<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NUMBER 333-41187
333-41211
DETAILS CAPITAL CORP.
DETAILS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 33-0780382
(STATE OR OTHER JURISDICTION 33-0779123
OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
1231 SIMON CIRCLE
ANAHEIM, CALIFORNIA 92806
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(714) 630-4077
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [X] No [_].
On August 7, 1998, all of the voting stock of Details, Inc. was held by Details
Capital Corp. and all of the voting stock of Details Capital Corp. was held by
Details Intermediate Holdings Corp. and all of the voting stock of Details
Intermediate Holdings Corp. was held be Details Holding Corp.
As of August 7, 1998, Details, Inc. had 100 shares of common stock, par value
$.01 per share, outstanding and Details Capital Corp. had 1,000 shares of common
stock, par value $.01 per share, outstanding.
<PAGE>
Details Capital Corp.
Details, Inc.
Form 10-Q
Table of Contents
PART I Financial Information Page No.
--------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1998
and December 31, 1997 3
Condensed Consolidated Statements of Income for the period
ended June 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II Other Information
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
2
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ------------------------------
Details Capital Corp. and Details, Inc.
Condensed Consolidated Balance Sheets
(In Thousands)
<TABLE>
<CAPTION>
Details, Inc. Details Capital
--------------------------- ---------------------------
June 30, December 31, June 30, December 31,
1998 1997 1998 1997
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,435 $ 5,377 $ 2,437 $ 5,377
Trade receivables, net 17,063 15,643 17,063 15,643
Inventories 7,226 4,330 7,226 4,330
Prepaid expenses and other 1,066 525 1,074 525
Income tax refunds 1,582 8,537 1,582 9,363
Deferred tax assets 2,879 6,239 8,019 8,240
--------- --------- --------- ---------
Total current assets $ 32,251 $ 40,651 $ 37,401 $ 43,478
Property and equipment, net 30,848 26,132 30,848 26,132
Debt issue costs, net 9,132 9,619 13,003 13,083
Goodwill, net 24,863 26,071 24,863 26,071
Due from affiliate 303 - 303 -
Due from parent 526 - - -
Other 376 98 376 98
--------- --------- --------- ---------
$ 98,299 $ 102,571 $ 106,794 $ 108,862
========= ========= ========= =========
Liabilities and Stockholders' Deficit
Current liabilities:
Current maturities of long-term debt $ 4,902 $ 2,450 $ 4,902 $ 2,450
Accounts payable 5,710 7,609 5,710 7,609
Accrued expenses 7,681 9,830 7,954 9,830
Escrow payable to redeemed stockholders 4,500 8,600 4,500 8,600
--------- --------- --------- ---------
Total current liabilities $ 22,793 $ 28,489 $ 23,066 $ 28,489
Long-term debt 209,162 210,100 273,923 271,068
Deferred tax liability 445 530 445 530
--------- --------- --------- ---------
Total liabilities $ 232,400 $ 239,119 $ 297,434 $ 300,087
--------- --------- --------- ---------
Stockholders' Deficit:
Common stock and additional paid-in-capital $ 138,404 $ 138,745 $ 88,630 $ 88,584
Accumulated deficit (272,505) (275,293) (279,270) (279,809)
--------- --------- --------- ---------
Total stockholders' deficit $(134,101) $(136,548) $(190,640) $(191,225)
--------- --------- --------- ---------
$ 98,299 $ 102,571 $ 106,794 $ 108,862
========= ========= ========= =========
</TABLE>
3
<PAGE>
Details, Inc.
