<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________
FORM 10-Q
(Mark One)
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended September 30, 1996
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: 0-24170
SIGMA CIRCUITS, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0107167
(State or other jurisdiction (I.R.S. of Employer
incorporation or organizatin) Identification Number)
393 Mathew Street
Santa Clara, California 95050
(408) 727-9169
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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
The number of shares outstanding of the Registrant's Common Stock, $.001 par
value, was 4,007,088 at November 1, 1996.
</PAGE>
<PAGE> 2
Sigma Circuits, Inc.
INDEX
Description Page Number
Cover Page 1
Index 2
Part I: Financial Information
Item 1: Financial Statements
Condensed Balance Sheets as of September
30, 1996 and June 30, 1996 3
Condensed Statements of Operations for the
Three Month Period Ended September 30,
1996 and 1995 4
Condensed Statements of Cash Flows for the
Three Month Period Ended September 30,
1996 and 1995 5
Notes to Condensed Financial Statements 6
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8
Part II: Other Information
Item 1: Legal Proceedings 15
Item 6: Exhibits and Reports on Form 8-K 15
Signatures 16
</PAGE>
<PAGE> 3
Part I: Financial Information
Item 1: Financial Statements
SIGMA CIRCUITS, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
(in thousands)
September 30, June 30,
1996 1996
<S> <C> <C>
ASSETS
Current Assets:
Accounts Receivable (Net of Allowances of
$530 and $598, Respectively) $12,522 $11,987
Income Taxes Receivable 1,393 1,393
Other Receivables 377 46
Inventories 4,511 4,753
Prepaid Expenses 333 268
Deferred Income Taxes 2,659 2,660
Total Current Assets 21,795 21,107
Property and Equipment, Net 18,903 18,899
Goodwill (Net of Accumulated Amortization of
$2,447 and $2,322, Respectively) 6,490 6,615
Deposits and Other Assets 299 339
Total $47,487 $46,960
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Cash Overdraft $ 497 $ 297
Current Portion of Long-Term Debt 7,332 7,681
Accounts Payable 5,428 4,418
Accrued Liabilities 4,460 5,947
Total Current Liabilities 17,717 18,343
Long-Term Debt 15,658 14,345
Deferred Income Taxes 1,354 1,354
Stockholders' Equity:
Preferred Stock, $0.001 Par Value:
Shares Authorized: 5,000
Shares Outstanding: None --
Common Stock, $0.001 Par Value:
Shares Authorized: 20,000
Shares Outstanding: 4,005 and 3,998, Respecti
3,998, Respectively 10,610 10,604
Deferred Stock Compensation (163) (180)
Retained Earnings 2,311 2,494
Total Stockholders' Equity 12,758 12,918
Total $47,487 $46,960
</TABLE>
See notes to condensed financial statements.
</PAGE>
<PAGE> 4
Item 1: Financial Statements (continued)
SIGMA CIRCUITS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
(in thousands, except
per share data)
Three Months Ended
September 30,
1996 1995
<S> <C> <C>
Net Sales $18,802 $16,076
Cost of Sales 16,484 12,513
Gross Profit 2,318 3,563
Selling, General and Administrative Expenses 1,966 2,380
Amortization of Goodwill 125 50
Operating Income 227 1,133
Interest Expense, Net 538 144
Income (Loss) Before Income Taxes (311) 989
Provision (Benefit) for Income Taxes (128) 423
Net Income (Loss) $ (183) $ 566
Net Income (Loss) Per Share $ (.05) $ .14
Number of Shares Used in Computing Per Share
Information 4,001 4,150
</TABLE>
See notes to condensed financial statements.
