce McMaster, has a total of 16 years of experience in the PCB industry. Mr. McMaster, together with the other members of his senior management team--Lee Muse (Vice President of Sales and Marketing), Joseph Gisch (Chief Financial Officer), Terry Wright (Vice President of Engineering), Michael Moisan (Vice President of Operations), and James S. Marcelli (Vice President)--have over 70 years of industry experience and approximately 30 years with the Company. Since 1992, management has successfully developed and implemented manufacturing and marketing strategies which have resulted in a compound annual growth rate in net sales of 25% from the fiscal year ended December 31, 1992 to the twelve months ended September 30, 1997. As a result of the Recapitalization, management owns stock and options for approximately 27.5% of the fully-diluted capital stock of Holdings. Such equity ownership represents a significant economic commitment to, and participation in the Company. BUSINESS STRATEGY The Company's goal is to maintain its growth rate in sales and profitability by leveraging its quick-turnaround capability, its market leading technology, and its large customer base to increase its penetration of value-added market segments. In order to accomplish its goal, the Company intends to: Increase Technical Leadership in Quick-Turn Segment. The Company intends to extend its leadership in the quick-turn segment by continuing to provide consistent, rapid delivery through leading-edge processes and technology. Currently, the Company is capable of delivering 12- layer boards in as little as 24 hours and had a less than 1% product return rate for the nine months ended September 30, 1997. Such performance is largely due to the technology and processes employed by the Company coupled with its engineering expertise and customized design and development services. The Company intends to maintain its focus on improving quality and delivery times by incorporating emerging technologies and by continuously improving its manufacturing processes. Cross-Sell Pre-Production to Quick-Turn Customers. The Company believes there are substantial opportunities to leverage its strong customer relations in the quick-turn segment by cross-selling 10 to 20 day pre-production volume to its existing customers utilizing the additional production capacity obtained through the recent NTI Acquisition. See "Recent Developments." The Company recognizes OEMs' desire to continue to use the same supplier through several stages of the product development process and thereby reduce the number of suppliers used. Through the acquisition of NTI, the Company intends to expand its services to the longer lead 10 to 20 day pre-production phase of product development in addition to servicing the quick-turn prototype phase, which the Company believes can thereby enhance the efficiency of its customers' production process. Specifically, the Company believes that by servicing a larger portion of its customers' production needs, it can: (i) reduce customers' tooling costs, (ii) eliminate supplier switching risk, and (iii) shorten its customers' "time-to-market." In furtherance of this initiative, the Company continues to make investments in capital equipment, engineering capability and systems infrastructure. Achieve International Presence. The Company believes there are substantial opportunities to satisfy international demand for time-critical, complex PCBs. Year-to-date, approximately 94% of the Company's revenues were generated domestically despite the fact that the U.S. accounts for only 27% 47 of the worldwide market. In particular, the Company has established a sales office in the United Kingdom to service existing European customers' needs and to broaden the Company's European presence. The Company is currently developing a manufacturers' representative arrangement in Singapore as an entry into the Asian market. Pursue Selective Acquisitions. The Company is currently pursuing selective acquisitions to complement its organic growth. Due to the high degree of fragmentation in the PCB industry, the Company believes substantial consolidation opportunities exist. Consequently, the Company is actively seeking acquisitions which will: (i) increase its 10 to 20 day pre-production capacity, (ii) expand its international geographic coverage, (iii) strengthen its position in existing markets, (iv) provide significant profit improvement opportunities through the application of the Company's superior operating capabilities, and (v) enhance its technology base. In furtherance of this strategy, on December 22, 1997, the Company acquired all of the outstanding shares of common stock of NTI. See "Recent Developments." PRODUCTS AND SERVICES The majority of the Company's business consists of building printed circuit boards for sophisticated electronics products on a quick-turn delivery basis and involves working closely with its customers from the initial design stage through product development and launch. The Company's product offering includes boards using super-fine line spaces and traces, buried resistors and capacitors, microvias and a wide range of substrates and materials. All of the Company's products are manufactured to customer order. The Company's PCBs are utilized in cellular phones, telecommunications equipment, computer networking equipment, medical devices, sophisticated industrial equipment and other high growth electronic applications. In addition to direct sales to OEMs, the Company sells to contract manufacturers and is a turnkey supplier in the event of product shortages. The Company provides design and engineering assistance in the early stages of product development to ensure that both mechanical and electrical considerations are integrated into a cost-effective manufacturing solution. In doing so, the Company often recommends design changes to its customers to reduce manufacturing costs and lead times or to increase manufacturing yields and the quality of the finished product. This cooperative approach enables the Company to gain valuable insight into the future technology requirements of its customers and to obtain opportunities for subsequent prototype and pre- production business. MANUFACTURING The production of complex printed circuit boards is an extensive and sequential process. A variety of manufacturing operations are utilized, including: (i) graphic operations such as photoprinting, screen printing, and phototool generation; (ii) chemical operations such as copper deposition, electroplating and etching; (iii) mechanical operations such as lamination, drilling and routing; and (iv) electronic operations such as computer-aided manufacturing ("CAM"), automated optical inspection, and electrical testing. Management believes that the highly specialized equipment it uses is among the most advanced in the industry. Details utilizes a number of advanced processes and technologies, including direct chip attached, multichip module-laminate, ball grid array, chip on board, tape automated bonding, flip chip, and high density interface. Details also maintains the capability to produce less sophisticated plate-through-hole circuit ("PTH") boards. The Company's engineering operations consist of 100 engineering professionals (including 66 front-end) dedicated to improving the design and functionality of its customers' products. The Company utilizes state-of-the-art equipment to implement advanced technologies such as high density interface (microvias), blind and buried vias, buried capacitors and resistors, electroless gold (wire bond), and controlled and differential impedance to meet customer 48 specifications. The Company is qualified under various industry standards for the manufacture of PCBs. Such qualifications include Bellcore compliance for telecommunications products and UL (Underwriters Laboratories) approval for electronics. In addition, all of the Company's facilities are ISO-9002 certified. These certifications require that the Company meet certain standards related to management, product design, production and quality control, among others. The Company seeks to maximize the use of its manufacturing capacity. This requires efficient management of time-critical production schedules. In addition, the Company opportunistically augments its quick-turn capacity with pre-production and longer-lead orders. The majority of engineering and manufacturing takes place at the Company's facilities in Anaheim, California and the NTI facilities in Colorado Springs, Colorado. Research and development and longer term manufacturing jobs are carried out in a nearby facility in Placentia, California. TECHNOLOGY, DEVELOPMENT AND PROCESSES The Company maintains a strong commitment to research and development, focusing its efforts on enhancing existing capabilities as well as developing new technologies. The Company's staff of over 100 experienced engineers, chemists and laboratory technicians works in conjunction with the Company's 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 Details with the opportunity to gain an in-depth understanding of its customers' businesses, thereby enabling it to better anticipate and serve their future needs. The market for the Company's products and services is characterized by rapidly changing technology and continuing process development. The future success of the Company's business will depend in large part upon its ability to maintain and enhance its technological capabilities, develop and market products and services that meet changing customer needs, and successfully anticipate or respond to technological changes on a cost-effective and timely basis. See "Risk Factors--Technological Change and Process Development." SALES AND MARKETING Marketing Strategy. The Company's marketing strategy focuses on developing close working relationships with its customers early in the design phase and throughout the lifecycle of the product. Accordingly, the Company's senior management personnel and engineering staff advise customers with respect to applicable technology, manufacturability of designs, and cost implications through on-line computer technical support, conference calls, and customer visits. Details has focused its marketing efforts on developing long-term relationships with key customers in high growth segments of the electronics industry. Sales Force. The Company markets its products and manufacturing services through an expansive network consisting of 12 top representative organizations with 60 manufacturers' representatives across the country complemented by a direct sales force of 16 individuals. Approximately 87% of the Company's net sales in the fiscal year ended December 31, 1996 were generated through manufacturers' representatives and 13% through its direct sales force. For many of these representatives, Details is their largest revenue source and their exclusive prototype supplier. The Company's representative network covers the entire United States and has recently expanded to Europe and Asia. The Company's marketing methodology of introducing its capabilities and providing technical support to customers requires extensive interaction with its customers. Consequently, the Company augments the manufacturer's representatives network's sales efforts by providing extensive marketing, engineering and technical support. The Company utilizes fully trained sales representatives and its own engineering force to provide customer service during all aspects of pre-production and prototype board fabrication. 49 MARKETS AND CUSTOMERS The Company believes that it has one of the broadest customer bases in the industry, with more than 300 customers consisting primarily of leading OEMs and contract manufacturers in a wide range of end-use markets. The Company's customers principally consist of telecommunications, industrial and business computers companies, as well as medical, semiconductor equipment and manufacturers. During the nine months ended September 30, 1997, sales to the Company's largest customer, Motorola, accounted for 10.9% of the Company's net revenues. Sales to the Company's two largest customers accounted for 20.4% of the Company's net revenues during the nine months ended September 30, 1997 and sales to its ten largest customers accounted for approximately 48.4% during the same period. The Company's customer list includes leading manufacturers of telecommunications equipment, such as Motorola and Qualcomm; computer workstations and servers, such as IBM and Silicon Graphics; semiconductor fabrication such as Intel; industrial products, such as Caterpillar and Delco; computer assemblers, such as Dell and Compaq; and contract manufacturing firms such as SCI and Jabil. The Company has been successful at retaining customers. For example, the Company has maintained a relationship with its top three year-to-date customers--Motorola, Intel and IBM--since at least 1993. The Company's active customer base (defined as customers who have placed orders within the month) has increased from an average of 122 in 1994 to the current average of 149 customers per month. The Company believes that its ability to rapidly respond to changes in demand for new or modified board designs with consistent high quality is a major factor in building customer partnerships. The following table shows, for the periods indicated, the Company's sales and the percentage of its sales in each of the principal end-user markets it serves for the fiscal years ended December 31, 1994 through 1996.
FISCAL YEAR ENDED DECEMBER 31, ------------------------------- MARKETS 1994 1995 1996 - ------- --------- --------- --------- (DOLLARS IN MILLIONS) Telecommunications..................... $12.0 27% $21.5 36% $20.7 30% Computer............................... 13.2 30 18.1 30 24.9 37 Automotive and Industrial.............. 3.6 8 2.2 4 2.7 4 Turnkey................................ 3.8 9 11.1 19 6.6 10 Governmental Aerospace................. 1.4 3 3.0 5 3.0 4 Other.................................. 10.2 23 3.9 6 10.2 15 ----- --- ----- --- ----- --- Total (1)............................ $44.2 100% $59.8 100% $68.1 100% ===== === ===== === ===== ===
- -------- (1) Sales include shipping charges and sales taxes not reflected in the Company's financial statements as net sales. The Company's core strategy is focused on serving the domestic quick-turn PCB market. It has broad national coverage and services customers in all regions of the country. The Company is also expanding internationally, and has recently opened an office in London, England staffed with three individuals. In addition, the Company is currently developing a manufacturers' representative arrangement in Singapore as an entry into the Asian market. The Company has no current plans for international expansion beyond its sales office in London, England and its manufacturers' representative arrangement in Singapore. SUPPLIERS The Company's raw materials inventory is small in comparison to sales and must be regularly and rapidly replenished. The Company uses "just-in-time" procurement practices to maintain its raw materials inventory at low levels and works closely with its suppliers to incorporate technological advances in the raw materials it purchases. Although the Company prefers 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 the Company believes this will continue in the foreseeable future. 50 The primary raw materials used by the Company in its manufacturing process are core materials (copperclad layers of fiberglass of varying thickness impregnated with bonding materials), chemical solutions (copper, gold, etc.) for plating operations, photographic film, carbide drill bits, and other supplies such as copper anodes which are used in plating operations. COMPETITION The PCB industry is highly fragmented and characterized by intense competition. Details principally competes with independent and captive manufacturers of complex and quick-turn PCBs. The Company's principal competitors include other independent, small private companies and integrated subsidiaries of more broadly based volume producers. Some of the Company's principal competitors are less highly-leveraged than the Company and may have greater financial and operating flexibility. Moreover, the Company may face additional competitive pressures as a result of changes in technology. Competition in the complex and quick-turn PCB industry has increased due to the consolidation trend in the industry, which results in potentially better capitalized and more effective competitors. The Company's basic technology is generally not subject to significant proprietary protection, and companies with significant resources or international operations may enter the market. Increased competition could result in price reductions, reduced margins or loss of market share, any of which could materially adversely affect the Company's business, financial condition and results of operations. See "Risk Factors--Competition." FACILITIES Details conducts its operations within 14 adjacent buildings, located in Anaheim, California, totalling 73,000 square feet. Existing leases have a remaining term of 8 years with an option to renew for 10 years or to purchase at fair market value upon expiration. These lease arrangements have been entered into with the Swenson Family Trust, which is controlled by the Company's founder and former shareholder, James I. Swenson and his wife. Most operations, including management, marketing, manufacturing, testing and shipping, are housed in this building complex. The Company also leases a 5,000 square foot facility located in Placentia, California approximately one mile from the main facility complex, which is used for research and development and longer-lead time production volumes. The Company believes that its facilities are adequate to support its current operations. See "Certain Relationships and Related Transactions." On December 22, 1997 the Company acquired NTI, which has two leased facilities in Colorado Springs, Colorado occupying 84,000 square feet, and leases a storage facility in Colorado Springs. See "Recent Developments." EMPLOYEES As of January 15, 1998, the Company had approximately 767 employees (including NTI employees), none of whom are represented by unions. The Company has not experienced any labor problems resulting in a work stoppage and believes it has good relations with its employees. ENVIRONMENTAL MATTERS The Company utilizes various chemicals in its plating operations (copper sulfate, sulfuric acid, nitric acid, hydrochloric acid, and ammonia agents) which are carefully monitored to assure compliance with EPA requirements. Other chemicals are used in the laminate processes, but are usually impregnated in raw materials and do not create toxic exposures. Proper waste disposal and environmental regulations are major considerations for PCB manufacturers because of the metals and chemicals used in the manufacturing process. 51 Although the Company believes that its facilities are currently in material compliance with applicable environmental laws, and it monitors its operations to avoid violations arising from human error or equipment failures, there can be no assurance that violations will not occur. In the event of a violation of environmental laws, the Company could be held liable for damages and for the costs of remedial actions and could also be subject to revocation of its affluent discharge permits. Any such revocations could require the Company to cease or limit production at one or more of its facilities, thereby having a material adverse effect on the Company's 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 the Company, its results of operations, prospects or debt service ability. See "Risk Factors--Environmental Matters." LEGAL PROCEEDINGS 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 or results of operations. 52 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information regarding the Directors and executive officers of the Company, Details Capital and Holdings following the Recapitalization and the incorporation of the Company and Details Capital, including their respective ages, as of February 1, 1998.
NAME AGE POSITION - ---- --- -------- Bruce D. McMaster................ 36 President and Director of Holdings, Details Capital and Details Joseph P. Gisch.................. 41 Chief Financial Officer of Holdings, Details Capital and Details Lee W. Muse, Jr. ................ 41 Vice President--Sales and Marketing of Holdings, Details Capital and Details Terry L. Wright.................. 38 Vice President--Engineering of Holdings, Details Capital and Details Michael P. Moisan................ 43 Vice President--Operations of Holdings, Details Capital and Details James S. Marcelli................ 50 Vice President of Details Edward W. Conard................. 41 Director of Holdings, Details Capital and Details Stephen M. Zide.................. 37 Vice President and Director of Holdings, Details Capital and Details Prescott Ashe.................... 30 Director of Holdings, Details Capital and Details Christopher Behrens.............. 36 Director of Holdings, Details Capital and Details
Bruce D. McMaster joined Details in 1985 and has served as President since 1991 and as a Director since the Recapitalization. Prior to joining the Company, Mr. McMaster was employed by Multiplex, Inc., a PCB manufacturer, where he was Production Supervisor for its factory. Joseph P. Gisch has served as 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 general accounting and income tax matters for Details. Mr. Gisch has not been responsible for any audit services for Details since 1991. Lee W. Muse, Jr. joined Details in 1989 and has served as Vice President, Sales and Marketing since 1992. Prior to 1989, Mr. Muse was employed by Metro- Circuits, Inc., a PCB manufacturer, where he served as both the East and West Coast Regional Sales Manager. Terry L. Wright joined Details in 1991 and has served as Vice President, Engineering since 1995. Prior to 1991, Mr. Wright was employed as a general manager at the circuit board manufacturer, Applied Circuit Solutions, Inc. Michael P. Moisan has been Vice President, Operations since 1996. Prior to joining Details in October 1996, Mr. Moisan was employed by Circuit-Wise, Inc., a PCB manufacturer, as Director of Technology & Engineering. From 1987 to 1995 Mr. Moisan was employed by AMP-AKZO, Inc., a PCB manufacturer, most recently as Director of Operations. James S. Marcelli joined Details and has been Vice President of Details since 1997 and has been President of NTI since 1991. 53 Edward W. Conard has served as a Director since the Recapitalization. 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. Previously, 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. Stephen M. Zide has served as Vice President and a Director since the Recapitalization. Mr. Zide has been an Associate at Bain Capital, Inc. since August 1997. Previously, he was a partner at the law firm of Kirkland & Ellis from 1992 to 1995. Prescott Ashe has served as a Director since the Recapitalization. Mr. Ashe has been an Associate at Bain Capital, Inc. since December 1992. Previously, he worked as an analyst at Bain Capital, Inc. and as a consultant at Bain & Company. Christopher Behrens has served as a Director since the Recapitalization. He has been a Principal of Chase Capital Partners since 1994. Prior to joining Chase Capital Partners ("CCP"), Mr. Behrens was a Vice President in the Merchant Banking Group of The Chase Manhattan Bank ("Chase") from 1990 to 1994. Mr. Behrens is also a director of Portola Packaging and The Pantry in addition to numerous private companies. At present, 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 the Board of Directors of Holdings set forth herein were elected by class vote pursuant to Holdings' Articles of Incorporation. There are no family relationships between any of the Directors or executive officers of Holdings, Details Capital or the Company. Executive officers of Holdings, Details Capital and the Company are elected by and serve at the discretion of their respective boards of directors. COMPENSATION OF EXECUTIVE OFFICERS The following table sets forth information concerning the compensation for the fiscal year ended December 31, 1996 of Mr. Swenson, the former CEO of Holdings, and the four other most highly compensated executive officers of Holdings (collectively, the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
LONG TERM ANNUAL COMPENSATION COMPENSATION ---------------------------------------- ------------ SECURITIES OTHER ANNUAL UNDERLYING ALL OTHER NAME AND POSITION SALARY ($) BONUS ($) COMPENSATION ($)(1) OPTIONS (2) COMPENSATION ($) - ----------------- ---------- --------- ------------------- ------------ ---------------- James I. Swenson(3)..... $611,538 $400,000 -- -- $10,397(4) Chief Executive Officer Bruce D. McMaster....... 331,250 300,000 -- 781 -- President Joseph P. Gisch......... 246,693 50,286 -- 111 -- Chief Financial Officer Lee W. Muse, Jr. ....... 254,807 300,000 -- 649 -- Vice President, Sales Terry L. Wright......... 127,502 75,000 -- 162 -- Vice President, Engineering
- -------- (1) The perquisites and other benefits paid to each Named Executive Officer did not exceed the lesser of $50,000 or 10% of the total annual salary and bonus received by each Named Executive Officer. (2) The options represent options to purchase shares of common stock of Holdings in 1996, prior to the Recapitalization. (3) Mr. Swenson resigned effective October 28, 1997 in connection with the Recapitalization and received approximately $1.2 million in connection with the termination of his employment agreement. (4) Reflects certain life insurance benefits paid by Holdings on behalf of Mr. Swenson. 54 OPTION GRANTS The following table sets forth information concerning grants of options to purchase common stock of Holdings made to the Named Executive Officers during the fiscal year ended December 31, 1996. OPTION GRANTS IN FISCAL 1996
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION INDIVIDUAL GRANTS FOR OPTION TERM(4) -------------------------------------- --------------------- NUMBER OF % OF TOTAL EXERCISE OPTIONS OPTIONS TO PRICE EXPIRATION NAME GRANTED (1)(2)(3) EMPLOYEES ($/SHARE) DATE 5% ($) 10% ($) - ---- ----------------- ---------- --------- ---------- ---------- ---------- James I. Swenson........ -- -- -- -- -- -- Bruce D. McMaster....... 781 41.3% $2,179 2006 $1,070,248 $2,712,231 Joseph P. Gisch......... 111 5.9 2,179 2006 152,110 385,477 Lee W. Muse, Jr. ....... 649 34.4 2,179 2006 889,364 2,253,828 Terry L. Wright......... 162 8.6 2,179 2006 221,999 562,589
- -------- (1) The options represent options to purchase shares of common stock of Holdings in 1996, prior to the Recapitalization. (2) Prior to the Recapitalization, upon the exercise of any options and, following the Recapitalization, upon the exercise of options to acquire shares of Class L Common (as defined), the Company must pay to the optionee a bonus in an aggregate amount sufficient to enable the optionee to satisfy his federal and state income tax liability attributable to such exercise and bonus (subject to certain limitations). (3) In connection with the Recapitalization: (i) unvested options to purchase 328.6 shares of common stock held by the Named Executive Officers became vested and converted into options to purchase approximately 74,279 shares of Class A Common at an exercise price of $0.9639 per share and options to purchase approximately 9,181 shares of Class L Common at an exercise price of $70.1858 per share; (ii) of the remaining options to purchase 1,374.4 shares of common stock, approximately 1,203.7 were exercised and converted into the right to receive cash and approximately 170.7 were exercised and converted into approximately 38,583 shares of Class A Common Stock of Holdings, without par value ("Class A Common"), and 4,769 shares of Class L Common Stock of Holdings, without par value ("Class L Common"); (iii) the Named Executive Officers received a bonus payment of $10 million in the aggregate from the Company; and (iv) the Named Executive Officers employed by the Company after the Recapitalization received an aggregate bonus of approximately $2.4 million, which amount is payable on the third anniversary of the Recapitalization whether or not such Named Executive Officer is still employed by the Company. (4) In the nine months ended September 30, 1997, the Company recorded a non- cash charge against earnings of approximately $2.9 million in connection with stock compensation and related bonuses under the 1996 Stock Option Plan. The Company estimates that an additional non-cash charge of approximately $15.9 million will be incurred in the fourth quarter of 1997 in connection with the Recapitalization and the 1996 Stock Option Plan. EMPLOYMENT AGREEMENTS Mr. McMaster is currently employed as President of the Company pursuant to an agreement dated September 1, 1995, as amended, effective until October 28, 2000. Under this agreement, Mr. McMaster is entitled to receive an annual salary of $375,000 in 1997, $425,000 in 1998 and $450,000 in 1999. 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 4,747.009 shares of Class A Common, on the Recapitalization closing date. Mr. McMaster's employment agreement contains customary confidentiality provisions and a non-compete clause effective for the duration of the term of 55 the agreement. In addition, Mr. McMaster will be entitled to receive an additional bonus of $1,088,558.35 in consideration of prior services which will be payable on the third anniversary of the Recapitalization whether or not he is still employed by the Company. Mr. Gisch is currently employed as Chief Financial Officer of the Company pursuant to an agreement dated September 19, 1995, as amended, effective until October 28, 2000. Under this agreement, Mr. Gisch is entitled to receive an annual salary of $252,000 in 1997, $265,000 in 1998 and $275,000 in 1999. 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 676.7889 shares of Class A Common on the Recapitalization closing date. Mr. Gisch's employment agreement contains customary confidentiality provisions. In addition, Mr. Gisch will be entitled to receive an additional bonus of $155,197.52 in consideration of prior services which will be payable on the third anniversary of the Recapitalization whether or not he is still employed by the Company. Mr. Muse is currently employed as Vice President--Sales and Marketing of the Company pursuant to an agreement dated September 1, 1995, as amended, effective until October 28, 2000. Under this agreement, Mr. Muse is entitled to receive 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 3,950.0435 shares of Class A Common on the Recapitalization closing date. 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 $905,802.38 in consideration of prior services which will be payable on the third anniversary of the Recapitalization whether or not he is still employed by the Company. Mr. Wright is currently employed as Vice President--Engineering of the Company pursuant to an agreement dated September 1, 1995, as amended, effective until October 28, 2000. Under this agreement, Mr. Wright is entitled to receive an annual salary of $140,000 in 1997, $155,000 in 1998 and $170,000 in 1999. 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 993.0454 shares of Class A Common on the Recapitalization closing date. 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 $227,719.73 in consideration of prior services which will be payable on the third anniversary of the Recapitalization whether or not he is still employed by the Company. COMPENSATION OF DIRECTORS During 1996 and 1997 until the closing date of the Recapitalization, outside Directors of Holdings received $2,500 per meeting attended for serving on the Board of Directors of Holdings and were reimbursed for their out-of-pocket expenses incurred in connection with attending board meetings. The Company, Details Capital and Holdings currently pay no compensation to their independent directors, and pay no additional remuneration to their employees or to executives of the Company, Details Capital or Holdings for serving as directors. STOCK OPTION PLANS AND RELATED TRANSACTIONS Prior to the Recapitalization, the Company had two stock option plans, (i) the 1996 Performance Stock Option Plan (the "1996 Stock Option Plan") under which the Board was authorized to sell or otherwise issue options to acquire up to 1,809 shares of the Company's common stock in such quantity, at such price, on such terms and subject to such conditions as established by the Board, and (ii) the 1996 Employee Stock Option Plan (the "1996 Employee Plan") under which the Board was 56 authorized to sell or otherwise issue options to acquire up to 260 shares of the Company's common stock in such quantity, at such price, on such terms and subject to such conditions as established by the Board. Under the 1996 Stock Option Plan, the Board had granted options to acquire 1,703 shares of the Company's common stock and, under the 1996 Employee Plan, the Board had granted options to acquire 247 shares of the Company's common stock, in each case, at an exercise price of $2,179 per share. In connection with the Recapitalization, the Board accelerated the vesting of all of the unvested options as of the closing date of the Recapitalization and (i) of the 1,703 options granted under the 1996 Stock Option Plan, 1,374.4 were exercised and the remaining 328.6 continue outstanding, and (ii) of the 247 options granted under the 1996 Employee Plan, 64.2 were canceled and redeemed and 182.8 continue outstanding. In accordance with the provisions of the respective plans, upon the effectiveness of the amendment of the Company's Articles of Incorporation in connection with the Recapitalization, the holder of each outstanding option became entitled to purchase 226.0362 shares of Class A Common at an exercise price of $0.9639 per share and 27.9371 shares of Class L Common at an exercise price of $70.1858 per share. Shortly after the Recapitalization, each of the Named Executive Officers elected to exercise his remaining options to acquire shares of Class A Common under the 1996 Stock Option Plan. The Company loaned to each Named Executive Officer sufficient funds to satisfy the exercise price of such options. Immediately after the Recapitalization, the Board of Directors adopted, and the stockholders approved, the 1997 Details, Inc. Equity Incentive Plan (the "1997 Stock Option Plan" and, together with the 1996 Stock Option Plan and the 1996 Employee Plan, collectively, the "Stock Option Plans") which authorizes the granting of stock options and the sale of Class A Common to current or future employees, directors, consultants or advisors of Holdings or its subsidiaries. The Board is authorized to sell or otherwise issue Class A Common 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 the Board up to an aggregate of 235,000 shares of Class A Common, 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 approximately 10,021 shares of Class A Common available for grant under the 1997 Stock Option Plan. Pursuant to the Recapitalization Agreement, the Named Executive Officers (i) received approximately $89.1 million, subject to adjustment, in cash in exchange for shares and options of Holdings held by such Named Executive Officers that were repurchased in the Recapitalization, (ii) received options with a net realizable value of $3.0 million, and (iii) retained common stock of Holdings with a value of approximately $11.3 million. Options to purchase an aggregate of 112,489.4228 shares of Class A Common at an exercise price of $61.17 per share were granted and 112,489.4228 shares of Class A Common restricted stock were made available at $5 per share to the Named Executive Officers under the 1997 Stock Option Plan in connection with the Recapitalization. The restricted stock and options vest in equal monthly increments over a four year period from the date of grant or issue, subject to earlier vesting upon certain events, including all of such shares vesting immediately on a sale of the Company. The aggregate exercise price of the options granted under the 1997 Stock Option Plan in connection with the Recapitalization is approximately $6.9 million. Subsequent to the Recapitalization, the Named Executive Officers purchased an aggregate of 112,489.4228 shares of Class A Common restricted stock at a price of $5 per share and exercised options to purchase an aggregate of 74,278.5902 shares of Class A Common with an exercise price of $0.9639 per share. The Company loaned to each such Named Executive Officer, pursuant to an interest bearing note, sufficient funds to pay the purchase price and the exercise price with respect to such shares and options. Mr. McMaster, Mr. Gisch, Mr. Muse and Mr. Wright received loans of approximately $285,885, $46,856, $224,137 and $77,164 for the purchase of restricted shares of Class A Common and the exercise of options to purchase shares of Class A Common. The Company has agreed to permit the Named Executive Officers to repay their respective loan obligations with proceeds received as deferred purchase price in connection with the Recapitalization. 57 The following table summarizes the shares of capital stock and options that were acquired by the Named Executive Officers under the 1997 Stock Option Plan in connection with the Recapitalization:
NO. OF OPTIONS TO PURCHASE NO. OF RESTRICTED SHARES SHARES OF OF CLASS A COMMON AGGREGATE CLASS A COMMON NAME PURCHASED(1) PURCHASE PRICE(2) GRANTED - ---- ------------------------ ----------------- ------------------- James I. Swenson........ -- $ -- -- Bruce D. McMaster....... 50,620.2402 253,101 50,620.2402 Joseph P Gisch.......... 8,436.7067 42,184 8,436.7067 Lee W. Muse, Jr. ....... 39,371.2980 196,856 39,371.2980 Terry L. Wright......... 14,061.1778 70,306 14,061.1778
