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 September 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 September 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 September 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.
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 September 30, 1999
and December 31, 1998 3
Condensed Consolidated Statements of Operations for the three months and
nine months ended September 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 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 23
Item 2. Changes in Securities and Use of Proceeds 23
Item 3. Defaults upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6 Exhibits and Reports on Form 8-K 23
Signatures 24
2
PART I FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS
DDi Capital Corp. and Dynamic Details, Incorporated
Condensed Consolidated Balance Sheets
(In Thousands)
DDi DDi Capital
--- -----------
September 30, December 31, September 30, December 31,
-----------------------------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
Assets (Unaudited) (Unaudited)
Current assets:
Cash and cash equivalents $ 609 $ 1,905 $ 609 $ 1,905
Trade receivables, net 50,856 34,764 50,856 34,764
Inventories 22,148 12,615 22,148 12,615
Prepaid expenses and other 2,544 1,236 2,544 1,236
Income tax receivable - 3,793 - 3,793
Deferred tax asset 4,816 4,816 4,816 4,816
---------------------------------------------------------
Total current assets 80,973 59,129 80,973 59,129
Property and equipment, net 65,399 61,018 65,399 61,018
Debt issue costs, net 9,980 11,458 13,660 15,167
Goodwill and other intangibles, net 209,961 226,286 209,961 226,286
Other 673 566 673 566
---------------------------------------------------------
Total Assets $ 366,986 $ 358,457 $ 370,666 $ 362,166
=========================================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current maturities of long-term debt and capital lease obligations $ 6,487 $ 4,390 $ 6,487 $ 4,390
Current portion of deferred interest rate swap income 1,454 - 1,454 -
Revolving credit facility 3,500 7,000 3,500 7,000
Accounts payable 22,955 14,612 22,955 14,612
Accrued expenses and other 23,624 16,046 23,624 16,046
Escrow payable to redeemed stockholders 3,900 3,900 3,900 3,900
---------------------------------------------------------
Total current liabilities 61,920 45,948 61,920 45,948
Long-term debt and capital lease obligations 353,126 358,150 428,507 426,955
Deferred interest rate swap income 4,247 - 4,247 -
Notes payable and other 2,421 4,429 2,421 4,429
Deferred tax liability 27,656 27,878 19,929 22,804
---------------------------------------------------------
Total liabilities 449,370 436,405 517,024 500,136
---------------------------------------------------------
Commitments and contingencies
Stockholders' deficit:
Common stock and additional paid-in-capital 246,847 245,532 196,053 194,738
Accumulated deficit (329,231) (323,480) (342,411) (332,708)
---------------------------------------------------------
Total stockholders' deficit (82,384) (77,948) (146,358) (137,970)
---------------------------------------------------------
Total Liabilities and Stockholders' Deficit $ 366,986 $ 358,457 $ 370,666 $ 362,166
=========================================================
The accompanying notes are an integral part of these consolidated
finanicial statements.
3
Dynamic Details, Incorporated
Condensed Consolidated Statements of Operations
(In Thousands)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
Net sales $ 82,919 $ 61,228 $ 213,838 $ 115,727
Cost of goods sold 57,163 41,465 149,197 73,912
-------------------------------------------------
Gross profit 25,756 19,763 64,641 41,815
Operating expenses:
General and administration 4,339 2,876 11,573 4,544
Sales and marketing 6,578 4,280 16,648 8,361
Amortization of intangibles 5,937 3,777 17,763 4,282
-------------------------------------------------
Operating income 8,902 8,830 18,657 24,628
Interest expense (net) and other expense (net) (8,078) (7,782) (24,507) (18,496)
-------------------------------------------------
Income (loss) before income taxes 824 1,048 (5,850) 6,132
Income tax (expense) benefit (583) (219) 99 (2,515)
-------------------------------------------------
Net income (loss) before extraordinary item 241 829 (5,751) 3,617
Extraordinary loss on retirement of debt, net of tax - (2,297) - (2,297)
-------------------------------------------------
Net income (loss) $ 241 $ (1,468) $ (5,751) $ 1,320
=================================================
The accompanying notes are an integral part of these consolidated
finanicial statements.
4
DDi Capital Corp.
