10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on November 16, 2000
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACTS OF 1934.
FOR THE QUARTERLY PERIOD ENDED OCTOBER 2, 2000
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 0-31285
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TTM TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in its Charter)
WASHINGTON 17550 N.E. 67TH COURT 91-1033443
(State or Other Jurisdiction of Redmond, Washington 98052 (I.R.S. Employer
Incorporation or Organization) (425) 883-7575 Identification No.)
(Address, including zip code, and telephone number, including area code,
of Registrant's Principal Executive Offices)
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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 |_| No |X| The Registrant became
subject to the above-described filing requirements on September 20, 2000, and
has filed all reports required to be filed since such date.
As of November 10, 2000, the number of shares of the issuer's common
stock outstanding was 37,338,705.
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TTM TECHNOLOGIES, INC.
FORM 10-Q
INDEX
2
PART I -- FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
TTM TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
3
TTM TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The accompanying notes are an integral part of these condensed consolidated
statements.
4
TTM TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
The accompanying notes are an integral part of these condensed consolidated
statements.
5
TTM TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been
prepared by TTM Technologies, Inc. (the "Company"), without audit, 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 accounting principles generally accepted in the United States
have been condensed or omitted pursuant to such rules and regulations. These
condensed consolidated financial statements reflect all adjustments (consisting
only of normal recurring adjustments), which in the opinion of management, are
necessary to present fairly the financial position, the results of operations
and cash flows of the Company for the periods presented. It is suggested that
these condensed consolidated financial statements be read in conjunction with
the consolidated financial statements and the notes thereto included in the
Company's registration statement on Form S-1 filed with the Securities and
Exchange Commission (File No. 333-39906).
The results of operations for the interim periods are not necessarily
indicative of the results to be expected for the full year.
2. INITIAL PUBLIC OFFERING AND OTHER DEBT TRANSACTIONS
The Company completed its initial public offering ("IPO") on September
20, 2000, and sold 7,500,000 shares of common stock (5,625,000 shares sold by
the Company and 1,875,000 shares sold by the selling shareholders) at a
public offering price of $16 per share. The Company received net proceeds of
approximately $79.5 million, after the underwriting discounts and commissions
of $1.12 per share and other IPO related expenses of approximately $4.2
million, which includes a $2.0 million financial advisory fee paid to T.C.
Management, LLC ("T.C. Management"), T.C. Management IV, LLC ("T.C.
Management IV"), and Brockway Moran & Partners Management, L.P. ("Brockway
Moran & Partners Management").
The proceeds from the IPO were used to buy-out the Company's deferred
retention bonus obligation for approximately $10.8 million, to redeem senior
and subordinated notes for approximately $16.8 million, to reduce
indebtedness under its existing senior credit facility of approximately $50.4
million and to pay a one-time fee of $1.5 million to amend and consolidate
the existing management agreements with T.C. Management, T.C. Management IV
and Brockway Moran & Partners Management.
Effective September 29, 2000, the Company entered into an amended and
restated agreement to refinance all remaining amounts outstanding under its
existing senior credit facility. Under the amended and restated senior credit
facility, the Company borrowed $45 million under a term loan and $14 million
under a revolving loan commitment. The term loan bears interest ranging from
LIBOR plus 1% to 2% or the Alternate Base rate, as defined in the agreement,
plus 0% to 0.5% and is due in quarterly payments of various amounts through
September 30, 2005. The revolving loan commitment is for up to $25 million,
bears interest at LIBOR plus 1% to 2% or the Alternate Base rate plus 0% to
0.5% and expires September 29, 2005. At October 2, 2000, the term loan and
the revolving loans had an interest rate of 9.5%. The Company pays quarterly
a commitment fee ranging from 0.30% to 0.45% on the unused revolving
commitment amount. In connection with the amended and restated senior credit
facility, the Company incurred debt issuance costs of approximately $222,000
which are capitalized and will be amortized to expense over the period of the
underlying indebtedness. All unamortized debt issuance costs related to the
existing senior credit facility were written off and classified as part of
the extraordinary loss.
In connection with the retirement and early repayment of debt obligations
and the amended and restated senior credit facility, the Company recorded an
extraordinary loss for the periods ended October 2, 2000 of approximately $6.8
million, which is net of a tax benefit of approximately $3.1 million.
In connection with the buy-out of the deferred retention bonus obligation,
all amounts which were not vested became 100% vested. Accordingly, deferred
amounts of $4.1 million were expensed and included in the caption
6
"amortization of deferred retention bonus" in the accompanying consolidated
statements of operations.
Subsequent to October 2, 2000, the underwriters of the IPO exercised an
overallotment option to purchase 1,125,000 shares at a public offering price
of $16 per share, of which 843,750 shares were sold by the Company and
281,250 shares were sold by selling shareholders. The Company used the net
proceeds to repay revolving loan amounts outstanding under its amended and
restated senior credit facility.
In connection with the IPO, the Company effected a 380 for 1 stock split
and a change in the authorized common stock to 100,000,000 shares. This stock
split has been retroactively reflected in the accompanying financial statements
for all periods presented.
3. EARNINGS PER COMMON SHARE
The following is a reconciliation of the numerator and denominator used to
calculate basic earnings per common share and diluted earnings per common share
for the quarter and the three quarters ended October 4, 1999 and October 2, 2000
(in thousands, except per share amounts):
4. STOCK-BASED COMPENSATION
During the three quarters ended October 2, 2000, the Company issued options
to employees to purchase 381,900 shares of common stock with an exercise price
of $2.63 per share, options to purchase 38,000 shares of common stock with an
exercise price of $7.04 per share and options to purchase 416,130 shares with an
exercise price of $16 per share. In addition, options to purchase 98,753 shares
were forfeited and options to purchase 106,932 shares were exercised and the
Company received proceeds of approximately $281,000. Of the 836,030 options
granted during the three quarters, options to purchase 209,950 shares vest on
the eighth anniversary of the date of grant or earlier upon the occurrence of
certain events as described in the agreements, and options to purchase 626,080
shares vest equally over five years from the grant date.
In connection with these stock options, the Company recorded deferred
stock-based compensation in the aggregate amount of approximately $322,000,
representing the difference between the deemed fair value of the Company's
common stock for accounting purposes and the exercise price of stock options at
the date of grant. The Company is amortizing the deferred stock-based
compensation over the option vesting periods. For the three quarters ended
October 2, 2000, amortization expense was $28,000. At October 2, 2000, the
remaining stock-based compensation of $294,000 is estimated to be amortized as
follows: $15,000 for the remainder of fiscal 2000, $52,000 in 2001, $52,000 in
2002, $52,000 in 2003, $52,000 in 2004 and $27,000 in 2005 and $44,000
thereafter. The amount of deferred stock-based compensation expense to be
amortized could change during these periods as a result of accelerated vesting
changes and forfeitures.
In June 2000, the stock option plan was amended to provide for the issuance
of a maximum of 5,600,000 shares of common stock.
At October 2, 2000, there were outstanding options to purchase 2,465,525
shares of common stock with an exercise price of $2.63, options to purchase
38,000 shares with an exercise price of $7.04 and options to purchase 416,130
shares with an exercise price of $16.
7
In connection with the IPO, the Company issued 70,800 shares of common
stock with a fair value of $1.1 million to various employees.