- -------- (1) The Company has the right to repurchase the restricted shares of Class A Common held by a Named Executive Officer for the original purchase price in the event that the Named Executive Officer ceases to be employed by the Company. (2) The Company loaned the aggregate purchase price to each Named Executive Officer pursuant to an interest bearing note. 58 PRINCIPAL STOCKHOLDERS All of the Company's issued and outstanding capital stock is owned by Details Capital. All of Details Capital's issued and outstanding capital stock is owned by Holdings. As of February 1, 1998, the outstanding equity securities of Holdings consisted of 2,081,753.1 shares of Class A Common and 233,593.7 shares of Class L Common. The Class A Common consists of six separate classes (A-1 through A-6), which have different rights with respect to the election of directors. All of the shares of Class A Common entitle the holder to one vote per share on all matters to be voted upon by the stockholders of Holdings except for Class A-6, which is nonvoting. The Class L Common is identical to the Class A Common except that the Class L Common is nonvoting and is entitled to a preference over the Class A Common with respect to any distribution by Holdings to holders of its capital stock equal to the original cost of such share ($364.0909) plus an amount which accrues on a daily basis at a rate of 12% per annum, compounded quarterly. The Class L Common is convertible into Class A Common upon a vote of a majority of the holders of the outstanding Class L Common at any time. The following table sets forth certain information as of February 1, 1998 regarding the beneficial ownership of (i) each class of voting securities of the Company by each person known to Holdings to own more than 5% of any class of outstanding voting securities of Holdings, and (ii) the equity securities of Holdings by each Director of Holdings, each Named Executive Officer and all of Holdings' directors and executive officers as a group. To the knowledge of Holdings, each of such stockholders has sole voting and investment power as to the shares shown unless otherwise noted. Beneficial ownership of the securities listed in the table has been determined in accordance with the applicable rules and regulations promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
SHARES BENEFICIALLY OWNED ------------------------------------------- CLASS A COMMON STOCK CLASS L COMMON STOCK ---------------------- -------------------- NUMBER PERCENTAGE NUMBER PERCENTAGE NAME AND ADDRESS OF SHARES OF CLASS OF SHARES OF CLASS - ---------------- ----------- ---------- --------- ---------- PRINCIPAL STOCKHOLDERS: Bain Capital Funds (1)............. 1,065,497.2 50.0% 131,690.7 53.1% c/o Bain Capital, Inc. Two Copley Place Boston, Massachusetts 02116 Chase Manhattan Capital, L.P.(2)... 386,912.0 18.1 47,820.6 19.3 380 Madison Avenue 12th Floor New York, New York 10017 DIRECTORS AND EXECUTIVE OFFICERS: James I. Swenson(3)................ -- -- -- -- Bruce D. McMaster(4)............... 204,589.1 9.6 18,741.7 7.6 Joseph P. Gisch(5)................. 29,382.7 1.4 2,554.9 1.0 Lee W. Muse(6)..................... 146,329.0 6.9 12,963.5 5.3 Terry L. Wright(7)................. 38,790.3 1.8 3,016.6 1.2 Christopher Behrens(8)............. 386,912.0 18.1 47,820.6 19.3 Edward Conard (9).................. 1,065,497.2 50.0 131,690.7 53.1 Stephen M. Zide(10)................ 230,595.8 10.8 28,493.1 11.5 Prescott Ashe(10).................. 230,595.8 10.8 28,493.1 11.5 All Directors and executive officers as a group (10 persons)(11).................. 463,114.5 21.7 41,602.5 16.8
- -------- (1) Includes shares of Class A Common and Class L Common 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"). 59 (2) CMC is the managing member of DI Investors, L.L.C. and owns a majority of the interests therein. Accordingly, CMC may be deemed to beneficially own shares owned by DI Investors, L.L.C. CMC disclaims beneficial ownership of any such shares in which it does not have a pecuniary interest. (3) Mr. Swenson's employment with Holdings and the Company terminated on October 28, 1997. (4) The shares of Class A Common included in the table include 48,205.1 shares, which are subject to vesting. The shares of Class L Common included in the table include 4,203.8 shares that can be acquired upon the exercise of outstanding options. (5) The shares of Class A Common included in the table include 8,034.2 shares, which are subject to vesting. The shares of Class L Common included in the table include 599.3 shares that can be acquired upon the exercise of outstanding options. (6) The shares of Class A Common included in the table include 37,492.8 shares, which are subject to vesting. The shares of Class L Common included in the table include 3,498.0 shares that can be acquired upon the exercise of outstanding options. (7) The shares of Class A Common included in the table include 13,390.3 shares, which are subject to vesting. The shares of Class L Common included in the table include 879.4 shares that can be acquired upon the exercise of outstanding options. (8) Mr. Behrens is a Principal of CCP, the general partner of CMC and, accordingly, may be deemed to beneficially own shares owned by CMC. 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. (9) Mr. Conard is Managing Director of Bain Capital, Inc. and a limited partner of Bain Capital Partners V, L.P., the sole general partner of Fund V and Fund V-B. Accordingly, Mr. Conard may be deemed to beneficially own shares owned by Fund V and Fund V-B. Mr. Conard is a general partner of BCIP and BCIP Trust and, accordingly, may be deemed to beneficially own shares owned by such funds. Mr. Conard disclaims beneficial ownership of any such shares in which he does not have a pecuniary interest. The address of Mr. Conard is c/o Bain Capital, Inc., Two Copley Place, Boston, Massachusetts 02116. (10) The shares of Class A Common and Class L Common included in the table represent shares held by BCIP. Messrs. Zide and Ashe are each Associates of Bain Capital, Inc. and are partners of BCIP and limited partners of 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. (11) Excludes shares deemed to be beneficially owned by Messrs. Conard, Zide, Ashe and Behrens. 60 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The following summary of the Recapitalization Agreement, the Stockholders Agreement and the Management Agreement is a description of the material provisions of these agreements a copy of each of which is filed as an exhibit to the Exchange Offer Registration Statement. RECAPITALIZATION AGREEMENT The Recapitalization Agreement contains customary provisions for such agreements, including representations and warranties with respect to the condition and operations of the business, covenants with respect to the conduct of the business prior to the Recapitalization closing date and various closing conditions, including the obtaining of financing and the continued accuracy of representations and warranties. In addition, the Company has agreed to pay to the equity holders immediately prior to the Recapitalization amounts received as a result of tax benefits realized in connection with the Recapitalization. Subject to certain limitations set forth therein, the Recapitalization Agreement contains indemnification provisions binding on the Company after the Recapitalization closing date. Specifically, the Company has agreed to indemnify each stockholder party to the Recapitalization Agreement against any and all liabilities resulting from (i) any misrepresentation or breach of warranty made by DIA in the Recapitalization Agreement and (ii) any breach or default in performance by the Company of any covenant or agreement contained in the Recapitalization Agreement, after the Recapitalization. Subject to certain limitations set forth therein, the equity holders immediately prior to the Recapitalization have agreed to indemnify the Company and its officers, directors, employees and agents on a pro rata basis against any and all liabilities resulting from (i) any misrepresentation or breach of warranty by such stockholders in the Recapitalization Agreement and (ii) any breach or default in performance by the Company, prior to the Effective Time, of such covenant or agreement (as described in the Recapitalization Agreement). STOCKHOLDERS AGREEMENT In connection with the Recapitalization, the Bain Capital Funds, Company management, CMC and all of the other stockholders and optionholders of Holdings entered into a stockholders agreement (the "Stockholders Agreement"), that, among other things, provides for tag-along rights, drag-along rights, registration rights, restrictions on the transfer of shares held by parties to the Stockholders Agreement and certain preemptive rights for certain stockholders including the Bain Capital Funds, management and CMC. The Stockholders Agreement also provides that the parties thereto will vote their shares in the same manner as the Bain Capital Funds in connection with certain transactions and that the Bain Capital Funds will be entitled to fix the number of directors of Holdings. Pursuant to Holdings' charter, the Bain Capital Funds will be entitled to designate a sufficient number of directors to maintain a majority of the board of directors of Holdings and each of management and CMC will be entitled to designate one director. MANAGEMENT AGREEMENT Pursuant to a management agreement among Bain Capital Partners V, L.P. ("Bain"), Holdings, and the Company (the "Management Agreement"), Bain is entitled to a management fee when, and if, it provides advisory services to Holdings or the Company in connection with potential business acquisitions. Beginning on the first anniversary of the Recapitalization, Bain may, upon the request of Holdings or the Company, perform certain management consulting services at Bain's customary rates plus reimbursement for reasonable out-of- pocket expenditures. In addition, Bain will receive a fee in an amount which will approximate 1% of the gross purchase price of any senior financing transaction for any acquisition, recapitalization or refinancing transaction (including assumed debt). In connection 61 with the Recapitalization, Bain received a transaction fee of approximately $3.1 million. In connection with the NTI Acquisition, Bain received a transaction fee of approximately $380,000. The Management Agreement continues in full force and effect, unless and 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. CERTAIN INTERESTS OF THE FORMER CEO The Company leases the buildings and certain equipment located at its Anaheim, California facility pursuant to lease arrangements entered into with the Swensen Family Trust, a trust controlled by the Company's founder and former shareholder, James I. Swensen, and his wife. Under the terms of these leases, the Company pays approximately $104,000 per month in 1997 as base rent subject to applicable adjustment based upon changes in the consumer price index. The leases have a remaining term of 8 years with an option to renew for an additional 10 years or to purchase the property at fair market value upon expiration. See "Business--Facilities." 62 DESCRIPTION OF SENIOR CREDIT FACILITIES The Company has entered into an agreement with various banks and financial institutions, including Chase, an affiliate of the Initial Purchaser, as a bank lender and as agent for the bank lenders party thereto, providing for the Senior Credit Facilities, which currently consists of (i) the Tranche A Facility of up to approximately $31.1 million in term loans; (ii) the acquisition facility (the "Acquisition Facility") of up to $25.0 million which was borrowed in connection with the NTI Acquisition; (iii) the Tranche B Facility of up to $50.0 million in term loans; and (iv) the Revolving Credit Facility of up to $30.0 million in revolving credit loans, letters of credit and swing line loans. The Senior Credit Facilities are (i) jointly and severally guaranteed by Holdings and Details Capital and (ii) secured by all of the stock of the Company and certain stock of the Company's subsidiaries. Future domestic subsidiaries of the Company will guarantee the Senior Credit Facilities and secure that guarantee with their tangible and intangible assets. The Senior Credit Facilities require the Company to meet certain financial tests, including without limitation: (i) a maximum debt to equity ratio that is established at 6.25 to 1.0 for the period through December 30, 1998 and diminishes each year to a ratio of 2.75 to 1.0 through December 31, 2003 and thereafter; (ii) a minimum interest to EBITDA ratio that is established at 1.60 to 1.0 for the period through December 30, 1998, after which it increases each year to a ratio of 2.75 to 1.0 for the period through December 31, 2002 and is maintained at 2.0 to 1.0 for the period through December 31, 2003 and thereafter; (iii) a minimum fixed charges to EBITDA ratio of 1.05 to 1.0; and (iv) a minimum EBITDA that is established at $30 million for fiscal 1997 and increases each year to $45 million for fiscal 2002 and thereafter. In addition, the Senior Credit Facilities contain certain negative covenants limiting, among other things, additional debt, additional liens, transactions with affiliates, mergers and consolidations, liquidations and dissolutions, sales of assets, dividends, capital expenditures, investments, loans and advances, prepayments and modifications of debt instruments and other matters customarily restricted in such agreements. Pursuant to the terms of the Senior Credit Facilities, the Company is required to compute financial ratios and certify to other covenants on a quarterly basis. The Senior Credit Facilities contain customary events of default, including without limitation, payment defaults, breaches of representations and warranties, covenant defaults, certain events of bankruptcy and insolvency, failure of any guaranty or security document supporting the Senior Credit Facilities to be in full force and effect, change of control of Holdings and change of ownership of the stock of the Company. The Tranche A Facility and any borrowings pursuant to the Acquisition Facility mature in quarterly installments from September 1998 until October 2003. The Tranche B Facility matures in minimal quarterly installments from September 1998 until December 2003 at which time the remaining outstanding loans under the Tranche B Facility become repayable in three equal quarterly installments with a final payment in October 2004. The Revolving Credit Facility terminates in October 2003. The Company's borrowings under the Senior Credit Facilities bear interest at a floating rate and may be maintained as ABR Loans (as defined in the Senior Credit Facilities) or, beginning 60 days after the closing date of the Senior Credit Facilities (or earlier upon syndication) at the Company's option, as Eurodollar Loans. ABR Loans bear interest at the ABR (defined as the higher of (x) the applicable prime lending rate of Chase and (y) the Federal Reserve reported overnight funds rate plus 1/2 of 1%) plus the Applicable Margin (as defined in the Senior Credit Facilities). Eurodollar Loans shall bear interest at the Eurodollar Rate (as defined in the Senior Credit Facilities) plus the Applicable Margin. The Applicable Margin shall be (a) with respect to the Revolving Credit Facility, the Acquisition Facility and the Tranche A Facility, (i) 1 1/2%, in the case of ABR Loans and (ii) 2 1/2%, in the case of 63 Eurodollar Loans and (b) with respect to the Tranche B Facility, (i) 1 3/4% in the case of ABR Loans and (ii) 2 3/4%, in the case of Eurodollar Loans. The Applicable Margin with respect to the Revolving Facility and the Tranche A Facility is subject to reduction after four fiscal quarters following the closing of the Senior Credit Facilities in accordance with an agreed upon pricing grid. The Company is required to pay to the lenders under the Senior Credit Facilities a commitment fee equal to 1/2 of 1% per annum, payable in arrears on a quarterly basis, on the average unused portion of the Revolving Credit Facilities during such quarter (provided that such commitment fee decreases to 3/8 of 1% per annum if during any quarterly payment period certain financial ratios relating to interest coverage and leverage are attained). The Company is required to pay to the lenders a letter of credit fee with respect to each letter of credit outstanding equal to a floating rate of interest equal to the Applicable Margin on Eurodollar Loans times the average daily stated amount of such letter of credit as well as a fronting fee of 1/4 of 1% on such average daily stated amount. The Senior Credit Facilities prescribe that certain amounts must be used to prepay the Term Loan Facilities and reduce commitments under the Revolving Credit Facility including (a) 100% of the net proceeds of any sale or issuance of equity or any incurrence of indebtedness after the closing date by the Company or any of its subsidiaries, except for proceeds of Notes offered hereby and the Discount Notes to the extent applied to repay the Senior Subordinated Facility or the Holdings Facility and subject to certain other exceptions including the retention of equity proceeds under certain circumstances including for use in acquisitions or the making of capital expenditures, (b) 100% of the net proceeds of any sale or other disposition by the Company or any of its subsidiaries of any assets (including casualties or condemnations), except for the sale of inventory or obsolete or worn-out property in the ordinary course of business and subject to exceptions for certain reinvestments and (c) 75% of Excess Cash Flow (as defined in the Senior Credit Facilities) for each fiscal year of the Company commencing with the fiscal year ending December 31, 1998, provided, that the foregoing percentage will be reduced to 50% upon satisfaction of certain financial ratios. Details repaid approximately $10.3 million of the Term Loan Facilities with a portion of the proceeds from the Initial Offering. In general, mandatory prepayments described above will be applied, first to prepay the Term Loan Facilities (pro rata among the Tranche A Facility and the Tranche B Facility) and second, to permanently reduce commitments under the Revolving Credit Facility (with extensions of credit thereunder being prepaid to the extent the aggregate amount thereof exceeds the Revolving Credit Facility commitments as so reduced). Prepayments, optional or mandatory of the Term Loan Facilities will be applied pro rata to the Tranche A Facility and the Tranche B Facility, and ratably to the respective installments thereof. Notwithstanding the foregoing, as long as any Tranche A term loans are outstanding, each holder of Tranche B term loans has the right to refuse all or any portion of such prepayment allocable to it, and the amount so refused will be applied to prepay the Tranche A term loans. Any prepayments of the Term Loan Facilities may not be reborrowed. 64 DESCRIPTION OF EXCHANGE NOTES GENERAL The Exchange Notes are to be issued under an indenture dated November 18, 1997, (the "Indenture"), between the Company and State Street Bank and Trust Company, as trustee (the "Trustee"), a copy of which is available upon request to the Company. The following is a description of the material provisions of the Indenture, which is filed as an exhibit to the Exchange Offer Registration Statement of which this Prospectus forms a part. Principal of, premium, if any, and interest on the Exchange Notes will be payable, and the Exchange Notes may be exchanged or transferred, at the office or agency of the Company in the Borough of Manhattan, The City of New York (which initially shall be the corporate trust office of the Trustee in New York, New York), except that, at the option of the Company, payment of interest may be made by check mailed to the address of the Holders as such address appears in the Note Register. The Exchange Notes will not be entitled to the benefit of any mandatory sinking fund. The Exchange Notes will be issued only in fully registered form, without coupons, in denominations of $1,000 and any integral multiple of $1,000. No service charge will be made for any registration of transfer or exchange of Exchange Notes, but the Company may require payment of a sum sufficient to cover any transfer tax or other similar governmental charge payable in connection therewith. Initially, the Trustee will act as Paying Agent and Registrar for the Exchange Notes. The Exchange Notes may be presented for registration of transfer and exchange at the offices of the Registrar, which initially will be the Trustee's corporate trust office. The Company may change any Paying Agent and Registrar without notice to Holders of the Exchange Notes. The Exchange Notes are expected to be eligible for trading in the PORTAL market. TERMS OF EXCHANGE NOTES The Exchange Notes will be unsecured, senior subordinated obligations of the Company, limited to $100 million aggregate principal amount, and will mature on November 15, 2005. Each Exchange Note will bear interest at the rate per annum shown on the front cover of this Prospectus from the date of issuance, or from the most recent date to which interest has been paid or provided for, payable semi-annually on May 15 and November 15 of each year commencing on May 15, 1998 to holders of record at the close of business on the May 1 or November 1 immediately preceding the interest payment date. OPTIONAL REDEMPTION Except as set forth below, the Notes will not be redeemable at the option of the Company prior to November 15, 2001. On and after such date, the Notes will be redeemable, at the Company's option, in whole or in part, at any time upon not less than 30 nor more than 60 days prior notice mailed by first-class mail to each holder's registered address, at the following redemption prices (expressed in percentages of principal amount), plus accrued and unpaid interest to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date): If redeemed during the 12-month period commencing on November 15 of the years set forth below:
PERIOD REDEMPTION PRICE ------ ---------------- 2001.................................................... 105.000% 2002.................................................... 103.333% 2003.................................................... 101.667% 2004 and thereafter..................................... 100.000%
65 In addition, at any time and from time to time prior to November 15, 2000, the Company may redeem in the aggregate up to 40% of the original principal amount of the Notes with the proceeds of one or more Equity Offerings received by, or invested in, the Company so long as there is a Public Market at the time of such redemption, at a redemption price (expressed as a percentage of principal amount) of 110% plus accrued and unpaid interest, if any, to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date); provided, however, that at least 60% of the original principal amount of the Notes must remain outstanding after each such redemption. At any time on or prior to November 15, 2001, the Notes may also be redeemed as a whole at the option of the Company upon the occurrence of a Change of Control, upon not less than 30 nor more than 60 days prior notice (but in no event more than 90 days after the occurrence of such Change of Control) mailed by first-class mail to each holder's registered address, at a redemption price equal to 100% of the principal amount thereof plus the Applicable Premium as of, and accrued and unpaid interest, if any, to, the date of redemption (the "Redemption Date") (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date). "Applicable Premium" means, with respect to an Note at any Redemption Date, the greater of (i) 1.0% of the principal amount of such Note and (ii) the excess of (A) the present value at such time of (1) the redemption price of such Note at November 15, 2001 (such redemption price being described under "--Optional Redemption") plus (2) all required interest payments due on such Note through November 15, 2001, computed using a discount rate equal to the Treasury Rate plus 50 basis points, over (B) the principal amount of such Note. "Treasury Rate" means the yield to maturity at the time of computation of United States Treasury securities with a constant maturity (as compiled and published in the most recent Federal Reserve Statistical Release H.15 (519) which has become publicly available at least two business days prior to the Redemption Date (or, if such Statistical Release is no longer published, any publicly available source or similar market data)) most nearly equal to the period from the Redemption Date to November 15, 2001; provided, however, that if the period from the Redemption Date to November 15, 2001 is not equal to the constant maturity of a United States Treasury security for which a weekly average yield is given, the Treasury Rate shall be obtained by linear interpolation (calculated to the nearest one-twelfth of a year) from the weekly average yields of United States Treasury securities for which such yields are given, except that if the period from the Redemption Date to November 15, 2001 is less than one year, the weekly average yield on actually traded United States Treasury securities adjusted to a constant maturity of one year shall be used. Selection. In the case of any partial redemption, selection of the Notes for redemption will be made by the Trustee on a pro rata basis, by lot or by such other method as the Trustee in its sole discretion shall deem to be fair and appropriate, although no Note of $1,000 in original principal amount or less will be redeemed in part. If any Note is to be redeemed in part only, the notice of redemption relating to such Note shall state the portion of the principal amount thereof to be redeemed. A new Note in principal amount equal to the unredeemed portion thereof will be issued in the name of the holder thereof upon cancellation of the original Note. RANKING AND SUBORDINATION The payment of the principal of, premium, if any, and interest on the Notes is subordinated in right of payment, as set forth in the Indenture, to the prior payment in full in cash or Cash Equivalents when due of all Senior Indebtedness of the Company. However, payment from the money or the proceeds of U.S. Government Obligations held in any defeasance trust described under "Defeasance" below is not subordinate to any Senior Indebtedness or subject to the restrictions described herein. As of 66 December 31, 1997, the outstanding Senior Indebtedness of the Company was approximately $111.2 million (exclusive of unused commitments). Although the Indenture contains limitations on the amount of additional Indebtedness that the Company may incur, under certain circumstances the amount of such Indebtedness could be substantial and, in any case, such Indebtedness may be Senior Indebtedness. See "Certain Covenants--Limitation on Indebtedness" below. "Senior Indebtedness" is defined, whether outstanding on the Issue Date or thereafter issued, created, incurred or assumed, as the Bank Indebtedness and all other Indebtedness of the Company, including interest (including any interest accruing subsequent to the filing of a petition of bankruptcy at the rate provided for in the documentation with respect thereto, whether or not such interest is an allowed claim under applicable law) thereon and fees relating thereto, unless, in the instrument creating or evidencing the same or pursuant to which the same is outstanding, it is provided that the obligations in respect of such Indebtedness are not superior in right of, or are subordinate to, payment to the Notes; provided, however, that Senior Indebtedness will not include (i) any obligation of the Company to any Subsidiary, (ii) any liability for Federal, state, foreign, local or other taxes owed or owing by the Company, (iii) any accounts payable or other liability to trade creditors arising in the ordinary course of business (including Guarantees thereof or instruments evidencing such liabilities), (iv) any Indebtedness, Guarantee or obligation of the Company that is expressly subordinate or junior in right of payment to any other Indebtedness, Guarantee or obligation of the Company, including any Senior Subordinated Indebtedness and any Subordinated Obligations or (v) any Capital Stock. Only Indebtedness of the Company that is Senior Indebtedness will rank senior to the Notes in accordance with the provisions of the Indenture. The Notes will in all respects rank pari passu with all other Senior Subordinated Indebtedness of the Company. The Company has agreed in the Indenture that it will not incur, directly or indirectly, any Indebtedness that is subordinate or junior in ranking in any respect to Senior Indebtedness unless such Indebtedness is Senior Subordinated Indebtedness or is expressly subordinated in right of payment to Senior Subordinated Indebtedness. In addition, no Subsidiary Guarantor shall incur any Indebtedness if such Indebtedness is subordinate or junior in ranking in any respect to any Senior Indebtedness of such Subsidiary Guarantor unless such Indebtedness is Senior Subordinated Indebtedness of such Subsidiary Guarantor or is expressly subordinated in right of payment to Senior Subordinated Indebtedness of such Subsidiary Guarantor. Unsecured Indebtedness is not deemed to be subordinate or junior to Secured Indebtedness merely because it is unsecured. The Company may not pay principal of, premium, if any, or interest on, the Notes or make any deposit pursuant to the provisions described under "Defeasance" below and may not otherwise purchase or retire any Notes (collectively, "pay the Notes") if (i) any Senior Indebtedness is not paid when due whether at maturity, upon any redemption, by declaration or otherwise, in cash or Cash Equivalents or (ii) any other default on Senior Indebtedness occurs and the maturity of such Senior Indebtedness is accelerated in accordance with its terms unless, in either case, the default has been cured or waived and any such acceleration has been rescinded or such Senior Indebtedness has been paid in full in cash or Cash Equivalents. However, the Company may pay the Notes without regard to the foregoing if the Company and the Trustee receive written notice approving such payment from the Representative of the Senior Indebtedness with respect to which either of the events set forth in clause (i) or (ii) of the immediately preceding sentence has occurred and is continuing. During the continuance of any default (other than a default described in clause (i) or (ii) of the second preceding sentence) with respect to any Designated Senior Indebtedness pursuant to which the maturity thereof may be accelerated immediately without further notice (except such notice as may be required to effect such acceleration) or the expiration of any applicable grace periods, the Company may not pay the Notes for a period (a "Payment Blockage Period") commencing upon the receipt by the Trustee (with a copy to the Company) of written notice (a "Blockage Notice") of such default from the Representative of the holders of such Designated Senior Indebtedness specifying an election to effect a Payment Blockage Period and ending 179 days thereafter (or earlier if such Payment Blockage Period is terminated (i) by 67 written notice to the Trustee and the Company from the Person or Persons who gave such Blockage Notice, (ii) because the default giving rise to such Blockage Notice is no longer continuing or (iii) because such Designated Senior Indebtedness has been repaid in full). Notwithstanding the provisions described in the immediately preceding sentence, unless the holders of such Designated Senior Indebtedness or the Representative of such holders have accelerated the maturity of such Designated Senior Indebtedness, the Company may resume payments on the Notes after the end of such Payment Blockage Period. Not more than one Blockage Notice may be given in any consecutive 360- day period, irrespective of the number of defaults with respect to Designated Senior Indebtedness during such period. Upon any payment or distribution of the assets of the Company upon a total or partial liquidation, dissolution, reorganization or bankruptcy of or similar proceeding relating to the Company or its property, the holders of Senior Indebtedness will be entitled to receive payment in full in cash or Cash Equivalents of the Senior Indebtedness (including interest after, or which would accrue but for, the commencement of any proceeding at the rate specified in the applicable Senior Indebtedness, whether or not a claim for such interest would be allowed) before the holders of the Notes are entitled to receive any payment, and until the Senior Indebtedness is paid in full in cash or Cash Equivalents, any payment or distribution to which holders of the Notes would be entitled but for the subordination provisions of the Indenture will be made to holders of the Senior Indebtedness as their interests may appear. If a distribution is made to holders of the Notes that, due to the subordination provisions, should not have been made to them, such holders are required to hold it in trust for the holders of Senior Indebtedness and pay it over to them as their interests may appear. If payment of the Notes is accelerated because of an Event of Default, the Company or the Trustee shall promptly notify the holders of the Designated Senior Indebtedness or the Representative of such holders of the acceleration. The Company may not pay the Notes until five Business Days after such holders or the Representative of the Designated Senior Indebtedness receive notice of such acceleration and, thereafter, may pay the Notes only if the subordination provisions of the Indenture otherwise permit payment at that time. By reason of such subordination provisions contained in the Indenture, in the event of insolvency, creditors of the Company who are holders of Senior Indebtedness may recover more, ratably, than the Noteholders. CHANGE OF CONTROL Upon the occurrence of any of the following events (each a "Change of Control"), unless the Company shall have exercised its right to redeem the Notes as described under "--Optional Redemption", each holder will have the right to require the Company to repurchase all or any part of such holder's Notes at a purchase price in cash equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date): (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than one or more Permitted Holders, is or becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that such person shall be deemed to have "beneficial ownership" of all shares that any such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 50% of the total voting power of the Voting Stock of the Company or Holdings (or its successor by merger, consolidation or purchase of all or substantially all of its assets) (for the purposes of this clause, such person shall be deemed to beneficially own any Voting Stock of the Company or Holdings held by a parent corporation, if such person "beneficially owns" (as defined above), directly or indirectly, more than 50% of the voting power of the Voting Stock of such parent corporation); or 68 (ii) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors of the Company or Holdings (together with any new directors whose election by such Board of Directors or whose nomination for election by the shareholders of the Company or Holdings was approved by a vote of at least a majority of the directors of the Company then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved or is a designee of the Permitted Holders or was nominated or elected by such Permitted Holders or any of their designees) cease for any reason to constitute a majority of the Board of Directors of the Company or Holdings then in office; or (iii) the sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the assets of the Company and its Restricted Subsidiaries taken as a whole to any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) other than a Permitted Holder or Holdings; or (iv) the adoption by the stockholders of a plan for the liquidation or dissolution of the Company or Holdings. Within 30 days following any Change of Control, unless the Company has mailed a redemption notice with respect to all the outstanding Notes in connection with such Change of Control as described under "--Optional Redemption", the Company shall mail a notice to each holder with a copy to the Trustee stating: (i) that a Change of Control has occurred and that such holder has the right to require the Company to purchase such holder's Notes at a purchase price in cash equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase (subject to the right of holders of record on a record date to receive interest on the relevant interest payment date); (ii) the repurchase date (which shall be no earlier than 30 days nor later than 60 days from the date such notice is mailed); and (iii) the procedures determined by the Company, consistent with the Indenture, that a holder must follow in order to have its Notes purchased. The Company will comply, to the extent applicable, with the requirements of Section 14(e) and Rule 13e-4 of the Exchange Act and any other securities laws or regulations in connection with the repurchase of Notes pursuant to this covenant. To the extent that the provisions of any securities laws or regulations conflict with provisions of the Indenture, the Company will comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations described in the Indenture by virtue thereof. Neither the Company nor the Trustee can waive the Holders' right to have the Notes redeemed at the Holder's election upon a Change in Control. The occurrence of certain of the events that would constitute a Change of Control would constitute a default under the Senior Credit Agreement. Future Senior Indebtedness of the Company and its Subsidiaries may also contain prohibitions of certain events that would constitute a Change of Control or require such Senior Indebtedness to be repurchased upon a Change of Control. Moreover, the exercise by the holders of their right to require the Company to repurchase the Notes could cause a default under such Senior Indebtedness, even if the Change of Control itself does not, due to the financial effect of such repurchase on the Company. Finally, the Company's ability to pay cash to the holders upon a repurchase may be limited by the Company's then existing financial resources. There can be no assurance that sufficient funds will be available when necessary to make any required repurchases. Even if sufficient funds were otherwise available, the terms of the Senior Credit Agreement will (and other Senior Indebtedness may) prohibit the Company's prepayment of Notes prior to their scheduled maturity. Consequently, if the Company is not able to prepay the Bank Indebtedness and any other Senior Indebtedness containing similar restrictions or obtain requisite consents, as described above, the Company will be unable to fulfill its repurchase obligations if holders of Notes exercise their repurchase rights following a Change of Control, thereby resulting in a default under the Indenture. 