Condensed Consolidated Statements of Operations
(In Thousands)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
Net sales $ 82,919 $ 61,228 $ 213,838 $ 115,727
Cost of goods sold 57,163 41,465 149,197 73,912
-------------------------------------------------
Gross profit 25,756 19,763 64,641 41,815
Operating expenses:
General and administration 4,339 2,879 11,573 4,554
Sales and marketing 6,578 4,280 16,648 8,361
Amortization of intangibles 5,937 3,777 17,763 4,282
-------------------------------------------------
Operating income 8,902 8,827 18,657 24,618
Interest expense (net) and other expense (net) (10,357) (9,716) (31,113) (24,235)
-------------------------------------------------
Income (loss) before income taxes (1,455) (889) (12,456) 383
Income tax benefit (expense) 326 576 2,751 (157)
-------------------------------------------------
Net income (loss) before extraordinary item (1,129) (313) (9,705) 226
Extraordinary loss on retirement of debt, net of tax - (2,297) - (2,297)
-------------------------------------------------
Net loss $ (1,129) $ (2,610) $ (9,705) $ (2,071)
=================================================
The accompanying notes are an integral part of these consolidated
financial statements.
5
DDi Capital Corp. and Dynamic Details, Incorporated
Condensed Consolidated Statement of Cash Flows
(In Thousands)
(Unaudited)
DDi DDi Capital
--- -----------
Nine Months Ended Nine Months Ended
September 30, September 30,
------------------------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
Cash flows from operating activities:
Net cash provided by operating activities $ 15,690 $ 7,863 $ 15,690 $ 7,111
-----------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (14,159) (10,276) (14,159) (10,276)
Additional costs incurred with the acquisition of NTI - (196) - (196)
Additional costs incurred in connection with the acquisition of DCI (337) - (337) -
Cash used in acquisition of DCI, net of cash acquired - (174,081) - (174,081)
-----------------------------------------------------
Net cash used in investing activities (14,496) (184,553) (14,496) (184,553)
-----------------------------------------------------
Cash flows from financing activities:
Issuance of new senior credit facilities in connection
with the acquisition of DCI (See Note 5) - 255,000 - 255,000
Payment of debt issuance and capital costs - (7,171) - (7,457)
Principal payments on long-term debt (2,175) - (2,175) -
Net (repayments) borrowings on the revolving credit facility (3,500) 6,000 (3,500) 6,000
Payments of deferred note payable (1,910) - (1,910) -
Principal payments on capital lease obligations (736) (662) (736) (662)
Capital contribution by Parent, net (231) 30,576 (231) 31,616
Proceeds from interest rate swaps (See Note 4) 6,062 - 6,062 -
Payments of escrow payable to redeemed stockholders - (4,100) - (4,100)
Retirement of senior credit facilities in connection
with the acquisition of DCI (See Note 5) - (106,089) - (106,089)
-----------------------------------------------------
Net cash provided by (used in) financing activities (2,490) 173,554 (2,490) 174,308
-----------------------------------------------------
Net decrease in cash (1,296) (3,136) (1,296) (3,134)
Cash and cash equivalents, beginning of year 1,905 5,377 1,905 5,377
-----------------------------------------------------
Cash and cash equivalents, end of period $ 609 $ 2,241 $ 609 $ 2,243
=====================================================
Supplemental disclosure of cash flow information:
Non-cash operating activities:
During the nine months ended September 30, 1999 and 1998, the Company recorded
$30 million and $11 million, respectively, of depreciation and amortization
expense. During the quarter ended September 30, 1998, the Company recorded a
non-cash loss (net of related taxes) of $2,297 as an extraordinary item,
relating to the early extinguishment of debt (See Note 5).
The accompanying notes are an integral part of these consolidated
financial statements.
6
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
September 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 September 30, 1999, and the results of operations and cash flows
for the nine months ended September 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 September 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
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):
September 30, 1999 December 31, 1998
---------------------------------------
Raw materials $ 11,693 $ 6,628
Work-in-process 8,266 4,406
Finished goods 2,189 1,581
---------------------------------------
Total $ 22,148 $ 12,615
=======================================
NOTE 3. LONG-TERM DEBT AND CAPITAL LEASES
Long-term debt and capital lease obligations consist of the following (in
thousands):
DDi DDi Capital
----------------------------------------------------------------------------------
September 30, 1999 December 31, 1998 September 30, 1999 December 31, 1998
----------------------------------------------------------------------------------
Senior Term Facility (a) $ 252,825 $ 255,000 $ 252,825 $ 255,000
10.0% Senior Sub. Notes 100,000 100,000 100,000 100,000
12.5% Discount Notes (b) - - 75,381 68,805
Capital lease obligations 6,788 7,540 6,788 7,540
----------------------------------------------------------------------------------
Sub-total 359,613 362,540 434,994 431,345
Less current maturities (6,487) (4,390) (6,487) (4,390)
----------------------------------------------------------------------------------
Total $ 353,126 $ 358,150 $ 428,507 $ 426,955
==================================================================================
(a) Interest rates are LIBOR-based and range from 7.63% to 7.88% as of September
30, 1999.
