<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, 1999
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
DDi CAPITAL CORP.
DYNAMIC DETAILS, INCORPORATED
(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.)
1220 SIMON CIRCLE
ANAHEIM, CALIFORNIA 92806
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(714) 688-7200
(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 June 30, 1999, all of the voting stock of Dynamic Details, Incorporated was
held by DDi Capital Corp. and all of the voting stock of DDi Capital Corp. was
held by DDi Intermediate Holdings Corp. which is wholly owned by DDi Holdings
Corp.
As of June 30, 1999, Dynamic Details, Incorporated had 100 shares of common
stock, par value $.01 per share, outstanding and DDi Capital Corp. had 1,000
shares of common stock, par value $.01 per share, outstanding.
<PAGE>
DDi Capital Corp.
Dynamic Details, Incorporated
Form 10-Q
Table of Contents
PART I Financial Information Page No.
--------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1999
and December 31, 1998 3
Condensed Consolidated Statements of Operations for the
three months and six months ended June 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 1999 and 1998 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 21
PART II Other Information
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Defaults upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
2
<PAGE>
PART I FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS
DDi Capital Corp. and Dynamic Details, Incorporated
Condensed Consolidated Balance Sheets
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
DDi DDi Capital
------------------------ ------------------------
June 30, December 31, June 30, December 31,
1999 1998 1999 1998
--------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 3,575 $ 1,905 $ 3,575 $ 1,905
Trade receivables, net 44,282 34,764 44,282 34,764
Inventories 19,181 12,615 19,181 12,615
Prepaid expenses and other 2,119 1,236 2,119 1,236
Income tax receivable - 3,793 - 3,793
Deferred tax asset 4,816 4,816 4,816 4,816
--------- --------- --------- ---------
Total current assets 73,973 59,129 73,973 59,129
Property and equipment, net 62,978 61,018 62,978 61,018
Debt issue costs, net 10,472 11,458 14,168 15,167
Goodwill and other intangibles, net 215,773 226,286 215,773 226,286
Other 458 566 458 566
--------- --------- --------- ---------
Total Assets $ 363,654 $ 358,457 $ 367,350 $ 362,166
========= ========= ========= =========
Liabilities and Stockholders' Deficit
Current liabilities:
Current maturities of long-term debt and
capital lease obligations $ 5,960 $ 4,390 $ 5,960 $ 4,390
Current portion of deferred interest
rate swap income 1,450 - 1,450 -
Revolving credit facility - 7,000 - 7,000
Accounts payable 25,853 14,612 25,853 14,612
Accrued expenses and other 18,533 16,046 18,533 16,046
Escrow payable to redeemed stockholders 3,900 3,900 3,900 3,900
--------- --------- --------- ---------
Total current liabilities 55,696 45,948 55,696 45,948
Long-term debt and capital lease obligations 354,998 358,150 428,116 426,955
Deferred interest rate swap income 4,612 - 4,612 -
Notes payable and other 3,505 4,429 3,505 4,429
Deferred tax liability 27,155 27,878 20,338 22,804
--------- --------- --------- ---------
Total liabilities 445,966 436,405 512,267 500,136
--------- --------- --------- ---------
Commitments and contingencies
Stockholders' deficit:
Common stock and additional paid-in-capital 247,160 245,532 196,366 194,738
Accumulated deficit (329,472) (323,480) (341,283) (332,708)
--------- --------- --------- ---------
Total stockholders' deficit (82,312) (77,948) (144,917) (137,970)
--------- --------- --------- ---------
Total Liabilities and Stockholders' Deficit $ 363,654 $ 358,457 $ 367,350 $ 362,166
========= ========= ========= =========
</TABLE>
3
<PAGE>
Dynamic Details, Incorporated
Condensed Consolidated Statements of Operations
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Net Sales $71,740 $26,293 $130,919 $ 54,499
Cost of goods sold 50,218 16,073 92,034 32,447
------- ------- -------- --------
Gross Profit 21,522 10,220 38,885 22,052
Operating Expenses:
General and administration 4,418 878 7,234 1,668
Sales and marketing 5,368 1,854 10,070 4,081
Amortization of intangibles 6,005 244 11,826 505
------- ------- -------- --------
Operating Income 5,731 7,244 9,755 15,798
Interest expense (net) and other expense (net) (8,258) (5,327) (16,429) (10,714)
------- ------- -------- --------
Income (loss) before income taxes (2,527) 1,917 (6,674) 5,084
Income tax benefit (expense) (312) (890) 682 (2,296)
------- ------- -------- --------
Net income (loss) $(2,839) $ 1,027 $ (5,992) $ 2,788
======= ======= ======== ========
</TABLE>
4
<PAGE>
DDi Capital Corp.