Condensed Consolidated Statements of Operations
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $26,293 $ 18,537 $ 54,499 $ 34,789
Cost of goods sold 16,073 8,898 32,447 17,000
------- -------- -------- --------
Gross profit $10,220 $ 9,639 $ 22,052 $ 17,789
Operating Expenses:
Compensation to former CEO $ - $ 273 $ - $ 514
General and administration 878 514 1,668 1,009
Sales and marketing 1,854 1,867 4,081 3,502
Stock compensation and related bonuses - 1,761 - 3,522
Amortization of goodwill 244 - 505 -
------- -------- -------- --------
Operating Income $ 7,244 $ 5,224 $ 15,798 $ 9,242
Interest expense, net
including interest paid to former stockholder
of $401 and $402 in 1998 and 1997, respectively $(5,327) $(2,439) $(10,714) $(4,953)
------- -------- -------- --------
Income before income taxes $ 1,917 $ 2,785 $ 5,084 $ 4,289
Income tax expense 890 1,175 2,296 1,850
------- -------- -------- --------
Net income $ 1,027 $ 1,610 $ 2,788 $ 2,439
======= ======== ======== ========
</TABLE>
4
<PAGE>
Details Capital Corp.
Condensed Consolidated Statements of Operations
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $26,293 $18,537 $ 54,499 $34,789
Cost of goods sold 16,073 8,898 32,447 17,000
------- -------- -------- -------
Gross profit $10,220 $ 9,639 $ 22,052 $17,789
Operating Expenses:
Compensation to former CEO $ - $ 273 $ - $ 514
General and administration 882 514 1,675 1,009
Sales and marketing 1,854 1,867 4,081 3,502
Stock compensation and related bonuses - 1,761 - 3,522
Amortization of goodwill 244 - 505 -
------- -------- -------- -------
Operating Income $ 7,240 $ 5,224 $ 15,791 $ 9,242
Interest expense, net
including interest paid to former stockholder
of $401 and $402 in 1998 and 1997, respectively $(7,256) $(2,439) $(14,519) $(4,953)
------- -------- -------- -------
Income before income taxes $ (16) $ 2,785 $ 1,272 $ 4,289
Income tax expense 98 1,175 733 1,850
------- -------- -------- -------
Net income $ (114) $ 1,610 $ 539 $ 2,439
======= ======= ======== =======
</TABLE>
5
<PAGE>
Details Capital Corp. and Details, Inc.
Condensed Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Details, Inc. Details Capital Corp.
------------------- ---------------------
Six Months Ended June 30,
-------------------------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net cash provided by operating activities $ 7,847 $ 6,816 $ 7,871 $ 6,816
------- ------- ------- -------
Cash flows from investing activities:
Purchase of property & equipment (4,710) (2,378) (4,710) (2,378)
Additional costs incurred with the acquisition of NTI (196) - (196) -
Deposits for leasehold improvements and
construction in progress (749) (368) (749) (368)
------- ------- ------- -------
Net cash used in investing activities $(5,655) $(2,746) $(5,655) $(2,746)
------- ------- ------- -------
Cash flows from financing activities:
Principal payments on debt - (4,664) - (4,664)
Principal payments on capital lease obligations (435) (226) (435) (226)
Payment of loan acquisition fees (259) - (666) -
Loan to parent (340) - - -
Short-term borrowing, on revolver - 1,750 - 1,750
Proceeds from sale of restricted stock - - 45 -
Payment of escrow payable (4,100) - (4,100) -
------- ------- ------- -------
Net cash used in financing activities $(5,134) $(3,140) $(5,156) $(3,140)
------- ------- ------- -------
Net decrease in cash (2,942) 930 (2,940) 930
Cash, beginning of year 5,377 169 5,377 169
------- ------- ------- -------
Cash, end of period $ 2,435 $ 1,099 $ 2,437 $ 1,099
======= ======= ======= =======
</TABLE>
Supplemental disclosure of cash flow information:
Noncash operating activities:
During the six months ended June 30, 1998 and 1997, the Company recorded
$3,139 and $1,185 of depreciation and amortization expense, respectively.
Noncash investing activities:
During the three months ended March 31, 1997, the Company entered into
capital lease obligations for the acquisition of property and equipment in
the amount of $646.
Noncash financing activities:
During the six months ended June 30, 1997, the Company recorded $1,948 of
expense relating to the issuance of stock options issued by Holdings below
market value included in stock compensation and related bonuses expense
aggregating to $3,522.
6
<PAGE>
Details Capital Corp. and Details, Inc.