</PAGE>
<PAGE> 5
Item 1: Financial Statements (continued)
SIGMA CIRCUITS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
(in thousands)
Three Months Ended
September 30,
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (183) $ 566
Reconciliation to Cash Provided by (Used for)
Operating Activities:
Depreciation and Amortization 1,067 686
Amortization of Goodwill 125 50
Amortization of Deferred Stock
Compensation 17 27
Loss on Disposal of Assets 151 37
Deferred Income Taxes -- (100)
Changes in Assets and Liabilities:
Accounts Receivable (535) (1,336)
Other Receivables (331) 96
Inventories 242 (221)
Prepaid Expenses (65) (237)
Accounts Payable 1,010 1,014
Accrued Liabilities (1,488) (204)
Income Taxes Payable -- (79)
Cash Provided by Operating Activities 10 299
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Property and Equipment (1,235) (661)
Proceeds from Sale of Property and Equipment 15 --
Deposits and Other Assets 40 (17)
Purchase of Citation Companies, Net of Cash
Acquired -- (9,092)
Cash Used for Investing Activities (1,180) (9,770)
CASH FLOWS FROM FINANCING ACTIVITIES:
Line of Credit, Net 1,901 235
Proceeds from Long-Term Borrowings -- 10,549
Repayment of Long-Term Borrowings (937) (139)
Cash Overdraft 200 --
Common Stock Transactions, Net 6 101
Cash Provided by Financing Activities 1,170 10,746
INCREASE IN CASH AND EQUIVALENTS -- 1,275
CASH AND EQUIVALENTS:
Beginning of Period -- 106
End of Period $ -- $ 1,381
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Equipment Acquired Under Capital Lease
Obligations $ 542
PURCHASE OF THE CITATION COMPANIES:
Cash Paid, Net of Cash Acquired $ 9,092
Stock Issued to Seller 2,500
Debt Issued to Seller 4,092
Liabilities Assumed 5,190
Assets Acquired (including Goodwill of $20,874
$5,744)
See notes to condensed financial statements.
</TABLE>
</PAGE>
<PAGE> 6
Item 1: Financial Statements (continued)
SIGMA CIRCUITS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
Basis of Presentation
While the quarterly financial information contained in this filing is
unaudited, the financial statements presented reflect all adjustments
(consisting only of normal recurring adjustments) which the Company
considers necessary for a fair presentation of the results of operations
for the interim periods covered and of the financial condition of the
Company at the dates of the interim balance sheets. The results for
interim periods are not necessarily indicative of the results of the entire
year. The information included in this report should be read in
conjunction with the Company's audited financial statements and notes
thereto included in the Company's fiscal year 1996 Annual Report on Form
10-K.
Per Share Information
Net income (loss) per share is based on the weighted average number of
common and common equivalent shares outstanding during the period. Common
equivalent shares include common stock options and warrants (using the
treasury stock method) and are excluded in loss periods as they are anti-
dilutive.
Inventories
Inventories consist of (in thousands):
<TABLE>
September 30, June 30,
1996 1996
<S> <C> <C>
Raw Materials $2,636 $2,641
Work in Process 1,643 1,880
Finished Goods 232 232
Inventories $4,511 $4,753
</TABLE>
Long-Term Debt and Capital Lease Obligations
As of June 30, 1996, the Company was in non-compliance with the
profitability and working capital convenants of its revolving line of
credit agreement with Comerica Bank (the "Bank"). The Company obtained a
waiver with respect to such convenants from the Bank as of that date, and
an amendment of its working capital limits for the remaining term of the
agreement. During the three months ended September 30, 1996, the Company
was in compliance with the various financial covenants of the long-term
revolving line of credit. The Company believes it will remain in
compliance with these revised terms during the remainder of fiscal year
1997; however, in the event that a covenant is violated and not cured to
the Bank's satisfaction, the Bank would be entitled to accelerate the
indebtedness owed by the Company.
Interest paid was approximately $372,000 and $152,000 for three months
ended September 30, 1996 and 1995, respectively.
</PAGE>
<PAGE> 7
Item 1: Financial Statements (continued)
Provision (Benefit) for Income Taxes
The Company incurred a combined federal and state effective income benefit
rate of 41.2% for the three month period ended September 30, 1996 compared
to an effective income tax rate of 42.8% for the same period of fiscal year
1995. Income taxes paid were approximately $0 and $602,000 for the three
months ended September 30, 1996 and 1995, respectively.
Pending Acquisition by Continental Circuits Corp.
On September 27, 1996, the Company signed a Letter of Intent whereby
Continental Circuits Corp. will acquire all of the outstanding shares of
the Company's common stock in exchange for Continental Circuits' stock.
Under the terms of the exchange, the Company's shareholders would receive
0.70 shares of Continental Circuits stock for each share of the Company's
stock. The companies are currently working toward the execution of a
definitive agreement. The transaction is expected to be completed during
early calendar year 1997, subject to shareholder approval.