69 The Change of Control provisions described above may deter certain mergers, tender offers and other takeover attempts involving the Company by increasing the capital required to effectuate such transactions. The definition of "Change of Control" includes a disposition of all or substantially all of the property and assets of the Company and its Restricted Subsidiaries. With respect to the disposition of property or assets, the phrase "all or substantially all" as used in the Indenture varies according to the facts and circumstances of the subject transaction, has no clearly established meaning under New York law (which is the choice of law under the Indenture) and is subject to judicial interpretation. Accordingly, in certain circumstances there may be a degree of uncertainty in ascertaining whether a particular transaction would involve a disposition of "all or substantially all" of the property or assets of a Person, and therefore it may be unclear as to whether a Change of Control has occurred and whether the Company is required to make an offer to repurchase the Notes as described above. CERTAIN COVENANTS The Indenture contains certain covenants including, among others, the following: Limitation on Indebtedness. (a) The Company shall not, and shall not permit any of its Restricted Subsidiaries to, Incur any Indebtedness; provided, however, that the Company and its Restricted Subsidiaries may Incur Indebtedness if on the date thereof the Consolidated Coverage Ratio for the Company and its Restricted Subsidiaries is at least (i) 2.00 to 1.00, if such Indebtedness is Incurred on or prior to the second anniversary of the Issue Date and (ii) 2.25 to 1.00, if such Indebtedness is Incurred thereafter. (b) Notwithstanding the foregoing paragraph (a), the Company and its Restricted Subsidiaries may Incur the following Indebtedness: (i) Indebtedness Incurred pursuant to the Senior Credit Agreement; provided, however, that the aggregate principal amount of all Indebtedness Incurred pursuant to this clause (i) does not exceed $160 million at any time outstanding, less the aggregate principal amount of all mandatory prepayments of principal thereof with the proceeds of Asset Dispositions; (ii) the Subsidiary Guarantees and Guarantees of Indebtedness Incurred pursuant to clause (i); (iii) Indebtedness of the Company owing to and held by any Wholly-Owned Subsidiary or Indebtedness of a Restricted Subsidiary owing to and held by the Company or any Wholly-Owned Subsidiary; provided, however, that any subsequent issuance or transfer of any Capital Stock or any other event which results in any such Wholly-Owned Subsidiary ceasing to be a Wholly-Owned Subsidiary or any subsequent transfer of any such Indebtedness (except to the Company or a Wholly-Owned Subsidiary) shall be deemed, in each case, to constitute the Incurrence of such Indebtedness by the issuer thereof; (iv) Indebtedness represented by (x) the Notes, (y) any Indebtedness (other than the Indebtedness described in clauses (i), (ii) and (iii)) outstanding on the Issue Date and (z) any Refinancing Indebtedness Incurred in respect of any Indebtedness described in this clause (iv) or clause (v) or Incurred pursuant to paragraph (a) of the covenant described under "Limitation on Indebtedness"; (v) Indebtedness of a Restricted Subsidiary Incurred and outstanding on the date on which such Restricted Subsidiary became a Restricted Subsidiary or was acquired by the Company (other than Indebtedness Incurred to provide all or any portion of the funds utilized to consummate the transaction or series of related transactions pursuant to which such Restricted Subsidiary became a Subsidiary or was otherwise acquired by the Company); provided, however, that at the time such Restricted Subsidiary is acquired by the Company, the Company would have been able to Incur $1.00 of additional Indebtedness under this covenant after giving effect to the Incurrence of such Indebtedness pursuant to this clause (v); (vi) Indebtedness under Currency Agreements and Interest Rate Agreements; provided, however, that in the case of Currency Agreements and Interest Rate Agreements, such Currency Agreements and Interest Rate Agreements are entered into for bona fide hedging purposes of the Company or its Restricted Subsidiaries (as determined in good faith by the Board of Directors or senior management of the Company) and correspond in terms of notional amount, duration, currencies and interest rates, as applicable, to Indebtedness of the Company or its Restricted Subsidiaries Incurred without violation of the Indenture or to business transactions of the 70 Company or its Restricted Subsidiaries on customary terms entered into in the ordinary course of business; (vii) Indebtedness of foreign Restricted Subsidiaries under working capital facilities; provided that the aggregate principal amount of such Indebtedness outstanding at any time does not exceed 5% of Consolidated Tangible Assets; (viii) Indebtedness (including Capital Lease Obligations) incurred by the Company or any of its Restricted Subsidiaries to finance the purchase, lease or improvement of property (real or personal) or equipment (whether through the direct purchase of assets or the Capital Stock of any Person owning such assets) in an aggregate principal amount outstanding not to exceed the greater of (A) $5.0 million or (B) 5% of Consolidated Tangible Assets at the time of any Incurrence thereof (including any Refinancing Indebtedness with respect thereto); (ix) Indebtedness incurred by the Company or any of its Restricted Subsidiaries constituting reimbursement obligations with respect to letters of credit issued in the ordinary course of business, including, without limitation, letters of credit in respect of workers' compensation claims or self-insurance, or other Indebtedness with respect to reimbursement type obligations regarding workers' compensation claims; (x) Indebtedness arising from agreements of the Company or a Restricted Subsidiary of the Company providing for indemnification, adjustment of purchase price, earn out or other similar obligations, in each case, incurred or assumed in connection with the disposition of any business, assets or a Restricted Subsidiary of the Company, provided that the maximum liability in respect of all such Indebtedness shall at no time exceed the gross proceeds actually received by the Company and its Restricted Subsidiaries in connection with such disposition; (xi) obligations in respect of performance and surety bonds and completion guarantees provided by the Company or any Restricted Subsidiary of the Company in the ordinary course of business; and (xii) Indebtedness (other than Indebtedness described in clauses (i)--(xi)) in a principal amount which, when taken together with the principal amount of all other Indebtedness Incurred pursuant to this clause (xii) and then outstanding, will not exceed the greater of (A) $5.0 million or (B) 5% of Consolidated Tangible Assets. (c) Neither the Company nor any Restricted Subsidiary shall Incur any Indebtedness under paragraph (b) above if the proceeds thereof are used, directly or indirectly, to refinance any Subordinated Obligations of the Company unless such Indebtedness shall be subordinated to the Notes to at least the same extent as such Subordinated Obligations. No Subsidiary Guarantor shall incur any Indebtedness under paragraph (b) above if the proceeds thereof are used, directly or indirectly to refinance any Subordinated Obligations of such Subsidiary Guarantor unless such Indebtedness shall be subordinated to the obligations of such Subsidiary Guarantor under its Subsidiary Guarantee to at least the same extent as such Subordinated Indebtedness. Limitation on Liens. The Company will not, and will not permit any of its Restricted Subsidiaries to, create, incur, assume or suffer to exist any Liens of any kind against or upon any of its property or assets, or any proceeds therefrom, unless (i) in the case of Liens securing Indebtedness that is expressly subordinate or junior in right of payment to the Notes, the Notes are secured by a Lien on such property, assets or proceeds that is senior in priority to such Liens and (ii) in all other cases, the Notes are equally and ratably secured, except for (A) Liens existing as of the Issue Date and any extensions, renewals or replacements thereof, (B) Liens securing Senior Indebtedness, (C) Liens securing the Notes, (D) Liens of the Company or a Wholly Owned Restricted Subsidiary of the Company on assets of any Subsidiary of the Company, (E) Liens securing Indebtedness which is incurred to refinance Indebtedness which has been secured by a Lien permitted under the Indenture and which has been incurred in accordance with the provisions of the Indenture; provided, however, that such Liens do not extend to or cover any property or assets of the Company or any of its Restricted Subsidiaries not securing the Indebtedness so refinanced, and (F) Permitted Liens. Limitation on Layering. The Company shall not Incur any Indebtedness if such Indebtedness is subordinate or junior in ranking in any respect to any Senior Indebtedness unless such Indebtedness is Senior Subordinated Indebtedness or is contractually subordinated in right of payment to Senior Subordinated Indebtedness. No Subsidiary Guarantor shall Incur any Indebtedness if such Indebtedness is contractually subordinate or junior in ranking in any respect to any Senior 71 Indebtedness of such Subsidiary Guarantor unless such Indebtedness is Guarantor Senior Subordinated Indebtedness of such Subsidiary Guarantor or is contractually subordinated in right of payment to Senior Subordinated Indebtedness of such Subsidiary Guarantor. Limitation on Restricted Payments. (a) The Company shall not, and shall not permit any of its Restricted Subsidiaries, directly or indirectly, to (i) declare or pay any dividend or make any distribution on or in respect of its Capital Stock except (A) dividends or distributions payable in its Capital Stock (other than Disqualified Stock) and (B) dividends or distributions payable to the Company or a Restricted Subsidiary of the Company (and if such Restricted Subsidiary is not a Wholly-Owned Subsidiary, to its other holders of Capital Stock on a pro rata basis), (ii) purchase, redeem, retire or otherwise acquire for value any Capital Stock of the Company held by Persons other than a Restricted Subsidiary of the Company or any Capital Stock of a Restricted Subsidiary of the Company held by any Affiliate of the Company, other than another Restricted Subsidiary (in either case, other than in exchange for its Capital Stock (other than Disqualified Stock)), (iii) purchase, repurchase, redeem, defease or otherwise acquire or retire for value, prior to scheduled maturity, scheduled repayment or scheduled sinking fund payment, any Subordinated Obligations (other than the purchase, repurchase or other acquisition of Subordinated Obligations purchased in anticipation of satisfying a sinking fund obligation, principal installment or final maturity, in each case due within one year of the date of purchase, repurchase or acquisition) or (iv) make any Investment (other than a Permitted Investment) in any Person (any such dividend, distribution, purchase, redemption, repurchase, defeasance, other acquisition, retirement or Investment being herein referred to in clauses (i) through (iv) as a "Restricted Payment"), if at the time the Company or such Restricted Subsidiary makes such Restricted Payment: (1) a Default shall have occurred and be continuing (or would result therefrom); or (2) the Company is not able to incur an additional $1.00 of Indebtedness pursuant to the covenant described in "Limitation on Indebtedness"; or (3) the aggregate amount of such Restricted Payment and all other Restricted Payments declared or made subsequent to the Issue Date would exceed the sum of: (A) 50% of the Consolidated Net Income accrued during the period (treated as one accounting period) from, but excluding, the Issue Date to, but excluding, the date of such Restricted Payment (or, in case such Consolidated Net Income shall be a deficit, minus 100% of such deficit); (B) the aggregate net proceeds, including the fair market value of property other than cash (determined in good faith by the Board of Directors as evidenced by a certificate filed with the Trustee, except that in the event the value of any non-cash consideration shall be $10 million or more, the value shall be as determined in writing by an Independent Appraiser) received by the Company from the issue or sale of its Capital Stock (other than Disqualified Stock) or other capital contributions subsequent to the Issue Date (other than net proceeds received from an issuance or sale of such Capital Stock to a Subsidiary of the Company or an employee stock ownership plan or similar trust to the extent such sale to an employee stock ownership plan or similar trust is financed by loans from the Company or any Restricted Subsidiary unless such loans have been repaid with cash on or prior to the date of determination); (C) the amount by which Indebtedness of the Company is reduced on the Company's balance sheet upon the conversion or exchange (other than by a Subsidiary of the Company) subsequent to the Issue Date of any Indebtedness of the Company convertible or exchangeable for Capital Stock of the Company (less the amount of any cash, or other property, distributed by the Company upon such conversion or exchange); (D) the amount equal to the net reduction in Investments made by the Company or any of its Restricted Subsidiaries in any Person resulting from (i) repurchases or redemptions of such Investments by such Person, proceeds realized upon the sale of such Investment to an unaffiliated purchaser, repayments of loans or advances or other transfers of assets (including by way of dividend or distribution) by such Person to the Company or any Restricted Subsidiary of the Company or (ii) the redesignation of Unrestricted Subsidiaries as Restricted Subsidiaries (valued in each case as provided in the definition of "Investment") not to exceed, in the case of any Unrestricted Subsidiary, the amount of Investments previously made by the Company or any Restricted Subsidiary in such Unrestricted Subsidiary, which amount was included in the calculation of the amount of Restricted Payments; provided, however, that no amount shall be included under this clause (D) to the extent it is already included in Consolidated Net Income. 72 (b) The provisions of paragraph (a) shall not prohibit: (i) any purchase or redemption of Capital Stock or Subordinated Obligations of the Company or any Restricted Subsidiary made by exchange for, or out of the proceeds of the substantially concurrent sale of, Capital Stock of the Company (other than Disqualified Stock and other than Capital Stock issued or sold to a Subsidiary or an employee stock ownership plan or similar trust to the extent such sale to an employee stock ownership plan or similar trust is financed by loans from the Company or any Restricted Subsidiary unless such loans have been repaid with cash on or prior to the date of determination); provided, however, that (A) such purchase or redemption shall be excluded in subsequent calculations of the amount of Restricted Payments and (B) the aggregate net proceeds from such sale shall be excluded from clause (3) (B) of paragraph (a); (ii) any purchase or redemption of Subordinated Obligations of the Company made by exchange for, or out of the proceeds of the substantially concurrent sale of, Subordinated Obligations of the Company; provided, however, that such purchase or redemption shall be excluded in subsequent calculations of the amount of Restricted Payments; (iii) any purchase or redemption of Subordinated Obligations from Net Available Cash to the extent permitted under "Limitation on Sales of Assets and Subsidiary Stock" below; provided, however, that such purchase or redemption shall be excluded in subsequent calculations of the amount of Restricted Payments; (iv) dividends paid within 60 days after the date of declaration if at such date of declaration such dividend would have complied with this provision; provided, however, that such dividend shall be included in subsequent calculations of the amount of Restricted Payments; (v) payments for the purpose of, and in amounts equal to, amounts required to permit Holdings to redeem or repurchase Capital Stock of Holdings from existing or former employees or management of the Company or any Subsidiary or their assigns, estates or heirs, in each case in connection with the repurchase provisions under employee stock option or stock purchase agreements or other agreements to compensate management employees; provided that such redemption or repurchases pursuant to this clause shall not exceed $5.0 million (and shall be increased by the amount of any proceeds to the Company from (x) sales of Capital Stock of Holdings to management employees subsequent to the Issue Date and (y) any "key-man" life insurance policies which are used to make such redemptions or repurchases) in the aggregate; provided, however, that such payments shall be included in the calculation of the amount of Restricted Payments; provided, further, that the cancellation of Indebtedness owing to the Company from members of management of the Company or any of its Restricted Subsidiaries in connection with a repurchase of Capital Stock of Holdings will not be deemed to constitute a Restricted Payment under the Indenture; (vi) loans or advances made after the Issue Date to employees or directors of the Company or any Subsidiary the proceeds of which are used to purchase Capital Stock of Holdings, in an aggregate amount not in excess of $1.0 million at any one time outstanding; provided, however, that such payments shall be included in the calculation of the amount of Restricted Payments; (vii) cash dividends to Holdings in amounts equal to (A) the amounts required for Holdings to pay any Federal, state or local income taxes to the extent that such income taxes are attributable to the income of the Company and its Subsidiaries, (B) the amounts required for Holdings to pay franchise taxes and other fees required to maintain its legal existence, (C) an amount not to exceed $250,000 in any fiscal year to permit Holdings to pay its corporate overhead expenses incurred in the ordinary course of business, and to pay salaries or other compensation of employees who perform services for both Holdings and the Company, (D) so long as no Default or Event of Default shall have occurred and be continuing, an amount not to exceed $100,000 in the aggregate, to enable Holdings to make payments to holders of its Capital Stock in lieu of issuance of fractional shares of its Capital Stock, (E) the amounts required for Holdings to make indemnification payments under the Recapitalization Agreement, and (F) on or about the Issue Date the amount required to enable Holdings to repay the Holdings Facility in an amount not to exceed the difference between all amounts then owing by Holdings in respect of the Holdings Facility less the net proceeds to Holdings from the issuance of the Holdings Senior Discount Notes; provided, however, that such payments shall not be included in the calculation of the amount of Restricted Payments; (viii) repurchases of Capital Stock deemed to occur upon the exercise of stock options if such Capital Stock represents a portion of the exercise price hereof; provided, however, that such repurchases shall not be included in the calculation of the amount of Restricted Payments; and 73 (ix) so long as (A) no Default or Event of Default has occurred and is continuing and (B) immediately before and immediately after giving effect thereto, the Company would have been permitted to Incur at least $1.00 of additional Indebtedness under the covenant described in "Limitation on Indebtedness," from and after May 15, 2003, payments of cash dividends to Holdings in an amount sufficient to enable Holdings to make payments of interest required to be made in respect of the Holdings Senior Discount Notes in accordance with the terms thereof in effect on the date of the Indenture, provided such interest payments are made with the proceeds of such dividends; provided, however, that such payments shall not be included in the calculation of the amount of Restricted Payments. Limitation on Restrictions on Distributions from Restricted Subsidiaries. The Company will not, and will not permit any Restricted Subsidiary to, create or otherwise cause or permit to exist or become effective any consensual encumbrance or consensual restriction on the ability of any Restricted Subsidiary to (i) pay dividends or make any other distributions on its Capital Stock or pay any Indebtedness or other obligations owed to the Company, (ii) make any loans or advances to the Company or (iii) transfer any of its property or assets to the Company, except (a) any encumbrance or restriction pursuant to an agreement in effect at or entered into on the date of the Indenture (including, without limitation, the Senior Credit Facility); (b) any encumbrance or restriction with respect to a Restricted Subsidiary pursuant to an agreement relating to any Indebtedness Incurred by a Restricted Subsidiary on or prior to the date on which such Restricted Subsidiary was acquired by the Company (other than Indebtedness Incurred to provide all or any portion of the funds utilized to consummate, the transaction or series of related transactions pursuant to which such Restricted Subsidiary became a Restricted Subsidiary or was acquired by the Company) and outstanding on such date; (c) any encumbrance or restriction with respect to a Restricted Subsidiary pursuant to an agreement effecting a refinancing of Indebtedness Incurred pursuant to an agreement referred to in clause (a) or (b) of this covenant or this clause (c) or contained in any amendment to an agreement referred to in clause (a) or (b) of this covenant or this clause (c); provided, however, that the encumbrances and restrictions with respect to such Restricted Subsidiary contained in any such agreement or amendment are no less favorable to the Holders of the Notes than encumbrances and restrictions contained in such agreements; (d) in the case of clause (iii) above, any encumbrance or restriction (A) that restricts in a customary manner the subletting, assignment or transfer of any property or asset that is subject to a lease, license or similar contract, or the assignment or transfer of any such lease, license or other contract, (B) by virtue of any transfer of, agreement to transfer, option or right with respect to, or Lien on, any property or assets of the Company or any Restricted Subsidiary not otherwise prohibited by the Indenture, (C) contained in mortgages, pledges or other security agreements securing Indebtedness of a Restricted Subsidiary to the extent such encumbrance or restrictions restrict the transfer of the property subject to such mortgages, pledges or other security agreements or (D) pursuant to customary provisions restricting dispositions of real property interests set forth in any reciprocal easement agreements of the Company or any Restricted Subsidiary; (e) any restriction with respect to a Restricted Subsidiary (or any of its property or assets) imposed pursuant to an agreement entered into for the direct or indirect sale or disposition of all or substantially all the Capital Stock or assets of such Restricted Subsidiary (or the property or assets that are subject to such restriction) pending the closing of such sale or disposition; (f) encumbrances or restrictions arising or existing by reason of applicable law; (g) any restrictions pursuant to the Indenture and the Holdings Senior Discount Notes; (h) restrictions imposed by any agreement or instrument governing Capital Stock of any Person that is acquired; and (i) restrictions on cash or other deposits or net worth imposed by customers under contracts entered into in the ordinary course of business. Limitation on Sales of Assets and Subsidiary Stock. (a) The Company shall not, and shall not permit any of its Restricted Subsidiaries to, make any Asset Disposition unless (i) the Company or such Restricted Subsidiary receives consideration at the time of such Asset Disposition at least equal to the fair market value, as determined in good faith by the Board of Directors (including as to the value of all non-cash consideration), of the shares and assets subject to such Asset Disposition, (ii) at least 74 75% of the consideration thereof received by the Company or such Restricted Subsidiary is in the form of cash or Cash Equivalents and (iii) an amount equal to 100% of the Net Available Cash from such Asset Disposition is applied by the Company (or such Restricted Subsidiary, as the case may be) (A) first, to the extent the Company or any Restricted Subsidiary, as the case may be, elects (or is required by the terms of any Senior Indebtedness), to prepay, repay or purchase Senior Indebtedness or Indebtedness (other than any Preferred Stock) of a Wholly Owned Subsidiary (in each case other than Indebtedness owed to the Company or an Affiliate of the Company) within 180 days from the later of the date of such Asset Disposition or the receipt of such Net Available Cash; (B) second, to the extent of the balance of such Net Available Cash after application in accordance with clause (A), at the Company's election to the investment in Additional Assets within one year from the later of the date of such Asset Disposition or the receipt of such Net Available Cash; (C) third, to the extent of the balance of such Net Available Cash after application and in accordance with clauses (A) and (B), to make an offer to purchase (an "Offer") Notes and other pari passu debt obligations subject to a similar covenant (collectively, the "pari passu Notes") at par plus accrued and unpaid interest, if any, thereon; and (D) fourth, to the extent of the balance of such Net Available Cash after application in accordance with clauses (A), (B) and (C), for other general corporate purposes not prohibited by the Indenture; provided, however, that, in connection with any prepayment, repayment or purchase of Indebtedness pursuant to clause (A) above, the Company or such Restricted Subsidiary shall retire such Indebtedness and shall cause the related loan commitment (if any) to be permanently reduced in an amount equal to the principal amount so prepaid, repaid or purchased. Notwithstanding the foregoing provisions, the Company and its Restricted Subsidiaries shall not be required to apply any Net Available Cash in accordance herewith except to the extent that the aggregate Net Available Cash from all Asset Dispositions which are not applied in accordance with this covenant exceed $5 million. The Company shall not be required to make an Offer for the Notes and for the pari passu Notes pursuant to this covenant if the Net Available Cash available therefor (after application of the proceeds as provided in clauses (A) and (B)) are less than $5 million for any particular Asset Disposition (which lesser amounts shall be carried forward for purposes of determining whether an Offer is required with respect to the Net Available Cash from any subsequent Asset Disposition). (b) If the aggregate principal amount (or accreted value, as applicable) of Notes and pari passu Notes validly tendered and not withdrawn in connection with an Offer pursuant to clause (C) above exceeds the funds available therefor ("Offer Proceeds"), the Offer Proceeds will be apportioned between the Notes and such pari passu Notes, with the portion of the Offer Proceeds payable in respect of the Notes equal to the lesser of (i) the Offer Proceeds amount multiplied by a fraction, the numerator of which is the outstanding principal amount of the Notes and the denominator of which is the sum of the outstanding principal amount of the Notes and the outstanding principal amount (or accreted value, as applicable) of the relevant pari passu Notes, and (ii) the aggregate principal amount of Notes validly tendered and not withdrawn. (c) For the purposes of this covenant, the following will be deemed to be cash: (x) the assumption by the transferee of Senior Indebtedness of the Company or Indebtedness of any Restricted Subsidiary of the Company and the release of the Company or such Restricted Subsidiary from all liability on such Senior Indebtedness or Indebtedness in connection with such Asset Disposition (in which case the Company shall, without further action, be deemed to have applied such assumed Indebtedness in accordance with clause (A) of the preceding paragraph), (y) securities received by the Company or any Restricted Subsidiary of the Company from the transferee that are promptly converted by the Company or such Restricted Subsidiary into cash and (z) any Designated Noncash Consideration received by the Company or any of its Restricted Subsidiaries in such Asset Disposition having an aggregate fair market value, taken together with all other Designated Noncash Consideration received pursuant to this clause (z) that is at that time outstanding, not to exceed 10% of Consolidated Tangible Assets at the time of the receipt of such Designated Noncash Consideration (with the fair market value of each item of Designated Noncash Consideration being measured at the time received and without giving effect to subsequent changes in value). 75 (d) In the event of an Asset Disposition that requires the purchase of Notes pursuant to clause (a)(iii)(C), the Company will be required to purchase Notes tendered pursuant to an offer by the Company for the Notes at a purchase price of 100% of their principal amount plus accrued and unpaid interest, if any, to the purchase date in accordance with the procedures (including prorating in the event of oversubscription) set forth in the Indenture. If the aggregate purchase price of the pari passu Notes tendered pursuant to the offer is less than the Net Available Cash allotted to the purchase of the pari passu Notes, the Company will apply the remaining Net Available Cash in accordance with clause (a)(iii)(D) above. (e) The Company will comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the repurchase of Notes pursuant to the Indenture. To the extent that the provisions of any securities laws or regulations conflict with provisions of this covenant, the Company will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under the Indenture by virtue thereof. Limitation on Affiliate Transactions. (a) The Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, enter into or conduct any transaction (including the purchase, sale, lease or exchange of any property or the rendering of any service) with any Affiliate of the Company (an "Affiliate Transaction") unless: (i) the terms of such Affiliate Transaction are no less favorable to the Company or such Restricted Subsidiary, as the case may be, than those that could be obtained at the time of such transaction in arm's-length dealings with a Person who is not such an Affiliate; (ii) in the event such Affiliate Transaction involves an aggregate amount in excess of $2 million, the terms of such transaction have been approved by a majority of the members of the Board of Directors of the Company and by a majority of the members of such Board having no personal stake in such transaction, if any (and such majority or majorities, as the case may be, determines that such Affiliate Transaction satisfies the criteria in (i) above); and (iii) in the event such Affiliate Transaction involves an aggregate amount in excess of $15 million, the Company has received a written opinion from an independent investment banking firm of nationally recognized standing that such Affiliate Transaction is not materially less favorable than those that might reasonably have been obtained in a comparable transaction at such time on an arms-length basis from a Person that is not an Affiliate. (b) The foregoing paragraph (a) shall not apply to (i) any Restricted Payment permitted to be made pursuant to the covenant described under "Limitation on Restricted Payments," (ii) any issuance of securities, or other payments, awards or grants in cash, securities or otherwise pursuant to, or the funding of, employment arrangements, stock options and stock ownership plans approved by the Board of Directors of the Company, (iii) the payment of compensation and directors' fees and the performance of indemnification or contribution obligations in the ordinary course of business, (iv) loans or advances to employees in the ordinary course of business of the Company or any of its Restricted Subsidiaries, (v) the execution, delivery and performance of the Management Agreement, or (vi) any transaction between the Company and a Wholly-Owned Subsidiary or between Wholly-Owned Subsidiaries. SEC Reports. Notwithstanding that the Company may not be subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, to the extent permitted by the Exchange Act, the Company will file with the Commission, and provide, within 15 days after the Company is required to file the same with the Commission, the Trustee and the holders of the Notes with the annual reports and the information, documents and other reports (or copies of such portions of any of the foregoing as the Commission may by rules and regulations prescribe) that are specified in Sections 13 and 15(d) of the Exchange Act. In the event that the Company is not permitted to file such reports, documents and information with the Commission pursuant to the Exchange Act, the Company will nevertheless deliver such Exchange Act information to the Trustee and the holders of the Notes as if the Company were subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act. 76 Merger and Consolidation. The Company shall not consolidate with or merge with or into, or convey, transfer or lease all or substantially all its assets to, any Person, unless: (i) the resulting, surviving or transferee Person (the "Successor Company") shall be a corporation, partnership, trust or limited liability company organized and existing under the laws of the United States of America, any State thereof or the District of Columbia and the Successor Company (if not the Company) shall expressly assume, by supplemental indenture, executed and delivered to the Trustee, in form satisfactory to the Trustee, all the obligations of the Company under the Notes and the Indenture; (ii) immediately after giving effect to such transaction (and treating any Indebtedness that becomes an obligation of the Successor Company or any Subsidiary of the Successor Company as a result of such transaction as having been incurred by the Successor Company or such Restricted Subsidiary at the time of such transaction), no Default or Event of Default shall have occurred and be continuing; (iii) immediately after giving effect to such transaction, the Consolidated Net Worth of the Company or the Successor Company, as the case may be, is not less than that of the Company immediately prior to the transaction; (iv) immediately after giving effect to such transaction, the Successor Company would be able to Incur at least an additional $1.00 of Indebtedness under the covenant described in "Limitation on Indebtedness"; and (v) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger or transfer and such supplemental indenture (if any) comply with the Indenture. The Successor Company will succeed to, and be substituted for, and may exercise every right and power of, the Company under the Indenture and thereafter the Company shall be released from all obligations and covenants thereunder, but, in the case of a lease of all or substantially all its assets, the Company will not be released from the obligation to pay the principal of and interest on the Notes. Notwithstanding the foregoing clauses (ii) and (iii), (i) any Restricted Subsidiary of the Company may consolidate with, merge into or transfer all or part of its properties and assets to the Company and (ii) the Company may merge with an Affiliate incorporated solely for the purpose of reincorporating the Company in another jurisdiction to realize tax or other benefits. Future Subsidiary Guarantors. After the Issue Date, the Company will cause each Restricted Subsidiary created or acquired by the Company which Guarantees the Bank Indebtedness to execute and deliver to the Trustee a Subsidiary Guarantee pursuant to which such Subsidiary Guarantor will unconditionally Guarantee on a joint and several basis, the full and prompt payment of the principal of, premium, if any and interest on Exchange Notes on a senior subordinated basis. The obligations of each Subsidiary Guarantor will be limited to the maximum amount as will, after giving effect to all other contingent and fixed liabilities of such Subsidiary Guarantor (including, without limitation, any guarantees under the Senior Credit Agreement) and after giving effect to any collections from or payments made by or on behalf of any other Subsidiary Guarantor in respect of the obligations of such other Subsidiary Guarantor under its Subsidiary Guarantee or pursuant to its contribution obligations under the Indenture, result in the obligations of such Subsidiary Guarantor under its Subsidiary Guarantee not constituting a fraudulent conveyance or fraudulent transfer under federal or state law. Each Subsidiary Guarantor will be permitted to consolidate with or merge into or sell its assets to the Company or another Subsidiary Guarantor without limitation. Each Subsidiary Guarantor will be permitted to consolidate with or merge into or sell all or substantially all its assets to a corporation, partnership or trust other than the Company or another Subsidiary Guarantor (whether or not affiliated with the Subsidiary Guarantor). Upon the sale or disposition of a Subsidiary Guarantor (by merger, consolidation, the sale of all or substantially all of its assets) to a Person (whether or not an Affiliate of the Subsidiary Guarantor) which is not a Subsidiary of the Company, which sale or disposition is otherwise in compliance with the Indenture (including the covenant described under "Certain Covenants-- Limitation on Sales of Assets and Subsidiary Stock"), such Subsidiary Guarantor shall be 77 deemed released from all its obligations under the Indenture and its Subsidiary Guarantee and such Subsidiary Guarantee shall terminate; provided, however, that any such termination shall occur only to the extent that all obligations of such Subsidiary Guarantor under the Senior Credit Agreement and all of its guarantees of, and under all of its pledges of assets or other security interests which secure, any other Indebtedness of the Company shall also terminate upon such release, sale or transfer. Limitation on Lines of Business. The Company will not, and will not permit any Restricted Subsidiary to, engage in any business other than a Related Business. EVENTS OF DEFAULT Each of the following constitutes an Event of Default under the Indenture: (i) a default in any payment of interest on any Note when due, continued for 30 days, whether or not such payment is prohibited by the provisions described under "Ranking and Subordination" above, (ii) a default in the payment of principal of any Note when due at its Stated Maturity, upon optional redemption, upon required repurchase, upon declaration or otherwise, whether or not such payment is prohibited by the provisions described under "Ranking and Subordination" above, (iii) the failure by the Company to comply for 30 days after notice with any of its obligations under the covenants described under "Change of Control" above or under covenants described under "Certain Covenants" above (in each case, other than a failure to purchase Notes which shall constitute an Event of Default under clause (ii) above), (iv) the failure by the Company to comply for 60 