5. RELATED-PARTY TRANSACTIONS
For the three quarters ended October 2, 2000 and October 4, 1999, total
management fees and expenses under the agreements with T.C. Management, T.C.
Management IV and Brockway Moran & Partners Management were $2,150,000 and
$289,000, respectively. Management fees for the three quarters ended October 2,
2000 include a one-time fee of $1.5 million, which was paid with the IPO
proceeds (see Note 2).
In connection with the IPO, the Company paid T.C. Management, T.C.
Management IV and Brockway Moran & Partners Management a $2.0 million financial
advisory fee which was accounted for as an offering cost and reflected as a
reduction of the IPO proceeds.
6. INCOME TAXES
As a result of completing the IPO and increased profitability, the Company
reevaluated the realizability of its deferred tax asset and eliminated the
previously recorded valuation allowance of approximately $14.7 million during
the quarter ended October 2, 2000. This was based upon the reduction of future
interest expense as a result of utilizing the proceeds from the IPO to repay
significant debt and increases in operating income during the quarter as well as
expectations of operating income in future years. Given these among other
factors, the Company believes that its future taxable income will be sufficient
to realize the net deferred tax asset. It is possible that the Company's
estimates could change in the near term and it may become necessary to record a
valuation allowance in future periods which would adversely affect the Company's
results of operations.
For the three quarters ended October 2, 2000, the Company's provision for
income taxes was approximately $5.9 million, excluding the reversal of the $14.7
million valuation allowance.
8
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL
STATEMENTS AND THE RELATED NOTES, AND THE OTHER FINANCIAL INFORMATION INCLUDED
IN THIS QUARTERLY REPORT ON FORM 10-Q. THIS DISCUSSION AND ANALYSIS CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL
RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF SPECIFIED FACTORS, INCLUDING THOSE SET FORTH IN THE
SECTION BELOW ENTITLED "FACTORS THAT MAY AFFECT FUTURE RESULTS" AND ELSEWHERE IN
THIS QUARTERLY REPORT ON FORM 10-Q.
OVERVIEW
We provide time-critical, one-stop manufacturing services for highly
complex printed circuit boards. Our customers include original equipment
manufacturers of electronic products and their suppliers, or electronic
manufacturing services providers. Our time-to-market focused manufacturing
services enable our customers to shorten the time required to develop new
products and bring them to market.
We support a strong and expanding customer base, and we continued to
reduce customer concentration through the first three fiscal quarters 2000. At
December 31, 1999, we had more than 400 customers. We added approximately 130
new customers for the first three fiscal quarters 2000. Sales to our top 10
customers decreased from 61.5% of our pro forma net sales (assumes we had
acquired Power Circuits on January 1, 1999) for the first three fiscal quarters
1999 to 53.3% of our net sales for the first three fiscal quarters 2000.
Sales in our networking and high-end computing segments increased in
the third fiscal quarter 2000 compared with the third fiscal quarter 1999 as a
result of continued strong demand in those segments.
The following table shows the percentage of our net sales in each of
the principal end markets we served for the periods indicated:
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*Assumes that we acquired Power Circuits on January 1, 1999.
We completed our initial public offering on September 20, 2000, and
sold 7,500,000 shares of common stock (5,625,000 shares sold by the Company
and 1,875,000 shares sold by the selling shareholders) at a public offering
price of $16 per share. We received net proceeds of approximately $79.5
million. Subsequent to October 2, 2000, the underwriters exercised an
overallotment option to purchase 1,125,000 shares at a public offering price
of $16 per share, of which 843,750 shares were sold by us, and 281,250 shares
were sold by selling shareholders. We received net proceeds of approximately
$12.6 million from our sale of shares in connection with the exercise by the
underwriters of their over-allotment option.
This discussion and analysis should be read in conjunction with
"Management's Discussion and Analysis
9
of Financial Condition and Results of Operations" set forth in our prospectus
dated September 20, 2000, filed with the Securities and Exchange Commission,
relating to our initial public offering.
RESULTS OF OPERATIONS
THIRD FISCAL QUARTER 2000 COMPARED TO THE THIRD FISCAL QUARTER 1999
NET SALES
Net sales increased $25.5 million, or 86.0%, to $55.1 million for the
third fiscal quarter 2000 from $29.6 million for the third fiscal quarter 1999.
Of this increase, approximately $2.6 million resulted from the Power Circuits
acquisition, which occurred in July 1999, while $22.9 million resulted from
internal sales growth. Internal sales growth increased primarily due to higher
levels of units shipped in response to increasing demand from new and existing
customers and a favorable sales mix, including a higher proportion of quick-turn
and advanced technology printed circuit boards, which have higher average
selling prices.
COST OF GOODS SOLD
Cost of goods sold increased $11.7 million, or 53.5%, from $21.9
million for the third fiscal quarter 1999 to $33.6 million for the third fiscal
quarter 2000. Higher costs of goods sold resulted from the acquisition of Power
Circuits, whose costs contributed approximately $1.1 million to the increase.
The remaining $10.6 million growth in costs was related to increased sales
volume.
GROSS PROFIT
Gross profit increased $13.8 million, or 179.2%, from $7.7 million for
the third fiscal quarter 1999 to $21.5 million for the third fiscal quarter
2000. This increase in gross profit resulted from an improved mix of higher
margin quick-turn and advanced technology printed circuit boards as well as
generally higher unit volumes and pricing levels for all of our products.
OPERATING EXPENSES
Sales and marketing expenses increased $1.6 million from $1.3 million
for the third fiscal quarter 1999 to $2.9 million for the third fiscal quarter
2000. Of this increase, approximately $181,000 was associated with the Power
Circuits acquisition. The remaining increase of $1.4 million resulted from
higher commissions related to higher sales volumes and an expansion of our
direct sales force.
General and administrative expenses increased $1.3 million from
$747,000 for the third fiscal quarter 1999 to $2.0 million for the third fiscal
quarter 2000. Rising costs resulted primarily from the Power Circuits
acquisition, increased incentive bonus expense and the hiring of additional
management personnel.
Amortization of intangibles consists of amortization of goodwill and
other intangible assets from the Power Circuits acquisition, which occurred in
July 1999. Amortization of intangibles was $1.2 million for the third fiscal
quarter 2000 compared with $1.0 million for the third fiscal quarter 1999. The
increase in amortization resulted from a complete quarter of amortization in
2000 as compared to a partial quarter in 1999.
Amortization of the deferred retention bonus was $4.5 million for the
third fiscal quarter 2000 as compared to $463,000 for the third fiscal quarter
in 1999. This increase resulted from the vesting and buy-out of our deferred
retention bonus plan with the proceeds of our initial public offering. Under the
buy-out agreement, the Company vested the remaining balance under the plan,
which amounted to approximately $4.1 million in additional expense.
Management fees and related expenses increased $1.5 million from
$140,000 for the third fiscal quarter 1999 to $1.6 million for the third fiscal
quarter 2000. This increase is due primarily to a one-time $1.5 million payment
to amend and consolidate our management agreements with T.C. Management, T.C.
Management IV and Brockway Moran & Partners Management. Under the amended
agreement, we are not required to pay management and consulting fees subsequent
to our initial public offering. We are required to pay financial advisory fees
in the event of certain transactions as defined in the amended agreement.