</PAGE>
<PAGE> 8
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
This discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from
those discussed herein. Factors that could cause or contribute to such
differences, include, but are not limited to, those discussed herein, as
well as those discussed in the Company's fiscal year 1996 Annual Report on
Form 10-K. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of
the date hereof. The Company undertakes no obligation to publicly release
the results of any revision to these forward-looking statements which may
be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
Overview
Beginning in fiscal year 1994, the Company adopted a strategy to service
more of the electronic interconnect needs of its strategic customers by
broadening its product offerings and increasing its capacity. The Company
believed that its reputation as a high quality, reliable quick-turn
supplier of PCBs would generate demand among its customers for additional
product offerings. The Company also believed that the customer
relationships established by providing quick-turn services during the
prototype stage of the product life cycle would give it an advantage in
securing the larger volume pre-production and production orders of such
products. Assisted by the proceeds of a private equity financing and its
initial public offering, the Company established its Systems Integration
and Flexible Circuits divisions during the latter part of fiscal year 1994
in order to broaden its product offerings. The Company completed the
acquisition of Stockton, California based Citation Circuits, Inc. and its
related companies (the "Citation Acquisition") during the first quarter of
fiscal year 1996 in order to obtain the manufacturing capacity required to
service its customers' higher volume production jobs in a lower cost
operating environment.
During the first half of fiscal year 1996, net sales and gross profit
increased significantly as a result of the additional capacity obtained in
the Citation Acquisition and the products offered by its two new divisions.
During the second half of fiscal year 1996, the electronic interconnect
industry experienced a softening period which adversely impacted the
Company, along with many of its competitors, as evidenced by a decline in
the demand for its products and services. As a result, the Company
announced the closure of its Costa Mesa PCB division and the redeployment
of certain assets and personnel into its existing Northern California PCB
operations and recorded a one-time charge of approximately $3.8 million for
facility closing costs during the fourth quarter of fiscal year 1996.
At the end of the first quarter of fiscal year 1997, the Company signed a
Letter of Intent whereby Continental Circuits Corp. will acquire all of the
outstanding shares of the Company's common stock in exchange for
Continental Circuits' stock. Management believes that the combined entity
will be better positioned to serve as a "one-stop" provider of electronic
interconnect products and services, offering prototype, quick-turn and
volume production of PCBs, flexible circuits, backplane assemblies, sub-
assemblies and complete systems, and that the combined company will benefit
from enhanced technological, production and cost synergies. The companies
are currently working toward the execution of a definitive agreement. The
transaction is expected to be completed during early calendar year 1997,
subject to shareholder approval.
</PAGE>
<PAGE> 9
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
The Company's operating results have been and are expected to continue to
be affected by a number of factors, including the timing and volume of
orders from and shipments to customers relative to the Company's
manufacturing capacity, level of product and price competition, product
mix, the number of working days in a particular quarter, economic
conditions in the electronic interconnect industry and general economic
factors. The lead times, volume levels and complexity of customer orders
have also affected overall gross margins.
Results of Operations
The following table sets forth, for the periods indicated, certain
statement of operations data expressed as a percentage of net sales. The
table and the discussion below should be read in conjunction with the
condensed financial statements and the notes thereto appearing elsewhere in
this report.
<TABLE>
Three Months Ended
September 30,
1996 1995
<S> <C> <C>
Net Sales 100.0% 100.0%
Cost of Sales 87.7 77.8
Gross Profit 12.3 22.2
Selling, General and
Administrative Expenses 10.4 14.8
Amortization of Goodwil 0.7 0.3
Operating Income 1.2 7.1
Interest Expense, Net 2.9 0.9
Income (Loss) Before Income Taxes (1.7) 6.2
Provision (Benefit) for Income Taxes (0.7) 2.7
Net Income (Loss) (1.0)% 3.5%
</TABLE>
Net Sales
Net sales for the quarter ended September 30, 1996 were approximately
$18.8 million, an increase of $2.7 million or 17.0% from the same quarter
in the prior fiscal year. The increase is primarily the result of
additional net sales in the Systems Integration and Flexible Circuits
divisions as revenues increased approximately 130.5% and 33.0%,
respectively, over the same quarter in the prior fiscal year. Although,
this quarter represents the first quarter with the Stockton PCB division
and without the Costa Mesa PCB division, net sales for the Company's PCB
products were unchanged compared to the prior year quarter due to both an
overall softness in the industry and a shift in product mix from a two
facility quick-turn PCB operation during the first quarter of fiscal year
1996, to a single quick-turn PCB operation and a single volume PCB
operation during the first quarter of fiscal year 1997.
Gross Profit
Gross profit for the quarter ended September 30, 1996 was approximately
$2.3 million, a decrease of $1.3 million or 34.9% from the same quarter in
the prior fiscal year. Gross margin for the first quarter of fiscal years
1997 and 1996 was 12.3% and 22.2%, respectively. Gross margin for the
first quarter was adversely impacted by lower and no margin production
associated with the closure of the Costa Mesa PCB facility and
manufacturing inefficiencies of the Company's PCB operations due to
shifting of orders and resources among its existing facilities. The impact
of the Systems Integration and Flexible Circuits divisions on gross margin
was approximately the same for the first quarters of fiscal years 1997 and
1996.