Condensed Consolidated Statements of Operations
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1999 1998 1999 1998
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Net Sales $ 71,740 $26,293 $130,919 $ 54,499
Cost of goods sold 50,218 16,073 92,034 32,447
-------- ------- -------- --------
Gross Profit 21,522 10,220 38,885 22,052
Operating Expenses:
General and administration 4,418 882 7,234 1,675
Sales and marketing 5,368 1,854 10,070 4,081
Amortization of intangibles 6,005 244 11,826 505
-------- ------- -------- --------
Operating Income 5,731 7,240 9,755 15,791
Interest expense (net) and other expense (net) (10,448) (7,256) (20,755) (14,519)
-------- ------- -------- --------
Income (loss) before income taxes (4,717) (16) (11,000) 1,272
Income tax benefit (expense) 574 (98) 2,425 (733)
-------- ------- -------- --------
Net income (loss) $ (4,143) $ (114) $ (8,575) $ 539
======== ======= ======== ========
</TABLE>
5
<PAGE>
DDi Capital Corp. and Dynamic Details, Incorporated
Condensed Consolidated Statement of Cash Flows
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
DDi DDi Capital
------------------- -------------------
Six Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net cash provided by operating activities $13,603 $ 7,847 $13,603 $ 7,871
------- ------- ------- -------
Cash flows from investing activities:
Purchase of property & equipment (8,064) (5,459) (8,064) (5,459)
Costs incurred in connection with the acquisition of DCI (212) (196) (212) (196)
------- ------- ------- -------
Net cash used in investing activities (8,276) (5,655) (8,276) (5,655)
------- ------- ------- -------
Cash flows from financing activities:
Principal payments on long-term debt (1,088) - (1,088) -
Net repayments on the revolving credit facility (7,000) - (7,000) -
Payments of deferred note payable (1,138) - (1,138) -
Principal payments on capital lease obligations (484) (435) (484) (435)
Capital contribution to Parent, net (9) - (9) -
Proceeds from interest rate swaps 6,062 - 6,062 -
Payments of escrow payable to redeemed stockholders - (4,100) - (4,100)
Loan to parent - (340) - -
Payment of debt issuance and capital costs - (259) - (666)
Proceeds from sale of restricted stock - - - 45
------- ------- ------- -------
Net cash used in financing activities (3,657) (5,134) (3,657) (5,156)
------- ------- ------- -------
Net increase (decrease) in cash 1,670 (2,942) 1,670 (2,940)
Cash and cash equivalents, beginning of year 1,905 5,377 1,905 5,377
------- ------- ------- -------
Cash and cash equivalents, end of period $ 3,575 $ 2,435 $ 3,575 $ 2,437
======= ======= ======= =======
</TABLE>
Supplemental disclosure of cash flow information:
Noncash operating activities:
During the six months ended June 30, 1999 and 1998, the Company recorded
$19,858 and $3,139, respectively, of depreciation and amortization expense.
6
<PAGE>
DDi Capital Corp. and Dynamic Details, Incorporated
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 periods ended
June 30, 1999 include the accounts of DDi Capital Corp. ("DDi Capital") and its
wholly-owned subsidiary Dynamic Details, Incorporated and subsidiaries ("DDi"),
(collectively, the "Company"). The consolidated financial statements of DDi
include the accounts of Dynamic Circuits, Inc. ("DCI") commencing on July 23,
1998 (date of acquisition) - see Note 5.
On November 19, 1997, DDi Holdings Corp. ("Holdings") organized DDi 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 DDi), subject to
certain liabilities, including its senior discount notes (the "Discount Notes"),
to DDi Capital. On July 15, 1998, Holdings organized DDi Intermediate Holdings
Corp. ("Intermediate") and, in conjunction with the acquisition of DCI,
contributed its ownership of DDi Capital to Intermediate. Other than the
Discount Notes and related financing fees and deferred tax assets, all the
assets and liabilities of DDi Capital are those of DDi. The transactions above
were between entities under common control and, accordingly, the historical
basis of the assets and liabilities of Holdings, DDi Capital and DDi were not
affected.
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, 1999, and the results of operations and cash flows for
the six months ended June 30, 1999 and 1998. 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, 1999 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, 1998.
NATURE OF BUSINESS
The Company is a leading designer, manufacturer and marketer of complex printed
circuit boards ("PCBs") for the time-critical or "quick-turn" segment of the
domestic PCB industry, as well as of longer-lead PCBs, backplanes and other
interconnects. The Company produces PCBs for over 1,000 customers across a wide
range of end-use markets including the telecommunications, computer, contract
manufacturing, industrial instrumentation and consumer electronics industries.
7
<PAGE>
DDi Capital Corp. and Dynamic Details, Incorporated
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, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Raw materials $ 8,905 $ 6,628
Work-in-process 8,826 4,406
Finished goods 1,450 1,581
------------- -----------------
Total $ 19,181 $ 12,615
============= =================
</TABLE>
NOTE 3. LONG-TERM DEBT AND CAPITAL LEASES
Long-term debt and capital lease obligations consist of the following
(in thousands):
<TABLE>
<CAPTION>
DDi DDi Capital
------------------------------------ ------------------------------------
June 30, 1999 December 31, 1998 June 30, 1999 December 31, 1998
------------- ----------------- ------------- -----------------
<S> <C> <C> <C> <C>
Senior Term Facility (a) $253,913 $255,000 $253,913 $255,000
10.0% Senior Sub. Notes 100,000 100,000 100,000 100,000
12.5% Discount Notes (b) - - 73,118 68,805
Capital lease obligations 7,045 7,540 7,045 7,540
------------- ----------------- ------------- -----------------
Sub-total 360,958 362,540 434,076 431,345
Less current maturities (5,960) (4,390) (5,960) (4,390)
------------- ----------------- ------------- -----------------
Total $354,998 $358,150 $428,116 $426,955
============= ================= ============= =================
(a) Interest rates are LIBOR-based and range from 7.39% to 7.64% as of June 30, 1999.