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
NOTE 1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements for the period ended
June 30, 1998 include the accounts of Details Capital Corp. ("Details
Capital") and its wholly-owned subsidiary Details, Inc. and subsidiaries
("Details"), (collectively, the "Company"). For the period ended June 30,
1998, Details Capital was wholly owned by Details Holdings Corp., formerly
Details, Inc. ("Holdings"), by virtue of a series of transactions related to
the financing of the recapitalization (the "Recapitalization") of the Company
in October 1997. In connection with the Transaction as defined in Note 5,
Details Capital become a wholly owned subsidiary of Details Intermediate
Holdings Corp., a wholly owned subsidiary of Holdings. See Note 5. The
financial information for the six months ended June 30, 1997 represents the
financial information of Holdings (the "Pre-Recapitalization Company").
In connection with the Recapitalization, Details, Inc. changed its name to
Details Holdings Corp., incorporated Details as a wholly owned subsidiary and
contributed substantially all of its assets, subject to certain liabilities,
to Details. On November 19, 1997, Holdings organized Details Capital as a
wholly-owned subsidiary, and on February 10, 1998, contributed substantially
all its assets (including all of the shares of common stock of Details),
subject to certain liabilities, including its senior discount notes ("The
Discount Notes"), to Details Capital. Other than the Discount Notes and
related financing fees and deferred tax assets, all the assets and liabilities
of Details Capital are those of Details. The transactions above were between
entities under common control, and accordingly, the historical basis of the
assets and liabilities of Holdings, Details Capital and Details were not
affected. In addition, the Details Capital condensed consolidated financial
statements have been prepared as if the contribution of Holdings' assets and
liabilities to Details Capital in exchange for its common stock occurred in
connection with the Recapitalization.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary
(consisting only of normal recurring adjustments) to present fairly the
financial position of the Company as of June 30, 1998, and the results of
operations and cash flows for the six months ended June 30, 1998 and 1997.
The results of operations for such interim periods are not necessarily
indicative of results of operations to be expected for the full year.
These financial statements have been prepared by the Company pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such regulations, although the Company
believes the disclosures provided are adequate to prevent the information
presented from being misleading.
This report on Form 10-Q for the quarter ended June 30, 1998, should be read
in conjunction with the audited financial statements presented in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
NATURE OF BUSINESS
The Company manufactures and sells printed circuit boards ("PCBs") primarily
to the domestic electronics industry. A significant portion of the Company's
sales are for the time critical segment (quick turn) of the PCB industry.
Quick turn PCBs are manufactured within 10 days.
7
<PAGE>
Details Capital Corp. and Details, Inc.
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
NOTE 2. INVENTORIES
Inventories are stated at the lower of cost (determined on a first-in, first-out
basis) or market and consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Raw materials $2,411 $1,440
Work-in-process 3,413 2,674
Finished goods 1,402 216
------ ------
Total $7,226 $4,330
====== ======
</TABLE>
NOTE 3. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
Details, Inc. Details Capital Corp.
----------------------- -----------------------
June 30, December 31, June 30, December 31,
1998 1997 1998 1997
-------- ------------ -------- ------------
<S> <C> <C> <C> <C>
Senior Term A Facility * $ 31,089 $ 31,089 $ 31,089 $ 31,089
Senior Term B Facility * 50,000 50,000 50,000 50,000
Senior Acquisition Facility * 25,000 25,000 25,000 25,000
10.0% Senior Sub. Notes 100,000 100,000 100,000 100,000
12.5% Discount Notes 64,761 60,968
Capital lease obligations to
former stockholder 6,190 6,438 6,190 6,438
Capital lease obligation 1,786 - 1,786 -
Other - 23 - 23
-------- -------- -------- --------
Sub-total 214,065 212,550 278,826 273,518
Less current maturities (4,903) (2,450) (4,903) (2,450)
-------- -------- -------- --------
Total $209,162 $210,100 $273,923 $271,068
======== ======== ======== ========
</TABLE>
* Interest rates are LIBOR based and range from 8.19% to 8.44% as of June 30,
1998.
8
<PAGE>
Details Capital Corp. and Details, Inc.
