-----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, RC+Pi8q5iSpisLkUX+5veNEdD9wIw0UT5qvcDtSC4A+dHvCbpN6S4C5SqV9smyGr ILwxYt8lSj9MAsZATJa1xQ== 0001017062-02-000458.txt : 20020415 0001017062-02-000458.hdr.sgml : 20020415 ACCESSION NUMBER: 0001017062-02-000458 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020325 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: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 333-41211 FILM NUMBER: 02583433 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 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DDI CORP CENTRAL INDEX KEY: 0001104252 STANDARD INDUSTRIAL CLASSIFICATION: PRINTED CIRCUIT BOARDS [3672] IRS NUMBER: 061576013 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-30241 FILM NUMBER: 02583434 BUSINESS ADDRESS: STREET 1: 1220 SAMON CIRCLE CITY: AHAMEIM STATE: CA ZIP: 92806 BUSINESS PHONE: 7145887200 MAIL ADDRESS: STREET 1: 1220 SIMON CIRCLE CITY: AHAHEIM STATE: CA ZIP: 92806 10-K 1 d10k.txt FORM 10-K FOR PERIOD ENDING 12/31/2001 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------- FORM 10-K (Mark One) [X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 OR [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to ______________ Commission file numbers: DDi Corp. 000-30241 DDi Capital Corp. 333-41187
----------------- DDi CORP. DDi CAPITAL CORP. (Exact names of registrants as specified in their charters) Delaware 06-1576013 California 33-0780382 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Nos.) 1220 Simon Circle Anaheim, California 92806 (Address of Principal Executive Offices) (Zip Code)
(714) 688-7200 (Registrants' telephone number, including area code) ----------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: DDi Corp.-Common Stock, par value $.01 per share (Title of class) ----------------- Indicate by check mark whether DDi Corp. and DDi Capital Corp.: (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) have been subject to such filing requirements for the past 90 days: Yes [X] No [_] . Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [_] . The aggregate market value of the DDi Corp.'s voting Common Stock held by non-affiliates of DDi Corp. was approximately $518,246,064 (computed using the closing price of $12.27 per share of Common Stock on March 11, 2002, as reported by The Nasdaq Stock Market, Inc.). On March 11, 2002, all of the voting stock of DDi Capital Corp. was held by DDi Intermediate Holdings Corp., and all of the voting stock of DDi Intermediate Holdings Corp. was held by DDi Corp. As of March 11, 2002, DDi Corp. had 47,975,106 shares of common stock, par value $0.01 per share, outstanding. As of March 11, 2002, DDi Capital Corp. had 1,000 shares of common stock, par value $.01 per share, outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of DDi Corp.'s Proxy Statement prepared in connection with the Annual Meeting of Stockholders to be held in 2002 are incorporated by reference into Part III of this Form 10-K. This Annual Report on Form 10-K is a combined annual report being filed separately by two registrants: DDi Corp ("DDi Corp." f/k/a DDi Holdings Corp.) and DDi Capital Corp. ("DDi Capital"). Except where the context clearly indicates otherwise, any references in this report to "DDi Corp." includes all subsidiaries of DDi Corp. including DDi Capital. DDi Capital makes no representation as to the information contained in this report in relation to DDi Corp. and its subsidiaries other than DDi Capital. DDi Capital meets the conditions set forth in General Instructions I(1)(a) and (b) of Form 10-K, and are filing this form with the reduced disclosure format pursuant to General Instruction I(2). ================================================================================ DDi CORP. DDi CAPITAL CORP. FORM 10-K INDEX Page ---- PART I Item 1 Business............................................................................. 3 Item 1A Executive Officers of DDi Corp....................................................... 12 Item 2 Properties........................................................................... 13 Item 3 Legal Proceedings.................................................................... 13 Item 4 Submission of Matters to a Vote of Security Holders.................................. 13 PART II Item 5 Market for the Registrants' Common Equity and Related Stockholder Matters............ 14 Item 6 Selected Financial Data.............................................................. 15 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 18 Item 7A Quantitative and Qualitative Disclosures About Market Risk........................... 37 Item 8 Financial Statements and Supplementary Data.......................................... 38 Item 9 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. 38 PART III Item 10 Directors and Executive Officers of the Registrant................................... 39 Item 11 Executive Compensation............................................................... 39 Item 12 Security Ownership of Certain Beneficial Owners and Management....................... 39 Item 13 Certain Relationships and Related Transactions....................................... 40 PART IV Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K..................... 41
2 Except for the historical information contained herein, this Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed here. Readers should pay particular attention to the considerations described in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations--Factors that May Affect Future Results." PART I ITEM 1. BUSINESS Overview DDi Corp., formerly known as DDi Holdings Corp. ("DDi Corp."), provides technologically advanced, time-critical electronics design, development and manufacturing services to original equipment manufacturers and other providers of electronics manufacturing services. Operating through our primary operating subsidiaries, Dynamic Details, Incorporated ("Dynamic Details") and DDi Europe Limited ("DDi Europe"), we target customers that are characterized by new product development programs demanding the rapid application of advanced technology and design. The technologically advanced, time-critical segment of the electronics manufacturing services industry in which we operate is characterized by high margins and significant customer diversity. Our customers use our services to develop and produce a wide variety of end products, including communications switching and transmission equipment, wireless base stations, wireless telephone handsets, computer work stations, high-end computing equipment, data networking equipment, medical devices, automotive components, industrial and test equipment, and various aerospace products. DDi Corp.'s predecessor corporation was incorporated in California in 1978. In 1991, new management, led by our President and Chief Executive Officer, Bruce D. McMaster, began to focus primarily on the time-critical segment of the electronics manufacturing services industry. In January 1996, we were recapitalized by Chase Manhattan Capital, LLC and its affiliates. In October 1997, we were recapitalized again by investors led by Bain Capital, Inc., Celerity Partners, L.L.C. and Chase Capital Partners. In April 2000, in conjunction with the closing of DDI Corp.'s initial public offering, DDi Corp. was reincorporated in Delaware. In October 1997, in connection with a second recapitalization, DDi Corp. incorporated Dynamic Details as a new, wholly-owned subsidiary, and contributed substantially all of its assets, subject to certain liabilities, to Dynamic Details. In November 1997, DDi Corp. organized DDi Capital Corp., a California corporation ("DDi Capital"), as a wholly-owned subsidiary, and in February 1998, DDi Corp. contributed substantially all of its assets (consisting primarily of all of the shares of capital stock of Dynamic Details), subject to certain liabilities, including senior discount notes, to DDi Capital. In July 1998, DDi Corp. organized DDi Intermediate Holdings Corp. ("Intermediate") as a wholly-owned subsidiary and contributed its ownership of DDi Capital to Intermediate. Acquisitions have been important to our growth. Set forth below is a summary of our acquisitions: . In December 1997, Dynamic Details acquired all of the outstanding shares of common stock of Colorado Springs Circuits, Inc., a Colorado corporation d/b/a Dynamic Details, Inc.--Colorado Springs. . In July 1998, Dynamic Details merged with Dynamic Circuits, Inc., a Delaware corporation. DCI was primarily a manufacturer of complex printed circuit boards and related components based in Silicon Valley and with additional facilities in Texas, Georgia and Massachusetts. . In December 1999, Dynamic Details implemented a plan to consolidate its Colorado operations into its Texas facility and to close the Colorado facility. The closure of this facility was effectively complete as of March 31, 2000. By combining the Texas and Colorado operations, Dynamic Details eliminated lower-margin product lines and decreased overhead costs, and gained efficiency through better capacity utilization and streamlined management. 3 . In April 2000, DDi Corp. acquired MCM Electronics Limited, a time-critical electronics manufacturing service provider based in the United Kingdom. MCM Electronics has been combined with our other European operations and does business as DDi Europe. . In August 2000, Dynamic Details acquired substantially all the U.S. assets of Automata International, Inc., a Virginia-based manufacturer of technologically advanced printed circuit boards. . In September 2000, Dynamic Details acquired substantially all the assets of Golden Manufacturing, Inc., a Texas-based manufacturer of engineered metal enclosures and provider of value-added assembly services to communications and electronics original equipment manufacturers. . In March 2001, DDi Europe completed the acquisition of Thomas Walter Limited, a leading circuit board manufacturer based in Marlow, England. Thomas Walter is a well-established provider of complex, quick-turn rigid and rigid-flex printed circuit boards for the European electronics industry. . In April 2001, Dynamic Details, through its wholly-owned subsidiary, DDi Sales Corp., formed Kabushiki Kaisha DDJ, a Japanese corporation, to serve as a sales office in Tokyo, Japan. . In April 2001, Dynamic Details completed the acquisition of the assets of Nelco Technology, a wholly owned subsidiary of Park Electrochemical Corp. Nelco is an Arizona-based manufacturer of semi-finished printed wiring boards, commonly known as mass lamination. . In May 2001, Dynamic Details completed the acquisition of Olympic Circuits Canada, a Canada-based time-critical electronics manufacturing service provider specializing in quick-turn prototype printed circuit boards. . In June 2001, Dynamic Details completed the acquisition of the assets of Altatron, a Southern California based provider of value-add assembly services to electronics original equipment manufacturers. In October 2001, our management and Board of Directors approved a plan to close our Garland, Texas and Marlborough, Massachusetts facilities. Prior to its closure, the Garland plant had manufactured our lowest technology pre-production volume printed circuit boards. The Marlborough plant provided electronic interconnect products to selected customers in the New England area. Our decision to close these facilities was based on their contribution to our financial objectives in 2001 as well as their expected contribution going forward. The closure of the facilities is estimated to be completed by June 30, 2002. This report is a combined annual report filed separately by two registrants, DDi Corp. and DDi Capital. DDi Capital is a wholly-owned subsidiary of Intermediate, and Intermediate is a wholly-owned subsidiary of DDi Corp. Each registrant has its principal executive offices at 1220 Simon Circle, Anaheim, California and their telephone number is (714) 688-7200. As used herein, the "Company," "we," "us" or "our" means DDi Corp. and its wholly-owned subsidiaries, including DDi Capital, or their predecessor entities as the context requires. Industry Background Electronics manufacturing services, or EMS, companies provide a range of services to electronics original equipment manufacturers, or OEMs. EMS industry revenues have increased from approximately $22 billion in 1993 to approximately $104 billion in 2001. In 2001, approximately 13.7% of the cost of goods sold by electronics OEMs was attributable to components and products outsourced to EMS providers. Electronics manufacturing services were historically labor-intensive functions outsourced by OEMs to obtain additional capacity during periods of high demand and initially consisted mainly of printed circuit board assembly. Early EMS providers acted essentially as subcontractors, providing production capacity on a 4 transactional basis. With advances in process technology, EMS providers developed additional capabilities and were able both to improve quality and to reduce OEMs' costs. Over time, OEMs came to rely on EMS providers to perform a broader array of manufacturing services, including design and development activities. In recent years, EMS providers have expanded their range of services to encompass design, product development, packaging and distribution and overall supply chain management. By using EMS providers, OEMs are able to focus on their core competencies, including product development, sales, marketing and customer service. Outsourcing allows OEMs to take advantage of the manufacturing expertise, advanced technology and capital investment of EMS providers, to achieve overall cost benefits and to enhance their competitive position by: . reducing time to market and time to volume production; . reducing operating costs and invested capital; . improving supply chain management; . focusing their resources on core competencies; . accessing advanced manufacturing capabilities and process technologies; and . improving access to global markets. The DDi Customer Solution We engineer technologically advanced materials for customers within extremely short turnaround times, which distinguishes us from traditional electronics manufacturing service providers, and provides our customers with a competitive advantage in delivering their new products to market quickly. Our customers benefit from the following components of the DDi customer solution: . Time-critical Service. Based on industry data, we believe we are one of the largest providers of quick-turn complex printed circuit boards in the United States. We can deliver highly complex printed circuit boards to customers in as little as 24 hours. Approximately 45% of our net sales in 2001 were generated from services delivered in 10 days or less. . Advanced Technology. The focus on time-critical design, development and manufacturing services requires our engineers to remain on the cutting edge of electronics technology, and our customers benefit from the expertise we have developed as they seek to introduce new products. Approximately 55% of our net sales in 2001 involved the design or manufacture of printed circuit boards with at least eight layers, an industry-accepted measure of complexity. In addition, many of our lower layer-count boards are complex as a result of the incorporation of other technologically advanced features. . Proactive Sales Force. Our knowledgeable and innovative sales force enables current and prospective customers to understand and exploit a wide range of services provided by our facilities across the country and in Europe. . Relationships with Research and Development Personnel. In many cases, we have design engineers stationed on-site in customers' product development divisions. As a result, we help customers develop workable technical solutions to their concepts for next generation products. . Experienced Management. Our management team, led by Bruce D. McMaster, collectively has more than 75 years of experience in the electronics manufacturing services industry. We believe that these attributes allow us to consistently meet and exceed our customers' expectations and that, as a result, we will continue to attract leading original equipment manufacturers and other providers of electronics manufacturing services as customers. 5 Our Strategy Our goal is to be the leading provider of technologically advanced, time-critical electronics manufacturing services. To achieve this goal, we will: Strengthen Technology and Process Management Leadership in the Time-Critical Segment of the Electronics Manufacturing Services Industry and Continue to Improve Quality and Delivery Times by Incorporating Emerging Technologies and Consistently Refining Manufacturing Processes. We have consistently been among the earliest users of new developments in printed circuit board design, development and manufacturing and are continuously incorporating new technology into our manufacturing processes in order to further improve quality and reduce delivery times. Because we concentrate on cutting-edge methods, we have the ability to service emerging providers of next-generation technology. This ability allows us to build customer relationships with companies with the potential for significant growth and enables us to provide these cutting-edge methods to customers accustomed to more traditional methods. We have developed process management expertise over time and are continuously enhancing our ability to quickly adapt design and production facilities on demand to serve time-critical customer needs. We believe this expertise and ability position us as an industry leader in providing flexible and responsive technologically advanced, time-critical services. Leverage Leadership in Quick-Turn Design and Manufacturing Services to Further Expand Assembly Operations and Other Value-Added Services. As a quick-turn design and manufacturing service provider, we gain early access to our customers' product development processes, giving us the opportunity to leverage the provision of design services into providing other value-added services including assembly of printed circuit boards and other electronic components and total system assembly and integration of electronics products. We predominantly use these additional capabilities in our customers' new product development programs to enable them to further reduce their time to market and overall cost. Pursue Customers with Significant New Product Development Activity. Our marketing efforts focus on customers having new product development programs that require the rapid application of advanced technology and design. These customers include original equipment manufacturers, emerging providers of next-generation technology, and providers of electronics manufacturing services that serve similar customers. Capitalize on Strong Customer Relationships and Design Expertise to Participate in Future Product Introductions and Further Outsourcing Programs. We have served established original equipment manufacturers for many years, through multiple product generations. We have positioned ourselves as a strategic partner in our customers' new product initiatives by focusing on direct relationships with our customers' research and development personnel. As a result, we have developed expertise and gained knowledge of our customers' new product design programs, all of which position us as a preferred service provider for future product generations. Pursue Selected Acquisition Opportunities, Including Asset Divestitures by Original Equipment Manufacturers. We have actively pursued acquisitions to enhance service offerings, expand geographic presence and increase production capabilities. An increasing number of original equipment manufacturers are divesting their production capabilities as an integral part of their manufacturing strategy. We completed four acquisitions in 2001: Thomas Walter, Nelco Technology, Olympic Circuits Canada and Altatron Technology. We intend to continue to pursue strategic acquisition opportunities, including asset divestitures by original equipment manufacturers, that we believe will complement internal growth. Further Expand International Operations to Better Serve the Needs of Customers Seeking to Outsource Their Worldwide Design and Manufacturing Activities. We are serving a growing number of European customers from DDi Europe's four U.K. facilities. We believe European markets offer significant growth opportunities as large electronics equipment manufacturers are increasing their global distribution and are seeking electronics manufacturing service providers with the ability to operate in multiple markets. We are 6 actively pursuing other acquisition possibilities in Europe. In addition, in 2001 we acquired a facility in Canada increasing our capability to serve customers in that geographic area. We also opened a sales office in Tokyo, Japan, which we are using to target opportunities for geographic expansion in Japan and other Asian markets. Our Services We provide a suite of value-added, integrated services, used by our customers predominantly in the development of their new products, including: On-campus and In-the-field Design of Complex Printed Circuit Boards. We target our design and development engineering services primarily at the earliest stages of the new product development process. We provide design and engineering assistance early in new product development to ensure that both mechanical and electrical considerations are integrated into a cost-effective manufacturing solution. We design and develop printed circuit boards that meet or exceed established operating parameters for new products. In doing so, we often recommend and assist in implementing design changes to reduce manufacturing costs and lead times, increase manufacturing yields and improve the quality of the finished product. Time-critical Development and Fabrication of Prototype Complex Printed Circuit Boards. Our time-critical, or quick-turn, services are used in the design, test and launch phases of new electronics product development and are generally delivered within 10 to 20 days or in as little as 24 hours. Larger volumes of printed circuit boards are needed as a product progresses past the testing, design and pre-production phases. The advanced design, development and manufacturing technologies we employ facilitate quick-turn production of complex, multi-layered printed circuit boards utilizing technologically-advanced methods. See "Technology, Development and Processes." Our ability to provide these services on a quick-turn and longer lead-time delivery basis involves working closely with customers from the initial design of new products through development and launch. Assembly of Printed Circuit Boards, Backpanels and Other Components of Electronics Products. We assemble printed circuit boards, backpanels, card cages and wire harnesses on a low volume, quick-turn basis. Backpanels are large printed circuit boards, and card cages and wire harnesses integrate wires with connectors and terminals to transmit electricity between two or more points. As the electronics industry has worked to increase component speed and performance, the design of these components has become more integrated. We have responded to this trend and provide these additional assembly services to complement design and development capabilities. Assembly and Integration of Customers' Complete Systems and Products. We provide full system assembly services, predominantly for products in development by original equipment manufacturers. These services require logistical capabilities and supply chain management to rapidly acquire components, assemble prototype products, perform complex testing and deliver products to the customer. Our Customers and Markets We believe that we have one of the broadest customer bases in the electronics manufacturing services industry. As of December 31, 2001, we had more than 2,000 customers, comprised of original equipment manufacturers and electronics manufacturing services providers representing a wide range of end-user markets. Our customers principally consist of leading communications and networking equipment and computer manufacturers, as well as medical, automotive, industrial and aerospace equipment manufacturers. During 2001, sales to our largest customer accounted for approximately 7% of net sales. We expect that sales to this customer will decline materially in the future because of circumstances in the communications industry. During 2001, sales to our ten largest customers accounted for approximately 34% of our net sales. We have been successful at retaining customers and have worked with our three largest customers since 1991. 7 Approximately 80% of our net sales are made to original equipment manufacturers, and the remainder are to electronics manufacturing service providers. The following table shows, for the periods indicated, the percentage of our sales in each of the principal end-user markets we served for the years ended December 31, 1999, 2000 and 2001.
Year Ended December 31, ---------------------- End-User Markets 1999 2000 2001 - ---------------- ---- ---- ---- Communications and networking equipment.................... 55% 61% 55% Computer and peripherals................................... 21 25 18 Medical, automotive, industrial and test instruments....... 9 9 14 Aerospace equipment........................................ 2 2 5 Other...................................................... 13 3 8 --- --- --- Total................................................... 100% 100% 100% === === ===
The following table indicates, for the year ended December 31, 2001, our largest original equipment manufacturers, or OEMs, and electronics manufacturing services, or EMS, customers in terms of net sales, in alphabetical order, and the primary end products for which we provided our services.
OEM Customers End Products - ------------- ------------ Alcatel...................... Communications switching and transmission equipment, networking and optical networking equipment IBM.......................... Network servers; high-end computers; memory, storage and personal computer products Intel........................ Personal computers and peripherals; mid- to high-end computers; semicondutor test equipment servers; memory Marconi Communications....... Communications switching and transmission equipment, networking and optical networking equipment Motorola..................... Wireless base station and handset products; two-way radio communication equipment; semiconductor test equipment EMS Customers End Products - ------------- ------------ Celestica.................... Communications equipment; mid- to high-end computers; servers; storage and memory products Jabil........................ Communications and computing equipment; optical networking products Solectron.................... Communications equipment; mid- to high-end computers; servers; printers; memory and storage products
Technology, Development and Processes We maintain a strong commitment to research and development and focus our efforts on enhancing existing capabilities as well as developing new technologies. Our close involvement with our customers in the early stages of their product development positions us at the leading edge of technical innovation in the design of quick-turn and complex printed circuit boards. Our staff of approximately 300 experienced engineers, chemists and laboratory technicians works in conjunction with our sales staff to identify specific needs and develop innovative, high performance solutions to customer issues. This method of product development allows customers to augment their own internal development teams while providing us with the opportunity to gain an in-depth understanding of our customers' businesses and enabling us to better anticipate and serve our customers' future needs. The market for our products and services is characterized by rapidly changing technology and continuing process development. In recent years, the trend in the electronics equipment industry has been to increase speed 8 and performance of components while at the same time reducing their size. This trend requires increasingly complex printed circuit boards with higher densities. The future success of our business will depend in large part upon our ability to maintain and enhance our technological capabilities, develop and market products and services that meet changing customer needs, and successfully anticipate or respond to technological changes on a cost-effective and timely basis. In the last three years, we have made substantial investments in equipment and technology to meet these needs and maintain our competitive advantage. We believe the highly specialized equipment we use is among the most advanced in the industry. We provide a number of advanced technologies, including: . Laser Direct Imaging. Laser direct imaging is a new process that allows us to increase board density through the use of increasingly small and accurate laser technology. . Microvias. Microvias are small holes, or vias, generally created with lasers employing depth control rather than mechanical drills, through which printed circuit board layers are interconnected. Microvias generally have diameters between .001 and .005 inches. . Blind or Buried Vias. Blind or buried vias are small holes which interconnect inner layers of high layer-count printed circuit boards. . Ball Grid Arrays. A ball grid array is a method of mounting an integrated circuit or other component to a printed circuit board. Rather than using pins, also called leads, the component is attached with small balls of solder at each contact. This method allows for greater component density and is used in printed circuit boards with higher layer counts. . Flip Chips. Flip chips are structures that house circuits which are interconnected without leads. They are utilized to minimize printed circuit board surface area when compact packaging is required. . Multichip Module-Laminates. Multichip module-laminates are a type of printed circuit board design that allows for the placement of multiple integrated circuits or other components in a limited surface area. . Advanced Substrates. Advanced substrates are a recent generation of printed circuit board materials that enable the use of ball grid arrays, flip chips and multichip module laminates. They are used for products requiring high-frequency transmission and have thermal properties superior to standard materials. We are qualified under various industry standards, including Bellcore compliance for communications products and UL (Underwriters Laboratories) approval for electronics products. In addition, all of our production facilities are ISO-9002 certified. These certifications require that we meet standards related to management, production and quality control, among others. On December 17, 2001, we announced that we will participate in collaborative sponsorship of a printed circuit board technology project that both (a) benefits the high technology and electronics engineering academia of two leading Virginia universities, and (b) serves as a commercial printed circuit board design/manufacturing facility. DDi will oversee the operations of the Center for Advanced Printed Circuit Board Design and Manufacturing Technology. The Center will be funded and supported in collaboration with Virginia Commonwealth University and the University of Virginia and three other industry sponsors, DuPont, Panasonic and Zuken. The State of Virginia has indicated a willingness to fund one half of the costs incurred by the sponsors up to $0.5 million in the first year of operations and up to $1.2 million in the second year of operations, pending final approval from state procurement and budget officials. At this stage, we are working with the universities to establish the specific terms and conditions of the project and a budget for the Center. Manufacturing We produce highly complex, technologically advanced multi-layer and low-layer printed circuit boards, backpanel assemblies, printed circuit board assemblies, card cage and wire harness assemblies and full system 9 assembly and integration that meet increasingly tight tolerances and specifications demanded by original equipment manufacturers. The manufacture of printed circuit boards involves several steps: etching the circuit image on copper-clad epoxy laminate, pressing the laminates together to form a panel, drilling holes and depositing copper or other conducive material to form the inter-layer electrical connections and, lastly, cutting the panels to shape. Our advanced interconnect products require additional critical steps, including dry film imaging, photoimageable soldermask processing, computer-controlled laser drilling and routing, automated plating and process controls and achievement of controlled impedance. Multi-layering, which involves placing multiple layers of electrical circuitry on a single printed circuit board or backpanel, expands the number of circuits and components that can be contained on the interconnect product and increases the operating speed of the system by reducing the distance that electrical signals must travel. Increasing the density of the circuitry in each layer is accomplished by reducing the width of the circuit tracks and placing them closer together on the printed circuit board or backpanel. Interconnect products having narrow, closely spaced circuit tracks are known as fine line products. The manufacture of complex multi-layer interconnect products often requires the use of sophisticated circuit interconnections, called blind or buried vias, between printed circuit board layers and adherence to strict electrical characteristics to maintain consistent circuit transmission speeds, referred to as controlled impedance. These technologies require very tight lamination and etching tolerances and are especially critical for printed circuit boards with ten or more layers. Manufacture of printed circuit boards used in backpanel assemblies requires specialized expertise and equipment because of the larger size of the backpanel relative to other printed circuit boards and the increased number of holes for component mounting. We have no patents for these proprietary techniques and rely primarily on trade secret protection. Accomplishing these operations in time-critical situations, as we do, requires the attention of highly-qualified personnel. Furthermore, our manufacturing systems are managed to maximize flexibility to accommodate widely varying projects for different customers with minimal or no turnover time. We seek to maximize the use of our production and manufacturing capacity through the efficient management of time-critical production schedules. Sales and Marketing Our marketing strategy focuses on developing close working relationships with customers early in the design phase and throughout the lifecycle of the product. Accordingly, our senior management personnel and engineering staff advise our customers with respect to applicable technology, manufacturing feasibility of designs and cost implications through on-line computer technical support and direct customer communication. We have focused our marketing efforts on developing long-term relationships with research and development personnel at key customers in high-growth segments of the electronics equipment industry. In order to establish individual salesperson accountability for each client, each customer is assigned one member of the sales staff for all services across all facilities. We have developed a comprehensive database and allocation process to control calling and cross-selling effort, and have a global account program for coordinating sales to our top 20 customers. We market our design, development and manufacturing services through an internal sales force of approximately 150 individuals and an expansive sales network consisting of 10 organizations comprised of approximately 44 manufacturers' representatives across the United States. Approximately 44% of our net sales in 2001 were generated through manufacturers' representatives. For many of these manufacturers' representatives, we are the largest revenue source and the exclusive supplier of quick-turn and pre-production printed circuit boards. In 1997, we opened a sales office in London, England. Following our acquisition of MCM, we integrated MCM's sales force into our pre-existing European staff and we plan to continue expanding our international sales 10 efforts. In April 2001, we opened a sales office in Tokyo, Japan. The financial information for geographic areas is included in Note 2 to the Consolidated Financial Statements under the caption "Segment Reporting." Our Suppliers Our raw materials inventory is small relative to sales and must be regularly and rapidly replenished. We use just-in-time procurement practices to maintain raw materials inventory at low levels, and work closely with our suppliers to incorporate technological advances in the raw materials we purchase. Because we provide primarily lower-volume quick-turn services, this inventory policy does not hamper our ability to complete customer orders. Although we have preferred suppliers for some raw materials, multiple sources exist for all materials. Adequate amounts of all raw materials have been available in the past and we believe this will continue in the foreseeable future. The primary raw materials that we use in production are core materials (copperclad layers of fiberglass of varying thickness impregnated with bonding materials) and chemical solutions (copper, gold, etc.) for plating operations, photographic film and carbide drill bits. Competition The electronics manufacturing services industry is highly fragmented and characterized by intense competition. We principally compete in the time-critical segment of the industry against independent, small private companies and integrated subsidiaries of large, broadly based volume producers, as well as the internal capacity of original equipment manufacturers. We believe that competition in the market segment we serve, unlike in the electronics manufacturing services industry, generally is not driven by price. Instead, because customers are willing to pay a premium for a responsive, broad-reaching capability to produce customized complex products in a very short time, we compete primarily on the basis of quick turnaround, product quality and customer service. In addition, we do not compete in the high volume production manufacturing aspect of the industry and as a result are less exposed to competition from low cost manufacturers who compete on price in the commodity segment of this market. Competition in the complex and time-critical segment of our industry has increased due to consolidation, resulting in potentially better capitalized competitors. Our basic technology is generally not subject to significant proprietary protection, and companies with significant resources, international operations or a sufficiently large customer base may enter the market. Backlog Although we obtain firm purchase orders from our customers, our customers typically do not make firm orders for delivery of products more than 30 to 90 days in advance. We do not believe the backlog of expected product sales covered by firm purchase orders is a meaningful measure of future sales since orders may be rescheduled or canceled. Governmental Regulation Our operations are subject to certain federal, state and local laws and regulatory requirements relating to environmental compliance and site cleanups, waste management and health and safety matters. Among others, we are subject to regulations promulgated by: . the Occupational Safety and Health Administration pertaining to health and safety in the workplace; . the Environmental Protection Agency pertaining to the use, storage, discharge and disposal of hazardous chemicals used in the manufacturing processes; and . corresponding state and local agencies. 11 To date the costs of compliance and environmental remediation have not been material to us. Nevertheless, additional or modified requirements may be imposed in the future. If such additional or modified requirements are imposed on us, or if conditions requiring remediation were found to exist, we may be required to incur substantial additional expenditures. Employees As of December 31, 2001, we had approximately 2,300 employees, none of whom are represented by unions. Of these employees, approximately 1,800 were involved in manufacturing and engineering, 150 worked in sales and marketing and 350 worked in other support capacities. We have not experienced any labor problems resulting in a work stoppage and believe we have good relations with our employees. ITEM 1A. EXECUTIVE OFFICERS OF DDi CORP. The following table sets forth the executive officers of DDi Corp., their ages as of March 11, 2002, and the positions currently held by each person:
Name Age Office ---- --- ------ Bruce D. McMaster 40 President, Chief Executive Officer and Director Joseph P. Gisch 45 Chief Financial Officer, Secretary and Treasurer Thomas Ingham 46 Vice President, Sales and Marketing Terry L. Wright 42 Vice President and Chief Technology Officer Kevin McClelland 43 Vice President, Operations - West Coast Michael Moisan 47 Vice President, Operations - East Coast
The President, Chief Executive Officer, Chief Financial Officer, Secretary and Treasurer are elected annually by the Board of Directors at its first meeting following the annual meeting of stockholders. Other executive officers may be appointed by the Board of Directors at such meeting or at any other meeting. All executive officers serve at the pleasure of the Board of Directors. Bruce D. McMaster has served as our President since 1991 and as a Director and our Chief Executive Officer since 1997. Before becoming our President, Mr. McMaster worked in various management capacities in our engineering and manufacturing departments. Mr. McMaster also serves as President and Chief Executive Officer of DDi Capital and Dynamic Details and serves as an executive officer of our other subsidiaries. Joseph P. Gisch has served as our Chief Financial Officer since 1995. Mr. Gisch also serves as Vice President, Chief Financial Officer and Treasurer of Dynamic Details. From 1986 to 1995, Mr. Gisch was a partner at the accounting firm of McGladrey & Pullen, LLP where he was responsible for the audit, accounting and information systems for a variety of manufacturing clients. Mr. Gisch was responsible for our general accounting and income tax matters. Mr. Gisch has not been responsible for any of our audit services since 1991. Thomas Ingham has served as our Vice President of Sales and Marketing since September 2001. Mr. Ingham has served Dynamic Details in various positions in sales and marketing over the last five years, starting as Regional Manager. Prior to joining Dynamic Details, Mr. Ingham worked for 12 years at Insulectro, a supplier of PCB materials and laminates, in various positions, most recently as Vice President, Sales and Marketing. Terry L. Wright joined us in 1991 and has served as our Vice President, Engineering from 1995 through 2000 and Chief Technology Officer since 2000. During 2001, Mr. Wright assumed the role of Vice President, Operations - Anaheim. Prior to joining us, Mr. Wright was a general manager at Applied Circuit Solutions and a quality assurance manager at Sigma Circuits. Kevin McClelland has served as our Vice President, Operations - West Coast since October 2001. He has more than two decades of experience in electronics manufacturing services including electronics engineering, 12 operations and business development. Before joining Dynamic Details, he was Vice President of Business Development for Multek, an EMS provider, from 1980 to 2001, where he was involved extensively in acquisitions and transition management domestically and in Europe and Mexico. Michael Moisan has served as our Vice President, Operations - East Coast since October 2001. Mr. Moisan has over two decades of experience in the EMS/PCB industry. Mr. Moisan oversaw our Anaheim operation from 1996 to October 2001. Prior to joining DDi, he was Director of Engineering at Circuitwise, an automotive printed circuit board supplier, from 1995 to 1996. He served as Director of Operations at AMP AKZO, a printed circuit board company, from 1990 to 1996 and as Director of Research at PCK Technology, an electronics research and development company, from 1982 to 1990. There are no arrangements or understandings pursuant to which any of the persons listed in the table above was selected as executive officers. ITEM 2. PROPERTIES We conduct our operations within approximately 981,000 square feet of building space. Our significant facilities are as follows:
Square Location Function Feet Remaining Lease Term - -------- -------- ------- -------------------- Anaheim, California Quick-turn printed circuit boards 150,000 1 to 5 years (a) Milpitas, California Quick-turn printed circuit boards 41,000 0.5 to 1.5 years (a) Milpitas, California Quick-turn printed circuit boards 40,000 10 years Marlow, England Quick-turn printed circuit boards 29,000 7 years Tewkesbury, England Quick-turn printed circuit boards 60,000 7 years Sterling, Virginia Quick-turn printed circuit boards 100,000 8 years Toronto, Canada Quick-turn printed circuit boards 52,000 8.5 years Tolworth, England Longer lead-time printed circuit boards 35,000 0.5 years Tempe, Arizona Longer lead-time printed circuit boards 68,000 1 to 4 years San Jose, California Assembly 62,000 4.5 years Dallas, Texas Assembly 49,000 0.5 year (a) Calne, England Assembly 90,000 21.5 years Hertford, England Assembly 40,000 16.5 years Dallas, Texas Assembly 90,000 1.75 years Moorpark, California Assembly 54,000 2 years ------- 960,000
- -------- (a) All of these leases have an option to renew or to purchase the property at fair market value after a specified date during the lease term. In addition to the facilities listed above, we also occupy space for our design operations in various states aggregating approximately 21,000 square feet. We lease our executive office space, which comprises approximately 20,000 square feet (including corporate administration, sales, finance and accounting, and engineering.) Our executive office space is located at 1220 Simon Circle in Anaheim, California and is included in the 150,000 square foot Anaheim, California location. We believe our facilities are currently adequate for our operating needs. ITEM 3. LEGAL PROCEEDINGS We are a party to various legal actions arising in the ordinary course of our business. We believe that the resolution of these legal actions will not have a material adverse effect on our financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 13 PART II ITEM 5. MARKET FOR THE REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS DDi Corp.'s common stock has been quoted on the Nasdaq National Market under the symbol "DDIC" since April 11, 2000. Prior to that time, there was no public market for DDi Corp.'s common stock. The following table sets forth the high and low sales prices of DDi Corp.'s common stock for the periods indicated as reported on the Nasdaq National Market.
Common Stock Price ------------- High Low ------ ------ 2001 Fourth Quarter................................................ $13.40 $ 5.71 Third Quarter................................................. $21.48 $ 7.30 Second Quarter................................................ $27.74 $12.40 First Quarter................................................. $33.63 $10.88 2000 Fourth Quarter................................................ $45.87 $19.25 Third Quarter................................................. $45.94 $21.81 Second Quarter................................................ $31.25 $ 9.50
We presently intend to retain earnings to finance future operations, expansion and capital investment and to reduce indebtedness. There were approximately 151 record holders of our common stock as of March 11, 2002. There is no established trading market for the common stock of DDi Capital. As of December 31, 2001, DDi Capital had 1,000 shares of common stock, par value $.01 per share outstanding, all of which were held by Intermediate, which is a wholly-owned subsidiary of DDi Corp. We have not declared or paid a cash dividend on common stock since January 1996, and we do not anticipate paying any cash dividends for the foreseeable future. Our existing debt instruments restrict our ability to pay dividends and restrict our subsidiaries' ability to pay dividends to us. Dynamic Details' ability to pay dividends is limited under its senior credit facility. DDi Capital's ability to pay dividends is limited under an indenture dated November 18, 1997, as supplemented by a supplemental indenture dated February 10, 1998 among DDi Corp., DDi Capital and State Street Bank & Trust Co. as trustee. DDi Corp.'s 5 1/4% Convertible Subordinated Notes due March 1, 2008 does not restrict its ability to pay dividends; however, the conversion price on these notes may be adjusted if dividends exceed certain amounts. We presently intend to retain earnings to finance future operations, expansion and capital investment and to reduce indebtedness. See "Description of Indebtedness" within "Management's Discussion and Analysis of Financial Condition and Results of Operations." 14 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data as of and for the dates and periods indicated have been derived from the consolidated financial statements of DDi Capital and DDi Corp. The selected financial data with respect to the consolidated statement of operations data for the years ended December 31, 1997 and 1998 and the consolidated balance sheet data as of December 31, 1997, 1998 and 1999 were derived from our audited consolidated financial statements that are not included herein. The selected historical consolidated statement of operations data for the years ended December 31, 1999, 2000 and 2001 and the historical consolidated balance sheet data as of December 31, 2000 and 2001 were derived from the audited historical consolidated financial statements of DDi Capital and DDi Corp. included elsewhere herein. You should read the data set forth below in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and the related notes thereto appearing elsewhere herein.
Year Ended December 31, ----------------------------------------------------------------------- DDi Corp. & DDi DDi DDi DDi DDi DDi DDi DDi DDi Capital Capital Corp. Capital Corp. Capital Corp. Capital Corp. 1997 1998 1998 1999 1999 2000 2000 2001 2001 ------- ------- ------ ------- ------ ------- ------ ------- ------- (in millions) Consolidated Statement of Operations Data: Net sales......................................... $ 78.8 $174.9 $174.9 $292.5 $292.5 $448.4 $497.7 $284.7 $ 361.6 Cost of goods sold................................ 38.7 119.3 119.6 201.4 202.4 274.7 306.2 209.3 263.6 Restructuring--related inventory impairment(a).... -- -- -- 1.9 1.9 -- -- 3.7 3.7 ------ ------ ------ ------ ------ ------ ------ ------ ------- Gross profit...................................... 40.1 55.6 55.3 89.2 88.2 173.7 191.5 71.7 94.3 Operating expenses: Sales and marketing.............................. 7.3 12.8 12.8 23.6 23.6 38.7 39.7 25.4 27.6 General and administration....................... 2.1 8.5 8.4 16.1 15.3 30.4 36.2 14.3 21.0 Amortization of intangibles...................... -- 10.9 10.9 22.3 22.3 19.5 22.8 17.7 22.6 Restructuring and related charges(a)............. -- -- -- 5.1 5.1 -- -- 75.7 76.1 Stock compensation and related bonuses(b)........ 31.3 -- -- -- -- -- -- -- -- Compensation to the former CEO................... 2.1 -- -- -- -- -- -- -- -- Write-off of acquired in-process research and development(c)................................... -- 39.0 39.0 -- -- -- -- -- -- ------ ------ ------ ------ ------ ------ ------ ------ ------- Operating income (loss)........................... (2.7) (15.6) (15.8) 22.1 21.9 85.1 92.8 (61.4) (53.0) Interest rate swap valuation...................... -- -- -- -- -- -- -- 10.0 10.0 Interest expense, net............................. 25.2 35.3 37.4 41.4 46.7 36.3 41.2 14.8 22.1 ------ ------ ------ ------ ------ ------ ------ ------ ------- Income (loss) before taxes and extraordinary loss. (27.9) (50.9) (53.2) (19.3) (24.8) 48.8 51.6 (86.2) (85.1) Income tax benefit (expense)...................... 10.9 2.6 3.5 5.2 7.4 (23.4) (25.0) 13.2 12.0 ------ ------ ------ ------ ------ ------ ------ ------ ------- Income (loss) before extraordinary loss........... (17.0) (48.3) (49.7) (14.1) (17.4) 25.4 26.6 (73.0) (73.1) Extraordinary loss................................ (1.6) (2.4) (2.4) -- -- (2.2) (6.4) (12.0) (12.0) ------ ------ ------ ------ ------ ------ ------ ------ ------- Net income (loss)................................. $(18.6) $(50.7) $(52.1) $(14.1) $(17.4) $ 23.2 $ 20.2 $(85.0) $ (85.1) ====== ====== ====== ====== ====== ====== ====== ====== =======
15
Year Ended December 31, -------------------------------------------------------------------------- DDi Corp. & DDi DDi DDi DDi DDi DDi DDi Capital Capital Corp. Capital Corp. Capital Corp. 1997 1998 1998 1999 1999 2000 2000 ---------- ------- ---------- ------- ---------- ------- ----------- (in millions, except share and per share data) Consolidated Statement of Operations Data (continued): Net income (loss) allocable to common stock...... $ (19.7) n/a $ (58.4) n/a $ (31.5) n/a $ 15.8 Net income (loss) per share of common stock (basic)......................................... $ (3.71) n/a $ (7.68) n/a $ (3.21) n/a $ 0.50 Net income (loss) per share of common stock (diluted)....................................... $ (3.71) n/a $ (7.68) n/a $ (3.21) n/a $ 0.47 Weighted average shares outstanding (basic)...... 5,299,600 n/a 7,607,024 n/a 9,831,042 n/a 31,781,536 Weighted average shares outstanding (diluted).... 5,299,600 n/a 7,607,024 n/a 9,831,042 n/a 33,520,447 Other Financial Data: Depreciation..................................... $ 2.6 $ 9.2 $ 9.2 $ 14.4 $ 14.4 $ 16.7 $ 18.7 Capital expenditures............................. 6.6 18.0 18.0 18.2 18.2 24.0 27.2 Supplemental Data: Adjusted EBITDA(d)............................... $ 33.3 $ 45.4 $ 44.1 $ 68.8 $ 66.7 $121.7 $ 134.8 Net cash from operating activities............... 9.1 18.9 16.7 24.8 24.8 61.1 64.8 Net cash used in investing activities............ (44.9) (194.8) (194.8) (18.5) (18.6) (56.2) (62.0) Net cash from (used in) financing activities..... 41.1 172.4 174.9 (7.5) (7.7) 34.1 61.2 Ratio of earnings to fixed charges(e)............ -- -- -- -- -- 2.3x 2.2x Consolidated Balance Sheet Data: Cash, cash equivalents and marketable securities. $ 5.4 $ 1.9 $ 2.1 $ 0.6 $ 0.6 $ 39.6 $ 66.9 Working capital (deficit)........................ 23.6 13.2 15.3 19.1 19.1 83.3 108.0 Total assets..................................... 108.9 362.2 365.0 353.6 354.3 459.8 581.4 Total debt, including current maturities......... 273.5 444.9 473.4 439.9 480.7 306.9 334.7 Stockholders' equity (deficit)................... (191.2) (138.0) (169.8) (147.0) (187.1) 62.7 136.4
DDi DDi Capital Corp. 2001 2001 ------- ----------- Consolidated Statement of Operations Data (continued): Net income (loss) allocable to common stock...... n/a $ (85.1) Net income (loss) per share of common stock (basic)......................................... n/a $ (1.79) Net income (loss) per share of common stock (diluted)....................................... n/a $ (1.79) Weighted average shares outstanding (basic)...... n/a 47,381,516 Weighted average shares outstanding (diluted).... n/a 47,381,516 Other Financial Data: Depreciation..................................... $ 17.1 $ 21.2 Capital expenditures............................. 24.7 35.2 Supplemental Data: Adjusted EBITDA(d)............................... $ 52.7 $ 70.6 Net cash from operating activities............... 47.6 55.8 Net cash used in investing activities............ (67.4) (102.8) Net cash from (used in) financing activities..... (2.3) 3.7 Ratio of earnings to fixed charges(e)............ -- -- Consolidated Balance Sheet Data: Cash, cash equivalents and marketable securities. $ 39.5 $ 45.5 Working capital (deficit)........................ 54.3 54.7 Total assets..................................... 336.1 470.8 Total debt, including current maturities......... 156.6 282.2 Stockholders' equity (deficit)................... 138.6 122.5
- -------- (a) The 1999 restructuring and related charges represent the charge recorded in December 1999 in connection with the announced consolidation of the Colorado operation into the Texas facility and the closure of the Colorado facility. The charge consists of $1.9 million related to the impairment of inventory, $2.6 million for severance and other exit costs and $2.5 million related to the impairment of net property, plant and equipment. The 2001 restructuring and related charges represent the charge recorded in the fourth quarter of 2001 in connection with the approved plan to downsize and consolidate facilities and to effect changes in senior management. The charge consists of $3.7 million related to the impairment of inventory, $8.8 million and $9.2 million for severance and other exit costs for DDi Capital and DDi Corp, respectively $15.5 million related to the impairment of net property, plant and equipment, and $51.4 million related to the impairment of intangible assets. (b) Represents the charge for stock compensation and related bonuses recorded for vested stock options exchanged in conjunction with the recapitalization in 1997. (c) Represents the allocation of a portion of the purchase price in the DCI merger to in-process research and development. At the date of the merger, technological feasibility of the in-process research and development projects had not been reached and the technology had no alternative future uses. Accordingly, we expensed the portion of the merger consideration allocated to in-process research and development. (d) EBITDA means earnings before net interest expense, income taxes, depreciation and amortization. Adjusted EBITDA is presented because management believes it is an indicator of our ability to incur and service debt and is used by our lenders in determining compliance with financial covenants. However, adjusted EBITDA should not be considered as an alternative to cash flow from operating activities, as a measure of liquidity or as an alternative to net income as a measure of operating results in accordance with generally accepted accounting principles. Our definition of adjusted EBITDA may differ from definitions of adjusted EBITDA used by other companies. 16 The following table sets forth a reconciliation of EBITDA to adjusted EBITDA for each period included herein:
Year Ended December 31, --------------------------------------------------------------- DDi DDi DDi DDi DDi DDi DDi DDi Capital Corp. Capital Corp. Capital Corp. Capital Corp. ------- ----- ------- ----- ------- ------ ------- ----- 1997** 1998 1998 1999 1999 2000 2000 2001 2001 ------ ------- ----- ------- ----- ------- ------ ------- ----- (in millions) EBITDA................................................ $(0.1) $43.5 $43.3 $58.8 $58.6 $121.2 $134.3 $(26.7) $(9.2) Former CEO compensation(1)............................ 2.1 -- -- -- -- -- -- -- -- Management fee(2)..................................... -- -- -- 1.1 1.1 -- -- -- -- Executive severance(3)................................ -- 0.8 0.8 -- -- -- -- -- -- Stock compensation and bonuses(4)..................... 31.3 -- -- -- -- -- -- -- -- Restructuring and related charges(5).................. -- -- -- 7.0 7.0 0.5 0.5 79.4 79.8 Non-cash expense allocations and other(6)............. -- 1.1 -- 1.9 -- -- -- -- -- ----- ----- ----- ----- ----- ------ ------ ------ ----- Adjusted EBITDA....................................... $33.3 $45.4 $44.1 $68.8 $66.7 $121.7 $134.8 $ 52.7 $70.6 ===== ===== ===== ===== ===== ====== ====== ====== =====
----- ** DDi Capital and DDi Corp. (1)Reflects elimination of compensation to the former CEO whose employment agreement was terminated in October 1997. (2)Reflects elimination of the management fee incurred under our Bain management agreement, which was terminated in connection with our initial public offering. (3)Reflects one-time severance payments to two of our executives who were terminated as a result of redundancies created by the DCI merger. (4)Reflects elimination of the charge for stock compensation and related bonuses recorded for vested stock options exchanged in conjunction with the recapitalization. (5)Reflects elimination of the restructuring and related charges: (a) for the 1999 consolidation and closure of the Colorado facility, (b) an additional $0.5 million recorded in 2000 which was recorded to cost of goods sold and (c) for the 2001 closure of two facilities and changes in senior management. (6)Reflects non-cash expense allocations to DDi Capital by its parent, Intermediate, of $0.8 and $1.9 million in 1998 and 1999, respectively, and approximately $0.3 million of non-operating income adjustments recorded in 1998. (e) For purposes of calculating the ratio of earnings to fixed charges, earnings represent income before income taxes plus fixed charges. Fixed charges consist of interest expense (net) and the portion of the operating rental expense which management believes is representative of the interest component of rental expense. Historical earnings were deficient in covering fixed charges for DDi Capital and DDi Corp. by $27.9 million in 1997, $50.9 and $53.2 million, respectively, in 1998, $19.3 million and $24.8 million, respectively, in 1999 and $86.3 million and $85.1 million, respectively, in 2001. On a pro forma basis, assuming the Dynamic Details senior subordinated notes and the DDi Capital senior discount notes were outstanding on January 1, 1997 and after eliminating the non-recurring stock compensation and related bonuses, the ratio of earnings to fixed charges would have been 2.4x in 1997. On a pro forma basis, assuming the merger with DCI was consummated on January 1, 1998 and after eliminating the non-recurring $39 million write off of acquired in-process research and development related to the merger with DCI, the deficiency would have been reduced to $15.1 million for DDi Capital and $17.5 million for DDi Corp. in 1998. On a pro forma basis, after eliminating the non-recurring $1.9 million in restructuring-related inventory impairment and $5.1 million in restructuring and related charges related to the closure of the Colorado facility, the deficiency would have been reduced to $12.3 million for DDi Capital and $17.8 million for DDi Corp. in 1999. On pro forma basis, after eliminating the non-recurring $3.7 million in restructuring-related inventory impairment and $76.1 million in restructuring and related charges related to the 2001 closure of two facilities and changes in senior management, the deficiency would have been reduced to $6.8 million for DDi Capital and $5.3 million for DDi Corp. in 2001. 17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview We provide electronics design, development and manufacturing services to original equipment manufacturers and other electronics manufacturing service providers. We target customers that are characterized by new product development programs demanding the rapid application of advanced technology and design. Time-critical. We can deliver highly complex printed circuit boards to customers in as little as 24 hours. Approximately 45% of our net sales for the year ended December 31, 2001 were generated from services delivered in 10 days or less. Technologically advanced. Approximately 55% of our net sales during the same period involved the design or manufacture of printed circuit boards with at least eight layers, an industry-accepted measure of complexity. In addition, many lower layer-count boards are complex as a result of the incorporation of technologically advanced features. Growth rate. Our net sales have grown at a compound annual growth rate of 37.9% for DDi Capital and 46.4% for DDi Corp. from $78.8 million for the year ended December 31, 1997 to $284.7 million for DDi Capital and $361.6 million for DDi Corp. for the year ended December 31, 2001, inclusive of the growth attributable to the acquisition of Colorado Springs Circuits, Inc., or NTI, in 1997, the merger with Dynamic Circuits, Inc., or DCI, in 1998 and the acquisitions of MCM Electronics (by DDi Corp.), Automata and Golden Manufacturing in 2000 and the acquisitions of Thomas Walter, Nelco Technology, Olympic Circuits Canada and Altatron Technology in 2001. Company History and Significant Transactions Our predecessor corporation was organized in 1978. In 1991, we installed new management, headed by Bruce D. McMaster, and began to focus primarily on time-critical electronics manufacturing services. Recapitalization In October 1997, we were recapitalized by investors led by Bain Capital, Celerity Partners and Chase Capital Partners, which collectively invested $62.4 million. After completing the recapitalization, investment funds associated with these entities owned stock representing approximately 72.5% of DDi Corp.'s fully-diluted equity; and management owned stock and options representing approximately 27.5% of DDi Corp.'s fully-diluted equity. In connection with the recapitalization, we incurred the following nonrecurring charges: . fees and interest charges on bridge loans aggregating $14.5 million; . $31.3 million for the accelerated vesting of variable employee stock options and related bonuses; . $2.7 million for the early extinguishment of long-term debt, before income taxes; and . $1.2 million for the buyout of our former CEO's employment contract. Colorado Facility (formerly NTI) In December 1997, Dynamic Details acquired Colorado Springs Circuits, Inc., or NTI, for approximately $38.9 million. NTI manufactured printed circuit boards requiring lead times of twenty days or more for original equipment manufacturers. At that time, the acquisition provided us with additional capacity and access to new customers. We accounted for the NTI acquisition under the purchase method of accounting and recorded approximately $27 million in goodwill. This goodwill was originally scheduled to be amortized over a period of 25 years. The unamortized balance as of October 2001 was reduced to zero, however, in connection with the closure of our Texas facility. 18 From December 1999 through March 2000, we implemented a plan to consolidate our Colorado operations into our Texas facility and to close our Colorado facility, which operated at a loss in 1999. DCI Merger On July 23, 1998, Dynamic Details merged with Dynamic Circuits, Inc., or DCI, for an aggregate consideration paid to DCI stockholders of approximately $250 million. A portion of the consideration was paid in cash, and the balance of the consideration (approximately $73 million) was paid through the issuance of DDi Corp. capital stock. Concurrent with this transaction, DDi Corp. contributed its investment in DCI through Intermediate and through DDi Capital to Dynamic Details. DCI provided design and manufacturing services relating to complex printed circuit boards, backpanel assemblies and electromechanical interconnect devices with operations in California, Texas, Georgia and Massachusetts. DCI experienced a growth in net sales of more than 67% during 1997, and its net sales for the six months ended June 30, 1998 were more than double its net sales for the six months ended June 30, 1997. We accounted for the DCI merger under the purchase method of accounting and recorded approximately $120 million in goodwill, approximately $60 million of identifiable intangible assets (which are being amortized over their estimated useful lives of 10 years, using an accelerated method of amortization, reflecting the relative contribution of each developed technology in periods following the acquisition date), and approximately $21 million and $4 million, respectively, of intangible assets associated with DCI's customer relationships and tradenames and assembled workforce assets (which are being amortized on a straight-line basis over their estimated useful lives of 18 years and 4 years, respectively). Dynamic Details also identified $39 million of acquired in-process research and development investments, which was expensed in the fourth quarter ended December 31, 1998. Since the DCI merger, we have continued to invest in the development of the various in-process research and development technologies that existed at DCI at the time of the merger. We believe that our research and development efforts are reasonably consistent with DCI's plans at the time of the merger, inclusive of the expected post-merger total costs to complete the projects and related project development time frames, given the inherent uncertainties involved in estimating the technological hurdles of developing next-generation technologies. These investments have enabled us to market products incorporating some of the technologies included in DCI's plan. No significant adjustments have been made in the economic assumptions or expectations on which we based our merger decision. In October 2001, we approved a plan to close our Garland, Texas and Marlborough, Massachusetts facilities (see Note 15 to the Consolidated Financial Statements). Prior to its closure, the Garland plant had manufactured our lowest technology pre-production volume printed circuit boards. The Marlborough plant provided electronic interconnect products to selected customers in the New England area. Each of the facilities closed was acquired in the DCI merger. In connection with our decision to close these facilities, we reduced to zero the value of goodwill and other intangibles acquired in the DCI merger that relate to the closed facilities. Such intangibles consist of $25.8 million of goodwill and $2.6 million of identifiable intangibles (customer relationships and assembled workforce). Initial Public Offering of DDi Corp. On April 14, 2000, DDi Corp. completed the initial public offering of its common stock. We used net proceeds of approximately $156.6 million to repay a portion of our debt and finance a portion of the MCM Electronics acquisition. MCM Electronics Acquisition On April 14, 2000, DDi Corp. acquired MCM Electronics Limited, headquartered in the United Kingdom, for total consideration of approximately $82 million in DDi Corp.'s common stock and cash, including repayment of some of MCM Electronics' debt and the assumption of the remainder of its debt. MCM 19 Electronics, which has been combined with other European operations and renamed DDi Europe Limited, focuses on the technologically advanced, time-critical segment of the electronics manufacturing industry. Under purchase accounting, the total purchase price has been allocated to the underlying assets and liabilities assumed based upon their respective fair values at the date of acquisition. We have allocated the total purchase price to tangible assets acquired (aggregating approximately $30 million), and liabilities assumed (aggregating approximately $46 million), with the remaining consideration consisting primarily of goodwill and identifiable intangible assets. The identifiable intangibles consist of developed technologies, non-compete agreements, and assembled workforce. The fair value of the developed technology assets at the date of acquisition was $1 million and represents the aggregate fair value of individually identified technologies that were fully developed at the time of acquisition. Developed technology assets are being amortized over an estimated useful life of 5 years. The non-compete agreement and assembled workforce assets were assigned values as of the acquisition date of approximately $1 million and $2 million, respectively, and are being amortized over their estimated useful lives of 1 year and 5 years, respectively. Goodwill generated in the acquisition of MCM has an assigned value of approximately $65 million and is being amortized over its estimated useful life of 20 years. Automata Acquisition On August 4, 2000, Dynamic Details acquired substantially all the U.S. assets of Automata International, Inc., a Virginia-based complex printed circuit boards manufacturer, for approximately $19.5 million in cash, plus fees and expenses. The acquisition provides additional capacity for high density, high layer count printed circuit boards and gives us a significant presence on the east coast. Since completing the acquisition, we have successfully increased average selling prices and have streamlined its operations to increase yields from approximately 50% to almost 90% per panel. In addition, we have shifted products from our other facilities to the 100,000 square foot Virginia facility to increase volume and free up capacity at our other facilities. Under purchase accounting, the total purchase price has been allocated to the underlying assets acquired and liabilities assumed based upon their respective fair market values at the date of acquisition. The excess of the purchase price was allocated to goodwill and is being amortized over its estimated useful life of 20 years. Golden Acquisition On September 15, 2000, Dynamic Details acquired substantially all of the assets of Golden Manufacturing, Inc., a Texas-based manufacturer of engineered metal enclosures and value-added assembly services to communications and electronics original equipment manufacturers, for approximately $14.4 million, plus expenses of $0.5 million. The acquisition, which provides us with over 70,000 square feet of production capacity, complements our existing Texas facilities by providing metal enclosure assembly capabilities for our customers. Under purchase accounting, the total purchase price has been allocated to the underlying assets acquired and liabilities assumed based upon their respective fair market values at the date of acquisition. The excess of the purchase price was allocated to goodwill and is being amortized over its estimated useful life of 20 years. October 2000 Common Stock Public Offering of DDi Corp. On October 16, 2000, DDi Corp. completed a public offering of 4,608,121 shares of its common stock. We used net proceeds of approximately $122.0 million to repay a portion of our debt and for general corporate purposes. During 2001, we used a portion of the proceeds for the acquisitions of Thomas Walter Limited, Olympic Circuits Canada and Altatron Technology (see Note 14 to the Consolidated Financial Statements). February 2001 Common Stock and Convertible Subordinated Notes Public Offerings of DDi Corp. On February 20, 2001, DDi Corp. and some of its shareholders completed a follow-on public offering of 6,000,000 shares of its common stock. Three million shares were sold by DDi Corp. and 3,000,000 shares were sold by selling shareholders. The shares were sold at $23.50 per share, generating proceeds to us of 20 approximately $67.0 million, net of underwriting discounts, commissions and expenses. Concurrently, DDi Corp. issued $100.0 million in aggregate principal amount of 5 1/4% convertible subordinated notes due March 1, 2008. These notes are convertible at any time prior to maturity into shares of common stock at a conversion price of $30.00 per share, subject to certain adjustments. These notes generated proceeds to us of $97.0 million, net of underwriting discounts, commissions and expenses. The net proceeds of both transactions were used to repurchase all of the Dynamic Details senior subordinated notes, repurchase a portion of the Capital senior discount notes, repay a portion of the Dynamic Details senior credit facility and for general corporate purposes. Thomas Walter Acquisition On March 5, 2001, DDi Europe completed the acquisition of Thomas Walter Limited, a leading printed circuit board manufacturer based in Marlow, England for total cash consideration of approximately $24.5 million, plus expenses of $0.3 million. Thomas Walter's core competencies in time-critical delivery and complex technology (including its high-end microvia laser technology) have helped to make DDi Europe the leading provider of quick-turn electronic manufacturing services in the U.K. Under purchase accounting, the total purchase price has been allocated to the underlying assets acquired and liabilities assumed based upon their respective fair market values at the date of acquisition. The excess of the purchase price was allocated to goodwill and identifiable intangibles. Goodwill generated in the acquisition of Thomas Walter has an assigned value of approximately $17.0 million and is being amortized over its estimated useful life of 20 years. The identifiable intangibles consist of developed technologies and assembled workforce. The fair value of the developed technology assets at the date of acquisition was approximately $0.5 million and represents the aggregate fair value of individually identified technologies that were fully developed at the time of acquisition. The assembled workforce asset was assigned a fair value of approximately $0.8 million at the date of acquisition. Nelco Technology Acquisition On April 27, 2001, Dynamic Details completed the acquisition of the assets of Nelco, a wholly owned subsidiary of Park Electrochemical Corp., for total cash consideration of approximately $3.0 million. Nelco is an Arizona-based manufacturer of semi-finished printed wiring boards, commonly known as mass lamination. Under purchase accounting, the total purchase price has been allocated to the underlying assets acquired and liabilities assumed based on their respective fair values at the date of acquisition. Olympic Circuits Canada Acquisition On May 9, 2001, Dynamic Details completed the acquisition of Olympic Circuits Canada, a Canada-based, time-critical electronics manufacturing service provider specializing in quick-turn prototype printed circuit boards for a total cash consideration of approximately $12.8 million, plus contingent consideration based on earnings in each of the three years following the date of acquisition plus expenses of $0.1 million. No contingent consideration has been earned or recorded as of December 31, 2001. If contingent consideration is earned and paid, it will be capitalized as additional purchase price. Under purchase accounting, the total purchase price has been allocated to the underlying assets acquired and liabilities assumed based upon their respective fair market values at the date of acquisition. The excess of the purchase price was allocated to goodwill and is being amortized over its estimated useful life of 20 years. Altatron Technology Acquisition On June 4, 2001, Dynamic Details completed the acquisition of the assets of Altatron, a Southern California-based provider of value-add assembly services to electronics original equipment manufacturers for a total cash consideration of approximately $4.8 million, plus contingent consideration based on earnings in each of the two years following the date of acquisition. No contingent consideration has been earned or recorded as of December 31, 2001. If contingent consideration is earned and paid, it will be capitalized as additional purchase price. 21 Under purchase accounting, the total purchase price has been allocated to the underlying assets acquired and liabilities assumed based upon their respective fair market values at the date of acquisition. The excess of the purchase price was allocated to goodwill and is being amortized over its estimated useful life of 20 years. Garland, Texas and Marlborough, Massachusetts Facilities In October 2001, our management and Board of Directors approved a plan to close our Garland, Texas and Marlborough, Massachusetts facilities (see Note 15 to the Consolidated Financial Statements). Prior to its closure, the Garland plant had manufactured our lowest technology pre-production volume printed circuit boards. The Marlborough plant provided electronic interconnect products to selected customers in the New England area. Our decision to close these facilities was based on their contribution to our financial objectives in 2001 as well as their expected contribution going forward. Accordingly, the plant closures are not expected to adversely impact our results of operations in future periods. The closure of the facilities is estimated to be effectively completed by June 30, 2002. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses for each period. The following represents a summary of our critical accounting policies, defined as those policies that we believe are: (a) the most important to the portrayal of our financial condition and results of operations, and (b) that require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain. . Valuation of long-lived assets--We assess the potential impairment of long-lived tangible and intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Changes in our operating strategy, such as the closure of a facility, can significantly reduce the estimated useful life of such assets. In our 1999 and 2001 Consolidated Statements of Operations, we recorded impairments of long-lived assets resulting from plant closures (see Note 15 to the Consolidated Financial Statements). In addition, under a new accounting standard effective January 1, 2002, our goodwill and certain other intangible assets will no longer be subject to periodic amortization over estimated useful lives. These assets are now considered to have an indefinite life and their carrying values are required to be assessed by us for impairment at least annually. Depending on future market values and other factors, these assessments could potentially result in impairment reductions of these intangible assets in the future. (See Note 2 to the Consolidated Financial Statements regarding recently issued accounting standards). . Inventory obsolescence--We generally purchase raw materials in quantities that we anticipate will be fully used in the near term. Changes in operating strategy, however, such as the closure of a facility, can limit our ability to effectively utilize all of the raw materials purchased. In our 1999 and 2001 Consolidated Statement of Operations, we recorded restructuring-related inventory impairments resulting from plant closures (see Note 15 to the Consolidated Financial Statements). In addition to evaluations of the market value in connection with significant activities, we regularly monitor potential inventory obsolescence and, when necessary, reduce the carrying amount of our inventory to its market value. . Allowance for doubtful accounts--We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. 22 . Income taxes--As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. The process incorporates an assessment of the current tax exposure together with temporary differences resulting from different treatment of transactions for tax and financial statement purposes. Such differences result in deferred tax assets and liabilities, which are included within the Consolidated Balance Sheet. The recovery of deferred tax assets from future taxable income must be assessed and, to the extent that recovery is not likely, we establish a valuation allowance. Increases in valuation allowances result in the recording of additional tax expense. Further, if our ultimate tax liability differs from the periodic tax provision reflected in the Consolidated Statements of Operations, additional tax expense may be recorded. . Litigation and other contingencies--Management regularly evaluates our exposure to threatened or pending litigation and other business contingencies. Because of the uncertainties related to the amount of loss from litigation and other business contingencies, the recording of losses relating to such exposures requires significant judgment about the potential range of outcomes. To date, we have not been affected by any litigation or other contingencies that have had, or are currently anticipated to have, a material impact on the company's results of operations or financial position. As additional information about current or future litigation or other contingencies becomes available, management will assess whether such information warrants the recording of additional expense relating to its contingencies. Such additional expense could potentially have a material impact on our results of operations and financial position. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Results of Operations The following table sets forth income statement data expressed as a percentage of net sales for the periods indicated:
Year Ended December 31, ----------------------------------------------- DDi DDi DDi DDi DDi DDi Capital Corp. Capital Corp. Capital Corp. 1999 1999 2000 2000 2001 2001 ------- ----- ------- ----- ------- ----- Net sales........................................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of goods sold............................... 68.8 69.2 61.3 61.5 73.5 72.9 Restructuring-related inventory impairment....... 0.7 0.6 -- -- 1.3 1.0 ----- ----- ----- ----- ----- ----- Gross profit..................................... 30.5 30.2 38.7 38.5 25.2 26.1 Operating expenses: Sales and marketing........................... 8.1 8.1 8.6 8.0 8.9 7.7 General and administration.................... 5.5 5.3 6.8 7.3 5.1 5.8 Amortization of intangibles................... 7.6 7.6 4.3 4.6 6.2 6.2 Restructuring and related charges............. 1.7 1.7 -- -- 26.6 21.0 ----- ----- ----- ----- ----- ----- Operating income (loss).......................... 7.6 7.5 19.0 18.6 (21.6) (14.6) Interest rate swap valuation..................... -- -- -- -- 3.5 2.8 Interest expense (net)........................... 14.2 16.0 8.1 8.3 5.2 6.1 ----- ----- ----- ----- ----- ----- Income (loss) before income taxes and extraordinary loss............................. (6.6) (8.5) 10.9 10.3 (30.3) (23.5) Income tax benefit (expense)..................... 1.8 2.5 (5.2) (5.0) 4.6 3.3 Extraordinary loss, net of income tax benefit.... -- -- (0.4) (1.3) (4.2) (3.3) ----- ----- ----- ----- ----- ----- Net income (loss)................................ (4.8)% (6.0)% 5.3% 4.0 % (29.9)% (23.5)% ===== ===== ===== ===== ===== =====
23 Year Ended December 31, 2001 Compared to the Year Ended December 31, 2000 Net Sales DDi Capital net sales decreased $163.7 million (37%) to $284.7 million in 2001, from $448.4 million in 2000. Such decrease in net sales is attributable to a reduction in panels produced and the average price per panel, reflecting softened economic conditions, partially offset by the impact of acquisitions during 2000 and 2001. DDi Capital net sales in 2001 relating to acquisitions in this year were $13.7 million. DDi Corp. net sales decreased $136.1 million (27%) to $361.6 million in 2001, from $497.7 million in 2000. Such decrease in net sales reflects the lower level of DDi Capital sales, partially offset by the impact of the acquisitions of MCM Electronics Limited ("MCM") in April 2000 and Thomas Walter in March 2001. DDi Corp. net sales for the twelve months ended December 2001 relating to acquisitions in 2001 were $26.4 million. Gross Profit DDi Capital gross profit decreased $102.0 million (59%) to $71.7 million in 2001, from $173.7 million in 2000. DDi Corp. gross profit decreased $97.2 million (51%) to $94.3 million in 2001, from $191.5 million in 2000. The gross profit for DDi Capital and DDi Corp. for 2001 includes a $3.7 million one-time charge for inventory write-downs in connection with our restructuring initiatives (see the discussion of Restructuring and Other Related Charges for further information). Excluding the one-time charge, DDi Capital gross profit was $75.5 million, or 27% of net sales for 2001, down from 39% of net sales for 2000. On the same basis, DDi Corp. gross profit was $98.0 million, or 27% of net sales for 2001, down from 38% of net sales for 2000. The decreases in the gross profit for DDi Capital and DDi Corp., excluding the 2001 restructuring charge, resulted from the lower level of sales generated in 2001. The impact of the decreases in sales on gross profit was mitigated by various cost control initiatives relating to materials, production personnel and overhead expenses. Sales and Marketing Expenses DDi Capital sales and marketing expenses decreased $13.3 million (34%) to $25.4 million in 2001, from $38.7 million in 2000. DDi Corp. sales and marketing expenses decreased $12.1 million (30%) to $27.6 million in 2001, from $39.7 million in 2000. Such decreases in sales and marketing expenses is primarily due to the lower level of sales generated in 2001, as well as cost control measures. General and Administration Expenses DDi Capital general and administration expenses decreased $16.1 million (53%) to $14.3 million in 2001, from $30.4 million in 2000. DDi Corp. general and administration expenses decreased $15.2 million (42%) to $21.0 million in 2001, from $36.2 million in 2000. Such decreases in general and administrative expenses are due to the lower level of sales generated in 2001, as well as cost control measures. Restructuring and Other Related Charges Restructuring and related charges in 2001 were $75.7 million for DDi Capital and $76.1 million for DDi Corp., respectively. Such charges represent one-time costs incurred in the fourth quarter of 2001 in connection with management's decision to close various facilities and the separation of certain executives from the Company (see Note 15 to the Consolidated Financial Statements). Amortization of Intangibles DDi Capital amortization of intangibles decreased $1.8 million (9%) to $17.7 million in 2001, from $19.5 million in 2000. Such decrease in amortization of intangibles is due to the use of accelerated amortization methods with regard to certain identifiable intangibles and the impact of the impairment of intangibles in the fourth quarter of 2001 in connection with our restructuring activities, partially offset by the additional amortization resulting from acquisitions. DDi Corp. amortization of intangibles decreased $0.2 million (1%) to $22.6 million in 2001, from $22.8 million in 2000. Such decrease in amortization of intangibles reflects the decrease in expense incurred by DDi Capital, which was nearly offset by the impact of the acquisitions of MCM and Thomas Walter. 24 Interest Rate Swap Valuation Interest rate swap valuation represents the change in the fair value of an interest rate swap agreement. (see Note 8 to the Consolidated Financial Statements). At December 31, 2001, existing interest rate swap agreements for DDi Capital and DDi Corp. qualify as effective cash flow hedges and, accordingly, changes in fair value are not charged to operations. Net Interest Expense DDi Capital net interest expense decreased $21.5 million (59%) to $14.8 million in 2001, from $36.3 million in 2000. Such decrease in net interest expense is due primarily to the repayment of a portion of the amounts owed under the Dynamic Details senior credit facility in April 2000, the redemption of a portion of the DDi Capital senior discount notes in October 2000 and during the second quarter of 2001, and the redemption of the Dynamic Details senior subordinated notes in full in February 2001. Cash generated from equity offerings funded these redemptions. DDi Corp. net interest expense decreased $19.1 million (46%) to $22.1 million in 2001, from $41.2 million in 2000. Such decrease in net interest expense reflects the decrease in net interest expense incurred by DDi Capital and the redemption of the DDi Intermediate senior discount notes in full in April and October 2000. These decreases were partially offset by interest expense incurred from the acquisition of MCM and $5 million in interest expense relating to the issuance in February 2001 of the 5 1/4% convertible subordinated notes due March 1, 2008. Income Taxes DDi Capital income taxes decreased $36.6 million to a benefit of $13.2 million in 2001, from a $23.4 million expense in 2000, reflecting a lower level of taxable income earned in the current period. DDi Corp. income taxes decreased $37 million to a benefit of $12 million in 2001, from a $25 million expense in 2000. Such decrease in income tax expense reflects the decreased DDi Capital provision, the impact of the acquisitions of MCM and Thomas Walter, and interest deductions relating to the DDi Corp. 5 1/4% convertible subordinated notes due March 1, 2008. See Note 12 to the Consolidated Financial Statements for a reconciliation of the tax expense or benefit recorded in each period to the corresponding amount of income tax determined by applying the U.S. Federal income tax rate to the earnings or loss before income taxes. Year Ended December 31, 2000 Compared to the Year Ended December 31, 1999 Net Sales DDi Capital net sales increased $155.9 million (53%) to $448.4 million in 2000, from $292.5 million in 1999. Such increase is attributable to: (a) the production of more complex and larger panels, which increased the average sales price per panel and (b) the impact of the Automata and Golden acquisitions, which contributed $60.6 million to our net sales. DDi Corp. net sales increased $205.2 million (70%) to $497.7 million in 2000, from $292.5 million in 1999. Such increase reflects the higher level of sales achieved by DDi Capital and the impact of the acquisition of MCM. In aggregate, the Automata, Golden and MCM acquisitions contributed $109.9 million to DDi Corp. net sales for 2000. Excluding the acquisitions, our net sales increased $95.3 million (33%). Gross Profit DDi Capital gross profit increased $84.5 million (95%) to $173.7 million in 2000, from $89.2 million in 1999. Gross profit for 1999 includes a $1.9 million one-time charge for inventory write-downs in connection with our restructuring initiatives (see the discussion herein of Restructuring and Related Charges for further information). Excluding the one-time charge, gross profit was $91.1 million for 1999. The increase in gross profit, excluding the 1999 restructuring charge resulted from the higher level of sales, an improvement in production yields in our pre-production operations, and the impact of the Automata and Golden acquisitions. DDi 25 Corp. gross profit increased $103.3 million (117%) to $191.5 million in 2000, from $88.2 million in 1999. Excluding the $1.9 million one-time restructuring charge, gross profit was $90.1 million for 1999. Such increase, excluding the 1999 restructuring charge reflects the improvements in gross profit achieved by DDi Capital and the impact of the acquisition of MCM. Sales and Marketing Expenses DDi Capital sales and marketing expenses increased $15.1 million (64%) to $38.7 million in 2000, from $23.6 million in 1999. Such increase is due to: (a) growth in our sales force to accommodate existing and anticipated near-term increases in customer demand and related variable expenses due to our increased sales volume and (b) the impact of the Automata and Golden acquisitions. DDi Corp. sales and marketing expenses increased $16.1 million (68%) to $39.7 million in 2000, from $23.6 million in 1999. Such increase reflects the increase in sales and marketing expenses incurred by DDi Capital and the impact of the acquisition of MCM. General and Administration Expenses DDi Capital general and administration expenses increased $14.3 million (89%) to $30.4 million in 2000, from $16.1 million in 1999. The increase in expenses is attributable to higher staffing costs and other back-office expenditures to support our growth (approximately $3.4 million), the impact of the Automata and Golden acquisitions (approximately $2.1 million), higher incentive compensation expense (approximately $3 million), and an increase in bad debt expense (approximately $7.9 million). The increase in credit related losses resulted from the current economic softening, particularly in the communications sector. Such increases were partially offset by the elimination of management fees in connection with the termination of a management agreement at the time of the initial public offering by DDi Corp. (resulting in a reduction in expense of $1.1 million). DDi Corp. general and administration expenses increased $20.9 million (136%) to $36.2 million in 2000, from $15.3 million in 1999. Such increase reflects the increase in general and administration expenses incurred by DDi Capital, the impact of the acquisition of MCM, and approximately $0.7 million in costs incurred in streamlining our U.K. operations. Amortization of Intangibles DDi Capital amortization of intangibles decreased $2.8 million (13%) to $19.5 million in 2000, from $22.3 million in 1999. The decrease is due to the use of accelerated amortization methods with regard to certain identifiable intangibles, partially offset by the additional amortization resulting from the Automata and Golden acquisitions (approximately $0.2 million). DDi Corp. amortization of intangibles increased $0.5 million (2%) to $22.8 million in 2000, from $22.3 million in 1999. Such increase reflects the decrease in amortization of intangibles incurred by DDi Capital, partially offset by amortization attributable to the acquisition of MCM. Restructuring and Related Charges Restructuring and related charges for DDi Capital and DDi Corp. were $5.1 million in 1999, representing one-time costs incurred in connection with management's decision to close our Colorado facility. These charges consist of $2.6 million for severance and other exit costs and $2.5 million of costs related to the impairment of net property, plant and equipment. See Note 15 to our Consolidated Financial Statements for further information about these charges. Net Interest Expense DDi Capital net interest expense decreased $5.2 (13%) to $36.3 million in 2000, from $41.5 million in 1999. Such decrease is due to the repayment of a portion of the amounts owed under the Dynamic Details senior credit facility from part of the proceeds of our initial public offering in April 2000, partially offset by the impact of discount accretion on the DDi Capital senior discount notes. DDi Corp. net interest expense decreased $5.5 million (12%) to $41.2 million in 2000, from $46.7 million in 1999. Such decrease reflects the decrease in 26 net interest expense incurred by DDi Capital, the redemption of DDi Intermediate senior discount notes principal resulting from the DDi Corp. initial public offering in April 2000 and follow-on offering in October 2000 and the repurchase of Capital Senior Discount Notes resulting from the DDi Corp. follow-on offering in October 2000. These decreases were largely offset by the impact of the acquisition of MCM. Interest on debt assumed in this acquisition was $2.0 million in 2000. Income Taxes DDi Capital income taxes increased $28.6 million to a tax expense of $23.4 million in 2000, from a tax benefit of $5.2 million in 1999. The increased provision reflects a higher level of taxable income earned in the current period. DDi Corp. income taxes increased $32.4 million to a tax expense of $25.0 million in 2000, from a tax benefit of $7.4 million in 1999. Such increase reflects the increased DDi Capital provision and the impact of the acquisition of MCM, which generated $2.8 million in tax expense in 2000. See Note 12 to the Consolidated Financial Statements for a reconciliation of the tax expense or benefit recorded in each period to the corresponding amount of income tax determined by applying the U.S. Federal income tax rate to the earnings or loss before income taxes. Quarterly Financial Information The following tables present selected quarterly financial information for each of the twelve quarters ended December 31, 2001. This information is unaudited but, in our opinion, reflects all adjustments, consisting only of normal recurring adjustments that we consider necessary for a fair presentation of this information, in accordance with generally accepted accounting principles. These quarterly results are not necessarily indicative of future results.