(b) Face amount of $110,000, net of unamortized discount of $36,882 and $41,195 at June 30, 1999 and
December 31, 1998, respectively.
</TABLE>
8
<PAGE>
DDi Capital Corp. and Dynamic Details, Incorporated
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
NOTE 4. INTEREST RATE SWAP AGREEMENTS
In June 1999, DDi elected to terminate and concurrently replace its existing
interest rate exchange agreements ("Swap Agreements"). DDi received cash
proceeds of approximately $6.1 million from these transactions which will be
recognized as a reduction to interest expense. Of this amount, approximately
$5.6 million represents the gain from the termination of the Swap Agreements
and will therefore be amortized through January 2002, the original scheduled
maturity of the Swap Agreements. The remaining $.5 million represents
proceeds from the execution of the new interest rate exchange agreements ("New
Swap Agreements") and will be amortized into interest expense as a yield
adjustment through April 2005, over the term of the New Swap Agreements. It
is anticipated that the impact of this amortization will not materially affect
interest expense in any period.
The New Swap Agreements represent an effective cash flow hedge, consistent
with the nature of the Swap Agreements. Under the terms of the New Swap
Agreements, the Company pays a maximum annual rate of interest applied to a
notional amount equal to the principal balance of the senior term facility for
the period June 30, 1999 through August 31, 2001. During this period, the
Company's maximum annual rate is 5.65% for a given month, unless 1-month LIBOR
for that month equals or exceeds 7.00%, in which case the Company pays 7.00%
for that month. From September 1, 2001 through the scheduled maturity of the
senior term facility in 2005, the Company pays a fixed annual rate of 7.35%
applied to a notional amount equal to 50% of the principal balance of the
senior term facility during that period.
As a result of the termination and replacement of the Swap Agreements, the
maximum rate of interest to be paid has increased from 4.96%, the fixed rate
of interest on the Swap Agreements, to 5.65% or 7.00% (depending on 1-month
LIBOR) through January 31, 2002. The New Swap Agreements, however, provide the
Company with increased protection against increases in interest rates from
January 31, 2002 through the maturity of the senior term facility in 2005,
since the New Swap Agreements do not contain an option, which was available to
the counterparties of the Swap Agreements, to terminate the agreements on
January 31, 2002.
NOTE 5. ACQUISITION OF DCI
On July 23, 1998, the Company acquired all of the outstanding shares of common
stock of DCI, a California corporation. The transaction was completed for
aggregate consideration of approximately $250 million which consisted of a
partial redemption, by way of a merger, of DCI's outstanding capital stock for
cash with the remaining capital stock being contributed to Holdings in
exchange for shares and options to purchase shares of the voting common stock
of Holdings (estimated value of approximately $73 million). The capital stock
of DCI received by Holdings was concurrently contributed through Intermediate
and through DDi Capital to DDi. The transaction was financed with a new $300
million senior bank facility and by $33 million of senior discount notes newly
issued by Intermediate. The proceeds from the issuance of these senior
discount notes were contributed through DDi Capital to DDi. In connection with
the new financing, DDi used $106 million of the proceeds from the senior bank
facility to retire all of its existing senior term debt.
The accompanying condensed consolidated financial statements of operations
include the accounts of DCI from January 1, 1999 to June 30, 1999. The
unaudited pro forma statement of operations for the six months ended June 30,
1998, which assumes that the DCI acquisition was consummated on January 1,
1998, reflects net sales of $133 million for the Company, net loss of $5
million for DDi Capital and net loss of $3 million for DDi. The unaudited pro
forma results are not necessarily indicative of the actual results that would
have been realized had the acquisition actually occurred at the beginning of
1998.
9
<PAGE>
DDi Capital Corp. and Dynamic Details, Incorporated
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
NOTE 6. RELATED PARTY TRANSACTIONS
Certain investment funds associated with Bain Capital, Inc. (the "Bain Capital
Funds"), the controlling shareholders of Holdings, were shareholders of DCI
prior to the Company's July 1998 acquisition of DCI (see Note 5). In
conjunction with the acquisition, the Bain Capital Funds received $22.9
million for the redemption of the DCI common stock they held prior to
consummation of the acquisition and Bain Capital, Inc. received $2.7 million
in transaction fees.
Chase Manhattan Capital, L.P., a shareholder of Holdings, is an affiliate of
Chase Manhattan Bank ("Chase"). In conjunction with the acquisition of DCI,
Chase acted as collateral, co-syndication, and administrative agent with
regard to the establishment of the new credit agreement. In this capacity,
Chase received $2.4 million in fees. Chase also participates as a lender in
the syndication, under terms similar to those of the other participants.