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
NOTE 4. ACQUISITION OF NTI AND THE RECAPITALIZATION
The accompanying consolidated statements of operations include the accounts of
NTI and the effects of the Recapitalization for the six months ended June 30,
1998. Assuming that the NTI acquisition and the Recapitalization were
consummated on January 1, 1997, the unaudited pro forma net sales and net loss
for the six months ended June 30, 1997, would have been $50.2 million and $2.6
million and $50.2 million and $250,000 for Details Capital and Details, Inc.
respectively.
These unaudited pro forma results are not necessarily indicative of the actual
results which would have been realized had the acquisition actually occurred
at the beginning of the period.
NOTE 5. SUBSEQUENT EVENT
On July 23, 1998, pursuant to a definitive Stock Contribution and Merger
Agreement (the "Agreement"), the Company consummated the acquisition (the
"Transaction") of Dynamic Circuits, Inc. ("DCI"), a Northern California based
manufacturer of printed circuit boards, back-plane assemblies and
electromechanical interconnect devices. In connection with the consummation
of the Transaction, DCI will become a wholly owned subsidiary of Details, Inc.
and will be accounted for as a purchase in accordance with APB No. 16.
The Transaction was completed for aggregate consideration of approximately
$247 million which consisted of a partial redemption of DCI's outstanding
capital stock for cash with the remaining capital stock being contributed to
Holdings in exchange for shares and options to purchase shares of the voting
common stock of Holdings (estimated value of approximately $69 million). The
capital stock of DCI received by Holdings was concurrently contributed through
Details Capital Corp. to Details, Inc. The Transaction was financed with a
new $300 million senior bank facility and by $35 million of newly issued
Senior Discount Notes by a newly formed, wholly owned subsidiary of Holdings.
In connection with the new financing, Details, Inc. used $106 million of the
proceeds to retire all of its existing senior term debt.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS.
- --------------
OVERVIEW
The Company believes, based on industry data, that it is one of the largest
domestic manufacturers and marketers of PCBs for the quick-turn segment of the
PCB industry. The Company produces PCBs for over 350 customers across a wide
range of end-use markets including the telecommunications, computer, contract
manufacturing, industrial instrumentation and consumer electronics industries.
This discussion and analysis should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations set
forth in the Company's Annual Report on Form 10-K for the year ended December
31, 1997.
RESULTS OF OPERATIONS
Three-Months Ended June 30, 1998 compared to the Three Months ended June 30,
1997
Net sales for the three months ended June 30, 1998 increased $7.8 million or
42.2% to $26.3 million from $18.5 million for the three months ended June 30,
1997. The increase resulted from two factors: (i) the acquisition of NTI, which
added $6.9 million to net sales; and (ii) a 10.3% increase in the average panel
(unit) selling price realized at the Company's Anaheim facility to $1,013 from
$918. The increase in the average panel price realized by the Anaheim facility
was driven by a demand for high layer count and more technologically advanced
printed circuit boards.
Gross profit for the three months ended June 30, 1998 increased $581,000 or 6.1%
to $10.2 million from $9.6 million for the three months ended June 30, 1997.
The increase resulted from the increase in net sales at the Anaheim facility and
from the acquisition of NTI, which added $566,000 million to gross profit. The
decline in gross profit as a percent of net sales to 37.1% from 40.5% resulted
from the acquisition of NTI, which has historically operated at a lower gross
profit margin, which is reflective of the market niche it serves.
Selling, general and administrative expenses for the three months ended June 30,
1998 increased $351,000 or 14.7% to $2.7 million from $2.4 million for the three
months ended June 30, 1997. The net increase resulted primarily from the
acquisition of NTI. For the three months ended June 30, 1998 selling, general
and administrative expenses as a percentage of net sales decreased to 10.4% from
14.4% for the three months ended June 30, 1997. The decrease resulted from the
spreading of fixed costs over a larger revenue base, and from a lower sales
commission cost for NTI's sales.
For the three months ended June 30, 1998, no stock compensation or related bonus
expense was recognized as compared to $1.8 million for the three months ended
June 30, 1997. The stock compensation and related bonuses recognized for the
three months ended June 30, 1997 was attributable to a 1996 variable stock
option plan which was fully vested in 1997 and therefore has no impact on
earnings for fiscal years beginning after December 31, 1997.
