AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 26, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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DETAILS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 3672 33-0779123
(PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NUMBER)
(I.R.S. EMPLOYER
(STATE OR OTHER IDENTIFICATION NUMBER)
JURISDICTION OF
INCORPORATION OR
ORGANIZATION)
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1231 SIMON CIRCLE
ANAHEIM, CALIFORNIA 92806
(714) 630-4077
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
BRUCE D. MCMASTER
DETAILS, INC.
1231 SIMON CIRCLE
ANAHEIM, CALIFORNIA 92806
(714) 630-4077
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,INCLUDING AREA CODE, OF
AGENT FOR SERVICE)
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COPY TO:
LAUREN I. NORTON, ESQ. ROPES & GRAY ONE INTERNATIONAL PLACE BOSTON,
MASSACHUSETTS 02110 (617) 951-7000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
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PROPOSED
MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER UNIT REGISTRATION FEE
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10% Senior Subordinated Notes due 2005.... $100,000,000 100% $30,303
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+THIS PROSPECTUS AND THE INFORMATION CONTAINED HEREIN ARE SUBJECT TO +
+COMPLETION OR AMENDMENT. UNDER NO CIRCUMSTANCES SHALL THIS PROSPECTUS +
+CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED NOVEMBER 26, 1997
PROSPECTUS
DETAILS, INC.
OFFER TO EXCHANGE
SENIOR SUBORDINATED NOTES DUE NOVEMBER 15, 2005
WHICH HAVE BEEN REGISTERED UNDER THE LOGO
SECURITIES ACT OF 1933, AS AMENDED,
FOR AN EQUAL PRINCIPAL AMOUNT OF ITS
SENIOR SUBORDINATED NOTES DUE NOVEMBER 15, 2005,
WHICH HAVE NOT BEEN SO REGISTERED
-----------
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS THEREUNDER WILL EXPIRE AT 5:00 P.M.
NEW YORK CITY TIME, ON , 1998, UNLESS EXTENDED
-----------
Details, Inc., a California corporation (the "Company"), hereby offers, upon
the terms and subject to the conditions set forth in this Prospectus and the
accompanying Letter of Transmittal (which together constitute the "Exchange
Offer"), to exchange an aggregate principal amount of up to $100,000,000 of its
new Senior Subordinated Notes due 2005 (the "Exchange Notes"), which have been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
for a like principal amount of its outstanding Senior Subordinated Notes due
2005 (the "Original Notes" and, together with the Exchange Notes, the "Notes")
from the holders (the "Holders") thereof. The terms of the Exchange Notes are
identical in all material respects to the Original Notes, except for certain
transfer restrictions and registration rights relating to the Original Notes.
The Company will accept for exchange any and all Original Notes validly
tendered and not withdrawn prior to 5:00 p.m., New York City time, on ,
1998, unless extended (as so extended, the "Expiration Date"). Tenders of
Original Notes may be withdrawn at any time prior to the Expiration Date. The
Exchange Offer is not conditioned upon any minimum principal amount of Original
Notes being tendered for exchange pursuant to the Exchange Offer. Pursuant to
the terms of the Registration Rights Agreement (as defined herein), the
Exchange Offer will remain open for not less than 30 days (or longer, if
required by applicable law) after the date of which notice of the Exchange
Offer is mailed to Holders of the Original Notes. The Exchange Offer is subject
to certain other customary conditions. See "The Exchange Offer."
Interest on the Exchange Notes is payable semi-annually on May 15 and November
15 of each year, commencing on May 15, 1998. Except as described below, the
Company may not redeem the Exchange Notes prior to November 15, 2001. On or
after such date, the Company may redeem the Exchange Notes, in whole or in
part, at the redemption prices set forth herein together with accrued and
unpaid interest, if any, to the redemption date. In addition, at any time on or
prior to November 15, 2000, the Company may, at its option, redeem up to 40% of
the original principal amount of the Exchange Notes at a redemption price of
110% of the principal amount thereof, together with accrued and unpaid interest
thereon to the applicable redemption date, with the net proceeds of one or more
Equity Offerings (as defined), received by, or invested in, the Company so long
as there is a Public Market (as defined) at the time of such redemption;
provided that at least 60% of the original aggregate principal amount of the
Exchange Notes remain outstanding immediately after the occurrence of such
redemption. The Exchange Notes will not be subject to any sinking fund
requirement. Upon the occurrence of a Change of Control (as defined), (i) the
Company will have the option, at any time prior to November 15, 2001, to redeem
the Exchange Notes, in whole but not in part, at a redemption price equal to
100% of the principal amount thereof plus the Applicable Premium (as defined),
together with accrued and unpaid interest, if any, to the date of redemption,
and (ii) if the Company does not so redeem the Exchange Notes or if the Change
of Control occurs after November 15, 2001, each Holder will have the right to
require the Company to make an offer to repurchase all of the outstanding
Exchange Notes at a price equal to 101% of the principal amount thereof,
together with accrued and unpaid interest, if any, to the date of repurchase.
See "Description of Exchange Notes."
The Exchange Notes will be unsecured obligations of the Company, subordinated
in right of payment to all existing and future Senior Indebtedness (as defined)
of the Company and will be effectively subordinated to all obligations of the
subsidiaries of the Company. The Exchange Notes will rank pari passu with all
senior subordinated indebtedness of the Company and will rank senior to all
subordinated indebtedness of the Company. On a pro forma basis offer giving
effect to the Transactions (as defined) and the Initial Offering (as defined)
as if they had occurred on September 30, 1997, the aggregate principal amount
of the Company's outstanding Senior Indebtedness was approximately $87.7
million. The Indenture under which the Exchange Notes will be issued (the
"Indenture") will permit the Company to incur additional indebtedness,
including Senior Indebtedness, subject to certain limitations. See "Description
of Exchange Notes."
The Exchange Notes are being offered hereunder in order to satisfy certain
obligations of the Company contained in the Exchange and Registration Rights
Agreement dated November 18, 1997, between the Company and the other signatory
thereto (the "Registration Rights Agreement"). The Company believes that based
on interpretations by the staff of the Securities and Exchange Commission (the
"Commission"), Exchange Notes issued pursuant to the Exchange Offer in exchange
for Original Notes may be offered for resale, resold and otherwise transferred
by each Holder thereof (other than any Holder which is an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act) without
compliance with the registration and prospectus delivery requirements of the
Securities Act, provided that such Exchange Notes are acquired in the ordinary
course of such Holder's business and such Holder has no arrangement with any
person to participate in the distribution of such Exchange Notes.
Each broker-dealer that receives Exchange Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act.
The Company will not receive any proceeds from the Exchange Offer and will pay
all expenses incident to the Exchange Offer.
--------------------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE
CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE EXCHANGE NOTES.
--------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-----------
The date of this Prospectus is , 1998.
The Exchange Offer is not being made to, nor will the Company accept
surrenders for exchange from, Holders of Original Notes in any jurisdiction in
which such Exchange Offer or the acceptance thereof would not be in compliance
with the securities or blue sky laws of such jurisdiction.
The Exchange Notes will be available initially only in book-entry form. The
Company expects that the Exchange Notes issued pursuant to this Exchange Offer
will be issued in the form of a Global Note (as defined herein), which will be
deposited with, or on behalf of, The Depository Trust Company (the
"Depositary") and registered in its name or in the name of Cede & Co., its
nominee. Beneficial interests in the Global Note representing the Exchange
Notes will be shown on, and transfers thereof will be effected through,
records maintained by the Depositary and its participants. After the initial
issuance of the Global Note, Exchange Notes in certificated form will be
issued in exchange for interests in the Global Note only on the terms set
forth in the Indenture (the "Indenture") between the Company and State Street
Bank and Trust Company, as trustee (the "Trustee"), dated as of November 18,
1997. See "Description of Exchange Notes--Book-Entry Transfer."
Prior to this Exchange Offer, there has been no public market for the
Original Notes. To the extent that Original Notes are tendered and accepted in
the Exchange Offer, a Holder's ability to sell untendered Original Notes could
be adversely affected. If a market for the Exchange Notes should develop, the
Exchange Notes could trade at a discount from their face value. The Company
does not currently intend to list the Exchange Notes on any securities
exchange or to seek approval for quotation through any automated quotation
system.
Neither the Company nor any of its subsidiaries will receive any cash
proceeds from the issuance of the Exchange Notes offered hereby. No dealer-
manager is being used in connection with this Exchange Offer. See "Use of
Proceeds" and "Plan of Distribution."
THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION. HOLDERS OF ORIGINAL NOTES ARE URGED TO READ THIS PROSPECTUS AND
THE RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO TENDER
THEIR ORIGINAL NOTES PURSUANT TO THE EXCHANGE OFFER.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. ALL
STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL FACTS INCLUDED IN THIS
PROSPECTUS, INCLUDING WITHOUT LIMITATION, CERTAIN STATEMENTS UNDER "SUMMARY,"
"THE TRANSACTIONS," "UNAUDITED PRO FORMA FINANCIAL DATA," "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND
"BUSINESS" AND LOCATED ELSEWHERE HEREIN REGARDING THE COMPANY'S FINANCIAL
POSITION AND BUSINESS STRATEGY, MAY CONSTITUTE FORWARD-LOOKING STATEMENTS. ALL
OF THESE FORWARD-LOOKING STATEMENTS ARE BASED ON ESTIMATES AND ASSUMPTIONS
MADE BY MANAGEMENT OF THE COMPANY, WHICH ALTHOUGH BELIEVED TO BE REASONABLE,
ARE INHERENTLY UNCERTAIN. THEREFORE, UNDUE RELIANCE SHOULD NOT BE PLACED ON
SUCH ESTIMATES AND STATEMENTS. NO ASSURANCE CAN BE GIVEN THAT ANY OF SUCH
ESTIMATES OR
i
STATEMENTS WILL BE REALIZED AND IT IS LIKELY THAT ACTUAL RESULTS WILL DIFFER
MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS. FACTORS
THAT MAY CAUSE SUCH DIFFERENCES INCLUDE: (1) INCREASED COMPETITION; (2)
INCREASED COSTS; (3) INABILITY TO CONSUMMATE ACQUISITIONS ON ATTRACTIVE TERMS;
(4) LOSS OR RETIREMENT OF KEY MEMBERS OF MANAGEMENT; (5) INCREASES IN THE
COMPANY'S COST OF BORROWINGS OR UNAVAILABILITY OF ADDITIONAL DEBT OR EQUITY
CAPITAL ON TERMS CONSIDERED REASONABLE BY MANAGEMENT; (6) ADVERSE STATE,
FEDERAL OR FOREIGN LEGISLATION OR REGULATION OR ADVERSE DETERMINATIONS BY
REGULATORS; (7) CHANGES IN GENERAL ECONOMIC CONDITIONS IN THE MARKETS IN WHICH
THE COMPANY MAY COMPETE AND FLUCTUATIONS IN DEMAND IN THE ELECTRONICS
INDUSTRY; AND (8) ABILITY TO SUSTAIN HISTORICAL MARGINS AS THE INDUSTRY
DEVELOPS. MANY OF SUCH FACTORS WILL BE BEYOND THE CONTROL OF THE COMPANY AND
ITS MANAGEMENT. FOR FURTHER INFORMATION OR OTHER FACTORS WHICH COULD AFFECT
THE FINANCIAL RESULTS OF THE COMPANY AND SUCH FORWARD-LOOKING STATEMENTS, SEE
"RISK FACTORS."
INDUSTRY DATA AND FINANCIAL INFORMATION
The Company relies on and refers to information it has received from various
industry analysts regarding the markets for its principal products, printed
circuit boards, which the Company believes to be reliable but the accuracy and
completeness of such information is not guaranteed and the Company has not
independently verified this market data. Similarly, internal Company surveys,
while believed by the Company to be reliable, have not been verified by
independent sources.
AVAILABLE INFORMATION
The Company has filed a registration statement on Form S-4 (herein referred
to, together with all exhibits and schedules thereto and any amendments
thereto, as the "Exchange Offer Registration Statement") under the Securities
Act with respect to the Exchange Notes offered hereby. This Prospectus, which
forms a part of the Exchange Offer Registration Statement, does not contain
all of the information set forth in the Exchange Offer Registration Statement,
certain parts of which are omitted in accordance with the rules and
regulations of the Commission. For further information with respect to the
Company and the Exchange Notes offered hereby, reference is made to the
Exchange Offer Registration Statement. Statements made in this Prospectus as
to the contents of certain documents are not necessarily complete and, in each
instance, reference is made to the copy of the document filed as an exhibit to
the Exchange Offer Registration Statement.
The Company is not currently subject to the periodic reporting and other
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). Pursuant to the Indenture, the Company has agreed that,
whether or not it is required to do so by the rules and regulations of the
Commission, for so long as any of the Notes remain outstanding, the Company
will furnish to the holders of the Notes and will, if permitted, file with the
Commission (i) all quarterly and annual financial information that would be
required to be contained in a filing with the Commission on Forms 10-Q and 10-
K if the Company was required to file such forms, including a "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and,
with respect to the annual information only, a report thereon by the Company's
certified independent accountants and (ii) all reports that would be required
to be filed with the Commission on Form 8-K if the Company were required to
file such reports. In addition, for so long as any of the Original Notes
remain outstanding, the Company has agreed to make available to any
prospective purchaser of the Original Notes or beneficial owner of the
Original Notes in connection with any sale thereof the information required by
Rule 144A(d)(4) under the Securities Act.
ii
Any reports or documents filed by the Company with the Commission (including
the Exchange Offer Registration Statement) may be inspected and copied at the
Public Reference Section of the Commission's office at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
in New York (7 World Trade Center, 13th Floor, New York, New York 10048) and
Chicago (Citicorp Center, 14th Floor, 500 West Madison Street, Chicago,
Illinois 60661). Copies of such reports or other documents may be obtained at
prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549. In addition, the Commission
maintains a Web site that contains reports and other information that is filed
through the Commission's Electronic Data Gathering Analysis and Retrieval
System. The Web site can be accessed at http://www.sec.gov.
iii
SUMMARY
Unless otherwise stated in this Prospectus or unless the context otherwise
requires, references to the "Company," "Details, Inc.," "Details" or the
"Issuer" means Details, Inc., a California corporation and a direct wholly-
owned subsidiary of Details Capital Corp. ("Details Capital"). Details Capital
is a direct wholly-owned subsidiary of Details Holdings Corp. (f/k/a Details,
Inc.) ("Holdings"), a California corporation. On November 3, 1997, Holdings
organized the Issuer and contributed substantially all of its assets, subject
to certain liabilities (other than the Holdings Facility (as defined)) to the
Issuer. References to the "Company," and the financial statements and other
financial data herein are, for the periods prior to such transfer, references
to Holdings or the financial statements and other financial data of Holdings,
as predecessor to the Issuer and Details Capital. On November 19, 1997 Holdings
organized Details Capital and on December , 1997, Holdings contributed
substantially all of its assets, subject to certain liabilities, including the
Discount Notes (as defined) to Details Capital. The following summary is
qualified in its entirety by, and should be read in conjunction with, the more
detailed information and financial data, including the "Unaudited Pro Forma
Financial Data," "Selected Historical Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the audited financial statements included elsewhere in this
Prospectus. Unless otherwise specified, "pro forma basis" as used in this
Summary means pro forma for the Transactions (as defined) and the Initial
Offering (as defined). Unless otherwise specified, "year-to-date" refers to the
nine months ended September 30, 1997.
THE COMPANY
Details is a leading manufacturer and marketer of complex printed circuit
boards ("PCBs") for the time critical or "quick-turn" segment of the domestic
PCB industry. Printed circuit boards are the basic platforms used to
interconnect microprocessors, integrated circuits, and other components
essential to the functioning of virtually all electronic products. Quick-turn
PCBs, which are defined as printed circuit boards manufactured within 10 days
(and as little as 24 hours) in prototype and pre-production quantities, are
used in the design, test and launch phases of new electronic products. The
quick-turn market is characterized by higher margins, faster growth and greater
customer diversity than the long-lead market. Approximately 70% of the
Company's year-to-date sales are quick-turn PCBs. Complex PCBs are those
employing difficult to manufacture specifications such as high layer counts,
dense circuitry designs, and exotic materials. Such boards command escalating
pricing premiums the greater the complexity. The Company's advanced engineering
capability enables it to produce boards with up to 40 layers employing leading-
edge fabrication technologies. The Company supplies over 300 customers in a
wide range of end-use markets including the telecommunications, computer,
contract manufacturing, industrial instrumentation, and consumer electronics
industries. On a pro forma basis for the twelve months ended September 30,
1997, the Company's net sales and adjusted EBITDA would have been $73.9 million
and $31.6 million, respectively.
Since the installation of a new management team in 1992, the Company has
successfully increased its sales and profitability and diversified its customer
base by strategically focusing on the quick-turn PCB market. Because of its
superior ability to deliver complex boards in short time frames with a high
degree of reliability, management believes that the Company plays a uniquely
mission critical role in facilitating its customers' "time-to-market" efforts.
Such efforts have become increasingly important in light of the electronic
industry's trends toward shortened product lifecycles and increased
competitiveness. As a result of this strategic shift, the Company has grown net
sales at a compound annual growth rate ("CAGR") of 25% from $25.8 million in
the fiscal year ended December 31, 1992 to $73.9 million for the twelve months
ended September 30, 1997. In the same time frame, the Company has grown
adjusted pro forma EBITDA at a 27% CAGR from $10.0 million to $31.6 million. As
a result of the Recapitalization (as defined), management owns stock and
options for approximately 27.5% of the fully-diluted capital stock of Holdings.
Such equity ownership represents a significant economic commitment to, and
participation in, the Company.
1
The Company's principal executive offices are located at 1231 Simon Circle,
Anaheim, California 92806, and its telephone number is (714) 630-4077.
INDUSTRY OVERVIEW
The Company primarily operates in the domestic market for quick-turn printed
circuit boards. The Company believes that the industry has the following
characteristics:
Large and Rapidly Growing Industry. In 1996, the worldwide market for printed
circuit boards was $30.4 billion, of which the U.S. represented 27%, or $8.3
billion. Approximately 87% of the domestic market, or $7.2 billion, was
supplied by merchant (i.e., non-captive) fabricators. Of this amount, quick-
turn PCBs accounted for 21%, or approximately $1.5 billion. The quick-turn
segment has experienced rapid growth, increasing at a 24% CAGR since 1992,
twice the rate for the overall domestic PCB industry. The Company believes that
the growing demand for quick-turn PCBs is due to a number of favorable trends,
including: (i) increasing importance to OEMs of being first to market in the
face of shortened product lifecycles; (ii) greater complexity of electronic
products which require increased prototyping and testing; (iii) general growth
in the number of products containing electronic components; and (iv) ongoing
outsourcing by OEMs of PCB design and fabrication.
Multiple Value-Added Segments. The customary evolution of an electronic
product results in several phases of PCB procurement: initially, in the design
and development stage, customers order small lot sizes (1-25 boards) and demand
quick-turn delivery ("prototype boards"); in the test-marketing and product
introduction stages, they order low to medium quantities (up to 5,000 boards)
which may or may not require quick-turn delivery ("pre-production boards"); and
in the product roll-out stage, they tend to order large volumes with lead times
in excess of three weeks ("production boards"). Prototype and pre-production
boards, the segments in which the Company competes, command escalating pricing
premiums the shorter the lead time and the greater the board complexity. PCB
complexity is determined by layer count, the use of exotic substrates and
materials, the fineness of line spaces and traces, the incorporation of buried
resistors and capacitors, the use of microvias and numerous other features. By
focusing on either time criticality, board complexity, or both, a PCB
fabricator can realize significant pricing premiums and commensurately higher
profitability per PCB than that attainable in the production segment of the
market.
Consolidating Industry. The domestic PCB industry is highly fragmented with
approximately 600 active fabricators. Although the industry has experienced
significant consolidation in the last four years, declining 37% from the
approximately 950 manufacturers in 1992, the top eight manufacturers still only
accounted for approximately 25% of industry sales in 1996. Consolidation in the
industry is being driven by (i) growing demand by electronic OEMs for both
increasingly complex PCBs and shortened delivery cycles which mandates
sophisticated design, engineering and manufacturing capabilities on the part of
PCB fabricators; (ii) ongoing outsourcing by electronic OEMs; and (iii)
increasing desire by OEMs to use fewer suppliers.
COMPETITIVE STRENGTHS
The Company believes that it has several competitive advantages in the PCB
industry, including:
Quick-Turn Market Leader. The Company is one of the largest manufacturers of
quick-turn PCBs in the United States, with approximately 70% of its year-to-
date sales derived from quick-turn products. The Company believes it is among a
select few manufacturers that can routinely complete complex orders in less
than 24 hours. The Company believes that its superior engineering expertise,
ability to produce highly complex PCBs, and consistent record of reliable
service, product quality and on-time performance give it a competitive
advantage in the quick-turn market.
2
Leading Technological Capabilities. The Company believes that it is an
industry leader in the engineering of advanced PCB materials and technologies
that maximize performance and board density. Customers utilize the
technological expertise of Details' 66 front-end engineers throughout the
product development effort to achieve an integrated cost-effective
manufacturing solution. The Company has the ability to produce boards with up
to 40 layers, and approximately 40% of its sales year-to-date included boards
with layer counts of 8 or more. The Company consistently delivers dependable,
high quality products with an on-time delivery record of approximately 97%. The
Company believes its ability to improve customer board designs for enhanced
manufacturing efficiency differentiates it from its competition.
Diverse and Loyal Customer Base. The Company believes that it has one of the
broadest customer bases in the industry, with more than 300 customers serving a
wide range of end-use markets. Year-to-date, the Company's largest customer
accounted for less than 11% of revenue. In addition, the Company has been
successful at retaining customers. For example, the Company has maintained a
relationship with its top three year-to-date customers--Motorola, Intel and
IBM--since at least 1993. The Company believes that its ability to rapidly
respond to changes in demand for new or modified board designs with consistent
high quality is a major factor in its success at creating customer
partnerships. The Company's customer list includes leading manufacturers of
telecommunications equipment, such as Motorola and Qualcomm; computer
workstations and servers, such as IBM and Silicon Graphics; semi-conductor
fabrication such as Intel; industrial products, such as Caterpillar and Delco;
computer assemblers, such as Dell and Compaq; and contract manufacturing firms
such as SCI and Jabil.
Experienced Management Team with Significant Equity Ownership. The Company's
President, Bruce McMaster, has a total of 16 years of experience in the PCB
industry. Mr. McMaster, together with the other members of his senior
management team--Lee Muse (Vice President of Sales and Marketing), Joseph Gisch
(Chief Financial Officer), Terry Wright (Vice President of Engineering), and
Michael Moisan (Vice President of Operations)--have over 70 years of industry
experience and approximately 30 years with the Company. Since 1992, management
has successfully developed and implemented manufacturing and marketing
strategies which have resulted in a compound annual growth rate in net sales of
25% from the fiscal year ended December 31, 1992 to the twelve months ended
September 30, 1997. As a result of the Recapitalization, management owns stock
and options for approximately 27.5% of the fully-diluted capital stock of
Holdings. Such equity ownership represents a significant economic commitment
to, and participation in, the Company.
BUSINESS STRATEGY
The Company's goal is to maintain its growth rate in sales and profitability
by leveraging its quick-turnaround capability, its market leading technology,
and its large customer base to increase its penetration of value-added market
segments. In order to accomplish its goal, the Company intends to:
Increase Technical Leadership in Quick-Turn Segment. The Company intends to
extend its leadership in the quick-turn segment by continuing to provide
consistent, rapid delivery through leading-edge processes and technology.
Currently, the Company is capable of delivering 12-layer boards in as little as
24 hours which it believes is among the fastest of any current industry
participant. Moreover, the Company had a less than 1% product return rate for
the nine months ended September 30, 1997, which it believes is among the lowest
in the quick-turn segment. Such performance is largely due to the technology
and processes employed by the Company coupled with its engineering expertise
and customized design and development services. The Company intends to maintain
its focus on improving quality and delivery times by incorporating emerging
technologies and by continuously improving its manufacturing processes.
3
Cross-Sell Pre-Production to Quick-Turn Customers. The Company believes there
are substantial opportunities to leverage its strong customer relations in the
quick-turn segment by cross-selling 10 to 20 day pre-production volume to its
existing customers. Recognizing OEMs' desire to simplify their supplier chain,
the Company aims to offer customers a more efficient production solution which
will (i) reduce customers' tooling costs, (ii) eliminate supplier switching
risk, and (iii) shorten customers' "time-to-market." In furtherance of this
initiative, the Company continues to make investments in capital equipment,
engineering capability and systems infrastructure.
Achieve International Presence. The Company believes there are substantial
opportunities to satisfy international demand for time-critical, complex PCBs.
Year-to-date, approximately 94% of the Company's revenues were generated
domestically despite the fact that the U.S. accounts for only 27% of the
worldwide market. In particular, the Company has established a sales office in
the United Kingdom to service existing European customers' needs and to broaden
the Company's European presence. The Company is currently developing a
manufacturers' representative arrangement in Singapore as an entry into the
Asian market.
Pursue Selective Acquisitions. The Company is currently pursuing selective
acquisitions to complement its organic growth. Due to the high degree of
fragmentation in the PCB industry, the Company believes substantial
consolidation opportunities exist. Consequently, the Company is actively
seeking acquisitions which will: (i) increase its 10 to 20 day pre-production
capacity, (ii) expand its international geographic coverage, (iii) strengthen
its position in existing markets, (iv) provide significant profit improvement
opportunities through the application of the Company's superior operating
capabilities, and (v) enhance its technology base. The Company is currently in
discussions with several potential acquisition candidates but has not entered
into any agreements or understandings with any third parties.
THE TRANSACTIONS
On or about October 4, 1997, Holdings and Holdings' stockholders entered into
a recapitalization agreement (as amended to date, the "Recapitalization
Agreement") with DI Acquisition Corp. ("DIA") which provided for the
recapitalization (the "Recapitalization") by means of a merger (the "Merger")
of DIA with and into Holdings.
On October 28, 1997, the Merger was consummated. In connection with the
Recapitalization, (i) certain stockholders and optionholders of Holdings
received an aggregate amount of cash equal to approximately $184.3 million,
(ii) Chase Manhattan Capital, L.P. ("CMC"), an affiliate of the Initial
Purchaser (as defined), retained a portion of its investment in Holdings
representing approximately 7.7%, and certain other stockholders of Holdings
retained a portion of their investments in Holdings representing approximately
2.8%, of the fully-diluted equity of Holdings (in each case after giving effect
to the Recapitalization and related transactions) (collectively, the "Existing
Owner Rollover"), and (iii) management retained certain shares representing
approximately 11.3%, and certain options to acquire shares of common stock of
Holdings representing approximately 5.8%, of the fully-diluted equity of
Holdings (after giving effect to the Recapitalization and related transactions)
(collectively the "Management Rollover Equity"). In addition, in connection
with the Recapitalization, management acquired additional shares and options to
acquire additional shares representing 10.4% of the fully-diluted equity of
Holdings (after giving effect to the Recapitalization and related
transactions). After the Recapitalization, management held shares and options
representing approximately 27.5% of the fully diluted equity of Holdings.
Financing for the Recapitalization, and the related fees and expenses,
consisted of (i) $46.3 million of equity capital provided by investment funds
associated with Bain Capital, Inc. (the "Bain Capital Funds"); (ii) $11.2
million of equity capital provided by an affiliate of CMC; (iii) $4.9 million
of equity capital provided by certain other investors (the "Other Investors");
(iv) the $16.1 million
4
Management Rollover Equity; (v) the $10.5 million Existing Owner Rollover; (v)
a senior subordinated loan facility of $85 million (the "Senior Subordinated
Facility"); (vi) a senior unsecured credit facility of $55 million of Holdings
(the "Holdings Facility"); and (vii) a syndicated senior secured Tranche A term
loan facility of $41.4 million as of the Recapitalization closing date (the
"Tranche A Facility"), a syndicated senior secured Tranche B term loan facility
of $50 million (the "Tranche B Facility" and, together with the Tranche A
Facility, the "Term Loan Facilities") and a senior secured revolving credit
facility of up to $30 million (the "Revolving Credit Facility" and, together
with the Term Loan Facilities, the "Senior Credit Facilities"). The
Recapitalization, the Merger, the Senior Subordinated Facility, the Holdings
Facility and the Senior Credit Facilities are referred to herein as the
"Transactions."
The following table sets forth the sources and uses of funds in connection
with the Recapitalization as of October 28, 1997:
DOLLARS
IN MILLIONS
-----------
SOURCES:
Senior Credit Facilities:
Revolving Credit Facility(1)................................... $ --
Term Loan Facilities(2)........................................ 91.4
Senior Subordinated Facility..................................... 85.0
Holdings Facility................................................ 55.0
Equity Investment(3)............................................. 62.4
Existing Owner Rollover.......................................... 10.5
Management Rollover Equity....................................... 16.1
------
Total Sources................................................ $320.4
======
USES:
Redemption of stock and distribution to shareholders............. $184.3
Repayment of Existing Indebtedness(4)............................ 96.4
Management Rollover Equity....................................... 16.1
Existing Owner Rollover.......................................... 10.5
Transaction Fees and Expenses(5)................................. 13.1
------
Total Uses................................................... $320.4
======
- --------
(1) Under the Revolving Credit Facility the Company had, as of October 28,
1997, availability of $30 million. See "Description of Senior Credit
Facilities."
(2) Following the Recapitalization, there was an additional $25 million
available for borrowing under the Term Loan Facilities for future
acquisitions, subject to certain conditions and restrictions. See
"Description of Senior Credit Facilities."
(3) Represents $46.3 million provided by Bain Capital Funds, $11.2 million
provided by an affiliate of CMC and $4.9 million provided by Other
Investors.
(4) Includes the repayment of bank indebtedness as well as other obligations of
the Company paid in connection with the Recapitalization. See "Management."
(5) Includes underwriting fees, financial advisory fees, and legal, accounting
and other professional fees. See "Certain Relationships and Related
Transactions."
On November 3, 1997, Holdings formed the Company, as a new wholly-owned
subsidiary, and contributed substantially all of its assets, subject to certain
liabilities (other than the Holdings Facility) to the Company. On November 18,
1997, the Company consummated the sale of the Original Notes in a transaction
exempt from the registration requirements of the Securities Act (the "Initial
Offering"). Concurrently with the Initial Offering, Holdings conducted the
offering (the "Discount Note Offering") of its 12 1/2% Senior Discount Notes
due 2007 (the "Discount Notes") with an aggregate discount value of
approximately $60.1 million.
The Company used the net proceeds (after deduction of related fees and
expenses) from the Initial Offering of approximately $96.4 million to repay (i)
the $85.0 million of indebtedness represented by the Senior Subordinated
Facility, plus accrued interest and related fees and expenses, (ii) a portion
of the Holdings Facility, and (iii) indebtedness under the Term Loan Facilities
of approximately $10.3 million. In connection with the Initial Offering, the
Company entered into the Registration Rights Agreement pursuant to which it
agreed to register the Exchange Notes under the Securities Act and offer them
in exchange for the Original Notes. The proceeds of the Discount Note Offering
were used to repay the Holdings Facility, plus accrued interest and related
fees and expenses. On November 19, 1997, Holdings formed Details Capital and on
December , 1997 Holdings contributed substantially all of its assets, subject
to certain liabilities, including the Discount Notes, to Details Capital.
5
THE EXCHANGE OFFER
The Exchange Offer............ Up to $100,000,000 aggregate principal amount
of Exchange Notes are being offered in exchange
for a like aggregate principal amount of
Original Notes. The Company is making the
Exchange Offer in order to satisfy its
obligations under the Registration Rights
Agreement relating to the Original Notes. For a
description of the procedures for tendering
Original Notes, see "The Exchange Offer--
Procedures for Tendering."
Expiration Date............... 5:00 p.m., New York City time, on , 1998,
unless the Exchange Offer is extended by the
Company in its sole discretion (in which case
the Expiration Date will be the latest date and
time to which the Exchange Offer is extended).
See "The Exchange Offer--Terms of the Exchange
Offer."
Conditions to the Exchange
Offer........................ The Exchange Offer is subject to the condition
that the Exchange Offer does not violate
applicable law or SEC staff interpretation. If
the Company determines that the Exchange Offer
is not permitted by applicable federal law, it
may terminate the Exchange Offer. The Exchange
Offer is not conditioned upon any minimum
principal amount of Original Notes being
tendered. See "The Exchange Offer--Conditions
of the Exchange Offer."
Resale of the Exchange Notes.. Based on an interpretation by the staff of the
Commission set forth in no-action letters
issued to third parties, the Company believes
that Exchange Notes issued pursuant to the
Exchange Offer in exchange for Original Notes
may be offered for resale, resold and otherwise
transferred by any holder thereof (other than
(i) a broker-dealer who purchased such Original
Notes directly from the Company for resale
pursuant to Rule 144A or any other available
exemption under the Securities Act or (ii) a
person that is an "affiliate" of the Company
within the meaning of Rule 405 under the
Securities Act) without compliance with the
registration and prospectus delivery provisions
of the Securities Act provided that the Holder
is acquiring the Exchange Notes in its ordinary
course of business and is not participating,
and has no arrangement or understanding with
any person to participate, in the distribution
of the Exchange Notes. Holders of Original
Notes wishing to accept the Exchange Offer must
represent to the Company that such conditions
have been met. In the event that the Company's
belief is inaccurate, Holders of Exchange Notes
who transfer Exchange Notes in violation of the
prospectus delivery provisions of the
Securities Act and without an exemption from
registration thereunder may incur liability
under the Securities Act. The Company does not
assume or indemnify Holders against such
liability, although the
6
Company does not believe that any such
liability should exist.
A broker-dealer that receives Exchange Notes in
exchange for Original Notes held for its own
account, as a result of market-making
activities or other trading activities, must
acknowledge that it will deliver a prospectus
in connection with any resale of such Exchange
Notes. Although such broker-dealer may be an
"underwriter" within the meaning of the
Securities Act, the Letter of Transmittal
states that by so acknowledging and by
delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an
"underwriter" within the meaning of the
Securities Act. See "Plan of Distribution."
The Exchange Offer is not being made to, nor
will the Company accept surrenders for exchange
from, Holders of Original Notes in any
jurisdiction in which the Exchange Offer or the
acceptance thereof would not be in compliance
with the securities or blue sky laws of such
jurisdiction.
Procedures for Tendering
Notes......................... Each Holder of Original Notes wishing to accept
the Exchange Offer must complete, sign and date
the accompanying Letter of Transmittal, as the
case may be, or a facsimile thereof, in
accordance with the instructions contained
herein and therein, and mail or otherwise
deliver such Letter of Transmittal, or such
facsimile, together with the Original Notes and
any other required documentation to the
Exchange Agent (as defined herein) at the
address set forth herein. By executing a Letter
of Transmittal, each Holder will represent to
the Company conducting the Exchange Offer that,
among other things, (i) the Exchange Notes
acquired pursuant to such Exchange Offer are
being obtained in the ordinary course of
business of the person receiving such Exchange
Notes, whether or not such person is the
Holder, (ii) neither the Holder nor any such
other person has any arrangement or
understanding with any person to participate in
the distribution of such Exchange Notes and
that such Holder is not engaged in, and does
not intend to engage in, a distribution of
Exchange Notes, and (iii) that neither the
Holder nor any such other person is an
"affiliate," as defined under Rule 405 of the
Securities Act, of the Company. See "The
Exchange Offer--Procedures for Tendering."
Special Procedures for
Beneficial Owners............. Any beneficial owner whose Original Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and who wishes to tender should contact such
registered Holder promptly and instruct
7
such registered Holder to tender on such
beneficial owner's behalf. See "The Exchange
Offer--Procedures for Tendering."
Guaranteed Delivery
Procedures................... Holders of Original Notes who wish to tender
their Original Notes and whose Original Notes
are not immediately available or who cannot
deliver their Original Notes, the Letter of
Transmittal, as the case may be, or any other
documents required by such Letter of
Transmittal to the Exchange Agent (as defined
herein) (or comply with the procedures for
book-entry transfer) prior to the Expiration
Date must tender their Original Notes according
to the guaranteed delivery procedures set forth
in "The Exchange Offer--Guaranteed Delivery
Procedures."
Untendered Notes.............. Following the consummation of the Exchange
Offer, Holders of Original Notes eligible to
participate but who do not tender their
Original Notes will not have any further
exchange rights and such Original Notes will
continue to be subject to certain restrictions
on transfer. Accordingly, the liquidity of the
market for such Original Notes could be
adversely affected by the Exchange Offer.
Consequences of Failure to
Exchange..................... The Original Notes that are not exchanged
pursuant to the Exchange Offer will remain
restricted securities. Accordingly, such
Original Notes may be resold only (i) to the
Company, (ii) pursuant to Rule 144A or Rule 144
under the Securities Act or pursuant to some
other exemption under the Securities Act, (iii)
outside the United States to a foreign person
pursuant to the requirements of Rule 904 under
the Securities Act, or (iv) pursuant to an
effective registration statement under the
Securities Act. See "The Exchange Offer--
Consequences of Failure to Exchange."
Shelf Registration Statement.. If (i) because of any change in law or
applicable interpretations thereof by the staff
of the Commission, the Company is not permitted
to effect the Exchange Offer as contemplated
hereby, (ii) any Securities (as defined)
validly tendered pursuant to the Exchange Offer
are not exchanged for Exchange Securities (as
defined) within 210 days after the Issue Date
(as defined), (iii) Chase Securities Inc. (the
"Initial Purchaser") so requests with respect
to Original Notes not eligible to be exchanged
for Exchange Notes in the Exchange Offer, (iv)
any applicable law or interpretations do not
permit any holder of Original Notes to
participate in the Exchange Offer, (v) any
Holder of Original Notes that participates in
the Exchange Offer does not receive freely
transferable Exchange Notes in exchange for
tendered Original Notes, or (vi) the Company so
elects, the Company has agreed pursuant to the
Registration Rights Agreement to register the
Original Notes issued by it on a
8
shelf registration statement (the "Shelf
Registration Statement") and use its best
efforts to cause it to be declared effective by
the Commission, as promptly as practicable
after the filing thereof, and if applicable,
use its reasonable best efforts to keep the
Shelf Registration Statement effective for a
period of two years from the Issue Date.
Withdrawal Rights............. Tenders may be withdrawn at any time prior to
5:00 p.m., New York City time, on the
Expiration Date.
Acceptance of Original Notes
and Delivery of Exchange
Notes........................ The Company will accept for exchange any and
all Original Notes which are properly tendered
in the Exchange Offer prior to 5:00 p.m., New
York City time, on the Expiration Date. The
Exchange Notes issued pursuant to the Exchange
Offer will be delivered promptly following the
Expiration Date. See "The Exchange Offer--Terms
of the Exchange Offer."
Federal Income Tax
Consequences.................. The exchange pursuant to the Exchange Offer
will generally not be a taxable event for
federal income tax purposes. See "Certain
Federal Income Tax Consequences."
Use of Proceeds............... There will be no cash proceeds to the Company
from the exchange pursuant to the Exchange
Offer.
Exchange Agent................ State Street Bank and Trust Company.
THE EXCHANGE NOTES
Issuer........................ Details, Inc.
Securities Offered............ $100,000,000 aggregate principal amount of 10%
Senior Subordinated Notes due 2005.
Maturity Date.................
November 15, 2005.
Interest Payment Dates........ May 15 and November 15, commencing May 15,
1998.
Sinking Fund.................. None.
Optional Redemption........... Except as described below, the Company may not
redeem the Exchange Notes prior to November 15,
2001. On or after such date, the Company may
redeem the Exchange Notes, in whole or in part,
at the redemption prices set forth herein
together with accrued and unpaid interest, if
any, to the date of redemption. In addition, at
any time prior to November 15, 2000, the
Company may, at its option, redeem up to 40% of
the original aggregate principal
9
amount of the Exchange Notes with the net
proceeds of one or more Equity Offerings (as
defined), received by, or invested in, the
Company so long as there is a Public Market (as
defined) at the time of such redemption, at a
redemption price equal to 110% of the principal
amount to be redeemed, together with accrued
and unpaid interest, if any, to the date of
redemption; provided that at least 60% of the
original aggregate principal amount of the
Exchange Notes remains outstanding immediately
after each such redemption. See "Description of
Exchange Notes--Optional Redemption."
Upon a Change of Control (as defined), (i) the
Company will have the option, at any time prior
Change of Control............. to November 15, 2001, to redeem the Exchange
Notes, in whole but not in part, at a
redemption price equal to 100% of the principal
amount thereof plus the Applicable Premium (as
defined), together with accrued and unpaid
interest, if any, to the date of redemption,
and (ii) if the Company does not so redeem the
Exchange Notes or if the Change of Control
occurs after November 15, 2001, each Holder
will have the right to require the Company to
make an offer to repurchase the Exchange Notes
at a price equal to 101% of the principal
amount thereof, together with accrued and
unpaid interest, if any, to the date of
repurchase. See "Description of Exchange
Notes--Change of Control."
The Indenture will provide that any Subsidiary
Guarantor (as defined) which guarantees the
Future Guarantees............. Company's Indebtedness under the Senior Credit
Facilities will guarantee the Exchange Notes on
an unsecured, senior subordinated basis. See
"Description of Exchange Notes --Certain
Covenants--Future Subsidiary Guarantors."
The Exchange Notes will be unsecured and will
Ranking....................... be subordinated in right of payment to all
existing and future Senior Indebtedness of the
Company and will be effectively subordinated to
all obligations of the subsidiaries of the
Company. The Exchange Notes will rank pari
passu with any future senior subordinated
indebtedness of the Company and will rank
senior to all other subordinated indebtedness
of the Company. On November 25, 1997, (i) the
aggregate amount of the outstanding Senior
Indebtedness of the Company would have been
approximately $87.6 million, (ii) there would
have been no indebtedness outstanding at the
Company's subsidiaries, and (iii) the Company
would have had no senior subordinated
indebtedness outstanding other than
10
the Notes and no indebtedness that is
subordinate or junior in right of repayment to
the indebtedness represented by the Exchange
Notes. See "Description of Exchange Notes--
Ranking and Subordination."
Restrictive Covenants......... The Indenture limits: (i) the incurrence of
additional indebtedness by the Company and its
Restricted Subsidiaries, (ii) the layering of
indebtedness, (iii) the payment of dividends
on, and redemption of, capital stock of the
Company and its Restricted Subsidiaries and the
redemption of certain subordinated obligations
of the Company and its Restricted Subsidiaries,
(iv) investments, (v) sales of assets and
Subsidiary stock, (vi) certain transactions
with affiliates, (vii) the creation and
existence of liens, (viii) the types of
businesses that the Company and its Restricted
Subsidiaries may operate, and (ix)
consolidations, mergers and transfers of all or
substantially all the Company's assets. The
Indenture also prohibits certain restrictions
on distributions from Restricted Subsidiaries.
However, all of these limitations and
prohibitions are subject to a number of
important qualifications and exceptions. See
"Description of Exchange Notes--Certain
Covenants."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered in evaluating an investment in the Exchange Notes.
11
SUMMARY UNAUDITED ADJUSTED PRO FORMA FINANCIAL DATA
The following summary unaudited adjusted pro forma financial data of the
Company set forth below give effect in the manner described under "Unaudited
Pro Forma Financial Data" and the notes thereto to the Transactions, the
Initial Offering and other supplemental adjustments as if they had occurred on
January 1, 1996 in the case of the adjusted pro forma statements of income
data, and as of September 30, 1997 in the case of the unaudited pro forma
balance sheet data. The unaudited pro forma consolidated statements of income
do not purport to represent what the Company's results of operations would have
been if the Transactions, the Initial Offering and other supplemental
adjustments had occurred as of the date indicated or what such results will be
for future periods. The information contained in this table should be read in
conjunction with "Unaudited Pro Forma Financial Data," "Selected Historical
Consolidated Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the audited consolidated
financial statements and the accompanying notes thereto included elsewhere in
this Prospectus.