DDi Capital, Three Months Ended -------------------------------------------------------------------------- Mar. June Sept. Dec. Mar. June Sept. Dec. Mar. June Sept. Dec. 31, 30, 30, 31, 31, 30, 30, 31, 31, 30, 30, 31, 1999 1999 1999 1999 2000 2000 2000 2000 2001 2001 2001 2001 ----- ----- ----- ----- ----- ----- ------ ------ ------ ----- ----- ----- (in millions) Net sales...................... $59.2 $71.7 $82.9 $78.7 $75.3 $86.9 $132.2 $154.0 $118.7 $65.2 $53.7 $47.1 Cost of goods sold............. 41.8 50.2 57.2 52.2 49.0 55.9 83.9 85.9 74.8 44.9 46.4 43.2 Restructuring-related inventory impairment.................... -- -- -- 1.9 -- -- -- -- -- -- -- 3.7 ----- ----- ----- ----- ----- ----- ------ ------ ------ ----- ----- ----- Gross profit................... $17.4 $21.5 $25.7 $24.6 $26.3 $31.0 $ 48.3 $ 68.1 $ 43.9 $20.3 $ 7.3 $ 0.2 ===== ===== ===== ===== ===== ===== ====== ====== ====== ===== ===== =====
DDi Corp., Three Months Ended --------------------------------------------------------------------------- Mar. June Sept. Dec. Mar. June Sept. Dec. Mar. June Sept. Dec. 31, 30, 30, 31, 31, 30, 30, 31, 31, 30, 30, 31, 1999 1999 1999 1999 2000 2000 2000 2000 2001 2001 2001 2001 ----- ----- ----- ----- ----- ------ ------ ------ ------ ----- ----- ----- (in millions) Net sales...................... $59.2 $71.7 $82.9 $78.7 $75.3 $101.5 $149.6 $171.3 $140.7 $85.8 $70.6 $64.5 Cost of goods sold............. 42.0 50.4 57.4 52.6 49.0 66.5 95.1 95.6 88.1 59.3 59.3 56.9 Restructuring-related inventory impairment.................... -- -- -- 1.9 -- -- -- -- -- -- -- 3.7 ----- ----- ----- ----- ----- ------ ------ ------ ------ ----- ----- ----- Gross profit................... $17.2 $21.3 $25.5 $24.2 $26.3 $ 35.0 $ 54.5 $ 75.7 $ 52.6 $26.5 $11.3 $ 3.9 ===== ===== ===== ===== ===== ====== ====== ====== ====== ===== ===== =====
The quarterly financial information provided above does not present income (loss) before extraordinary items, net income (loss) and related per share data. Such information is not presented because it does not allow for meaningful comparisons among quarters; the data fluctuates greatly from quarter to quarter due to the reclassification of our Class A and Class L common stock into new common stock in connection with our initial public offering and due to the changes in our net interest expense (and related tax expense) as a result of the reduction in debt with the use of proceeds from our debt and equity offerings. Further quarterly financial information not presented above is presented in our quarterly reports on Form 10-Q. 27 Liquidity and Capital Resources As of December 31, 2001, cash, cash equivalents and marketable securities were $39.5 million for DDi Capital, and $45.5 million for DDi Corp. compared to $39.6 million for DDi Capital, and $66.9 million for DDi Corp. as of December 31, 2000. Our principal source of liquidity to fund ongoing operations for the year ended December 31, 2001 was cash provided by operations. Net cash provided by operating activities for the year ended December 31, 2001 was $47.6 million for DDi Capital and $55.8 million for DDi Corp., compared to $61.1 million for DDi Capital and $64.8 million for DDi Corp. for the year ended December 31, 2000 and $24.8 million for both DDi Capital and DDi Corp. for the year ended December 31, 1999. Capital expenditures for the year ended December 31, 2001 were $24.7 million for DDi Capital, and $35.2 million for DDi Corp., compared to $24.0 million for DDi Capital and $27.2 million for DDi Corp. for the year ended December 31, 2000 and $18.2 million for both DDi Capital and DDi Corp. during the year ended December 31, 1999. As of December 31, 2001, DDi Capital and DDi Corp. had long-term borrowings of $139.0 million and $261.0 million, respectively. Dynamic Details has a $75.0 million revolving credit facility for revolving credit loans, letters of credit and swing line loans. Access to the full amount of the revolving credit facility is subject to conditions set forth in the credit facility agreement. Under an amendment to the Dynamic Details senior credit facility in December 2001, the maximum amount we can borrow under the revolving credit facility is limited to $37.5 million until mid-2003. At December 31, 2001, Dynamic Details had no borrowings outstanding under this revolving credit facility and had $0.7 million reserved against the facility for a letter of credit and had $36.8 million available for borrowing under the facility. Our European operating subsidiary, DDi Europe, has $11.6 million available for borrowing under its revolving credit facility. At December 31, 2001, we had $3.0 million outstanding under this revolving credit facility. The following table shows our contractual cash obligations and commercial commitments as of December 31, 2001: Payments Due by Period (in thousands)
DDi Capital Year Ending December 31, ---------------------------------------------------------- Commitments 2002 2003 2004 2005 2006 Thereafter Total ----------- ---------------------------------------------------------- Long-Term Debt............... $15,552 $19,338 $43,410 $57,519 $ -- $16,090 $151,909 Capital Lease Obligations.... 1,625 1,498 1,433 1,312 -- -- 5,868 Operating Leases............. 6,738 5,814 5,055 4,987 3,740 12,274 38,608 ---------------------------------------------------------- Total Commitments..... $23,915 $26,650 $49,898 $63,818 $3,740 $28,364 $196,385 ==========================================================
DDi Corp. Year Ending December 31, ---------------------------------------------------------- Commitments 2002 2003 2004 2005 2006 Thereafter Total ----------- ---------------------------------------------------------- Long-Term Debt............... $15,552 $23,706 $47,778 $61,887 $4,368 $120,458 $273,749 Capital Lease Obligations.... 2,305 1,635 1,433 1,312 -- -- 6,685 Operating Leases............. 8,985 7,779 6,832 6,720 5,473 29,601 65,390 ---------------------------------------------------------- Total Commitments..... $26,842 $33,120 $56,043 $69,919 $9,841 $150,059 $345,824 ==========================================================
The Dynamic Details senior credit facility, the DDi Capital senior discount notes, the 5 1/4% convertible subordinated notes due March 1, 2008 and the DDi Europe facilities agreement are described under the caption "Description of Indebtedness." 28 Based on our current level of operations, we believe that cash, cash equivalents, marketable securities, cash generated from operations and amounts available under the Dynamic Details senior credit facility and the DDi Europe facilities agreement will be adequate to meet our debt service requirements, capital expenditures and working capital needs for the foreseeable future. There can be, however, no assurance that our business will generate sufficient cash flow from operations or that future borrowings will be available to enable us to service our indebtedness. We have substantial indebtedness and our operating performance and our ability to service or refinance our indebtedness will be subject to economic conditions and to financial, business and other factors, certain of which are beyond our control. For example, current economic conditions include a downturn in the communications industry that has continued to have a negative impact on our revenues and operating performance during the first quarter or 2002. If our revenues and operating performance do not improve significantly, there is significant risk that DDi Europe and Dynamic Details will not be able to meet specified financial ratios and satisfy certain financial condition tests, including a minimum EBITDA covenant contained in the Dynamic Details senior credit facility. If we do not comply with our covenants, our lenders will be able to exercise all or any of their rights and remedies under the credit facilities. Description of Indebtedness Dynamic Details Senior Credit Facility Dynamic Details has entered into a credit agreement, as amended, for which JPMorgan Chase Bank is the collateral, co-syndication and administrative agent and for which Bankers Trust Company is the documentation and co-syndication agent. The lenders are a syndicate comprised of various banks, financial institutions or other entities which hold transferable interests in the Dynamic Details senior credit facility. The Dynamic Details senior credit facility, as of December 31, 2001 consists of: . Tranche A term facility of approximately $47.6 million; . Tranche B term facility of approximately $88.2 million; and . a revolving line of credit of up to $75 million, including revolving credit loans, letters of credit and swing line loans (access to the full amount is subject to conditions set forth in the agreement and is currently limited to $37.5 million through mid-2003), of which no amounts are outstanding, and $0.7 million is reserved for a letter of credit. The Dynamic Details senior credit facility is jointly and severally guaranteed by DDi Capital and its subsidiaries and secured by the assets of all of our domestic subsidiaries. Future domestic subsidiaries of Dynamic Details will also guarantee the senior credit facility and secure that guarantee with their assets. The senior credit facility requires Dynamic Details to meet financial ratios and benchmarks and to comply with other restrictive covenants, including restrictions on making distributions or loans to DDi Corp. to pay interest or principal on the notes. The Tranche A term facility amortizes in quarterly installments from June 1999 until July 2004 when the remaining outstanding loans under the Tranche A term facility become repayable. The Tranche B term facility amortizes in quarterly installments from June 1999 until September 2004 at which time the remaining outstanding loans under the Tranche B term facility becomes repayable in two equal quarterly installments with a final payment in April 2005. The revolving line of credit terminates in July 2004. Borrowings under the Dynamic Details senior credit facilities for Tranche A and the revolving credit facility bear interest at varying rates based, at our option, on either LIBOR plus 300 basis points or the bank rate plus 200 basis points in each case subject to adjustment based on the consolidated leverage ratio of Dynamic Details, as defined in the credit agreement. Borrowings for Tranche B under the Dynamic Details senior credit facility bear interest at rates based, at our option, on either LIBOR plus 400 basis points or the bank rate plus 300 basis points. The overall effective interest rate for the term loans, after giving effect to the interest rate swap agreement, as of 29 December 31, 2001, was 8.05%. Dynamic Details is required to pay to the lenders under the senior credit facility a commitment on the average unused portion of the revolving credit facility and a letter of credit fee on each letter of credit outstanding. The senior credit facility requires Dynamic Details to apply proceeds of sales of debt, equity or material assets to prepay its senior credit facility, subject to some exceptions, and Dynamic Details must also, in some circumstances, pay excess cash flow to the lenders under its senior credit facility. DDi Europe Facilities Agreement In connection with DDi Corp.'s acquisition of MCM Electronics, DDi Corp. assumed MCM Electronics' debt obligations under a facilities agreement dated May 27, 1999 between MCM Electronics and The Governor and Company of the Bank of Scotland, as arranger, agent, security trustee, term loan bank and working capital bank. MCM Electronics has been combined with our other European operations to form DDi Europe Limited. We amended and restated the facilities agreement in part on November 15, 2001. This facility consists of: . Tranche A term loan facility of up to an aggregate principal amount of (Pounds)17.25 million; . Tranche B term loan facility of up to an aggregate principal amount of (Pounds)0.75 million; and . working capital facilities of an aggregate maximum principal amount of (Pounds)10.0 million The term loan facilities require DDi Europe to meet financial ratios and to comply with other restrictive covenants. Substantially all of the assets of DDi Europe are pledged as collateral under the DDi Europe facilities agreement. As of December 31, 2001, an aggregate of (Pounds)17 million, or $24.8 million, was outstanding under the facilities. The Tranche A term loan facility is repayable in increasing quarterly installments beginning in June 2000 with the final payment payable in September 2007. Pursuant to an amendment in November 2001, no payments are due on the Tranche A term loan facility from October 2001 through February 2003. The Tranche B term loan facility is repayable in full in December 2007. The working capital facility is available until November 2002 and may be renewed at Bank of Scotland's discretion. Borrowings under the facilities bear interest at varying rates, comprising of LIBOR at the dates of commencement of the relevant quarterly interest period plus a margin of 150 basis points for Tranche A, Tranche B and the working capital facility. The agreement requires DDi Europe to make interest hedging arrangements and consequently DDi Europe has entered into an interest rate swap agreement covering 100% of its borrowings under these facilities. The overall effective interest rate for the DDi Europe term loan facilities, after giving effect to the interest rate swap agreement, as of December 31, 2001, was 8.42%. DDi Europe is required to pay non-utilization fees on the average unused portion of each of the facilities. DDi Capital Senior Discount Notes The DDi Capital senior discount notes were issued in an aggregate principal amount at maturity of $110 million and will mature on November 15, 2007. The senior discount notes were issued under an indenture dated as of November 18, 1997 between DDi Corp., as issuer, and The State Street Bank and Trust Company, as trustee, as supplemented by the supplemental indenture dated as of February 10, 1998 between DDi Capital and the trustee. The senior discount notes are senior unsecured obligations of DDi Capital. The senior discount notes were issued at a discount to their aggregate principal amount at maturity and will accrete in value until November 15, 2002 at a rate per annum equal to 12.5%, compounded semi-annually. Cash interest on the senior discount notes will not accrue prior to November 15, 2002. Thereafter, interest will accrue at the rate of 12.5% per annum, payable semi-annually in arrears on each May 15 and November 15 of each year commencing May 15, 2003 to the holders of record on the immediately preceding May 1 and November 1, respectively. 30 On or after November 15, 2002, the DDi Capital senior discount notes may be redeemed at the option of DDi Capital, in whole at any time or in part from time to time, at a redemption price that is greater than the accreted value of the notes, plus accrued and unpaid interest, if any, to the redemption date. We used $37.6 million of the proceeds from DDi Corp.'s October 2000 follow-on public offering to repurchase a portion of the DDi Capital senior discount notes with an aggregate principal amount at maturity of $47.0 million, and we used $45.5 million of the proceeds from our February 2001 public offering to repurchase notes with an aggregate principal amount at maturity of $46.9 million. DDi Corp. 5 1/4% Convertible Subordinated Notes due March 1, 2008 The DDi Corp. 5 1/4% convertible subordinated notes were issued in an aggregate principal amount of $100 million and will mature on March 1, 2008. The convertible subordinated notes were issued under an indenture dated as of February 20, 2001, as supplemented by a supplemental indenture dated as of February 20, 2001, in each case between us, as issuer, and The State Street Bank and Trust Company, as trustee. The convertible subordinated notes are subordinated, unsecured obligations of DDi Corp. Cash interest on the convertible subordinated notes accrues at the rate of 5.25% per annum, payable semi-annually in arrears on each March 1 and September 1 of each year commencing September 1, 2001 to the holders of record on the immediately preceding February 15 and August 15, respectively. On or after March 5, 2004, the convertible subordinated notes may be redeemed at the option of DDi Corp., in whole or in part, at a redemption price that is greater than the outstanding principal amount of the notes, plus accrued and unpaid interest, if any, to the redemption date. Recently Issued Accounting Standards In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141 and No. 142. SFAS No. 141 "Business Combinations" requires that the purchase method of accounting be used for all business combinations, establishes specific criteria for recognizing intangible assets separately from goodwill and requires certain disclosures regarding reasons for a business combination and the allocation of the purchase price paid. SFAS No. 141 is effective for all business combinations initiated after June 30, 2001 and for all business combinations accounted for using the purchase accounting method for which the date of acquisition is after June 30, 2001. SFAS No. 142 "Goodwill and Other Intangible Assets" establishes that goodwill and certain intangible assets will not be amortized and the amortization period of certain intangible assets will no longer be limited to forty years. In addition, SFAS No. 142 requires that goodwill and intangible assets that are not amortized be tested for impairment at least annually. SFAS No. 142 is effective in fiscal years beginning after December 15, 2001. For acquisitions effective before June 30, 2001, we adopted both SFAS No. 141 and No. 142 on January 1, 2002. We will also implement SFAS No. 141 and SFAS No. 142 for any acquisitions occurring after June 30, 2001. As part of the adoption of SFAS No. 142 on January 1, 2002, we will no longer amortize goodwill or intangible assets with indefinite lives related to existing goodwill and intangible assets. We expect that upon adoption of SFAS No. 142, we will no longer record annual fiscal year amortization associated with existing goodwill of approximately $10.0 million. In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 develops one accounting model for long-lived assets that are to be disposed of by sale, requires that long-lived assets that are to be disposed by sale be measured at the lower of book value or fair value less cost to sell and expands the scope of discontinued operations to include all components of an entity with operations that (a) can be distinguished from the rest of the entity and (b) will be eliminated from the ongoing operations of the entity in a disposal transaction. SFAS No. 144 is effective for all fiscal years beginning after December 15, 2001 and is therefore effective for us beginning with our fiscal quarter ending March 31, 2002. We are currently evaluating the impact of the adoption of SFAS No. 144 on our consolidated financial statements. 31 FORWARD-LOOKING STATEMENTS A number of the matters and subject areas discussed in this Form 10-K are forward-looking in nature. The discussion of such matters and subject areas is qualified by the inherent risks and uncertainties surrounding future expectations generally, and also may differ materially from our actual future experience involving any one or more of such matters and subject areas. We wish to caution readers that all statements other than statements of historical facts included in this Annual Report on Form 10-K regarding our financial position and business strategy may constitute forward-looking statements. All of these forward-looking statements are based on estimates and assumptions made by our management, which although believed to be reasonable, are inherently uncertain. Therefore, undue reliance should not be placed on such estimates and statements. No assurance can be given that any of such estimates or statements will be realized and it is likely that actual results will differ materially from those contemplated by such forward-looking statements. Factors that may cause such differences include: (1) changes in general economic conditions in the markets in which we may compete and fluctuations in demand in the electronics industry; (2) ability to sustain historical margins as the industry develops; (3) increased competition; (4) increased costs; (5) loss or retirement of key members of management; (6) increases in our cost of borrowings or unavailability of additional debt or equity capital on terms considered reasonable by management; (7) adverse state, federal or foreign legislation or regulation or adverse determinations by regulators; and (8) inability to consummate acquisitions on attractive terms. We have attempted to identify, in context, certain of the factors that we currently believe may cause actual future experience and results to differ from our current expectations regarding the relevant matter or subject area. In addition to the items specifically discussed in the foregoing, our business and results of operations are subject to the rules and uncertainties described under the heading "Factors That May Affect Future Results" contained herein, however, the operations and results of our business also may be subject to the effect of other risks and uncertainties. Such risks and uncertainties include, but are not limited to, items described from time to time in our reports filed with the Securities and Exchange Commission. FACTORS THAT MAY AFFECT OUR FUTURE RESULTS Substantial Indebtedness We have a substantial amount of indebtedness. As of December 31, 2001, our total debt was approximately $282.2 million for DDi Corp. and $156.6 million for DDi Capital. As of December 31, 2001, we had $36.8 million available under the Dynamic Details senior credit facility and $11.6 million available under the DDi Europe revolving credit facility for future borrowings for general corporate purposes and working capital needs. Access to the full amount amount available under the Dynamic Details senior credit facility is subject to conditions set forth in the agreement. In addition, subject to the restrictions in the DDi Capital senior discount notes, the DDi Europe facilities agreement and Dynamic Details senior credit facility, we may incur additional indebtedness from time to time to finance acquisitions or capital expenditures or for other purposes. As a result of our level of debt and the terms of our debt instruments: . our vulnerability to adverse general economic conditions is heightened; . we will be required to dedicate a substantial portion of our cash flow from operations to repayment of debt, limiting the availability of cash for other purposes; . we are and will continue to be limited by financial and other restrictive covenants in our ability to borrow additional funds, consummate asset sales, enter into transactions with affiliates or conduct mergers and acquisitions; . our flexibility in planning for, or reacting to, changes in its business and industry will be limited; . we are sensitive to fluctuations in interest rates because some of our debt obligations are subject to variable interest rates; and . our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes may be impaired. 32 Our ability to pay principal and interest on our indebtedness and to satisfy our other debt obligations will depend upon our future operating performance, which will be affected by prevailing economic conditions and financial, business and other factors, some of which are beyond our control, as well as the availability of revolving credit borrowings under the Dynamic Details senior credit facility and the DDi Europe facilities agreement or successor facilities. We anticipate that our existing cash and marketable securities, operating cash flow, amounts available under our existing credit facilities and the proceeds of DDi Corp.'s public offerings will be sufficient to meet our operating expenses and to service our debt requirements as they become due. If we are unable to service our indebtedness, we will be forced to take actions such as reducing or delaying capital expenditures, selling assets, restructuring or refinancing our indebtedness, or seeking additional equity capital. There is no assurance that we can effect any of these remedies on satisfactory terms, or at all. Business Cycles of the End Markets We Serve The end markets into which we sell printed circuit boards and electronic manufacturing services (including communications and networking equipment; computers and peripherals; medical, automotive, industrial and test equipment; and aerospace equipment) have their own business cycles. Some of these cycles show predictability from year to year. However, other cycles, are unpredictable in commencement, depth and duration. The communications industry entered into a significant downturn in late 2000, which continues as of this date. This has had a negative impact on our revenues and operating performance for the year ended December 31, 2001 and has continued to have a negative impact on our revenues and operating performance during the first quarter of 2002. The failure of such industries to recover, a worsening of the downturn, or any other event leading to additional excess capacity will negatively impact our revenues, gross margins and operating margins. If our revenues and our operating performance do not improve significantly, there is significant risk that DDi Europe and Dynamic Details will not be able to meet specified financial ratios and satisfy certain financial condition tests, including a minimum EBITDA covenant contained in the Dynamic Details senior credit facility. As a result of the foregoing, we may be required to commence discussions with our lenders regarding forbearance agreements, additional amendments or waivers under, or a potential restructuring of, the Dynamic Details senior credit facility and our other indebtedness. We do not currently have any agreement with any lenders with respect to any such forbearance, amendments, waivers or restructuring, and there can be no assurance that any such agreement could be obtained. Any increase in our debt service requirements or any reduction in amounts available for borrowing under the Dynamic Details senior credit facility or our other indebtedness could significantly affect our ability to meet debt service requirements, to fund capital expenditures, acquisitions, and working capital. There can be no assurance that the Dynamic Details senior credit facility or our other indebtedness would be renegotiated on terms acceptable to us. If we are not able to comply with the current financial covenant levels, we will not be able to borrow under the Dynamic Details senior credit facility, and the lenders under this facility will have the right to declare the outstanding borrowings under the facility to be immediately due and payable and the exercise of all or any of their other rights and remedies, including foreclosing on the collateral pledged to secure the facility, which consists of substantially all of the assets of Dynamic Details and its subsidiaries. Restrictions Imposed by Terms of Indebtedness The terms of our indebtedness restrict, among other things, our ability to incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of our assets. DDi Europe, DDi Capital and Dynamic Details are also 33 required to maintain specified financial ratios and satisfy certain financial condition tests. Our subsidiaries' ability to meet those financial ratios and tests can be affected by events beyond our subsidiaries' control, and there can be no assurance that they will meet those tests. Depending on the specific circumstances, breach of any of these covenants may result in a default under some or all of our indebtedness agreements. Upon the occurrence of an event of default, lenders under such indebtedness could elect to declare all amounts outstanding together with accrued interest, to be immediately due and payable. If we were unable to repay such amounts, the lenders could proceed against the collateral granted to them to secure that indebtedness. Substantially all the assets of Dynamic Details and its subsidiaries are pledged as security under the Dynamic Details senior credit facility. Substantially all the assets of DDi Europe are pledged as security under the DDi Europe facilities agreement. Technological Change and Process Development The market for our products and services is characterized by rapidly changing technology and continuing process development. The future success of our business will depend in large part upon our ability to maintain and enhance our technological capabilities, to develop and market products and services that meet changing customer needs, and to successfully anticipate or respond to technological changes on a cost-effective and timely basis. Research and development expenses are expected to increase as manufacturers make demands for products and services requiring more advanced technology on a quicker turnaround basis. We are more leveraged than some of our principal competitors, and therefore may not be able to respond to technological changes as quickly as these competitors. In addition, the electronics manufacturing services industry could in the future encounter competition from new or revised technologies that render existing technology less competitive or obsolete or that reduce the demand for our services. We cannot assure you that we will effectively respond to the technological requirements of the changing market. To the extent we determine that new technologies and equipment are required to remain competitive, the development, acquisition and implementation of such technologies and equipment may require us to make significant capital investments. We cannot assure you that we will be able to obtain capital for these purposes in the future or that any investments in new technologies will result in commercially viable technological processes. Dependence on a Core Group of Significant Customers Although we have a large number of customers, net sales to our largest customer accounted for approximately 7% of our net sales in 2001. Net sales to our ten largest customers accounted for approximately 34% of our net sales during the same period. We may depend upon a core group of customers for a material percentage of our net sales in the future. Substantially all of our sales are made on the basis of purchase orders rather than long-term agreements. We cannot assure you that significant customers will order services from us in the future or that they will not reduce or delay the amount of services ordered. Any reduction or delay in orders could negatively impact our revenues. In addition, we generate significant accounts receivable in connection with providing services to our customers. If one or more of our significant customers were to become insolvent or otherwise were unable to pay us for the services provided, our results of operations would be adversely affected. Variability of Orders Our operating results fluctuate because we sell on a purchase-order basis rather than pursuant to long-term contracts and we expect these fluctuations to continue in the future. We are therefore sensitive to variability in demand by our customers. Because we time our expenditures in anticipation of future sales, our operating results may be less than we estimate if the timing and volume of customer orders do not match our expectations. Furthermore, we may not be able to capture all potential revenue in a given period if our customers' demand for quick-turnaround services exceeds our capacity during that period. Because of these factors, you should not rely on quarter-to-quarter comparisons of our results of operations as an indication of our future performance. Because a significant portion of our operating expenses are fixed, even a small revenue shortfall can have a 34 disproportionate effect on our operating results. It is possible that, in future periods, our results may be below the expectations of public market analysts and investors. This could cause the market price of DDi Corp.'s common stock to decline. Competition The printed circuit board industry is highly fragmented and characterized by intense competition. We principally compete with independent and captive manufacturers of complex quick-turn and longer-lead printed circuit boards. Our principal competitors include other independent small private companies and integrated subsidiaries of more broadly based volume producers that also manufacture multilayer printed circuit boards and other electronic assemblies. Some of our principal competitors are less highly-leveraged than us and may have greater financial and operating flexibility. Competition in the complex quick-turn and longer-lead printed circuit board industry has increased due to the consolidation trend in the industry, which results in potentially better capitalized and more effective competitors. Our basic technology is generally not subject to significant proprietary protection, and companies with significant resources or international operations may enter the market. Increased competition could result in price reductions, reduced margins or loss of market share, any of which could materially adversely affect our business, financial condition and results of operations. Dependence on Acquisition Strategy As part of our business strategy, we expect that we will continue to grow by pursuing acquisitions of other companies, assets or product lines that complement or expand our existing business. Competition for attractive companies in our industry is substantial. We cannot assure you that we will be able to identify suitable acquisition candidates or to finance and complete transactions that we select. In addition, existing credit facilities restrict our ability to acquire the assets or business of other companies. The attention of our management may be diverted, and operations may be otherwise disrupted. If we fail to effectively execute this acquisition strategy, the growth of our revenues may suffer and the price of DDi Corp.'s common stock may decline. Ability to Integrate Acquired Businesses and Manage Expansion Since December 1997, we have completed a merger and acquired eight companies. We have a limited history of owning and operating our businesses on a consolidated basis. We cannot assure that we will be able to meet performance expectations without disrupting the quality and reliability of service to customers or diverting management resources. Our expected growth has placed and may continue to place a significant strain on our management, financial resources and information, operating and financial systems. If we are unable to manage this growth effectively, our rate of growth and revenues may be adversely affected. Ability to Process Transferred Orders at Current Margins During the fourth quarter of 2001, we closed two of our manufacturing facilities which required us to transfer associated orders to other facilities. This transfer has had a negative impact on our expected margins for these orders in the first quarter of 2002 and has negatively impacted our financial performance. We can provide no assurance that this will not occur in the future if we pursue additional restructuring. Costs of International Expansion We have expanded into new foreign markets and intend to continue our international expansion. We completed our acquisitions of MCM Electronics, a United Kingdom company, and Thomas Walter limited, based in Marlow, England, on April 14, 2000 and March 5, 2001, respectively. We also acquired Olympic Circuits Canada, based in Canada, in May 2001. In addition, in April 2001, we established Dynamic Details Japan as a 35 sales office in Tokyo, Japan. Entry into foreign markets may require considerable management time as well as, in the case of new operations, start-up expenses for market development, hiring and establishing office facilities before any significant revenues are generated. As a result, operations in new foreign markets may achieve low margins or may be unprofitable. We will be unable to utilize net operating losses incurred by foreign operations to reduce our U.S. income taxes. Therefore, as we continue to expand internationally, we may not generate operating results consistent with historical performance, and the market price of DDi Corp.'s common stock price may decline. Intellectual Property Our success depends in part on proprietary technology and manufacturing techniques. Currently, we do not rely on patent protection to safeguard these proprietary techniques but rely primarily on trade secret protection. Litigation may be necessary to protect our technology and determine the validity and scope of the proprietary rights of competitors. Intellectual property litigation could result in substantial costs and diversion of our management and other resources. If any infringement claim is asserted against us, we may seek to obtain a license of the other party's intellectual property rights. We cannot assure you that a license would be available on reasonable terms or at all. Environmental Matters Our operations are regulated under a number of federal, state, local and foreign environmental and safety laws and regulations that govern, among other things, the discharge of hazardous materials into the air and water, as well as the handling, storage and disposal of such materials. These laws and regulations include the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, and the Comprehensive Environmental Response, Compensation and Liability Act, as well as analogous state and foreign laws. Compliance with these environmental laws is a major consideration for us because we use in our manufacturing process materials classified as hazardous such as ammoniacal etching solutions, copper and nickel. In addition, because we are a generator of hazardous wastes, we may be subject to potential financial liability for costs associated with an investigation and any remediation of sites at which we have arranged for the disposal of hazardous wastes if such sites become contaminated. Even if we fully comply with applicable environmental laws and are not directly at fault for the contamination, we may still be liable. The wastes we generate include spent ammoniacal etching solutions, solder stripping solutions and hydrochloric acid solution containing palladium; waste water which contains heavy metals, acids, cleaners and conditioners; and filter cake from equipment used for on-site waste treatment. Violations of environmental laws could subject us to revocation of its effluent discharge permits. Any such revocations could require us to cease or limit production at one or more of our facilities, thereby negatively impacting revenues and potentially causing the market price of DDi Corp.'s common stock to decline. Dependence on Key Management We depend on the services of our senior executives, including Bruce D. McMaster, President and Chief Executive Officer. We cannot assure that we will be able to retain him and other executive officers and key personnel or attract additional qualified management in the future. Mr. McMaster is not a party to an employment agreement with us. Our business also depends on our ability to continue to recruit, train and retain skilled employees, particularly engineering and sales personnel, due to our focus on the technologically advanced and time-critical segment of the electronics manufacturing services industry. In addition, our ability to successfully integrate acquired companies depends in part on our ability to retain key management and existing employees at the time of the acquisition. Charter Documents and State Law Provisions Provisions in our charter and bylaws may have the effect of delaying or preventing a change of control or changes in our management that stockholders consider favorable or beneficial. If a change of control or change in management is delayed or prevented, the market price of our common stock could suffer. 36 Controlling Stockholders Investment funds affiliated with Bain Capital, Inc. beneficially own approximately 6% of the outstanding common stock of DDi Corp. In addition, of the nine directors who serve on our board, three are current representatives of Bain Capital, Inc. and two are former representatives of Bain Capital, Inc. By virtue of such stock ownership and board representation, these entities will continue to have a significant influence over all matters submitted to our stockholders, including the election of our directors, and to exercise significant control over our business, policies and affairs. Such concentration of voting power could have the effect of delaying, deterring or preventing a change of control or other business combination that might otherwise be beneficial to our stockholders. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk The DDi Europe facilities agreement and the Dynamic Details senior credit facility bear interest at a floating rate; the DDi Capital senior discount notes and DDi Corp. convertible subordinated notes bear interest at fixed rates. We reduce our exposure to interest rate risks through swap agreements. The Dynamic Details revolving credit facility bears interest at (a) 3.00% per annum plus the applicable LIBOR or (b) 2.00% per annum plus the federal reserve reported overnight funds rate plus 0.5% per annum. As of December 31, 2001, we had no amount outstanding under our revolving credit facility. Based upon our anticipated utilization of the Dynamic Details revolving credit facility through the year ending December 31, 2002, a 10% change in interest rates is not expected to materially affect the interest expense to be incurred on this facility during such period. Under the terms of the current swap agreement, we pay a maximum annual rate of interest applied to a notional amount equal to the principal balance of the term facility portion of the Dynamic Details senior credit facility. From January 1, 2002 through December 31, 2002 we pay a fixed annual rate of 5.99%, from January 1, 2003 through December 31, 2003, we pay a fixed annual rate of 6.49% and from January 1, 2004 through the scheduled maturity of the Tranche B term facility under the Dynamic Details senior credit facility in 2005 we pay a fixed annual rate of 6.99%. The term loan facility portion of the Dynamic Details senior credit facility bears interest based on one-month LIBOR. As of December 31, 2001, one-month LIBOR was 1.88%. If one-month LIBOR increased by 10% to 2.07%, interest expense related to the term loan facility portion would not increase over the year ending December 31, 2002 due to the fixed rates under the swap agreements. The overall effective interest rate for the term loans, after giving effect to the interest rate swap agreement, as of December 31, 2001, was 8.05%. Under the terms of the current swap agreement, DDi Europe pays a fixed annual rate of interest equal to 6.92% applied to fixed amounts of debt per the agreement, through September 2002. As of December 31, 2001, the swap covers approximately 100% of the outstanding debt under the facilities agreement. Based upon our anticipated utilization of the DDi Europe revolving credit facility through the year ending December 31, 2002, a 10% change in interest rates is not expected to materially affect the interest expense to be incurred on this facility during such period. The DDi Europe facilities agreement bears interest based on three-month LIBOR. As of December 31, 2001, three-month LIBOR was 1.88%. If three-month LIBOR increased by 10% to 2.07%, interest expense related to the term loan facility would not increase due to the fixed rate of 6.92% under the swap agreement. The overall effective interest rate for the DDi Europe term loan facilities, after giving effect to the interest rate swap agreement, as of December 31, 2001, was 8.42%. A change in interest rates would not have an effect on our interest expense on the DDi Capital senior discount notes or DDi Corp. convertible subordinated notes because these instruments bear a fixed rate of interest. 37 Foreign Currency Exchange Risk The sales and expenses and financial results of DDi Europe and of our Canadian operations are denominated in British pounds and Canadian dollars, respectively. We have foreign currency translation risk equal to our net investment in those operations. However, since nearly all of our sales are denominated in local currency or in U.S. dollars, we have relatively little exposure to foreign currency transaction risk with respect to sales made. Based on our fiscal 2002 forecast, the effect of an immediate 10% change in exchange rates would not have an impact on our operating results over the year ending December 31, 2002. We do not use forward exchange contracts to hedge exposures to foreign currency denominated transactions and do not utilize any other derivative financial instruments for trading or speculative purposes. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statement information, including the report of independent accountants, required by this Item 8 is set forth on pages F-1 to F-40 of this Annual Report on Form 10-K and is hereby incorporated into this Item 8 by reference. The Quarterly Financial Information required by this Item 8 is set forth in Item 7 of this Annual Report on Form 10-K and is hereby incorporated into this Item 8 by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 38 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (a) DDi Corp. The information set forth under the captions "ELECTION OF DIRECTORS" and "TRANSACTIONS WITH MANAGEMENT AND OTHERS--Section 16(a) Beneficial Ownership Reporting Compliance" in DDi Corp.'s definitive proxy statement (the "Proxy Statement") for the Annual Meeting of Stockholders scheduled to be held in May 2002, is incorporated herein by reference. The Proxy Statement will be filed with the U.S. Securities and Exchange Commission (the "Commission") not later than 120 days after the close of Fiscal 2001. Information regarding DDi Corp.'s executive officers is included in Part I of this Annual Report on Form 10-K under the caption "Executive Officers of DDi Corp." (b) DDi Capital. The information called for by this Item 10 with respect to DDi Capital is omitted under the reduced disclosure format pursuant to General Instruction I(2)(c) of Form 10-K. ITEM 11. EXECUTIVE COMPENSATION (a) DDi Corp. Except as specifically provided, the information set forth under the captions "COMPENSATION OF EXECUTIVE OFFICERS" and "INFORMATION ABOUT THE BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD--Compensation of Directors" in the Proxy Statement is incorporated herein by reference. The Proxy Statement will be filed with the Commission not later than 120 days after the close of Fiscal 2001. The Performance Graph and the Report on Executive Compensation set forth under the caption "COMPENSATION OF EXECUTIVE OFFICERS" in the Proxy Statement shall not be deemed incorporated by reference herein and shall not otherwise be deemed "filed" as part of this Annual Report on Form 10-K. (b) DDi Capital. The information called for by this Item 11 with respect to DDi Capital is omitted under the reduced disclosure format pursuant to General Instruction I(2)(c) of Form 10-K. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (a) DDi Corp. The information set forth under the caption "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" in the Proxy Statement is incorporated herein by reference. The Proxy Statement will be filed with the Commission not later than 120 days after the close of Fiscal 2001. (b) DDi Capital The information called for by this Item 12 with respect to DDi Capital is omitted under the reduced disclosure format pursuant to General Instruction I(2)(c) of Form 10-K. 39 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (a) DDi Corp. The information set forth under the caption "TRANSACTIONS WITH MANAGEMENT AND OTHERS" in the Proxy Statement is incorporated herein by reference. The Proxy Statement will be filed with the Commission not later than 120 days after the close of Fiscal 2001. (b) DDi Capital The information called for by this Item 13 with respect to DDi Capital is omitted under the reduced disclosure format pursuant to General Instruction I(2)(c) of Form 10-K. 40 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Financial Statements INDEX TO FINANCIAL STATEMENTS
Page ---- Report of Independent Accountants.................................................................... F-1 Consolidated Balance Sheets as of December 31, 2001 and 2000......................................... F-2 Consolidated Statements of Operations for the Years Ended December 31, 2001, 2000 and 1999........... F-3 Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2001, 2000 and 1999........................................................................................... F-5 Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended December 31, 2001, 2000 and 1999........................................................................................... F-7 Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999........... F-9 Notes to Consolidated Financial Statements........................................................... F-11
(a)(2) Financial Statement Schedules. Schedule II--Valuation and Qualifying Accounts All other schedules are omitted because they are not applicable or the required information is shown in the Financial Statements or the notes thereto. (a)(3) Exhibits. The exhibits listed below are hereby filed with the Commission as part of this Annual Report on Form 10-K. Certain of the following exhibits have been previously filed with the Commission pursuant to the requirements of the Securities Act or the Exchange Act. Such exhibits are identified by the parenthetical references following the listing of each such exhibit and are incorporated herein by reference. We will furnish a copy of any exhibit upon request, but a reasonable fee will be charged to cover our expense in furnishing such exhibit.
Exhibit Description - ------- ----------- 3.1 Certificate of Incorporation of DDi Merger Co. (Previously filed with Commission on March 30, 2001 as Exhibit 3.1 to DDi Corp.'s, DDi Capital's and Dynamic Details' combined Annual Report on Form 10-K.) 3.2 Amended and Restated By-laws of DDi Corp. (Previously filed with the Commission on March 30, 2001 as Exhibit 3.2 to DDi Corp.'s, DDi Capital's and Dynamic Details' combined Annual Report on Form 10-K.) 3.3 Certificate of Merger of DDi Corp., a California corporation, with and into DDi Merger Co., a Delaware corporation. (Previously filed with the Commission on March 30, 2001 as Exhibit 3.3 to DDi Corp.'s, DDi Capital's and Dynamic Details' combined Annual Report on Form 10-K.) 3.4 DDi Capital Corp. Articles of Incorporation, as amended. (Previously filed with the Commission on November 26, 1997 as Exhibit 3.1 to DDi Capital's Registration Statement on Form S-4, Registration No. 333-41187.) 3.5 Amendment to the Articles of Incorporation of DDi Capital Corp. dated December 15, 1998. (Previously filed with the Commission on March 31, 1999 as Exhibit 3.1.1 to DDi Capital's and Dynamic Details' combined Annual Report on Form 10-K.) 3.6 DDi Capital Corp. By-laws. (Previously filed with the Commission on November 26, 1997 as Exhibit 3.2 to DDi Capital's Registration Statement on Form S-4, Registration No. 333-41187.)
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Exhibit Description - ------- ----------- 4.1 Stockholders Agreement dated as of March 31, 2000. (Previously filed with the Commission on March 30, 2001 as Exhibit 4.1 to DDi Corp.'s, DDi Capital's and Dynamic Details' combined Annual Report on Form 10-K.) 4.2 Amendment, dated as of October 2, 2000, to the Stockholders Agreement dated as of March 31, 2000. (Previously filed with the Commission on March 30, 2001 as Exhibit 4.2 to DDi Corp.'s, DDi Capital's and Dynamic Details' combined Annual Report on Form 10-K.) 4.3 Amendment, dated as of January 29, 2001, to the Stockholders Agreement dated as of March 31, 2000. (Previously filed with the Commission on March 30, 2001 as Exhibit 4.3 to DDi Corp.'s, DDi Capital's and Dynamic Details' combined Annual Report on Form 10-K.) 4.4 Form of certificate representing shares of Common Stock. (Previously filed with the Commission on April 6, 2000 as Exhibit 4.2 to Amendment No. 3 to DDi Corp.'s Registration Statement on Form S-1, Registration No. 333-95623.) 4.5 Subordinated Indenture dated February 20, 2001 between DDi Corp. and State Street Bank and Trust Company Relating to Subordinated Debt Securities. (Previously filed with the Commission on March 30, 2001 as Exhibit 4.5 to DDi Corp.'s, DDi Capital's and Dynamic Details' combined Annual Report on Form 10-K.) 4.6 Supplemental Indenture dated February 20, 2001 between DDi Corp. and State Street Bank and Trust Company Relating to 5 1/4% Convertible Subordinated Notes due 2008. (Previously filed with the Commission on March 30, 2001 as Exhibit 4.6 to DDi Corp.'s, DDi Capital's and Dynamic Details' combined Annual Report on Form 10-K.) 4.7 Indenture dated as of November 18, 1997 between Details Holdings Corp. and State Street Bank and Trust Company Relating to 12 1/2% Senior Discount Notes due 2007. (Previously filed with the Commission on November 26, 1997 as Exhibit 4.1 to DDi Capital's Registration Statement on Form S-4, Registration No. 333-41187.) 4.8 Exchange and Registration Rights Agreement dated as of November 18, 1997, regarding Details Holdings Corp. 12 1/2% Senior Discount Notes due 2007. (Previously filed with the Commission on November 26, 1997 as Exhibit 4.3 to DDi Capital's Registration Statement on Form S-4, Registration No. 333-41187. 4.9 First Supplemental Indenture dated February 10, 1998 between Details Holdings Corp. and State Street Bank and Trust Company. (Previously filed with the Commission on March 30, 2001 as Exhibit 4.9 to DDi Corp.'s, DDi Capital's and Dynamic Details' combined Annual Report on Form 10-K.)
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Exhibit Description - ------- ----------- Material Contracts Relating to Management Compensation Plans or Arrangements 10.1 Details Holdings Corp.-Dynamic Circuits 1996 Stock Option Plan dated as of July 23, 1998. (Previously filed with the Commission on March 31, 1999 as Exhibit 10.6 to DDi Capital's and Dynamic Details' combined Annual Report on Form 10-K.) 10.2 Details Holdings Corp.-Dynamic Circuits 1997 Stock Option Plan dated as of July 23, 1998. (Previously filed with the Commission on March 31, 1999 as Exhibit 10.7 to DDi Capital's and Dynamic Details' combined Annual Report on Form 10-K.) 10.3 Details Holdings Corp. Bonus Plan dated as of July 23, 1998. (Previously filed with the Commission on March 31, 1999 as Exhibit 10.8 to DDi Capital's and Dynamic Details' combined Annual Report on Form 10-K.) 10.4 DDi Corp. 2000 Equity Incentive Plan. (Previously filed with the Commission on March 22, 2000 as Exhibit 10.8 to Amendment No. 2 to DDi Corp.'s Registration Statement on Form S-1, Registration No. 333-95623.) 10.5 The 1997 Details, Inc. Equity Incentive Plan. (Previously filed with the Commission on November 26, 1997 as Exhibit 10.7 to DDi Capital's Registration Statement on Form S-4, Registration No. 333-41187.) 10.6 Details, Inc. 1996 Employee Stock Option Plan. (Previously filed with the Commission on November 26, 1997 as Exhibit 10.8 to DDi Capital's Registration Statement on Form S-4, Registration No. 333-41187.) 10.7 Details, Inc. 1996 Performance Stock Option Plan. (Previously filed with the Commission on November 26, 1997 as Exhibit 10.9 to DDi Capital's Registration Statement on Form S-4, Registration No. 333-41187.) Other Material Contracts 10.9 DDi Corp. Employee Stock Purchase Plan. (Previously filed with the Commission on March 22, 2000 as Exhibit 10.37 to Amendment No. 2 to DDi Corp.'s Registration Statement on Form S-1, Registration No. 333-95623). 10.10 DDi Corp. Employee Stock Purchase Plan for Employees of Non-U.S. Subsidiaries. (Previously filed with the Commission on September 12, 2000 as Exhibit 10.40 to DDi Corp.'s Registration Statement on Form S-1, Registration No. 333- 45648). 10.11 Credit Agreement, dated as of July 23, 1998 (and as amended and restated as of August 28, 1998), among Details Capital Corp., Details, Inc., Dynamic Circuits, Inc., the several banks and other financial institutions or entities from time to time parties to this Agreement, Bankers Trust Company, and The Chase Manhattan Bank. (Previously filed with the Commission on March 2, 2000 as Exhibit 10.3.1 to Amendment No. 1 to DDi Corp.'s Registration Statement on Form S-1, Registration No. 333-95623.) 10.12 First Amendment, dated as of March 10, 1999, to the Credit Agreement, dated as of July 23, 1998, among (i) DDi Capital Corp., formerly known as Details Capital Corp.; (ii) Dynamic Details, Incorporated, formerly known as Details, Inc.; (iii) Dynamic Details Incorporated, Silicon Valley, formerly known as Dynamic Circuits, Inc.; (iv) the several banks and other financial institutions from time to time parties thereto; (v) Bankers Trust Company.; and (vi) The Chase Manhattan Bank. (Previously filed with the Commission on March 2, 2000 as Exhibit 10.3.2 to Amendment No. 1 to DDi Corp.'s Registration Statement on Form S-1, Registration No. 333-95623.)
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Exhibit Description - ------- ----------- 10.13 Second Amendment, dated as of March 22, 2000, to the Credit Agreement, dated as of July 23, 1998, among (i) DDi Capital Corp., formerly known as Details Capital Corp.; (ii) Dynamic Details, Incorporated, formerly known as Details, Inc.; (iii) Dynamic Details Incorporated, Silicon Valley, formerly known as Dynamic Circuits, Inc.; (iv) the several banks and other financial institutions from time to time parties thereto; (v) Bankers Trust Company; and (vi) The Chase Manhattan Bank. (Previously filed with the Commission on March 30, 2001 as Exhibit 10.14 to DDi Corp.'s, DDi Capital's and Dynamic Details' combined Annual Report on Form 10-K.) 10.14 Third Amendment, dated as of October 10, 2000, to the Credit Agreement, dated as of July 23, 1998, among (i) DDi Capital Corp., formerly known as Details Capital Corp.; (ii) Dynamic Details, Incorporated, formerly known as Details, Inc.; (iii) Dynamic Details Incorporated, Silicon Valley, formerly known as Dynamic Circuits, Inc.; (iv) the several banks and other financial institutions from time to time parties thereto; (v) Bankers Trust Company; and (vi) The Chase Manhattan Bank. (Previously filed with the Commission on March 30, 2001 as Exhibit 10.15 to DDi Corp.'s, DDi Capital's and Dynamic Details' combined Annual Report on Form 10-K.) 10.15 Fourth Amendment, dated as of February 13, 2001, to the Credit Agreement, dated as of July 23, 1998, among (i) DDi Capital Corp., formerly known as Details Capital Corp.; (ii) Dynamic Details, Incorporated, formerly known as Details, Inc.; (iii) Dynamic Details Incorporated, Silicon Valley, formerly known as Dynamic Circuits, Inc.; (iv) the several banks and other financial institutions from time to time parties thereto; (v) Bankers Trust Company; and (vi) The Chase Manhattan Bank. (Previously filed with the Commission on March 30, 2001 as Exhibit 10.16 to DDi Corp.'s, DDi Capital's and Dynamic Details' combined Annual Report on Form 10-K.) 10.16 Fifth Amendment, dated as of December 31, 2001, to the Credit Agreement, dated as of July 23, 1998, among (i) DDi Capital Corp., formerly known as Details, Capital Corp.; (ii) Dynamic Details, Incorporated, formerly known as Details, Inc.; (iii) Dynamic Details Incorporated, Silicon Valley, formerly known as Dynamic Circuits, Inc.; (iv) the several banks and other financial institutions from time to time parties thereto; (v) Bankers Trust Company; and (vi) The Chase Manhattan Bank. 10.17 Amendment and Restatement Deed, dated November 15, 2001, relating to a Facilities Agreement dated 27 May 1999, among (i) DDi Europe Limited, formerly known as MCM Electronics Limited, (ii) the additional borrowers named therein, (iii) the other charging parties named therein, and (iv) the Governor and Company of the Bank of Scotland. 10.18 Working Capital Letter, dated November 15, 2001, among (i) DDi Europe Limited, (ii) the additional borrowers named therein, and (iii) the Governor and Company of the Bank of Scotland. 10.19 Composite Guarantee and Debenture, dated November 15, 2001, among (i) DDi Europe Limited and the additional charging companies named therein, and (ii) the Governor and Company of the Bank of Scotland. 10.20 Management Agreement dated October 28, 1997 by and between Details, Inc. and Bain Capital Partners V, L.P. (Previously filed with the Commission on January 20, 1998 as Exhibit 10.6 to Amendment No. 1 to DDi Capital's Registration Statement on Form S-4, Registration No. 333-41187). 10.21 Termination and Fee Agreement dated April 14, 2000 by and between DDi Corp. and Bain Capital Partners V, L.P. (Previously filed with the Commission on March 30, 2001 as Exhibit 10.18 to DDi Corp.'s, DDi Capital's and Dynamic Details' combined Annual Report on Form 10-K.) 10.22 Real Property Master Lease Agreement dated January 1, 1996 between James I. Swenson and Susan G. Swenson, as Trustees of the Swenson Family Trust, and Details, Inc. (Previously filed with the Commission on November 26, 1997 as Exhibit 10.4 to DDi Capital's Registration Statement on Form S-4, Registration No. 333-41187.)
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Exhibit Description - ------- ----------- 10.23 Personal Property Master Lease Agreement dated January 1, 1996 between James I. Swenson and Susan G. Swenson, as Trustees of the Swenson Family Trust, and Details, Inc. (Previously filed with the Commission on November 26, 1997 as Exhibit 10.5 to DDi Capital's Registration Statement on Form S-4, Registration No. 333-41187.) 10.24 Amendment Number One to Real Property Master Lease Agreement dated January 1, 1997 between James I. Swenson and Susan G. Swenson, as trustees of the Swenson Family Trust and Details, Inc. (Previously filed with the Commission on March 30, 2001 as Exhibit 10.38 to DDi Corp.'s, DDi Capital's and Dynamic Details' combined Annual Report on Form 10-K.) 10.25 Lease dated June 15, 1994, by and between Michael J. Irvin, Trustee of the Davila Living Trust dated March 13, 1989 and Colorado Springs Circuits, Inc., regarding 6031-6035 Galley Road, Colorado Springs, Colorado (Previously filed with the Commission on January 20, 1998 as Exhibit 10.16 to Amendment No. 1 to DDi Capital's Registration Statement on Form S-4, Registration No. 333-41187.) 10.26 Lease dated June 15, 1994, by and between Michael J. Irvin, Trustee of the Davila Living Trust dated March 13, 1989 and Colorado Springs Circuits, Inc., regarding 2115 Victor Place, Colorado Springs, Colorado (Previously filed with the Commission on January 20, 1998 as Exhibit 10.17 to Amendment No. 1 to DDi Capital's Registration Statement on Form S-4, Registration No. 333-41187.) 10.27 Lease dated June 15, 1994, by and between Michael J. Irvin, Trustee of the Davila Living Trust dated March 13, 1989 and Colorado Springs Circuits, Inc., regarding 980 Technology Court, Colorado Springs, Colorado. (Previously filed with the Commission on January 20, 1998 as Exhibit 10.18 to Amendment No. 1 to DDi Capital's Registration Statement on Form S-4, Registration No. 333-41187.) 10.28 Lease Agreement dated July 22, 1991 between Geomax and Dynamic Circuits, Inc. (Previously filed with the Commission on March 31, 1999 as Exhibit 10.30 to DDi Capital's and Dynamic Details' combined Annual Report on Form 10-K.) 10.29 Lease dated March 20, 1997 by and between Mercury Partners 30, Inc. and Dynamic Circuits, Inc. (Previously filed with the Commission on March 31, 1999 as Exhibit 10.31 to DDi Capital's and Dynamic Details' combined Annual Report on Form 10-K.) 10.30 Amendment to Lease Agreement, dated as of November 9, 2001 by and between D & D Tarob Properties, LLC and Dynamic Details Incorporated Silicon Valley. 10.31 Lease dated November 12, 1997 by and between Miller and Associates and Dynamic Circuits Inc. (Previously filed with the Commission on March 30, 2001 as Exhibit 10.27 to DDi Corp.'s, DDi Capital's and Dynamic Details' combined Annual Report on Form 10-K.) 10.32 Lease dated August 18 ,1998, by and between Mrs. Alberta M. Talley, Trustee and Dynamic Circuits, Inc. (Previously filed with the Commission on March 31, 1999 as Exhibit 10.33 to DDi Capital's and Dynamic Details' combined Annual Report on Form 10-K.) 10.33 Lease Agreement dated April 14, 1998 by and between Continental Electric Contractors and Cuplex, Inc. (Previously filed with the Commission on March 31, 1999 as Exhibit 10.34 to DDi Capital's and Dynamic Details' combined Annual Report on Form 10-K.) 10.34 Lease Agreement dated as of May 13, 1996, as amended by a First Lease Amendment dated August 7, 1996, between 410 Forest Street Realty Trust and Cuplex, Inc. (Previously filed with the Commission on March 31, 1999 as Exhibit 10.35 to DDi Capital's and Dynamic Details' combined Annual Report on Form 10-K.) 10.35 Lease Agreement dated as of November 2, 1995, between Trammell Crow International Partners and Cuplex, Inc. (Previously filed with the Commission on March 30, 2001 as Exhibit 10.31 to DDi Corp.'s, DDi Capital's and Dynamic Details' combined Annual Report on Form 10-K.)
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Exhibit Description - ------- ----------- 10.36 Asset Purchase Agreement dated June 26, 2000, by and between Dynamic Details, Incorporated, Virginia, and Automata International, Inc., successor by merger to Automata, Inc., Debtor and Debtor in Possession under Case No. 00-2845 (MFW) in the United States Bankruptcy Court for the District of Delaware. (Previously filed with the Commission on September 12, 2000 as Exhibit 10.41 to DDi Corp.'s Registration Statement on Form S-1, Registration No. 333- 45648). 10.37 Amendment No. 1, dated August 1, 2000, to the Asset Purchase Agreement dated June 26, 2000, by and between Dynamic Details, Incorporated, Virginia, and Automata International, Inc., successor by merger to Automata, Inc., Debtor and Debtor in Possession under Case No. 00-2845 (MFW) in the United States Bankruptcy Court for the District of Delaware. (Previously filed with the Commission on September 12, 2000 as Exhibit 10.41.1 to DDi Corp.'s Registration Statement on Form S-1, Registration No. 333-45648). 12.1 Statement re: computation of ratio of earnings to fixed charges. 21.1 Subsidiaries of DDi Corp. 23.1 Consent of PricewaterhouseCoopers LLP. 24.1 Power of Attorney.
(b) Reports on Form 8-K No reports on Form 8-K were filed during the fourth quarter of the fiscal year covered by this report. 46 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, DDi Corp. has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized, in the city of Anaheim, state of California, on the 25th day of March, 2002. DDi CORP. /s/ JOSEPH P. GISCH By: _______________________________ Joseph P. Gisch Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of DDi Corp. and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- * President, Chief Executive - ----------------------------- Officer and Director Bruce D. McMaster (Principal Executive Officer) /s/ JOSEPH P. GISCH Chief Financial Officer, March 25, 2002 - ----------------------------- Secretary and Treasurer Joseph P. Gisch (Principal Financial Officer) * Controller (Principal - ----------------------------- Accounting Officer) John Stumpf * Director - ----------------------------- Prescott Ashe * Director - ----------------------------- Mark Benham * Director - ----------------------------- Edward Conard * Director - ----------------------------- David Dominik * Director - ----------------------------- Robert Guezuraga * Director - ----------------------------- Murray Kenney * Director - ----------------------------- Stephen Pagliuca * Director - ----------------------------- Stephen Zide *By: /s/ JOSEPH P. GISCH ------------------------- Joseph P. Gisch as Attorney-in-fact March 25, 2002 47 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, DDi Capital Corp. has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized, in the city of Anaheim, state of California, on the 25th day of March, 2002. DDi CAPITAL CORP. /s/ JOSEPH P. GISCH By: _______________________________ Joseph P. Gisch Vice President, Chief Financial Officer and Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of DDi Capital Corp. and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- * President, Chief Executive - ----------------------------- Officer and Director Bruce D. McMaster (Principal Executive Officer) /s/ JOSEPH P. GISCH Chief Financial Officer, March 25, 2002 - ----------------------------- Secretary and Treasurer Joseph P. Gisch (Principal Financial and Accounting Officer) * Director - ----------------------------- Prescott Ashe * Director - ----------------------------- David Dominik *By: /s/ JOSEPH P. GISCH ------------------------- Joseph P. Gisch as Attorney-in-fact March 25, 2002 48 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors DDi Corp. and DDi Capital Corp.: In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) on page 42 present fairly, in all material respects, the financial position of DDi Corp. and subsidiaries and DDi Capital Corp. and its subsidiary (collectively, the "Company") at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed under Item 14(a)(2) on page 42 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide reasonable basis for our opinion. As disclosed in Notes 2 and 8 to the consolidated financial statements, effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities." /s/ PRICEWATERHOUSECOOPERS LLP PricewaterhouseCoopers LLP Orange County, California January 29, 2002 F-1 DDi CORP. AND DDi CAPITAL CORP. CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts)
December 31, ------------------------------------------- 2000 2000 2001 2001 ----------- --------- ----------- ---------- DDi Capital DDi Corp. DDi Capital DDi Corp. ----------- --------- ----------- ---------- ASSETS Current assets: Cash and cash equivalents............................................. $ 39,629 $ 66,874 $ 17,569 $ 23,629 Marketable securities--available for sale............................. -- -- 21,886 21,886 Accounts receivable, net.............................................. 87,860 99,828 30,385 42,548 Inventories........................................................... 24,824 30,290 15,196 24,030 Prepaid expenses and other............................................ 2,349 3,145 1,766 3,178 Income tax receivable................................................. -- -- 5,291 5,290 Deferred tax asset.................................................... 14,584 14,584 12,241 12,241 -------- -------- -------- -------- Total current assets............................................... 169,246 214,721 104,334 132,802 Property, plant and equipment, net....................................... 80,928 92,726 79,134 106,869 Debt issuance costs, net................................................. 9,217 9,217 6,280 9,778 Goodwill and other intangibles, net...................................... 199,389 263,456 144,577 218,984 Other.................................................................... 1,048 1,247 1,824 2,384 -------- -------- -------- -------- $459,828 $581,367 $336,149 $470,817 ======== ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt and capital lease obligations......................................................... $ 13,656 $ 16,935 $ 17,184 $ 17,845 Current portion of deferred interest rate swap income................. 1,017 1,017 95 96 Current maturities of other notes payable............................. 895 895 441 441 Revolving credit facilities........................................... -- -- -- 2,975 Accounts payable...................................................... 26,612 37,099 14,470 26,767 Accrued expenses...................................................... 37,647 42,540 17,698 27,582 Income tax payable.................................................... 6,099 8,215 188 2,369 -------- -------- -------- -------- Total current liabilities.......................................... 85,926 106,701 50,076 78,075 Long-term debt and capital lease obligations............................. 291,797 316,308 138,982 260,977 Other notes payable...................................................... 594 594 20 20 Deferred tax liability................................................... 17,971 20,493 784 1,628 Other.................................................................... 874 874 7,645 7,645 -------- -------- -------- -------- Total liabilities.................................................. 397,162 444,970 197,507 348,345 -------- -------- -------- -------- Commitments and contingencies (Note 13) Stockholders' equity: Common stock for DDi Corp. - $0.01 par value, 75,000,000 shares authorized, 44,328,371 and 47,950,886 shares issued and outstanding at December 31, 2000 and 2001, respectively, and for DDi Capital - $0.01 par value, 1,000 shares issued and outstanding at December 31, 2000 and 2001................ 1 443 1 480 Additional paid-in capital............................................ 386,297 468,256 546,710 541,215 Accumulated other comprehensive income (loss)......................... -- (3,048) 565 (4,311) Stockholder receivables............................................... -- (104) -- (712) Accumulated deficit................................................... (323,632) (329,150) (408,634) (414,200) -------- -------- -------- -------- Total stockholders' equity......................................... 62,666 136,397 138,642 122,472 -------- -------- -------- -------- $459,828 $581,367 $336,149 $470,817 ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-2 DDi CAPITAL CORP. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands)
Year Ended December 31, ---------------------------- 1999 2000 2001 -------- -------- -------- Net sales.................................................................. $292,493 $448,357 $284,700 Cost of goods sold......................................................... 201,368 274,659 209,235 Restructuring-related inventory impairment................................. 1,900 -- 3,747 -------- -------- -------- Gross profit............................................................ 89,225 173,698 71,718 Operating expenses: Sales and marketing..................................................... 23,609 38,713 25,447 General and administration.............................................. 16,135 30,426 14,378 Amortization of intangibles............................................. 22,262 19,474 17,681 Restructuring and other related charges................................. 5,100 -- 75,713 -------- -------- -------- Operating income (loss)................................................. 22,119 85,085 (61,501) Interest rate swap valuation............................................... -- -- 9,981 Interest expense (net) and other expense (net)............................. 41,450 36,271 14,797 -------- -------- -------- Income (loss) before income taxes and extraordinary loss................ (19,331) 48,814 (86,279) Income tax benefit (expense)............................................... 5,215 (23,433) 13,226 -------- -------- -------- Income (loss) before extraordinary loss.................................... (14,116) 25,381 (73,053) Extraordinary loss--early extinguishment of debt, net of income tax benefit of $1,437 and $7,640 in 2000 and 2001, respectively...................... -- (2,189) (11,949) -------- -------- -------- Net income (loss).......................................................... $(14,116) $ 23,192 $(85,002) ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-3 DDi CORP. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share and per share amounts)
Year Ended December 31, ---------------------------- 1999 2000 2001 -------- -------- -------- Net sales.................................................................. $292,493 $497,665 $361,638 Cost of goods sold......................................................... 202,387 306,193 263,563 Restructuring-related inventory impairment................................. 1,900 -- 3,747 -------- -------- -------- Gross profit............................................................ 88,206 191,472 94,328 Operating expenses: Sales and marketing..................................................... 23,613 39,723 27,627 General and administration.............................................. 15,362 36,147 21,030 Amortization of intangibles............................................. 22,262 22,806 22,568 Restructuring and other related charges................................. 5,100 -- 76,089 -------- -------- -------- Operating income (loss)................................................. 21,869 92,796 (52,986) Interest rate swap valuation............................................... -- -- 9,981 Interest expense (net) and other expense (net)............................. 46,717 41,225 22,115 -------- -------- -------- Income (loss) before income taxes and extraordinary loss................ (24,848) 51,571 (85,082) Income tax benefit (expense)............................................... 7,415 (25,000) 11,981 -------- -------- -------- Income (loss) before extraordinary loss.................................... (17,433) 26,571 (73,101) Extraordinary loss--early extinguishment of debt, net of income tax benefit of $4,207 and $7,640 in 2000 and 2001, respectively...................... -- (6,367) (11,949) -------- -------- -------- Net income (loss).......................................................... (17,433) 20,204 (85,050) Priority distribution due shares of Class L common stock................... (14,112) (4,356) -- -------- -------- -------- Net income (loss) allocable to common stock................................ $(31,545) $ 15,848 $(85,050) ======== ======== ======== Income (loss) per share--basic: Before extraordinary item................................................ $ (3.21) $ 0.70 $ (1.54) Extraordinary item....................................................... $ -- $ (0.20) $ (0.25) Net income (loss)........................................................ $ (3.21) $ 0.50 $ (1.79) Income (loss) per share--diluted: Before extraordinary item................................................ $ (3.21) $ 0.66 $ (1.54) Extraordinary item....................................................... $ -- $ (0.19) $ (0.25) Net income (loss)........................................................ $ (3.21) $ 0.47 $ (1.79)
The accompanying notes are an integral part of these consolidated financial statements. F-4 DDi CAPITAL CORP. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (In thousands)
Year Ended December 31, -------------------------- 1999 2000 2001 -------- ------- -------- Net income (loss)................................................. $(14,116) $23,192 $(85,002) Other comprehensive income (loss): Foreign currency translation adjustments....................... -- -- (433 ) Cumulative effect of adoption of SFAS No. 133.................. -- -- (627) Unrealized gain on inerest rate swap agreements, net of income tax effect................................................... -- -- 1,575 Unrealized holding gain on marketable securities--available for sale..................................................... -- -- 50 -------- ------- -------- Comprehensive income (loss)....................................... $(14,116) $23,192 $(84,437) ======== ======= ========
The accompanying notes are an integral part of these consolidated financial statements. F-5 DDi CORP. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (In thousands)
Year Ended December 31, --------------------------- 1999 2000 2001 -------- ------- -------- Net income (loss)................................................ $(17,433) $20,204 $(85,050) Other comprehensive income (loss): Foreign currency translation adjustments...................... -- (3,048) (5,021) Cumulative effect of adoption of SFAS No. 133................. -- -- (1,150) Unrealized gain on interest rate swap agreements, net of income tax effect.................................................. -- -- 1,810 Unrealized holding gain on marketable securities--available for sale.................................................... -- -- 50 -------- ------- -------- Comprehensive income (loss)...................................... $(17,433) $17,156 $(89,361) ======== ======= ========
The accompanying notes are an integral part of these consolidated financial statements. F-6 DDi CAPITAL CORP. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (In thousands, except share amounts)
Accumulated Common Stock Additional Other ------------- Paid-In Comprehensive Accumulated Shares Amount Capital Income Deficit Total ------ ------ ---------- ------------- ----------- --------- Balance, December 31, 1998................. 1,000 $ 1 $194,737 $ -- $(332,708) $(137,970) Capital contribution from parent, net... -- -- 5,092 -- -- 5,092 Net loss................................ -- -- -- -- (14,116) (14,116) ----- --- -------- ------ --------- --------- Balance, December 31, 1999................. 1,000 1 199,829 -- (346,824) (146,994) Capital contribution from parent, net... -- -- 186,468 -- -- 186,468 Net income.............................. -- -- -- -- 23,192 23,192 ----- --- -------- ------ --------- --------- Balance, December 31, 2000................. 1,000 1 386,297 -- (323,632) 62,666 Capital contribution from parent, net... -- -- 160,413 -- -- 160,413 Foreign currency translation adjustment............................ -- -- -- (433) -- (433) Cumulative adjustment to reflect adoption of SFAS No. 133.............. -- -- -- (627) -- (627) Unrealized gain on interest rate swap agreements, net of income tax effect............................ -- -- -- 1,575 -- 1,575 Unrealized holding gain on marketable securities................. -- -- -- 50 -- 50 Net loss................................ -- -- -- -- (85,002) (85,002) ----- --- -------- ------ --------- --------- Balance, December 31, 2001................. 1,000 $ 1 $546,710 $ 565 $(408,634) $ 138,642 ===== === ======== ====== ========= =========
The accompanying notes are an integral part of these consolidated financial statements. F-7 DDi CORP. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (In thousands, except share and per share amounts)
Accumulated Common Stock Additional Other ----------------- Paid-In Stockholder Accumulated Comprehensive Shares Amount Capital Receivables Deficit Loss Total ---------- ------ ---------- ----------- ----------- ------------- --------- Balance, December 31, 1998........................ 24,182,636 $242 $162,552 $(648) $(331,921) $ -- $(169,775) Issuance of common stock upon exercise of stock options.................................. 110,774 1 44 -- -- -- 45 Issuance of common stock........................ 9,421 -- 66 -- -- -- 66 Accrued interest on stockholder receivables..... -- -- -- (34) -- -- (34) Repayment of stockholder receivables............ -- -- -- 16 -- -- 16 Net loss........................................ -- -- -- -- (17,433) -- (17,433) ---------- ---- -------- ----- --------- ------- --------- Balance, December 31, 1999........................ 24,302,831 243 162,662 (666) (349,354) -- (187,115) Issuance of common stock upon exercise of stock options.................................. 665,376 7 1,261 -- -- -- 1,268 Issuance of common stock in initial public offering, net of offering costs of $14,977..... 12,000,000 120 152,903 -- -- -- 153,023 Issuance of common stock in MCM acquisition..... 2,230,619 22 29,040 -- -- -- 29,062 Issuance of common stock in follow-on offering, net of offering costs of $7,557...... 4,608,121 46 120,848 -- -- -- 120,894 Issuance of common stock upon exercise of warrants....................................... 451,782 5 102 -- -- -- 107 Issuance of common stock through Employee Stock Purchase Plan............................ 69,642 -- 1,269 -- -- -- 1,269 Income tax benefit of disqualified dispositions of stock options............................... -- -- 171 -- -- -- 171 Foreign currency translation adjustment......... -- -- -- -- -- (3,048) (3,048) Accrued interest on stockholder receivables..... -- -- -- (33) -- -- (33) Repayment, net, of stockholder receivables...... -- -- -- 595 -- -- 595 Net income...................................... -- -- -- -- 20,204 -- 20,204 ---------- ---- -------- ----- --------- ------- --------- Balance, December 31, 2000........................ 44,328,371 443 468,256 (104) (329,150) (3,048) 136,397 Issuance of common stock upon exercise of stock options.................................. 531,743 6 3,132 -- -- -- 3,138 Issuance of common stock in follow-on offering, net of offering costs of $4,369...... 3,000,000 30 66,101 -- -- -- 66,131 Issuance of common stock through Employee Stock Purchase Plan............................ 90,772 1 1,131 -- -- -- 1,132 Foreign currency translation adjustment......... -- -- -- -- -- (1,973) (1,973) Accrued interest on stockholder receivables..... -- -- -- (8) -- -- (8) Increase in stockholders receivable............. -- -- -- (600) -- -- (600) Cumulative adjustment to reflect adoption of SFAS No. 133................................... -- -- -- -- -- (1,150) (1,150) Unrealized gain on interest rate swap agreements, net of income tax effect........... -- -- -- -- -- 1,810 1,810 Unrealized holding gain on marketable securities..................................... -- -- -- -- -- 50 50 Income tax benefit of disqualified dispositions of stock options............................... -- -- 2,391 -- -- -- 2,391 Compensation charge for stock option modification................................... -- -- 204 -- -- -- 204 Net loss........................................ -- -- -- -- (85,050) -- (85,050) ---------- ---- -------- ----- --------- ------- --------- Balance, December 31, 2001........................ 47,950,886 $480 $541,215 $(712) $(414,200) $(4,311) $ 122,472 ========== ==== ======== ===== ========= ======= =========
The accompanying notes are an integral part of these consolidated financial statements. F-8 DDi CAPITAL CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Year Ended December 31, ------------------------------- 1999 2000 2001 -------- --------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)......................................................................... $(14,116) $ 23,192 $ (85,002) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Restructuring and other related charges................................................. 7,000 -- 77,018 Depreciation............................................................................ 14,413 16,690 17,088 Amortization of debt issuance costs and discount........................................ 10,931 11,073 5,186 Amortization of goodwill and intangible assets.......................................... 22,262 19,474 17,681 Amortization of deferred interest rate swap income...................................... (724) (1,020) (1,351) Write-off of debt issuance costs........................................................ -- 3,524 4,788 Write-off of deferred swap income....................................................... -- (1,190) -- Deferred income taxes................................................................... (6,462) (10,829) (17,370) Interest rate swap valuation........................................................... -- -- 9,981 Gain on sale of fixed assets........................................................... -- -- (32) Change in operating assets and liabilities, net of acquisitions: (Increase) decrease in accounts receivable.............................................. (7,703) (36,368) 59,325 (Increase) decrease in inventories...................................................... (9,813) (564) 7,815 (Increase) decrease in prepaid expenses and other....................................... (1,497) (883) 262 Increase (decrease) in current income taxes............................................. 4,687 15,361 (6,913) Increase (decrease) in accounts payable................................................. 3,227 6,630 (15,320) Increase (decrease) in accrued expenses and other accrued liabilities................... 2,607 15,961 (25,519) -------- --------- ---------- Net cash provided by operating activities............................................ 24,812 61,051 47,637 -------- --------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of equipment and leasehold improvements......................................... (18,225) (24,016) (24,670) Proceeds from sale of fixed assets........................................................ -- -- 142 Purchase of marketable securities--available for sale..................................... -- -- (51,758) Proceeds from sale of marketable securities--available for sale........................... -- -- 29,922 Merger and acquisition-related expenditures............................................... (323) -- (535) Acquisition of Automata................................................................... -- (19,676) -- Acquisition of Golden, net of cash acquired of $722....................................... -- (12,473) -- Acquisition of Olympic.................................................................... -- -- (12,757) Acquisition of Nelco...................................................................... -- -- (2,963) Acquisition of Altatron, net of cash acquired of $81...................................... -- -- (4,786) -------- --------- ---------- Net cash used in investing activities................................................ (18,548) (56,165) (67,405) -------- --------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments on long-term debt................................................................ (3,263) (140,588) (150,875) Net repayments on revolving credit facility............................................... (7,000) -- (186) Payments of debt issuance and capital costs............................................... -- (742) (3,915) Payments of other notes payable........................................................... (2,569) (2,473) (1,028) Principal payments on capital lease obligations........................................... (1,016) (1,553) (1,810) Capital contribution from parent, net..................................................... 261 182,759 157,623 Payments of escrow payable to redeemed stockholders....................................... -- (1,267) (1,602) Proceeds from (payments for) interest rate swaps.......................................... 6,062 (2,037) -- Payments from stockholder receivables..................................................... -- -- (487) -------- --------- ---------- Net cash provided by (used in) financing activities.................................. (7,525) 34,099 (2,280) -------- --------- ---------- Effect of exchange rate changes on cash................................................... -- -- (12) -------- --------- ---------- Net increase (decrease) in cash and cash equivalents......................................... (1,261) 38,985 (22,060) Cash and cash equivalents, beginning of year................................................. 1,905 644 39,629 -------- --------- ---------- Cash and cash equivalents, end of year....................................................... $ 644 $ 39,629 $ 17,569 ======== ========= ==========
The accompanying notes are an integral part of these consolidated financial statements. F-9 DDi CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Year Ended December 31, ------------------------------ 1999 2000 2001 -------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)............................................................... $(17,433) $ 20,204 $ (85,050) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Restructuring and other related charges....................................... 7,000 -- 77,328 Depreciation.................................................................. 14,413 18,730 21,156 Amortization of debt issuance costs and discount.............................. 16,226 14,298 5,668 Amortization of goodwill and intangible assets................................ 22,262 22,806 22,568 Amortization of deferred interest rate swap income............................ (724) (1,020) (1,351) Write-off of debt issuance costs.............................................. -- 4,165 4,788 Write-off of deferred swap income............................................. -- (1,190) -- Deferred income taxes......................................................... (8,892) (12,673) (18,298) Interest income on stockholder receivables.................................... (34) (33) (8) Interest rate swap valuation.................................................. -- -- 9,981 Gain on sale of fixed assets.................................................. -- -- (26) Change in operating assets and liabilities, net of acquisitions: (Increase) decrease in accounts receivable.................................... (7,703) (34,953) 61,954 (Increase) decrease in inventories............................................ (9,813) (1,212) 5,972 Increase in prepaid expenses and other........................................ (1,066) (936) (668) Increase (decrease) in current income taxes................................... 4,687 12,171 (7,582) Increase (decrease) in accounts payable....................................... 3,227 8,021 (16,754) Increase (decrease) in accrued expenses and other accrued liabilities......... 2,662 16,453 (23,854) -------- --------- --------- Net cash provided by operating activities.................................... 24,812 64,831 55,824 -------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of equipment and leasehold improvements............................... (18,225) (27,214) (35,158) Proceeds from sale of fixed assets.............................................. -- -- 142 Purchase of marketable securities--available for sale........................... -- -- (51,758) Proceeds from sale of marketable securities--available for sale................. -- -- 29,922 Merger and acquisition-related expenditures..................................... (323) -- (535) Acquisition of MCM, net of cash acquired of $7,794.............................. -- (2,599) (89) Acquisition of Automata......................................................... -- (19,676) -- Acquisition of Golden, net of cash acquired of $722............................. -- (12,473) -- Acquisition of Olympic.......................................................... -- -- (12,757) Acquisition of Nelco............................................................ -- -- (2,963) Acquisition of Altatron, net of cash acquired of $81............................ -- -- (4,786) Acquisition of Thomas Walter.................................................... -- -- (24,787) -------- --------- --------- Net cash used in investing activities........................................ (18,548) (61,962) (102,769) -------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt........................................ -- -- 100,000 Payments on long-term debt...................................................... (3,263) (207,536) (155,547) Net borrowings (repayments) on revolving credit facilities...................... (7,000) -- 2,750 Payments of debt issuance and capital costs..................................... -- (742) (7,896) Payments of other notes payable................................................. (2,569) (2,473) (1,028) Principal payments on capital lease obligations................................. (1,016) (1,902) (2,789) Payments of escrow payable to redeemed stockholders............................. -- (1,267) (1,602) Repayment/(borrowing) of stockholder receivables................................ 16 595 (600) Proceeds from (payments for) interest rate swaps................................ 6,062 (2,037) -- Net proceeds from issuance of common stock through initial public offering...... -- 156,660 -- Costs incurred in connection with the issuance of common stock through initial public offering............................................................... -- (3,638) -- Net proceeds from issuance of common stock through follow-on public offerings... -- 122,000 66,975 Costs incurred in connection with the issuance of common stock through follow-on public offerings.............................................................. -- (1,106) (844) Issuance of common stock through Employee Stock Purchase Plan................... -- 1,270 1,132 Proceeds from exercise of stock options......................................... 45 1,375 3,138 -------- --------- --------- Net cash provided by (used in) financing activities.......................... (7,725) 61,199 3,689 -------- --------- --------- Effect of exchange rate changes on cash......................................... -- 2,158 11 -------- --------- --------- Net increase (decrease) in cash and cash equivalents......................... (1,461) 66,226 (43,245) Cash and cash equivalents, beginning of year..................................... 2,109 648 66,874 -------- --------- --------- Cash and cash equivalents, end of year........................................... $ 648 $ 66,874 $ 23,629 ======== ========= =========
The accompanying notes are an integral part of these consolidated financial statements. F-10 DDi CORP. AND DDi CAPITAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) 1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS Basis of Presentation The consolidated financial statements for DDi Corp. ("DDi Corp.") include the accounts of its wholly-owned subsidiaries, DDi Intermediate Holdings Corp. ("Intermediate") and its subsidiaries and DDi Europe Limited ("DDi Europe" f/k/a MCM Electronics Limited ("MCM")). The consolidated financial statements for DDi Capital Corp. ("DDi Capital"), a wholly-owned subsidiary of Intermediate, includes the accounts of its wholly-owned subsidiary Dynamic Details, Incorporated and its subsidiaries ("Dynamic Details"). Collectively, DDi Corp. and its subsidiaries are referred to as the "Company." As more fully described in Note 14, the consolidated financial statements of DDi Corp. include the results of MCM commencing on April 14, 2000, the date of acquisition of MCM, Automata International, Inc. ("Automata") commencing on August 4, 2000, the date of the acquisition of Automata's assets, Golden Manufacturing, Inc. ("Golden") commencing on September 15, 2000, the date of the acquisition of Golden's assets, Thomas Walter Limited ("Thomas Walter") commencing on March 5, 2001, the date of acquisition of Thomas Walter, Nelco Technology, Inc. ("Nelco") commencing on April 27, 2001, the date of acquisition of Nelco's assets, Olympic Circuits Canada ("Olympic") commencing on May 9, 2001, the date of acquisition of Olympic and Altatron Technology Inc. ("Altatron") commencing on June 4, 2001, the date of acquisition of Altatron's assets. All intercompany transactions have been eliminated in consolidation. Recapitalization--In October 1997, the Company completed a recapitalization transaction with a group of investors. The historical bases of the Company's assets and liabilities were not affected. In connection with the recapitalization, DDi Corp. incorporated Dynamic Details, Incorporated ("Dynamic Details") as a wholly-owned subsidiary and contributed substantially all of its assets, subject to certain liabilities, to Dynamic Details. In November 1997, DDi Corp. organized DDi Capital Corp. ("DDi Capital") as a wholly-owned subsidiary, and in February 1998, contributed substantially all its assets (including all of the shares of common stock of Dynamic Details), subject to certain liabilities, including discount notes (as described in Note 6, the "Capital Senior Discount Notes"), to DDi Capital. In July 1998, DDi Corp. organized Intermediate as a wholly-owned subsidiary and contributed all of the shares of common stock of DDi Capital to Intermediate. In April 2000, DDi Corp. acquired MCM, (see Note 14) and has subsequently combined MCM with its other European operations to form DDi Europe Limited ("DDi Europe"). DDi Europe, Dynamic Details and Dynamic Details Design LLC, a wholly-owned subsidiary of Intermediate formed in 1998, represent the operating divisions of DDi Corp. Reclassification--Concurrent with the closing of DDi Corp.'s initial public offering on April 14, 2000 (see Note 18), each share of Class L common stock was reclassified into one share of Class A common stock plus an additional number of shares of Class A common stock (determined by dividing the preference amount of such per share by the initial public offering price of $14.00 per share). Class A and Class L common stock share ratably in the net income (loss) remaining after giving effect to the 12% yield on the Class L common stock. Each share of Class A common stock was then converted into 2.8076 shares of new common stock when DDi Corp. reincorporated in the state of Delaware. All periods presented have been retroactively adjusted for the effect of the reclassification and stock split. Liquidity--Based on the Company's current level of operations, management believes that cash, cash equivalents, marketable securities, cash generated from operations and amounts available under its Senior Credit Facility (as defined in Note 6) will be adequate to meet its debt service requirements, capital expenditures and working capital needs for the foreseeable future. F-11 DDi CORP. AND DDi CAPITAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands, except share and per share amounts) Nature of Business The Company provides technologically advanced, time-critical electronics design, development and manufacturing services to original equipment manufacturers and other providers of electronics manufacturing services. The Company serves over 2,000 customers in the communications, networking, computer, medical, automotive industrial and aerospace industries. 2. SIGNIFICANT ACCOUNTING POLICIES The preparation of the Company's consolidated financial statements, in accordance with accounting principles generally accepted in the United States of America, requires the Company to make estimates and judgments that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses for each period. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Cash and cash equivalents--Management defines cash and cash equivalents as highly liquid deposits with maturities of 90 days or less when purchased. The Company maintains cash and cash equivalents balances at certain financial institutions in excess of amounts insured by federal agencies. Management does not believe that as a result of this concentration it is subject to any unusual financial risk beyond the normal risk associated with commercial banking relationships. Marketable securities--The Company classifies its existing marketable equity securities as available-for-sale in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." These securities, consisting of government and agency bonds and corporate bonds, are carried at fair market value, with unrealized gains and losses reported in stockholders' equity as a component of accumulated other comprehensive income (loss). Realized gains or losses on securities sold are based on the specific identification method. Inventories--Inventories include freight-in, materials, labor and manufacturing overhead costs and are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. Property, plant and equipment--Property, plant and equipment are stated at cost or in the case of property, plant and equipment acquired through business combinations, at fair value based upon allocated purchase price at the acquisition date. Depreciation is provided over the estimated useful lives of the assets using both the straight-line and accelerated methods. For leasehold improvements, amortization is provided over the shorter of the estimated useful lives of the assets or the lease term and included in the caption depreciation expense. Debt issuance costs and debt discounts--The Company defers certain debt issuance costs relating to the establishment of its various debt facilities and the issuance of its debt instruments (see Note 6). These costs are capitalized and amortized over the expected term of the related indebtedness using the effective interest method. The Company issued the Capital Senior Discount Notes (as defined in Note 6) at a discount. Discounts are reflected in the accompanying balance sheets as a reduction of face value and are amortized over the expected term of the related indebtedness using the effective interest method. Amortization included as interest expense F-12 DDi CORP. AND DDi CAPITAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands, except share and per share amounts) for DDi Capital amounted to approximately $8.9 million, $9.2 million and $3.1 million for the years ended December 31, 1999, 2000 and 2001, respectively. Amortization included as interest expense for DDi Corp. amounted to approximately $14.1 million, $12.4 million and $3.1 million for the years ended December 31, 1999, 2000 and 2001, respectively. Business combinations--The Company has accounted for all business combinations through December 31, 2001 as purchases in accordance with Accounting Principles Board Opinion No. 16, and accordingly, the results of operations since the date of acquisition are included in the consolidated financial statements. Goodwill and identifiable intangibles--The Company amortizes the goodwill recorded as a result of its business combinations on a straight-line basis ranging from 20 years to 25 years, from the date of each transaction. Management believes that the estimated useful lives established at the dates of each transaction were reasonable based on the economic factors applicable to each of the businesses. Identifiable intangibles represent assets acquired through business combinations, and are stated at their fair values based upon purchase price allocations as of the transaction date. At December 31, 2000 and 2001, these assets are primarily comprised of developed technologies, customer relationships/tradenames, and assembled workforce. The developed technology assets are being charged to income over their estimated useful lives ranging from 5 to 10 years, using straight-line and accelerated methods of amortization, reflective of the relative contribution of each developed technology in periods following the acquisition date. The customer relationships/tradenames assets are being amortized on a straight-line basis over their estimated useful lives of 18 years. The assembled workforce assets are being amortized on a straight-line basis over their estimated useful lives ranging from 4 to 5 years. As of December 31, 2000 and 2001, the accumulated amortization related to goodwill and identifiable intangibles for DDi Capital was approximately $52.6 million and $59.6 million, respectively. As of December 31, 2000 and 2001, the accumulated amortization related to goodwill and identifiable intangibles for DDi Corp. was approximately $55.9 million and $67.7 million, respectively. Revenue recognition--The Company recognizes revenue when there is persuasive evidence of an arrangement with the customer which states a fixed and determinable sales price and terms, delivery of the product has occurred in accordance with the terms of the sale and collectibility of the sale is reasonably assured. The Company provides a normal warranty on its products and accrues an estimated amount for this expense at the time of the sale. Comprehensive Income--SFAS No. 130 "Reporting Comprehensive Income" establishes requirements for reporting and disclosure of comprehensive income (loss) and its components. Comprehensive income (loss) includes unrealized holding gains and losses and other items that have previously been excluded from net income and reflected instead in stockholders' equity. Comprehensive income (loss) for DDi Capital and DDi Corp. consists of net income (loss) plus the effect of foreign currency translation adjustments, unrealized holding gains on marketable securities classified as available-for-sale and unrealized net gains (losses) on interest rate swaps and related unrealized net tax impact. The Company adopted SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" on January 1, 2001 (see Note 8). In accordance with the transition provisions of SFAS No. 133, DDi Capital and DDi Corp. recorded a cumulative-effect-type adjustment to accumulated other comprehensive income (loss) for the initial difference between the book value and fair value of interest rate swap agreements as of January 1, 2001. Concentration of credit risk--Financial instruments which potentially expose the Company to concentration of credit risk consist principally of trade accounts receivable. To minimize this risk, the Company performs F-13 DDi CORP. AND DDi CAPITAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands, except share and per share amounts) ongoing credit evaluations of customers' financial condition and maintains contacts with its customers which allows the Company to monitor current changes in business operations so it can respond as needed; the Company, however, generally does not require collateral. In 2001, no individual customer accounted for 10% or more of the Company's net sales and no individual customer accounted for 10% or more of the Company's total receivables. In 2000, one individual customer accounted for 11% of DDi Corp.'s net sales. As of December 31, 2000, one individual customer accounted for 17% of the Company's total receivables. Environmental matters--The Company expenses environmental expenditures related to existing conditions resulting from past or current operations and from which no current or future benefit is discernible. Expenditures which extend the life of the related property or mitigate or prevent future environmental contamination are capitalized. The Company determines its liability on a site-by-site basis and records a liability at the time when it is probable and can be reasonably estimated. To date, such costs have not been material (see Note 13). Income taxes--The Company records on its balance sheet deferred tax assets and liabilities for expected future tax consequences of events that have been recognized in different periods for financial statement purposes versus tax return purposes. Management provides a valuation allowance for net deferred tax assets when it is more likely than not that a portion of such net deferred tax assets will not be recovered through future operations (see Note 12). DDi Capital is included as part of the consolidated tax return filed by DDi Corp. For financial statement purposes, DDi Capital has provided for income taxes as if it were filing separately throughout each year. Long-lived assets--The Company follows SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS No. 121 requires that long-lived assets, including goodwill, be reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. The Company evaluates potential impairment by comparing the carrying amount of the assets with the estimated undiscounted cash flows associated with them. If an impairment exists, the Company measures the impairment utilizing discounted cash flows. During the year ended December 31, 2001, pursuant to an evaluation under SFAS No. 121, the Company determined that the intangibles associated with the two facilities to be closed in connection with the Company's 2001 restructuring plan (see Note 15) have a fair value of zero. The Company estimated the amount of the impairment by comparing the discounted cash flows expected to be generated from the assets of the closed facilities to their carrying value. As a result, the Company recorded an adjustment to the carrying value of these intangible assets of $51.4 million to restructuring and related charges in the fourth quarter of 2001. Foreign currency translation--The Company has designated local currency as the functional currency for its foreign subsidiaries. Accordingly, the assets and liabilities of foreign subsidiaries are translated at the rates of exchange at the balance sheet date. The income and expense items of these subsidiaries are translated at average monthly rates of exchange. The resulting translation gains and losses are included as a component of stockholders' equity on the consolidated balance sheet. The impact of these translation gains and losses on comprehensive income loss are included on the consolidated statement of comprehensive income (loss). Derivative financial instruments--The Company has only limited involvement with derivative financial instruments. From October 1998 through December 31, 2001 the Company utilized interest rate exchange agreements ("Swap Agreements") (see Note 8) to reduce the risk of fluctuations in interest rates applicable to its Senior Term Facility (see Note 6). F-14 DDi CORP. AND DDi CAPITAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands, except share and per share amounts) On January 1, 2001, the Company adopted SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities." In accordance with the transition provisions of SFAS No. 133, DDi Capital and DDi Corp. recorded a cumulative-effect-type adjustment to accumulated other comprehensive income (loss) of approximately $0.6 million and $1.2 million, respectively, for the initial difference between the book value and fair value of interest rate swap agreements as of January 1, 2001. The fair value of interest rate swaps at December 31, 2001 is included in accrued expenses and other long-term liabilities in the consolidated balance sheets. Stock options--The Company has adopted SFAS No. 123, "Accounting for Stock-Based Compensation," which establishes a fair value based method of accounting for compensation cost related to stock option plans and other forms of stock-based compensation plans. The Company has elected to provide the pro forma disclosures as if the fair value based method had been applied. In accordance with SFAS No. 123, the Company applies the intrinsic value based method of accounting defined under Accounting Principles Board Opinion No. 25 ("APB Opinion No. 25"), and accordingly, does not recognize compensation expense for its plans to the extent employee options are issued at exercise prices equal to or greater than the fair market value at the date of grant. Basic and diluted earnings per share--The Company has adopted the provisions of SFAS No. 128 "Earnings Per Share," which requires the Company to report both basic net income (loss) per share, which is based on the weighted average number of common shares outstanding, excluding contingently issuable shares such as the Class L common stock that were contingently convertible into common stock upon certain events, and diluted net income (loss) per share, which is based on the weighted average number of common shares outstanding and dilutive potential common shares outstanding. Prior to the initial public offering (see Note 1 and Note 18), the Company had two classes of common stock, Class A common stock ("Class A common") and Class L common stock ("Class L common"). Class L common was identical to Class A common, except that each share of Class L common was entitled to a preferential payment upon any distribution by the Company equal to the original cost of such share ($364.09) plus an amount which accrues from the original issuance date on a daily basis at 12% per annum, compounded quarterly. After payment of this preference amount, each share of Class A common and Class L common would then share equally in all distributions. There were 396,330 Class L common shares issued and outstanding at December 31, 1999. The stated values for Class L common was $147,216 at December 31, 1999. The Class L common liquidation preference was $179,996 at December 31, 1999. F-15 DDi CORP. AND DDi CAPITAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands, except share and per share amounts) The following is a reconciliation of the numerator and denominator used in the primary and diluted income (loss) per share calculation:
Year Ended December 31, ------------------------------------ 1999 2000 2001 ---------- ----------- ----------- Numerator: Income (loss) before extraordinary item......................... $ (17,433) $ 26,571 $ (73,101) Priority distribution due shares of Class L common stock........ (14,112) (4,356) -- ---------- ----------- ----------- Income (loss) allocable to common stock......................... (31,545) 22,215 (73,101) Extraordinary item.............................................. -- (6,367) (11,949) ---------- ----------- ----------- Net income (loss) allocable to common stock..................... $ (31,545) $ 15,848 $ (85,050) ========== =========== =========== Denominator: Weighted average shares of common stock outstanding (basic)..... 9,831,042 31,781,536 47,381,516 Dilutive potential common shares: Stock options and warrants...................................... -- 1,738,911 -- ---------- ----------- ----------- Shares used in computing diluted income (loss) per share........ 9,831,042 33,520,447 47,381,516 ========== =========== ===========
As a result of the loss before extraordinary item, after deducting priority distributions of Class L common stock, incurred during the years ended December 31, 1999 and 2001 all potential common shares were anti-dilutive and excluded from the diluted net loss per share calculation for those periods. Segment reporting--The Company has adopted the provisions of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 established standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports issued to stockholders. It also established standards for related disclosures about products and services, geographic areas and major customers. Operating segments are defined as components of an enterprise that engages in business activities from which it may earn revenues and incur expenses whose separate financial information is available and is evaluated regularly by the Company's chief operating decision makers, or decision making group, to perform resource allocations and performance assessments. The Company's chief operating decision maker is the Chief Executive Officer. Based on the evaluation of the Company's financial information, management believes that the Company operates in one reportable segment which designs, develops, manufactures, assembles and tests complex printed circuit boards, back panels and related electronic products. The Company operates in two geographical areas, domestic (U.S.A.) and international. Revenues are attributed to the country to which the product is sold. Revenues by product and service are not reported as it is impracticable to do so. During the years ended December 31, 1999, 2000 and 2001 there were no material assets in or revenues realized from any individual foreign country. F-16 DDi CORP. AND DDi CAPITAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands, except share and per share amounts) The following summarizes financial information by geographic area for DDi Corp.:
Year ended December 31, -------------------------- 1999 2000 2001 -------- -------- -------- Net sales: Domestic............................ $275,406 $408,151 $262,938 Europe.............................. 9,161 67,503 84,433 Other............................... 7,926 22,011 14,267 -------- -------- -------- Total........................... $292,493 $497,665 $361,638 ======== ======== ========
Net sales by geographic area for DDi Capital for the years ended December 31, 1999, 2000 and 2001 are the same except the sales to Europe were $18,195 and $7,495 for the years ended December 31, 2000 and 2001, respectively.