10
INTEREST EXPENSE
Interest expense increased from $3.4 million for the third fiscal
quarter 1999 to $3.6 million for the third fiscal quarter 2000. This increase
resulted from a higher level of indebtedness and higher interest rates
associated with the acquisition of Power Circuits. As a result of our repayment
of indebtedness with the proceeds of our initial public offering, we anticipate
that our interest expense will be significantly lower in subsequent periods.
AMORTIZATION OF DEBT ISSUANCE COSTS
Amortization of debt issuance costs remained approximately flat at
$245,000 for the third fiscal quarter 1999 and $236,000 for the third fiscal
quarter 2000. As a result of our repayment of indebtedness and the refinancing
of our senior credit facility (more fully described in "Liquidity and Capital
Resources" below), we wrote off a significant portion of our debt issuance
costs. Accordingly, we expect that our amortization will be significantly lower
for subsequent periods.
INTEREST INCOME AND OTHER, NET
Interest income and other, net, decreased from income of $68,000 for
the third fiscal quarter 1999 to an expense of $85,000 for the third fiscal
quarter 2000. This decrease was due to the reduction in rental income associated
with a sublease the Company terminated in the second fiscal quarter 2000 to
accommodate our planned Santa Ana facility expansion.
INCOME TAXES
The provision for income taxes decreased from an expense of $199,000
for the third fiscal quarter 1999 to a benefit of $11.8 million for the third
fiscal quarter 2000. This decrease resulted primarily from a $14.7 million
benefit recorded from eliminating our deferred tax asset valuation allowance.
Subsequent to our initial public offering, we reevaluated the realizability of
our deferred tax assets and eliminated our previously established valuation
allowance. This was based on increases in operating income during the quarter
and expected increases in operating income in future years, resulting partly
from the reduction of interest expense by utilizing the initial public offering
proceeds to repay significant debt. It is possible that our estimates could
change in the near term, and it may become necessary to record a valuation
allowance, which would adversely affect our results of operations. We expect our
future effective tax rate will be approximately 37%.
Our most significant deferred tax asset is tax-deductible goodwill
related to the acquisition of Pacific Circuits in December 1998. This goodwill
of approximately $77.5 million, which is not recorded for financial reporting
purposes because the transaction was accounted for as a recapitalization,
results in an annual tax deduction of $5.2 million for 15 years, which, assuming
an effective income tax rate of 37%, could reduce our cash taxes payable each
year by $1.9 million. We also have goodwill and other intangibles of $90.1
million resulting from the Power Circuits acquisition in July 1999. These
intangibles, which have been recorded for financial and income tax reporting
purposes, generate an annual tax deduction of $6.0 million, or a $2.2 million
reduction to our cash taxes payable, assuming an effective income tax rate of
37%.
EXTRAORDINARY ITEMS
We recorded extraordinary items in both the third fiscal quarter 1999
and the third fiscal quarter 2000. Both extraordinary items were for losses on
early extinguishment of debts, net of the tax benefit. In the third fiscal
quarter 2000, we recorded a loss of $6.8 million, net of a tax benefit of $3.1
million, to extinguish subordinated debt obligations carried at a discount and
to write off debt issuance costs related to repayments and refinancing of our
senior credit facility. In the third fiscal quarter 1999, we recorded a loss of
$1.5 million, net of a tax benefit of $834,000, for the write off of debt
issuance costs as a result of new financing obtained in connection with our
acquisition of Power Circuits.
FIRST THREE FISCAL QUARTERS 2000 COMPARED TO THE FIRST THREE FISCAL QUARTERS
1999
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NET SALES
Net sales increased $69.8 million, or 95.2%, from $73.4 million for the
first three fiscal quarters 1999 to $143.2 million for the first three fiscal
quarters 2000. Of this increase, $31.0 million resulted from the acquisition of
Power Circuits while $38.8 million resulted from internal sales growth. Internal
sales growth increased primarily due to higher levels of units shipped in
response to increasing demand from new and existing customers and a favorable
sales mix, including a higher proportion of quick-turn and advanced technology
printed circuit boards, which have higher average selling prices.
COST OF GOODS SOLD
Costs of goods sold increased $37.0 million, or 64.6%, from $57.4
million for the first three fiscal quarters 1999 to $94.4 million for the first
three fiscal quarters 2000. Higher costs of goods sold resulted from our
acquisition of Power Circuits, which contributed $16.0 million to the increase.
The remaining $21.0 million increase in costs was related to increased sales
volume.
GROSS PROFIT
Gross profit grew $32.8 million, or 205.0%, from $16.0 million during
the first three fiscal quarters 1999 to $48.8 million during the first three
fiscal quarters 2000. Of this increase, $14.9 million resulted from the
acquisition of Power Circuits. The remaining increase of $17.9 million resulted
from an improved mix of higher margin quick-turn and advanced technology printed
circuit boards as well as generally higher unit volumes and pricing levels for
all of our products.
OPERATING EXPENSES
Sales and marketing expenses increased $4.4 million from $2.5 million
for the first three fiscal quarters 1999 to $6.9 million for the first three
fiscal quarters 2000. Of this increase, $2.3 million was associated with the
Power Circuits acquisition. The remaining increase of $2.1 million was due to an
increase in commissions related to higher sales volume.
General and administrative expenses grew $3.9 million from $1.5 million
for the first three fiscal quarters 1999 to $5.4 million for the first three
fiscal quarters 2000. Of this increase, $1.6 million is associated with the
Power Circuits acquisition. The remaining increase of $2.3 million is due to
increased incentive bonus expense and the hiring of additional management and
back-office staff to support sales growth.
Amortization of intangibles was $3.6 million for the first three fiscal
quarters 2000, which represents an increase of $2.6 million from $1.0 million
for the first three fiscal quarters 1999. This increase relates to the
acquisition of Power Circuits in July 1999.
Amortization of deferred retention bonus increased $4.1 million from
$1.4 million for the first three fiscal quarters 1999 to $5.5 million in the
first three fiscal quarters 2000. This increase resulted from the vesting and
buy-out of our deferred retention bonus plan with the proceeds of our initial
public offering.
Management fees and related expenses were $290,000 for the first three
fiscal quarters 1999 compared with $2.2 million for the first three fiscal
quarters 2000. This increase of $1.9 million is due primarily to a one-time $1.5
million payment to amend and consolidate our management agreements with T.C.
Management, T.C. Management IV and Brockway Moran & Partners Management. The
remaining increase is due to additional management fees related to greater scope
and services in 2000 due to the Power Circuits acquisition as well as
reimbursable expenses under the agreements.
INTEREST EXPENSE
Interest expense increased $4.2 million, or 61.1%, from $7.0 million
for the first three fiscal quarters 1999 to $11.2 million for the first three
fiscal quarters 2000. This increase resulted from a higher level of indebtedness
and higher interest rates associated with the acquisition of Power Circuits.
12
AMORTIZATION OF DEBT ISSUANCE COSTS
Amortization of debt issuance costs increased $221,000 from $510,000
for the first three fiscal quarters 1999 to $731,000 for the first three fiscal
quarters 2000. This increase resulted from amortization associated with a higher
level of debt issuance costs incurred in connection with the acquisition of
Power Circuits.