NINE MONTHS LATEST
ENDED TWELVE MONTHS
YEAR ENDED SEPTEMBER 30, ENDED
DECEMBER 31, ------------------ SEPTEMBER 30,
1996(1) 1996(1) 1997(1) 1997(2)
------------ -------- -------- -------------
(DOLLARS IN THOUSANDS)
STATEMENT OF INCOME DATA:
Net sales...................... $ 67,515 $ 49,086 $ 55,421 $ 73,850
Cost of goods sold............. 30,505 21,899 27,019 35,625
-------- -------- -------- --------
Gross profit................. 37,010 27,187 28,402 38,225
Operating expenses:
General and administration... 1,929 1,377 1,625 2,177
Sales and marketing.......... 5,989 4,503 5,338 6,824
-------- -------- -------- --------
Operating income............... 29,092 21,307 21,439 29,224
Interest expense............... (19,082) (14,343) (14,332) (19,071)
Interest income................ 102 71 56 87
-------- -------- -------- --------
Income before provision for
income taxes.................. 10,112 7,035 7,163 10,240
Provision for income taxes..... 4,146 2,884 2,937 4,199
-------- -------- -------- --------
Net income..................... $ 5,966 $ 4,151 $ 4,226 $ 6,041
======== ======== ======== ========
OTHER FINANCIAL DATA:
Adjusted EBITDA (3)............ $ 31,139 $ 22,802 $ 23,268 $ 31,605
Adjusted EBITDA margin (4)..... 46% 46% 42% 43%
Depreciation................... 2,047 1,495 1,829 2,381
Capital expenditures........... 3,666 2,720 3,267 4,213
Cash interest expense.......... 17,995 13,528 13,517 17,984
Ratio of adjusted EBITDA to
cash interest expense......... 1.7x 1.7x 1.7x 1.8x
Ratio of earnings to fixed
charges (5)................... 1.5x 1.5x 1.5x 1.5x
PRO FORMA
SEPTEMBER 30, 1997
------------------
BALANCE SHEET DATA (END OF PERIOD):
Cash....................................................... $ 4,992
Working capital............................................ 9,376
Total assets............................................... 55,496
Total debt................................................. 187,656
Equity (net capital deficiency)............................ (150,497)
- --------
(1) See "Unaudited Pro Forma Financial Data."
(2) Information for the twelve months ended September 30, 1997 represents the
summation of the adjusted pro forma year ended December 31, 1996 and the
adjusted pro forma nine months ended September 30, 1997 information, less
the adjusted pro forma nine months ended September 30, 1996.
(3) "Adjusted EBITDA" is defined herein as EBITDA as adjusted for other
supplemental adjustments. Other supplemental adjustments for 1997 total
$5.3 million, consisting of the non-cash compensation expense of $2.9
million related to the vesting of options under the Company's 1996 Stock
Option Plan, coupled with the cash expense of $2.4 million related to the
bonuses payable to employees to cover employee taxes upon their exercise
of these options in conjunction with the Recapitalization. "EBITDA" is
defined herein as income before provision for income taxes, depreciation,
amortization and net interest expense. EBITDA is presented because the
Company believes its is frequently used by security analysts in the
evaluation of companies. However, EBITDA should not be considered as an
alternative to net income as a measure of operating results or to cash
flows as a measure of liquidity in accordance with generally accepted
accounting principles.
(4) Represents adjusted EBITDA as a percentage of net sales.
(5) For purposes of computing this ratio, earnings consists of income before
income taxes plus fixed charges. Fixed charges consist of interest expense
and the estimated interest portion of rent expense.
12
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
Set forth below are summary historical consolidated financial data of the
Company at the dates and for the periods indicated. The summary historical
consolidated statements of income data of the Company for the years ended
December 31, 1994, 1995 and 1996 and the summary historical consolidated
balance sheet data as of December 31, 1995 and 1996 were derived from the
historical consolidated financial statements of the Company that were audited
by McGladrey & Pullen, LLP, whose reports appear elsewhere in this Prospectus.
The summary historical consolidated financial data of the Company for the year
ended December 31, 1992 and for the nine month periods ended September 30, 1996
and 1997 are derived from unaudited consolidated financial statements of the
Company which, in the opinion of management, include all adjustments necessary
for a fair presentation. The summary historical consolidated financial data set
forth below should be read in conjunction with, and is qualified by reference
to, "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the audited consolidated financial statements and accompanying
notes thereto included elsewhere in this Prospectus.
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------- ----------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
STATEMENT OF INCOME DA-
TA:
Net sales.............. $25,759 $32,394 $44,086 $59,370 $67,515 $49,086 $55,421
Cost of goods sold..... 13,142 16,480 20,415 25,156 30,505 21,899 27,019
------- ------- ------- ------- ------- ------- -------
Gross profit........... 12,617 15,914 23,671 34,214 37,010 27,187 28,402
Operating expenses:
Compensation to CEO
(1)................... 9,414 11,513 412 418 1,055 836 811
General and administra-
tion ................. 690 1,136 1,385 1,789 1,929 1,377 1,625
Sales and marketing.... 2,672 3,074 3,542 5,293 5,989 4,503 5,338
Stock compensation and
related bonuses (2)... -- -- -- -- -- -- 5,283
------- ------- ------- ------- ------- ------- -------
Operating income
(loss)................ (159) 191 18,332 26,714 28,037 20,471 15,345
Interest expense....... (57) (167) (181) (371) (9,518) (6,974) (7,427)
Interest income........ 21 10 13 42 102 71 56
------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes.......... (195) 34 18,164 26,385 18,621 13,568 7,974
Provision for (benefit
from) income taxes
(3)................... (18) 221 273 396 6,265 4,270 3,400
------- ------- ------- ------- ------- ------- -------
Net income (loss)...... $ (177) $ (187) $17,891 $25,989 $12,356 $ 9,298 $ 4,574
======= ======= ======= ======= ======= ======= =======
OTHER FINANCIAL DATA:
EBITDA (4)............. $ 567 $ 1,047 $19,214 $27,768 $30,084 $21,966 $17,174
Adjusted EBITDA (5).... 9,981 12,560 19,626 28,186 31,139 22,802 23,268
Adjusted EBITDA margin
(6)................... 39% 39% 45% 47% 46% 46% 42%
Depreciation........... 726 856 882 1,054 2,047 1,495 1,829
Capital expenditures... 1,428 1,254 844 2,946 3,666 2,720 3,267
Ratio of earnings to
fixed charges (7)..... -- 1.1x 51.5x 46.6x 3.0x 2.9x 2.1x
BALANCE SHEET DATA (END
OF PERIOD):
Cash................... $ 175 $ 1,592 $ 3,686 $ 472 $ 169 $ 1,856 $ 942
Working capital (defi-
cit).................. 1,170 (74) (96) (2,264) (3,514) (884) (5,892)
Total assets........... 6,164 9,097 12,015 13,081 27,503 26,930 31,686
Total debt............. 1,434 3,446 1,316 1,982 94,101 96,157 87,410
Equity (net capital de-
ficiency) (8)......... 2,993 2,806 2,806 2,500 (72,674) (75,732) (65,177)
See Notes to Summary Historical Consolidated Financial Data.
13
NOTES TO SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
(1) Represents compensation paid to the Company's former CEO, who also was the
sole shareholder since the Company's inception through the Initial
Recapitalization (as defined) and whose employment terminated on October
28, 1997.
(2) Represents stock compensation and related bonuses under the Company's 1996
Stock Option Plan.
(3) Prior to February 1996, the Company elected to be taxed as an "S"
corporation and paid income taxes at a reduced rate. On a pro forma basis,
income tax expense would have been higher by the following amounts: 1994--
$7,175; 1995--$10,425; 1996--$1,295 and September 30, 1996--$1,295.
(4) "EBITDA" is defined herein as income before income taxes, plus
depreciation, amortization and net interest expense. EBITDA is presented
because the Company believes it is frequently used by security analysts in
the evaluation of companies. However, EBITDA should not be considered as an
alternative to net income as a measure of operating results or to cash
flows as a measure of liquidity in accordance with generally accepted
accounting principles.
(5) "Adjusted EBITDA" is defined herein as EBITDA adjusted for certain items of
income which are not expected to be incurred by the Company subsequent to
the Transactions. These items consist of the compensation paid to the
Company's former CEO whose employment terminated on October 28, 1997 and
stock compensation and related bonuses under the Company's 1996 Stock
Option Plan.
(6) Represents adjusted EBITDA as a percentage of net sales.
(7) For purposes of computing this ratio, earnings consists of income before
income taxes plus fixed charges. Fixed charges consist of interest expense
and the estimated interest portion of rent expense. Earnings were not
sufficient to cover fixed charges by $195 for the year ended December 31,
1992.
(8) The net capital deficiency as of December 31, 1996 reflects the effects of
the Initial Recapitalization of the Company that took place in January of
1996 and which reduced stockholders' equity by $86.2 million.
14
RISK FACTORS
Prospective investors should carefully consider the following factors in
addition to the other information set forth in this Prospectus before making
an investment in the Exchange Notes offered hereby. This Prospectus contains
certain forward looking statements within the meaning of Section 27A of the
Securities Act. Actual results could differ materially from those projected in
the forward looking statements as a result of certain factors and
uncertainties set forth below and elsewhere in this Prospectus.
SUBSTANTIAL LEVERAGE; STOCKHOLDER'S DEFICIT
As a result of the Transactions and the Initial Offering, the Company is
highly leveraged. As of September 30, 1997, after giving pro forma effect to
the Transactions and the Initial Offering, the Company's indebtedness was
approximately $187.7 million, of which $87.7 million was Senior Indebtedness,
and there was approximately $30 million available under the Senior Credit
Facilities for future borrowings for general corporate purposes and working
capital needs. On the same pro forma basis, the Company's ratio of earnings to
fixed charges for the fiscal year ended December 31, 1996 and for the nine
months ended September 30, 1997 would have been 1.5 to 1.0 in both periods.
The Company has a stockholder's deficit which, at September 30, 1997 on a pro
forma basis after giving effect to the Transactions and the Initial Offering
and the application of the proceeds therefrom, was approximately $150.5
million. In addition, subject to the restrictions in the Senior Credit
Facilities, the Indenture and the Discount Note Indenture, the Company and its
subsidiaries may incur additional indebtedness (including additional Senior
Indebtedness) from time to time to finance acquisitions or capital
expenditures or for other purposes. See "Capitalization" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The Company's high degree of leverage could have important consequences to
holders of the Notes, including: (i) a substantial portion of the Company's
cash flow from operations must be dedicated to debt service and will not be
available for other purposes; (ii) the Company's ability to obtain additional
debt financing in the future for working capital, capital expenditures,
research and development or acquisitions may be limited; (iii) the Company's
leveraged position and the covenants that will be contained in the Indenture
and the Senior Credit Facilities could limit the Company's ability to compete,
as well as its ability to expand, including through acquisitions, and to make
capital improvements; (iv) the Company may be more leveraged than certain of
its competitors, which may place the Company at a competitive disadvantage;
and (v) the Company's ability to refinance the Notes in order to pay the
principal of the Notes at maturity or upon a Change of Control may be
adversely affected. See "Description of Senior Credit Facilities" and
"Description of Notes."
The Company's ability to pay principal and interest on the Notes and to
satisfy its other debt obligations will depend upon its future operating
performance, which will be affected by prevailing economic conditions and
financial, business and other factors, certain of which are beyond its
control, as well as the availability of revolving credit borrowings under the
Senior Credit Facilities or successor facilities. The Company anticipates that
its operating cash flow, together with borrowings under the Senior Credit
Facilities, will be sufficient to meet its operating expenses and to service
its debt requirements as they become due. If the Company is unable to service
its indebtedness, it will be forced to take actions such as reducing or
delaying capital expenditures, selling assets, restructuring or refinancing
its indebtedness (which could include the Notes), or seeking additional equity
capital. There is no assurance that any of these remedies can be effected on
satisfactory terms, if at all. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources" and "Description of Senior Credit Facilities."
15
RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS
The Indenture restricts, among other things, the Company's ability to incur
additional indebtedness, incur liens, pay dividends or make certain other
restricted payments, consummate certain asset sales, enter into certain
transactions with affiliates, incur indebtedness that is subordinate in right
of payment to any Senior Indebtedness and senior in right of payment to the
Notes, merge or consolidate with any other person or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of the assets
of the Company. In addition, the Senior Credit Facilities contain other and
more restrictive covenants and prohibit the Company and its subsidiaries from
prepaying other indebtedness (including the Notes). The Senior Credit
Facilities also require the Company to maintain specified financial ratios and
satisfy certain financial condition tests. The Company's ability to meet those
financial ratios and tests can be affected by events beyond its control, and
there can be no assurance that the Company will meet those tests. A breach of
any of these covenants could result in a default under the Senior Credit
Facilities and/or the Indenture. Upon the occurrence of an event of default
under the Senior Credit Facilities, the lenders could elect to declare all
amounts outstanding under the Senior Credit Facilities, together with accrued
interest, to be immediately due and payable. If the Company were unable to
repay those amounts, the lenders could proceed against the collateral granted
to them to secure that indebtedness. If the Senior Indebtedness were to be
accelerated, there can be no assurance that the assets of the Company would be
sufficient to repay in full that indebtedness and the other indebtedness of
the Company, including the Notes. Substantially all the assets of the Company
and its subsidiaries are pledged as security under the Senior Credit
Facilities. See "Description of Senior Credit Facilities" and "Description of
Exchange Notes--Certain Covenants."
SUBORDINATION
The Notes will be subordinated in right of payment to all existing and
future Senior Indebtedness, including the principal of (and premium, if any)
and interest on and all other amounts due on or payable in connection with
Senior Indebtedness. As of November 25, 1997, there was outstanding
approximately $87.6 million of Senior Indebtedness, $81.1 million of which was
fully secured borrowings under the Senior Credit Facilities. By reason of such
subordination, in the event of the insolvency, liquidation, reorganization,
dissolution or other winding-up of the Company or upon a default in payment
with respect to, or the acceleration of, any Senior Indebtedness, the holders
of such Senior Indebtedness and any other creditors who are holders of Senior
Indebtedness, and creditors of subsidiaries must be paid in full before the
holders of the Notes may be paid. If the Company incurs any additional pari
passu debt, the holders of such debt would be entitled to share ratably with
the holders of the Notes in any proceeds distributed in connection with any
insolvency, liquidation, reorganization, dissolution or other winding-up of
the Company. This may have the effect of reducing the amount of proceeds paid
to holders of the Notes. In addition, certain holders of Senior Indebtedness
may prevent cash payments with respect to the principal of (and premium, if
any) or interest or liquidated damages, if any, on the Notes for a period of
up to 179 days following a non-payment default with respect to Senior
Indebtedness. In addition, the Indenture permits the subsidiaries of the
Company to incur debt under certain circumstances. Any such debt incurred by a
subsidiary of the Company could be structurally senior to the Notes. See
"Description of Exchange Notes."
In addition to being subordinated to all existing and future Senior
Indebtedness of the Company, the Notes will not be secured by any assets of
the Company or its subsidiaries; however, obligations under the Senior Credit
Facilities are secured by a pledge of all the capital stock of the Company's
subsidiaries, and the tangible and intangible assets of the Company and its
subsidiaries. If the Company becomes insolvent or is liquidated, or if payment
under any of the Senior Credit Facilities is accelerated, the lenders under
the Senior Credit Facilities will be entitled to exercise the remedies
available to a secured lender under applicable law pursuant to the Senior
Credit Facilities. Accordingly,
16
such lenders will have a prior claim with respect to such assets. See
"Description of Senior Credit Facilities."
REPAYMENT UPON CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of Notes may require
the Company to repurchase all or a portion of such Holder's Notes at 101% of
the principal amount of the Notes together with accrued and unpaid interest,
if any, to the date of repurchase. See "Description of Notes--Change of
Control" for the definition of "Change of Control". The occurrence of certain
of the events that would constitute a Change of Control would constitute a
default under the Senior Credit Facilities. Future Senior Indebtedness of the
Company and its subsidiaries may also contain prohibitions of certain events
that would constitute a Change of Control. Moreover, the exercise by the
Holders of their right to require the Company to repurchase the Notes could
cause a default under such Senior Indebtedness, even if the Change of Control
itself does not, due to the financial effect of such repurchase on the
Company. Finally, the Company's ability to pay cash to the Holders upon a
repurchase may be limited by the Company's then existing financial resources.
There can be no assurance that sufficient funds will be available when
necessary to make any required repurchases. Even if sufficient funds were
otherwise available, the terms of the Senior Credit Facilities will (and other
Senior Indebtedness may) prohibit the Company's prepayment of Exchange Notes
prior to their scheduled maturity. Consequently, if the Company is not able to
prepay the indebtedness under the Senior Credit Facilities and any other
Senior Indebtedness containing similar restrictions or obtain requisite
consents, as described above, the Company will be unable to fulfill its
repurchase obligations if Holders of Notes exercise their repurchase rights
following a Change of Control, thereby resulting in a default under the
Indenture.
FRAUDULENT CONVEYANCE CONSIDERATIONS
If under applicable provisions of federal bankruptcy law and comparable
provisions of state and federal fraudulent conveyance laws it were found that
the Company had (a) incurred the indebtedness represented by the Notes with
the intent of hindering, delaying or defrauding creditors or (b) had received
less than reasonably equivalent value or consideration for incurring such
indebtedness and (i) was insolvent or was rendered insolvent by reason of such
transactions, (ii) was engaged in a business or transaction for which its
remaining assets constituted unreasonably small capital to carry on its
business, or (iii) intended to incur, or believed that it would incur, debts
beyond its ability to pay such debts as they matured, the obligations of the
Company on the Notes could be subordinated to all other indebtedness of the
Company.
The measure of insolvency for purposes of determining whether a transfer is
avoidable as a fraudulent transfer varies depending upon the law of the
jurisdiction which is being applied. Generally, however, a debtor would be
considered insolvent if the sum of all its liabilities, including contingent
liabilities were greater than the fair saleable value of the debtor's assets
at a fair valuation, or if the present fair saleable value of the debtor's
assets were less than the amount required to repay its probable liabilities on
its existing debts, including contingent liabilities, as they become absolute
and matured. There can be no assurance as to what standard a court would apply
in order to determine solvency.
The Company believes (i) that it did not enter into the Initial Offering
with fraudulent intent, (ii) that circumstances constituting constructive
fraud will not have arisen with respect to the Company as a result of, and
after giving effect to, the Initial Offering and (iii) that, accordingly, the
property transferred to the Company as part of the Initial Offering and the
obligations of the Company with respect to the Notes would not be subject to
such detrimental action. These beliefs are based on the Company's operating
history and analysis of internal cash flow projections and estimated values of
assets and liabilities of the Company at the time of the offering of the
Notes. Since each of the components of the question of whether the incurrence
of the debt represented by the DIscount Notes constitutes a fraudulent
conveyance is inherently fact-based are fact-specific, there can be no
assurance that a court passing on such questions would agree with the Company.
17
TECHNOLOGICAL CHANGE AND PROCESS DEVELOPMENT
The market for the Company's products and services is characterized by
rapidly changing technology and continuing process development. The future
success of the Company's business will depend in large part upon its ability
to maintain and enhance its technological capabilities, develop and market
products and services that meet changing customer needs, and successfully
anticipate or respond to technological changes on a cost-effective and timely
basis. Research and development expenses are expected to increase as
manufacturers make demands for higher technology and smaller PCBs. In
addition, the PCB industry could in the future encounter competition from new
or revised technologies that render existing electronic interconnect
technology less competitive or obsolete or technologies that may reduce the
number of PCBs required in electronic components. There can be no assurance
that the Company will effectively respond to the technological requirements of
the changing market. To the extent the Company determines that new
technologies and equipment are required to remain competitive, the
development, acquisition and implementation of such technologies and equipment
may require significant capital investment by the Company. There can be no
assurance that capital will be available for these purposes in the future or
that investments in new technologies will result in commercially viable
technological processes. The loss of revenue and earnings to the Company from
such a technological change or process development could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Technology, Development and Processes."
DEPENDENCE ON A LIMITED NUMBER OF CUSTOMERS
During the fiscal year ended December 31, 1996, sales to the Company's
largest customer, IBM, accounted for 15.9% of the Company's net revenues.
Sales to the Company's two largest customers accounted for approximately 24.6%
of the Company's net revenues and sales to the Company's ten largest customers
accounted for 51.8% of the Company's net revenues during the same period.
During the nine months ended September 30, 1997, sales to the Company's
largest customer, Motorola, accounted for 10.9% of the Company's net revenues.
Sales to the Company's two largest customers accounted for approximately 20.4%
of the Company's net revenues during the nine months ended September 30, 1997
and sales to the Company's ten largest customers accounted for 48.4% of the
Company's net revenues during the same period. There can be no assurance that
the Company will not depend upon a relatively small number of customers for a
significant percentage of its net revenues in the future. There can be no
assurance that present or future customers will not terminate their
manufacturing arrangements with the Company or significantly change, reduce or
delay the amount of manufacturing services ordered from the Company. Any such
termination of a manufacturing relationship or change, reduction or delay in
orders could have an adverse effect on the Company's results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "Business--Markets and Customers."
DEPENDENCE ON ELECTRONIC INDUSTRY
The electronics industry, which encompasses the Company's principal
customers, is characterized by intense competition, relatively short product
life-cycles and significant fluctuations in product demand. In addition, the
electronics industry is generally subject to rapid technological change and
product obsolescence. Furthermore, the electronics industry is subject to
economic cycles and has in the past experienced, and is likely in the future
to experience, recessionary periods. A recession or any other event leading to
excess capacity or a downturn in the electronics industry would likely have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "The Industry--Technical Overview,"
"Business--Markets and Customers."
18
ABILITY TO IMPLEMENT THE COMPANY'S OPERATING AND ACQUISITION STRATEGY
No assurances can be given that the Company or its management team will be
able to implement successfully the operating strategy described herein,
including the ability to identify, negotiate and consummate future
acquisitions on terms management considers favorable.
The Company may from time to time pursue the acquisitions of other
companies, assets or product lines that complement or expand its existing
business. Acquisitions involve a number of risks that could adversely affect
the Company's operating results, including the diversion of management's
attention, the costs of assimilating the operations and personnel of the
acquired companies, and the potential loss of employees of the acquired
companies. No assurance can be given that any acquisition by the Company will
not materially and adversely affect the Company or that any such acquisition
will enhance the Company's business. The ability of the Company to implement
its operating strategy and to consummate future acquisitions may require
significant additional debt and/or equity capital, and no assurance can be
given as to whether, and on what terms, such additional debt and/or equity
capital will be available.
The Company's efforts to increase international sales may be adversely
affected by, among other things, changes in foreign import restrictions and
regulations, taxes, currency exchange rates, currency and monetary transfer
restrictions and regulations and economic and political changes in the foreign
nations to which the Company's products are exported. There can be no
assurance that one or more of these factors will not have a material adverse
effect on the Company's financial position or results of operations. See
"Business--Business Strategy" and "--Markets and Customers."
VARIABILITY OF ORDERS
The level and timing of orders placed by the Company's customers vary due to
a number of factors, including customer attempts to manage inventory, changes
in the customer's manufacturing strategies and variation in demand for
customer products due to, among other things, technological change, new
product introductions, product life-cycles, competitive conditions or general
economic conditions. Because the Company generally does not obtain long-term
production orders or advance commitments from its customers, it must attempt
to anticipate the future volume of orders based on discussions with its
customers. A substantial portion of sales in a given quarter may depend on
obtaining orders for products to be manufactured and shipped in the same
quarter in which those orders are received. The Company relies on its estimate
of anticipated future volumes when making commitments regarding the level of
business that it will seek and accept, the mix of products that it intends to
manufacture, the timing of production schedules and the levels and utilization
of personnel and other resources. A variety of conditions, both specific to
the individual customer and generally affecting the customer's industry, may
cause customers to cancel, reduce or delay orders that were previously made or
anticipated. The Company cannot assure the timely replacement of canceled,
delayed or reduced orders. Significant or numerous cancellations, reductions
or delays in orders by a group of customers could materially adversely affect
the Company's business, financial condition and results of operation.
INTELLECTUAL PROPERTY
The Company's success depends in part on proprietary technology and
manufacturing techniques. The Company has no patents for these proprietary
techniques and chooses to rely primarily on trade secret protection.
Litigation may be necessary to protect the Company's technology, to determine
the validity and scope of the proprietary rights of others. The Company is not
aware of any pending or threatened claims that affect any of the Company's
intellectual property rights. If any infringement claim is asserted against
the Company, the Company may seek to obtain a license of the other party's
19
intellectual property rights. There is no assurance that a license would be
available on reasonable terms or at all. Litigation with respect to patents or
other intellectual property matters could result in substantial costs and
diversion of management and other resources and could have a material adverse
effect on the Company.
RISKS ASSOCIATED WITH A SINGLE MANUFACTURING FACILITY
The Company produces all of its quick-turn products and most of its other
products in its manufacturing facility located in Anaheim, California, other
than research and development and longer term manufacturing jobs. The
Company's manufacturing processes are highly complex and require sophisticated
and costly equipment. As a result, any prolonged disruption in the operations
of the Company's manufacturing facility, whether due to technical or labor
difficulties, destruction of or damage to this facility or other reasons,
including as a result of a natural disaster such as an earthquake, fire or
flood, could have a material adverse effect on the Company's financial
condition or results of operations. See "Business--Facilities."
ENVIRONMENTAL MATTERS
The Company's operations are regulated under a number of federal, state,
local and foreign environmental laws and regulations, which govern, among
other things, the discharge of hazardous materials into the air and water as
well as the handling, storage and disposal of such materials. Compliance with
these environmental laws are major considerations for all PCB manufacturers
because metals and other hazardous materials are used in the manufacturing
process. In addition, because the Company is a generator of hazardous wastes,
the Company, along with any other person who arranges for the disposal of such
wastes, may be subject to potential financial exposure for costs associated
with an investigation and remediation of sites at which it has arranged for
the disposal of hazardous wastes, if such sites become contaminated. This is
true even if the Company fully complies with applicable environmental laws.
Although the Company believes that its facilities are currently in material
compliance with applicable environmental laws, and it monitors its operations
to avoid violations arising from human error or equipment failures, there can
be no assurances that violations will not occur. In the event of a violation
of environmental laws, the Company could be held liable for damages and for
the costs of remedial actions and could also be subject to revocation of its
effluent discharge permits. Any such revocations could require the Company to
cease or limit production at one or more of its facilities, thereby having a
material adverse effect on the Company's operations. Environmental laws could
also become more stringent over time, imposing greater compliance costs and
increasing risks and penalties associated with any violation, which could have
a material adverse effect on the Company, its results of operations, prospects
or debt service ability. See "Business--Environmental Matters."
COMPETITION
The PCB industry is highly fragmented and characterized by intense
competition. The Company principally competes with independent and captive
manufacturers of complex and quick-turn PCBs. The Company's principal
competitors include other independent small private companies and integrated
subsidiaries of more broadly based volume producers, that also manufacture
multilayer PCBs and other electronic assemblies. Some of the Company's
principal competitors are less highly-leveraged than the Company and may have
greater financial and operating flexibility. Moreover, the Company may face
additional competitive pressures as a result of changes in technology.
Competition in the complex and quick-turn PCB industry has increased due to
the consolidation trend in the industry, which results in potentially better
capitalized and more effective competitors. The Company's basic technology is
generally not subject to significant proprietary protection, and companies
with significant resources or international operations may enter the market.
Increased
20
competition could result in price reductions, reduced margins or loss of
market share, any of which could materially adversely affect the Company's
business, financial condition and results of operations. See "Business--
Competition."
DEPENDENCE ON KEY MANAGEMENT
The Company's success will continue to depend to a significant extent on its
executive and other key management personnel. Although the Company has entered
into employment agreements with certain of its executive officers, there can
be no assurance that the Company will be able to retain its executive officers
and key personnel or attract additional qualified management in the future.
CONTROLLING STOCKHOLDERS
The Bain Capital Funds hold approximately 49.9% of the outstanding voting
stock of Holdings, the sole stockholder of the Company's parent, Details
Capital. In addition, the Bain Capital Funds and all of Holdings' other
stockholders have entered into a stockholders agreement regarding, among other
things, the voting of such stock. By virtue of such stock ownership and these
agreements, the Bain Capital Funds have the power to control all matters
submitted to stockholders of Holdings, Details Capital and the Company, to
elect a majority of the directors of Holdings and its subsidiaries, including
the Company, and to exercise control over the business, policies and affairs
of Holdings, Details Capital and the Company. The interests of the Bain
Capital Funds as equity holders may differ from the interests of holders of
the Exchange Notes. See "Certain Relationships and Related Transactions--
Stockholders Agreement."
ABSENCE OF PUBLIC MARKET; RESTRICTIONS ON TRANSFER
There is currently no established market for the Exchange Notes and,
although the Exchange Notes are expected to be eligible for trading in the
PORTAL market, there can be no assurance as to the liquidity of any markets
that may develop for the Exchange Notes, the ability of Holders of the
Exchange Notes to sell their Exchange Notes or the price at which Holders
would be able to sell their Exchange Notes. Future trading prices of the
Exchange Notes will depend on many factors, including, among other things,
prevailing interest rates, the Company's operating results and the market for
similar securities. The Company does not intend to apply for listing of the
Notes on any securities exchange or on any automated dealer quotation system.
21
USE OF PROCEEDS
The Company will receive no proceeds from the issuance of the Exchange
Notes.
The Company used the net proceeds (after deduction of related fees and
expenses) from the Initial Offering of approximately $96.4 million to repay
(i) the $85.0 million of indebtedness represented by the Senior Subordinated
Facility, plus accrued interest and related fees and expenses, (ii) a portion
of the Holdings Facility and (iii) indebtedness under the Term Loan Facilities
of approximately $10.3 million.
The proceeds of the Senior Subordinated Facility, the Holdings Facility and
the Senior Credit Facilities were used to finance, in part, the
Recapitalization and related fees and expenses. See "Summary--The
Transactions".
22
CAPITALIZATION
The following table sets forth (i) the historical capitalization of Holdings
at September 30, 1997, (ii) the capitalization of Holdings as adjusted to give
effect to the Transactions, and (iii) the capitalization of Details as
adjusted to give effect to the Transactions and the Initial Offering and
application of the net proceeds therefrom, as if such transactions had
occurred on that date. This table should be read in conjunction with the
Selected Historical Consolidated Financial Data and Unaudited Pro Forma
Financial Data and the audited consolidated financial statements included
elsewhere in this Prospectus.
HOLDINGS DETAILS
------------------------------- --------------------
AS ADJUSTED
AS ADJUSTED FOR THE TRANSACTIONS
ACTUAL FOR THE TRANSACTIONS AND THE OFFERING
--------- -------------------- --------------------
(DOLLARS IN THOUSANDS)
Cash...................... $ 942 $ 3,891 $ 4,992
Debt:
Senior Credit Facili-
ties(1)................ -- 91,400 81,100
Existing Indebtedness... 87,410 6,556 6,556
Senior Subordinated Fa-
cility................. -- 85,000 --
Notes................... -- -- 100,000
Holdings Facility(2).... -- 51,580 -- (5)
--------- --------- ---------
Total debt............ 87,410 234,536 187,656
Temporary equity(3)....... 83,350 -- --
Total stockholder's equity
(deficit)(4)............. (148,527) (196,222) --
Contributed capital (defi-
cit)(4)(5)............... -- -- (150,497)
--------- --------- ---------
Total capitalization...... $ 23,175 $ 42,205 $ 42,151
========= ========= =========
- --------
(1) The Company's $30 million Revolving Credit Facility and $25 million
acquisition facility under the Term Loan Facilities were undrawn at
October 28, 1997. On a pro forma basis as of September 30, 1997, the
Company would have had $55 million available under these facilities.
(2) Concurrently with the Initial Offering, Holdings conducted the Discount
Note Offering, the proceeds of which were used to repay the Holdings
Facility.
(3) Temporary equity represents the fair value at September 30, 1997 of the
Company stock and warrants subject to a put at the option of the holders
thereof which were issued in 1996 in connection with the Initial
Recapitalization and exercised in connection with the Transactions.
(4) As a result of the Initial Recapitalization and subsequent increases in
temporary equity, Holdings had a stockholder's deficit. As a result of the
Recapitalization, Holdings' total stockholders' deficit increased by $47.7
million. In the Recapitalization, the Bain Capital Funds, an affiliate of
CMC and the Other Investors received common stock representing 62.0% of
Holdings for an aggregate consideration of $62.4 million. Existing Owners
and management retained 10.5% and 17.1% of Holdings, respectively, which,
based on the price of the stock received by the Bain Capital Funds, an
affiliate of CMC and the Other Investors, had a value of $26.6 million.
The total value of the common stock purchased and retained in the
Recapitalization was $89.0 million.
(5) Subsequent to the Recapitalization, Holdings incorporated Details, Inc. as
a wholly-owned subsidiary with a $1 capital contribution and contributed
substantially all of its assets, subject to certain liabilities (other
than the Holdings Facility) to Details.
23
UNAUDITED PRO FORMA FINANCIAL DATA
The following Unaudited Pro Forma Consolidated Balance Sheet as of September
30, 1997 gives effect to the Transactions and the Initial Offering as if they
had occurred on such date.
The following Unaudited Pro Forma Consolidated Statements of Income for the
year ended December 31, 1996, the nine months ended September 30, 1996 and
1997 and the last twelve months ended September 30, 1997 give effect to the
Transactions and the Initial Offering as if they had occurred on January 1,
1996. See "The Transactions." The Unaudited Pro Forma Consolidated Statements
of Income do not purport to represent what the Company's results of operations
would have been if the Transactions and the Initial Offering had occurred as
of the dates indicated or what such results will be for any future periods.
The unaudited pro forma financial data are based on the historical
consolidated financial statements of the Company and the assumptions and
adjustments described in the accompanying notes.
The unaudited pro forma balance sheet also includes the following non-
recurring charges related to the Transactions: (i) approximately $6 million
from the write-off of deferred financing fees; (ii) approximately $1.2 million
from the early extinguishment of the Company's long term debt; (iii)
approximately $1.2 million related to the buyout of the CEO's employment
contract; and (iv) approximately $30.6 million of stock compensation and
related bonuses under the Company's 1996 Stock Option Plan. Such charges
aggregate $39.0 million and result in a net charge to earnings of $23.0
million (net of tax benefit of $16.0 million, assuming an estimated 41% tax
rate).
24
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
HOLDINGS DETAILS, INC.
--------------------------------------------- --------------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 PRO FORMA 1997 1997 OTHER
HISTORICAL ADJUSTMENTS PRO FORMA PRO FORMA* ADJUSTMENTS PRO FORMA
------------- ----------- ------------- ------------- ----------- ---------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash................... $ 942 $ 3,130 (a) $ 3,891 $ 3,892 $ 1,100 (i) $ 4,992
(1)(b)
(180)(c)
Trade receivables,
net................... 10,148 -- 10,148 10,148 -- 10,148
Inventories............ 2,414 -- 2,414 2,414 -- 2,414
Other.................. 1,047 -- 1,047 1,047 -- 1,047
--------- -------- --------- --------- -------- ---------
Total current assets... 14,551 2,949 17,500 17,501 1,100 18,601
Investment in Details,
Inc. .................. -- 1 (b) 1 -- --
Property and equipment,
net.................... 14,931 -- 14,931 14,931 -- 14,931
Other assets............ 662 -- 662 662 -- 662
Deferred tax assets..... -- 8,333 (a) 11,957 11,957 1,845 (j) 13,802
1,596 (e)
2,028 (f)
Debt issue costs, net... 1,542 11,600 (c) 11,600 8,400 3,600 (i) 7,500
(1,542)(e) (4,500)(j)
--------- -------- --------- --------- -------- ---------
Total assets............ $ 31,686 $ 24,965 $ 56,651 $ 53,451 $ 2,045 $ 55,496
========= ======== ========= ========= ======== =========
LIABILITIES AND EQUITY
Current liabilities:
Current portion long-
term debt............. $ 10,990 $ 10,000 (a) $ 365 $ 365 $ -- $ 365
1,200 (e)
3,400 (g)
(25,225)(c)
Accounts payable....... 3,505 -- 3,505 3,505 -- 3,505
Accrued expenses....... 2,989 -- 2,989 2,989 -- 2,989
Accrued bonuses ....... 2,959 (593)(a) 2,366 2,366 -- 2,366
--------- -------- --------- --------- -------- ---------
Total current
liabilities........... 20,443 (11,218) 9,225 9,225 -- 9,225
Other long-term
liabilities............ -- 9,477 (d)(g) 9,477 9,477 -- 9,477
Long-term debt.......... 76,420 (70,229)(c) 6,191 6,191 -- 6,191
Senior Credit
Facilities............. -- 91,400 (c) 91,400 91,400 (10,300)(i) 81,100
Senior Subordinated
Facility............... -- 85,000 (c) 85,000 85,000 (85,000)(i) --
Notes................... -- -- -- -- 100,000 (i) 100,000
Holdings Facility....... -- 51,580 (c) 51,580
Temporary equity........ 83,350 (83,350)(g) -- -- -- --
Stockholders' equity
(deficit):
Common stock........... 5,301 (5,301)(g) -- -- -- --
Convertible preferred
stock................. 13,532 (13,532)(g) -- -- -- --
Class A Common, Class L
Common................ -- 60,895 (c) 67,325 -- -- --
5,867 (c)
563 (h)
Additional paid in
capital............... 2,922 14,048 (a) 8,367 -- -- --
(16,970)(g)
4,947 (f)
3,420 (c)
Receivables from
stockholders.......... -- (563)(h) (563) -- -- --
Retained earnings
(deficit)............. (170,282) (11,992)(a) (271,351) -- -- --
(83,862)(g)
(2,296)(e)
(2,919)(f)
--------- -------- --------- --------- -------- ---------
Total stockholders'
equity (deficit)...... (148,527) (47,695) (196,222) -- -- --
Contributed capital
(deficit).............. -- -- -- (147,842) (2,655)(j) (150,497)
--------- -------- --------- --------- -------- ---------
Total liabilities and
equity................. $ 31,686 $ 24,965 $ 56,651 $ 53,451 $ 2,045 $ 55,496
========= ======== ========= ========= ======== =========
- --------
* Subsequent to the Recapitalization, Holdings incorporated Details, Inc. as a
wholly-owned subsidiary with a $1 capital contribution and contributed
substantially all of its assets, subject to certain liabilities (other than
the Holdings Facility) to Details.
See Notes to Unaudited Pro Forma Consolidated Balance Sheet
25
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
(a) Reflects: (i) the compensation expense of $13,840 (recorded net of the
estimated tax benefit of $5,675 assuming a 41% effective tax rate) related
to the accelerated vesting of 1,437 options that were outstanding under
the Company's variable stock plan at an exercise price of approximately
$2,179 per share and an estimated fair market value of the Company of
approximately $11,810 per share; (ii) the exercise of these options
immediately prior to the Recapitalization, resulting in cash proceeds to
the Company of $3,130 and an increase in additional paid in capital of
$16,970; (iii) the compensation expense attributable to the bonuses
payable to cover employee taxes on these options of $11,768 (recorded net
of the estimated tax benefit of $4,825 assuming a 41% effective tax rate);
and (iv) the increase in the Company's short-term debt in connection with
paying $10,000 of these bonuses prior to the Recapitalization. The net pro
forma adjustment recorded has been calculated as the total amount required
to be recorded less the amount already recorded in the Company's September
30, 1997 historical financial statements, summarized as follows:
TOTAL CALCULATED RECORDED AS OF NET PRO FORMA
ADJUSTMENT SEPTEMBER 30, 1997 ADJUSTMENT
---------------- ------------------ -------------
DEBIT(CREDIT)
Cash...................... 3,130 -- 3,130
Deferred tax asset........ 10,500 2,167 8,333
Retained earnings......... 15,108 3,116 11,992
Additional paid-in capital
("APIC")................. (16,970) (2,922) (14,048)
Accrued bonuses........... (1,768) (2,361) 593
Short-term debt........... (10,000) -- (10,000)
(b) Represents Holdings' initial capital contribution of $1 to Details, Inc.
subsequent to the Recapitalization.
(c) Reflects the incurrence of debt relating to the Senior Credit Facilities,
the Senior Subordinated Facility, the Notes, the Holdings Facility and the
uses of cash for the purposes of effecting the Recapitalization.
SOURCES OF CASH:
Cash............................................................. $ 180
Senior Credit Facilities......................................... 91,400
Senior Subordinated Facility..................................... 85,000
Holdings Facility(I)............................................. 55,000
Class L Common and Class A Common (net of fees and expenses of
$1,500)......................................................... 60,895
Common stock and common stock equivalents(II).................... 26,605
--------
Total Sources.................................................. $319,080
========
USES OF CASH:
Payment of deferred financing fees............................... 11,600
Payment of existing indebtedness(III)............................ 96,604
Continuing equity interest(II)................................... 26,605
Redemption of stock and distribution to shareholders............. 184,271
--------
Total Uses..................................................... $319,080
========
(I) A portion of the proceeds received from the Holdings Facility of
$55,000 was allocated to the estimated fair market value of the Class L
Common and Class A Common warrants of $3,420.
(II) As part of the Recapitalization, $26,605 (estimated fair market value)
of common stock and common stock options was exchanged in a non-cash
transaction for Class L Common and Class A Common and options to
acquire Class L Common and Class A Common of Holdings. These exchanges
are included in the above table to highlight the common stock
(exchanged
26
at carryover basis of $5,867) and options (exchanged at carryover basis
of $4,689), which differs from their estimated fair market value of
$26,605.
(III) Includes $15,000 payment on the Company's existing subordinated debt
which has a carrying value at September 30, 1997 of $13,850, the
difference has been recorded as a non-recurring charge of $1,150 (see
Note (e) below).
(d) Represents a deferred purchase price obligation, contingent upon the
Company's ability to utilize the deferred tax benefit recorded in
connection with the exercise of options prior to the Recapitalization (See
Note (a)). Management believes that it is probable that the Company will
utilize these tax benefits in the near future.
(e) Represents the balance sheet impact for the following non-recurring
charges related to the Transactions.
Write-off of deferred financing fees................................. $1,542
Early extinguishment of long term debt............................... 1,150
Buy out of CEO's employment contract................................. 1,200
------
3,892
Net deferred tax benefit (assuming 41% effective rate)........... (1,596)
------
Net charge to equity............................................. $2,296
======
(f) Represents compensation expense of $4,947 for vested but unexercised
options exchanged for new Class A options and Class L options at the same
intrinsic value. The charge to equity of $2,919 is net of a tax benefit of
$2,028 (assuming an estimated 41% effective tax rate).
(g) Represents the net change in retained earnings (deficit) as a result of
the redemption and subsequent retirement of existing common and common
stock equivalents and preferred stock in conjunction with the
Recapitalization.
Distribution to shareholders...................................... $(184,271)
Estimated fees and expenses of Recapitalization................... (3,400)
Deferred purchase obligation...................................... (9,477)
Retire common stock and APIC(I)................................... 16,404
Retire convertible preferred stock................................ 13,532
Retire temporary equity........................................... 83,350
---------
$ (83,862)
=========
(I) Represents the carrying value of common stock of $5,301 and the
carrying value of common stock issued and retired as a result of
options that were exercised prior to the Recapitalization (valued at
$16,970, as discussed in Note (a) above), less common stock converted
into Class L Common and Class A Common at their historical carrying
value ($5,867).
(h) Represents the Company's issuance of restricted Class A Common (valued at
$563) to management in exchange for a recourse note.
(i) Reflects the incurrence of debt related to the Notes and the use of
proceeds therefrom to retire the existing Senior Subordinated Facility and
a portion of the Senior Credit Facilities.
SOURCES OF CASH:
Notes.............................................................. $100,000
========
USES OF CASH:
Payment of Senior Subordinated Facility........................... $ 85,000
Payment of Senior Credit Facilities............................... 10,300
Payment of deferred financing fees................................ 3,600
Cash(I)........................................................... 1,100
--------
$100,000
========
(I) A portion of the cash proceeds from the Original Notes was used to
repay the accrued interest on the Holdings Facility and the Senior
Subordinated Facility.
(j) Reflects the write-off of deferred financing fees of $4,500 in conjunction
with the retirement of the Senior Subordinated Facility. The charge to
equity for the write-off of deferred financing fees of $2,655 is net of a
tax benefit of $1,845 (assuming estimated 41% effective tax rate).
27
DETAILS, INC.
UNAUDITED PRO FORMA STATEMENT OF INCOME
(DOLLARS IN THOUSANDS)
LATEST TWELVE MONTH PERIOD ENDED SEPTEMBER 30, 1997(A)
------------------------------------------------------------
PRO FORMA SUPPLEMENTAL ADJUSTED
HISTORICAL ADJUSTMENTS PRO FORMA ADJUSTMENTS(E) PRO FORMA
---------- ----------- --------- -------------- ---------
Net sales............... $73,850 $ -- $73,850 $ -- $ 73,850
Cost of goods sold...... 35,625 -- 35,625 -- 35,625
------- ------- ------- ------- --------
Gross profit............ 38,225 -- 38,225 -- 38,225
Operating expenses:
Compensation to CEO.... 1,030 (1,030)(b) -- -- --
General and
administration........ 2,177 -- 2,177 -- 2,177
Sales and marketing.... 6,824 -- 6,824 -- 6,824
Stock compensation and
related bonuses....... 5,283 -- 5,283 (5,283)(f) --
------- ------- ------- ------- --------
Operating income........ 22,911 1,030 23,941 5,283 29,224
Interest expense........ (9,971) (9,100)(c) (19,071) -- (19,071)
Interest income......... 87 -- 87 -- 87
------- ------- ------- ------- --------
Income before income
taxes.................. 13,027 (8,070) 4,957 5,283 10,240
Provision for (benefit
from) income taxes..... 5,395 (3,362)(d) 2,033 2,166 (d) 4,199
------- ------- ------- ------- --------
Net income.............. $ 7,632 $(4,708) $ 2,924 $ 3,117 $ 6,041
======= ======= ======= ======= ========
OTHER DATA:
Adjusted EBITDA (g)..................................................... $ 31,605
Adjusted EBITDA margin.................................................. 43%
Depreciation............................................................ 2,381
Capital expenditures.................................................... 4,213
See Notes to Unaudited Pro Forma Consolidated Statement of Income
28
DETAILS, INC.