Pursuant to a management agreement among Bain Capital Partners V, L.P.
("Bain"), Holdings and DDi (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. In addition, Bain
may, upon 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 this capacity, Bain received
approximately $.5 million in fees in 1999.
NOTE 7. SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATED FINANCIAL DATA
On November 15, 1997, Dynamic Details, Incorporated (the "Issuer"), issued
$100 million aggregate principal amount of 10% Senior Subordinated Notes due
in 2005. The senior subordinated notes are fully and unconditionally
guaranteed on a senior subordinated basis, jointly and severally, by all of
its wholly-owned subsidiaries (the "Subsidiary Guarantors").
The condensed financial data of the Issuer is presented below and should be
read in conjunction with the condensed consolidated financial statements of
DDi. Separate financial data of the Subsidiary Guarantors are not presented
because (i) the Subsidiary Guarantors are wholly-owned and have fully and
unconditionally guaranteed the Notes on a joint and several basis and (ii) the
Company's management has determined such separate financial data are not
material to investors and believes the condensed financial data of the Issuer
presented is more meaningful in understanding the financial position of the
Company.
10
<PAGE>
SUPPLEMENTAL DYNAMIC DETAILS, INCORPORATED CONDENSED FINANCIAL DATA
(In Thousands)
(Unaudited)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------------ ------------------
<S> <C> <C>
Current assets $ 22,705 $ 20,755
Non-current assets 301,809 287,619
-------- --------
Total assets $324,514 $308,374
======== ========
Current liabilities $ 52,729 $ 37,372
Non-current liabilities 354,097 348,950
-------- --------
Total liabilities 406,826 386,322
-------- --------
Total stockholders' deficit (82,312) (77,948)
-------- --------
Total liabilities and stockholders' deficit $324,514 $308,374
======== ========
</TABLE>
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
June 30, 1999 June 30, 1998
------------------ ------------------
<S> <C> <C>
Net sales $ 23,373 $ 19,417
Cost of sales 11,716 9,766
-------- --------
Gross profit 11,657 9,651
Operating expenses 2,884 1,800
-------- --------
Income from operations 8,773 7,851
Interest expense, net (8,648) (5,307)
-------- --------
Income before taxes 125 2,544
Income tax expense (72) (936)
-------- --------
Income before equity in loss of subsidiaries 53 1,608
Equity in loss of subsidiaries (2,892) (581)
-------- --------
Net income (loss) $ (2,839) $ 1,027
======== ========
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1999 June 30, 1998
------------------ ------------------
<S> <C> <C>
Net sales $ 42,913 $ 39,811
Cost of sales 23,085 19,927
-------- --------
Gross profit 19,828 19,884
Operating expenses 5,119 4,434
-------- --------
Income from operations 14,709 15,450
Interest expense, net (16,809) (10,661)
-------- --------
Income (loss) before taxes (2,100) 4,789
Income tax benefit (expense) 757 (1,964)
-------- --------
Income (loss) before equity in loss of subsidiaries (1,343) 2,825
Equity in loss of subsidiaries (4,649) (37)
-------- --------
Net income (loss) $ (5,992) $ 2,788
======== ========
</TABLE>
11
<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 a leading designer,
manufacturer and marketer of complex PCBs for the time-critical or "quick-turn"
segment of the domestic PCB industry, as well as of longer-lead PCBs,
backplanes, and other interconnects. The Company produces PCBs for over 1,000
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, 1998.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1999 compared to the Three Months ended June 30,
1998
Net sales for the three months ended June 30, 1999 increased $45.4 million
(173%) to $71.7 million, from $26.3 million for the three months ended June 30,
1998. The increase primarily resulted from the acquisition of DCI, which
contributed $40.1 million to net sales for the three months ended June 30, 1999.
Also contributing to the increase in revenues was a higher average panel price
experienced by the other divisions, due to greater demand for more
technologically advanced printed circuit boards, partially offset by a decrease
in panel production in these operations.
Gross profit for the three months ended June 30, 1999 increased $11.3 million
(111%) to $21.5 million, from $10.2 million for the three months ended June 30,
1998. The increase resulted from the acquisition of DCI, which contributed $11.2
million to gross profit for the three months ended June 30, 1999. Partially
offsetting this increase was a decline in gross profit as a percent of net sales
to 34% from 39% in divisions other than DCI due to a decrease in panel shipments
in those operations. For the Company, gross profit as a percent of net sales
decreased to 30% for the three months ended June 30, 1999 as DCI's operating
margins have historically been lower than that of DDi, reflective of the market
niches each entity serves.
General and administration expenses for the three months ended June 30, 1999
increased $3.5 million (389%) to $4.4 million, from $.9 million for the three
months ended June 30, 1998. The increase in these expenses is primarily due to
the acquisition of DCI and higher overhead, inclusive of fees incurred under the
management agreement with the Company's majority owner. Sales and marketing
expenses for the three months ended June 30, 1999 increased $3.5 million (184%)
to $5.4 million, from $1.9 million for the three months ended June 30, 1998. The
increase in sales and marketing expenses is primarily due to the acquisition of
DCI. The higher level of sales experienced by the other divisions also
contributed to the increase in sales and marketing expenses.