Goodwill amortization for the three months ended June 30, 1998 of $244,000
resulted from the acquisition of NTI on December 22, 1997.
Interest expense for the three months ended June 30, 1998 increased $4.9 million
to $7.3 million for Details Capital and $2.9 million to $5.3 million for Details
compared to $2.4 million for the three months ended June 30, 1997. The increase
in net interest expense is attributable to the increased level of borrowings in
connection with the Recapitalization and the acquisition of NTI. Interest
expense for Details Capital included amortization of approximately $1.9 million
related to the Discount Notes, not included in Details.
Income taxes for the three months ended June 30, 1998 decreased $1.1 million to
$98,000 for Details Capital and decreased $285,000 to $ 890,000 for Details
compared to $1.2 million for the three months ended June 30, 1997.
10
<PAGE>
The Company anticipates a consolidated effective income tax rate of
approximately 41% for the year ending December 31, 1998 and accordingly, the
Company recorded income taxes during the three months ended June 30, 1998 based
on such expected effective income tax rate of 41%.
Net income for the three months ended June 30, 1998 decreased $1.7 million to
$(114,000) for Details Capital and decreased $583,000 to $1.0 million for
Details compared to $1.6 for the three months ended June 30, 1997 largely due to
factors discussed above.
Six-Months Ended June 30, 1998 compared to the Six Months ended June 30, 1997
Net sales for the six months ended June 30, 1998 increased $19.7 million or
56.6% to $54.5 million from $34.8 million for the six months ended June 30,
1997. The increase resulted from two factors: (i) the acquisition of NTI, which
added $14.7 million to net sales; and (ii) a 17.0% increase in the average panel
(unit) selling price realized at the Company's Anaheim facility to $1,036 from
$885. The increase in the average panel price realized by the Anaheim facility
was driven by a demand for high layer count and more technologically advanced
printed circuit boards.
Gross profit for the six months ended June 30, 1998 increased $4.2 or 23.6% to
$22.0 million from $17.8 million for the six months ended June 30, 1997. The
increase resulted from the increase in net sales at the Anaheim facility and
from the acquisition of NTI, which added $2.2 million to gross profit. The
decline in gross profit as a percent of net sales to 40.5% from 51.2% resulted
from the acquisition of NTI, which has historically operated at a lower gross
profit margin, which is reflective of the market niche it serves.
Selling, general and administrative expenses for the six months ended June 30,
1998 increased $1.2 million or 26.7% to $5.7 million from $4.5 million for the
six months ended June 30, 1997. The net increase resulted primarily from the
acquisition of NTI, which added $1.3 million to selling, general and
administrative expenses. For the six months ended June 30, 1998 selling,
general and administrative expenses as a percentage of net sales decreased to
10.6% from 13.0% for the six months ended June 30, 1997. The decrease resulted
from the spreading of fixed costs over a larger revenue base, and from a lower
sales commission cost from NTI's sales.
For the six months ended June 30, 1998, no stock compensation or related bonus
expense was recognized as compared to $3.5 million for the six months ended June
30, 1997. The stock compensation and related bonuses recognized for the six
months ended June 30, 1997 was attributable to a 1996 variable stock option plan
which was fully vested in 1997 and therefore has no impact on earnings for
fiscal years beginning after December 31, 1997.
Goodwill amortization for the three months ended June 30, 1998 of $505,000
resulted from the acquisition of NTI on December 22, 1997.
Interest expense for the six months ended June 30, 1998 increased $9.5 million
to $14.5 million for Details Capital and $5.7 million to $10.7 million for
Details compared to $5.0 million for the six months ended June 30, 1997. The
increase in net interest expense is attributable to the increased level of
borrowings in connection with the Recapitalization and the acquisition of NTI.
Interest expense for Details Capital included amortization of approximately $3.8
million related to the Discount Notes, not included in Details.
Income taxes for the six months ended June 30, 1998 decreased $1.1 million to
$733,000 for Details Capital and increased $446,000 to $ 2.3 million for Details
compared to $1.9 million for the six months ended June 30, 1997. The Company
anticipates a consolidated effective income tax rate of approximately 41% for
the year ending December 31, 1998 and accordingly, the Company recorded income
taxes during the six months ended June 30, 1998 based on such expected effective
income tax rate of 41%.