UNAUDITED PRO FORMA STATEMENT OF INCOME
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1996
------------------------------------------------------------
PRO FORMA SUPPLEMENTAL ADJUSTED
HISTORICAL ADJUSTMENTS PRO FORMA ADJUSTMENTS(E) PRO FORMA
---------- ----------- --------- -------------- ---------
Net sales............... $67,515 $ -- $ 67,515 $ -- $ 67,515
Cost of goods sold...... 30,505 -- 30,505 -- 30,505
------- ------- -------- ------- --------
Gross profit............ 37,010 -- 37,010 -- 37,010
Operating expenses:
Compensation to CEO.... 1,055 (1,055)(b) -- -- --
General and
administration........ 1,929 -- 1,929 -- 1,929
Sales and marketing.... 5,989 -- 5,989 -- 5,989
------- ------- -------- ------- --------
Operating income........ 28,037 1,055 29,092 -- 29,092
Interest expense........ (9,518) (9,564)(c) (19,082) -- (19,082)
Interest income......... 102 -- 102 -- 102
------- ------- -------- ------- --------
Income before income
taxes.................. 18,621 (8,509) 10,112 -- 10,112
Provision for (benefit
from) income taxes..... 6,265 (2,119)(d) 4,146 -- 4,146
------- ------- -------- ------- --------
Net income.............. $12,356 $(6,390) $ 5,966 $ -- $ 5,966
======= ======= ======== ======= ========
OTHER DATA:
Adjusted EBITDA (g)..................................................... $ 31,139
Adjusted EBITDA margin.................................................. 46%
Depreciation............................................................ 2,047
Capital expenditures.................................................... 3,666
See Notes to Unaudited Pro Forma Consolidated Statement of Income
29
DETAILS, INC.
UNAUDITED PRO FORMA STATEMENT OF INCOME
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, 1996
------------------------------------------------------------
PRO FORMA SUPPLEMENTAL ADJUSTED
HISTORICAL ADJUSTMENTS PRO FORMA ADJUSTMENTS(A) PRO FORMA
---------- ----------- --------- -------------- ---------
Net sales............... $49,086 $ -- $ 49,086 $ -- $ 49,086
Cost of goods sold...... 21,899 -- 21,899 -- 21,899
------- ------- -------- ------ --------
Gross profit............ 27,187 -- 27,187 -- 27,187
Operating expenses:
Compensation to CEO.... 836 (836)(b) -- -- --
General and
administration........ 1,377 -- 1,377 -- 1,377
Sales and marketing.... 4,503 -- 4,503 -- 4,503
------- ------- -------- ------ --------
Operating income........ 20,471 836 21,307 -- 21,307
Interest expense........ (6,974) (7,369)(c) (14,343) -- (14,343)
Interest income......... 71 -- 71 -- 71
------- ------- -------- ------ --------
Income before provision
for income taxes....... 13,568 (6,533) 7,035 -- 7,035
Provision for (benefit
from) income
taxes.................. 4,270 (1,386)(d) 2,884 -- 2,884
------- ------- -------- ------ --------
Net income.............. $ 9,298 $(5,147) $ 4,151 $ -- $ 4,151
======= ======= ======== ====== ========
OTHER DATA:
Adjusted EBITDA (g)..................................................... $ 22,802
Adjusted EBITDA margin.................................................. 46%
Depreciation............................................................ 1,495
Capital expenditures.................................................... 2,720
See Notes to Unaudited Pro Forma Consolidated Statement of Income
30
DETAILS, INC.
UNAUDITED PRO FORMA STATEMENT OF INCOME
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, 1997
------------------------------------------------------------
ADJUSTED
PRO FORMA SUPPLEMENTAL PRO
HISTORICAL ADJUSTMENTS PRO FORMA ADJUSTMENTS(E) FORMA
---------- ----------- --------- -------------- --------
Net sales............... $55,421 $ -- $ 55,421 $ -- $ 55,421
Cost of goods sold...... 27,019 -- 27,019 -- 27,019
------- ------- -------- ------- --------
Gross profit............ 28,402 -- 28,402 -- 28,402
Operating expenses:
Compensation to CEO.... 811 (811)(b) -- -- --
General and
administration........ 1,625 -- 1,625 -- 1,625
Sales and marketing.... 5,338 -- 5,338 -- 5,338
Stock compensation and
related bonuses....... 5,283 -- 5,283 (5,283)(f) --
------- ------- -------- ------- --------
Operating income........ 15,345 811 16,156 5,283 21,439
Interest expense........ (7,427) (6,905)(c) (14,332) -- (14,332)
Interest income......... 56 -- 56 -- 56
------- ------- -------- ------- --------
Income before income
taxes.................. 7,974 (6,094) 1,880 5,283 7,163
Provision for (benefit
from) income taxes..... 3,400 (2,629)(d) 771 2,166 2,937
------- ------- -------- ------- --------
Net income.............. $ 4,574 $(3,465) $ 1,109 $ 3,117 $ 4,226
======= ======= ======== ======= ========
OTHER DATA:
Adjusted EBITDA (g)..................................................... $ 23,268
Adjusted EBITDA margin.................................................. 42%
Depreciation............................................................ 1,829
Capital expenditures.................................................... 3,267
See Notes to Unaudited Pro Forma Consolidated Statement of Income
31
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996 AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(DOLLARS IN THOUSANDS)
(a) Information for the latest twelve months ended September 30, 1997
represents the summation of the pro forma year ended December 31, 1996 and
pro forma nine months ended September 30, 1997 information, less the pro
forma nine months ended September 30, 1996.
(b) Reflects cost savings as a result of the cancellation of the employment
agreement with the Company's CEO as a direct result of the
Recapitalization. The CEO's employment was terminated on October 28, 1997.
(c) The increase to pro forma interest expense as a result of the
Recapitalization is as follows:
LATEST
TWELVE MONTHS YEAR ENDED NINE MONTHS NINE MONTHS
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1996 1997
------------- ------------ ------------- -------------
Elimination of
historical interest
expense and fees....... $(9,971) $(9,518) $ (6,974) $(7,427)
------- ------- -------- -------
Senior Credit Facilities
(assuming LIBOR at 5.8%)
Term Loan A--LIBOR
plus 2.50%........... 2,581 2,581 1,936 1,936
Term Loan B--LIBOR
plus 2.75%........... 4,289 4,289 3,217 3,217
Notes................... 10,000 10,000 7,500 7,500
Other bank fees and
unused commitment fee
on the Revolving Credit
Facility............... 150 150 113 113
Capital leases.......... 764 775 612 601
Other................... 200 200 150 150
------- ------- -------- -------
Cash interest ex-
pense.............. 17,984 17,995 13,528 13,517
Amortization of de-
ferred financing fees
($7,500 over average
6.9 years)............ 1,087 1,087 815 815
------- ------- -------- -------
Total interest from
recapitalization
debt requirements.. 19,071 19,082 14,343 14,332
------- ------- -------- -------
Net increase in
interest......... $ 9,100 $ 9,564 $ 7,369 $ 6,905
======= ======= ======== =======
An increase or decrease in the assumed weighted average interest rate on
the Senior Credit Facilities of 0.125% would change pro forma interest
expense by $102, $102, $77, and $77 for the latest twelve months ended
September 30, 1997, for the year ended December 31, 1996, and the nine
months ended September 30, 1996 and 1997, respectively.
(d) Represents the income tax adjustment required to result in a pro forma
income tax provision based on: (i) the Company's historical tax provision
using historical amounts and (ii) the direct tax effects of the pro forma
adjustments described above at an estimated 41% effective tax rate.
(e) Supplemental adjustments represent those adjustments which management
believes are appropriate to reflect the elimination of certain expenses not
expected to recur after the Recapitalization.
(f) Reflects the supplemental adjustment for the exclusion of the charge
recorded for stock options vested under the Company's 1996 Stock Option
Plan.
(g) "Adjusted EBITDA" is defined herein as income before provision for income
taxes, plus depreciation, amortization and net interest expense and other
supplemental adjustments for the expense recorded for stock compensation
and related bonuses under the Company's 1996 Stock Option Plan.
32
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
Set forth below are selected historical consolidated financial data of the
Company at the dates and for the periods indicated. The selected historical
consolidated statements of income data of the Company for each of the three
years ended December 31, 1996 and the selected historical consolidated balance
sheet data as of December 31, 1995 and 1996 were derived from the historical
consolidated financial statements of the Company that were audited by
McGladrey & Pullen, LLP, whose report appears elsewhere in this Prospectus.
The selected historical consolidated financial data of the Company for the
year ended December 31, 1992 and the nine month periods ended September 30,
1996 and 1997 are derived from unaudited consolidated financial statements of
the Company which, in the opinion of management, include all adjustments
necessary for a fair presentation. The selected historical consolidated
financial data set forth below should be read in conjunction with, and is
qualified by reference to, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the audited consolidated financial
statements and accompanying notes thereto included elsewhere in this
Prospectus.
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- -------- -------- -------- -------- ---------
(DOLLARS IN THOUSANDS)
STATEMENT OF INCOME DA-
TA:
Net sales.............. $25,759 $32,394 $ 44,086 $ 59,370 $ 67,515 $ 49,086 $ 55,421
Cost of goods sold..... 13,142 16,480 20,415 25,156 30,505 21,899 27,019
------- ------- -------- -------- -------- -------- ---------
Gross profit........... 12,617 15,914 23,671 34,214 37,010 27,187 28,402
Operating expenses:
Compensation to CEO
(1)................... 9,414 11,513 412 418 1,055 836 811
General and administra-
tion.................. 690 1,136 1,385 1,789 1,929 1,377 1,625
Sales and marketing.... 2,672 3,074 3,542 5,293 5,989 4,503 5,338
Stock compensation and
related bonuses (2)... -- -- -- -- -- -- 5,283
------- ------- -------- -------- -------- -------- ---------
Operating income
(loss)................ (159) 191 18,332 26,714 28,037 20,471 15,345
Interest expense....... (57) (167) (181) (371) (9,518) (6,974) (7,427)
Interest income........ 21 10 13 42 102 71 56
------- ------- -------- -------- -------- -------- ---------
Income (loss) before
income taxes.......... (195) 34 18,164 26,385 18,621 13,568 7,974
Provision for (benefit
from) income taxes
(3)................... (18) 221 273 396 6,265 4,270 3,400
------- ------- -------- -------- -------- -------- ---------
Net income (loss)...... $ (177) $ (187) $ 17,891 $ 25,989 $ 12,356 $ 9,298 4,574
======= ======= ======== ======== ======== ======== =========
OTHER FINANCIAL DATA:
EBITDA (4)............. $ 567 $ 1,047 $ 19,214 $ 27,768 $ 30,084 $ 21,966 $ 17,174
Adjusted EBITDA (5).... 9,981 12,560 19,626 28,186 31,139 22,802 23,268
Depreciation........... 726 856 882 1,054 2,047 1,495 1,829
Cash provided by oper-
ating activities...... 298 395 18,094 26,141 12,158 10,882 11,506
Cash flow (used in) in-
vesting activities.... (1,273) (1,254) (844) (2,946) (3,577) (2,712) (3,267)
Cash provided by (used
in) financing
activities............ 786 2,277 (15,156) (26,409) (8,885) (6,786) (7,466)
Ratio of earnings to
fixed charges (6)..... -- 1.1x 51.5x 46.6x 3.0x 2.9x 2.1x
BALANCE SHEET DATA (END
OF PERIOD):
Working capital........ $ 1,170 $ (74) $ (96) $ (2,264) $ (3,514) $ (884) $ (5,892)
Total assets........... 6,164 9,097 12,015 13,081 27,503 26,930 31,686
Total debt............. 1,434 3,446 1,316 1,982 94,101 96,157 87,410
Equity (net capital de-
ficiency) (7).......... 2,993 2,806 2,806 2,500 (72,674) (75,732) (65,177)
- --------
(1) Represents compensation paid to the Company's former CEO, who also was the
sole shareholder since the Company's inception through the Initial
Recapitalization and whose employment terminated on October 28, 1997.
(2) Represents stock compensation and related bonuses under the Company's 1996
Stock Option Plan.
(3) Prior to February 1996, the Company elected to be taxed as an "S"
corporation and paid income taxes at a reduced rate. On a pro forma basis,
income tax expense would have been higher by the following amounts: 1994-
$7,175; 1995-$10,425; 1996-$1,295 and September 30, 1996-$1,295.
(4) "EBITDA" is defined herein as income before income taxes, depreciation,
amortization and net interest expense. EBITDA is presented because the
Company believes it is frequently used by security analysts in the
evaluation of companies. However, EBITDA should not be considered as an
alternative to net income as a measure of operating results or to cash
flows as a measure of liquidity in accordance with generally accepted
accounting principles.
(5) "Adjusted EBITDA" is defined herein as EBITDA adjusted for certain items
of income which are not expected to be incurred by the Company subsequent
to the Transactions. These items consist of the compensation paid to the
Company's former CEO whose employment terminated on October 28, 1997 and
stock compensation and related bonuses under the Company's 1996 Stock
Option Plan.
(6) For purposes of computing this ratio, earnings consists of income before
income taxes plus fixed charges. Fixed charges consist of interest expense
and the estimated interest portion of rent expense. Earnings were not
sufficient to cover fixed charges by $195 for the year ended December 31,
1992.
(7) The net capital deficiency as of December 31, 1996 reflects the Initial
Recapitalization of the Company that took place in January of 1996.
33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and results
of operations covers periods before completion of the Transactions. In
connection with the Transactions, the Company entered into financing
arrangements and altered its capital structure. Accordingly, the results of
operations for periods subsequent to the consummation of the Transactions will
not necessarily be comparable to prior periods. See "The Transactions,"
"Capitalization," "Description of Senior Credit Facilities," "Selected
Historical Consolidated Financial Data," "Unaudited Pro Forma Consolidated
Financial Data," and the audited and unaudited consolidated financial
statements and notes thereto included elsewhere in this Prospectus.
OVERVIEW
The Company is a leading domestic manufacturer and marketer of PCBs for the
quick-turn segment of the PCB industry. The Company produces PCBs for over 300
customers across a wide range of end-use markets including the
telecommunications, computer, contract manufacturing, industrial
instrumentation and consumer electronics industries. For the nine months ended
September 30, 1997, approximately 70% of the Company's sales were quick-turn
PCBs. The Company's net sales of PCB panels, which consist of multiple
individual printed circuit boards, have grown at a compound annual growth rate
of 25% from $25.8 million in fiscal year ended December 31, 1992 to $73.9
million in the twelve months ended September 30, 1997.
SIGNIFICANT TRANSACTIONS
The Company was established in 1978 by James Swenson. In 1992, the Company
installed new management, headed by Bruce McMaster, and began to focus
primarily on quick-turn products. In late January 1996, CMC and its affiliates
acquired approximately 40% of the outstanding stock of the Company in a
recapitalization (the "Initial Recapitalization"). On October 4, 1997,
Holdings and its stockholders entered into the Recapitalization Agreement
pursuant to which the Merger was consummated on October 28, 1997. See "The
Transactions." The Company incurred a non-recurring charge of approximately
$39.0 million (net of estimated income tax benefits of $16.0 million) as a
result of the following events in connection with the Transactions: (i) the
write-off of deferred financing fees; (ii) the early extinguishment of the
Company's long-term debt; (iii) the buyout of the CEO's employment contract;
and (iv) the compensation expense attributable to the accelerated vesting of
the outstanding options under the Company's variable stock plan in conjunction
with the Recapitalization. Because the Merger has been accounted for as a
recapitalization, the historical cost basis of the Company's assets and
liabilities was not affected.
RESULTS OF OPERATIONS
The following table sets forth certain condensed historical financial data
for the Company expressed as a percentage of net sales for the periods set
forth below:
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- ------------------
1994 1995 1996 1996 1997
------- ------- ------- -------- --------
Net sales....................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold.............. 46.3 42.4 45.2 44.6 48.8
------- ------- ------- -------- --------
Gross profit.................... 53.7 57.6 54.8 55.4 51.2
Operating expenses:
Stock compensation and related
bonuses...................... 0 0 0 0 9.5
Other operating expenses...... 12.1 12.6 13.3 13.7 14.0
------- ------- ------- -------- --------
Operating income................ 41.6 45.0 41.5 41.7 27.7
Net interest expense............ (0.4) (0.5) (13.9) (14.1) (13.3)
------- ------- ------- -------- --------
Income before income taxes...... 41.2 44.5 27.6 27.6 14.4
Income tax expense.............. (0.6) (0.7) (9.3) (8.7) (6.1)
------- ------- ------- -------- --------
Net income...................... 40.6 43.8 18.3 18.9 8.3
======= ======= ======= ======== ========
34
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1996
Net Sales. Net sales for the nine months ended September 30, 1997, increased
$6.3 million or 12.9% to $55.4 million from $49.1 million for the nine months
ended September 30, 1996. The increase was largely due to growth in the volume
of units shipped primarily attributable to increased demand from
telecommunications customers. During the nine months ended September 30, 1997,
the Company's largest customer accounted for 10.9% of net sales. During the
nine months ended September 30, 1996, the Company's largest customer accounted
for 17.5% of net sales.
Gross Profit. Gross profit for the nine months ended September 30, 1997,
increased $1.2 million to $28.4 million from $27.2 million for the nine months
ended September 30, 1996. As a percentage of net sales, gross profit decreased
4.2% from 55.4% for the nine months ended September 30, 1996, to 51.2% for the
nine months ended September 30, 1997. The decrease in gross profit as a
percentage of sales was primarily attributable to increases in engineering,
manufacturing and systems personnel needed to support continued growth in
manufacturing capacity.
Stock Compensation. During the nine months ended September 30, 1997, stock
compensation and related bonuses increased $5.3 million from the nine months
ended September 30, 1996, due primarily to non-cash expense for the vesting of
employee stock options granted in 1996.
Other Operating Expenses. Other operating expenses increased $1.1 million or
15.8% to $7.8 million for the nine months ended September 30, 1997, as
compared to $6.7 million for the nine months ended September 30, 1996. As a
percentage of net sales, other operating expenses increased to 14.0% for the
nine months ended September 30, 1997, as compared to 13.7% for the nine months
ended September 30, 1996. The increase was due to additional sales and
marketing expenses attributable to increased sales coupled with the start-up
costs associated with the January 1997 opening of the Company's sales office
in London. The Company anticipates operating expenses will continue to
increase as the Company expands.
Net Interest Expense. Net interest expense for the nine months ended
September 30, 1997, increased $469,000 to $7.4 million from $6.9 million for
the nine months ended September 30, 1996. The increase in interest expense is
primarily due to the nine months ended September 30, 1996 containing only 8
months of interest from the Initial Recapitalization which occurred in late
January 1996. In connection with the Initial Recapitalization, the Company
incurred approximately $95.0 million in bank indebtedness. If the Initial
Recapitalization would have been entered into on January 1, 1996, interest
expense for the nine months ended September 30, 1996, would have been higher
by approximately $770,000 for a total of $7.6 million. At September 30, 1997,
the Company's total debt is approximately $87.4 million resulting in a
corresponding decrease in interest expense for the nine months ended September
30, 1997. The Company anticipates that interest expense will increase
substantially upon completion of the Transactions and the Offering.
Income Tax Expense. Income tax expense for the nine months ended September
30, 1997, was $3.4 million or 42.6% of income before income taxes. Income tax
expense for the nine months ended September 30, 1996, was $4.3 million or
31.5% of income before income taxes. Prior to the Initial Recapitalization,
the Company was taxed as an "S" corporation for income tax purposes. As an "S"
corporation, the Company paid reduced income taxes and all income was passed
through to the stockholder of the Company. On a pro forma basis, the Company's
effective tax rate would have been 41% had the "S" corporation election not
been in effect. The Company anticipates a combined tax rate of approximately
41% in the future under the current federal and state income tax rate
structure.
35
Net Income. For the reasons discussed above, net income for the nine months
ended September 30, 1997, decreased $4.7 million to $4.6 million from $9.3
million for the nine months ended September 30, 1996.
1996 COMPARED TO 1995
Net Sales. Net sales increased $8.1 million or 13.7% to $67.5 million in
1996 from $59.4 million in 1995. The increase was due primarily to a change in
the product sales mix resulting in an increase in average panel price
partially offset by a decrease in total panels shipped. The overall increase
in average price per panel was a result of the Company's increased emphasis on
prototype and premium products. During 1996, the Company had sales to two
customers totaling $16.6 million or 24.6% of net sales. During 1995, the
Company had sales to these two customers totaling $16.4 million or 27.7% of
net sales.
Gross Profit. Gross profit increased $2.8 million to $37.0 million in 1996
from $34.2 million for 1995. As a percentage of net sales, gross profit
decreased 2.8% to 54.8% in 1996 from 57.6% in 1995. The decrease in gross
profit as a percentage of sales was primarily the result of an increase in the
Company's investment in engineering, manufacturing and systems personnel to
support continued growth in manufacturing capacity, combined with increased
manufacturing costs incurred on more complex, high density PCBs.
Other Operating Expenses. Other operating expenses increased $1.5 million or
19.6% to $9.0 million in 1996 from $7.5 million in 1995. As a percentage of
net sales, other operating expenses increased to 13.3% in 1996 from 12.6% in
1995. Of these totals, compensation to the CEO increased $637,000 to $1.1
million in 1996 from $418,000 in 1995. This increase was due to a new
employment contract signed in January 1996 in connection with the Initial
Recapitalization. In connection with the Recapitalization, the Company
negotiated a termination of the CEO's current contract and anticipates an
elimination of annual compensation expense to this individual of $1.1 million
beginning in November 1997.
Net Interest Expense. Net interest expense increased $9.1 million to $9.4
million from $329,000 in 1995. The increase in interest expense is primarily
due to the debt incurred of approximately $95.0 million and $6.6 million in
capital lease transactions in connection with the Initial Recapitalization.
Prior to 1996, the Company had incurred only nominal amounts of debt for the
purchase of equipment.
Income Tax Expense. Income tax expense was $6.3 million or 33.6% of income
before income taxes in 1996. Income tax expense was $396,000 or 1.5% of income
before income taxes in 1995. The income tax rates were lower than the
statutory income tax rate since the Company changed from an "S" corporation to
a "C" corporation in late January 1996. On a pro forma basis, the income tax
rate of the Company if it were taxable as a "C" corporation for all of 1996
would have been 41%.
Net Income. For the reasons discussed above, net income decreased $13.6
million to $12.4 million in 1996 from $26.0 million in 1995.
1995 COMPARED TO 1994
Net Sales. Net sales increased $15.3 million or 34.7% to $59.4 million in
1995 from $44.1 million in 1994. The increase was due primarily to a change in
the product sales mix resulting in an increase in the average panel price
combined with an increase in total panels shipped. The overall increase
in average price per panel was a result of the Company's increased emphasis on
prototype and premium products. The increase in panels shipped is the result
of the Company's focus on obtaining larger quantity orders for quick-turn PCB
business as well as increases in prototype and premium units produced.
Increased capacity utilization experienced at standard lead-time PCB
36
production houses also resulted in extended lead times for production orders
and less capacity available for quick-turn services, and as a result, the
Company experienced increased orders to fill this shortage of quick-turn
capacity. During 1995, two customers accounted for $16.4 million or 27.7% of
net sales. During 1994, two customers accounted for sales of $17.3 million or
39.3% of net sales.
Gross Profit. Gross profit increased $10.5 million to $34.2 million in 1995
from $23.7 million for 1994. As a percentage of net sales, gross profit
increased 3.9% to 57.6% in 1995 from 53.7% in 1994. The increase in gross
profit was primarily attributable to the increase in prototype and premium
units produced and sold in 1995 as compared to 1994 and a decrease in
manufacturing expenses.
Other Operating Expenses. Other operating expenses increased $2.2 million or
40.5% to $7.5 million in 1995 from $5.3 million in 1994. As a percentage of
net sales, other operating expenses increased 0.5% to 12.6% in 1995 from 12.1%
in 1994. The increase was due to a $1.7 million increase in sales and
marketing expense due to higher variable costs directly attributable to
increased sales. In addition, general and administrative expenses increased by
$404,000 as a result of an increase in fixed costs associated with the
administration of a larger organization.
Net Interest Expense. Net interest expense increased $161,000 to $329,000 in
1995 from $168,000 in 1994 due to an increase in debt outstanding used in the
purchase of production equipment.
Income Tax Expenses. Income tax expense was $396,000 or 1.5% of income
before income taxes in 1995. Income tax expense was $273,000 or 1.5% of income
before income taxes in 1994. The income tax rates were lower than the
statutory income tax rate since the Company was an "S" corporation for income
tax purposes.
Net Income. For the reasons discussed above, net income increased $8.1
million to $26.0 million in 1995 from $17.9 million in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are cash provided by operations
and borrowings under various debt instruments. The Company's principal uses of
cash have been to finance capital expenditures and meet debt service
requirements. The Company anticipates that it will also use cash in the future
to finance possible acquisitions.
Net cash provided by operating activities was $11.5 million and $10.9
million for the nine months ended September 30, 1997 and 1996, respectively.
Net cash provided by operating activities was $12.2 million, $26.1 million and
$18.1 million for the fiscal years ended 1996, 1995 and 1994, respectively.
Fluctuations in net cash provided by operating activities is primarily
attributable to increases and decreases in the Company's net income before
non-cash charges.
Financing activities in 1996 primarily consisted of distributions to
shareholders and shareholder transactions and increased debt requirements in
connection with the Initial Recapitalization. Net cash used in financing
activities was $15.2 million, $26.4 million and $8.9 million for the fiscal
years ended December 31, 1994, 1995 and 1996, respectively. Financing
activities in 1994 and 1995 primarily consisted of distributions to
shareholders.
The Company's capital expenditures were $0.8 million, $2.9 million, $3.7
million and $3.3 million in 1994, 1995, 1996 and the nine months ended
September 30, 1997, respectively. The Company anticipates these expenditures
will increase to approximately $4 million for the full year 1997 and $6
million for 1998.
37
As of October 28, 1997, after giving effect to the Transactions, the Company
incurred new indebtedness aggregating $181.4 million. As a result of the
Transactions, the Company has significantly increased cash requirements for
debt service relating to the Notes and Senior Credit Facilities. As of
September 30, 1997, on a pro forma basis, the Company would had borrowings of
approximately $187.7 million and up to $30 million available for borrowing
under the Revolving Credit Facility and, following the Recapitalization, $25
million additional availability under the Term Loan Facilities. The Company's
estimated minimum principal payment obligations under the Senior Credit
Facilities are $2.3 million and $4.5 million for fiscal 1998 and fiscal 1999,
respectively. This compares to $11.0 million and $12.5 million, which would
have been required under its previous facilities.
Concurrently with the Initial Offering, Holdings conducted the Discount
Notes Offering, the proceeds of which it used to repay the Holdings Facility.
On December , 1997, Holdings contributed substantially all of its assets,
subject to certain liabilities, including the Discount Notes, to Details
Capital. Concurrently with the Exchange Offer, Details Capital is conducting
an exchange offer for the Discount Notes. The Discount Notes and the Exchange
Discount Notes exchanged therefor are both herein referred to as the "Discount
Notes". The Discount Notes require no interest payments for the first five
years. Although none of the Company's assets secure the Discount Notes and the
Company does not guarantee the Discount Notes, Neither Holdings nor Details
Capital currently has any operations or sources of cash flow. The Company
expects that, based on current operations, it will be the only source of
payment for Details Capital's debt service. See "Description of Exchange
Notes--Certain Covenants." The Company's ability to incur additional
indebtedness is limited under the Indenture, the Discount Note Indenture and
the Senior Credit Facilities.
Based upon the current level of operations, the Company believes that cash
generated from operations, available cash and amounts available under the
Senior Credit Facilities, will be adequate to meet its debt service
requirements, capital expenditures and working capital needs for the
foreseeable future, although no assurance can be given in this regard.
Accordingly, there can be no assurance that the Company's business will
generate sufficient cash flow from operations or that future borrowings will
be available under the Senior Credit Facilities to enable the Company to
service its indebtedness, including the Notes, or make anticipated capital
expenditures. The Company's future operating performance and ability to
service or refinance the Notes and to extend or refinance the Senior Credit
Facilities will be subject to future economic conditions and to financial,
business and other factors, many of which are beyond the Company's control.
IMPACT OF INFLATION
The Company believes that its results of operations are not dependent upon
moderate changes in the inflation rate. However, severe increases in inflation
could affect the global and United States economy and could have an impact on
the Company's profitability.
COMPUTER SYSTEMS AND YEAR 2000
The Company is currently developing a plan to insure that its systems and
software infrastructure are Year 2000 compliant. The scheduled implementation
of all phases of the plan is February 1998. Given the relatively small size of
the Company's systems and the predominately new hardware, software and
operating systems, management does not anticipate any significant delays in
becoming Year 2000 compliant. However, the Company is unable to control
whether its customers' and suppliers' systems are Year 2000 compliant. To the
extent that customers would be unable to order product or pay invoices or
suppliers would be unable to manufacture and ship product, it could affect the
Company's operations.
CHANGES IN ACCOUNTING PRINCIPLES
FASB has also issued Statement No. 131 "Disclosures about Segments of an
Enterprise and Related Information." Statement No. 131 modifies the disclosure
requirements for reportable segments and is effective for the Company's year
ending December 31, 1998. The Company has not determined if the effect of the
adoption of this Statement would require the Company to report industry
segments.
38
THE INDUSTRY
TECHNICAL OVERVIEW
PCBs serve as the foundation of almost all electronic products, providing
the circuitry and mounting surfaces necessary to interconnect discrete
electronic components, including integrated circuits, capacitors and
resistors. PCBs consist of a pattern of electrical circuitry etched from
copper and laminated to a board made of insulating material, thereby providing
electrical interconnection between the components mounted onto it. PCBs can be
designed as single-sided, double-sided, or multi-layer boards, are
characterized as rigid or flexible depending on their end-use and are designed
to customer specification using computer aided design ("CAD") software. Multi-
layer PCBs consist of stacked boards separated by bonding sheets and pressed
to form a solid board. Electrical connections between the layers are made
using standard plated through-holes (drilled and plated through the whole
board), or by vias (plated holes between two or more layers). To meet
increasing demand among OEMs and contract manufacturers, PCB manufacturers
have developed more complex multi-layer designs with surface mount and other
attachment technologies, narrower widths and separations of copper traces,
advanced materials (such as Teflon), and small diameters of vias and through-
holes to connect internal circuitry. Changes in the industry are predominantly
evolutionary rather than revolutionary and many of the production processes
and technologies used today were first developed more than 10 years ago.
MARKET SEGMENTATION AND GROWTH
As electronic products have become smaller and more complex, the manufacture
of PCBs has required increasingly sophisticated engineering and manufacturing
expertise. These advanced manufacturing processes and technology requirements
have caused OEMs to rely increasingly on independent or merchant manufacturers
and to reduce dependence on their own internal captive facilities. It is
estimated that in 1996 independent or merchant manufacturers served 87% of the
domestic PCB market, an increase from 71% in 1992.
The worldwide PCB market, including both captive and merchant PCB
production, generated approximately $30.4 billion of revenue in 1996. The U.S.
accounted for approximately 27% of the worldwide market, or $8.3 billion. As
described above, approximately 87% of the domestic market, or $7.2 billion was
supplied by merchant (i.e., non-captive) fabricators. The merchant market is
divided between quick-turn and long-lead manufacturers. Of the $7.2 billion of
domestic merchant production, quick-turn PCBs accounted for 21% or
approximately $1.5 billion. Quick-turn PCBs, which are defined as printed
circuit boards manufactured within 10 days (and as little as 24 hours) in
prototype and pre-production quantities, are used in the design, test and
launch phases of new electronic products. The quick-turn market is
characterized by higher margins, faster growth and greater customer diversity
than the long-lead PCB market. Since 1992, the quick-turn segment has
experienced rapid growth, increasing at a 24% CAGR, twice the rate for the
overall domestic PCB industry. Long-lead PCBs, defined as those with delivery
lead times in excess of ten days (and customarily 3-5 weeks), typically have
larger order sizes and are utilized in both the ramp-to-production and full
production phases of electronic product development. The following table
describes the domestic PCB market.
DOMESTIC PCB MARKET SIZE
SHIPMENT VALUE IN BILLIONS OF DOLLARS
-----------------------------------------
1992 1993 1994 1995 1996 CAGR
------ ------ ------ ------ ------ ------
Quick-Turn......................... $ 0.6 $ 0.8 $ 1.0 $ 1.2 $ 1.5 24%
Long-Lead.......................... 3.1 3.6 4.2 4.9 5.7 16%
------ ------ ------ ------ ------ -----
Total Merchant................... 3.7 4.4 5.2 6.1 7.2 18%
Captive............................ 1.5 1.5 1.5 1.4 1.1 (8%)
------ ------ ------ ------ ------ -----
Total PCB Market................. $ 5.2 $ 5.9 $ 6.7 $ 7.5 $ 8.3 12%
39
The customary evolution of an electronic product results in several phases
of PCB procurement: prototype, pre-production and production. Initially, in
the design and development stage, customers order small lot sizes (1-25
boards) and demand quick-turn delivery ("prototype boards"); in the test-
marketing and product introduction stages, they order low to medium quantities
(up to 5,000 boards) which may or may not require quick-turn delivery ("pre-
production boards"); and in the product roll-out stage, they tend to order
large volumes with lead times in excess of three weeks ("production boards").
Prototype and pre-production boards, the segments in which the Company
competes, command escalating pricing premiums the shorter the lead time and
the greater the board complexity. PCB complexity is determined by layer count,
the use of exotic substrates and materials, the fineness of line spaces and
traces, the incorporation of buried resistors and capacitors, the use of
microvias and numerous other features. By focusing on either time criticality,
board complexity, or both, a PCB fabricator can realize significant pricing
premiums and commensurately higher profitability per PCB than that attainable
in the production segment of the market.
END-USE MARKETS
PCBs are customized for specific electronic applications and are sold to
OEMs and contract manufacturers in volumes that range from smaller quantities
for prototypes and pre-production orders to larger quantities for volume
production. PCBs are used in various end-use markets which include
(i) telecommunications products such as cellular phones, pagers and switching
and transmission equipment; (ii) computers and peripherals such as notebook
and desktop computers, high-end workstations, network servers, modems and
printers; (iii) automotive systems such as ABS traction control, airbag and
electric-powered engines and engine transmission control; (iv) industrial
applications such as optical code-readers and test equipment; and (v) basic
home appliances such as microwave ovens and remote controls.
TRENDS
The PCB industry is characterized by the following trends:
Increasing Complexity of Electronic Products. The increasing complexity of
electronic products has driven technological advancements in PCBs. As this
trend continues, fabricators face increasingly more difficult demands on the
manufacturing process. For example, modern compact and portable designs
feature advanced materials, high layer counts, narrower line widths and spaces
and smaller vias to connect internal circuitry. As a result, manufacturers
must remain at the forefront of both design and manufacturing technologies in
order to be competitive in the prototype and pre-production segments.
Accelerating Product Lifecycles. Rapid advances in technology and increasing
competitive pressures are shortening product lifecycles and forcing electronic
OEMs to develop and bring new products to market faster. This has resulted in
OEMs viewing "speed to market" as a key competitive advantage causing them to
partner with suppliers that can consistently deliver highly reliable product
under demanding time constraints. This trend is a key driver of growth in the
quick-turn market.
Consolidating Industry. The domestic PCB industry is highly fragmented with
approximately 600 active fabricators. Although the industry has experienced
significant consolidation in the last four years, declining 37% from the
approximately 950 manufacturers in 1992, the top eight manufacturers still
only account for approximately 25% of industry sales in 1996. Consolidation in
the industry is driven by (i) growing demand by electronic OEMs for both
increasingly complex PCBs and shortened delivery cycles which mandates
sophisticated design, engineering and manufacturing capabilities; (ii) ongoing
outsourcing by electronic OEMs; and (iii) increasing desire by OEMs to use
fewer suppliers.
40
BUSINESS
GENERAL
Details is a leading manufacturer and marketer of complex printed circuit
boards for the time critical or "quick-turn" segment of the domestic PCB
industry. Printed circuit boards are the basic platforms used to interconnect
microprocessors, integrated circuits, and other components essential to the
functioning of virtually all electronic products. Quick-turn PCBs, which are
defined as printed circuit boards manufactured within 10 days (and as little
as 24 hours) in prototype and pre-production quantities, are used in the
design, test and launch phases of new electronic products. The quick-turn
market is characterized by higher margins, faster growth and greater customer
diversity than the long-lead market. Approximately 70% of the Company's year-
to-date sales are quick-turn PCBs. Complex PCBs are those employing difficult
to manufacture specifications such as high layer counts, dense circuitry
designs, and exotic materials. Such boards command escalating pricing premiums
the greater the complexity. The Company's advanced engineering capability
enables it to produce boards with up to 40 layers employing leading edge
fabrication technologies. The Company supplies over 300 customers in a wide
range of end-use markets including the telecommunications, computer, contract
manufacturing, industrial instrumentation, and consumer electronics
industries. On a pro forma basis for the twelve months ended September 30,
1997, the Company's net sales and adjusted EBITDA would have been $73.9
million and $31.6 million, respectively.
Since the installation of a new management team in 1992, the Company has
successfully increased its sales and profitability and diversified its
customer base by strategically focusing on the quick-turn PCB market. Because
of its superior ability to deliver complex boards in short time frames with a
high degree of reliability, management believes that the Company plays a
uniquely mission critical role in facilitating its customers' "time-to-market"
efforts. Such efforts have become increasingly important in light of the
electronic industry's trends toward shortened product lifecycles and increased
competitiveness. As a result of this strategic shift, the Company has grown
net sales at a CAGR of 25% from $25.8 million in the fiscal year ended
December 31, 1992 to $73.9 million for the twelve months ended September 30,
1997. In the same time frame, the Company has grown adjusted pro forma EBITDA
at a 27% CAGR from $10.0 million to $31.6 million. As a result of the
Recapitalization, management owns stock and options for approximately 27.5% of
the fully-diluted capital stock of Holdings. Such equity ownership represents
a significant economic commitment to, and participation in, the Company.
COMPETITIVE STRENGTHS
The Company believes that it has several competitive advantages in the PCB
industry, including:
Quick-Turn Market Leader. The Company is one of the largest manufacturers of
quick-turn PCBs in the United States, with approximately 70% of its year-to-
date sales derived from quick-turn products. The Company believes it is among
a select few manufacturers that can routinely complete complex orders in less
than 24 hours. The Company believes that its superior engineering expertise,
ability to produce highly complex PCBs, and consistent record of reliable
service, product quality and on-time performance give it a competitive
advantage in the quick-turn market.
Leading Technological Capabilities. The Company believes that it is an
industry leader in the engineering of advanced PCB materials and technologies
that maximize performance and board density. Customers utilize the
technological expertise of Details' 66 front-end engineers throughout the
product development effort to achieve an integrated cost-effective
manufacturing effort. The Company
41
has the ability to produce boards with up to 40 layers, and approximately 40%
of its sales year-to-date included boards with layer counts of 8 or more. The
Company consistently delivers dependable, high quality products with an on-
time delivery record of approximately 97%. The Company believes its ability to
improve customer board designs for enhanced manufacturing efficiency
differentiates it from its competition.
Diverse and Loyal Customer Base. The Company believes that it has one of the
broadest customer bases in the industry, with more than 300 customers serving
a wide range of end-use markets. Year-to-date, the Company's largest customer
accounted for less than 11% of revenue. In addition, the Company has been
successful at retaining customers. For example, the Company has maintained a
relationship with its top three year-to-date customers--Motorola, Intel and
IBM--since at least 1993. Details believes that its ability to rapidly respond
to changes in demand for new or modified board designs with consistent high
quality is a major factor in its success at creating customer partnerships.
The Company's customer list includes leading manufacturers of
telecommunications equipment, such as Motorola and Qualcomm; computer
workstations and servers, such as IBM and Silicon Graphics; semi-conductor
fabrication such as Intel; industrial products, such as Caterpillar and Delco;
computer assemblers, such as Dell and Compaq; and contract manufacturing firms
such as SCI and Jabil.
Experienced Management Team with Significant Equity Ownership. The Company's
President, Bruce McMaster, has a total of 16 years of experience in the PCB
industry. Mr. McMaster, together with the other members of his senior
management team--Lee Muse (Vice President of Sales and Marketing), Joseph
Gisch (Chief Financial Officer), Terry Wright (Vice President of Engineering),
and Michael Moisan (Vice President of Operations)--have over 70 years of
industry experience and approximately 30 years with the Company. Since 1992,
management has successfully developed and implemented manufacturing and
marketing strategies which have resulted in a compound annual growth rate in
net sales of 25% from the fiscal year ended December 31, 1992 to the twelve
months ended September 30, 1997. As a result of the Recapitalization,
management owns stock and options for approximately 27.5% of the fully-diluted
capital stock of Holdings. Such equity ownership represents a significant
economic commitment to, and participation in the Company.
BUSINESS STRATEGY
The Company's goal is to maintain its growth rate in sales and profitability
by leveraging its quick-turnaround capability, its market leading technology,
and its large customer base to increase its penetration of value-added market
segments. In order to accomplish its goal, the Company intends to:
Increase Technical Leadership in Quick-Turn Segment. The Company intends to
extend its leadership in the quick-turn segment by continuing to provide
consistent, rapid delivery through leading-edge processes and technology.
Currently, the Company is capable of delivering 12- layer boards in as little
as 24 hours which it believes is among the fastest of any current industry
participant. Moreover, the Company had a less than 1% product return rate for
the nine months ended September 30, 1997 which it believes is among the lowest
in the quick-turn segment. Such performance is largely due to the technology
and processes employed by the Company coupled with its engineering expertise
and customized design and development services. The Company intends to
maintain its focus on improving quality and delivery times by incorporating
emerging technologies and by continuously improving its manufacturing
processes.
Cross-Sell Pre-Production to Quick-Turn Customers. The Company believes
there are substantial opportunities to leverage its strong customer relations
in the quick-turn segment by cross-selling 10 to 20 day pre-production volume
to its existing customers. Recognizing OEMs' desire to
42
simplify their supplier chain, the Company aims to offer customers a more
efficient production solution which will (i) reduce customers' tooling costs,
(ii) eliminate supplier switching risk, and (iii) shorten its customers'
"time-to-market." In furtherance of this initiative, the Company continues to
make investments in capital equipment, engineering capability and systems
infrastructure.
Achieve International Presence. The Company believes there are substantial
opportunities to satisfy international demand for time-critical, complex PCBs.
Year-to-date, approximately 94% of the Company's revenues were generated
domestically despite the fact that the U.S. accounts for only 27% of the
worldwide market. In particular, the Company has established a sales office in
the United Kingdom to service existing European customers' needs and to
broaden the Company's European presence. The Company is currently developing a
manufacturers' representative arrangement in Singapore as an entry into the
Asian market.
Pursue Selective Acquisitions. The Company is currently pursuing selective
acquisitions to complement its organic growth. Due to the high degree of
fragmentation in the PCB industry, the Company believes substantial
consolidation opportunities exist. Consequently, the Company is actively
seeking acquisitions which will: (i) increase its 10 to 20 day pre-production
capacity, (ii) expand its international geographic coverage, (iii) strengthen
its position in existing markets, (iv) provide significant profit improvement
opportunities through the application of the Company's superior operating
capabilities, and (v) enhance its technology base. The Company is currently in
discussions with several potential acquisition candidates but has not entered
into any agreements or understandings with third parties.
PRODUCTS AND SERVICES
The majority of the Company's business consists of building printed circuit
boards for sophisticated electronics products on a quick-turn delivery basis
and involves working closely with its customers from the initial design stage
through product development and launch. The Company's product offering
includes boards using super-fine line spaces and traces, buried resistors and
capacitors, microvias and a wide range of substrates and materials. All of the
Company's products are manufactured to customer order. The Company's PCBs are
utilized in cellular phones, telecommunications equipment, computer networking
equipment, medical devices, sophisticated industrial equipment and other high
growth electronic applications. In addition to direct sales to OEMs, the
Company sells to contract manufacturers and is a turnkey supplier in the event
of product shortages.
The Company provides design and engineering assistance in the early stages
of product development to ensure that both mechanical and electrical
considerations are integrated into a cost-effective manufacturing solution. In
doing so, the Company often recommends design changes to its customers to
reduce manufacturing costs and lead times or to increase manufacturing yields
and the quality of the finished product. The Company believes that this long-
term view of manufacturing and customer relationships distinguishes it from
many of its competitors in the quick-turn market. This cooperative approach
further enables the Company to gain valuable insight into the future
technology requirements of its customers and to obtain opportunities for
subsequent prototype and pre-production business.