(b) Face amount of $110,000, net of unamortized discount of $34,619 and $41,195
at September 30, 1999 and December 31, 1998, respectively.
8
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 through January 31, 2002.
The New Swap Agreements, however, provide the Company with greater 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 (comprised of term loans with an initial
principal balance of $255 million and a $45 million revolving borrowing
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 new senior bank
facility to retire all of its existing senior term debt, which resulted in an
extraordinary loss of $2.3 million, net of related taxes of $1.6 million.
9
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 senior credit facility. 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 $0.8 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
SUPPLEMENTAL DYNAMIC DETAILS, INCORPORATED CONDENSED FINANCIAL DATA
(In Thousands)
(Unaudited)
CONDENSED BALANCE SHEETS
September 30, 1999 December 31, 1998
------------------ -----------------
Current assets $ 23,718 $ 20,755
Non-current assets 302,336 287,619
------------------ -----------------
Total assets $ 326,054 $ 308,374
================== =================
Current liabilities $ 57,414 $ 37,372
Non-current liabilities 350,820 348,950
------------------ -----------------
Total liabilities 408,234 386,322
------------------ -----------------
Total stockholders' deficit (82,180) (77,948)
------------------ -----------------
Total liabilities and stockholders' deficit $ 326,054 $ 308,374
================== =================
CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended Three Months Ended
September 30, 1999 September 30, 1998
------------------ -----------------
Net sales $ 27,912 $ 23,134
Cost of sales 14,256 11,723
------------------ -----------------
Gross profit 13,656 11,411
Operating expenses 4,527 2,726
------------------ -----------------
Income from operations 9,129 8,685
Interest expense, net (7,558) (7,776)
------------------ -----------------
Income before taxes 1,571 909
Income tax (expense) benefit (608) 208
------------------ -----------------
Income before extraordinary loss and equity in loss of subsidiaries 963 1,117
Extraordinary loss - (2,297)
------------------ -----------------
Income (loss) before equity in loss of subsidiaries 963 (1,180)
Equity in loss of subsidiaries (722) (288)
------------------ -----------------
Net income (loss) $ 241 $ (1,468)
================== =================
Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
------------------ ------------------
Net sales $ 70,825 $ 62,945
Cost of sales 37,341 31,650
------------------ ------------------
Gross profit 33,484 31,295
Operating expenses 9,646 7,160
------------------ ------------------
Income from operations 23,838 24,135
Interest expense, net (24,367) (18,437)
------------------ ------------------
Income (loss) before taxes (529) 5,698
Income tax benefit (expense) 149 (1,756)
------------------ ------------------
Income (loss) before extraordinary loss and equity in loss of subsidiaries (380) 3,942
Extraordinary loss - (2,297)
------------------ ------------------
Income (loss) before equity in loss of subsidiaries (380) 1,645
Equity in loss of subsidiaries (5,371) (325)
------------------ ------------------
Net income (loss) $ (5,751) $ 1,320
================== ==================
11
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 September 30, 1999 Compared to the Three Months ended
September 30, 1998
Net sales for the three months ended September 30, 1999 increased $21.7 million
(35%) to $82.9 million, from $61.2 million for the three months ended September
30, 1998. The increase primarily resulted from the acquisition of DCI, which
contributed $14.3 million to net sales for the three months ended September 30,
1999. Also contributing to the increase in revenues was a higher average panel
price experienced by DDi's other divisions, due to greater demand for more
technologically advanced printed circuit boards, partially offset by a decrease
in panel production in those operations.
Gross profit for the three months ended September 30, 1999 increased $6.0
million (30%) to $25.8 million, from $19.8 million for the three months ended
September 30, 1998. The increase resulted from the acquisition of DCI, which
contributed $5.3 million to gross profit for the three months ended September
30, 1999. Partially offsetting this increase was a decline in gross profit as a
percent of net sales to 35% from 39% in DDi's other divisions due to a decrease
in panel production in those operations. For the Company, gross profit as a
percent of net sales decreased to 31% for the three months ended September 30,
1999 as DCI's operating margins have historically been lower than that of DDi's
other divisions, reflective of the market niches each serves.