INTEREST INCOME AND OTHER, NET
Interest income and other, net, increased $48,000 from $76,000 for the
first three fiscal quarters 1999 to $124,000 for the first three fiscal quarters
2000. This increase is due primarily to additional income from a sublease that
we obtained as a result of the Power Circuits acquisition. We terminated the
sublease in the second fiscal quarter 2000 to accommodate our planned Santa Ana
facility expansion.
INCOME TAXES
The provision for income taxes decreased from an expense of $695,000
for the first three fiscal quarters 1999 to a benefit of $8.7 million for the
first three fiscal quarters 2000. This decrease resulted primarily from a $14.7
million benefit recorded from eliminating our deferred tax asset valuation
allowance. We expect our future effective tax rate will be approximately 37%.
EXTRAORDINARY ITEMS
We recorded extraordinary items in both the third fiscal quarter 1999
and the third fiscal quarter 2000. Both extraordinary items were for losses on
early extinguishment of debts, net of the tax benefit. In the third fiscal
quarter 2000, we recorded a loss of $6.8 million, net of a tax benefit of $3.1
million, to extinguish subordinated debt obligations carried at a discount and
to write off debt issuance costs related to repayments and refinancing of our
senior credit facility. In the third fiscal quarter 1999, we recorded a loss of
$1.5 million, net of a tax benefit of $834,000, for the write off of debt
issuance costs as a result of new financing obtained in connection with our
acquisition of Power Circuits.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity have been cash provided by
operations, proceeds from our initial public offering and borrowings under debt
agreements. Our principal uses of cash have been to finance mergers and
acquisitions, meet debt service requirements and finance capital expenditures.
We anticipate that these uses will continue to be our principal uses of cash in
the future.
Net cash provided by operating activities was $22.6 million for the
first three fiscal quarters 2000. Net cash used in operating activities was $1.6
million for the first three fiscal quarters 1999. The increase in cash from
operating activities was due primarily to higher net income levels. Net income
increased from a loss of $348,000 for the first three fiscal quarters 1999 to a
profit of $15.3 million in the first three fiscal quarters 2000. Several
non-cash expenses also contributed to an increase in cash from operating
activities for the first three fiscal quarters 2000. The one-time buyout and
accelerated vesting of our retention bonus plan led to a non-cash charge of $4.1
million. Other factors that increased cash from operating activities were
increased goodwill amortization, a non-cash loss on early retirement of
subordinated liabilities, the non-cash write-off of deferred financing fees and
a $14.7 million reduction in the deferred tax asset valuation allowance. Changes
in our working capital accounts used $6.2 million during the first three fiscal
quarters 2000. During the first three fiscal quarters 1999, changes in our
working capital accounts used $4.6 million in cash.
Net cash used in investing activities was $96.3 million for the first
three fiscal quarters 1999. Net cash used in investing activities was $11.0
million during the first three fiscal quarters 2000. The acquisition of Power
Circuits in July 1999 accounted for $95.5 million of the cash used in investing
activities during the first three fiscal quarters 1999. In the first three
fiscal quarters 2000, the most significant use of cash for investing activities
was the purchase of property and equipment. We acquired $8.8 million in property
and equipment during the first three fiscal quarters 2000 compared to $917,000
of property and equipment purchases in the first three fiscal quarters 1999.
Net cash provided by financing activities was $98.1 million for the
first three fiscal quarters 1999. Net cash
13
used in financing activities was $8.1 million during the first three fiscal
quarters 2000. We received $79.5 million from the sale of our common stock, net
of offering costs, as part of our initial public offering in September 2000.
This was offset during the first three fiscal quarters 2000 by a payment of
$10.8 million to retire our retention bonus plan obligation, option exercises of
$281,000 and a net payment of $77.1 million on our other long-term debt
agreements. Our principal financing activities in the first three fiscal
quarters 1999 included the repayment of existing debt facilities and borrowings
on our new debt facilities in connection with the Power Circuits acquisition.
Common stock amounting to $37.5 million was also issued to fund this acquisition
during the first three fiscal quarters 1999.
Effective September 29, 2000, we entered into an amended and restated
agreement to refinance all remaining amounts outstanding under our existing
senior credit facility. Under the new agreement, we borrowed $45 million under a
term loan and $14 million under a revolving loan commitment. The term loan bears
interest ranging from LIBOR plus 1% to 2% or the Alternate Base rate, as defined
in the agreement, plus 0% to .5% and is due in quarterly payments of various
amounts through September 30, 2005. The revolving loan commitment is for up to
$25 million, bears interest at LIBOR plus 1% to 2% or the Alternate Base rate
plus 0% to .5% and expires September 29, 2005. At October 2, 2000, the term loan
and the revolving loans had an interest rate of 9.5%. We pay quarterly a
commitment fee ranging from .30% to .45% on the unused revolving commitment
amount. The new credit facility contains financial covenants customary for this
type of financing, and as of October 2, 2000, we were in compliance with the
covenants. In connection with the amended and restated senior credit facility,
we incurred debt issuance costs of approximately $222,000, which are capitalized
and amortized to expense over the period of the underlying indebtedness. All
unamortized debt issuance costs related to the existing senior credit facility
were written off and classified as part of the extraordinary loss.
Based on our current level of operations, we believe that cash
generated from operations, available cash and amounts available under our
amended and restated senior credit facility will be adequate to meet the debt
service requirements, capital expenditures and working capital needs of our
current operations for at least the next twelve months. We may require
additional financing if we decide to consummate additional acquisitions. We are
leveraged, and our future operating performance and ability to service or
refinance our amended and restated senior credit facility will be subject to
future economic conditions and to financial, business and other factors, many of
which are beyond our control.
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q contains forward-looking statements
in "Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Item 3: Quantitative and Qualitative Disclosures About
Market Risk," and elsewhere. These statements relate to future events or our
future financial performance. In some cases, forward-looking statements may be
identified by terminology such as "may," "will," "should," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential," "continue" or
the negative of these terms or other comparable terminology. These statements
are only predictions and involve known and unknown risks, uncertainties and
other factors that may cause our or our industry's actual results, levels of
activity, performance or achievements to be materially different from any future
results, levels of activity, performance or achievements expressed or implied by
these forward-looking statements.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. Moreover, neither we nor any
other person assumes responsibility for the accuracy and completeness of these
statements. We are under no duty to update any of the forward-looking statements
after the date of this Quarterly Report on Form 10-Q to conform these statements
to actual future results.
14
FACTORS THAT MAY AFFECT FUTURE RESULTS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
INVESTORS EVALUATING OUR COMPANY AND ITS BUSINESS SHOULD CAREFULLY CONSIDER THE
FACTORS DESCRIBED BELOW AND ALL OTHER INFORMATION CONTAINED IN THIS QUARTERLY
REPORT ON FORM 10-Q BEFORE PURCHASING OUR COMMON STOCK. ANY OF THE FOLLOWING
FACTORS COULD MATERIALLY HARM OUR BUSINESS, OPERATING RESULTS AND FINANCIAL
CONDITION. ADDITIONAL FACTORS AND UNCERTAINTIES NOT CURRENTLY KNOWN TO US OR
THAT WE CURRENTLY CONSIDER IMMATERIAL COULD ALSO HARM OUR BUSINESS, OPERATING
RESULTS AND FINANCIAL CONDITION. INVESTORS COULD LOSE ALL OR PART OF THEIR
INVESTMENT AS A RESULT OF THESE FACTORS.