MANUFACTURING
The production of complex printed circuit boards is an extensive and
sequential process. A variety of manufacturing operations are utilized,
including: (i) graphic operations such as photoprinting, screen printing, and
phototool generation; (ii) chemical operations such as copper deposition,
electroplating and etching; (iii) mechanical operations such as lamination,
drilling and routing; and (iv) electronic operations such as computer-aided
manufacturing ("CAM"), automated optical inspection, and electrical testing.
Management believes that the highly specialized equipment it uses is among the
most advanced in the industry.
43
Details utilizes a number of advanced processes and technologies, including
direct chip attached, multichip module-laminate, ball grid array, chip on
board, tape automated bonding, flip chip, and high density interface. Details
also maintains the capability to produce less sophisticated plate-through-hole
circuit ("PTH") boards. The Company's engineering operations consist of 89
engineering professionals (including 66 front-end) dedicated to improving the
design and functionality of its customers' products. The Company utilizes
state-of-the-art equipment to implement advanced technologies such as high
density interface (microvias), blind and buried vias, buried capacitors and
resistors, electroless gold (wire bond), and controlled and differential
impedance to meet customer specifications. The Company is qualified under
various industry standards for the manufacture of PCBs. Such qualifications
include Bellcore compliance for telecommunications products and UL
(Underwriters Laboratories) approval for electronics. In addition, all of the
Company's facilities are ISO-9002 certified.
The Company seeks to maximize the use of its manufacturing capacity. This
requires efficient management of time-critical production schedules. In
addition, the Company opportunistically augments its quick-turn capacity with
pre-production and longer-lead orders. The majority of engineering and
manufacturing takes place at the Company's facilities in Anaheim, California.
Research and development and longer term manufacturing jobs are carried out in
a nearby facility in Placentia, California.
TECHNOLOGY, DEVELOPMENT AND PROCESSES
The Company maintains a strong commitment to research and development,
focusing its efforts on enhancing existing capabilities as well as developing
new technologies. The Company's staff of over 80 experienced engineers,
chemists and laboratory technicians works in conjunction with the Company's
sales staff to identify specific needs and develop innovative, high
performance solutions to customer issues. This method of product development
allows customers to augment their own internal development teams while
providing Details with the opportunity to gain an in-depth understanding of
its customers' businesses, thereby enabling it to better anticipate and serve
their future needs.
The market for the Company's products and services is characterized by
rapidly changing technology and continuing process development. The future
success of the Company's business will depend in large part upon its ability
to maintain and enhance its technological capabilities, develop and market
products and services that meet changing customer needs, and successfully
anticipate or respond to technological changes on a cost-effective and timely
basis. See "Risk Factors--Technological Change and Process Development."
SALES AND MARKETING
Marketing Strategy. The Company's marketing strategy focuses on developing
close working relationships with its customers early in the design phase and
throughout the lifecycle of the product. Accordingly, the Company's senior
management personnel and engineering staff advise customers with respect to
applicable technology, manufacturability of designs, and cost implications
through on-line computer technical support, conference calls, and customer
visits. Details has focused its marketing efforts on developing long-term
relationships with key customers in high growth segments of the electronics
industry.
Sales Force. The Company markets its products and manufacturing services
through an expansive network consisting of 12 top representative organizations
with 60 manufacturers' representatives across the country complemented by a
direct sales force of 16 individuals. Approximately 87% of the Company's net
sales in the fiscal year ended December 31, 1996 were generated through
manufacturers' representatives and 13% through its direct sales force. For
many of these representatives, Details is their largest revenue source and
their exclusive prototype supplier.
44
The Company's representative network covers the entire United States and has
recently expanded to Europe and Asia. The Company's marketing methodology of
introducing its capabilities and providing technical support to customers
requires extensive interaction with its customers. Consequently, the Company
augments the manufacturer's representatives network's sales efforts by
providing extensive marketing, engineering and technical support. The Company
utilizes fully trained sales representatives and its own engineering force to
provide customer service during all aspects of pre-production and prototype
board fabrication.
MARKETS AND CUSTOMERS
The Company believes that it has one of the broadest customer bases in the
industry, with more than 300 customers consisting primarily of leading OEMs
and contract manufacturers in a wide range of end-use markets. The Company's
customers principally consist of telecommunications, industrial and business
computers companies, as well as medical, semiconductor equipment and
manufacturers. During the nine months ended September 30, 1997, sales to the
Company's largest customer, Motorola, accounted for 10.9% of the Company's net
revenues. Sales to the Company's two largest customers accounted for 20.4% of
the Company's net revenues during the nine months ended September 30, 1997 and
sales to its ten largest customers accounted for approximately 48.4% during
the same period. The Company's customer list includes leading manufacturers of
telecommunications equipment, such as Motorola and Qualcomm; computer
workstations and servers, such as IBM and Silicon Graphics; semiconductor
fabrication such as Intel; industrial products, such as Caterpillar and Delco;
computer assemblers, such as Dell and Compaq; and contract manufacturing firms
such as SCI and Jabil. The Company has been successful at retaining customers.
For example, the Company has maintained a relationship with its top three
year-to-date customers--Motorola, Intel and IBM--since at least 1993. The
Company's active customer base (defined as customers who have placed orders
within the month) has increased from an average of 122 in 1994 to the current
average of 149 customers per month. The Company believes that its ability to
rapidly respond to changes in demand for new or modified board designs with
consistent high quality is a major factor in building customer partnerships.
The following table shows, for the periods indicated, the Company's sales
and the percentage of its sales in each of the principal end-user markets it
serves for the fiscal years ended December 31, 1994 through 1996.
FISCAL YEAR ENDED DECEMBER
31,
-------------------------------
MARKETS 1994 1995 1996
- ------- --------- --------- ---------
(DOLLARS IN MILLIONS)
Telecommunications..................... $12.0 27% $21.5 36% $20.7 30%
Computer............................... 13.2 30 18.1 30 24.9 37
Automotive and Industrial.............. 3.6 8 2.2 4 2.7 4
Turnkey................................ 3.8 9 11.1 19 6.6 10
Governmental Aerospace................. 1.4 3 3.0 5 3.0 4
Other.................................. 10.2 23 3.9 6 10.2 15
----- --- ----- --- ----- ---
Total (1)............................ $44.2 100% $59.8 100% $68.1 100%
===== === ===== === ===== ===
- --------
(1)Sales include shipping charges and sales taxes not reflected in the
Company's financial statements as net sales.
The Company's core strategy is focused on serving the domestic quick-turn
PCB market. It has broad national coverage and services customers in all
regions of the country. The Company is also expanding internationally, and has
recently opened an office in London, England staffed with three individuals.
In addition, the Company is currently developing a manufacturers'
representative arrangement in Singapore as an entry into the Asian market.
45
SUPPLIERS
The Company's raw materials inventory is small in comparison to sales and
must be regularly and rapidly replenished. The Company uses "just-in-time"
procurement practices to maintain its raw materials inventory at low levels
and works closely with its suppliers to incorporate technological advances in
the raw materials it purchases. Although the Company prefers certain suppliers
for some raw materials, multiple sources exist for all materials. Adequate
amounts of all raw materials have been available in the past and the Company
believes this will continue in the foreseeable future.
The primary raw materials used by the Company in its manufacturing process
are core materials (copperclad layers of fiberglass of varying thickness
impregnated with bonding materials), chemical solutions (copper, gold, etc.)
for plating operations, photographic film, carbide drill bits, and other
supplies such as copper anodes which are used in plating operations.
COMPETITION
The PCB industry is highly fragmented and characterized by intense
competition. Details principally competes with independent and captive
manufacturers of complex and quick-turn PCBs. The Company's principal
competitors include other independent, small private companies and integrated
subsidiaries of more broadly based volume producers. Some of the Company's
principal competitors are less highly-leveraged than the Company and may have
greater financial and operating flexibility. Moreover, the Company may face
additional competitive pressures as a result of changes in technology.
Competition in the complex and quick-turn PCB industry has increased due to
the consolidation trend in the industry, which results in potentially better
capitalized and more effective competitors. The Company's basic technology is
generally not subject to significant proprietary protection, and companies
with significant resources or international operations may enter the market.
Increased competition could result in price reductions, reduced margins or
loss of market share, any of which could materially adversely affect the
Company's business, financial condition and results of operations. See "Risk
Factors--Competition."
FACILITIES
Details conducts its operations within 14 adjacent buildings, located in
Anaheim, California, totalling 73,000 square feet. Existing leases have a
remaining term of 8 years with an option to renew for 10 years or to purchase
at fair market value upon expiration. These lease arrangements have been
entered into with the Swenson Family Trust, which is controlled by the
Company's founder and former shareholder, James I. Swenson and his wife. Most
operations, including management, marketing, manufacturing, testing and
shipping, are housed in this building complex. The Company also leases a 5,000
square foot facility located in Placentia, California approximately one mile
from the main facility complex, which is used for research and development and
longer-lead time production volumes. The Company believes that its facilities
are adequate to support its current operations. See "Certain Relationships and
Related Transactions."
EMPLOYEES
As of October 1, 1997, the Company has approximately 417 employees, none of
whom are represented by unions. The Company has not experienced any labor
problems resulting in a work stoppage and believes it has good relations with
its employees.
ENVIRONMENTAL MATTERS
The Company utilizes various chemicals in its plating operations (copper
sulfate, sulfuric acid, nitric acid, hydrochloric acid, and ammonia agents)
which are carefully monitored to assure compliance
46
with EPA requirements. Other chemicals are used in the laminate processes, but
are usually impregnated in raw materials and do not create toxic exposures.
Proper waste disposal and environmental regulations are major considerations
for PCB manufacturers because of the metals and chemicals used in the
manufacturing process.
Although the Company believes that its facilities are currently in material
compliance with applicable environmental laws, and it monitors its operations
to avoid violations arising from human error or equipment failures, there can
be no assurance that violations will not occur. In the event of a violation of
environmental laws, the Company could be held liable for damages and for the
costs of remedial actions and could also be subject to revocation of its
affluent discharge permits. Any such revocations could require the Company to
cease or limit production at one or more of its facilities, thereby having a
material adverse effect on the Company's operations. Environmental laws could
also become more stringent over time, imposing greater compliance costs and
increasing risks and penalties associated with any violation, which could have
a material adverse effect on the Company, its results of operations, prospects
or debt service ability. See "Risk Factors--Environmental Matters."
LEGAL PROCEEDINGS
The Company is a party to various legal actions arising in the ordinary
course of its business. The Company believes that the resolution of these
legal actions will not have a material adverse effect on the Company's
financial position or results of operations.
47
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the Directors
and executive officers of the Company, Details Capital and Holdings following
the Recapitalization and the incorporation of the Company and Details Capital,
including their respective ages, as of November 25, 1997.
NAME AGE POSITION
- ---- --- --------
Bruce D. McMaster................ 36 President and Director of Holdings,
Details Capital and Details
Joseph P. Gisch.................. 41 Chief Financial Officer of Holdings,
Details Capital and Details
Lee W. Muse, Jr. ................ 41 Vice President--Sales and Marketing of
Holdings, Details Capital and
Details
Terry L. Wright.................. 38 Vice President--Engineering of Holdings,
Details Capital and Details
Michael P. Moisan................ 43 Vice President--Operations of Holdings,
Details Capital and Details
Stephen M. Zide.................. 37 Vice President and Director of Holdings,
Details Capital and Details
Christopher Behrens.............. 36 Director of Holdings, Details Capital and
Details
Edward W. Conard................. 41 Director of Holdings, Details Capital and
Details
Prescott Ashe.................... 30 Director of Holdings, Details Capital and
Details
Bruce D. McMaster joined Details in 1985 and has served as President since
1991 and as a Director since the Recapitalization. Prior to joining the
Company, Mr. McMaster was employed by Multiplex, Inc., a PCB manufacturer,
where he was Production Supervisor for its factory.
Joseph P. Gisch has served as Chief Financial Officer since 1995. Prior to
1995, Mr. Gisch was a partner at the accounting firm of McGladrey & Pullen,
LLP where he was responsible for the audit, accounting and information systems
for a variety of manufacturing clients. Mr. Gisch was responsible for general
accounting and income tax matters for Details. Mr. Gisch has not been
responsible for any audit services for Details since 1991.
Lee W. Muse, Jr. joined Details in 1989 and has served as Vice President,
Sales and Marketing since 1992. Prior to 1989, Mr. Muse was employed by Metro-
Circuits, Inc., a PCB manufacturer, where he served as both the East and West
Coast Regional Sales Manager.
Terry L. Wright joined Details in 1991 and has served as Vice President,
Engineering since 1995. Prior to 1991, Mr. Wright was employed as a general
manager at the circuit board manufacturer, Applied Circuit Solutions, Inc.
Michael P. Moisan has been Vice President, Operations since 1996. Prior to
joining Details in October 1996, Mr. Moisan was employed by Circuit-Wise,
Inc., a PCB manufacturer, as Director of Technology & Engineering. From 1987
to 1995 Mr. Moisan was employed by AMP-AKZO, Inc., a PCB manufacturer, most
recently as Director of Operations.
Edward W. Conard has served as a Director since the Recapitalization. He has
been a Managing Director of Bain Capital, Inc. since March 1993. From 1990 to
1992, Mr. Conard was a director of Wasserstein Perella, an investment banking
firm that specializes in mergers and acquisitions. Previously, he was a Vice
President at Bain & Company, where he headed the firm's operations practice
area. Mr. Conard also serves as a director of Waters Corporation.
48
Stephen M. Zide has served as Vice President and a Director since the
Recapitalization. Mr. Zide has been an Associate at Bain Capital, Inc. since
August 1997. Previously, he was a partner at the law firm of Kirkland & Ellis
from 1992 to 1995.
Christopher Behrens has served as a Director since the Recapitalization. He
has been a Principal of Chase Capital Partners since 1994. Prior to joining
Chase Capital Partners ("CCP"), Mr. Behrens was a Vice President in the
Merchant Banking Group of The Chase Manhattan Bank ("Chase") from 1990 to
1994. Mr. Behrens is also a director of Portola Packaging and The Pantry in
addition to numerous private companies.
Prescott Ashe has served as a Director since the Recapitalization. Mr. Ashe
has been an Associate at Bain Capital, Inc. since December 1992. Previously,
he worked as an analyst at Bain Capital, Inc. and as a consultant at Bain &
Company.
At present, all Directors are elected and serve until a successor is duly
elected and qualified or until the earlier of his death, resignation or
removal. All members of the Board of Directors of Holdings set forth herein
were elected by class vote pursuant to Holdings' Articles of Incorporation.
There are no family relationships between any of the Directors or executive
officers of Holdings, Details Capital or the Company. Executive officers of
Holdings, Details Capital and the Company are elected by and serve at the
discretion of their respective boards of directors.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth information concerning the compensation for
the fiscal year ended December 31, 1996 of Mr. Swenson, the former CEO of
Holdings, and the four other most highly compensated executive officers of
Holdings (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------------- ------------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND POSITION SALARY ($) BONUS ($) COMPENSATION ($)(1) OPTIONS (2) COMPENSATION ($)
- ----------------- ---------- --------- ------------------- ------------ ----------------
James I. Swenson(3)..... $611,538 $400,000 -- -- $10,397(4)
Chief Executive Officer
Bruce D. McMaster....... 331,250 300,000 -- 781 --
President
Joseph P. Gisch......... 246,693 50,286 -- 111 --
Chief Financial Officer
Lee W. Muse, Jr. ....... 254,807 300,000 -- 649 --
Vice President, Sales
Terry L. Wright......... 127,502 75,000 -- 162 --
Vice President,
Engineering
- --------
(1) The perquisites and other benefits paid to each Named Executive Officer
did not exceed the lesser of $50,000 or 10% of the total annual salary and
bonus received by each Named Executive Officer.
(2) The options represent options to purchase shares of common stock of
Holdings in 1996, prior to the Recapitalization.
(3) Mr. Swenson resigned effective October 28, 1997 in connection with the
Recapitalization and received approximately $1.2 million in connection
with the termination of his employment agreement.
(4) Reflects certain life insurance benefits paid by Holdings on behalf of Mr.
Swenson.
49
OPTION GRANTS
The following table sets forth information concerning grants of options to
purchase common stock of Holdings made to the Named Executive Officers during
the fiscal year ended December 31, 1996.
OPTION GRANTS IN FISCAL 1996
POTENTIAL REALIZABLE
VALUE AT
ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM(4)
-------------------------------------- ---------------------
NUMBER OF % OF TOTAL EXERCISE
OPTIONS OPTIONS TO PRICE EXPIRATION
NAME GRANTED (1)(2)(3) EMPLOYEES ($/SHARE) DATE 5% ($) 10% ($)
- ---- ----------------- ---------- --------- ---------- ---------- ----------
James I. Swenson........ -- -- -- -- -- --
Bruce D. McMaster....... 781 41.3% $2,179 2006 $1,070,248 $2,712,231
Joseph P. Gisch......... 111 5.9 2,179 2006 152,110 385,477
Lee W. Muse, Jr. ....... 649 34.4 2,179 2006 889,364 2,253,828
Terry L. Wright......... 162 8.6 2,179 2006 221,999 562,589
- --------
(1) The options represent options to purchase shares of common stock of
Holdings in 1996, prior to the Recapitalization.
(2) Prior to the Recapitalization, upon the exercise of any options and,
following the Recapitalization, upon the exercise of options to acquire
shares of Class L Common (as defined), the Company must pay to the
optionee a bonus in an aggregate amount sufficient to enable the optionee
to satisfy his federal and state income tax liability attributable to such
exercise and bonus (subject to certain limitations).
(3) In connection with the Recapitalization: (i) unvested options to purchase
328.6 shares of common stock held by the Named Executive Officers became
vested and converted into options to purchase approximately 74,279 shares
of Class A Common at an exercise price of $0.9639 per share and options to
purchase approximately 9,181 shares of Class L Common at an exercise price
of $70.1858 per share; (ii) of the remaining options to purchase 1,374.4
shares of common stock, approximately 1,203.7 were exercised and converted
into the right to receive cash and approximately 170.7 were exercised and
converted into approximately 38,583 shares of Class A Common Stock of
Holdings, without par value ("Class A Common"), and 4,769 shares of Class
L Common Stock of Holdings, without par value ("Class L Common"); (iii)
the Named Executive Officers received a bonus payment of $10 million in
the aggregate from the Company; and (iv) the Named Executive Officers
employed by the Company after the Recapitalization received an aggregate
bonus of approximately $2.4 million, which amount is payable on the third
anniversary of the Recapitalization whether or not such Named Executive
Officer is still employed by the Company.
(4) In the nine months ended September 30, 1997, the Company recorded a non-
cash charge against earnings of approximately $2.9 million in connection
with stock compensation and related bonuses under the 1996 Stock Option
Plan. The Company estimates that an additional non-cash charge of
approximately $15.9 million will be incurred in the fourth quarter of 1997
in connection with the Recapitalization and the 1996 Stock Option Plan.
EMPLOYMENT AGREEMENTS
Mr. McMaster is currently employed as President of the Company pursuant to
an agreement dated September 1, 1995, as amended, effective until October 28,
2000. Under this agreement, Mr. McMaster is entitled to receive an annual
salary of $375,000 in 1997, $425,000 in 1998 and $450,000 in 1999. In
addition, Mr. McMaster is eligible for an annual bonus based upon the
achievement of EBITDA targets and received an award, pursuant to the
agreement, of 4,747.009 shares of Class A Common, on the Recapitalization
closing date. Mr. McMaster's employment agreement contains
50
customary confidentiality provisions and a non-compete clause effective for
the duration of the term of the agreement. In addition, Mr. McMaster will be
entitled to receive an additional bonus of $1,088,558.35 in consideration of
prior services which will be payable on the third anniversary of the
Recapitalization whether or not he is still employed by the Company.
Mr. Gisch is currently employed as Chief Financial Officer of the Company
pursuant to an agreement dated September 19, 1995, as amended, effective until
October 28, 2000. Under this agreement, Mr. Gisch is entitled to receive an
annual salary of $252,000 in 1997, $265,000 in 1998 and $275,000 in 1999. In
addition, Mr. Gisch is eligible for an annual bonus based upon the achievement
of EBITDA targets and received an award, pursuant to the agreement, of
676.7889 shares of Class A Common on the Recapitalization closing date. Mr.
Gisch's employment agreement contains customary confidentiality provisions. In
addition, Mr. Gisch will be entitled to receive an additional bonus of
$155,197.52 in consideration of prior services which will be payable on the
third anniversary of the Recapitalization whether or not he is still employed
by the Company.
Mr. Muse is currently employed as Vice President--Sales and Marketing of the
Company pursuant to an agreement dated September 1, 1995, as amended,
effective until October 28, 2000. Under this agreement, Mr. Muse is entitled
to receive an annual salary of $300,000 in 1997, $350,000 in 1998 and $375,000
in 1999. In addition, Mr. Muse is eligible for an annual bonus based upon the
achievement of EBITDA targets and received an award, pursuant to the
agreement, of 3,950.0435 shares of Class A Common on the Recapitalization
closing date. Mr. Muse's employment agreement contains customary
confidentiality provisions and a non-compete clause effective for the duration
of the term of the agreement. In addition, Mr. Muse will be entitled to
receive an additional bonus of $905,802.38 in consideration of prior services
which will be payable on the third anniversary of the Recapitalization whether
or not he is still employed by the Company.
Mr. Wright is currently employed as Vice President--Engineering of the
Company pursuant to an agreement dated September 1, 1995, as amended,
effective until October 28, 2000. Under this agreement, Mr. Wright is entitled
to receive an annual salary of $140,000 in 1997, $155,000 in 1998 and $170,000
in 1999. In addition, Mr. Wright is eligible for an annual bonus based upon
the achievement of EBITDA targets and received an award, pursuant to the
agreement, of 993.0454 shares of Class A Common on the Recapitalization
closing date. Mr. Wright's employment agreement contains customary
confidentiality provisions and a non-compete clause effective for the duration
of the term of the agreement. In addition, Mr. Wright will be entitled to
receive an additional bonus of $227,719.73 in consideration of prior services
which will be payable on the third anniversary of the Recapitalization whether
or not he is still employed by the Company.
COMPENSATION OF DIRECTORS
During 1996 and 1997 until the closing date of the Recapitalization, outside
Directors of Holdings received $2,500 per meeting attended for serving on the
Board of Directors of Holdings and were reimbursed for their out-of-pocket
expenses incurred in connection with attending board meetings. The Company,
Details Capital and Holdings currently pay no compensation to their
independent directors, and pay no additional remuneration to their employees
or to executives of the Company, Details Capital or Holdings for serving as
directors.
STOCK OPTION PLANS AND RELATED TRANSACTIONS
Prior to the Recapitalization, the Company had two stock option plans, (i)
the 1996 Performance Stock Option Plan (the "1996 Stock Option Plan") under
which the Board was authorized to sell or otherwise issue options to acquire
up to 1,809 shares of the Company's common stock in such quantity, at such
price, on such terms and subject to such conditions as established by the
Board, and (ii) the 1996 Employee Stock Option Plan (the "1996 Employee Plan")
under which the Board was authorized
51
to sell or otherwise issue options to acquire up to 260 shares of the
Company's common stock in such quantity, at such price, on such terms and
subject to such conditions as established by the Board. Under the 1996 Stock
Option Plan, the Board had granted options to acquire 1,703 shares of the
Company's common stock and, under the 1996 Employee Plan, the Board had
granted options to acquire 247 shares of the Company's common stock, in each
case, at an exercise price of $2,179 per share.
In connection with the Recapitalization, the Board accelerated the vesting
of all of the unvested options as of the closing date of the Recapitalization
and (i) of the 1,703 options granted under the 1996 Stock Option Plan, 1,374.4
were exercised and the remaining 328.6 continue outstanding, and (ii) of the
247 options granted under the 1996 Employee Plan, 64.2 were canceled and
redeemed and 182.8 continue outstanding. In accordance with the provisions of
the respective plans, upon the effectiveness of the amendment of the Company's
Articles of Incorporation in connection with the Recapitalization, the holder
of each outstanding option became entitled to purchase 226.0362 shares of
Class A Common at an exercise price of $0.9639 per share and 27.9371 shares of
Class L Common at an exercise price of $70.1858 per share. Shortly after the
Recapitalization, each of the Named Executive Officers elected to exercise his
remaining options to acquire shares of Class A Common under the 1996 Stock
Option Plan. The Company loaned to each Named Executive Officer sufficient
funds to satisfy the exercise price of such options. Immediately after the
Recapitalization, the Board of Directors adopted, and the stockholders
approved, the 1997 Details, Inc. Equity Incentive Plan (the "1997 Stock Option
Plan" and, together with the 1996 Stock Option Plan and the 1996 Employee
Plan, collectively, the "Stock Option Plans") which authorizes the granting of
stock options and the sale of Class A Common to current or future employees,
directors, consultants or advisors of Holdings or its subsidiaries. The Board
is authorized to sell or otherwise issue Class A Common at any time prior to
the termination of the 1997 Stock Option Plan in such quantity, at such price,
on such terms and subject to such conditions as established by the Board up to
an aggregate of 235,000 shares of Class A Common, subject to adjustment upon
the occurrence of certain events to prevent any dilution or expansion of the
rights of participants that might otherwise result from the occurrence of such
events. Currently there are approximately 10,021 shares of Class A Common
available for grant under the 1997 Stock Option Plan. Pursuant to the
Recapitalization Agreement, the Named Executive Officers (i) received
approximately $89.1 million, subject to adjustment, in cash in exchange for
shares and options of Holdings held by such Named Executive Officers that were
repurchased in the Recapitalization, (ii) received options with a net
realizable value of $3.0 million, and (iii) retained common stock of Holdings
with a value of approximately $11.3 million.
Options to purchase an aggregate of 112,489.4228 shares of Class A Common at
an exercise price of $61.17 per share were granted and 112,489.4228 shares of
Class A Common restricted stock were made available at $5 per share to the
Named Executive Officers under the 1997 Stock Option Plan in connection with
the Recapitalization. The restricted stock and options vest in equal monthly
increments over a four year period from the date of grant or issue, subject to
earlier vesting upon certain events, including all of such shares vesting
immediately on a sale of the Company. The aggregate exercise price of the
options granted under the 1997 Stock Option Plan in connection with the
Recapitalization is approximately $6.9 million. Subsequent to the
Recapitalization, the Named Executive Officers purchased an aggregate of
112,489.4228 shares of Class A Common restricted stock at a price of $5 per
share and exercised options to purchase an aggregate of 74,278.5902 shares of
Class A Common with an exercise price of $0.9639 per share. The Company loaned
to each such Named Executive Officer, pursuant to an interest bearing note,
sufficient funds to pay the purchase price and the exercise price with respect
to such shares and options. Mr. McMaster, Mr. Gisch, Mr. Muse and Mr. Wright
received loans of approximately $285,885, $46,856, $224,137 and $77,164 for
the purchase of restricted shares of Class A Common and the exercise of
options to purchase shares of Class A Common. The Company has agreed to permit
the Named Executive Officers to repay their respective loan obligations with
proceeds received as deferred purchase price in connection with the
Recapitalization.
52
The following table summarizes the shares of capital stock and options that
were acquired by the Named Executive Officers under the 1997 Stock Option Plan
in connection with the Recapitalization:
NO. OF
OPTIONS TO PURCHASE
NO. OF RESTRICTED SHARES SHARES OF
OF CLASS A COMMON AGGREGATE CLASS A COMMON
NAME PURCHASED(1) PURCHASE PRICE(2) GRANTED
- ---- ------------------------ ----------------- -------------------
James I. Swenson........ -- $ -- --
Bruce D. McMaster....... 50,620.2402 253,101 50,620.2402
Joseph P Gisch.......... 8,436.7067 42,184 8,436.7067
Lee W. Muse, Jr. ....... 39,371.2980 196,856 39,371.2980
Terry L. Wright......... 14,061.1778 70,306 14,061.1778
- --------
(1) The Company has the right to repurchase the restricted shares of Class A
Common held by a Named Executive Officer for the original purchase price
in the event that the Named Executive Officer ceases to be employed by the
Company.
(2) The Company loaned the aggregate purchase price to each Named Executive
Officer pursuant to an interest bearing note.
53
PRINCIPAL STOCKHOLDERS
All of the Company's issued and outstanding capital stock is owned by
Details Capital. All of Details Capital's issued and outstanding capital stock
is owned by Holdings. As of November 25, 1997, the outstanding equity
securities of Holdings consisted of 1,924,936.8583 shares of Class A Common
and 208,380.2060 shares of Class L Common. The Class A Common consists of six
separate classes (A-1 through A-6), which have different rights with respect
to the election of directors. All of the shares of Class A Common entitle the
holder to one vote per share on all matters to be voted upon by the
stockholders of Holdings except for Class A-6, which is nonvoting. The Class L
Common is identical to the Class A Common except that the Class L Common is
nonvoting and is entitled to a preference over the Class A Common with respect
to any distribution by Holdings to holders of its capital stock equal to the
original cost of such share ($364.0909) plus an amount which accrues on a
daily basis at a rate of 12% per annum, compounded quarterly. The Class L
Common is convertible into Class A Common upon a vote of a majority of the
holders of the outstanding Class L Common at any time.
The following table sets forth certain information as of November 25, 1997
regarding the beneficial ownership of (i) each class of voting securities of
the Company by each person known to Holdings to own more than 5% of any class
of outstanding voting securities of Holdings, and (ii) the equity securities
of Holdings by each Director of Holdings, each Named Executive Officer and all
of Holdings' directors and executive officers as a group. To the knowledge of
Holdings, each of such stockholders has sole voting and investment power as to
the shares shown unless otherwise noted. Beneficial ownership of the
securities listed in the table has been determined in accordance with the
applicable rules and regulations promulgated under the Securities Exchange Act
of 1934, as amended (the "Exchange Act").
SHARES BENEFICIALLY OWNED
-----------------------------------------------
CLASS A COMMON STOCK CLASS L COMMON STOCK
----------------------- -----------------------
NUMBER PERCENTAGE NUMBER PERCENTAGE
NAME AND ADDRESS OF SHARES OF CLASS OF SHARES OF CLASS
- ---------------- ------------ ---------- ------------ ----------
PRINCIPAL STOCKHOLDERS:
Bain Capital Funds (1)......... 960,775.8780 49.9% 118,747.5833 53.3%
c/o Bain Capital, Inc.
Two Copley Place
Boston, Massachusetts 02116
Chase Manhattan Capital,
L.P.(2)....................... 344,036.3778 17.9 42,521.3511 19.1
380 Madison Avenue
12th Floor
New York, New York 10017
DIRECTORS AND EXECUTIVE OFFI-
CERS:
James I. Swenson(3)............ -- -- -- --
Bruce D. McMaster(4)........... 207,004.2630 10.8 18,741.6538 8.4
Joseph P. Gisch(5)............. 29,785.2110 1.6 2,554.9312 1.2
Lee W. Muse(6)................. 148,207.4334 7.7 12,963.4499 5.8
Terry L. Wright(7)............. 39,461.1467 2.1 3,016.5861 1.4
Christopher Behrens(8)......... 344,036.3778 17.9 42,521.3511 19.1
Edward Conard (9).............. 960,775.8780 49.9 118,747.5833 53.3
Stephen M. Zide(10)............ 199,770.7344 10.4 24,683.2317 11.1
Prescott Ashe(10).............. 199,770.7344 10.4 24,683.2317 11.1
All Directors and executive of-
ficers as a group (9 per-
sons)(11)..................... 424,458.0541 22.1 37,276.6210 16.7
- --------
(1) Includes shares of Class A Common and Class L Common held by Bain Capital
Fund V, L.P., ("Fund V"); Bain Capital Fund V-B, L.P. ("Fund V-B"); BCIP
Associates ("BCIP"); and BCIP Trust Associates, L.P. ("BCIP Trust" and
collectively with Fund V, Fund V-B and BCIP, the "Bain Capital Funds").
54
(2) CMC is the managing member of DI Investors, L.L.C. and owns a majority of
the interests therein. Accordingly, CMC may be deemed to beneficially own
shares owned by DI Investors, L.L.C. CMC disclaims beneficial ownership
of any such shares in which it does not have a pecuniary interest.
(3) Mr. Swenson's employment with Holdings and the Company terminated on
October 28, 1997.
(4) The shares of Class A Common included in the table include 50,620.2402
shares, which, upon purchase, are subject to vesting and 34,012.2526
shares that can be acquired upon the exercise of outstanding options. The
shares of Class L Common included in the table include 4,203.7617 shares
that can be acquired upon the exercise of outstanding options.
(5) The shares of Class A Common included in the table include 8,436.7067
shares, which, upon purchase, are subject to vesting and 4,849.1820
shares that can be acquired upon the exercise of outstanding options. The
shares of Class L Common included in the table include 599.3371 shares
that can be acquired upon the exercise of outstanding options.
(6) The shares of Class A Common included in the table include 39,371.2980
shares, which, upon purchase, are subject to vesting and 28,302.0008
shares that can be acquired upon the exercise of outstanding options. The
shares of Class L Common included in the table include 3,498.0002 shares
that can be acquired upon the exercise of outstanding options.
(7) The shares of Class A Common included in the table include 14,061.1778
shares, which, upon purchase, are subject to vesting and 7,115.1548
shares that can be acquired upon the exercise of outstanding options. The
shares of Class L Common included in the table include 879.4012 shares
that can be acquired upon the exercise of outstanding options.
(8) Mr. Behrens is a Principal of CCP, the general partner of CMC and,
accordingly, may be deemed to beneficially own shares owned by CMC. Mr.
Behrens disclaims beneficial ownership of any such shares in which he
does not have a pecuniary interest. The address of Mr. Behrens is c/o
Chase Capital Partners, 380 Madison Avenue, 12th Floor, New York, New
York 10017.
(9) Mr. Conard is Managing Director of Bain Capital, Inc. and a limited
partner of Bain Capital Partners V, L.P., the sole general partner of
Fund V and Fund V-B. Accordingly, Mr. Conard may be deemed to
beneficially own shares owned by Fund V and Fund V-B. Mr. Conard is a
general partner of BCIP and BCIP Trust and, accordingly, may be deemed to
beneficially own shares owned by such funds. Mr. Conard disclaims
beneficial ownership of any such shares in which he does not have a
pecuniary interest. The address of Mr. Conard is c/o Bain Capital, Inc.,
Two Copley Place, Boston, Massachusetts 02116.
(10) The shares of Class A Common and Class L Common included in the table
represent shares held by BCIP. Messrs. Zide and Ashe are each Associates
of Bain Capital, Inc. and are partners of BCIP and limited partners of
BCIP Trust and, accordingly, may be deemed to beneficially own shares
owned by such funds. Each such person disclaims beneficial ownership of
any such shares in which he does not have a pecuniary interest. The
address of each such person is c/o Bain Capital, Inc., Two Copley Place,
Boston, Massachusetts 02116.
(11) Excludes shares deemed to be beneficially owned by Messrs. Conard, Zide,
Ashe and Behrens.
55
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following summary of the Recapitalization Agreement, the Stockholders
Agreement and the Management Agreement is a description of the material
provisions of these agreements a copy of each of which is filed as an exhibit
to the Exchange Offer Registration Statement.
RECAPITALIZATION AGREEMENT
The Recapitalization Agreement contains customary provisions for such
agreements, including representations and warranties with respect to the
condition and operations of the business, covenants with respect to the
conduct of the business prior to the Recapitalization closing date and various
closing conditions, including the obtaining of financing and the continued
accuracy of representations and warranties. In addition, the Company has
agreed to pay to the equity holders immediately prior to the Recapitalization
amounts received as a result of tax benefits realized in connection with the
Recapitalization.
Subject to certain limitations set forth therein, the Recapitalization
Agreement contains indemnification provisions binding on the Company after the
Recapitalization closing date. Specifically, the Company has agreed to
indemnify each stockholder party to the Recapitalization Agreement against any
and all liabilities resulting from (i) any misrepresentation or breach of
warranty made by DIA in the Recapitalization Agreement and (ii) any breach or
default in performance by the Company of any covenant or agreement contained
in the Recapitalization Agreement, after the Recapitalization.
Subject to certain limitations set forth therein, the equity holders
immediately prior to the Recapitalization have agreed to indemnify the Company
and its officers, directors, employees and agents on a pro rata basis against
any and all liabilities resulting from (i) any misrepresentation or breach of
warranty by such stockholders in the Recapitalization Agreement and (ii) any
breach or default in performance by the Company, prior to the Effective Time,
of such covenant or agreement (as described in the Recapitalization
Agreement).
STOCKHOLDERS AGREEMENT
In connection with the Recapitalization, the Bain Capital Funds, Company
management, CMC and all of the other stockholders and optionholders of
Holdings entered into a stockholders agreement (the "Stockholders Agreement"),
that, among other things, provides for tag-along rights, drag-along rights,
registration rights, restrictions on the transfer of shares held by parties to
the Stockholders Agreement and certain preemptive rights for certain
stockholders including the Bain Capital Funds, management and CMC. The
Stockholders Agreement also provides that the parties thereto will vote their
shares in the same manner as the Bain Capital Funds in connection with certain
transactions and that the Bain Capital Funds will be entitled to fix the
number of directors of Holdings. Pursuant to Holdings' charter, the Bain
Capital Funds will be entitled to designate a sufficient number of directors
to maintain a majority of the board of directors of Holdings and each of
management and CMC will be entitled to designate one director.
MANAGEMENT AGREEMENT
Pursuant to a management agreement among Bain Capital Partners V, L.P.
("Bain"), Holdings, and the Company (the "Management Agreement"), Bain is
entitled to a management fee when, and if, it provides advisory services to
Holdings or the Company in connection with potential business acquisitions.
Beginning on the first anniversary of the Recapitalization, Bain may, upon the
request of Holdings or the Company, perform certain management consulting
services at Bain's customary rates plus reimbursement for reasonable out-of-
pocket expenditures. In addition, Bain will receive a fee in an amount which
will approximate 1% of the gross purchase price of any senior financing
transaction for any acquisition, recapitalization or refinancing transaction
(including assumed debt). In connection
56
with the Recapitalization, Bain received a transaction fee of approximately
$3.1 million. The Management Agreement continues in full force and effect,
unless and until terminated by mutual consent of the parties, or until
terminated as a result of a breach of the Management Agreement. The Management
Agreement includes customary indemnification provisions in favor of Bain.
CERTAIN INTERESTS OF THE FORMER CEO
The Company leases the buildings and certain equipment located at its
Anaheim, California facility pursuant to lease arrangements entered into with
the Swensen Family Trust, a trust controlled by the Company's founder and
former shareholder, James I. Swensen, and his wife. Under the terms of these
leases, the Company pays approximately $104,000 per month in 1997 as base rent
subject to applicable adjustment based upon changes in the consumer price
index. The leases have a remaining term of 8 years with an option to renew for
an additional 10 years or to purchase the property at fair market value upon
expiration. See "Business--Facilities."
57
DESCRIPTION OF SENIOR CREDIT FACILITIES
The Company has entered into an agreement with various banks and financial
institutions, including Chase, an affiliate of the Initial Purchaser, as a
bank lender and as agent for the bank lenders party thereto, providing for the
Senior Credit Facilities, which currently consists of (i) the Tranche A
Facility of up to approximately $31.1 million in term loans; (ii) the
acquisition facility (the "Acquisition Facility") of up to $25.0 million which
may be borrowed for a period of up to one year after the closing date of the
Senior Credit Facilities for permitted acquisitions by the Company; (iii) the
Tranche B Facility of up to $50.0 million in term loans; and (iv) the
Revolving Credit Facility of up to $30.0 million in revolving credit loans,
letters of credit and swing line loans.
The Senior Credit Facilities are (i) jointly and severally guaranteed by
Holdings and Details Capital and (ii) secured by all of the stock of the
Company and certain stock of the Company's subsidiaries. Future domestic
subsidiaries of the Company will guarantee the Senior Credit Facilities and
secure that guarantee with their tangible and intangible assets.
The Senior Credit Facilities require the Company to meet certain financial
tests, including without limitation, maximum leverage ratio, minimum interest
coverage and fixed charges coverage and minimum levels of EBITDA. In addition,
the Senior Credit Facilities contain certain negative covenants limiting,
among other things, additional debt, additional liens, transactions with
affiliates, mergers and consolidations, liquidations and dissolutions, sales
of assets, dividends, capital expenditures, investments, loans and advances,
prepayments and modifications of debt instruments and other matters
customarily restricted in such agreements. The Senior Credit Facilities
contain customary events of default, including without limitation, payment
defaults, breaches of representations and warranties, covenant defaults,
certain events of bankruptcy and insolvency, failure of any guaranty or
security document supporting the Senior Credit Facilities to be in full force
and effect, change of control of Holdings and change of ownership of the stock
of the Company.
The Tranche A Facility and any borrowings pursuant to the Acquisition
Facility mature in quarterly installments from September 1998 until October
2003. The Tranche B Facility matures in minimal quarterly installments from
September 1998 until December 2003 at which time the remaining outstanding
loans under the Tranche B Facility become repayable in three equal quarterly
installments with a final payment in October 2004. The Revolving Credit
Facility terminates in October 2003.
The Company's borrowings under the Senior Credit Facilities bear interest at
a floating rate and may be maintained as ABR Loans (as defined in the Senior
Credit Facilities) or, beginning 60 days after the closing date of the Senior
Credit Facilities (or earlier upon syndication) at the Company's option, as
Eurodollar Loans. ABR Loans bear interest at the ABR (defined as the higher of
(x) the applicable prime lending rate of Chase and (y) the Federal Reserve
reported overnight funds rate plus 1/2 of 1%) plus the Applicable Margin (as
defined in the Senior Credit Facilities). Eurodollar Loans shall bear interest
at the Eurodollar Rate (as defined in the Senior Credit Facilities) plus the
Applicable Margin.
The Applicable Margin shall be (a) with respect to the Revolving Credit
Facility, the Acquisition Facility and the Tranche A Facility, (i) 1 1/2%, in
the case of ABR Loans and (ii) 2 1/2%, in the case of Eurodollar Loans and (b)
with respect to the Tranche B Facility, (i) 1 3/4% in the case of ABR Loans
and (ii) 2 3/4%, in the case of Eurodollar Loans. The Applicable Margin with
respect to the Revolving Facility and the Tranche A Facility is subject to
reduction after four fiscal quarters following the closing of the Senior
Credit Facilities in accordance with an agreed upon pricing grid.
The Company is required to pay to the lenders under the Senior Credit
Facilities a commitment fee equal to 1/2 of 1% per annum, payable in arrears
on a quarterly basis, on the average unused portion of the Revolving Credit
Facilities during such quarter (provided that such commitment
58
fee decreases to 3/8 of 1% per annum if during any quarterly payment period
certain financial ratios relating to interest coverage and leverage are
attained). The Company is required to pay to the lenders a letter of credit
fee with respect to each letter of credit outstanding equal to a floating rate
of interest equal to the Applicable Margin on Eurodollar Loans times the
average daily stated amount of such letter of credit as well as a fronting fee
of 1/4 of 1% on such average daily stated amount.
The Senior Credit Facilities prescribe that certain amounts must be used to
prepay the Term Loan Facilities and reduce commitments under the Revolving
Credit Facility including (a) 100% of the net proceeds of any sale or issuance
of equity or any incurrence of indebtedness after the closing date by the
Company or any of its subsidiaries, except for proceeds of Notes offered
hereby and the Discount Notes to the extent applied to repay the Senior
Subordinated Facility or the Holdings Facility and subject to certain other
exceptions including the retention of equity proceeds under certain
circumstances including for use in acquisitions or the making of capital
expenditures, (b) 100% of the net proceeds of any sale or other disposition by
the Company or any of its subsidiaries of any assets (including casualties or
condemnations), except for the sale of inventory or obsolete or worn-out
property in the ordinary course of business and subject to exceptions for
certain reinvestments and (c) 75% of Excess Cash Flow (as defined in the
Senior Credit Facilities) for each fiscal year of the Company commencing with
the fiscal year ending December 31, 1998, provided, that the foregoing
percentage will be reduced to 50% upon satisfaction of certain financial
ratios. Details repaid approximately $10.3 million of the Term Loan Facilities
with a portion of the proceeds from the Initial Offering.
In general, mandatory prepayments described above will be applied, first to
prepay the Term Loan Facilities (pro rata among the Tranche A Facility and the
Tranche B Facility) and second, to permanently reduce commitments under the
Revolving Credit Facility (with extensions of credit thereunder being prepaid
to the extent the aggregate amount thereof exceeds the Revolving Credit
Facility commitments as so reduced). Prepayments, optional or mandatory of the
Term Loan Facilities will be applied pro rata to the Tranche A Facility and
the Tranche B Facility, and ratably to the respective installments thereof.