days after notice with its other agreements contained in the Indenture, (v) Indebtedness of the Company or any Restricted Subsidiary is not paid within any applicable grace period after final maturity or is accelerated by the holders thereof because of a default and the total amount of such Indebtedness unpaid or accelerated exceeds $10 million (the "cross acceleration provision"), (vi) certain events of bankruptcy, insolvency or reorganization of the Company or a Significant Subsidiary (the "bankruptcy provisions"), (vii) any judgment or decree for the payment of money in excess of $10 million is rendered against the Company or a Significant Subsidiary and such judgment or decree shall remain undischarged or unstayed for a period of 60 days after such judgment becomes final and non- appealable (the "judgment default provision") or (viii) any Subsidiary Guarantee ceases to be in full force and effect (except as contemplated by the terms of the Indenture) or any Subsidiary Guarantor denies or disaffirms its obligations under the Indenture or its Subsidiary Guarantee. However, a default under clauses (iii) and (iv) will not constitute an Event of Default until the Trustee or the holders of 25% in principal amount of the outstanding Exchange Notes notify the Company of the default and the Company does not cure such default within the time specified in clauses (iii) and (iv) hereof after receipt of such notice. If an Event of Default occurs and is continuing, the Trustee or the holders of at least 25% in principal amount of the outstanding Notes by notice to the Company and the Trustee may declare the principal of and accrued and unpaid interest, if any, on all the Notes to be due and payable. Upon such a declaration, such principal and accrued and unpaid interest shall be due and payable immediately. If an Event of Default relating to certain events of bankruptcy, insolvency or reorganization of the Company occurs and is continuing, the principal of and accrued and unpaid interest on all the Notes will become and be immediately due and payable without any declaration or other act on the part of the Trustee or any holders. Under certain circumstances, the holders of a majority in principal amount of the outstanding Notes may rescind any such acceleration with respect to the Notes and its consequences. Subject to the provisions of the Indenture relating to the duties of the Trustee, if an Event of Default occurs and is continuing, the Trustee will be under no obligation to exercise any of the rights or powers under the Indenture at the request or direction of any of the holders unless such holders have offered to the Trustee reasonable indemnity or security against any loss, liability or expense. Except to enforce the right to receive payment of principal, premium, if any, or interest when due, no holder may pursue any remedy with respect to the Indenture or the Notes unless (i) such holder has 78 previously given the Trustee notice that an Event of Default is continuing, (ii) holders of at least 25% in principal amount of the outstanding Notes have requested the Trustee to pursue the remedy, (iii) such holders have offered the Trustee reasonable security or indemnity against any loss, liability or expense, (iv) the Trustee has not complied with such request within 60 days after the receipt of the request and the offer of security or indemnity and (v) the holders of a majority in principal amount of the outstanding Notes have not given the Trustee a direction that, in the opinion of the Trustee, is inconsistent with such request within such 60-day period. Subject to certain restrictions, the holders of a majority in principal amount of the outstanding Notes are given the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or of exercising any trust or power conferred on the Trustee. The Trustee, however, may refuse to follow any direction that conflicts with law or the Indenture or that the Trustee determines is unduly prejudicial to the rights of any other holder or that would involve the Trustee in personal liability. Prior to taking any action under the Indenture, the Trustee shall be entitled to indemnification satisfactory to it in its sole discretion against all losses and expenses caused by taking or not taking such action. The Indenture provides that if a Default occurs and is continuing and is known to the Trustee, the Trustee must mail to each holder notice of the Default within 90 days after it occurs. Except in the case of a Default in the payment of principal of, premium, if any, or interest on any Note, the Trustee may withhold notice if and so long as a committee of its Trust officers in good faith determines that withholding notice is in the interests of the Noteholders. In addition, the Company is required to deliver to the Trustee, within 120 days after the end of each fiscal year, a certificate indicating whether the signers thereof know of any Default that occurred during the previous year. The Company also is required to deliver to the Trustee, within 30 days after the occurrence thereof, written notice of any events which would constitute certain Defaults, their status and what action the Company is taking or proposes to take in respect thereof. AMENDMENTS AND WAIVERS Subject to certain exceptions, the Indenture may be amended with the consent of the holders of a majority in principal amount of the Notes then outstanding and any past default or compliance with any provisions may be waived with the consent of the holders of a majority in principal amount of the Notes then outstanding. However, without the consent of each holder of an outstanding Note affected, no amendment may, among other things, (i) reduce the amount of Notes whose holders must consent to an amendment, (ii) reduce the stated rate of or extend the stated time for payment of interest on any Note, (iii) reduce the principal of or extend the Stated Maturity of any Note, (iv) reduce the premium payable upon the redemption or repurchase of any Note or change the time at which any Note may be redeemed as described under "Optional Redemption" above, (v) make any Note payable in money other than that stated in the Note, (vi) impair the right of any holder to receive payment of principal of and interest on such holder's Notes on or after the due dates therefor or to institute suit for the enforcement of any payment on or with respect to such holder's Notes or (vii) make any change in the amendment provisions which require each holder's consent or in the waiver provisions. Without the consent of any holder, the Company and the Trustee may amend the Indenture to cure any ambiguity, omission, defect or inconsistency, to provide for the assumption by a successor corporation, partnership, trust or limited liability company of the obligations of the Company under the Indenture, to provide for uncertificated Notes in addition to or in place of certificated Notes (provided that the uncertificated Notes are issued in registered form for purposes of Section 163(f) of the Code, or in a manner such that the uncertificated Notes are described in Section 163(f) (2) (B) of the Code), to add Guarantees with respect to the Notes, to secure the Notes, to add to the covenants of the Company for the benefit of the holders or to surrender any right or power conferred upon the Company, to make any change that does not adversely affect the rights of any holder or to comply with any requirement of the Commission in connection with the qualification of the Indenture under the Trust Indenture Act. However, no amendment may be made to the subordination provisions of the 79 Indenture that adversely affects the rights of any holder of Senior Indebtedness then outstanding unless the holders of such Senior Indebtedness (or any group or representative thereof authorized to give a consent) consent to such change. The consent of the holders is not necessary under the Indenture to approve the particular form of any proposed amendment. It is sufficient if such consent approves the substance of the proposed amendment. After an amendment under the Indenture becomes effective, the Company is required to mail to the holders a notice briefly describing such amendment. However, the failure to give such notice to all the holders, or any defect therein, will not impair or affect the validity of the amendment. DEFEASANCE The Company at any time may terminate all its obligations under the Notes and the Indenture ("legal defeasance"), except for certain obligations, including those respecting the defeasance trust and obligations to register the transfer or exchange of the Notes, to replace mutilated, destroyed, lost or stolen Notes and to maintain a registrar and paying agent in respect of the Notes. The Company at any time may terminate its obligations under covenants described under "Certain Covenants" (other than "Merger and Consolidation"), the operation of the cross acceleration provision, the bankruptcy provisions with respect to Significant Subsidiaries, the judgment default provision and the Subsidiary Guarantee provision described under "Events of Default" above and the limitations contained in clauses (iii) and (iv) under "Certain Covenants--Merger and Consolidation" above ("covenant defeasance"). The Company may exercise its legal defeasance option notwithstanding its prior exercise of its covenant defeasance option. If the Company exercises its legal defeasance option, payment of the Notes may not be accelerated because of an Event of Default with respect thereto. If the Company exercises its covenant defeasance option, payment of the Notes may not be accelerated because of an Event of Default specified in clause (iii), (v), (vi) (with respect only to Significant Subsidiaries), (vii) or (viii) under "Events of Default" above or because of the failure of the Company to comply with clause (iii) or (iv) under "Certain Covenants--Merger and Consolidation" above. In order to exercise either defeasance option, the Company must irrevocably deposit in trust (the "defeasance trust") with the Trustee money or U.S. Government Obligations for the payment of principal, premium, if any, and interest on the Notes to redemption or maturity, as the case may be, and must comply with certain other conditions, including delivery to the Trustee of an Opinion of Counsel to the effect that holders of the Notes will not recognize income, gain or loss for Federal income tax purposes as a result of such deposit and defeasance and will be subject to Federal income tax on the same amount and in the same manner and at the same times as would have been the case if such deposit and defeasance had not occurred (and, in the case of legal defeasance only, such Opinion of Counsel must be based on a ruling of the Internal Revenue Service or other change in applicable Federal income tax law). CONCERNING THE TRUSTEE State Street Bank and Trust Company is the Trustee under the Indenture and has been appointed by the Company as Registrar and Paying Agent with regard to the Notes. The Trustee is also the trustee under the indenture for the Discount Notes. GOVERNING LAW The Indenture provides that it and the Notes will be governed by, and construed in accordance with, the laws of the State of New York without giving effect to applicable principles of conflicts of law to the extent that the application of the law of another jurisdiction would be required thereby. 80 CERTAIN DEFINITIONS "Additional Assets" means (i) any property or assets (other than Indebtedness and Capital Stock) to be used by the Company or a Restricted Subsidiary in a Related Business; (ii) the Capital Stock of a Person that becomes a Restricted Subsidiary as a result of the acquisition of such Capital Stock by the Company or a Restricted Subsidiary of the Company; or (iii) Capital Stock constituting a minority interest in any Person that at such time is a Restricted Subsidiary of the Company; provided, however, that, in the case of clauses (ii) and (iii), such Restricted Subsidiary is primarily engaged in a Related Business. "Affiliate" of any specified Person means any other Person, directly or indirectly, controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Asset Disposition" means any sale, lease (other than operating leases entered into in the ordinary course of business), transfer, issuance or other disposition (or series of related sales, leases, transfers, issuances or dispositions that are part of a common plan) of shares of Capital Stock of a Restricted Subsidiary (other than directors' qualifying shares), property or other assets (each referred to for the purposes of this definition as a "disposition") by the Company or any of its Restricted Subsidiaries (including any disposition by means of a merger, consolidation or similar transaction) other than (i) a disposition by a Restricted Subsidiary to the Company or by the Company or a Restricted Subsidiary to a Wholly-Owned Subsidiary, (ii) the sale of Cash Equivalents or Temporary Cash Investments in the ordinary course of business, (iii) a disposition of inventory or a licensing of intellectual property in the ordinary course of business, (iv) a disposition of obsolete or worn out equipment or equipment that is no longer useful or to be used in the conduct of the business of the Company and its Restricted Subsidiaries and that is disposed of in each case in the ordinary course of business, (v) transactions permitted under "Certain Covenants--Merger and Consolidation" above, (vi) for purposes of "Limitation on Sales of Assets and Subsidiary Stock" only, a disposition subject to "Limitation on Restricted Payments" and (vii) the sale, discount or factoring, in each case without recourse, of accounts receivable arising in the ordinary course of business. "Attributable Indebtedness" in respect of a Sale/Leaseback Transaction means, as at the time of determination, the present value (discounted at the greater of (i) the interest rate implicit in such Sale/Leaseback Transaction and (ii) the interest rate borne by the Notes, in each case, compounded semi- annually) of the total obligations of the lessee for rental payments during the remaining term of the lease included in such Sale/Leaseback Transaction (including any period for which such lease has been extended). "Bank Indebtedness" means any and all amounts, whether outstanding on the Issue Date or thereafter incurred, payable by the Company under or in respect of the Senior Credit Agreement and any related notes, collateral documents, letters of credit and guarantees, including principal, premium, if any, interest (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to the Company whether or not a claim for post filing interest is allowed in such proceedings), fees, charges, expenses, reimbursement obligations, guarantees and all other amounts payable thereunder or in respect thereof and refinancings thereof. "Board of Directors" means, as to any Person, the board of directors of such Person or any duly authorized committee thereof. "Capital Stock" of any Person means any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) equity of such Person, including any Preferred Stock, but excluding any debt securities convertible into such equity. 81 "Capitalized Lease Obligations" means an obligation that is required to be classified and accounted for as a capitalized lease for financial reporting purposes in accordance with GAAP, and the amount of Indebtedness represented by such obligation shall be the capitalized amount of such obligation determined in accordance with GAAP, and the Stated Maturity thereof shall be the date of the last payment of rent or any other amount due under such lease prior to the first date such lease may be terminated without penalty. "Cash Equivalents" means (i) securities issued or directly and fully guaranteed or insured by the United States Government or any agency or instrumentality thereof, having maturities of not more than one year from the date of acquisition; (ii) marketable general obligations issued by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof maturing within one year from the date of acquisition thereof and, at the time of acquisition thereof, having a credit rating of "A" or better from either Standard & Poor's Ratings Group or Moody's Investors Service, Inc.; (iii) certificates of deposit, time deposits, eurodollar time deposits, overnight bank deposits or bankers' acceptances having maturities of not more than one year from the date of acquisition thereof issued by any commercial bank the long-term debt of which is rated at the time of acquisition thereof at least "A" or the equivalent thereof by Standard & Poor's Rating Group, or "A" or the equivalent thereof by Moody's Investors Service, Inc., and having capital and surplus in excess of $500 million; (iv) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clauses (i), (ii) and (iii) entered into with any bank meeting the qualifications specified in clause (iii) above; (v) commercial paper rated at the time of acquisition thereof at least "A-2" or the equivalent thereof by Standard & Poor's Rating Group or "P-2" or the equivalent thereof by Moody's Investors Service, Inc., or carrying an equivalent rating by a nationally recognized rating agency, if both of the two named rating agencies cease publishing ratings of investments, and in either case maturing within 270 days after the date of acquisition thereof; and (vi) interests in any investment company which invests solely in instruments of the type specified in clauses (i) through (v) above. "Code" means the Internal Revenue Code of 1986, as amended. "Consolidated Coverage Ratio" as of any date of determination means, with respect to any Person, the ratio of (i) the aggregate amount of Consolidated EBITDA of such Person for the period of the most recent four consecutive fiscal quarters ending prior to the date of such determination to (ii) Consolidated Interest Expense for such four fiscal quarters (in each case, determined, for each fiscal quarter (or portion thereof) of the four fiscal quarters ending prior to or including the Issue Date, on a pro forma basis to give effect to the Transactions, the Offering and the application of proceeds thereof as if they had occurred at the beginning of such four quarter period adjusted for any pro forma expense and cost reductions and related adjustments that are directly attributable to the Transactions and the Offering); provided, however, that (1) If the Company or any Restricted Subsidiary (x) has Incurred any Indebtedness since the beginning of such period that remains outstanding on such date of determination or if the transaction giving rise to the need to calculate the Consolidated Coverage Ratio is an Incurrence of Indebtedness, Consolidated EBITDA and Consolidated Interest Expense for such period shall be calculated after giving effect on a pro forma basis to such Indebtedness as if such Indebtedness had been Incurred on the first day of such period (except that in making such computation, the amount of Indebtedness under any revolving credit facility outstanding on the date of such calculation shall be computed based on (A) the average daily balance of such Indebtedness during such four fiscal quarters or such shorter period for which such facility was outstanding or (B) if such facility was created after the end of such four fiscal quarters, the average daily balance of such Indebtedness during the period from the date of creation of such facility to the date of such calculation) and the discharge of any other Indebtedness repaid, repurchased, defeased or otherwise discharged with the proceeds of such new Indebtedness as if such discharge had occurred on the first day of such period, or (y) has repaid, repurchased, defeased or otherwise discharged any Indebtedness since the beginning of the period that is no longer outstanding on such date of determination or if the transaction 82 giving rise to the need to calculate the Consolidated Coverage Ratio involves a discharge of Indebtedness (in each case other than Indebtedness incurred under any revolving credit facility unless such Indebtedness has been permanently repaid), Consolidated EBITDA and Consolidated Interest Expense for such period shall be calculated after giving effect on a pro forma basis to such discharge of such Indebtedness, including with the proceeds of such new Indebtedness, as if such discharge had occurred on the first day of such period, (2) if since the beginning of such period the Company or any Restricted Subsidiary shall have made any Asset Disposition or if the transaction giving rise to the need to calculate the Consolidated Coverage Ratio is an Asset Disposition, the Consolidated EBITDA for such period shall be reduced by an amount equal to the Consolidated EBITDA (if positive) directly attributable to the assets which are the subject of such Asset Disposition for such period or increased by an amount equal to the Consolidated EBITDA (if negative) directly attributable thereto for such period and Consolidated Interest Expense for such period shall be reduced by an amount equal to the Consolidated Interest Expense directly attributable to any Indebtedness of the Company or any Restricted Subsidiary repaid, repurchased, defeased or otherwise discharged with respect to the Company and its continuing Restricted Subsidiaries in connection with such Asset Disposition for such period (or, if the Capital Stock of any Restricted Subsidiary is sold, the Consolidated Interest Expense for such period directly attributable to the Indebtedness of such Restricted Subsidiary to the extent the Company and its continuing Restricted Subsidiaries are no longer liable for such Indebtedness after such sale), (3) if since the beginning of such period the Company or any Restricted Subsidiary (by merger or otherwise) shall have made an Investment in any Restricted Subsidiary (or any Person which becomes a Restricted Subsidiary) or an acquisition of assets, including any acquisition of assets occurring in connection with a transaction causing a calculation to be made hereunder, Consolidated EBITDA and Consolidated Interest Expense for such period shall be calculated after giving pro forma effect thereto (including the Incurrence of any Indebtedness) as if such Investment or acquisition occurred on the first day of such period (adjusted for any pro forma expense and cost reductions and related adjustments calculated on a basis consistent with Regulation S-X under the Act) and (4) if since the beginning of such period any Person (that subsequently became a Restricted Subsidiary or was merged with or into the Company or any Restricted Subsidiary since the beginning of such period) shall have made any Asset Disposition or any Investment that would have required an adjustment pursuant to clause (2) or (3) above if made by the Company or a Restricted Subsidiary during such period, Consolidated EBITDA and Consolidated Interest Expense for such period shall be calculated after giving pro forma effect thereto as if such Asset Disposition or Investment occurred on the first day of such period. For purposes of this definition, whenever pro forma effect is to be given to an acquisition of assets, the amount of income or earnings relating thereto and the amount of Consolidated Interest Expense associated with any Indebtedness Incurred in connection therewith, the pro forma calculations shall be determined in good faith by a responsible financial or accounting officer of the Company. If any Indebtedness bears a floating rate of interest and is being given pro forma effect, the interest expense on such Indebtedness shall be calculated as if the rate in effect on the date of determination had been the applicable rate for the entire period (taking into account any Interest Rate Agreement applicable to such Indebtedness if such Interest Rate Agreement has a remaining term in excess of 12 months). "Consolidated EBITDA" for any period means the Consolidated Net Income for such period, plus the following to the extent deducted in calculating such Consolidated Net Income: (i) income tax expense, (ii) Consolidated Interest Expense, (iii) depreciation expense and (iv) amortization of intangibles and (v) other non-cash charges reducing Consolidated Net Income (excluding any such non-cash charge to the extent it represents an accrual of or reserve for cash charges in any future period or amortization of a prepaid cash expense that was paid in a prior period not included in the calculation) and less, to the extent added in calculating Consolidated Net Income, non-cash items increasing Consolidated Net Income (excluding such non-cash items to the extent they represent an accrual for cash receipts to be received prior to the Stated Maturity of the Notes) for such period. Notwithstanding the foregoing, the provision for taxes based on the income or profits of, and the 83 interest, depreciation and amortization of, a Restricted Subsidiary of a Person shall be added to Consolidated Net Income to compute Consolidated EBITDA of such Person only to the extent (and in the same proportion) that the net income of such Subsidiary was included in calculating the Consolidated Net Income of such Person. "Consolidated Interest Expense" means, for any period, the total interest expense of the Company and its Restricted Subsidiaries on a consolidated basis determined in accordance with GAAP, plus, to the extent not included in such interest expense, (i) interest expense attributable to Capitalized Lease Obligations and the interest portion of rent expense associated with Attributable Indebtedness in respect of the relevant lease giving rise thereto, determined as if such lease were a capitalized lease in accordance with GAAP, (ii) amortization of debt discount and debt issuance cost, (iii) capitalized interest, (iv) non-cash interest expense, (v) commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing, (vi) interest actually paid by the Company or any such Subsidiary under any Guarantee of Indebtedness or other obligation of any other Person, (vii) net costs associated with Hedging Obligations (including amortization of fees), (viii) dividends in respect of all Disqualified Stock of the Company and any Restricted Subsidiaries, in each case, held by Persons other than the Company or a Wholly-Owned Subsidiary and (ix) the cash contributions to any employee stock ownership plan or similar trust to the extent such contributions are used by such plan or trust to pay interest or fees to any Person (other than the Company) in connection with Indebtedness Incurred by such plan or trust to purchase Capital Stock of the Company; provided, however, that there shall be excluded therefrom any such interest expense of any Unrestricted Subsidiary to the extent the related Indebtedness is not Guaranteed or paid by the Company or any Restricted Subsidiary. For purposes of the foregoing, total interest expense shall be determined after giving effect to any net payments made or received by the Company and its Subsidiaries with respect to Interest Rate Agreements. Notwithstanding the foregoing, the Consolidated Interest Expense with respect to any Restricted Subsidiary of the Company that was not a Wholly-Owned Subsidiary shall be included only to the extent (and in the same proportion) that the net income of such Restricted Subsidiary was included in calculating Consolidated Net Income and shall not include interest on the Holdings Senior Discount Notes incurred or accrued by the Company. "Consolidated Net Income" means, for any period, the net income (loss) of the Company and its Restricted Subsidiaries on a consolidated basis determined in accordance with GAAP; provided, however, that there shall not be included in such Consolidated Net Income: (i) any net income (loss) of any Person if such Person is not a Restricted Subsidiary, except that (A) subject to the limitations contained in (iv) below, the Company's equity in the net income of any such Person for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash actually distributed by such Person during such period to the Company or a Restricted Subsidiary as a dividend or other distribution (subject, in the case of a dividend or other distribution to a Restricted Subsidiary, to the limitations contained in clause (iii) below) and (B) the Company's equity in a net loss of any such Person (other than an Unrestricted Subsidiary) for such period shall be included in determining such Consolidated Net Income to the extent such loss has been funded with cash from the Company or a Restricted Subsidiary; (ii) any net income (loss) of any Person acquired by the Company or a Subsidiary in a pooling of interests transaction for any period prior to the date of such acquisition; (iii) any net income of any Restricted Subsidiary if such Subsidiary is subject to restrictions, directly or indirectly, on the payment of dividends or the making of distributions by such Restricted Subsidiary, directly or indirectly, to the Company, except that (A) subject to the limitations contained in (iv) below the Company's equity in the net income of any such Restricted Subsidiary for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash that could have been distributed by such Restricted Subsidiary during such period to the Company or another Restricted Subsidiary as a dividend (subject, in the case of a dividend to another Restricted Subsidiary, to the limitation contained in this clause) and (B) the Company's equity in a net loss of any such Restricted Subsidiary for such period shall be included in determining such Consolidated Net Income; (iv) any 84 gain or loss realized upon the sale or other disposition of any property, plant or equipment of the Company or its consolidated Subsidiaries (including pursuant to any Sale/Leaseback Transaction) which is not sold or otherwise disposed of in the ordinary course of business and any gain or loss realized upon the sale or other disposition of any Capital Stock of any Person; (v) any extraordinary gain or loss, (vi) any non-cash compensation charge for employee stock options or other stock awards, (vii) non-cash, non-recurring charges reducing Consolidated Net Income (excluding any such non-cash charge to the extent it represents an accrual of or reserve for cash charges in any future period or amortization of prepaid cash expense that was paid in a prior period not included in the calculation); (viii) non-cash, non-recurring items increasing Consolidated Net Income (excluding such non-cash items to the extent they represent an accrual for cash receipts to be received prior to the Stated Maturity of the Notes); and (ix) the cumulative effect of a change in accounting principles. "Consolidated Net Worth" means the total of the amounts shown on the balance sheet of the Company and its Restricted Subsidiaries, determined on a consolidated basis in accordance with GAAP, as of the end of the most recent fiscal quarter of the Company ending prior to the taking of any action for the purpose of which the determination is being made, as (i) the par or stated value of all outstanding Capital Stock of the Company plus (ii) paid-in capital or capital surplus relating to such Capital Stock plus (iii) any retained earnings or earned surplus less (A) any accumulated deficit and (B) any amounts attributable to Disqualified Stock. "Consolidated Tangible Assets" means, as of any date of determination, the total assets, less goodwill, deferred financing costs and other intangibles less accumulated amortization, shown on the balance sheet of the Company and its Restricted Subsidiaries as of the most recent date for which such balance sheet is available, determined on a consolidated basis in accordance with GAAP. "Currency Agreement" means in respect of a Person any foreign exchange contract, currency swap agreement or other similar agreement as to which such Person is a party or a beneficiary. "Default" means any event which is, or after notice or passage of time or both would be, an Event of Default. "Designated Noncash Consideration" means the fair market value of noncash consideration received by the Company or one of its Restricted Subsidiaries in connection with an Asset Disposition that is so designated as Designated Noncash Consideration pursuant to an Officers' Certificate executed by the principal executive officer and the principal financial officer of the Company or such Restricted Subsidiary, less the amount of cash or Cash Equivalents received in connection with a sale of such Designated Noncash Consideration. Such Officers' Certificate shall state the basis of such valuation, which shall be as determined by an Independent Appraiser with respect to the receipt in one or a series of related transactions of Designated Noncash Consideration with a fair market value in excess of $10 million. "Designated Senior Indebtedness" means (i) the Bank Indebtedness in the case of the Company and (ii) any other Senior Indebtedness which, at the date of determination, has an aggregate principal amount outstanding of, or under which, at the date of determination, the holders thereof are committed to lend up to, at least $10.0 million and is specifically designated in the instrument evidencing or governing such Senior Indebtedness as "Designated Senior Indebtedness" for purposes of the Indenture. "Disqualified Stock" means, with respect to any Person, any Capital Stock of such Person which by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable) or upon the happening of any event (i) matures or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise, (ii) is convertible or exchangeable for Indebtedness or Disqualified Stock (excluding capital stock which is convertible or exchangeable solely at the option of the Company or a 85 Restricted Subsidiary) or (iii) is redeemable at the option of the holder thereof, in whole or in part, in each case on or prior to the Stated Maturity of the Notes, provided, that only the portion of Capital Stock which so matures or is mandatorily redeemable, is so convertible or exchangeable or is so redeemable at the option of the holder thereof prior to such Stated Maturity shall be deemed to be Disqualified Stock. "Equity Offering" means an offering for cash by either of the Company or Holdings of its respective common stock, or options, warrants or rights with respect to its common stock. "GAAP" means generally accepted accounting principles in the United States of America as in effect as of the date of the Indenture, including those set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as approved by a significant segment of the accounting profession. All ratios and computations based on GAAP contained in the Indenture shall be computed in conformity with GAAP. "Guarantee" means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Indebtedness of any other Person and any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness of such other Person (whether arising by virtue of partnership arrangements, or by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for purposes of assuring in any other manner the obligee of such Indebtedness of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided, however, that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "Hedging Obligations" of any Person means the obligations of such Person pursuant to any Interest Rate Agreement or Currency Agreement. "Holdings" means Details Holdings Corp. (formerly known as Details, Inc.), a California corporation, and any corporation, which is the direct or indirect sole stockholder of the Company or Holdings. "Incur" means issue, assume, Guarantee, incur or otherwise become liable for; provided, however, that any Indebtedness or Capital Stock of a Person existing at the time such person becomes a Restricted Subsidiary (whether by merger, consolidation, acquisition or otherwise) shall be deemed to be incurred by such Restricted Subsidiary at the time it becomes a Restricted Subsidiary. "Indebtedness" means, with respect to any Person on any date of determination (without duplication), (i) the principal of and premium (if any) in respect of indebtedness of such Person for borrowed money; (ii) the principal of and premium (if any) in respect of obligations of such Person evidenced by bonds, debentures, notes or other similar instruments; (iii) all obligations of such Person in respect of letters of credit or other similar instruments (including reimbursement obligations with respect thereto); (iv) all obligations of such Person to pay the deferred and unpaid purchase price of property or services (except trade payables), which purchase price is due more than six months after the date of placing such property in service or taking delivery and title thereto or the completion of such services; (v) all Capitalized Lease Obligations and all Attributable Indebtedness of such Person; (vi) the amount of all obligations of such Person with respect to the redemption, repayment or other repurchase of any Disqualified Stock (but excluding, in each case, any accrued dividends); (vii) all Indebtedness of other Persons secured by a Lien on any asset of such Person, whether or not such Indebtedness is assumed by such Person; provided, however, that the amount of such Indebtedness shall be the lesser of (A) the fair market value of such asset at such date of determination and (B) the 86 amount of such Indebtedness of such other Persons; (viii) all Indebtedness of other Persons to the extent Guaranteed by such Person; and (ix) to the extent not otherwise included in this definition, net obligations of such Person under Currency Agreements and Interest Rate Agreements (the amount of any such obligations to be equal at any time to the termination value of such agreement or arrangement giving rise to such obligation that would be payable by such Person at such time). The amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and the maximum liability, upon the occurrence of the contingency giving rise to the obligation, of any contingent obligations at such date. "Independent Appraiser" means, with respect to any transaction or series of related transactions, an independent, nationally recognized appraisal or investment banking firm or other expert with experience in evaluating or appraising the terms and conditions of such transaction or series of related transactions. "Interest Rate Agreement" means with respect to any Person any interest rate protection agreement, interest rate future agreement, interest rate option agreement, interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, interest rate hedge agreement or other similar agreement or arrangement as to which such Person is party or a beneficiary. "Investment" in any Person means any direct or indirect advance, loan (other than advances to customers in the ordinary course of business) or other extension of credit (including by way of Guarantee or similar arrangement, but excluding any debt or extension of credit represented by a bank deposit other than a time deposit) or capital contribution to (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or any purchase or acquisition of Capital Stock, Indebtedness or other similar instruments issued by, such Person. For purposes of the "Limitation on Restricted Payments" covenant, (i) "Investment" shall include the portion (proportionate to the Company's equity interest in a Restricted Subsidiary to be designated as an Unrestricted Subsidiary) of the fair market value of the net assets of such Restricted Subsidiary of the Company at the time that such Restricted Subsidiary is designated an Unrestricted Subsidiary; provided, however, that upon a redesignation of such Subsidiary as a Restricted Subsidiary, the Company shall be deemed to continue to have a permanent "Investment" in an Unrestricted Subsidiary in an amount (if positive) equal to (x) the Company's "Investment" in such Subsidiary at the time of such redesignation less (y) the portion (proportionate to the Company's equity interest in such Subsidiary) of the fair market value of the net assets of such Subsidiary at the time that such Subsidiary is so re- designated a Restricted Subsidiary; and (ii) any property transferred to or from an Unrestricted Subsidiary shall be valued at its fair market value at the time of such transfer, in each case as determined in good faith by the Board of Directors of the Company. If the Company or any Restricted Subsidiary of the Company sells or otherwise disposes of any Common Stock of any direct or indirect Restricted Subsidiary of the Company such that, after giving effect to any such sale or disposition, the Company no longer owns, directly or indirectly, 100% of the outstanding Common Stock of such Restricted Subsidiary, the Company shall be deemed to have made an Investment on the date of any such sale or disposition equal to the fair market value of the Common Stock of such Restricted Subsidiary not sold or disposed of. "Issue Date" means the date on which the Exchange Notes are originally issued. "Lien" means any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including any conditional sale or other title retention agreement or lease in the nature thereof). "Management Agreement" means the Management Agreement between the Company and Bain Capital, Inc. (and its permitted successors and assigns thereunder) as in effect on the Issue Date. "Net Available Cash" from an Asset Disposition means cash payments received (including any cash payments received by way of deferred payment of principal pursuant to a note or installment 87 receivable or otherwise, but only as and when received, but excluding any other consideration received in the form of assumption by the acquiring person of Indebtedness or other obligations relating to the properties or assets that are the subject of such Asset Disposition or received in any other noncash form) therefrom, in each case net of (i) all legal, accounting, investment banking, title and recording tax expenses, commissions and other fees and expenses incurred, and all Federal, state, provincial, foreign and local taxes required to be paid or accrued as a liability under GAAP, as a consequence of such Asset Disposition, (ii) all payments made on any Indebtedness which is secured by any assets subject to such Asset Disposition, in accordance with the terms of any Lien upon such assets, or which must by its terms, or in order to obtain a necessary consent to such Asset Disposition, or by applicable law be repaid out of the proceeds from such Asset Disposition, (iii) all distributions and other payments required to be made to minority interest holders in Subsidiaries or joint ventures as a result of such Asset Disposition and (iv) the deduction of appropriate amounts to be provided by the seller as a reserve, in accordance with GAAP, against any liabilities associated with the assets disposed of in such Asset Disposition and retained by the Company or any Restricted Subsidiary after such Asset Disposition. "Officer" means the Chairman of the Board, the President, any Vice President, the Treasurer or the Secretary of the Company. "Officers' Certificate" means a certificate signed by two Officers. "Opinion of Counsel" means a written opinion from legal counsel who is acceptable to the Trustee. The counsel may be an employee of or counsel to the Company or the Trustee. "Permitted Holders" means Bain Capital, Inc. and any Affiliate thereof (or any wholly-owned Subsidiary of Holdings for purposes of the definition of "Change of Control"). "Permitted Investment" means an Investment by the Company or any Restricted Subsidiary in (i) a Restricted Subsidiary or a Person which will, upon the making of such Investment, become a Restricted Subsidiary; provided, however, that the primary business of such Restricted Subsidiary is a Related Business; (ii) another Person if as a result of such Investment such other Person is merged or consolidated with or into, or transfers or conveys all or substantially all its assets to, the Company or a Restricted Subsidiary; provided, however, that such Person's primary business is a Related Business; (iii) cash, Cash Equivalents and Temporary Cash Investments; (iv) receivables owing to the Company or any Restricted Subsidiary created or acquired in the ordinary course of business; (v) payroll, travel and similar advances made in the ordinary course of business; (vi) loans or advances to employees and officers made in the ordinary course of business; (vii) stock, obligations or securities received in settlement of debts created in the ordinary course of business and owing to the Company or any Restricted Subsidiary or in satisfaction of judgments; and (viii) Currency Agreements and Interest Rate Agreements entered into in the ordinary course of the Company's or its Restricted Subsidiaries' businesses and otherwise in compliance with the Indenture; (ix) Investments in securities of trade creditors or customers received pursuant to any plan of reorganization or similar arrangement upon the bankruptcy or insolvency of such trade creditors or customers; (x) the Subsidiary Guarantees and guarantees by the Company of Indebtedness otherwise permitted to be incurred by Restricted Subsidiaries of the Company under the Indenture; (xi) Investments the payment for which consists exclusively of Capital Stock (other than Disqualified Stock) of the Company; provided that the fair market value of such Investments shall not be counted under clause (3)(B) of paragraph (a) of "Limitation on Restricted Payments"; (xii) Investments received by the Company or its Restricted Subsidiaries as consideration for asset dispositions, including Asset Dispositions; provided in the case of an Asset Disposition, such Asset Disposition is effected in compliance with the covenant described under "Limitation on Sales of Assets and Subsidiary Stock;" and (xiii) other Investments in an aggregate amount outstanding at any time not to exceed the greater of (A) $7.5 million and (B) 5% of Total Consolidated Assets. 88 "Permitted Liens" means the following types of Liens: (i) Liens for taxes, assessments or governmental charges or claims either (a) not delinquent or (b) contested in good faith by appropriate proceedings and as to which the Company or its Restricted Subsidiaries shall have set aside on its books such reserves as may be required pursuant to GAAP; (ii) statutory Liens of landlords and Liens of carriers, warehousemen, mechanics, suppliers, materialmen, repairmen and other Liens imposed by law incurred in the ordinary course of business for sums not yet delinquent or being contested in good faith, if such reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made in respect thereof. (iii) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, including any Lien securing letters of credit issued in the ordinary course of business consistent with past practice in connection therewith, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, leases, government contracts, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money); (iv) judgment Liens not giving rise to an Event of Default; (v) easements, rights-of-way, zoning restrictions and other similar charges or encumbrances in respect of real property not interfering in any material respect with the ordinary conduct of the business of the Company or any of its Restricted Subsidiaries; (vi) any interest or title of a lessor under any Capitalized Lease Obligation; (vii) purchase money Liens to finance property or assets of the Company or any Restricted Subsidiary of the Company acquired in the ordinary course of business, provided, however, that (A) the related purchase money Indebtedness shall not exceed the cost of such property or assets and shall not be secured by any property or assets of the Company or any Restricted Subsidiary of the Company other than the property and assets so acquired and (B) the Lien securing such Indebtedness shall be created within 90 days of such acquisition; (viii) Liens upon specific items of inventory or other goods and proceeds of any Person securing such Person's obligations in respect of bankers' acceptances issued or created for the account of such Person to facilitate the purchase, shipment, or storage of such inventory or other goods; (ix) Liens securing reimbursement obligations with respect to commercial letters of credit which encumber documents and other property relating to such letters of credit and products and proceeds thereof; (x) Liens encumbering deposits made to secure obligations arising from statutory, regulatory, contractual, or warranty requirements of the Company or any of its Restricted Subsidiaries, including rights of offset and set- off; (xi) Liens securing Hedging Obligations that are otherwise permitted under the Indenture; (xii) Liens securing Indebtedness of foreign Restricted Subsidiaries of the Company incurred in reliance on clause (b)(vii) of "Limitation on Indebtedness"; (xiii) Liens securing acquired Indebtedness incurred in reliance on clause (b) of "Limitation on Indebtedness"; provided that such Liens do not extend to or cover any property or assets of the Company or any of its Restricted Subsidiaries other than the property or assets that secured the acquired Indebtedness prior to the time such Indebtedness became acquired Indebtedness of the Company or a Restricted Subsidiary of the Company; (xiv) leases or subleases granted to others that do not materially interfere with the ordinary course of business of the Company and its Restricted Subsidiaries; 89 (xv) Liens arising from filing Uniform Commercial Code financing statements regarding leases; (xvi) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of custom duties in connection with the importation of goods; and (xvii) Liens existing on the Issue Date, together with any Liens securing Indebtedness incurred in reliance on clause (b) of "Limitation on Indebtedness" in order to refinance the Indebtedness secured by Liens existing on the Issue Date; provided that the Liens securing Refinancing Indebtedness shall not extend to property other than that pledged under the Liens securing the Indebtedness being refinanced. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization, government or any agency or political subdivision hereof or any other entity. "Preferred Stock", as applied to the Capital Stock of any corporation, means Capital Stock of any class or classes (however designated) which is preferred as to the payment of dividends, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such corporation, over shares of Capital Stock of any other class of such corporation. A "Public Market" exists at any time with respect to the common stock of the Company or Holdings, as the case may be, if the common stock of the Company or Holdings, as the case may be, is then registered with the Securities Exchange Commission pursuant to Section 12(b) or 12(g) of Exchange Act and traded either on a national securities exchange or in the National Association of Securities Dealers Automated Quotation System. "Refinancing Indebtedness" means Indebtedness that is Incurred to refund, refinance, replace, renew, repay or extend (including pursuant to any defeasance or discharge mechanism) (collectively, "refinance", "refinances," and "refinanced" shall have a correlative meaning) any Indebtedness existing on the date of the Indenture or Incurred in compliance with the Indenture (including Indebtedness of the Company that refinances Indebtedness of any Restricted Subsidiary and Indebtedness of any Restricted Subsidiary that refinances Indebtedness of another Restricted Subsidiary) including Indebtedness that refinances Refinancing Indebtedness, provided, however, that (i) only with respect to Indebtedness described under subclause (y) of clause (b)(iv) in the covenant "Limitation on Indebtedness," the Refinancing Indebtedness has a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of the Indebtedness being refinanced (other than Indebtedness which is Senior Indebtedness referred to in clause (iv) under the covenant "Limitation on Indebtedness") and (ii) such Refinancing Indebtedness is Incurred in an aggregate principal amount (or if issued with original issue discount, an aggregate issue price) that is equal to or less than the sum of the aggregate principal amount (or if issued with original issue discount, the aggregate accreted value) then outstanding (plus fees and expenses, including any premium and defeasance costs) of the Indebtedness being refinanced. "Related Business" means any business which is the same as or related, ancillary or complementary to any of the businesses in which the Company and its Restricted Subsidiaries are primarily engaged on the date of the Indenture. "Representative" means any trustee, agent or representative (if any) of an issue of Senior Indebtedness. "Restricted Subsidiary" means any Subsidiary of the Company other than an Unrestricted Subsidiary. 90 "Sale/Leaseback Transaction" means an arrangement relating to property now owned or hereafter acquired whereby the Company or a Restricted Subsidiary transfers such property to a Person and the Company or a Subsidiary leases it from such Person. "Secured Indebtedness" means any Indebtedness of the Company secured by a Lien. "Senior Credit Agreement" means (i) the Senior Secured Credit Agreement to be entered into among the Company, The Chase Manhattan Bank, as Administrative Agent, and the lenders parties thereto from time to time, as the same may be amended, supplemented or otherwise modified from time to time and any guarantees issued thereunder and (ii) any renewal, extension, refunding, restructuring, replacement or refinancing thereof (whether with the original Administrative Agent and lenders or another administrative agent or agents or other lenders and whether provided under the original Senior Credit Agreement or any other credit or other agreement or indenture). "Senior Subordinated Indebtedness" means the Notes and any other Indebtedness of the Company that specifically provides that such Indebtedness is to rank pari passu with the Notes in right of payment and is not subordinated by its terms in right of payment to any Indebtedness or other obligation of the Company which is not Senior Indebtedness. "Significant Subsidiary" means any Subsidiary that would be a "Significant Subsidiary" of the Company within the meaning of Rule 1-02 under Regulation S- X promulgated by the SEC. "Stated Maturity" means, with respect to any security, the date specified in such security as the fixed date on which the payment of principal of such security is due and payable, including pursuant to any mandatory redemption provision. "Subordinated Obligation" means, as to any Person, any Indebtedness of such Person (whether outstanding on the Issue Date or thereafter Incurred) which is subordinate or junior in right of payment to the Notes pursuant to a written agreement. "Subsidiary" of any Person means any corporation, association, partnership or other business entity of which more than 50% of the total voting power of shares of Capital Stock or other interests (including partnership interests) entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by (i) such Person, (ii) such Person and one or more Subsidiaries of such Person or (iii) one or more Subsidiaries of such Person. Unless otherwise specified herein, each reference to a Subsidiary shall refer to a Subsidiary of the Company. "Subsidiary Guarantee" means, individually, any Guarantee of payment of the Exchange Notes by a Subsidiary Guarantor pursuant to the terms of the Indenture, and, collectively, all such Guarantees. Each such Subsidiary Guarantee will be in the form prescribed in the Indenture. "Subsidiary Guarantor" means any Restricted Subsidiary which Guarantees the Bank Indebtedness after the Issue Date. "Temporary Cash Investments" means any of the following: (i) any Investment in direct obligations of the United States of America or any agency thereof or obligations Guaranteed by the United States of America or any agency thereof, (ii) Investments in time deposit accounts, certificates of deposit and money market deposits maturing within 180 days of the date of acquisition thereof issued by a bank or trust company which is organized under the laws of the United States of America, any state thereof or any foreign country recognized by the United States of America having capital, surplus and undivided profits aggregating in excess of $250 million (or the foreign currency equivalent thereof) and whose long-term debt, or whose parent holding company's long-term debt, is rated "A" (or such similar equivalent rating) or higher by at least one nationally recognized statistical rating organization (as 91 defined in Rule 436 under the Securities Act), (iii) repurchase obligations with a term of not more than 30 days for underlying securities of the types described in clause (i) above entered into with a bank meeting the qualifications described in clause (ii) above, (iv) Investments in commercial paper, maturing not more than 180 days after the date of acquisition, issued by a corporation (other than an Affiliate of the Company) organized and in existence under the laws of the United States of America or any foreign country recognized by the United States of America with a rating at the time as of which any investment therein is made of "P-1" (or higher) according to Moody's Investors Service, Inc. or "A-1" (or higher) according to Standard and Poor's Ratings Group, (v) Investments in securities with maturities of six months or less from the date of acquisition issued or fully guaranteed by any state, commonwealth or territory of the United States of America, or by any political subdivision or taxing authority thereof, and rated at least "A" by Standard & Poor's Ratings Group or "A" by Moody's Investors Service, Inc. and (vi) Investments in mutual funds whose investment guidelines restrict such funds' investments to those satisfying the provisions of clauses (i) through (v) above. "Total Consolidated Assets" means, as of any date of determination, the total assets shown on the balance sheet of the Company and its Restricted Subsidiaries as of the most recent date for which such balance sheet is available, determined on a consolidated basis in accordance with GAAP. "Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at the time of determination shall be designated an Unrestricted Subsidiary by the Board of Directors in the manner provided below and (ii) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of the Company (including any newly acquired or newly formed Subsidiary of the Company) to be an Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries owns any Capital Stock or Indebtedness of, or owns or holds any Lien on any property of, the Company or any Restricted Subsidiary of the Company that is not a Subsidiary of the Subsidiary to be so designated; provided, however, that either (A) the Subsidiary to be so designated has total consolidated assets of $10,000 or less or (B) if such Subsidiary has consolidated assets greater than $10,000, then such designation would be permitted under "Limitation on Restricted Payments." The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided, however, that immediately after giving effect to such designation (x) the Company could Incur $1.00 of additional Indebtedness under the covenant described in "Limitation on Indebtedness" and (y) no Default shall have occurred and be continuing. Any such designation by the Board of Directors shall be evidenced to the Trustee by promptly filing with the Trustee a copy of the Board Resolution giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing provisions. "Voting Stock" of a corporation means all classes of Capital Stock of such corporation then outstanding and normally entitled to vote in the election of directors. "Weighted Average Life to Maturity" means, when applied to any Indebtedness at any date, the number of years obtained by dividing (a) the then outstanding aggregate principal amount of such Indebtedness into (b) the sum of the total of the products obtained by multiplying (i) the amount of each then remaining installment, sinking fund, serial maturity or other required payment of principal, including payment at final maturity, in respect thereof, by (ii) the number of years (calculated to the nearest one-twelfth) which will elapse between such date and the making of such payment. "Wholly-Owned Subsidiary" means a Restricted Subsidiary of the Company, all of the Capital Stock of which (other than directors' qualifying shares) is owned by the Company or another Wholly-Owned Subsidiary. 92 CERTAIN FEDERAL INCOME TAX CONSEQUENCES The following is a summary of certain United States federal income tax consequences associated with the acquisition, ownership, and disposition of the Exchange Notes by holders who exchange Original Notes for Exchange Notes. The following summary does not discuss all of the aspects of United States federal income taxation that may be relevant to a prospective holder of the Exchange Notes in light of his or her particular circumstances, or to certain types of holders (including dealers in securities, insurance companies, tax- exempt organizations, financial institutions, broker-dealers, S corporations, persons who hold the Exchange Notes as part of a hedge, straddle, "synthetic security" or other integrated investment and except as discussed below, foreign corporations, and persons who are not citizens or residents of the United States) which are subject to special treatment under the federal income tax laws. This discussion also does not address the tax consequences to nonresident aliens or foreign corporations that are subject to United States federal income tax on a net basis on income with respect to a Note because such income is effectively connected with the conduct of a U.S. trade or business. Such holders generally are taxed in a similar manner to U.S. Holders (as defined below); however, certain special rules apply. In addition, this discussion is limited to holders who hold the Exchange Notes as capital assets within the meaning of Section 1221 of the Code. This summary also does not describe any tax consequences under state, local, or foreign tax laws. The discussion is based upon currently existing provisions of the Internal Revenue Code of 1986, as amended (the "Code"), Treasury Regulations promulgated thereunder, Internal Revenue Service ("IRS") rulings and pronouncements and judicial decisions all in effect as of the date hereof, all of which are subject to change at any time by legislative, judicial or administrative action. Any such changes may be applied retroactively in a manner that could adversely affect a holder of the Exchange Notes. There can be no assurance that the IRS will not take positions concerning the tax consequences of the purchase, ownership or disposition of the Notes which are different from those discussed herein. PROSPECTIVE HOLDERS OF EXCHANGE NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE U.S. FEDERAL INCOME TAX CONSEQUENCES THAT MAY APPLY TO THEM, AS WELL AS THE APPLICATION OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS. CERTAIN FEDERAL INCOME TAX CONSEQUENCES TO U.S. HOLDERS A U.S. Holder is any holder who or which, for United States federal income tax purposes, is (i) a citizen or resident of the United States; (ii) a domestic corporation or domestic partnership; (iii) an estate other than a "foreign estate" as defined in Section 7701(a)(31) of the Code; or (iv) a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States fiduciaries have the authority to control all substantial decisions of the trust. EXCHANGE OF ORIGINAL NOTES FOR EXCHANGE NOTES. The exchange by a U.S. Holder of an Original Note for an Exchange Note pursuant to the Exchange Offer will not constitute a taxable exchange of the Original Note if the economic terms of the Exchange Note (including the interest rate) are identical to the economic terms of the Original Note. Under recently promulgated Treasury regulations relating to modifications and exchanges of debt instruments (the "Section 1001 Regulations"), with certain exceptions, an alteration of a legal right or obligation that occurs by operation of the terms of a debt instrument is not a modification of the debt instrument and thus does not result in a taxable exchange. Therefore, even if Liquidated Damages were payable with respect to the Original Notes but not with respect to the Exchange Notes, the exchange of an Original Note for an Exchange Note would not be treated as a taxable exchange. Accordingly, the Company intends to take the position that in the circumstances described in the preceding sentence, the exchange will not 93 constitute a taxable exchange of the Original Notes. As a result, there should be no U.S. Federal income tax consequences to U.S. Holders exchanging the Original Notes for the Exchange Notes. TAXATION OF STATED INTEREST. In general, U.S. Holders of the Exchange Notes will be required to include interest received thereon in taxable income as ordinary income at the time it accrues or is received, in accordance with the holder's regular method of accounting for United States federal income tax purposes. SALE OR OTHER TAXABLE DISPOSITION OF THE NOTES. The sale, exchange, redemption, retirement or other taxable disposition of an Exchange Note will result in the recognition of taxable gain or loss to a U.S. Holder in an amount equal to the difference between (a) the amount of cash and fair market value of property received in exchange therefor (except to the extent attributable to the payment of accrued but unpaid stated interest) and (b) the holder's adjusted tax basis in such Exchange Note. A holder's initial tax basis in an Exchange Note purchased by such holder will be equal to such holder's adjusted tax basis in the Original Note exchange therefor. Any gain or loss recognized on the sale or other taxable disposition of an Exchange Note generally will be capital gain or loss and will be long-term capital gain or loss if the Exchange Note had been held for more than one year (the maximum rate of tax on any such long-term capital gain being further reduced if the Exchange Note were held for more than eighteen months) and otherwise will be short-term capital gain or loss. Payments on such disposition for accrued interest not previously included in income will be treated as ordinary interest income. The holding period of an Exchange Note will include the holding period of the Original Note exchanged therefor. BACKUP WITHHOLDING. Certain holders of the Exchange Notes may be subject to backup withholding at the rate of 31% with respect to interest and cash received in certain circumstances upon the disposition of an Exchange Note. Generally, backup withholding will apply if (i) the payee fails to furnish a taxpayer identification number ("TIN") in the prescribed manner, (ii) the IRS notifies the payor that the TIN furnished by the payee is incorrect, (iii) the payee has failed to report properly the receipt of "reportable payments" and the IRS has notified the payor that withholding is required, or (iv) the payee fails to certify under the penalty of perjury that such payee is not subject to backup withholding. Any amounts withheld from a payment to a holder under the backup withholding rules will be allowed as a refund or credit against such holder's United States federal income tax liability, provided that the required information is furnished to the IRS. Certain holders (including, among others, corporations and certain tax-exempt organizations) are not subject to backup withholding. CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES FOR NON-U.S. HOLDERS This section discusses special rules applicable to a Non-U.S. Holder of Exchange Notes. For purposes hereof, a "Non-U.S. Holder" is any person who is not a U.S. Holder and is not subject to U.S. federal income tax on a net basis on income with respect to an Exchange Note because such income is effectively connected with the conduct of a U.S. trade or business. INTEREST. Payments of interest to a Non-U.S. Holder that do not qualify for the portfolio interest exception discussed below will be subject to withholding of U.S. federal income tax at a rate of 30% unless a U.S. income tax treaty applies to reduce the rate of withholding. To claim a treaty reduced rate, the beneficial owner of the Exchange Note must provide a properly executed Form 1001 (or successor form). Interest that is paid to a Non-U.S. Holder on an Exchange Note will not be subject to U.S. income or withholding tax if the interest qualified as "portfolio interest". Generally, interest on the Exchange Notes that is paid by the Company will qualify as portfolio interest if (i) the Non-U.S. Holder does not own, actually or constructively, 10% or more of the total combined voting power of all classes of stock 94 of the Company entitled to vote; (ii) the Non-U.S. Holder is not a controlled foreign corporation that is related to the Company actually or constructively through stock ownership for U.S. federal income tax purposes; (iii) the Non- U.S. Holder is not a bank within the meaning of Section 881(c)(3)(A) of the Code; and (iv) either (x) the beneficial owner of the Exchange Note provides the Company or its paying agent, a properly executed certification on IRS Form W-8 (or a suitable substitute form) signed under penalties of perjury that the beneficial owner is not a "U.S. person" for U.S. federal income tax purposes and that provides the beneficial owner's name and address, or (y) a securities clearing organization, bank or other financial institution that holds a customers' securities in the ordinary course of its business holds the Exchange Note and certifies to the Company or its agent under penalties of perjury that the IRS Form W-8 (or a suitable substitute) has been received by it from the beneficial owner of the Note or a qualifying intermediary and furnishes the payor a copy thereof. SALE, EXCHANGE OR RETIREMENT OF EXCHANGE NOTES. Any gain realized by a Non- U.S. Holder on the sale, exchange or retirement of the Exchange Notes, will generally not be subject to U.S. federal income tax or withholding unless (i) the Non-U.S. Holder is an individual who was present in the U.S. for 183 days or more in the taxable year of the disposition and meets certain other requirements; or (ii) the Non-U.S. Holder is an individual who is a former citizen of the United States who lost such citizenship within the preceding ten year period (or former long-term permanent resident of the United States who relinquished residency on or after February 6, 1995) whose loss of citizenship or residency had as one of its principal purposes the avoidance of United States tax. If a Non-U.S. Holder falls under (ii) above, the holder will be taxed on the net gain derived from the sale under the graduated U.S. federal income tax rates that are applicable to U.S. citizens and resident aliens, and may be subject to withholding under certain circumstances. If a Non-U.S. Holder falls under (i) above, the holder generally will be subject to U.S. federal income tax at a rate of 30% on the gain derived from the sale (or reduced treaty rate) and may be subject to withholding in certain circumstances. U.S. INFORMATION REPORTING AND BACKUP WITHHOLDING TAX. Back-up withholding and information reporting generally will not apply to payments made on a Note issued in registered form that is beneficially owned by a Non-U.S. Holder if the certification of Non-U.S. Holder status is provided to the Company or its agent as described above in "Certain Federal Income Tax Consequences to Non- U.S. Holders--Interest", provided that the payor does not have actual knowledge that the holder is a U.S. person. The Company may be required to report annually to the IRS and to each Non-U.S. Holder the amount of interest paid to, and the tax withheld, if any, with respect to each Non-U.S. Holder. If payments of principal, and interest are made to the beneficial owner of an Exchange Note outside the United States by or through the foreign office of a foreign custodian, foreign nominee or other foreign agent of such beneficial owner, or if the proceeds of the sale of Exchange Notes are paid to the beneficial owner of a Note through a foreign office of a "broker" (as defined in the pertinent United States Treasury Regulations), the proceeds will not be subject to backup withholding or information reporting (absent actual knowledge that the payee is a U.S. person). Information reporting (but not backup withholding) will apply, however, to a payment by a foreign office of a custodian, nominee, agent or broker that is (i) a U.S. person, (ii) a controlled foreign corporation for U.S. federal income tax purposes, or (iii) derives 50% or more of its gross income from the conduct of a U.S. trade or business for a specified three year period; unless the broker has in its records documentary evidence that the holder is a Non-U.S. Holder and certain other conditions are met (including that the broker has no actual knowledge that the holder is a U.S. Holder) or the holder otherwise establishes an exemption. Payment through the U.S. office of a custodian, nominee, agent or broker is subject to both backup withholding at a rate of 31% and information reporting, unless the holder certifies that it is a Non-U.S. Holder under penalties of perjury or otherwise establishes an exemption. Any amount withheld under the backup withholding rules from a payment to a Non-U.S. Holder will be allowed as a credit against, or refund of, such holder's U.S. federal income tax liability, provided that certain required information is provided by the holder to the IRS. 95 On October 6, 1997, the IRS released Treasury regulations that revise the procedures for withholding tax and the associated backup withholding and information reporting rules described above for payment of interest and gross proceeds made after December 31, 1998. The regulations modify the requirements imposed on a Non-U.S. Holder or certain intermediaries for establishing the recipient's status as a Non-U.S. Holder eligible for exemption from withholding and backup withholding. In particular, the final regulations impose more stringent conditions on the ability of financial intermediaries acting for a Non-U.S. Holder to provide certifications on behalf of the Non- U.S. Holder, which may include entering into an agreement with the IRS to audit certain documentation with respect to such certifications. Non-U.S. Holders should consult their tax advisors to determine how the regulations will affect their particular circumstances. 