Net income for the six months ended June 30, 1998 decreased $1.9 million to
$539,000 for Details Capital and increased $349,000 to $2.8 million for Details
compared to $2.4 for the six months ended June 30, 1997 largely due to factors
discussed above.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998, Details Capital and Details, Inc. had cash of $2.4 million
compared to $5.4 million as of December 31, 1997. The principal source of
liquidity for the 2nd quarter of 1998 was cash provided by operations.
Net cash provided by operating activities for the six months ended June 30, 1998
was $7.8 million, compared to $6.8 million for the six months ended June 30,
1997.
Capital expenditures and deposits on capital assets for the six months ended
June 30, 1998 were $5.6 million, compared to $2.7 million for the six months
ended June 30, 1997.
As of June 30, 1998, Details Capital and Details, Inc. had borrowings of $278.8
million and $214.0 million respectively. The Company had up to $30 million
available for borrowing under its revolving credit facility. The Company's
estimated minimum principal payment obligations under its Senior Credit Facility
are $1.9 million for fiscal 1998.
Based upon the current level of operations, management believes that cash
generated from operations, available cash and amounts available under its Senior
Credit Facility 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 to enable the Company to service its
indebtedness. The Company is highly leveraged, and its future operating
performance and ability to service or refinance its indebtedness will be subject
to future economic conditions and to financial, business and other factors, many
of which are beyond the Company's control.
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 December 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. However,
management does not believe that Year 2000 changes will have a material impact
on the operating results or financial condition of the Company.
12
<PAGE>
CHANGES IN ACCOUNTING PRINCIPLES
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income".
SFAS No. 130 establishes requirements for disclosure of comprehensive income and
becomes effective for the Company's fiscal year ending December 31, 1998.
Reclassification of prior year financial statements for comparative purposes is
required. At June 30, 1998, the Company has no elements which give rise to
reporting comprehensive income.
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. This pronouncement currently has no significant
impact on the reporting practices of the Company since its adoption; and until
such time the Company diversifies its operations, management believes such
pronouncement will not be applicable.
FACTORS THAT MAY AFFECT FUTURE RESULTS
SUBSTANTIAL LEVERAGE
The Company's high degree of leverage could have significant consequences,
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
are contained in the terms of its Indebtedness could limit the Company's ability
to compete, as well as its ability to expand, including through acquisitions,
and to make capital improvements; and (iv) the Company may be more leveraged
than certain of its competitors, which may place the Company at a competitive
disadvantage.
The Company's ability to pay principal and interest on the its indebtedness 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. The Company anticipates that its operating cash
flow, together with borrowings 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 or seeking additional equity capital. There is no
assurance that any of these remedies can be effected on satisfactory terms, if
at all.
RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS
The terms of the Company's indebtedness restrict, among other things, Details
Capital's and Details' ability to incur additional indebtedness, pay dividends
or make certain other restricted payments, consummate certain asset sales, enter
into certain transactions with affiliates, incur indebtedness, 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.
Details is also required to maintain specified financial ratios and satisfy
certain financial condition tests. Details' ability to meet those financial
ratios and tests can be affected by events beyond its control, and there can be
no assurance that Details will meet those tests. A breach of any of these
covenants could result in a default under some or all of, the Company's
indebtedness agreements. Upon the occurrence of an event of default lenders
under such indebtedness could elect to declare all amounts outstanding together
with accrued interest, to be immediately due and payable. If the Company were
unable to repay such amounts, the lenders could proceed against the collateral
granted to them to secure that indebtedness. Substantially all the assets of
the Company and its subsidiaries are pledged as security under the Senior Credit
Facilities.
13
<PAGE>
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.
DEPENDENCE ON A LIMITED NUMBER OF CUSTOMERS
During the six months ended June 30, 1998, sales to the Company's largest
customer accounted for 10.3% of the Company's net revenues. Sales to the
Company's two largest customers accounted for approximately 20.0% of the
Company's net revenues and sales to the Company's ten largest customers
accounted for 54.6% 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.