December 31, ----------------- 2000 2001 -------- -------- Long-lived assets: Domestic...................................... $290,582 $222,101 International................................. 76,064 115,914 -------- -------- Total..................................... $366,646 $338,015 ======== ========
Long-lived assets for DDi Capital at December 31, 2000 consist only of the domestic long-lived assets. Long-lived assets for DDi Capital at December 31, 2001 consist of $218,603 in domestic long-lived assets and $13,212 in international long-lived assets. Reclassifications--Certain prior year amounts have been reclassified to conform with the 2001 presentation. Recently issued accounting standards--In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141 and No. 142. SFAS No. 141 "Business Combinations" requires that the purchase method of accounting be used for all business combinations, establishes specific criteria for recognizing intangible assets separately from goodwill and requires certain disclosures regarding reasons for a business combination and the allocation of the purchase price paid. SFAS No. 141 is effective for all business combinations initiated after June 30, 2001 and for all business combinations accounted for using the purchase accounting method for which the date of acquisition is after June 30, 2001. SFAS No. 142 "Goodwill and Other Intangible Assets" establishes that goodwill and certain intangible assets will not be amortized and the amortization period of certain other intangible assets will no longer be limited to forty years. In addition, SFAS No. 142 requires that goodwill and intangible assets that are not amortized be tested for impairment at least annually. SFAS No. 142 is effective in fiscal years beginning after December 15, 2001. For acquisitions effective before June 30, 2001, the Company will adopt both SFAS No. 141 and No. 142 on January 1, 2002. The Company will implement SFAS No. 141 and SFAS No. 142 for any acquisitions occurring after June 30, 2001. As part of the adoption of SFAS No. 142 on January 1, 2002, the Company will no longer amortize goodwill or intangible assets with indefinite lives related to existing goodwill and intangible assets. The Company is currently evaluating the impact of the adoption of SFAS No. 142 on its consolidated financial statements. In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of F-17 DDi CORP. AND DDi CAPITAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands, except share and per share amounts) long-lived assets. SFAS No. 144 develops one accounting model for long-lived assets that are to be disposed of by sale, requires that long-lived assets that are to be disposed by sale be measured at the lower of book value or fair value less cost to sell and expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. SFAS No. 144 is effective for all fiscal years beginning after December 15, 2001 and is therefore effective for the Company beginning with its fiscal quarter ending March 31, 2002. The Company is currently evaluating the impact of the adoption of SFAS No. 144 on its consolidated financial statements. 3. ACCOUNTS RECEIVABLE Accounts receivable, net consist of the following:
DDi Capital DDi Corp. ------------------------ ------------------------ December 31, December 31, December 31, December 31, 2000 2001 2000 2001 ------------ ------------ ------------ ------------ Accounts receivable........................... $ 99,734 $34,662 $112,705 $47,549 Less: Allowance for doubtful accounts......... (11,874) (4,277) (12,877) (5,001) -------- ------- -------- ------- $ 87,860 $30,385 $ 99,828 $42,548 ======== ======= ======== =======
4. INVENTORIES Inventories consist of the following:
DDi Capital DDi Corp. ------------------------- ------------------------- December 31, December 31, December 31, December 31, 2000 2001 2000 2001 ------------ ------------ ------------ ------------ Raw materials................................. $ 9,970 $ 9,868 $12,561 $14,325 Work-in-process............................... 12,117 3,493 14,667 6,840 Finished goods................................ 2,737 1,835 3,062 2,865 ------- ------- ------- ------- $24,824 $15,196 $30,290 $24,030 ======= ======= ======= =======
5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following:
DDi Capital DDi Corp. ------------------------ ------------------------ December 31, December 31, December 31, December 31, 2000 2001 2000 2001 ------------ ------------ ------------ ------------ Buildings and leasehold improvements... $ 18,497 $ 23,557 $ 20,644 $ 28,695 Machinery and equipment................ 101,141 93,810 120,253 138,428 Office furniture and equipment......... 16,179 17,043 19,535 21,494 Vehicles............................... 334 269 1,157 878 Land................................... 2,235 2,235 2,235 2,235 Deposits on equipment.................. 2,336 554 2,390 554 -------- -------- -------- -------- 140,722 137,468 166,214 192,284 Less: Accumulated depreciation......... (59,794) (58,334) (73,488) (85,415) -------- -------- -------- -------- $ 80,928 $ 79,134 $ 92,726 $106,869 ======== ======== ======== ========
F-18 DDi CORP. AND DDi CAPITAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands, except share and per share amounts) The depreciable lives assigned to buildings are 30-40 years. Existing leasehold improvements are depreciated over 7-15 years. Machinery, office furniture, equipment and vehicles are each depreciated over 3-7 years. Deposits are not depreciated as the related asset has not been placed into service. Buildings and leasehold improvements include capital leases of approximately $5.1 million with related accumulated depreciation of $2.5 million and $3.0 million at December 31, 2000 and 2001, respectively. DDi Capital machinery and equipment includes capital leases of approximately $6.5 million and $4.9 million, with related accumulated depreciation of $2.3 million and $2.7 million at December 31, 2000 and 2001, respectively. DDi Corp. machinery and equipment includes capital leases of approximately $7.2 million and $7.8 million, with related accumulated depreciation of $2.8 million and $3.6 million at December 31, 2000 and 2001, respectively. The land and building associated with the closure of the Garland, Texas facility (see Note 15) held for sale by the Company has a book value of approximately $6.4 million with related accumulated depreciation of $0.3 million. Depreciation of the building was discontinued in October 2001. 6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS Long-term debt and capital lease obligations consist of the following:
December 31, 2000 December 31, 2001 ------------------ ------------------ DDi DDi DDi DDi Capital Corp. Capital Corp. -------- -------- -------- -------- Senior Term Facility...................................................... $147,743 $147,743 $135,819 135,819 10.0% Senior Subordinated Notes........................................... 100,000 100,000 -- -- 5.25% Convertible Subordinated Notes...................................... -- -- -- 100,000 12.5% Capital Senior Discount Notes, face amount of $63,000 and $16,090 at December 31, 2000 and 2001, respectively, net of unamortized discount of $12,689 and $1,612 at December 31, 2000 and 2001, respectively........... 50,311 50,311 14,478 14,478 DDi Europe Facilities Agreement........................................... -- 27,249 -- 21,840 Capital lease obligations................................................. 7,399 7,940 5,869 6,685 -------- -------- -------- -------- Sub-total............................................................ 305,453 333,243 156,166 278,822 Less current maturities................................................... (13,656) (16,935) (17,184) (17,845) -------- -------- -------- -------- Total................................................................ $291,797 $316,308 $138,982 $260,977 ======== ======== ======== ========
Senior Credit Facility In connection with the merger with Dynamic Circuits, Inc. ("DCI") (see Note 14), Dynamic Details entered into an agreement with a co-syndication of banks, including JPMorgan Chase Bank (formerly Chase Manhattan Bank, N.A.) and Bankers Trust Company. Borrowings under this agreement consist of the Senior Term Facility and the Revolving Credit Facility (collectively, the "Senior Credit Facility"). Under the terms of this agreement, Dynamic Details must comply with certain restrictive covenants, which include the requirement that Dynamic Details meet certain financial tests. In addition, Dynamic Details is restricted from making certain payments, including dividend payments to its stockholders. The Senior Credit Facility is jointly and severally guaranteed by Intermediate and DDi Capital, and is collateralized by a pledge of substantially all of the capital stock of Dynamic Details and certain of its subsidiaries. The Senior Credit Facility expires in April 2005. F-19 DDi CORP. AND DDi CAPITAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands, except share and per share amounts) Senior Term Facility Under the Senior Term Facility, $255.0 million ($105.0 million under Tranche A and $150.0 million under Tranche B) was advanced to Dynamic Details in connection with the merger with DCI (see Note 14) on July 23, 1998. Scheduled principal and interest payments are due quarterly beginning June 30, 1999 (other than with respect to the last installment, which is due on July 22, 2004 and April 22, 2005 for Tranche A and Tranche B, respectively). Borrowings under the Senior Term Facility bear interest at a floating rate at the Company's option at a rate equal to either (1) 3.00%, for Tranche A, and 4.00%, for Tranche B, per annum plus the applicable LIBOR rate or (2) 2.00%, for Tranche A, and 3.00%, for Tranche B, per annum plus the higher of (a) the applicable prime lending rate of JPMorgan Chase Bank (4.75% at December 31, 2001) or (b) the federal reserve reported overnight funds rate plus 1/2 of 1% per annum (the "Index Rate"). The applicable margin of 3.00% for Tranche A is subject to reduction in accordance with an agreed upon pricing grid based on decreases in the Company's consolidated leverage ratio, defined as consolidated total debt to consolidated EBITDA (earnings before net interest expense, income taxes, depreciation, amortization and extraordinary or non-recurring expenses). As of December 31, 2001, the Company elected the LIBOR rate (1.9% at December 31, 2001), reset monthly. The overall effective interest rate for the Senior Term Facility, after giving effect to the interest rate swap agreement (see Note 8), as of December 31, 2001, was 8.05%. In April 2000, the Company used a portion of the proceeds from DDi Corp.'s initial public offering (see Note 18) to repay $100.0 million of the Senior Term Facility. The balance at December 31, 2000 and 2001 was $147.7 million and $135.8 million, respectively. Revolving Credit Facility Dynamic Details also has a $75.0 million Revolving Credit Facility for revolving credit loans, letters of credit and swing line loans which expires on July 22, 2004. Advances under the Revolving Credit Facility bear interest at the Company's option at a rate equal to either (1) 3.00% per annum plus the applicable LIBOR rate or (2) 2.00% per annum plus the Index Rate. In addition, Dynamic Details is required to pay a fee of 1/2 of 1% per annum on the average unused commitment under the Revolving Credit Facility. Access to the full amount of the Revolving Credit Facility is subject to conditions set forth in the agreement and is currently limited to $37.5 million until mid-2003. At December 31, 1999 and 2000, Dynamic Details had no borrowings outstanding on this Revolving Credit Facility and had $0.7 million reserved against the Revolving Credit Facility for a letter of credit, leaving $36.8 million available for borrowings. As of December 31, 2001, the Company elected the LIBOR rate (1.9% at December 31, 2001), reset monthly. Senior Subordinated Notes On November 18, 1997, Dynamic Details issued $100 million of Senior Subordinated Notes. The Senior Subordinated Notes bear interest at 10% per annum, payable semi-annually in arrears on each May 15 and November 15 of each year, through the maturity date on November 15, 2005. On February 14, 2001, DDi Corp. and some of its shareholders completed a follow-on public offering of 6,000,000 shares of its common stock, with 3,000,000 shares issued by DDi Corp. and the remainder sold by selling shareholders. Concurrently, DDi Corp. issued 5.25% Convertible Subordinated Notes due March 1, 2008 with an aggregate principal of $100.0 million. The net proceeds of both transactions were used to repurchase all of the Dynamic Details Senior Subordinated Notes. Convertible Subordinated Notes On February 14, 2001, DDi Corp. issued 5.25% Convertible Subordinated Notes due March 1, 2008 with an aggregate principal of $100.0 million. These notes are convertible at any time prior to maturity into shares of F-20 DDi CORP. AND DDi CAPITAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands, except share and per share amounts) common stock at a conversion price of $30.00 per share, subject to certain adjustments. These notes generated proceeds of $97.0 million, net of underwriting discounts. The net proceeds of this transaction were used to repurchase a portion of the Capital Senior Discount Notes and the Dynamic Details Senior Subordinated Notes. Capital Senior Discount Notes In November 1997, DDi Capital issued $110.0 million face amount at maturity (net proceeds of $60.1 million) of senior discount notes ("Capital Senior Discount Notes"), and DDi Capital later succeeded to DDi Corp. obligations under the Capital Senior Discount Notes. The Capital Senior Discount Notes are unsecured, senior obligations and will be effectively subordinated to all future indebtedness and liabilities of DDi Capital's subsidiaries. The Capital Senior Discount Notes begin bearing cash interest of 12.5% on November 15, 2002, payable each May 15 and November 15 in arrears, through the maturity date of November 15, 2007. Except as described below, DDi Capital may not redeem the Capital Senior Discount Notes prior to November 15, 2002. On or after November 15, 2002, the Capital Senior Discount Notes may be redeemed at the option of DDi Capital, in whole or in part from time to time, at redemption prices ranging from 106.25% of accreted principal amount in the year ended November 15, 2002 to 100% of accreted principal amount subsequent to November 15, 2005, plus accrued and unpaid interest. The Capital Senior Discount Note indenture also contains covenants that restrict the Company from incurring additional indebtedness and from making certain payments, including dividend payments to its stockholders. The Company repurchased a portion of the Capital Senior Discount Notes with an aggregate principal amount at maturity of $47.0 million with a portion of the proceeds from DDi Corp.'s October 2000 follow-on public offering (see Note 18). In April and June 2001, the Company repurchased a portion of the Capital Senior Discount Notes, with an accreted balance of $46.9 million, for $45.5 million, using a portion of the proceeds from DDi Corp's February 2001 follow-on public offering (see Note 18). The balance at December 31, 2000 and 2001 was $50.3 million and $14.5 million, respectively. DDi Europe Facilities Agreement In connection with the acquisition of MCM (see Note 14), the Company assumed MCM's remaining outstanding indebtedness under a facilities agreement dated May 27, 1999 between MCM and the Governor of the Bank of Scotland as arranger, agent, security trustee, term loan bank and working capital bank ("the DDi Europe Facilities Agreement"). The DDi Europe Facilities Agreement expires on September 30, 2007 and requires DDi Europe to meet financial ratios and to comply with other restrictive covenants. All the assets of DDi Europe are pledged as collateral under the DDi Europe facilities agreement. Term Loans The DDi Europe Facilities Agreement consists of a Tranche A term loan facility of approximately $26 million and a Tranche B term loan facility of approximately $1 million. The Tranche A term loan facility is repayable in quarterly installments beginning in June 2000 with the final payment payable in September 2007. Pursuant to an amendment in November 2001, no payments are due on the Tranche A term loan facility from October 2001 through February 2003. The Tranche B term loan facility is repayable in full in December 2007. Borrowings under the term loans bear interest at varying rates, comprising LIBOR at the dates of commencement F-21 DDi CORP. AND DDi CAPITAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands, except share and per share amounts) of the relevant quarterly interest period plus a margin of 1.50%. Interest payments are due quarterly. In addition, the DDi Europe Facilities Agreement requires payments of non-utilization fees on the average unused portion of each of the facilities. The overall effective interest rate for the DDi Europe term loan facilities, after giving effect to the interest rate swap agreement (see Note 8), as of December 31, 2001, was 8.42%. Revolving Credit Facility The DDi Europe Facilities Agreement also contains a Revolving Credit Facility of up to an aggregate maximum principal amount of approximately $14.6 million. The revolving credit facility is available until November 2002 and bears interest at varying rates, comprising LIBOR at the dates of commencement of the relevant quarterly interest period plus a margin of 1.50%. Interest payments are due quarterly. In addition, the DDi Europe Facilities Agreement requires payments of non-utilization fees on the average unused portion of this facility. At December 31, 2001, DDi Europe had $3.0 million outstanding on the DDi Europe Revolving Credit Facility leaving $11.6 million available for borrowings. Debt Issuance Costs In connection with the amendments made to the Senior Credit Facility during 2000 and 2001, to allow for the use of proceeds pursuant to DDi Corp.'s public offerings (see Note 18), DDi Capital incurred approximately $1.5 million and $3.9 million, respectively, in fees which have been capitalized as debt issuance costs. Accumulated amortization as of December 31, 2000 and 2001 for DDi Capital was approximately $5.2 million and $4.8 million, respectively, and for DDi Corp. was approximately $5.2 million and $5.4 million, respectively. During 2000 and 2001, certain debt was retired and the net carrying amount of the related debt issuance costs were written off, resulting in an extraordinary loss of $2,189 and $11,949 (net of related income taxes of $1,437 and $7,640) for DDi Capital and an extraordinary loss of $6,367 and $11,949 (net of related income taxes of $4,207 and $7,640) for DDi Corp., respectively (see Note19). Change of Control Upon a change in control, as defined in the Capital Senior Discount Note indentures, DDi Capital may redeem the Capital Senior Discount Notes, in whole, but not in part, before November 15, 2002 at 100% of the accreted value in the case of the Capital Senior Discount Notes, plus the applicable premium, as defined in the Capital Senior Discount Note indentures, and accrued and unpaid interest as of the date of redemption. In the event the Company does not elect to redeem the notes prior to such date, each holder of the Capital Senior Discount Notes may require DDi Capital, respectively, to repurchase all or a portion of such holder's notes at a cash purchase price equal to 101% of the principal amount or the accreted value, plus accrued and unpaid interest if any, to the date of repurchase. The Senior Credit Facility provides that the occurrence of such a change in control constitutes an event of default, which could require the immediate repayment of Senior Credit Facility. F-22 DDi CORP. AND DDi CAPITAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands, except share and per share amounts) Future Payments As of December 31, 2001, the scheduled future annual principal payments of long-term debt, excluding capital lease obligations (see Note 10), are as follows:
DDi Capital DDi Corp. ----------- --------- Year Ending December 31, 2002......................... $ 15,552 $ 15,552 2003......................... 19,338 23,706 2004......................... 43,410 47,778 2005......................... 57,519 61,887 2006......................... -- 4,368 Thereafter...................... 16,090 120,458 -------- -------- $151,909 $273,749 ======== ========
7. ACCRUED EXPENSES Accrued expenses consist of the following:
DDi Capital DDi Corp. ------------------------- ------------------------- December 31, December 31, December 31, December 31, 2000 2001 2000 2001 ------------ ------------ ------------ ------------ Accrued salaries and related benefits............ $21,512 $ 6,667 $21,470 $ 6,893 Accrued interest payable......................... 1,319 54 1,319 1,862 Accrued restructuring charges.................... 475 6,092 475 6,402 Other accrued expenses........................... 11,708 4,885 16,643 12,425 Escrow payable to redeemed stockholders.......... 2,633 -- 2,633 -- ------- ------- ------- ------- $37,647 $17,698 $42,540 $27,582 ======= ======= ======= =======
8. DERIVATIVES Pursuant to its interest rate risk management strategy and to certain requirements imposed by the Company's Senior Credit Facility (see Note 6), the Company entered into various interest rate exchange agreements ("Swap Agreements"), effective October 1, 1998. Such agreements represented an effective cash flow hedge of the variable rate of interest (1-month LIBOR) paid under the Senior Term Facility, mitigating exposure to increases in interest rates related to this debt. Under the Swap Agreements, the Company received a variable rate of interest (1-month LIBOR) and paid a fixed rate of interest. These rates were applied to a notional amount that resulted in the hedging of the full principal balance under the Senior Term Facility from October 1998 through September 2000. From October 2000 through June 2001, the hedge had a notional amount equal to 50% of the principal balance then outstanding. The annual fixed rate of interest paid was 5.27% for October 1998 through December 1998, 4.96% for January 1999 through May 1999, 5.65% for June 1999 through September 2000, and 6.58% from October 2000 through June 2001. In July 2001, the Company elected to terminate and replace the Swap Agreements then in effect. From July 2001 through October 2001, the new Swap Agreements fixed the rate of interest to be paid on 100% of the principal balance of the Senior Term Facility through its scheduled maturity in 2005. One of these agreements F-23 DDi CORP. AND DDi CAPITAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands, except share and per share amounts) contained a feature that precluded the agreement from being treated as an effective cash flow hedge pursuant to SFAS No. 133. Accordingly, the change in the fair value of such agreement of $10 million was included in the consolidated statement of operations ("Interest rate swap valuation"). In November 2001, the Company elected to modify its new Swap Agreements. The agreements, as amended, qualify as effective hedges under SFAS No. 133. The initial fair value of the amended swaps will be recognized as reductions to periodic interest expense over their remaining term, in accordance with SFAS No. 133. The annual fixed rate of interest paid under the Swap Agreements in effect from July 2001 through December 2001 ranged from 3.80% to 4.40%. The annual fixed rate of interest to be paid under the amended Swap Agreements is 5.99% for 2002, is 6.49% for 2003, and is 6.99% from January 2004 through the scheduled maturity of the Senior Term Facility in 2005. The overall effective interest rate for the Senior Term Facility, after giving effect to the interest rate swap agreement, as of December 31, 2001, was 8.05%. Counterparty risk is limited to amounts to be reflected in the Company's consolidated balance sheet. This risk is minimized and is expected to be immaterial to the Company's consolidated results of operations as the amended Swap Agreements provide for monthly settlement of the net interest owing. Further, each counterparty to the Swap Agreements carries at least a "single-A" credit rating. The impact of the interest rate exchange agreements on the Company's interest expense was not material. MCM entered into an interest rate swap agreement ("DDi Europe Swap Agreement") effective January 12, 2000 which represents an effective cash flow hedge of the variable rate of interest (3-month LIBOR) paid under the DDi Europe Facilities Agreement, minimizing exposure to increases in interest rates related to this debt over the scheduled term of the DDi Europe Swap Agreement through September 2002. Under the DDi Europe Swap Agreement, DDi Europe pays a fixed rate of interest at an annual rate of 6.92%. This rate is applied to fixed amounts of debt per the agreement, which is 100% of the outstanding balance at December 31, 2001. The overall effective interest rate for the DDi Europe term loan facilities, after giving effect to the interest rate swap agreement, as of December 31, 2001 was 8.42%. 9. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of financial instruments including cash, accounts receivable, accounts payable, accrued liabilities and variable rate debt approximate book value as of December 31, 2000 and 2001. As of December 31, 2000 and 2001, the fair value of the Company's Senior Subordinated Notes, Convertible Subordinated Notes and Capital Senior Discount Notes were different from their carrying values. The fair values of the Company's Senior Subordinated Notes, Convertible Subordinated Notes and Capital Senior Discount Notes are estimated based on their quoted market prices. The estimated fair values of the Company's financial instruments are as follows:
DDi Capital DDi Corp. DDi Capital DDi Corp. December 31, 2000 December 31, 2000 December 31, 2001 December 31, 2001 ----------------- ----------------- ----------------- ----------------- Carrying Fair Carrying Fair Carrying Fair Carrying Fair Amount Value Amount Value Amount Value Amount Value -------- ------- -------- ------- -------- ------- -------- ------- Fixed rate debt: 10% Senior Subordinated Notes......... $100,000 $92,000 $100,000 $92,000 $ -- $ -- $ -- $ -- 5.25% Convertible Subordinated Notes.. $ -- $ -- $ -- $ -- $ -- $ -- $100,000 $68,875 12.5% Capital Senior Discount Notes... $ 50,311 $49,140 $ 50,311 $49,140 $14,478 $14,803 $ 14,478 $14,803
10. CAPITAL LEASE OBLIGATIONS DDi Capital leases certain facilities and equipment under capital lease obligations bearing implicit interest rates ranging from 7% to 12%. The terms of the leases require monthly payments of approximately $195 including interest at December 31, 2001. Certain leases contain an option for an additional term at the end of the F-24 DDi CORP. AND DDi CAPITAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands, except share and per share amounts) initial term and an option to purchase the facilities and equipment at their fair values at the end of the initial term and at the end of the second term. DDi Corp. leases certain facilities and equipment under capital lease obligations bearing implicit interest rates ranging from 7% to 13%. The terms of the leases require monthly payments of approximately $250 including interest at December 31, 2001. Certain leases contain an option for an additional term at the end of the initial term and an option to purchase the facilities and equipment at their fair values at the end of the initial term and at the end of the second term. Future Payments Aggregate annual maturities of capital lease obligations (for periods subsequent to December 31, 2001) are as follows:
DDi Capital DDi Corp. ------------------------------------------ ------------------------------------------ Less Present Less Present Amounts Value of Net Amounts Value of Net Total Minimum Representing Minimum Total Minimum Representing Minimum Lease Payments Interest Lease Payments Lease Payments Interest Lease Payments -------------- ------------ -------------- -------------- ------------ -------------- Year ending December 31, 2002................. $2,319 $ 694 $1,625 $3,022 $ 717 $2,305 2003................. 2,022 524 1,498 2,168 533 1,635 2004................. 1,796 363 1,433 1,796 363 1,433 2005................. 1,515 203 1,312 1,515 203 1,312 ------ ------ ------ ------ ------ ------ $7,652 $1,784 $5,868 $8,501 $1,816 $6,685 ====== ====== ====== ====== ====== ======
11. STOCKHOLDERS' EQUITY Common Stock At December 31, 2000 and 2001, DDi Capital had 1,000 shares of $0.01 par value common stock, authorized, issued and outstanding. DDi Corp. had 75,000,000 shares authorized, 44,328,371 and 47,950,886 shares of $0.01 par value common stock issued and outstanding at December 31, 2000 and 2001, respectively. Stockholder Receivables DDi. Corp. has notes receivable from certain executive officers which are collateralized by the Company's common stock (see Note 17). Additional Paid-In Capital In connection with the changes in senior management undertaken in the fourth quarter of 2001 (see Note 15), the Company modified stock option agreements which resulted in a compensation charge of $0.2 million. Common Stock Warrants As part of the financing associated with the recapitalization of the Company in November 1997, warrants were granted to affiliates of JPMorgan Chase Bank (formerly The Chase Manhattan Bank) to purchase 447,174 shares of DDi Corp. common stock. In connection with the initial public offering (see Note 18), these affiliates of JPMorgan Chase Bank received 447,123 shares of common stock through a cashless exercise of their outstanding warrants. A fair value of $3,420 was ascribed to the warrants and recorded as a debt discount. F-25 DDi CORP. AND DDi CAPITAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands, except share and per share amounts) In connection with the DCI Merger (see Note 14), warrants were granted to purchase 195,406 shares of DDi Corp. common stock at $21.79 per share. As of December 31, 2001, 4,659 shares were exercised, leaving 190,747 outstanding. Such warrants are exercisable through July 22, 2008. Stock Options Prior to 1997, the Company had two stock option plans, the 1996 Performance Stock Option Plan and the 1996 Employee Stock Option Plan. The term of the options under these plans is ten years from the date of grant. The options under these plans were fully vested as of December 31, 2001. During 1999 there were no grants, exercises, forfeitures, or expirations of options under either of these plans. During 2000, there were no grants or forfeitures under either of these plans and 256,273 options were exercised, leaving 274,566 vested options outstanding at December 31, 2000. During 2001, there were no grants or forfeitures under either of these plans and 101,720 options were exercised, leaving 172,846 vested options outstanding at December 31, 2001 at exercise prices ranging from $0.34 to $2.44 per share. As of December 31, 2001, the options outstanding under these plans had remaining weighted-average contractual terms of approximately five years. In 1997, DDi Corp. adopted its 1997 Details, Inc. Equity Incentive Plan (the "1997 Employee Stock Option Plan"), authorizing the grant of options to certain management of the Company to purchase 659,786 shares of common stock. The term of the options under this plan is ten years from the date of grant. Options granted under this plan vest in equal monthly amounts over four years, with immediate vesting upon a change in control or sale of all of the assets of the Company. For all options granted under this plan, the exercise prices approximated the estimated fair value at the date of grant, resulting in no compensation expense. As of December 31, 2001, the options outstanding under this plan had a remaining weighted-average contractual term of approximately eight years. Stock option activity under the 1997 Employee Stock Option Plan is:
$1.78 Options $21.79 Options --------------- ---------------- Number Number Exercise of Exercise of Price Shares Price Shares -------- ------ -------- ------- Balance at December 31, 1998................ -- -- $ 21.79 326,089 Granted..................................... $ 1.78 27,444 $ 21.79 33,778 Exercised................................... -- -- -- -- Forfeited................................... -- -- $ 21.79 (25,333) ------ ------ ------- ------- Balance at December 31, 1999................ $ 1.78 27,444 $ 21.79 334,534 Granted..................................... -- -- -- -- Exercised................................... $ 1.78 (2,891) $ 21.79 (1,051) Forfeited................................... $ 1.78 (6,908) $ 21.79 (30,059) ------ ------ ------- ------- Balance at December 31, 2000................ $1.78 17,645 $21.79 303,424 Granted..................................... -- -- -- -- Exercised................................... $ 1.78 (131) $ 21.79 (67,157) Forfeited................................... -- -- $ 21.79 (5,477) ------ ------- Balance at December 31, 2001................ 17,514 230,790 ====== ======= Options exercisable at December 31, 2001.... 12,680 219,023 ====== =======
The weighted average fair value per option (computed using the minimum-value method as the Company was a non-public entity when the options were granted) of the stock options granted in 1999 was nil. Fair value was estimated using the minimum-value method, a risk-free interest rate of 6.0% and an expected life of 3 months for the grants in 1999. No dividends were assumed to be declared. F-26 DDi CORP. AND DDi CAPITAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands, except share and per share amounts) In connection with the DCI Merger (see Note 14), the Board of Directors adopted, and the stockholders of DDi Corp. approved, the Details Holdings Corp.-Dynamic Circuits 1996 Stock Option Plan ("DCI 1996 Plan") and the Details Holdings Corp.-Dynamic Circuits 1997 Stock Option Plan ("DCI 1997 Plan"), together the "DCI Stock Option Plans", which authorized the granting of stock options and the sale of common stock in connection with the merger with DCI. The terms applicable to options issued under the DCI Stock Option Plans are substantially similar to the terms applicable to the options to purchase shares of DCI outstanding immediately prior to the merger with DCI. These terms include vesting from the date of merger through 2002 for those options outstanding as of the date of the merger with DCI. Options granted under these plans subsequent to the merger will typically vest in equal monthly amounts over four years. An optionholder's scheduled vesting is dependent upon continued employment with the Company. Upon termination of employment, any unvested options as of the termination date are forfeited. In connection with the DCI Merger, DDi Corp. converted each DCI stock option award into the right to receive a cash payment and an option to purchase shares of common stock. The options granted in 1998 bear exercise prices of either $0.56 ("$0.56 Options") or $21.79 ("$21.79 Options") or $12.64 ("$12.64 Options"). During 1999, options to purchase shares of common stock were also granted with an exercise price of $1.78 ("$1.78 Options"). As of December 31, 2001, there are no options available for grant under the DCI Stock Option Plans. The maximum term of the options under the DCI 1996 Plan is August 2006 and under the DCI 1997 Plan is March 2008. As of December 31, 2001, all options outstanding under the DCI Stock Option Plans had weighted average remaining contractual lives of approximately seven years. Stock option activity under the DCI Stock Option Plans is:
$0.56 Options $21.79 Options $1.78 Options $12.64 Options ----------------- --------------- ---------------- ----------------- Number Number Number Number Exercise of Exercise of Exercise of Exercise of Price Shares Price Shares Price Shares Price Shares -------- -------- -------- ------ -------- ------- -------- -------- Balance at December 31, 1998...... $0.56 380,449 $21.79 38,627 -- -- $12.64 923,119 Granted........................... $0.56 4,551 $21.79 247 $1.78 25,268 $12.64 5,936 Exercised......................... $0.56 (110,774) -- -- -- -- -- -- Forfeited......................... $0.56 (31,355) $21.79 (1,727) -- -- $12.64 (15,700) ----- -------- ------ ------ ----- ------- ------ -------- Balance at December 31, 1999...... $0.56 242,871 $21.79 37,147 $1.78 25,268 $12.64 913,355 Granted........................... -- -- -- -- -- -- -- -- Exercised......................... $0.56 (93,394) $21.79 (6,264) $1.78 (2,889) $12.64 (302,614) Forfeited......................... $0.56 (1,764) $21.79 (215) $1.78 (3,607) $12.64 (3,838) ----- -------- ------ ------ ----- ------- ------ -------- Balance at December 31, 2000...... $0.56 147,713 $21.79 30,668 $1.78 18,772 $12.64 606,903 Granted........................... -- -- -- -- -- -- -- -- Exercised......................... $0.56 (59,041) $21.79 (112) $1.78 (4,149) $12.64 (215,407) Forfeited......................... $0.56 (4,715) $21.79 (2,338) $1.78 (11,057) $12.64 (6,140) -------- ------ ------- -------- Balance at December 31, 2001...... 83,957 28,218 3,566 385,356 ======== ====== ======= ======== Options exercisable at December 31, 2001............... 78,163 27,983 1,898 379,291 ======== ====== ======= ========
F-27 DDi CORP. AND DDi CAPITAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands, except share and per share amounts) For all options granted under the DCI Stock Option Plans in 1999, the exercise prices approximated the estimated fair value at the date of grant, resulting in no compensation expense. Fair value was estimated using the minimum-value method as the Company was a non-public entity when the options were granted, a risk-free interest rate of 6.0% for 1999 and an expected life of 3 months for both $0.56 Options and $1.78 Options or two years for both $21.79 Options and $12.64 Options. No dividends were assumed to be declared. The weighted-average fair value per option of the stock options granted under the DCI Stock Option Plans in 1999 was as follows:
Fair Value per Option --------------------- Option category 1999 2000 2001 --------------- ----- ---- ---- $0.56 Options.......................... Nil N/A N/A $1.78 Options.......................... $0.04 N/A N/A $21.79 Options......................... Nil N/A N/A $12.64 Options......................... $1.35 N/A N/A
During 2000, the Company adopted the 2000 Equity Incentive Plan (the "2000 Plan"). No future grants will be made under existing plans as of the effective date of the 2000 Plan. A total of (a) 4,100,000 shares of common stock, (b) any shares returned to existing plans as a result of termination of options and (c) annual increases of 1.0% of outstanding common stock to be added on the date of each annual meeting of the Company's stockholders commencing in 2001, or such lesser amounts as may be determined by the Company, will be reserved for issuance pursuant to the 2000 Plan. The 2000 Plan provides for the grant of incentive stock options to employees (including officers and employee directors) and for the grant of nonstatutory stock options to employees, directors and consultants. The 2000 Plan also provides for the grant of stock appreciation rights, restricted stock, unrestricted stock, deferred stock, and securities (other than stock options) which are convertible into or exchangeable for common stock on such terms and conditions as the Company determines. The weighted-average fair value per option of the stock options granted under the 2000 Plan was $10.40 and $8.70 for shares granted in 2000 and 2001, respectively, calculated using the Black-Scholes option pricing model, assuming that no dividends were to be declared, a volatility of 100% and a risk free interest rate of 6.22% in 2000 and 4.11% in 2001. These options have an average life of 4 years and vest in yearly installments for the first 2 years and quarterly installments thereafter. Stock option activity under the 2000 Plan since the Company's initial public offering on April 14, 2000 is as follows:
Number of Exercise Price Shares -------------- --------- Balance at April 14, 2000........................ -- Granted.......................................... $12.00-$38.31 2,138,930 Exercised........................................ -- -- Forfeited........................................ $12.00-$14.00 (72,050) --------- Balance at December 31, 2000..................... $12.00-$38.31 2,066,880 Granted.......................................... $ 7.02-$28.81 2,692,985 Exercised........................................ $12.00-$14.00 (84,026) Forfeited........................................ $ 7.02-$26.38 (502,269) --------- Balance at December 31, 2001..................... $ 7.02-$38.31 4,173,570 ========= Options exercisable as of December 31, 2001...... 401,336 =========
F-28 DDi CORP. AND DDi CAPITAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands, except share and per share amounts) The following table summarizes information regarding stock options outstanding under the 2000 Plan at December 31, 2001:
Options Outstanding --------------------------------------------- Number Weighted-Average Range of Outstanding Remaining Weighted-Average Exercise Prices at 12/31/01 Contractual Life Exercise Price --------------- ----------- ---------------- ---------------- $ 7.02 - 10.28 1,344,600 9.8 $ 7.16 $12.00 - 17.66 2,567,320 8.5 $14.91 $18.53 - 25.23 146,150 9.1 $21.03 $28.81 - 38.31 115,500 8.8 $29.38 -------------- --------- --- ------ $ 7.02 - 38.31 4,173,570 8.9 $13.03
During 2000, the Company's Board of Directors adopted the Employee Stock Purchase Plan ("ESPP") and the non-U.S. Employee Stock Purchase Plan ("non-U.S. ESPP") (collectively the "Plans"). The Plans allow eligible employees to purchase shares of common stock through payroll deductions at a discounted price. A total of 1,450,000 shares of common stock are reserved for issuance under the Plans, 1,250,000 shares under the ESPP, which are intended to qualify under Section 423 of the Internal Revenue Code and 200,000 shares under the non-U.S. ESPP. The Plans allow for purchases in a series of offering periods, each six months in duration, with new offering periods (other than the initial offering period) commencing on January 1 and July 1 of each year. The initial offering period commenced on April 14, 2000, the date of the initial public offering. Unless terminated earlier by the Company's Board of Directors, the plans have a term of ten years. The net weighted-average fair value per share granted under the Plans was $8.42 and $8.69 for shares granted in 2000 and 2001, respectively, calculated using the Black-Scholes option pricing model, assuming that no dividends were to be declared, a volatility of 100% and a risk free interest rate of 6.10% in 2000 and 4.73% in 2001. As of the years ended December 31, 2000 and 2001, 69,642 shares and 160,414 shares, respectively, of common stock were purchased through the ESPP. Had compensation cost for all stock-based compensation plans been determined consistent with SFAS No. 123, DDi Corp.'s net income (loss) allocable to common stock and net income (loss) per share allocable to common stock would have been the following (amounts in millions, except per share data):
Year Ended December 31, ---------------------- 1999 2000 2001 ------ ----- ------ Net income (loss) allocable to common stock: As reported............................................. $(31.5) $15.8 $(85.1) Pro forma............................................... $(31.6) $11.5 $(92.8) Income (loss) per share allocable to common stock--basic: As reported............................................. $(3.21) $0.50 $(1.79) Pro forma............................................... $(3.22) $0.36 $(1.96) Income (loss) per share allocable to common stock--diluted: As reported............................................. $(3.21) $0.47 $(1.79) Pro forma............................................... $(3.22) $0.34 $(1.96)
F-29 DDi CORP. AND DDi CAPITAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands, except share and per share amounts) 12. INCOME TAX MATTERS The provision (benefit) for income taxes before extraordinary items in 1999, 2000 and 2001 consists of the following:
Year Ended ------------------------------------------------------ December 31, 1999 December 31, 2000 December 31, 2001 ---------------- ---------------- ------------------ DDi DDi DDi DDi DDi DDi Capital Corp. Capital Corp. Capital Corp. ------- ------- ------- ------- -------- -------- Current: Federal... $ 4,210 $ 1,302 $25,159 $24,147 $ (3,570) $ (5,178) State..... 358 158 3,092 2,896 -- -- Foreign... -- 17 -- 2,118 345 3,694 ------- ------- ------- ------- -------- -------- 4,568 1,477 28,251 29,161 (3,225) (1,484) ------- ------- ------- ------- -------- -------- Deferred: Federal... (8,355) (7,391) (4,513) (4,540) (8,201) (8,112) State..... (1,428) (1,501) (305) (301) (1,750) (1,730) Foreign... -- -- -- 680 (50) (655) ------- ------- ------- ------- -------- -------- (9,783) (8,892) (4,818) (4,161) (10,001) (10,497) ------- ------- ------- ------- -------- -------- $(5,215) $(7,415) $23,433 $25,000 $(13,226) $(11,981) ======= ======= ======= ======= ======== ========
Deferred income tax assets and liabilities consist of the following:
December 31, 2000 December 31, 2001 ------------------ ------------------ DDi DDi DDi DDi Capital Corp. Capital Corp. -------- -------- -------- -------- Deferred tax assets: Net operating loss carryforwards.............. $ 774 $ 774 $ 7,016 $ 8,640 Trade receivables............................. 4,996 4,996 1,310 1,310 Deferred compensation......................... 2,275 2,275 557 557 Tax credits................................... 1,100 1,100 6,265 6,265 Accrued liabilities........................... 11,566 11,566 10,527 10,527 Amortization.................................. 411 411 -- -- Asset impairment.............................. -- -- 7,125 7,125 Other......................................... 177 177 384 384 -------- -------- -------- -------- 21,299 21,299 33,184 34,808 -------- -------- -------- -------- Deferred tax liabilities: Property, plant and equipment................. (1,726) (1,786) (4,928) (7,396) Intangible assets............................. (22,186) (24,648) (16,025) (16,025) -------- -------- -------- -------- (23,912) (26,434) (20,953) (23,421) -------- -------- -------- -------- Valuation allowance............................... (774) (774) (774) (774) -------- -------- -------- -------- Net deferred tax assets (liabilities)...... $ (3,387) $ (5,909) $ 11,457 $ 10,613 ======== ======== ======== ========
In connection with the acquisitions of MCM, Thomas Walter and Olympic Circuits, the Company acquired certain net deferred tax liabilities of approximately $1.9 million, approximately $0.6 million and approximately $0.2 million, respectively. The tax effect related to the extraordinary items (see Notes 6 and 19) is current U.S. federal and state taxes for 2000 and deferred U.S. federal and state taxes for 2001. F-30 DDi CORP. AND DDi CAPITAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands, except share and per share amounts) The income tax provision (benefit) before the extraordinary items differs from the amount of income tax determined by applying the U.S. federal statutory income tax rate to the income (loss) before income taxes and the extraordinary items due to the following:
Year Ended ------------------------------------------------------ December 31, 1999 December 31, 2000 December 31, 2001 ---------------- ---------------- ------------------ DDi DDi DDi DDi DDi DDi Capital Corp. Capital Corp. Capital Corp. ------- ------- ------- ------- -------- -------- Computed "expected" tax expense (benefit)............... $(6,766) $(8,697) $17,085 $18,050 $(30,194) $(29,774) Increase (decrease) in income taxes resulting from: State taxes, net of credits and federal tax benefit.. (1,070) (1,343) 2,787 2,595 (1,424) (1,404) Goodwill amortization................................ 2,456 2,456 2,515 3,289 19,884 21,168 Foreign tax differential............................. -- -- -- (418) -- (506) Research tax credits................................. -- -- -- -- (1,513) (1,513) Other................................................ 165 169 1,046 1,484 21 48 ------- ------- ------- ------- -------- -------- $(5,215) $(7,415) $23,433 $25,000 $(13,226) $(11,981) ======= ======= ======= ======= ======== ========
At December 31, 2001, the Company has federal and various state net operating loss ("NOL") carryforwards, exclusive of Colorado, of approximately $18.0 million and $18.0 million, respectively. The federal and state NOLs begin expiring in 2021 and 2002, respectively. In addition, the Company has Colorado NOL carryforwards of approximately $12.0 million at December 31, 2001. The Colorado NOL carryforwards begin to expire in 2012. A valuation allowance has been established for deferred income tax benefits related to the Colorado NOL carryforwards. Management believes it is more likely than not that these NOL carryforwards may not be realized as a result of the closure of the Colorado facility in December 1999 (see Note 15). The Company also has tax research credit carryforwards of $3.0 million which begin expiring in 2018, alternative minimum tax (AMT) credit carryforwards of $1.3 million, which do not expire and state investment tax credits of $1.9 million which begin expiring in 2005. If certain substantial changes in the Company's ownership should occur, there would be an annual limitation on the amount of the NOL and other tax attribute carryforwards which can be utilized. U.S. income taxes have not been provided on approximately $3.0 million of undistributed earnings of foreign subsidiaries since management considers these earnings to be invested indefinitely or substantially offset by foreign tax credits. It is not practicable to estimate the amount of unrecognized deferred U.S. taxes on these undistributed earnings. 13. COMMITMENTS AND CONTINGENCIES Environmental matters--The Company's operations are regulated under a number of federal, state, and local environmental laws and regulations, which govern, among other things, the discharge of hazardous materials into the air and water as well as the handling, storage and disposal of such materials. Compliance with these environmental laws are major considerations for all printed circuit board manufacturers because metals and other hazardous materials are used in the manufacturing process. In addition, because the Company is a generator of hazardous wastes, the Company, along with any other person who arranges for the disposal of such wastes, may be subject to potential financial exposure for costs associated with an investigation and remediation of sites at which it has arranged for the disposal of hazardous wastes, if such sites become contaminated. This is true even if the Company fully complies with applicable environmental laws. In addition, it is possible that in the future new or more stringent requirements could be imposed. Management believes it has complied with all applicable environmental laws and regulations. There have been no claims asserted nor is management aware of any unasserted claims for environmental matters. F-31 DDi CORP. AND DDi CAPITAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands, except share and per share amounts) Employment agreements--Pursuant to certain employment agreements dated September 1, 1995, as amended, effective until October 28, 2000, certain members of senior management received base salaries in the aggregate amount of $1.3 million in both 1999 and 2000, respectively. The base salaries on or after January 1, 2001 have been established by the Compensation Committee of the Company's Board of Directors at a level that equals or exceeds base salaries for 2000. These employees are eligible for annual bonuses based upon the achievement of EBITDA targets. These employees received a bonus in the aggregate amounts of $2.4 million in consideration of prior services which were paid in October 2000. In addition, pursuant to an employment agreement dated July 23, 1998, and effective until July 23, 2001 a certain key employee received a base salary of approximately $445, $474 and $290 in 1999, 2000 and 2001, respectively. In addition, this key employee is eligible to receive an annual bonus based upon achievement of EBITDA targets. Post-merger salary and other compensation were recorded as period costs. Operating leases--The Company has entered into various operating leases principally for office space and equipment that expire at various dates through 2022. Future annual minimum lease payments under all non-cancelable operating leases with initial or remaining terms of one year or more consist of the following at December 31, 2001:
DDi DDi Capital Corp. ------- ------- Year Ending December 31, 2002........................ $ 6,738 $ 8,985 2003........................ 5,814 7,779 2004........................ 5,055 6,832 2005........................ 4,987 6,720 2006........................ 3,740 5,473 Thereafter.................. 12,274 29,601 ------- ------- Future minimum lease payments... $38,608 $65,390 ======= =======
The above future minimum lease payments include $2.1 million of accrued restructuring expenses for minimum lease payments of non-cancelable leases (see Note 15). Rent expense for 1999 was approximately $3.0 million. Rent expense for 2000 and 2001 was approximately $3.7 million and $6.2 million, respectively, for DDi Capital. Rent expense for 2000 and 2001 was approximately $5.8 million and $7.5 million, respectively, for DDi Corp. Litigation--The Company is a party to various legal actions arising in the ordinary course of its business. The Company believes that the resolution of these legal actions will not have a material adverse effect on the Company's financial position, results of operations or cash flows. Retirement plans--The Company has various retirement plans available to eligible employees. Participants can elect to contribute 1% to 15% of their annual compensation to the retirement plans. For domestic employees, these contributions are made under Section 401(k) of the Internal Revenue Code. Depending on the plan, the Company matches employee contributions at $0.25 per $1.00 contributed, subject to a maximum per employee participant, or the Company contributes from 3% to 10% of the eligible employee's annual compensation. For the plan years ended December 31, 1999, 2000 and 2001, employer contributions totaled $394, $683 and $501, respectively. F-32 DDi CORP. AND DDi CAPITAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands, except share and per share amounts) 14. BUSINESS COMBINATIONS DCI In July 1998, Dynamic Details consummated the merger with DCI. DCI provided design and manufacturing services relating to complex printed circuit boards, backpanel assemblies and electromechanical interconnect devices with operations in California, Texas, Georgia and Massachusetts. The DCI merger consideration, aggregating approximately $250 million, was allocated to tangible assets (aggregating approximately $65 million) acquired and liabilities assumed (aggregating approximately $30 million), with the remaining merger consideration consisting primarily of identifiable intangible assets, goodwill, and acquired in-process research and development ("in-process R&D"). The identifiable intangibles consist primarily of developed technologies, customer relationships/tradenames, and assembled workforce. The fair value of the developed technology assets at the date of merger was $60 million and represents the aggregate fair value of individually identified technologies that were fully developed at the time of merger. The customer relationships/tradenames and assembled workforce assets were assigned values as of the merger date of approximately $21 million and $4 million, respectively. Goodwill generated in the merger with DCI has an assigned value of approximately $120 million. The Company expensed the portion of merger consideration allocated to in-process R&D of $39 million in the year ended December 31, 1998. As of December 31, 2000 and 2001, the accumulated amortization related to this goodwill and identifiable intangibles acquired in the merger with DCI was approximately $48.9 million and $57.7 million, respectively. Due to the closure of two facilities in connection with Company's 2001 restructuring plan (see Note 15), the Company determined that a portion of the DCI goodwill and identifiable intangibles which related to these facilities have a fair value of zero. As a result, the Company recorded an adjustment of $25.8 million and $2.6 million to the carrying value of goodwill and identifiable intangibles, respectively. MCM On April 14, 2000, DDi Corp. completed the acquisition of MCM, a time-critical electronics manufacturing service provider based in the United Kingdom, for a total purchase price of approximately $82 million, excluding acquisition expenses of approximately $4 million, paid in a combination of cash of approximately $10 million, the issuance of 2,230,619 shares of common stock valued at approximately $29 million, the repayment of outstanding indebtedness of MCM of approximately $24 million, and the assumption of approximately $23 million of MCM's remaining outstanding indebtedness (net of cash acquired of approximately $8 million). The total purchase price has been allocated to the underlying assets and liabilities based upon their estimated respective fair values at the date of acquisition. The Company has allocated the total purchase price to tangible assets acquired (aggregating approximately $30 million), and liabilities assumed (aggregating approximately $46 million), with the remaining consideration consisting of goodwill and identifiable intangible assets. The identifiable intangibles consist of developed technologies, non-compete agreements, and assembled workforce. The fair value of the developed technology assets at the date of acquisition was $1 million and represents the aggregate fair value of individually identified technologies that were fully developed at the time of acquisition. The non-compete agreements and assembled workforce assets were assigned values as of the acquisition date of approximately $1 million and $2 million, respectively. Goodwill generated in the acquisition of MCM has an assigned value of approximately $65 million. As of December 31, 2000 and 2001, the accumulated amortization related to this goodwill and identifiable intangibles acquired in the acquisition of MCM was approximately $3.3 million and $7.2 million, respectively. F-33 DDi CORP. AND DDi CAPITAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands, except share and per share amounts) Automata On August 4, 2000, Dynamic Details completed the acquisition of substantially all the U.S. assets of Automata, a Virginia-based manufacturer of technologically advanced printed circuit boards for total cash consideration of approximately $19.5 million, plus fees and expenses of $0.5 million. The total purchase price has been allocated to the underlying assets acquired and liabilities assumed based upon their respective fair market values at the date of acquisition. The excess of the purchase price was allocated to goodwill and is being amortized over its estimated useful life of 20 years. Golden On September 15, 2000, Dynamic Details completed the acquisition of the assets of Golden, a Texas-based manufacturer of engineered metal enclosures and provider of value-added assembly services to communications and electronics original equipment manufacturers, for approximately $14.4 million paid in combination of cash of approximately $12.6 million and the assumption of approximately $1.8 million of Golden's outstanding capital lease liabilities (net of cash acquired of approximately $0.7 million), plus expenses of $0.5 million. The total purchase price has been allocated to the underlying assets acquired and liabilities assumed based upon their respective fair market values at the date of acquisition. The excess of the purchase price was allocated to goodwill and is being amortized over its estimated useful life of 20 years. Thomas Walter On March 5, 2001, DDi Europe completed the acquisition of Thomas Walter, a leading circuit board manufacturer based in Marlow, England for approximately $24.5 million, plus expenses of $0.3 million. Thomas Walter is a well-established provider of complex, quick-turn rigid and rigid-flex printed circuit boards for the European electronics industry. The total purchase price has been allocated to the underlying assets and liabilities based upon their estimated respective fair values at the date of acquisition. The excess of the purchase price was allocated to goodwill and identifiable intangible assets. Goodwill generated in the acquisition of Thomas Walter has an assigned value of approximately $17.0 million and is being amortized over its estimated useful life of 20 years. The identifiable intangibles consist of developed technologies and assembled workforce. The fair value of the developed technology assets at the date of acquisition was approximately $0.5 million and represents the aggregate fair value of individually identified technologies that were fully developed at the time of acquisition. The assembled workforce asset was assigned a fair value of approximately $0.8 million at the date of acquisition. As of December 31, 2001, the accumulated amortization related to the goodwill and identifiable intangibles acquired in the acquisition of Thomas Walter was approximately $0.9 million. Nelco Technology On April 27, 2001, Dynamic Details completed the acquisition of the assets of Nelco, a wholly owned subsidiary of Park Electrochemical Corp., for total cash consideration of approximately $3.0 million. Nelco is an Arizona-based manufacturer of semi-finished printed wiring boards, commonly known as mass lamination. F-34 DDi CORP. AND DDi CAPITAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands, except share and per share amounts) The total purchase price has been allocated to the underlying assets and liabilities based upon their estimated respective fair values at the date of the transaction. Olympic Circuits Canada On May 9, 2001, Dynamic Details completed the acquisition of Olympic, a Canada-based, time-critical electronics manufacturing service provider specializing in quick-turn prototype printed circuit boards for a total cash consideration of approximately $12.8 million plus contingent consideration, of up to $4.5 million based on earnings in each of the three years following the date of acquisition, plus expenses of $0.1 million. No contingent consideration has been earned or recorded as of December 31, 2001. If contingent consideration is earned and paid, it will be capitalized as additional purchase price. The total purchase price has been allocated to the underlying assets and liabilities based upon their estimated respective fair values at the date of acquisition. The excess of the purchase price was allocated to goodwill and is being amortized over its estimated useful life of 20 years. Altatron Technology On June 4, 2001, Dynamic Details completed the acquisition of the assets of Altatron, a Southern California-based provider of value-add assembly services to electronics original equipment manufacturers for a total cash consideration of approximately $4.8 million, plus contingent consideration based on earnings in each of the two years following the date of acquisition. No contingent consideration has been earned or recorded as of December 31, 2001. If contingent consideration is earned and paid, it will be capitalized as additional purchase price. The total purchase price has been allocated to the underlying assets and liabilities based upon their estimated respective fair values at the date of the transaction. The excess of the purchase price was allocated to goodwill and is being amortized over its estimated useful life of 20 years. F-35 DDi CORP. AND DDi CAPITAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands, except share and per share amounts) Pro Forma Financial Information The accompanying consolidated statements of operations include the accounts of MCM for the period April 15, 2000 through December 31, 2001, Automata for the period August 5, 2000 through December 31, 2001, and Golden for the period September 16, 2000 through December 31, 2001. Also included are the accounts of Thomas Walter for the period March 6, 2001 through December 31, 2001, Nelco Technology for the period April 28, 2001 through December 31, 2001, Olympic Circuits Canada for the period May 10, 2001 through December 31, 2001 and Altatron Technology for the period June 5, 2001 through December 31, 2001. The following pro forma information for the years ended December 31, 2000 and 2001 presents net sales, income (loss) before extraordinary loss, and net income (loss) for each of these periods as if the MCM, Automata Thomas Walter, Nelco Technology, Olympic Circuits Canada, and Altatron Technology transactions were consummated at the beginning of each respective period. The unaudited pro forma financial information does not reflect Golden's pre-acquisition results.