Notwithstanding the foregoing, as long as any Tranche A term loans are
outstanding, each holder of Tranche B term loans has the right to refuse all
or any portion of such prepayment allocable to it, and the amount so refused
will be applied to prepay the Tranche A term loans. Any prepayments of the
Term Loan Facilities may not be reborrowed.
59
DESCRIPTION OF EXCHANGE NOTES
GENERAL
The Exchange Notes are to be issued under an indenture dated November 18,
1992, (the "Indenture"), between the Company and State Street Bank and Trust
Company, as trustee (the "Trustee"), a copy of which is available upon request
to the Company. The following is a description of the material provisions of
the Indenture, which is filed as an exhibit to the Exchange Offer Registration
Statement of which this Prospectus forms a part.
Principal of, premium, if any, and interest on the Exchange Notes will be
payable, and the Exchange Notes may be exchanged or transferred, at the office
or agency of the Company in the Borough of Manhattan, The City of New York
(which initially shall be the corporate trust office of the Trustee in New
York, New York), except that, at the option of the Company, payment of
interest may be made by check mailed to the address of the Holders as such
address appears in the Note Register.
The Exchange Notes will not be entitled to the benefit of any mandatory
sinking fund.
The Exchange Notes will be issued only in fully registered form, without
coupons, in denominations of $1,000 and any integral multiple of $1,000. No
service charge will be made for any registration of transfer or exchange of
Exchange Notes, but the Company may require payment of a sum sufficient to
cover any transfer tax or other similar governmental charge payable in
connection therewith. Initially, the Trustee will act as Paying Agent and
Registrar for the Exchange Notes. The Exchange Notes may be presented for
registration of transfer and exchange at the offices of the Registrar, which
initially will be the Trustee's corporate trust office. The Company may change
any Paying Agent and Registrar without notice to Holders of the Exchange
Notes.
The Exchange Notes are expected to be eligible for trading in the PORTAL
market.
TERMS OF EXCHANGE NOTES
The Exchange Notes will be unsecured, senior subordinated obligations of the
Company, limited to $100 million aggregate principal amount, and will mature
on November 15, 2005. Each Exchange Note will bear interest at the rate per
annum shown on the front cover of this Prospectus from the date of issuance,
or from the most recent date to which interest has been paid or provided for,
payable semi-annually on May 15 and November 15 of each year commencing on May
15, 1998 to holders of record at the close of business on the May 1 or
November 1 immediately preceding the interest payment date.
OPTIONAL REDEMPTION
Except as set forth below, the Notes will not be redeemable at the option of
the Company prior to November 15, 2001. On and after such date, the Notes will
be redeemable, at the Company's option, in whole or in part, at any time upon
not less than 30 nor more than 60 days prior notice mailed by first-class mail
to each holder's registered address, at the following redemption prices
(expressed in percentages of principal amount), plus accrued and unpaid
interest to the redemption date (subject to the right of holders of record on
the relevant record date to receive interest due on the relevant interest
payment date):
60
If redeemed during the 12-month period commencing on November 15 of the
years set forth below:
PERIOD REDEMPTION PRICE
------ ----------------
2001.................................................... 105.000%
2002.................................................... 103.333%
2003.................................................... 101.667%
2004 and thereafter..................................... 100.000%
In addition, at any time and from time to time prior to November 15, 2000,
the Company may redeem in the aggregate up to 40% of the original principal
amount of the Notes with the proceeds of one or more Equity Offerings received
by, or invested in, the Company so long as there is a Public Market at the
time of such redemption, at a redemption price (expressed as a percentage of
principal amount) of 110% plus accrued and unpaid interest, if any, to the
redemption date (subject to the right of holders of record on the relevant
record date to receive interest due on the relevant interest payment date);
provided, however, that at least 60% of the original principal amount of the
Notes must remain outstanding after each such redemption.
At any time on or prior to November 15, 2001, the Notes may also be redeemed
as a whole at the option of the Company upon the occurrence of a Change of
Control, upon not less than 30 nor more than 60 days prior notice (but in no
event more than 90 days after the occurrence of such Change of Control) mailed
by first-class mail to each holder's registered address, at a redemption price
equal to 100% of the principal amount thereof plus the Applicable Premium as
of, and accrued and unpaid interest, if any, to, the date of redemption (the
"Redemption Date") (subject to the right of holders of record on the relevant
record date to receive interest due on the relevant interest payment date).
"Applicable Premium" means, with respect to an Note at any Redemption Date,
the greater of (i) 1.0% of the principal amount of such Note and (ii) the
excess of (A) the present value at such time of (1) the redemption price of
such Note at November 15, 2001 (such redemption price being described under
"--Optional Redemption") plus (2) all required interest payments due on such
Note through November 15, 2001, computed using a discount rate equal to the
Treasury Rate plus 50 basis points, over (B) the principal amount of such
Note.
"Treasury Rate" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H.15 (519)
which has become publicly available at least two business days prior to the
Redemption Date (or, if such Statistical Release is no longer published, any
publicly available source or similar market data)) most nearly equal to the
period from the Redemption Date to November 15, 2001; provided, however, that
if the period from the Redemption Date to November 15, 2001 is not equal to
the constant maturity of a United States Treasury security for which a weekly
average yield is given, the Treasury Rate shall be obtained by linear
interpolation (calculated to the nearest one-twelfth of a year) from the
weekly average yields of United States Treasury securities for which such
yields are given, except that if the period from the Redemption Date to
November 15, 2001 is less than one year, the weekly average yield on actually
traded United States Treasury securities adjusted to a constant maturity of
one year shall be used.
Selection. In the case of any partial redemption, selection of the Notes for
redemption will be made by the Trustee on a pro rata basis, by lot or by such
other method as the Trustee in its sole discretion shall deem to be fair and
appropriate, although no Note of $1,000 in original principal amount or less
will be redeemed in part. If any Note is to be redeemed in part only, the
notice of redemption relating
61
to such Note shall state the portion of the principal amount thereof to be
redeemed. A new Note in principal amount equal to the unredeemed portion
thereof will be issued in the name of the holder thereof upon cancellation of
the original Note.
RANKING AND SUBORDINATION
The payment of the principal of, premium, if any, and interest on the Notes
is subordinated in right of payment, as set forth in the Indenture, to the
prior payment in full in cash or Cash Equivalents when due of all Senior
Indebtedness of the Company. However, payment from the money or the proceeds
of U.S. Government Obligations held in any defeasance trust described under
"Defeasance" below is not subordinate to any Senior Indebtedness or subject to
the restrictions described herein. As of November 25, 1997, the outstanding
Senior Indebtedness of the Company was approximately $87.6 million (exclusive
of unused commitments). Although the Indenture contains limitations on the
amount of additional Indebtedness that the Company may incur, under certain
circumstances the amount of such Indebtedness could be substantial and, in any
case, such Indebtedness may be Senior Indebtedness. See "Certain Covenants--
Limitation on Indebtedness" below.
"Senior Indebtedness" is defined, whether outstanding on the Issue Date or
thereafter issued, created, incurred or assumed, as the Bank Indebtedness and
all other Indebtedness of the Company, including interest (including any
interest accruing subsequent to the filing of a petition of bankruptcy at the
rate provided for in the documentation with respect thereto, whether or not
such interest is an allowed claim under applicable law) thereon and fees
relating thereto, unless, in the instrument creating or evidencing the same or
pursuant to which the same is outstanding, it is provided that the obligations
in respect of such Indebtedness are not superior in right of, or are
subordinate to, payment to the Notes; provided, however, that Senior
Indebtedness will not include (i) any obligation of the Company to any
Subsidiary, (ii) any liability for Federal, state, foreign, local or other
taxes owed or owing by the Company, (iii) any accounts payable or other
liability to trade creditors arising in the ordinary course of business
(including Guarantees thereof or instruments evidencing such liabilities),
(iv) any Indebtedness, Guarantee or obligation of the Company that is
expressly subordinate or junior in right of payment to any other Indebtedness,
Guarantee or obligation of the Company, including any Senior Subordinated
Indebtedness and any Subordinated Obligations or (v) any Capital Stock.
Only Indebtedness of the Company that is Senior Indebtedness will rank
senior to the Notes in accordance with the provisions of the Indenture. The
Notes will in all respects rank pari passu with all other Senior Subordinated
Indebtedness of the Company. The Company has agreed in the Indenture that it
will not incur, directly or indirectly, any Indebtedness that is subordinate
or junior in ranking in any respect to Senior Indebtedness unless such
Indebtedness is Senior Subordinated Indebtedness or is expressly subordinated
in right of payment to Senior Subordinated Indebtedness. In addition, no
Subsidiary Guarantor shall incur any Indebtedness if such Indebtedness is
subordinate or junior in ranking in any respect to any Senior Indebtedness of
such Subsidiary Guarantor unless such Indebtedness is Senior Subordinated
Indebtedness of such Subsidiary Guarantor or is expressly subordinated in
right of payment to Senior Subordinated Indebtedness of such Subsidiary
Guarantor. Unsecured Indebtedness is not deemed to be subordinate or junior to
Secured Indebtedness merely because it is unsecured.
The Company may not pay principal of, premium, if any, or interest on, the
Notes or make any deposit pursuant to the provisions described under
"Defeasance" below and may not otherwise purchase or retire any Notes
(collectively, "pay the Notes") if (i) any Senior Indebtedness is not paid
when due whether at maturity, upon any redemption, by declaration or
otherwise, in cash or Cash Equivalents or (ii) any other default on Senior
Indebtedness occurs and the maturity of such Senior Indebtedness is
accelerated in accordance with its terms unless, in either case, the default
has been cured or waived and any such acceleration has been rescinded or such
Senior Indebtedness has been paid in full in cash or Cash Equivalents.
However, the Company may pay the Notes without regard to the foregoing if the
Company and the Trustee receive written notice approving such payment
62
from the Representative of the Senior Indebtedness with respect to which
either of the events set forth in clause (i) or (ii) of the immediately
preceding sentence has occurred and is continuing. During the continuance of
any default (other than a default described in clause (i) or (ii) of the
second preceding sentence) with respect to any Designated Senior Indebtedness
pursuant to which the maturity thereof may be accelerated immediately without
further notice (except such notice as may be required to effect such
acceleration) or the expiration of any applicable grace periods, the Company
may not pay the Notes for a period (a "Payment Blockage Period") commencing
upon the receipt by the Trustee (with a copy to the Company) of written notice
(a "Blockage Notice") of such default from the Representative of the holders
of such Designated Senior Indebtedness specifying an election to effect a
Payment Blockage Period and ending 179 days thereafter (or earlier if such
Payment Blockage Period is terminated (i) by written notice to the Trustee and
the Company from the Person or Persons who gave such Blockage Notice, (ii)
because the default giving rise to such Blockage Notice is no longer
continuing or (iii) because such Designated Senior Indebtedness has been
repaid in full). Notwithstanding the provisions described in the immediately
preceding sentence, unless the holders of such Designated Senior Indebtedness
or the Representative of such holders have accelerated the maturity of such
Designated Senior Indebtedness, the Company may resume payments on the Notes
after the end of such Payment Blockage Period. Not more than one Blockage
Notice may be given in any consecutive 360-day period, irrespective of the
number of defaults with respect to Designated Senior Indebtedness during such
period.
Upon any payment or distribution of the assets of the Company upon a total
or partial liquidation, dissolution, reorganization or bankruptcy of or
similar proceeding relating to the Company or its property, the holders of
Senior Indebtedness will be entitled to receive payment in full in cash or
Cash Equivalents of the Senior Indebtedness (including interest after, or
which would accrue but for, the commencement of any proceeding at the rate
specified in the applicable Senior Indebtedness, whether or not a claim for
such interest would be allowed) before the holders of the Notes are entitled
to receive any payment, and until the Senior Indebtedness is paid in full in
cash or Cash Equivalents, any payment or distribution to which holders of the
Notes would be entitled but for the subordination provisions of the Indenture
will be made to holders of the Senior Indebtedness as their interests may
appear. If a distribution is made to holders of the Notes that, due to the
subordination provisions, should not have been made to them, such holders are
required to hold it in trust for the holders of Senior Indebtedness and pay it
over to them as their interests may appear.
If payment of the Notes is accelerated because of an Event of Default, the
Company or the Trustee shall promptly notify the holders of the Designated
Senior Indebtedness or the Representative of such holders of the acceleration.
The Company may not pay the Notes until five Business Days after such holders
or the Representative of the Designated Senior Indebtedness receive notice of
such acceleration and, thereafter, may pay the Notes only if the subordination
provisions of the Indenture otherwise permit payment at that time.
By reason of such subordination provisions contained in the Indenture, in
the event of insolvency, creditors of the Company who are holders of Senior
Indebtedness may recover more, ratably, than the Noteholders.
CHANGE OF CONTROL
Upon the occurrence of any of the following events (each a "Change of
Control"), unless the Company shall have exercised its right to redeem the
Notes as described under "--Optional Redemption", each holder will have the
right to require the Company to repurchase all or any part of
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such holder's Notes at a purchase price in cash equal to 101% of the principal
amount thereof plus accrued and unpaid interest, if any, to the date of
purchase (subject to the right of holders of record on the relevant record
date to receive interest due on the relevant interest payment date):
(i) any "person" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act), other than one or more Permitted Holders, is or becomes the
beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Exchange
Act, except that such person shall be deemed to have "beneficial ownership"
of all shares that any such person has the right to acquire, whether such
right is exercisable immediately or only after the passage of time),
directly or indirectly, of more than 50% of the total voting power of the
Voting Stock of the Company or Holdings (or its successor by merger,
consolidation or purchase of all or substantially all of its assets) (for
the purposes of this clause, such person shall be deemed to beneficially
own any Voting Stock of the Company or Holdings held by a parent
corporation, if such person "beneficially owns" (as defined above),
directly or indirectly, more than 50% of the voting power of the Voting
Stock of such parent corporation); or
(ii) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors of the Company
or Holdings (together with any new directors whose election by such Board
of Directors or whose nomination for election by the shareholders of the
Company or Holdings was approved by a vote of at least a majority of the
directors of the Company then still in office who were either directors at
the beginning of such period or whose election or nomination for election
was previously so approved or is a designee of the Permitted Holders or was
nominated or elected by such Permitted Holders or any of their designees)
cease for any reason to constitute a majority of the Board of Directors of
the Company or Holdings then in office; or
(iii) the sale, lease, transfer, conveyance or other disposition (other
than by way of merger or consolidation), in one or a series of related
transactions, of all or substantially all of the assets of the Company and
its Restricted Subsidiaries taken as a whole to any "person" (as such term
is used in Sections 13(d) and 14(d) of the Exchange Act) other than a
Permitted Holder or Holdings; or
(iv) the adoption by the stockholders of a plan for the liquidation or
dissolution of the Company or Holdings.
Within 30 days following any Change of Control, unless the Company has
mailed a redemption notice with respect to all the outstanding Notes in
connection with such Change of Control as described under "--Optional
Redemption", the Company shall mail a notice to each holder with a copy to the
Trustee stating: (i) that a Change of Control has occurred and that such
holder has the right to require the Company to purchase such holder's Notes at
a purchase price in cash equal to 101% of the principal amount thereof plus
accrued and unpaid interest, if any, to the date of purchase (subject to the
right of holders of record on a record date to receive interest on the
relevant interest payment date); (ii) the repurchase date (which shall be no
earlier than 30 days nor later than 60 days from the date such notice is
mailed); and (iii) the procedures determined by the Company, consistent with
the Indenture, that a holder must follow in order to have its Notes purchased.
The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Notes pursuant to this covenant. To the
extent that the provisions of any securities laws or regulations conflict with
provisions of the Indenture, the Company will comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations described in the Indenture by virtue thereof.
The occurrence of certain of the events that would constitute a Change of
Control would constitute a default under the Senior Credit Agreement. Future
Senior Indebtedness of the Company and its
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Subsidiaries may also contain prohibitions of certain events that would
constitute a Change of Control or require such Senior Indebtedness to be
repurchased upon a Change of Control. Moreover, the exercise by the holders of
their right to require the Company to repurchase the Notes could cause a
default under such Senior Indebtedness, even if the Change of Control itself
does not, due to the financial effect of such repurchase on the Company.
Finally, the Company's ability to pay cash to the holders upon a repurchase
may be limited by the Company's then existing financial resources. There can
be no assurance that sufficient funds will be available when necessary to make
any required repurchases. Even if sufficient funds were otherwise available,
the terms of the Senior Credit Agreement will (and other Senior Indebtedness
may) prohibit the Company's prepayment of Notes prior to their scheduled
maturity. Consequently, if the Company is not able to prepay the Bank
Indebtedness and any other Senior Indebtedness containing similar restrictions
or obtain requisite consents, as described above, the Company will be unable
to fulfill its repurchase obligations if holders of Notes exercise their
repurchase rights following a Change of Control, thereby resulting in a
default under the Indenture.
The Change of Control provisions described above may deter certain mergers,
tender offers and other takeover attempts involving the Company by increasing
the capital required to effectuate such transactions. The definition of
"Change of Control" includes a disposition of all or substantially all of the
property and assets of the Company and its Restricted Subsidiaries. With
respect to the disposition of property or assets, the phrase "all or
substantially all" as used in the Indenture varies according to the facts and
circumstances of the subject transaction, has no clearly established meaning
under New York law (which is the choice of law under the Indenture) and is
subject to judicial interpretation. Accordingly, in certain circumstances
there may be a degree of uncertainty in ascertaining whether a particular
transaction would involve a disposition of "all or substantially all" of the
property or assets of a Person, and therefore it may be unclear as to whether
a Change of Control has occurred and whether the Company is required to make
an offer to repurchase the Notes as described above.
CERTAIN COVENANTS
The Indenture contains certain covenants including, among others, the
following:
Limitation on Indebtedness. (a) The Company shall not, and shall not permit
any of its Restricted Subsidiaries to, Incur any Indebtedness; provided,
however, that the Company and its Restricted Subsidiaries may Incur
Indebtedness if on the date thereof the Consolidated Coverage Ratio for the
Company and its Restricted Subsidiaries is at least (i) 2.00 to 1.00, if such
Indebtedness is Incurred on or prior to the second anniversary of the Issue
Date and (ii) 2.25 to 1.00, if such Indebtedness is Incurred thereafter.
(b) Notwithstanding the foregoing paragraph (a), the Company and its
Restricted Subsidiaries may Incur the following Indebtedness: (i) Indebtedness
Incurred pursuant to the Senior Credit Agreement; provided, however, that the
aggregate principal amount of all Indebtedness Incurred pursuant to this
clause (i) does not exceed $160 million at any time outstanding, less the
aggregate principal amount of all mandatory prepayments of principal thereof
with the proceeds of Asset Dispositions; (ii) the Subsidiary Guarantees and
Guarantees of Indebtedness Incurred pursuant to clause (i); (iii) Indebtedness
of the Company owing to and held by any Wholly-Owned Subsidiary or
Indebtedness of a Restricted Subsidiary owing to and held by the Company or
any Wholly-Owned Subsidiary; provided, however, that any subsequent issuance
or transfer of any Capital Stock or any other event which results in any such
Wholly-Owned Subsidiary ceasing to be a Wholly-Owned Subsidiary or any
subsequent transfer of any such Indebtedness (except to the Company or a
Wholly-Owned Subsidiary) shall be deemed, in each case, to constitute the
Incurrence of such Indebtedness by the issuer thereof; (iv) Indebtedness
represented by (x) the Notes, (y) any Indebtedness (other than
the Indebtedness described in clauses (i), (ii) and (iii)) outstanding on the
Issue Date and (z) any
65
Refinancing Indebtedness Incurred in respect of any Indebtedness described in
this clause (iv) or clause (v) or Incurred pursuant to paragraph (a) of the
covenant described under "Limitation on Indebtedness"; (v) Indebtedness of a
Restricted Subsidiary Incurred and outstanding on the date on which such
Restricted Subsidiary became a Restricted Subsidiary or was acquired by the
Company (other than Indebtedness Incurred to provide all or any portion of the
funds utilized to consummate the transaction or series of related transactions
pursuant to which such Restricted Subsidiary became a Subsidiary or was
otherwise acquired by the Company); provided, however, that at the time such
Restricted Subsidiary is acquired by the Company, the Company would have been
able to Incur $1.00 of additional Indebtedness under this covenant after
giving effect to the Incurrence of such Indebtedness pursuant to this clause
(v); (vi) Indebtedness under Currency Agreements and Interest Rate Agreements;
provided, however, that in the case of Currency Agreements and Interest Rate
Agreements, such Currency Agreements and Interest Rate Agreements are entered
into for bona fide hedging purposes of the Company or its Restricted
Subsidiaries (as determined in good faith by the Board of Directors or senior
management of the Company) and correspond in terms of notional amount,
duration, currencies and interest rates, as applicable, to Indebtedness of the
Company or its Restricted Subsidiaries Incurred without violation of the
Indenture or to business transactions of the Company or its Restricted
Subsidiaries on customary terms entered into in the ordinary course of
business; (vii) Indebtedness of foreign Restricted Subsidiaries under working
capital facilities; provided that the aggregate principal amount of such
Indebtedness outstanding at any time does not exceed 5% of Consolidated
Tangible Assets; (viii) Indebtedness (including Capital Lease Obligations)
incurred by the Company or any of its Restricted Subsidiaries to finance the
purchase, lease or improvement of property (real or personal) or equipment
(whether through the direct purchase of assets or the Capital Stock of any
Person owning such assets) in an aggregate principal amount outstanding not to
exceed the greater of (A) $5.0 million or (B) 5% of Consolidated Tangible
Assets at the time of any Incurrence thereof (including any Refinancing
Indebtedness with respect thereto); (ix) Indebtedness incurred by the Company
or any of its Restricted Subsidiaries constituting reimbursement obligations
with respect to letters of credit issued in the ordinary course of business,
including, without limitation, letters of credit in respect of workers'
compensation claims or self-insurance, or other Indebtedness with respect to
reimbursement type obligations regarding workers' compensation claims; (x)
Indebtedness arising from agreements of the Company or a Restricted Subsidiary
of the Company providing for indemnification, adjustment of purchase price,
earn out or other similar obligations, in each case, incurred or assumed in
connection with the disposition of any business, assets or a Restricted
Subsidiary of the Company, provided that the maximum liability in respect of
all such Indebtedness shall at no time exceed the gross proceeds actually
received by the Company and its Restricted Subsidiaries in connection with
such disposition; (xi) obligations in respect of performance and surety bonds
and completion guarantees provided by the Company or any Restricted Subsidiary
of the Company in the ordinary course of business; and (xii) Indebtedness
(other than Indebtedness described in clauses (i)--(xi)) in a principal amount
which, when taken together with the principal amount of all other Indebtedness
Incurred pursuant to this clause (xii) and then outstanding, will not exceed
the greater of (A) $5.0 million or (B) 5% of Consolidated Tangible Assets.
(c) Neither the Company nor any Restricted Subsidiary shall Incur any
Indebtedness under paragraph (b) above if the proceeds thereof are used,
directly or indirectly, to refinance any Subordinated Obligations of the
Company unless such Indebtedness shall be subordinated to the Notes to at
least the same extent as such Subordinated Obligations. No Subsidiary
Guarantor shall incur any Indebtedness under paragraph (b) above if the
proceeds thereof are used, directly or indirectly to refinance any
Subordinated Obligations of such Subsidiary Guarantor unless such Indebtedness
shall be subordinated to the obligations of such Subsidiary Guarantor under
its Subsidiary Guarantee to at least the same extent as such Subordinated
Indebtedness.
Limitation on Liens. The Company will not, and will not permit any of its
Restricted Subsidiaries to, create, incur, assume or suffer to exist any Liens
of any kind against or upon any of its property or
66
assets, or any proceeds therefrom, unless (i) in the case of Liens securing
Indebtedness that is expressly subordinate or junior in right of payment to
the Notes, the Notes are secured by a Lien on such property, assets or
proceeds that is senior in priority to such Liens and (ii) in all other cases,
the Notes are equally and ratably secured, except for (A) Liens existing as of
the Issue Date and any extensions, renewals or replacements thereof, (B) Liens
securing Senior Indebtedness, (C) Liens securing the Notes, (D) Liens of the
Company or a Wholly Owned Restricted Subsidiary of the Company on assets of
any Subsidiary of the Company, (E) Liens securing Indebtedness which is
incurred to refinance Indebtedness which has been secured by a Lien permitted
under the Indenture and which has been incurred in accordance with the
provisions of the Indenture; provided, however, that such Liens do not extend
to or cover any property or assets of the Company or any of its Restricted
Subsidiaries not securing the Indebtedness so refinanced, and (F) Permitted
Liens.
Limitation on Layering. The Company shall not Incur any Indebtedness if such
Indebtedness is subordinate or junior in ranking in any respect to any Senior
Indebtedness unless such Indebtedness is Senior Subordinated Indebtedness or
is contractually subordinated in right of payment to Senior Subordinated
Indebtedness. No Subsidiary Guarantor shall Incur any Indebtedness if such
Indebtedness is contractually subordinate or junior in ranking in any respect
to any Senior Indebtedness of such Subsidiary Guarantor unless such
Indebtedness is Guarantor Senior Subordinated Indebtedness of such Subsidiary
Guarantor or is contractually subordinated in right of payment to Senior
Subordinated Indebtedness of such Subsidiary Guarantor.
Limitation on Restricted Payments. (a) The Company shall not, and shall not
permit any of its Restricted Subsidiaries, directly or indirectly, to (i)
declare or pay any dividend or make any distribution on or in respect of its
Capital Stock except (A) dividends or distributions payable in its Capital
Stock (other than Disqualified Stock) and (B) dividends or distributions
payable to the Company or a Restricted Subsidiary of the Company (and if such
Restricted Subsidiary is not a Wholly-Owned Subsidiary, to its other holders
of Capital Stock on a pro rata basis), (ii) purchase, redeem, retire or
otherwise acquire for value any Capital Stock of the Company held by Persons
other than a Restricted Subsidiary of the Company or any Capital Stock of a
Restricted Subsidiary of the Company held by any Affiliate of the Company,
other than another Restricted Subsidiary (in either case, other than in
exchange for its Capital Stock (other than Disqualified Stock)), (iii)
purchase, repurchase, redeem, defease or otherwise acquire or retire for
value, prior to scheduled maturity, scheduled repayment or scheduled sinking
fund payment, any Subordinated Obligations (other than the purchase,
repurchase or other acquisition of Subordinated Obligations purchased in
anticipation of satisfying a sinking fund obligation, principal installment or
final maturity, in each case due within one year of the date of purchase,
repurchase or acquisition) or (iv) make any Investment (other than a Permitted
Investment) in any Person (any such dividend, distribution, purchase,
redemption, repurchase, defeasance, other acquisition, retirement or
Investment being herein referred to in clauses (i) through (iv) as a
"Restricted Payment"), if at the time the Company or such Restricted
Subsidiary makes such Restricted Payment: (1) a Default shall have occurred
and be continuing (or would result therefrom); or (2) the Company is not able
to incur an additional $1.00 of Indebtedness pursuant to the covenant
described in "Limitation on Indebtedness"; or (3) the aggregate amount of such
Restricted Payment and all other Restricted Payments declared or made
subsequent to the Issue Date would exceed the sum of: (A) 50% of the
Consolidated Net Income accrued during the period (treated as one accounting
period) from, but excluding, the Issue Date to, but excluding, the date of
such Restricted Payment (or, in case such Consolidated Net Income shall be a
deficit, minus 100% of such deficit); (B) the aggregate net proceeds,
including the fair market value of property other than cash (determined in
good faith by the Board of Directors as evidenced by a certificate filed with
the Trustee, except that in the event the value of any non-cash consideration
shall be $10 million or more, the value shall be as determined in writing by
an Independent Appraiser) received by the Company from the issue or sale of
its Capital Stock (other than Disqualified Stock) or other capital
contributions subsequent to the Issue Date (other than net proceeds received
from an issuance or sale of such Capital Stock to a Subsidiary of the
67
Company or an employee stock ownership plan or similar trust to the extent
such sale to an employee stock ownership plan or similar trust is financed by
loans from the Company or any Restricted Subsidiary unless such loans have
been repaid with cash on or prior to the date of determination); (C) the
amount by which Indebtedness of the Company is reduced on the Company's
balance sheet upon the conversion or exchange (other than by a Subsidiary of
the Company) subsequent to the Issue Date of any Indebtedness of the Company
convertible or exchangeable for Capital Stock of the Company (less the amount
of any cash, or other property, distributed by the Company upon such
conversion or exchange); (D) the amount equal to the net reduction in
Investments made by the Company or any of its Restricted Subsidiaries in any
Person resulting from (i) repurchases or redemptions of such Investments by
such Person, proceeds realized upon the sale of such Investment to an
unaffiliated purchaser, repayments of loans or advances or other transfers of
assets (including by way of dividend or distribution) by such Person to the
Company or any Restricted Subsidiary of the Company or (ii) the redesignation
of Unrestricted Subsidiaries as Restricted Subsidiaries (valued in each case
as provided in the definition of "Investment") not to exceed, in the case of
any Unrestricted Subsidiary, the amount of Investments previously made by the
Company or any Restricted Subsidiary in such Unrestricted Subsidiary, which
amount was included in the calculation of the amount of Restricted Payments;
provided, however, that no amount shall be included under this clause (D) to
the extent it is already included in Consolidated Net Income.
(b) The provisions of paragraph (a) shall not prohibit: (i) any purchase or
redemption of Capital Stock or Subordinated Obligations of the Company or any
Restricted Subsidiary made by exchange for, or out of the proceeds of the
substantially concurrent sale of, Capital Stock of the Company (other than
Disqualified Stock and other than Capital Stock issued or sold to a Subsidiary
or an employee stock ownership plan or similar trust to the extent such sale
to an employee stock ownership plan or similar trust is financed by loans from
the Company or any Restricted Subsidiary unless such loans have been repaid
with cash on or prior to the date of determination); provided, however, that
(A) such purchase or redemption shall be excluded in subsequent calculations
of the amount of Restricted Payments and (B) the aggregate net proceeds from
such sale shall be excluded from clause (3) (B) of paragraph (a); (ii) any
purchase or redemption of Subordinated Obligations of the Company made by
exchange for, or out of the proceeds of the substantially concurrent sale of,
Subordinated Obligations of the Company; provided, however, that such purchase
or redemption shall be excluded in subsequent calculations of the amount of
Restricted Payments; (iii) any purchase or redemption of Subordinated
Obligations from Net Available Cash to the extent permitted under "Limitation
on Sales of Assets and Subsidiary Stock" below; provided, however, that such
purchase or redemption shall be excluded in subsequent calculations of the
amount of Restricted Payments; (iv) dividends paid within 60 days after the
date of declaration if at such date of declaration such dividend would have
complied with this provision; provided, however, that such dividend shall be
included in subsequent calculations of the amount of Restricted Payments; (v)
payments for the purpose of, and in amounts equal to, amounts required to
permit Holdings to redeem or repurchase Capital Stock of Holdings from
existing or former employees or management of the Company or any Subsidiary or
their assigns, estates or heirs, in each case in connection with the
repurchase provisions under employee stock option or stock purchase agreements
or other agreements to compensate management employees; provided that such
redemption or repurchases pursuant to this clause shall not exceed $5.0
million (and shall be increased by the amount of any proceeds to the Company
from (x) sales of Capital Stock of Holdings to management employees subsequent
to the Issue Date and (y) any "key-man" life insurance policies which are used
to make such redemptions or repurchases) in the aggregate; provided, however,
that such payments shall be included in the calculation of the amount of
Restricted Payments; provided, further, that the cancellation of Indebtedness
owing to the Company from members of management of the Company or any of its
Restricted Subsidiaries in connection with a repurchase of Capital Stock of
Holdings will not be deemed to constitute a Restricted Payment under the
Indenture; (vi) loans or advances made after the Issue Date to employees or
directors of the Company or any Subsidiary the proceeds of which are used to
purchase Capital Stock of Holdings, in an aggregate amount not in
68
excess of $1.0 million at any one time outstanding; provided, however, that
such payments shall be included in the calculation of the amount of Restricted
Payments; (vii) cash dividends to Holdings in amounts equal to (A) the amounts
required for Holdings to pay any Federal, state or local income taxes to the
extent that such income taxes are attributable to the income of the Company
and its Subsidiaries, (B) the amounts required for Holdings to pay franchise
taxes and other fees required to maintain its legal existence, (C) an amount
not to exceed $250,000 in any fiscal year to permit Holdings to pay its
corporate overhead expenses incurred in the ordinary course of business, and
to pay salaries or other compensation of employees who perform services for
both Holdings and the Company, (D) so long as no Default or Event of Default
shall have occurred and be continuing, an amount not to exceed $100,000 in the
aggregate, to enable Holdings to make payments to holders of its Capital Stock
in lieu of issuance of fractional shares of its Capital Stock, (E) the amounts
required for Holdings to make indemnification payments under the
Recapitalization Agreement, and (F) on or about the Issue Date the amount
required to enable Holdings to repay the Holdings Facility in an amount not to
exceed the difference between all amounts then owing by Holdings in respect of
the Holdings Facility less the net proceeds to Holdings from the issuance of
the Holdings Senior Discount Notes; provided, however, that such payments
shall not be included in the calculation of the amount of Restricted Payments;
(viii) repurchases of Capital Stock deemed to occur upon the exercise of stock
options if such Capital Stock represents a portion of the exercise price
hereof; provided, however, that such repurchases shall not be included in the
calculation of the amount of Restricted Payments; and (ix) so long as (A) no
Default or Event of Default has occurred and is continuing and (B) immediately
before and immediately after giving effect thereto, the Company would have
been permitted to Incur at least $1.00 of additional Indebtedness under the
covenant described in "Limitation on Indebtedness," from and after May 15,
2003, payments of cash dividends to Holdings in an amount sufficient to enable
Holdings to make payments of interest required to be made in respect of the
Holdings Senior Discount Notes in accordance with the terms thereof in effect
on the date of the Indenture, provided such interest payments are made with
the proceeds of such dividends; provided, however, that such payments shall
not be included in the calculation of the amount of Restricted Payments.
Limitation on Restrictions on Distributions from Restricted
Subsidiaries. The Company will not, and will not permit any Restricted
Subsidiary to, create or otherwise cause or permit to exist or become
effective any consensual encumbrance or consensual restriction on the ability
of any Restricted Subsidiary to (i) pay dividends or make any other
distributions on its Capital Stock or pay any Indebtedness or other
obligations owed to the Company, (ii) make any loans or advances to the
Company or (iii) transfer any of its property or assets to the Company, except
(a) any encumbrance or restriction pursuant to an agreement in effect at or
entered into on the date of the Indenture (including, without limitation, the
Senior Credit Facility); (b) any encumbrance or restriction with respect to a
Restricted Subsidiary pursuant to an agreement relating to any Indebtedness
Incurred by a Restricted Subsidiary on or prior to the date on which such
Restricted Subsidiary was acquired by the Company (other than Indebtedness
Incurred to provide all or any portion of the funds utilized to consummate,
the transaction or series of related transactions pursuant to which such
Restricted Subsidiary became a Restricted Subsidiary or was acquired by the
Company) and outstanding on such date; (c) any encumbrance or restriction with
respect to a Restricted Subsidiary pursuant to an agreement effecting a
refinancing of Indebtedness Incurred pursuant to an agreement referred to in
clause (a) or (b) of this covenant or this clause (c) or contained in any
amendment to an agreement referred to in clause (a) or (b) of this covenant or
this clause (c); provided, however, that the encumbrances and restrictions
with respect to such Restricted Subsidiary contained in any such agreement or
amendment are no less favorable to the Holders of the Notes than encumbrances
and restrictions contained in such agreements; (d) in the case of clause (iii)
above, any encumbrance or restriction (A) that restricts in a customary manner
the subletting, assignment or transfer of any property or asset that is
subject to a lease, license or similar contract, or the assignment or transfer
of any such lease, license or other contract, (B) by virtue of any transfer
of, agreement to transfer, option or right with respect to, or Lien on, any
property or assets of the Company or any Restricted Subsidiary not otherwise
prohibited by
69
the Indenture, (C) contained in mortgages, pledges or other security
agreements securing Indebtedness of a Restricted Subsidiary to the extent such
encumbrance or restrictions restrict the transfer of the property subject to
such mortgages, pledges or other security agreements or (D) pursuant to
customary provisions restricting dispositions of real property interests set
forth in any reciprocal easement agreements of the Company or any Restricted
Subsidiary; (e) any restriction with respect to a Restricted Subsidiary (or
any of its property or assets) imposed pursuant to an agreement entered into
for the direct or indirect sale or disposition of all or substantially all the
Capital Stock or assets of such Restricted Subsidiary (or the property or
assets that are subject to such restriction) pending the closing of such sale
or disposition; (f) encumbrances or restrictions arising or existing by reason
of applicable law; (g) any restrictions pursuant to the Indenture and the
Holdings Senior Discount Notes; (h) restrictions imposed by any agreement or
instrument governing Capital Stock of any Person that is acquired; and (i)
restrictions on cash or other deposits or net worth imposed by customers under
contracts entered into in the ordinary course of business.
Limitation on Sales of Assets and Subsidiary Stock. (a) The Company shall
not, and shall not permit any of its Restricted Subsidiaries to, make any
Asset Disposition unless (i) the Company or such Restricted Subsidiary
receives consideration at the time of such Asset Disposition at least equal to
the fair market value, as determined in good faith by the Board of Directors
(including as to the value of all non-cash consideration), of the shares and
assets subject to such Asset Disposition, (ii) at least 75% of the
consideration thereof received by the Company or such Restricted Subsidiary is
in the form of cash or Cash Equivalents and (iii) an amount equal to 100% of
the Net Available Cash from such Asset Disposition is applied by the Company
(or such Restricted Subsidiary, as the case may be) (A) first, to the extent
the Company or any Restricted Subsidiary, as the case may be, elects (or is
required by the terms of any Senior Indebtedness), to prepay, repay or
purchase Senior Indebtedness or Indebtedness (other than any Preferred Stock)
of a Wholly Owned Subsidiary (in each case other than Indebtedness owed to the
Company or an Affiliate of the Company) within 180 days from the later of the
date of such Asset Disposition or the receipt of such Net Available Cash; (B)
second, to the extent of the balance of such Net Available Cash after
application in accordance with clause (A), at the Company's election to the
investment in Additional Assets within one year from the later of the date of
such Asset Disposition or the receipt of such Net Available Cash; (C) third,
to the extent of the balance of such Net Available Cash after application and
in accordance with clauses (A) and (B), to make an offer to purchase (an
"Offer") Notes and other pari passu debt obligations subject to a similar
covenant (collectively, the "pari passu Notes") at par plus accrued and unpaid
interest, if any, thereon; and (D) fourth, to the extent of the balance of
such Net Available Cash after application in accordance with clauses (A), (B)
and (C), for other general corporate purposes not prohibited by the Indenture;
provided, however, that, in connection with any prepayment, repayment or
purchase of Indebtedness pursuant to clause (A) above, the Company or such
Restricted Subsidiary shall retire such Indebtedness and shall cause the
related loan commitment (if any) to be permanently reduced in an amount equal
to the principal amount so prepaid, repaid or purchased. Notwithstanding the
foregoing provisions, the Company and its Restricted Subsidiaries shall not be
required to apply any Net Available Cash in accordance herewith except to the
extent that the aggregate Net Available Cash from all Asset Dispositions which
are not applied in accordance with this covenant exceed $5 million. The
Company shall not be required to make an Offer for the Notes and for the pari
passu Notes pursuant to this covenant if the Net Available Cash available
therefor (after application of the proceeds as provided in clauses (A) and
(B)) are less than $5 million for any particular Asset Disposition (which
lesser amounts shall be carried forward for purposes of determining whether an
Offer is required with respect to the Net Available Cash from any subsequent
Asset Disposition).
(b) If the aggregate principal amount (or accreted value, as applicable) of
Notes and pari passu Notes validly tendered and not withdrawn in connection
with an Offer pursuant to clause (C) above exceeds the funds available
therefor ("Offer Proceeds"), the Offer Proceeds will be apportioned between
the Notes and such pari passu Notes, with the portion of the Offer Proceeds
payable in
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respect of the Notes equal to the lesser of (i) the Offer Proceeds amount
multiplied by a fraction, the numerator of which is the outstanding principal
amount of the Notes and the denominator of which is the sum of the outstanding
principal amount of the Notes and the outstanding principal amount (or
accreted value, as applicable) of the relevant pari passu Notes, and (ii) the
aggregate principal amount of Notes validly tendered and not withdrawn.
(c) For the purposes of this covenant, the following will be deemed to be
cash: (x) the assumption by the transferee of Senior Indebtedness of the
Company or Indebtedness of any Restricted Subsidiary of the Company and the
release of the Company or such Restricted Subsidiary from all liability on
such Senior Indebtedness or Indebtedness in connection with such Asset
Disposition (in which case the Company shall, without further action, be
deemed to have applied such assumed Indebtedness in accordance with clause (A)
of the preceding paragraph), (y) securities received by the Company or any
Restricted Subsidiary of the Company from the transferee that are promptly
converted by the Company or such Restricted Subsidiary into cash and (z) any
Designated Noncash Consideration received by the Company or any of its
Restricted Subsidiaries in such Asset Disposition having an aggregate fair
market value, taken together with all other Designated Noncash Consideration
received pursuant to this clause (z) that is at that time outstanding, not to
exceed 10% of Consolidated Tangible Assets at the time of the receipt of such
Designated Noncash Consideration (with the fair market value of each item of
Designated Noncash Consideration being measured at the time received and
without giving effect to subsequent changes in value).
(d) In the event of an Asset Disposition that requires the purchase of Notes
pursuant to clause (a)(iii)(C), the Company will be required to purchase Notes
tendered pursuant to an offer by the Company for the Notes at a purchase price
of 100% of their principal amount plus accrued and unpaid interest, if any, to
the purchase date in accordance with the procedures (including prorating in
the event of oversubscription) set forth in the Indenture. If the aggregate
purchase price of the pari passu Notes tendered pursuant to the offer is less
than the Net Available Cash allotted to the purchase of the pari passu Notes,
the Company will apply the remaining Net Available Cash in accordance with
clause (a)(iii)(D) above.
(e) The Company will comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations in connection with the repurchase of Notes pursuant to the
Indenture. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company will comply
with the applicable securities laws and regulations and will not be deemed to
have breached its obligations under the Indenture by virtue thereof.
Limitation on Affiliate Transactions. (a) The Company will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly, enter
into or conduct any transaction (including the purchase, sale, lease or
exchange of any property or the rendering of any service) with any Affiliate
of the Company (an "Affiliate Transaction") unless: (i) the terms of such
Affiliate Transaction are no less favorable to the Company or such Restricted
Subsidiary, as the case may be, than those that could be obtained at the time
of such transaction in arm's-length dealings with a Person who is not such an
Affiliate; (ii) in the event such Affiliate Transaction involves an aggregate
amount in excess of $2 million, the terms of such transaction have been
approved by a majority of the members of the Board of Directors of the Company
and by a majority of the members of such Board having no personal stake in
such transaction, if any (and such majority or majorities, as the case may be,
determines that such Affiliate Transaction satisfies the criteria in (i)
above); and (iii) in the event such Affiliate Transaction involves an
aggregate amount in excess of $15 million, the Company has received a written
opinion from an independent investment banking firm of nationally recognized
standing that such Affiliate Transaction is not materially less favorable than
those that might reasonably have been obtained in a comparable transaction at
such time on an arms-length basis from a Person that is not an Affiliate.
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(b) The foregoing paragraph (a) shall not apply to (i) any Restricted
Payment permitted to be made pursuant to the covenant described under
"Limitation on Restricted Payments," (ii) any issuance of securities, or other
payments, awards or grants in cash, securities or otherwise pursuant to, or
the funding of, employment arrangements, stock options and stock ownership
plans approved by the Board of Directors of the Company, (iii) the payment of
compensation and directors' fees and the performance of indemnification or
contribution obligations in the ordinary course of business, (iv) loans or
advances to employees in the ordinary course of business of the Company or any
of its Restricted Subsidiaries, (v) the execution, delivery and performance of
the Management Agreement, or (vi) any transaction between the Company and a
Wholly-Owned Subsidiary or between Wholly-Owned Subsidiaries.
SEC Reports. Notwithstanding that the Company may not be subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, to the
extent permitted by the Exchange Act, the Company will file with the
Commission, and provide, within 15 days after the Company is required to file
the same with the Commission, the Trustee and the holders of the Notes with
the annual reports and the information, documents and other reports (or copies
of such portions of any of the foregoing as the Commission may by rules and
regulations prescribe) that are specified in Sections 13 and 15(d) of the
Exchange Act. In the event that the Company is not permitted to file such
reports, documents and information with the Commission pursuant to the
Exchange Act, the Company will nevertheless deliver such Exchange Act
information to the Trustee and the holders of the Notes as if the Company were
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act.