While management is optimistic about our long-term prospects, the
following factors, among others, could materially harm our business, operating
results and financial condition and should be considered in evaluating the
Company.
DEPENDENCE ON THE ELECTRONICS INDUSTRY
Our business is heavily dependent on the electronics industry. A
majority of our revenues are generated from the networking, high-end computing
and computer peripherals segments of the electronics industry, which is
characterized by intense competition, relatively short product life-cycles and
significant fluctuations in product demand. Furthermore, these segments are
subject to economic cycles and have experienced in the past, and are likely to
experience in the future, recessionary periods. A recession or any other event
leading to excess capacity or a downturn in these segments of the electronics
industry could result in intensified price competition as well as a decrease in
our gross margins and unit volume sales.
ABILITY TO RESPOND TO TECHNOLOGICAL CHANGE
The market for our products is characterized by rapidly changing
technology and continual implementation of new production processes. The future
success of our business will depend in large part upon our ability to maintain
and enhance our technological capabilities, to develop and market products that
meet changing customer needs and to successfully anticipate or respond to
technological changes on a cost-effective and timely basis. We expect that the
investment necessary to maintain our technological position will increase as
customers make demands for products and services requiring more advanced
technology on a quicker turnaround basis. We may not be able to borrow
additional funds in order to respond to technological changes as quickly as our
competitors. In addition, the printed circuit board industry could encounter
competition from new or revised manufacturing and production technologies that
render existing manufacturing and production technology less competitive or
obsolete. We may not respond effectively to the technological requirements of
the changing market. If we need new technologies and equipment to remain
competitive, the development, acquisition and implementation of those
technologies and equipment may require us to make significant capital
investments.
DEPENDENCE ON A SMALL NUMBER OF CUSTOMERS
A small number of customers is responsible for a significant portion of
our net sales. Solectron accounted for 16.9% of our pro forma net sales and
19.4% of our historical net sales in 1999 and 14.3% of our net sales for the
first three fiscal quarters 2000. Sales to Compaq, including sales to
Compaq-directed electronic manufacturing services providers, accounted for 15.3%
of our pro forma net sales and 16.7% of our historical net sales in 1999 and
14.0% of our net sales for the first three fiscal quarters 2000. Our 10 largest
customers accounted for approximately 62.3% of our pro forma net sales and 68.4%
of our historical net sales in 1999 and 53.3% of our net sales for the first
three fiscal quarters 2000. Our principal customers may not continue to purchase
products from us at past levels and we expect a significant portion of our net
sales will continue to be generated by a small number of customers. Our customer
concentration could increase or decrease depending on future customer
requirements, which will depend in large part on market conditions in the
electronics industry segments in which our customers participate. The loss of
one or more major customers or a decline in sales to our major customers could
significantly harm our business and results of operations and lead to declines
in the price of our common stock. In addition, we generate significant accounts
receivable in connection with providing services to our customers. If one or
more of our significant customers were to become insolvent or were otherwise
unable to pay for the services provided by us, our results of operations would
be harmed.
15
FLUCTUATION IN OPERATING RESULTS
Our results of operations vary for a variety of reasons, including
timing of orders from and shipments to major customers; the levels at which we
utilize our manufacturing capacity; changes in the pricing of our products or
those of our competitors; changes in our mix of revenues generated from
quick-turn versus standard lead time production; expenditures or write-offs
related to acquisitions; and expenses relating to expanding existing
manufacturing facilities. A significant portion of our operating expenses are
relatively fixed in nature and planned expenditures are based in part on
anticipated orders. Accordingly, even a relatively small revenue shortfall would
decrease our gross margins. In addition, we have historically experienced lower
sales in our second and third fiscal quarters due to patterns in the capital
budgeting and purchasing cycles of our customers and our end-markets served. In
particular, the seasonality of the computer industry impacts the overall printed
circuit board industry. These seasonal trends have caused fluctuations in our
quarterly operating results in the past and may continue to do so in the future.
Results of operations in any period should not be considered indicative of the
results to be expected for any future period. In addition, our future quarterly
operating results may fluctuate and may not meet the expectations of securities
analysts or investors. If this occurs, the price of our common stock would
likely decline.
UNCERTAINTIES AND VARIABILITY IN DEMAND
We sell to customers on a purchase order basis rather than pursuant to
long-term contracts and, consequently, our net sales are subject to short-term
variability in demand by our customers. Customers submitting a purchase order
may cancel, reduce or delay their order for a variety of reasons. The level and
timing of orders placed by our customers vary due to customer attempts to manage
inventory; changes in customers' manufacturing strategies, such as a decision by
a customer to either diversify or consolidate the number of printed circuit
board manufacturers used or to manufacture their own products internally; and
variation in demand for our customers' products. Significant or numerous
terminations, reductions or delays in our customers' orders could negatively
impact our operating results.
POTENTIAL FOR EXCESS CAPACITY
We generally schedule our quick-turn production facilities at less than
full capacity to retain our ability to respond to unexpected additional
quick-turn orders. However, if these orders are not made, we may forego some
production and could experience excess capacity. When we experience excess
capacity, our sales revenues may be insufficient to fully cover our fixed
overhead expenses and our gross margins will fall. Conversely, we may not be
able to capture all potential revenue in a given period if our customers'
demands for quick-turn services exceed our capacity during that period.
POTENTIAL NEW PRODUCTS AND SERVICES
In the future, we may broaden our service offering by providing new
products and services. If we do this, we will likely compete with companies that
have substantially greater financial and manufacturing resources than we have
and who have been providing these services longer than we have. We may not be
able to successfully compete on this basis with more established competitors.
EXPANSION THROUGH ACQUISITION
We consummated our acquisition of Power Circuits in July 1999. We have
a limited history of owning and operating our businesses on a consolidated
basis. We may not be able to meet performance expectations or successfully
integrate our acquired businesses on a timely basis without disrupting the
quality and reliability of service to our customers or diverting management
resources. To manage the expansion of our operations and any future growth, we
will be required to improve existing and implement new operational, financial
and management information controls, reporting systems and procedures; hire,
train and manage additional qualified personnel; expand our direct and indirect
sales channels; and effectively transition our relationships with our customers,
suppliers and partners to operations under our TTM brand. In particular, we
expect to implement a new financial and accounting management information system
at our Santa Ana facility during the next four months. We may not be able to
link this management information and control system in an efficient and timely
manner with the financial and accounting management information system at our
two other facilities.
16
As part of our business strategy, we expect that we will continue to
grow by pursuing acquisitions, assets or product lines that complement or expand
our existing business. We currently have no commitments or agreements to acquire
any business. Our existing credit facilities restrict our ability to acquire the
assets or business of other companies and will accordingly require us to obtain
the consent of our lenders and could require us to pay significant fees in order
to consummate such acquisitions. Consequently, we may not be able to identify
suitable acquisition candidates or to finance and complete transactions that we
select. Our acquisition of companies and businesses and expansion of operations
involve risks, including the following: the potential inability to identify the
company best suited to our company's business plan; the potential inability to
successfully integrate acquired operations and businesses or to realize
anticipated synergies, economics of scale or other expected value; difficulties
in managing production and coordinating operations at new sites; the potential
need to restructure, modify or terminate customer relationships of the acquired
company; and loss of key employees of acquired operations. In addition, future
acquisitions may result in dilutive issuances of equity securities, the
incurrence of additional debt, large one-time write-offs and the creation of
goodwill or other intangible assets that could result in amortization expense.