General and administration expenses for the three months ended September 30,
1999 increased $1.4 million (48%) to $4.3 million, from $2.9 million for the
three months ended September 30, 1998. The increase in these expenses is
primarily due to the acquisition of DCI, an increase in expenditures relating to
building the Company's newly-formed design operations, and an increase in fees
incurred under the management agreement with the Company's majority owner. Sales
and marketing expenses for the three months ended September 30, 1999 increased
$2.3 million (53%) to $6.6 million, from $4.3 million for the three months ended
September 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 September 30, 1999
increased $2.1 million to $5.9 million, from $3.8 million for the three months
ended September 30, 1998, resulting primarily from the acquisition of DCI.
Net interest expense for DDi Capital for the three months ended September 30,
1999 increased $0.7 million (7%) to $10.4 million, from $9.7 million for the
like period in 1998. Net interest expense for DDi for the three months ended
September 30, 1999 increased $0.3 million (4%) to $8.1 million, from $7.8
million for the like period in 1998. The increase in net interest expense for
DDi Capital is primarily attributable to the increased level of borrowings in
connection with the acquisition of DCI and an increase in the net carrying
amount of DDi Capital's senior discount
12
notes resulting from accretion of the discount. The increase in net interest
expense for DDi is primarily attributable to the acquisition of DCI.
Income tax expense for DDi Capital for the three months ended September 30, 1999
increased $0.3 million to a benefit of $0.3 million, from a benefit of $0.6
million for the like period in 1998. Income tax expense for DDi for the three
months ended September 30, 1999 increased $0.4 million to $0.6 million, from
$0.2 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.
Nine Months Ended September 30, 1999 Compared to the Nine Months ended September
30, 1998
Net sales for the nine months ended September 30, 1999 increased $98.1 million
(85%) to $213.8 million, from $115.7 million for the nine months ended September
30, 1998. The increase primarily resulted from the acquisition of DCI, which
contributed $87.3 million to net sales for the nine months ended September 30,
1999. Also contributing to the increase in revenues was a higher average panel
price experienced by DDi's other divisions, due to greater demand for more
technologically advanced printed circuit boards, partially offset by a decrease
in panel production in those operations.
Gross profit for the nine months ended September 30, 1999 increased $22.8
million (55%) to $64.6 million, from $41.8 million for the nine months ended
September 30, 1998. The increase resulted from the acquisition of DCI, which
contributed $25 million to gross profit for the nine months ended September 30,
1999. Partially offsetting this increase was a decline in gross profit as a
percent of net sales to 35% from 40% in DDi's other divisions due to a decrease
in panel production in those operations. For the Company, gross profit as a
percent of net sales decreased to 30% for the nine months ended September 30,
1999 as DCI's operating margins have historically been lower than that of DDi's
other divisions, reflective of the market niches each serves.
General and administration expenses for the nine months ended September 30, 1999
increased $7.1 million (158%) to $11.6 million, from $4.5 million for the nine
months ended September 30, 1998. The increase in these expenses is primarily due
to the acquisition of DCI, an increase in expenditures relating to building the
Company's newly-formed design operations, and an increase in fees incurred under
the management agreement with the Company's majority owner. Sales and marketing
expenses for the nine months ended September 30, 1999 increased $8.2 million
(98%) to $16.6 million, from $8.4 million for the nine months ended September
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 nine months ended September 30, 1999
increased $13.5 million to $17.8 million, from $4.3 million for the nine months
ended September 30, 1998, resulting primarily from the acquisition of DCI.
Net interest expense for DDi Capital for the nine months ended September 30,
1999 increased $6.9 million (29%) to $31.1 million, from $24.2 million for the
like period in 1998. Net interest expense for DDi for the nine months ended
September 30, 1999 increased $6.0 million (32%) to $24.5 million, from $18.5
million for the like period in 1998. The increase in net interest expense for
DDi Capital is primarily attributable to the increased level of borrowings in
connection with the acquisition of DCI and an increase in the net carrying
amount of DDi Capital's senior discount notes resulting from accretion of the
discount. The increase in net interest expense for DDi is primarily attributable
to the acquisition of DCI.