Merger and Consolidation. The Company shall not consolidate with or merge
with or into, or convey, transfer or lease all or substantially all its assets
to, any Person, unless: (i) the resulting, surviving or transferee Person (the
"Successor Company") shall be a corporation, partnership, trust or limited
liability company organized and existing under the laws of the United States
of America, any State thereof or the District of Columbia and the Successor
Company (if not the Company) shall expressly assume, by supplemental
indenture, executed and delivered to the Trustee, in form satisfactory to the
Trustee, all the obligations of the Company under the Notes and the Indenture;
(ii) immediately after giving effect to such transaction (and treating any
Indebtedness that becomes an obligation of the Successor Company or any
Subsidiary of the Successor Company as a result of such transaction as having
been incurred by the Successor Company or such Restricted Subsidiary at the
time of such transaction), no Default or Event of Default shall have occurred
and be continuing; (iii) immediately after giving effect to such transaction,
the Consolidated Net Worth of the Company or the Successor Company, as the
case may be, is not less than that of the Company immediately prior to the
transaction; (iv) immediately after giving effect to such transaction, the
Successor Company would be able to Incur at least an additional $1.00 of
Indebtedness under the covenant described in "Limitation on Indebtedness"; and
(v) the Company shall have delivered to the Trustee an Officers' Certificate
and an Opinion of Counsel, each stating that such consolidation, merger or
transfer and such supplemental indenture (if any) comply with the Indenture.
The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of, the Company under the Indenture and
thereafter the Company shall be released from all obligations and covenants
thereunder, but, in the case of a lease of all or substantially all its
assets, the Company will not be released from the obligation to pay the
principal of and interest on the Notes.
Notwithstanding the foregoing clauses (ii) and (iii), (i) any Restricted
Subsidiary of the Company may consolidate with, merge into or transfer all or
part of its properties and assets to the Company and (ii) the Company may
merge with an Affiliate incorporated solely for the purpose of reincorporating
the Company in another jurisdiction to realize tax or other benefits.
Future Subsidiary Guarantors. After the Issue Date, the Company will cause
each Restricted Subsidiary created or acquired by the Company which Guarantees
the Bank Indebtedness to execute
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and deliver to the Trustee a Subsidiary Guarantee pursuant to which such
Subsidiary Guarantor will unconditionally Guarantee on a joint and several
basis, the full and prompt payment of the principal of, premium, if any and
interest on Exchange Notes on a senior subordinated basis.
The obligations of each Subsidiary Guarantor will be limited to the maximum
amount as will, after giving effect to all other contingent and fixed
liabilities of such Subsidiary Guarantor (including, without limitation, any
guarantees under the Senior Credit Agreement) and after giving effect to any
collections from or payments made by or on behalf of any other Subsidiary
Guarantor in respect of the obligations of such other Subsidiary Guarantor
under its Subsidiary Guarantee or pursuant to its contribution obligations
under the Indenture, result in the obligations of such Subsidiary Guarantor
under its Subsidiary Guarantee not constituting a fraudulent conveyance or
fraudulent transfer under federal or state law.
Each Subsidiary Guarantor will be permitted to consolidate with or merge
into or sell its assets to the Company or another Subsidiary Guarantor without
limitation. Each Subsidiary Guarantor will be permitted to consolidate with or
merge into or sell all or substantially all its assets to a corporation,
partnership or trust other than the Company or another Subsidiary Guarantor
(whether or not affiliated with the Subsidiary Guarantor). Upon the sale or
disposition of a Subsidiary Guarantor (by merger, consolidation, the sale of
all or substantially all of its assets) to a Person (whether or not an
Affiliate of the Subsidiary Guarantor) which is not a Subsidiary of the
Company, which sale or disposition is otherwise in compliance with the
Indenture (including the covenant described under "Certain Covenants--
Limitation on Sales of Assets and Subsidiary Stock"), such Subsidiary
Guarantor shall be deemed released from all its obligations under the
Indenture and its Subsidiary Guarantee and such Subsidiary Guarantee shall
terminate; provided, however, that any such termination shall occur only to
the extent that all obligations of such Subsidiary Guarantor under the Senior
Credit Agreement and all of its guarantees of, and under all of its pledges of
assets or other security interests which secure, any other Indebtedness of the
Company shall also terminate upon such release, sale or transfer.
Limitation on Lines of Business. The Company will not, and will not permit
any Restricted Subsidiary to, engage in any business other than a Related
Business.
EVENTS OF DEFAULT
Each of the following constitutes an Event of Default under the Indenture:
(i) a default in any payment of interest on any Note when due, continued for
30 days, whether or not such payment is prohibited by the provisions described
under "Ranking and Subordination" above, (ii) a default in the payment of
principal of any Note when due at its Stated Maturity, upon optional
redemption, upon required repurchase, upon declaration or otherwise, whether
or not such payment is prohibited by the provisions described under "Ranking
and Subordination" above, (iii) the failure by the Company to comply for 30
days after notice with any of its obligations under the covenants described
under "Change of Control" above or under covenants described under "Certain
Covenants" above (in each case, other than a failure to purchase Notes which
shall constitute an Event of Default under clause (ii) above), (iv) the
failure by the Company to comply for 60 days after notice with its other
agreements contained in the Indenture, (v) Indebtedness of the Company or any
Restricted Subsidiary is not paid within any applicable grace period after
final maturity or is accelerated by the holders thereof because of a default
and the total amount of such Indebtedness unpaid or accelerated exceeds $10
million (the "cross acceleration provision"), (vi) certain events of
bankruptcy, insolvency or reorganization of the Company or a Significant
Subsidiary (the "bankruptcy provisions"), (vii) any judgment or decree for the
payment of money in excess of $10 million is rendered against the Company or a
Significant Subsidiary and such judgment or decree shall remain undischarged
or unstayed for a period of 60 days after such judgment becomes final and non-
appealable (the "judgment default provision") or (viii) any Subsidiary
Guarantee ceases to be in full force and effect (except as contemplated by the
terms of the
73
Indenture) or any Subsidiary Guarantor denies or disaffirms its obligations
under the Indenture or its Subsidiary Guarantee. However, a default under
clauses (iii) and (iv) will not constitute an Event of Default until the
Trustee or the holders of 25% in principal amount of the outstanding Exchange
Notes notify the Company of the default and the Company does not cure such
default within the time specified in clauses (iii) and (iv) hereof after
receipt of such notice.
If an Event of Default occurs and is continuing, the Trustee or the holders
of at least 25% in principal amount of the outstanding Notes by notice to the
Company and the Trustee may declare the principal of and accrued and unpaid
interest, if any, on all the Notes to be due and payable. Upon such a
declaration, such principal and accrued and unpaid interest shall be due and
payable immediately. If an Event of Default relating to certain events of
bankruptcy, insolvency or reorganization of the Company occurs and is
continuing, the principal of and accrued and unpaid interest on all the Notes
will become and be immediately due and payable without any declaration or
other act on the part of the Trustee or any holders. Under certain
circumstances, the holders of a majority in principal amount of the
outstanding Notes may rescind any such acceleration with respect to the Notes
and its consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, if an Event of Default occurs and is continuing, the Trustee will be
under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the holders unless such
holders have offered to the Trustee reasonable indemnity or security against
any loss, liability or expense. Except to enforce the right to receive payment
of principal, premium, if any, or interest when due, no holder may pursue any
remedy with respect to the Indenture or the Notes unless (i) such holder has
previously given the Trustee notice that an Event of Default is continuing,
(ii) holders of at least 25% in principal amount of the outstanding Notes have
requested the Trustee to pursue the remedy, (iii) such holders have offered
the Trustee reasonable security or indemnity against any loss, liability or
expense, (iv) the Trustee has not complied with such request within 60 days
after the receipt of the request and the offer of security or indemnity and
(v) the holders of a majority in principal amount of the outstanding Notes
have not given the Trustee a direction that, in the opinion of the Trustee, is
inconsistent with such request within such 60-day period. Subject to certain
restrictions, the holders of a majority in principal amount of the outstanding
Notes are given the right to direct the time, method and place of conducting
any proceeding for any remedy available to the Trustee or of exercising any
trust or power conferred on the Trustee. The Trustee, however, may refuse to
follow any direction that conflicts with law or the Indenture or that the
Trustee determines is unduly prejudicial to the rights of any other holder or
that would involve the Trustee in personal liability. Prior to taking any
action under the Indenture, the Trustee shall be entitled to indemnification
satisfactory to it in its sole discretion against all losses and expenses
caused by taking or not taking such action.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each holder notice of the
Default within 90 days after it occurs. Except in the case of a Default in the
payment of principal of, premium, if any, or interest on any Note, the Trustee
may withhold notice if and so long as a committee of its Trust officers in
good faith determines that withholding notice is in the interests of the
Noteholders. In addition, the Company is required to deliver to the Trustee,
within 120 days after the end of each fiscal year, a certificate indicating
whether the signers thereof know of any Default that occurred during the
previous year. The Company also is required to deliver to the Trustee, within
30 days after the occurrence thereof, written notice of any events which would
constitute certain Defaults, their status and what action the Company is
taking or proposes to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the consent
of the holders of a majority in principal amount of the Notes then outstanding
and any past default or compliance with any
74
provisions may be waived with the consent of the holders of a majority in
principal amount of the Notes then outstanding. However, without the consent
of each holder of an outstanding Note affected, no amendment may, among other
things, (i) reduce the amount of Notes whose holders must consent to an
amendment, (ii) reduce the stated rate of or extend the stated time for
payment of interest on any Note, (iii) reduce the principal of or extend the
Stated Maturity of any Note, (iv) reduce the premium payable upon the
redemption or repurchase of any Note or change the time at which any Note may
be redeemed as described under "Optional Redemption" above, (v) make any Note
payable in money other than that stated in the Note, (vi) impair the right of
any holder to receive payment of principal of and interest on such holder's
Notes on or after the due dates therefor or to institute suit for the
enforcement of any payment on or with respect to such holder's Notes or (vii)
make any change in the amendment provisions which require each holder's
consent or in the waiver provisions.
Without the consent of any holder, the Company and the Trustee may amend the
Indenture to cure any ambiguity, omission, defect or inconsistency, to provide
for the assumption by a successor corporation, partnership, trust or limited
liability company of the obligations of the Company under the Indenture, to
provide for uncertificated Notes in addition to or in place of certificated
Notes (provided that the uncertificated Notes are issued in registered form
for purposes of Section 163(f) of the Code, or in a manner such that the
uncertificated Notes are described in Section 163(f) (2) (B) of the Code), to
add Guarantees with respect to the Notes, to secure the Notes, to add to the
covenants of the Company for the benefit of the holders or to surrender any
right or power conferred upon the Company, to make any change that does not
adversely affect the rights of any holder or to comply with any requirement of
the Commission in connection with the qualification of the Indenture under the
Trust Indenture Act. However, no amendment may be made to the subordination
provisions of the Indenture that adversely affects the rights of any holder of
Senior Indebtedness then outstanding unless the holders of such Senior
Indebtedness (or any group or representative thereof authorized to give a
consent) consent to such change.
The consent of the holders is not necessary under the Indenture to approve
the particular form of any proposed amendment. It is sufficient if such
consent approves the substance of the proposed amendment. After an amendment
under the Indenture becomes effective, the Company is required to mail to the
holders a notice briefly describing such amendment. However, the failure to
give such notice to all the holders, or any defect therein, will not impair or
affect the validity of the amendment.
DEFEASANCE
The Company at any time may terminate all its obligations under the Notes
and the Indenture ("legal defeasance"), except for certain obligations,
including those respecting the defeasance trust and obligations to register
the transfer or exchange of the Notes, to replace mutilated, destroyed, lost
or stolen Notes and to maintain a registrar and paying agent in respect of the
Notes. The Company at any time may terminate its obligations under covenants
described under "Certain Covenants" (other than "Merger and Consolidation"),
the operation of the cross acceleration provision, the bankruptcy provisions
with respect to Significant Subsidiaries, the judgment default provision and
the Subsidiary Guarantee provision described under "Events of Default" above
and the limitations contained in clauses (iii) and (iv) under "Certain
Covenants--Merger and Consolidation" above ("covenant defeasance").
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Notes may not be accelerated because
of an Event of Default with respect thereto. If the Company exercises its
covenant defeasance option, payment of the Notes may not be accelerated
because of an Event of Default specified in clause (iii), (v), (vi) (with
respect only to Significant Subsidiaries), (vii) or (viii) under "Events of
Default" above or because of the failure of the Company to comply with clause
(iii) or (iv) under "Certain Covenants--Merger and Consolidation" above.
75
In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal, premium, if any, and
interest on the Notes to redemption or maturity, as the case may be, and must
comply with certain other conditions, including delivery to the Trustee of an
Opinion of Counsel to the effect that holders of the Notes will not recognize
income, gain or loss for Federal income tax purposes as a result of such
deposit and defeasance and will be subject to Federal income tax on the same
amount and in the same manner and at the same times as would have been the
case if such deposit and defeasance had not occurred (and, in the case of
legal defeasance only, such Opinion of Counsel must be based on a ruling of
the Internal Revenue Service or other change in applicable Federal income tax
law).
CONCERNING THE TRUSTEE
State Street Bank and Trust Company is the Trustee under the Indenture and
has been appointed by the Company as Registrar and Paying Agent with regard to
the Notes. The Trustee is also the trustee under the indenture for the
Discount Notes.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) to be used by the Company or a Restricted
Subsidiary in a Related Business; (ii) the Capital Stock of a Person that
becomes a Restricted Subsidiary as a result of the acquisition of such Capital
Stock by the Company or a Restricted Subsidiary of the Company; or (iii)
Capital Stock constituting a minority interest in any Person that at such time
is a Restricted Subsidiary of the Company; provided, however, that, in the
case of clauses (ii) and (iii), such Restricted Subsidiary is primarily
engaged in a Related Business.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Asset Disposition" means any sale, lease (other than operating leases
entered into in the ordinary course of business), transfer, issuance or other
disposition (or series of related sales, leases, transfers, issuances or
dispositions that are part of a common plan) of shares of Capital Stock of a
Restricted Subsidiary (other than directors' qualifying shares), property or
other assets (each referred to for the purposes of this definition as a
"disposition") by the Company or any of its Restricted Subsidiaries (including
any disposition by means of a merger, consolidation or similar transaction)
other than (i) a disposition by a Restricted Subsidiary to the Company or by
the Company or a Restricted Subsidiary to a Wholly-Owned Subsidiary, (ii) the
sale of Cash Equivalents or Temporary Cash Investments in the ordinary course
of business, (iii) a disposition of inventory or a licensing of intellectual
property in the ordinary course of business, (iv) a disposition of obsolete or
worn out equipment or equipment that is no longer useful or to be used in the
conduct of the business of the Company and its Restricted Subsidiaries and
that is disposed of in each case in the ordinary course of business, (v)
transactions permitted under "Certain Covenants--Merger and Consolidation"
above,
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(vi) for purposes of "Limitation on Sales of Assets and Subsidiary Stock"
only, a disposition subject to "Limitation on Restricted Payments" and (vii)
the sale, discount or factoring, in each case without recourse, of accounts
receivable arising in the ordinary course of business.
"Attributable Indebtedness" in respect of a Sale/Leaseback Transaction
means, as at the time of determination, the present value (discounted at the
greater of (i) the interest rate implicit in such Sale/Leaseback Transaction
and (ii) the interest rate borne by the Notes, in each case, compounded semi-
annually) of the total obligations of the lessee for rental payments during
the remaining term of the lease included in such Sale/Leaseback Transaction
(including any period for which such lease has been extended).
"Bank Indebtedness" means any and all amounts, whether outstanding on the
Issue Date or thereafter incurred, payable by the Company under or in respect
of the Senior Credit Agreement and any related notes, collateral documents,
letters of credit and guarantees, including principal, premium, if any,
interest (including interest accruing on or after the filing of any petition
in bankruptcy or for reorganization relating to the Company whether or not a
claim for post filing interest is allowed in such proceedings), fees, charges,
expenses, reimbursement obligations, guarantees and all other amounts payable
thereunder or in respect thereof and refinancings thereof.
"Board of Directors" means, as to any Person, the board of directors of such
Person or any duly authorized committee thereof.
"Capital Stock" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any
Preferred Stock, but excluding any debt securities convertible into such
equity.
"Capitalized Lease Obligations" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented
by such obligation shall be the capitalized amount of such obligation
determined in accordance with GAAP, and the Stated Maturity thereof shall be
the date of the last payment of rent or any other amount due under such lease
prior to the first date such lease may be terminated without penalty.
"Cash Equivalents" means (i) securities issued or directly and fully
guaranteed or insured by the United States Government or any agency or
instrumentality thereof, having maturities of not more than one year from the
date of acquisition; (ii) marketable general obligations issued by any state
of the United States of America or any political subdivision of any such state
or any public instrumentality thereof maturing within one year from the date
of acquisition thereof and, at the time of acquisition thereof, having a
credit rating of "A" or better from either Standard & Poor's Ratings Group or
Moody's Investors Service, Inc.; (iii) certificates of deposit, time deposits,
eurodollar time deposits, overnight bank deposits or bankers' acceptances
having maturities of not more than one year from the date of acquisition
thereof issued by any commercial bank the long-term debt of which is rated at
the time of acquisition thereof at least "A" or the equivalent thereof by
Standard & Poor's Rating Group, or "A" or the equivalent thereof by Moody's
Investors Service, Inc., and having capital and surplus in excess of $500
million; (iv) repurchase obligations with a term of not more than seven days
for underlying securities of the types described in clauses (i), (ii) and
(iii) entered into with any bank meeting the qualifications specified in
clause (iii) above; (v) commercial paper rated at the time of acquisition
thereof at least "A-2" or the equivalent thereof by Standard & Poor's Rating
Group or "P-2" or the equivalent thereof by Moody's Investors Service, Inc.,
or carrying an equivalent rating by a nationally recognized rating agency, if
both of the two named rating agencies cease publishing ratings of investments,
and in either case maturing within 270 days after the date of acquisition
thereof; and (vi) interests in any investment company which invests solely in
instruments of the type specified in clauses (i) through (v) above.
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"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Coverage Ratio" as of any date of determination means, with
respect to any Person, the ratio of (i) the aggregate amount of Consolidated
EBITDA of such Person for the period of the most recent four consecutive
fiscal quarters ending prior to the date of such determination to (ii)
Consolidated Interest Expense for such four fiscal quarters (in each case,
determined, for each fiscal quarter (or portion thereof) of the four fiscal
quarters ending prior to or including the Issue Date, on a pro forma basis to
give effect to the Transactions, the Offering and the application of proceeds
thereof as if they had occurred at the beginning of such four quarter period
adjusted for any pro forma expense and cost reductions and related adjustments
that are directly attributable to the Transactions and the Offering);
provided, however, that (1) If the Company or any Restricted Subsidiary (x)
has Incurred any Indebtedness since the beginning of such period that remains
outstanding on such date of determination or if the transaction giving rise to
the need to calculate the Consolidated Coverage Ratio is an Incurrence of
Indebtedness, Consolidated EBITDA and Consolidated Interest Expense for such
period shall be calculated after giving effect on a pro forma basis to such
Indebtedness as if such Indebtedness had been Incurred on the first day of
such period (except that in making such computation, the amount of
Indebtedness under any revolving credit facility outstanding on the date of
such calculation shall be computed based on (A) the average daily balance of
such Indebtedness during such four fiscal quarters or such shorter period for
which such facility was outstanding or (B) if such facility was created after
the end of such four fiscal quarters, the average daily balance of such
Indebtedness during the period from the date of creation of such facility to
the date of such calculation) and the discharge of any other Indebtedness
repaid, repurchased, defeased or otherwise discharged with the proceeds of
such new Indebtedness as if such discharge had occurred on the first day of
such period, or (y) has repaid, repurchased, defeased or otherwise discharged
any Indebtedness since the beginning of the period that is no longer
outstanding on such date of determination or if the transaction giving rise to
the need to calculate the Consolidated Coverage Ratio involves a discharge of
Indebtedness (in each case other than Indebtedness incurred under any
revolving credit facility unless such Indebtedness has been permanently
repaid), Consolidated EBITDA and Consolidated Interest Expense for such period
shall be calculated after giving effect on a pro forma basis to such discharge
of such Indebtedness, including with the proceeds of such new Indebtedness, as
if such discharge had occurred on the first day of such period, (2) if since
the beginning of such period the Company or any Restricted Subsidiary shall
have made any Asset Disposition or if the transaction giving rise to the need
to calculate the Consolidated Coverage Ratio is an Asset Disposition, the
Consolidated EBITDA for such period shall be reduced by an amount equal to the
Consolidated EBITDA (if positive) directly attributable to the assets which
are the subject of such Asset Disposition for such period or increased by an
amount equal to the Consolidated EBITDA (if negative) directly attributable
thereto for such period and Consolidated Interest Expense for such period
shall be reduced by an amount equal to the Consolidated Interest Expense
directly attributable to any Indebtedness of the Company or any Restricted
Subsidiary repaid, repurchased, defeased or otherwise discharged with respect
to the Company and its continuing Restricted Subsidiaries in connection with
such Asset Disposition for such period (or, if the Capital Stock of any
Restricted Subsidiary is sold, the Consolidated Interest Expense for such
period directly attributable to the Indebtedness of such Restricted Subsidiary
to the extent the Company and its continuing Restricted Subsidiaries are no
longer liable for such Indebtedness after such sale), (3) if since the
beginning of such period the Company or any Restricted Subsidiary (by merger
or otherwise) shall have made an Investment in any Restricted Subsidiary (or
any Person which becomes a Restricted Subsidiary) or an acquisition of assets,
including any acquisition of assets occurring in connection with a transaction
causing a calculation to be made hereunder, Consolidated EBITDA and
Consolidated Interest Expense for such period shall be calculated after giving
pro forma effect thereto (including the Incurrence of any Indebtedness) as if
such Investment or acquisition occurred on the first day of such period
(adjusted for any pro forma expense and cost reductions and related
adjustments calculated on a basis consistent with Regulation S-X under the
Act) and (4) if since the beginning of such period any Person (that
subsequently became a Restricted Subsidiary or was
78
merged with or into the Company or any Restricted Subsidiary since the
beginning of such period) shall have made any Asset Disposition or any
Investment that would have required an adjustment pursuant to clause (2) or
(3) above if made by the Company or a Restricted Subsidiary during such
period, Consolidated EBITDA and Consolidated Interest Expense for such period
shall be calculated after giving pro forma effect thereto as if such Asset
Disposition or Investment occurred on the first day of such period. For
purposes of this definition, whenever pro forma effect is to be given to an
acquisition of assets, the amount of income or earnings relating thereto and
the amount of Consolidated Interest Expense associated with any Indebtedness
Incurred in connection therewith, the pro forma calculations shall be
determined in good faith by a responsible financial or accounting officer of
the Company. If any Indebtedness bears a floating rate of interest and is
being given pro forma effect, the interest expense on such Indebtedness shall
be calculated as if the rate in effect on the date of determination had been
the applicable rate for the entire period (taking into account any Interest
Rate Agreement applicable to such Indebtedness if such Interest Rate Agreement
has a remaining term in excess of 12 months).
"Consolidated EBITDA" for any period means the Consolidated Net Income for
such period, plus the following to the extent deducted in calculating such
Consolidated Net Income: (i) income tax expense, (ii) Consolidated Interest
Expense, (iii) depreciation expense and (iv) amortization of intangibles and
(v) other non-cash charges reducing Consolidated Net Income (excluding any
such non-cash charge to the extent it represents an accrual of or reserve for
cash charges in any future period or amortization of a prepaid cash expense
that was paid in a prior period not included in the calculation) and less, to
the extent added in calculating Consolidated Net Income, non-cash items
increasing Consolidated Net Income (excluding such non-cash items to the
extent they represent an accrual for cash receipts to be received prior to the
Stated Maturity of the Notes) for such period. Notwithstanding the foregoing,
the provision for taxes based on the income or profits of, and the interest,
depreciation and amortization of, a Restricted Subsidiary of a Person shall be
added to Consolidated Net Income to compute Consolidated EBITDA of such Person
only to the extent (and in the same proportion) that the net income of such
Subsidiary was included in calculating the Consolidated Net Income of such
Person.
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its Restricted Subsidiaries on a consolidated basis
determined in accordance with GAAP, plus, to the extent not included in such
interest expense, (i) interest expense attributable to Capitalized Lease
Obligations and the interest portion of rent expense associated with
Attributable Indebtedness in respect of the relevant lease giving rise
thereto, determined as if such lease were a capitalized lease in accordance
with GAAP, (ii) amortization of debt discount and debt issuance cost, (iii)
capitalized interest, (iv) non-cash interest expense, (v) commissions,
discounts and other fees and charges owed with respect to letters of credit
and bankers' acceptance financing, (vi) interest actually paid by the Company
or any such Subsidiary under any Guarantee of Indebtedness or other obligation
of any other Person, (vii) net costs associated with Hedging Obligations
(including amortization of fees), (viii) dividends in respect of all
Disqualified Stock of the Company and any Restricted Subsidiaries, in each
case, held by Persons other than the Company or a Wholly-Owned Subsidiary and
(ix) the cash contributions to any employee stock ownership plan or similar
trust to the extent such contributions are used by such plan or trust to pay
interest or fees to any Person (other than the Company) in connection with
Indebtedness Incurred by such plan or trust to purchase Capital Stock of the
Company; provided, however, that there shall be excluded therefrom any such
interest expense of any Unrestricted Subsidiary to the extent the related
Indebtedness is not Guaranteed or paid by the Company or any Restricted
Subsidiary. For purposes of the foregoing, total interest expense shall be
determined after giving effect to any net payments made or received by the
Company and its Subsidiaries with respect to Interest Rate Agreements.
Notwithstanding the foregoing, the Consolidated Interest Expense with respect
to any Restricted Subsidiary of the Company that was not a Wholly-Owned
Subsidiary shall be included only to the extent (and in the same proportion)
that the
79
net income of such Restricted Subsidiary was included in calculating
Consolidated Net Income and shall not include interest on the Holdings Senior
Discount Notes incurred or accrued by the Company.
"Consolidated Net Income" means, for any period, the net income (loss) of
the Company and its Restricted Subsidiaries on a consolidated basis determined
in accordance with GAAP; provided, however, that there shall not be included
in such Consolidated Net Income: (i) any net income (loss) of any Person if
such Person is not a Restricted Subsidiary, except that (A) subject to the
limitations contained in (iv) below, the Company's equity in the net income of
any such Person for such period shall be included in such Consolidated Net
Income up to the aggregate amount of cash actually distributed by such Person
during such period to the Company or a Restricted Subsidiary as a dividend or
other distribution (subject, in the case of a dividend or other distribution
to a Restricted Subsidiary, to the limitations contained in clause (iii)
below) and (B) the Company's equity in a net loss of any such Person (other
than an Unrestricted Subsidiary) for such period shall be included in
determining such Consolidated Net Income to the extent such loss has been
funded with cash from the Company or a Restricted Subsidiary; (ii) any net
income (loss) of any Person acquired by the Company or a Subsidiary in a
pooling of interests transaction for any period prior to the date of such
acquisition; (iii) any net income of any Restricted Subsidiary if such
Subsidiary is subject to restrictions, directly or indirectly, on the payment
of dividends or the making of distributions by such Restricted Subsidiary,
directly or indirectly, to the Company, except that (A) subject to the
limitations contained in (iv) below the Company's equity in the net income of
any such Restricted Subsidiary for such period shall be included in such
Consolidated Net Income up to the aggregate amount of cash that could have
been distributed by such Restricted Subsidiary during such period to the
Company or another Restricted Subsidiary as a dividend (subject, in the case
of a dividend to another Restricted Subsidiary, to the limitation contained in
this clause) and (B) the Company's equity in a net loss of any such Restricted
Subsidiary for such period shall be included in determining such Consolidated
Net Income; (iv) any gain or loss realized upon the sale or other disposition
of any property, plant or equipment of the Company or its consolidated
Subsidiaries (including pursuant to any Sale/Leaseback Transaction) which is
not sold or otherwise disposed of in the ordinary course of business and any
gain or loss realized upon the sale or other disposition of any Capital Stock
of any Person; (v) any extraordinary gain or loss, (vi) any non-cash
compensation charge for employee stock options or other stock awards, (vii)
non-cash, non-recurring charges reducing Consolidated Net Income (excluding
any such non-cash charge to the extent it represents an accrual of or reserve
for cash charges in any future period or amortization of prepaid cash expense
that was paid in a prior period not included in the calculation); (viii) non-
cash, non-recurring items increasing Consolidated Net Income (excluding such
non-cash items to the extent they represent an accrual for cash receipts to be
received prior to the Stated Maturity of the Notes); and (ix) the cumulative
effect of a change in accounting principles.
"Consolidated Net Worth" means the total of the amounts shown on the balance
sheet of the Company and its Restricted Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter of the Company ending prior to the taking of any action for the
purpose of which the determination is being made, as (i) the par or stated
value of all outstanding Capital Stock of the Company plus (ii) paid-in
capital or capital surplus relating to such Capital Stock plus (iii) any
retained earnings or earned surplus less (A) any accumulated deficit and (B)
any amounts attributable to Disqualified Stock.
"Consolidated Tangible Assets" means, as of any date of determination, the
total assets, less goodwill, deferred financing costs and other intangibles
less accumulated amortization, shown on the balance sheet of the Company and
its Restricted Subsidiaries as of the most recent date for which such balance
sheet is available, determined on a consolidated basis in accordance with
GAAP.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement as to which such
Person is a party or a beneficiary.
80
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Noncash Consideration" means the fair market value of noncash
consideration received by the Company or one of its Restricted Subsidiaries in
connection with an Asset Disposition that is so designated as Designated
Noncash Consideration pursuant to an Officers' Certificate executed by the
principal executive officer and the principal financial officer of the Company
or such Restricted Subsidiary, less the amount of cash or Cash Equivalents
received in connection with a sale of such Designated Noncash Consideration.
Such Officers' Certificate shall state the basis of such valuation, which
shall be as determined by an Independent Appraiser with respect to the receipt
in one or a series of related transactions of Designated Noncash Consideration
with a fair market value in excess of $10 million.
"Designated Senior Indebtedness" means (i) the Bank Indebtedness in the case
of the Company and (ii) any other Senior Indebtedness which, at the date of
determination, has an aggregate principal amount outstanding of, or under
which, at the date of determination, the holders thereof are committed to lend
up to, at least $10.0 million and is specifically designated in the instrument
evidencing or governing such Senior Indebtedness as "Designated Senior
Indebtedness" for purposes of the Indenture.
"Disqualified Stock" means, with respect to any Person, any Capital Stock of
such Person which by its terms (or by the terms of any security into which it
is convertible or for which it is exchangeable) or upon the happening of any
event (i) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise, (ii) is convertible or exchangeable for Indebtedness
or Disqualified Stock (excluding capital stock which is convertible or
exchangeable solely at the option of the Company or a Restricted Subsidiary)
or (iii) is redeemable at the option of the holder thereof, in whole or in
part, in each case on or prior to the Stated Maturity of the Notes, provided,
that only the portion of Capital Stock which so matures or is mandatorily
redeemable, is so convertible or exchangeable or is so redeemable at the
option of the holder thereof prior to such Stated Maturity shall be deemed to
be Disqualified Stock.
"Equity Offering" means an offering for cash by either of the Company or
Holdings of its respective common stock, or options, warrants or rights with
respect to its common stock.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the date of the Indenture, including those set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession. All ratios and computations based on GAAP contained in
the Indenture shall be computed in conformity with GAAP.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and
any obligation, direct or indirect, contingent or otherwise, of such Person
(i) to purchase or pay (or advance or supply funds for the purchase or payment
of) such Indebtedness of such other Person (whether arising by virtue of
partnership arrangements, or by agreement to keep-well, to purchase assets,
goods, securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise) or (ii) entered into for purposes of
assuring in any other manner the obligee of such Indebtedness of the payment
thereof or to protect such obligee against loss in respect thereof (in whole
or in part); provided, however, that the term "Guarantee" shall not include
endorsements for collection or deposit in the ordinary course of business. The
term "Guarantee" used as a verb has a corresponding meaning.
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"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Holdings" means Details Holding Corp. (formerly known as Details, Inc.), a
California corporation, and any corporation, which is the direct or indirect
sole stockholder of the Company or Holdings.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such person becomes a Restricted Subsidiary (whether by
merger, consolidation, acquisition or otherwise) shall be deemed to be
incurred by such Restricted Subsidiary at the time it becomes a Restricted
Subsidiary.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of indebtedness of such Person for borrowed money; (ii) the
principal of and premium (if any) in respect of obligations of such Person
evidenced by bonds, debentures, notes or other similar instruments; (iii) all
obligations of such Person in respect of letters of credit or other similar
instruments (including reimbursement obligations with respect thereto); (iv)
all obligations of such Person to pay the deferred and unpaid purchase price
of property or services (except trade payables), which purchase price is due
more than six months after the date of placing such property in service or
taking delivery and title thereto or the completion of such services; (v) all
Capitalized Lease Obligations and all Attributable Indebtedness of such
Person; (vi) the amount of all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Disqualified Stock (but
excluding, in each case, any accrued dividends); (vii) all Indebtedness of
other Persons secured by a Lien on any asset of such Person, whether or not
such Indebtedness is assumed by such Person; provided, however, that the
amount of such Indebtedness shall be the lesser of (A) the fair market value
of such asset at such date of determination and (B) the amount of such
Indebtedness of such other Persons; (viii) all Indebtedness of other Persons
to the extent Guaranteed by such Person; and (ix) to the extent not otherwise
included in this definition, net obligations of such Person under Currency
Agreements and Interest Rate Agreements (the amount of any such obligations to
be equal at any time to the termination value of such agreement or arrangement
giving rise to such obligation that would be payable by such Person at such
time). The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and the maximum liability, upon the occurrence of the contingency giving
rise to the obligation, of any contingent obligations at such date.
"Independent Appraiser" means, with respect to any transaction or series of
related transactions, an independent, nationally recognized appraisal or
investment banking firm or other expert with experience in evaluating or
appraising the terms and conditions of such transaction or series of related
transactions.
"Interest Rate Agreement" means with respect to any Person any interest rate
protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar
agreement or arrangement as to which such Person is party or a beneficiary.
"Investment" in any Person means any direct or indirect advance, loan (other
than advances to customers in the ordinary course of business) or other
extension of credit (including by way of Guarantee or similar arrangement, but
excluding any debt or extension of credit represented by a bank deposit other
than a time deposit) or capital contribution to (by means of any transfer of
cash or other property to others or any payment for property or services for
the account or use of others), or any purchase or acquisition of Capital
Stock, Indebtedness or other similar instruments issued by, such Person. For
purposes of the "Limitation on Restricted Payments" covenant, (i) "Investment"
shall include the portion (proportionate to the Company's equity interest in a
Restricted Subsidiary to be designated as an Unrestricted Subsidiary) of the
fair market value of the net assets of such Restricted
82
Subsidiary of the Company at the time that such Restricted Subsidiary is
designated an Unrestricted Subsidiary; provided, however, that upon a
redesignation of such Subsidiary as a Restricted Subsidiary, the Company shall
be deemed to continue to have a permanent "Investment" in an Unrestricted
Subsidiary in an amount (if positive) equal to (x) the Company's "Investment"
in such Subsidiary at the time of such redesignation less (y) the portion
(proportionate to the Company's equity interest in such Subsidiary) of the
fair market value of the net assets of such Subsidiary at the time that such
Subsidiary is so re-designated a Restricted Subsidiary; and (ii) any property
transferred to or from an Unrestricted Subsidiary shall be valued at its fair
market value at the time of such transfer, in each case as determined in good
faith by the Board of Directors of the Company. If the Company or any
Restricted Subsidiary of the Company sells or otherwise disposes of any Common
Stock of any direct or indirect Restricted Subsidiary of the Company such
that, after giving effect to any such sale or disposition, the Company no
longer owns, directly or indirectly, 100% of the outstanding Common Stock of
such Restricted Subsidiary, the Company shall be deemed to have made an
Investment on the date of any such sale or disposition equal to the fair
market value of the Common Stock of such Restricted Subsidiary not sold or
disposed of.
"Issue Date" means the date on which the Exchange Notes are originally
issued.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Management Agreement" means the Management Agreement between the Company
and Bain Capital, Inc. (and its permitted successors and assigns thereunder)
as in effect on the Issue Date.
"Net Available Cash" from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or otherwise, but only as and
when received, but excluding any other consideration received in the form of
assumption by the acquiring person of Indebtedness or other obligations
relating to the properties or assets that are the subject of such Asset
Disposition or received in any other noncash form) therefrom, in each case net
of (i) all legal, accounting, investment banking, title and recording tax
expenses, commissions and other fees and expenses incurred, and all Federal,
state, provincial, foreign and local taxes required to be paid or accrued as a
liability under GAAP, as a consequence of such Asset Disposition, (ii) all
payments made on any Indebtedness which is secured by any assets subject to
such Asset Disposition, in accordance with the terms of any Lien upon such
assets, or which must by its terms, or in order to obtain a necessary consent
to such Asset Disposition, or by applicable law be repaid out of the proceeds
from such Asset Disposition, (iii) all distributions and other payments
required to be made to minority interest holders in Subsidiaries or joint
ventures as a result of such Asset Disposition and (iv) the deduction of
appropriate amounts to be provided by the seller as a reserve, in accordance
with GAAP, against any liabilities associated with the assets disposed of in
such Asset Disposition and retained by the Company or any Restricted
Subsidiary after such Asset Disposition.
"Officer" means the Chairman of the Board, the President, any Vice
President, the Treasurer or the Secretary of the Company.
"Officers' Certificate" means a certificate signed by two Officers.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Company or the Trustee.
"Permitted Holders" means Bain Capital, Inc. and any Affiliate thereof (or
any wholly-owned Subsidiary of Holdings for purposes of the definition of
"Change of Control").
83
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in (i) a Restricted Subsidiary or a Person which will, upon the
making of such Investment, become a Restricted Subsidiary; provided, however,
that the primary business of such Restricted Subsidiary is a Related Business;
(ii) another Person if as a result of such Investment such other Person is
merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, the Company or a Restricted Subsidiary;
provided, however, that such Person's primary business is a Related Business;
(iii) cash, Cash Equivalents and Temporary Cash Investments; (iv) receivables
owing to the Company or any Restricted Subsidiary created or acquired in the
ordinary course of business; (v) payroll, travel and similar advances made in
the ordinary course of business; (vi) loans or advances to employees and
officers made in the ordinary course of business; (vii) stock, obligations or
securities received in settlement of debts created in the ordinary course of
business and owing to the Company or any Restricted Subsidiary or in
satisfaction of judgments; and (viii) Currency Agreements and Interest Rate
Agreements entered into in the ordinary course of the Company's or its
Restricted Subsidiaries' businesses and otherwise in compliance with the
Indenture; (ix) Investments in securities of trade creditors or customers
received pursuant to any plan of reorganization or similar arrangement upon
the bankruptcy or insolvency of such trade creditors or customers; (x) the
Subsidiary Guarantees and guarantees by the Company of Indebtedness otherwise
permitted to be incurred by Restricted Subsidiaries of the Company under the
Indenture; (xi) Investments the payment for which consists exclusively of
Capital Stock (other than Disqualified Stock) of the Company; provided that
the fair market value of such Investments shall not be counted under clause
(3)(B) of paragraph (a) of "Limitation on Restricted Payments"; (xii)
Investments received by the Company or its Restricted Subsidiaries as
consideration for asset dispositions, including Asset Dispositions; provided
in the case of an Asset Disposition, such Asset Disposition is effected in
compliance with the covenant described under "Limitation on Sales of Assets
and Subsidiary Stock;" and (xiii) other Investments in an aggregate amount
outstanding at any time not to exceed the greater of (A) $7.5 million and (B)
5% of Total Consolidated Assets.
"Permitted Liens" means the following types of Liens:
(i) Liens for taxes, assessments or governmental charges or claims either
(a) not delinquent or (b) contested in good faith by appropriate
proceedings and as to which the Company or its Restricted Subsidiaries
shall have set aside on its books such reserves as may be required pursuant
to GAAP;
(ii) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for sums not yet delinquent or
being contested in good faith, if such reserve or other appropriate
provision, if any, as shall be required by GAAP shall have been made in
respect thereof.
(iii) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other
types of social security, including any Lien securing letters of credit
issued in the ordinary course of business consistent with past practice in
connection therewith, or to secure the performance of tenders, statutory
obligations, surety and appeal bonds, bids, leases, government contracts,
performance and return-of-money bonds and other similar obligations
(exclusive of obligations for the payment of borrowed money);
(iv) judgment Liens not giving rise to an Event of Default;
(v) easements, rights-of-way, zoning restrictions and other similar
charges or encumbrances in respect of real property not interfering in any
material respect with the ordinary conduct of the business of the Company
or any of its Restricted Subsidiaries;
(vi) any interest or title of a lessor under any Capitalized Lease
Obligation;
84
(vii) purchase money Liens to finance property or assets of the Company
or any Restricted Subsidiary of the Company acquired in the ordinary course
of business, provided, however, that (A) the related purchase money
Indebtedness shall not exceed the cost of such property or assets and shall
not be secured by any property or assets of the Company or any Restricted
Subsidiary of the Company other than the property and assets so acquired
and (B) the Lien securing such Indebtedness shall be created within 90 days
of such acquisition;
(viii) Liens upon specific items of inventory or other goods and proceeds
of any Person securing such Person's obligations in respect of bankers'
acceptances issued or created for the account of such Person to facilitate
the purchase, shipment, or storage of such inventory or other goods;
(ix) Liens securing reimbursement obligations with respect to commercial
letters of credit which encumber documents and other property relating to
such letters of credit and products and proceeds thereof;
(x) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual, or warranty requirements of the Company
or any of its Restricted Subsidiaries, including rights of offset and set-
off;
(xi) Liens securing Hedging Obligations that are otherwise permitted
under the Indenture;
(xii) Liens securing Indebtedness of foreign Restricted Subsidiaries of
the Company incurred in reliance on clause (b)(vii) of "Limitation on
Indebtedness";
(xiii) Liens securing acquired Indebtedness incurred in reliance on
clause (b) of "Limitation on Indebtedness"; provided that such Liens do not
extend to or cover any property or assets of the Company or any of its
Restricted Subsidiaries other than the property or assets that secured the
acquired Indebtedness prior to the time such Indebtedness became acquired
Indebtedness of the Company or a Restricted Subsidiary of the Company;
(xiv) leases or subleases granted to others that do not materially
interfere with the ordinary course of business of the Company and its
Restricted Subsidiaries;
(xv) Liens arising from filing Uniform Commercial Code financing
statements regarding leases;
(xvi) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payment of custom duties in connection with the
importation of goods; and
(xvii) Liens existing on the Issue Date, together with any Liens securing
Indebtedness incurred in reliance on clause (b) of "Limitation on
Indebtedness" in order to refinance the Indebtedness secured by Liens
existing on the Issue Date; provided that the Liens securing Refinancing
Indebtedness shall not extend to property other than that pledged under the
Liens securing the Indebtedness being refinanced.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization,
government or any agency or political subdivision hereof or any other entity.
"Preferred Stock", as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes (however designated) which is preferred
as to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
A "Public Market" exists at any time with respect to the common stock of the
Company or Holdings, as the case may be, if the common stock of the Company or
Holdings, as the case may be,
85
is then registered with the Securities Exchange Commission pursuant to Section
12(b) or 12(g) of Exchange Act and traded either on a national securities
exchange or in the National Association of Securities Dealers Automated
Quotation System.
"Refinancing Indebtedness" means Indebtedness that is Incurred to refund,
refinance, replace, renew, repay or extend (including pursuant to any
defeasance or discharge mechanism) (collectively, "refinance", "refinances,"
and "refinanced" shall have a correlative meaning) any Indebtedness existing
on the date of the Indenture or Incurred in compliance with the Indenture
(including Indebtedness of the Company that refinances Indebtedness of any
Restricted Subsidiary and Indebtedness of any Restricted Subsidiary that
refinances Indebtedness of another Restricted Subsidiary) including
Indebtedness that refinances Refinancing Indebtedness, provided, however, that
(i) only with respect to Indebtedness described under subclause (y) of clause
(b)(iv) in the covenant "Limitation on Indebtedness," the Refinancing
Indebtedness has a Weighted Average Life to Maturity equal to or greater than
the Weighted Average Life to Maturity of the Indebtedness being refinanced
(other than Indebtedness which is Senior Indebtedness referred to in clause
(iv) under the covenant "Limitation on Indebtedness") and (ii) such
Refinancing Indebtedness is Incurred in an aggregate principal amount (or if
issued with original issue discount, an aggregate issue price) that is equal
to or less than the sum of the aggregate principal amount (or if issued with
original issue discount, the aggregate accreted value) then outstanding (plus
fees and expenses, including any premium and defeasance costs) of the
Indebtedness being refinanced.