AMORTIZATION OF INTANGIBLE ASSETS
As of October 2, 2000, our consolidated balance sheet reflected $84.2
million of intangible assets, a substantial portion of our total assets at such
date. Intangible assets consist of goodwill and other identifiable intangibles
relating to our acquisition of Power Circuits. 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, we continuously evaluate
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, we may be required to reduce
the carrying value of our intangible assets, which could have a material adverse
effect on our results during the periods in which such a reduction is
recognized. We may be required to write down intangible assets in future
periods.
ABILITY TO COMPETE
The printed circuit board industry is intensely competitive, highly
fragmented and rapidly changing. We expect competition to continue, which could
result in price reductions, reduced gross margins and loss of market share. Our
principal competitors include: DDi; Hadco, which recently was acquired by
Sanmina; Merix; and Tyco. In addition, new and emerging technologies may result
in new competitors entering our market. Many of our competitors and potential
competitors have a number of significant advantages over us, including greater
financial and manufacturing resources that can be devoted to the development,
production and sale of their products; more established and broader sales and
marketing channels; more manufacturing facilities worldwide, some of which are
closer in proximity to original equipment manufacturers; manufacturing
facilities which are located in countries with lower production costs; and
greater name recognition.
In addition, these competitors may respond more quickly to new or
emerging technologies, or may adapt more quickly to changes in customer
requirements and may devote greater resources to the development, promotion and
sale of their products than we do. We must continually develop improved
manufacturing processes to meet our customers' needs for complex products, and
our manufacturing process technology is generally not subject to significant
proprietary protection. Furthermore, increased production capacity by our
competitors can result in an excess supply of printed circuit boards, which
could also lead to price reductions. During recessionary periods in the
electronics industry, our competitive advantages in the areas of providing
quick-turn services, an integrated manufacturing solution and responsive
customer service may be of reduced importance to our customers who may become
more price-sensitive. This may force us to compete more on the basis of price
and cause our margins to decline. Recently, Internet-based auctions have
developed as a channel for the sale of printed circuit boards; if these auctions
further develop as a channel for printed circuit board purchasing, our
customers' price sensitivity could intensify.
EFFECT OF FOREIGN COMPETITION
We may be at a competitive disadvantage with respect to price for
volume production when compared to
17
manufacturers with lower cost facilities in Asia and other locations. We believe
price competition from printed circuit board manufacturers in Asia and other
locations with lower production costs may play an increasing role in the market
for volume production. We do not currently have offshore facilities in lower
cost locations, such as Asia. While historically our competitors in these
locations have produced less technologically advanced printed circuit boards,
they continue to expand their technology to include higher technology printed
circuit boards. In addition, fluctuations in foreign currency exchange rates may
benefit these offshore competitors. As a result, these competitors may gain
market share in the market for higher technology printed circuit boards, which
may force us to lower our prices, reducing our gross profit.
AVAILABILITY OF RAW MATERIALS
To manufacture our printed circuit boards, we use raw materials such as
laminated layers of fiberglass, copper foil and chemical solutions which we
order from our suppliers. Although we have preferred suppliers for most of our
raw materials, the materials we use are generally readily available in the open
market and numerous other potential suppliers exist. However, from time to time
manufacturers of products that also use these raw materials increase their
demand for these materials and, as a result, the prices of these materials
increase. During these periods of increased demand, our gross margins decrease
as we have to pay more for our raw materials.
INCREASE IN THE NUMBER OF ELECTRONIC MANUFACTURING SERVICES PROVIDERS
For the first three fiscal quarters 2000, approximately 30.5% of our
net sales were to electronic manufacturing services providers. Electronic
manufacturing services providers supply electronic product assembly services to
original equipment manufacturers, and in recent years, some electronic
manufacturing services providers have acquired the ability to directly
manufacture printed circuit boards. If a significant number of our electronic
manufacturing services customers were to acquire the ability to directly
manufacture printed circuit boards, our customer bases may shrink and our
business and net sales may decline substantially. In addition, if any of our
original equipment manufacturer customers outsource the production of printed
circuit boards to these electronic manufacturing services providers, our
business and results of operations may also suffer.
RELIANCE ON EMPLOYEES
We have no patent or trade secret protection for our manufacturing
process, but instead rely on the collective experience of our employees in the
manufacturing process to ensure we continuously evaluate and adopt new
technologies in our industry. Although we are not dependent on any one employee
or a small number of employees, if a significant number of our employees
involved in our manufacturing process were to leave our employment and we were
not able to replace these people with new employees with comparable experience,
our manufacturing process may suffer as we may be unable to keep up with
innovations in the industry. As a result, we may not be able to continue to
compete effectively.
INTELLECTUAL PROPERTY
We could be subject to legal proceedings and claims for alleged
infringement by us of third party proprietary rights, such as patents, from time
to time in the ordinary course of business. For example, we were recently
informed that our use in the past of a chemical solution in our manufacturing
process may have infringed upon the intellectual property rights of the holder
of the patent of the chemical solution. Although no legal action has been taken
against us, any claims relating to this alleged infringement, even if not
meritorious, could result in costly litigation and divert management's attention
and resources. In addition, if we are unsuccessful in disputing this assertion,
we could be required to pay royalties or damages for our past use of the
chemical solution. We no longer use the chemical solution in our manufacturing
process.
COMPANIES WITH SIMILAR NAMES
It is possible that other companies will adopt trade names similar
to ours which would impede our ability to build brand identity and possibly
lead to customer confusion. Although we have applied for trademark protection
of TTM Technologies, we have not yet received this trademark protection. We
are aware of at least one other company using "Pacific Circuits" as part of
its corporate name and of another company using "TTM Technologies" as part
of
18
its corporate name. This may cause confusion as to the source, quality and
dependability of our product which may, in turn, dilute our brand name and
harm our reputation.
RELIANCE ON SENIOR EXECUTIVES
Our future success depends to a large extent on the services of our key
managerial employees, particularly Kent Alder, our chief executive officer.
Although we have entered into employment agreements with Mr. Alder and other
executive officers, we may not be able to retain our executive officers and key
personnel or attract additional qualified management in the future. To
facilitate our integration of Power Circuits, we entered into transition-related
employment agreements with the president and vice-president of our Santa Ana
facility. These agreements expire at the end of 2000 and may not be renewed. If
these individuals do not continue their employment, we may not be able to
replace them with qualified personnel. Our business also depends on our
continuing ability to recruit, train and retain highly qualified employees,
particularly engineering and sales and marketing personnel. The competition for
these employees is intense and the loss of these employees could harm our
business. In addition, it may be difficult and costly for us to retain hourly
skilled employees, particularly in our Burlington, Washington facility, where
there is a shortage of skilled labor. Further, our ability to successfully
integrate acquired companies depends in part on our ability to retain key
management and existing employees at the time of the acquisition.
