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. 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 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS - ------------------------------ Details Capital Corp. and Details, Inc. Condensed Consolidated Balance Sheets (In Thousands) Details, Inc. Details Capital --------------------------- --------------------------- June 30, December 31, June 30, December 31, 1998 1997 1998 1997 ------------ ------------ ------------ ------------ (Unaudited) (Unaudited) 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 ========= ========= ========= ========= 3 Details, Inc. Condensed Consolidated Statements of Operations (In Thousands) (Unaudited) Three Months Ended Six Months Ended June 30, June 30, ------------------- ------------------- 1998 1997 1998 1997 -------- -------- -------- -------- 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 ======= ======== ======== ======== 4 Details Capital Corp. Condensed Consolidated Statements of Operations (In Thousands) (Unaudited) Three Months Ended Six Months Ended June 30, June 30, ------------------- ------------------- 1998 1997 1998 1997 -------- -------- -------- -------- 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 ======= ======= ======== ======= 5 Details Capital Corp. and Details, Inc. Condensed Consolidated Statements of Cash Flows (In Thousands) (Unaudited) Details, Inc. Details Capital Corp. ------------------- --------------------- Six Months Ended June 30, ------------------------------------------- 1998 1997 1998 1997 -------- -------- -------- -------- 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 ======= ======= ======= ======= 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 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 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): June 30, December 31, 1998 1997 ------------ ------------ Raw materials $2,411 $1,440 Work-in-process 3,413 2,674 Finished goods 1,402 216 ------ ------ Total $7,226 $4,330 ====== ====== NOTE 3. LONG-TERM DEBT Long-term debt consists of the following (in thousands): Details, Inc. Details Capital Corp. ----------------------- ----------------------- June 30, December 31, June 30, December 31, 1998 1997 1998 1997 -------- ------------ -------- ------------ 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 ======== ======== ======== ======== * Interest rates are LIBOR based and range from 8.19% to 8.44% as of June 30, 1998. 8 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 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 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 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 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 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 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 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 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 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 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