</PAGE>
<PAGE> 10
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the quarter ended
September 30, 1996 were approximately $2.0 million, a decrease of $414,000
or 17.4% from the same quarter in the prior fiscal year. The overall
decrease is primarily attributable to cost reduction efforts of the
Company, consistent with the consolidation and streamlining of the
Company's management infrastructure. Selling, general and administrative
expenses decreased from 14.8% to 10.4%, as a percentage of net sales, as a
significant amount of revenues in the quarter ended September 30, 1996 are
associated with volume production which has lower related selling costs.
Interest Expense, Net
Net interest expense for the quarter ended September 30, 1996 was
approximately $538,000, an increase of $394,000 from the same quarter in
the prior fiscal year. The overall increase is primarily attributable to
the debt incurred in connection with the Citation Acquisition completed at
the end of the first quarter of fiscal year 1996. The remaining debt
outstanding from the Citation Acquisition is approximately $12.3 million
and bears interest at rates ranging from 9.3% to 12.0%.
Provision (Benefit) for Income Taxes
The Company's effective income tax (benefit) rate was (41.2)% and 42.8% for
the quarters ended September 30, 1996 and 1995, respectively. These rates
differ from statutory rates primarily due to state taxes, net of federal
benefit, amortization of goodwill and deferred stock compensation which are
not deductible in determining taxable income or loss. Additionally, the
amount of pre-tax income or loss can have a material effect on the
Company's effective income tax (benefit) rate.
Financial Condition
The Company has historically financed its operations primarily through bank
borrowings, issuances of debt and equity securities and cash generated from
operations.
Liquidity
The Company generated cash from operating activities of approximately
$10,000 and $299,000 in the three months ended September 30, 1996 and 1995,
respectively. Cash generated in the three months ended September 30, 1996
was primarily attributable to a non-cash depreciation and amortization
expense of approximately $1.1 million, payments related to the facility
closing accrual of approximately $560,000 as well as other working capital
changes. Cash generated in the three months ended September 30, 1995 was
primarily attributable to a non-cash depreciation expense of approximately
$686,000 and other working capital changes.
The Company used cash in investing activities of approximately $1.2 million
and $9.8 million in the three months ended September 30, 1996 and 1995,
respectively. Cash used in the three months ended September 30, 1996 was
primarily attributable to approximately $1.2 million used for the purchase
of property and equipment. Cash used in the three months ended September
30, 1995 was primarily attributable to approximately $9.1 million in
expenditures for the purchase of the Citation Companies and approximately
$661,000 used for the purchase of property and equipment.
</PAGE>
<PAGE> 11
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
The Company generated cash from financing activities of approximately $1.2
million and $10.8 million in the three months ended September 30, 1996 and
1995, respectively. Cash generated in the three months ended September 30,
1996 was attributable to approximately $1.9 million in increased net
borrowings under the long-term revolving line of credit offset by
approximately $937,000 in repayment of debt and capital lease obligations.
Cash generated in the three months ended September 30, 1995 was primarily
attributable to $10.5 million in long-term borrowings of which $10.0
million was used to finance the Citation Acquisition.
As of September 30, 1996 the Company had total debt outstanding of
approximately $23.0 million, consisting primarily of $7.6 million
outstanding under the Company's long-term revolving line of credit, $12.3
million of debt issued in connection with the Citation Acquisition and $4.0
million of real estate and other equipment obligations. The Company has an
$8.0 million long-term revolving line of credit with Comerica Bank ( the
"Bank"). The Company's credit agreement limits borrowings under the line
of credit to the maximum of $8.0 million or 75% of the Company's eligible
trade accounts receivable as contractually defined. The current line of
credit was amended on September 26, 1996 to expire on January 2, 1998 and
bears interest at the Bank's base rate plus 0.25%. In connection with the
Citation Acquisition, the Company borrowed $8.5 million and $1.5 million
from the Bank under two variable rate installment notes, which have terms
of five and two years, respectively, and bear interest at the Bank's base
rate plus 1.0%. Under both notes, principal and interest payments are due
monthly. Additionally, in connection with the Citation Acquisition, the
Company issued two 12.0% subordinated notes to the seller of the Citation
Companies in the amounts of approximately $2.6 million and $1.5 million.
These notes and accrued interest are payable in June 1997. As of June 30,
1996, the Company was in non-compliance with the profitability and working
capital convenants of its revolving line of credit agreement with the Bank.