RELIANCE ON MANAGEMENT TEAM
Our management team has only been working together as a combined unit
since the acquisition of Power Circuits in July 1999. In addition, our chief
financial officer has been employed by us since February 2000 and our vice
president of sales has been employed by us since March 2000. If our management
team cannot successfully work together, we may not be able to execute our
business strategy successfully or compete effectively. Any failure to manage our
expansion effectively could harm our business.
POTENTIAL FOR DESIGN OR MANUFACTURING DEFECTS
We manufacture products to our customers' specifications, which are
highly complex and may contain design or manufacturing errors or failures
despite our quality control and quality assurance efforts. Defects in the
products we manufacture, whether caused by a design, manufacturing or component
failure or error, may result in delayed shipments, customer dissatisfaction, or
a reduction or cancellation of purchase orders. If these defects occur either in
large quantities or too frequently, our business reputation may be impaired.
Since our products are used in products that are integral to our customers'
businesses, errors, defects or other performance problems could result in
financial or other damages to our customers, which we may be legally required to
compensate them for. Although our purchase orders generally contain provisions
designed to limit our exposure to product liability claims, existing or future
laws or unfavorable judicial decisions could negate these limitation of
liability provisions. Product liability litigation against us, even if it were
unsuccessful, would be time consuming and costly to defend.
ENVIRONMENTAL MATTERS
Our operations are regulated under a number of federal, state and
foreign environmental and safety laws and regulations that 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. These laws and regulations
include the Clean Air Act, the Clean Water Act, the Resource Conservation and
Recovery Act, and the Comprehensive Environmental Response, Compensation and
Liability Act, as well as analogous state and foreign laws. Compliance with
these environmental laws is a major consideration for us because our
manufacturing process uses and generates materials classified as hazardous such
as ammoniacal etching solutions, copper and nickel. In addition, because we use
hazardous materials and generate hazardous wastes in our manufacturing
processes, we may be subject to potential financial liability for costs
associated with the investigation and remediation of our own sites, or sites at
which we have arranged for the disposal of hazardous wastes, if such sites
become contaminated. Even if we fully comply with applicable environmental laws
and are not directly at fault for the contamination, we may still be liable. The
wastes we generate include spent ammoniacal etching solutions, solder stripping
solutions and hydrochloric acid solution containing palladium; waste water which
contains heavy metals, acids, cleaners and conditioners; and filter cake from
equipment used for on-site waste treatment. We believe that our operations
substantially comply with all applicable environmental laws. However, any
material violations of environmental laws by us could subject us to
19
revocation of our effluent discharge permits. Any such revocations could require
us to cease or limit production at one or more of our facilities, negatively
impacting our revenues and causing our common stock price to decline. Even if we
ultimately prevail, environmental lawsuits against us would be time consuming
and costly to defend.
Environmental laws could also become more stringent over time, imposing
greater compliance costs and increasing risks and penalties associated with
violation. We operate in environmentally sensitive locations and we are subject
to potentially conflicting and changing regulatory agendas of political,
business and environmental groups. Changes or restrictions on discharge limits,
emissions levels, material storage, handling or disposal might require a high
level of unplanned capital investment, limit our ability to expand our existing
facilities and/or require us to relocate one or more of our facilities. It is
possible that environmental compliance costs and penalties from new or existing
regulations may harm our business, financial condition and results of
operations.
INFLUENCE OF MAJOR STOCKHOLDER
As of November 10, 2000, Circuit Holdings LLC held approximately 50.9%
of our outstanding stock. Thayer Capital Partners controls three entities which
together own 60.0% of Circuit Holdings and beneficially owned 59.4% of our
shares as of November 10, 2000. Two of our directors are representatives of
Thayer Capital Partners. Although Thayer Capital does not own any interests in
our competitors, the interests of Thayer Capital Partners may not always
coincide with our interests or those of our other stockholders, particularly if
Thayer Capital decided to sell its controlling interest in us. By virtue of its
stock ownership and board representation, Thayer Capital Partners will continue
to have a significant influence over all matters submitted to our board and our
stockholders, including the election of our directors, and will be able to
exercise significant control over our business, policies and affairs. Through
its concentration of voting power, Thayer Capital Partners could cause us to
take actions that we would not consider absent its influence, or could delay,
deter or prevent a change of control of our company or other business
combination that might otherwise be beneficial to our public stockholders.
In addition, Thayer Capital Partners has historically worked closely
with Brockway Moran & Partners, Inc. in managing our company and in structuring
our leveraged recapitalization and acquisition of Power Circuits. Brockway Moran
& Partners Fund, L.P. owns the remaining 40% of Circuit Holdings. In addition,
two of our directors are representatives of Brockway Moran & Partners. Although
there is no legal agreement requiring Thayer Capital Partners and Brockway Moran
& Partners to vote their shares together or for their representatives on our
board to vote together, given their relationship in the past these two entities
may continue to work together, in which case they would control our board and
exercise voting control over 65.0% of our shares.
POTENTIAL STOCK PRICE VOLATILITY
The stock market has recently experienced volatility which has often
been unrelated to the operating performance of any particular company or
companies. If market or industry-based fluctuations continue, our stock price
could decline regardless of our actual operating performance and investors could
lose a substantial part of their investments. In addition, prior to this
offering, our stock could not be bought or sold on a public market. If an active
public market for our stock is not sustained, it may be difficult to resell our
stock. The market price of our common stock will likely fluctuate in response to
a number of factors, including the following: our failure to meet the
performance estimates of securities analysts; changes in financial estimates of
our revenues and operating results by securities analysts; the timing of
announcements by us or our competitors of significant contracts or acquisitions;
and general stock market conditions.
Recently, when the market price of a company's stock has been volatile,
stockholders have often instituted securities class action litigation against
the company. If a class action lawsuit is filed against us, we could incur
substantial costs defending the lawsuit and management time and attention would
be diverted. An adverse judgment could cause our financial condition or
operating results to suffer.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or 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
20
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This statement, as amended, is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000 and is therefore effective for us beginning with
our first fiscal quarter 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 us to reflect the fair value of our derivative
instruments on the consolidated balance sheet. Changes in fair value of these
instruments may be reflected as a component of comprehensive income to the
extent our hedging activities are effective while any ineffectiveness will be
reported in current earnings.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discusses our exposure to market risk related to changes
in interest rates, foreign currency exchange rates and inflation.
INTEREST RATE RISK
Our amended and restated senior credit facility bears interest at
floating rates. We reduce our exposure to interest rate risks through swap
agreements. Under the terms of our current swap agreements, we pay maximum
annual rates of interest applied to notional amounts. As of October 2, 2000,
these notional amounts equaled 100% of the principal balance outstanding under
our amended and restated senior credit facility. Subsequent to quarter end, we
paid down the balance on our revolving loan, leaving in place interest rate swap
agreements totaling more than 100% of the principal balance outstanding under
our amended and restated senior credit facility. In the future, we plan to
renegotiate these swap agreements to cover less than 100% of the principal
balance outstanding on our amended and restated senior credit facility. Under
our interest rate swap arrangements, our maximum annual LIBOR rate ranges from
5.08% to 6.36%.