Amortization of intangibles for the three months ended June 30, 1999 increased
$5.8 million to $6.0 million, from $.2 million for the three months ended June
30, 1998, resulting primarily from the acquisition of DCI.
Net interest expense for DDi Capital for the three months ended June 30, 1999
increased $3.1 million (42%) to $10.4 million, from $7.3 million for the like
period in 1998. Net interest expense for DDi for the three months ended June
30, 1999 increased $3 million (57%) to $8.3 million, from $5.3 million for the
like period in 1998. The increase in net interest expense in both instances is
primarily attributable to the increased level of borrowings in connection with
the acquisition of DCI.
12
<PAGE>
Provision for income taxes for DDi Capital for the three months ended June 30,
1999 decreased $.7 million to a benefit of $.6 million, from an expense of $.1
million for the like period in 1998. Provision for income taxes for DDi for the
three months ended June 30, 1999 decreased $.6 million to $.3 million, from $.9
million for the like period in 1998. The provisions for income taxes for each
period are based on the Company's expected effective income tax rate in each
respective fiscal year.
Six Months Ended June 30, 1999 compared to the Six Months ended June 30, 1998
Net sales for the six months ended June 30, 1999 increased $76.4 million (140%)
to $130.9 million, from $54.5 million for the six months ended June 30, 1998.
The increase primarily resulted from the acquisition of DCI, which contributed
$73 million to net sales for the six months ended June 30, 1999. Also
contributing to the increase in revenues was a higher average panel price
experienced by the other divisions, due to greater demand for more
technologically advanced printed circuit boards, partially offset by a decrease
in panel production in these operations.
Gross profit for the six months ended June 30, 1999 increased $16.8 million
(76%) to $38.9 million, from $22.1 million for the six months ended June 30,
1998. The increase resulted from the acquisition of DCI, which contributed $19.7
million to gross profit for the six months ended June 30, 1999. Partially
offsetting this increase was a decline in gross profit as a percent of net sales
to 35% from 41% in divisions other than DCI due to a decrease in panel shipments
in those operations. For the Company, gross profit as a percent of net sales
decreased to 30% for the six months ended June 30, 1999 as DCI's operating
margins have historically been lower than that of DDi, reflective of the market
niches each entity serves.
General and administration expenses for the six months ended June 30, 1999
increased $5.5 million (324%) to $7.2 million, from $1.7 million for the six
months ended June 30, 1998. The increase in these expenses is primarily due to
the acquisition of DCI and higher overhead, inclusive of fees incurred under the
management agreement with the Company's majority owner. Sales and marketing
expenses for the six months ended June 30, 1999 increased $6 million (146%) to
$10.1 million, from $4.1 million for the six months ended June 30, 1998. The
increase in sales and marketing expenses is primarily due to the acquisition of
DCI. The higher level of sales experienced by the other divisions also
contributed to the increase in sales and marketing expenses.
Amortization of intangibles for the six months ended June 30, 1999 increased
$11.3 million to $11.8 million, from $.5 million for the six months ended June
30, 1998, resulting primarily from the acquisition of DCI.
Net interest expense for DDi Capital for the six months ended June 30, 1999
increased $6.3 million (43%) to $20.8 million, from $14.5 million for the like
period in 1998. Net interest expense for DDi for the six months ended June 30,
1999 increased $5.7 million (53%) to $16.4 million, from $10.7 million for the
like period in 1998. The increase in net interest expense in both instances is
primarily attributable to the increased level of borrowings in connection with
the acquisition of DCI.
Provision for income taxes for DDi Capital for the six months ended June 30,
1999 decreased $3.1 million to a benefit of $2.4 million, from an expense of $.7
million for the like period in 1998. Provision for income taxes for DDi for the
six months ended June 30, 1999 decreased $3.0 million to a benefit of $.7
million, from an expense of $2.3 million for the like period in 1998. The
provisions for income taxes for each period are based on the Company's expected
effective income tax rate in each respective fiscal year.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, the Company had cash and cash equivalents of $3.6 million,
compared to $1.9 million as of December 31, 1998. The principal source of
liquidity for the six months ended June 30, 1999 was cash provided by
operations.
Net cash provided by operating activities for the six months ended June 30, 1999
was $13.6 million, compared to $7.8 million for the six months ended June 30,
1998.
Capital expenditures for the six months ended June 30, 1999 were $8.1 million,
compared to $5.5 million for the six months ended June 30, 1998.
As of June 30, 1999, DDi Capital and DDi had long-term borrowings of $434.1
million and $361.0 million, respectively. The Company has $45 million available
for borrowing under its revolving credit facility, less amounts that may be in
use from time-to-time. At June 30, 1999, the Company had no borrowings
outstanding under its revolving credit facility.
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,
certain of which are beyond the Company's control.