"Related Business" means any business which is the same as or related,
ancillary or complementary to any of the businesses in which the Company and
its Restricted Subsidiaries are primarily engaged on the date of the
Indenture.
"Representative" means any trustee, agent or representative (if any) of an
issue of Senior Indebtedness.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers such property to a Person and the Company or a Subsidiary leases it
from such Person.
"Secured Indebtedness" means any Indebtedness of the Company secured by a
Lien.
"Senior Credit Agreement" means (i) the Senior Secured Credit Agreement to
be entered into among the Company, The Chase Manhattan Bank, as Administrative
Agent, and the lenders parties thereto from time to time, as the same may be
amended, supplemented or otherwise modified from time to time and any
guarantees issued thereunder and (ii) any renewal, extension, refunding,
restructuring, replacement or refinancing thereof (whether with the original
Administrative Agent and lenders or another administrative agent or agents or
other lenders and whether provided under the original Senior Credit Agreement
or any other credit or other agreement or indenture).
"Senior Subordinated Indebtedness" means the Notes and any other
Indebtedness of the Company that specifically provides that such Indebtedness
is to rank pari passu with the Notes in right of payment and is not
subordinated by its terms in right of payment to any Indebtedness or other
obligation of the Company which is not Senior Indebtedness.
"Significant Subsidiary" means any Subsidiary that would be a "Significant
Subsidiary" of the Company within the meaning of Rule 1-02 under Regulation S-
X promulgated by the SEC.
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"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision.
"Subordinated Obligation" means, as to any Person, any Indebtedness of such
Person (whether outstanding on the Issue Date or thereafter Incurred) which is
subordinate or junior in right of payment to the Notes pursuant to a written
agreement.
"Subsidiary" of any Person means any corporation, association, partnership
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock or other interests (including partnership interests)
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by (i) such Person, (ii) such Person and
one or more Subsidiaries of such Person or (iii) one or more Subsidiaries of
such Person. Unless otherwise specified herein, each reference to a Subsidiary
shall refer to a Subsidiary of the Company.
"Subsidiary Guarantee" means, individually, any Guarantee of payment of the
Exchange Notes by a Subsidiary Guarantor pursuant to the terms of the
Indenture, and, collectively, all such Guarantees. Each such Subsidiary
Guarantee will be in the form prescribed in the Indenture.
"Subsidiary Guarantor" means any Restricted Subsidiary which Guarantees the
Bank Indebtedness after the Issue Date.
"Temporary Cash Investments" means any of the following: (i) any Investment
in direct obligations of the United States of America or any agency thereof or
obligations Guaranteed by the United States of America or any agency thereof,
(ii) Investments in time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized
by the United States of America having capital, surplus and undivided profits
aggregating in excess of $250 million (or the foreign currency equivalent
thereof) and whose long-term debt, or whose parent holding company's long-term
debt, is rated "A" (or such similar equivalent rating) or higher by at least
one nationally recognized statistical rating organization (as defined in Rule
436 under the Securities Act), (iii) repurchase obligations with a term of not
more than 30 days for underlying securities of the types described in clause
(i) above entered into with a bank meeting the qualifications described in
clause (ii) above, (iv) Investments in commercial paper, maturing not more
than 180 days after the date of acquisition, issued by a corporation (other
than an Affiliate of the Company) organized and in existence under the laws of
the United States of America or any foreign country recognized by the United
States of America with a rating at the time as of which any investment therein
is made of "P-1" (or higher) according to Moody's Investors Service, Inc. or
"A-1" (or higher) according to Standard and Poor's Ratings Group, (v)
Investments in securities with maturities of six months or less from the date
of acquisition issued or fully guaranteed by any state, commonwealth or
territory of the United States of America, or by any political subdivision or
taxing authority thereof, and rated at least "A" by Standard & Poor's Ratings
Group or "A" by Moody's Investors Service, Inc. and (vi) Investments in mutual
funds whose investment guidelines restrict such funds' investments to those
satisfying the provisions of clauses (i) through (v) above.
"Total Consolidated Assets" means, as of any date of determination, the
total assets shown on the balance sheet of the Company and its Restricted
Subsidiaries as of the most recent date for which such balance sheet is
available, determined on a consolidated basis in accordance with GAAP.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by
the Board of Directors in the manner provided below and (ii) any Subsidiary of
an Unrestricted Subsidiary. The Board of Directors may
87
designate any Subsidiary of the Company (including any newly acquired or newly
formed Subsidiary of the Company) to be an Unrestricted Subsidiary unless such
Subsidiary or any of its Subsidiaries owns any Capital Stock or Indebtedness
of, or owns or holds any Lien on any property of, the Company or any
Restricted Subsidiary of the Company that is not a Subsidiary of the
Subsidiary to be so designated; provided, however, that either (A) the
Subsidiary to be so designated has total consolidated assets of $10,000 or
less or (B) if such Subsidiary has consolidated assets greater than $10,000,
then such designation would be permitted under "Limitation on Restricted
Payments." The Board of Directors may designate any Unrestricted Subsidiary to
be a Restricted Subsidiary; provided, however, that immediately after giving
effect to such designation (x) the Company could Incur $1.00 of additional
Indebtedness under the covenant described in "Limitation on Indebtedness" and
(y) no Default shall have occurred and be continuing. Any such designation by
the Board of Directors shall be evidenced to the Trustee by promptly filing
with the Trustee a copy of the Board Resolution giving effect to such
designation and an Officers' Certificate certifying that such designation
complied with the foregoing provisions.
"Voting Stock" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
aggregate principal amount of such Indebtedness into (b) the sum of the total
of the products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (ii)
the number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"Wholly-Owned Subsidiary" means a Restricted Subsidiary of the Company, all
of the Capital Stock of which (other than directors' qualifying shares) is
owned by the Company or another Wholly-Owned Subsidiary.
88
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain United States federal income tax
consequences associated with the acquisition, ownership, and disposition of
the Exchange Notes by holders who exchange Original Notes for Exchange Notes.
The following summary does not discuss all of the aspects of United States
federal income taxation that may be relevant to a prospective holder of the
Exchange Notes in light of his or her particular circumstances, or to certain
types of holders (including dealers in securities, insurance companies, tax-
exempt organizations, financial institutions, broker-dealers, S corporations,
persons who hold the Exchange Notes as part of a hedge, straddle, "synthetic
security" or other integrated investment and except as discussed below,
foreign corporations, and persons who are not citizens or residents of the
United States) which are subject to special treatment under the federal income
tax laws. This discussion also does not address the tax consequences to
nonresident aliens or foreign corporations that are subject to United States
federal income tax on a net basis on income with respect to a Note because
such income is effectively connected with the conduct of a U.S. trade or
business. Such holders generally are taxed in a similar manner to U.S. Holders
(as defined below); however, certain special rules apply. In addition, this
discussion is limited to holders who hold the Exchange Notes as capital assets
within the meaning of Section 1221 of the Code. This summary also does not
describe any tax consequences under state, local, or foreign tax laws.
The discussion is based upon currently existing provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), Treasury Regulations
promulgated thereunder, Internal Revenue Service ("IRS") rulings and
pronouncements and judicial decisions all in effect as of the date hereof, all
of which are subject to change at any time by legislative, judicial or
administrative action. Any such changes may be applied retroactively in a
manner that could adversely affect a holder of the Exchange Notes. There can
be no assurance that the IRS will not take positions concerning the tax
consequences of the purchase, ownership or disposition of the Notes which are
different from those discussed herein.
PROSPECTIVE HOLDERS OF EXCHANGE NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS
WITH RESPECT TO THE U.S. FEDERAL INCOME TAX CONSEQUENCES THAT MAY APPLY TO
THEM, AS WELL AS THE APPLICATION OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES TO U.S. HOLDERS
A U.S. Holder is any holder who or which, for United States federal income
tax purposes, is (i) a citizen or resident of the United States; (ii) a
domestic corporation or domestic partnership; (iii) an estate other than a
"foreign estate" as defined in Section 7701(a)(31) of the Code; or (iv) a
trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United States
fiduciaries have the authority to control all substantial decisions of the
trust.
EXCHANGE OF ORIGINAL NOTES FOR EXCHANGE NOTES. The exchange by a U.S. Holder
of an Original Note for an Exchange Note pursuant to the Exchange Offer will
not constitute a taxable exchange of the Original Note if the economic terms
of the Exchange Note (including the interest rate) are identical to the
economic terms of the Original Note. Under recently promulgated Treasury
regulations relating to modifications and exchanges of debt instruments (the
"Section 1001 Regulations"), with certain exceptions, an alteration of a legal
right or obligation that occurs by operation of the terms of a debt instrument
is not a modification of the debt instrument and thus does not result in a
taxable exchange. Therefore, even if Liquidated Damages were payable with
respect to the Original Notes but not with respect to the Exchange Notes, the
exchange of an Original Note for an Exchange Note would not be treated as a
taxable exchange. Accordingly, the Company intends to take the position that
in the circumstances described in the preceding sentence, the exchange will
not constitute a taxable exchange of the Original Notes. As a result, there
should be no U.S. Federal income tax consequences to U.S. Holders exchanging
the Original Notes for the Exchange Notes.
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TAXATION OF STATED INTEREST. In general, U.S. Holders of the Exchange Notes
will be required to include interest received thereon in taxable income as
ordinary income at the time it accrues or is received, in accordance with the
holder's regular method of accounting for United States federal income tax
purposes.
SALE OR OTHER TAXABLE DISPOSITION OF THE NOTES. The sale, exchange,
redemption, retirement or other taxable disposition of an Exchange Note will
result in the recognition of taxable gain or loss to a U.S. Holder in an
amount equal to the difference between (a) the amount of cash and fair market
value of property received in exchange therefor (except to the extent
attributable to the payment of accrued but unpaid stated interest) and (b) the
holder's adjusted tax basis in such Exchange Note.
A holder's initial tax basis in an Exchange Note purchased by such holder
will be equal to such holder's adjusted tax basis in the Original Note
exchange therefor.
Any gain or loss recognized on the sale or other taxable disposition of an
Exchange Note generally will be capital gain or loss and will be long-term
capital gain or loss if the Exchange Note had been held for more than one year
(the maximum rate of tax on any such long-term capital gain being further
reduced if the Exchange Note were held for more than eighteen months) and
otherwise will be short-term capital gain or loss. Payments on such
disposition for accrued interest not previously included in income will be
treated as ordinary interest income. The holding period of an Exchange Note
will include the holding period of the Original Note exchanged therefor.
BACKUP WITHHOLDING. Certain holders of the Exchange Notes may be subject to
backup withholding at the rate of 31% with respect to interest and cash
received in certain circumstances upon the disposition of an Exchange Note.
Generally, backup withholding will apply if (i) the payee fails to furnish a
taxpayer identification number ("TIN") in the prescribed manner, (ii) the IRS
notifies the payor that the TIN furnished by the payee is incorrect, (iii) the
payee has failed to report properly the receipt of "reportable payments" and
the IRS has notified the payor that withholding is required, or (iv) the payee
fails to certify under the penalty of perjury that such payee is not subject
to backup withholding. Any amounts withheld from a payment to a holder under
the backup withholding rules will be allowed as a refund or credit against
such holder's United States federal income tax liability, provided that the
required information is furnished to the IRS. Certain holders (including,
among others, corporations and certain tax-exempt organizations) are not
subject to backup withholding.
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES FOR NON-U.S. HOLDERS
This section discusses special rules applicable to a Non-U.S. Holder of
Exchange Notes. For purposes hereof, a "Non-U.S. Holder" is any person who is
not a U.S. Holder and is not subject to U.S. federal income tax on a net basis
on income with respect to an Exchange Note because such income is effectively
connected with the conduct of a U.S. trade or business.
INTEREST. Payments of interest to a Non-U.S. Holder that do not qualify for
the portfolio interest exception discussed below will be subject to
withholding of U.S. federal income tax at a rate of 30% unless a U.S. income
tax treaty applies to reduce the rate of withholding. To claim a treaty
reduced rate, the beneficial owner of the Exchange Note must provide a
properly executed Form 1001 (or successor form).
Interest that is paid to a Non-U.S. Holder on an Exchange Note will not be
subject to U.S. income or withholding tax if the interest qualified as
"portfolio interest". Generally, interest on the Exchange Notes that is paid
by the Company will qualify as portfolio interest if (i) the Non-U.S. Holder
does not own, actually or constructively, 10% or more of the total combined
voting power of all classes of stock of the Company entitled to vote; (ii) the
Non-U.S. Holder is not a controlled foreign corporation that is related to the
Company actually or constructively through stock ownership for U.S. federal
income tax purposes; (iii) the Non-U.S. Holder is not a bank within the
meaning of Section 881(c)(3)(A) of the Code; and (iv) either (x) the
beneficial owner of the Exchange Note provides the Company or its paying
90
agent, a properly executed certification on IRS Form W-8 (or a suitable
substitute form) signed under penalties of perjury that the beneficial owner
is not a "U.S. person" for U.S. federal income tax purposes and that provides
the beneficial owner's name and address, or (y) a securities clearing
organization, bank or other financial institution that holds a customers'
securities in the ordinary course of its business holds the Exchange Note and
certifies to the Company or its agent under penalties of perjury that the IRS
Form W-8 (or a suitable substitute) has been received by it from the
beneficial owner of the Note or a qualifying intermediary and furnishes the
payor a copy thereof.
SALE, EXCHANGE OR RETIREMENT OF EXCHANGE NOTES. Any gain realized by a Non-
U.S. Holder on the sale, exchange or retirement of the Exchange Notes, will
generally not be subject to U.S. federal income tax or withholding unless (i)
the Non-U.S. Holder is an individual who was present in the U.S. for 183 days
or more in the taxable year of the disposition and meets certain other
requirements; or (ii) the Non-U.S. Holder is an individual who is a former
citizen of the United States who lost such citizenship within the preceding
ten year period (or former long-term permanent resident of the United States
who relinquished residency on or after February 6, 1995) whose loss of
citizenship or residency had as one of its principal purposes the avoidance of
United States tax. If a Non-U.S. Holder falls under (ii) above, the holder
will be taxed on the net gain derived from the sale under the graduated U.S.
federal income tax rates that are applicable to U.S. citizens and resident
aliens, and may be subject to withholding under certain circumstances. If a
Non-U.S. Holder falls under (i) above, the holder generally will be subject to
U.S. federal income tax at a rate of 30% on the gain derived from the sale (or
reduced treaty rate) and may be subject to withholding in certain
circumstances.
U.S. INFORMATION REPORTING AND BACKUP WITHHOLDING TAX. Back-up withholding
and information reporting generally will not apply to payments made on a Note
issued in registered form that is beneficially owned by a Non-U.S. Holder if
the certification of Non-U.S. Holder status is provided to the Company or its
agent as described above in "Certain Federal Income Tax Consequences to Non-
U.S. Holders--Interest", provided that the payor does not have actual
knowledge that the holder is a U.S. person. The Company may be required to
report annually to the IRS and to each Non-U.S. Holder the amount of interest
paid to, and the tax withheld, if any, with respect to each Non-U.S. Holder.
If payments of principal, and interest are made to the beneficial owner of
an Exchange Note outside the United States by or through the foreign office of
a foreign custodian, foreign nominee or other foreign agent of such beneficial
owner, or if the proceeds of the sale of Exchange Notes are paid to the
beneficial owner of a Note through a foreign office of a "broker" (as defined
in the pertinent United States Treasury Regulations), the proceeds will not be
subject to backup withholding or information reporting (absent actual
knowledge that the payee is a U.S. person). Information reporting (but not
backup withholding) will apply, however, to a payment by a foreign office of a
custodian, nominee, agent or broker that is (i) a U.S. person, (ii) a
controlled foreign corporation for U.S. federal income tax purposes, or (iii)
derives 50% or more of its gross income from the conduct of a U.S. trade or
business for a specified three year period; unless the broker has in its
records documentary evidence that the holder is a Non-U.S. Holder and certain
other conditions are met (including that the broker has no actual knowledge
that the holder is a U.S. Holder) or the holder otherwise establishes an
exemption. Payment through the U.S. office of a custodian, nominee, agent or
broker is subject to both backup withholding at a rate of 31% and information
reporting, unless the holder certifies that it is a Non-U.S. Holder under
penalties of perjury or otherwise establishes an exemption.
Any amount withheld under the backup withholding rules from a payment to a
Non-U.S. Holder will be allowed as a credit against, or refund of, such
holder's U.S. federal income tax liability, provided that certain required
information is provided by the holder to the IRS.
On October 6, 1997, the IRS released Treasury regulations that revise the
procedures for withholding tax and the associated backup withholding and
information reporting rules described above for payment of interest and gross
proceeds made after December 31, 1998. The regulations modify the requirements
imposed on a Non-U.S. Holder or certain intermediaries for establishing the
recipient's status as a Non-U.S. Holder eligible for exemption from
withholding and backup withholding.
91
In particular, the final regulations impose more stringent conditions on the
ability of financial intermediaries acting for a Non-U.S. Holder to provide
certifications on behalf of the Non-U.S. Holder, which may include entering
into an agreement with the IRS to audit certain documentation with respect to
such certifications. Non-U.S. Holders should consult their tax advisors to
determine how the regulations will affect their particular circumstances.
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THE EXCHANGE OFFER
At the closing of the Initial Offering, the Company and the Initial
Purchaser entered into the Registration Rights Agreement, pursuant to which
the Company agreed to (i) file with the Commission on or prior to 90 days
after the date of issuance of the Original Notes (the "Issue Date") a
registration statement on Form S-1 or Form S-4, (the "Exchange Offer
Registration Statement') relating to the Exchange Offer for the Original Notes
under the Securities Act and (ii) use its reasonable best efforts to cause the
Exchange Offer Registration Statement to be declared effective under the
Securities Act within 180 days after the Issue Date. As soon as practicable
after the effectiveness of the Exchange Offer Registration Statement, the
Company will offer to the holders of Transfer Restricted Securities (as
defined below) who are not prohibited by any law or policy of the Commission
from participating in the Exchange Offer the opportunity to exchange their
Transfer Restricted Securities (the Exchange Notes) The Company agreed to keep
the Exchange Offer open for not less than 30 days (or longer, if required by
applicable law) after the date on which notice of the Exchange Offer is mailed
to the holders of the Original Notes.
If (i) because of any change in law or applicable interpretations thereof by
the staff of the Commission, the Company is not permitted to effect the
Exchange Offer as contemplated hereby, (ii) any Securities (as defined herein)
validly tendered pursuant to the Exchange Offer are not exchanged for Exchange
Securities within 210 days after the Issue Date, (iii) the Initial Purchaser
so requests with respect to Original Notes not eligible to be exchanged for
Exchange Notes in the Exchange Offer, (iv) any applicable law or
interpretations do not permit any holder of Original Notes to participate in
the Exchange Offer, (v) any holder of Original Notes that participates in the
Exchange Offer does not receive freely transferable Exchange Notes in exchange
for tendered Original Notes, or (vi) the Company so elects, then the Company
will file with the Commission a shelf registration statement (the "Shelf
Registration Statement") to cover resales of Transfer Restricted Securities by
such holders who satisfy certain conditions relating to the provision of
information in connection with the Shelf Registration Statement. For purposes
of the foregoing, "Transfer Restricted Securities" means each Original Note
until (i) the date on which such Original Note has been exchanged for a freely
transferable Exchange Note in the Exchange Offer; (ii) the date on which such
Original Note has been effectively registered under the Securities Act and
disposed of in accordance with the Shelf Registration Statement or (iii) the
date on which such Original Note is distributed to the public pursuant to Rule
144 under the Securities Act or is saleable pursuant to Rule 144(k) under the
Securities Act.
The Company has agreed to use its reasonable best efforts to have the
Exchange Offer Registration Statement or, if applicable, the Shelf
Registration Statement (each, a "Registration Statement") declared effective
by the Commission as promptly as practicable after the filing thereof. Unless
the Exchange Offer would not be permitted by a policy of the Commission, the
Company will commence the Exchange Offer and will use its reasonable best
efforts to consummate the Exchange Offer as promptly as practicable, but in
any event prior to 210 days after the Issue Date. If applicable, the Company
will use its reasonable best efforts to keep the Shelf Registration Statement
effective for a period of two years after the Issue Date.
If (i) the Exchange Offer Registration Statement or a Shelf Registration
Statement, if applicable, is not declared effective within 180 days after the
Issue Date; (ii) the Exchange Offer is not consummated on or prior to 210 days
after the Issue Date or (iii) a Shelf Registration Statement is filed and
declared effective within 180 days after the Issue Date but shall thereafter
cease to be effective (at any time that the Company is obligated to maintain
the effectiveness thereof) without being succeeded within 60 days by an
additional Registration Statement filed and declared effective (each such
event referred to in clauses (i) through (iii), a "Registration Default"), the
Company will be obligated to pay liquidated damages to each holder of Transfer
Restricted Securities, during the period of one or more such Registration
Defaults, in an amount equal to $0.192 per week per $1,000 principal amount of
the Notes
93
constituting Transfer Restricted Securities held by such holder until the
applicable Registration Statement is filed, the Exchange Offer Registration
Statement is declared effective and the Exchange Offer is consummated or the
Shelf Registration Statement is declared effective or again becomes effective,
as the case may be. All accrued liquidated damages shall be paid to holders in
the same manner as interest payments on the Notes on semi-annual payment dates
which correspond to interest payment dates for the Notes. Following the cure
of all Registration Defaults, the accrual of liquidated damages will cease.
The Registration Rights Agreement also provides that the Company (i) shall,
if required under applicable securities laws, upon written request make
available for a period of 90 days after the consummation of the Exchange Offer
a prospectus meeting the requirements of the Securities Act to any broker-
dealer for use in connection with any resale of any such Exchange Notes and
(ii) shall pay all expenses incident to the Exchange Offer (including the
expense of one counsel to the holders of the Notes) and will indemnify certain
holders of the Notes (including any broker-dealer) against certain
liabilities, including liabilities under the Securities Act. A broker-dealer
which delivers such a prospectus to purchasers in connection with such resales
will be subject to certain of the civil liability provisions under the
Securities Act and will be bound by the provisions of the Registration Rights
Agreement (including certain indemnification rights and obligations).
Each holder of Notes who wishes to exchange such Original Notes for Exchange
Notes in the Exchange Offer will be required to make certain representations,
including representations that (i) any Exchange Notes to be received by it
will be acquired in the ordinary course of its business; (ii) it has no
arrangement or understanding with any person to participate in the
distribution of the Exchange Notes and (iii) it is not an "affiliate" (as
defined in Rule 405 under the Securities Act) of the Company, or if it is an
affiliate, that it will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable.
If the holder is not a broker-dealer, it will be required to represent that
it is not engaged in, and does not intend to engage in, the distribution of
the Exchange Notes. If the holder is a broker-dealer that will receive
Exchange Notes for its own account in exchange for Original Notes that were
acquired as a result of market-making activities or other trading activities
(an "Exchanging Dealer"), it will be required to acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes.
Holders of the Original Notes will be required to make certain
representations to the Company (as described above) in order to participate in
the Exchange Offer and will be required to deliver information to be used in
connection with the Shelf Registration Statement in order to have their
Original Notes included in the Shelf Registration Statement and benefit from
the provisions regarding liquidated damages set forth in the preceding
paragraphs. A holder who sells Original Notes pursuant to the Shelf
Registration Statement generally will be required to be named as a selling
securityholder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Exchange and Registration Rights Agreement which are
applicable to such a holder (including certain indemnification obligations).
The summary herein of certain provisions of the Registration Rights
Agreement is a description of the material provisions of the Registration
Rights Agreement, a copy of which is filed as an exhibit to the Exchange Offer
Registration Statement.
Except as set forth herein, after consummation of the Exchange Offer,
holders of Original Notes have no registration or exchange rights under the
Registration Rights Agreement. See "--Consequences of Failure to Exchange,"
and "--Resales of Exchange Notes; Plan of Distribution."
94
CONSEQUENCES OF FAILURE TO EXCHANGE
The Original Notes which are not exchanged for Exchange Notes pursuant to an
Exchange Offer and are not included in a resale prospectus will remain
Transfer Restricted Securities. Accordingly, such Original Notes may not be
offered, sold or otherwise transferred prior to the date which is two years
after the later of the date of original issue and the last date that the
Company or any affiliate of the Company was the owner of such securities (or
any predecessor thereto) (the "Resale Restriction Termination Date") only (a)
to the Company (b) pursuant to a registration statement which has been
declared effective under the Securities Act, (c) for so long as the Original
Notes are eligible for resale pursuant to rule 144A, to a person the owner
reasonably believes is a qualified institutional buyer that purchases for its
own account or for the account of a qualified institutional buyer to whom
notice is given that the transfer is being made in reliance on Rule 144A, (d)
to an "accredited investor" within the meaning of subparagraph (1), (2), (3)
or (7) of paragraph (a) of Rule 501 under the Securities Act that is
purchasing for his own or for the account of such an "accredited investor" in
each case in a minimum of Original Notes with a purchase price of $500,000 or
(c) pursuant to any other available exemption from the registration
requirements of the Securities Act, subject in each of the foregoing cases to
any requirement of law that the disposition of its property or the property of
such investor account or accounts be at all times within its or their control.
The foregoing restrictions on resale will not apply subsequent to the Resale
Restriction Termination Date. If any resale or other transfer of the Original
Notes is proposed to be made pursuant to clause (d) above prior to the Resale
Restriction Termination Date, the transferor shall deliver a letter from the
transferee to the Company and the Trustee, which shall provide, among other
things, that the transferee is an "accredited investor" within the meaning of
subparagraphs (1), (2), (3) or (7) of paragraph (a) of Rule 501 under the
Securities Act and that it is acquiring such Securities for investment
purposes and not for distribution in violation of the Securities Act. Prior to
any offer, sale or other transfer of Original Notes prior to the Resale
Restriction Termination Date pursuant to clauses (d) or (e) above, the issuer
and the Trustee may require the delivery of an opinion of counsel,
certification and/or other information satisfactory to each of them.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in the Prospectus and
in the Letter of Transmittal, the form of which is included as Exhibit 99.1 to
the Registration Statement of which this prospectus is a part, the Company
will accept any and all Original Notes validly tendered and not withdrawn
prior to the applicable Expiration Date. The Company will issue $1,000
principal amount of Exchange Notes in exchange for each $1,000 principal
amount of Original Notes accepted in the Exchange Offer. Holders may tender
some or all of their Original Notes pursuant to the Exchange Offer. However,
Original Notes may be tendered only in integral multiples of $1,000 principal
amount.
The form and terms of the Exchange Notes are the same as the form and terms
of the Original Notes, except that (i) the Exchange Notes have been registered
under the Securities act and therefore will not bear legends restricting their
transfer pursuant to the Securities Act, and (ii) the holders of Exchange
Notes will not be entitled to rights under the Registration Rights Agreement
(except under certain limited circumstances). The exchange Notes will evidence
the same debt as the Original Notes (which they replace), and will be issued
under, and be entitled to the benefits of, the Indenture.
Solely for reasons of administration (and for no other purpose) the Company
has fixed the close of business on , 1997 as the record date for the
Exchange Offer for purpose of determining the persons to whom this Prospectus
and the Letter of Transmittal will be mailed initially. Only a registered
holder of Original Notes (or such holder's legal representative or attorney-
in-fact) as reflected on the records of the trustee under the governing
indenture may participate in the Exchange Offer. There will be no fixed record
date for determining registered holders of the Original Notes entitled to
participate in the relevant Exchange Offer.
95
Holders of the Original Notes do not have any appraisal or dissenters'
rights under the General Corporation Law of California or under the Indenture
in connection with the Exchange Offer. The Company intends to conduct the
Exchange Offer in accordance with the applicable requirements of the Exchange
Act and the rules and regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Original Notes
when, as and if it has given oral or written notice thereof to the Exchange
Agent. The Exchange Agent will act as agent for the tendering holders of the
Original Notes for the purposes of receiving the Exchange Notes.
If any tendered Original Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Original Notes will be
returned without expense, to the tendering holder thereof as promptly as
practicable after the Expiration Date.
Holders who tender Original Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the Instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of the
Original Notes pursuant to the Exchange Offer. The Company will pay all
charges and expenses, other than certain applicable taxes, in connection with
their Exchange Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSION; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time on ,
1998, unless the Company extends the Exchange Offer, in which case the term
"Expiration Date" shall mean the latest date and time to which such Exchange
Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will make a public
announcement thereof, prior to 9:00 a.m., New York City time, on the next
Business Day after the previously scheduled Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Original Notes, (ii) extend the Exchange Offer, (iii) if the
condition set forth below under "--Conditions of the Exchange Offer" shall not
have been satisfied, to terminate the Exchange Offer, by giving oral or
written notice of such delay, extension or termination to the Exchange Agent,
or (iv) to amend the terms of the Exchange Offer in any manner. Any such delay
in acceptance, extension, termination or amendment will be followed as
promptly as practicable by a public announcement thereof. If the Exchange
Offer is amended in a manner determined by the Company to constitute a
material change, it will promptly disclose such amendment by means of a
prospectus supplement that will be distributed to the registered holders of
the Original Notes and the Exchange Offer will be extended for a period of
five to ten business days, as required by law, depending upon the significance
of the amendment and the manner of disclosure to the registered holders, if
the Exchange Offer would otherwise expire during such five to ten business day
period.
Without limiting the manner in which the Company may choose to make public
announcement of any delay, extension, termination or amendment of its Exchange
Offer, the Company shall not have an obligation to publish, advertise, or
otherwise communicate any such public announcement, other than by making a
timely release thereof to the Dow Jones News Service.
PROCEDURES FOR TENDERING
Only a registered holder of Original Notes may tender such Original Notes in
the Exchange Offer. To tender in the Exchange Offer, a holder must complete,
sign and date the Letter of Transmittal, have the signatures thereon
guaranteed if required by such Letter of Transmittal, and mail or otherwise
96
deliver such Letter of Transmittal to the Exchange Agent at the address set
forth below under "--Exchange Agent" for receipt prior to the applicable
Expiration Date. In addition, either (i) certificates for such Original Notes
must be received by the Exchange Agent along with the Letter of Transmittal,
or (ii) a timely confirmation of a book-entry transfer (a "Book-Entry
Confirmation") of such Original Notes into the Exchange Agent's account at The
Depository Trust Company (the "Book-Entry Transfer Facility") pursuant to the
procedure for book-entry transfer described below, must be received by the
Exchange Agent prior to the applicable Expiration Date, or (iii) the Holder
must comply with the guaranteed delivery procedures described below. To be
tendered effectively, the Letter of Transmittal and all other required
documents must be received by the Exchange Agent at the address set forth
below under "--Exchange Agent" prior to the applicable Expiration Date.
The tender by a Holder will constitute an agreement between such Holder and
the Company in accordance with the terms and subject to the conditions set
forth herein and in the Letter of Transmittal applicable to such Exchange
Offer.
THE METHOD OF DELIVERY OF THE ORIGINAL NOTES AND THE APPLICABLE LETTER OF
TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE
ELECTION AND RISK OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS
RECOMMENDED THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL
CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE
AGENT BEFORE THE APPLICABLE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR
ORIGINAL NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR
RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO
EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Original Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct such
registered Holder to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's behalf, such owner must,
prior to completing and executing the Letter of Transmittal and delivering
such owner's Original Notes, either make appropriate arrangements to register
ownership of the Original Notes in such beneficial owner's name or obtain a
properly completed bond power from the registered holder. The transfer of
registered ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Original Notes tendered pursuant thereto are tendered (i) by a
registered holder who has not completed the box entitled "Special Delivery
Instructions" on the Letter of Transmittal designated for such Original Notes,
or (ii) for the account of an Eligible Institution. In the event that
signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, are required to be guaranteed, such guarantee must be by a participant
in a recognized signature guarantee program within the meaning of Rule 17Ad-15
under the Exchange Act (an "Eligible Institution").
If a Letter of Transmittal is signed by a person other than the registered
holder of any Original Notes listed therein, such Original Notes must be
endorsed or accompanied by a properly completed bond power, signed by such
registered holder as such registered holder's name appears on such Original
Notes, with signature guaranteed by an Eligible Institution.
If a Letter of Transmittal or any Original Notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity,
such persons should so indicate when signing, and evidence satisfactory to the
Company, as applicable, of their authority to so act must be submitted with
the Letter of Transmittal designated for such Original Notes.
97
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Original Notes will be
determined by the Company in its sole discretion, which determination will be
final and binding. The Company reserves the absolute right to reject any and
all Original Notes not properly tendered or any Original Notes the issuer's
acceptance of which would, in the opinion of counsel for such Issuer, be
unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Original Notes. The
interpretation of the terms and conditions of the Exchange Offer (including
the instructions in the Letter of Transmittal) by the Company will be final
and binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Original Notes must be cured within such time as
the Company shall determine. Although the Company intends to notify holders of
defects or irregularities with respect to tenders of Original Notes issued by
it, neither the Company, the Exchange Agent nor any other person shall incur
any liability for failure to give such notification. Tenders of Original Notes
will not be deemed to have been made until such defects or irregularities have
been cured or waived. Any Original Notes received by the Exchange Agent that
are not validly tendered and as to which the defects or irregularities have
not been cured or waived, or if Original Notes are submitted in a principal
amount greater than the principal amount of Original Notes being tendered by
such tendering holder, such unaccepted or non-exchanged Original Notes will be
returned by the Exchange Agent to the tendering holders (or, in the case of
Original Notes tendered by book-entry transfer into the Exchange Agent's
account at the Book-Entry Transfer Facility pursuant to the book-entry
transfer procedures described below, such unaccepted or non-exchanged Original
Notes will be credited to an account maintained with such Book-Entry Transfer
Facility), unless otherwise provided in the Letter of Transmittal designated
for such Original Notes, as soon as practicable following the applicable
Expiration Date.
By tendering Original Notes in the Exchange Offer, each registered holder
will represent to the issuer of such Original Notes that, among other things,
(i) the Exchange Notes to be acquired by the holder and any beneficial
owner(s) of such Original Notes ("Beneficial Owner(s)") in connection with the
Exchange Offer are being acquired by the holder and any Beneficial Owner(s) in
the ordinary course of business of the holder and any Beneficial Owner(s),
(ii) the holder and each Beneficial Owner are not participating, do not intend
to participate, and have no arrangement or understanding with any person to
participate, in a distribution of the Exchange Notes, (iii) the holder and
each Beneficial Owner acknowledge and agree that (x) any person participating
in an Exchange Offer for the purpose of distributing the Exchange Notes must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction with respect
to the Exchange Notes acquired by such person and cannot rely on the position
of the Staff of the Commission set forth in no-action letters that are
discussed herein under "--Resales of the Exchange Notes," and (y) any
Participating Broker-Dealer that receives Exchange Notes for its own account
in exchange for Original Notes pursuant to an Exchange Offer must deliver a
prospectus in connection with any resale of such Exchange Notes, but by so
acknowledging, the holder shall not be deemed to admit that, by delivering a
prospectus, it is an "underwriter" within the meaning of the Securities Act,
(iv) neither the holder nor any Beneficial Owner is an "affiliate," as defined
under Rule 405 of the Securities Act, of the Company except as otherwise
disclosed to the Company in writing, and (v) the holder and each Beneficial
Owner understands that a secondary resale transaction described in clause
(iii) above should be covered by an effective registration statement
containing the selling securityholder information required by Item 507 of
Regulation S-K of the Commission.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Original Notes at the Book-Entry Transfer Facility, for purposes of the
Exchange Offers, within two business days after the date of this Prospectus,
and any financial institution that is a participant in the Book-Entry Transfer
Facility's system may make book-entry delivery of Original Notes by causing
the Book-Entry Transfer Facility to transfer such Original Notes into the
Exchange Agent's account at the
98
Book-Entry Transfer Facility in accordance with such Book-Entry Transfer
Facility's procedures for transfer. However, although delivery of Original
Notes may be effected through book-entry transfer at the Book-Entry Transfer
Facility, the applicable Letter of Transmittal, with any required signature
guarantees and any other documents, must be transmitted to and received by the
Exchange Agent at the address set forth below under "--Exchange Agent" on or
prior to the applicable Expiration Date or the guaranteed delivery procedures
described below must be complied with.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Original Notes and (i) whose Original Notes
are not immediately available, or (ii) who cannot deliver their Original
Notes, the Letter of Transmittal or any other required documents to the
Exchange Agent prior to the applicable Expiration Date, may effect a tender
if:
(1) The tender is made through an Eligible Institution;
(2) Prior to the applicable Expiration Date, the Exchange Agent receives
from such Eligible Institution a properly completed and duly executed
Notice of Guaranteed Delivery (by mail, hand delivery or facsimile
transmission) setting forth the name and address of the Holder, the
certificate number(s) of such Original Notes and the principal amount of
the Original Notes being tendered, stating that the tender is being made
thereby and guaranteeing that, within five business days after the
applicable Expiration Date, the applicable Letter of Transmittal together
with the certificate(s) representing the Original Notes (or a Book-Entry
Confirmation) and any other documents required by the applicable Letter of
Transmittal will be delivered by the Eligible Institution to the Exchange
Agent; and
(3) Such properly completed and executed Letter of Transmittal, as well
as the certificate(s) representing all tendered Original Notes in proper
form for transfer (or a Book-Entry Confirmation) and all other documents
required by the Letter of Transmittal are received by the Exchange Agent
within five business days after the applicable Expiration Date.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Original Notes pursuant to
an Exchange Offer may be withdrawn, unless theretofore accepted for exchange
as provided in the applicable Exchange Offer, at any time prior to the
Expiration Date of that Exchange Offer.
To be effective, a written or facsimile transmission notice of withdrawal
must be received by the Exchange Agent at its address set forth herein prior
to the Expiration Date. Any such notice of withdrawal must (i) specify the
name of the person having deposited the Original Notes to be withdrawn (the
"Depositor"), (ii) identify the Original Notes to be withdrawn (including the
certificate number or numbers and aggregate principal amount of such Original
Notes), and (iii) be signed by the holder in the same manner as the original
signature on the applicable Letter of Transmittal (including any required
signature guarantees). All questions as to the validity, form and eligibility
(including time of receipt) of such notices will be determined by the Company
in its sole respective discretion, which determination shall be final and
binding on all parties. Any Original Notes so withdrawn will be deemed not to
have been validly tendered for purposes of the Exchange Offer and no Exchange
Notes will be issued with respect thereto unless the Original Notes so
withdrawn are retendered. Properly withdrawn Original Notes may be retendered
by following one of the procedures described above under "--Procedures for
Tendering" at any time prior to the applicable Expiration Date.
Any Original Notes which have been tendered but which are not accepted for
exchange due to the rejection of the tender due to uncured defects or the
prior termination of the applicable Exchange Offer, or which have been validly
withdrawn, will be returned to the holder thereof (unless otherwise provided
in the Letter of Transmittal), as soon as practicable following the applicable
Expiration Date
99
or, if so requested in the notice of withdrawal, promptly after receipt by the
issuer of the Original Notes of notice of withdrawal without cost to such
holder.
CONDITIONS OF THE EXCHANGE OFFER
The Exchange Offer is subject to the condition that the Exchange Offer, or
the making of any exchange by a holder, does not violate applicable law or any
applicable interpretation of the staff of the Commission. If there has been a
change in commission policy such that there is a substantial question whether
the Exchange Offer is permitted by applicable federal law, the Company has
agreed to seek a no-action letter or other favorable decision from the
Commission allowing the Company to consummate the Exchange Offer.
If the Company determines that the Exchange Offer is not permitted by
applicable Federal law, it may terminate the Exchange Offer. In connection
therewith the Company may (i) refuse to accept any Original Notes and return
any Original Notes that have been tendered by the holders thereof, (ii) extend
the Exchange Offer and retain all Original Notes tendered prior to the
Expiration of the Exchange Offer, subject to the rights of such holders of
tendered Original Notes to withdraw their tendered Original Notes, or (iii)
waive such termination event with respect to the Exchange Offer and accept all
properly tendered Original Notes that have not been withdrawn. If such waiver
constitutes a material change in the Exchange Offer, the Company will disclose
such change by means of a supplement to this Prospectus that will be
distributed to each registered holder of Original Notes, and the Company will
extend the Exchange Offer for a period of five to ten business days, depending
upon the significance of the waiver and the manner of disclosure to the
registered holders of the Original Notes, if the Exchange Offer would
otherwise expire during such period.
EXCHANGE AGENT
State Street Bank and Trust Company has been appointed as "Exchange Agent"
for the Exchange Offer, Questions and request for assistance, requests for
additional copies of this Prospectus or of the Letter of Transmittal and other
documents should be directed to the Exchange Agent addressed as follows:
By Registered or Certified Mail or Hand or Overnight Delivery:
State Street Bank and Trust Company
Two International Place
4th Floor
Boston, MA 02110
Attention: Earl Dennison
Confirm by Telephone: (617) 664-5670
Facsimile Transmissions:
(ELIGIBLE INSTITUTIONS ONLY)
Delivery to other than the above addresses or facsimile numbers will not
constitute a valid delivery.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
100
No dealer-manager has been retained in connection with the Exchange Offer
and no payments will be made to brokers, dealers or others soliciting
acceptance of the Exchange Offer. However, reasonable and customary fees will
be paid to the Exchange Agent for its service and it will be reimbursed for
its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company and are estimated in the aggregate to be approximately
[$ .] Such expenses include fees and expenses of the Exchange Agent and the
Trustee under the indenture, accounting and legal fees and printing costs,
among others.
The Company will pay all transfer taxes, if any, applicable to the exchange
of the Original Notes pursuant to the Exchange Offer. If, however, a transfer
tax is imposed for any reason other than the exchange of the Original Notes
pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered holder or any other persons) will be
payable by the tendering holder. If satisfactory evidence of payment of such
taxes or exemption therefrom is not submitted with the Letter of Transmittal,
the amount of such transfer taxes will be billed directly to such tendering
holder.
ACCOUNTING TREATMENT
The carrying values of the Original Notes are not expected to be materially
different from the fair value of the Exchange Notes at the time of the
exchange. Accordingly, no gain or loss for accounting purposes will be
recognized. The expenses of the Exchange Offer will be amortized over the term
of the Exchange Notes.
RESALES OF THE EXCHANGE NOTES; PLAN OF DISTRIBUTION
Based on no-action letters issued by the staff of the Commission to third
parties, the Company believes the Exchange Notes issued pursuant to the
Exchange Offer in exchange for the Original Notes may be offered for resale,
resold and otherwise transferred by any holder thereof (other than (i) a
broker-dealer who purchased such Original Notes directly from the Company to
resell pursuant to Rule 144A or any other available exemption under the
Securities Act or (ii) a person that is an "affiliate" of the Company within
the meaning of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act provided
that the holder is acquiring the Exchange Notes in its ordinary course of
business and is not participating, and has no arrangement or understanding
with any person to participate, in the distribution of the Exchange Notes.
Holders of Original Notes wishing to accept the Exchange Offer must represent
to the Company that such conditions have been met. In the event that the
Company's belief is inaccurate, holders of Exchange Notes who transfer
Exchange Notes in violation of the prospectus delivery provisions of the
Securities Act and without an exemption from registration thereunder may incur
liability under the Securities Act. The Company does not assume or indemnify
holders against such liability.
Each affiliate of the Company must acknowledge that such person will comply
with the registration and prospectus delivery requirements of the Securities
Act to the extent applicable. Each Participating Broker-Dealer that receives
Exchange Notes in exchange for Original Notes held for its own account, as a
result of market-making or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such Exchange
Notes. Although a Participating Broker-Dealer may be an "underwriter" within
the meaning of the Securities Act, the Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a Participating Broker-Dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a Participating Broker-Dealer in connection with
resales of Exchange Notes received in exchange for Original Notes.
101
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes.
The Company will not receive any proceeds from any sales of the Exchange
Notes by Participating Broker-Dealers. Exchange Notes received by
Participating Broker-Dealers for their own account pursuant to the Exchange
Offer may be sold from time to time in one or more transactions in the over-
the-counter market, in negotiated transactions, through the writing of options
on the Exchange Notes or a combination of such methods of resale, at market
prices prevailing at the time of resale, at prices related to such prevailing
market prices or negotiated prices. Any such resale may be made directly to
the purchaser or to or through brokers or dealers who may receive compensation
in the form of commissions or concessions from any such Participating Broker-
Dealer and/or the purchasers of any such Exchange Notes. Any Participating
Broker-Dealer that resells the Exchange Notes that were received by it for its
own account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commissions or concessions received by
any such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver any by delivering a prospectus, a Participating Broker-Dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act.
LEGAL MATTERS
Certain legal matters in connection with the Exchange Notes offered hereby
will be passed upon for the Company by its counsel, Ropes & Gray, One
International Place, Boston, Massachusetts and its special California counsel
Stradling Yocca Carlson & Rauth, a Professional Corporation, 660 Newport
Center Drive, Newport Beach, California.