The Company obtained a waiver with respect to such convenants from the Bank
as of that date, and an amendment of its working capital limits for the
remaining term of the agreement. During the three months ended September
30, 1996, the Company was in compliance with the various financial
covenants of the long-term revolving line of credit. The Company believes
it will remain in compliance with these revised terms during the remainder
of fiscal year 1997; however, in the event that a covenant is violated and
not cured to the Bank's satisfaction, the Bank would be entitled to
accelerate the indebtedness owed by the Company.
The Company believes that its existing funds, borrowings available under
its revolving line of credit and funds expected to be generated from
operations will be sufficient to meet its working capital needs for the
next twelve months. There can be no assurance, however, that events in the
future will not require the Company to seek additional capital sooner or,
if so required, that it will be available on terms acceptable to the
Company. To the extent that cash generated from operations is not
sufficient to meet the Company's projected capital expenditures or future
working capital needs, the Company's business, financial condition and
results of operations would be materially and adversely affected.
Capital Resources
During the three months ended September 30, 1996, the Company purchased
approximately $1.2 million of property and equipment which was funded
through cash generated from operations. Management expects the Company's
level of future capital expenditures to remain at levels consistent with
the Company's operational projections mitigated by the redeployment of
selected capital equipment from the closed Costa Mesa PCB facility.
Excluding the financial impact of any acquisition or establishment of new
facilities, the Company expects to incur capital expenditures of
approximately $1.3 million in the remaining nine months of fiscal year
1997.
</PAGE>
<PAGE> 12
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Inflation
The Company recognizes that inflationary pressures may have an adverse
effect on its operations through increased production costs. The Company
attempts to minimize the effect of inflation through productivity
improvements as well as price increases that assist in maintaining
reasonable profit margins. Although the Company believes that the impact of
inflation on its operating results has been moderate in recent years, there
can be no assurance that, in the future, it could not have a material
adverse effect on the Company's business, financial condition and results
of operations.
Seasonality
The Company believes that its net sales have not historically been subject
to significant seasonal fluctuations.
Factors That May Affect Future Results
Dependence on Electronics Industry
The Company's principal customers are original equipment manufacturers
(OEM) and contract manufacturers in the data communications,
telecommunications, computer and computer peripherals, industrial and
medical industries. These industry segments, and the electronics industry
as a whole, are 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. Discontinuance or
modifications of products containing components manufactured by the Company
could adversely affect the Company's business, financial condition and
results of operations. In addition, the electronics industry 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 in the
electronics industry would likely result in intensified price competition
and a decrease in unit volume, both of which would have a material adverse
effect on the Company's business, financial condition and results of
operations.
Fluctuations in Quarterly Operating Results
The Company's quarterly operating results have varied and may continue to
fluctuate significantly. At times in the past, the Company's net sales and
net income have decreased from the prior quarter. Operating results are
affected by a number of factors, including timing and volume of orders from
and shipments to customers relative to the Company's manufacturing
capacity, level of product and price competition, product mix, the number
of working days in a particular quarter and general economic factors. In
recent years, the Company's gross margins have varied primarily as a result
of capacity utilization, product mix, start-up costs in its two new
divisions, lead times, volume levels and complexity of customer orders.
Although the Company has recently acquired facilities through the
acquisition of the Citation Companies that could allow the Company to
produce products at lower cost, there can be no assurance that the Company
will be able to manage the utilization of manufacturing capacity or product
mix in a manner that would improve gross margins or the Company's business,
financial condition and results of operations. The timing and volume of
order placed by the Company's OEM customers vary due to customer attempts
to manage inventory, changes in the OEM's manufacturing strategy and
</PAGE>
<PAGE> 13
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
variation in demand for customer products. An interruption in
manufacturing resulting from shortages of parts or equipment, fire, natural
disaster, equipment failure or otherwise would have a material adverse
effect on the Company's business, financial condition and results of
operations. Due to all of the foregoing factors, it is likely that in some
future quarter the Company's operating results will be below the
expectations of public market analysts and investors. In such event, the
price of the Company's common stock would likely be materially adversely
affected.
Customer Concentration
The Company's growth has resulted, in part, from its ability to identify
and attract customers in rapidly growing segments of the electronics
industry. The Company has manufactured products for some of these
customers for a relatively short period of time. There can be no assurance
that the Company will continue to be able to identify, attract and retain
customers with high growth rates or that the customers that they do attract
and retain will continue to grow at their historical rates or at all.