Pro Forma Pro Forma Year Ended Year Ended December 31, December 31, 2000 2001 ------------ ------------ (in millions, except per share data) Net sales: --DDi Capital........................................... $537.3 $296.5 --DDi Corp.............................................. $623.7 $376.9 Income (loss) before extraordinary loss: --DDi Capital........................................... $ 25.2 $(74.1) --DDi Corp.............................................. $ 26.6 $(74.1) Net income (loss): --DDi Capital........................................... $23. 0 $(86.1) --DDi Corp.............................................. $ 20.2 $(86.0) Net income (loss) per share of common stock--basic......... $ 0.64 $(1.81) Net income (loss) per share of common stock--diluted....... $ 0.60 $(1.81)
15. RESTRUCTURING AND OTHER RELATED CHARGES 1999 Charges In December 1999, management and the Company's Board of Directors approved a plan to consolidate its Colorado operations into its Garland, Texas facility, resulting in the closure of the Colorado facility. By combining its Colorado and Texas operations, the Company has eliminated its lowest-margin product lines and decreased its overhead costs, gaining efficiency through better capital utilization and streamlined management. Revenues and EBITDA (earnings before income taxes, depreciation, amortization and net interest expense) for the Colorado facility were approximately $30 million and $(1.7) million, respectively, for the year ended December 31, 1999. Net income/(loss) for this facility is not readily determinable. The closure of this facility was effectively complete as of March 31, 2000. In conjunction with the closure of the Colorado facility, the Company recorded charges in the fourth quarter of 1999 totaling $7.0 million. Of this amount, $1.9 million represents restructuring-related inventory impairments and is therefore reflected as a component of gross profit. The remaining $5.1 million of charges are classified as F-36 DDi CORP. AND DDi CAPITAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands, except share and per share amounts) "Restructuring and other related charges" and consists of $2.6 million for accrued restructuring expenses and $2.5 million related to the impairment of net property, plant and equipment. Of the $2.6 million recorded as accrued restructuring expenses, approximately $2.0 million relates to severance and related expenses associated with the involuntary termination of the 275 staff and management employees of this plant. The remainder represents expenses principally related to minimum lease payments through the scheduled maturities of the non-cancelable real property operating leases. No amounts related to the accrual for either the $2.0 million in severance and related expenses or the $0.6 million related to the operating leases were expended as of December 31, 1999. As of December 31, 2000, the accrued exit cost remaining was $0.5 million, representing expenses principally related to net rental payments through scheduled maturities of real property operating leases. The calculated impairment of net property, plant and equipment was determined in accordance with SFAS No. 121, based upon a detailed review of the individual long-lived assets in the Colorado facility. Management determined that most of these assets would be utilized by the Company's other operations and are not impaired. Other assets, however, were transferred to the Company's other operations, from where they were sold or otherwise disposed, as in the case of obsolete or redundant equipment. The carrying amount of such assets was reduced to estimated fair value, less estimated selling costs. Some assets were neither utilized in the Company's other operations, nor were they saleable. Accordingly, these assets were written-down to zero value. The impairment to assets to be sold or otherwise disposed comprises approximately $1.7 million of the total write-down of net property, plant and equipment. The remaining $0.8 million charge represents the loss on assets possessing no remaining value. The impact of the disposition of these assets was not significant to the Company's results of operations. 2001 Charges In October 2001, management and the Company's Board of Directors approved a plan to close its Garland, Texas and Marlborough, Massachusetts facilities. Prior to its closure, the Garland plant had manufactured the Company's lowest technology pre-production volume printed circuit boards. The Marlborough plant provided electronic interconnect products to selected customers in the New England area. The decision to close these facilities was based upon their contribution to the Company's financial objectives in 2001 as well as their expected contribution going forward. Combined revenues for the two facilities were approximately $28 million for the year ended December 31, 2001 and EBITDA (earnings before income taxes, depreciation, amortization and net interest expense) for these entities was approximately zero during the same period. Net income/(loss) for these facilities is not readily determinable. The closure of the facilities is estimated to be effectively complete by June 30, 2002. In conjunction with the closure of the Garland and Marlborough facilities, DDi Corp. and DDi Capital recorded charges in the fourth quarter of 2001 totaling $79.8 million and $79.4 million, respectively. Of these amounts, $3.7 million represents restructuring related inventory impairments and are therefore reflected as a component of gross profit. The remaining $76.1 million of charges are classified as "Restructuring and other related charges" and consists of $51.4 million relating to impairments of intangible assets, $15.5 million relating to impairments of net property, plant and equipment, and $9.2 million for DDi Corp. and $8.8 million for DDi Capital in accrued restructuring expenses. Such accrued restructuring expenses represent $4.4 million in estimated facilities closure costs such as minimum lease payments through the scheduled maturities of the non-cancelable real property operating leases and the estimated costs of readying facilities for lease or sale, $3.5 million for DDi Corp. and $3.1 million for DDi Capital in severance and related expenses associated with the F-37 DDi CORP. AND DDi CAPITAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands, except share and per share amounts) involuntary termination of the 208 staff and management employees from the plant closures and changes in senior management undertaken in the fourth quarter of 2001, and $1.3 million in other exit costs. Of the total accrued restructuring expenses, approximately $2.6 million and $2.5 million for DDi Corp. and DDi Capital, respectively, was expended in cash, and $0.2 million was credited to additional paid-in capital (see Note 11), leaving a balance at December 31, 2001 of $6.4 million and $6.1 million for DDi Corp. and DDi Capital, respectively. The calculated impairment of $15.5 million in net property, plant and equipment was made in accordance with SFAS No. 121, based upon a detailed review of the individual long-lived assets in the closed facilities. Management determined that certain of these assets would be utilized by the Company's other operations and are not impaired. Most of the assets, however, were determined to be either obsolete or redundant equipment with no residual value, after consideration of estimated disposal costs. Accordingly, these assets were written down to zero value. Further, the Company owns the land and building associated with the Garland facility. The Company intends to market this property for sale subsequent to the completion of the plant closure. Based upon information available at this time, the Company believes proceeds from such sale would likely exceed the net book value of the property (approximately $6.1 million), plus expected selling costs. As of December 31, 2001, the Company's Consolidated Balance Sheet reflects the historical cost of the land and building. Depreciation of the building was discontinued in October 2001. In connection with the calculation of the impairment of tangible assets described above, the Company determined that the intangibles associated with the facilities to be closed have a fair value of zero. The Company estimated the amount of the impairment by comparing the discounted cash flows expected to be generated from the assets to their carrying value. Of the $51.4 million of restructuring charges relating to the impairment of intangible assets, $23.0 million represents goodwill relating to business transferred from the Company's former Colorado plant with the remainder representing the portion of the intangibles acquired in conjunction with the merger with DCI (see Note 14) that relate to the Garland and Marlborough facilities. The latter is comprised of $25.8 million of goodwill and $2.6 million of identifiable intangibles (customer relationships and assembled work-force). 16. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Year Ended Year Ended Year Ended December 31, 1999 December 31, 2000 December 31, 2001 --------------------- --------------------- --------------------- DDi Capital DDi Corp. DDi Capital DDi Corp. DDi Capital DDi Corp. ----------- --------- ----------- --------- ----------- --------- CASH PAYMENTS FOR: Income taxes................. $ 1,141 $ 1,141 $17,461 $21,294 $3,965 $ 6,906 ======= ======= ======= ======= ====== ======= Interest..................... $30,603 $30,603 $31,583 $44,992 $ 857 $6,301 ======= ======= ======= ======= ====== ======= SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Equity issued in mergers and acquisitions (see Note 14). $ -- $ -- $ -- $29,062 $ -- $ -- ------- ------- ------- ------- ------ -------
17. RELATED PARTY TRANSACTIONS The Company leases a facility used for design and assembly from D&D Tarob Properties, LLC ("D&D"), an entity owned or controlled by the Company's former Chairman and Director. During the year ended December 31, 2001, the Company paid $0.5 million to D&D under this lease agreement. F-38 DDi CORP. AND DDi CAPITAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands, except share and per share amounts) On June 1, 2000, in connection with the exercise of certain options, the Company accepted as payment from a certain executive officer purchasing such shares, a note in the amount of $0.1 million bearing interest at a rate of 6.46% per annum, compounded quarterly. The note is collateralized by shares of the Company's common stock. On November 30, 2001, pursuant to the terms of a Secured Promissory Note and Pledge Agreement, the Company loaned a certain executive officer a note in the amount of $0.6 million bearing interest at a rate of 2.7% per annum, compounded quarterly. The note is collateralized by shares of the Company's common stock. 18. PUBLIC OFFERINGS On April 14, 2000, DDi Corp. completed an initial public offering of 12,000,000 shares of its common stock at $14.00 per share generating proceeds of $156.7 million, net of underwriting discounts and commissions. The net proceeds were used to repay $100 million of the Senior Term Facility, redeem $21.2 million accreted balance of the Intermediate senior discount notes, pay associated redemption premiums and accrued and unpaid interest thereon, finance a portion of the acquisition of MCM (see Note 14) and pay offering expenses. On October 16, 2000, the Company and some of its shareholders completed a follow-on public offering of 6,000,000 shares of the Company's common stock, with 4,608,121 shares issued by the Company and the remainder sold by selling shareholders. The shares were sold at $27.875 per share, generating proceeds to the Company of $122.0 million, net of underwriting discounts and commissions. The net proceeds were used to redeem all outstanding Intermediate senior discount notes aggregating $17.5 million in principal amount, pay associated redemption premiums of $3.6 million and accrued and unpaid interest thereon of $5.2 million, repurchase a portion of the Capital Senior Discount Notes, with an accreted balance of $36.5 million, for $37.6 million and pay offering expenses. The remaining net proceeds of approximately $58.1 million are to be used for general corporate purposes, including potential future acquisitions. On February 14, 2001, DDi Corp. and some of its shareholders completed a follow-on public offering of 6,000,000 shares of its common stock, with 3,000,000 shares issued by DDi Corp. and the remainder sold by selling shareholders. The shares were sold at $23.50 per share, generating proceeds of $67.0 million, net of underwriting discounts, commissions and expenses. Concurrently, DDi Corp. issued 5.25% Convertible Subordinated Notes due March 1, 2008 with an aggregate principal of $100.0 million. These notes are convertible at any time prior to maturity into shares of common stock at a conversion price of $30.00 per share, subject to certain adjustments. These notes generated proceeds of $97.0 million, net of underwriting discounts, commissions and expenses. The net proceeds of both transactions have been used to repurchase a portion of the Capital Senior Discount Notes and all of the Senior Subordinated Notes. 19. EXTRAORDINARY ITEMS During the year ended December 31, 2000, Dynamic Details recorded, as extraordinary items, write-offs of debt issuance costs and deferred swap income of approximately $0.7 million, net of related taxes of $0.4 million, related to the Senior Term Facility principal repayments funded from the net proceeds of DDi Corp.'s initial public offering (see Note 18). In addition, Intermediate recorded, as extraordinary items, the redemption premium and write-off of debt issuance costs of approximately $4.2 million, net of related taxes of $2.8 million related to the Intermediate Senior Discount Notes principal repayments funded from the net proceeds of DDi Corp.'s initial public offering and secondary offering (see Note 18). DDi Capital recorded, as extraordinary items, the purchase premium and write-off of debt issuance costs of approximately $1.5 million, net of related F-39 DDi CORP. AND DDi CAPITAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (In thousands, except share and per share amounts) taxes of $1.0 million related to the Capital Senior Discount Notes repurchase funded from the net proceeds of DDi Corp.'s secondary offering. During the year ended December 31, 2001, Dynamic Details recorded, as extraordinary items, the write-off of unamortized debt issuance costs of approximately $3.3 million, the payment of repurchase premium of approximately $7.8 million, and direct transaction costs of approximately $0.4 million, net of related income taxes of $4.5 million, related to the repurchase of the Senior Subordinated Notes funded from the net proceeds of DDi Corp.'s February 14, 2001 follow-on public offering (see Note 18). In addition, DDi Capital recorded, as extraordinary items, the write-off of unamortized debt issuance costs of approximately $1.5 million, the payment of repurchase premium of approximately $6.5 million, net of related income taxes of $3.1 million, related to the repurchase of the DDi Capital Senior Discount Notes funded from the net proceeds of DDi Corp.'s February 14, 2001 follow-on public offering. 20. SUBSEQUENT EVENT On January 3, 2002, Dynamic Details repaid $9.2 million of the Senior Term Facility. F-40 FINANCIAL STATEMENT SCHEDULE The financial statement Schedule II--VALUATION AND QUALIFYING ACCOUNTS is filed as part of this Form 10-K. SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (in thousands) DDi CORP.
Balance Increase at Charged attributable Balance at beginning to to end of of year income acquisitions Deductions year --------- ------- ------------ ---------- ---------- Allowance for Doubtful Accounts Year ended December 31, 1999... $ 1,428 $ 435 $ -- $ (279) $ 1,584 Year ended December 31, 2000... $ 1,584 $12,462 $1,445 $(2,614) $12,877 Year ended December 31, 2001... $12,877 $ 131 $ 469 $(8,476) $ 5,001
DDi CAPITAL CORP.
Balance Increase at Charged attributable Balance at beginning to to end of of year income acquisitions Deductions year --------- ------- ------------ ---------- ---------- Allowance for Doubtful Accounts Year ended December 31, 1999... $ 1,428 $ 435 $ -- $ (279) $ 1,584 Year ended December 31, 2000... $ 1,584 $12,122 $ 621 $(2,453) $11,874 Year ended December 31, 2001... $11,874 $ 79 $ 371 $(8,047) $ 4,277
F-41 EX-10.16 3 dex1016.txt FIFTH AMENDMENT TO CREDIT AGREEMENT Exibit 10.16 EXECUTION COPY FIFTH AMENDMENT, dated as of December 31, 2001 (this "Fifth Amendment") to --------------- the Credit Agreement, dated as of July 23, 1998 and as Amended and Restated as of August 28, 1998 (as amended by the First Amendment, dated as of March 10, 1999, the Second Amendment, dated as of March 22, 2000, the Third Amendment, dated as of October 10, 2000, the Fourth Amendment, dated as of February 13, 2001, and as may be further amended, modified or supplemented from time to time, the "Credit Agreement"), among (i) DDI Capital Corp., formerly known as Details ---------------- Capital Corp. (the "Company"); (ii) Dynamic Details, Incorporated, formerly ------- known as Details, Inc. ("Details"); (iii) Dynamic Details Incorporated, Silicon ------- Valley, formerly known as Dynamic Circuits, Inc. ("DCI", and collectively with --- Details, the "Borrowers"); (iv) the several banks and other financial --------- institutions from time to time parties thereto, (individually, a "Lender," and ------ collectively, the "Lenders"); (v) BANKERS TRUST COMPANY, as documentation and ------- co-syndication agent; and (vi) JPMorgan Chase Bank, as collateral, co-syndication and administrative agent (in such capacity, the "Administrative -------------- Agent"). Terms defined in the Credit Agreement shall be used in this Fifth - ----- Amendment with their defined meanings unless otherwise defined herein. W I T N E S S E T H : - - - - - - - - - - WHEREAS, pursuant to the Credit Agreement the Lenders have agreed to make, and have made, certain Loans to the Borrowers; WHEREAS, the Company and the Borrowers have requested that the Lenders amend, and the Lenders have agreed to amend, certain of the provisions of the Credit Agreement upon the terms and subject to the conditions set forth below; WHEREAS, the Lenders are willing to effect such amendments to the Credit Agreement, but only upon the terms and subject to the conditions set forth below; NOW, THEREFORE, the parties hereto hereby agree as follows: 1. Amendment to Section 1.1. Section 1.1 of the Credit Agreement is hereby ------------------------ amended as follows: (a) by amending and restating the following definitions in their entireties: "Applicable Margin": for the Tranche B Term Loans, the rate per annum set ----------------- forth under the relevant column heading below: ABR Loans Eurodollar Loans --------- ---------------- 3.00% 4.00% ; provided: that the Applicable Margin with respect to Revolving Credit -------- Loans, the Swing Line Loans, and Tranche A Term Loans will be determined pursuant to the Pricing Grid. 2 "ECF Percentage": 75%; provided, that, with respect to each fiscal year of -------------- Details ending on or after December 31, 2000, the ECF Percentage shall be reduced to 50% if the Consolidated Leverage Ratio as of the last day of such fiscal year is not greater than 2.0 to 1.0. "Interest Payment Date": (a) as to any ABR Loan, the last day of each month --------------------- to occur while such Loan is outstanding and the final maturity date of such Loan, (b) as to any Eurodollar Loan having an Interest Period of three months or less, the last day of such Interest Period, (c) as to any Eurodollar Loan having an Interest Period longer than three months, each day which is three months, or a whole multiple thereof, after the first day of such Interest Period and the last day of such Interest Period and (d) as to any Loan (other than any Revolving Credit Loan that is an ABR Loan and any Swing Line Loan), the date of any repayment or prepayment made in respect thereof. (b) by adding the following new definition in the proper alphabetical order: "Fifth Amendment Effective Date": the Fifth Amendment Effective Date under ------------------------------ the Fifth Amendment to this Agreement (which date is as of December 31, 2001). "Permitted Investments": (i) direct obligations of the U.S. Treasury --------------------- including treasury bills, notes and bonds; (i) federal agency securities which carry the direct or implied guarantee of the U.S. Government including Government National Mortgage Association, Federal Home Loan Bank, Federal Farm Credit Bank, Federal National Mortgage Association, Student Loan Marketing Association, World Bank, and Tennessee Valley Authority, including notes, discount notes, medium term notes and floating rate notes; (iii) bank certificates of deposit and bankers' acceptances including Eurodollar denominated and Yankee issues, provided that such investments are limited to those institutions with total assets in excess of $2 billion and which carry a Moody's and Standard and Poor's rating of A1/P1 or better or a Keefe Bruyette and Woods rating of at least A/B; (iv) commercial paper rated A1/P1 or better; (v) short-term tax exempt securities including municipal notes, commercial paper, auction rate floaters, and floating rate notes rated A1/P1 or better, municipal notes rated SP-1/MIG-2 or better, and bonds rated AA or better; (vi) pre-funded municipal bonds escrowed to maturity and backed by U.S. Treasury securities; (vii) auction rate preferred stock or bonds issued with a rate-reset mechanism and a maximum term of 180 days, provided that such investments are limited to those issuers who have a Moody's rating of AA or better; and (viii) money market mutual funds, which offer daily purchase and redemption and maintain a constant share price, provided that such funds are "no-load" funds which have a constant $1.00 NAV. "Purchase Money Indebtedness": as defined as in Section 7.2(c). --------------------------- "Qualified Account": as defined in Section 7.17. ----------------- "Sale-Leaseback Transaction": as defined in Section 7.11. -------------------------- "Second Quarter 2003 Compliance Date": the date on which the Company and ----------------------------------- Borrowers shall have delivered financial statements for the fiscal quarter ended June 30, 2003 in compliance with Section 6.1 (together with the relevant items required to be delivered concurrently pursuant to Section 6.2). 3 (c) by deleting the following definitions, added to the Credit Agreement pursuant to the Third Amendment: "Incremental Lenders", "Incremental Maturity Date", "Incremental Revolving Lenders", "Incremental Revolving Loan Activation Date", "Incremental Revolving Loan Activation Notice", "Incremental Revolving Loan Amount", "Incremental Revolving Loan Closing Date", "Incremental Term Lenders", "Incremental Term Loan Activation Date", "Incremental Term Loan Activation Notice", "Incremental Term Loan Amount", "Incremental Term Loan Closing Date", "Incremental Term Loan Facility", "Incremental Term Loan Percentage", "Incremental Term Loans", "Incremental Term Loan Incurrence Pro Forma Compliance", "Incremental Term Loan Termination Date", and "Incremental Term Note". 2. Amendment to Section 2.1. Section 2.1 of the Credit Agreement is hereby ------------------------ amended by deleting such section in its entirety and substituting in lieu thereof the following new section: (a) "Term Loan Commitments. Subject to the terms and conditions hereof, (a) --------------------- each Tranche A Term Loan Lender severally agrees to make term loans to the Borrowers on the Closing Date and to DCI on the Second Closing Date (the "Tranche A Term Loans") in an aggregate amount not to exceed the amount of the Tranche A Term Loan Commitment of such Lender and (b) each Tranche B Term Loan Lender severally agrees to make term loans (the "Tranche B Term Loans") to the Borrowers on the Closing Date and on the Second Closing Date in an aggregate amount not to exceed the amount of the Tranche B Term Loan Commitment of such Lender. The Term Loans may from time to time be Eurodollar Loans or ABR Loans, as determined by the relevant Borrower and notified to the Administrative Agent in accordance with Sections 2.2 and 2.12." 3. Amendment to Section 2.4. Section 2.4 of the Credit Agreement is hereby ------------------------ amended by deleting such section in its entirety and substituting in lieu thereof the following new section: "(a) Revolving Credit Commitments. (a) Subject to the terms and conditions hereof, each Revolving Credit Lender severally agrees to make revolving credit loans ("Revolving Credit Loans") to the Borrowers from time to time during the Revolving Credit Commitment Period in an aggregate principal amount at any one time outstanding which, when added to such Lender's Revolving Credit Percentage of the sum of (i) the aggregate principal amount of the Swing Line Loans then outstanding and (ii) the aggregate amount of the L/C Obligations then outstanding, does not exceed the amount of such Lender's Revolving Credit Commitment. During the Revolving Credit Commitment Period the Borrowers may use the Revolving Credit Commitments by borrowing, prepaying the Revolving Credit Loans in whole or in part, and reborrowing, all in accordance with the terms and conditions hereof. The Revolving Credit Loans may from time to time be Eurodollar Loans or ABR Loans, as determined by the Borrowers and notified to the Administrative Agent in accordance with Sections 2.5 and 2.12, provided that no Revolving Credit Loan shall be made as a Eurodollar Loan after the day that is one month prior to the Scheduled Revolving Credit Termination Date." (b) The Borrowers shall repay all outstanding Revolving Credit Loans on the Scheduled Revolving Credit Termination Date (or such earlier date as all amounts owing hereunder shall become due and payable). 4 (c) Notwithstanding anything to the contrary in this Agreement, the sum of all Revolving Extensions of Credit shall not at any time exceed $37,500,000. The requirements set forth in the preceding sentence shall cease to apply from and after the Second Quarter 2003 Compliance Date, provided, that on such date, no -------- Default or Event of Default shall have occurred and be continuing (including, without limitation, pursuant to Section 7.1 for the second calendar quarter of 2003)." 4. Amendment to Section 2.11(b). Section 2.11(b) of the Credit Agreement is ---------------------------- hereby amended by deleting the reference to "$4,000,000" in proviso (i) and substituting in lieu thereof "$1,000,000". 5. Addition of Section 2.11(g). Section 2.11(g) is hereby added to the --------------------------- Credit Agreement, such Section to read as follows: "(g) An amount equal to 50% of the Net Cash Proceeds received with respect to any convertible Indebtedness issued by DDi Corp. in accordance with Section 7.2(o)." 6. Amendment to Section 2.17(b). Section 2.17(b) is hereby amended by (1) ---------------------------- deleting the language "or the Incremental Term Loans" following the language "Tranche B Term Loans" in the first sentence thereof, (2) deleting the language "and the Incremental Term Loans" following the language "Tranche B Term Loans" in the second sentence thereof, (3) deleting the "," after the language "Tranche A Term Loans" in the first sentence thereof and substituting in lieu thereof the word "or", and (4) deleting "," after the language "Tranche A Term Loans" in the second sentence thereof and substituting in lieu thereof the word "and". 7. Amendment to Section 6.1(c). Section 6.1(c) of the Credit Agreement is --------------------------- hereby amended by adding the following to the end of such clause: "together with a management discussion and analysis of such financial information." 8. Amendment to Section 7.1(a). Section 7.1(a) of the Credit Agreement is --------------------------- hereby amended by deleting such Section in its entirety and substituting in lieu thereof the following: "[intentionally omitted]." 9. Amendment to Section 7.1(b). Section 7.1(b) of the Credit Agreement is --------------------------- hereby amended by deleting such Section in its entirety and substituting in lieu thereof the following: "(b) Consolidated Senior Leverage Ratio. Permit the Consolidated Senior Leverage Ratio as of the last day of any period of four consecutive fiscal quarters of Details to exceed the ratio set forth below opposite such period: Period Consolidated Senior Leverage Ratio ------ ---------------------------------- January 1, 2002 through March 31, 2002 8.0 to 1.0 April 1, 2002 through June 30, 2002 8.0 to 1.0 July 1, 2002 through September 30, 2002 6.5 to 1.0 October 1, 2002 through December 31, 2002 3.0 to 1.0 5 January 1, 2003 through March 31, 2003 2.0 to 1.0 April 1, 2003 through June 30, 2003 1.75 to 1.0 July 1, 2003 through September 29, 2003 1.50 to 1.0 September 30, 2003 through thereafter 1.25 to 1.0" 10. Amendment to Section 7.1(c). Section 7.1(c) of the Credit Agreement is --------------------------- deleted in its entirety and the following substituted in lieu thereof: "Consolidated Fixed Charge Coverage Ratio. After July 1, 2003, permit the Consolidated Fixed Charge Coverage Ratio for any period of four consecutive fiscal quarters of Details to be less than 1.05 to 1.0." 11. Addition of Section 7.1(d). Section 7.1 of the Credit Agreement is -------------------------- hereby amended by adding a new Section 7.1(d) to read as follows: "(d) Minimum EBITDA. (1) Permit Consolidated EBITDA for any period during (i) the fiscal quarter ending December 31, 2001 to be more than $5,000,000 below zero, (ii) the fiscal quarter ending March 31, 2002 to be less than $0, (iii) the two consecutive fiscal quarters ending June 30, 2002 to be less than $6,000,000, (iv) the three consecutive fiscal quarters ending September 30, 2002 to be less than $21,000,000, and (v) the four consecutive fiscal quarters ending during any period set forth below to be less than the amount set forth opposite such period: Fiscal Quarter Consolidated EBITDA - -------------- ------------------- October 1, 2002 through December 31, 2002 $40,000,000 January 1, 2003 through March 31, 2003 $50,000,000 April 1, 2003 through June 30, 2003 $58,000,000 July 1, 2003 through September 30, 2003 $63,000,000" 12. Amendment to Section 7.2(c). Section 7.2 of the Credit Agreement is --------------------------- hereby amended by deleting paragraph (c) in its entirety and substituting in lieu thereof the following: "(c) Indebtedness secured by Liens permitted by Section 7.3(g) ("Purchase -------- Money Indebtedness") existing as of the Fifth Amendment Effective Date and other - ------------------ Purchase Money Indebtedness, which other Purchase Money Indebtedness shall not exceed $2,000,000 at any one time outstanding." 13. Amendment to Section 7.2(d). Section 7.2 of the Credit Agreement is --------------------------- hereby amended by deleting paragraph (d) in its entirety and substituting in lieu thereof the following: "(d) Capital Lease Obligations existing as of the Fifth Amendment Effective Date and other Capital Lease Obligations, which other Capital Lease Obligations shall not exceed $3,000,000." 6 14. Amendment to Section 7.2(m). Section 7.2 of the Credit Agreement is --------------------------- hereby amended by deleting paragraph (m) in its entirety and substituting in lieu thereof the following: "(m) additional Indebtedness of Details or any of its Subsidiaries existing as of the Fifth Amendment Effective Date and other such additional Indebtedness, which other such additional Indebtedness shall not exceed in an aggregate principal amount (for Details and all Subsidiaries) $5,000,000 at any one time outstanding." 15. Amendment to Section 7.2(n). Section 7.2 of the Credit Agreement is --------------------------- hereby amended by deleting paragraph (n) in its entirety and substituting in lieu thereof the following: "(n) [intentionally omitted]" 16. Addition of Section 7.2(o). The Credit Agreement is hereby amended by -------------------------- adding a new Section 7.2(o) to read as follows: "(o) convertible Indebtedness issued by DDi Corp., provided that such Indebtedness is (i) unsecured, (ii) matures later than October 22, 2005 and (iii) DDi Corp. deposits in a Qualified Account an amount from the Net Cash Proceeds of such Indebtedness that is equal to two years of Consolidated Fixed Charges with respect to such Indebtedness, which amount shall be reduced from time to time by an amount equal to the Consolidated Fixed Charges due and payable on such Indebtedness." 17. Amendment to Section 7.3(j). Section 7.3(j) of the Credit Agreement is --------------------------- hereby amended by deleting the reference to the amount "$4,000,000" and substituting in lieu thereof "$1,000,000". 18. Amendment to Section 7.5(f). Section 7.5(f) of the Credit Agreement is --------------------------- hereby amended by deleting such Section in its entirety and substituting in lieu thereof the following: "(f) the sale of other assets (including pursuant to a Sale-Leaseback Transaction) having a fair market value not to exceed $10,000,000 in the aggregate for any fiscal year of Details." 19. Amendment to Section 7.6(d). Section 7.6(d) is hereby amended by --------------------------- deleting said Section in its entirety and substituting in lieu thereof the following: "[intentionally omitted]." 20. Amendment to Section 7.6(h). Section 7.6(h) is hereby amended by --------------------------- deleting said Section in its entirety and substituting in lieu thereof the following: "[intentionally omitted]." 7 21. Amendment to Section 7.7. Section 7.7, which consists solely of the ------------------------ language "[INTENTIONALLY OMITTED]", is hereby deleted in its entirety and the following substituted in lieu thereof: "7.7 Limitation on Capital Expenditures. Make or commit to make (by way of the acquisition of securities of a Person or otherwise) any Capital Expenditure, except Capital Expenditures of Details and its Subsidiaries in the ordinary course of business not exceeding in any fiscal year of Details the amount set forth below opposite such fiscal year (the "Base CapEx Amount"): ----------------- Fiscal Year Base CapEx Amount 2002 $25,000,000 2003 $27,500,000 2004 $30,300,000 2005 $33,300,000" 22. Amendment to Section 7.8(i). Section 7.8(i) of the Credit Agreement is --------------------------- hereby amended by deleting such Section in its entirety and substituting in lieu thereof the following: "From and after the Second Quarter 2003 Compliance Date, Details and its Subsidiaries may acquire all or substantially all of the Capital Stock or assets of any Person or business unit of a Person; provided that (i) no -------- Default or Event of Default has occurred and is continuing or would result therefrom, (ii) the Company would have been in compliance, on a pro forma basis, with each of the financial covenants contained in Section 7.1 if such acquisition had been made on the first day of the most recently completed period of calculation thereof and (iii) immediately prior to consummating such acquisition, and after giving pro forma effect thereto, the Available Revolving Credit Commitments of all the Lenders shall be at least $20,000,000." 23. Amendment to Section 7.8(j). Section 7.8(j) of the Credit Agreement is --------------------------- hereby amended by deleting such Section in its entirety and substituting in lieu thereof the following: "From and after the Second Quarter 2003 Compliance Date, in addition to investments otherwise expressly permitted by this Section 7.8, investments by Details or any of its Subsidiaries in an aggregate amount (valued at cost, but net of returns of capital from such investments) not to exceed during the term of this Agreement the sum of $10,000,000 and the then unused Permitted Expenditure Amount on the date upon which such investment is made." 24. Amendment to Section 7.10. Section 7.10 of the Credit Agreement is ------------------------- hereby amended by deleting such Section in its entirety and substituting in lieu thereof the following: "Limitation on Transactions with Affiliates. Enter into any transaction, ------------------------------------------ including, without limitation, any purchase, sale, lease or exchange of Property, the rendering of any service or the payment of any management, advisory or similar fees, with any Affiliate (other than the Company, Details or any Wholly Owned Subsidiary Guarantor) unless such transaction 8 is (a) not otherwise prohibited under this Agreement and (b) upon fair and reasonable terms no less favorable to the Company, Details or such Subsidiary, as the case may be, than it would obtain in a comparable arm's length transaction with a Person which is not an Affiliate. Notwithstanding anything to the contrary contained in this Section 7.10, at no time will the Company or any of its Subsidiaries make any payments to Bain Capital and/or any of its Affiliates in an amount which would exceed that amount permitted to be paid pursuant to the Senior Subordinated Note Indenture, the Company Indenture or the New Intermediate Note Indenture at such time." 25. Amendment to Section 7.11. Section 7.11 is hereby deleted in its ------------------------- entirety and the following substituted in lieu thereof: "Limitation on Sales and Leasebacks. Other than as permitted in the second ---------------------------------- sentence, enter into any arrangement with any Person providing for the leasing by the Company or any of its Subsidiaries of real or personal property which has been or is to be sold or transferred by the Company or such Subsidiary to such Person or to any other Person to whom funds have been or are to be advanced by such Person on the security of such property or rental obligations of the Company or such Subsidiary (a "Sale-Leaseback Transaction"). The Company or any -------------------------- of its Subsidiaries may enter into a Sale-Leaseback Transaction with respect to the Company's facility located in Garland, Texas, provided that (i) such -------- Sale-Leaseback Transaction does not raise more than $10,000,000 in Net Cash Proceeds and (ii) there is deposited into a Qualified Account an amount equal to the first two years of rent payable to the new owner of the Garland, Texas facility and (iii) notwithstanding any other provision of the Credit Agreement, Net Cash Proceeds that arise from the Sale-Leaseback Transaction are applied in accordance with Section 2.11(d) of the Credit Agreement." 26. Addition of Section 7.18. A new Section 7.18, to read as follows, is ------------------------ hereby added to the Credit Agreement: "Cash Accounts. From 90 days after the Fifth Amendment Effective Date, ------------- permit the aggregate amount of cash or cash equivalents held by the Borrowers and their Subsidiaries that is not held in Qualified Accounts to exceed $5,000,000. As used above, "Qualified Account" means any deposit account ----------------- (consisting of Permitted Investments) of the Borrowers and their Subsidiaries in which the Administrative Agent has a perfected first priority security interest, in each case on terms and conditions satisfactory to the Administrative Agent. The requirements set forth in this Section shall cease to apply from and after the Second Quarter 2003 Compliance Date, provided, that on such date, no Default -------- or Event of Default shall have occurred and be continuing (including, without limitation, pursuant to Section 7.1 for the second calendar quarter of 2003)." 27. Amendment to Section 8(m). Section 8(m)(v) of the Credit Agreement is ------------------------- hereby amended by deleting the word "and" before the beginning of clause (F) and adding the following new clause (G) at the end thereof and prior to the semi-colon: "and (G) with respect to DDi Corp., pursuant to Section 7.2(o)." 28. Amendment to Annex A. Annex A of the Credit Agreement is hereby amended -------------------- by deleting the Pricing Grid in its entirety and substituting in lieu thereof the following: 9
Consolidated Applicable Applicable Commitment Fee Leverage Ratio Margin for Margin for ABR Rate Eurodollar Loans Loans and and Letters of Swing Line Credit Loans (greater than or equal to) 5.00 to 1.0 3.75% 2.75% 0.50% (less than) 5.00 to 1.0 3.50% 2.50% 0.50% and (greater than or equal to) 4.00 to 1.0 (less than) 4.00 to 1.0 3.25% 2.25% 0.50% and (greater than or equal to) 3.00 to 1.0 (less than) 3.00 to 1.0 3.25% 2.25% 0.50% and (greater than or equal to) 2.50 to 1.0 (less than) 2.50 to 1.0 3.00% 2.00% 0.50%
29. Representations and Warranties. As of the date hereof and after giving ------------------------------ effect to this Fifth Amendment, the Company and each Borrower hereby confirm, reaffirm and restate the representations and warranties made by it in Section 4 of the Credit Agreement and otherwise in the Loan Documents to which it is a party; provided that each reference to the Credit Agreement therein shall be deemed to be a reference to the Credit Agreement after giving effect to this Fifth Amendment. No Default or Event of Default has occurred and is continuing. 30. Fees. The Borrowers agree to pay an amendment fee for the account of ---- each Lender that consents to this Fifth Amendment in the amount of 0.25% of each such Lender's Commitment. 31. Within 30 days of the Fifth Amendment Effective Date, the Borrowers agree to provide to the Administrative Agent an Officer's Certificate, in form and substance reasonably acceptable to the Administrative Agent, certifying as to the correctness and completeness of the Schedules to the Guarantee and Collateral Agreement. 32. No Change. Except as expressly provided herein, no term or provision of --------- the Credit Agreement shall be amended, modified or supplemented, and each term and provision of the Credit Agreement shall remain in full force and effect. 33. Effectiveness. This Fifth Amendment shall become effective as of the ------------- date hereof upon receipt by the Administrative Agent of: (a) counterparts hereof duly executed by Company, the Borrowers and the Required Lenders; the execution and delivery of this Fifth Amendment by any Lender shall be binding upon each of its successors and assigns (including assignees of its Commitments and Loans in whole or in part prior to effectiveness hereof) and binding in respect of all of its Commitments and Loans, including any acquired subsequent to its execution and delivery hereof and prior to the effectiveness hereof; 10 (b) a copy of resolutions of such Borrower, certified by the Secretary of such Borrower, authorizing the execution, delivery and performance of this Fifth Amendment, which shall be in form and substance reasonably satisfactory to the Administrative Agent and shall state that the resolutions thereby certified have not been amended, modified, revoked or rescinded; (c) a certificate of each of the Borrowers, dated as of the date hereof, as to the incumbency and signature of the officers of such Borrower executing this Fifth Amendment, which shall be in form and substance reasonably satisfactory to the Administrative Agent; (d) such other documents, instruments and agreements with respect to the matters contemplated by this Fifth Amendment as the Administrative Agent reasonably shall request, and all such documents, instruments and agreements shall be in form and substance reasonably satisfactory to the Administrative Agent; and (e) the fees referred to in paragraph 29 of this Fifth Amendment shall have been paid. 34. Counterparts. This Fifth Amendment may be executed by the parties ------------ hereto in any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. 35. GOVERNING LAW. THIS FIFTH AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF ------------- THE PARTIES UNDER THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. 11 IN WITNESS WHEREOF, the parties have caused this Amendment to be duly executed and delivered by their respective proper and duly authorized officers as of the day and year first above written. DDI CAPITAL CORP. By: -------------------------------------------- Title: DYNAMIC DETAILS, INCORPORATED By: -------------------------------------------- Title: DYNAMIC DETAILS, INCORPORATED, SILICON VALLEY By: -------------------------------------------- Title: 12 JPMorgan Chase Bank, as Administrative Agent, Collateral Agent, Co- Syndication Agent and as a Lender By: -------------------------------------------- Title: BANKERS TRUST COMPANY, as Documentation Agent, Co-Syndication Agent and as a Lender By: -------------------------------------------- Title: 13 BANK AUSTRIA CREDITANSTALT CORP. By: -------------------------------------------- Title: 14 THE BANK OF NOVA SCOTIA By: -------------------------------------------- Title: 15 BANKBOSTON, N.A. By: -------------------------------------------- Title: 16 SANKATY ADVISORS, INC., as Collateral Manager for BRANT POINT II CBO 2000-1 LTD. By: -------------------------------------------- Title: 17 CITIZENS BANK OF MASSACHUSETTS By: -------------------------------------------- Title: 18 CRESCENT/MACH I PARTNERS, L.P. By: -------------------------------------------- Title: 19 CYPRESSTREE INVESTMENT PARTNERS I By: -------------------------------------------- Title: 20 CYPRESSTREE INVESTMENT PARTNERS II By: -------------------------------------------- Title: 21 DEBT STRATEGIES FUND By: -------------------------------------------- Title: 22 DRESDNER BANK AG By: -------------------------------------------- Title: 23 FIRST DOMINION FUNDING II By: -------------------------------------------- Title: 24 FLEET BANK, N.A. By: -------------------------------------------- Title: 25 GRAYSTON CLO 2001-01 LTD. By: -------------------------------------------- Title: 26 IBM CREDIT CORPORATION By: -------------------------------------------- Title: 27 INDOSUEZ CAPITAL FUNDING IIA, LTD. By: -------------------------------------------- Title: 28 INDOSUEZ CAPITAL FUNDING IV, L.P. By: -------------------------------------------- Title: 29 IBJ WHITEHALL BANK & TRUST COMPANY By: -------------------------------------------- Title: 30 KZH CRESCENT 2 LLC By: -------------------------------------------- Title: 31 KZH CRESCENT 3 LLC By: -------------------------------------------- Title: 32 KZH CYPRESSTREE-1 LLC By: -------------------------------------------- Title: 33 MSDW PRIME INCOME TRUST By: -------------------------------------------- Title: 34 MASS MUTUAL HIGH YIELD PARTNERS II By: -------------------------------------------- Title: 35 MASTER SENIOR FLOATING RATE TRUST By: -------------------------------------------- Title: 36 MASSACHUSETTS MUTUAL LIFE INSURANCE By: -------------------------------------------- Title: 37 MERRILL LYNCH PRIME RATE PORTFOLIO By: -------------------------------------------- Title: 38 MERRILL LYNCH SENIOR FLOATING RATE FUND By: -------------------------------------------- Title: EXECUTION COPY NORTH AMERICAN SENIOR FLOATING RATE FUND By: -------------------------------------------- Title: 2 PILGRIM AMER. HIGH INCOME INVEST. LTD. By: -------------------------------------------- Title: 3 PILGRIM CLO 1999-1 By: -------------------------------------------- Title: 4 SANKATY HIGH YIELD ASSET PARTNERS, L.P. By: -------------------------------------------- Title: 5 SANKATY HIGH YIELD PARTNERS II, L.P. By: -------------------------------------------- Title: 6 SOMERS CDO, LIMITED By: -------------------------------------------- Title: 7 TCW SELECT LOAN FUND, LIMITED By: -------------------------------------------- Title: 8 TORONTO DOMINION (NEW YORK) INC. By: -------------------------------------------- Title: 9 VAN KAMPEN SR. FLOATING RATE FUND By: -------------------------------------------- Title: EX-10.17 4 dex1017.txt AMENDMENT AND RESTATEMENT DEED EXHIBIT 10.17 CONFORMED COPY DATED 15 NOVEMBER 2001 - -------------------------------------------------------------------------------- DDI EUROPE LIMITED (formerly known as MCM ELECTRONICS LIMITED) - and - THE ADDITIONAL BORROWERS NAMED HEREIN - and - THE OTHER CHARGING COMPANIES NAMED HEREIN - and - THE GOVERNOR AND COMPANY OF THE BANK OF SCOTLAND (in its various capacities as the Arranger, the Agent, the Security Trustee, the Bank and the Working Capital Bank) ---------------------------------------------------- AMENDMENT AND RESTATEMENT DEED relating to a Facilities Agreement dated 27 May 1999 ---------------------------------------------------- CONTENTS 1. INTERPRETATION........................................................................................2 2. EFFECTIVE DATE........................................................................................2 3. AMENDMENT AND RESTATEMENT OF FACILITIES AGREEMENT AND CANCELLATION OF ORIGINAL WORKING CAPITAL FACILITY.............................................................................2 4. CONFIRMATION..........................................................................................2 5. REPRESENTATIONS AND WARRANTIES........................................................................2 6. EXPENSES..............................................................................................2 7. MISCELLANEOUS.........................................................................................3 SCHEDULE 1.................................................................................................4 Amended and Restated Facilities Agreement.............................................................4 SCHEDULE 2...............................................................................................104 Conditions Precedent................................................................................104
- -------------------------------------------------------------------------------- THIS DEED is made on 15 November 2001 BETWEEN (1) DDI EUROPE LIMITED (formerly known as MCM ELECTRONICS LIMITED) (registered in England and Wales under company number 3731403) ("Principal Borrower"); (2) DDI GROUP LIMITED (Registered No.:445250), CLASSICAL CIRCUITS LIMITED (Registered No.:1034995), DDI TECHNOLOGIES LIMITED (Registered No.: 1336602), PRETAN ENGINEERING LIMITED (Registered No.: 2407995), INTEGRATED DESIGNS & SYSTEMS LIMITED (Registered No.: 2624416), DYNAMIC DETAILS LIMITED (Registered No.: 3232495), ZLIN ELECTRONICS LIMITED (Registered No.: 1338479), DDI PRECISION LIMITED (Registered No.:2900127), DDI INTERNATIONAL LIMITED (Registered No.: 3328896), DDI SALES LIMITED (Registered No.: 3292688) and THOMAS WALTER LIMITED (Registered No.: 1415705) (the "Additional Borrowers" and together with the Principal Borrower, the "Borrowers"); (3) DDI GROUP LIMITED, CLASSICAL CIRCUITS LIMITED, DDI TECHNOLOGIES LIMITED, PRETAN ENGINEERING LIMITED, INTEGRATED DESIGNS & SYSTEMS LIMITED, DYNAMIC DETAILS LIMITED, ZLIN ELECTRONICS LIMITED, DDI PRECISION LIMITED, DDI INTERNATIONAL LIMITED, DDI SALES LIMITED, BWMP (HOLDINGS) LIMITED, REDLAB LIMITED, KRIZANTEM LIMITED and THOMAS WALTER LIMITED (the "Other Charging Companies" and, together with the Principal Borrower, the "Charging Companies"); (4) THE GOVERNOR AND COMPANY OF THE BANK OF SCOTLAND as arranger (the "Arranger"); (5) THE GOVERNOR AND COMPANY OF THE BANK OF SCOTLAND as agent for the Senior Lenders (the "Agent"); (6) THE GOVERNOR AND COMPANY OF THE BANK OF SCOTLAND as Security Trustee for the Security Beneficiaries (the "Security Trustee"); (7) THE GOVERNOR AND COMPANY OF THE BANK OF SCOTLAND and any other bank which has a Participation in the Term Loan Facility (the "Banks"); and (8) THE GOVERNOR AND COMPANY OF THE BANK OF SCOTLAND as provider of the Working Capital Facility (the "Working Capital Bank"). WHEREAS: A. By a facilities agreement dated 27 May 1999 made between the Principal Borrower and The Governor and Company of the Bank of Scotland (in its various capacities) (the "Facilities Agreement"), it agreed to make available certain term loan facilities on the terms and conditions of the Facilities Agreement. B. The Additional Borrowers subsequently acceded to the Facilities Agreement and each became a Borrower (as defined in the Facilities Agreement). C. The parties to the Facilities Agreement have agreed to amend and restate the terms of the Facilities Agreement upon the terms set out below, to repay the Original Working Capital Facility and cancel the Original Working Capital Facility Letter and to enter into the 2001 Working Capital Facility Letter. IT IS AGREED as follows: - -------------------------------------------------------------------------------- 1 1. INTERPRETATION 1.1. In this Deed (including the recitals) words and expressions defined in the Facilities Agreement (as amended and restated by this Deed) shall (unless otherwise defined) have the same meanings when used in this Deed; and "2001 Debenture" means the composite guarantee and debenture in the agreed terms to be entered into by all the Charging Companies in favour of the Security Trustee as trustee for the Security Beneficiaries on or before the date first written above; and "Effective Date" means the date upon which all of the conditions in referred to in the first sentence of Clause 2 have been satisfied or waived by the Agent. 1.2. The interpretation section of Clause 1.2 of the Facilities Agreement (as amended and restated by this Deed) shall be included in this Deed, subject to necessary changes. 2. EFFECTIVE DATE Notwithstanding any other provisions of this Deed, this Deed (other than Clause 6) shall have no effect unless the Agent shall have received (or waived the receipt of) each of the documents referred to in Schedule 2 in form and substance satisfactory to it. 3. AMENDMENT AND RESTATEMENT OF FACILITIES AGREEMENT AND CANCELLATION OF ORIGINAL WORKING CAPITAL FACILITY 3.1 With effect from the Effective Date the Facilities Agreement shall be amended and restated so as to take effect in the form set out in Schedule 1 to this Deed. 3.2 The Borrowers agree that the Original Working Capital Facility has been cancelled and that amounts may not be redrawn thereunder. 4. CONFIRMATION 4.1. The parties confirm that the Facilities Agreement remains in full force and effect save as amended by this Deed. 4.2. Each Charging Company confirms that the Security Documents to which it is a party remain and will remain in full force and effect notwithstanding the amendments effected by this Deed and that they shall continue to guarantee or, as the case may be, act as security for liabilities incurred in connection, inter alia, with the Facilities. 5. REPRESENTATIONS AND WARRANTIES 5.1. On the Effective Date each Obligor that is a party to this Agreement shall make the representations and warranties set out in Clauses 22.1.1 to Clause 22.1.12 as provided for in the Facilities Agreement (as amended and restated hereby) to each of the Senior Lenders. 5.2. Each Borrower acknowledges that each of the Senior Lenders is relying on the accuracy of such representations and warranties for the purposes of determining to enter into this Deed. 6. EXPENSES 6.1. The Principal Borrower shall discharge, by payment direct to the Agent's solicitors DLA, all costs and expenses (including, without limitation, legal fees, registration costs and VAT) - -------------------------------------------------------------------------------- 2 reasonably incurred by the Agent in connection with the negotiation, preparation and execution of this Deed and any documents negotiated, prepared or executed in connection with this Deed (including, without limitation and for the avoidance of doubt, documentation necessary in order to register the security interests created in connection with the transactions referred to in this Deed). 7. MISCELLANEOUS 7.1. This Deed may be signed in any number of counterparts and this shall have the same effect as though the signatures thereon were on a single copy of this Deed. 7.2. The parties do not intend that any provision of this Deed should be enforceable pursuant to the Contracts (Rights of Third Parties) Act 1999. 7.3. Nothing in this Deed shall require any party to it to do any act that would be in breach of s.151 Companies Act 1985. 7.4. For the avoidance of doubt, the effect of this Deed shall be to reduce the Margin to 1.5 per cent. per annum from 15 October 2001 and interest that accrued (including, interest accrued but unpaid as at 15 October 2001) prior to 15 October 2001 shall be paid at the rate stated in the Facilities Agreement prior to its amendment and restatement pursuant to this Deed. IN WITNESS WHEREOF the parties have caused this Deed to be duly executed on the date first written above. - -------------------------------------------------------------------------------- 3 SCHEDULE 1 Amended and Restated Facilities Agreement DATED As of 27 May 1999 - -------------------------------------------------------------------------------- MCM ELECTRONICS LIMITED (subsequently called DDI Europe Limited) - and - THE GOVERNOR AND COMPANY OF THE BANK OF SCOTLAND (in its various capacities as the Arranger, the Agent, the Security Trustee, the Bank, and the Working Capital Bank) ----------------------------------------------------- FACILITIES AGREEMENT relating to the provision of Term Loan Facilities and a Working Capital Facility to MCM Electronics Limited (subsequently called DDI Europe Limited) and its Subsidiaries ----------------------------------------------------- - -------------------------------------------------------------------------------- 4 CONTENTS 1. DEFINITIONS AND INTERPRETATION........................................................................9 2. THE FACILITIES.......................................................................................31 3. PURPOSE..............................................................................................32 4. MAXIMUM AMOUNTS......................................................................................33 5. CONDITIONS PRECEDENT.................................................................................33 6. CONDITIONS SUBSEQUENT................................................................................35 7. AVAILABILITY OF THE TERM LOAN FACILITIES.............................................................37 8. AVAILABILITY OF THE WORKING CAPITAL FACILITY.........................................................38 9. INTEREST PERIODS.....................................................................................38 10. INTEREST.............................................................................................38 11. BREAK COSTS..........................................................................................41 12. REPAYMENT............................................................................................41 13. PREPAYMENT...........................................................................................43 14. PREPAYMENT AND/OR CANCELLATION OF THE FACILITIES.....................................................44 15. PAYMENTS.............................................................................................44 16. TAXES................................................................................................46 17. INCREASED COST.......................................................................................47 18. CHANGE IN LAW OR REGULATIONS.........................................................................49 19. MITIGATION...........................................................................................49 20. FINANCIAL RATIOS.....................................................................................49 21. COVENANTS............................................................................................51 22. REPRESENTATIONS AND WARRANTIES.......................................................................67 23. DEFAULT..............................................................................................70 24. FEES.................................................................................................76 25. COSTS AND EXPENSES...................................................................................76 26. STAMP DUTY...........................................................................................77
- -------------------------------------------------------------------------------- 5 27. ASSIGNMENTS AND TRANSFERS............................................................................77 28. AGENCY PROVISIONS....................................................................................79 29. DECISIONS............................................................................................82 30. SET-OFF..............................................................................................83 31. CALCULATIONS AND EVIDENCE OF DEBT....................................................................84 32. REDISTRIBUTION OF PAYMENTS...........................................................................84 33. NOTICES..............................................................................................85 34. INVALIDITY OF PROVISIONS.............................................................................85 35. WAIVER...............................................................................................86 36. COUNTERPARTS.........................................................................................86 37. GOVERNING LAW AND JURISDICTION.......................................................................86 38. EURO.................................................................................................86 SCHEDULE 1................................................................................................87 The Banks and their Commitments...........................................................................87 SCHEDULE 2................................................................................................88 Financial Definitions.....................................................................................88 SCHEDULE 3................................................................................................92 Form of Notice of Drawdown................................................................................92 SCHEDULE 4................................................................................................94 Conditions Precedent......................................................................................94 Part I - Conditions Precedent to be satisfied before the issue of Press Release...........................94 Part II - Conditions Precedent to be satisfied on or before first Drawdown................................96 Part III - Conditions Precedent for the Granting of Security..............................................96 SCHEDULE 5................................................................................................98 Deed of Accession.........................................................................................98 SCHEDULE 6................................................................................................99 Form of Transfer Certificate for a Bank...................................................................99
- -------------------------------------------------------------------------------- 6 SCHEDULE 7...............................................................................................101 The Group Companies......................................................................................101 Part I - Initial Charging Companies......................................................................101 Part II - Dormant Companies..............................................................................102
- -------------------------------------------------------------------------------- 7 DOCUMENTS IN THE AGREED TERMS Accountants Report Articles Board Resolutions Business Plan Directors and Secretary's Certificate Environmental Reports Existing Lender Comfort Letters Financial Model First Debenture Flow of Funds Statement Insurance Report Intercreditor Agreement Intra Group Loan Agreement Investment Agreement Keyman Insurance Assignment Legal Charge Legal Due Diligence Report Managers References Market Report New Issuance Instrument Offer Document Offer Expenses Estimate Opening Consolidated Balance Sheet Pensions Report Pre Press Release Letter Press Release Pro Forma Financial Assistance Documents Property Valuation Receiving Bank Instruction Letter Report on Title Second Debenture Security Trust Deed Service Agreements Summary of Existing Borrowings Being Refinanced Third Debenture - -------------------------------------------------------------------------------- 8 THIS AGREEMENT is dated 27 May 1999 and is made BETWEEN (1) MCM ELECTRONICS LIMITED (subsequently called DDI Europe Limited) a company registered in England and Wales under number 3731403 ("the Principal Borrower"); (2) THE GOVERNOR AND COMPANY OF THE BANK OF SCOTLAND as arranger ("the Arranger"); (3) THE GOVERNOR AND COMPANY OF THE BANK OF SCOTLAND as agent for the Senior Lenders ("the Agent"); (4) THE GOVERNOR AND COMPANY OF THE BANK OF SCOTLAND as Security Trustee for the Security Beneficiaries ("the Security Trustee"); (5) THE GOVERNOR AND COMPANY OF THE BANK OF SCOTLAND and any other bank which has a Participation in the Term Loan Facility ("the Banks"); (6) THE GOVERNOR AND COMPANY OF THE BANK OF SCOTLAND as provider of the Working Capital Facility ("the Working Capital Bank") NOW IT IS HEREBY AGREED as follows:- 1 DEFINITIONS AND INTERPRETATION 1.1 Definitions In this Agreement: "Accountants Report" means the accountants report prepared by Deloitte & Touche dated on or about the date hereof relating to the Target Group addressed (inter alios) to the Agent (for itself and on behalf of the Senior Lenders); "Accounting Period" shall have the same meaning given to the term "Accounting Reference Period" by Section 224 of the Companies Act 1985; "Adjusted Net Worth" is defined in Schedule 2 (Financial Definitions); "Advance" means the principal amount of each loan made or to be made to the Borrowers under the Term Loan Facilities. The expressions "Term Loan Advance" and "Advances" shall be construed accordingly;"All Outstanding Amounts" means all amounts from time to time outstanding to the Senior Lenders or any of them under the Banking Documents; "Amendment and Restatement Deed" means the amendment and restatement agreement made between, inter alios, the Principal Borrower and the Agent dated on or about 15 November 2001; "Amendment and Restatement Effective Date" has the meaning given to "Effective Date" in the Amendment and Restatement Deed; "Annual Budget" means the annual budget to be provided to the Agent in accordance with Clause 21.4 (Annual Budget); - -------------------------------------------------------------------------------- 9 "A Ordinary Shares" means the A ordinary shares of 1p each in the capital of the Principal Borrower; "Applicable Taxes" means all Taxes (whether or not collectable by deduction or withholding) imposed by or in the jurisdiction in which the relevant Charging Company is resident or any other country through or out of which the relevant payment is made on any payment by any Charging Company, or by any Agent to any Bank, under any Banking Document, other than: (i) Taxes (not being withholding Taxes) imposed on the overall net income or gains of a Bank by the jurisdiction in which its principal office is located or on the overall net income or gains of a Bank's Facility Office by the jurisdiction in which that Facility Office is located; and (ii) Taxes imposed on that payment which would not have been imposed on that payment if the Bank to which or for whose account that payment was made had been at the date of payment a Qualifying Lender; "Articles" means the articles of association of the Principal Borrower as the same are amended from time to time in the agreed terms; "Assumed Senior Interest" is defined in Schedule 2 (Financial Definitions); "Audited Accounts" means, in relation to any member of the Group, the latest available audited consolidated accounts of that company; "Auditors" means KPMG or such other firm of accountants as shall be appointed from time to time in accordance with Clause 21.11.10 (Appointment of Auditors) of this Agreement; "Available Share Purchase Facility" means the aggregate amount of the Tranche A Term Loan Facility and the Tranche B Term Loan Facility less the aggregate of (but without double counting):- (i) any cancellation or reduction of the aggregate Tranche A and Tranche B Term Loan Facilities pursuant to this Agreement; (ii) the balance on the Payments Account Overdraft; (iii)the Tranche A and Tranche B Term Loans; and (iv) any Tranche A or Tranche B Term Loan Advance which has been requested by the Principal Borrower in accordance with the terms of this Agreement but not yet advanced by the Banks (except where such Term Loan Advance is being made available to repay all or part of the balance on the Payments Account Overdraft); "Available Term Loan Facility" means the aggregate amount of the Tranche A Term Loan Facility, the Tranche B Term Loan Facility less the aggregate of (but without double counting):- (i) any cancellation or reduction of the aggregate Term Loan Facilities pursuant to this Agreement; (ii) the balance on the Payments Account Overdraft; - -------------------------------------------------------------------------------- 10 (iii)the Term Loans; and (iv) any Term Loan Advance which has been requested by the Principal Borrower in accordance with the terms of this Agreement but not yet advanced by the Banks (except where such Term Loan Advance is being made available to repay all or part of the balance on the Payments Account Overdraft); "Banking Documents" means this Agreement, the Working Capital Facility Letter, the Security Documents, the Intercreditor Agreement, the Hedging Documents, any Deed of Accession, any Transfer Certificate, the New Issuance Certificate and any other document for the time being between any Obligor and any Senior Lender expressed to be supplemental thereto (except that the Hedging Documents will only be deemed to be a Banking Document for the purposes of this Agreement after they have been executed and delivered to the Agent in accordance with Clause 6 (Conditions Subsequent) of this Agreement); "Bank of Scotland" means The Governor and Company of the Bank of Scotland; "Banks" means Bank of Scotland and any other bank which has a Participation in the Term Loan Facility or, where the context admits, in the Working Capital Facility, or any person who has an interest in any warrant issued pursuant to the New Issuance Instrument; "Base Rate" means the base rate for the time being in force of Bank of Scotland; "Borrower" means the Principal Borrower and any other Group Company which has for the time being been approved in writing by the Banks and which has executed and delivered a deed of accession substantially in the form of Schedule 5 (Deed of Accession) and "Borrowers" means all or any of them from time to time; "Borrowers' Solicitors" means edge ellison; "Borrowings" has the meaning specified in Schedule 2 (Financial Definitions); "Business Day" means a day on which the relevant London interbank markets are open for business in London; "Business Plan" means the business plan in the agreed terms; "Capex Budget" means the capital expenditure budget which has been approved by the Agent for each Accounting Period of the Principal Borrower and which has been delivered to the Agent in accordance with Clause 21.5 (Capex Budget) except that for the period to 31 March 2000 the Capex Budget shall be in accordance with the Business Plan; "Cash Collateral Account" means any interest bearing account with the Agent or any of the Banks (bearing interest at the best rate available from the Agent or the relevant Bank (as the case may be) in respect of such amount for the relevant period) in accordance with the provisions of this Agreement into which certain sums are to be paid to be held as security for the obligations of the Borrowers and/or any of them under the Banking Documents; "Cash Collateral Charge" means a charge in a form reasonably required by the Agent and granted or to be granted to the Security Trustee by the Borrowers or any of them (as the Agent may require) in relation to a Cash Collateral Account; - -------------------------------------------------------------------------------- 11 "Certain Funds Period" means the period commencing on the date hereof and ending on the earlier of: (i) the date which falls four months after the date of posting of the Offer Document if the Principal Borrower is not then entitled to purchase all outstanding shares in Target pursuant to Sections 428-430(F) of the Companies Act 1985; (ii) the date on which the Offer lapses or is withdrawn; (iii)the date which falls 77 days after the date on which the Principal Borrower is first entitled to exercise any of its rights under Sections 428-430(F) Companies Act 1985; (iv) the date which falls 21 days after the Offer has closed (unless at that time the period in (iii) above is still running); "Change of Control" means a change such that:- (i) any single person, or group of persons acting in concert, acquires Control of the Principal Borrower (excluding the Initial Investors); or (ii) the Initial Investors cease to have Control of the Principal Borrower; "Charging Company" means each of the Initial Charging Companies together with any Group Company which is for the time being a party to any Security Document by reason of Clause 21.13.9 (Security from Non-Charging Companies); "Charging Group" means all the Charging Companies together with any other Group Company for the time being which are required to provide security for the benefit of the Security Beneficiaries pursuant to Clause 21.13.9 (Security from Non-Charging Companies); "Code" means The City Code on Takeovers and Mergers; "Collection Account Letters" means the letters in the agreed terms relating to the operation of the Group's bank accounts with the Banks; "Commitment" means the commitment of the Arranger as set out in Schedule 1 (The Banks and the Commitments) to provide:- (i) up to(pound)17,250,000 in respect of the Tranche A Term Loan Facility including the Payments Account Overdraft; (ii) prior to the Amendment and Restatement Effective Date up to (pound)2,500,000 in respect of the Tranche B Term Loan Facility including the Payments Account Overdraft and thereafter, (pound)750,000; and (iii) prior to the Amendment and Restatement Effective Date up to (pound)4,000,000 in respect of the Original Working Capital Facility and thereafter, in respect of the 2001 Working Capital Facility (pound)10,000,000; and after syndication the amount of the Term Loan Facilities which the Banks are committed from time to time to provide in each case as the same may be transferred cancelled reduced varied or terminated in accordance with this Agreement and "Term Loan Commitment" shall - -------------------------------------------------------------------------------- 12 be construed accordingly. "Total Commitments" means the aggregate of all such commitments; "Commitment Period" means, in relation to:- (i) the Tranche A and Tranche B Term Loan Facilities, the period beginning on the date of this Agreement and ending on the last day of the Certain Funds Period or such earlier date upon which the relevant Facility has been cancelled or finally repaid and discharged in accordance with this Agreement; and (ii) not restated; (iii)the Original Working Capital Facility, the period of three years commencing on the Completion Date; (iv) the 2001 Working Capital Facility, the period of one year commencing on the Amendment and Restatement Effective Date; "Completion Date" means the date of the first Advance under a Term Loan Facility; "Control" in relation to a body corporate, means the right, by virtue of holding shares in such body corporate, or by virtue of any contract or other arrangement with any holder of shares in such body corporate, to exercise or control the exercise of more than 50 per cent of the total voting rights conferred upon the holders of the entire issued share capital for the time being of that body corporate and "Controlled" shall be construed accordingly; "Deed of Intercreditor Accession" means deeds by which the Initial Charging Companies accede to the Intercreditor Deed; "Deed of Accession" means a deed substantially in the form set out in Schedule 5 (Deed of Accession); "Deed of Adherence" means a deed in the agreed terms by which the Initial Charging Companies accede to the Security Trust Deed; "Disclosure Letter" means the disclosure letter to the Investment Agreement (if any); "Disposal" means any sale, lease, transfer or other disposal of all or any part of the assets of any Group Company; "Dividends" means any dividends payable in respect of any of the Shares of the Principal Borrower; "Dormant Company" means together (i) each Group Company identified as a Dormant Company in Schedule 7 Part II (Dormant Companies) and (ii) each other Group Company which is not a Charging Company, does not trade, is not required to make entries into its accounting records in accordance with Section 221 Companies Act 1985 and does not hold or own any material assets or property (including intellectual property and/or tax losses); "Drawdown" means the making of a Term Loan Advance and/or the issue of a Loan Note Guarantee; "Drawdown Date" means the date of a Drawdown; - -------------------------------------------------------------------------------- 13 "EBIT" has the meaning specified in Schedule 2 (Financial Definitions); "EBITDA" has the meaning specified in Schedule 2 (Financial Definitions); "Environmental Claims" means any claim arising as a result of: (i) any breach of Environmental Laws; or (ii) any circumstances giving rise to any remedy or penalty that may be enforced either by public or private law or imposed against any Group Company as a result of Environmental Contamination; or (iii)any application for any judicial or administrative order or proceeding in respect of Environmental Contamination; or (iv) any other remedial action that any Group Company is obliged to undertake pursuant to Environmental Laws in respect of Environmental Contamination; "Environmental Consents" means all licences, authorisations, consents or permits of any kind required by any Group Company to operate its business under Environmental Laws to which such Group Company is subject; "Environmental Contamination" means any release, leakage or spillage of any toxic, poisonous, noxious or polluting matter or hazardous or dangerous substance or thing at or from any site owned or occupied by any Group Company and the consequences thereof; "Environmental Laws" means all legislation, regulations or orders concerning protection of the environment for the time being in force which are capable of enforcement in relation to any Group Company in the jurisdiction of incorporation of such Group Company; "Environmental Reports" means the environmental report in respect of the Properties in the agreed terms prepared by Aspinwall & Co addressed (inter alia) to the Agent (for itself and on behalf of the Senior Lenders); "Event of Default" means any of the events specified in Clause 23 (Default); "Existing Borrowings being Refinanced" has the meaning set out in Clause 21.11.1 (Borrowings); "Existing Lender Comfort Letters" means the letters in agreed terms between the Target and each of the Existing Lenders; "Existing Lenders" means National Westminster Bank Plc; "Facilities" means any or all of the Term Loan Facilities and the Working Capital Facility and any other facilities from time to time granted by the Banks or the Working Capital Bank; "Facility Office" in relation to each Senior Lender means the office in the United Kingdom through which it is acting and through which it will participate in the Facilities for the purpose of this Agreement; "Final Repayment Date" means in relation to:- - -------------------------------------------------------------------------------- 14 (i) the Tranche A Term Loan Facility, 30th September 2007; (ii) the Tranche B Term Loan Facility, 30th December 2007; and (iii) not restated; (iv) the Working Capital Facility, the first anniversary of the Amendment and Restatement Effective Date; or such earlier date or dates by which the Term Loans are required to be repaid in full pursuant to this Agreement; "Financial Assistance Auditors" means KPMG; "Financial Event of Default" means any of the following:- (i) an Event of Default arising under any of Clauses 23.1.1, 23.1.2, 23.1.10, 23.1.11, 23.1.12, 23.1.13, 23.1.14, 23.1.15, , 23.1.17, 23.1.18 or 23.1.24 (but not if the Event of Default arises only under head (iv) of the definition of Material Adverse Effect); or (ii) the Borrower failing to comply with the provisions of any of Clauses 21.1, 21.2, 21.3 or 21.4; or (iii)the Borrower being in breach of any of the Financial Ratios; "Financial Model" means the financial model in the agreed terms; "Financial Ratios" means the ratios and covenants set out in Clause 20; "First Debenture" means the debenture in the agreed terms to be issued by the Principal Borrower in favour of the Security Trustee to secure the obligations of the Principal Borrower to the Security Beneficiaries; "Flotation" means the admission of any part of the share capital of the Principal Borrower to the Official List of the London Stock Exchange or to trading on NASDAQ or EASDAQ or any other recognised investment exchange; "Flow of Funds Statement" means the Flow of Funds Statement in the agreed terms; "Full Drawdown Date" means the earlier of (a) the date on which the Share Purchase Term Loan Facilities are fully drawn and (b) 1 July 1999; "GAAP" is defined in Schedule 2 (Financial Definitions); "Gross Asset Cover Percentage" is defined in Schedule 2 (Financial Definitions); "Group" means at any time the Principal Borrower and its Subsidiaries for the time being and "Group Company" means any of them; "Hedging Arrangements" means the interest rate cap, struck at a rate of 6 1/2% with the Hedging Counterparty in respect of the Term Loans which the Agent shall reasonably require in respect of at least one half of the Facilities ((pound)13,375,000) for a period of 3 years, such arrangements being on commercial terms which are substantially in line with those generally - -------------------------------------------------------------------------------- 15 available to companies of a standing similar to the Principal Borrower in the market at the time of quotation for arrangements of such type; "Hedging Counterparty" means Bank of Scotland Treasury Services plc but if a cap is purchased then it shall mean Bank of Scotland Treasury Services plc or such other bank of reasonable standing acceptable to the Agent (acting reasonably) which provides the cap but only if Bank of Scotland Treasury Services plc shall have been unwilling to match the terms quoted by such other bank; "Hedging Documents" means the documents executed in pursuance of the Hedging Arrangements; "Indebtedness" shall be construed to include any obligation (whether incurred as principal or surety) for the payment or repayment of money, whether present or future, actual or contingent; "Information Documents" means the Accountants Report, Business Plan, the Financial Model, the Summary of Existing Borrowings being Refinanced, the Legal Due Diligence Report, the Report on Title, the Market Report, the Property Valuation, the Environmental Reports and the Pensions Report; "Initial Charging Companies" means the Principal Borrower and the Companies listed in Part I of Schedule 7 (The Initial Charging Companies): "Initial Investors" means: (i) each of the Investors as defined in the Investment Agreement so long as it remains a party to the Investment Agreement; and (ii) any transferee who is a Qualifying Investor; "in the agreed terms" means in the terms of the relevant documents initialled by or on behalf of the Agent and by or on behalf of the Principal Borrower; "Insurance Brokers" means such brokers as shall be agreed by the Agent, such agreement not to be unreasonably withheld; "Insurance Report" means the insurance report in the agreed terms prepared by the Insurance Brokers addressed (inter alia) to the Agent (for itself and on behalf of the Senior Lenders) confirming the adequacy and details of the insurance in place at the Completion Date and that all premiums have been paid; "Intellectual Property Rights" means all and any inventions patents applications for patents registered designs applications for registered designs trade and service marks whether registered or unregistered applications for trade and service marks trade names design rights licences copyrights of all descriptions (and rights by whatever name called affording equivalent or similar protection) confidential information know-how trade secrets research and development information design standards specifications computer software tables of data bills of material calculations formulae product codings and designations and rights under the International Convention for the Protection of Industrial Property 1983 (and licences and permissions granted in respect of any of the aforesaid) (in each case wherever the same may be located) and any other property in the nature of intellectual property; - -------------------------------------------------------------------------------- 16 "Intercreditor Agreement" means the deed in the agreed terms between, inter alios, the Bank of Scotland as Senior Agent, the Security Trustee, a Bank, the Working Capital Bank and Hedging Counterparty (1-5) the Managers (6) the Initial Investors (7) and the Charging Companies (8) which regulates the respective rights and obligations of the parties thereto with respect to the Facilities; "Interest on the Subordinated Loans" means interest payable in respect of the Subordinated Loans in accordance with the terms of the Investment Agreement; "Interest Payment Date" means in respect of any Advance the last day of the Interest Period applicable thereto; "Interest Period" means, for the purpose of determining the rate of interest applicable to any Advance a period of one, three, or six months or such other periods as the Agent may permit as determined from time to time in accordance with Clause 9 (Interest Periods); "Intra-Group Loan Agreement" means the loan agreement in the agreed terms to be entered into between the Principal Borrower and the Target Group; "Investment" in relation to any Joint Venture (each an "Investee") means the aggregate of the following: (i) all monies subscribed or invested by a UK Company for shares, bonds, loan notes, debentures or other shareholder or financial instruments of an Investee; (ii) all expenditure incurred in relation to loans, gifts, or capital contributions to an Investee by a UK Company (including the amount by which any transfer of assets or assumption of liabilities represents an undervalue for the UK Company); (iii)all liabilities of an Investee for which a UK Company is liable as guarantor, surety or indemnifier; "Investment Agreement" means the investment agreement of even date herewith made between the Principal Borrower (1) M Malone, M Glanfield and J Calvert (2) NatWest Equity Partners (3) and The European Private Equity Fund, The European Private Equity Fund 'B; T he European Private Equity Fund 'C', T he European Private Equity Fund 'D; NatWest Equity Partners No. 4 Fund and the NatWest Equity Partners Partnership together with all other documents to be executed or delivered in accordance with the terms thereof; "Investors" means (i) each of the Investors as defined in the Investment Agreement so long as it remains a party to the Investment Agreement and (ii) any transferee of it who is for the time being a party to the Investment Agreement or who is for the time being bound by the terms thereof; "Joint Venture" means any joint venture entity whether in the form of a company, incorporated firm, partnership, joint venture, association, partnership or other joint enterprise in which in any such case one or more Group Companies have an interest of less than 100%; "Keymen" means Martin Glanfield, Martin Malone and John Calvert; "Keyman Insurance Assignment" means the keyman assurance assignment in the agreed terms entered into between the Target and the Security Trustee relating to the assignment of - -------------------------------------------------------------------------------- 17 the insurance policies ("Keyman Policies") to be taken out in respect of the death and critical illness of the Keymen upon the following terms: Keyman Amount Term Martin Glanfield (pound)2,000,000 5 years Martin Malone (pound)3,000,000 5 years John Calvert (pound)1,000,000 5 years "Keystone Events of Default" has the meaning given in Clause 5.1 (Conditions to the Obligations of the Senior Lenders); "Legal Due Diligence Report" means the legal due diligence report dated on or around the date of this agreement prepared by the Borrower's Solicitors and addressed (inter alia) to the Agent (for itself and on behalf of the Senior Lenders); "Legal Charge" means a first legal charge in the agreed terms to be given by Zlin Electronics Limited in respect of its Freehold property shortly known as land on the east side of Alexandra Way, Ashchurch Road, Tewkesbury, Gloucestershire (Title No GR 117211); "LIBOR" means, in respect of any Advance or unpaid sum for a particular period:- (i) the rate per annum for sterling deposits for a period comparable to the relevant period which appears on page 3750 of the Telerate Service (or any page replacing page 3750) (or, in the absence thereof, the relevant page of the Reuters screen applicable thereto) at or about 11:00am on the first day of that period; or (ii) if no such rate appears on the relevant page, the rate (rounded upwards to the nearest four decimal places) certified by the Agent as the average of rates at which sterling deposits in an amount comparable to the Advance or unpaid sum quoted to the Agent are being offered by the Banks on the London Interbank Sterling Market at or about 11.00 a.m. on the first day of the relevant Interest Period for a period comparable to the relevant Interest Period and for delivery on the first day thereof; "Majority Banks" means one or more of the Banks the aggregate of whose Participation Amounts equals or at that time exceeds 66 2/3% of the aggregate of the Participation Amounts of all of the Banks; "Managers References" means references in the agreed form in respect of the Managers; "Management Accounts" means the management accounts of the Group and each of the Group Companies (in a format agreed with the Agent) which the Principal Borrower is required to produce pursuant to Clause 21.1 (Financial Information) and which shall include without limitation: (i) a profit and loss statement including numbers showing performance in the relevant Monthly Accounting Period, performance in the year to date, and a comparison of actual performance against budgeted performance as set out in the Annual Budget; - -------------------------------------------------------------------------------- 18 (ii) a balance sheet including numbers showing performance in the relevant Monthly Accounting Period, performance in the year to date, and a comparison of actual performance against budgeted performance as set out in the Annual Budget; (iii)a cash flow statement including numbers showing performance in the relevant Monthly Accounting Period, performance in the year to date, and a comparison of actual performance against budgeted performance as set out in the Annual Budget; (iv) a cashflow forecast (prepared on a basis acceptable to the Agent) as at the end of each Quarterly Period for the 6 months thereafter; (v) in the Management Accounts referable to the relevant period of testing only, a schedule demonstrating in reasonable detail (together with appropriate workings and calculations) whether or not the financial covenants set out in Clause 20.1 (Financial Covenants) have been complied with in relation to the relevant period; "Managers" means each of the Managers as defined in the Investment Agreement; "Margin" means:- (i) in relation to the Tranche A Term Loan Facility, 2% per annum prior to 15 October 2001, and thereafter, 1.5% per annum; and (ii) in relation to the Tranche B Term Loan Facility, 3.5% per annum prior to 15 October 2001, and thereafter, 1.5% per annum; or such other percentage as may be established from time to time in accordance with this Agreement; "Market Report" means the market report in the agreed terms prepared by Arthur D Little Limited addressed (inter alia) to the Agent (for itself and on behalf of the Senior Lenders); "Material Adverse Effect" means any event or circumstance which has or could reasonably be expected to: (i) have a material adverse effect on the ability of any Obligor to perform its payment obligations under any of the Banking Documents; or (ii) have a material adverse effect on the ability of the Borrowers to comply with the financial covenants contained in clause 20 (Financial Ratios); or (iii)have a material adverse effect on the business, assets or financial condition of the Group or any substantial part of the Group; or (iv) result in any Banking Document not being legal, valid and binding on, and enforceable substantially in accordance with its material terms against any party to that Banking Document and/or, in the case of Security Documents not providing to the Security Trustee (or other holder of the security interest(s) created by that Security Document) for itself and on behalf of the Security Beneficiaries, perfected and enforceable security over the assets purported to be covered by that Security Document; - -------------------------------------------------------------------------------- 19 in each case in a manner and to an extent reasonably considered by the Majority Banks to be materially adverse to the interests of the Senior Lenders under the Banking Documents; "Material Company" means the Principal Borrower and any other Charging Company and any Material Subsidiary (if not a Charging Company); "Material Subsidiary" means:- (i) any Group Company whose sales, assets, net worth or earnings is not less than 5% of the aggregate sales, assets, net worth or earnings of the Group; or (ii) a company (being itself a subsidiary of the Principal Borrower) which is a holding company of such a member or which is a holding company of members of the Group and which on a consolidated basis has sales, assets, net worth or earnings of not less than 5% of the aggregate sales, assets, net worth or earnings of the Group; "Millennium Compliance" means the ability of the Target Group to procure that its systems are Millennium Compliant in all material respects by 31st December 1999; "Millennium Compliant" means that when correctly operated without being connected to a system which is not Millennium Compliant (i) the date change at the end of 1999 will not cause the computer and information technology system of any member of the Target Group to malfunction, end abruptly, provide invalid results or adversely affect the business of any member of the Target Group, (ii) neither the performance nor functionality of the computer and information technology systems of any member of the Group is or will be affected by dates before, during or after the year 2000, and (iii) in particular (but without limitation) in respect of the computer and information technology systems of any member of the Target Group:- (a) no value for current date causes or will cause any interruption in operation; (b) date-based functionality behaves and will behave consistently for dates before, during and after the year 2000; (c) in all interfaces and data storage, the century in any date is and will be specified either explicitly or by unambiguous algorithms or inferencing rules; and (d) the year 2000 is and will be recognised as a leap year; "Minimum Transfer Amount" means in relation to the Tranche A Term Loan (pound)1,000,000, and in relation to the Tranche B Term Loan, (pound)250,000; "MLA Rate" in relation to each Advance or overdue amount denominated in Sterling means, for the Interest Period relating to that Advance or overdue amount, the cost imputed to each Bank participating in such Advance or overdue amount through a facility office in the United Kingdom of compliance with the requirements of the Bank of England as to special deposits or cash ratio deposits