96 THE EXCHANGE OFFER At the closing of the Initial Offering, Details and the Initial Purchaser entered into the Registration Rights Agreement, pursuant to which the Company agreed to (i) file with the Commission on or prior to 90 days after the date of issuance of the Original Notes (the "Issue Date") a registration statement on Form S-1 or Form S-4, (the "Exchange Offer Registration Statement") relating to the Exchange Offer for the Original Notes under the Securities Act and (ii) use its reasonable best efforts to cause the Exchange Offer Registration Statement to be declared effective under the Securities Act within 180 days after the Issue Date. As soon as practicable after the effectiveness of the Exchange Offer Registration Statement, Details will offer to the holders of Transfer Restricted Securities (as defined below) who are not prohibited by any law or policy of the Commission from participating in the Exchange Offer the opportunity to exchange their Transfer Restricted Securities for Exchange Notes that are identical in all material respects to the Original Notes (except that the Exchange Notes will not contain terms with respect to transfer restrictions) and that would be registered under the Securities Act. The Company will keep the Exchange Offer open for the longer of 20 business days or 30 days (unless extended if required by applicable law) after the date hereof. If (i) because of any change in law or applicable interpretations thereof by the staff of the Commission, Details is not permitted to effect the Exchange Offer as contemplated hereby, (ii) any Securities (as defined herein) validly tendered pursuant to the Exchange Offer are not exchanged for Exchange Securities within 210 days after the Issue Date, (iii) the Initial Purchaser so requests with respect to Original Notes not eligible to be exchanged for Exchange Notes in the Exchange Offer, (iv) any applicable law or interpretations do not permit any holder of Original Notes to participate in the Exchange Offer, (v) any holder of Original Notes that participates in the Exchange Offer does not receive freely transferable Exchange Notes in exchange for tendered Original Notes, or (vi) Details so elects, then Details will file with the Commission a shelf registration statement (the "Shelf Registration Statement") to cover resales of Transfer Restricted Securities by such holders who satisfy certain conditions relating to the provision of information in connection with the Shelf Registration Statement. For purposes of the foregoing, "Transfer Restricted Securities" means each Original Note until (i) the date on which such Original Note has been exchanged for a freely transferable Exchange Note in the Exchange Offer; (ii) the date on which such Original Note has been effectively registered under the Securities Act and disposed of in accordance with the Shelf Registration Statement or (iii) the date on which such Original Note is distributed to the public pursuant to Rule 144 under the Securities Act or is saleable pursuant to Rule 144(k) under the Securities Act. Details has agreed to use its reasonable best efforts to have the Exchange Offer Registration Statement or, if applicable, the Shelf Registration Statement (each, a "Registration Statement") declared effective by the Commission as promptly as practicable after the filing thereof. Unless the Exchange Offer would not be permitted by a policy of the Commission, Details will commence the Exchange Offer and will use its reasonable best efforts to consummate the Exchange Offer as promptly as practicable, but in any event prior to 210 days after the Issue Date. If applicable, Details will use its reasonable best efforts to keep the Shelf Registration Statement effective for a period of two years after the Issue Date. If (i) the Exchange Offer Registration Statement or a Shelf Registration Statement, if applicable, is not declared effective within 180 days after the Issue Date; (ii) the Exchange Offer is not consummated on or prior to 210 days after the Issue Date or (iii) a Shelf Registration Statement is filed and declared effective within 180 days after the Issue Date but shall thereafter cease to be effective (at any time that Details is obligated to maintain the effectiveness thereof) without being succeeded within 60 days by an additional Registration Statement filed and declared effective (each such event referred to in clauses (i) through (iii), a "Registration Default"), Details will be obligated to pay liquidated damages to each holder of Transfer Restricted Securities, during the period of one or more such Registration Defaults, in an amount equal to $0.192 per week per $1,000 principal amount of the Notes constituting Transfer Restricted Securities held by such holder until the applicable Registration Statement is filed, the Exchange Offer Registration Statement is declared effective and the Exchange Offer is 97 consummated or the Shelf Registration Statement is declared effective or again becomes effective, as the case may be. All accrued liquidated damages shall be paid to holders in the same manner as interest payments on the Notes on semi- annual payment dates which correspond to interest payment dates for the Notes. Following the cure of all Registration Defaults, the accrual of liquidated damages will cease. The Registration Rights Agreement also provides that Details (i) shall, if required under applicable securities laws, upon written request make available for a period of 90 days after the consummation of the Exchange Offer a prospectus meeting the requirements of the Securities Act to any broker-dealer for use in connection with any resale of any such Exchange Notes and (ii) shall pay all expenses incident to the Exchange Offer (including the expense of one counsel to the holders of the Notes) and will indemnify certain holders of the Notes (including any broker-dealer) against certain liabilities, including liabilities under the Securities Act. A broker-dealer which delivers such a prospectus to purchasers in connection with such resales will be subject to certain of the civil liability provisions under the Securities Act and will be bound by the provisions of the Registration Rights Agreement (including certain indemnification rights and obligations). Each holder of Notes who wishes to exchange such Original Notes for Exchange Notes in the Exchange Offer will be required to make certain representations, including representations that (i) any Exchange Notes to be received by it will be acquired in the ordinary course of its business; (ii) it has no arrangement or understanding with any person to participate in the distribution of the Exchange Notes and (iii) it is not an "affiliate" (as defined in Rule 405 under the Securities Act) of Details, or if it is an affiliate, that it will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable. If the holder is not a broker-dealer, it will be required to represent that it is not engaged in, and does not intend to engage in, the distribution of the Exchange Notes. If the holder is a broker-dealer that will receive Exchange Notes for its own account in exchange for Original Notes that were acquired by such broker-dealer as a result of market-making activities or other trading activities (an "Exchanging Dealer"), it will be required to acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. See "Plan of Distribution." Holders of the Original Notes will be required to make certain representations to Details (as described above) in order to participate in the Exchange Offer and will be required to deliver information to be used in connection with the Shelf Registration Statement in order to have their Original Notes included in the Shelf Registration Statement and benefit from the provisions regarding liquidated damages set forth in the preceding paragraphs. A holder who sells Original Notes pursuant to the Shelf Registration Statement generally will be required to be named as a selling securityholder in the related prospectus and to deliver a prospectus to purchasers, will be subject to certain of the civil liability provisions under the Securities Act in connection with such sales and will be bound by the provisions of the Exchange and Registration Rights Agreement which are applicable to such a holder (including certain indemnification obligations). The summary herein of certain provisions of the Registration Rights Agreement is a description of the material provisions of the Registration Rights Agreement, a copy of which is filed as an exhibit to the Exchange Offer Registration Statement. Except as set forth herein, after consummation of the Exchange Offer, holders of Original Notes have no registration or exchange rights under the Registration Rights Agreement. See "--Consequences of Failure to Exchange," and "--Resales of Exchange Notes; Plan of Distribution." CONSEQUENCES OF FAILURE TO EXCHANGE The Original Notes which are not exchanged for Exchange Notes pursuant to an Exchange Offer and are not included in a resale prospectus will remain Transfer Restricted Securities. Accordingly, 98 such Original Notes may not be offered, sold or otherwise transferred prior to the date which is two years after the later of the date of original issue and the last date that Details or any affiliate of Details was the owner of such securities (or any predecessor thereto) (the "Resale Restriction Termination Date") only (a) to Details (b) pursuant to a registration statement which has been declared effective under the Securities Act, (c) for so long as the Original Notes are eligible for resale pursuant to rule 144A, to a person the owner reasonably believes is a qualified institutional buyer that purchases for its own account or for the account of a qualified institutional buyer to whom notice is given that the transfer is being made in reliance on Rule 144A, (d) to an "accredited investor" within the meaning of subparagraph (1), (2), (3) or (7) of paragraph (a) of Rule 501 under the Securities Act that is purchasing for his own or for the account of such an "accredited investor" in each case in a minimum of Original Notes with a purchase price of $500,000 or (c) pursuant to any other available exemption from the registration requirements of the Securities Act, subject in each of the foregoing cases to any requirement of law that the disposition of its property or the property of such investor account or accounts be at all times within its or their control. The foregoing restrictions on resale will not apply subsequent to the Resale Restriction Termination Date. If any resale or other transfer of the Original Notes is proposed to be made pursuant to clause (d) above prior to the Resale Restriction Termination Date, the transferor shall deliver a letter from the transferee to Details and the Trustee, which shall provide, among other things, that the transferee is an "accredited investor" within the meaning of subparagraphs (1), (2), (3) or (7) of paragraph (a) of Rule 501 under the Securities Act and that it is acquiring such Securities for investment purposes and not for distribution in violation of the Securities Act. Prior to any offer, sale or other transfer of Original Notes prior to the Resale Restriction Termination Date pursuant to clauses (d) or (e) above, the issuer and the Trustee may require the delivery of an opinion of counsel, certification and/or other information satisfactory to each of them. TERMS OF THE EXCHANGE OFFER Upon the terms and subject to the conditions set forth in the Prospectus and in the Letter of Transmittal, the form of which is included as Exhibit 99.1 to the Registration Statement of which this Prospectus is a part, Details will accept any and all Original Notes validly tendered and not withdrawn prior to the applicable Expiration Date. Details will issue $1,000 principal amount of Exchange Notes in exchange for each $1,000 principal amount of Original Notes accepted in the Exchange Offer. Holders may tender some or all of their Original Notes pursuant to the Exchange Offer. However, Original Notes may be tendered only in integral multiples of $1,000 principal amount. The form and terms of the Exchange Notes are the same as the form and terms of the Original Notes, except that (i) the Exchange Notes have been registered under the Securities act and therefore will not bear legends restricting their transfer pursuant to the Securities Act, and (ii) the holders of Exchange Notes will not be entitled to rights under the Registration Rights Agreement (except under certain limited circumstances). The Exchange Notes will evidence the same debt as the Original Notes (which they replace), and will be issued under, and be entitled to the benefits of, the Indenture. Solely for reasons of administration (and for no other purpose) Details has fixed the close of business on February 9, 1998 as the record date for the Exchange Offer for purpose of determining the persons to whom this Prospectus and the Letter of Transmittal will be mailed initially. Only a registered holder of Original Notes (or such holder's legal representative or attorney- in-fact) as reflected on the records of the trustee under the governing indenture may participate in the Exchange Offer. There will be no fixed record date for determining registered holders of the Original Notes entitled to participate in the relevant Exchange Offer. Holders of the Original Notes do not have any appraisal or dissenters' rights under the General Corporation Law of California or under the Indenture in connection with the Exchange Offer. Details intends to conduct the Exchange Offer in accordance with the applicable requirements of the Exchange Act and the rules and regulations of the Commission thereunder. 99 Details shall be deemed to have accepted validly tendered Original Notes when, as and if it has given oral or written notice thereof to the Exchange Agent. The Exchange Agent will act as agent for the tendering holders of the Original Notes for the purposes of receiving the Exchange Notes. If any tendered Original Notes are not accepted for exchange because of an invalid tender, the occurrence of certain other events set forth herein or otherwise, certificates for any such unaccepted Original Notes will be returned without expense, to the tendering holder thereof as promptly as practicable after the Expiration Date. Holders who tender Original Notes in the Exchange Offer will not be required to pay brokerage commissions or fees or, subject to the Instructions in the Letter of Transmittal, transfer taxes with respect to the exchange of the Original Notes pursuant to the Exchange Offer. Details will pay all charges and expenses, other than certain applicable taxes, in connection with their Exchange Offer. See "--Fees and Expenses." EXPIRATION DATE; EXTENSION; AMENDMENTS The term "Expiration Date" shall mean 5:00 p.m., New York City time on March 16, 1998, unless Details extends the Exchange Offer, in which case the term "Expiration Date" shall mean the latest date and time to which such Exchange Offer is extended. In order to extend the Exchange Offer, Details will notify the Exchange Agent of any extension by oral or written notice and will make a public announcement thereof, prior to 9:00 a.m., New York City time, on the next Business Day after the previously scheduled Expiration Date. Details reserves the right, in its sole discretion, (i) to delay accepting any Original Notes, (ii) extend the Exchange Offer, (iii) if the condition set forth below under "--Conditions of the Exchange Offer" shall not have been satisfied, to terminate the Exchange Offer, by giving oral or written notice of such delay, extension or termination to the Exchange Agent, or (iv) to amend the terms of the Exchange Offer in any manner. Any such delay in acceptance, extension, termination or amendment will be followed as promptly as practicable by a public announcement thereof. If the Exchange Offer is amended in a manner determined by Details to constitute a material change, it will promptly disclose such amendment by means of a prospectus supplement that will be distributed to the registered holders of the Original Notes and the Exchange Offer will be extended for a period of five to ten business days, as required by law, depending upon the significance of the amendment and the manner of disclosure to the registered holders, if the Exchange Offer would otherwise expire during such five to ten business day period. Without limiting the manner in which Details may choose to make public announcement of any delay, extension, termination or amendment of its Exchange Offer, Details shall not have an obligation to publish, advertise, or otherwise communicate any such public announcement, other than by making a timely release thereof to the Dow Jones News Service. PROCEDURES FOR TENDERING Only a registered holder of Original Notes may tender such Original Notes in the Exchange Offer. To tender in the Exchange Offer, a holder must complete, sign and date the Letter of Transmittal, have the signatures thereon guaranteed if required by such Letter of Transmittal, and mail or otherwise deliver such Letter of Transmittal to the Exchange Agent at the address set forth below under "--Exchange Agent" for receipt prior to the applicable Expiration Date. In addition, either (i) certificates for such Original Notes must be received by the Exchange Agent along with the Letter of Transmittal, or (ii) a timely confirmation of a book-entry transfer (a "Book-Entry Confirmation") of such Original Notes into the Exchange Agent's account at The Depository Trust Company (the "Book-Entry Transfer Facility") pursuant to the procedure for book-entry transfer described below, must be received by the 100 Exchange Agent prior to the applicable Expiration Date, or (iii) the Holder must comply with the guaranteed delivery procedures described below. To be tendered effectively, the Letter of Transmittal and all other required documents must be received by the Exchange Agent at the address set forth below under "--Exchange Agent" prior to the applicable Expiration Date. The tender by a Holder will constitute an agreement between such Holder and Details in accordance with the terms and subject to the conditions set forth herein and in the Letter of Transmittal applicable to such Exchange Offer. THE METHOD OF DELIVERY OF THE ORIGINAL NOTES AND THE APPLICABLE LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE APPLICABLE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR ORIGINAL NOTES SHOULD BE SENT TO DETAILS. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS. Any beneficial owner whose Original Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender should contact the registered holder promptly and instruct such registered Holder to tender on such beneficial owner's behalf. If such beneficial owner wishes to tender on such owner's behalf, such owner must, prior to completing and executing the Letter of Transmittal and delivering such owner's Original Notes, either make appropriate arrangements to register ownership of the Original Notes in such beneficial owner's name or obtain a properly completed bond power from the registered holder. The transfer of registered ownership may take considerable time. Signatures on a Letter of Transmittal or a notice of withdrawal, as the case may be, must be guaranteed by an Eligible Institution (as defined below) unless the Original Notes tendered pursuant thereto are tendered (i) by a registered holder who has not completed the box entitled "Special Delivery Instructions" on the Letter of Transmittal designated for such Original Notes, or (ii) for the account of an Eligible Institution. In the event that signatures on a Letter of Transmittal or a notice of withdrawal, as the case may be, are required to be guaranteed, such guarantee must be by a participant in a recognized signature guarantee program within the meaning of Rule 17Ad-15 under the Exchange Act (an "Eligible Institution"). If a Letter of Transmittal is signed by a person other than the registered holder of any Original Notes listed therein, such Original Notes must be endorsed or accompanied by a properly completed bond power, signed by such registered holder as such registered holder's name appears on such Original Notes, with signature guaranteed by an Eligible Institution. If a Letter of Transmittal or any Original Notes or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and evidence satisfactory to Details, as applicable, of their authority to so act must be submitted with the Letter of Transmittal designated for such Original Notes. All questions as to the validity, form, eligibility (including time of receipt), acceptance and withdrawal of tendered Original Notes will be determined by Details in its sole discretion, which determination will be final and binding. The Company reserves the absolute right to reject any and all Original Notes not properly tendered or any Original Notes the issuer's acceptance of which would, in the opinion of counsel for such Issuer, be unlawful. Details also reserves the right to waive any defects, irregularities or conditions of tender as to particular Original Notes. The interpretation of the terms and conditions of the Exchange Offer (including the instructions in the Letter of Transmittal) by Details will 101 be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Original Notes must be cured within such time as Details shall determine. Although Details intends to notify holders of defects or irregularities with respect to tenders of Original Notes issued by it, neither Details, the Exchange Agent nor any other person shall incur any liability for failure to give such notification. Tenders of Original Notes will not be deemed to have been made until such defects or irregularities have been cured or waived. Any Original Notes received by the Exchange Agent that are not validly tendered and as to which the defects or irregularities have not been cured or waived, or if Original Notes are submitted in a principal amount greater than the principal amount of Original Notes being tendered by such tendering holder, such unaccepted or non-exchanged Original Notes will be returned by the Exchange Agent to the tendering holders (or, in the case of Original Notes tendered by book-entry transfer into the Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the book-entry transfer procedures described below, such unaccepted or non-exchanged Original Notes will be credited to an account maintained with such Book-Entry Transfer Facility), unless otherwise provided in the Letter of Transmittal designated for such Original Notes, as soon as practicable following the applicable Expiration Date. By tendering Original Notes in the Exchange Offer, each registered holder will represent to the issuer of such Original Notes that, among other things, (i) the Exchange Notes to be acquired by the holder and any beneficial owner(s) of such Original Notes ("Beneficial Owner(s)") in connection with the Exchange Offer are being acquired by the holder and any Beneficial Owner(s) in the ordinary course of business of the holder and any Beneficial Owner(s) for such holder's own account, for investment and not with a view to or for sale in connection with any distribution of the Exchange Notes, (ii) the holder and each Beneficial Owner are not participating, do not intend to participate, and have no arrangement or understanding with any person to participate, in a distribution of the Exchange Notes, (iii) the holder and each Beneficial Owner acknowledge and agree that (x) any person participating in an Exchange Offer for the purpose of distributing the Exchange Notes must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction with respect to the Exchange Notes acquired by such person and cannot rely on the position of the Staff of the Commission set forth in no-action letters that are discussed herein under "--Resales of the Exchange Notes," and (y) any Participating Broker-Dealer that receives Exchange Notes for its own account in exchange for Original Notes pursuant to an Exchange Offer, where such Original Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities, must deliver a prospectus in connection with any resale of such Exchange Notes, see "Plan of Distribution," but by so acknowledging, the holder shall not be deemed to admit that, by delivering a prospectus, it is an "underwriter" within the meaning of the Securities Act, (iv) neither the holder nor any Beneficial Owner is an "affiliate," as defined under Rule 405 of the Securities Act, of Details except as otherwise disclosed to Details in writing, and (v) the holder and each Beneficial Owner understands that a secondary resale transaction described in clause (iii) above should be covered by an effective registration statement containing the selling securityholder information required by Item 507 of Regulation S-K of the Commission. BOOK-ENTRY TRANSFER The Exchange Agent will make a request to establish an account with respect to the Original Notes at the Book-Entry Transfer Facility, for purposes of the Exchange Offers, within two business days after the date of this Prospectus, and any financial institution that is a participant in the Book-Entry Transfer Facility's system may make book-entry delivery of Original Notes by causing the Book-Entry Transfer Facility to transfer such Original Notes into the Exchange Agent's account at the Book-Entry Transfer Facility in accordance with such Book-Entry Transfer Facility's procedures for transfer. However, although delivery of Original Notes may be effected through book-entry transfer at the Book-Entry Transfer Facility, the applicable Letter of Transmittal, with any required signature guarantees and any other documents, must be transmitted to and received by the Exchange Agent at the address set forth below under "--Exchange Agent" on or prior to the applicable Expiration Date or the guaranteed delivery procedures described below must be complied with. 102 GUARANTEED DELIVERY PROCEDURES Holders who wish to tender their Original Notes and (i) whose Original Notes are not immediately available, or (ii) who cannot deliver their Original Notes, the Letter of Transmittal or any other required documents to the Exchange Agent prior to the applicable Expiration Date, may effect a tender if: (1) The tender is made through an Eligible Institution; (2) Prior to the applicable Expiration Date, the Exchange Agent receives from such Eligible Institution a properly completed and duly executed Notice of Guaranteed Delivery (by mail, hand delivery or facsimile transmission) setting forth the name and address of the Holder, the certificate number(s) of such Original Notes and the principal amount of the Original Notes being tendered, stating that the tender is being made thereby and guaranteeing that, within five business days after the applicable Expiration Date, the applicable Letter of Transmittal together with the certificate(s) representing the Original Notes (or a Book-Entry Confirmation) and any other documents required by the applicable Letter of Transmittal will be delivered by the Eligible Institution to the Exchange Agent; and (3) Such properly completed and executed Letter of Transmittal, as well as the certificate(s) representing all tendered Original Notes in proper form for transfer (or a Book-Entry Confirmation) and all other documents required by the Letter of Transmittal are received by the Exchange Agent within five business days after the applicable Expiration Date. WITHDRAWAL OF TENDERS Except as otherwise provided herein, tenders of Original Notes pursuant to an Exchange Offer may be withdrawn, unless theretofore accepted for exchange as provided in the applicable Exchange Offer, at any time prior to the Expiration Date of that Exchange Offer. To be effective, a written or facsimile transmission notice of withdrawal must be received by the Exchange Agent at its address set forth herein prior to the Expiration Date. Any such notice of withdrawal must (i) specify the name of the person having deposited the Original Notes to be withdrawn (the "Depositor"), (ii) identify the Original Notes to be withdrawn (including the certificate number or numbers and aggregate principal amount of such Original Notes), and (iii) be signed by the holder in the same manner as the original signature on the applicable Letter of Transmittal (including any required signature guarantees). All questions as to the validity, form and eligibility (including time of receipt) of such notices will be determined by the Company in its sole respective discretion, which determination shall be final and binding on all parties. Any Original Notes so withdrawn will be deemed not to have been validly tendered for purposes of the Exchange Offer and no Exchange Notes will be issued with respect thereto unless the Original Notes so withdrawn are retendered. Properly withdrawn Original Notes may be retendered by following one of the procedures described above under "--Procedures for Tendering" at any time prior to the applicable Expiration Date. Any Original Notes which have been tendered but which are not accepted for exchange due to the rejection of the tender due to uncured defects or the prior termination of the applicable Exchange Offer, or which have been validly withdrawn, will be returned to the holder thereof (unless otherwise provided in the Letter of Transmittal), as soon as practicable following the applicable Expiration Date or, if so requested in the notice of withdrawal, promptly after receipt by the issuer of the Original Notes of notice of withdrawal without cost to such holder. CONDITIONS OF THE EXCHANGE OFFER The Exchange Offer is subject to the condition that the Exchange Offer, or the making of any exchange by a holder, does not violate applicable law or any applicable interpretation of the staff of the Commission. If there has been a change in commission policy such that there is a substantial question whether the Exchange Offer is permitted by applicable federal law, Details has agreed to seek 103 a no-action letter or other favorable decision from the Commission allowing the Company to consummate the Exchange Offer. If Details determines that the Exchange Offer is not permitted by applicable Federal law, it may terminate the Exchange Offer. In connection therewith Detail may (i) refuse to accept any Original Notes and return any Original Notes that have been tendered by the holders thereof, (ii) extend the Exchange Offer and retain all Original Notes tendered prior to the Expiration of the Exchange Offer, subject to the rights of such holders of tendered Original Notes to withdraw their tendered Original Notes, or (iii) waive such termination event with respect to the Exchange Offer and accept all properly tendered Original Notes that have not been withdrawn. If such waiver constitutes a material change in the Exchange Offer, Details will disclose such change by means of a supplement to this Prospectus that will be distributed to each registered holder of Original Notes, and Details will extend the Exchange Offer for a period of five to ten business days, depending upon the significance of the waiver and the manner of disclosure to the registered holders of the Original Notes, if the Exchange Offer would otherwise expire during such period. EXCHANGE AGENT State Street Bank and Trust Company has been appointed as "Exchange Agent" for the Exchange Offer, Questions and request for assistance, requests for additional copies of this Prospectus or of the Letter of Transmittal and other documents should be directed to the Exchange Agent addressed as follows: By Registered or Certified Mail or Hand or Overnight Delivery: State Street Bank and Trust Company Two International Place 4th Floor Boston, MA 02110 Attention: Kellie Mullen Confirm by Telephone: (617) 664-5587 Facsimile Transmissions: (617) 664-5290 (ELIGIBLE INSTITUTIONS ONLY) Delivery to other than the above addresses or facsimile numbers will not constitute a valid delivery. FEES AND EXPENSES The expenses of soliciting tenders will be borne by Details. The principal solicitation is being made by mail; however, additional solicitation may be made by telegraph, telephone or in person by officers and regular employees of Details and its affiliates. No dealer-manager has been retained in connection with the Exchange Offer and no payments will be made to brokers, dealers or others soliciting acceptance of the Exchange Offer. However, reasonable and customary fees will be paid to the Exchange Agent for its service and it will be reimbursed for its reasonable out-of-pocket expenses in connection therewith. The cash expenses to be incurred in connection with the Exchange Offer will be paid by Details and are estimated in the aggregate to be approximately $350,000. Such expenses include fees and expenses of the Exchange Agent and the Trustee under the indenture, accounting and legal fees and printing costs, among others. 104 Details will pay all transfer taxes, if any, applicable to the exchange of the Original Notes pursuant to the Exchange Offer. If, however, a transfer tax is imposed for any reason other than the exchange of the Original Notes pursuant to the Exchange Offer, then the amount of any such transfer taxes (whether imposed on the registered holder or any other persons) will be payable by the tendering holder. If satisfactory evidence of payment of such taxes or exemption therefrom is not submitted with the Letter of Transmittal, the amount of such transfer taxes will be billed directly to such tendering holder. ACCOUNTING TREATMENT The carrying values of the Original Notes are not expected to be materially different from the fair value of the Exchange Notes at the time of the exchange. Accordingly, no gain or loss for accounting purposes will be recognized. The expenses of the Exchange Offer will be amortized over the term of the Exchange Notes. RESALES OF THE EXCHANGE NOTES; PLAN OF DISTRIBUTION Based on no-action letters issued by the staff of the Commission to third parties, Details believes the Exchange Notes issued pursuant to the Exchange Offer in exchange for the Original Notes may be offered for resale, resold and otherwise transferred by any holder thereof (other than (i) a broker-dealer who purchased such Original Notes directly from Details to resell pursuant to Rule 144A or any other available exemption under the Securities Act or (ii) a person that is an "affiliate" of Details within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act provided that the holder is acquiring the Exchange Notes in its ordinary course of business and is not participating, and has no arrangement or understanding with any person to participate, in the distribution of the Exchange Notes. Holders of Original Notes wishing to accept the Exchange Offer must represent to Details that such conditions have been met. In the event that Details' belief is inaccurate, holders of Exchange Notes who transfer Exchange Notes in violation of the prospectus delivery provisions of the Securities Act and without an exemption from registration thereunder may incur liability under the Securities Act. Details does not assume or indemnify holders against such liability. All resales must be made in compliance with applicable state securities or "blue sky" laws. Such compliance may require that the Exchange Notes be registered or qualified in a particular state or that the resales be made by or through a licensed broker-dealer, unless exemptions from these requirements are available. Details assumes no responsibility with regard to compliance with such requirements. Each affiliate of Details must acknowledge that such person will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable. Each Participating Broker-Dealer that receives Exchange Notes in exchange for Original Notes held for its own account, as a result of market-making or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. Although a Participating Broker-Dealer may be an "underwriter" within the meaning of the Securities Act, the Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a Participating Broker-Dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a Participating Broker-Dealer in connection with resales of Exchange Notes received in exchange for Original Notes. 105 PLAN OF DISTRIBUTION Each broker-dealer that receives Exchange Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Exchange Notes received in exchange for Original Notes where such Original Notes were acquired as a result of market-making activities or other trading activities. Details has agreed that, for a period of 90 days after the Expiration Date, it will make this Prospectus, as amended or supplemented, available to any broker-dealer for use in connection with any such resale. In addition, until May 13, 1998, all dealers effecting transactions in the Exchange Discount Notes may be required to deliver a prospectus. Details will not receive any proceeds from any sales of the Exchange Notes by Participating Broker-Dealers. Exchange Notes received by Participating Broker-Dealers for their own account pursuant to the Exchange Offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the Exchange Notes or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or negotiated prices. Any such resale may be made directly to the purchaser or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such Participating Broker- Dealer and/or the purchasers of any such Exchange Notes. Any Participating Broker-Dealer that resells the Exchange Notes that were received by it for its own account pursuant to the Exchange Offer and any broker or dealer that participates in a distribution of such Exchange Notes may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit on any such resale of Exchange Notes and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The Letter of Transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a Participating Broker-Dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. For a period of 90 days after the Expiration Date Details will promptly send additional copies of this Prospectus and any amendment or supplement to this Prospectus to any broker-dealer that requests such documents in the Letter of Transmittal. Details has agreed to pay all expenses incident to the Exchange Offer (including the expenses of one counsel for the Holders of the Notes) other than commissions or concessions of any broker-dealers and will indemnify the Holders of the Notes (including any broker-dealers) against certain liabilities, including liabilities under the Securities Act. LEGAL MATTERS Certain legal matters in connection with the Exchange Notes offered hereby will be passed upon for the Company by its counsel, Ropes & Gray, One International Place, Boston, Massachusetts and its special California counsel Stradling Yocca Carlson & Rauth, a Professional Corporation, 660 Newport Center Drive, Newport Beach, California. EXPERTS The consolidated financial statements of Details Holdings Corp. formerly Details Inc. as of December 31, 1996 and 1995 and for each of the three years in the period ended December 31, 1996 included in this Prospectus, have been audited by McGladrey & Pullen, LLP, independent auditors, as stated in their report appearing herein, and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. 106 The financial statements of Colorado Springs Circuits, Inc. as of April 1, 1997 and 1996 and for the years then ended, included in this Prospectus have been audited by Stockman Kast Ryan & Scruggs, P.C., independent auditors, as stated in their report appearing herein, and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The statements of income and retained earnings and of cash flows of Colorado Springs Circuits, Inc. for the year ended March 31, 1995 included in this Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein, and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. CHANGE IN ACCOUNTANTS On December 16, 1997, the Company notified McGladrey & Pullen, LLP that it would be dismissed as the Company's independent accountant effective December 31, 1997. On January 1, 1998, the Company notified Price Waterhouse LLP that it would be engaged as the Company's new principal independent accountant to audit the Company's financial statements. The Company and its Board of Directors selected Price Waterhouse LLP based primarily on the fact that Price Waterhouse LLP typically serves as independent accountant for portfolio companies of certain of Holdings' shareholders. The Company's former accountants, McGladrey & Pullen, LLP, were considered for the engagement but were not selected. In connection with the audits of the two fiscal years 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 the consolidated financial statements of the Company as of and for the years ended December 31, 1996 and 1995, did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles. A letter from McGladrey & Pullen, LLP to that effect is attached as Exhibit 16.1 to the Registration Statement of which this Prospectus is a part. 107 INDEX TO FINANCIAL STATEMENTS DETAILS HOLDINGS CORP., FORMERLY DETAILS, INC. AND SUBSIDIARIES Independent Auditor's Report............................................. F-3 Consolidated Balance Sheets as of December 31, 1996 and 1995 and as of September 30, 1997 (unaudited).......................................... F-4 Consolidated Statements of Income for the Years Ended December 31, 1996, 1995 and 1994 and for the Nine Months Ended September 30, 1997 and 1996 (unaudited)............................................................. F-5 Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended December 31, 1996, 1995 and 1994 and for the Nine Months Ended September 30, 1997 (unaudited).......................................... F-6 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 and the Nine Months Ended September 30, 1997 and 1996 (unaudited)........................................................ F-8 Notes to Consolidated Financial Statements............................... F-9 COLORADO SPRINGS CIRCUITS, INC. Independent Auditors' Reports............................................ F-19 Balance Sheets as of April 1, 1997 and 1996.............................. F-21 Statements of Income and Retained Earnings for the Years Ended April 1, 1997 and 1996 and March 31, 1995........................................ F-22 Statements of Cash Flows for the Years Ended April 1, 1997 and 1996 and March 31, 1995.......................................................... F-23 Notes to Financial Statements............................................ F-24 Interim Balance Sheet as of September 29, 1997 (unaudited)............... F-29 Interim Statements of Income and Retained Earnings for the Six Months Ended September 29, 1997 and September 30, 1996 (unaudited)............. F-30 Interim Statements of Cash Flows for the Six Months Ended September 29, 1997 and September 30, 1996 (unaudited)................................. F-31 Notes to Interim Financial Statements (unaudited)........................ F-32