Income tax expense for DDi Capital for the nine months ended September 30, 1999
decreased $2.9 million to a benefit of $2.7 million, from an expense of $0.2
million for the like period in 1998. Income tax expense for DDi for the nine
months ended September 30, 1999 decreased $2.6 million to a benefit of $0.1
million, from an expense of $2.5 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
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, the Company had cash and cash equivalents of $0.6
million, compared to $1.9 million as of December 31, 1998. The principal source
of liquidity for the nine months ended September 30, 1999 was cash provided by
operations.
Net cash provided by operating activities for the nine months ended September
30, 1999 was $15.6 million, compared to $7.9 million for the nine months ended
September 30, 1998.
Capital expenditures for the nine months ended September 30, 1999 were $14.2
million, compared to $10.3 million for the nine months ended September 30, 1998.
As of September 30, 1999, DDi Capital and DDi had long-term borrowings of $435.0
million and $359.6 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 September 30, 1999, the Company had $3.5 million in
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 executed 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 plan consisted of
five phases: (1) Review of system compliance issues, (2) Identifying and
assessing system compliance issues, (3) Testing of systems, (4) Resolution of
system issues detected in Phase III and (5) Monitoring system compliance on an
ongoing basis. The implementation of the first four phases of the plan, on a
company-wide basis, is effectively complete. The final phase, monitoring system
compliance on an ongoing basis, will represent a continuous process up until
January 1, 2000. The Company has completed a contingency plan for dealing with
the most reasonably likely worst case scenario.
Based upon its implementation efforts to date, most of the Company's computer
equipment and software it currently uses did 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.
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
14
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's 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,
have not been and are not expected to 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. 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 September 30, 1999, the Company's balance sheet reflected $210 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.
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 September 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
15
June 15, 2000 and is therefore 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.
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.
16
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 nine months ended September 30, 1999, sales to the Company's largest
customer accounted for 8% of the Company's net revenues. Sales to the Company's
two largest customers accounted for 15% of the Company's net revenues and sales
to the Company's ten largest customers accounted for 40% 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.
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
17
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.
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
18
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.
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 the stockholders of 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.
19
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
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
Interest Rate Risk
In 1998, the Company entered into interest rate exchange agreements ("Swap
Agreements") to minimize the impact of an increase in interest rates on it long-
term variable interest rate debt. In January 1999, the Company modified certain
features of the Swap Agreements. In return for a reduction in the blended fixed
rate of interest paid by the Company (to 4.96% per annum), the counterparties
were granted the option to terminate their respective agreements on January 31,
2002. In June 1999, the Company elected to terminate and concurrently replace
the 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 through January 31, 2002. The
New Swap Agreements, however, provide the Company with greater protection
against increases in interest rates from January 31, 2002 through the maturity
of the senior term facility in 2005. This rate protection results from the New
Swap Agreements not providing 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, through August 31, 2001 there are no
periodic cash settlements when the 1-month LIBOR rate (5.38% at September 30,
1999) remains below 5.65%. When the 1-month LIBOR rate falls between 5.65% to
7.00% for a settlement period through such date, the Company pays 5.65% and
receives 1-month LIBOR for such settlement period. An immediate 10% increase in
the 1-month LIBOR rate (amounting to 54 basis points) would have the effect of
increasing the LIBOR rate to 5.92%. The net effect of such a rate change would
be to reduce the Company's interest expense related to these instruments for the
difference between 5.92% and 5.65%, applied to the notional amount of the New
Swap Agreements in each period. This impact over the 12 months ended September
30, 2000 would amount to approximately $0.7 million.
In addition to the New Swap Agreements, the Company's significant financial
instruments at September 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 September 30, 2000 by approximately $1.3 million.
The revolving credit facility bears interest at (1) 2.25% per annum plus the
applicable LIBOR rate (5.38% at September 30, 1999) or (2) 1.25% per annum plus
the federal reserve reported overnight funds rate (8.25% at September 30, 1999).
In addition, the Company is required to pay a fee of 1/2 of 1% per annum on the
average unused commitment under the revolving credit facility. As of September
30, 1999, the outstanding balance on the revolving credit facility was $3.5
million. Based upon such balance, an immediate 10% change in interest rates
would not materially affect the interest expense to be incurred on this facility
over the 12 months ending September 30, 2000.
21
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 to foreign currency denominated transactions and does not
utilize 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 September 30, 2000.
22
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.
23
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 November, 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 November 11, 1999
------------------- Chief Financial Officer
(principal financial and
Joseph P. Gisch chief accounting officer)
24
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 November, 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 November 11, 1999
------------------- Chief Financial Officer
(principal financial and
Joseph P. Gisch chief accounting officer)
25