The revolving loan bears interest ranging from 1.0% to 2.0% per annum
plus the applicable LIBOR or from 0.0% to 0.5% per annum plus the Alternate Base
Rate, as defined in the agreement governing the amended and restated senior
credit facility. Therefore, a 10% change in interest rates as of October 2,
2000, is not expected to materially affect the interest expense to be incurred
on the revolving loan during such period.
FOREIGN CURRENCY EXCHANGE RISK
All of our sales are denominated in U.S. dollars, and as a result, we
have relatively little exposure to foreign currency exchange risk with respect
to sales made.
IMPACT OF INFLATION
We believe that our results of operations are not dependent upon
moderate changes in the inflation rate as we expect that we will be able to pass
along component price increases to our customers.
21
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
We are not currently subject to any material legal proceedings;
however, we may from time to time become a party to various legal proceedings in
the ordinary course of our business.
ITEM 2: CHANGES IN SECURITIES AND USES OF PROCEEDS
(a) None.
(b) None.
(c) None.
(d) Pursuant to Rule 463 under the Securities Act of 1933, as amended (the
"Securities Act"), and Item 701(f) of Regulation S-K promulgated under
the Securities Act, the following information is included in this
Report:
(1) Our Registration Statement on Form S-1 (File No. 333-39906)
(as amended, the "Registration Statement") was declared
effective by the Securities and Exchange Commission on
September 20, 2000.
(2) The offering contemplated by the Registration Statement (the
"Offering") commenced on September 20, 2000.
(3) The Offering was consummated on September 26, 2000. Subsequent
to that date, the underwriters exercised their over-allotment
option in full, and the sale of shares in connection with the
exercise of the over-allotment option was consummated on
October 13, 2000.
(4) The managing underwriters in the Offering were Robertson
Stephens, Inc., Chase Securities Inc., Donaldson, Lufkin &
Jenrette Securities Corporation and First Union Securities,
Inc.
(5) The Registration Statement related to shares of our common
stock, no par value (the "Common Stock").
(6) The Registration Statement registered an aggregate of
8,625,000 shares of Common Stock (including 1,125,000 shares
of Common Stock for which the underwriters had the option to
purchase to cover over-allotments). The aggregate gross
offering price of the Common Stock registered was
$138,000,000. We sold 6,468,750 shares of Common Stock
(including 843,750 shares sold in connection with the exercise
by the underwriters of their over-allotment option) for an
aggregate gross offering price of $103,500,000. Circuit
Holdings LLC, one of our stockholders, sold 1,953,946 shares
of Common Stock (including 254,863 shares sold in connection
with the exercise by the underwriters of their over-allotment
option) for an aggregate gross offering price of $31,263,136.
Lewis O. Coley, III, one of our stockholders, sold 116,812
shares of Common Stock (including 15,236 shares sold in
connection with the exercise by the underwriters of their
over-allotment option) for an aggregate gross offering price
of $1,868,992. TCW/Crescent Mezzanine Partners II, L.P., one
of our stockholders, sold 61,931 shares of Common Stock
(including 8,078 shares sold in connection with the exercise
by the underwriters of their over-allotment option) for an
aggregate gross offering price of $990,896. TCW/Crescent
Mezzanine Trust II, one of our stockholders, sold 15,011
shares of
22
Common Stock (including 1,957 shares sold in connection with
the exercise by the underwriters of their over-allotment
option) for an aggregate gross offering price of $240,176. TCW
Leveraged Income Trust, L.P., one of our stockholders, sold
4,275 shares of Common Stock (including 558 shares sold in
connection with the exercise by the underwriters of their
over-allotment option) for an aggregate gross offering price
of $68,400. TCW Leveraged Income Trust II, L.P., one of our
stockholders, sold 4,275 shares of Common Stock (including 558
shares sold in connection with the exercise by the
underwriters of their over-allotment option) for an aggregate
gross offering price of $68,400.
(7) Through the date of this Report, we incurred estimated
expenses (including underwriters' discount and commissions) of
approximately $11.5 million in connection with the Offering,
which included approximately $7.3 million in underwriters'
discount and commissions, $2.0 million in financial advisory
fees to T.C. Management, T.C. Management IV and Brockway Moran
& Partners Management (see subparagraph (8)(vi) below for a
description of the relationship between these entities and
some of our directors and stockholders) and approximately $2.2
million of other expenses (including filing fees related to
the Registration Statement and the National Association of
Securities Dealers, Inc., the Nasdaq National Market listing
fee, printing and engraving expenses, legal fees and expenses,
accounting fees and expenses, blue sky fees and expenses,
transfer agent and registrar fees and miscellaneous expenses).
(8) Through the date of this Report, the aggregate net proceeds to
us of approximately $92.1 million were used as follows:
i. approximately $50.4 million was used to reduce our
indebtedness under our existing senior credit facility;
ii. approximately $12.6 million was used to reduce our
indebtedness under our amended and restated senior credit
facility;
iii. approximately $10.8 million was used to eliminate our
obligations under our retention bonus plan;
iv. approximately $12.8 million was used to redeem all of our
outstanding senior subordinated notes;
v. approximately $4.0 million was used to redeem our
outstanding subordinated note; and
vi. approximately $1.5 million was used to pay management
consulting and financial advisory fees to T.C. Management,
T.C. Management IV and Brockway Moran & Partners
Management. T.C. Management and T.C. Management IV are
affiliates of Thayer Equity Investors III, L.P., Thayer
Equity Investors IV, L.P. and TC Circuits L.L.C. Thayer
Equity Investors III, L.P., Thayer Equity Investors IV,
L.P. and TC Circuits L.L.C. are affiliates (the "Thayer
Capital Partners entities") and beneficially owned 59.4%
of our Common Stock as of November 10, 2000. The Thayer
Capital Partners entities hold shares directly and, as a
result of their ownership of 60% of Circuit Holdings LLC,
are deemed to beneficially own all of the shares of our
Common Stock which are owned directly by Circuit Holdings
LLC. Jeffrey W. Goettman, one of our directors, is a
Managing Director of each of the limited liability
companies that control Thayer Equity Investors III, L.P.
and Thayer Equity Investors IV, L.P. Douglas P. McCormick,
one of our directors, is a Vice President of the limited
liability company that controls Thayer Equity Investors
IV, L.P. Brockway & Moran Partners Management is an
affiliate of Brockway & Moran Partners Fund, L.P., which
beneficially owned 5.6% of our Common Stock as of
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November 10,. 2000 through direct holdings. Brockway &
Moran Partners Fund, L.P. owns 40% of Circuit Holdings
LLC. Michael E. Moran, one of our directors, is a partner
of Brockway & Moran Partners Inc., which controls Brockway
& Moran Partners Fund, L.P. Philip M. Carpenter III, one
of our directors, is a Vice President of Brockway & Moran
Partners Inc.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
third quarter of 2000.
ITEM 5: OTHER INFORMATION
Not applicable.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
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*These exhibits were filed as exhibits to the Company's Registration
Statement on Form S-1 (File No. 333-39906) as indicated on the following table
and are incorporated herein by this reference thereto:
(b) REPORTS ON FORM 8-K.
On October 27, 2000, the Company filed a Report on Form 8-K dated
September 29, 2000 describing the amendment and restatement of the Company's
senior credit facility on September 29, 2000 and the amendment thereof on
October 13, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
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