INDEPENDENT AUDITORS
The consolidated financial statements of the Company as of December 31, 1996
and 1995 and for each of the three years in the period ended December 31, 1996
included in this Offering Memorandum, have been audited by McGladrey & Pullen,
LLP, independent auditors, as stated in their report appearing herein.
102
INDEX TO FINANCIAL STATEMENTS
Independent Auditor's Report.............................................. F-3
Consolidated Balance Sheets as of December 31, 1996 and 1995 and as of
September 30, 1997 (unaudited)........................................... F-4
Consolidated Statements of Income for the Years Ended December 31, 1996,
1995 and 1994 and for the Nine Months Ended September 30, 1997 and 1996
(unaudited).............................................................. F-5
Consolidated Statements of Stockholders' Equity (Deficit) for the Years
Ended December 31, 1996, 1995 and 1994 and for the Nine Months Ended Sep-
tember 30, 1997 (unaudited).............................................. F-6
Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1995 and 1994 and the Nine Months Ended September 30, 1997 and 1996
(unaudited).............................................................. F-8
Notes to Consolidated Financial Statements................................ F-9
F-1
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F-2
INDEPENDENT AUDITOR'S REPORT
To the Board of DirectorsDetails, Inc.Anaheim, California
We have audited the accompanying consolidated balance sheets of Details,
Inc. and Subsidiaries as of December 31, 1995 and 1996, and the related
consolidated statements of income, stockholders' equity (deficit) and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Details,
Inc. and Subsidiaries as of December 31, 1995 and 1996, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted
accounting principles.
McGladrey & Pullen, LLP
Anaheim, California
February 14, 1997
F-3
DETAILS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
------------------------- SEPTEMBER 30,
1995 1996 1997
----------- ------------- -------------
(UNAUDITED)
ASSETS (NOTE 4)
Current Assets
Cash (Note 7)...................... $ 472,200 $ 168,900 $ 942,300
Trade receivables, less allowance
for doubtful accounts 1995
$330,000; 1996 $300,000; 1997
$400,000 (Note 7)................. 6,921,600 9,511,000 10,148,100
Inventories (Note 2)............... 874,900 1,237,800 2,413,700
Prepaid expenses................... 48,500 217,000 196,600
Prepaid income taxes............... -- 648,000 160,300
Deferred income taxes (Note 5)..... -- 690,000 690,000
----------- ------------- -------------
Total current assets............. 8,317,200 12,472,700 14,551,000
----------- ------------- -------------
Property and Equipment, net (Note 3). 4,701,800 12,846,900 14,931,000
----------- ------------- -------------
Unamortized Debt Issue Costs, net.... -- 2,057,500 1,542,300
Other Assets......................... 62,200 125,400 661,500
----------- ------------- -------------
62,200 2,182,900 2,203,800
----------- ------------- -------------
$13,081,200 $ 27,502,500 $ 31,685,800
=========== ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current Liabilities
Current maturities of long-term
debt (Note 4)..................... $ 1,981,900 $ 9,500,000 $ 10,625,000
Current maturities of capital
leases with stockholder (Note 4).. -- 410,900 364,700
Accounts payable................... 3,280,200 3,560,600 3,505,500
Accrued commissions................ 504,900 587,100 1,002,800
Other accrued expenses............. 729,600 1,799,500 1,858,400
Accrued bonus payable.............. -- -- 2,958,500
Dividends payable.................. 4,084,500 128,200 128,200
----------- ------------- -------------
Total current liabilities........ 10,581,100 15,986,300 20,443,100
----------- ------------- -------------
Long-Term Debt (Note 4).............. -- 78,350,300 70,229,200
Capital Leases with stockholder (Note
4).................................. -- 5,839,700 6,191,200
----------- ------------- -------------
Total liabilities (Note 6)....... 10,581,100 100,176,300 96,863,500
----------- ------------- -------------
Commitments and Contingencies (Notes
4, 6 and 10)
Temporary Stockholders' Equity
(Note 6)
Redeemable common stock, 1996 6,959
shares; 1997 6,873 shares......... -- 38,906,000 77,000,000
Redeemable common stock warrants... -- 3,200,000 6,350,000
----------- ------------- -------------
Total temporary stockholders'
equity.......................... -- 42,106,000 83,350,000
----------- ------------- -------------
Other Stockholders' Equity (Deficit)
(Notes 4 and 6)
Common stock, no par value,
authorized 100,000 shares, issued
and outstanding 1995 15,300
shares; 1996 and 1997 2,758
shares............................ 15,300 5,300,500 5,300,500
Convertible preferred stock, no par
value, authorized 1995 none; 1996
and 1997 100,000 shares, issued
and outstanding 1996 and 1997
6,601 shares...................... -- 13,531,900 13,531,900
Additional paid-in-capital......... -- -- 2,922,000
Retained earnings (deficit)........ 2,484,800 (133,612,200) (170,282,100)
----------- ------------- -------------
Total other stockholders' equity
(deficit)....................... 2,500,100 (114,779,800) (148,527,700)
----------- ------------- -------------
$13,081,200 $ 27,502,500 $ 31,685,800
=========== ============= =============
See Notes to Consolidated Financial Statements.
F-4
DETAILS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------- ------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
Net Sales (Note 7)...... $44,085,800 $59,370,200 $67,515,000 $49,086,000 $55,420,800
Cost of Goods Sold,
including rent paid to
stockholders 1994
$452,200; 1995 $558,700
(Note 4)............... 20,415,100 25,156,400 30,504,800 21,899,100 27,018,700
----------- ----------- ----------- ----------- -----------
Gross profit........ 23,670,700 34,213,800 37,010,200 27,186,900 28,402,100
Operating Expenses
(Note 4)
Compensation to CEO... 411,900 417,900 1,055,100 836,000 811,000
General and
administration
including rent paid
to stockholder 1994
$85,200; 1995
$63,500.............. 1,384,600 1,789,700 1,929,000 1,377,500 1,624,800
Sales and marketing... 3,542,700 5,292,800 5,989,800 4,502,900 5,337,700
Stock compensation and
related bonuses...... -- -- -- -- 5,283,000
----------- ----------- ----------- ----------- -----------
Operating income.... 18,331,500 26,713,400 28,036,300 20,470,500 15,345,600
Interest Income
(Expense)
Interest income....... 13,100 41,800 102,300 71,100 55,500
Interest expense,
including interest
paid to stockholder
of $774,000 for 1996
year................. (180,900) (370,600) (9,517,800) (6,973,600) (7,427,000)
----------- ----------- ----------- ----------- -----------
Income before income
taxes.............. 18,163,700 26,384,600 18,620,800 13,568,000 7,974,100
Income Tax Expense (Note
5)..................... 272,400 396,000 6,265,000 4,270,000 3,400,000
----------- ----------- ----------- ----------- -----------
Net income.......... 17,891,300 25,988,600 12,355,800 9,298,000 4,574,100
=========== =========== =========== =========== ===========
Pro forma income tax
adjustment
(Note 4)............... 7,175,000 10,425,000 1,295,000 1,295,000
----------- ----------- ----------- -----------
Pro forma net income
(Note 5)............... $10,716,300 $15,563,600 $11,060,800 $ 8,003,000
=========== =========== =========== ===========
See Notes to Consolidated Financial Statements.
F-5
DETAILS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
CONVERTIBLE
COMMON STOCK PREFERRED STOCK
------------------ -------------------
SHARES AMOUNT SHARES AMOUNT
------ ---------- ------ -----------
Balance, December 31, 1993............. 15,300 $ 15,300 -- $ --
Net income........................... -- -- -- --
Dividends declared................... -- -- -- --
------ ---------- ----- -----------
Balance, December 31, 1994............. 15,300 15,300 -- --
Net income........................... -- -- -- --
Dividends declared................... -- -- -- --
------ ---------- ----- -----------
Balance, December 31, 1995............. 15,300 15,300 -- --
Retirement of common stock (Note 6).. (8,162) (8,200) -- --
Transfer common stock subject to put
option (Note 6)..................... (6,959) (7,000) -- --
Issuance of common stock (Note 6).... 2,509 5,147,900 -- --
Issuance of preferred stock (Note 6). -- -- 6,671 13,684,400
Transfer of preferred stock to common
stock............................... 70 152,500 (70) (152,500)
Issuance of redeemable common stock
warrants (Note 6)................... -- -- -- --
Net income........................... -- -- -- --
Accretion of temporary stockholders'
equity to estimated fair value
(Note 6)............................ -- -- -- --
Dividends declared................... -- -- -- --
------ ---------- ----- -----------
Balance, December 31, 1996............. 2,758 5,300,500 6,601 13,531,900
Net income (unaudited)............... -- -- -- --
Accretion of temporary stockholders'
equity to estimated fair value
(unaudited) (Note 6)................ -- -- -- --
Stock compensation expense
(unaudited) (Note 6)................ -- -- -- --
------ ---------- ----- -----------
Balance, September 30, 1997
(unaudited)........................... 2,758 $5,300,500 6,601 $13,531,900
====== ========== ===== ===========
See Notes to Consolidated Financial Statements.
F-6
DETAILS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
TEMPORARY STOCKHOLDERS' EQUITY
----------------------------------
ADDITIONAL RETAINED REDEEMABLE COMMON
PAID-IN- EARNINGS COMMON STOCK
CAPITAL (DEFICIT) TOTAL STOCK WARRANTS TOTAL
- ---------- ------------- ------------- ----------- ---------- -----------
$ -- $ 2,790,700 $ 2,806,000 $ -- $ -- $ --
-- 17,891,300 17,891,300 -- -- --
-- (17,891,300) (17,891,300) -- -- --
- ---------- ------------- ------------- ----------- ---------- -----------
-- 2,790,700 2,806,000 -- -- --
-- 25,988,600 25,988,600 -- -- --
-- (26,294,500) (26,294,500) -- -- --
- ---------- ------------- ------------- ----------- ---------- -----------
-- 2,484,800 2,500,100 -- -- --
-- (104,991,800) (105,000,000) -- -- --
-- (14,967,000) (14,974,000) 14,974,000 -- 14,974,000
-- -- 5,147,900 -- -- --
-- -- 13,684,400 -- -- --
-- -- -- -- -- --
-- -- -- -- 1,300,000 1,300,000
-- 12,355,800 12,355,800 -- -- --
-- (25,832,000) (25,832,000) 23,932,000 1,900,000 25,832,000
-- (2,662,000) (2,662,000) -- -- --
- ---------- ------------- ------------- ----------- ---------- -----------
-- (133,612,200) (114,779,800) 38,906,000 3,200,000 42,106,000
-- 4,574,100 4,574,100 -- -- --
-- (41,244,000) (41,244,000) 38,094,000 3,150,000 41,244,000
2,922,000 -- 2,922,000 -- -- --
- ---------- ------------- ------------- ----------- ---------- -----------
$2,922,000 $(170,282,100) $(148,527,700) $77,000,000 $6,350,000 $83,350,000
========== ============= ============= =========== ========== ===========
See Notes to Consolidated Financial Statements.
F-7
DETAILS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
----------------------------------------- --------------------------
1994 1995 1996 1996 1997
------------ ------------ ------------- ------------- -----------
(UNAUDITED) (UNAUDITED)
Cash Flows from Operating
Activities
Net income................ $ 17,891,300 $ 25,988,600 $ 12,355,800 $ 9,298,000 $ 4,574,100
Adjustments to reconcile
net income to net cash
provided by
operating activities:
Depreciation............. 881,800 1,054,200 2,047,100 1,494,500 1,828,800
Amortization............. -- -- 844,800 619,500 644,100
Stock compensation
expense................. -- -- -- -- 2,922,000
Deferred taxes........... -- -- (690,000) (297,000) --
Bad debt expense
(recovery).............. 164,200 (21,400) (27,100) (27,100) 95,300
Change in assets and
liabilities:
(Increase) decrease in:
Receivables............ (837,000) (1,975,200) (2,562,300) (1,327,000) (732,400)
Inventories............ (142,400) (421,000) (362,900) (519,000) (1,175,900)
Prepaid expenses and
other assets.......... (46,500) 28,900 (879,700) (221,600) (28,000)
Increase (decrease) in:
Accounts payable....... 259,200 1,747,000 280,400 (309,600) (55,100)
Accrued expenses....... (76,400) (259,900) 1,152,100 2,171,400 3,433,100
------------ ------------ ------------- ------------- -----------
Net cash provided by
operating activities. 18,094,200 26,141,200 12,158,200 10,882,100 11,506,000
------------ ------------ ------------- ------------- -----------
Cash Flows from Investing
Activities
Proceeds from sale of
equipment................ -- -- 89,600 7,800 --
Purchase of equipment..... (844,100) (2,945,900) (3,666,400) (2,719,900) (3,266,600)
------------ ------------ ------------- ------------- -----------
Net cash (used in)
investing activities. (844,100) (2,945,900) (3,576,800) (2,712,100) (3,266,600)
------------ ------------ ------------- ------------- -----------
Cash Flows from Financing
Activities
Principal payments on
notes payable............ (1,716,300) (752,200) (7,982,000) (5,982,000) (7,125,000)
Principal payments on
stockholder loan......... (1,000,000) -- -- -- --
Borrowings on notes
payable.................. 585,800 1,418,600 95,000,000 95,000,000 --
Principal payments on
capital lease
to stockholder........... -- -- (364,700) (266,400) (341,000)
Cash dividends paid....... (13,025,800) (27,075,500) (6,618,300) (6,618,300) --
Proceeds from the issuance
of common and preferred
stock.................... -- -- 20,000,000 20,000,000 --
Stock issuance costs...... -- -- (1,167,700) (1,167,700) --
Debt issue costs incurred. -- -- (2,752,000) (2,752,000) --
Retirement of common
stock.................... -- -- (105,000,000) (105,000,000) --
------------ ------------ ------------- ------------- -----------
Net cash (used in)
financing activities. (15,156,300) (26,409,100) (8,884,700) (6,786,400) (7,466,000)
------------ ------------ ------------- ------------- -----------
Net increase
(decrease) in cash... 2,093,800 (3,213,800) (303,300) 1,383,600 773,400
Cash
Beginning................. 1,592,200 3,686,000 472,200 472,200 168,900
------------ ------------ ------------- ------------- -----------
Ending.................... $ 3,686,000 $ 472,200 $ 168,900 $ 1,855,800 $ 942,300
============ ============ ============= ============= ===========
See Notes to Consolidated Financial Statements.
F-8
DETAILS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of business:
The Company manufactures and sells printed circuit boards (PCB) to the
electronics industry throughout the United States on credit terms that the
Company establishes for individual customers. A majority of the Company's
sales are for the time critical segment (quick turn) of the PCB industry.
Quick turn PCB's are manufactured within 10 days.
Subsequent to the Recapitalization discussed in Note 10, the Company changed
its name to Details Holdings Corp. and incorporated Details, Inc. as a wholly-
owned subsidiary and contributed substantially all of its assets, subject to
certain liabilities to Details, Inc.
Environmental matters:
The Company's operations are regulated under a number of federal, state,
local and foreign environmental laws and regulations, which govern, among
other things, the discharge of hazardous materials into the air and water as
well as the handling, storage and disposal of such materials. Compliance with
these environmental laws are major considerations for all PCB manufacturers
because metals and other hazardous materials are used in the manufacturing
process. In addition, because the Company is a generator of hazardous wastes,
the Company, along with any other person who arranges for the disposal of such
wastes, may be subject to potential financial exposure for costs associated
with an investigation and remediation of sites at which it has arranged for
the disposal of hazardous wastes, if such sites become contaminated. This is
true even if the Company fully complies with applicable environmental laws. In
addition, it is possible that in the future new or more stringent requirements
could be imposed. Management believes it has complied with all applicable
environmental laws and regulations. There have been no claims asserted nor is
management aware of any unasserted claims for environmental matters.
Interim financial information:
The financial information presented as of and for the periods ending
September 30, 1996 and 1997 has been prepared from the books and records
without audit. Such financial information does not include all disclosures
required by generally accepted accounting principles. In the opinion of
management, all adjustments, consisting of normal recurring adjustments
necessary for a fair presentation of financial information for the periods
indicated have been included. The results of the Company's operations for any
interim period are not necessarily indicative of the results attained for a
full fiscal year. The data disclosed in these notes to financial statements
related to the interim information is also unaudited.
A summary of the Company's significant accounting policies is as follows:
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and their reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Principles of consolidation:
In December 1996, the Company incorporated Details Europe Limited in the
United Kingdom and a foreign sales corporation. These subsidiaries had no
transactions during 1996.
Inventories:
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
F-9
DETAILS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Property and equipment:
Property and equipment are stated at cost. Depreciation is provided over the
estimated useful lives of the assets using both the straight-line and
declining balance methods. For leasehold improvements, depreciation is
provided over the shorter of the estimated useful lives of the assets or the
lease term. Amortization of capitalized lease payments are included with
depreciation expense.
Unamortized debt issue costs:
Unamortized debt issue costs represent the portion of costs incurred in
connection with Company financing. These costs are being amortized over the
term of the credit agreement using the interest method. Accumulated
amortization as of December 31, 1996 was $692,500.
Revenue recognition:
The Company recognizes revenue from the sale of its products upon delivery
of its products to its customers. The Company provides a normal warranty on
its products and accrues an estimated amount for this expense at the time of
the sale.
Income taxes:
Deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and operating loss
and tax credit carryforwards and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion
of management, it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Deferred tax assets and liabilities
are adjusted for the effects of changes in tax laws and rates on the date of
enactment.
Fair value of financial instruments:
The methods and assumptions used to estimate the fair value of the following
classes of financial instruments were as follows:
Debt--For fixed-rate instruments with a maturity in excess of one year,
the fair value of the debt is estimated using discounted cash flow analysis
based on the Company's current incremental borrowing rates for similar
types of borrowing arrangements. The carrying value of these fixed rate
instruments approximates their fair value. For variable-rate instruments,
the carrying amount approximates fair value.
Interest rate cap agreement--The carrying amount approximates the fair
value based on the fair value of instruments with similar remaining terms.
NOTE 2. INVENTORIES
Inventories as of December 31, 1995 and 1996 and September 30, 1997 consist
of the following:
SEPTEMBER 30,
1995 1996 1997
-------- ---------- -------------
(UNAUDITED)
Raw materials.............................. $498,300 $ 800,000 $ 985,000
Work-in-process............................ 376,600 437,800 1,428,700
-------- ---------- ----------
$874,900 $1,237,800 $2,413,700
======== ========== ==========
F-10
DETAILS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3. PROPERTY AND EQUIPMENT
The components of property and equipment at December 31, 1996 and 1995 are
as follows:
1995 1996
----------- -----------
Buildings and leasehold improvements................ $ 1,003,700 $ 5,845,600
Machinery and equipment............................. 7,733,200 12,053,500
Office furniture and equipment...................... 1,487,100 2,136,600
Waste treatment system.............................. 262,100 288,700
Vehicles............................................ 384,400 378,600
----------- -----------
10,870,500 20,703,000
Less accumulated depreciation....................... 6,168,700 7,856,100
----------- -----------
$ 4,701,800 $12,846,900
=========== ===========
Buildings and leasehold improvements include buildings under a capitalized
lease of approximately $4,496,500 with related accumulated depreciation of
$449,600 at December 31, 1996. Machinery and equipment include a capitalized
lease of $2,118,900 with related accumulated depreciation of $211,900 at
December 31, 1996.
NOTE 4. LONG-TERM DEBT
Long-term debt at December 31, 1996 consists of the following:
Term A senior debt(A)........................................... $53,000,000
Term B senior debt(A)........................................... 21,000,000
Subordinated debt, net of discount(B)........................... 13,850,300
Capital leases(C)............................................... 6,250,600
-----------
94,100,900
Less current maturities......................................... 9,910,900
-----------
$84,190,000
===========
- --------
(A) The Term A senior debt requires quarterly principal payments at increasing
amounts (ranging from $2,375,000 to $5,000,000) plus interest through
December 2000. The Term B senior debt requires quarterly interest only
payments with the principal due in January 2002. All interest is
calculated based upon LIBOR (5.53% at December 31, 1996) plus 3% or the
prime rate (8.25% at December 31, 1996) plus 1.75% at the Company's
option. The loans also contain a mandatory prepayment provision which
requires 100% of the cash proceeds upon the sale of stock or certain asset
sales and recoveries; and 75% of the "Excess Cash Flow Payment Periods",
as defined, through December 1997 and 50% thereafter. Included in the
credit facility with the Term A and B senior debt, is a $7,500,000
revolving note available to the Company. The revolving note bears interest
at similar rates to the Term notes as discussed above and is due and
payable in January 2002. At December 31, 1996 there is no balance
outstanding on this revolving note.
(B) The subordinated debt requires monthly interest payments at 12%. Principal
is due in two installments of $7,500,000 in February 2003 and 2004. The
debt is subordinate to the senior debt discussed above. In the event the
Company prepays the principal amount of this debt prior to maturity, the
Company is subject to a prepayment penalty ranging from 5% in year 1 to 0%
after year five. This prepayment penalty is reduced by 50% upon an Initial
Public Offering (IPO) and is
F-11
DETAILS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
eliminated upon the attainment of a certain internal rate of return by the
note holder. The subordinated debt holders also received warrants to
purchase 706.3 shares of the Company's common stock for a nominal price.
Management determined the fair value of the warrants and allocated the
proceeds to the subordinated debt and the warrants issued based upon their
relative fair value. The resulting discount is being amortized over the
life of the note using the interest method (Note 6).
Both the senior and the subordinated debt are secured by substantially all
assets of the Company, contain certain debt covenants which the Company is
required to meet and include restrictions on the payment of dividends.
(C) On January 1, 1996, the Company and its major stockholder renegotiated the
two existing operating leases for its facilities and certain equipment.
The terms of the new leases require monthly payments totaling
approximately $95,000 over the ten-year term of the leases. The leases
contain an option for the Company to renew the leases for an additional
ten years at the end of the initial term. The leases also contain an
option for the Company to purchase the buildings and the machinery at its
fair value at the end of the initial term and at the end of the second
term. The building lease requires the Company to pay maintenance,
insurance and taxes and contains a provision to adjust the lease rate for
increases in the Consumer Price Index rate. These leases have been
accounted for as capital leases with an implicit interest rate of 12%.
Rent expense for 1994 and 1995 was $541,400 and $622,200, respectively
under the previous operating leases.
Floating-rate hedge:
The Company has entered into interest rate cap and interest rate floor
agreements having notional principal amounts of $40 million to reduce the
impact of changes in interest rates on its floating-rate debt. This agreement
effectively limits the Company's interest rate exposure on $40 million of
floating-rate debt should the three-month LIBOR rate exceed 8.5% or fall below
4.7% through April 1998, the term of the agreement. The Company is exposed to
credit loss in the event of nonperformance by the counterparties to the
agreements. However, the Company does not anticipate nonperformance by the
counterparties.
Aggregate maturities of long-term debt are as follows:
CAPITAL LEASE
-------------------------------------
PRESENT
TOTAL LESS VALUE OF NET
MINIMUM AMOUNT MINIMUM OTHER
YEAR ENDING LEASE REPRESENTING LEASE LONG-TERM
DECEMBER 31, PAYMENTS INTEREST PAYMENTS DEBT TOTAL
------------ ----------- ------------ ------------ ----------- -----------
1997.................... $ 1,138,900 $ 728,000 $ 410,900 $ 9,500,000 $ 9,910,900
1998.................... 1,138,900 675,800 463,100 11,000,000 11,463,100
1999.................... 1,138,900 617,100 521,800 12,500,000 13,021,800
2000.................... 1,138,900 550,900 588,000 20,000,000 20,588,000
2001.................... 1,138,900 476,300 662,600 -- 662,600
Thereafter.............. 4,555,800 951,600 3,604,200 36,000,000 39,604,200
----------- ---------- ---------- ----------- -----------
$10,250,300 $3,999,700 $6,250,600 $89,000,000 95,250,600
=========== ========== ========== ===========
Less discount on subordinated debt........................................ 1,149,700
-----------
$94,100,900
===========
F-12
DETAILS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5. INCOME TAX MATTERS AND CHANGE IN TAX STATUS
For the year ended December 31, 1995 and prior years, the Company, with the
consent of its stockholder, elected to be taxed under sections of federal and
state income tax law, which provide that, in lieu of corporation income taxes,
the stockholder separately accounts for his pro rata share of the Company's
income, deductions, losses and credits. An additional state income tax is
imposed at a 1.5% rate. The Company's stockholder terminated this election
effective on February 1, 1996. The Company has presented pro forma net income
as if the Company had been a taxable entity.
As a result of this termination, the Company recorded a net deferred tax
asset of $297,000 on February 1, 1996 by a credit against income tax expense,
for temporary differences between the financial reporting and the income tax
basis of assets and liabilities.
Current deferred tax assets consist of the following components as of
December 31, 1996:
Receivables........................................................ $120,000
Other.............................................................. 91,000
California Franchise tax........................................... 479,000
--------
$690,000
========
The provision for income taxes charged to income consists of the following:
1994 1995 1996
-------- -------- ----------
Current income tax expense..................... $272,400 $396,000 $6,955,000
Deferred income tax (benefit).................. -- -- (690,000)
-------- -------- ----------
$272,400 $396,000 $6,265,000
======== ======== ==========
The income tax provision differs from the amount of income tax determined by
applying the U.S. Federal income tax rate to income before income taxes due to
the following:
1994 1995 1996
----------- ----------- ----------
Computed "expected" tax expense...... $ 6,357,000 $ 9,235,000 $6,517,000
Increase (decrease) in income taxes
resulting from:
State taxes, net of credits........ 272,400 396,000 981,000
Effect of change in tax status..... -- -- (297,000)
Income not subject to federal
corporate tax..................... (6,357,000) (9,235,000) (996,000)
Other.............................. -- -- 60,000
----------- ----------- ----------
$ 272,400 $ 396,000 $6,265,000
=========== =========== ==========
NOTE 6. STOCKHOLDERS' EQUITY
In January 1996, the Company declared a dividend of $2,662,000 payable to
its sole stockholder. On January 31, 1996, the Company redeemed 8,162 shares
of its common stock from this stockholder for $105 million. The Company funded
this redemption through the issuance of $95 million of debt and
F-13
DETAILS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the sale of stock. In addition, the Company granted this stockholder the right
to put back to the Company, for cash, his remaining 6,959 shares of stock at
its fair value upon the earlier of January 2002 or 90 days after the full
payment of the Senior Debt (Note 4). The put expires upon a qualified public
offering, as defined. The Company also granted this stockholder certain
antidilution rights in connection with his remaining shares of stock. The
stockholder agreed to forfeit to the Company .64 shares of common stock for
each share of the common stock warrants and Tranche I options which are
canceled (up to a maximum of 1,018 shares). During the period ended September
30, 1997, 86 shares were forfeited (unaudited). Due to the existence of the
put option, the estimated fair value of these shares have been classified as
temporary stockholders' equity.
On January 31, 1996, the Company issued 6,671 shares of convertible
preferred stock for $14,533,338. In addition, the Company issued 2,509 shares
of common stock for $5,466,662. In connection with these issuances, the
Company incurred costs of $1,167,700. These costs have been applied against
the proceeds from the sale of stock.
In order to accomplish the sale of stock, the Company amended its articles
of incorporation to authorize the Company to issue up to 100,000 shares of
convertible preferred stock. The preferred stock is convertible into an equal
number of common shares of stock at the option of the holders. The holders of
the convertible preferred stock cast two votes for each share of stock held;
share equally with common stockholders as to dividends and have a preference
in the event of liquidation. Upon the occurrence of an Initial Public
Offering, the preferred stock will automatically convert to common stock.
Common stock warrants:
In connection with the issuance of $15 million of subordinated debt (Note
4), the Company issued warrants to acquire 706.3 shares of common stock at a
nominal price. Management estimated the value of these warrants at $1,300,000
at the time of issuance. The warrants contain certain antidilution provisions
and are exercisable through 2004. After five years, the warrant holders may
require the Company to repurchase the warrants or the stock purchased with the
warrants for fair value. The warrants also contain a "clawback" provision
which requires the holders of the warrants to surrender up to 282 of the
warrants upon the attainment of certain earnings targets by the Company in
1996 and 1997. The Company met the earnings target in 1996 and anticipates
that 141 of the warrants will be canceled. Due to the put provisions in the
warrants, the Company adjusts the recorded amount of the warrants to their
estimated fair value by a charge or credit to retained earnings. At December
31, 1996, management estimated the fair value of the remaining 565.3 warrants
at $3,200,000. Due to the existence of the put option, the estimated fair
value of these warrants has been classified as temporary stockholders' equity.
Stock options:
On February 1, 1996, the Company granted stock options to various employees
under two programs. All options expire 10 years after the date they are
granted and contain a provision which requires the option holder to return the
option or the related stock purchased under the option to the Company at no
gain or a reduced gain should their employment with the Company be terminated
prior to five years from the date of grant. The options with senior management
include a provision which requires the Company to pay the optionee a bonus in
an amount sufficient to cover taxes that the optionee will incur upon exercise
of the option.
Senior management was granted options to purchase a total of 1,809 shares of
common stock at an exercise price of $2,179 per share. Options to purchase 880
shares of common stock (Tranche I) vest at the rate of 176 shares per year
through 2000 upon the attainment of certain annual earnings
F-14
DETAILS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
targets. If the earnings target for a specific year is not met, the options
related to that year are canceled. Any future unearned options will become
100% vested upon the sale of the Company or an initial public offering of the
Company's stock. During 1996, the Company met the 1996 earnings target and 176
common stock options vested on May 1, 1997.
The remaining options to purchase 929 shares of common stock (Tranche II)
vest 185 shares in 1996 and 186 shares in 1997 through 2000 upon the
attainment of certain annual or cumulative earnings targets which are higher
than the targets discussed above. Any future unearned options become 100%
vested upon the sale of the Company. Tranche II option to purchase 106 shares
of common stock were transferred to middle management. During 1996, the
Company did not meet the earnings target for the Tranche II options and no
options were vested. Further, the Company does not believe that it is likely
that the Tranche II earnings targets will be met in the future.
The Company also issued to middle management options to purchase 247 shares
of common stock (including the 106 shares discussed above) at an exercise
price of $2,179 per share. The options vest based on the discretion of the
Compensation Committee. No options have been exercised.
The Company accounts for these stock options using APB Opinion No. 25 and
related interpretations. All stock options are accounted for as a variable
awards. Accordingly, the difference between the exercise price and the
estimated market price of the stock is recorded as compensation when the
number of shares is known. Although there is no established market for the
Company's stock, management estimated that the exercise price was at or above
the estimated market price for the common stock of the Company for the options
earned in 1996, and no compensation expense was recorded. However, options
which are earned in the future may result in a charge to earnings. Had
compensation cost for the stock options been determined based on the grant
date fair values as required by FASB Statement No. 123, there would have been
the following effect on the Company's reported net income for the year ended
December 31, 1996:
As reported.................................................... $12,355,800
===========
Pro forma...................................................... $12,355,800
===========
Fair value was estimated using the minimum-value method, a risk-free
interest rate of 7.1% and an expected life of five years. No dividends were
assumed to be declared. Although there is no established market for the
Company's common stock, management believes the exercise price of the options
was at or above the fair value of the Company's stock on the grant date. The
weighted average value per option (computed using the minimum value method) of
the stock options granted in 1996 was $-0-.
F-15
DETAILS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7. CONCENTRATIONS
Major customers:
The Company had sales to the following customers that individually accounted
for more than 10% of the Company's total revenue. Revenue from these customers
and accounts receivable as of December 31, 1996 and 1995 are as follows:
NET REVENUE ACCOUNTS RECEIVABLE
----------------------------------- -------------------
1994 1995 1996 1995 1996
----------- ----------- ----------- --------- ---------
Customer A.............. $12,573,156 $11,484,195 $ 5,889,401 $ 879,238 $ 528,927
Customer B.............. 4,737,816 4,939,054 10,709,947 989,091 931,130
- --------
* Under 10% of sales
Cash concentration:
The Company has approximately $1,003,500 at December 31, 1996 invested with
one fund.
NOTE 8. EMPLOYEE BENEFIT PLAN
The Company has adopted a 401(k) plan subsequent to year end which is
effective January 1997. All employees of the Company over the age of 21 and
having at least one year of service, are eligible to participate in the plan.
The eligible employees may contribute 1% to 15% of their annual compensation
and there is currently no matching contribution required to be made by the
Company. At the discretion of the board of directors, they may elect to make a
nonelective contribution which vests at various rates depending on the years
of service until after six years when an employee would be 100% vested.
NOTE 9. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
DECEMBER 31, SEPTEMBER 30,
---------------------------- -----------------------
1994 1995 1996 1996 1997
-------- -------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
Cash payments for:
Income taxes.......... $ -- $632,523 $7,638,914 $6,036,800 $7,437,600
======== ======== ========== ========== ==========
Interest.............. $112,800 $401,500 $7,774,034 $3,732,900 $2,912,300
======== ======== ========== ========== ==========
Supplemental Schedule of
Investing and Financing
Activities, capital
leases incurred for
acquisition of property
and equipment.......... $ -- $ -- $6,615,400 $6,615,400 $ 646,300
======== ======== ========== ========== ==========
NOTE 10. SUBSEQUENT EVENTS (UNAUDITED)
On or about October 4, 1997, Holdings and Holdings' stockholders entered
into the Recapitalization Agreement with DIA which provided for the
Recapitalization by means of the Merger of DIA with and into Holdings.
F-16
DETAILS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On October 28, 1997, the Merger was consummated. In connection with the
Recapitalization, (i) certain stockholders and optionholders of Holdings
received an aggregate amount of cash equal to approximately $184.3 million,
(ii) Chase Manhattan Capital, L.P., an affiliate of the Initial Purchaser,
retained a portion of their investment in Holdings, representing approximately
7.7%, and certain other stockholders of Holdings retained a portion of their
investments in Holdings representing approximately 2.8%, of the fully-diluted
equity of Holdings (in each case after giving effect to the Recapitalization
and related transactions) (collectively, the "Existing Owner Rollover"), and
(iii) management retained certain shares and certain options to acquire shares
of common stock of Holdings representing approximately 17.1% of the fully-
diluted equity of Holdings (after giving effect to the Recapitalization and
related transactions), (the "Management Rollover Equity"). In addition, in
connection with the Recapitalization, management acquired additional shares
and options to acquire additional shares representing 10.4% of the fully-
diluted equity of Holdings (after giving effect to the Recapitalization and
related transactions). After the Recapitalization, management held shares and
options representing approximately 27.5% of the fully-diluted equity of
Holdings.
Financing for the Recapitalization, and the related fees and expenses,
consisted of (i) $46.3 million of equity capital provided by investment funds
associated with Bain Capital, Inc. (the "Bain Capital Funds"); (ii) $11.2
million of equity capital provided by an affiliate of CMC; (iii) $4.9 million
of equity capital provided by certain other investors; (iv) the $16.1
Management Rollover Equity; (v) the $10.5 million Existing Owner Rollover; (v)
a senior subordinated loan facility of up to $85 million; (vi) a senior
unsecured credit facility of up to $55 million of Holdings; and (vii) a
syndicated senior secured Tranche A term loan facility of up to $41.4 million
as of the Recapitalization closing date, a syndicated senior secured Tranche B
term loan facility of up to $50 million and a senior secured revolving credit
facility of up to $30 million.
The effect of the above Recapitalization and related transaction increased
stockholders' (deficit) to approximately $196.2 million and resulted in
charges to earnings of $23 million, net of estimated income tax of $16
million, in the fourth quarter of 1997 related to accelerated vesting of stock
options under variable awards and related cash bonuses, write-off of deferred
financing fees, amortization of remaining debt discount on existing debt and
other fees and expenses related to the Recapitalization. Because the merger
has been accounted for as a recapitalization, the historical basis of the
Company's assets and liabilities was not affected.
F-17
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
SECURITIES TO WHICH IT RELATES OR ANY OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO ITS DATE.
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
Summary.................................................................... 1
Risk Factors............................................................... 15
Use of Proceeds............................................................ 22
Capitalization............................................................. 23
Unaudited Pro Forma Financial Data......................................... 24
Selected Historical Consolidated Financial Data............................ 33
Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................ 34
The Industry............................................................... 39
Business................................................................... 41
Management................................................................. 48
Principal Stockholders..................................................... 54
Certain Relationships and Related Transactions............................. 56
Description of Senior Credit Facilities.................................... 58
Description of Exchange Notes.............................................. 60
Certain Federal Income Tax Consequences.................................... 89
The Exchange Offer......................................................... 93
Plan of Distribution....................................................... 102
Legal Matters.............................................................. 102
Independent Auditors....................................................... 102
Index to Financial Statements.............................................. F-1
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
DETAILS, INC.
EXCHANGE OFFER
$100,000,000
10% SENIOR SUBORDINATED
NOTES DUE 2005
--------------------------
LOGO
--------------------------
-----------------
PROSPECTUS
-----------------
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As permitted by Section 204(a) of the California General Corporation Law,
the Registrant's Articles of Incorporation eliminate a director's personal
liability for monetary damages to the Registrant and its shareholders arising
from a breach or alleged breach of the director's fiduciary duty, except for
liability for (i) acts or omissions that involve intentional misconduct or
knowing and culpable violation of law, (ii) acts or omissions that a director
believes to be contrary to the best interests of the Registrant or its
shareholders or that involve the absence of good faith on the part of the
director, (iii) any transaction from which a director derived an improper
personal benefit, (iv) acts or omissions that show a reckless disregard for
the director's duty to the Registrant or its shareholders in circumstances in
which the director was aware, or should have been aware, in the ordinary
course of performing a director's duties, of a risk of serious injury to the
Registrant or its shareholders, (v) acts or omissions that constitute an
unexcused pattern of inattention that amounts to an abdication of the
director's duty to the Registrant or its shareholders, (vi) any improper
transactions between the corporation and a director in which a director has a
material financial interest, and (vii) liability for unlawful distributions,
loans or guarantees. This provision does not eliminate the directors' duty of
care, and in appropriate circumstances equitable remedies such as an
injunction or other forms of non-monetary relief would remain available under
California law.
Sections 204(a) and 317 of the California General Corporation Law authorize
a corporation to indemnify its directors, officers, employees and other agents
in terms sufficiently broad to permit indemnification (including reimbursement
for expenses) under certain circumstances for liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act"). The Registrant's
Articles of Incorporation and By-laws contain provisions covering
indemnification to the maximum extent permitted by the California General
Corporation Law of corporate directors, officers and other agents against
certain liabilities and expenses incurred as a result of proceedings involving
such persons in their capacities as directors, officers, employees or agents,
including proceedings under the Securities Act or the Securities Exchange Act
of 1934, as amended.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or other agent of the Registrant in which
indemnification is being sought, nor is the Registrant aware of any threatened
litigation that may result in a claim for indemnification by any director,
officer, employee or other agent of the Registrant.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 Details, Inc. Articles of Incorporation, as amended.
3.2 Details, Inc. By-laws.
4.1 Indenture dated as of November 18, 1997.
4.2 Exchange and Registration Rights Agreement dated as of November 18,
1997.
5.1 Opinion of Ropes & Gray re: legality.
5.2 Opinion of Stradling Yocca Carlson & Rauth re: legality.
II-1
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.1 Credit Agreement dated as of October 28, 1997.
10.2* Management Agreement dated October 28, 1997.
10.3* Amended and Restated Recapitalization Agreement dated as of October
4, 1997
10.4 Stockholders Agreement dated October 28, 1997
10.5 1997 Details, Inc. Equity Incentive Plan
10.6 1996 Employee Stock Option Plan dated December 31, 1996
10.7 1996 Performance Stock Option Plan dated December 31, 1996
10.8 Real Property Master Lease Agreement dated January 1, 1996
10.9 Personal Property Master Lease Agreement dated January 1, 1996
10.10 McMaster Employment Agreement dated September 1, 1995, as amended
October 28, 1997.
10.11 Gisch Employment Agreement dated September 19, 1995 as amended
October 28, 1997.
10.12 Muse Employment Agreement dated September 1, 1995, as amended
October 28, 1997.
10.13 Wright Employment Agreement dated September 1, 1995, as amended
October 28, 1997.
12.1 Statement regarding computation of ratio of earnings to fixed
charges.
23.1 Consent of McGladrey & Pullen LLP.
23.2 Consent of Ropes & Gray (included in Exhibit 5.1).
23.3 Consent of Stradling Yocca Carlson & Rauth (included in Exhibit
5.2).
24.1 Powers of Attorney (included on signature page).
25.1 Statement of Eligibility on Form T-1 of State Street Bank and Trust
Company
as Trustee under the Indenture.
27.1 Financial Data Schedules.
99.1* Form of Letter of Transmittal used in connection with the Exchange
Offer.
99.2* Form of Notice of Guaranteed Delivery used in connection with The
Exchange Offer.
99.3* Exchange Agent Agreement.
- --------
* To be filed separately by amendment.
(B) FINANCIAL STATEMENT SCHEDULES.
Not applicable.
ITEM 22. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant, pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by any such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of their counsel the matter has been settled by
II-2
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether or not such indemnification is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when it
became effective.
(2) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933.
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(3) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(4) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Anaheim, state of
California, on the 26th day of November, 1997.
DETAILS, INC.
/s/ Bruce D. McMaster
By: _________________________________
NAME: BRUCE D. MCMASTER
TITLE: PRESIDENT
We, the undersigned officers and directors of Details, Inc., hereby
severally constitute Bruce D. McMaster, Joseph P. Gisch, Edward Conard,
Stephen M. Zide and Prescott Ashe, and each of them singly, our true and
lawful attorneys-in-fact with full power of substitution and resubstitution,
for them, and each of them singly, to sign for us and in our names in the
capacities indicated below, the Registration Statement filed herewith and any
and all amendments to said Registration Statement (including pre-effective and
post-effective amendments), and generally to do all such things in our name
and behalf in our capacities as officers and directors to enable Details, Inc.
to comply with the provisions of the Securities Act of 1933, and all
requirements of the Securities and Exchange Commission, hereby ratifying and
confirming our signatures as they may be signed by our said attorneys-in-fact,
or any of them, to said Registration Statement and any and all amendments
thereto.
Witness our hands and common seal on the dates set forth below.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Bruce D. McMaster President (principal November 26,
- ------------------------------------- executive officer) 1997
BRUCE D. MCMASTER
/s/ Joseph P. Gisch Vice President and November 26,
- ------------------------------------- Chief Financial 1997
JOSEPH P. GISCH Officer (principal
financial and
accounting officer)
/s/ Stephen M. Zide Vice President and November 26,
- ------------------------------------- Director 1997
STEPHEN M. ZIDE
/s/ Edward Conard Director November 26,
- ------------------------------------- 1997
EDWARD CONARD
/s/ Prescott Ashe Director November 26,
- ------------------------------------- 1997
PRESCOTT ASHE
/s/ Christopher Behrens Director November 26,
- ------------------------------------- 1997
CHRISTOPHER BEHRENS
II-4
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
3.1 Details, Inc. Articles of Incorporation, as amended.
3.2 Details, Inc. By-laws.
4.1 Indenture dated as of November 18, 1997.
4.2 Exchange and Registration Rights Agreement dated as of
November 18, 1997.
5.1 Opinion of Ropes & Gray re: legality.
5.2 Opinion of Stradling Yocca Carlson & Rauth re: legality.
10.1 Credit Agreement dated as of October 28, 1997.
10.2* Management Agreement dated October 28, 1997.
10.3* Amended and Restated Recapitalization Agreement dated as of
October 4, 1997
10.4 Stockholders Agreement dated October 28, 1997
10.5 1997 Details, Inc. Equity Incentive Plan
10.6 1996 Employee Stock Option Plan dated December 31, 1996
10.7 1996 Performance Stock Option Plan dated December 31, 1996
10.8 Real Property Master Lease Agreement dated January 1, 1996
10.9 Personal Property Master Lease Agreement dated January 1,
1996
10.10 McMaster Employment Agreement dated September 1, 1995, as
amended October 28, 1997.
10.11 Gisch Employment Agreement dated September 19, 1995 as
amended October 28, 1997.
10.12 Muse Employment Agreement dated September 1, 1995, as
amended October 28, 1997.
10.13 Wright Employment Agreement dated September 1, 1995, as
amended October 28, 1997.
12.1 Statement regarding computation of ratio of earnings to
fixed charges.
23.1 Consent of McGladrey & Pullen LLP.
23.2 Consent of Ropes & Gray (included in Exhibit 5.1).
23.3 Consent of Stradling Yocca Carlson & Rauth (included in
Exhibit 5.2).
24.1 Powers of Attorney (included on signature page).
25.1 Statement of Eligibility on Form T-1 of State Street Bank
and Trust Company
as Trustee under the Indenture.
27.1 Financial Data Schedules.
99.1* Form of Letter of Transmittal used in connection with the
Exchange Offer.
99.2* Form of Notice of Guaranteed Delivery used in connection
with The Exchange Offer.
99.3* Exchange Agent Agreement.
- --------
* To be filed separately by amendment.