or any charge imposed by the Financial Services Authority (or other authority which replaces it) in respect of eligible liabilities (as defined by the Bank of England Act 1998 or by the Bank of England) during that Interest Period, expressed as a percentage rate per annum and determined by such Bank in accordance with usual market practice; "month" means unless otherwise agreed between the Principal Borrower and the Agent a period starting on one day in a calendar month and ending on the nearest preceding Business - -------------------------------------------------------------------------------- 20 Day in the next calendar month save that where a period starts on the last Business Day in a calendar month that period shall end on the last Business Day in the next calendar month; "Monthly Accounting Period" means in each Accounting Period each successive calendar month (or, if altered, each period of four or five successive weeks), the first of which commences on the first day of such Accounting Period and the last of which ends on the last day of such Accounting Period except that the first Monthly Accounting Period shall be the period beginning on the Completion Date and ending on or about the last day of the month in which the Relevant Date falls or if this is less than four (or five as the case may be) weeks on or about the last day of the immediately following month; "Net Borrowings" is defined in Schedule 2 (Financial Definitions); "Net Security Value of Stock" is defined in Schedule 2 (Financial Definitions); "Notice of Drawdown" means a notice substantially in the form set out in Schedule 3 (Notice of Drawdown) duly completed and signed by the relevant Borrower; "Obligor" means each of the Principal Borrower, Target and any Group Company which is expressed (or required by this Agreement) to be a party to any Banking Document; "Offer" means the recommended offer proposed to be made by PriceWaterhouseCoopers on behalf of the Principal Borrower substantially on the terms set out in the Press Release, to acquire the whole of the ordinary share capital (whether in issue or falling to be allotted) of Target not already owned by the Principal Borrower, as such offer may, subject to the prior written consent of the Agent (such consent not to be unreasonably withheld or delayed), be amended, added to, revised, renewed or waived from time to time; "Offer Costs" means all costs, fees and expenses (and Taxes thereon) and all stamp, documentary, registration or similar Tax incurred by or on behalf of the Principal Borrower and Target in connection with the Offer including the preparation, negotiation and entry into of this Agreement and all other documentation in relation to the Offer up to a maximum of (pound)2,434,000; "Offer Document" means the document substantially in the agreed terms to be despatched to shareholders of Target in connection with the Offer; "Opening Cash Statement" is defined in clause 6.6; "Ordinary Shares" means the ordinary shares in the capital of the Principal Borrower; "Original Working Capital Facility" means the overdraft and ancillary facilities of up to (pound)4,000,000 made or to be made available in accordance with the terms of this Agreement and the Original Working Capital Facility Letter or as the case may be or as the context requires the principal amount thereof from time to time outstanding; "Original Working Capital Facility Letter" means the letter dated today between Bank of Scotland and the Principal Borrower setting out the terms and conditions upon and subject to which Bank of Scotland has agreed to make available to the Principal Borrower and other Borrowers the Original Working Capital Facility (as amended from time to time); "Participation" means, in relation to a Bank, its right, title, interest and obligations in relation to the Term Loan Facilities including without limitation (i) its right to receive its Participation - -------------------------------------------------------------------------------- 21 Proportion of principal and interest in respect of the Term Loans; and (ii) its obligation to participate in its Participation Proportion in any amounts to be advanced or paid by the Banks under or pursuant to or in connection with this Agreement; "Participation Amount" means in relation to a Bank its Participation Proportion of the Term Loan Advances for the time being outstanding, or if no Term Loan Advance shall then be outstanding under the Term Loan Facility, its Term Loan Commitment; "Participation Proportion" means, in relation to a Bank, at any time, in respect of any Facility, the proportion which that Bank's Commitment in respect of that Facility bears to the aggregate amount of all the Commitments in respect of that Facility at that time; "Payments Account Overdraft" means an on demand overdraft facility to be provided by the Bank of Scotland in an amount equal to the Tranche A and Tranche B Term Loan Facilities made available to the Principal Borrower pursuant to Clause 2 (Facilities) hereof; "Pensions Report" means the pensions report in the agreed terms prepared by KPMG addressed (inter alia) to the Agent (for itself and on behalf of the Senior Lenders) "Permitted Borrowings" means:- (i) Borrowings under this Agreement (including, for the avoidance of doubt, any outstandings under the BACS Facility); (ii) the Subordinated Loans; (iii)Borrowings between Charging Companies and, from the Amendment and Restatement Effective Date, unsecured Borrowings of up to (pound)5,000,000 from DDI Corp.; (iv) Borrowings in any Accounting Period in respect of finance leases or contracts for hire purchase where the aggregate capital amount outstanding at any time does not in aggregate exceed (pound)2,000,000 for the Group; (v) Borrowings under the Hedging Documents; (vi) any other Borrowings to which the Majority Banks have given their prior written consent; (vii)any other Borrowings not exceeding in any Accounting Period in aggregate(pound)100,000; and (viii)any Borrowings existing at the Relevant Date pending the repayment or discharge thereof pursuant to Clause 21.11.1 (Borrowings) of this Agreement up to a maximum of (pound)2,900,000; (ix) the Variable Rate Loan Notes 2003 (series 3); (x) the Variable Rate Guaranteed Loan Notes 2004 (series 1); (xi) (until the date falling two months after the Relevant Dates) any counter indemnity given in respect of the guarantee of the Variable Rate Guaranteed Loan Notes 2004 (series 1); - -------------------------------------------------------------------------------- 22 (xii)guarantees, indemnities (including counter indemnities) or bonds given in the ordinary course of and for the purposes of the business; "Permitted Disposals" means:- (i) Disposals by any Group Company of assets (including cash) in the ordinary course of the trading or business activities of that Group Company on arm's length terms and for full consideration; or (ii) Disposals by one Charging Company to another Charging Company; or (iii)provided no Event of Default or Potential Event of Default has occurred which has not been waived by the Agent or remedied Disposals (other than of any shares in Group Companies and those falling in any other category of this definition) on arm's length terms by Group Companies, in respect of which the disposal value of any single item does not exceed (pound)50,000 and provided that the aggregate value in respect of all such disposals by all Group Companies in any Accounting Period does not exceed (pound)250,000; or (iv) provided no Event of Default or Potential Event of Default has occurred which has not been waived by the Agent or remedied Disposals of assets (other than Intellectual Property Rights and any real or heritable property or any interest in real property) in exchange for other assets, in the reasonable opinion of the person effecting the disposal comparable or superior as to type, value and quality; or (v) provided no Event of Default or Potential Event of Default has occurred which has not been waived by the Agent or remedied Disposals on arm's length terms of surplus obsolete or redundant plant equipment or other assets not required for the efficient operation of its business; or (vi) provided no Event of Default or Potential Event of Default has occurred which has not been waived by the Agent or remedied Disposals of capital assets (other than Intellectual Property Rights and any interest in shares) when the proceeds of the disposal are reinvested in other capital assets which are in the reasonable opinion of the person effecting the Disposal comparable or superior as to type, value and quality or in such other assets as the Majority Banks may agree within 9 months of the disposal occurring provided that forthwith upon receipt of such disposal proceeds, such proceeds shall be paid over to and be held by the Security Trustee in a Cash Collateral Account pending such reinvestment and (in the absence of such reinvestment the disposal proceeds shall be applied to prepay the Term Loan in accordance with Clause 13.3 (Proceeds of Disposals); or (vii)Disposals to which the Agent (acting on the instructions of the Majority Banks unless otherwise provided for in this Agreement) has given its prior written consent; or (viii) Disposals contracted or committed for prior to the Relevant Date provided they are in the ordinary course of business or were fully disclosed in the Business Plan; or (ix) Disposals of cash for any purpose not restricted by this Agreement; or (x) Disposals by any Group Company by the temporary application of funds, not immediately required in the disposing entity's business, in the purchase or making of short term investments, or the realisation of such investments; or - -------------------------------------------------------------------------------- 23 (xi) Disposals by any Group Company by the application of the proceeds of any insurance recovery in or towards the reinstatement or replacement of the asset in respect of which the same were paid; or (xii)The Disposal of Finishing Technologies Limited and/or Osborne Electronic Limited (limited to assets in those companies at the date of this agreement or acquired in the ordinary course of business hereafter) on terms set out in the Business Plan or such other terms approved by the Agent; Permitted Investment" means: (i) Investments in any Charging Company; (ii) any other Investment to the extent that the amounts of Investments made after the date of this Agreement do not exceed in any Accounting Period (pound)25,000 individually or (pound)50,000 in aggregate while the Term Loans or any part thereof shall be outstanding, provided that the maximum aggregate investment in any single Joint Venture, company, partnership, firm, business, consortium or other enterprise or entity shall not exceed at any time (pound)50,000; "Permitted Security Interest" means:- (i) a lien or right of set-off arising between Charging Companies or in the ordinary course of business solely by operation of law (or by contractual provisions having a substantially similar effect); (ii) any Security Interest arising by operation of law with respect to Taxes; (iii)any Security Interest over goods and documents of title to goods arising in the ordinary course of letter of credit and other documentary credit transactions entered into in the ordinary course of trading; (iv) any Security Interest arising by virtue of any bankers lien, right of set-off or netting arrangements relating to balances on bank accounts which bank accounts are permitted by this Agreement; (v) any Security Interest which the Agent (acting on the instructions of the Majority Banks) has at any time in writing agreed shall be a Permitted Security Interest; (vi) any Security Interest arising under the Banking Documents; (vii)any Security Interest over any asset arising in the ordinary course of business as a result of a title-retention or title transfer provision in the contract relating to the acquisition of that asset; (viii)any Security Interest existing at the Relevant Date provided that within 42 days after the Relevant Date all indebtedness secured by any such Security Interest (except for any Security Interests falling within any other category in this definition of Permitted Security Interests) shall be repaid by the relevant borrower and all such Security Interests shall be fully and effectively discharged; (ix) hire purchase, leases (including finance leases), deferred purchase arrangements and like arrangements if, and insofar as, they are not prohibited by this Agreement; - -------------------------------------------------------------------------------- 24 "Potential Event of Default" means any event which, with the giving of notice and/or the lapse of time would constitute an Event of Default; "Potential Financial Event of Default" means an event which, with the giving of notice under this Agreement and/or lapse of time, would constitute a Financial Event of Default; "Prepayment Fee Percentage" means:- (i) in respect of any prepayment of the Tranche A Term Loan Facility within 2 years of the date of first Drawdown of that Facility, 1% of the amount prepaid; (ii) in respect of any prepayment of the Tranche B Term Loan Facility within 2 years of the date of first Drawdown of the Tranche B Term Loan Facility, 3% of the amount prepaid; and (iii)in respect of any prepayment of the Tranche B Term Loan Facility on or after the second anniversary but before the third anniversary of the date of first Drawdown of the Tranche B Term Loan Facility, 1.5% of the amount prepaid; "Prepayment Notice" means an irrevocable written notice served by a Borrower on the Agent giving not less than 10 days (in the case of a prepayment of the Tranche A Term Loan Facility) or 30 days (in the case of a prepayment of the Tranche B Term Loan Facility) notice that a Borrower wishes to prepay the whole or any permitted part of the relevant Term Loan; " Pre Press Release Letter" means the letter from the Financial Assistance Auditors in the agreed terms; "Press Release" means a press announcement to be released by the Principal Borrower announcing the terms of the Offer; "Pro Forma Financial Assistance Documents" means the documents relating to financial assistance substantially in the agreed form or with such amendments thereto as the Agent may reasonably require in accordance with best practice having regard to the circumstances prevailing at the time of the intended execution of such documents; "Projected EBITD" means for any relevant period the projected EBITD as shown by, or reasonably determined by the Agent from the information contained in, the Business Plan; "Properties" means all interests of the Group Companies in any property; "Property Report" means a report on the Properties in the agreed terms prepared by Messrs Chestertons; "Qualifying Investor" means (a) a subsidiary of an Initial Investor; or (b) a member of the British Venture Capital Association; or (c) an investment fund managed by a member of the British Venture Capital Association; or - -------------------------------------------------------------------------------- 25 (d) in the case of a transfer by an investment fund managed by a member of the British Venture Capital Association, a member of that investment fund; or (e) a Qualifying Bank; or (f) a financial institution specialising in the provision of mezzanine loan funding or a Subsidiary thereof or an investment fund managed thereby; or (g) an individual approved by the Agent, such approval not to be unreasonably withheld who has previously or simultaneously agrees with the then parties thereto to be bound by the provisions of the Intercreditor Agreement as an Investor by entering into a suitable deed of accession; "Qualifying Lender" means a bank as defined in Section 840A Taxes Act 1988 for the purposes of Section 349 of that Act which is within the charge to UK corporation tax as respects any interest payable or paid to it pursuant to any Banking Document and to which it is beneficially entitled at the time that such interest is paid; "Quarter Day" 31 March, 30 June, 30 September and 31 December; "Quarterly Period" means in each Accounting Period each period of three successive Monthly Accounting Periods, the first of which commences on the first day of such Accounting Period and the last of which ends on the last day of such Accounting Period except that the first Quarterly Period shall be the period beginning on the Completion Date and ending on the next Quarter Day unless such Quarter Day is less than 90 days after the Completion Date in which case the immediately following Quarter Day; "Receiving Bank" means the Bank of Scotland as receiving bank in connection with the Offer; "Receiving Bank Account" means an account with the Receiving Bank in the name of the Principal Borrower to receive the proceeds of subscriptions for shares of the Principal Borrower and the Subordinated Loans; "Receiving Bank Instruction Letter" means the instruction letter in the agreed terms between the Principal Borrower and the Receiving Bank; "Relevant Date" means the date on which the Offer is declared or becomes unconditional in all respects following acceptances of the Offer having been received and not withdrawn in respect of, and/or the Principal Borrower having otherwise acquired or agreed to acquire in the open market or by private treaty, 90% or more of the Target Shares to which the Offer relates (or such lower percentage in excess of 50% as the Agent may otherwise agree with the Principal Borrower) PROVIDED THAT an acquisition of Target Shares otherwise than pursuant to the Offer must be treated as an acceptance of the Offer for the purposes of Section 429(8) of the Companies Act 1985 and in any event must have been acquired in accordance with the Code; - -------------------------------------------------------------------------------- 26 "Repayment Dates" means in relation to each Tranche A and Tranche B Term Advance, each date referred to in Clauses 12.1, 12.2, and 12.3 respectively; "Report on Title" means the report on title in the agreed terms prepared by the Principal Borrower's solicitors in respect of the Properties and addressed (inter alia) to the Agent (for itself and on behalf of the Senior Lenders); "Reservations" means the principle that equitable remedies are remedies which may be granted or refused at the discretion of the court, the limitation of enforcement by laws relating to bankruptcy, insolvency, liquidation, reorganisation, court schemes, moratoria, administration and other laws generally affecting the rights of creditors, the time barring of claims under the Limitation Acts, the possibility that an undertaking to assume liability for or to indemnify against non-payment of UK stamp duty may be void, defences of set-off or counterclaim and similar principles and similar matters arising under the laws of any foreign jurisdictions in which the relevant obligations may have to be performed; "Second Debenture" means the guarantee and debenture in the agreed terms to be issued by each of the Initial Charging Companies (other than the Principal Borrower) in favour of the Security Trustee to secure their respective obligations to the Security Beneficiaries; "Security Beneficiaries" means the Agent, the Banks, the Working Capital Bank, the Hedging Counterparty (provided the Hedging Counterparty is Bank of Scotland or Bank of Scotland Treasury Services plc ); "Security Documents" means the First Debenture, the Second Debenture and the Third Debenture, the Keyman Insurance Assignment, the Legal Charge, the Security Trust Deed and any other documents entered into from time to time by any Group Company to secure for the benefit of the Security Beneficiaries or any of them any liabilities owed by any Group Company under or in connection with the Banking Documents to some or all of the Senior Lenders; "Security Interest" includes any mortgage, pledge, lien, charge, assignment by way of security, hypothecation, security interest, standard security, assignation in security, bond and floating charge or any other security agreement or arrangement entered into for the purpose and having the effect of providing security (excluding retention of title clauses) whether relating to existing or future assets (including, without limitation the deposit of monies or property with a person with the primary intention of affording such person a right of set-off or lien); "Security Trust Deed" means the security trust deed in the agreed terms to be entered into between the Security Beneficiaries, the Security Trustee, the Principal Borrower and the Charging Companies; "Security Trustee" means the person described as such in the Security Trust Deed; "Senior Interest" is defined in Schedule 2 (Financial Definitions); "Senior Lenders" means the Banks, the Working Capital Bank and the Hedging Counterparty (provided the Hedging Counterparty is Bank of Scotland or Bank of Scotland Treasury Services plc); "Service Agreements" means service agreements in the agreed form in respect of the Keymen; - -------------------------------------------------------------------------------- 27 "Share Purchase Term Loan Facilities" means the Tranche A Term Loan Facility and the Tranche B Term Loan Facility; "Shares of the Principal Borrower" means any of the shares of the Principal Borrower, including without limitation the Ordinary Shares and the A Ordinary Shares; "Six Monthly Period" means in each Accounting Period, each of the two periods of six successive Monthly Accounting Periods, the first of which commences on the first day of such Accounting Period and the second of which ends on the last day of such Accounting Period, except that the first Six Monthly Period shall be the Six Monthly Accounting Period beginning on the Completion Date and ending on the second Quarter Day following the Completion Date; "Sterling" and "(pound)" means the lawful currency for the time being of the United Kingdom; "Stock" is defined in Schedule 2 (Financial Definitions); "Strategic Sale" means a sale of the whole or a substantial part (being more than 90% of the consolidated gross assets)of the business assets and undertaking of the Group (taken as a whole); "Subordinated Investors Loan" means the loan made by the Investors to the Principal Borrower pursuant to the terms of the Investment Agreement; "Subordinated Lenders" means the Investors and the Managers; "Subordinated Loans" means the Subordinated Investors Loan and the Subordinated Managers Loan; "Subordinated Managers Loan" means the loan made by the Managers to the Principal Borrower pursuant to the terms of the Investment Agreement; "Subsidiary" means:- (i) a subsidiary as defined in Section 736 of the Companies Act, 1985; and (ii) for the purposes of Clause 20 (Financial Ratios) only a subsidiary undertaking as defined in Section 258 of the Companies Act 1985; "Summary of Borrowings being Refinanced" means the summary of the existing banking facilities used by and available to the Target Group as at the Completion Date in the agreed terms prepared by the Target Group's existing bankers or such other party as Bank of Scotland shall agree and including confirmation that no events of default are outstanding or have been waived; "Target" means Symonds Plc, a company incorporated in England and Wales with registered number 445250; "Target Group" means, at any time, Target and its Subsidiaries at that time; "Target Group Share Schemes" means the Approved Executive Share Option Scheme of Target; - -------------------------------------------------------------------------------- 28 "Target Shares" means the existing unconditionally allotted or issued and fully paid shares of (pound)1 each in Target and any further such shares which are unconditionally allotted or issued fully paid or credited as fully paid whilst the Offer remains open for acceptance whether pursuant to the exercise of options granted under the Target Group Share Schemes or otherwise; "Taxes" means all present and future taxes, levies, duties, withholdings or similar charges of whatever nature and wherever levied or assessed, together with interest thereon and any penalties in respect thereof and "Taxation" shall be construed accordingly; "Term Loan Facilities" means prior to the Amendment and Restatement Effective Date, the Tranche A Term Loan Facility, the Tranche B Term Loan Facility and the Tranche C Term Loan Facility and thereafter, the Tranche A Term Loan Facility and the Tranche B Term Loan Facility, and "Term Loan Facility" means any of them; "Term Loans" means prior to the Amendment and Restatement Effective Date the Tranche A Term Loan, the Tranche B Term Loan and the Tranche C Term Loan and thereafter, the Tranche A Term Loan and the Tranche B Term Loan, and "Term Loan" means any of them as the context requires; "Third Debenture" means the composite guarantee and debenture in the agreed terms to be entered into by all the Charging Companies (other than the Principal Borrower) in favour of the Security Trustee as trustee for the Security Beneficiaries and the expression "the Debenture" shall where appropriate include any further guarantee and debenture or other security executed or to be executed by one or more Charging Companies in favour of the Security Trustee as trustee for the Security Beneficiaries securing any liabilities incurred by any Group Company from time to time; "Third Debenture Date" means the date the Third Debenture is delivered to the Security Trustee; "Total Assets" is defined in Schedule 2 (Financial Definitions); "Total Debt" has the meaning specified in Schedule 2 (Financial Definitions); "Total Debt Service" has the meaning specified in Schedule 2 (Financial Definitions); "Total Interest" has the meaning specified in Schedule 2 (Financial Definitions); "Trade Debtors" has the meaning specified in Schedule 2 (Financial Definitions); "Tranche A Term Loan" means the principal amount of each advance made or to be made under the Tranche A Term Loan Facility as from time to time reduced by repayment or prepayment; "Tranche A Term Loan Facility" means the term loan facility in the maximum principal amount of (pound)17,250,000 made available to the Borrowers pursuant to Clause 2 (The Facilities); "Tranche B Term Loan" means the principal amount of each advance made or to be made under the Tranche B Term Loan Facility as from time to time reduced by repayment or prepayment; "Tranche B Term Loan Facility" means the term loan facility in the maximum principal amount of (pound)2,500,000 made available to the Borrowers pursuant to Clause 2 (The Facilities); - -------------------------------------------------------------------------------- 29 "Transaction Documents" means together the Offer Document, the Investment Agreement, the Articles, and the Banking Documents; "Transfer Certificate" means a certificate substantially in the form set out in Schedule 6 (Form of Transfer Certificate for a Bank); "Transferee" means a bank or other financial institution to which a Bank seeks to transfer all or part of its rights and obligations hereunder in accordance with Clause 27 (Assignments and Transfers); "TUPE Payment" means the aggregate of all costs due to Osborne Electronic Limited employees and ex-employees arising out of the termination of their employment prior to the date of this Agreement and paid pursuant to TUPE legislation; "2001 Working Capital Facility" means the overdraft and ancillary facilities of up to (pound)10,000,000 made or to be made available in accordance with the terms of this Agreement and the 2001 Working Capital Facility Letter or as the case may be or as the context requires the principal amount thereof from time to time outstanding; "2001 Working Capital Facility Letter" means the letter dated on or about the date of the Amendment and Restatement Agreement between, amongst others, Bank of Scotland and the Principal Borrower setting out the terms and conditions upon and subject to which Bank of Scotland has agreed to make available to the Principal Borrower and other Borrowers the 2001 Working Capital Facility (as amended from time to time); "UK Company" means any Group Company which is incorporated in England and Wales or Scotland and "UK Companies" means all or any of them; "Whitewashability Certificate" is defined in Schedule 4, Part I, clause 4.3; "Whitewash Directors" means the directors of the Principal Borrower at the date of the issue of the Press Release and all those who are intended to be or may be directors of the Principal Borrower and/or the Initial Charging Companies at the time of intended execution of the Pro Forma Financial Assistance Documents; "Working Capital" has the meaning specified in Schedule 2 (Financial Definitions); "Working Capital Facility" means the 2001 Working Capital Facility or the Original Working Capital Facility, as the context requires; "Working Capital Facility Letter" means the 2001 Working Capital Facility Letter or the Original Working Capital Facility Letter, as the context requires (as amended from time to time); 1.2. Interpretation 1.2.1. Save where the contrary is indicated, any reference in this Agreement to:- (i) this Agreement or any document include references to this Agreement or such other document as varied, supplemented, novated and/or replaced in any manner from time to time; - -------------------------------------------------------------------------------- 30 (ii) any statutory provision shall be deemed to include references to such statutory provision as from time to time re-enacted, amended, extended or replaced; (iii) the Principal Borrower, any Group Company, any Borrower, any Charging Company, the Agent, any Bank, the Senior Lenders, the Security Trustee, the Investors, the Subordinated Lenders or any Security Beneficiary shall, where relevant, be deemed to include their respective successors or assignees; (iv) the singular shall include the plural and vice versa. 1.2.2. Headings in this Agreement are for convenience only and shall not affect its interpretation. 1.2.3. The words "including" or "in particular" are to be construed as being by way of illustration or emphasis only and are not to be construed as, nor shall they take effect as, limiting the generality of any preceding words. 1.2.4. Where the expression "such consent not to be unreasonably withheld or delayed" or similar is used in this Agreement in relation to any consent or other approval from the Agent or any of the Senior Lenders such expression shall be construed on the basis of what is reasonable in relation to the interests of the Senior Lenders applying usual lending criteria. 2. THE FACILITIES 2.1. Commitments: Subject to the terms of this Agreement:- (i) Bank of Scotland agrees to make the Payments Accounts Overdraft and the Banks agree to make the Share Purchase Term Loan Facilities available to the Principal Borrower; (ii) not restated; (iii) the Working Capital Bank agrees to make the Working Capital Facility available to the Borrowers. 2.2. Proportionate Participation: Each of the Banks agrees to participate in Advances made pursuant to the Term Loan Facilities in each case in its Participation Proportion for that Facility, up to an aggregate maximum principal amount not exceeding its Commitment in respect of that Facility. 2.3. Obligations Several: The obligations of each Senior Lender under this Agreement shall be several. Failure of a Senior Lender to carry out its obligations hereunder shall not relieve any other party hereto of any of its obligations hereunder. Neither the Agent nor any Senior Lender shall be responsible for the obligations of any other Senior Lender. The Agent shall, however, promptly after becoming aware of the same give the Principal Borrower notice of any failure by a Senior Lender to carry out any payment obligation. 2.4. Rights Several: After the Final Repayment Date for the Facilities or after the Agent shall have made any declaration referred to in Clause 23.2 (Rights on a Default) each Senior Lender shall - -------------------------------------------------------------------------------- 31 have a separate cause of action against the Borrowers in respect of any sums due to the Senior Lender in respect of the Facilities which shall not have been repaid. 2.5. Separate Rights of Protection: Subject to the terms and conditions of this Agreement and the Intercreditor Agreement, each Senior Lender may separately protect and enforce its rights hereunder, and it shall not be necessary for any other Senior Lender or the Agent to be joined as an additional party in any proceedings for such purpose. 3. PURPOSE 3.1. The Payment Accounts Overdraft: The Payment Accounts Overdraft may be used as and when required by the Principal Borrower to fund any cash consideration payable by the Principal Borrower to shareholders of Target after the Relevant Date. The Payment Accounts Overdraft shall at all times, and notwithstanding any other provision of this Agreement, be repayable on demand. The Payment Accounts Overdraft shall be reduced to zero on each occasion it reaches(pound)250,000 or more by a drawing under first the Tranche B Term Loan Facility and thereafter the Tranche A Term Loan Facility and it shall in any event be reduced to zero by the end of the Commitment Period for the Share Purchase Term Loan Facilities. No drawing under the Payment Accounts Overdraft shall be permitted if the amount of such drawdown would exceed the Available Share Purchase Facility. 3.2. The Share Purchase Term Loan Facilities: Each Advance under the Share Purchase Term Loan Facilities will be applied in or towards: (i) financing or refinancing the consideration payable by the Principal Borrower for the Target Shares being acquired by the Principal Borrower either pursuant to the Offer or in the open market or by private treaty, PROVIDED THAT an acquisition of Target Shares otherwise than pursuant to the Offer must be treated as an acceptance of the Offer for the purposes of s.429(8) of the Companies Act 1985 and in any event must be made in accordance with the Code (and after the Relevant Date, in the open market or by private treaty); and/or (ii) financing or refinancing the Offer Costs; and/or (iii) financing or refinancing the consideration payable by the Principal Borrower (including the discharge of the Payments Account Overdraft referred to in Clause 3.1) pursuant to the implementation of the procedures contained in Sections 428-430F of the Companies Act 1985; and/or (iv) financing or refinancing the consideration payable to participants in the Target Group Share Scheme pursuant to any relevant offer on terms approved by the Agent (acting on the instructions of the Banks); and/or (v) repaying the Existing Borrowings being Refinanced. 3.3. Not restated; 3.4. The Working Capital Facility: The Working Capital Facility shall be used for:- (i) the general corporate purposes of the Borrowers; and/or (ii) for such other purposes as the Working Capital Bank may from time to time agree in writing; - -------------------------------------------------------------------------------- 32 subject always to any restrictions in the Working Capital Facility Letter. 3.5. Unlawful Financial Assistance: None of the Facilities shall be used for any purpose which would be contrary to the provisions of s151 Companies Act 1985, unless the provisions of s155 to s158 of that Act are actually complied with. 3.6. Application: Without prejudice to the respective obligations of the Principal Borrower and the Borrowers under this Clause 3 (Purpose), neither the Agent, the Arranger, the Banks nor the Working Capital Bank nor any of them shall be obliged nor be under any duty to concern themselves as to the application of amounts drawndown hereunder. 4. MAXIMUM AMOUNTS 4.1. Maximum Amounts: Notwithstanding any other provision of this Agreement:- 4.1.1. the Tranche A Term Loan shall in aggregate not exceed(pound)17,250,000; 4.1.2. the Tranche B Term Loan shall in aggregate not exceed(pound)2,500,000 prior to the Amendment and Restatement Effective Date and thereafter(pound)750,000; and 4.1.3. not restated; 5. CONDITIONS PRECEDENT 5.1. Conditions to the Obligations of the Senior Lenders: The Senior Lenders will not be obliged to advance monies under the Facilities: (i) until the Offer shall have become or is declared unconditional in all respects following acceptances of the Offer having been received and not withdrawn in respect of and/or the Principal Borrower having otherwise acquired or agreed to acquire in the open market or by private treaty, 90% or more of the Target Shares to which the Offer relates (or such lower percentage in excess of 50% as the Agent may otherwise agree with the Principal Borrower) PROVIDED THAT an acquisition of Target Shares otherwise than pursuant to the Offer must be treated as an acceptance of the Offer for the purposes of s.429(8) of the Companies Act 1985 and in any event must be made in accordance with the Code; (ii) unless prior to the issue of the Press Release the Agent has received (or waived its requirements to receive) all of the documents and evidence listed in Part I of Schedule 4 (Conditions Precedent) each in a form and substance satisfactory to the Agent and the Agent upon being requested to do so shall provide written confirmation to the Principal Borrower that the same have been satisfied; and (iii) unless on or prior to the first Drawdown or other utilisation of the Facilities, the Agent has received (or waived its requirements to receive) all of the documents and evidence listed in Part II of Schedule 4 (Conditions Precedent) each in a form and substance satisfactory to the Agent; (iv) unless the Offer is posted within 28 days of the date of this Agreement; (v) if an Event of Default has occurred and is continuing either under or in respect of any of the following Clauses or (whether or not under such Clauses) arising from a wilful act or omission of the Principal Borrower and which has not been remedied within - -------------------------------------------------------------------------------- 33 any applicable grace period but relating only to the Principal Borrower (and for the avoidance of doubt not to any member of the Target Group) and which, in any case, would have a Material Adverse Effect ("the Keystone Events of Default"): 21.11.7 (Variation or Extension of the Offer) 23.1.10 (Enforcement Proceedings) (but only if the Principal Borrower can as a result of the default invoke Condition 8(g) of the Offer 23.1.11 (Inability to Pay Debts) 23.1.12 (Insolvency Proceedings) 23.1.13 (Appointment of Insolvency Practitioner) 23.1.14 (Administration Order); For the avoidance of doubt, throughout the Certain Funds Period, the Principal Borrower shall be entitled to drawdown Advances under the Term Loan Facilities and amounts by way of overdraft under the Payment Accounts Overdraft and the Banks shall be obliged to make Advances available in accordance with this Agreement notwithstanding the occurrence of any Event of Default or Potential Event of Default or any breach of any of the other Banking Documents, save for the Keystone Events of Default. 5.2. Conditions for Drawdowns: 5.2.1. The obligations of the Banks to permit any Drawdown of the Tranche A Term Loan Facility is subject to the further condition precedent that the Tranche B Term Loan Commitment shall have been fully drawn prior to or contemporaneously with such Drawdown. 5.2.2. The obligation of the Working Capital Bank to permit any utilisation of the Working Capital Facility by any Borrower (other than the Principal Borrower) is subject to the further condition precedent that at the time of first utilisation, the Borrowers (other than the Principal Borrower) have (save as otherwise permitted by the Agent in writing) complied with their obligations under (i) Clause 6.2 (Security) to deliver to the Agent the executed Second Debenture, Keyman Insurance Assignment and Deeds of Accession and (ii) under Clause 21.11.1 (Borrowings) to refinance the Existing Borrowings being Refinanced and any Security Interests relating thereto. 5.2.3. The obligation of the Working Capital Bank to permit any utilisation of the Working Capital Facility by the Principal Borrower is subject to the further condition precedent that the Borrowers' obligations under clauses 21.13.7 (Re-registration as a Private Company) and 21.13.8 (Security from the Target Group) shall first have been complied with in full. 5.2.4. The obligations of the Banks to permit any Drawdown of any Term Loan Facility by any Borrower other than the Principal Borrower are subject to the further conditions precedent that the Borrowers' obligations under clauses 21.13.7 (Re-registration as a Private Company) and 21.13.8 (Security from the Target Group) and in particular the obligation to deliver the Third Debenture to the Agent pursuant to clause 21.13.8 (iii) shall first have been complied with in full. - -------------------------------------------------------------------------------- 34 5.2.5. Subject to the provisions of clause 23.3 (The Certain Funds Period) the obligations of the Banks and the Working Capital Bank (as the case may be) to permit any Drawdown of a Term Loan Facility or utilisation of the Working Capital Facility are subject to the further conditions precedent that:- (i) at the time of the Drawdown the representations and warranties deemed to be repeated by virtue of Clause 22.2 (Deemed Repetition of Representations and Warranties) are true and correct in all material respects; and (ii) at the time of any utilisation and/or the giving of any Notice of Drawdown and on each Drawdown Date no Event of Default or Potential Event of Default is outstanding or would result from the making of the relevant Advances or utilisation. 5.2.6. Not restated. 5.3. Undertakings pending Completion: the Principal Borrower undertakes to the Senior Lenders to use all reasonable endeavours to procure the satisfaction of the conditions precedent to this Agreement as soon as reasonably practicable following the execution of this Agreement. Prior to the Completion Date, the Principal Borrower undertakes: (i) to inform the Agent forthwith of all matters of which it becomes aware concerning the Target Group which would give rise to a Material Adverse Effect and to consult fully with the Agent concerning all material matters reasonably raised by the Agent concerning the Target Group; (ii) not to waive, agree or accept any waiver of the conditions of the Offer which would give rise to a Material Adverse Effect without the previous written consent of the Agent (acting on the instructions of all of the Banks). In giving or withholding its consent to any waiver or amendment of any conditions of the Offer the Agent will treat itself as being bound by Rule 13 of the City Code of Takeovers and Mergers as if it were the Principal Borrower and subject to the jurisdiction of the Takeover Panel; (iii) to notify the Agent immediately upon becoming aware of any matters which are reasonably likely to result in any of the conditions of the Offer not being satisfied or the Offer not proceeding. 5.4. Lapse: 5.4.1. The Principal Borrower shall procure that the Press Release is not issued until the conditions precedent set out in Part I of Schedule 4 (Conditions Precedent) have been satisfied or duly waived by the Agent. If the Press Release has not been issued by the date 14 days after the signing of this Agreement, then this Agreement shall lapse and be of no further force and effect and the parties shall be under no further obligation to each other in respect of this Agreement. 5.4.2. Any lapse or withdrawal of the Offer for any reason will result in the automatic cancellation and reduction to zero of the Commitments. 6. CONDITIONS SUBSEQUENT 6.1. Not Restated. - -------------------------------------------------------------------------------- 35 6.2. Security: The Principal Borrower shall within 28 days after the Relevant Date procure that each of the Initial Charging Companies (other than the Principal Borrower) shall execute and deliver to the Security Trustee the Second Debenture and the Initial Charging Companies (other than the Principal Borrower) shall execute and deliver to the Agent, Deeds of Accession, Deeds of Intercreditor Accession and Deeds of Adherence together with each of the documents listed in Part III of Schedule 4 (Conditions Precedent for the Granting of Security) duly completed and executed. For the avoidance of doubt the provisions of the Second Debenture to be delivered pursuant to this provision shall not take effect to the extent that to do so would constitute financial assistance for the purposes of s.151 Companies Act 1985 unless and until the requirements of s.155-158 Companies Act 1985 are complied with, as envisaged by Clause 21.13.8 (Security from the Target Group). 6.3. Shares in Target: The Principal Borrower shall:- (i) procure that within 21 days after the Relevant Date share certificates and stock transfer forms executed in blank (or such other equivalent documentary evidence of title as may be necessitated by the application of the Crest settlement system) in respect of the shares of Target acquired by the Principal Borrower (whether acquired pursuant to the Offer or otherwise) are delivered to the Security Trustee by way of security except that if the Principal Borrower has not paid for any shares because the share certificates or letters of indemnity were not available, then the share certificates and blank stock transfer forms (or such other documentation) in respect of those shares shall be delivered to the Security Trustee within six weeks of the Principal Borrower having received the relevant certificates or letters of indemnity; and (ii) procure that as soon as possible after the Principal Borrower acquires other shares in Target share certificates and stock transfer forms executed in blank in respect of those shares of Target (or such other equivalent documentary evidence as may be necessitated by the application of the Crest settlement system) are delivered by way of security to the Security Trustee to be held by the Security Trustee in accordance with the Security Documents. 6.4. New Articles of Target: The Principal Borrower shall deliver to the Agent as soon as practicable after the same are adopted a certified copy of the new subsidiary articles of association (if any) (in a form satisfactory to the Agent) adopted by Target. 6.5. Investment Agreement: The Principal Borrower shall promptly enforce its rights to require any party to the Investment Agreement to subscribe for shares in the Principal Borrower as soon as such person is required to do so by the Investment Agreement. 6.6. Statement of Opening Cash Position: The Principal Borrower shall by 1 August 1999, deliver to the Agent a detailed Statement ("Opening Cash Statement") showing the cash position of the Target Group as at 30 June 1999 reconciled against the projected cash position as stated in the Business Plan and calculated on the same basis. For the avoidance of doubt the Opening Cash Statement shall exclude any monies provided directly or indirectly by any of the Banks (save, on a pound for pound basis, any monies drawn under the Share Purchase Term Facilities and actually used to repay in whole or part the Existing Borrowings being Refinanced), the Working Capital Bank, the Investors or (on or after the date hereof) the Managers. 6.7. Opening Consolidated Balance Sheet: The Principal Borrower shall provide to the Agent an opening consolidated balance sheet within 30 days of receipt of all the Subordinated Loans or (if earlier) by 1 August 1999. - -------------------------------------------------------------------------------- 36 7. AVAILABILITY OF THE TERM LOAN FACILITIES 7.1. Availability during Commitment Period: Subject to the restrictions contained in Clause 3.1 (Purpose: Payments Account Overdraft), Clause 3.2 (Purpose: The Share Purchase Term Loan Facilities) and Clause 3.5 (Unlawful Financial Assistance) and subject to Clause 5.1 (Conditions Precedent) the Payments Account Overdraft and Share Purchase Term Loan Facilities shall be made available to the Principal Borrower during the Commitment Period for the Share Purchase Term Loan Facilities. At the end of the Commitment Period for the Share Purchase Term Loan Facilities, any balance on the Payments Account Overdraft shall be cleared by a final Drawdown on the Share Purchase Term Loan Facilities and any undrawn amount of the Share Purchase Term Loan Facilities and/or the Payments Account Overdraft undrawn thereafter shall be cancelled, and the limit of the Share Purchase Term Loan Facilities shall be reduced accordingly. In the event that the Bank of Scotland shall demand repayment of the Payments Account Overdraft there shall be an automatic drawdown of the Share Purchase Term Loan Facilities of such amount as may be required to clear Payment Accounts Overdraft. The Tranche B Term Loan shall be drawndown in full before the Tranche A Term Loan is drawn. 7.2. Available Term Loan Facility: No Notice of Drawdown under the Term Loan Facilities shall be served if; 7.2.1. the amount of the proposed Advance is in excess of the Available Term Loan Facility; or 7.2.2. the amount of the proposed Advance (or where Advances are requested under more than one Term Loan Facility, the aggregate of such Advances) is less than (pound)1,000,000 or is not a multiple of (pound)1,000,000 or is not to clear the final balance on the Payments Account Overdraft or for such other amount as the Agent (acting reasonably) shall permit; or 7.2.3. the number of Advances for the time being outstanding under each of the Term Loan Facilities after the making of the proposed Advance would exceed four provided that there shall be permitted in addition to such number of Advances as many other Advances as may be required to clear the Payments Account Overdraft. 7.2.4. the number of different dates on which Interest Periods for Advances are due to expire shall not at any time exceed 4. 7.3. Not restated. 7.4. Notice of Drawdown Required: A Drawdown under any of the Term Loan Facilities may not be made unless a Notice of Drawdown has been delivered to the Agent not later than noon one Business Day before the proposed Drawdown Date or such other time as the Agent shall agree. The first Notice of Drawdown under the Term Loan Facilities shall confirm that: (i) the Subordinated Loans have been (or will simultaneously with Drawdown be) paid to the Principal Borrower in an amount of(pound)14,205,000; (ii) the following proceeds of subscription for shares in the Principal Borrower have been (or will simultaneously with Drawdown be) received in cash by the Principal Borrower or in respect of certain of the Ordinary Shares to be subscribed by the Managers, the Receiving Bank has received irrevocable letters of instruction - -------------------------------------------------------------------------------- 37 authorising an equivalent amount of the proceeds to be received in respect of such Managers' Target Shares to be used to subscribe for the relevant Ordinary Shares:- Ordinary Shares (pound)1,240,000 ----------- TOTAL (pound)1,240,000 ================ 8. AVAILABILITY OF THE WORKING CAPITAL FACILITY The Working Capital Facility shall be made available on the terms of the Working Capital Facility Letter. 9. INTEREST PERIODS 9.1. Interest Periods: Except as stipulated in Clause 10.7 (Market Disruption) and subject to Clause 10.8 (Default Interest), the Interest Periods for each Advance shall where all or part of the Term Loans are the subject of the Hedging Arrangements be periods of such duration as shall equate to the interest periods (if any) applicable to the Hedging Arrangements at least as regards the amount of the Term Loans so hedged or in the absence of any Hedging Arrangements applicable to the Term Loans, periods of one, three or six months' duration as the relevant Borrower shall select or such other periods as the Agent (acting reasonably) shall permit (in each case as selected by such Borrower by giving not less than one Business Day prior notice to the Agent), except in relation to the Drawdown of the Advances on the Completion Date in respect of which notice must be given to the Agent before noon on the Completion Date PROVIDED THAT: 9.1.1. if the relevant Borrower fails to give a notice of selection in accordance with the above, the duration of the relevant Interest Period shall be one month; 9.1.2. if the relevant Borrower so elects, but subject always to the other provisions of this Agreement, it may divide an Advance into two or more parts and designate different Interest Periods for such parts and each part of an Advance so divided shall thereafter constitute a separate Advance; 9.1.3. any Interest Period that would otherwise end at any time after the Final Repayment Date shall end on that date; and 9.1.4. the relevant Borrower shall select the duration of Interest Periods so as to ensure that each Repayment Date is also the last day of an Interest Period for an Advance or Advances in an aggregate principal amount at least equal to that part of the Term Loan Facilities repayable on such Repayment Date and, to the extent that the relevant Borrower does not do so, the Agent is authorised to shorten an Interest Period for an Advance in order to comply with this provision. 10. INTEREST 10.1. Rate of Interest: 10.1.1. Payments Account Overdraft: The rate of interest on the Payments Account Overdraft shall be the Margin applicable to the Tranche B Term Loan Facility (until - -------------------------------------------------------------------------------- 38 the Tranche B Term Loan Facility has been drawndown in full in which case the Margin shall thereafter be the Margin applicable to the Tranche A Term Loan) plus Bank of Scotland's base rate applicable from time to time. 10.1.2. Term Loans: The rate of interest on each Advance in any Interest Period shall be a rate per annum equal to the aggregate of: (i) the applicable Margin; (ii) LIBOR; and (iii) the MLA Rate (if any). 10.2. Basis of Calculation: Interest shall be calculated by reference to the number of days elapsed and on the basis of a 365 day year. 10.3. Payment: The Borrowers shall pay interest in arrears on each Advance and such interest shall be paid to the Agent for the account of the Banks on each Interest Payment Date relating to such Advance and on the Final Repayment Date for the relevant Facility (except that if an Interest Period is longer than six months then accrued interest shall be paid on the first Business Day falling six months after the first day of the Interest Period and also on the last day of such period). 10.4. Margin Reduction: Subject to Clause 10.6 (Increase of Margin), the Margin for the Term Loans (the "Relevant Margin") after the Amendment and Restatement Effective Date shall be 1.5% unless Total Debt calculated as at any Quarter Day in respect of the preceding 12 month period is less than 200 per cent. of EBITDA. In the event that it is, then the Relevant Margin in respect of each day of the Quarterly Period commencing on such Quarter Day shall be deemed to be 1.25 per cent., if the Total Debt so calculated was less than 200 per cent. of EBITDA but greater than or equal to 150 per cent. of EBITDA, and 1 per cent, if Total Debt was calculated to be less than 150 per cent. of EBITDA, provided that: [AK and MW to discuss] 10.4.1. the Relevant Margin shall never be reduced below 1% (one per cent); 10.4.2. there shall be no reduction in Relevant Margin and any existing reduction shall cease to be applicable if an Event of Default or Potential Event of Default has occurred and is continuing unwaived PROVIDED THAT if the only reason for the Principal Borrower not receiving a reduction in the Margin is the subsistence of a Potential Event of Default, the Principal Borrower shall receive the benefit of such reduction in the Margin as soon as it has demonstrated to the Agent that the relevant Potential Event of Default has been remedied such that no Event of Default actually occurs and at the relevant time no other Event of Default has occurred and is continuing unwaived; and 10.4.3. if the Audited Accounts indicate that the Relevant Margin reduction should not have been made at any time then an additional charge for the relevant period of the reduced Relevant Margin shall be payable by the Borrowers within 5 Business Days of the delivery of such Audited Accounts, in an amount equal to the interest payments that would have been paid at the relevant higher Relevant Margin less an amount - -------------------------------------------------------------------------------- 39 equal to the interest payment actually paid for the relevant period. 10.5. Temporary Restitution of Relevant Margin: The Relevant Margin shall be 1.5% (if not already such rate) if and for so long as: (i) the Principal Borrower fails to produce the Audited Accounts or the Management Accounts in accordance with Clause 21.1 (Financial Information); and/or (ii) any other Event of Default has occurred which has not been waived by the Agent or remedied. The date on which such increase (if any) shall take effect shall be the date on which the Principal Borrower was due to deliver the Audited Accounts or the Management Accounts in accordance with Clause 21.1 (Financial Information) whether or not an Event of Default has been declared, or the date upon which the Agent notifies the Principal Borrower that an Event of Default has occurred which has not at the date of such notification been waived by the Agent or remedied. In either event such temporary increase in the Relevant Margin shall cease to take effect when any such breach or Event of Default is waived or remedied and the Relevant Margin shall revert to the level that would have been applicable had the failure or other Event of Default not occurred. 10.6. Increase of Margin: If within 90 days after the Relevant Date, the Principal Borrower has failed to procure the satisfaction by Target and the Initial Charging Companies (other than the Principal Borrower) of the requirements of s.151-158 Companies Act 1985 in relation to the Third Debenture required to be given by Target and the Initial Charging Companies (other than the Principal Borrower) or has otherwise failed to provide in favour of the Security Trustee the Third Debenture duly executed by each of Target and the Charging Group and which is fully perfected and enforceable (subject to the Reservations) the Margin shall, notwithstanding any other provisions of this Agreement, be increased to 3% (three per cent) for the Tranche A Term Loan Facility and the Tranche B Term Loan Facility for so long as such failure continues. 10.7. Market Disruption: If by reason of circumstances affecting the London Interbank Market generally, adequate and fair means do not exist for ascertaining LIBOR, a substitute rate shall be adopted by each Bank which fairly expresses the cost to such Bank of funding an Advance from whatever sources it may reasonably select after consultation with the Principal Borrower. 10.8. Default Interest: 10.8.1. If any Borrower fails to pay any sum due under this Agreement on its due date for payment the relevant Borrower shall on demand by the Agent pay interest on that sum from the due date to the date of actual payment (as well after as before judgement) at a rate per annum determined by the Agent to be the aggregate of: 10.8.1.1. LIBOR determined on a basis the Agent may reasonably select; 10.8.1.2. the highest Margin applicable to the Facilities on the date of such demand; 10.8.1.3. the MLA Rate (if any); and 10.8.1.4. 2% (two per cent). - -------------------------------------------------------------------------------- 40 10.8.2. If by reason of a Financial Event of Default the Agent becomes entitled to exercise its rights under Clause 23.2 (Rights on a Default) then, whether or not the Agent exercises any such rights the rate of interest on each Advance shall thenceforth (until remedied to the satisfaction of the Agent or waived) be a rate per annum equal to the aggregate of the following (in lieu of the rate prescribed by Clause 10.1.2):- 10.8.2.1. the applicable Margin; 10.8.2.2. LIBOR; 10.8.2.3. the MLA Rate (if any); and 10.8.2.4. 2% (two percent) 11. BREAK COSTS 11.1. Amount Payable: If any Bank or the Agent on its behalf receives or recovers (including without limitation after an Event of Default), all or part of that Bank's share of an Advance otherwise than on the last day of the applicable Interest Period and otherwise than as a result of the operation of Clause 18 (Change in Law or Regulations), the Borrowers shall pay to the Agent on demand for the account of that Bank such additional amount, certified by that Bank, (together with a brief calculation thereof) as is necessary to compensate it for losses (other than loss of Margin) (if any) and reasonable expenses sustained or incurred in liquidating or re-deploying funds acquired or committed to make, fund or maintain its Participation in such Advance for such Interest Period. 11.2. Funding Indemnity: The Borrowers jointly and severally undertake to indemnify each Senior Lender against any loss it may suffer as a result of its funding an Advance or other utilisation of the Facilities requested by any Borrower but not made by reason of the operation of the provisions of this Agreement (and, for the avoidance of doubt, not because of any act or omission of any Senior Lender or the Agent). 12. REPAYMENT 12.1. Repayment of the Tranche A Term Loan: 12.1.1. The Principal Borrower shall make the following repayments of the Tranche A Term Loan on the dates referred to below:- Repayment Date Amount of Repayment (last Business Day of the following months) 06.2000 (pound) 500,000 09.2000 (pound) 500,000 12.2000 (pound) 500,000 03.2001 (pound) 500,000 06.2001 (pound) 500,000 - -------------------------------------------------------------------------------- 41 09.2001 (pound) 500,000 12.2001 (pound) 0 03.2002 (pound) 0 06.2002 (pound) 0 09.2002 (pound) 0 12.2002 (pound) 0 03.2003 (pound) 750,000 06.2003 (pound) 750,000 09.2003 (pound) 750,000 12.2003 (pound) 750,000 03.2004 (pound) 750,000 06.2004 (pound) 750,000 09.2004 (pound) 750,000 12.2004 (pound) 750,000 03.2005 (pound) 750,000 06.2005 (pound) 750,000 09.2005 (pound) 750,000 12.2005 (pound) 750,000 03.2006 (pound) 750,000 06.2006 (pound) 750,000 09.2006 (pound) 750,000 12.2006 (pound) 750,000 03.2007 (pound) 750,000 06.2007 (pound) 750,000 09.2007 (pound) 750,000 ----------------- (pound)17,250,000 12.1.2. The Principal Borrower shall not be entitled to reborrow any amount repaid in accordance with this Clause 12.1. - -------------------------------------------------------------------------------- 42 12.2. Repayment of the Tranche B Term Loan 12.2.1. The Borrowers shall make the following repayment of the Tranche B Term Loan on the date referred to below: Repayment Date Amount of Repayment The last Business Day in December (pound)750,000 2007 12.2.2. The Principal Borrower shall not be entitled to reborrow any amount repaid in accordance with Clause 12.2. 12.3. Repayment of the Tranche C Term Loan Not Restated. 12.4. Mandatory Repayment: Notwithstanding any other provision of this Agreement, if there is:- 12.4.1.1.1.1. a Change of Control; or 12.4.1.1.1.2. a Flotation; or 12.4.1.1.1.3. a Strategic Sale; then the Agent shall (but subject always to the provisions of clauses 5.1(v) and 23.3), at the request of the Majority Banks, by notice in writing to the Principal Borrower, demand the repayment of all amounts for the time being outstanding in respect of the Facilities If such demand is made the Facilities shall be cancelled and All Outstanding Amounts shall become immediately due and payable by the relevant Borrowers together with all interest, fees and other amounts payable hereunder in respect thereof. For the purposes of this Clause 12.4, a Change of Control shall be deemed to have occurred if the Principal Borrower becomes a direct subsidiary of any company (other than in consequence of a reorganisation or amalgamation which is not materially prejudicial to the interests of the Banks) which does not, if so requested by the Agent in writing, become a guarantor of the obligations of the Principal Borrower and its Subsidiaries as if Clause 21.13.9 had been applicable. 13. PREPAYMENT 13.1. Voluntary Prepayment: The Principal Borrower may at any time (but subject always to Clause 11 (Break Costs)) elect to prepay any Term Loan by giving the Agent an appropriate Prepayment Notice PROVIDED THAT the Principal Borrower shall not make any prepayment of the Tranche B Term Loan until all other Facilities have been repaid (if drawn) or cancelled (if undrawn). If the prepayment is of part only of the Term Loans it must be in an amount of not less than (pound)250,000 and be a multiple of (pound)250,000. The relevant Borrower shall be obliged to make such prepayment on the date specified in the relevant Prepayment Notice. 13.2. Accrued Interest on Prepayments: All prepayments under this Agreement shall be made together with accrued interest thereon and all other amounts due and payable hereunder in relation thereto. - -------------------------------------------------------------------------------- 43 13.3. Proceeds of Disposals: The proceeds of Permitted Disposals by any Group Company may be retained by that Company except where the Agent's consent (or that of the relevant Senior Lenders) to any such disposal otherwise requires. Where any such proceeds are to be applied to reduce the Facilities the net proceeds (after taking into account any Taxes or reasonable expenses relating to such Disposal) shall (to the extent in each case such reduction shall not be in breach of any applicable law prohibiting financial assistance PROVIDED THAT the Principal Borrower shall be under an obligation to use its best endeavours to procure the compliance by the relevant Group Company with such applicable laws or regulations relating thereto which would permit such financial assistance to be given) be applied (unless the Agent acting on the instructions of the Majority Banks otherwise agrees) to reduce the Facilities in the following order:- 13.3.1.1.1.1. the Tranche A Term Loan; 13.3.1.1.1.2. the Tranche B Term Loan; and 13.3.1.1.1.3. the Working Capital Facility; in each case against such Advances as the Borrowers may select and advise the Agent, subject always to the order specified above. Any amount repaid pursuant to this Clause 13.3 will reduce the relevant Facility by the amount repaid. For the avoidance of doubt, no prepayment fee shall be payable in respect of a prepayment made under this Clause 13.3. With the consent of the Agent, such consent not to be unreasonably withheld or delayed, such proceeds may, instead of being applied immediately to reduce the Facilities, be so applied on the next Interest Payment Date or Dates. When the Term Loans have been repaid in full any surplus arising from Disposals shall be held in a Cash Collateral Account to secure the Working Capital Facility until the Working Capital Facility is demanded or cancelled and thereafter shall be freely available to the depositing Borrower. 13.4. When any prepayment of the Term Loans is made the amount so prepaid shall if it is compulsory be applied to reduce the remaining scheduled repayments the Term Loans. 13.5. Not restated. 14. PREPAYMENT AND/OR CANCELLATION OF THE FACILITIES 14.1. Not restated. 14.2. Effect of Cancellation: Any cancellation of the Facility in part shall reduce the Commitment of each Bank in relation to the Facility pro rata to its then existing Commitment in respect of that Facility. No amounts cancelled shall be reinstated or be available for re-drawing. The Principal Borrower may not cancel the whole or any part of the Facilities except in accordance with this Clause 14. 14.3. Not Restated. 15. PAYMENTS 15.1. Payments to be made without Deduction: Subject to Clause 16.1 (Grossing Up of Payments) all payments to be made by the Borrowers in respect of the Facilities (whether of principal, interest, fees or otherwise) shall be made free and clear of and without any deduction for or on account of any set-off or counterclaim or (except to the extent compelled by law) any deduction on account of any Applicable Taxes. - -------------------------------------------------------------------------------- 44 15.2. Payments by the Borrowers: Each payment due to the Senior Lenders and/or the Agent from the Borrowers or any of them under this Agreement (whether of principal interest fees or otherwise) shall be made in Sterling to the Agent (for the account of the Senior Lenders or the Agent as the case may be) in immediately available freely transferable cleared funds not later than 11.00 a.m. on the due date to such account at such branch in the United Kingdom as the Agent shall have notified to the Principal Borrower. 15.3. Payments by the Agent: Where any sum is to be paid under this Agreement to the Agent for the account of the Senior Lenders, the Agent shall not be obliged to pay the same to the Senior Lenders until it is satisfied that it has actually received such sum. It may, however, assume that it has received such sum and, if it does make such a payment when in fact it had not actually received the relevant sum, the Senior Lender to which such payment has been made shall forthwith on demand refund the amount of such payment to the Agent together with interest thereon at the rate determined by the Agent as being the cost to the Agent of funding such amount for the period until receipt by the Agent thereof. 15.4. Distribution of Payments: Unless otherwise provided in this Agreement, all payments made to the Agent by the Borrowers (or any of them) for the account of the Banks shall be promptly distributed by the Agent among the Banks in the same proportions as their respective Participations in the relevant Advance and in like funds as they are received by the Agent. 15.5. Partial Payments: In the case of a partial payment by the Borrowers in respect of any sums due to the Banks hereunder, the Agent may appropriate such payment towards such of the obligations of the Borrowers under this Agreement as the Agent may decide or the Banks shall direct but in either case always pro-rata to the respective Participations of the Banks. The Borrowers waive any right to make an appropriation in respect of a partial payment. Any appropriation by the Agent or the Banks shall apply to the exclusion of any actual or purported appropriation by any Borrower. 15.6. Business Days: If any date for payment of any sum due is not a Business Day then such payment shall be made on the next following Business Day or, if that Business Day would fall in the following month, such payment shall be made on the preceding Business Day. 15.7. Advances under the Term Loan Facilities: All amounts to be advanced to the Principal Borrower under the Term Loan Facilities, other than amounts in relation to: (i) Offer Costs, which shall be made to the account of the Principal Borrower notified to the Agent in writing within 10 days from the date of this Agreement; (ii) amounts due to shareholders of Target pursuant to the provisions of Sections 428-430F of the Companies Act 1985, which shall be paid to Target to be held in accordance with Section 430 of the Companies Act 1985; (iii) payments to reduce the Payments Account Overdraft; (iv) share scheme payments contemplated by Clause 3.2(iv); or (v) payments to repay Existing Borrowings being Refinanced; shall, save as the Principal Borrower and the Agent may otherwise agree, be transferred to the Receiving Bank Account against receipt of forms of acceptance and share certificates or documents of title or an acceptable indemnity in lieu thereof relating to the Target Shares in respect of which payment is to be made pursuant to the Offer. - -------------------------------------------------------------------------------- 45 15.8. Cash Collateral Accounts: 15.8.1. Whenever any Borrower is required under the terms of this Agreement to provide an amount by way of cash cover or cash collateral or elects so to do it shall do so by paying such amount as the Agent may direct for the credit of a Cash Collateral Account; 15.8.2. Amounts standing to the credit of a Cash Collateral Account shall bear interest at 0.25% below Base Rate. Such interest shall:- 15.8.2.1.1.1. be added to the balance on the Cash Collateral Account unless the Agent holding such deposit otherwise allows; 15.8.2.1.1.2. if an Event of Default or a Potential Event of Default shall have occurred and is continuing, at the discretion of the Agent, either accrue to the Cash Collateral Account or be applied by the Agent in discharge of interest or other amounts then due hereunder; 15.8.3. The Agent may direct the Borrowers or any of them to subdivide the Cash Collateral Account, whether by opening associated accounts which shall also be Cash Collateral Accounts, for the purpose of segregating amounts of cash cover; 15.8.4. Whenever a Cash Collateral Account is established or further monies placed in a Cash Collateral Account, each Borrower shall, if so required by the Agent, forthwith either:- (i) enter into a Cash Collateral Charge in respect of such Cash Collateral Account; and/or (ii) enter into a letter of agreement in relation to such Cash Collateral Account conferring set-off and similar rights in favour of the Agent on behalf of the Senior Lenders. Without prejudice to the provisions of this Clause 15.8 if a Cash Collateral Account is established with the Agent then:- (a) following the occurrence of an Event of Default the Agent shall be entitled to set-off the credit balance on any Cash Collateral Account against the relevant Group Company's obligations to the Senior Lenders under the Banking Documents; (b) the amounts standing to the credit of the Cash Collateral Account shall not be repayable to the relevant Group Company (save as otherwise provided herein or in any of the other Banking Documents) unless and until all outstanding payments and liabilities under this Agreement have been repaid and discharged in full; and (c) the relevant Group Company shall not be entitled to assign, charge or otherwise deal with the Cash Collateral Account or any credit balances thereon except to the extent necessary to comply with this Clause 15.8.4 16. TAXES - -------------------------------------------------------------------------------- 46 16.1. Grossing Up of Payments: If any Borrower is compelled by law to withhold or deduct any applicable Taxes from any sum payable hereunder otherwise than as a result of a Bank not being or ceasing to be a Qualifying Lender: 16.1.1. the sum so payable by the relevant Borrower shall be increased ("the Increased Amount") so as to result in the receipt by the Agent and/or each Senior Lender (as the case may be) to whom such sum is due of a net amount equal to the full amount expressed to be payable hereunder; 16.1.2. the relevant Borrower shall deliver to the Agent as soon as reasonably practicable, evidence reasonably satisfactory to the Agent evidencing the payment by the relevant Borrower to the appropriate authority of all amounts so required to be withheld or deducted; and 16.1.3. if as a result of any additional payment by any Borrower under Clause 16.1.1 the Agent and/or any Senior Lender obtains any tax credit (not otherwise taken into account in determining the amount necessary to compensate the Agent or Senior Lender pursuant to Clause 16.1.1) then the Agent or that Senior Lender (as the case may be) shall pay to the Borrower an amount equal to such tax credit; provided that Increased Amounts shall only be payable by any Borrower to any person under this Clause if and so long as such person is and continues to be a Qualifying Lender. 16.2. Exemptions from Gross Up: No Increased Amount will be payable to a Bank under Clause 16.1 in respect of Applicable Taxes to the extent that (i) such Bank fails to take all reasonable steps to comply with any certification, identification, information, documentation or other reporting requirement if such compliance is required by law, regulation, administrative practice or an applicable treaty as a precondition to exemption from or reduction in the rate of deduction or withholding of any taxes for which the relevant Borrower is required to pay Increased Amounts pursuant to Clause 16.1 as soon as practicable after the relevant Borrower shall have notified the relevant Bank in writing that it would be required to comply with such requirement or (ii) such Applicable Tax constitutes fines or penalties imposed solely as a result of a Bank's act or omission. 17. INCREASED COST 17.1. Compensation for Increased Cost: If as a result of:- (i) the enactment of or change in any applicable law, regulation, or directive or in the interpretation thereof, in each case, after the date hereof; or (ii) compliance by any Senior Lender with any request (whether or not having the force of law but if not having the force of law, being a regulation, treaty, official directive, official request or rule with which it is the practice of banks to comply) of any central fiscal monetary or regulatory authority issued after the date hereof; or (iii) the imposition or modification after the date hereof of any capital adequacy requirements applicable to any Senior Lender and affecting banks generally; or (iv) any Senior Lender becoming subject to any Tax in respect of its participation in the Facilities or any change in the basis of Taxation of any payment made or to be made to any Senior Lender under the Banking Documents, in each case, occurring after the - -------------------------------------------------------------------------------- 47 date hereof (except in each case for Tax on the overall net income or profits of that Senior Lender) any of the following consequences follow:- (a) a Senior Lender incurs an increased cost as a result of its having entered into any of the Banking Documents or performing its obligations thereunder or as a result of assuming or maintaining its Commitment or Participation in the Facilities; or (b) any sum received or receivable by a Senior Lender under any of the Banking Documents or the effective return to it thereunder is reduced (except on account of Tax on its overall net income or profit); (c) a Senior Lender having by law to make any payment (except on account of Tax on its overall net income) or forego any interest or return calculated by reference to any amount received or receivable by it under the Banking Documents; the Borrowers shall indemnify each Senior Lender against such increased cost, reduction, payment or foregone interest or other return (except to the extent the Borrowers have compensated the Senior Lender by virtue of any other provisions of this Agreement or would have compensated the Senior Lender but for the operation of the proviso to Clause 16.1) and, accordingly, the Borrowers shall, from time to time on demand (whenever made) pay to the Agent for the account of the relevant Senior Lender the amount certified by such Senior Lender to be necessary to indemnify it on such a basis in a certificate setting out the calculation of the amount in reasonable detail but so that the Borrowers will not be liable to pay any sum under this Clause to a Senior Lender which is not or ceases to be a Qualifying Lender in excess of the amount they would have paid hereunder if the Senior Lender had at all times been a Qualifying Lender. 17.2. Limitations on Increased Costs Claims: No Borrower shall be obliged to compensate any Bank under Clause 17.1 (Compensation for Increased Cost) in respect of any increased cost which is: (i) compensated for by payment of the MLA Rate; (ii) attributable to any change in the rate of tax on the overall net income of any Bank; (iii) attributable to any Bank incurring after the date of this Agreement, a commitment to lend (or lending pursuant to any such commitment) in breach of any requirement in force at that time of any central bank or other fiscal, monetary or other authority having jurisdiction over the Bank; (iv) incurred by the Bank where that Bank fails to notify the relevant Borrower of the increased costs within six months of it becoming aware of the same; or (v) (for the avoidance of doubt) arising as a result of the implementation of the paper entitled "International Convergence of Capital Measurement and Capital Standards" dated July 1988 and prepared by the Basle Committee on Banking Regulations and Supervision, as amended in November 1991, in the manner in which it is required or proposed to be and/or is being implemented at the date hereof. - -------------------------------------------------------------------------------- 48 18. CHANGE IN LAW OR REGULATIONS Illegality: If, as the result of the introduction of, or any change in, any applicable law, regulation directive or regulatory requirement or any change in the interpretation or application thereof, in each case after the date hereof it becomes unlawful for a Senior Lender to maintain or give effect to its obligations as contemplated by any of the Banking Documents, then the Senior Lender shall as soon as reasonably practicable thereafter, inform the Agent and the Principal Borrower to that effect whereupon its obligation to permit the Facilities to remain outstanding shall forthwith terminate and the Borrowers shall prepay, on the latest available date permitted by the relevant law, regulation or directive or requirement to the Senior Lender all sums as shall be outstanding to that Senior Lender together with accrued interest thereon. 19. MITIGATION 19.1. Mitigation: If any of the Borrowers becomes obliged to pay any additional amounts (or in the case of Clause 18 (Change in Law or Regulations) to prepay) to the Agent or any Senior Lender pursuant to Clauses 10.7 (Market Disruption), 16 (Taxes), 17 (Increased Cost) or 18 (Change in Law or Regulations), each Senior Lender to whom such additional amounts or prepayment (as the case may be) are payable shall, without prejudice to the provisions of those Clauses take such steps after consultation with the relevant Borrower in relation to the Borrowers and/or the provision of the Facilities as may be reasonable to avoid or mitigate the payment of such additional amounts or prepayment (as the case may be). 19.2. Right to Prepay: If any of the Borrowers becomes obliged pursuant to Clause 10.7 (Market Disruption), Clause 16 (Taxes), Clause 17 (Increased Cost) or Clause 18 (Change in Law or Regulations) to make any additional payments(or in the case of Clause 18 (Change in Law or Regulations) to prepay), then, for so long as the circumstances giving rise to such payment continue, the Borrowers may prepay in accordance with Clause 13.1 (Voluntary Prepayment) the whole but not part of the Participation in the Facilities of any Senior Lender to whom such additional payments are payable or illegality relates, together with all accrued interest and all other sums payable hereunder for the account of such Senior Lender. 20. FINANCIAL RATIOS 20.1. Financial Covenants: The Principal Borrower shall procure that:- 20.1.1. During the term of the Facilities and so long as any part of the Term Loans remain outstanding: The Adjusted Net Worth: the Adjusted Net Worth, to be measured by reference to the relevant Audited Accounts and Management Accounts (as appropriate) at the end of each Quarterly Period, will be greater than the amount set out opposite such period: Period (pound) At all times after the Amendment and Restatement (pound)25,000,000 Effective Date - -------------------------------------------------------------------------------- 49 20.1.2. During the term of the Facilities and so long as the Term Loans remain outstanding:- 20.1.2.1. Assumed Senior Interest Cover: the EBIT to Assumed Senior Interest at the end of each period referred to below shall equal or exceed the ratio set out opposite such period such ratio to be measured by reference to the Management Accounts and calculated on a rolling 12 month basis by reference to the twelve months ending on the last day of the relevant period except that the first occasion on which this covenant shall be tested shall be 31 March 2000 by reference to the Management Accounts in respect of the period from the Full Drawdown Date to 31 March 2000; Period Ratio the Full Drawdown Date to 31 March 2000 2.5:1 1 July 1999 to 30 June 2000 2. 5:1 1 October 1999 to 30 September 2000 2.75:1 1 January 2000 to 31 December 2000 2.9:1 1 April 2000 to 31 March 2001 3:1 1 July 2000 to 30 June 2001 3.3:1 1 October 2000 to 30 September 2001 3.75:1 1 January 2001 to 31 December 2001 4:1 1 April 2001 to 31 March 2002 and 4:1 thereafter, each period of twelve consecutive Monthly Accounting Periods ending on 30 June, 30 September, 31 December or 31 March 20.1.2.2. Total Debt to EBITDA: the ratio of Total Debt to EBITDA at the end of each period referred to below shall be less than the ratio set out opposite such period such ratio to be measured by reference to the relevant Management Accounts and where applicable, the Audited Accounts and calculated on a rolling 12 month basis by reference to the twelve months ending on the last day of the relevant period; Period Ratio Each period of twelve consecutive 3:1 Monthly Accounting Periodsending on 30 September, 31 December, 31 - -------------------------------------------------------------------------------- 50 Period Ratio March or 30 June 20.2. Verification: 20.2.1. The Principal Borrower shall, unless the Agent agrees to the contrary, each year instruct the Auditors, at the same time that the Principal Borrower delivers the Audited Accounts to the Senior Lenders, to deliver to the Agent a certificate addressed to the Agent (for itself and as agent for the Senior Lenders) certifying whether or not the financial covenants in Clause 20.1 (Financial Covenants) have been complied with at the end of the Accounting Period covered by the Audited Accounts and such certificate shall have annexed to it brief particulars of the supporting numbers and ratios and may contain such qualifications and assumptions as the Auditors shall reasonably consider appropriate. 20.2.2. The Agent may (and only if it has reasonable grounds believing that the covenants contained in Clause 20.1 have not been complied with.) require the Auditors to verify compliance with the same or the Agent may (and only if after consultation with the Investors it has reasonable grounds for forming that belief) require the Auditors or, as the Agent shall determine, an independent firm of accountants acceptable to the Agent to carry out an appropriate investigation into the financial affairs of the Group and give a certificate in a form and content satisfactory to the Agent certifying such matters as the Agent may reasonably request for the relevant period. The costs of compliance with such requirements shall be borne by the Principal Borrower only once in any Accounting Period so that any additional third party costs shall be borne by the Banks. 20.2.3. At the same time that the Principal Borrower delivers the Management Accounts to the Agent for those periods by reference to which the financial covenants are to be tested, the Principal Borrower shall deliver to the Agent a certificate (addressed to the Agent, for itself and as agent for the Senior Lenders) certifying whether or not the financial covenants in Clause 20.1 (Financial Covenants) have been complied with at the end of the relevant testing period and such certificate shall have annexed to it brief particulars of the supporting numbers and ratios. 21. COVENANTS During the term of the Facilities and for so long as the Term Loans or any other monies under this Agreement remain outstanding: 21.1. Financial Information: The Principal Borrower shall unless the Agent (acting on the instructions of all the Banks) otherwise agrees in writing:- 21.1.1. deliver to the Agent for distribution to the Senior Lenders copies in sufficient numbers for all of them of:- (i) Audited Accounts of the Principal Borrower: the audited ------------------------------------------- consolidated profit and loss account, balance sheet and cashflow statements of the Principal Borrower for each Accounting Period ending after the date hereof as soon as the same are available but in any event not later than 120 days, from the end of the Accounting Period to which the accounts relate; - -------------------------------------------------------------------------------- 51 (ii) Audited Accounts of Group Companies: the audited profit and loss ------------------------------------ accounts, balance sheets and cashflow statements of any Group Company for each Accounting Period ending after the date hereof as soon as the same are available but in any event not later than 120 days, from the end of the Accounting Period to which they relate; (iii) Management Accounts: -------------------- (aa) Management Accounts for the Group on a consolidated basis within 30 days after the end of each Monthly Accounting Period, except that the first such consolidated Management Accounts shall be produced in respect of the Monthly Accounting Period commencing immediately after the Relevant Date PROVIDED THAT in relation to the Monthly Accounting Period in which the Relevant Date occurs, the Principal Borrower shall also deliver to the Agent Management Accounts for each prior Monthly Accounting Period in the then current Accounting Period incorporating a comparison of actual EBITDA against budgeted EBITDA for that period; (bb) Management Accounts for each Group Company within 45 days after the end of each Six Monthly Period, except that the first such Management Accounts shall be produced in respect of the period commencing at the start of the then current Accounting Period; such Management Accounts to be approved (without personal liability on their part) by two directors for and on behalf of the Principal Borrower as being a fair and reasonable view of the financial condition and trading performance of the Group within the normal constraints of management information; (iv) Commercial Briefing: at the same time as the delivery of the -------------------- Management Accounts, a written report by the managing director (or in his absence the finance director) of the Principal Borrower commenting on the performance of each operating Group Company (including the numbers relating to the key performance indicators) the main operational and financial issues arising in or applicable to the period and explaining any material variances against the Budget for the Accounting Period to date detailing any off-balance sheet financing arrangements together with such other reports information and statistics as the Agent may from time to time reasonably require; (v) Other Information: any other information material to the business ------------------ or financial condition of any Group Company which the Agent or the Majority Banks may, after consultation with the Investors, reasonably request from time to time. 21.2. Preparation of Financial Information: The Principal Borrower shall (unless the Agent otherwise consents in writing):- 21.2.1. Consistent Basis of Preparation: ensure that subject to Clause 21.3 (Variations in Accounting Treatment), all accounts and other financial information submitted to the Agent are prepared using accounting bases, policies, practices and procedures - -------------------------------------------------------------------------------- 52 ("accounting principles") consistent (so far as applicable) in all material respects and in accordance with generally accepted United Kingdom accounting principles or, to the extent they are not, that the differences are highlighted and explained; 21.2.2. Restriction on Changing Accounting Reference Date: ensure that no Group Company shall alter its Accounting Period without first notifying the Agent (in which event the Agent and the Principal Borrower shall seek to agree, and thereafter implement, such changes to the financial covenants contained in this Agreement as may be necessary to reflect such change but in the absence of such agreement as the Auditors after consultation with the Agent shall consider appropriate and notify to the Agent and the Principal Borrower) and the Principal Borrower shall procure that the accounting reference dates of each Group Company shall be the same. 21.3. Variations in Accounting Treatment: If: (i) any accounts (so far as is applicable) delivered to the Agent hereunder have not been prepared in accordance with generally accepted United Kingdom accounting principles in force as at the date hereof ("Present UK GAAP"); or (ii) any accounts delivered to the Agent hereunder have not been prepared in accordance with the accounting principles which were applied in the immediately preceding equivalent accounts, (including without limitation any change in depreciation policy); the Principal Borrower shall promptly so advise the Agent and provide reasonable details of the differences and the reasons therefor and, for the purpose of the covenants contained in Clause 20 (Financial Ratios) the Agent and the Principal Borrower shall seek to agree such changes (if any) to such financial covenants as will reflect fairly and reasonably the changes which have been made but in the absence of such agreement:- (a) the Principal Borrower may provide the Agent as soon as reasonably practicable with revised accounts prepared by the Principal Borrower showing what the position would have been had the accounts in question been prepared in accordance with Present UK GAAP. The Agent may consult with the Auditors (subject to the agreement of satisfactory terms of engagement between the Auditors the Principal Borrower and the Agent) in respect of such changes in accounting principles and require the Auditors to confirm that the revised accounts properly reflect the adjustments that need to be made to restate the accounts on a basis consistent with the immediately preceding accounts; and/or (b) either the Agent or the Principal Borrower may instruct the Auditors (subject to the agreement of satisfactory terms of engagement between the Auditors the Principal Borrower and the Agent) to make such changes to the financial covenants as they consider appropriate to reflect fairly and reasonably the changes which have been made. 21.4. Annual Budget: The Principal Borrower shall not later than four weeks before the beginning of (a) the Accounting Period commencing on 1 April 2000 and (b) each Accounting Period thereafter submit to the Agent itemised company and consolidated capital and revenue budgets and cashflow and balance sheet forecasts for the Group in a format acceptable to the Agent acting reasonably and shall discuss with the Agent the calculations and workings relating to such budgets provided that, in respect of the Accounting Period beginning on 1 January 2002, - -------------------------------------------------------------------------------- 53 such budgets and forecasts need not be delivered by the Principal Borrower to the Agent until 31 January 2002. The Principal Borrower shall make a presentation to the Banks in relation to such Annual Budget at such time as the Agent may reasonably require. For the period to 31 March 2000 , the Annual Budget shall be the Financial Model to the extent that it relates to such period. 21.5. Capex Budget 21.5.1. The Principal Borrower shall each year submit to the Agent for approval (not to be unreasonably withheld or delayed) at the same time as the Principal Borrower submits the Annual Budget, a Capex Budget in a format and content acceptable to the Agent, acting reasonably, showing, inter alia:- (i) the maximum aggregate amount of capital expenditure to be incurred by each Group Company during the relevant Accounting Period and the class or classes of assets to be acquired; (ii) the amount and nature of any capital expenditure approved in the immediately preceding Capex Budget which has not been incurred in the Accounting Period to which that Capex Budget relates but which a Group Company is committed to incur in the next Accounting Period; and 21.5.2. The overall amount of the Capex Budget once approved by the Agent shall not be amended by the Principal Borrower without the prior written consent of the Agent, such consent not to be unreasonably withheld or delayed. 21.6. Capital Expenditure: The Principal Borrower shall procure that the aggregate capital expenditure of the Group shall not, without the prior written consent of the Agent, (such consent not to be unreasonably withheld or delayed) exceed by more than 10% the projected aggregate capital expenditure for all Group Companies for that Accounting Period contained in the Capex Budget. 