COMPUTER SYSTEMS AND YEAR 2000
The Year 2000 issue exists because certain computer programs use only the last
two digits, rather than four, to refer to a year. As a result, computer programs
and systems with time-sensitive technology do not properly recognize a date of
"00" as the year 2000, but rather as the year 1900. The extent of the potential
impact of the Year 2000 problem is not yet known, but it could result in
computer application and system failure or miscalculations causing disruptions
of operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
The Company has developed and is currently executing a plan to ensure that its
information technology (IT) systems, which include computer equipment and
software as well as its non-IT systems, such as fax machines and alarm systems,
will be able to function properly with respect to the year 2000 and thereafter.
The implementation of all phases of the plan, on a company-wide basis, is
currently in process. The Company has existing personnel who will facilitate the
identification, assessment, testing, renovation and monitoring of Year 2000
compliance issues and initiatives. The Company currently anticipates that its
Year 2000 identification, assessment, testing and renovation efforts, which
began in October 1997, will be completed by August 31, 1999. The Company
anticipates completion of a contingency plan for dealing with the most
reasonably likely worst case scenario by September 30, 1999.
The Company recently completed the identification of its IT and non-IT systems,
and is now in the renovation or validation phases of its IT and non-IT systems
and currently intends to implement these systems by August 31, 1999. Based upon
its identification and assessment efforts to date, most of the Company's
computer equipment and software it currently uses does not require replacement
or modification. This is due to the relatively small size of the Company's
systems and its predominately new hardware, software and operating systems. The
Company estimates that as of June 30, 1999, approximately 97% of the initiatives
scheduled to fully address potential Year 2000 issues have been completed. The
following chart shows the status of the Company's progress, identified by phase,
including the estimated timetable for completion of each remaining phase:
14
<PAGE>
<TABLE>
<CAPTION>
PERCENT
YEAR 2000 COMPLIANCE SCHEDULE TIMING COMPLETE
- ----------------------------- ------ --------
<S> <C> <C>
Phase I: Review system compliance issues. 10/97 - 1/98 100%
Phase II: Identify and assess system compliance issues. 5/98 - 11/98 100%
Phase III: Testing of systems. 8/98 - 8/99 97%
Phase IV: Resolution of system issues detected in Phase III. 10/98 - 8/99 95%
Phase V: Monitor system compliance on an ongoing basis Continuous N/A
</TABLE>
In addition to reviewing its internal systems, the Company has polled or is in
the process of polling its outside software and other vendors, customers and
freight carriers to determine whether they are Year 2000 compliant and to
attempt to identify any potential issues. If the Company's customers and vendors
do not achieve Year 2000 compliance before the end of 1999, the Company may
experience a variety of problems which may have a material adverse effect on the
Company. To the extent vendors are not Year 2000 compliant by the end of 1999,
such vendors may fail to deliver ordered materials and products to the Company
and may fail to bill the Company properly and promptly. Consequently, the
Company may experience a shortage or surplus of inventory, affecting its ability
to ship product to its customers as expected. Although the Company does not
currently have a plan for addressing these potential problems with respect to
its vendors, the Company has alternative sources of supply. The Company's
management does not believe that third party Year 2000 issues will have a
material impact on the operating results or financial condition of the Company.
However, there can be no assurance that such issues will not have a material
adverse impact on the Company's systems, results of operations or financial
condition.
The Company believes that the cost of the implementation of its Year 2000
compliance schedule for the Company's IT and non-IT systems, as well as
currently anticipated costs to be incurred by the Company with respect to Year
2000 issues of third parties, will not be material to the Company's results of
operations. The costs of the systems implementation and Year 2000 modifications
are based upon management's best estimates, which are derived utilizing numerous
assumptions of future events, including the continued availability of certain
resources, and other factors. However, there can be no guarantee that these
estimates will be achieved and actual results could differ materially from those
anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes, and
similar uncertainties.
RISKS ASSOCIATED WITH INTANGIBLE ASSETS
At June 30, 1999, the Company's balance sheet reflected $216 million of
intangible assets, a substantial portion of the Company's total assets at such
date. The intangible assets consist of goodwill and other identifiable
intangibles relating to the Company's recent acquisitions. The balances of these
intangible assets may increase in future periods, principally from the
consummation of further acquisitions. Amortization of these additional
intangibles would, in turn, have a negative impact on earnings. In addition, the
Company continuously evaluates whether events and circumstances have occurred
that indicate the remaining balance of intangible assets may not be recoverable.
When factors indicate that assets should be evaluated for possible impairment,
the Company may be required to reduce the carrying value of its intangible
assets, which could have a material adverse effect on the results of the Company
during the periods in which such a reduction is recognized. There can be no
assurance that the Company will not be required to write down intangible assets
in future periods.