Although there can be no assurance that the Company's principal customers
will continue to purchase products and services from the Company at current
levels, if at all, the Company expects to continue to depend upon its
principal customers for a significant portion of its net sales. The
decrease in or loss of orders from one or more major customers could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Variability of Orders
The Company does not obtain long term purchase commitments from its
customers and a substantial portion of net sales in a given quarter depends
on obtaining orders for products to be manufactured and shipped in the same
quarter in which those orders are received. Customers may cancel orders
and change or delay delivery schedules at any time. The timely replacement
of canceled, delayed or reduced orders with new orders cannot be assured.
Significant or numerous cancellations, reduction or delays in order by a
customer or group of customers could have a material adverse effect on the
Company's business, financial condition and results of operations. Because
the Company operates with virtually no backlog, net sales for any quarter
are substantially dependent on orders booked in that quarter and net sales
for any future quarter are not predictable with any significant degree of
certainty. The Company's expense levels are relatively fixed and are
based, in part, on expectations of future net sales. Consequently, if net
sales levels are below expectations, the Company's business, financial
condition and results of operations are likely to be adversely affected.
Competition
The electronic interconnect industry is characterized by intense
competition. The Company faces significant competition in its quick-turn,
PCB and flexible circuits product lines primarily from a number of regional
privately-held manufacturers. As the Company increasingly expands its
volume production of PCBs, backplane assemblies and flexible circuits, it
will continue to face much larger competitors. Many of these competitors
have significantly greater financial, technical and marketing resources,
greater name recognition and a larger installed customer base than the
Company. In addition, these competitors may have the ability to respond
more quickly to new or emerging technologies and may adapt more quickly to
changes in customer requirements and may devote greater resources to the
development, promotion and sale of their products than the Company.
</PAGE>
<PAGE> 14
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
The Company believes that when it competes in the standard lead-time volume
production of its PCB, backplane and flexible circuits products, it will
encounter greater price sensitivity from potential customers. From time to
time the Company operates in the lower technology, higher volume segments
of the PCB market, where the Company may be at a competitive disadvantage
when competing with manufacturers with lower cost structures, particularly
those with offshore facilities where labor and other costs are generally
lower. During periods of recession or economic slowdown in the electronics
industry, the Company's competitive advantages in the areas of quick-turn
manufacturing and responsive customer service may be of reduced importance
to the Company's customers, who may become more price sensitive. Although
capital barriers to entry are relatively high for manufacturing
technologically complex electronic interconnect products, the basic
interconnect technology is generally not protected by patents or
copyrights, and companies with significant resources or international
operations may enter the market. Consolidation of smaller competitors may
also result in increased competition. Increased competition could result
in price reductions, reduced margins or loss of market share, any of which
could materially and adversely affect the Company's business, financial
condition and results of operations.
Management of Growth
The Company has experienced a period of rapid growth that has placed, and
is expected to continue to place, a significant strain on the Company's
management, operational and financial resources. This situation is
compounded by the acquisition of the Citation Companies. The Company's
growth is expected to require the addition of new management personnel and
the development of additional expertise by existing management personnel.
The Company's ability to manage growth effectively, particularly given the
increasing scope of its operations, will require it to continue to
implement and improve its management, operational, and financial
information systems, as well as to develop the management skills of its
managers and supervisors and to train, motivate and manage its employees.
The Company's failure to effectively manage growth could have a material
adverse effect on the Company's business, financial condition and results
of operations. Competition for personnel is intense and there can be no
assurance that the Company will be able to attract, assimilate or retain
additional highly qualified employees in the future. The failure to hire
and retain such personnel could have a material adverse effect on the
Company's business, financial condition and results of operations.
Pending Acquisition by Continental Circuits Corp.
On September 27, 1996, the Company signed a letter of intent with
Continental Circuits Corp. whereby Continental will acquire all of the
outstanding shares of the Company's common stock in exchange for shares of
Continental's common stock (the "Merger"). The parties are currently
working toward the execution of a definitive agreement and expect the
Merger to be completed during early calendar year 1997, subject to
shareholder approval. However, there can be no assurance that the parties
will be able to agree on the terms of a definitive agreement or that the
Merger will be consummated during early calendar year 1997, or at all. The
failure to consummate the Merger could have a material adverse effect on
the Company's business, financial condition or results of operations, and
could adversely affect the market price of the Company's common stock. In
addition, there can be no assurance that if the Merger is consummated, the
Company and Continental will be able to successfully integrate the
operations, products, or personnel of the two companies without a material
adverse effect on the Company's or Continental's business, financial
condition or results of operations, or the market price of Continental's
common stock.