21.7. Other Asset Acquisitions: The Principal Borrower shall procure that no Group Company shall without the consent of the Agent acting on the instructions of the Majority Banks (such consent not to be unreasonably withheld or delayed) incur or agree to incur any expenditure in excess of (pound)50,000 in any Accounting Period on the acquisition of assets or businesses other than:- (i) expenditure incurred in the normal course of trading; (ii) expenditure permitted pursuant to Clause 21.6 (Capital Expenditure)or Clause 21.11.3 (Joint Enterprises and other Investments); (iii) expenditure incurred in connection with the acquisition of the Target; (iv) expenditure in connection with any permitted short term investments referred to in sub-clause (xi) of the definition of Permitted Disposals. 21.8. Disposals: The Principal Borrower shall not (and shall procure that no other Group Company shall) without the prior written consent of the Agent acting on the instructions of the Majority Banks make or agree to make a Disposal other than a Permitted Disposal. - -------------------------------------------------------------------------------- 54 No Charging Company shall be entitled to dispose of any assets which are subject to a fixed charge or other fixed security without giving prior notice to and receiving consent from the Agent acting on the instructions of the Majority Banks, but the Agent shall be obliged to promptly give such consent and execute any relevant release (of security or otherwise) in relation to Permitted Disposals (without any requirement that such proceeds of such Disposal be applied to reduce the Facilities save in relation to a Permitted Disposal arising under paragraph (vii) of the definition of Permitted Disposals) without reference to the Senior Lenders unless it is actually aware of the occurrence of an Event of Default or a Potential Event of Default which, in either case, has not been waived by the Agent or remedied; 21.9. Not Restated 21.10. Reduction of Capital: The Principal Borrower shall not (without the prior written consent of the Agent acting on the instructions of the Majority Banks): (i) make any distribution of capital (whether in cash or in specie) to its members; or (ii) redeem or purchase any of its shares other than in connection with syndication to a Syndicate (as defined in the Investment Agreement and Articles); or (iii) otherwise reduce its capital with the exception of the application of transaction costs and/or goodwill to share premium account. unless and until there has occurred or will contemporaneously occur the permanent repayment of All Outstanding Amounts and the cancellation of the Facilities; 21.11. Other Restrictions subject to Majority Banks' Consent: The Principal Borrower shall not (and shall procure that no other Group Company shall) without the prior written consent of the Agent (acting on the instructions of the Majority Banks save for Clause 21.11.7 (Variation or Extension of the Offer) which shall require the instructions of all of the Banks): 21.11.1. Borrowings: incur Borrowings other than Permitted Borrowings. ---------- The Principal Borrower shall procure that as soon as reasonably practical and in any event within 42 days after the Relevant Date all Borrowings falling under sub-clause (viii) of the definition of "Permitted Borrowings" but not covered by any other sub-clause of Permitted Borrowings shall be repaid or discharged ("the Existing Borrowings being Refinanced"). Where the Existing Borrowing being Refinanced include any guarantees or other contingent liabilities and the Banks or Working Capital Bank agree to provide replacement guarantees or counter indemnities (or other similar instruments entailing the Banks or Working Capital Bank incurring contingent liabilities) ("Replacement Instruments") the relevant Borrowers whose obligations are being guaranteed or counter indemnified shall, as a precondition to such Replacement Instruments being issued, drawdown from the Term Loan Facilities or the Working Capital Facility as appropriate, a sum equal to the maximum potential liability under the Replacement Instruments and place it with the Agent in a separate nominated deposit account. That account shall be treated as if it were a Cash Collateral Account. The fee for each Replacement Instrument shall be equal to the Margin for the Facility from which the cash-backing is drawn; 21.11.2. Security Interests: create or permit to subsist any Security ------------------ Interest(other than Permitted Security Interests) over any of its assets from time to time; - -------------------------------------------------------------------------------- 55 21.11.3. Joint Enterprises, Other Investments and Change of Business: ----------------------------------------------------------- merge or consolidate with any other entity or enter into or voluntarily terminate any Joint Venture and not make any Investment of any type (including by paying purchase consideration of any type or assuming any liability) in any corporate entity, Joint Venture, partnership or other entity other than Permitted Investments, or materially change the nature of its business; 21.11.4. Loans and Guarantees: make any loans or grant any credit or -------------------- give or permit to subsist any guarantee of any of the indebtedness of any person or make any repayments in relation to any existing loans, indebtedness or guarantees other than:- (i) normal trade credit; (ii) loans and the granting of credit to Charging Companies (including for the avoidance of doubt the repayment of such loans or indebtedness); (iii) guarantees given to a third party by one Charging Company in respect of the performance obligations of another Group Company or Group Companies; (iv) loans and the granting of credit or the giving of guarantees which have been approved in writing by the Majority Banks; (v) loans and guarantees to or for the benefit of employees of UK Companies not exceeding in aggregate at any time(pound)50,000; (vi) loans and guarantees made or given by the Target Group prior to the Relevant Date, provided that: (a) the Principal Borrower shall use its reasonable endeavours to procure the prompt repayment or release of such loans or guarantees; (b) the terms and conditions are not amended to the material prejudice of the Target Group, and the principal amount of such loans and guarantees is not voluntarily increased after the Relevant Date; (vii) any other loans and/or guarantees to UK Companies not exceeding in aggregate(pound)100,000 in any Accounting Period; (viii) repayment of Existing Borrowings being Refinanced; (ix) repayment of the loan notes described in paragraphs (ix) and (x) of the definition of "Permitted Borrowings" 21.11.5. Factoring and Invoice Discounting: enter into any factoring --------------------------------- or invoice discounting arrangements or any other arrangements to sell or dispose of, or whereby any person shall otherwise acquire or gain the right to acquire, any right, title or interest in any of the trade debts of the Group; - -------------------------------------------------------------------------------- 56 21.11.6. Shares and Interests in Shares: ------------------------------- (i) (a) issue in the case of any Group Company other than the Principal Borrower any shares after the Relevant Date other than shares to a Charging Company; or (b) in the case of the Principal Borrower issue any shares other than the ordinary shares having the same rights as the Ordinary Shares under the Articles or shares which carry the same rights to receive payment of any dividends, distributions or redemption premiums as those shares in issue on the Relevant Date or issued pursuant to the Investment Agreement. (ii) incorporate any company as a subsidiary other than a new company which is a wholly owned subsidiary and becomes a Charging Company upon becoming a Subsidiary other than any Dormant Company; or (iii) acquire after the Relevant Date or dispose of any interest in any shares or securities of any company other than (a) the disposal of shares in a company whose only asset is an asset which may be disposed of as a Permitted Disposal (b) any shares in Target; 21.11.7. Variation or Extension of the Offer: (i) waive, vary or agree ----------------------------------- to the waiver or variation of any material terms and conditions of the Offer in any manner which would give rise to a Material Adverse Effect which shall, in any event, and without limitation be deemed to be the case in relation to any proposed increase in the price of the Offer or any alteration to the level of acceptances at which the Offer may be declared unconditional as to acceptances or the triggering of an obligation to effect a cash offer pursuant to the provisions of Rule 9 of the City Code on Takeovers and Mergers; or (ii) prior to the Offer becoming unconditional extend the Offer beyond 81 days from the date on which the Offer Document is posted or such later date as the Agent and the Panel On Takeovers and Mergers shall agree. In giving or withholding its consent to any waiver or amendment of any conditions of the Offer the Agent will treat itself as being bound by Rule 13 of the City Code of Takeovers and Mergers as if it were the Principal Borrower and subject to the jurisdiction of the Takeover Panel/ 21.11.8. Amendments to Principal Contracts: make any amendment to, --------------------------------- waive, supplement or vary the terms of the Investment Agreement in any material respect if such amendment would increase the amount or affect the timing of entitlement to or receipt of any dividend or payment (whether of interest or capital) or any other benefit accruing or due to the Investors or Managers which can be calculated in monetary terms. 21.11.9. Amendment of Memorandum and Articles: ------------------------------------ (i) make any material amendment to, waive, supplement or vary in any material respect the memorandum of association or other constitutional documents of any Group Company in a manner which would increase the amount or affect the timing of entitlement or receipt of any dividend or payment (whether of interest or to, capital) or any other benefit accruing or - -------------------------------------------------------------------------------- 57 due to the Investors or Managers which can be calculated in monetary terms; or (ii) make any material amendment to the Articles of Association or other constitutional documents of any Group Company so as to confer any right to receive dividends or distributions or any redemption of capital or any other redemption of the subscription price or premium thereon which is not restricted by reference to this Agreement; 21.11.10. Appointment of Auditors: change the Auditors of the ----------------------- Principal Borrower or any other Group Company unless the proposed new Auditors are a firm of international standing; 21.11.11. Other Bank Accounts: open or maintain any account with any ------------------- recognised bank or building society other than: (i) an account with the Bank of Scotland or any of its subsidiaries; or (ii) any account existing at the Relevant Date in the name of or for the benefit of any company in the Target Group, provided that such accounts are closed within two months after the Relevant Date or as soon as practicable thereafter; 21.11.12. Announcements: except to the extent, if any, required by ------------- law, or by the Code or by the Takeover Panel or The Stock Exchange make or authorise the making of any announcement or issue or authorise the issue of any publicity material concerning the transactions contemplated by the Banking Documents (other than general announcements where the only details of such transactions disclosed are the identity of the Senior Lenders and the type and, amount of the Facilities) without the prior written approval of the Agent (such approval not to be unreasonably withheld or delayed); 21.12. Ring-fencing Arrangements: The Principal Borrower will:- (i) ensure that the business of the Charging Companies is carried on independently from and at arm's length to the businesses carried on by the other Group Companies and, in particular, that: (a) any material services or material assets provided to a non-Charging Company by a Charging Company (other than the making available of management time and management services by individuals who have a group head office function and other than Permitted Investments) are only provided to the extent required for the proper operation of the business of such non-Charging Company and are provided on arm's length terms for full market consideration payable in cash by such non-Charging Company or on terms which would apply to any transactions on arm's length terms in the market generally; (b) no Charging Company acquires any assets or receives any services from a non-Charging Company except to the extent that they are required for the proper operation of that Charging Company's business and are not acquired at greater than a fair value; - -------------------------------------------------------------------------------- 58 PROVIDED THAT this sub-clause shall not operate to affect commercial arrangements and/or licensing and/or technology sharing arrangement in place at the date hereof; (ii) ensure that no Charging Company shall (without the prior written consent of the Agent) and save for any Permitted Investment and as permitted pursuant to Clause 21.11.4(iii), (v), (vi), (vii), (viii) and (x):- (a) make any loan (except loans needed to enable the Group Companies to give financial assistance to each other which is properly legalised as contemplated herein), grant any credit or give or permit to subsist any security, guarantee, indemnity or financial accommodation to or for the benefit of any Group Company which is not a Charging Company, other than amounts of credit incurred in the normal course of trading activities; (b) make any cash payments (save as otherwise permitted by any other provision of this Clause) to any Group Company which is not a Charging Company in excess of (pound)50,000 in aggregate for all such Group Companies in any Accounting Period; (c) subscribe for any shares, loan notes, debentures, commercial paper or other financial instrument issued or proposed to be issued by any Group Company which is not a Charging Company. 21.13. Positive Obligations: The Principal Borrower shall (unless the Agent otherwise consents in writing): 21.13.1. Binding Obligations: subject to the Reservations ensure that ------------------- all of the obligations of any Group Company under the Banking Documents will at all times constitute direct, enforceable and binding obligations of such Group Company; 21.13.2. Priority of Facilities: take all reasonable steps requested ---------------------- by the Agent to ensure that the claims of the Security Beneficiaries under the Security Documents will at all times (save to the extent that such security constitutes financial assistance for the purpose of Section 151 Companies Act 1985 in which case immediately after the requirements of Sections 155-158 Companies Act 1985 are complied with as envisaged by Clause 21.13.8 (Security from the Target Group)) rank in priority to all present and future indebtedness of any Charging Company (except for such indebtedness as is entitled to priority by operation of law or any Permitted Security Interests); 21.13.3. Compliance with Laws: procure that each Group Company shall -------------------- use its reasonable endeavours:- (i) at all times to comply with all laws and regulations applicable to it and which are necessary in relation to the conduct of its business where failure to do so would have a Material Adverse Effect; (ii) to make or obtain, keep in full force and effect and comply with all governmental and other regulatory consents, licences, exemptions, clearances, filings, registrations and authorisations required for the conduct of its business and the validity, enforceability and admissibility in evidence of each of the Banking Documents where, in each case, failure to do so would have a Material Adverse Effect: - -------------------------------------------------------------------------------- 59 (iii)promptly and in any event within any relative period laid down in any applicable statute, law or regulation to make all necessary declarations and deliver all necessary forms and documents required to be delivered to, filed or registered in connection with the Transaction Documents and any of the transactions contemplated thereunder where, in each case, failure to do so would have a Material Adverse Effect; 21.13.4. Taxes: procure that each Group Company will, pay all material ----- Taxes due and payable by it or that Group Company within a reasonable time of the relevant due date (save to the extent that payment of the same is being contested in good faith and adequate reserves are being maintained for those Taxes) where failure to do so would have a Material Adverse Effect; 21.13.5. Notification of Events of Default: notify the Agent of any --------------------------------- Event of Default or Potential Event of Default as soon as reasonably practicable after becoming aware of the occurrence thereof, and of the steps being taken to remedy the same; 21.13.6. Insurance: procure that each Group Company shall effect and --------- maintain adequate insurances (on terms commonly available in the relevant insurance markets provided always such insurance is available at commercially reasonable premiums) in relation to its business and assets with reputable underwriters or insurers against such risks as are usual for companies carrying on a business such as that carried on by any Group Company whose practice is not to self insure and in an amount equal to the full replacement cost of such assets. The Principal Borrower shall procure that the interest of the Security Trustee on behalf of the Security Beneficiaries is noted thereon as soon as practicable after such request. The Principal Borrower shall from time to time upon request supply the Agent with copies of all such insurance policies or certificates of insurance or premium receipts in respect thereof or such other evidence of the existence of such policies as may be reasonably acceptable to the Agent; 21.13.7. Re-Registration as a Private Company: procure that within 77 ------------------------------------ days of the date of the Relevant Date a special resolution of Target is passed to entitle Target to be re-registered as a private company pursuant to s.53 Companies Act 1985 and the Principal Borrower shall procure that such resolution is duly passed, and undertakes to take all such action as may be reasonably necessary to ensure that the requirements of s.53 Companies Act 1985 are complied with promptly, and to use its best endeavours to procure that the Registrar of Companies is able to issue Target with a certificate of re-registration as a private company ("the Certificate of Re-Registration"); 21.13.8. Security from the Target Group: procure that: ------------------------------ (i) as soon as reasonably practicable but within any event within 28 days of the issue by the Registrar of Companies of the Certificate of Re-Registration of Target, each of the Initial Charging Companies shall duly pass any such special resolutions as shall be required to comply with s.155 Companies Act 1985 in relation to the Third Debenture , the Legal Charge, the Keyman Insurance Assignment and the Intra-Group Loan Agreement ("the Financial Assistance") provided that this limit shall be extended to 40 days if the meeting to pass such special resolutions cannot practicably be held on short notice; - -------------------------------------------------------------------------------- 60 (ii) as soon as practicable after the requirements of s.151-158 Companies Act 1985 can be satisfied (but in any event within 7 days of the expiry of the 4 week period during which any shareholder may apply for the cancellation of any special resolution pursuant to s.158 Companies Act 1985 provided no such shareholder application is made) each of the Initial Charging Companies (other than the Principal Borrower) shall take whatever steps may be necessary (including the elimination of any net asset deficiency in any Charging Company) to put themselves in a position to comply with the requirements of s151-158 Companies Act 1985 and enter into such documents as the Agent may reasonably require for such Initial Charging Companies (other than the Principal Borrower) to guarantee and secure any monies due to the Security Beneficiaries under the Banking Documents, including without limitation the execution and delivery of the Third Debenture (in addition to the Second Debenture each may already have executed and delivered pursuant to Clause 6.2 (Security) hereof, the Legal Charge, the Keyman Insurance Assignment and the Intra-Group Loan Agreement; (iii) the requirements of s.151-158 Companies Act 1985 are satisfied in relation to the giving of the Financial Assistance; (iv) each Initial Charging Company (other than the Principal Borrower) (and where applicable each of their directors) shall as soon as practicable after they are legally in a position to do so (but in any event within 7 days of the expiry of the 4 week period during which any shareholder may apply for the cancellation of any special resolution pursuant to s.158 Companies Act 1985 provided no such shareholder application is made) duly execute all such documents and make or obtain all such declarations, approvals, consents, filings and registrations as the Agent may reasonably require for the efficacy, validity or enforceability of the Financial Assistance, including without limitation duly completed, executed and/or sworn Pro Forma Financial Assistance Documents adapted to meet the circumstances; (v) as soon as practicable after the Relevant Date (but in any event within 7 days of the expiry of the 4 week period during which any shareholder may apply for the cancellation of a special resolution pursuant to s.158 Companies Act 1985 provided no such shareholder application is made) each Initial Charging Company shall take such other steps as the Agent may reasonably require (including, without limitation, ensuring that each relevant Group Company has positive net assets and appropriate commitments of financial support) to ensure that all relevant legal requirements are satisfied in relation to the giving of the Financial Assistance; (vi) notwithstanding the requirements of sub-clauses (i) to (v) above the Third Debenture , the Legal Charge and the Keyman Insurance Assignment duly executed by the Initial Charging Companies as first ranking securities and the Intra Group Loan Agreement are delivered to the Agent within both 150 days of the Offer being posted, and within 90 days of the Relevant Date or, if the Principal Borrower has been unable to implement the procedures in Sections 428-430F of the Companies Act 1983, within both 180 days of the Offer being posted, and 120 days of the Relevant Date. - -------------------------------------------------------------------------------- 61 21.13.9. Security from Non-Charging Companies: subject to Clause ------------------------------------ 21.13.8 (Security from the Target Group) procure that any Group Company (other than a Dormant Company) which is not for the time being a Charging Company shall as soon as reasonably practicable and in any event within 28 days of being so required by the Agent (but only if and to the extent permitted by law): (i) enter into such documents as the Agent may reasonably require for such Group Company to guarantee and secure any monies due to the Security Beneficiaries under the Banking Documents; (ii) obtain or make all such approvals, declarations, consents, filings and registrations as are necessary for the efficacy, validity or enforceability of such guarantee and/or security; and (iii) take such other steps as the Agent may reasonably require to ensure that all relevant legal requirements are satisfied such that the action referred to in paragraphs (i) and (ii) above is lawful; 21.13.10. Dormant Companies: procure that, save with the prior written ----------------- consent of the Agent, or unless a Dormant Company becomes a Charging Company and a party to the Debenture, no Dormant Company shall commence trading (whether for its own account or for that of another) after the Relevant Date or the date it becomes a member of the Group (if later) or incur any further material liabilities or hold or acquire (whether legally or beneficially) any material assets or property after such date; 21.13.11. Compliance with Environmental Laws ---------------------------------- (i) comply and shall ensure that each Group Company will comply with all Environmental Laws applicable to the operations or premises of any Group Company and obtain from the appropriate authorities all Environmental Consents required in respect thereto where failure to comply or to obtain such consent would have a Material Adverse Effect; (ii) procure that each Group Company shall carry out any environmental audit or site investigation at the Properties required by Environmental Laws or if required to do so by the Agent where the Agent reasonably believes that: (a) a breach of any of the Environmental Laws which would give rise to a Material Adverse Effect has or is likely to occur; or (b) the value of the Properties is likely to be materially and adversely affected by any matter or thing on, under or adjacent to the Properties which is likely to result in an Environmental Contamination or constitute a material environmental risk (whether or not that matter or thing constitutes an immediate breach of any Environmental Laws); or (c) an Event of Default is subsisting and the Agent or the Senior Lenders are contemplating the enforcement of any of the Security Documents affecting the Properties; - -------------------------------------------------------------------------------- 62 (iii) notify the Agent in writing to the extent that the same would have a Material Adverse Effect if: (a) any Group Company receives any written notice that it is not in compliance with any applicable Environmental Laws; or (b) any Group Company becomes aware that there exists any Environmental Claim pending or threatened against it; or (c) there occurs any release, emission, discharge or disposal of any substance which could reasonably be expected to form the basis of any material Environmental Claim against any Group Company; and the Principal Borrower shall promptly thereafter provide to the Agent a report specifying in detail the nature of such event and the actions which the relevant Group Company intends to take in response thereto. Upon a reasonable request from the Agent the Principal Borrower shall submit to the Agent at reasonable intervals thereafter an updated report providing any update of the situation resulting from such event; 21.13.12. Valuations: at any time while an Event of Default is ---------- subsisting if so requested by the Agent acting reasonably obtain a valuation of the assets and properties of the Charging Companies from an independent valuer acceptable to the Agent. The cost of such valuation shall be borne by the Principal Borrower; 21.13.13. Details of Litigation: promptly upon becoming aware thereof --------------------- advise the Agent of the details of any litigation or administrative proceeding which is pending or threatened against any Group Company and which or which would involve liability or potential liability or alleged liability of(pound)100,000 or its equivalent in Sterling (at the Agent's spot rate of exchange); 21.13.14. Funding of Pension Schemes: procure that all the -------------------------- occupational pension schemes of the Group are at all times maintained properly funded (or to the extent not fully funded contribution rates are adjusted appropriately) in accordance with the advice given from time to time by the actuaries of such schemes and to the extent that failure to do so would have a Material Adverse Effect; 21.13.15. Intellectual Property Rights: procure that each member of ---------------------------- the Group will:- (i) make such registrations and pay such fees, registration taxes and similar amounts as are necessary to keep those registered Intellectual Property Rights owned by the Group which are material to the business of a member of the Group ("the Material Rights") in force and to record its interest in those Intellectual Property Rights; (ii) to the extent it is within its control take such steps as are necessary and commercially reasonable (including, without limitation, the institution of legal proceedings) to prevent third parties infringing the Material Rights and (without prejudice to paragraph (i) above) take such other - -------------------------------------------------------------------------------- 63 steps as are reasonably practicable to maintain and preserve its interests in those Material Rights; (iii) promptly upon being required to do so by the Agent, comply with all reasonable instructions of the Agent which the Agent is entitled to give under the Security Documents in respect of its Material Rights; (iv) not sell, transfer, lease, licence or otherwise dispose of all or any part of its interest in the Material Rights save:- (a) as effected pursuant to any of the Security Documents; or (b) as permitted with the prior written consent of the Agent; or (c) for any licence arrangements in respect of those rights entered into with members of the Group for so long as they remain members of the Group; or (d) in the ordinary course of business; (v) not permit any registration of any of the Intellectual Property Rights to be abandoned, cancelled or lapsed or to be liable to any claim of abandonment for non-use or otherwise if to do so would have a Material Adverse Effect. 21.13.16. The Offer: --------- (i) ensure that the terms and conditions of the Press Release and the Offer Document comply in all material respects with all applicable laws and regulations and the Code and that the terms and conditions of the Offer Document are consistent in all material respects with the terms of the Press Release; (ii) not to issue the Press Release or any press announcements relating to the Offer save as required by the Panel or London Stock Exchange Limited without the approval of the Agent (such approval not to be unreasonably withheld or delayed) and to keep the Agent advised of the progress of the Offer and of all material matters affecting or reasonably likely to affect the interests of the Banks arising in connection with the Offer and the Principal Borrower shall provide the Agent with any information and copies of professional advice received, as the Agent may reasonably request; (iii)disclose to the Agent all information which has come to its attention which is relevant to any decision whether or not to waive (or to consent to the waiver of) any condition of the Offer; (iv) promptly deliver to the Agent copies of the Offer Document and press announcements made by or on behalf of the Principal Borrower in relation to the Offer, all written public statements made by or on behalf of Target in response to or otherwise commenting on the Offer, and other public documents issued by the Panel on Takeovers and Mergers, the Office of Fair Trading or the Competition Commission or any other regulatory authority in - -------------------------------------------------------------------------------- 64 relation to the Offer, the Offer Document or the transactions contemplated herein or therein; (v) ensure that it shall not and shall use its best endeavours to procure that no person acting in concert with it (as defined in the Code) shall become obliged to make an offer to the shareholders of Target under Rule 9 of the Code, and ensure that neither it nor persons acting in concert with it acquire any shares in Target at a price above the Offer price which may result in an obligation to increase the Offer price; (vi) ensure that at all times all laws and directives applicable in relation the Offer or any documents connected thereto are complied with and that, as and when necessary all consents from all governmental and other regulatory authorities required in connection therewith (including (without limitation), the Financial Services Act 1986, applicable rules of any self-regulatory organisation deriving authority from the Securities and Investments Board or the Financial Services Authority and the rules of London Stock Exchange) are obtained, maintained and/or renewed (vii) subject to compliance by the Banks with their obligations pursuant to the terms of this Agreement ensure that all its obligations pursuant to the Offer are complied with and performed, use all reasonable endeavours to ensure that the conditions attached to the Offer (save for those that are waived with the consent of the Agent) are satisfied as soon as reasonably practicable and declare the Offer unconditional in all respects immediately such conditions are satisfied (or, with the consent of the Agent, waived as aforesaid); (viii) after the Relevant Date use its best endeavours to acquire all of the issued share capital of Target as soon as reasonably practicable either pursuant to or otherwise on the same terms as the terms of the Offer; (ix) promptly and in any event no later than 20 Business Days after unconditionally acquiring 90% of the Target Shares the subject of the Offer serve notices under Section 429(2) of the Companies Act 1985 (in respect of acquiring minority shareholdings). Without prejudice to the Principal Borrower's obligations under this covenant, if the Principal Borrower (or the Receiving Bank on its behalf) shall not have sent out notices under Section 429(2) of the Companies Act 1985 within 20 Business Days of being entitled to do so, the Agent shall be entitled to do so on the Principal Borrower's behalf and the Principal Borrower hereby irrevocably appoints the Agent as its agent to take all necessary action to do so; (x) within seven days of the date on which acceptances of the Offer are received from holders of not less than 90% of the Target shares to which the offer relates, or if earlier, 120 days after the date on which the Offer Document is posted give notice to close the Offer in accordance with the Code PROVIDED THAT the Offer may be kept open during the period required to acquire shares in Target under Section 430 Companies Act 1985 following the service of valid notices under Section 429(2) of the Companies Act 1985. (xi) immediately on acquisition by it of any of the Target Shares (whether or not pursuant to the Offer) procure the delivery to the Security Trustee of all - -------------------------------------------------------------------------------- 65 copies of receipts and acknowledgements (whether or not documents of title) and all documents of title in respect of such Target Shares and give to the Receiving Bank irrevocable instructions accordingly; (xii) ensure that, without the prior written consent of the Agent, the Principal Borrower shall not make any acquisition of Target Shares prior to the Offer Document being posted; and (xiii) not without the consent of the Agent (acting on the instructions of the Banks) waive or amend any conditions of the Offer or (unless the Offer shall have become unconditional) extend (prior to the Offer becoming unconditional) the Offer beyond 81 days from the date when the Offer is posted. In giving or withholding its consent to any waiver or amendment of any conditions of the Offer the Agent will treat itself as being bound by Rule 13 of the City Code of Takeovers and Mergers as if it were the Principal Borrower and subject to the jurisdiction of the Takeover Panel. 21.14. Stamp Duty: The Principal Borrower shall pay or procure the payment of stamp duty in respect of any Target Shares acquired within 30 days of payment of the purchase price in respect thereof. 21.15. Performance of Obligations: Each of the Borrowers shall give written notice to the Agent (as soon as reasonably practicable upon becoming aware of the same) of any occurrence (including without limitation any material third party claim or liability or any dispute involving any major customer) which would or would have a Material Adverse Effect. 21.16. Service Agreements: The Principal Borrower shall use its best endeavours to procure the completion of the Service Agreements as soon as reasonably practicable after the Relevant Date. 21.17. Further Assurance: The Principal Borrower shall do all such things (and shall procure that the Obligors shall do all such things within its or their control) as the Agent (or any receiver or similar insolvency official in the relevant jurisdiction) may reasonably request from time to time to perfect or remedy any defects in the Transaction Documents as has rendered any of the same ineffective invalid or unenforceable or otherwise to make the Transaction Documents effective valid and enforceable and the Principal Borrower and/or the Obligors concerned shall meet all reasonable costs incurred in connection with the same save insofar as such costs have been necessitated solely by reason of the negligence of any of the Agent, the Security Trustee or any of the Senior Lenders or their respective advisers. 21.18. Receiving Bank Account: The Principal Borrower shall procure that all proceeds of subscription for shares in the Principal Borrower and the Subordinated Loan Notes shall be paid into the Receiving Bank Account and shall not be paid out of such Receiving Bank Account without the consent of the Agent which consent shall be given so long as the purpose for which any request to withdraw funds from such account is made is one of those set out in Clause 3.2 (Purpose: The Share Purchase Term Facilities). 21.19. Reports on Title: The Principal Borrower shall after the Relevant Date procure that as soon as reasonably practicable following a written request made at any time and from time to time by the Agent reports on title prepared by the Principal Borrower's solicitors on any Properties being charged to the Security Trustee under the relevant Security Document which the Agent (acting reasonably) considers of material value shall be delivered to the Agent. - -------------------------------------------------------------------------------- 66 21.20. Not Restated 21.21. Millennium Compliance: The Principal Borrower shall procure that (so far as it has not already done so) as soon as practicable after the Relevant Date the Target Group develops and implements a comprehensive detailed programme which will ensure that its computer and technology systems are Millennium Compliant. 22. REPRESENTATIONS AND WARRANTIES 22.1. Representations and Warranties: The Borrowers acknowledge that each of the Senior Lenders has or will have entered into the Banking Documents to which it is a party and participated in the Facilities in full reliance on the representations and warranties by the Borrowers, but subject to any matters expressly disclosed in the Information Documents (but for the avoidance of doubt the directors of the Borrowers shall not incur any personal liability in respect of any breach of any of the representations and warranties) set out below:- 22.1.1. Valid Incorporation: each Obligor is a limited company duly ------------------- organised, validly existing and registered under the laws of the jurisdiction in which it is incorporated; 22.1.2. Powers and Approvals to carry on Business: each Obligor has ----------------------------------------- the power and authorities and all necessary governmental and other consents, approvals, licences to own its property and assets and carry on its business; 22.1.3. Authority to Perform Transaction Documents: each Obligor when ------------------------------------------ executing the same is empowered to enter into and perform its respective obligations under the Transaction Documents to which it is a party and has taken all necessary action to authorise the execution, delivery and performance of the Transaction Documents to which it is a party; 22.1.4. Borrowing Powers: no limit on the powers of any Obligor ---------------- contained in any of its constitutional documents will be exceeded as a result of the borrowings, grant of security and giving of guarantees contemplated by the Banking Documents to which it is a party; 22.1.5. Validity of Obligations: subject to all applicable insolvency ----------------------- laws and the Reservations, the Transaction Documents will when executed constitute legal, valid and binding obligations of those Obligors which are expressed to be parties to the Transaction Documents; 22.1.6. No resulting breach of other Documents: neither the execution -------------------------------------- nor the performance of the Banking Documents by any Obligor which is a party thereto will result in any breach by any of them of any provision of any deed, agreement or obligation of such Obligor would have a Material Adverse Effect; 22.1.7. No Material Litigation: except as notified in writing to the ---------------------- Agent from time to time, no Obligor is involved in or engaged in any material litigation, arbitration or other legal proceedings nor, so far as the Borrowers are aware, are there any circumstances likely to give rise to any such litigation, arbitration or proceedings which have not been notified to the Agent which, if adversely determined, would have a Material Adverse Effect; 22.1.8. Borrowings and Security Interests: no Security Interest other --------------------------------- than a Permitted Security Interest, exists over any material part of the undertakings or assets of any Group - -------------------------------------------------------------------------------- 67 Company and no Group Company has any Borrowings other than Permitted Borrowings; 22.1.9. Accounts: the latest Audited Accounts prepared after the -------- Relevant Date have been prepared in accordance with generally accepted accounting principles which have been consistently applied (or if not consistently applied, such inconsistency has been notified to the Agent) and such Audited Accounts represent a true and fair view of the financial position of the companies in the Group for the Accounting Period for which such Accounts were prepared; 22.1.10. Management Accounts: the Management Accounts:- ------------------- (i) fairly represent the financial condition and operations of the Group as at the date up to which they have been prepared and for the period for which such Management Accounts relate; and (ii) were or will when the same are produced be prepared on a basis substantially in accordance with the accounting principles used in the latest available Audited Accounts (other than in the event of any change notified to the Agent); in each case within the reasonable parameters which may be expected of management accounts not the subject of audit procedures; 22.1.11. Environmental Matters --------------------- (i) each Group Company is and has been in full compliance with all material applicable Environmental Laws where failure to do so would have a Material Adverse Effect. There are no circumstances known to any Group Company that may prevent or interfere with such compliance in the future where failure to do so would have a Material Adverse Effect; (ii) each Group Company has been and is in compliance with the terms of all Environmental Consents necessary for the ownership and operation of its facilities and businesses as presently owned and operated to the extent required so as not to have a Material Adverse Effect; (iii) there is no Environmental Claim pending nor to the knowledge of any Group Company, after due inquiry, threatened, which is material to such Group Company and there are to the knowledge of any Group Company no past or present acts, omissions, events or circumstances that could form the basis of any Environmental Claim, against any Group Company in each case which would have a Material Adverse Effect; 22.1.12. Tax Liabilities: each Group Company is in compliance in all --------------- material respects with all Taxation laws in all jurisdictions in which any of them is subject to Taxation; no claims are being asserted against any Group Company with respect to non-compliance with Taxation laws which would, if adversely determined, have a Material Adverse Effect; - -------------------------------------------------------------------------------- 68 22.1.13. Subsidiaries: ------------ (i) as at the date hereof, the Principal Borrower has no Subsidiaries; (ii) so far as the Principal Borrower is aware, the Subsidiaries of Target as at the date hereof are those companies listed in Schedule 7 (The Group Companies) other than the Target; 22.1.14. Information Documents: --------------------- (i) all information provided by the Principal Borrower or its advisers (as updated, if applicable, prior to the date hereof), in the Information Documents:- (a) is true and accurate in all material respects insofar as it relates to factual information concerning the Principal Borrower; (b) insofar as it relates to factual information concerning the Target Group, is information which the Principal Borrower has no reason to believe provides a view or assessment of the Target Group which is materially inaccurate or misleading in the context of the Target Group taken as a whole; and (c) in respect of the projections and assumptions of the Target Group fairly represents (consistently with the assumptions stated therein) the views and expectations of the Principal Borrower formed in good faith (after such proper investigation and consideration as was practicable in the circumstances) in as far as they consist of statements of opinion and financial projections relating to the Target Group after the Relevant Date; (ii) so far as the Principal Borrower is aware there is nothing contained in any of the Information Documents which would materially prevent, inhibit, restrict or delay any Group Company from putting into effect or pursuing any of the proposals or plans contained in the Financial Model in any material respect or from carrying on business in a materially different manner to that contemplated in those documents; (iii) there is nothing contained in any of the Information Documents which is reasonably likely to cause the Financial Model to be materially inaccurate in any material respect or the assumptions on which they have been based to be other than fair and reasonable; 22.1.15. Disclosures: there is no disclosure made in respect of the ----------- Investment Agreement which the Principal Borrower believes is reasonably likely to have a material detrimental effect on any of the information, projections, prospects, forecasts and estimates contained in the Financial Model; 22.1.16. New Company: prior to the date hereof, the Principal Borrower ----------- has not traded or undertaken any commercial activities of any kind and save as contemplated by, or otherwise in connection with this Agreement and the other Transaction Documents - -------------------------------------------------------------------------------- 69 and the transactions contemplated thereby including the Offer, the Principal Borrower has no liabilities or obligations, actual or contingent; 22.1.17. Service Agreements: all relevant parties have confirmed their ------------------ willingness to enter into the Service Agreements; 22.1.18. Millennium Compliance: to the best of the Principal Borrowers --------------------- knowledge information and belief the Target Group has developed and implemented a comprehensive detailed programme which will ensure that its computer and technology systems are Millennium Compliant. 22.2. Deemed Repetition of the Representations: The representations and warranties shall be made on the date of this Agreement and (if different) on the Completion Date and all the representations and warranties contained in Clause 22.1 shall survive the completion of this Agreement and the Drawdown of the Term Loans and, except for those representations in sub-clauses 22.1.13 (Subsidiaries) to 22.1.16 (New Company) inclusive which shall not be repeated shall be deemed to be repeated at the time of:- 22.2.1. the first day of each Interest Period; and 22.2.2. the last day of each Quarterly Period; in each case with reference to the facts and circumstances subsisting at the time at which they are repeated. 22.3. Reliance on the Representations and Warranties: The parties acknowledge that the Senior Lenders are relying on the representations and warranties contained in Clause 22.1 and the documentation they have examined in relation to the conditions precedent set out in Schedule 4 and are not relying on any other information of which the Senior Lenders or any of them or their respective agents or advisers may have actual or constructive knowledge. 23. DEFAULT 23.1. Default: Each of the events set out below is an Event of Default:- 23.1.1. Non-Payment: the failure by any Borrower to pay within three ----------- days of the due date for payment any amount payable under the terms of the Banking Documents; 23.1.2. Breach of Financial Covenant: if the Principal Borrower is in ---------------------------- breach of the covenants contained in Clause 20.1 (Financial Covenants); 23.1.3. Breach of Provisions relating to the Offer: if there is a ------------------------------------------ breach in any material respect of Clause 21.11.7 (Variation of the Offer) of this Agreement; 23.1.4. Breach of Other Obligations: if there is a breach in any --------------------------- material respect of any of the following provisions of this Agreement: Clause 21.1.1 (i) - (iii) (Audited Accounts and Management Accounts); Clause 21.8 (Disposals); Clause 21.9 (Interest, Dividends and Distributions); - -------------------------------------------------------------------------------- 70 Clause 21.10 (Reduction of Capital); Clause 21.11.2 (Security Interests); and Clause 21.13.9 (Security from Non-Charging Companies); 23.1.5. Other Provisions of this Agreement: if any Obligor fails to ---------------------------------- comply in any material respect with any other provisions of this Agreement to which it is a party and if such breach is capable of remedy, such failure is not remedied to the reasonable satisfaction of the Agent within 10 Business Days of notice to the Principal Borrower from the Agent requiring such breach to be remedied; 23.1.6. Banking Documents: if any Obligor fails to comply in any ----------------- material respect with any material provisions of any Banking Document to which it is a party other than this Agreement and if such breach is capable of remedy, such failure is not remedied to the reasonable satisfaction of the Agent within 10 Business Days of notice to the Principal Borrower from the Agent requiring such breach to be remedied; 23.1.7. Misrepresentation: if any representation, warranty or ----------------- statement made by any Obligor in any Banking Document to which it is a party or in any document delivered under any of them proves to be incorrect in any material respect (in the reasonable opinion of the Agent) when made or repeated by reference to the facts and circumstances then subsisting and, if the circumstances causing such misrepresentation are, in the reasonable opinion of the Agent, capable of remedy within such period, after receipt by the relevant Obligor of written notice from the Agent to such Obligor requiring the circumstances causing such misrepresentation to be remedied, such Obligor shall have failed to remedy such circumstances within 10 Business Days of receipt of such notice; 23.1.8. Unlawfulness ------------ (i) if it becomes unlawful for any Obligor to perform all or any of its obligations under any Banking Document to which it is a party and the result thereof would have a Material Adverse Effect; or (ii) any Banking Document is not or ceases to be legal, valid and binding in any material respect on any Obligor which is a party to it; or (iii) any Obligor shall initiate any action with a view to any of the Security Documents to which it is a party being declared void by any competent judicial authority; or (iv) the admissibility, validity or enforceability of any of the Banking Documents shall be contested or repudiated by any Obligor thereto. 23.1.9. Cross Default: if any Borrowings (other than under the ------------- Subordinated Loan Notes) of any Material Company in excess of(pound)100,000: (i) are not paid when due or within any contractual grace period; or - -------------------------------------------------------------------------------- 71 (ii) are declared to be or otherwise become due and payable prior to their specified maturity by reason of a default on the part of the Material Company; or (iii) are placed on demand by reason of a default or event of default; unless the obligation to pay such Borrowings is being disputed on bona fide grounds by the relevant Material Company. 23.1.10. Enforcement Proceedings: if a creditor attaches or takes ----------------------- possession of, or a distress, execution, diligence, sequestration or other process is levied or enforced upon or sued out against, any material part of the undertakings, assets, rights or revenues of any Material Company in respect of a claim or claims which aggregate more than (pound)100,000 and is not discharged within 28 days or is not being contested in good faith to the satisfaction of the Agent (acting reasonably). 23.1.11. Inability to Pay Debts: if any Material Company:- ---------------------- (i) suspends payment of its debts or threatens to stop payment of its debts generally or is unable to pay its debts or is deemed unable to pay its debts (within the meaning of Section 123(1) of the Insolvency Act 1986) (other than Section 123(1)(a)); (ii) proposes a voluntary arrangement under Part I of the Insolvency Act 1986; or (iii) enters into any composition or other arrangement for the benefit of its creditors generally. 23.1.12. Insolvency Proceedings: if any Material Company (save with ---------------------- the prior written consent of the Agent) takes any action or any legal proceedings are initiated or are consented to by any member of such Material Company or any petition is presented for: (i) a general reconstruction or rescheduling of its debts or for any process giving protection against creditors generally; (ii) its winding-up or dissolution other than:- (a) in the course of a dispute being contested on reasonable grounds and in good faith by the Material Company and where applicable the advertisement of any petition is prevented within 14 days of date of presentation; or (b) a solvent reconstruction on terms previously approved by the Agent (such approval not to be unreasonably withheld or delayed); 23.1.13. Appointment of Insolvency Practitioner: if a liquidator, -------------------------------------- provisional liquidator, trustee, receiver, administrative receiver or similar officer is appointed over the whole or any part of the undertakings, assets, rights or revenues of any Material Company; 23.1.14. Administration Order: if a petition is presented for the -------------------- granting of an administration order in respect of any Material Company unless the Agent is of the opinion (acting - -------------------------------------------------------------------------------- 72 reasonably) that the petition is frivolous or vexatious or such petition is discharged or stayed within 14 days of presentation; 23.1.15. Analogous Proceedings: if there occurs in any country or --------------------- territory in relation to any Material Company or any material part of its assets or business, any event which, in the reasonable opinion of the Majority Banks, reasonably appears to correspond in that country or territory with any of the events referred to in sub-clause 23.1.10 (Enforcement Proceedings) to 23.1.14 (Administration Order) inclusive; 23.1.16. Security becoming Enforceable: if the security created by any ----------------------------- Security Interest created by any Obligor and securing an amount equal to or exceeding(pound)50,000 becomes enforceable; 23.1.17. Cessation of Business: if any Material Company ceases (except --------------------- with the prior written consent of the Agent or other than by way of a disposal on arm's length terms for cash consideration which is then applied in accordance with Clause 13.3 (Proceeds of Disposals) (if required)) to carry on a material part of its business or shall suspend all or a substantial part of its operations except where such businesses or operations are transferred to a Charging Company; 23.1.18. Rescission of Investment Agreement: if any party to the ---------------------------------- Investment Agreement rescinds or purports to rescind any such Agreement if such rescission is reasonably likely to have a Material Adverse Effect; 23.1.19. Warranty Claim against the Principal Borrower under the ------------------------------------------------------- Investment Agreement: if any Investor brings a claim against the -------------------- Principal Borrower in respect of any breach of any of the representations and warranties provided to the Investors under the Investment Agreement; 23.1.20. Intercreditor Agreement: if: ----------------------- (i) any Obligor or any Investor fails to comply with its material obligations under the Intercreditor Agreement; or (ii) the Intercreditor Agreement is not or ceases to be binding on or enforceable (subject to the Reservations) against any Obligor which is a party to it or on any Investor or shall otherwise not be effective; and in each case in the reasonable opinion of the Majority Banks, the interests of the Banks under the Banking Documents or any of them shall be materially prejudiced thereby; 23.1.21. Material Litigation: if any Material Company is or becomes ------------------- involved in or engages in any litigation, arbitration or legal proceedings including any Environmental Claims where such proceedings have a reasonable likelihood of being adversely determined against such Material Company and which would, if so adversely determined, be reasonably likely to have a Material Adverse Effect; 23.1.22. Auditors' Qualification: if the Auditors qualify their report ----------------------- on the Audited Accounts unless in the reasonable opinion of the Agent such qualification is not material in the context of the Banking Documents; - -------------------------------------------------------------------------------- 73 23.1.23. Seizure of Assets: if the whole or a substantial part of the ----------------- assets of any Material Company shall be seized or sequestrated by any governmental or other authority or if any Material Company shall be legally restrained from using the whole or a substantial part of its assets in its business and it is reasonably likely to have a Material Adverse Effect; or 23.1.24. Material Adverse Change: any event occurs or circumstances ----------------------- arise which would have a Material Adverse Effect. 23.1.25. Change of Control: if there is a Change of Control after the ----------------- Relevant Date. 23.1.26. Change of Ownership: if after the Relevant Date: ------------------- 23.1.26.1. save for any Permitted Disposal any member of Target Group ceases to be a wholly owned subsidiary of the Target (as that term is defined in Section 736 of the Companies Act 1985); 23.1.26.2. the Principal Borrower disposes of any of its shares in Target. 23.1.27. Not restated. ------------ 23.2. Rights on a Default 23.2.1. Rights of the Agent and the Majority Banks: Subject to Clause ------------------------------------------ 23.3, the Agent may, in its sole discretion, and if so instructed by the Majority Banks shall (without prejudice to any rights of the Agent or any Senior Lender) upon and at any time after the happening of an Event of Default, so long as the same is continuing by notice in writing to the Principal Borrower:- (i) cancel any unutilised amount of the Facilities and any obligation of the Senior Lenders to make any Advance provide any Loan Note Guarantee or provide any other Facility shall be terminated whereupon the Commitments of the Senior Lenders in respect of the Facilities shall be reduced to zero; and/or (ii) declare the Term Loans and/or the Working Capital Facility to be immediately due and payable whereupon the Borrowers shall forthwith repay the same together with all interest, fees and other amounts payable hereunder (including without limitation any amount payable pursuant to Clause 11 (Break Costs)); and/or (iii) declare the Term Loans and/or the Working Capital Facility to be due and payable on demand, whereupon the Term Loans and all interest and other sums payable under this Agreement shall at all times after such declaration be due and payable forthwith on demand by the Agent; and/or (iv) suspend the right of the Borrowers to make any utilisation of the Facilities; and/or (v) declare that the Security Documents (or any of them) shall have become enforceable; and/or (vi) call for cash cover from any Borrower in respect of any contingent or future liability assumed by the Senior Lenders in respect of the Facilities - -------------------------------------------------------------------------------- 74 whereupon the amount of such call shall become immediately due and payable; (vii) require the Borrowers to charge by way of first fixed charge any cash cover called for to secure to the Agent on behalf of the Senior Lenders the repayment of any sums which the Senior Lenders are, or may become liable to pay in connection with the Facilities; and/or (viii) require the Principal Borrower to close the Offer at the first available opportunity. 23.2.2. Call for Cash Cover: "call for cash cover" means:- ------------------- in relation to any call made by the Agent in respect of the Senior Lenders' contingent liability under the Facilities, that the Borrowers or any of them shall be obliged to pay to the Agent for the credit of a blocked deposit account with the Agent a sum which is equal to the total amount of the liabilities (including contingent and future liabilities) assumed by the Senior Lenders in respect of the Facilities which sum shall become immediately due and payable upon such call being made and such sum shall be available for application (and in respect of which the Agent and/or the Senior Lenders are authorised to make applications) in respect of claims made upon the Senior Lenders in respect of any liabilities (including contingent and future liabilities) under the Facilities; and "cash cover" means the payment of sums to the credit of the blocked deposit account(s) aforesaid from time to time in respect of the relevant liabilities assumed by the Senior Lenders. 23.3. The Certain Funds Period: Prior to the end of the Certain Funds Period, unless a Keystone Event of Default has occurred which is continuing, the Banks shall not be entitled:- (i) to exercise any rights of rescission or (ii) to terminate, suspend or cancel the Facilities or (iii) to refuse to make any Advance or (iv) to require repayment of the Term Loan Facilities in consequence of:- (a) any of the representations and warranties of the Obligors in any Banking Document being or being proved to have been incorrect in any respect or (b) any Obligor having failed to perform, observe or comply with any of its covenants or other obligations or agreements in any Banking Documents or (c) the occurrence of any Event of Default or Potential Event of Defaults (d) the fact that an Event of Default (other than a Keystone Event of Default) would occur as a result of the making of an Advance. - -------------------------------------------------------------------------------- 75 23.4. Indemnity for Default: Without prejudice to the foregoing provisions of this Clause, the Borrowers indemnify each Senior Lender and the Agent against any loss or expense which such Senior Lender and the Agent may sustain or incur as a consequence of the occurrence of any Event of Default or any event specified in Clause 12.4 (Mandatory Repayment) including any break costs payable pursuant to Clause 11 (Break Costs). 23.5. Investigations and Reports: Without prejudice to any other rights and remedies of the Senior Lenders, at any time after the occurrence of a breach of any of the financial covenants contained in Clause 20.1 (Financial Covenants) (which breach will be deemed cured for the purposes of this Clause if the Principal Borrower proves compliance with such covenants on a subsequent testing date), the Majority Banks may while such breach is continuing commission any accounting, legal, property valuation, actuarial, environmental, insurance or other report or investigation as they consider necessary or appropriate to assist with the evaluation of their position or their exposure in relation to the Facilities or the Group or any assets of the Group, and the Borrowers jointly and severally undertake to pay on demand on a full indemnity basis, all actual costs and expenses including out of pocket expenses, fees and value added tax thereon incurred by the Agent and/or the Senior Lenders in connection with the preparation of such reports or the carrying out of such investigations and any advice given to the Agent and/or Senior Lenders with respect thereto; 24. FEES The following fees shall be paid: 24.1. Underwriting Fee: The Principal Borrower shall on the earlier of the Completion Date and 21 days after the Relevant Date pay to the Agent for its own account an underwriting fee in accordance with the letter agreed between us. For the avoidance of doubt the underwriting fee shall be payable by the Principal Borrower if the offer is declared unconditional in all respects, irrespective of whether or not drawdown of the Facilities takes place. 24.2. Agency Fee: If at any time the Banks are two or more in number, the Principal Borrower shall pay to the Agent for its own account an agency fee of (pound)15,000 per annum exclusive of value added tax, such fee to accrue on a day to day basis and shall be payable annually in advance from the date of notification of syndication for so long as any of the Term Loans remain outstanding. 24.3. Non-Utilisation Fees: The Principal Borrower shall pay to the Agent for the account of each Bank (pro rata to their Commitments in respect of the relevant Facility) a non-utilisation fee on the amount of the Available Term Loan Facility from day to day during the period beginning on the date hereof and ending on the last date of the relevant Commitment Period for the Term Loan Facility at a rate per annum equal to 75 basis points on the Available Tranche A Term Loan Facility and on the Available Tranche B Term Loan Facility. Such non-utilisation fee shall be calculated on the actual number of days elapsed and a 365 day year. The non-utilisation fee shall be payable in arrears on the last business day of each successive Quarterly Period and on the relevant Final Repayment Date. The non-utilisation fee shall not be payable if the Offer does not become unconditional in all respects. 25. COSTS AND EXPENSES 25.1. Expenses in connection with the Amendment of the Banking Documents: The Principal Borrower shall pay on demand and on a full indemnity basis in connection with any actual or reasonably proposed amendment or extension of or waiver or consent under the Banking Documents. - -------------------------------------------------------------------------------- 76 25.2. Expenses of Enforcement or Preservation of the Banking Documents: The Borrowers severally undertake to pay on demand at any time and from time to time after the date 21 days after the Relevant Date and on a full indemnity basis, all actual costs and expenses including out of pocket expenses, legal fees (and any value added or similar tax thereon), incurred by the Agent, the Security Trustee and/or the Senior Lenders in contemplation of or otherwise in connection with the enforcement (or attempted enforcement) or preservation (or attempted preservation) of any of their respective rights under the Banking Documents or otherwise in respect of any sum from time to time owing under the Banking Documents. 25.3. Payment by Deduction: The Agent shall be entitled to settle (to the extent not already discharged) all fees, expenses and other sums due and payable by any Borrower under Clause 24 (Fees) and Clause 25 (Costs and Expenses) the amount of which have been agreed by the Principal Borrower) out of and by deduction from the relevant Borrowers' account. 25.4. Indemnity for the Agent: If any of the Borrowers fails to perform any of its obligations under Clause 23.4 (Indemnity for Default), Clause 25 (Costs and Expenses) or Clause 26 (Stamp Duty), each Bank shall, in the proportion borne by its share of the Total Commitments (if no Advances have been made) (or, if the Term Loans have been repaid in full, its share of the Term Loans immediately prior to the final repayment thereof), indemnify the Agent against any loss incurred by it as a result of such failure and the Borrowers shall forthwith reimburse each Bank for any payment made by it pursuant to this Clause. 26. STAMP DUTY The Borrowers shall pay on the Relevant Date all present and thereafter all future stamp, registration and similar taxes or charges which are payable or determined to be payable in connection with the execution, delivery, performance or enforcement of any Banking Document (other than stamp duty on any assignment or transfer pursuant to Clause 27.3) or any judgement given in connection therewith and shall indemnify the Agent and the Senior Lenders against any and all liabilities including penalties with respect to or resulting from its delay or omission to pay any such stamp, registration and similar taxes or charges. 27. ASSIGNMENTS AND TRANSFERS 27.1. Benefit of Agreement: This Agreement shall be binding upon and enure to the benefit of each party hereto and its successors and permitted assigns. 27.2. Assignments and Transfers by the Borrowers: The Borrowers shall not be entitled to assign or transfer all or any of their rights, benefits and obligations hereunder. 27.3. Assignments and Transfers by Banks 27.3.1. Any Bank may after consultation with the Principal Borrower and the Agent at any time assign all or any of its rights and benefits hereunder or transfer in accordance with Clause 27.3.2 all or any of its rights, benefits and obligations hereunder to a Qualifying Lender PROVIDED that: (i) at the same time it assigns or transfers an equivalent proportion of its rights, benefits and obligations under the Banking Documents including, without limitation, the Intercreditor Agreement to the assignee or transferee and the assignee or transferee undertakes to be bound by the terms of the Banking Documents as a Bank (or, as the case may be, Senior Lender) under these documents; and - -------------------------------------------------------------------------------- 77 (ii) any such transfer shall be in respect of the same proportion of that Bank's obligations in respect of the Term Loan Facilities as it is of its Participation in the relevant Facility; and (iii) the transfers are in minimum amounts of the Minimum Transfer Amount or higher amounts being multiples of the Minimum Transfer Amount or all of its Participation. 27.3.2. If any Bank assigns all or any of its rights and benefits hereunder and under the Banking Documents in accordance with Clause 27.3.1, then, unless and until the assignee has agreed with the Principal Borrower, the Agent and the other Senior Lenders that it shall be under the same obligations towards each of them as it would have been under if it had been a party hereto and to the Banking Documents as a Bank, the Borrowers, the Agent and the other Senior Lenders shall not be obliged to recognise such assignee as having the rights against each of them which it would have had if it had been such a party hereto. 27.3.3. If any Bank wishes to transfer all or any of its rights, benefits and/or obligations hereunder and under the Banking Documents as contemplated in Clause 27.3.1, then, subject as provided therein, such transfer may be effected by the delivery to the Agent of a duly completed and duly executed Transfer Certificate in which event, on the later of the Transfer Date specified in the Transfer Certificate and the fifth business day following the date of the delivery thereof to the Agent (unless the Agent agrees a shorter period): (i) to the extent that in such Transfer Certificate the Bank party thereto seeks to transfer its rights and/or its obligations hereunder and thereunder, the Borrowers and such Bank shall each be discharged from further obligations to the other hereunder and their respective rights against each other shall be cancelled (such rights and obligations being referred to in this Clause as "discharged rights and obligations"); (ii) the Borrowers and the Transferee party thereto shall each assume obligations towards each other and/or acquire rights against each other which differ from the discharged rights and obligations only insofar as the Borrowers and such Transferee have assumed and/or acquired the same in place of the Borrowers and such Bank; and (iii) the Agent, the Security Trustee, such Transferee and the other Senior Lenders shall acquire the same rights and assume the same obligations between themselves as they would have acquired and assumed had such Transferee been an original party hereto and thereto as a Bank with the rights and/or obligations acquired or assumed by it as a result of such transfer. 27.4. Notwithstanding the above, Bank of Scotland as the original Bank agrees with the Principal Borrower that it will retain a Participation of at least sixty six and two thirds per cent of the Term Loans. 27.5. Disclosure of Information: Subject to first notifying the Principal Borrower in writing of the person to whom the information is to be disclosed, the Agent or any Bank may disclose to any actual or potential assignee or Transferee or to any person who may otherwise enter into contractual relations with the Agent or such Bank provided that it is a permitted assignee or - -------------------------------------------------------------------------------- 78 transferee in relation to this Agreement such information about the Borrowers and their Subsidiaries as the Agent or such Bank shall consider appropriate PROVIDED that it shall require the actual or potential assignee or Transferee to keep such information confidential save as required by statute or court of law or as may be required to be disclosed to the Bank of England or similar monetary or regulatory authority in accordance with whose instructions such bank, assignee or transferee is accustomed to acting or as may be required by the Takeover Panel or The Stock Exchange or to its professional advisers on a confidential basis or where such information has come into the public domain. 27.6. Secondary Sell Down: If a Transferee wishes to assign or transfer or grant any subparticipations in respect of any rights benefits and obligations hereunder to a Bank which is not an original Transferee from the Arranger it shall do so only after the prior approval of the Agent after consultation with the Principal Borrower. 28. AGENCY PROVISIONS 28.1. The Agent and the Senior Lenders 28.1.1. Each Senior Lender hereby appoints the Agent to act as its agent in connection with this Agreement and the other Banking Documents and authorises the Agent to exercise such rights, powers and discretions as are specifically delegated to it by the terms of the Banking Documents together with all such rights, powers and discretions as are reasonably incidental thereto and each Senior Lender expressly authorises the Agent to enter into the Intercreditor Agreement on its behalf and the Banks authorise the Agent to enter into such amendments and variations thereto as may be agreed by the Majority Banks; 28.1.2. In acting as Agent or Security Trustee for the Banks, the relevant division of the Agent or, as the case may be, the Security Trustee, shall be treated as a separate entity from any other of its divisions or departments and despite the provisions of this Clause , if the Agent or Security Trustee acts for or transacts business with any Obligor in any capacity in relation to any other matter (including as a Bank under this Agreement) any information given by any Obligor to the Agent or Security Trustee in such other capacity may be treated as confidential by the Agent or the Security Trustee; 28.1.3. The Agent may: (i) assume that: (a) any representation made by any Obligor in connection with any Banking Document is true; (b) no Event of Default or Potential Event of Default has occurred; and (c) no Obligor is in breach of or default under its obligations under any Banking Document; unless it has actual knowledge or actual notice to the contrary; (ii) assume that the Facility Office of each Senior Lender is that specified in this Agreement (or, in the case of a Transferee, at the end of the Transfer Certificate to which it is a party as Transferee) until it has received from - -------------------------------------------------------------------------------- 79 such Senior Lender a notice designating some other office of such Senior Lender to replace its Facility Office and the Agent may act upon any such notice until the same is superseded by a further such notice; (iii) engage and pay for the advice or services of any lawyers, accountants, surveyors or other experts whose advice or services may to it seem necessary, expedient or desirable and rely upon any advice so obtained; (iv) rely as to any matters of fact which might reasonably be expected to be within the knowledge of any Obligor upon a certificate signed by or on behalf of the Obligor; (v) rely upon any communication or document believed by it to be genuine; (vi) refrain from exercising any right, power or discretion vested in it as agent or trustee under any Banking Document unless and until instructed by the Banks and the Majority Banks (as the case may be) as to whether or not such right, power or discretion is to be exercised and, if it is to be exercised, as to the manner in which it should be exercised; and (vii) refrain from acting in accordance with any instructions of the Senior Lenders or any of them to begin any legal action or proceeding arising out of or in connection with any Banking Document until it shall have received such security as it may require (whether by way of payment in advance or otherwise) for all costs, claims, expenses (including legal fees) and liabilities which it will or may expend or incur in complying with such instructions; 28.1.4. The Agent shall: (i) promptly inform each Senior Lender of the contents of any notice or document received by it under any Banking Document; (ii) promptly notify each Senior Lender of the occurrence of any Event of Default or any default by any Obligor in the due performance of or compliance with its obligations under any Banking Document of which the Agent has actual knowledge or actual notice; (iii) save as otherwise provided herein, act as agent and trustee respectively under the Banking Documents in accordance with any instructions given to it by the Banks or the Majority Banks (as this Agreement may require), which instructions shall be binding on the Banks; and (iv) without prejudice to any liability of the Senior Lenders or the Agent to any Obligor arising out of any breach of any requirement of any Banking Document that any consent or approval shall not be unreasonably withheld or delayed, if so instructed by the Banks or the Majority Banks (as this Agreement may require), refrain from exercising any right, power or discretion vested in it as agent hereunder or as trustee under any Banking Document; 28.1.5. Notwithstanding anything to the contrary expressed or implied herein, the Agent shall not: - -------------------------------------------------------------------------------- 80 (i) be bound to enquire as to: (a) whether or not any representation made by any Obligor in connection with any Banking Document is true; (b) the occurrence or otherwise of any event which is an Event of Default or Potential Default; (c) the performance by any Obligor of its obligations under any Banking Document to which it is expressed to be a party; (d) any breach of or default by any Obligor of or under its obligations under any Banking Document to which it is expressed to be a party; (ii) be bound to account to any Senior Lender for any sum or the profit element of any sum received by it for its own account; (iii) be bound to disclose to any other person any information relating to any member of the Group if such disclosure would or might in its opinion constitute a breach of any law or regulation or be otherwise actionable at the suit of any person; or (iv) be under any obligations other than those for which express provision is made herein or in English law generally; 28.1.6. Each Bank shall, from time to time on demand by the Agent, indemnify the Agent in the proportion borne by its share of the Facilities or, if no Advances have been made, its Commitment to the Term Loan Facilities or, if the Term Loans have then been repaid or cash collateralised in full, its share of the Term Loans immediately prior to the final repayment thereof against any and all costs, claims, expenses (including legal fees) and liabilities which the Agent may incur, otherwise than by reason of its own negligence or wilful misconduct, in acting in its capacity as Agent under the Banking Documents; 28.1.7. The Agent accepts no responsibility for the accuracy and/or completeness of any information supplied by any member of the Group in connection herewith or for the legality, validity, effectiveness, adequacy or enforceability of any Banking Document and the Agent shall be under no liability as a result of taking or omitting to take any action in relation to any Banking Document, save in the case of negligence or wilful misconduct; 28.1.8. Each of the Senior Lenders agrees that it will not assert or seek to assert against any director, officer or employee of the Agent any claim it might have against any of them in respect of the matters referred to in Clause 28.1.7; 28.1.9. The Agent may accept deposits from, lend money to and generally engage in any kind of banking or other business with any member of the Group; 28.1.10. The Agent shall not be treated for any purposes as having actual knowledge of any matter of which the corporate finance or any other division outside the corporate lending or loan administration departments of the entity for the time being acting as the Agent may become aware in the context of corporate finance or advisory activities from time to time undertaken by such entity for any Group Company; - -------------------------------------------------------------------------------- 81 28.1.11. The Agent may following consultation with the Principal Borrower resign its appointment hereunder at any time without assigning any reason therefor by giving not less than 30 days' prior written notice to that effect to each of the other parties hereto PROVIDED that no such resignation shall be effective until a successor for the Agent is appointed in accordance with the succeeding provisions of this Clause 28; 28.1.12. If the Agent gives notice of its resignation pursuant to Clause 28.1.1, then following consultation by the Senior Lenders with the Principal Borrower another Senior Lender (acceptable to the Principal Borrower acting reasonably) failing which any reputable and experienced bank or other financial institution may be appointed as a successor to the Agent by the Senior Lenders during the period of such notice but, if no such successor is so appointed and the Agent (by reason of conflict of interest or duty, or principles of law) is obliged to retire as Agent, the Agent may appoint such a successor itself after further consultation with the Principal Borrower whose representations the Agent will take into account; 28.1.13. If a successor to the Agent is appointed under the provisions of Clause 28.1.12, then (i) the retiring Agent shall be discharged from any further obligation hereunder but shall remain entitled to the benefit of the provisions of this Clause 28.1.13 and (ii) its successor and each of the other parties hereto shall have the same rights and obligations amongst themselves as they would have had if such successor had been a party hereto; 28.1.14. It is understood and agreed by each Senior Lender that it has itself been, and will continue to be, solely responsible for making its own independent appraisal of and investigations into the financial condition, creditworthiness, condition, affairs, status and nature of the Borrowers and the Group and, accordingly, each Senior Lender warrants to the Agent that it has not relied and will not hereafter rely on the Agent: (i) to check or enquire on its behalf into the adequacy, accuracy or completeness of any information provided by or in relation to any member of the Group in connection with any Banking Document or the transactions therein contemplated (whether or not such information has been or is hereafter circulated to such Senior Lender by the Agent); or (ii) to assess or keep under review on its behalf the financial condition, creditworthiness, condition, affairs, status or nature of the Borrowers or any other member of the Group. 29. DECISIONS 29.1. Matters requiring Unanimous Agreement of the Banks: 29.1.1. Any question which would:- 29.1.1.1.1.1. increase or extend the period of any Participation of any Bank; 29.1.1.1.1.2. reduce the Margin other than in accordance with this Agreement; 29.1.1.1.1.3. extend the Commitment Period or the Final Repayment Date for the Term Loan Facilities; - -------------------------------------------------------------------------------- 82 29.1.1.1.1.4. reduce the amount of or extend the time for payment of principal, interest, fee or any other sum payable hereunder in respect of the Term Loan Facilities; 29.1.1.1.1.5. vary the provisions of Clause 23 (Default); 29.1.1.1.1.6. materially vary the Intercreditor Agreement or any of the Security Documents, (provided always that whether such variation is material shall be determined by the Agent solely acting reasonably); 29.1.1.1.1.7. change the definition of Majority Banks or change this Clause 29; 29.1.1.1.1.8. prior to the Offer becoming unconditional, extend the Offer beyond 81 days from the date on which the Offer Document is posted (or to such later date as the Agent and the Panel on Takeovers and Mergers shall agree), or waive or amend any condition of the Offer; shall be determined only with the unanimous agreement of all of the Banks; 29.1.2. Any consent or approval to be given by the Agent for the purposes of Clause 3.2 (iv) (The Term Loan Facility), Clause 5.3 (Undertakings pending Completion) or Clause 21.9 (Interest, Dividends and Distributions) shall be given by the Agent acting on the instructions of all of the Banks. 29.2. Matters to be decided by the Majority Banks: Any question as to the exercise of the Agent's discretion which is not expressed in the Agreement to be determinable by all the Banks shall be resolved by the Majority Banks. 29.3. Matters to be decided by the Senior Lenders: Save for any variations or releases necessary to complete any Permitted Disposals any question which relates to the release or material variation of any security held by the Security Trustee on behalf of the Senior Lenders shall be decided by the unanimous consent of the Banks, failing which no such release or variation may be effected. 30. SET-OFF 30.1. Right of Set-Off: The Agent, the Security Trustee and each Senior Lender shall have the right at any time or times after demand has been made under Clause 23 (Default):- (i) to combine or consolidate all or any sums of money now or hereafter standing to the credit of the then existing accounts of the Borrowers with the Agent, the Security Trustee and/or that Senior Lender with the liabilities of the Borrowers or any of them to the Agent, the Security Trustee and/or that Senior Lender; and/or (ii) to set-off or transfer any sum or sums standing to the credit of any one or more of such accounts in or towards satisfaction of any of the liabilities of any of the Borrowers to the Agent, the Security Trustee and/or that Senior Lender on any other account or in any other respect; whether in either case such liabilities be actual, contingent, primary, collateral, several or joint and shall promptly notify the relevant Borrower of such application. - -------------------------------------------------------------------------------- 83 30.2. Authority in favour of the Agent, the Security Trustee and each Senior Lender: Each of the Borrowers irrevocably authorises the Agent, the Security Trustee and each Senior Lender in its name and at its expense to perform such acts and sign such documents as may be required to give effect to any set-off or transfer pursuant to Clause. 30.3. Rights Cumulative: The provisions of this Clause 30 (Set-Off) shall be in addition to and without prejudice to such rights of set-off, combination, consolidation, lien and other rights whatsoever conferred on the Agent, the Security Trustee and/or the Senior Lenders by law. Notwithstanding anything else contained in this Clause 30 no proprietary interest or charge or other security shall be created by this Clause. 31. CALCULATIONS AND EVIDENCE OF DEBT 31.1. Agent to maintain Accounts: The Agent will maintain and keep accounts showing the aggregate amount of all sums advanced from time to time by the Banks hereunder and all payments made from time to time by the Borrowers in respect thereof. The accounts kept by the Agent shall constitute prima facie evidence of the Advances made by the Banks pursuant to this Agreement. 31.2. Certificates: 31.2.1. a certificate of the Agent as to any interest rate for the purposes of this Agreement or the MLA Rate ; or 31.2.2. a certificate of a Senior Lender as to (i) any amount by which a sum is to be increased under Clause 16.1 (Grossing Up of Payments); (ii) any increased cost claimed under Clause 17.1 (Compensation for Increased Cost); or (iii) any broken Interest Period costs payable under Clause 11 (Break Costs); shall constitute prima facie evidence thereof. 32. REDISTRIBUTION OF PAYMENTS 32.1. Procedure for Redistribution: If at any time prior to the enforcement by the Agent or the Security Trustee of any of the Security Documents a Bank ("a Receiving Bank") receives or recovers any amount or is deemed to receive and recover any amount (whether by exercising a right of set-off or banker's lien, voluntary payment or otherwise in respect of its share of any sum ("the relevant sum") due from any of the Borrowers hereunder for the account of the Receiving Bank and one or more other Banks an in a greater proportion than that received or recovered by any of such other Banks:- 32.1.1. the Receiving Bank shall forthwith inform the Agent and pay to the Agent, within five Business Days after receipt of the amount so received or recovered, an amount equal thereto; 32.1.2. there shall then fall due from the Borrowers to the Receiving Bank an amount equal to the amount so paid by the Receiving Bank, which shall be treated for the purposes of Clause 32.1.1 as if it were an unpaid part of the Receiving Bank's share of the relevant sum; and 32.1.3. the Agent shall on behalf of the Borrowers pay to each Bank to whom the relevant sum was due that part of the amount so received or recovered as would have been - -------------------------------------------------------------------------------- 84 payable to such Bank if such amount had been paid by the Borrowers to the Agent for account of those Banks. 32.2. Repayments compelled by law: If any Bank is compelled by law to repay to any of the Borrowers any amount corresponding to an amount distributed to it pursuant to Clause 32, the Banks shall make such payments and take such other steps as the Agent shall determine to be just and equitable to restore them to the position they would have been in if such amount had not been so distributed. 32.3. Provisions not applicable to the Hedging Counterparty: For the avoidance of doubt, the provisions of this Clause 32 shall not apply to amounts received by or on behalf of the Hedging Counterparty under the Hedging Documents. 33. NOTICES 33.1. Communications to be in writing: All communications to be made hereunder shall be made in writing. 33.2. Address for service of the Borrowers: Any notices, proceedings or other documents to be served on any of the Borrowers pursuant to this Agreement shall be addressed to it care of the Principal Borrower at its registered office for the time being marked for the attention of the Managing Director or at such other address as the Principal Borrower may hereafter advise the Agent in writing. 33.3. Address for service of the Banks, the Agent and the Security Trustee: Any notice to the Senior Lenders and/or the Agent shall be sent to the Agent. The address for service of The Governor and Company of the Bank of Scotland in its various capacities under this Agreement shall be its address set out in Schedule 1 (The Banks and their Commitments) or such other address as it may advise the other parties in writing from time to time. 33.4. Time Notices deemed to be given to the Borrowers: Any notice to the Borrowers shall be deemed to have been given:- 33.4.1. if posted, on the second Business Day following the day on which it has been properly despatched by first class mail (on the fourth Business Day in the case of airmail, if appropriate) postage prepaid; and 33.4.2. if sent by facsimile (subject to evidence of effective transmission) on the Business Day on which transmitted; or 33.4.3. if lodged by hand, at the time of actual delivery thereof at the address referred to above if delivered on a Business Day. 33.5. Time Notices deemed to be given to the Agent, the Security Trustee, Hedging Counterparty and the Banks: Any notice to the Agent, the Security Trustee, the Hedging Counterparty or the Banks shall be deemed to have been given only on actual receipt by the intended recipient who will promptly acknowledge receipt of any such notice. 34. INVALIDITY OF PROVISIONS If at any time any provision hereof is or becomes illegal, invalid or unenforceable in any respect neither the legality, validity nor enforceability of the remaining provisions hereof shall in any way be affected or impaired thereby. - -------------------------------------------------------------------------------- 85 35. WAIVER No failure to exercise and no delay in exercising on the part of the Agent, or the Security Trustee or any Senior Lender any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise of any such right, power or privilege preclude any other or further exercise thereof or the exercise of any other power or right. The rights and remedies herein provided are cumulative and not exclusive of any rights or remedies provided by law. 36. COUNTERPARTS This Agreement may be executed in any number of counterparts and by the different parties hereto in separate counterparts, each of which when so executed and delivered to the Agent shall be an original, but all the counterparts shall together constitute one and the same instrument. Upon receipt by the Agent of counterparts executed by all the parties hereto, the Agent shall forthwith date each such counterpart and give notice in writing of such delivery and dating to all the other parties hereto. 37. GOVERNING LAW AND JURISDICTION 37.1. English Law: This Agreement shall be governed by and construed in accordance with the laws of England. 37.2. Non-exclusive Jurisdiction of the English Courts: Each of the Borrowers agrees for the benefit of the Agent and the Senior Lenders that the courts of England shall have jurisdiction to hear and determine any suit, action or proceeding and to settle any disputes which may arise out of or in connection with this Agreement and each of the Banking Documents to which it is expressed to be a party and, for such purposes, irrevocably submits to the non-exclusive jurisdiction of such courts. 38. EURO If the United Kingdom moves to the third stage of EMU, the Agent shall after consultation with the Principal Borrower be entitled to make such changes to this Agreement as it reasonably considers are necessary to reflect the changeover to the euro (including, without limitation, the rounding (up or down) of fixed monetary amounts to convenient fixed amounts in the euro and amending any provisions to reflect the market conventions for a euro facility of the kind contemplated in this Agreement). AS WITNESS the hands of the authorised signatories of the parties hereto the day and year first above written. - -------------------------------------------------------------------------------- 86 SCHEDULE 1 The Banks and their Commitments