15
<PAGE>
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes
requirements for disclosure of comprehensive income and its components. This
statement became effective for the Company's fiscal year ended December 31,
1998. Through June 30, 1999, the Company has no elements which give rise to
reporting comprehensive income.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 modifies the disclosure
requirements for reportable segments. This statement became effective for the
Company's fiscal year ended December 31, 1998. This pronouncement has had no
significant impact on the reporting practices of the Company since its adoption;
and until such time that the Company diversifies its operations, management
believes such pronouncement will not be applicable.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. SFAS No. 137, issued by the FASB in July 1999, establishes a new
effective date for SFAS No. 133. This statement, as amended by SFAS No. 137, is
effective for all fiscal years beginning after June 15, 2000 and is effective
for the Company beginning with its fiscal quarter ending March 31, 2001. Based
upon the nature of the financial instruments and hedging activities in effect as
of the date of this filing, this pronouncement would require the Company to
reflect the fair value of its derivative instruments on the consolidated balance
sheet. Changes in fair value of these instruments will be reflected as a
component of comprehensive income.
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.
In July 1998, Intermediate issued discount notes which have a stated maturity of
June 30, 2008 and a stated principal at maturity of approximately $67 million,
although approximately 43% of the stated principal amount of the debt is due
December 2003. As the repayment of the Intermediate discount notes is the
obligation of Intermediate, the carrying amount of the associated liability is
reflected on the books and records of Intermediate and, therefore, is not
included in the consolidated financial statements of the Company. Although the
Intermediate discount notes do not require principal or interest payments until
December 2003, Intermediate does not have, and may not have in the future, any
assets other than the common stock of DDi Capital. The net cash flows from the
Company are currently the only source of cash available to repay the obligations
under the Intermediate discount notes.
The Company's ability to pay principal and interest on its indebtedness 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 Company's
senior credit facility or successor facilities. The Company anticipates that its
operating cash flow, together with borrowings under its senior credit facility,
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.
16
<PAGE>
RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS
The terms of the Company's indebtedness restrict, among other things, DDi
Capital's and DDi's ability to incur additional indebtedness, pay dividends or
make certain other restricted payments, consummate certain asset sales, enter
into certain transactions with affiliates, merge or consolidate with any other
person or sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of the assets of the Company. DDi is also required to maintain
specified financial ratios and satisfy certain financial condition tests. DDi's
ability to meet those financial ratios and tests can be affected by events
beyond its control, and there can be no assurance that DDi 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 agreements 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 its senior credit facility.
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, 1999, sales to the Company's largest
customer accounted for 7% of the Company's net revenues. Sales to the Company's
two largest customers accounted for 12% of the Company's net revenues and sales
to the Company's ten largest customers accounted for 35% 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 a
material adverse effect on the Company's business, financial condition and
results of operations.
17
<PAGE>
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.
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
business, financial condition 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 cancelled, 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 operations.
18
<PAGE>
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 and 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 and
local environmental laws and regulations, which govern, among other things, the
discharge of hazardous materials into the air and water as well as the handling,
storage and disposal of such materials. Compliance with these environmental laws
are major considerations for all 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 financial condition, results of operations, prospects
or debt service ability.
COMPETITION
The PCB industry is highly fragmented and characterized by intense competition.
The Company principally competes with independent and captive manufacturers of
complex printed circuit boards in the time-critical segment of the PCB industry.
The Company's principal competitors include other independent, small private
companies as well as 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 time-critical segment of the 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.
19
<PAGE>
CONTROLLING STOCKHOLDERS
The Bain Capital Funds hold approximately 41% of the outstanding voting stock of
Holdings, the sole stockholder of Intermediate, which is the sole stockholder of
DDi Capital which, in turn, is the sole stockholder of DDi. 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 that agreement, the Bain Capital Funds
have the power to control all matters submitted to stockholders of the Holdings
and its subsidiaries, to elect a majority of the directors of Holdings and its
subsidiaries, and to exercise control over the business, policies and affairs of
Holdings and the Company.
FORWARD-LOOKING STATEMENTS
A number of the matters and subject areas discussed in this Form 10-Q are
forward-looking in nature. The discussion of such matters and subject areas is
qualified by the inherent risks and uncertainties surrounding future
expectations generally, and may differ materially from the Company's actual
future experience involving any one or more of such matters and subject areas.
The Company wishes to caution readers that all statements other than statements
of historical facts included in this quarterly report on Form 10-Q regarding the
Company's financial position and business strategy may constitute forward-
looking statements. All of these forward-looking statements are based upon
estimates and assumptions made by management of the Company, which although
believed to be reasonable, are inherently uncertain. Therefore, undue reliance
should not be placed on such estimates and statements. No assurance can be given
that any of such estimates or statements will be realized and it is likely that
actual results will differ materially from those contemplated by such forward-
looking statements. Factors that may cause such differences include: (1)
increased competition; (2) increased costs; (3) the inability to consummate
business acquisitions on attractive terms; (4) the 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) the ability to
sustain historical margins as the industry develops. The Company has attempted
to identify certain of the factors that it currently believes may cause actual
future experiences to differ from the Company's current expectations regarding
the relevant matter or subject area. In addition to the items specifically
discussed in the foregoing, the Company's business and results of operations is
subject to the risks and uncertainties described under the headings "Computer
Systems and Year 2000," "Risks Associated with Intangible Assets" and "Factors
That May Affect Future Results" contained herein. However, the operations and
results of the Company's business also may be subject to the effect of other
risks and uncertainties. Such risks and uncertainties include, but are not
limited to, items described from time-to-time in the Company's reports filed
with the Securities and Exchange Commission.