F-1 [This page intentionally left blank] F-2 INDEPENDENT AUDITOR'S REPORT To the Board of DirectorsDetails Holdings Corp., formerly Details, Inc.Anaheim, California We have audited the accompanying consolidated balance sheets of Details Holdings Corp., formerly Details, Inc. and Subsidiaries as of December 31, 1995 and 1996, and the related consolidated statements of income, stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1996. 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Details Holdings Corp., formerly Details, Inc. and Subsidiaries as of December 31, 1995 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. McGladrey & Pullen, LLP Anaheim, California February 14, 1997 F-3 DETAILS HOLDINGS CORP., FORMERLY DETAILS, INC., AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------------------- SEPTEMBER 30, 1995 1996 1997 ----------- ------------- ------------- (UNAUDITED) ASSETS (NOTE 4) Current Assets Cash (Note 7)...................... $ 472,200 $ 168,900 $ 942,300 Trade receivables, less allowance for doubtful accounts 1995 $330,000; 1996 $300,000; 1997 $400,000 (Note 7)................. 6,921,600 9,511,000 10,148,100 Inventories (Note 2)............... 874,900 1,237,800 2,413,700 Prepaid expenses................... 48,500 217,000 196,600 Prepaid income taxes............... -- 648,000 160,300 Deferred income taxes (Note 5)..... -- 690,000 690,000 ----------- ------------- ------------- Total current assets............. 8,317,200 12,472,700 14,551,000 ----------- ------------- ------------- Property and Equipment, net (Note 3). 4,701,800 12,846,900 14,931,000 ----------- ------------- ------------- Unamortized Debt Issue Costs, net.... -- 2,057,500 1,542,300 Other Assets......................... 62,200 125,400 661,500 ----------- ------------- ------------- 62,200 2,182,900 2,203,800 ----------- ------------- ------------- $13,081,200 $ 27,502,500 $ 31,685,800 =========== ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities Current maturities of long-term debt (Note 4)..................... $ 1,981,900 $ 9,500,000 $ 10,625,000 Current maturities of capital leases with stockholder (Note 4).. -- 410,900 364,700 Accounts payable................... 3,280,200 3,560,600 3,505,500 Accrued commissions................ 504,900 587,100 1,002,800 Other accrued expenses............. 729,600 1,799,500 1,858,400 Accrued bonus payable.............. -- -- 2,958,500 Dividends payable.................. 4,084,500 128,200 128,200 ----------- ------------- ------------- Total current liabilities........ 10,581,100 15,986,300 20,443,100 ----------- ------------- ------------- Long-Term Debt (Note 4).............. -- 78,350,300 70,229,200 Capital Leases with stockholder (Note 4).................................. -- 5,839,700 6,191,200 ----------- ------------- ------------- Total liabilities (Note 6)....... 10,581,100 100,176,300 96,863,500 ----------- ------------- ------------- Commitments and Contingencies (Notes 4, 6 and 10) Temporary Stockholders' Equity (Note 6) Redeemable common stock, 1996 6,959 shares; 1997 6,873 shares......... -- 38,906,000 77,000,000 Redeemable common stock warrants... -- 3,200,000 6,350,000 ----------- ------------- ------------- Total temporary stockholders' equity.......................... -- 42,106,000 83,350,000 ----------- ------------- ------------- Other Stockholders' Equity (Deficit) (Notes 4 and 6) Common stock, no par value, authorized 100,000 shares, issued and outstanding 1995 15,300 shares; 1996 and 1997 2,758 shares............................ 15,300 5,300,500 5,300,500 Convertible preferred stock, no par value, authorized 1995 none; 1996 and 1997 100,000 shares, issued and outstanding 1996 and 1997 6,601 shares...................... -- 13,531,900 13,531,900 Additional paid-in-capital......... -- -- 2,922,000 Retained earnings (deficit)........ 2,484,800 (133,612,200) (170,282,100) ----------- ------------- ------------- Total other stockholders' equity (deficit)....................... 2,500,100 (114,779,800) (148,527,700) ----------- ------------- ------------- $13,081,200 $ 27,502,500 $ 31,685,800 =========== ============= =============
See Notes to Consolidated Financial Statements. F-4 DETAILS HOLDINGS CORP., FORMERLY DETAILS, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------------- ------------------------ 1994 1995 1996 1996 1997 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) Net Sales (Note 7)...... $44,085,800 $59,370,200 $67,515,000 $49,086,000 $55,420,800 Cost of Goods Sold, including rent paid to stockholders 1994 $452,200; 1995 $558,700 (Note 4)............... 20,415,100 25,156,400 30,504,800 21,899,100 27,018,700 ----------- ----------- ----------- ----------- ----------- Gross profit........ 23,670,700 34,213,800 37,010,200 27,186,900 28,402,100 Operating Expenses (Note 4) Compensation to CEO... 411,900 417,900 1,055,100 836,000 811,000 General and administration including rent paid to stockholder 1994 $85,200; 1995 $63,500.............. 1,384,600 1,789,700 1,929,000 1,377,500 1,624,800 Sales and marketing... 3,542,700 5,292,800 5,989,800 4,502,900 5,337,700 Stock compensation and related bonuses...... -- -- -- -- 5,283,000 ----------- ----------- ----------- ----------- ----------- Operating income.... 18,331,500 26,713,400 28,036,300 20,470,500 15,345,600 Interest Income (Expense) Interest income....... 13,100 41,800 102,300 71,100 55,500 Interest expense, including interest paid to stockholder of $774,000 for 1996 year................. (180,900) (370,600) (9,517,800) (6,973,600) (7,427,000) ----------- ----------- ----------- ----------- ----------- Income before income taxes.............. 18,163,700 26,384,600 18,620,800 13,568,000 7,974,100 Income Tax Expense (Note 5)..................... 272,400 396,000 6,265,000 4,270,000 3,400,000 ----------- ----------- ----------- ----------- ----------- Net income.......... 17,891,300 25,988,600 12,355,800 9,298,000 4,574,100 =========== =========== =========== =========== =========== Pro forma income tax adjustment (Note 4)............... 7,175,000 10,425,000 1,295,000 1,295,000 ----------- ----------- ----------- ----------- Pro forma net income (Note 5)............... $10,716,300 $15,563,600 $11,060,800 $ 8,003,000 =========== =========== =========== ===========
See Notes to Consolidated Financial Statements. F-5 DETAILS HOLDINGS CORP., FORMERLY DETAILS, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
CONVERTIBLE COMMON STOCK PREFERRED STOCK ------------------ ------------------- SHARES AMOUNT SHARES AMOUNT ------ ---------- ------ ----------- Balance, December 31, 1993............. 15,300 $ 15,300 -- $ -- Net income........................... -- -- -- -- Dividends declared................... -- -- -- -- ------ ---------- ----- ----------- Balance, December 31, 1994............. 15,300 15,300 -- -- Net income........................... -- -- -- -- Dividends declared................... -- -- -- -- ------ ---------- ----- ----------- Balance, December 31, 1995............. 15,300 15,300 -- -- Retirement of common stock (Note 6).. (8,162) (8,200) -- -- Transfer common stock subject to put option (Note 6)............................ (6,959) (7,000) -- -- Issuance of common stock (Note 6).... 2,509 5,147,900 -- -- Issuance of preferred stock (Note 6). -- -- 6,671 13,684,400 Transfer of preferred stock to common stock............................... 70 152,500 (70) (152,500) Issuance of redeemable common stock warrants (Note 6)................... -- -- -- -- Net income........................... -- -- -- -- Accretion of temporary stockholders' equity to estimated fair value (Note 6).................................. -- -- -- -- Dividends declared................... -- -- -- -- ------ ---------- ----- ----------- Balance, December 31, 1996............. 2,758 5,300,500 6,601 13,531,900 Net income (unaudited)............... -- -- -- -- Accretion of temporary stockholders' equity to estimated fair value (unaudited) (Note 6)................ -- -- -- -- Stock compensation expense (unaudited) (Note 6)................ -- -- -- -- ------ ---------- ----- ----------- Balance, September 30, 1997 (unaudited)........................... 2,758 $5,300,500 6,601 $13,531,900 ====== ========== ===== ===========
See Notes to Consolidated Financial Statements. F-6 DETAILS HOLDINGS CORP., FORMERLY DETAILS, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
TEMPORARY STOCKHOLDERS' EQUITY ---------------------------------- ADDITIONAL RETAINED REDEEMABLE COMMON PAID-IN- EARNINGS COMMON STOCK CAPITAL (DEFICIT) TOTAL STOCK WARRANTS TOTAL - ---------- ------------- ------------- ----------- ---------- ----------- $ -- $ 2,790,700 $ 2,806,000 $ -- $ -- $ -- -- 17,891,300 17,891,300 -- -- -- -- (17,891,300) (17,891,300) -- -- -- - ---------- ------------- ------------- ----------- ---------- ----------- -- 2,790,700 2,806,000 -- -- -- -- 25,988,600 25,988,600 -- -- -- -- (26,294,500) (26,294,500) -- -- -- - ---------- ------------- ------------- ----------- ---------- ----------- -- 2,484,800 2,500,100 -- -- -- -- (104,991,800) (105,000,000) -- -- -- -- (14,967,000) (14,974,000) 14,974,000 -- 14,974,000 -- -- 5,147,900 -- -- -- -- -- 13,684,400 -- -- -- -- -- -- -- -- -- -- -- -- -- 1,300,000 1,300,000 -- 12,355,800 12,355,800 -- -- -- -- (25,832,000) (25,832,000) 23,932,000 1,900,000 25,832,000 -- (2,662,000) (2,662,000) -- -- -- - ---------- ------------- ------------- ----------- ---------- ----------- -- (133,612,200) (114,779,800) 38,906,000 3,200,000 42,106,000 -- 4,574,100 4,574,100 -- -- -- -- (41,244,000) (41,244,000) 38,094,000 3,150,000 41,244,000 2,922,000 -- 2,922,000 -- -- -- - ---------- ------------- ------------- ----------- ---------- ----------- $2,922,000 $(170,282,100) $(148,527,700) $77,000,000 $6,350,000 $83,350,000 ========== ============= ============= =========== ========== ===========
See Notes to Consolidated Financial Statements. F-7 DETAILS HOLDINGS CORP., FORMERLY DETAILS, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30, ----------------------------------------- -------------------------- 1994 1995 1996 1996 1997 ------------ ------------ ------------- ------------- ----------- (UNAUDITED) (UNAUDITED) Cash Flows from Operating Activities Net income................ $ 17,891,300 $ 25,988,600 $ 12,355,800 $ 9,298,000 $ 4,574,100 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation............. 881,800 1,054,200 2,047,100 1,494,500 1,828,800 Amortization............. -- -- 844,800 619,500 644,100 Stock compensation expense................. -- -- -- -- 2,922,000 Deferred taxes........... -- -- (690,000) (297,000) -- Bad debt expense (recovery).............. 164,200 (21,400) (27,100) (27,100) 95,300 Change in assets and liabilities: (Increase) decrease in: Receivables............ (837,000) (1,975,200) (2,562,300) (1,327,000) (732,400) Inventories............ (142,400) (421,000) (362,900) (519,000) (1,175,900) Prepaid expenses and other assets.......... (46,500) 28,900 (879,700) (221,600) (28,000) Increase (decrease) in: Accounts payable....... 259,200 1,747,000 280,400 (309,600) (55,100) Accrued expenses....... (76,400) (259,900) 1,152,100 2,171,400 3,433,100 ------------ ------------ ------------- ------------- ----------- Net cash provided by operating activities. 18,094,200 26,141,200 12,158,200 10,882,100 11,506,000 ------------ ------------ ------------- ------------- ----------- Cash Flows from Investing Activities Proceeds from sale of equipment................ -- -- 89,600 7,800 -- Purchase of equipment..... (844,100) (2,945,900) (3,666,400) (2,719,900) (3,266,600) ------------ ------------ ------------- ------------- ----------- Net cash (used in) investing activities. (844,100) (2,945,900) (3,576,800) (2,712,100) (3,266,600) ------------ ------------ ------------- ------------- ----------- Cash Flows from Financing Activities Principal payments on notes payable............ (1,716,300) (752,200) (7,982,000) (5,982,000) (7,125,000) Principal payments on stockholder loan......... (1,000,000) -- -- -- -- Borrowings on notes payable.................. 585,800 1,418,600 95,000,000 95,000,000 -- Principal payments on capital lease to stockholder........... -- -- (364,700) (266,400) (341,000) Cash dividends paid on common stock............. (13,025,800) (27,075,500) (6,618,300) (6,618,300) -- Proceeds from the issuance of common and preferred stock.................... -- -- 20,000,000 20,000,000 -- Stock issuance costs...... -- -- (1,167,700) (1,167,700) -- Debt issue costs incurred. -- -- (2,752,000) (2,752,000) -- Retirement of common stock.................... -- -- (105,000,000) (105,000,000) -- ------------ ------------ ------------- ------------- ----------- Net cash (used in) financing activities. (15,156,300) (26,409,100) (8,884,700) (6,786,400) (7,466,000) ------------ ------------ ------------- ------------- ----------- Net increase (decrease) in cash... 2,093,800 (3,213,800) (303,300) 1,383,600 773,400 Cash Beginning................. 1,592,200 3,686,000 472,200 472,200 168,900 ------------ ------------ ------------- ------------- ----------- Ending.................... $ 3,686,000 $ 472,200 $ 168,900 $ 1,855,800 $ 942,300 ============ ============ ============= ============= ===========
See Notes to Consolidated Financial Statements. F-8 DETAILS HOLDINGS CORP., FORMERLY DETAILS, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES Nature of business: The Company manufactures and sells printed circuit boards (PCB) to the electronics industry throughout the United States on credit terms that the Company establishes for individual customers. A majority of the Company's sales are for the time critical segment (quick turn) of the PCB industry. Quick turn PCB's are manufactured within 10 days. Subsequent to the Recapitalization discussed in Note 10, the Company changed its name to Details Holdings Corp. (Holdings) and incorporated Details, Inc. as a wholly-owned subsidiary and contributed substantially all of its assets, subject to certain liabilities to Details, Inc. Environmental matters: The Company's operations are regulated under a number of federal, state, local and foreign 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 PCB 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. Interim financial information: The financial information presented as of and for the periods ending September 30, 1996 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 the periods indicated 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 information is also unaudited. A summary of the Company's significant accounting policies is as follows: 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. Principles of consolidation: In December 1996, the Company incorporated Details Europe Limited in the United Kingdom and a foreign sales corporation. These subsidiaries had no transactions during 1996. Inventories: Inventories are stated at the lower of cost (first-in, first-out method) or market. F-9 DETAILS HOLDINGS CORP., FORMERLY DETAILS, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Property and equipment: Property and equipment are stated at cost. Depreciation is provided over the estimated useful lives of the assets using both the straight-line and declining balance methods. For leasehold improvements, depreciation is provided over the shorter of the estimated useful lives of the assets or the lease term. Amortization of capitalized lease payments are included with depreciation expense. Unamortized debt issue costs: Unamortized debt issue costs represent the portion of costs incurred in connection with Company financing. These costs are being amortized over the term of the credit agreement using the interest method. Accumulated amortization as of December 31, 1996 was $692,500. Temporary Stockholder's equity: The Company has common stock and warrants to purchase common stock outstanding which contain the right for the holder to put the instrument back to the Company for cash. The Company records the fair value of these instruments as temporary stockholders' equity with a corresponding charge to accumulated deficit for any changes in the fair value of these instruments. The fair value at January 31, 1996 was estimated at $2,179 per share, which was the price per share paid by the outside investors upon the sale of stock by the Company. The fair value at September 30, 1997 was estimated at $11,200 per share which approximates the price which was agreed to be paid to redeem the temporary equity in connection with the Recapitalization as discussed in Note 10. The fair value for all periods is estimated by management and the board of directors. Employee stock options: The fair value of employee stock options has been estimated by management and the board of directors. In estimating the fair value of stock options, management considered both the $2,179 per share price of shares sold to outside investors on January 31, 1996 and the fact that the employee stock options did not represent a controlling interest in the Company. Revenue recognition: The Company recognizes revenue from the sale of its products upon delivery of its products 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. Income taxes: Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Fair value of financial instruments: The methods and assumptions used to estimate the fair value of the following classes of financial instruments were as follows: Debt--For fixed-rate instruments with a maturity in excess of one year, the fair value of the debt is estimated using discounted cash flow analysis based on the Company's current F-10 DETAILS HOLDINGS CORP., FORMERLY DETAILS, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) incremental borrowing rates for similar types of borrowing arrangements. The carrying value of these fixed rate instruments approximates their fair value. For variable-rate instruments, the carrying amount approximates fair value. Interest rate cap agreement--The carrying amount approximates the fair value based on the fair value of instruments with similar remaining terms. NOTE 2. INVENTORIES Inventories as of December 31, 1995 and 1996 and September 30, 1997 consist of the following:
SEPTEMBER 30, 1995 1996 1997 -------- ---------- ------------- (UNAUDITED) Raw materials.............................. $498,300 $ 800,000 $ 985,000 Work-in-process............................ 376,600 437,800 1,428,700 -------- ---------- ---------- $874,900 $1,237,800 $2,413,700 ======== ========== ==========
NOTE 3. PROPERTY AND EQUIPMENT The components of property and equipment at December 31, 1996 and 1995 are as follows:
1995 1996 ----------- ----------- Buildings and leasehold improvements................ $ 1,003,700 $ 5,845,600 Machinery and equipment............................. 7,733,200 12,053,500 Office furniture and equipment...................... 1,487,100 2,136,600 Waste treatment system.............................. 262,100 288,700 Vehicles............................................ 384,400 378,600 ----------- ----------- 10,870,500 20,703,000 Less accumulated depreciation....................... 6,168,700 7,856,100 ----------- ----------- $ 4,701,800 $12,846,900 =========== ===========
Buildings and leasehold improvements include buildings under a capitalized lease of approximately $4,496,500 with related accumulated depreciation of $449,600 at December 31, 1996. Machinery and equipment include a capitalized lease of $2,118,900 with related accumulated depreciation of $211,900 at December 31, 1996. NOTE 4. LONG-TERM DEBT Long-term debt at December 31, 1996 consists of the following: Term A senior debt(A)........................................... $53,000,000 Term B senior debt(A)........................................... 21,000,000 Subordinated debt, net of discount(B)........................... 13,850,300 Capital leases(C)............................................... 6,250,600 ----------- 94,100,900 Less current maturities......................................... 9,910,900 ----------- $84,190,000 ===========
F-11 DETAILS HOLDINGS CORP., FORMERLY DETAILS, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) - -------- (A) The Term A senior debt requires quarterly principal payments at increasing amounts (ranging from $2,375,000 to $5,000,000) plus interest through December 2000. The Term B senior debt requires quarterly interest only payments with the principal due in January 2002. All interest is calculated based upon LIBOR (5.53% at December 31, 1996) plus 3% or the prime rate (8.25% at December 31, 1996) plus 1.75% at the Company's option. The loans also contain a mandatory prepayment provision which requires 100% of the cash proceeds upon the sale of stock or certain asset sales and recoveries; and 75% of the "Excess Cash Flow Payment Periods", as defined, through December 1997 and 50% thereafter. Included in the credit facility with the Term A and B senior debt, is a $7,500,000 revolving note available to the Company. The revolving note bears interest at similar rates to the Term notes as discussed above and is due and payable in January 2002. At December 31, 1996 there is no balance outstanding on this revolving note. (B) The subordinated debt requires monthly interest payments at 12%. Principal is due in two installments of $7,500,000 in February 2003 and 2004. The debt is subordinate to the senior debt discussed above. In the event the Company prepays the principal amount of this debt prior to maturity, the Company is subject to a prepayment penalty ranging from 5% in year 1 to 0% after year five. This prepayment penalty is reduced by 50% upon an Initial Public Offering (IPO) and is eliminated upon the attainment of a certain internal rate of return by the note holder. The subordinated debt holders also received warrants to purchase 706.3 shares of the Company's common stock for a nominal price. Management determined the fair value of the warrants and allocated the proceeds to the subordinated debt and the warrants issued based upon their relative fair value. The resulting discount is being amortized over the life of the note using the interest method (Note 6). Both the senior and the subordinated debt are secured by substantially all assets of the Company, contain certain debt covenants which the Company is required to meet and include restrictions on the payment of dividends. (C) On January 1, 1996, the Company and its major stockholder renegotiated the two existing operating leases for its facilities and certain equipment. The terms of the new leases require monthly payments totaling approximately $95,000 over the ten-year term of the leases. The leases contain an option for the Company to renew the leases for an additional ten years at the end of the initial term. The leases also contain an option for the Company to purchase the buildings and the machinery at its fair value at the end of the initial term and at the end of the second term. The building lease requires the Company to pay maintenance, insurance and taxes and contains a provision to adjust the lease rate for increases in the Consumer Price Index rate. These leases have been accounted for as capital leases with an implicit interest rate of 12%. Rent expense for 1994 and 1995 was $541,400 and $622,200, respectively under the previous operating leases. Floating-rate hedge: The Company has entered into interest rate cap and interest rate floor agreements having notional principal amounts of $40 million to reduce the impact of changes in interest rates on its floating-rate debt. This agreement effectively limits the Company's interest rate exposure on $40 million of floating-rate debt should the three-month LIBOR rate exceed 8.5% or fall below 4.7% through April 1998, the term of the agreement. The Company is exposed to credit loss in the event of nonperformance by the counterparties to the agreements. However, the Company does not anticipate nonperformance by the counterparties. F-12 DETAILS HOLDINGS CORP., FORMERLY DETAILS, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Aggregate maturities of long-term debt are as follows:
CAPITAL LEASE ------------------------------------- PRESENT TOTAL LESS VALUE OF NET MINIMUM AMOUNT MINIMUM OTHER YEAR ENDING LEASE REPRESENTING LEASE LONG-TERM DECEMBER 31, PAYMENTS INTEREST PAYMENTS DEBT TOTAL ------------ ----------- ------------ ------------ ----------- ----------- 1997.................... $ 1,138,900 $ 728,000 $ 410,900 $ 9,500,000 $ 9,910,900 1998.................... 1,138,900 675,800 463,100 11,000,000 11,463,100 1999.................... 1,138,900 617,100 521,800 12,500,000 13,021,800 2000.................... 1,138,900 550,900 588,000 20,000,000 20,588,000 2001.................... 1,138,900 476,300 662,600 -- 662,600 Thereafter.............. 4,555,800 951,600 3,604,200 36,000,000 39,604,200 ----------- ---------- ---------- ----------- ----------- $10,250,300 $3,999,700 $6,250,600 $89,000,000 95,250,600 =========== ========== ========== =========== Less discount on subordinated debt........................................ 1,149,700 ----------- $94,100,900 ===========
NOTE 5. 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 is imposed at a 1.5% rate. The Company's stockholder terminated this election effective on February 1, 1996. The Company has presented pro forma net income as if the Company had been a taxable entity. 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. Current deferred tax assets consist of the following components as of December 31, 1996: Receivables........................................................ $120,000 Other.............................................................. 91,000 California Franchise tax........................................... 479,000 -------- $690,000 ========
The provision for income taxes charged to income consists of the following:
1994 1995 1996 -------- -------- ---------- Current income tax expense..................... $272,400 $396,000 $6,955,000 Deferred income tax (benefit).................. -- -- (690,000) -------- -------- ---------- $272,400 $396,000 $6,265,000 ======== ======== ==========
F-13 DETAILS HOLDINGS CORP., FORMERLY DETAILS, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The income tax provision differs from the amount of income tax determined by applying the U.S. Federal income tax rate to income before income taxes due to the following:
1994 1995 1996 ----------- ----------- ---------- Computed "expected" tax expense...... $ 6,357,000 $ 9,235,000 $6,517,000 Increase (decrease) in income taxes resulting from: State taxes, net of credits........ 272,400 396,000 981,000 Effect of change in tax status..... -- -- (297,000) Income not subject to federal corporate tax..................... (6,357,000) (9,235,000) (996,000) Other.............................. -- -- 60,000 ----------- ----------- ---------- $ 272,400 $ 396,000 $6,265,000 =========== =========== ==========
NOTE 6. STOCKHOLDERS' EQUITY In January 1996, the Company declared a dividend of $2,662,000 payable to its sole stockholder. On January 31, 1996, the Company redeemed 8,162 shares of its common stock from this stockholder for $105 million. The Company funded this redemption through the issuance of $95 million of debt and the sale of stock. In addition, the Company granted this stockholder the right to put back to the Company, for cash, his remaining 6,959 shares of stock at its fair value upon the earlier of January 2002 or 90 days after the full payment of the Senior Debt (Note 4). The put expires upon a qualified public offering, as defined. The Company also granted this stockholder certain antidilution rights in connection with his remaining shares of stock. The stockholder agreed to forfeit to the Company .64 shares of common stock for each share of the common stock warrants and Tranche I options which are canceled (up to a maximum of 1,018 shares). During the period ended September 30, 1997, 86 shares were forfeited (unaudited). Due to the existence of the put option, the estimated fair value of these shares have been classified as temporary stockholders' equity. On January 31, 1996, the Company issued 6,671 shares of convertible preferred stock for $14,533,338. In addition, the Company issued 2,509 shares of common stock for $5,466,662. In connection with these issuances, the Company incurred costs of $1,167,700. These costs have been applied against the proceeds from the sale of stock. In order to accomplish the sale of stock, the Company amended its articles of incorporation to authorize the Company to issue up to 100,000 shares of convertible preferred stock. The preferred stock is convertible into an equal number of common shares of stock at the option of the holders. The holders of the convertible preferred stock cast two votes for each share of stock held; share equally with common stockholders as to dividends and have a preference in the event of liquidation. Upon the occurrence of an Initial Public Offering, the preferred stock will automatically convert to common stock. Common stock warrants: In connection with the issuance of $15 million of subordinated debt (Note 4), the Company issued warrants to acquire 706.3 shares of common stock at a nominal price. Management estimated the value of these warrants at $1,300,000 at the time of issuance. The warrants contain certain antidilution provisions and are exercisable through 2004. After five years, the warrant holders may require the Company to repurchase the warrants or the stock purchased with the warrants for fair value. The warrants also contain a "clawback" provision which requires the holders of the warrants to surrender up to 282 of 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 anticipates that 141 of the warrants will be F-14 DETAILS HOLDINGS CORP., FORMERLY DETAILS, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) canceled. Due to the put provisions in the warrants, the Company adjusts the recorded amount of the warrants to their estimated fair value by a charge or credit to retained earnings. At December 31, 1996, management estimated the fair value of the remaining 565.3 warrants at $3,200,000. Due to the existence of the put option, the estimated fair value of these warrants has been classified as temporary stockholders' equity. Stock options: On February 1, 1996, the Company granted stock options to various employees under two programs. All options expire 10 years after the date they are granted and contain a provision which requires the option holder to return the option or the related stock purchased under the option to the Company at no gain or a reduced gain should their employment with the Company be terminated prior to five years from the date of grant. The options with senior management include a provision which requires the Company to pay the optionee a bonus in an amount sufficient to cover taxes that the optionee will incur upon exercise of the option. Senior management was granted options to purchase a total of 1,809 shares of common stock at an exercise price of $2,179 per share. Options to purchase 880 shares of common stock (Tranche I) vest at the rate of 176 shares per year through 2000 upon the attainment of certain annual earnings targets. If the earnings target for a specific year is not met, the options related to that year are canceled. Any future unearned options will become 100% vested upon the sale of the Company or an initial public offering of the Company's stock. During 1996, the Company met the 1996 earnings target and 176 common stock options vested on May 1, 1997. The remaining options to purchase 929 shares of common stock (Tranche II) vest 185 shares in 1996 and 186 shares in 1997 through 2000 upon the attainment of certain annual or cumulative earnings targets which are higher than the targets discussed above. Any future unearned options become 100% vested upon the sale of the Company. Tranche II option to purchase 106 shares of common stock were transferred to middle management. During 1996, the Company did not meet the earnings target for the Tranche II options and no options were vested. Further, the Company does not believe that it is likely that the Tranche II earnings targets will be met in the future. The Company also issued to middle management options to purchase 247 shares of common stock (including the 106 shares discussed above) at an exercise price of $2,179 per share. The options vest based on the discretion of the Compensation Committee. No options have been exercised. The Company accounts for these stock options using APB Opinion No. 25 and related interpretations. All stock options are accounted for as a variable awards. Accordingly, the difference between the exercise price and the estimated market price of the stock is recorded as compensation when the number of shares is known. Although there is 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. However, options which are earned in the future may result in a charge to earnings. Had compensation cost for the stock options been determined based on the grant date fair values as required by FASB Statement No. 123, there would have been the following effect on the Company's reported net income for the year ended December 31, 1996: As reported.................................................... $12,355,800 =========== Pro forma...................................................... $12,355,800 ===========
F-15 DETAILS HOLDINGS CORP., FORMERLY DETAILS, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Fair value was estimated using the minimum-value method, a risk-free interest rate of 7.1% and an expected life of five years. No dividends were assumed to be declared. Although there is no established market for the Company's common stock, management believes the exercise price of the options was at or above the fair value of the Company's stock on the grant date. The weighted average value per option (computed using the minimum value method) of the stock options granted in 1996 was $-0-. NOTE 7. CONCENTRATIONS Major customers: The Company had sales to the following customers that individually accounted for more than 10% of the Company's total revenue. Revenue from these customers and accounts receivable as of December 31, 1996 and 1995 are as follows:
NET REVENUE ACCOUNTS RECEIVABLE ----------------------------------- ------------------- 1994 1995 1996 1995 1996 ----------- ----------- ----------- --------- --------- Customer A.............. $12,573,156 $11,484,195 $ 5,889,401 $ 879,238 $ 528,927 Customer B.............. 4,737,816 4,939,054 10,709,947 989,091 931,130
- -------- * Under 10% of sales Cash concentration: The Company has approximately $1,003,500 at December 31, 1996 invested with one fund. NOTE 8. EMPLOYEE BENEFIT PLAN The Company has adopted a 401(k) plan subsequent to year end which is 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 and there is currently no matching contribution required to be made by the Company. At the discretion of the board of directors, they may elect to make a nonelective contribution which vests at various rates depending on the years of service until after six years when an employee would be 100% vested. NOTE 9. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
DECEMBER 31, SEPTEMBER 30, ---------------------------- ----------------------- 1994 1995 1996 1996 1997 -------- -------- ---------- ----------- ----------- (UNAUDITED) (UNAUDITED) Cash payments for: Income taxes.......... $ -- $632,523 $7,638,914 $6,036,800 $7,437,600 ======== ======== ========== ========== ========== Interest.............. $112,800 $401,500 $7,774,034 $3,732,900 $2,912,300 ======== ======== ========== ========== ========== Supplemental Schedule of Investing and Financing Activities, capital leases incurred for acquisition of property and equipment.......... $ -- $ -- $6,615,400 $6,615,400 $ 646,300 ======== ======== ========== ========== ==========