Bank Facility Commitment The Governor and Company of the Bank of Tranche A Term Loan Facility (pound)17,250,000 Scotland 55 Temple Row Tranche B Term Loan Facility (pound)2,500,000 Birmingham (prior to the Amendment and B2 5LS Restatement Effective Date) Tranche B Term Loan Facility (pound)750,000 (after the Amendment and Restatement Effective Date) Original Working Capital (pound)4,000,000 Facility 2001 Working Capital (pound)10,000,000 Facility
The address of The Governor and Company of the Bank of Scotland for service of notices on it in its capacities as Arranger, Agent and Security Trustee shall be 55 Temple Row, Birmingham B2 5LS. - -------------------------------------------------------------------------------- 87 SCHEDULE 2 Financial Definitions "Adjusted Net Worth" means: ------------------ the aggregate of: (i) the amount paid up or credited as paid up on the issued share capital of the Principal Borrower including any amount credited to its share premium account; and (ii) the credit or debit balance in respect of consolidated Group accumulated profit and loss reserves or other capital and revenue reserves, after accruing for any dividend or other distributions declared or made by any member of the Group (other than to another member of the Group) for the relevant period and after accounting for tax on the profits for the relevant period, as reported in the latest Audited Accounts or monthly Management Accounts as applicable; but excluding any reserves derived from any revaluation or write-up of book values in respect of any property or assets since the date hereof. "Assumed Senior Interest" in respect of any testing period means the higher of (a) the actual Senior Interest for that period, or (b) the Senior Interest that would have arisen during that period if the Share Acquisition Terms Facilities had been fully drawn on the 1 July 1999. "Borrowings" means in relation to any person at any time (and without double counting) the principal amount (including capitalised interest) of any indebtedness incurred in respect of:- (i) monies borrowed or raised by reference to the amount repayable (other than intra Group borrowings); and (ii) the capital element of conditional purchase agreements, hire purchase agreements and finance lease commitments computed in accordance with statement of standard accounting practice No. 21 of The Institute of Chartered Accountants in England and Wales; and (iii) any debenture, loan stock, notes or bonds (not being performance bonds), commercial paper or similar instrument or acceptance credit, bill discounting or note purchase facility including the Subordinated Loans; and (iv) the acquisition cost of assets or services to the extent payable more than six months after the time of acquisition or possession thereof by the party liable where the primary purpose of deferment of payment is agreed in order to enable a Group Company to finance the acquisition cost; and (v) any guarantee (other than guarantees of the obligations of other Group Companies), counter-indemnity obligation letter of credit, standby letter of credit or other assurance against financial loss in respect of indebtedness falling within this definition: and (vi) receivables sold, assigned or discounted to the extent that any Group Company is under any obligation to repurchase or make good any loss relating to such receivables; and (vii) any net liability incurred and due or to become due under any interest rate management agreement; and - -------------------------------------------------------------------------------- 88 (viii) for the purposes of Clause 23.1.9 (Cross Default) only any forward foreign exchange contracts entered into with indebtedness calculated at the rate of 10% of the contract value for contracts of up to twelve months duration and 20% of the contract value for contracts in excess of twelve months; and (ix) any other transaction having substantially the same commercial effect as any of the foregoing. "EBIT" in respect of any period means the consolidated profits of the Group for that period, before the deduction or addition of all interest payable or receivable and corporation tax on the overall income of the Group payable in respect of the financial period to which the relevant profit and loss accounts relate, and after: (i) adding back an amount equal to any amortisation charged during such period; (ii) adding back any and all costs (including issue costs) and fees incurred in respect of acquisitions and charged to the profit and loss account for the relevant period, in accordance with FRS4 or otherwise; (iii) excluding any profit or loss arising on any disposal write down or revaluation of assets; and (iv) the deduction of extraordinary and exceptional items; "EBITDA" in respect of any period means the consolidated profits of the Group for that period, before the deduction or addition of all interest payable or receivable and corporation tax on the overall income of the Group payable in respect of the financial period to which the relevant profit and loss accounts relate, and after: (i) adding back an amount equal to any depreciation and any amortisation charged during such period; (ii) adding back any and all costs (including issue costs) and fees incurred in respect of acquisitions and charged to the profit and loss account for the relevant period, in accordance with FRS4 or otherwise; and (iii) excluding any profit or loss arising on any disposal write down or revaluation of assets; "Excluded Sums" means sums standing to the credit of a Group Company, whether in the Cash Collateral Account or elsewhere, which are held by the Banks, the Working Capital Bank or National Westminster Bank plc as cash-backing for any contingent liability. "GAAP" means generally accepted accounting principals and practices in the UK; "Gross Asset Cover Percentage" means at any time the Total Assets of the Group expressed as a percentage of the Net Borrowings of the Group. "Net Borrowings" means total Borrowings of the Borrowers under the Facilities Agreement and the Working Capital Facility Letter, less sums, other than Excluded Sums, standing at credit of all accounts of the Group with the Banks and the Working Capital Bank from time to time in respect of which they have valid and enforceable rights of set-off. "Net Security Value of Stock" means all Stock valued in accordance with GAAP; "Senior Debt" means at any time the aggregate at that time of:- ----------- (i) the Term Loans; (ii) the amount outstanding under the Working Capital Facility; "Senior Financing Costs" means the aggregate of:- ---------------------- - -------------------------------------------------------------------------------- 89 (i) Senior Interest; and (ii) scheduled repayments of the Term Loans; "Senior Interest" means, in relation to any specified period, the aggregate --------------- amount of interest, commission and other recurrent financial expenses attributable to the total Borrowings of the Group from the Banks and the Working Capital Bank and interest in respect of hire purchase and/or finance leasing charged for such period less interest received on sums standing to credit of all accounts of the Group with the Banks and the Working Capital Bank from time to time, but excluding interest received on Excluded Sums; "Stock" means all marketable stock in trade and all raw materials, working in ----- progress, goods in progress, finished goods, materials and supplies of every nature and description (less provision for obsolete or slow moving Stock) of each Group Company, all as may be properly included as "stock" in accordance with GAAP (but excluding any of the above held in trust); "Total Assets" means from time to time the aggregate value (adjusted by the ------------ Agent to accord with GAAP) and applied in regard to the Borrowers Management Accounts and Audited Accounts, and to reflect any material adverse change in the financial or trading position of any Group Company of all Trade Debtors and the Net Security Value of Stock and all of the investments and other assets of each Group Company properly included as "tangible fixed assets" net of hire purchase and finance lease balances in accordance with GAAP but excluding any tangible assets held on trust; "Total Debt" means, at any time, the principal amount of all Borrowings of the - ----------- Group; "Total Debt Service" means in relation to any specified period the aggregate of ------------------ Total Interest, scheduled repayments due on the total Borrowings of the Group, loan note/loan stock repayments (but excluding repayments made under the Variable Rate Guarantee Loan Notes 2004 series 1 and the Variable Rate Loan Notes 2003 series 3 up to a maximum of (pound)802,000), and sums due or payable under the Investment Agreement from time to time; "Total Interest" means, in relation to any specified period, the aggregate -------------- amount of interest, commission and other recurrent financial expenses attributable to the Borrowings of the Group (including Dividends) paid or due to be paid in such period less interest received on sums standing to the credit of all accounts of the Group with the Banks and the Working Capital Bank; "Trade Debtors" means debts due to each Group Company in the ordinary course of business outstanding for not more than 90 days from the date of invoice (or such other period agreed with the Agent) and which are not bad or doubtful (or determined by the Agent to be bad or doubtful) but excluding: (i) any debt owed by another Group Company; (ii) any debt owed by any person who is also a creditor of a Group Company to the extent of the amount owed by that Group Company to the creditor; (iii) any debt which has been assigned or charged to or is held in trust for any third party or is subject to any fracturing or invoiced discounting or similar letter; and subject to (iv) any adjustments the Agent may from time to time consider to be appropriate in the context of the business of each Group Company and the Facilities. "Working Capital" means:- --------------- - -------------------------------------------------------------------------------- 90 (i) the aggregate amount receivable by any Group Company from good trade debtors, other debtors and prepayments; plus (ii) stock and work-in-progress; less (iii) any amounts due to trade creditors and other creditors (not including amounts accrued but unpaid in respect of Dividends and/or the Subordinated Loan Notes or to the Senior Lenders) within one year (to include for the avoidance of doubt accruals, deferred income and PAYE, and VAT); and excluding (iv) corporation tax (including any advance corporation tax) dividends, interest, and any amounts accounted for as a provision for liabilities and charges in accordance with generally accepted accounting principles (including deferred tax). - -------------------------------------------------------------------------------- 91 SCHEDULE 3 Form of Notice of Drawdown To : [ ] ---- Dated : [ ] 1999 ---- Dear Sirs, We refer to the Facilities Agreement ("the Facilities Agreement") dated -------- 1999 between (1) the Principal Borrower, (2)-(7) The Governor and Company of the Bank of Scotland. Terms defined in the Facilities Agreement shall have the same meaning in this notice. We hereby confirm that we have received confirmation from the Receiving Bank that payment for [number] of [ ] Shares acquired pursuant to the Offer is to be made on [date]. Payment is to be effected by a cash payment of (pound)[ ] ---- ("the Cash Amount"). A [Receiving Bank Certificate is attached] and we hereby irrevocably instruct you to pay the Cash Amount of this Advance on our behalf to the Receiving Bank. We hereby request a Drawdown of an Advance under the Tranche [A/B/C] Term Loan Facility in the Amount of (pound)[ ] ([ ] sterling). ----- ------ For the purposes of Clause 9 of the Facilities Agreement the Interest Period in respect thereof shall be of [ ] duration. Please make such Advance available ----- as soon as possible after satisfaction of all conditions governing the availability thereof [by way of a banker's draft in favour of "[ ]"] [by ----- crediting the following account:- Account Name: Bank: Sort Code: Account No: ] We confirm that: (i) of the amount of(pound)[ ] being drawn down under the Tranche [A/B] -------- Term Loan Facility:- (a)(pound)[ ] is in respect of the consideration payable for [ ] ------- ------ [ ] Shares as referred to above; ------- (b)(pound)[ ] is in respect of Offer Costs payable to [details]; ------- (c) [other - specify]; [*(ii) at the date hereof:- (a) no Keystone Events of Default have occurred and are continuing;] **(iii) each of the representations and warranties/contained in Clause 22.1 deemed repeated by virtue of Clause 22.2 are true and correct in all material respects on the date hereof and will be true and correct in all material respects on the date on which the Advance is made; and - -------------------------------------------------------------------------------- 92 **(iv) on the date on which the requested Advance is made and immediately after the making of that Advance there will exist no Event of Default and no Potential Event of Default. Yours faithfully, for and on behalf of [the Principal Borrower] * include for drawings during the Certain Funds Period ** include for drawings after the Certain Funds Period - -------------------------------------------------------------------------------- 93 SCHEDULE 4 Conditions Precedent Part I - Conditions Precedent to be satisfied before the issue of Press Release 1. The following documents duly executed by each of the relevant parties thereto:- (i) this Agreement; (ii) the First Debenture; (iii) the Intercreditor Agreement; and (iv) the Security Trust Deed; 2. A certified copy of the following documents duly executed by the relevant parties thereto: (i) the Investment Agreement; 3. A certified copy of the following documents in the agreed form:- (i) the Press Release substantially in the form in which it is to be issued; (ii) the latest draft of the Offer Document; (iii) the Pro Forma Financial Assistance Documents; (iv) a provisional estimate of Expenses of the Offer; (v) the Second Debenture, Third Debenture, Legal Charge, Keyman Insurance Assignment and Intra-Group Loan Agreement; (vi) Receiving Bank Instruction Letter; (vii) the Flow of Funds Statement; and (viii) the Service Agreements. 4. In respect of the Principal Borrower:- 4.1 a certified copy of its Certificate of Incorporation and Memorandum and Articles of Association; 4.2 a certificate (without personal liability) of a director and the secretary of the Principal Borrower to the effect that the requisite board resolutions in the agreed terms have been duly and properly passed at a duly convened and constituted meeting of the Principal Borrower:- (i) authorising the execution, delivery and performance on behalf of the Principal Borrower of those of the Banking Documents to which the Principal Borrower is a party; and (ii) authorising a named person or persons specified therein to sign on behalf of the Principal Borrower those of the Banking Documents to which the Principal Borrower is a party and to give any notices or certificates required in connection therewith and - -------------------------------------------------------------------------------- 94 confirming that such resolutions are still in effect and have not been varied or rescinded; (iii) such certificate having annexed thereto a certified copy of the relevant resolution of the board of directors. In addition, such certificate shall confirm that on the date of the issue of the Press Release:- (a) the aggregate of the Borrowings of the Principal Borrower (including borrowings under any of the Banking Documents) do not or, as the case may be, would not, if fully drawn, exceed any borrowing limit contained in the Principal Borrower's constitutional documents; (b) the execution of the Banking Documents by the Principal Borrower is lawful and complies with its constitution; (c) the matters represented and warranted by the Principal Borrower in Clause 22 (Representations and Warranties) are true and correct in all material respects and will be true and correct in all material respects immediately after the issue of the Press Release and no Event of Default or Potential Event of Default is outstanding or would result from the issue of the Press Release; 4.3 a certificate ("the Whitewashability Certificate") of Martin Glanfield and Martin Malone confirming that:- (i) as at the date of the Press Release each of the Initial Charging Companies (excluding Symonds Precision Engineering Limited) has net assets; (ii) those net assets would not be materially reduced by the giving of the financial assistance contemplated by the Pro Forma Financial Assistance Documents (or to the extent that they would be reduced, the financial assistance could be provided out of distributable profits); (iii) they know of no reason, whether disclosed in the Information Documents or not, and including issues relating to Millennium Compliance, why they, the Principal Borrower and the Initial Charging Companies should not be able to enter into the Pro Forma Financial Assistance Documents on the re-registration of Target as a private company, following the Relevant Date. 5. Written instructions from the Principal Borrower to the Agent (conditional upon the occurrence of the Relevant Date) authorising and instructing the Agent to debit the account of the Principal Borrower with the Agent with the underwriting fee and agency fee payable to the Agent in accordance with Clauses 24.1 and 24.2; 6. A certified copy of each of the Information Documents; 7. Pre Press Release Letter; 8. Summary of Existing Borrowings being Refinanced; 9. Management Accounts for the Target Group in respect of the period ending 30 April 1999; 10. The New Issuance Instrument and a supporting board minute in the agreed terms to effect the issue of the necessary warrants and register Uberior Trading Limited as the holder thereof; 11. Forecast opening consolidated balance sheet of the Principal Borrower in the agreed terms; - -------------------------------------------------------------------------------- 95 12. Evidence acceptable to Bank of Scotland that the operating profit of the Target Group or the Accounting Period which ended on 31st March 1999 exceeded(pound)3,900,000; 13. The Managers References. Part II - Conditions Precedent to be satisfied on or before first Drawdown 1. A certificate from the Principal Borrower confirming that the conditions precedent to the Investment Agreement have been, or will, simultaneously with the initial Drawdown be satisfied, that no material conditions or obligations contained therein have been waived or modified except with the consent of the Agent and that none of the parties thereto has, at the relevant Drawdown Date, any right to rescind any such agreements; 2. Receipt by the Principal Borrower into the Receiving Bank Account of (pound)15,444,700 by way of subscription for Ordinary Shares and/or the Subordinated Loans PROVIDED THAT irrevocable letters of instruction are received by the Receiving Bank from certain of the Managers for the amount of (pound)373,033 representing the amount which they shall subscribe in the Principal Borrower following receipt of such funds in respect of their acceptance of the Offer for the Target Shares, authorising the Receiving Bank to apply such proceeds for the purposes of a deemed subscription for shares in the Principal Borrower; 3. A certificate from the Principal Borrower confirming that save for such increase as has been made with the prior written consent of the Agent (acting on the instructions of all of the Banks), there has been no increase in the amount of the Offer; 4. A certified copy of:- (i) the press announcement confirming that the Offer has become or been declared unconditional in all respects following acceptances of the Offer having been received and not withdrawn in respect of more than such percentage of the Target Shares as is required by Clause 5.1(i) hereof; (ii) the Offer Document. 5. Bank Mandates duly completed by the relevant Borrowers. 6. Executed Receiving Bank Instruction Letter. 7. The Insurance Report. 8. The Existing Lender Comfort Letter showing an aggregate amount owing to Existing Lenders below (pound)2,900,000 as at the Relevant Date. 9. Bank Mandates for the Principal Borrower; 10. A Collection Account Letter executed by each Charging Company. 11. An ISDA Master Agreement incorporating Bank of Scotland's standard terms and amendments duly executed by the Principal Borrower; Part III - Conditions Precedent for the Granting of Security 1. In respect of each Charging Company:- 1.1 a certified copy of its Certificate of Incorporation and Memorandum, Articles of Association or other constitutional documents; - -------------------------------------------------------------------------------- 96 1.2 a certificate (without personal liability) of a director and the secretary of each Charging Company to the effect that the requisite board resolutions in the agreed terms have been duly and properly passed at a duly convened and constituted meeting of that Charging Company; (i) authorising the execution, delivery and performance on behalf of that Charging Company of those of the Banking Documents to which that Charging Company is a party; and (ii) authorising a named person or persons specified therein to sign on behalf of that Charging Company those of the Banking Documents to which that Charging Company is a party and to give any notices or certificates required in connection therewith and confirming that such resolutions are still in effect and have not been varied or rescinded; such certificate having annexed thereto a certified copy of the relevant resolution of the board of directors. In addition, such certificate shall confirm that on the date of execution of the relevant Security Document (a) the aggregate of the Borrowings of that Charging Company (including borrowings under any of the Banking Documents) do not or, as the case may be, would not, if fully drawn, exceed any borrowing limit contained in that Charging Company's constitutional documents; (b) the execution of the Banking Documents by that Charging Company is lawful and complies with its constitution. 1.3 evidence satisfactory to the Agent that (to the extent necessary) all the requirements of s151-158 Companies Act 1985 (or comparable restrictions in the relevant jurisdiction) have been satisfied in respect of the Banking Documents to which that Charging Company is (or is to be) a party. - -------------------------------------------------------------------------------- 97 SCHEDULE 5 Deed of Accession THIS DEED is made on 19 (1) [ ] ("the new Borrower") --------------------------- (2) [ ] ("the Principal Borrower") on behalf of --------------------------- itself and the Borrowers for the time being under the Facilities Agreement; and (3) [ ] as agent ("the Agent") on behalf of itself --------------------------- and the Senior Lenders (as defined in the Facilities Agreement referred to below). WHEREAS this Deed is supplemental to the Facilities Agreement dated 1999 ------ and made between the Principal Borrower and The Governor and Company of the Bank of Scotland in its various capacities ("the Facilities Agreement"). NOW THIS DEED WITNESSES:- 1. Accession of New Borrower In consideration of the Senior Lenders through the Agent agreeing to the new Borrower becoming an additional borrower under the Facilities Agreement and by the execution of this Deed the new Borrower agrees to observe and be bound by the terms and provisions of the Facilities Agreement insofar as they apply to the new Borrower as if it were an original party to the Facilities Agreement as a Borrower PROVIDED THAT the new Borrower shall not be required to enter into any guarantee or give any security to secure any liabilities under the Facilities Agreement other than in respect of any monies actually borrowed by it and interest and charges payable by it in respect thereof and shall only have several obligations in respect of its own borrowings, and interest and charges thereon, and the Senior Lenders shall not be entitled to set off any liabilities of any of the other Borrowers against any sum outstanding to the credit of the new Borrower's accounts unless and until the requirements of s151-158 Companies Act 1985 have been complied with to the extent applicable (if at all) so as to make the entering into of any guarantee or additional security or acceptance of joint obligations or set off lawful. 2. Interpretation This Deed shall be read as one with the Facilities Agreement so that any reference therein to "this Agreement" "hereunder" and similar expressions shall include and be deemed to include this Deed. 3. Conditions Precedent The obligations of the Agent and each Senior Lender hereunder are subject to the condition that the Agent is satisfied that all appropriate conditions precedent have been fulfilled by the new Borrower and that the new Borrower has executed security documentation acceptable to the Agent. 4. Notices The new Borrower's address for notices and demands under the Facilities Agreement is care of the Principal Borrower (marked for the attention of [X]). - -------------------------------------------------------------------------------- 98 SCHEDULE 6 Form of Transfer Certificate for a Bank TO: The Governor and Company of the Bank of Scotland for itself and on behalf of the other parties to the Facilities Agreement mentioned below Transfer Certificate -------------------- relating to the Facilities Agreement ("the Facilities Agreement") dated ---------- 1999 whereby inter alia Term Loan Facilities were made available to inter alia the Principal Borrower and certain Group Companies. Terms defined in the Facilities Agreement shall (unless otherwise defined herein) have the same meaning in this Transfer Certificate. 1. [Transferor Bank] ("the Bank"):- (i) confirms that the details appearing in the Schedule hereto under the heading "Participation" accurately summarise the amount of the Term Loans and the Commitment in relation to the Term Loan Facility which is to be transferred and novated hereunder; (ii) requests [Transferee Bank] ("the Transferee") to accept and procure the transfer to and novation by the Transferee of the amount of the Term Loans, the Commitment in relation to the Term Loan Facilities specified in the Schedule hereto by duly executing and delivering this Transfer Certificate to the Agent at its address for the service of notices specified in the Facilities Agreement. 2. The Transferee hereby requests the Agent to accept this Transfer Certificate as being delivered to the Agent pursuant to and for the purposes of Clause 27 of the Facilities Agreement so as to take effect in accordance with the terms thereof on [date of transfer] [subject only to there having been credited to the account of the Bank (details below) the sum of (pound)[ ]:- --- [Details of Account] 3. The Transferee confirms that it has received a copy of the Facilities Agreement and the Banking Documents together with such other documents and information as it has required in connection with this transaction and that it has not relied and will not hereafter rely on the Bank to check or enquire on its behalf into the legality, validity, effectiveness, adequacy, accuracy or completeness of any such documents or information and further agrees that it has not relied and will not rely on the Bank or to assess or keep under review on its behalf the financial condition, creditworthiness, condition, affairs, status or nature of any Group Company or of any other party to the Banking Documents. 4. The Transferee hereby undertakes with the Agent, the Banks and each of the other parties to the Facilities Agreement that it will perform in accordance with their terms all those obligations which by the terms of the Facilities Agreement will be assumed by it after delivery of this Transfer Certificate to the Agent and satisfaction of the conditions (if any) subject to which this Transfer Certificate is expressed to take effect. 5. The Bank makes no representation or warranty and assumes no responsibility for the legality, validity, effectiveness, adequacy or enforceability of any Banking Document or any document relating thereto or for the financial condition of any Group Company or for the performance and observance by any Group Company of any of its obligations under any Banking Document or any documents relating thereto and any and all such conditions and warranties, whether express or implied by law or otherwise, are hereby excluded. - -------------------------------------------------------------------------------- 99 6. This Transfer Certificate and the rights and obligations of the parties hereunder shall be governed by and construed in accordance with English law. Schedule -------- Details of the Participation being transferred ---------------------------------------------- Amount of the Tranche A Term Loan and the Tranche B Term Loan including the Term Loan Commitment being transferred and novated to the Transferee: Lending office address of the Transferee and address for service of notices on the Transferee: Sort Code: Account No: IN WITNESS whereof the parties hereto have caused this Deed to be duly executed on the date first written above. - -------------------------------------------------------------------------------- 100 SCHEDULE 7 The Group Companies Part I - Initial Charging Companies
Company Registration Number Symonds PLC (subsequently called DDI Group Limited) 445250 Classical Circuits Limited 1034995 Calne Electronics Limited (subsequently called DDI Technologies 1336602 Limited) Pretan Engineering Limited 2407995 Integrated Designs & Systems Limited 2624416 Osborne Group Holdings Limited (subsequently called Dynamic 3232495 Details Limited) Garner Osborne Circuits Limited (subsequently called 2641343 Taylate Limited) Osborne Electronics Limited (unless the subject of a 2725420 prior close-down such that it becomes a Dormant Company) (subsequently called DDI Electronics Limited) Osborne Precision SheetMetal Limited 2746716 Zlin Electronics Limited 1338479 Symonds Engineering (Precision) Limited 2900127 (subsequently called DDI Precision Limited) Symonds Electronics International Limited (subsequently called DDI 3328896 International Limited) Finishing Technology Limited (unless the subject of a prior Permitted 2859128 Disposal)
- -------------------------------------------------------------------------------- 101 Part II - Dormant Companies BEMS Limited Osborne Electronics Limited (if the subject of a close- down such that it becomesa Dormant Company) Osborne SMT Limited HBH Group Limited - -------------------------------------------------------------------------------- 102 THIS DOCUMENT has been executed as an Agreement by each of the parties to it. The Principal Borrower - ---------------------- SIGNED for and on behalf of ) John Calvert MCM ELECTRONICS LIMITED ) (subsequently called DDI Europe Limited) Director Martin Glanfield As Arranger, Agent, Bank, Guaranteeing Bank and Security Trustee - ---------------------------------------------------------------- SIGNED for and on behalf of ) Peter Naylor THE GOVERNOR ) AND COMPANY OF THE BANK ) OF SCOTLAND by its duly ) authorised attorney - -------------------------------------------------------------------------------- 103 SCHEDULE 2 Conditions Precedent 1. The duplicate of this Deed signed on behalf of the Borrowers and the Charging Companies; 2. A certified copy of the resolution of the board of directors of the Borrowers and the Charging Companies approving the entering into this Deed, the 2001 Working Capital Facility Letter, the 2001 Debenture and any document to be entered into pursuant to paragraph 7 below and authorising a specified person or persons to sign this Deed and any documents required under this Deed on its behalf; 3. Confirmation to the Agent's satisfaction that no Event of Default or Potential Event of Default has occurred and is continuing. 4. The representations and warranties in Clauses 22.1.1 to 22.1.12 (inclusive) of the Facilities Agreement (as amended and restated hereby) are true with respect to the facts and circumstances then existing. 5. Repayment of the Original Working Capital Facility. 6. Execution of the 2001 Working Capital Facility Letter and the 2001 Debenture. - -------------------------------------------------------------------------------- 104 EXECUTED as a DEED (but not ) delivered until the date hereof) by DDI ) EUROPE ) LIMITED acting by: ) Director M Malone Director/Secretary M Glanfield EXECUTED as a Deed (but not ) delivered until the date hereof) ) by DDI GROUP LIMITED ) acting by: ) Director M Malone Director/Secretary P Fowler EXECUTED as a Deed (but not ) delivered until the date hereof) ) by CLASSICAL CIRCUITS LIMITED ) acting by: ) Director M Malone Director/Secretary P Fowler EXECUTED as a Deed (but not ) delivered until the date hereof) ) by DDI TECHNOLOGIES LIMITED ) acting by: ) Director M Malone Director/Secretary P Fowler - -------------------------------------------------------------------------------- 105 EXECUTED as a Deed (but not ) delivered until the date hereof) ) by PRETAN ENGINEERING LIMITED ) acting by: ) Director M Malone Director/Secretary P Fowler EXECUTED as a Deed (but not ) delivered until the date hereof) ) by INTEGRATED DESIGNS & SYSTEMS ) LIMITED acting by: ) Director M Malone Director/Secretary P Fowler EXECUTED as a Deed (but not ) delivered until the date hereof) ) by DYNAMIC DETAILS LIMITED acting by: ) Director M Malone Director/Secretary P Fowler EXECUTED as a Deed (but not ) delivered until the date hereof) ) by ZLIN ELECTRONICS LIMITED ) acting by: ) Director M Malone Director/Secretary P Fowler EXECUTED as a Deed (but not ) delivered until the date hereof) ) by DDI PRECISION LIMITED acting by: ) ) Director M Malone Director/Secretary P Fowler - -------------------------------------------------------------------------------- 106 EXECUTED as a Deed (but not ) delivered until the date hereof) ) by DDI INTERNATIONAL LIMITED ) acting by: ) Director M Malone Director/Secretary P Fowler EXECUTED as a Deed (but not ) delivered until the date hereof) ) by DDI SALES LIMITED ) acting by: ) Director M Malone Director/Secretary P Fowler EXECUTED as a Deed (but not ) delivered until the date hereof) ) by THOMAS WALTER LIMITED ) acting by: ) Director M Malone Director/Secretary M Glanfield SIGNED as a deed by Andrew Morris ) as duly appointed attorney of ) The Governor and Company of the Bank of Scotland ) A Morris in the presence of: ) ) Michael I Winning Victoria Square House Victoria Square Birmingham B2 4DL Solicitor - -------------------------------------------------------------------------------- 107 EX-10.18 5 dex1018.txt WORKING CAPITAL LETTER EXHIBIT 10.18 CONFORMED COPY Bank of Scotland 55 Temple Row Birmingham B2 5LS The Directors DDI EUROPE LIMITED Green Lane Business Park Green Lane Tewkesbury Gloucestershire GL20 8DN (Registered No.: 3731403) (the "Parent") Telephone: 0121 255 2580 Direct Line: 0121 255 2599 Fax: 0121 255 2572 The Directors DDI GROUP LIMITED (Registered No.:445250), CLASSICAL CIRCUITS LIMITED (Registered No.:1034995), DDI TECHNOLOGIES LIMITED (Registered No.: 1336602), PRETAN ENGINEERING LIMITED (Registered No.: 2407995), INTEGRATED DESIGNS & SYSTEMS LIMITED (Registered No.: 2624416), DYNAMIC DETAILS LIMITED (Registered No.: 3232495), ZLIN ELECTRONICS LIMITED (Registered No.: 1338479), DDI PRECISION LIMITED (Registered No.:2900127), DDI INTERNATIONAL LIMITED (Registered No.: 3328896), DDI SALES LIMITED (Registered No.: 3292688) and THOMAS WALTER LIMITED (Registered No.: 1415705) Each with its registered office at: Green Lane Business Park Green Lane Tewkesbury Gloucestershire GL20 8DN (each, a "Subsidiary") 15 November 2001 Dear Sirs WORKING CAPITAL We are pleased to offer you (each a "Borrower" and together the "Borrowers") a working capital facility (the "Working Capital") on the terms set out in this letter. This offer is open for acceptance by the Borrowers until the date seven days after the date of this letter when it will lapse. If accepted, this letter and its Schedules will form the agreement between the Borrowers and BoS for the Working Capital. Definitions are given in Clause 16 below. 1. Conditions Precedent -------------------- The Working Capital may not be drawn or utilised: 1.1 by the Parent to pay any amount in respect of the Term Loans (as defined in the Facilities Agreement); 1.2 unless each Borrower has accepted this letter and any Borrower which has not accepted will not be permitted to draw or utilise it; - -------------------------------------------------------------------------------- 1 1.3 unless an account mandate from each Borrower has been received by BoS; and 1.4 by any Borrower that has not entered into the Third Debenture or the 2001 Debenture. 2. Working Capital --------------- 2.1 The Working Capital may be drawn as: 2.1.1 Overdraft (the "Overdraft"); or be utilised for: 2.1.2 Business Visa (the amount so utilized from time to time, the "Business Visa Utilization"); 2.1.3 Guarantees ; 2.1.4 Letters of Credit ; 2.1.5 Currency Borrowings; on the terms and conditions set out below. 2.2 In addition to the Working Capital facilities specified above and not taken into account in relation to calculation of the limit specified below, BoS will also make the following payment system(s) and facilities available to the Borrowers on the terms and conditions set out in Schedule 1: 2.2.1 BACS facilities up to(pound)3,000,000 (the "BACS Limit"); 2.2.2 CHAPS facilities with a daylight limit of(pound)500,000; 2.2.3 CHOBS facilities with a daylight limit of(pound)250,000; and/or 2.2.4 Forward Foreign Exchange Contracts facilities up to (pound)3,000,000 (the "FFEC Limit"). 2.3 Limit ----- 2.3.1 The total limit applicable to the Working Capital is (pound)10,000,000 (the "Limit"). 2.3.2 The Borrowers may operate a number of current accounts on which the Working Capital may be drawn. BoS may refuse to pay any cheques, orders or withdrawals on any one or more of the Borrowers' current accounts where payment would result in the Limit (taking into account the notional offsets referred to below) being exceeded. 2.3.3 To ascertain compliance with that part of the Limit which is only attributable to the Overdraft, BoS will notionally set off (1) those of the Borrowers' current account credit balances over which BoS considers it has a valid right of set off against (2) the Borrowers' current account debit balances. 2.3.4 To ascertain compliance with the Limit, the total indebtedness of the Borrowers to BoS in respect of the Working Capital shall be calculated by adding together: (1) the net balances on the Borrowers' current accounts calculated in accordance with Clause 2.3.3 above; (2) the Business Visa Utilization; - -------------------------------------------------------------------------------- 2 (3) the aggregate amount of BoS exposure under all guarantees issued by BoS under this letter; (4) the aggregate amount of BoS exposure under all Letters of Credit issued by BoS under this letter; and (5) the sterling equivalent of all currency borrowings calculated in accordance with this letter. 2.3.5 The Borrowers must at all times provide sufficient funds to ensure that the Limit is not exceeded. If the Limit is likely to be exceeded, the Parent must notify BoS and advise which cheque(s) are to be honoured in the case of competition. If the Parent fails to do so BoS may, in its discretion, refuse to pay a cheque or allow any other drawing or utilisation under this letter which would have the effect of exceeding the Limit. If BoS does pay a cheque or allows a utilisation of the Working Capital so as to exceed the Limit, that does not mean that the Limit has changed or that BoS will agree to pay any other cheque or meet any other payment instruction which would have the effect of exceeding the Limit. 2.3.6 Unless otherwise agreed with BoS, any debit balance over the Limit and, where the Working Capital has ceased to be available (whether on the Review Date or by earlier demand) the total debit balance of the Working Capital, will attract interest at the BoS unauthorised rate which will be three and a half per cent (3.50 %) per annum over the BoS base rate as that rate fluctuates. 2.3.7 From the date of this letter, each Borrower ceases to be entitled to use any working capital facilities of the type specified in this letter previously made available by BoS and any existing utilisation of them shall, to the extent not repaid or discharged, be taken into account when assessing compliance with the Limit. 2.4 Availability ------------ 2.4.1 BoS shall review the Working Capital annually (the last Business Day before each anniversary of the date of this letter being the "Review Date"). On the Review Date, the Working Capital will cease to be available unless BoS has agreed in writing to its renewal or extension. In ascertaining whether or not the Working Capital will be renewed or extended, BoS will require the Borrowers to deliver the financial information required by clause 11 by way of financial information prior to that decision being made. 2.4.2 In accordance with normal banking practice, the Overdraft will be payable on demand. 2.4.3 In some circumstances, BoS may demand payment before the Review Date. This may happen if BoS considers that: 2.4.3.1 any of the terms or conditions of this letter have been breached; or 2.4.3.2 the financial condition of any Borrower or any guarantor of any Borrower has altered in any material way; or 2.4.3.3 the Working Capital was agreed on the basis of incorrect or incomplete information from the Borrowers; or 2.4.3.4 the basis upon which the Working Capital was agreed by BoS has altered in any material way. - -------------------------------------------------------------------------------- 3 2.4.4 If repayment of the Overdraft is demanded, any other utilisation will cease to be available (save in respect of payments already instructed by a Borrower in respect of BACS, CHAPS or CHOBS and not yet debited to the relevant Borrower's account) and BoS will be entitled to request the Borrowers to lodge a sufficient amount as security for all other outstanding liabilities under this letter (whether actual or contingent) and the Borrowers shall immediately comply with that request. Any determination by BoS of any amount of principal, interest, commission or charges or an applicable interest rate shall, in the absence of manifest error, be conclusive and binding on the Borrowers. 3. Overdraft --------- 3.1 The rate of interest applicable to the Overdraft shall be the annual rate which is the sum of (1) one and a half per cent. (1.5%) and (2) BoS base rate as that rate fluctuates. Interest will be calculated by BoS on a day to day basis on the cleared daily debit balance of the amount drawn down and will be debited to the relevant Borrower's current accounts monthly in arrears on the Standard Application Dates. A notice of the accrued interest will be issued each month and interest applied 14 days after the date of that notice. 3.2 Interest at one and a half per cent. (1.5%) per annum over BoS base rate as that rate fluctuates will accrue on the cleared credit balances on any current accounts held with BoS of each Borrower in respect of which BoS considers it has a valid right of set off (the "Credit Balances") calculated on a daily basis and set off monthly in arrears on the Standard Application Dates against the interest due on the Working Capital, provided that interest on the Credit Balances will be calculated as follows: 3.2.1 Where the aggregate amount of the Credit Balances is less than or equal to the aggregate amount of the debit balances on any current account held with BoS of each Borrower (the "Debit Balances"), interest will be calculated on the full amount of the Credit Balances; and 3.2.2 where the aggregate amount of the Credit Balances is greater than the aggregate amount of the Debit Balances, interest will be calculated on an amount equal to the aggregate amount of the Debit Balances. 4. Business Visa ------------- Facilities may be drawn by the use of BoS Business Visa Cards subject to the published terms and conditions and charges applicable to BoS Business Visa Cards from time to time. 5. Guarantees ---------- 5.1 On request by a Borrower, BoS will issue guarantees or performance bonds on its behalf. Before BoS issues a guarantee or bond on behalf of a Borrower: 5.1.1 BoS must have approved the terms of the guarantee or bond; and 5.1.2 that Borrower shall have executed and delivered to BoS a counter indemnity in a form acceptable to BoS agreeing to indemnify BoS against any claim under the guarantee or bond and authorising BoS to debit the amount of a claim to any of the Borrowers' accounts. 5.2 A charge of one and a half per cent (1.5%) of BoS outstanding liabilities (whether actual or contingent) from time to time under the guarantees shall be payable by the Borrowers in respect of guarantees or performance bonds issued by BoS on its behalf. This charge will be payable quarterly in advance on such dates as may be intimated by BoS. - -------------------------------------------------------------------------------- 4 6. Letters of Credit ----------------- 6.1 On receipt of an acceptable written application, BoS will issue Letters of Credit (up to in aggregate the Letters of Credit Limit) on behalf of a Borrower under the terms of the Uniform Customs and Practice for Documentary Credits (as revised from time to time) and otherwise on BoS standard terms and conditions (which will be set out in the BoS application for the documentary credit, a copy of which will be provided to the relevant Borrower if so requested). 6.2 Charges will be payable for the issue of Letters of Credit in accordance with the tariffs applicable to those services issued to the Borrowers from time to time. 7. Currency Borrowings ------------------- 7.1 A Borrower may borrow such part of the Working Capital in any optional currency (which means, for the purpose of this Letter, any currency which is freely transferable and convertible into Sterling and is approved by BoS) on giving BoS two days prior written notice. 7.2 Currency borrowings shall be repayable on demand. 7.3 The Borrowers shall pay interest in regard to currency borrowings drawn down at a rate equal to the cost of funds incurred by BoS for purchasing such currencies plus one and a half per cent (1.5%) per annum, such interest payable in arrears. The relevant interest rate will be set by BoS on a weekly basis and calculated and accrued daily. Interest will be debited to the relevant Borrower's currency current account with BoS half yearly in February and August in each year or on such other dates in each year as BoS shall notify to the Borrowers. 7.4 All sums payable under this letter shall be paid in the currency in which they are due and owing. 7.5 If the Borrowers fail to pay any amount due under the currency borrowings on demand BoS may at any time purchase so much of an optional currency as BoS considers necessary or desirable to cover the currency borrowings at the then prevailing BoS spot rate of exchange and the Borrowers shall indemnify BoS against the full Sterling price (including all costs, charges and expenses) paid by it. 7.6 Whenever the "sterling equivalent" of any currency borrowings require to be calculated, it shall be calculated at the BoS spot rate of exchange for such currency on the applicable day at such time as BoS may select. 8. Termination ----------- Each of the utilisations above including the facilities made available under Clause 2.2 shall immediately cease to be available if BoS makes a demand for payment under Clauses 2.4.2 or 7.2 or gives notice to the Parent that they are withdrawn. 9. Other Borrowers --------------- The Working Capital shall not be available to any other person (whether a subsidiary of the Parent or not) unless with the express written agreement of BoS and after having provided BoS with whatever security it requires in respect of that person and its assets. 10. Security -------- The Working Capital will be secured by the Security Documents and any other security granted by any Group Company in favour of BoS from time to time. - -------------------------------------------------------------------------------- 5 11. Financial Information --------------------- The Borrowers will supply the financial information specified in the Facilities Agreement which will also be required by BoS prior to its agreeing to any renewal of the Working Capital. 12. Obligations ----------- The obligations of each Borrower in relation to the Working Capital are joint and several. 13. Notices ------- All notices or communications to or between the parties will be in writing and: 13.1 will be by first class prepaid post or by telefax transmission, authenticated to the satisfaction of BoS and if by letter, receipt will be deemed forty-eight hours after posting (unless hand delivered and then at time of delivery) and if by fax, when sent (provided a transmission report is received); 13.2 if given to BoS, it will be given at the address at the head of this letter or at any other address in the UK BoS may designate at any time by notice to the Parent; 13.3 if given to the Borrowers it will be deemed to be duly given if given only to the Parent at the above address or at any other UK address that it designates by notice to BoS; 13.4 BoS may rely upon any communication by telephone or fax or purporting to be on behalf of any Borrower, by anyone notified to BoS as being authorised, without enquiry as to authority or identity. The Borrowers agree to indemnify BoS against any liability incurred or sustained by BoS as a result; and 13.5 in order to prove that a notice or demand has been made, BoS need only establish that the notice or demand was properly addressed and posted or transmitted. 14. Fees and Expenses ----------------- 14.1 The Borrowers will pay to BoS an arrangement fee of(pound)15,000 payable on acceptance of this letter. 14.2 The Borrowers will meet or reimburse to BoS (on a full indemnity basis) all reasonable legal, accountancy, valuation, due diligence and other fees, costs and expenses or tax charged to or incurred by BoS (which shall include any fees and expenses of external solicitors engaged by BoS in relation to the Security Documents) in connection with this letter and the Security Documents (including the enforcement or preservation of BoS rights). 15. Third Party Rights ------------------ A person who is not party to this letter shall have no right under the Contracts (Rights of Third Parties) Act 1999 to enforce any term of this letter. This Clause does not affect any right or remedy of any person which exists or is available otherwise than pursuant to that Act. 16. Accession to Facilities Agreement --------------------------------- As Agent of the Senior Lenders, BoS agrees that, to the extent that any Subsidiary (as defined above) has not previously acceded to the Facilities Agreement so as to become a Borrower thereunder, by the execution of this letter each Subsidiary that has not so acceded shall so accede and each such Subsidiary agrees to observe and be bound by the terms and provisions of the Facilities Agreement insofar as they apply to it as if it were an original party to the Facilities Agreement as a Borrower (as defined therein). - -------------------------------------------------------------------------------- 6 17. Interpretation and Definitions ------------------------------ The definitions given in the Facilities Agreement and in Schedule 2 of this letter shall apply in this letter save where the context requires otherwise. 18. Law --- This letter will be governed by and construed according to English law and each of the Borrowers submits to the jurisdiction of the English Courts. Yours faithfully For and on behalf of THE GOVERNOR AND COMPANY OF THE BANK OF SCOTLAND Agreed and accepted on behalf of Agreed and accepted on behalf of DDI EUROPE LIMITED DDI GROUP LIMITED acting by acting by M Malone Director M Malone Director M Glanfield Director/Secretary P Fowler Director/Secretary Date: 15 November 2001 Date: 15 November 2001 Agreed and accepted on behalf of Agreed and accepted on behalf of CLASSICAL CIRCUITS LIMITED DDI TECHNOLOGIES LIMITED acting by acting by M Malone Director M Malone Director P Fowler Director/Secretary P Fowler Director/Secretary Date: 15 November 2001 Date: 15 November 2001 - -------------------------------------------------------------------------------- 7 Agreed and accepted on behalf of Agreed and accepted on behalf of PRETAN ENGINEERING LIMITED INTEGRATED DESIGNS & SYSTEMS LIMITED acting by acting by M Malone Director M Malone Director P Fowler Director/Secretary P Fowler Director/Secretary Date: 15 November 2001 Date: 15 November 2001 Agreed and accepted on behalf of Agreed and accepted on behalf of DYNAMIC DETAILS LIMITED ZLIN ELECTRONICS LIMITED acting by acting by M Malone Director M Malone Director P Fowler Director/Secretary P Fowler Director/Secretary Date: 15 November 2001 Date: 15 November 2001 Agreed and accepted on behalf of Agreed and accepted on behalf of DDI PRECISION LIMITED DDI INTERNATIONAL LIMITED acting by acting by M Malone Director M Malone Director P Fowler Director/Secretary P Fowler Director/Secretary Date: 15 November 2001 Date: 15 November 2001 Agreed and accepted on behalf of Agreed and accepted on behalf of DDI SALES LIMITED THOMAS WALTER LIMITED acting by acting by M Malone Director M Malone Director P Fowler Director/Secretary M Glanfield Director/Secretary Date: 15 November 2001 Date: 15 November 2001 IMPORTANT NOTICE: As with any legally binding agreement, we recommend that you consult your solicitor or other independent legal adviser before accepting this letter. - -------------------------------------------------------------------------------- 8 This is the Schedule 1 referred to in the preceding facility letter between BoS and, amongst others, DDI EUROPE LIMITED dated 15 November, 2001. SCHEDULE 1 SETTLEMENT LIMITS 1. BACS Facility ------------- 1.1 BACS Limit (pound)3,000,000. 1.2 Purpose ------- TheBACS facility may only be used by the Borrowers to make fund transfers utilising the Bankers Automated Clearing System, subject to sufficient funds being made available by the Borrowers to cover the BACS payments by close of business on the day on which each of those payments is debited to their relevant accounts without exceeding the Limit specified in 2.2.1. 1.3 Terms and Conditions -------------------- The BACS facility shall be made available to the Borrowers subject to: 1.3.1 the terms and conditions of the Bankers Automated Clearing System operated by BACS Limited; and 1.3.2 its rules of operation as agreed between BoS and the Borrowers from time to time. 1.4 Throughout the duration of the Working Capital, BoS shall be entitled to vary both the limit and the terms and conditions referred to above by notice to the Borrowers. 2. CHAPS Facility -------------- 2.1 CHAPS daylight limit (pound)500,000. 2.2 Purpose ------- TheCHAPS facility may only be used by the Borrowers to make fund transfers utilising the automated money transmission systems available from BoS, subject to sufficient funds being made available by the Borrowers to cover each of those CHAPS payments by close of business on the same day without exceeding the Limit specified in 2.2.1. 2.3 Terms and Conditions -------------------- TheCHAPS facility shall be made available to the Borrowers subject to the standard terms and conditions of the Clearing House Automated Payments System as advised by BoS. 2.4 Throughout the duration of the Working Capital, BoS shall be entitled to vary both the limit and the terms and conditions referred to above by notice to the Borrowers. 3. CHOBS Facility -------------- 3.1 CHOBS daylight limit (pound)250,000. - -------------------------------------------------------------------------------- 9 3.2 Purpose ------- The CHOBS facility may only be used by the Borrowers to make fund transfers utilising the BoS Corporate Home and Office Banking System, subject to sufficient funds being made available by the Borrowers to cover each of those CHOBS payments by close of business on the same day without exceeding the Limit specified in 2.2.1. 3.3 Terms and Conditions -------------------- The CHOBS facility shall be made available to the Borrowers subject to: 3.3.1 the terms of and conditions of the BoS Corporate Home and Office Banking System; and 3.3.2 the rules of operation thereof as agreed between BoS and the Borrowers from time to time. 3.4 Throughout the duration of the Working Capital, BoS shall be entitled to vary both the limit and the terms and conditions referred to above by notice to the Borrowers. 4. Forward Foreign Exchange Contracts Facility ------------------------------------------- 4.1 FFEC Limit: (pound)3,000,000. 4.2 Purpose ------- A Borrower may enter into Forward Foreign Exchange Contracts (up to in aggregate the FFEC Limit) with BoS for the purchase or sale of any freely convertible currency and with a maturity period of up to twelve months. 4.3 Terms and Conditions -------------------- The Forward Foreign Exchange Contracts facility shall be made ---------------------------------- available to the Borrowers subject to the following: 4.3.1 for the purpose of calculating utilisations of this facility, BoS will assess its risk at 10% of the face value of each contract for a duration of up to 12 months and 20% in respect of contracts for more than 12 months unless BoS advises the relevant Borrower otherwise.; 4.3.2 the Borrowers must ensure that each of them make sufficient funds (either in Sterling or in the appropriate foreign currency) available to meet their obligations under each of the Forward Foreign Exchange Contracts as and when they fall due. In the event that the Borrowers fail to do so, the Borrowers shall be liable to BoS in respect of the difference between (1) the Sterling equivalent of the amount the Borrowers were due to pay BoS on completion of the relevant Forward Foreign Exchange Contract and (2) (if less) the Sterling equivalent of the amount which BoS would have received by completing that contract at the prevailing spot rate of exchange for the relevant currency on the date of completion of the contract; 4.3.3 whenever the sterling equivalent of any currency amounts require to be calculated, it shall be calculated at the BoS spot rate of exchange for such currency on the applicable day at such time as BoS may select; and 4.3.4 charges will be payable for the issue of Forward Foreign Exchange Contracts in accordance with the tariffs applicable to those services issued to the Borrowers from time to time. - -------------------------------------------------------------------------------- 10 4.4 Throughout the duration of the Working Capital, BoS shall be entitled to vary both the limit and the terms and conditions referred to above by notice to the Borrowers. - -------------------------------------------------------------------------------- 11 SCHEDULE 2 DEFINITIONS "2001 Debenture" has the meaning given to it in the Amendment and Restatement Deed to be entered into, inter alios, between BoS and the Parent on or after the date hereof. "BoS" means The Governor and Company of the Bank of Scotland and its successors, assignees and transferees. "Facilities Agreement" means the facilities agreement entered into between the Parent and BoS on 27 May 1999 (as modified, amended, supplemented or restated from time to time). "Financial Statements" means the audited annual profit and loss account and balance sheet of the relevant company for each of its financial years (consolidated for each financial year during which that company has a Subsidiary) together with related directors' and auditors' reports. "Group" means the Borrowers and each of their Subsidiaries which is not dormant and "Group Company" is construed accordingly. "Relevant Margin" has the meaning given to it in the Facilities Agreement. "Schedules" means the Schedules attached to this letter. "Security Documents" has the meaning given to it in the Facilities Agreement. "Standard Application Dates" means the last business day in each month or such other dates as BoS may advise the Borrowers from time to time. "Subsidiary" and "holding company" shall have the meanings given to them in section 736 of the Companies Act 1985 (including any Subsidiary acquired after the date of this Letter) and "Subsidiaries" shall mean all or any of them, as appropriate. "Third Debenture" has the meaning given to it in the Facilities Agreement. Any references to an Act of Parliament is to the Act as amended, substituted, modified or re-enacted from time to time. A reference to "including" shall not be construed as limiting the generality of the words preceding it. References to this letter and to any provisions of it or to any other document referred to in this letter shall be construed as references to it in force for the time being and as amended, varied, supplemented, restated, substituted or novated from time to time. References to statutes, statutory provisions and other legislation shall include all amendments, modifications and re-enactments for the time being in force. Words importing the singular are to include the plural and vice versa. References to a person are to be construed to include references to a corporation, firm, company, partnership, joint venture, unincorporated body of persons, individual or any state or any agency of a state, whether or not a separate legal entity. References to any person are to be construed to include that person's assignees or transferees or successors in title, whether direct or indirect. Clause headings are for ease of reference only and are not to affect the interpretation of this letter. - -------------------------------------------------------------------------------- 12 EX-10.19 6 dex1019.txt COMPOSITE GUARANTEE AND DEBENTURE EXHIBIT 10.19 CONFORMED COPY 2001 DEBENTURE DATED 15 NOVEMBER 2001 - -------------------------------------------------------------------------------- THE COMPANIES NAMED HEREIN AS THE CHARGING COMPANIES (1) - and - THE GOVERNOR AND COMPANY OF THE BANK OF SCOTLAND (2) --------------------------------------------- COMPOSITE GUARANTEE AND DEBENTURE --------------------------------------------- CONTENTS 1. INTERPRETATION........................................................................................1 2. GUARANTEE PROVISIONS..................................................................................3 3. COVENANT TO PAY.......................................................................................4 4. FIXED AND FLOATING CHARGES............................................................................4 5. CHARGES ON NON CHARGING SUB SHARES BY THE CHARGING COMPANIES..........................................7 6. CRYSTALLISATION OF FLOATING CHARGE....................................................................9 7. NEGATIVE PLEDGE AND FURTHER SECURITY.................................................................10 8. REPRESENTATIONS AND WARRANTIES.......................................................................11 9. COVENANTS OF THE CHARGING COMPANIES..................................................................11 10. RECEIVABLES..........................................................................................15 11. THE SECURITY TRUSTEE'S POWERS OF SALE AND LEASING....................................................16 12. CONSOLIDATION OF SECURITIES..........................................................................17 13. APPOINTMENT AND POWERS OF RECEIVER...................................................................17 14. POWER OF ATTORNEY....................................................................................19 15. PROTECTION OF THIRD PARTIES..........................................................................20 16. NEW ACCOUNTS.........................................................................................20 17. RIGHTS AS BETWEEN EACH CHARGING COMPANY, THE OTHER CHARGING COMPANIES AND THE SECURITY TRUSTEE (ON BEHALF OF THE SECURITY BENEFICIARIES)....................................................21 18. CONSOLIDATION OF ACCOUNTS AND SET-OFF................................................................23 19. CURRENCY.............................................................................................24 20. SUSPENSE ACCOUNT.....................................................................................24 21. TIME AND INDULGENCES.................................................................................24 22. REMEDIES, WAIVERS, AMENDMENTS AND CONSENTS...........................................................25 23. EXPENSES.............................................................................................25 24. PROVISIONS SEVERABLE.................................................................................25
- -------------------------------------------------------------------------------- 25. AVOIDANCE OF PAYMENTS................................................................................26 26. DISCRETIONS..........................................................................................26 27. ASSIGNMENT...........................................................................................26 28. INTERCREDITOR AGREEMENT AND FACILITIES AGREEMENT TO PREVAIL..........................................27 29. NOTICES..............................................................................................27 30. LAW AND JURISDICTION.................................................................................27 31. MEMORANDUM AND ARTICLES..............................................................................27 FIRST SCHEDULE...............................................................................................28 The Charging Companies...................................................................................28 THE SECOND SCHEDULE..........................................................................................29 Part I...................................................................................................29 Details of Registered Land...............................................................................29 Part II..................................................................................................29 Details of Unregistered Land.............................................................................29 THE THIRD SCHEDULE...........................................................................................30 The Guarantee............................................................................................30
- -------------------------------------------------------------------------------- THIS COMPOSITE GUARANTEE AND DEBENTURE is made 15 November 2001 BETWEEN: (1) THE COMPANIES LISTED IN THE FIRST SCHEDULE TO THIS DEED (the "Charging Companies"). (2) THE GOVERNOR AND COMPANY OF THE BANK OF SCOTLAND, Bank House, 8 Cherry Street, Birmingham B2 5AD (as security trustee for the Security Beneficiaries as defined herein (the "Security Trustee"). WHEREAS: (A) One or more of the Charging Companies has already been granted, or may hereafter be granted facilities from time to time by the Security Beneficiaries (or any of them) (as herein defined) and/or is now or may hereafter become indebted to the Security Beneficiaries (B) The Charging Companies have agreed to execute this Deed in order to secure all monies now owing or which may hereafter become owing from the Charging Companies (or any of them) to the Security Beneficiaries (or any of them) (C) It has been agreed between the Charging Companies and the Security Beneficiaries that the security constituted hereby will be held by the Security Trustee and given to the Security Trustee for the benefit of the Security Beneficiaries THIS DEED WITNESSES: 1 INTERPRETATION In this Deed, except so far as the context otherwise requires:- 1.1 Except as otherwise specified herein, all terms defined in the Facilities Agreement or the Intercreditor Agreement shall have the same meaning when used herein. 1.2 The following terms shall have ascribed to them the following meanings:- the "Act" means the Law of Property Act 1925; "Charged Property" means the property referred to in Clauses 3 or 4 and all other property of whatsoever nature from time to time charged by or pursuant to this Deed; "this Deed" means this Deed as from time to time amended and any document made pursuant or supplemental hereto; the "Facilities Agreement" means the facilities agreement dated 27 May 1999 between DDI Europe Limited (formerly called MCM Electronics Limited) (1) and The Governor and Company of the Bank of Scotland (in its various capacities) (2) - (6); "Group" means Newco and its Subsidiaries from time to time and "Group Company" means any of them and "Group Companies" means all of them; the "Guarantee" means the Guarantee contained in Clause 2 as extended by the Third Schedule hereto; - -------------------------------------------------------------------------------- 1 "Intellectual Property" means copyrights, patents and registered and unregistered designs (including applications and rights to apply therefor), inventions, trademarks and service marks whether registered or not (including all registrations thereof and applications and rights to apply therefor), confidential information and know-how and fees, royalties and other rights of every kind deriving from copyright, patents or inventions or other intellectual property throughout the World now or at any time hereafter belonging to or created by or assigned to a Charging Company; "Newco" means DDI Europe Limited (company registration number 3731403); "Non Charging Sub Shares" means the issued shares in the capital of DDI Interconnect Limited, HBH Group Limited, Osborne Precision Sheetmetal Limited and DDI Electronics Limited; "Planning Acts" means the Town & Country Planning Acts 1990 and the Planning (Listed Buildings and Conservation Areas) Act 1990; "Receivables" means all present and future book debts, rentals, royalties, fees, amounts receivable under Hedging Arrangements, VAT and all other amounts recoverable or receivable by any Charging Company from other persons due or owing to such Charging Company and the benefit of all rights relating thereto including, without limitation, negotiable instruments, legal and equitable charges, reservations of property rights, rights of tracing and unpaid vendor's liens and similar associated rights "Receiver" means any receiver or receiver and manager or administrative receiver appointed by the Security Trustee under or by virtue of this Deed whether alone or jointly with any other person and includes any substitute for any of them appointed from time to time; "Related Rights" means, in relation to the Non Charging Sub Shares, all dividends and interest paid or payable in relation thereto and all stocks, shares, securities (and the dividends or interest thereon), rights, moneys or property accruing or offered at any time in relation to such shares or other securities by way of redemption, substitution, exchange, bonus or preference, pursuant to option rights or otherwise in respect of any of the Non Charging Sub Shares or in substitution or exchange for any of the Non Charging Sub Shares; "Secured Obligations" means all indebtedness, liabilities and obligations which are now or may at any time hereafter be due, owing or incurred in any manner whatsoever to the Security Beneficiaries by any Group Company whether actually or contingently, whether pursuant to the Guarantee or otherwise, whether solely or jointly with any other person, whether as principal or surety and whether or not the Security Beneficiaries shall have been an original party to the relevant transaction and in whatever currency denominated including all liabilities from time to time assumed or incurred by the Security Beneficiaries at the request of any Group Company in connection with foreign exchange transactions, acceptances, discounting or otherwise or under guarantees, bonds, indemnities, documentary or other credits or any instruments whatsoever and including interest, discount, commission and other lawful charges or reasonable expenses which the Security Beneficiaries may in the course of their business charge in respect of any facilities or accommodation or service provided by the Security Beneficiaries for keeping any Group Company's account; - -------------------------------------------------------------------------------- 2 1.3 Section 61 of the Act (other than the definition of "month" contained therein) shall govern the construction hereof. 1.4 References to the Agent, Security Trustee, the Security Beneficiaries, the Banks, the Working Capital Bank, and the Hedging Counterparty shall include their respective successors and permitted assigns. 1.5 A reference to a Clause, sub-Clause, or Schedule shall mean and refer to a Clause, sub-Clause, or Schedule of this Deed. 1.6 Any reference in this Deed to any statute or to any provisions of any statute shall be construed as including a reference to any statutory modification or re-enactment thereof and to any regulations or orders made thereunder or deriving validity therefrom and from time to time in force. 1.7 Headings are inserted for convenience only and shall be ignored in construing this Deed. 1.8 References in this Deed to this Deed or any document include references to this Deed or such other document as varied supplemented novated and/or replaced in any manner from time to time. 1.9 The terms of the other Banking Documents and of any side letters between the parties thereto in relation to any Banking Documents are incorporated in this Deed to the extent required to ensure that any disposition of the Charged Property contained in this Deed is a valid disposition in accordance with Section 2(1) of the Law of Property (Miscellaneous Provisions) Act 1989. 1.10 If the Security Trustee reasonably considers that an amount paid by any Charging Company or any person to the Security Trustee under any agreement in respect of the Secured Obligations is likely to be avoided or otherwise set aside on the liquidation or administration of any Charging Company or any other person then that amount shall not be considered to have been irrevocably paid for the purposes of this Deed. 1.11 A reference in this Deed to any assets includes present and future assets. 1.12 A reference in this Deed to a charge or mortgage of any freehold or leasehold property includes all buildings and all the chargor's fixtures and fittings (including trade fixtures and fittings) and fixed plant and machinery from time to time on the Charged Property. 2. GUARANTEE PROVISIONS 2.1 Each Charging Company hereby irrevocably and unconditionally guarantees to the Security Trustee (on behalf of each of the Security Beneficiaries) to pay to the Security Trustee on behalf of the Security Beneficiaries on demand the Secured Obligations (except any Secured Obligations in respect of which the relevant Charging Company is already primarily liable). 2.2 The Guarantee is given subject to and with the benefit of the provisions set out in the Third Schedule. - -------------------------------------------------------------------------------- 3 3 COVENANT TO PAY 3.1 Each of the Charging Companies hereby covenants with the Security Trustee that as and when the Secured Obligations or any part thereof are due for payment or on such earlier date as this security becomes enforceable and the Security Trustee determines to enforce the same it shall on demand in writing by the Security Trustee pay the Secured Obligations (or as the case may be the part of the Secured Obligations then due to be paid and remaining unpaid) to the Security Trustee for its own account, or for the account of the Security Beneficiaries. 3.2 Each Charging Company hereby covenants that it shall on demand pay to the Security Trustee all costs and expenses incurred by the Security Trustee in relation to the protection and enforcement of the Security Trustee's rights hereunder. 3.3 The Security Trustee shall hold the benefit of the guarantees and covenants in Clauses 2, 3.1 and 3.2 of this Deed (and any other covenant expressed to be made in favour of it in this document) and all security hereunder, and all its rights and claims under this Deed and such security as shall be vested in it, as security trustee for the Security Beneficiaries, as is hereby acknowledged by each of the parties to this Deed. 4. FIXED AND FLOATING CHARGES With full title guarantee and as a continuing security for the payment or discharge of all the Secured Obligations and all their other obligations under this Deed:- 4.1 each Charging Company hereby charges to the Security Trustee (for the benefit of the Security Beneficiaries) by way of first legal mortgage:- 4.1.1 all its freehold and leasehold interest in the properties title to which is registered at HM Land Registry described in Part I of the Second Schedule together with all buildings, fixtures (excluding in the case of leasehold property landlord's fixtures but including other trade fixtures and excluding in the case of freehold property and leasehold property which is let or sub-let to a third party, tenant's and trade fixtures and fittings of such third party) and its fixed plant and machinery at any time thereon; 4.1.2 all other freehold and leasehold interests in the properties now vested in it but title to which is not registered at HM Land Registry described in Part II of the Second Schedule together with all buildings, fixtures (excluding in the case of leasehold property landlord's fixtures but including other trade fixtures and excluding in the case of freehold property and leasehold property which is let or sub-let to a third party, tenant's and trade fixtures and fittings of such third party) and its fixed plant and machinery at any time thereon; 4.2 each Charging Company charges to the Security Trustee (for the benefit of the Security Beneficiaries) by way of first fixed charge:- 4.2.1 all present and future freehold and leasehold property of such Charging Company not otherwise charged by way of legal charge pursuant to Clauses 4.1.1 or 4.1.2 together with all buildings, fixtures (excluding in the case of leasehold property landlord's fixtures but including trade fixtures and excluding in the case of freehold property and leasehold property which is let - -------------------------------------------------------------------------------- 4 or sub-let to a third party, tenant's and trade fixtures and fittings of such third party) and its fixed plant and machinery at any time thereon; 4.2.2 all estates and interests not hereinbefore effectively charged now or hereafter belonging to such Charging Company in or over land wheresoever situate or the proceeds of sale of land and all licences now or hereafter held by such Charging Company to enter upon or use land and the benefit of all other agreements relating to land to which such Charging Company is or may become a party or otherwise entitled and all trade and tenants' fixtures, plant and machinery owned by such Charging Company now or hereafter annexed to all freehold and leasehold property its estate or interest in which stands charged hereunder; 4.2.3 all stocks, shares (including but not limited to shares in any subsidiary), debentures, loan capital, right to subscribe for, convert other securities into or otherwise acquire any stocks, shares, debentures or loan capital of any other body corporate now or at any time hereafter belonging to such Charging Company, together with all dividends (unless such dividends are or are to be paid in satisfaction of any of the Secured Obligations), interest and other income and all other rights of whatsoever kind deriving from or incidental to any of the foregoing; 4.2.4 the goodwill of such Charging Company and its uncalled capital now or at any time hereafter in existence and future calls (whether made by the directors of the Charging Company or by a Receiver or a liquidator); 4.2.5 all Intellectual Property; 4.2.6 all plant, vehicles and machinery now or at any time hereafter belonging to such Charging Company (excluding however plant and machinery for the time being forming part of its stock in trade or work in progress); 4.2.7 all chattels now or at any time hereafter hired, leased or rented by such Charging Company to any other person together in each case subject to and with the benefit of the related hiring, leasing or rental contract and any guarantee, indemnity or other security for the performance of the obligations of any person under or in respect of such contract; 4.2.8 all Receivables; 4.2.9 the benefit of all contracts licences consents and authorisations (statutory or otherwise) (the "Contracts") held in connection with its business or the use of any Charged Property specified in any other paragraph or sub-paragraph of this Clause 4 and the right to recover and receive all compensation which may be payable to it in respect of them. 4.3 Each Charging Company hereby charges to the Security Trustee (for the benefit of the Security Beneficiaries) by way of first floating charge all its undertaking and all its property and assets whatsoever and wheresoever situated both present and future, including (without prejudice to the generality of the foregoing) (i) heritable property and all other property and assets in Scotland and (ii) the proceeds of the collection of any Receivables, but excluding any property or assets from time to time or for the time being effectively charged by way of fixed charge under or pursuant to this Deed. - -------------------------------------------------------------------------------- 5 4.4 The security from time to time constituted by or pursuant to this Deed shall:- 4.4.1 be in addition to and shall be independent of every bill, note, guarantee, mortgage or other security which the Security Beneficiaries may at any time hold for any of the Secured Obligations and it is hereby declared that no prior security held by the Security Trustee and/or the Security Beneficiaries over the Charged Property or any part thereof shall merge into the security created hereby or pursuant hereto; and 4.4.2 remain in full force and effect as a continuing security until the earlier of (i) the Security Trustee having certified in writing that the Secured Obligations have been discharged in full and (ii) the security constituted by this Deed having been released. 4.5 Leasehold Interests Containing Prohibition on Charging 4.5.1 Until the relevant consent shall have been obtained, there shall be excluded from the charge created by Clause 4.1 above (and further assurance provisions as set out in Clause 7.2 below) any leasehold property held by any Charging Company under a lease the terms of which either preclude absolutely the relevant Charging Company from creating any charge over its leasehold interest in such property or require the consent of any third party prior to the creation of such charge and such consent shall not have been previously obtained (each an "Excluded Property"); 4.5.2 With regard to each Excluded Property, the relevant Charging Company hereby undertakes to make application for the consent of the relevant third party to the creation of the charge contained in Clause 4.1 above (or Clause 7.2 below) within twenty eight days of the date hereof and to use all its reasonable endeavours to obtain such consent as soon as possible and to keep the Security Trustee informed of the progress of its negotiations with such third parties; 4.5.3 Forthwith, upon receipt of the relevant third party's consent as aforesaid, the relevant Excluded Property shall thereupon be charged to the Security Trustee pursuant to the terms of Clause 4.1 above (or Clause 7.2 below, as the case may be). If required by the Security Trustee in respect of any Excluded Property at any time following receipt of such consent or if earlier, the date falling sixty days after the date hereof, the relevant Charging Company will execute a valid legal mortgage in such form as the Security Trustee shall require. 4.6 Intellectual Property Interests Containing Prohibition on Charging 4.6.1 Until the relevant consent shall have been obtained, there shall be excluded from the charge created by Clause 4.1 above (and further assurance provisions as set out in Clause 7.2 below) any Intellectual Property in which any Charging Company has an interest pursuant to any licence or other agreement the terms of which either preclude in any way the Charging Company from assigning or creating any charge over its interest in such Intellectual Property or require the consent of any third party prior to the making of such assignment or creation of such charge and such consent shall not have been previously obtained (each an "Excluded Intellectual Property Right"); - -------------------------------------------------------------------------------- 6 4.6.2 With regard to each Excluded Intellectual Property Right, the relevant Charging Company hereby undertakes to make application for the consent of the relevant third party (where the identity of the relevant third party is known to the relevant Charging Company) to the creation of the charge contained in Clause 4.1 above (or Clause 7.2 below) within twenty eight days of the date hereof and to use its reasonable endeavours to obtain such consent as soon as possible and to keep the Security Trustee informed of the progress of its negotiations with such third parties; 4.6.3 Forthwith, upon receipt of the relevant third party's consent as aforesaid, the relevant Excluded Intellectual Property Right shall thereupon be charged to the Security Trustee pursuant to the terms of Clause 4.1 above (or Clause 7.2 below, as the case may be). If required by the Security Trustee in respect of any Excluded Intellectual Property Right at any time following receipt of such consent or if earlier, the date falling sixty days after the date hereof, the relevant Charging Company will execute a valid equitable charge or legal assignment in such form as the Security Trustee shall require. 4.7 Interests in Contracts Containing Prohibition on Charging 4.7.1 Until the relevant consent shall have been obtained, there shall be excluded from the charge created by Clause 4.1 above (and further assurance provisions as set out in Clause 7.2 below) any Contract in which any Charging Company has an interest pursuant to any licence or other agreement the terms of which either preclude in any way the Charging Company from assigning or creating any charge over its interest in such Contract or require the consent of any third party prior to the making of such assignment or the creation of such charge and such consent shall not have been previously obtained (each an "Excluded Contract Right"); 4.7.2 With regard to each Excluded Contract Right, the relevant Charging Company hereby undertakes to make application for the consent of the relevant third party (where the identity of the relevant third party is known to the relevant Charging Company) to the creation of the charge contained in Clause 4.1 above (or Clause 7.2 below) within twenty eight days of the date hereof and to use its reasonable endeavours to obtain such consent as soon as possible and to keep the Security Trustee informed of the progress of its negotiations with such third parties; 4.7.3 Forthwith, upon receipt of the relevant third party's consent as aforesaid, the relevant Excluded Contract Right shall thereupon be charged to the Security Trustee pursuant to the terms of Clause 4.1 above (or Clause 7.2 below, as the case may be). If required by the Security Trustee in respect of any Excluded Contract Right at any time following receipt of such consent the relevant Charging Company will execute a valid equitable charge or legal assignment in such form as the Security Trustee shall require. 5. CHARGES ON NON CHARGING SUB SHARES BY THE CHARGING COMPANIES 5.1 Each Charging Company, as sole beneficial owner hereby as continuing security for the payment, discharge and performance of all the Secured Obligations:- - -------------------------------------------------------------------------------- 7 5.1.1 mortgages and charges and agrees to mortgage and charge to the Security Trustee all Non Charging Sub Shares held now or in the future by it and/or any nominee on its behalf, the same to be a security by way of a first mortgage or charge; and 5.1.2 mortgages and charges and agrees to mortgage and charge to the Security Trustee all the Related Rights accruing to all or any of the Non Charging Sub Shares held now or in the future by it and/or any nominee on its behalf, the same to be a security by way of a first mortgage or charge; and 5.1.3 undertakes to comply with its obligations under Clause 5.2 hereof. 5.2 Each Charging Company shall by way of security for the Secured Obligations:- 5.2.1 immediately deposit by way of security with the Security Trustee all bearer instruments and certificates or other documents evidencing an entitlement to the Non Charging Sub Shares and share transfer forms in blank in respect of those Shares as are in certificated form and the Security Trustee will hold the same by way of security on the terms set out in this Deed; 5.2.2 immediately on receipt of any certificate or other document evidencing any entitlement to any further or other Non Charging Sub Shares deposit it with the Security Trustee together with such share transfer forms in blank which the Security Trustee will hold by way of security on the terms set out in this Deed. 5.3 Each Charging Company authorises the Security Trustee:- 5.3.1 to arrange for any of the Non Charging Sub Shares which are in registered form to be registered in the name of the Security Trustee or a nominee of the Security Trustee (if required by the Security Trustee to perfect the Security Trustee's security); and 5.3.2 at any time after the security hereby constituted has become enforceable to transfer or cause any of the Non Charging Sub Shares to be transferred to and registered in the name of any purchase or transferee. 5.4 Each Charging Company shall from time to time on the request of the Security Trustee execute and sign all transfers, powers of attorney and other documents and give such instructions and directions as the Security Trustee may require for perfecting its title to any of the Non Charging Sub Shares or for vesting the same in itself in order to perfect the security constituted hereby or its nominee or, in the exercise of its powers or realisation, in any purchaser or transferee. 5.5 Unless and until the security constituted hereby becomes enforceable, and, while it remains so, each Charging Company shall be entitled:- 5.5.1 to receive all dividends, interest and income from the Non Charging Sub Shares and, if necessary, the Security Trustee shall, and shall cause its nominee to release or account for the same to the relevant Charging Company; and 5.5.2 to exercise all the voting rights and other rights and powers attached or incidental to the Non Charging Sub Shares, and if necessary for this purpose, - -------------------------------------------------------------------------------- 8 the Security Trustee shall and shall cause its nominees either to exercise such voting and other rights and powers attached to or incidental to the Non Charging Sub Shares from time to time in accordance with the directions of the relevant Charging Company or to appoint the relevant Charging Company or any person nominated by it to be the proxy of the Security Trustee or its nominees to exercise such voting and other rights and powers attached to or incidental to the Non Charging Sub Shares in accordance with the directions of the relevant Charging Company PROVIDED HOWEVER THAT the relevant Charging Company shall not, without the previous consent in writing of the Security Trustee, exercise or require the Security Trustee or its nominees or any such proxy to exercise the voting rights attached to any of the Non Charging Sub Shares in favour of resolutions having any of the following effects, namely:- 5.5.2.1 any change in the terms of the Non Charging Sub Shares concerned; or 5.5.2.2 any other matter which, in the opinion of the Security Trustee, would be contrary to the provisions of the Banking Documents. In the event of any meeting of the holders of any of the Non Charging Sub Shares being called for the purpose of passing a resolution relating to any such matters referred to above the Security Trustee shall vote or procure its nominees or proxies to vote in respect of the Non Charging Sub Shares registered in their name or under their control in such manner as they shall in their entire discretion consider to be in the interests of the security constituted hereby. 5.6 Any time after the security becomes enforceable, and while it remains so, and without any further consent or authority on the part of the relevant Charging Company, the Security Trustee may exercise at its discretion (in the name of the relevant Charging Company or otherwise) in respect of any of the Non Charging Sub Shares any voting rights and any powers or rights which may be exercised by the person or persons in whose name or names the Non Charging Sub Shares are registered or who is the holder or bearer of them including (but without limitation) all the powers given to trustees by section 10(3) and (4) of the Trustee Act 1925 (as amended by section 9 of the Trustee Investment Act 1961) in respect of securities or property subject to a trust. 6. CRYSTALLISATION OF FLOATING CHARGE 6.1 The Security Trustee may by notice in writing to a Charging Company convert the floating charge created pursuant to Clause 4.3 into a fixed charge as regards all or any of that Charging Company's assets charged under Clause 4.3 and specified in the notice if:- 6.1.1 an Event of Default occurs which remains unremedied or unwaived; or 6.1.2 the Security Trustee in its absolute discretion considers those assets to be in danger of being seized, or sold under any form of distress, attachment, execution or other legal process. 6.2 The floating charge created by a Charging Company under this Deed shall (in addition to the circumstances in which the same will occur under general law) - -------------------------------------------------------------------------------- 9 automatically be converted into a fixed charge in relation to the assets of that Charging Company:- 6.2.1 on the convening of any meeting of the members of that Charging Company to consider a resolution to wind up that Charging Company; or 6.2.2 on the presentation of a petition (other than a petition determined by the Security Trustee to be frivolous or vexatious) to wind up that Charging Company which is not discharged within fourteen days; or 6.2.3 on the appointment of an administrator to that Charging Company; or 6.2.4 if that Charging Company fails to comply with its obligations under Clause 7 of this Deed PROVIDED ALWAYS that in such circumstances the floating charge shall be converted into a fixed charge in respect only of the assets of such Charging Company which have been encumbered or that have been otherwise sold, discounted, factored, transferred, leased, lent or otherwise disposed of. 6.3 Service by the Security Trustee of a notice pursuant to Clause 6.1 above in relation to any class of assets of any Charging Company shall not be construed as a waiver or abandonment of the Security Trustee's rights to serve similar notices in respect of any other class of assets or of any other of the rights of the Security Trustee and/or the Security Beneficiaries hereunder. 7. NEGATIVE PLEDGE AND FURTHER SECURITY 7.1 Each Charging Company severally covenants with the Security Trustee (for the benefit of the Security Beneficiaries) that during the continuance of this security it shall not without the consent in writing of the Security Trustee:- 7.1.1 create, extend or permit to subsist any Security Interest (other than a Permitted Security Interest) upon any of the Charged Property to secure any liability, actual or contingent; 7.1.2 save as permitted or required under this Deed or under the Facilities Agreement, sell, discount, factor, transfer, lease, lend or otherwise dispose of, whether by means of one or a number of transactions related or not and whether at one time or over a period of time, the whole or, save in the normal course of trading, any part of the Charged Property. 