DEPENDENCE ON ELECTRONICS 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.
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 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.
14
<PAGE>
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.
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 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.
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.
15
<PAGE>
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 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.
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
Certain investment funds associated with Bain Capital, Inc. (the "Bain Capital
Funds") hold approximately 50.3% of the outstanding voting stock of Holdings,
the sole stockholder of Details Intermediate Holdings Corp., which is the sole
stockholder of 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 the Company, to elect a majority of the
directors of Holdings and its subsidiaries, and to exercise control over the
business, policies and affairs of the Company.
16
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is currently not a party to any legal actions or proceedings.
Item 2. Changes in Securities. None.
Item 3. Defaults upon Senior Securities. None
Item 4. Submission of Matters to a Vote of Security Holders. None
Item 5. Other Information. None
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits:
-----------------
27.1 Financial Data Schedule for Details, Inc.
27.2 Financial Data Schedule for Details Capital Corp.
(b) Reports on Form 8-K:
--------------------
None.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Details Capital Corp. has duly caused this quarterly
report to be signed on its behalf by the undersigned, thereto duly authorized,
in the city of Anaheim, state of California, on the 7th day of August, 1998.
DETAILS CAPITAL CORP.
By: /s/ Bruce D. McMaster
---------------------
Name: Bruce D. McMaster
Title: President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons in the capacities and on the dates
indicated.
Signature Title Date
--------- ----- ----
/s/ Bruce D. McMaster President (principal August 7, 1998
- --------------------- executive officer)
Bruce D. McMaster
/s/ Joseph P. Gisch Vice President and Chief August 7, 1998
- ------------------- Financial Officer
Joseph P. Gisch (principal financial and
accounting officer)
18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Details, Inc. has duly caused this annual report to be
signed on its behalf by the undersigned, thereto duly authorized, in the city of
Anaheim, state of California, on the 7th day of August, 1998.
DETAILS, INC.
By: /s/ Bruce D. McMaster
---------------------
Name: Bruce D. McMaster
Title: President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons in the capacities and on the dates
indicated.
Signature Title Date
--------- ----- ----
/s/ Bruce D. McMaster President (principal August 7, 1998
--------------------- executive officer)
Bruce D. McMaster
/s/ Joseph P. Gisch Vice President and Chief August 7, 1998
------------------- Financial Officer
Joseph P. Gisch (principal financial and
accounting officer)
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0001050117
<NAME> DETAILS INC.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,435,000
<SECURITIES> 0
<RECEIVABLES> 17,405,000
<ALLOWANCES> (342,000)
<INVENTORY> 7,226,000
<CURRENT-ASSETS> 32,251,000
<PP&E> 55,816,000
<DEPRECIATION> (24,968,000)
<TOTAL-ASSETS> 98,299,000
<CURRENT-LIABILITIES> 22,793,000
<BONDS> 100,000,000
0
0
<COMMON> 138,404,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 98,299,000
<SALES> 54,499,000
<TOTAL-REVENUES> 54,499,000
<CGS> 32,447,000
<TOTAL-COSTS> 32,447,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,714,000
<INCOME-PRETAX> 5,084,000
<INCOME-TAX> 2,296,000
<INCOME-CONTINUING> 2,788,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,788,000
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0001050119
<NAME> DETAILS CAPITAL CORP.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,437,000
<SECURITIES> 0
<RECEIVABLES> 17,405,000
<ALLOWANCES> (342,000)
<INVENTORY> 7,226,000
<CURRENT-ASSETS> 37,401,000
<PP&E> 55,816,000
<DEPRECIATION> (24,968,000)
<TOTAL-ASSETS> 106,794,000
<CURRENT-LIABILITIES> 23,066,000
<BONDS> 64,761,000
0
0
<COMMON> 88,630,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 106,794,000
<SALES> 54,499,000
<TOTAL-REVENUES> 54,499,000
<CGS> 32,447,000
<TOTAL-COSTS> 32,447,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,519,000
<INCOME-PRETAX> 1,272,000
<INCOME-TAX> 733,000
<INCOME-CONTINUING> 539,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 539,000
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