20
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
Interest Rate Risk
In 1998, the Company entered into interest rate exchange agreements to minimize
the impact of an increase in interest rates on it long-term variable interest
rate debt. In June 1999, the Company elected to terminate and concurrently
replace its existing interest rate exchange agreements ("Swap Agreements"). The
Swap Agreements were terminated to generate additional free cash flow available
from the unrealized gain that existed at the time of termination. The
termination of the Swap Agreements did not have a material impact on the
Company's results of operations.
The new interest rate exchange agreements ("New Swap Agreements") represent an
effective cash flow hedge, consistent with the nature of the Swap Agreements.
Under the terms of the New Swap Agreements, the Company pays a maximum annual
rate of interest applied to a notional amount equal to the principal balance of
the senior term facility for the period June 30, 1999 through August 31, 2001.
During this period, the Company's maximum annual rate is 5.65% for a given
month, unless 1-month LIBOR for that month equals or exceeds 7.00%, in which
case the Company pays 7.00% for that month. From September 1, 2001 through the
scheduled maturity of the senior term facility in 2005, the Company pays a fixed
annual rate of 7.35% applied to a notional amount equal to 50% of the principal
balance of the senior term facility during that period.
As a result of the termination and replacement of the Swap Agreements, the
maximum rate of interest to be paid has increased from 4.96%, the fixed rate of
interest on the Swap Agreements, to 5.65% or 7.00% (depending on 1-month LIBOR)
through January 31, 2002. The New Swap Agreements, however, provide the Company
with increased protection against increases in interest rates from January 31,
2002 through the maturity of the senior term facility in 2005, since the New
Swap Agreements do not contain an option, which was available to the
counterparties of the Swap Agreements to terminate the agreements on January 31,
2002.
Under the terms of the New Swap Agreements, there are no net periodic cash
settlements when the 1-month LIBOR rate (5.14% at June 30, 1999) remains below
5.65%. Therefore, an immediate 10% increase in the 1-month LIBOR rate would not
have an effect on swap interest expense to be incurred over the 12 months ending
June 30, 2000.
In addition to the New Swap Agreements, the Company's significant financial
instruments at June 30, 1999 include the 10.0% Senior Subordinated Notes, 12.5%
Discount Notes, Senior Term Facility, and the revolving credit facility. No
other financial instruments expose the Company to significant interest rate
risk.
Any change in interest rates would not have an effect on the interest expense to
be incurred on the Senior Subordinated Notes and Discount Notes as each of these
instruments bears a fixed rate of interest.
The Senior Term Facility bears interest at 1-month LIBOR plus an applicable
margin. An immediate 10% increase in interest rates would increase the
Company's interest expense related to this debt instrument over the 12 months
ending June 30, 2000 by approximately $1.3 million.
The revolving credit facility bears interest at (1) 2.25% per annum plus the
applicable LIBOR rate or (2) 1.25% per annum plus the federal reserve reported
overnight funds rate plus 1/2 of 1% per annum. As of June 30, 1999, the
Company had no outstanding balance on the revolving credit facility. It is
anticipated that the Company will not have a material outstanding balance on
this facility over the 12 months ending June 30, 2000. Therefore, an immediate
10% change in interest rates is not expected to materially affect the interest
expense to be incurred on this facility during such period.
Foreign Currency Exchange Risk
All of the Company's sales are denominated in U.S. dollars and as a result, the
Company has relatively little exposure to foreign currency exchange risk with
respect to sales made. The Company does not use forward exchange contracts to
hedge exposures denominated in foreign currencies or any other derivative
financial instruments for trading or speculative purposes. Therefore, the
effect of an immediate 10% change in exchange rates would not have an impact on
the Company's operating results over the 12 month period ending June 30, 2000.
21
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is currently not a party to any material legal actions or
proceedings.
Item 2. Changes in Securities and Use of Proceeds. 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 Dynamic Details, Incorporated
27.2 Financial Data Schedule for DDi Capital Corp.
(b) Reports on Form 8-K:
--------------------
None.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, DDi Capital Corp. has duly caused this quarterly report to be
signed on its behalf by the undersigned, thereto duly authorized, in the city of
Anaheim, state of California, on the 11th day of August, 1999.
DDi CAPITAL CORP.
By: /s/ Bruce D. McMaster
-----------------------------
Name: Bruce D. McMaster
Title: President and CEO
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/ Joseph P. Gisch Vice President and August 11, 1999
------------------- Chief Financial Officer
Joseph P. Gisch (principal financial and
chief accounting officer)
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Dynamic Details, Incorporated. 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 11th day of August, 1999.
DYNAMIC DETAILS, INCORPORATED
By: /s/ Bruce D. McMaster
--------------------------------
Name: Bruce D. McMaster
Title: President and CEO
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/ Joseph P. Gisch Vice President and August 11, 1999
------------------- Chief Financial Officer
Joseph P. Gisch (principal financial and
chief accounting officer)
24
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