7.2 Without prejudice to the generality of the covenant for further assurance deemed to be included herein by virtue of Section 76(1)(c) of the Act, each Charging Company shall from time to time whensoever requested by the Security Trustee and at such Charging Company's cost, execute in favour of the Security Trustee, or as the Security Trustee may reasonably direct, such further or other legal assignments, transfers, mortgages, legal or other charges or securities as in each case it may be lawful for such Charging Company to execute and are not inconsistent with the provisions of this Deed or the Facilities Agreement and the Security Trustee shall reasonably stipulate over the Charged Property for the purpose of more effectively providing the security stipulated herein for the payment or discharge of the Secured Obligations. Without prejudice to the generality of the foregoing, such assignments, transfers, mortgages, legal or other charges or securities shall be in such form as the Security Trustee may reasonably require and may contain provisions such as are - -------------------------------------------------------------------------------- 10 herein contained and provisions to the like effect to the extent it is legally able to do so and/or such other provisions of whatsoever kind as the Security Trustee shall reasonably consider requisite for the perfection of the security constituted by or pursuant to this Deed. 8. REPRESENTATIONS AND WARRANTIES Each Charging Company hereby represents and warrants to the Security Trustee (for the benefit of the Security Beneficiaries) in respect of itself as follows:- 8.1 no liquidator, Receiver, administrator or similar appointee has been appointed in respect of the Charging Company or any part of any of its assets and no action is currently being taken with a view to appointing any such liquidator, Receiver, administrator or similar appointee; 8.2 neither the entry nor the performance of or compliance with its obligations under or pursuant to this Deed nor the creation of the security created by it pursuant to this Deed does or will violate in any material manner, or exceed any borrowing or other powers or restrictions granted or imposed under or pursuant to:- 8.2.1 any law to which the Charging Company is subject; or 8.2.2 the Charging Company's Memorandum or Articles of Association; or 8.2.3 any other agreement, arrangement or understanding to which the Charging Company is a party or otherwise subject; 8.3 each of the representations and warranties in sub-clauses 8.1 to 8.2 above will be correct and complied with in all material respects at all times during the continuance of this security. 9. COVENANTS OF THE CHARGING COMPANIES Each of the Charging Companies hereby covenants that, during the continuance of this security:- 9.1 9.1.1 it shall maintain insurances on and in relation to its business and assets including, without limitation, employers liability insurance and product liability insurance third party liability insurance and cause all buildings trade and other fixtures forming part of the Charged Property to be insured with reputable underwriters or insurers against such risks and to such extent as is usual for companies carrying on a business such as that carried on by the Charging Company whose practice is not to self insure (or, in relation to any leasehold property in respect of which the insurance requirements are specified to be subject to the approval of the relevant landlord, use all reasonable endeavours to procure the same). If so required by the Security Trustee such insurances shall be effected in the joint names of the Charging Company and the Security Trustee or, at the option of the Security Trustee, with the interest of the Security Trustee noted on the policies of insurance and with the policies containing such provisions for the protection of the Security Trustee (for the benefit of the Security Beneficiaries) as the Security Trustee may require. The Charging Company shall from time to time upon written request supply the Security Trustee with copies of all such insurance - -------------------------------------------------------------------------------- 11 policies or certificates of insurance in respect thereof or such other evidence of the existence of such policies as may be acceptable to the Security Trustee and any premium receipts in respect of such policies; 9.1.2 without limiting the generality of the preceding sub-clause if so required by the Security Trustee, use all reasonable endeavours to cause the policies of insurance maintained by it pursuant to paragraph 9.1.1 above to be as soon as reasonably practicable amended to include clauses reasonably satisfactory to the Security Trustee to ensure that no breach of any of the terms of any such policy of insurance nor failure to give notice of any event giving rise to any claim by any Charging Company will invalidate such policy of insurance or any provision thereof as regards the Security Trustee and/or the Security Beneficiaries and to ensure that the relevant insurer shall advise the Security Trustee:- 9.1.2.1 of any cancellation alteration termination or expiry of any such policy at least 30 days before such cancellation alteration termination or expiry is due to take effect; 9.1.2.2 of any default in the payment of any premium or failure to renew the insurance at least 30 days before the renewal date; and 9.1.2.3 of any act or omission or the occurrence of any event of which the insurer has knowledge and which might invalidate or render unenforceable (in whole or in part) the insurance; 9.1.3 it will duly and punctually pay all premiums and other monies necessary for effecting and keeping in force such insurances and shall renew all insurance at least 14 days before the relevant policies or contracts expire and shall promptly confirm in writing to the Security Trustee when each such renewal is effected; 9.1.4 it shall not do or suffer or cause to be done or suffered anything whereby any insurance policy now or at any time effected upon the Charged Property may become liable to be vitiated or cancelled and in particular shall not use or allow the Charged Property to be used otherwise than in accordance with the terms of any policy of insurance for the time being relating thereto (including any warranties or trading limits therein) without first giving written notice to the Security Trustee and obtaining the consent of the insurers concerned and complying with such requirements as to the payment of extra premiums or otherwise as the insurers may impose; 9.1.5 if default shall at any time be made by any Charging Company in effecting or keeping up the insurances referred to in sub-clause 9.1.1 or in producing any such policy or receipt to the Security Trustee on demand, the Security Trustee may take out or renew such insurances in any sum which the Security Trustee may think expedient and all monies expended by the Security Trustee under this provision shall be deemed to be properly paid by the Security Trustee, and shall be reimbursed by the Charging Company on demand and shall bear interest at the highest rate for the time being in effect under the Facilities Agreement from the date of payment until the date of reimbursement. This Deed shall be a security for the reimbursement to the Security Trustee of such monies together with such interest as aforesaid; - -------------------------------------------------------------------------------- 12 9.1.6 all claims and monies received or receivable under any such insurances of freehold and leasehold properties shall (subject to the rights of any claims of any lessor or landlord of any part of the Charged Property) be applied by the Charging Company, in repairing, replacing, restoring or rebuilding the property damaged or destroyed (or shall be otherwise applied subject to the consent of the Security Trustee) or, if so directed by the Security Trustee after the occurrence only of an Event of Default, held by the Charging Company in trust for the Security Trustee; 9.2 it shall keep all buildings forming part of the Charged Property and in which trading operations are carried on, and all plant, machinery, fixtures, fittings and other effects in or upon the same and every part thereof required for the use of the Charging Company in a state of repair working order and condition that is no worse than the state of repair, working order and condition as at the date of this Debenture and shall keep all other buildings in a good state of repair working order and condition, and shall comply with all covenants and notices in relation thereto to be performed by the Charging Company and contained in any lease of such buildings and permit the Security Trustee, its officers, employees and agents free access at all reasonable times and on the giving of reasonable notice to view the state and condition of the foregoing without becoming liable as mortgagees in possession; 9.3 it shall duly and punctually pay all rates, rents, taxes, and other outgoings due by it in respect of the Charged Property or any of it; 9.4 it shall permit the Security Trustee or its designated representatives on reasonable notice to have access during normal office hours to its accounts and accounting records and to any books and records relating to the Charged Property, to inspect and take extracts from the same and make photocopies thereof and the Charging Company shall provide, at its cost and expense, such clerical and other assistance as the Security Trustee may reasonably request with regard thereto; 9.5 it shall in relation to the Charged Property comply with all material obligations under any present or future statute, regulation, order and instrument or under any bye-laws, regulations or requirements of any competent authority or other approvals, licences or consents and if requested by the Security Trustee produce to the Security Trustee within 14 days of receipt every material notice, order or proposal given or made in relation to the Charged Property by any competent authority and either comply with the same or make such objections and representations against the same as the Security Trustee may reasonably require or approve (such approval not to be unreasonably withheld or delayed); 9.6 it shall observe and perform all covenants and stipulations from time to time affecting any part of the Charged Property or the manner of use or the enjoyment of the same and shall not without the prior written consent of the Security Trustee enter into any onerous or restrictive obligations affecting any part thereof; 9.7 it shall not without the prior written consent of the Security Trustee such consent not to be unreasonably withheld or delayed confer on any person any right or licence to occupy any land or buildings forming part of the Charged Property or any licence to assign or sub-let any part of the Charged Property; 9.8 it shall not carry out any development within the meaning of the Planning Acts in or upon the Charged Property or any part thereof without first obtaining such permissions as may be required under or by virtue of the Planning Acts, and in the - -------------------------------------------------------------------------------- 13 case of development involving a substantial change in the structure or a change of use of the Charged Property or any part thereof, without first obtaining the written consent of the Security Trustee; 9.9 it shall upon request by the Security Trustee deposit with the Security Trustee and the Security Trustee during the continuance of this security shall be entitled to hold all deeds and documents of title relating to the Charging Company's title to the freehold and leasehold and heritable property (and all insurance policies relating thereto to which the Charging Company is entitled to possession) and other Charged Property and all stocks, shares and other securities and all policies of insurance hereby charged for the time being; 9.10 it shall preserve, maintain and renew as and when necessary all Intellectual Property required in connection with its business and/or the premises in which such business is conducted; 9.11 it shall indemnify the Security Trustee (for the benefit of the Security Beneficiaries) (and as a separate covenant any Receiver appointed by them) against all existing and future rents, taxes, duties, fees, renewal fees, charges, assessments, impositions and outgoings whatsoever (whether imposed by deed or statute or otherwise and whether the nature of capital or revenue and even though of a wholly novel character) which now or at any time during the continuance of the security constituted by or pursuant to this Deed are payable in respect of the Charged Property or any part thereof or by the owner or occupier thereof; if any such sums as are referred to in this sub-clause shall be paid by the Security Trustee (or any such Receiver) the same shall be repaid by the Charging Company on demand with interest (as well after as before judgment) at the highest rate for the time being in effect under the Facilities Agreement from the date of payment until the date of reimbursement. This Deed shall be a security for the reimbursement to the Security Trustee of such monies together with interest as aforesaid; 9.12 it shall:- 9.12.1 notify the Security Trustee forthwith upon the acquisition by that Charging Company of any freehold or leasehold property; 9.12.2 insofar as it is lawfully able to do so, on written demand made to that Charging Company by the Security Trustee and at the reasonable cost of the Charging Company, execute and deliver to the Security Trustee any legal mortgage in favour of the Security Trustee of any freehold or (subject to any prohibition on charging in the relevant lease) leasehold property which becomes vested in it after the date of this Deed (in similar form and terms to the legal mortgage in this Deed) which the Security Trustee may reasonably require; In the case of any leasehold property in relation to which the consent of the landlord in whom the reversion of that lease is vested is required in order for the Charging Company to perform any of its obligations under this Clause 9.12, the Charging Company shall not be required to perform that particular obligation unless and until it has obtained the landlord's consent (which it shall use its reasonable endeavours to do); 9.13 it shall, in respect of any freehold or leasehold land which it may hereafter acquire and which is registered land (or unregistered land subject to compulsory first - -------------------------------------------------------------------------------- 14 registration) apply to the Chief Land Registrar for the registration of a Restriction against the registered titles in the following terms:- "Except under an order of the Registrar no disposition by the proprietor of the land is to be registered without the consent of the proprietor for the time being of the Charge dated [___] in favour of The Governor and Company of the Bank of Scotland." 10 RECEIVABLES 10.1 Each of the Charging Companies hereby covenants that during the continuance of this security it shall:- 10.1.1 promptly get in and realise all Receivables in the ordinary course of its business and pay into a denominated account (the "Collections Account") with the Security Trustee or to such account as the Security Trustee shall from time to time direct all monies which it may receive in respect of the same forthwith on receipt; 10.1.2 without prejudice to the foregoing, in the event of receipt or recovery of any amounts referred to in sub-clause 10.1.1 by any Charging Company, otherwise than by credit to the Collections Account, the Charging Company shall pay the same to the Collections Account forthwith upon receipt or recovery and in like funds as received or recovered by the relevant Charging Company and such Charging Company shall in the meantime hold the same on trust for this purpose; 10.1.3 deal with such Receivables in accordance with any directions from time to time given by the Security Trustee and in default of and subject to any such directions deal with the same only in the ordinary course of getting in and realising the same (without selling assigning factoring or discounting the same in any way); 10.1.4 if called upon to do so by the Security Trustee execute and deliver to the Security Trustee a legal assignment of the Receivables to the Security Trustee (to the extent that the Receivables have not already been assigned to the Security Trustee) on such terms as the Security Trustee may require and give notice thereof to the debtors from whom the Receivables are due owing or incurred and take any other steps as the Security Trustee may require to perfect such legal assignment; 10.1.5 not without the prior consent of the Security Trustee sell, assign, factor, discount, release, exchange, compound, set-off, grant time or indulgence in respect of or in any other manner deal with all or any of the Receivables save as hereinbefore expressly provided PROVIDED ALWAYS that no set-off arising by operation of law or by virtue of any equitable rights of set-off shall constitute a breach of this Clause 10.1.5. 10.2 The Collections Account must be maintained at a branch of the Security Trustee. 10.3 Before the security constituted by this Deed shall have been enforced the monies credited to the Collections Account may be withdrawn by the relevant Charging Company and applied by it for any lawful purpose. - -------------------------------------------------------------------------------- 15 10.4 Amounts standing to the credit of each Collections Account shall bear interest at a fair market rate agreed between the Security Trustee and the relevant Charging Company and in default of agreement at the Security Trustee's standard rate for deposits of this size and nature. 10.5 Upon the security constituted by this Deed being enforced the Security Trustee (or a Receiver) may (subject to the payment of any claims having priority to this security) withdraw amounts standing to the credit of each Collections Account to meet any amount due and payable in respect of the Secured Obligations. 10.6 The Security Trustee, any of the Security Beneficiaries or a Receiver shall not be responsible to any Charging Company for any non-payment of any liability of any Charging Company which could be paid out of monies standing to the credit of the relevant Collections Account, nor be liable to any Charging Company for any withdrawal wrongly made if made in good faith. 10.7 The Security Trustee may delegate its powers of withdrawal under this Clause to the administrative receiver, and/or manager appointed pursuant to this Debenture. 10.8 Prior to the floating charge constituted by Clause 4.3 hereof being converted into a fixed charge by operation of law or otherwise and in the absence of any directions from the Security Trustee under Clause 10.1.3 hereof any moneys received by the relevant Charging Company and paid into the Collections Account in respect of the Receivables shall upon payment in stand released from the fixed charge contained in Clause 4.2.8 hereof and shall stand subject to the floating charge contained in Clause 4.3 hereof but such release shall in no respects derogate from the subsistence of the said fixed charge on all other Receivables for the time being outstanding. 11. THE SECURITY TRUSTEE'S POWERS OF SALE AND LEASING 11.1 The Security Trustee (on behalf of the Security Beneficiaries) may exercise the statutory power of sale conferred on mortgagees by the Act free from the restrictions imposed by Section 103 thereof. 11.2 The Secured Obligations shall be deemed to have become due within the meaning of Section 101 of the Act and the security created by the Charging Companies by or pursuant to this Deed shall immediately become enforceable and the power of sale and other powers conferred by the said Section and/or by Schedule 1 to the Insolvency Act 1986, in each case as varied or extended by this Deed, and all other powers conferred on the Security Trustee (for the benefit of the Security Beneficiaries) by this Deed shall be immediately exercisable at any time, in relation to the whole or any part of the Charged Property, after the Security Trustee shall have validly and effectively demanded the payment or discharge by the Charging Companies or any of them of all or any of the Secured Obligations. Any demand for payment shall be valid and effective for the purposes of this sub-clause 11.2 notwithstanding that the demand may contain an inaccurate or incomplete statement of the Secured Obligations. 11.3 The statutory powers of leasing, letting, entering into agreements for leases or lettings and accepting and agreeing to accept surrenders of leases conferred by Sections 99 and 100 of the Act shall be exercisable by the Security Trustee at any time after the Security Trustee shall have demanded the payment or discharge by the Charging Companies or any of them of all or any of the Secured Obligations in accordance with the provisions of Clause 11.2 and whether or not the Security - -------------------------------------------------------------------------------- 16 Trustee shall then be in possession of that part of the Charged Property proposed to be leased so as to authorise the Security Trustee to make a lease or agreement for lease at a premium and for any length of term and generally without any restriction on the kinds of leases and agreements for lease that the Security Trustee may make and generally, without the necessity for the Security Trustee to comply with any restrictions imposed by or any other provisions of the said Sections 99 and 100, the Security Trustee may delegate such powers to any person but no such delegation shall preclude the subsequent exercise of any such powers by the Security Trustee itself or a subsequent delegation by the Security Trustee to any other person; and any such delegation may be revoked by the Security Trustee at any time. 12. CONSOLIDATION OF SECURITIES Sub-section (1) of Section 93 of the Act shall not apply to this Deed. 13. APPOINTMENT AND POWERS OF RECEIVER 13.1 At any time after the security constituted by this Deed becomes enforceable and while it remains so or at the request of the relevant Charging Company the Security Trustee (on behalf of the Security Beneficiaries) may appoint one or more persons to be a Receiver of the whole or any part of the Charged Property and/or of the income thereof. The Security Trustee may:- 13.1.1 (subject to the provisions of the Insolvency Act 1986) remove any Receiver previously appointed hereunder; and 13.1.2 appoint another person or persons as Receiver either in place of a Receiver so removed or who has otherwise ceased to act or to act jointly with a Receiver previously appointed. 13.2 If at any time and by virtue of any such appointment(s) any two or more persons shall hold office as Receiver of the whole or the same part or parts of the Charged Property and/or the income thereof they shall have power to act severally (unless the contrary shall be stated in the deed(s) or other instrument(s) appointing them). 13.3 Every Receiver shall (subject to any limitations or restrictions expressed in the deed or other instrument appointing him but notwithstanding any winding-up or dissolution of the Charging Companies or any of them) have and be entitled to exercise all powers conferred by the Act and/or the Insolvency Act 1986 and/or any other statute conferring power on a Receiver and in particular by way of addition thereto but without limiting any general powers hereinbefore referred to (and without prejudice to the Security Trustee's powers) the Receiver shall have power:- 13.3.1 to take possession of collect and get in the Charged Property and/or income in respect of which he was appointed; 13.3.2 to carry on or concur in carrying on the business of any of the Charging Companies and raise money from the Security Beneficiaries and others without security or on the security of all or any of the Charged Property; 13.3.3 to alter, improve, develop, complete, construct, modify, refurbish or repair any building or land and to complete or undertake or concur in the completion or undertaking (with or without modification) of any project in which any of the Charging Companies were concerned or interested prior to - -------------------------------------------------------------------------------- 17 his appointment being a project for the alteration, improvement, development, completion, construction, modification, refurbishment or repair of any building or land; 13.3.4 to sell or concur in selling leasing or otherwise disposing of the whole or any part of the Charged Property in respect of which he was appointed without the need to observe the restriction imposed by Section 103 of the Act; 13.3.5 to carry out any sale lease or other disposal of the whole or any part of the Charged Property by conveying transferring assigning or leasing in the name of any of the Charging Companies and for that purpose to enter into covenants and other contractual obligations in the name of and so as to bind any of the Charging Companies; 13.3.6 to take any such proceedings as he shall think fit in respect of the Charged Property and/or income in respect of which he was appointed in the name of any of the Charging Companies or otherwise including proceedings for recovery of rent or other monies in arrear at the date of his appointment; 13.3.7 to enter into or make any such agreement, arrangement or compromise as he shall think fit; 13.3.8 to insure the Charged Property as he shall think fit or as the Security Trustee shall direct and renew any insurances; 13.3.9 to appoint and employ such managers, officers and workmen and engage such professional advisers as he shall think fit including without prejudice to the generality of the foregoing power to employ his partners and firm; 13.3.10 to operate any rent review clause in respect of any property in respect of which he was appointed or any part thereof and to apply for any new or extended lease; 13.3.11 to do all such other things as may seem to him to be incidental or conducive to any other power vested in him in the realisation of the security hereby constituted. 13.4 In making any sale or other disposal in the exercise of their respective powers the Receiver or the Security Trustee (on behalf of the Security Beneficiaries) may accept as and by way of consideration for such sale or other disposal cash, shares, loan capital or other obligations including, without limitation, consideration fluctuating according to or dependent upon profit or turnover and consideration the amount whereof is to be determined by a third party. Any such consideration may be receivable in a lump sum or by instalments and upon receipt by the Receiver shall ipso facto be and become charged with the payment of the Secured Obligations. Any contract for any such sale or other disposal by the Receiver or the Security Trustee may contain conditions excluding or restricting the personal liability of the Receiver, and the Security Trustee and/or the Security Beneficiaries. 13.5 All monies received by the Security Trustee or by any Receiver appointed under this Deed shall (subject to the rights and claims of any person having a security ranking in priority to the security constituted by this Deed) be applied in the following order:- - -------------------------------------------------------------------------------- 18 13.5.1 in satisfaction of the costs, charges and expenses of and incidental to the Receiver's appointment and the payment of his remuneration; 13.5.2 in the payment and discharge of any liabilities incurred by the Receiver on the Charging Companies' behalf in the exercise of any of the powers of the Receiver; 13.5.3 in providing for the matters (other than the remuneration of the Receiver) specified in the first three paragraphs of sub-section (8) of Section 109 of the Act; 13.5.4 in or towards the satisfaction of the Secured Obligations and all the other obligations of the Charging Companies under this Deed; and any surplus shall be paid to the Charging Companies or other person entitled thereto. The provisions of this Clause 13.5 and Clause 13.7 shall take effect as and by way of variation and extension to the provisions of the said Section 109 which provisions as so varied and extended shall be deemed incorporated herein. 13.6 Every Receiver so appointed shall be deemed at all times and for all purposes to be the agent of the Charging Companies and (subject to the provisions of the Companies Act 1985 and the Insolvency Act 1986) the Charging Companies shall be solely responsible for his acts and defaults (except for wilful acts of default and recklessness) and for the payment of his remuneration. 13.7 Every Receiver so appointed shall be entitled to remuneration for his services at a rate to be fixed by agreement between him and the Security Trustee (or failing such agreement to be fixed by the Security Trustee) appropriate to the work and responsibilities involved upon the basis of charging from time to time adopted in accordance with his current practice or the current practice of his firm and without being limited to the maximum rate specified in Section 109(6) of the Act. 13.8 Only monies actually paid by any such Receiver to the Security Trustee in satisfaction or discharge of the Secured Obligations shall be capable of being applied by the Security Trustee in satisfaction thereof. 13.9 All or any of the powers, authorities and discretions which are conferred by this Deed either expressly or impliedly by or upon a Receiver may be exercised by the Security Trustee in relation to the whole of the Charged Property or any part thereof or notwithstanding the appointment of a Receiver of such property or any part thereof. 14. POWER OF ATTORNEY 14.1 Each of the Charging Companies hereby irrevocably appoints:- 14.1.1 the Security Trustee; 14.1.2 each and every person to whom the Security Trustee shall from time to time have delegated the exercise of the power of attorney conferred by this Clause; and 14.1.3 any Receiver appointed hereunder and for the time being holding office as such, - -------------------------------------------------------------------------------- 19 severally to be its attorney and on its behalf and in its name or otherwise to execute and do all such assurances, acts and things which may be required (or which the Security Trustee or any Receiver appointed hereunder shall consider requisite) for the protection of any security created hereunder and following the occurrence of an Event of Default or a Potential Event of Default and for carrying out any obligation imposed on any of the Charging Companies by or pursuant to this Deed including (without prejudice to the generality of the foregoing) generally for enabling the Security Trustee and the Receiver to exercise their respective powers conferred on them by this Deed or by the Act or the Insolvency Act 1986. The Security Trustee shall have full power to delegate the power conferred on it by this Clause but no such delegation by the Security Trustee to any person shall preclude the subsequent exercise of such power by the Security Trustee itself or any subsequent delegation thereof by the Security Trustee to any other person; and the Security Trustee may revoke any such delegation at any time. 14.2 Each of the Charging Companies hereby ratifies and confirms and agrees to ratify and confirm whatever such attorney as is mentioned in Clause 14.1 shall lawfully do or in good faith purport to do in the exercise or purported exercise of all or any of the powers, authorities and discretions referred to in Clause 14.1. 14.3 The power of attorney hereby granted is as regards any such Receiver (and as each of the Charging Companies hereby acknowledges) granted irrevocably and for value as part of the security constituted by this Deed to secure proprietary interests of and the performance of obligations owed to the respective donees within the meaning of the Powers of Attorney Act 1971. 15. PROTECTION OF THIRD PARTIES No person dealing with the Security Trustee or with any Receiver of the Charged Property or any part thereof appointed by the Security Trustee or with any delegate or sub-delegate of the Security Trustee shall be concerned to enquire whether any event has happened upon which any of the powers, authorities and discretions conferred by or pursuant to this Deed in relation to the Charged Property or any part thereof are or may be exercisable by the Security Trustee or by any such Receiver, delegate or sub-delegate or otherwise as to the propriety or regularity of acts purporting or intended to be in exercise of any such powers and all the protection to purchasers contained in Sections 104 and 107 of the Act and Section 42(3) of the Insolvency Act 1986 shall apply to any person purchasing from or dealing with the Security Trustee or any such Receiver, delegate or sub-delegate in like manner as if the statutory powers of sale and of appointing a Receiver in relation to the Charged Property had not been varied or extended by this Deed. 16. NEW ACCOUNTS If any of the Security Beneficiaries shall at any time receive notice (whether actual or otherwise) of any subsequent Security Interest other than a Permitted Security Interest affecting the Charged Property or any part of it, the relevant Security Beneficiary may open a new account or accounts for any of the Charging Companies in its books and if it does not in fact open any such new account then, unless the relevant Security Beneficiary gives written notice to the relevant Charging Company to the contrary, the relevant Security Beneficiary shall nevertheless be treated as if it had in fact done so at the time when it received or was deemed to have received such notice. As from that time and unless such written notice shall be given to any of the Charging Companies, all payments by or on behalf of such Charging Company to the relevant Security Beneficiary shall be credited, or treated as having been credited, to a new account of such Charging Company and shall not operate to reduce such - -------------------------------------------------------------------------------- 20 Charging Company's indebtedness and other liabilities to the relevant Security Beneficiary at the time when the relevant Security Beneficiary received or was deemed to have received such notice. 17. RIGHTS AS BETWEEN EACH CHARGING COMPANY, THE OTHER CHARGING COMPANIES AND THE SECURITY TRUSTEE (ON BEHALF OF THE SECURITY BENEFICIARIES) It is hereby agreed and declared by each Charging Company that:- 17.1 As between such Charging Company and the Security Trustee the property hereby charged by such Charging Company shall so far as concerns the Security Trustee be deemed to be a primary and principal security (notwithstanding that the property is hereby charged by such Charging Company by way of collateral security only) and accordingly such Charging Company shall not be released or discharged nor shall the security constituted by or pursuant to this Deed be impaired, affected or revoked by any act, omission, transaction, limitation, matter, thing or circumstance whatsoever which but for this provision might operate to release or exonerate such Charging Company or all or any part of the security constituted by or pursuant to this Deed or reduce, impair or affect such security or cause all or any part of the Secured Obligations to be irrecoverable from or unenforceable against the Charging Companies or any other person or to discharge, reduce, affect or impair the security constituted by or pursuant to this Deed, including without limitation:- 17.1.1 any time, waiver or indulgence granted to any of the Charging Companies or any other person or the forbearance of the Security Trustee in enforcing the obligations of any of the Charging Companies or any other person under the Facilities Agreement or hereunder or in respect of any other guarantee, security, obligation, right or remedy; 17.1.2 the recovery of any judgment against any of the Charging Companies or any other person or any action to enforce the same; 17.1.3 the taking of any other security from any of the Charging Companies or any other person or the variation, compromise, renewal or release of, or the failure, refusal or neglect to take, perfect or enforce, any rights, remedies or securities from or against any of the Charging Companies or any other person; 17.1.4 any alteration in the constitution of any of the Charging Companies or any defect in or irregular exercise of the powers of any of the Charging Companies (including, without limitation the borrowing powers of the Charging Companies) or any other person or any legal limitations, disability, incapacity or other circumstances relating to any of the Charging Companies or any other person; 17.1.5 subject as hereinafter provided, notwithstanding any amendment or supplement to or variation of the Facilities Agreement, the Security Documents or any other document or security whether or not the same shall increase the amount of the Facilities or the amount of any sums payable to the Security Trustee (on behalf of the Security Beneficiaries) and without prejudice to anything else herein contained, this Deed shall be a continuing security for any such increased amount or liability; - -------------------------------------------------------------------------------- 21 17.1.6 the insolvency, bankruptcy, liquidation or reorganisation of, or analogous proceedings relating to any of the Charging Companies or any other person or any composition or arrangement made by any of them with the Security Trustee and/or the Security Beneficiaries or any other person or any transfer or extinction of any liabilities of any of the Charging Companies or any other person by any law, order, regulation, decree, court order or similar instrument; or 17.1.7 any irregularity, unenforceability or invalidity of any obligations of any of the Charging Companies or any other person under any security or document (including this Deed) (to the intent that the security constituted by or pursuant to this Deed shall remain in full force and this Deed be construed accordingly as if there were no such irregularity, unenforceability or invalidity); and so that as a separate and independent stipulation all sums, obligations and liabilities the payment and discharge of which is expressed to be secured by this Deed which may not be recoverable from another Charging Company by reason of any act, omission, transaction, limitation, matter, thing or circumstance whatsoever shall nevertheless be recoverable from such Charging Company as though the same had been incurred by such Charging Company and such Charging Company was the sole or principal debtor in respect thereof. 17.2 Until all sums and liabilities intended to be secured by these presents have been paid off and satisfied in full, such Charging Company will not, unless the Security Trustee shall otherwise consent or, in the case of Clause 17.2.2 and 17.2.3 direct:- 17.2.1 exercise any right of subrogation or contribution or any other right or remedy which it may have in respect of any sum recovered under these presents and so that all claims and other rights and remedies it may have against any of the Charging Companies in relation thereto (including, except to the extent required by the mandatory provisions of any applicable laws, any right of set-off or counterclaim) shall be subject and subordinate to the prior payment and satisfaction in full to the Security Trustee for the benefit of the Security Beneficiaries of all sums and liabilities expressed to be hereby secured; 17.2.2 at any time after the security constituted by these presents has become enforceable and while it remains so, claim or receive payment of any monies due to it by any of the Charging Companies or exercise any other right or remedy (including, except to the intent required by the mandatory provisions of any applicable laws, any rights of set-off or counterclaim); 17.2.3 subject to the terms of the Intercreditor Agreement prove in any liquidation, bankruptcy, insolvency, reorganisation or analogous proceedings relating to any of the Charging Companies in competition with the Security Trustee or the Security Beneficiaries for any sums or liabilities owing or incurred to it by any of the Charging Companies; 17.2.4 be entitled to the benefit of any security held by or on behalf of the Security Trustee in respect of any sums and liabilities expressed to be secured by these presents; 17.2.5 take or hold security from any of the Charging Companies. - -------------------------------------------------------------------------------- 22 Any monies received and any security taken or held by a Charging Company such as is referred to in this sub-clause 17.2 and whether with or without the consent of the Security Trustee and whether or not in breach of the provisions of this Clause 17.2 shall be held by such company in trust to pay or hold the same for the Security Trustee in or towards discharge or, as the case may be, as security for the liabilities hereby secured. 17.3 The Security Trustee (on behalf of the Security Beneficiaries) shall be entitled to enforce the security constituted by these presents against any one or more of the Charging Companies without making any demand on or taking any proceedings against any of the other Charging Companies or any other person or exhausting any right or remedy against any of the Charging Companies or any other person or taking any action to enforce any part of the security constituted by any of the other Security Documents or any other guarantee or security and so that the Security Trustee shall be at liberty but not bound to resort to any other means of payment at any time and in any order as the Security Trustee thinks fit without thereby diminishing or affecting the security constituted by these presents and the security constituted by these presents may be enforced either for the payment of the ultimate balance after other means of payment have been resorted to or for the balance due at any time, notwithstanding that other means of payment have not been resorted to and, in the latter case, without entitling any Charging Company to any benefit from and/or any right of contribution in respect of such other means of payment until all sums and liabilities expressed to be secured by these presents have been finally paid off or satisfied in full. 17.4 The security constituted by these presents is in addition to and is not to prejudice or affect or be prejudiced or affected by:- 17.4.1 any other guarantee, security or lien for the sums and liabilities intended to be hereby secured which is or are now or may thereafter be held by any of the Security Beneficiaries from any Charging Company or any other person; or 17.4.2 by the omission of the Security Trustee or Security Beneficiaries to take any such security. 17.5 Any dividends or payment received by or on behalf of the Security Trustee in respect of the sums and liabilities expressed to be secured by these presents in any insolvency, bankruptcy, liquidation, reorganisation or similar proceedings, shall for the purposes of this Deed be taken to discharge those sums and liabilities only to the extent of the actual amount so received and so that the Security Trustee (on behalf of the Security Beneficiaries) may prove in any insolvency, bankruptcy, liquidation, reorganisation or similar proceedings of the Charging Company concerned for the full amount then owing to it. 18. CONSOLIDATION OF ACCOUNTS AND SET-OFF In addition to any general lien or similar right to which it may be entitled by operation of law, each of the Security Beneficiaries shall have the right at any time after the security hereby constituted has become enforceable and while it remains so and without notice to the Charging Companies (as well before as after making any demand hereunder) to combine or consolidate all or any of the Charging Companies' then existing accounts (including the Collections - -------------------------------------------------------------------------------- 23 Account) with and liabilities to them and to set-off or transfer any sum or sums standing to the credit of any one or more of such accounts (including the Collections Account) in or towards satisfaction of any of the liabilities of all or any of the Charging Companies to the Security Beneficiaries on any other account or in any other respect. The liabilities referred to in this Clause may be actual, contingent, primary, collateral, several or joint liabilities, and the accounts, sums and liabilities referred to in this Clause may be denominated in any currency. The existence of the floating charge contained in Clause 4.3 hereof over the proceeds of collection of any Receivables will not prejudice the right contained in this Clause 18 to combine or consolidate accounts. 19. CURRENCY 19.1 All monies received or held by the Security Trustee or any Receiver under this Deed may be converted into such other currency as the Security Trustee or Receiver considers necessary or desirable to cover the obligations and liabilities comprised in the Secured Obligations in that other currency at the Security Trustee's spot rate of exchange then prevailing for purchasing that other currency with the existing currency. 19.2 No payment to the Security Trustee (whether under any judgement or court order or otherwise) shall discharge the obligation or liability of the relevant Charging Company in respect of which it was made unless and until the Security Trustee shall have received payment in full in the currency in which the obligation or liability was incurred and to the extent that the amount of any such payment shall on actual conversion into such currency fall short of such obligation or liability expressed in that currency the Security Trustee shall have a further separate cause of action against the relevant Charging Company and shall be entitled to enforce the security constituted by this Deed to recover the amount of the shortfall. 20. SUSPENSE ACCOUNT All monies received, recovered or realised by the Security Trustee under this Deed may in the discretion of the Security Trustee be credited to any suspense or impersonal account and may be held in such account for so long as the Security Trustee thinks fit (with interest accruing thereon at such rate, if any, as the Security Trustee may deem fit for the account of the relevant Charging Company) pending their application from time to time (as the Security Trustee shall be entitled to do in its discretion) in or towards the discharge of any of the Secured Obligations. 21. TIME AND INDULGENCES 21.1 The Security Trustee may at any time or times without discharging or in any way affecting the security created by or pursuant to this Deed or any remedy in respect of such security, grant to any of the Charging Companies time or indulgence or abstain from asserting, calling, exercising or enforcing any remedies, securities, guarantees or other rights which it may now or hereafter have from or against any of the Charging Companies. 21.2 The Security Trustee may in its discretion grant time or other indulgence, or make any other arrangement, variation or release with, any person or persons not party hereto (whether or not such person or persons are jointly liable with the Charging Companies) in respect of any of the Secured Obligations or of any other security therefor or guarantee in respect thereof without prejudice either to the security constituted by or pursuant to this Deed or to the liability of the Charging Companies for the Secured Obligations or the exercise by the Security Trustee of any rights, remedies and privileges conferred upon it by this Deed. - -------------------------------------------------------------------------------- 24 22. REMEDIES, WAIVERS, AMENDMENTS AND CONSENTS 22.1 No failure on the part of the Security Trustee or any Receiver to exercise, and no delay on its part or their part in exercising, any right or remedy under this Deed will operate as a waiver thereof, nor will any single or partial exercise of any right or remedy preclude any other or further exercise thereof or the exercise of any other right or remedy. The rights and remedies provided in this Deed are cumulative and not exclusive of any rights and remedies provided by law. 22.2 Any provision of this Deed may be amended only if the Security Trustee and the Charging Companies so agree in writing and any breach hereof may be waived before or after it occurs only if the Security Trustee so agrees in writing. Any such waiver, and any consent by the Security Trustee under any provision of this Deed, must be in writing and may be given subject to any conditions thought fit by the Security Trustee. Any waiver or consent shall be effective only in the instance and for the purpose for which it is given. 23. EXPENSES The Charging Companies agree to pay to the Security Trustee on demand (on a full indemnity basis) all costs, charges, expenses and other sums properly incurred or to be incurred by the Security Trustee or the Security Beneficiaries or by or through any Receiver, attorney, delegate, sub-delegate, substitute or agent of the Charging Companies, or the Security Trustee for any of the purposes referred to in this Deed relating to or in connection with the security over the Charged Property including (without prejudice to the generality of the foregoing):- 23.1 all liabilities resulting from any delay in paying any stamp duty, value added tax or other similar taxes imposed on the Charged Property or in connection with any of the transactions contemplated by this Deed and all liabilities resulting from any delay in paying any such taxes; 23.2 the remuneration of any such Receiver, attorney, delegate, sub-delegate, substitute or agents of the Charging Companies and of any other servants or agents employed by the Security Trustee for any purposes connected with the enforcement or attempted enforcement of this Deed or the protection preservation realisation or attempted protection or preservation of the Charged Property; and 23.3 all costs charges and expenses (whether in respect of litigation or not) and incurred in the protection, realisation or enforcement of this Deed or the collection and recovery of any monies from time to time arising under such security (or any security collateral or supplemental thereto) or in insuring, inspecting, maintaining, completing, managing, letting, realising or exercising any other power, authority or discretion in relation to the Charged Property or any part thereof incurred under this Deed; to the intent that subject as provided herein the Security Trustee shall be afforded a full and unlimited indemnity in respect thereof. 24. PROVISIONS SEVERABLE Every provision contained in this Deed shall be severable and distinct from every other such provision and if at any time any one or more of such provisions is or becomes invalid, illegal - -------------------------------------------------------------------------------- 25 or unenforceable, the validity, legality and enforceability of the remaining such provisions shall not in any way be affected thereby. 25. AVOIDANCE OF PAYMENTS 25.1 No assurance, security or payment which may be avoided under any law relating to bankruptcy, insolvency or winding-up (including Sections 238, 239, 244 or 245 of the Insolvency Act 1986), and no release, settlement or discharge given or made by the Security Trustee (on behalf of the Security Beneficiaries) on the faith of any such assurance, security or payment, shall prejudice or affect the right of the Security Trustee to enforce the security created by or pursuant to this Deed to the full extent of the Secured Obligations. 25.2 Any settlement or discharge between a Charging Company and any Security Beneficiary shall be conditional upon no security or payment to such Security Beneficiary by that Charging Company or any other person being avoided or set aside or ordered to be refunded or reduced by virtue of any provision or enactment relating to bankruptcy, insolvency or liquidation for the time being in force and accordingly (but without limiting the other rights of such Security Beneficiary hereunder), such Security Beneficiary shall be entitled to recover from that Charging Company the value which such Security Beneficiary has placed upon such security or the amount of any such payment as if such settlement or discharge had not occurred. 25.3 Subject to Clause 25.2, upon all the Secured Obligations having been paid or discharged in full and all the Security Beneficiaries having ceased to have any further obligations under any Security Documents whether actual or contingent to make any credit or accommodation to any Group Company, the Security Trustee will, at the request and cost of the Charging Companies, immediately execute, reassign and/or do all such deeds, acts and things as may be reasonably necessary to release the Charged Property from the security and guarantees created by or pursuant to this Deed. 26. DISCRETIONS 26.1 Any liberty or power which may be exercised or any determination which may be made hereunder by the Security Trustee, as against the Charging Companies, may be exercised or made (unless otherwise expressly provided in this Deed or in the Facilities Agreement) in the absolute and unfettered discretion of the Security Trustee which shall not be under any obligation to give reasons therefor. 26.2 In this Deed where any matter fact or opinion is qualified by the words "reasonable" or "material" or any variations thereof the determination by the Security Trustee of what is reasonable or material shall be binding on the Charging Companies unless the Charging Company concerned shows that such determination is unreasonable. 27. ASSIGNMENT The Security Trustee shall have a full and unfettered right to assign the whole (but not part) of the benefit of this Deed to any person to whom the Security Beneficiaries have the right to assign their interest in the Facilities Agreement. - -------------------------------------------------------------------------------- 26 28. INTERCREDITOR AGREEMENT AND FACILITIES AGREEMENT TO PREVAIL Where any provision in this Deed conflicts with a provision of the Intercreditor Agreement and/or the Facilities Agreement the terms of the Intercreditor Agreement shall prevail for so long as the same remains in force and thereafter the terms of the Facilities Agreement shall prevail for so long as the same remains in full force and effect. Any consent, waiver or concession granted under the Facilities Agreement shall also operate as a consent, waiver or concession hereunder. Where the context permits, the rights and remedies of the Security Trustee under the Facilities Agreement and the Intercreditor Agreement and this Deed are cumulative. 29. NOTICES 29.1 All communications to made hereunder shall be made in writing. 29.2 Any notices, proceedings or other documents to be served on any of the Charging Companies pursuant to this Deed shall be addressed to it at its registered office for the attention of the Managing Director or at such other address as a Charging Company may hereafter advise the Security Trustee in writing. 29.3 Any notice to the Security Trustee should be addressed if despatched by mail to the Security Trustee at 124 Colmore Row, Birmingham B3 3AU or at such other address as it may hereafter advise the other parties in writing. 29.4 Any notice to any Charging Company shall be deemed to have been given:- 29.4.1 if posted, on the second Business Day following the day on which it has been properly despatched by first class mail (airmail, if appropriate) postage prepaid; and 29.4.2 if sent by facsimile transmission, on the Business Day on which transmitted or if sent after 5.00 p.m. at 9.30 a.m. on the next following business day or, in the case of a written notice lodged by hand, at the time of actual delivery thereof at the address referred to above. 29.5 Any notice to the Security Trustee shall be deemed to have been given only on actual receipt by the Security Trustee and the Security Trustee will promptly acknowledge receipt of any such notice. 30. LAW AND JURISDICTION This Deed shall be governed and construed in accordance with English law and the parties hereto hereby irrevocably submit to the non-exclusive jurisdiction of the English Courts. 31. MEMORANDUM AND ARTICLES Each of the Charging Companies hereby certifies that its creation by this Deed of Security in favour of the Security Trustee (for the benefit of the Security Beneficiaries) does not contravene any of the provisions of their respective Memoranda and Articles of Association. IN WITNESS whereof the Charging Companies have each duly executed this Deed the day and the year first before written - -------------------------------------------------------------------------------- 27 FIRST SCHEDULE The Charging Companies Company Name Registered No. Registered Office - ------------ -------------- ----------------- DDI Europe Limited 3731403 Green Lane, Tewkesbury, Gloucestershire GL20 8DN DDI Group Limited 445250 Green Lane, Tewkesbury, Gloucestershire GL20 8DN Classical Circuits Limited 1034995 Green Lane, Tewkesbury, Gloucestershire GL20 8DN DDI Technologies Limited 1336602 Green Lane, Tewkesbury, Gloucestershire GL20 8DN Pretan Engineering Limited 2407995 Green Lane, Tewkesbury, Gloucestershire GL20 8DN Integrated Designs & Systems Limited 2624416 Green Lane, Tewkesbury, Gloucestershire GL20 8DN Dynamic Details Limited 3232495 Green Lane, Tewkesbury, Gloucestershire GL20 8DN Zlin Electronics Limited 1338479 Green Lane, Tewkesbury, Gloucestershire GL20 8DN DDI Precision Limited 2900127 Green Lane, Tewkesbury, Gloucestershire GL20 8DN DDI International Limited 3328896 Green Lane, Tewkesbury, Gloucestershire GL20 8DN Thomas Walter Limited 1415705 Green Lane, Tewkesbury GL20 8DN DDI Sales Limited 03292688 Green Lane, Tewkesbury GL20 8DN Redlab Limited 03367094 Green Lane, Tewkesbury GL20 8DN Krizantem Limited 03366229 Green Lane, Tewkesbury GL20 8DN BWMP (Holdings) Limited 03085865 Green Lane, Tewkesbury GL20 8DN - -------------------------------------------------------------------------------- 28 THE SECOND SCHEDULE Part I Details of Registered Land Property Title No. Leasehold property at Unit 17 Alexandra Way, Ashchurch Business GR164514 Centre, Tewkesbury, Gloucester Leasehold property at 9 Harris Road also known as 32 Harris WT177524 Road, Porte Marsh Industrial Estate, Calne, Wiltshire Leasehold property at Woburn Road Industrial Estate, Postley BD199250 Road, Kempston, Bedfordshire Part II Details of Unregistered Land Leasehold property at First Floor, Phase 4 Building Racal Site, Northway Industrial Estate, Green Lane, Tewkesbury, Gloucester Leasehold property at 214 Red Lion Road, Tolworth, Surbiton, Surrey Leasehold property at 21-23 Harris Road, Porte Marsh Industrial Estate, Calne, Wiltshire Leasehold property at Unit C Belcon Industrial Estate, Bingley Road, Hoddesdon, Hertfordshire Leasehold property at Axis 10, John Tate Road, Foxholes Business Park, Hertford Leasehold property at Unit 8, Harris Road, Porte Marsh Industrial Estate, Calne, Wiltshire Leasehold property at Unit 9, Harris Road, Porte Marsh Industrial Estate, Calne, Wiltshire Leasehold property at Unit 10, Harris Road, Porte Marsh Industrial Estate, Calne, Wiltshire Leasehold property at Unit 1, Harris Road, Porte Marsh Industrial Estate, Calne, Wiltshire Leasehold property at Unit 2, Harris Road, Porte Marsh Industrial Estate, Calne, Wiltshire Leasehold property at Unit 4, Harris Road, Porte Marsh Industrial Estate, Calne, Wiltshire Leasehold property at Unit 5, Harris Road, Porte Marsh Industrial Estate, Calne, Wiltshire - -------------------------------------------------------------------------------- 29 THE THIRD SCHEDULE The Guarantee 1. The Guarantee is to be a continuing security for the whole amount now due or owing to the Security Trustee (on behalf of the Security Beneficiaries) or which may hereafter at any time become due or owing to the Security Trustee (on behalf of the Security Beneficiaries) as provided for in Clause 2 (including any and all liabilities interest and bank charges arising pursuant to and in connection therewith). References in this Schedule to payments of sums owing to or security held by or rights of the Security Trustee are references to the Security Trustee on its own behalf and on behalf of the Security Beneficiaries. 2. For all purposes of the liability of the Charging Companies and each of them to the Security Trustee (on behalf of the Security Beneficiaries) under the Guarantee (including in particular but without prejudice to the generality of the foregoing the liability of the Charging Companies for interest) every sum of money which may now be or which hereafter may from time to time become due or owing to the Security Trustee (on behalf of the Security Beneficiaries) (or would have become so due or owing were it not for the winding up of any other company) shall be deemed to continue due and owing to the Security Trustee (on behalf of the Security Beneficiaries) until the same shall be actually repaid to the Security Trustee (on behalf of the Security Beneficiaries) notwithstanding the winding up of any company or any other event whatever. 3. The Guarantee is to be in addition to and is not to prejudice or be prejudiced by any other securities or guarantees (including any guarantee signed by the Charging Companies or any of them) which the Security Trustee (on behalf of the Security Beneficiaries) or the Security Beneficiaries may now or hereafter hold on account of the Secured Obligations and is to be binding on the Charging Companies and each of them as a continuing security notwithstanding any payments from time to time made to the Security Trustee, (on behalf of the Security Beneficiaries) or the Security Beneficiaries or any settlement of account or any other thing whatsoever. 4. The Guarantee is to be applicable to the ultimate balance that may become due to the Security Trustee (on behalf of the Security Beneficiaries) or the Security Beneficiaries from any Charging Company and until payment of such balance no Charging Company shall be entitled to participate in any security held or money received by the Security Trustee (on behalf of the Security Beneficiaries) on account of such balance or to stand in the place of the Security Trustee or any of the Security Beneficiaries in respect of any such security or money until all monies and liabilities hereby guaranteed have been paid or discharged in full. 5. Any admission or acknowledgement in writing by a director of any Charging Company or any duly authorised person on behalf of any Charging Company of the amount of the indebtedness of the relevant Charging Company or of other matters relating to the Guarantee or any judgment or award of a competent court or tribunal in the United Kingdom or elsewhere obtained by the Security Trustee (on behalf of the Security Beneficiaries) or any of the Security Beneficiaries themselves against any or all of the Charging Companies or proof by the Security Trustee (on behalf of the Security Beneficiaries) or any of the Security Beneficiaries themselves in a winding up of a Charging Company which is admitted or, in the absence of manifest error, any statement of account furnished by the Security Trustee (on behalf of the Security Beneficiaries) or any of the Security Beneficiaries themselves (the correctness of which is certified by the Security Trustee), shall be prima facie evidence binding on the Charging Companies and each of them in the absence of proof to the contrary. - -------------------------------------------------------------------------------- 30 6. The Security Trustee (on behalf of the Security Beneficiaries) or any of the Security Beneficiaries themselves may without thereby affecting the rights of the Security Trustee (on behalf of the Security Beneficiaries) or any of the Security Beneficiaries themselves hereunder at any time and from time to time (whether before or after any demand for payment made by the Security Trustee under or any notice of determination of this Guarantee), refuse or grant (as the case may be) further credit or further financial facilities in addition to the Facilities to any Charging Company or the Charging Companies and the Security Trustee (on behalf of the Security Beneficiaries) or any of the Security Beneficiaries themselves may, without thereby affecting such rights, accept compositions from and make any other arrangements with any of the Charging Companies or any persons liable to the Security Trustee on behalf of the Security Beneficiaries or any of the Security Beneficiaries themselves in respect of securities held or to be held by the Security Trustee and enter into, give up and waive, modify, exchange or abstain from perfecting or taking advantage of or enforcing such securities, guarantees or other contracts or the proceeds of any of the foregoing, discharge any parties thereto and realise any securities in such manner as the Security Trustee may think expedient. 7. In the event of any of the Charging Companies going into liquidation or being wound up or reconstructed or making any arrangement with its creditors, any dividends or payments which the Security Trustee (on behalf of the Security Beneficiaries) or any of the Security Beneficiaries themselves may receive from the Charging Companies or any of them or any other persons shall be taken and applied as payments in gross and shall not prejudice the right of the Security Trustee (on behalf of the Security Beneficiaries) or any of the Security Beneficiaries themselves to recover from the Charging Companies or any of them to the full extent of the Guarantee the ultimate balance which after the receipt of such dividends or payments may remain owing to the Security Trustee (on behalf of the Security Beneficiaries) or any of the Security Beneficiaries themselves by the Charging Companies and secured by the Guarantee. 8. The Security Trustee (on behalf of the Security Beneficiaries) or any of the Security Beneficiaries themselves may without thereby affecting the rights of either of them hereunder at any time and from time to time at their absolute discretion release, discharge, compound with or otherwise vary or agree to vary the liability under the Guarantee of or make any other arrangements with the Charging Companies or any of them and no such release, discharge, composition, variation, agreement or arrangement shall prejudice or in any way affect the rights and remedies of the Security Trustee (on behalf of the Security Beneficiaries) or any of the Security Beneficiaries themselves against any other Charging Company. 9. The Security Trustee (on behalf of the Security Beneficiaries) or any of the Security Beneficiaries themselves may without prejudice to any other rights they may have at any time and from time to time place and keep for such time as they may think prudent any monies received, recovered or realised under or by virtue of the Guarantee to or on a separate or suspense account (with interest accruing thereon at such rate, if any, as the Security Trustee may deem fit for the account of the relevant Charging Company) to the credit either of any Charging Company or any of the Security Beneficiaries selected by the Security Trustee without any intermediate obligation on the part of the Security Trustee or any of the Security Beneficiaries to apply the same or any part thereof in or towards the discharge of the monies due or owing to the Security Trustee or any of the Security Beneficiaries by the Charging Companies. 10. In the event of the winding up of any of the Charging Companies, the Security Trustee (on behalf of the Security Beneficiaries) or any of the Security Beneficiaries themselves may, notwithstanding payment to the Security Trustee (on behalf of the Security Beneficiaries) or any of the Security Beneficiaries themselves by any Charging Company or any other person - -------------------------------------------------------------------------------- 31 of any part of the amount hereby guaranteed or any release, settlement, discharge or arrangement made or given by the Security Trustee (on behalf of the Security Beneficiaries) or any of the Security Beneficiaries themselves, rank as creditor and prove in the liquidation of the relevant Charging Company for the full amount of the claim of the Security Trustee (on behalf of the Security Beneficiaries) or any of the Security Beneficiaries and the Security Trustee (on behalf of the Security Beneficiaries) or any of the Security Beneficiaries may and shall receive and retain the whole of the dividends to the exclusion of the rights (if any) of the Charging Companies or any of them in competition with the Security Trustee (on behalf of the Security Beneficiaries) or any of the Security Beneficiaries themselves until such claim is fully satisfied. 10.1 No assurance, security or payment which may be avoided under Sections 238, 239 or 245 of the Insolvency Act 1986 or any of such sections and no release, settlement, discharge or arrangement which may have been given or made on the faith of any such assurance security or payment shall prejudice or affect the right of the Security Trustee (on behalf of the Security Beneficiaries) or the Security Beneficiaries themselves to recover from the Charging Companies or any of them to the full extent of the Guarantee as if such assurance, security, payment, release, settlement, discharge or arrangement (as the case may be) had never been granted given or made. 10.2 Any settlement or discharge between a Charging Company and any Security Beneficiary shall be conditional upon no security or payment to such Security Beneficiary by that Charging Company or any other person being avoided or set aside or ordered to be refunded or reduced by virtue of any provision or enactment relating to bankruptcy, insolvency or liquidation for the time being in force and accordingly (but without limiting the other rights of such Security Beneficiary hereunder), such Security Beneficiary shall be entitled to recover from that Charging Company the value which such Security Beneficiary has placed upon such security or the amount of any such payment as if such settlement or discharge has not occurred. 10.3 Subject to Clause 10.2 upon all the Secured Obligations having been paid or discharged in full and all the Security Beneficiaries having ceased to have any further obligations under any Security Documents whether actual or contingent to make any credit or accommodation to any Group Company, the Security Trustee will, at the request and cost of the Charging Companies, immediately execute, reassign and/or do all such deeds, acts and things as may be reasonably necessary to release the Charged Property from the security and guarantees created by or pursuant to this Deed. 10.4 Any release, settlement, discharge or arrangement shall as between the Security Trustee (on behalf of the Security Beneficiaries) (on the one hand) and the Charging Companies and each of them (on the other hand) be deemed to have been given or made upon the express condition that it shall become and be wholly void and of no effect if the assurance, security or payment on the faith of which it was made or given shall at any time thereafter be avoided under any of the before-mentioned statutory provisions to the intent and so that the Security Trustee (on behalf of the Security Beneficiaries) shall become and be entitled at any time after any such avoidance to exercise all or any of the rights in the Guarantee expressly conferred upon the Security Trustee (on behalf of the Security Beneficiaries) and all or any other rights which by virtue and as a consequence of the Guarantee the Security Trustee (on behalf of the Security Beneficiaries) would have been entitled to exercise but for such release, settlement, discharge or arrangement. 10.5 The Charging Companies and each of them agree that such Guarantee shall be deemed to have been and to have remained held by the Security Trustee (on behalf of - -------------------------------------------------------------------------------- 32 the Security Beneficiaries) as and by way of security for the payment to the Security Trustee (on behalf of the Security Beneficiaries) of all or any sums which shall or may become due and owing to the Security Trustee (on behalf of the Security Beneficiaries) from and by the Charging Companies or any of them either under and by virtue of the terms and conditions of the Guarantee in the event of and upon or after any avoidance of any assurance, security or payment under the said sections of the Insolvency Act 1986 or any of such sections or under or as a consequence of any Order (if any) made under Sections 238 and/or 239 of the Insolvency Act 1986. 11. Each Charging Company agrees and consents to be bound by the Guarantee notwithstanding that any other Charging Company which was intended to execute these presents or any other company which was or is to undertake liability co-extensive with any liability assumed by a Charging Company hereunder, may not do so, or that any Charging Company or any other company may be subsequently released from or found not be bound by the same. 12. As a separate and independent stipulation and without prejudice to anything else herein, the Charging Companies and each of them agree that all sums of money which have become due hereunder and which may not be recoverable from the Charging Companies or any of them on the footing of a guarantee whether by reason of any legal limitation on or disability or incapacity of any company or any other fact or circumstance and whether known to the Security Trustee and/or the Security Beneficiaries or not shall as to an equivalent amount thereof nevertheless be recoverable from the Charging Company or Charging Companies concerned as sole or principal debtor or debtors in respect thereof and shall be paid on demand in writing made by the Security Trustee and the Charging Companies hereby indemnify the Security Trustee and the Security Beneficiaries on demand, from and against any loss they may incur as a result of having now or hereafter made available any monies to the Charging Companies or having now or hereafter incurred any obligation on behalf of or at the request of the Charging Companies. - -------------------------------------------------------------------------------- 33 EXECUTED as a DEED (but not ) delivered until the date hereof) by ) DDI EUROPE LIMITED ) acting by: Director M Malone Director/Secretary P Glanfield EXECUTED as a Deed (but not ) delivered until the date hereof) ) by DDI GROUP LIMITED ) acting by: ) Director M Malone Director/Secretary P Fowler EXECUTED as a Deed (but not ) delivered until the date hereof) ) by CLASSICAL CIRCUITS LIMITED ) acting by: ) Director M Malone Director/Secretary P Fowler EXECUTED as a Deed (but not ) delivered until the date hereof) ) by DDI TECHNOLOGIES LIMITED ) acting by: ) Director M Malone Director/Secretary P Fowler - -------------------------------------------------------------------------------- 34 EXECUTED as a Deed (but not ) delivered until the date hereof) ) by PRETAN ENGINEERING LIMITED ) acting by: ) Director M Malone Director/Secretary P Fowler EXECUTED as a Deed (but not ) delivered until the date hereof) ) by INTEGRATED DESIGNS & SYSTEMS ) LIMITED acting by: ) Director M Malone Director/Secretary P Fowler EXECUTED as a Deed (but not ) delivered until the date hereof) ) by DYNAMIC DETAILS LIMITED ) acting by: ) Director M Malone Director/Secretary P Fowler EXECUTED as a Deed (but not ) delivered until the date hereof) ) by ZLIN ELECTRONICS LIMITED ) acting by: ) Director M Malone Director/Secretary P Fowler - -------------------------------------------------------------------------------- 35 EXECUTED as a Deed (but not ) delivered until the date hereof) ) by DDI PRECISION LIMITED acting by: ) ) Director M Malone Director/Secretary P Fowler EXECUTED as a Deed (but not ) delivered until the date hereof) ) by DDI INTERNATIONAL LIMITED ) acting by: ) Director M Malone Director/Secretary P Fowler EXECUTED as a Deed (but not ) delivered until the date hereof) ) by THOMAS WALTER LIMITED ) acting by: ) Director M Malone Director/Secretary M Glanfield EXECUTED as a Deed (but not ) delivered until the date hereof) ) by DDI SALES LIMITED ) acting by: ) Director M Malone Director/Secretary P Fowler - -------------------------------------------------------------------------------- 36 EXECUTED as a Deed (but not ) delivered until the date hereof) ) by REDLAB LIMITED ) acting by: ) Director M Malone Director/Secretary M Glanfield EXECUTED as a Deed (but not ) delivered until the date hereof) ) by KRIZANTEM LIMITED ) acting by: ) Director M Malone Director/Secretary M Glanfield EXECUTED as a Deed (but not ) delivered until the date hereof) ) by BWMP (HOLDINGS) LIMITED ) acting by: ) Director M Malone Director/Secretary M Glanfield SIGNED as a deed by Andrew Morris ) as duly appointed attorney of ) The Governor and Company of ) A Morris the Bank of Scotland ) in the presence of: ) Michael I Winning Victoria Square House Victoria Square Birmingham B2 4DL Solicitor - -------------------------------------------------------------------------------- 37 EX-10.30 7 dex1030.txt AMENDMENT TO LEASE AGREEMENT EXHIBIT 10.30 AMENDMENT TO LEASE ------------------ THIS AMENDMENT TO LEASE ("Amendment") is dated as of this 9th day of November, 2001, by and between D&D TAROB PROPERTIES, LLC, a California limited liability company ("Lessor"), and, DYNAMIC DETAILS INCORPORATED SILICON VALLEY, a Delaware corporation, formerly known as Dynamic Circuits, Inc., a Delaware Corporation ("Lessee"), who agree as follows: 1. Recital. This Agreement is made with reference to the following facts ------- and objectives: A. Mercury Partners 30, Inc. and Dynamic, Circuits Inc. entered into that certain Standard Industrial/Commercial Multi-Lease Agreement dated March 20, 1997 ("Lease"), for the lease of approximately 32,025 square feet of space located at 1988 Tarob Court, Milpitas, California, which is more particularly described in the Lease ("Premises"). B. The term of the Lease was for five (5) years commencing on August 1, 1997, and expiring on July 31, 2002. Additionally, Lessee has one (1) option to extend the term of the Lease for five (5) years subject to determination of the prevailing rental rate ("Renewal Option"). C. Lessee desires to exercise the Renewal Option and extend the term of the Lease for an additional five (5) years, whereby the extended term will commence August 1, 2002, and terminate on July 31, 2007. 2. Extension of Term. The original term of the Lease is hereby extended by ----------------- the exercise of the Renewal Option for a period of five (5) additional years, whereby the extended term shall commence on August 1, 2002, and shall terminate on July 31, 2007 ("Extended Term"). 3. Base Rent Schedule During Extended Term. The following is added to the --------------------------------------- end of Section 50 of the Lease: "The following monthly triple net Base Rent shall apply during the Extended Term of this Lease: Months Monthly Base Rent ------ ----------------- 01 - 12 $60,847.50 13 - 24 $63,281.40 25 - 36 $65,812.66 37 - 48 $68,445.16 49 - 60 $71,182.97" 4. Condition of Premises. Lessee has inspected the Premises and --------------------- acknowledges that the Premises are in good condition and accepts the same on an "As Is" basis. D&D Tarob Properties, LLC/DDI Corporation Extension Amendment to Lease 5. Option to Extend. In recognition that Lessee has duly executed its ---------------- right to extend the Lease under Section 55 of the Lease, Section 55 of the Lease entitled "Option to Renew is hereby deleted in its entirety and replaced with a new Section 55 which reads in its entirety as follows: "a.) Option to Extend. Provided that Lessee has not assigned Lessee's ---------------- interest in the Lease or subleased the Premises (or any portion thereof, excepting paragraph 67 herein) and subject to the conditions of paragraph 39 under the Lease, Lessee, shall have the option to extend ("Option to Extend") the Term of the Lease for one (1) period of five (5) years ("Second Extended Term") on the terms and conditions provided herein, except with regard to the amount of the Base Rent and adjustments, as described below. Lessee shall exercise the Option to Extend, if at all, by giving written notice (the "Option Notice") to Lessor at least six (6) months, but no more than twelve (12) months prior to the expiration date of the Extended Term of this Lease. If Lessee fails to exercise the Option to Extend by giving the Option Notice to Lessor on or before a date which is twelve (12) months to six (6) months prior to the expiration of the Extended Term, the Option to Extend will be deemed to have been waived by Lessee. If Lessee is in default under the terms and provisions of the Lease on the date of giving the Option Notice, and such default is not cured within the applicable cure period, the Option Notice, at Lessor's sole election, shall be totally ineffective; and if Lessee is in default of any terms or provisions of the Lease on the date the Second Extended Term is to commence, which default is not cured within the applicable cure period, then at Lessor's sole election, the Second Extended Term shall not commence and this Lease shall expire at the termination of the Extended Term of this Lease. The Base Rent payable by Lessee to Lessor at the commencement of the Extended Term, and adjustments to the Base Rent during the Extended Term shall be the then prevailing market rental rate and adjustments for space of equivalent quality, size, utility and location with the length of the Extended Term and the credit standing of Lessee to be taken into account, as agreed to by Lessor and Lessee; as hereinafter provided but in any event not less than the Base Rent payable at the expiration of the Extended Term. b.) Determination of Prevailing Market Rental Value. Base Rent for an ----------------------------------------------- Extended Term shall be at prevailing market rental value, determined as follows: (i) Lessor shall deliver to Lessee written notice of Lessor's determination of the prevailing market rental value within thirty (30) days after Lessor receives the Option Notice from Lessee. (ii) If Lessee disputes Lessor's determination of the prevailing market rental value as contained in Lessor's notice, Lessee shall notify Lessor in writing within thirty (30) days of its receipt of Lessor's determination, which notice shall set forth Lessee's determination of the prevailing market rental value. Should Lessee fail to timely notify Lessor as aforesaid, then Lessor's determination of the prevailing market rental 2 value as contained in Lessor's notice shall constitute the Base Rent for the Second Extended Term. (iii) Should Lessee timely notify Lessor as aforesaid, Lessor and Lessee shall attempt to resolve their differences within ten (10) days following Lessor's receipt of Lessee's notice. If Lessor and Lessee cannot agree on the prevailing market rental value during such ten (10) day period, Lessor and Lessee shall each appoint a disinterested M.A.I. appraiser with no less than five (5) years experience appraising similar space in the county in which the Premises are located and give notice of such appointment to the other within ten (10) days after the preceding ten (10) day period. If either Lessor or Lessee shall fail timely to appoint an appraiser, then the single appraiser appointed by one party shall proceed to make the determination of the prevailing market rental value. Such appraiser(s) shall, within thirty (30) days after the appointment of the last of them to be appointed, complete their written determinations of the prevailing market rental value and furnish the same to Lessor and Lessee. Each party shall pay the fees and costs of the appraiser appointed by it. If the valuations vary by 5% or less of the lower value, the prevailing market rental value shall be the average of the two valuations. (iv) If the valuations vary by more than 5% of the lower value, the two appraisers shall, within ten (10) days after submission of the last appraisal report, appoint a third disinterested M.A.I. appraiser experienced in appraising similar space in the county in which the Premises are located. If the two appraisers shall be unable to agree in a timely manner on the selection of the third appraiser, then either appraiser, on behalf of both, may request appointment of such third disinterested M.A.I. appraiser by the American Arbitration Association process. Such third appraiser shall, within thirty (30) days after appointment, select one of the two valuations submitted by the first two appraisers as such third appraiser's determination of the prevailing market value, and shall submit such decision to Lessor and Lessee. The prevailing market rental value of the Premises as determined by the third appraiser shall be controlling. All fees and costs incurred in connection with the determination of the prevailing market rental value by the third appraiser shall be paid one-half by Lessor and one-half by Lessee." 6. Brokers' Fees. All negotiations relative to this Amendment and the ------------- transactions contemplated hereby have been carried on by Lessee directly with Lessor, without the use of any brokers. Each party shall indemnify and hold harmless the other party against and in respect to any claim for brokers' fees resulting from actions taken by the former. 7. Miscellaneous Provisions. ------------------------ A. Except as modified herein, all terms of the Lease, together with all Addendums and attachments thereto, shall continue to remain in full force and effect. 3 B. If either party commences an action against the other party arising out of or in connection with this Amendment, or in connection with the Lease, or any addenda thereto, the prevailing party shall be entitled to have and recover from the losing party reasonable attorney's fees and costs of suit. IN WITNESS WHEREOF, the parties have executed this First Amendment to Lease as of the date and year first above written at Milpitas, California. DYNAMIC DETAILS INCORPORATED SILICON VALLEY By: /s/ Tim Donnelly ------------------------------------- Tim Donnelly, Vice President Authorized Officer D&D TAROB PROPERTIES, LLC By: /s/ Charles D. Dimick ------------------------------------- Charles D. Dimick, Managing Member 4 [logo] JER Partners [LETTERHEAD OF JER PARTNERS] November 13, 2000 DDI Corporation 1988 Tarob Court Milpitas, CA 95035 Re: Notice Of Assignment Of Lease, Change Of Rent Payment Address, and Change Of Notice Address Dear Tenant: Notice is hereby given that on November 8, 2000, JER Tarob LLC, a Delaware limited liability company ("Landlord") assigned to D&D Tarob Properties, LLC, a California limited liability company ("Assignee"), all of Landlord's rights, title, deposits, advance rents, impound accounts, and interest in the lease agreement by and between JER Tarob LLC and DDI Corporation dated August 1, 1997 (the "Lease"). The address for all notices and rent payments under the Lease is hereby --- changed to: D&D Tarob Properties, LLC Attention: Chuck Dimick 1988 Tarob Court Milpitas, CA 95035 If you have any questions, regarding this Letter, please contact the undersigned. JER TAROB LLC, a Delaware limited liability company By: JER REAL ESTATE PARTNERS, L.P., a Delaware limited partnership, Member By: JER REAL ESTATE ADVISORS, L.P., a Delaware limited partnership, General Partner By: JER REAL ESTATE ADVISORS, INC., a Delaware corporation, General Partner By: /s/ Barbara Bowman -------------------------- Name: Barbara Bowman ------------------- Title: Vice President ------------------- cc: Bernard J. Vogel, III, Esq. EX-12.1 8 dex121.txt STATEMENT RE: COMPUTATION OF RATIO Exhibit 12.1 Computation of Earnings to Fixed Charges ---------------------------------------- (in millions, except ratio data)
Year Ended Year Ended December 31, 1998 December 31, 1999 ---------------------------- ---------------------------- DDi Capital DDi Corp. DDi Capital DDi Corp. ----------- --------- ----------- --------- Earnings: Income before provision for income taxes (50.9) (53.3) (19.3) (24.8) Plus: fixed charges 35.8 37.9 42.4 47.7 ------ ------ ------ ------ (15.1) (15.4) 23.1 22.9 -------- -------- ------ ------ Fixed Charges: Interest Expense (income), net 35.3 37.4 41.4 46.7 One-third of rent expense (a) 0.5 0.5 1.0 1.0 --- --- --- --- 35.8 37.9 42.4 47.7 ------ ------ ------ ------ Earnings to fixed charges ratio (0.4) (0.4) 0.5 0.5 ===== ===== === === Earnings deficiency, if applicable (50.9) (53.3) (19.3) (24.8) ======== ======== ======== ======== Year Ended Year Ended December 31, 2000 December 31, 2001 ---------------------------- ---------------------------- DDi Capital DDi Corp. DDi Capital DDi Corp. ----------- --------- ----------- --------- Earnings: Income before provision for income taxes 48.8 51.6 (86.3) (85.1) Plus: fixed charges 37.5 43.1 16.9 24.6 ------ ------ ------ ------ 86.3 94.7 (69.4) (60.5) ------ ------ ------ ------ Fixed Charges: Interest Expense (income), net 36.3 41.2 14.8 22.1 One-third of rent expense (a) 1.2 1.9 2.1 2.5 ------ ------ ------ ------ 37.5 43.1 16.9 24.6 ------ ------ ------ ------ Earnings to fixed charges ratio 2.3 2.2 (4.1) (2.5) === === === === Earnings deficiency, if applicable n/a n/a (86.3) (85.1) === === ====== ======
(a) Based on the amount reported as rent expense under operating leases in the Company's historical financial statements. EX-21.1 9 dex211.txt SUBSIDIARIES OF DDI CORP. EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT The table below lists DDi Corp's consolidated subsidiaries. The ownership of these entities is as follows:
Jurisdiction of Name Organization Ownership - ---- --------------- --------- DDi Europe Limited United Kingdom 100% directly owned by DDi Corp. DDi Sales Limited United Kingdom 100% directly owned by DDi Europe Limited DDi Intermediate Holdings Corp. California 100% directly owned by DDi Corp. DDi Capital Corp. California 100% directly owned by DDi Intermediate Holdings Corp. Dynamic Details, Incorporated California 100% directly owned by DDi Capital Corp. DDi Sales Corp. Delaware 100% directly owned by Dynamic Details, Incorporated Dynamic Details Design, L.L.C. Delaware 100% directly owned by DDi Sales Corp. DCI/Design Plus, LLC Delaware 100% directly owned by DDi Sales Corp. DDJ, Inc. (Kabushiki Kaisha DDJ) Japan 100% directly owned by DDi Sales Corp. Dynamic Details Engineering Services, LLC Delaware 100% directly owned by DDi Sales Corp. Dynamic Details Incorporated, Virginia Delaware 100% directly owned by Dynamic Details, Incorporated DDi Canada Acquisition Corp. Ontario, Canada 100% directly owned by Dynamic Details, Incorporated Dynamic Details Canada, Inc. Ontario, Canada 100% directly owned by DDi Canada Acquisition Corp. Laminate Technology Corp. Delaware 100% directly owned by Dynamic Details, Incorporated Dynamic Details Incorporated, Silicon Delaware 100% directly owned by Dynamic Details, Incorporated Valley Details Global Sales, Inc. Virgin Islands 100% directly owned by Dynamic Details, Incorporated Dynamic Details Incorporated, Colorado Colorado 100% directly owned by Dynamic Details, Incorporated Springs Dynamic Details Texas Holdings Corp. Delaware 100% directly owned by Dynamic Details, Incorporated DDi-Texas Intermediate Holdings, L.L.C. Delaware 100% directly owned by Dynamic Details Texas Holding Corp.
DDi-Texas Intermediate Partners, L.L.C. Delaware 100% directly owned by Dynamic Details Texas Holding Corp. Dynamic Details Texas, L.P. Delaware 100% indirectly owned by Dynamic Details Texas Holding Corp. Dynamic Details Incorporated, Texas Delaware 100% directly owned by Dynamic Details Incorporated, Silicon Valley DDi-Texas Intermediate Holdings II, Delaware 100% directly owned by Dynamic Details Incorporated, L.L.C. Texas DDi-Texas Intermediate Partners II, Delaware 100% directly owned by Dynamic Details Incorporated, L.L.C. Texas Dynamic Details, L.P. Delaware 100% indirectly owned by Dynamic Details Incorporated, Texas DDi Group Limited United Kingdom 100% directly owned by DDi Europe Limited BWMP (Holdings) Limited United Kingdom 100% indirectly owned by DDi Europe Limited Zlin Electronics Limited United Kingdom 100% directly owned by DDi Group Limited Classical Circuits Limited United Kingdom 100% directly owned by DDi Group Limited Zlin International Limited United Kingdom 100% directly owned by DDi Group Limited Symonds Precision Limited United Kingdom 100% directly owned by DDi Group Limited Calne Electronics Limited United Kingdom 100% directly owned by DDi Group Limited Integrated Designs & Systems Limited United Kingdom 100% directly owned by Calne Electronics Limited Preton Electronics Limited United Kingdom 100% directly owned by Calne Electronics Limited Thomas Walter Limited United Kingdom 100% directly owned by BWMP (Holdings), Limited Redlab Limited United Kingdom 100% directly owned by DDi Europe Limited Krizanthem Limited United Kingdom 100% directly owned by DDi Europe Limited Symonds Electronics Limited United Kingdom 100% directly owned by DDi Europe Limited Osborne Group Holdings Limited United Kingdom 100% indirectly owned by DDi Europe Limited HBH Group Limited United Kingdom 100% directly owned by DDi Europe Limited Osborne Electronics Limited United Kingdom 100% directly owned by Osborne Group Holdings Limited Osborne SMT Limited United Kingdom 100% directly owned by Osborne Group Holdings Limited
EX-23.1 10 dex231.txt CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (File No. 333-37336) of DDi Corp. of our report dated January 29, 2002 relating to the consolidated financial statements and financial statement schedule, which appears in this Form 10-K. /s/ PRICEWATERHOUSECOOPERS LLP - ------------------------------- PricewaterhouseCoopers LLP Orange County, California March 22, 2002 EX-24.1 11 dex241.txt POWER OF ATTORNEY Exhibit 24.1 POWER OF ATTORNEY We, the undersigned Officers and Directors of DDi Corp. ("DDi Corp.") and DDi Capital Corp. ("DDi Capital"), as the case may be, hereby severally constitute and appoint Joseph P. Gisch, Bruce D. McMaster, and each of them singly, our true and lawful attorneys, with full power to them and each of them, to sign for us, and in our names and in the capacities indicated below, the Form 10-K of the companies listed above and any and all amendments to said Form 10-K, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto our said attorneys, and each of them acting alone, full power and authority to do and perform each and every act and thing requisite or necessary to be done in the premises, as fully to all intents and purposes as he or she might or could do in person, and hereby ratify and confirm all that said attorneys or any of them may lawfully do or cause to be done by virtue thereof. WITNESS our hands and common seal on the date set forth below.
Signature Title Date - --------- ----- ---- /S/ BRUCE D. MCMASTER President, Chief Executive Officer and March 25, 2002 - ------------------------ Director of DDi Corp. and DDi Capital Bruce D. McMaster /S/ JOSEPH P. GISCH Chief Financial Officer, Treasurer and March 25, 2002 - ------------------------ Secretary of DDi Corp. and DDi Capital Joseph P. Gisch /S/ JOHN STUMPF Controller of DDi Corp. March 25, 2002 - ------------------------ John Stumpf /S/ PRESCOTT ASHE Director of DDi Corp. and DDi Capital March 25, 2002 - ------------------------ Prescott Ashe /S/ MARK R. BENHAM Director of DDi Corp. March 25, 2002 - ------------------------ Mark R. Benham /S/ EDWARD W. CONARD Director of DDi Corp. March 25, 2002 - ------------------------ Edward W. Conard
Signature Title Date - --------- ----- ---- /S/ DAVID DOMINIK Director of DDi Corp. and DDi Capital March 25, 2002 - ------------------------ David Dominik /S/ ROBERT GUEZURAGA Director of DDi Corp. March 25, 2002 - ------------------------ Robert Guezuraga /S/ MURRAY KENNEY Director of DDi Corp. March 25, 2002 - ------------------------ Murray Kenney /S/ STEPHEN G. PAGLIUCA Director of DDi Corp. March 25, 2002 - ------------------------ Stephen G. Pagliuca /S/ STEPHEN M. ZIDE Director of DDi Corp. March 25, 2002 - ------------------------ Stephen M. Zide
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