</PAGE>
<PAGE> 15
Part II: Other Information
Item 1. Legal Proceedings
In connection with the acquisition of the Citation Companies on September
30, 1995, the Company assumed certain environmental contingent liabilities
pertaining to operations prior to that date. As of the acquisition date,
the Citation Companies had accrued $303,000 for the two known claims.
The first contingent liability relates to allegations by the City of
Stockton of violations of its City Code regarding discharge of waste water
into the City's sewer system in excess of allowed limits during several
months in 1992. As of September 30, 1996, no further action has taken
place between the City of Stockton and the Company. The Company has
established a reserve for this contingency and in the opinion of its
management, any settlement would not likely result in a loss that would
have a material adverse effect on the Company's business, financial
condition and results of operations.
The second contingent liability relates to the United States Environmental
Protection Agency ("EPA") issuance of an administrative civil complaint
regarding the timely submission of required federal forms under the
Emergency Planning and Community Right-to-Know Act of 1986 ("EPCRA"). On
April 15, 1996, the Company entered into a tentative "Consent Agreement and
Consent Order" ("CACO") with the EPA pertaining to its complaint. In the
CACO, the Company has certified that it has completed and submitted all
required federal forms to the EPA under the EPCRA, and that it has complied
with all other EPCRA requirements at all of its facilities. In addition,
the Company will also purchase and test certain equipment to aid in its
environmental regulatory requirements within twelve months of the effective
date of the CACO. The minimum aggregate cost associated with the purchase,
installation and testing of this equipment is $220,250 and if the actual
aggregate cost is lower, the difference between the actual cost and such
minimum threshold, will be remitted to the EPA. As of September 30, 1996,
the Company had incurred approximately $146,000 of costs associated with
the minimum threshold. In relation to the testing of the equipment, the
Company is subject to additional filing requirements with the EPA
pertaining to the functionality of the equipment. Further, the Company
paid a civil penalty of $65,000 upon execution of and as required by the
CACO in July 1996. Terms of the CACO constitute a full and final
settlement of the complaint.
Item 6: Exhibits and Reports on Form 8-K
A. Exhibits
See Index to Exhibits at page 17 of this filing and is
incorporated by reference herein.
B. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
September 30, 1996.
</PAGE>
<PAGE> 16
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, in the City of Santa Clara, County of
Santa Clara, State of California, on the 12th day of November, 1996.
Sigma Circuits, Inc.
(Registrant)
By /s/ B. Kevin Kelly
B. Kevin Kelly
President, Chief Executive Officer
and Director
By /s/ Philip S. Bushnell
Philip S. Bushnell
Senior Vice President, Finance and
Administration, Chief Financial Officer,
Secretary and Director
</PAGE>
<PAGE> 17
INDEX OF EXHIBITS
<TABLE>
<S> <C> <C>
Sequentially
Exhibit Numbered
Number Description Page
3.1 Restated Certificate of Incorporation of the Registrant.(1) --
3.2 Bylaws of the Registrant.(1) --
4.1 Reference is made to Exhibits 3.1 and 3.2 --
4.2 Registration Agreement among the Registrant and certain
other parties named therein, dated April 15, 1986.(1) --
4.3 Series C Registration Rights Agreement among the Registrant
and certain other parties named therein, dated September 30,
1993.(1) --
4.5 Specimen stock certificate.(1) --
10.1 Form of Indemnity Agreement entered into between the
Registrant and its directors and officers, with related
schedule.(1) --
10.2 Registrant's 1988 Stock Option Plan, as amended to date.(1) --
10.3 Form of Incentive Stock Option under the 1988 Stock Option
Plan.(1) --
10.4 Form of Nonstatutory Stock Option under the 1988 Stock
Option Plan.(1) --
10.5 Form of Notice of Exercise under the 1988 Stock Option
Plan.(1) --
10.6 Registrant's 1994 Non-Employee Directors' Stock Option Plan,
as amended to date.(1) --
10.7 Registrant's 1994 Employee Stock Purchase Plan, as amended
to date.(1) --
10.9 Form of Stock Warrant granted to Cruttenden & Company.(1) --
10.10 Note Secured by Deed of Trust granted to Plaza Bank of
Commerce, dated March 29, 1990.(1) --
10.11 Promissory Notes granted Comerica Bank-California, dated
June 1, 1993 and November 12, 1993.(1) --
10.13 Master Lease between the Registrant and CIT Group/Equipment
Financing, Inc., dated October 6, 1993, and Schedule 1
thereto.(1) --
10.15 Lease Agreement between the Registrant and Anthony and
Cydelle Drago, dated December 30, 1986, as amended to
date.(1) --
10.17 Equipment Lease between the Registrant and Copelco Leasing
Corporation, dated January 9, 1993.(1) --
10.19 Lease Agreement between the Registrant and Retail Control
Systems, Inc., dated December 15, 1984, as amended to
date.(1) --
10.21 Lease Agreement between the Registrant and The Kontrabecki
Group, dated May 3, 1994, and attachments thereto.(1) --
10.22 Lease Agreement between the Registrant and The Kontrabecki
Group, dated June 9, 1995, and attachments thereto.(2) --
</TABLE>
</PAGE>
<PAGE> 18
INDEX OF EXHIBITS (Continued)