F-16 DETAILS HOLDINGS CORP., FORMERLY DETAILS, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 10. SUBSEQUENT EVENTS (UNAUDITED) On or about October 4, 1997, Holdings and Holdings' stockholders entered into a recapitalization agreement (as amended to date, the "Recapitalization Agreement") with DI Acquisition Corp. ("DIA") which provided for the recapitalization (the "Recapitalization") by means of a merger (the "Merger") of DIA with and into Holdings. DIA had no operations and was formed solely for the purpose of effecting the Recapitalization. Prior to the Recapitalization, Holdings accelerated the vesting of all outstanding options (totalling 1,950 shares) to purchase shares of its common stock (the "Old Common") making all such options immediately exercisable. Certain members of management then exercised options to purchase 1,374.4 shares of Old Common. Immediately prior to the Recapitalization, DIA was capitalized with a $62.4 million equity investment, summarized as follows: (i) investment funds associated with Bain Capital, Inc. (the "Bain Capital Funds") purchased 925,775.9 shares of a DIA's class A common stock ("DIA Class A") and 114,421.7 shares of DIA's class L common stock ("DIA Class L"), (ii) an affiliate of Chase Manhattan Capital, L.P. ("CMC") purchased 224,120.0 shares of DIA Class A and 27,700.2 shares of DIA Class L and (iii) certain other investors (the "Other Investors") purchased an aggregate of 98,000.0 shares of DIA Class A and 12,112.4 shares of DIA Class L Common. The purchase paid for each share of DIA Class A and DIA Class L was $5.00 and $364.09, respectively (the Class A and L Issuance Price). On October 28, 1997, the Recapitalization was consummated. In connection with the Recapitalization: (i) new classes of Holdings' common stock were created: Class A Common Stock (the "Class A Common") and Class L Common Stock (the "Class L Common"); (ii) DIA merged with and into Holdings, with Holdings surviving the merger; (iii) each share of DIA Class A was converted into the right to receive one share of Class A Common and each share of DIA Class L was converted into the right to receive one share of Class L Common; (iv) the value of each share of Old Common was established at approximately $11,810 per share (which includes the right to contingent payments of up to approximately $502 per share which right was retained by all holders of Old Common and options to purchase Old Common); (v) the holders of 16,295.6 shares of Old Common and Old Common Equivalents, received approximately $184.3 million in cash, based on a valuation of approximately $11,308 per share (the Per Share Merger Consideration). (vi) management retained 1,005.7 shares of Old Common, and options to purchase 513.6 shares of Old Common; based upon the Per Share Merger Consideration and the Class A and L Issuance Price, management's retained shares and options were converted into 227,445.9 shares of Class A Common and 28,111.3 shares of Class L Common and options to purchase 116,158.0 shares of Class A Common and 14,356.6 shares of Class L Common (collectively, the "Management Rollover Equity"); (vii) CMC retained 685.4 shares of Old Common, and another stockholder retained 247.1 shares of Old Common, based upon the Per Share Merger Consideration and the Class A and L Issuance Price, CMC's retained shares were converted into 155,000.0 shares of Class A Common and 19,157.3 shares of Class L Common and the other stockholder's retained shares were converted into 55,880.0 shares of Class A Common and 6,906.5 shares of Class L Common (collectively, the "Existing Owner Rollover"); and F-17 DETAILS HOLDINGS CORP., FORMERLY DETAILS, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (viii) certain members of management received: (i) an aggregate of 10,374.5 shares of Class A Common as compensation for services rendered to Holdings and its subsidiaries at a valuation of $5.00 per share of Class A Common; and (ii) options to purchase an aggregate of 112,508.1 shares of restricted Class A Common at a price of $5.00 per share granted under the 1997 Stock Option Plan, and options to acquire 112,508.1 shares of Class A Common at an exercise price of $61.17 per share granted under the 1997 Stock Option Plan. After giving effect to the Recapitalization and related transactions, the Bain Capital Funds owned approximately 46.0% of the fully diluted equity of Holdings, CMC and its affiliates owned approximately 18.8% of the fully diluted equity of Holdings, the other Existing Owner Rollover stockholder owned approximately 2.8% of the fully diluted equity of Holdings, the Other Investors owned approximately 4.9% of the fully diluted equity of Holdings, and members of management owned (or had options to acquire) approximately 27.5% of the fully diluted equity of Holdings. Financing for the Recapitalization consisted of a $62.4 million equity investment and debt financing totalling $231.4 million. The effect of the above Recapitalization and related transaction increased stockholders' (deficit) to approximately $196.2 million and resulted in charges to earnings of $23 million, net of estimated income tax of $16 million, in the fourth quarter of 1997 related to accelerated vesting of stock options under variable awards and related cash bonuses, write-off of deferred financing fees, amortization of remaining debt discount on existing debt and other fees and expenses related to the Recapitalization. Because the merger has been accounted for as a recapitalization, the historical basis of the Company's assets and liabilities was not affected. NTI ACQUISITION On December 22, 1997, Details, Inc. acquired all of the outstanding shares of common stock of Colorado Springs Circuits, Inc., a Colorado corporation and a subsidiary of NTI, d/b/a NTI ("NTI"), for approximately $38.5 million. The purchase price includes the assumption of approximately $7.4 million of NTI's debt without giving effect to the final purchase price adjustment. The acquisition was funded in part through the issuance of additional equity interests in Holdings 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 from Holdings and a $25 million term loan borrowing under the Details, Inc. Term Loan Facilities. The NTI Acquisition has been accounted for under the purchase method of accounting. As a result, the total acquisition cost has been allocated to the estimated fair value of tangible and intangible assets acquired and liabilities assumed. Based upon management's preliminary estimate of the fair value of the assets acquired and liabilities assumed, Details, Inc. has recorded approximately $26 million in goodwill, which will be amortized over a period of twenty five years. F-18 INDEPENDENT AUDITORS' REPORT To the Board of Directors Colorado Springs Circuits, Inc. We have audited the accompanying balance sheets of Colorado Springs Circuits, Inc. as of April 1, 1997 and 1996, and the statements of income and retained earnings and of cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our 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, such financial statements present fairly, in all material respects, the financial position of Colorado Springs Circuits, Inc. as of April 1, 1997 and 1996, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Stockman Kast Ryan & Scruggs, P.C. Colorado Springs, Colorado May 9, 1997 (December 22, 1997 as to the matter discussed in Note 10 to the financial statements) F-19 INDEPENDENT AUDITORS' REPORT To the Board of Directors of Colorado Springs Circuits, Inc. Colorado Springs, Colorado We have audited the accompanying statements of income and retained earnings and of cash flows of Colorado Springs Circuits, Inc. for the year ended March 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the results of Colorado Springs Circuits, Inc.'s operations and its cash flows for the year ended March 31, 1995 in conformity with generally accepted accounting principles. Deloitte & Touche LLP Colorado Springs, Colorado June 2, 1995 F-20 COLORADO SPRINGS CIRCUITS, INC. BALANCE SHEETS APRIL 1, 1997 AND 1996
1997 1996 ------------ ------------ ASSETS Current Assets Cash and cash equivalents (Note 4)................. $ 431,732 $ 982,207 Trade receivables, less allowance for doubtful ac- counts of $82,000 and $114,000 for 1997 and 1996, respectively (Note 4)............................. 4,232,025 3,499,828 Inventories (Notes 2 and 4)........................ 2,033,933 2,118,770 Deferred income taxes (Note 6)..................... 109,000 151,000 Prepaid expenses and other current assets.......... 311,711 65,793 ------------ ------------ Total current assets............................. 7,118,401 6,817,598 Property and Equipment--Net (Notes 3 and 4).......... 9,725,642 5,425,327 Deferred Income Taxes (Note 6)....................... 243,000 109,000 Other Assets......................................... 20,165 227,104 ------------ ------------ Total............................................ $ 17,107,208 $ 12,579,029 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable................................... $ 2,441,608 $ 1,644,866 Accrued payroll.................................... 256,798 418,451 Income taxes payable (Note 6)...................... 40,144 539,000 Other accrued liabilities.......................... 449,417 596,428 Current portion of note payable to bank (Note 4)... 1,240,000 125,926 Current portion of note payable to NTI (Note 4).... 420,000 420,000 Borrowings under bank line of credit (Note 4)...... 500,000 ------------ ------------ Total current liabilities........................ 4,847,967 4,244,671 ------------ ------------ Long-Term Debt (Note 4) Note payable to bank............................... 4,443,333 1,003,240 Note payable to NTI................................ 2,914,967 3,334,967 ------------ ------------ Total long-term debt............................. 7,358,300 4,338,207 ------------ ------------ Deferred Income Taxes (Note 6)....................... 556,000 406,000 ------------ ------------ Commitments (Note 5) Stockholders' Equity Common stock: Class A--no par value, 3,000,000 shares autho- rized, 1,000,000 shares issued and outstanding... 539,829 539,829 Class B--no par value, 2,000,000 shares autho- rized, no shares outstanding Retained earnings................................. 3,805,112 3,050,322 ------------ ------------ Total stockholders' equity....................... 4,344,941 3,590,151 ------------ ------------ Total............................................ $ 17,107,208 $ 12,579,029 ============ ============
See notes to financial statements. F-21 COLORADO SPRINGS CIRCUITS, INC. STATEMENTS OF INCOME AND RETAINED EARNINGS FOR THE YEARS ENDED APRIL 1, 1997 AND 1996 AND MARCH 31, 1995
1997 1996 1995 ----------- ----------- ----------- Net Sales............................... $26,984,726 $28,082,524 $21,943,818 Cost of Goods Sold (Note 5)............. 23,100,569 23,057,183 17,710,399 ----------- ----------- ----------- Gross Margin........................ 3,884,157 5,025,341 4,233,419 ----------- ----------- ----------- Operating Expenses Sales and marketing................... 1,224,524 1,385,196 1,140,270 General and administrative (Note 5)... 1,076,603 1,106,688 1,221,644 ----------- ----------- ----------- Total operating expenses............ 2,301,127 2,491,884 2,361,914 ----------- ----------- ----------- Income from Operations.................. 1,583,030 2,533,457 1,871,505 ----------- ----------- ----------- Other Income (Expense) Interest expense (Note 4)............. (617,668) (595,612) (492,340) Gain on sale of equipment............. 29,572 100,025 ----------- ----------- ----------- Other income (expense)--net......... (588,096) (495,587) (492,340) ----------- ----------- ----------- Income Before Income Tax Provision...... 994,934 2,037,870 1,379,165 Income Tax Provision (Note 6)........... 240,144 772,470 368,815 ----------- ----------- ----------- Net Income.......................... 754,790 1,265,400 1,010,350 Retained Earnings, Beginning of year.... 3,050,322 1,784,922 774,572 ----------- ----------- ----------- Retained Earnings, End of year.......... $ 3,805,112 $ 3,050,322 $ 1,784,922 =========== =========== =========== Net Income Per Common Share............. $ 0.75 $ 1.27 $ 1.01 =========== =========== =========== Weighted Average Common Shares Outstand- ing.................................... 1,000,000 1,000,000 1,000,000 =========== =========== ===========
See notes to financial statements. F-22 COLORADO SPRINGS CIRCUITS, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED APRIL 1, 1997 AND 1996 AND MARCH 31, 1995
1997 1996 1995 ----------- ---------- ----------- Operating Activities Net income............................. $ 754,790 $1,265,400 $ 1,010,350 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........ 2,023,461 1,910,479 1,716,845 Gain on sale of equipment............ (29,572) (100,025) (2,500) Deferred income taxes................ 58,000 (27,000) (90,000) Changes in operating assets and lia- bilities: Accounts receivable................ (732,197) (712,438) (489,207) Inventories........................ 84,837 187,167 (1,123,151) Prepaid expenses and other current assets............................ (245,918) 1,244 1,845 Other assets....................... 206,939 (218,804) 32,043 Accounts payable and accrued lia- bilities.......................... 488,078 (405,934) 1,473,807 Income taxes payable............... (498,856) 80,000 249,000 ----------- ---------- ----------- Net cash provided by operating activities...................... 2,109,562 1,980,089 2,779,032 ----------- ---------- ----------- Investing Activities Purchases of property and equipment.... (6,341,156) (931,701) (3,048,546) Proceeds from sales of equipment....... 46,952 100,025 2,500 ----------- ---------- ----------- Net cash used in investing activ- ities........................... (6,294,204) (831,676) (3,046,046) ----------- ---------- ----------- Financing Activities Net repayments under line of credit.... (500,000) (100,770) (399,230) Repayment of note to bank.............. (1,645,833) (416,667) (354,167) Repayment of note to NTI............... (420,000) (420,000) (280,000) Proceeds from issuance of note to bank. 6,200,000 400,000 1,250,000 ----------- ---------- ----------- Net cash provided by (used in) financing activities............ 3,634,167 (537,437) 216,603 ----------- ---------- ----------- Net Increase (Decrease) in Cash and Cash Equivalents............................. (550,475) 610,976 (50,411) Cash and Cash Equivalents, Beginning of year.................................... 982,207 371,231 421,642 ----------- ---------- ----------- Cash and Cash Equivalents, End of year... $ 431,732 $ 982,207 $ 371,231 =========== ========== =========== SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest (Note 4)........ $ 654,566 $ 577,919 $ 479,876 Cash paid for income taxes............. 681,000 719,470 209,815
See notes to financial statements. F-23 COLORADO SPRINGS CIRCUITS, INC. NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business--Colorado Springs Circuits, Inc. (the "Company"), a Colorado corporation, manufactures printed circuit boards (PCB) primarily for computer, electronics, medical and telecommunications industries. NTI, a California corporation, owns 79.9% of the Class A voting common stock of the Company. Two trusts, which are also the stockholders of NTI, each own 0.1% of the Company's stock. The remaining 19.9% of the Company's stock is owned by the president of the Company. The Company uses the name NTI in conducting its business and is commonly referred to as NTI. Fiscal Year--The Company's fiscal year end is determined by the Board of Directors based on the Company's production periods. Revenue Recognition--Sales are recognized by the Company when the products are shipped. Inventories--The Company's inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. Property and Equipment--Property and equipment are stated at cost and depreciated using the straight-line method over estimated useful lives of five years. Leasehold improvements are amortized over the term of the related lease agreements. The Company reviews its long-lived assets annually to determine potential impairment. In performing the review, the Company estimates the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment is recognized. Income Taxes--Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities using current tax rates. Changes in tax rates are recognized in the period of the enactment date. Net Income Per Common Share--Net income per common share is based upon the net income and weighted average common shares outstanding for each year. The adoption of Statement of Financial Accounting Standards No. 128 for fiscal year 1998 will not have an impact on the Company's net income per common share. Statement of Cash Flows--For the purposes of the statement of cash flows, the Company considers all highly liquid investments maturing within three months of acquisition to be cash equivalents. Use of Estimates--The preparation of the Company's 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 the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Environmental Matters--The Company's operations are regulated under a number of federal, state, local and foreign 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 PCB manufacturers because metals and other hazardous materials are used in the manufacturing process. F-24 COLORADO SPRINGS CIRCUITS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 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. 2. INVENTORIES Inventories at April 1, 1997 and 1996 consist of the following:
1997 1996 ---------- ---------- Raw materials.......................................... $ 201,965 $ 188,843 Work in process........................................ 1,721,097 1,816,097 Finished goods......................................... 110,871 113,830 ---------- ---------- Total................................................ $2,033,933 $2,118,770 ========== ==========
3. PROPERTY AND EQUIPMENT Property and equipment at April 1, 1997 and 1996 consist of the following:
1997 1996 ----------- ----------- Shop machinery and equipment........................ $16,663,898 $11,670,690 Leasehold improvements.............................. 2,834,666 2,117,722 Office furniture and equipment...................... 1,503,443 1,027,337 Vehicles............................................ 37,525 37,525 ----------- ----------- Total............................................. 21,039,532 14,853,274 Accumulated depreciation and amortization........... 11,313,890 9,427,947 ----------- ----------- Property and equipment--net....................... $ 9,725,642 $ 5,425,327 =========== ===========
4. LONG-TERM DEBT The Company has a note payable to a bank with total outstanding principal balances as of April 1, 1997 and 1996 of $5,683,333 and $1,129,166, respectively, with interest at the bank's prime rate plus 1%. Monthly principal payments of $103,333 plus interest are required on the note until its maturity date of October 15, 2001. The Company also has a $2,500,000 revolving bank line of credit under which the Company had outstanding borrowings of $500,000 as of April 1, 1996. No borrowings were outstanding as of April 1, 1997. Borrowings bear interest at the bank's prime rate (8.5% at April 1, 1997) plus 1%. The line of credit matures on June 30, 1997. Under the terms of the borrowing agreements, the Company is required to comply with certain restrictive financial covenants relating to the maintenance of certain net worth levels and financial ratios as well as limitations with respect to incurring further indebtedness. Borrowings under the agreements are collateralized by cash and cash equivalents, trade receivables, inventories and property and equipment, and are guaranteed by NTI, its stockholders and the president of the Company. F-25 COLORADO SPRINGS CIRCUITS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The note payable to NTI is due in monthly installments of $35,000 plus interest through April 30, 1999, at which time all remaining principal and interest is due. The note is subordinated to all outstanding bank borrowings. Interest accrues at the bank's prime rate plus 1%. The Company recorded interest expense related to this note of $330,728, $394,986 and $359,585 for the years ended April 1, 1997 and 1996 and March 31, 1995, respectively. Future maturities of principal under the terms of existing debt agreements are as follows as of April 1, 1997: Fiscal year ending: 1998............................................................ $1,660,000 1999............................................................ 1,660,000 2000............................................................ 3,734,967 2001............................................................ 1,240,000 2002............................................................ 723,333 ---------- Total......................................................... $9,018,300 ==========
The carrying values of the Company's debt are considered reasonable estimates of the fair values. 5. COMMITMENTS The Company leases certain facilities from the stockholders of NTI and certain equipment from a bank under noncancelable operating leases. Future minimum annual lease payments under these noncancelable operating leases are as follows as of April 1, 1997: Fiscal year ending: 1998............................................................ $ 735,084 1999............................................................ 735,084 2000............................................................ 735,084 2001............................................................ 660,324 2002............................................................ 510,804 Thereafter...................................................... 1,149,309 ---------- Total......................................................... $4,525,689 ==========
Total rent expense charged to operations for the years ended April 1, 1997 and 1996 and March 31, 1995 was $724,794, $544,440 and $468,740, respectively, including $500,517, $469,681 and $468,740, respectively, under the lease agreements with the stockholders of NTI. The lease agreements with the stockholders of NTI include renewal options and provide for rent escalations based on increases in the consumer price index. Rent expense is allocated to cost of goods sold and general and administrative expense in the accompanying statements of income and retained earnings. In the event that the Company sells substantially all of its assets or merges with another entity whereby the other entity becomes the surviving company, or should the stockholders of the Company sell more than fifty percent of the outstanding shares of the Company to a third party, the Company is committed under agreements to pay bonuses to certain individuals based on percentages of the net consideration received. See Note 10. 6. INCOME TAXES For the years ended April 1, 1996 and March 31, 1995, the Company's operations were included in the consolidated federal and state income tax returns of NTI. Under NTI's tax allocation method, a tax provision was allocated to the Company based upon a calculation of income taxes as if the F-26 COLORADO SPRINGS CIRCUITS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Company filed separate income tax returns. As of April 1, 1996, the Company has a liability to NTI of $539,000 for income taxes which have been allocated to the Company. For the year ended April 1, 1997, due to a change in ownership of the Company's common stock, the Company has filed federal and state income tax returns separate from NTI and has recorded income taxes payable of $40,144 to the applicable taxing authorities. The tax effects of temporary differences that give rise to significant portions of deferred taxes at April 1, 1997 and 1996 are as follows:
1997 1996 --------- --------- Deferred income tax assets: Income tax credit carryforwards..................... $ 325,000 $ 169,000 Allowance for doubtful accounts and various non-deductible accrued liabilities................. 109,000 151,000 --------- --------- Total deferred income tax assets.................. 434,000 320,000 Deferred income tax liabilities--excess tax depreci- ation.............................................. (638,000) (466,000) --------- --------- Net deferred income tax liability................. $(204,000) $(146,000) ========= =========
The deferred income tax assets and liabilities are recorded in the accompanying balance sheets as follows:
1997 1996 --------- --------- Deferred income tax assets--current.................... $ 109,000 $ 151,000 Deferred income tax assets--noncurrent................. 243,000 109,000 Deferred income tax liabilities--noncurrent............ (556,000) (406,000) --------- --------- Net deferred income tax liability.................... $(204,000) $(146,000) ========= =========
The income tax provision for the years ended April 1, 1997 and 1996 and March 31, 1995 consists of the following:
1997 1996 1995 -------- -------- -------- Current provision............................... $182,144 $799,470 $458,815 Deferred provision (benefit).................... 58,000 (27,000) (90,000) -------- -------- -------- Income tax provision--net..................... $240,144 $772,470 $368,815 ======== ======== ========
The following summary reconciles income taxes computed at the federal statutory rate with the income tax provision for the years ended April 1, 1997 and 1996 and March 31, 1995:
1997 1996 1995 --------- -------- --------- Federal income tax expense at statutory rate....................................... $ 338,278 $692,876 $ 468,916 Tax effects of: State income taxes, net of federal deduc- tion..................................... 32,833 67,250 45,512 State tax credits generated............... (173,074) (42,974) (153,984) Other..................................... 42,107 55,318 8,371 --------- -------- --------- Income tax provision--net............... $ 240,144 $772,470 $ 368,815 ========= ======== =========
The Company's state tax credit carryforwards expire from 1998 through 2009. F-27 COLORADO SPRINGS CIRCUITS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 7. MAJOR CUSTOMERS Sales to the Company's largest customer accounted for approximately 11% of total sales for the year ended April 1, 1997. Sales to the Company's two largest customers accounted for approximately 12% each of total sales for the year ended April 1, 1996 and approximately 13% and 12%, respectively, of total sales for the year ended March 31, 1995. 8. EMPLOYEE BENEFIT PLAN The Company has a qualified employee retirement savings plan covering substantially all employees. The plan permits voluntary salary reduction contributions by employees which are matched by the Company subject to limitations as specified in the plan. The Company's matching contributions vest over a period of six years. The Company made contributions to the plan totalling $46,604, $42,716 and $39,706, respectively, for the years ended April 1, 1997 and 1996 and March 31, 1995. 9. CONCENTRATIONS OF CREDIT RISK Certain financial instruments potentially subject the Company to concentrations of credit risk. These financial instruments consist primarily of temporary cash investments and trade receivables. Although the Company maintains cash deposits in excess of federal insured limits, such deposits are placed with high quality financial institutions. Concentrations of credit risk with respect to accounts receivable are limited due to a large number of customers in diverse industries and generally short payment terms. Due to these factors, no additional credit risk beyond amounts provided as an allowance for doubtful accounts is believed to be inherent in the Company's accounts receivable. 10. SUBSEQUENT EVENT On December 22, 1997, the Company's stockholders sold all of their Class A voting common stock of the Company to Details, Inc. for a purchase price of approximately $38,500,000. The purchase price includes the assumption of approximately $7.4 million of the Company's debt without giving effect to the final purchase price adjustment. As a result of the sale of the common stock, the Company is committed to pay the bonuses of approximately $3,280,000 to certain individuals as discussed in Note 5. These bonuses were funded by the selling stockholders of the Company and paid on December 22, 1997 in conjunction with the sale. F-28 COLORADO SPRINGS CIRCUITS, INC. BALANCE SHEET SEPTEMBER 29, 1997
SEPTEMBER 29, 1997 ------------- (UNAUDITED) ASSETS Current Assets Cash and cash equivalents (Note 4)............................. $ 1,409,334 Trade receivables, less allowance for doubtful accounts of $93,750 and $82,000 at September 29 and April 1, respectively (Note 4)...................................................... 4,666,794 Inventories (Notes 2 and 4).................................... 2,172,185 Deferred income taxes.......................................... 186,575 Prepaid expenses and other current assets...................... 353,486 ----------- Total current assets......................................... 8,788,374 Property and Equipment--Net (Notes 3 and 4)...................... 9,183,479 Deferred Income Taxes............................................ 175,128 Other Assets..................................................... 28,162 ----------- Total........................................................ $18,175,143 =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable............................................... $ 2,055,782 Accrued payroll................................................ 233,721 Income taxes payable........................................... 33,174 Other accrued liabilities...................................... 607,742 Current portion of note payable to bank (Note 4)............... 1,240,000 Current portion of note payable to NTI (Note 4)................ 420,000 Borrowings under bank line of credit (Note 4).................. 1,300,000 ----------- Total current liabilities.................................... 5,890,419 ----------- Long-Term Debt (Note 4) Note payable to bank........................................... 3,823,333 Note payable to NTI............................................ 2,704,967 ----------- Total long-term debt......................................... 6,528,300 ----------- Deferred Income Taxes............................................ 691,371 ----------- Stockholders' Equity Common stock: Class A--no par value, 3,000,000 shares authorized, 1,000,000 shares issued and outstanding................................ 539,829 Class B--no par value, 2,000,000 shares authorized, no shares outstanding.................................................. Retained earnings.............................................. 4,525,224 ----------- Total stockholders' equity................................... 5,065,053 ----------- Total........................................................ $18,175,143 ===========
See notes to financial statements. F-29 COLORADO SPRINGS CIRCUITS, INC. STATEMENTS OF INCOME AND RETAINED EARNINGS FOR THE SIX MONTHS ENDED SEPTEMBER 29, 1997 AND SEPTEMBER 30, 1996
SEPTEMBER 29, SEPTEMBER 30, 1997 1996 ------------- ------------- (UNAUDITED) (UNAUDITED) Net Sales........................................... $15,891,626 $13,685,592 Cost of Goods Sold.................................. 13,123,516 11,537,465 ----------- ----------- Gross Margin........................................ 2,768,110 2,148,127 ----------- ----------- Operating Expenses Sales and marketing............................... 775,254 606,823 General and administrative........................ 567,909 542,786 ----------- ----------- Total operating expenses........................ 1,343,163 1,149,609 ----------- ----------- Income From Operations.............................. 1,424,947 998,518 ----------- ----------- Other Income (Expense) Interest expense (Note 4)......................... (401,739) (249,873) Gain on sale of equipment......................... 11,743 27,608 ----------- ----------- Other income (expense)--net..................... (389,996) (222,265) ----------- ----------- Income Before Income Tax Provision.................. 1,034,951 776,253 Income Tax Provision................................ 314,839 187,284 ----------- ----------- Net Income.......................................... 720,112 588,969 Retained Earnings, Beginning of period.............. 3,805,112 3,050,322 ----------- ----------- Retained Earnings, End of period.................... $ 4,525,224 $ 3,639,291 =========== =========== Net Income Per Common Share......................... $ 0.72 $ 0.59 =========== =========== Weighted Average Common Shares Outstanding.......... 1,000,000 1,000,000 =========== ===========
See notes to financial statements. F-30 COLORADO SPRINGS CIRCUITS, INC. STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED SEPTEMBER 29, 1997 AND SEPTEMBER 30, 1996
SEPTEMBER 29, SEPTEMBER 30, 1997 1996 ------------- ------------- (UNAUDITED) (UNAUDITED) Operating Activities Net income....................................... $ 720,112 $ 588,969 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.................. 832,423 867,374 Gain on sale of equipment...................... (11,743) (27,608) Deferred income taxes.......................... 125,668 (11,883) Changes in operating assets and liabilities: Accounts receivable.......................... (434,769) 811,022 Inventories.................................. (138,252) 282,793 Prepaid expenses and other current assets.... (41,775) 46,107 Other assets................................. (7,997) 223,204 Accounts payable and accrued liabilities..... (250,578) 476,169 Income taxes payable......................... (6,970) (481,833) ---------- ----------- Net cash provided by operating activities.. 786,119 2,774,314 ---------- ----------- Investing Activities Purchases of property and equipment.............. (296,237) (4,736,554) Proceeds from sales of equipment................. 17,720 33,000 ---------- ----------- Net cash used in investing activities...... (278,517) (4,703,554) ---------- ----------- Financing Activities Net borrowings (repayments) under line of credit. 1,300,000 (500,000) Repayment of note to bank........................ (620,000) (34,731) Repayment of note to NTI......................... (210,000) (210,000) Proceeds from issuance of note to bank........... 2,000,000 ---------- ----------- Net cash provided by financing activities.. 470,000 1,255,269 ---------- ----------- Net Increase (Decrease) In Cash and Cash Equiva- lents............................................. 977,602 (673,971) Cash and Cash Equivalents, Beginning of period..... 431,732 982,207 ---------- ----------- Cash and Cash Equivalents, End of period........... $1,409,334 $ 308,236 ========== =========== SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest........................... $ 406,186 $ 276,794 Cash paid for income taxes....................... 120,000 681,000
See notes to financial statements. F-31 COLORADO SPRINGS CIRCUITS, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. INTERIM FINANCIAL STATEMENTS The financial statements of Colorado Springs Circuits, Inc. (the Company) for the six months ended September 29, 1997 and September 30, 1996 are unaudited. In management's opinion, the financial statements reflect all adjustments necessary for a fair presentation of the results for these periods, all adjustments being of a normal and recurring nature. The Company's interim financial statements may not be indicative of the Company's operations for the related fiscal years. The interim financial statements should be read in conjunction with the financial statements and the notes thereto for the years ended April 1, 1997 and 1996 and March 31, 1995. The Company uses the name NTI in conducting its business and is commonly referred to as NTI. 2. INVENTORIES Inventories at September 29, 1997 consist of the following:
SEPTEMBER 29, 1997 ------------- Raw materials.................................................. $ 243,376 Work in process................................................ 1,884,368 Finished goods................................................. 44,441 ---------- Total........................................................ $2,172,185 ==========
3. PROPERTY AND EQUIPMENT Property and equipment at September 29, 1997 consist of the following:
SEPTEMBER 29, 1997 ------------- Shop machinery and equipment................................... $16,406,934 Leasehold improvements......................................... 2,857,287 Office furniture and equipment................................. 1,476,513 Vehicles....................................................... 37,525 ----------- Total........................................................ 20,778,259 Accumulated depreciation and amortization...................... 11,594,780 ----------- Property and equipment--net.................................. $ 9,183,479 ===========
Effective April 2, 1997, the Company changed the estimated useful lives of shop machinery and equipment from five years to seven years. This change had the effect of increasing net income for the six months ended September 29, 1997 by approximately $300,000 ($0.30 per common share). 4. LONG-TERM DEBT The Company has a note payable to a bank with a total outstanding principal balance as of September 29, 1997 of $5,063,333 with interest at the bank's prime rate plus 1%. Monthly principal payments of $103,333 plus interest are required on the note until its maturity date of October 15, 2001. The Company also has a $2,500,000 revolving bank line of credit under which the Company had outstanding borrowings of $1,300,000 as of September 29, 1997. Borrowings bear interest at the bank's prime rate (8.5% at September 29, 1997) plus 1%. The line of credit matures on June 30, 1998. F-32 COLORADO SPRINGS CIRCUITS, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED) The note payable to NTI, which owns 79.9% of the Company's outstanding common stock, is due in monthly installments of $35,000 plus interest through April 30, 1999, at which time all remaining principal and interest is due. The note is subordinated to all outstanding bank borrowings. Interest accrues at the bank's prime rate plus 1%. The Company recorded interest expense related to this note of $150,034 and $169,796 for the six months ended September 29, 1997 and September 30, 1996, respectively. Under the terms of the borrowing agreements, the Company is required to comply with certain restrictive financial covenants relating to the maintenance of certain net worth levels and financial ratios as well as limitations with respect to incurring further indebtedness. Borrowings under the agreements are collateralized by cash and cash equivalents, trade receivables, inventories and property and equipment, and are guaranteed by NTI, its stockholders and the president of the Company. 5. SUBSEQUENT EVENT On December 22, 1997, the Company's stockholders sold all of their shares of Class A voting common stock of the Company to Details, Inc. for a purchase price of approximately $38,500,000. The purchase price includes the assumption of approximately $7.4 million of the Company's debt without giving effect to the final purchase price adjustment. As a result of the sale of the common stock, the Company is committed to pay bonuses of approximately $3,280,000 to certain individuals. These bonuses were funded by the selling stockholders of the Company and paid on December 22, 1997 in conjunction with the sale. F-33 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR ANY OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. - ------------------------------------------------------------------------------- TABLE OF CONTENTS Summary.................................................................... 1 Risk Factors............................................................... 15 Use of Proceeds............................................................ 22 Capitalization............................................................. 23 Unaudited Pro Forma Financial Data......................................... 24 Selected Historical Consolidated Financial Data............................ 37 Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................ 38 The Industry............................................................... 44 Business................................................................... 46 Management................................................................. 53 Principal Stockholders..................................................... 59 Certain Relationships and Related Transactions............................. 61 Description of Senior Credit Facilities.................................... 63 Description of Exchange Notes.............................................. 65 Certain Federal Income Tax Consequences.................................... 93 The Exchange Offer......................................................... 97 Plan of Distribution....................................................... 106 Legal Matters.............................................................. 106 Experts.................................................................... 106 Change in Accountants...................................................... 107 Index to Financial Statements.............................................. F-1
UNTIL MAY 13, 1998 ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- DETAILS, INC. EXCHANGE OFFER $100,000,000 SERIES B 10% SENIOR SUBORDINATED NOTES DUE 2005 ------------------------- LOGO ------------------------- ---------------- PROSPECTUS ---------------- FEBRUARY 12, 1998 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- -----END PRIVACY-ENHANCED MESSAGE-----