<TABLE>
<S> <C> <C>
Sequentially
Exhibit Numbered
Number Description Page
10.24 Lease Agreement Extension and Modification dated September
30, 1995, between the Registrant and Anthony and Cydelle
Drago to Lease Agreement dated December 30, 1986, as
amended.(2) --
10.25 Consulting Agreement between the Registrant and Robert P.
Cummins, dated July 1, 1995.(4) --
10.26 Change-in-Control Severance Agreement between the
Registrant and B. Kevin Kelly, dated October 26, 1995.(4) --
10.27 Change-in-Control Severance Agreement between the
Registrant and Philip S. Bushnell, dated October 26,
1995.(4) --
10.28 Revolving Credit Loan & Security Agreement between the
Registrant and Comerica Bank-California, with exhibits,
dated September 29, 1995.(4) --
10.29 Variable Rate Installment Notes granted to Comerica Bank-
California, dated September 29, 1995.(4) --
10.30 Subordinated Promissory Note granted to Citation Circuits,
Inc., dated September 30, 1995.(4) --
10.31 Convertible Subordinated Promissory Note granted to Citaton
Circuits, Inc., dated September 30, 1995.(4) --
10.32 Lease Agreement between Registrant and Dockside, dated
June 23, 1989.(4) --
10.33 Asset Purchase Agreement between the Registrant, Citation
Circuits, Inc., Citation Enterprises, Inc., Citron Inc. and
Carl Brockl, dated September 8, 1995.(3) --
11.1 Statements Regarding Calculation of Net Income (Loss) Per
Share. 19
27.1 Financial Data Schedule. --
</TABLE>
(1) Incorporated by reference to the corresponding Exhibit previously
filed as an Exhibit to the Company's Registration Statement on Form
S-1, as amended, filed May 26, 1994 (File No. 33-76606).
(2) Incorporated by reference to the corresponding Exhibit previously
filed as an Exhibit to the Company's Form 10-K, as amended, filed
September 28, 1995 (File No. 0-24170).
(3) Incorporated by reference to the corresponding Exhibit previously
filed as an Exhibit to the Company's Form 8-K, as amended, filed
October 11, 1995 (File No. 0-24170).
(4) Incorporated by reference to the corresponding exhibit previously
filed as an exhibit to the Company's Registration Statement on Form
S-1, as amended, filed February 16, 1996 (File No. 333-1262).
</PAGE>
<PAGE> 19
EXHIBIT 11.1
SIGMA CIRCUITS, INC.
STATEMENTS REGARDING CALCULATION
OF NET INCOME (LOSS) PER SHARE
(in thousands, except per share amounts)
<TABLE>
Three Months Ended
September 30,
1996 1995
<S> <C> <C>
Net Income (Loss) $ (183) $ 566
Weighted Average Common Stock Outstanding 4,001 3,464
Common Stock Equivalents:
Dilutive Effect of Stock Options --(1) 592
Dilutive Effect of Underwriter's Warrant --(1) 94
Number of Shares Used in Computing Per Share 4,001 4,150
Information
Net Income (Loss) Per Share $ (.05) $ .14
</TABLE>
1) Excludes common stock equivalents of approximately 581,000 shares as they
are anti-dilutive for computing net loss per share.
</PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> SEP-30-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 13,052
<ALLOWANCES> 530
<INVENTORY> 4,511
<CURRENT-ASSETS> 21,795
<PP&E> 18,903
<DEPRECIATION> 0
<TOTAL-ASSETS> 47,487
<CURRENT-LIABILITIES> 17,717
<BONDS> 0
0
0
<COMMON> 10,610
<OTHER-SE> (163)
<TOTAL-LIABILITY-AND-EQUITY> 47,487
<SALES> 18,802
<TOTAL-REVENUES> 18,802
<CGS> 16,484
<TOTAL-COSTS> 16,484
<OTHER-EXPENSES> 2,091
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 538
<INCOME-PRETAX> (311)
<INCOME-TAX> (128)
<INCOME-CONTINUING> (183)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (183)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
