<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, 1997
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. Employer Identification Number)
of incorporation or organization)
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 4,144,014 at November 5, 1997.
</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, 1997 and June 30, 1997 3
Condensed Statements of Operations
for the Three Month Period Ended
September 30, 1997 and 1996 4
Condensed Statements of Cash Flows
for the Three Month Period Ended
September 30, 1997 and 1996 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 16
Item 6: Exhibits and Reports on Form 8-K 17
Signatures 18
</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,
1997 1997
ASSETS
<S> <C> <C>
Current Assets:
Cash and Equivalents $ 1,479 $ 1,633
Accounts Receivable (Net of Allowances of
$513 and $630, Respectively) 12,249 12,432
Income Taxes Receivable 1,387 1,476
Inventories 3,758 2,797
Prepaid Expenses and Other Assets 426 330
Deferred Income Taxes 1,537 1,510
Total Current Assets 20,836 20,178
Property and Equipment, Net 15,293 15,874
Goodwill (Net of Accumulated Amortization of
$2,948 and $2,823, Respectively) 5,989 6,114
Deposits and Other Assets 442 481
Total $42,560 $42,647
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current Portion of Long-Term Debt 1,960 1,633
Accounts Payable 6,267 4,518
Accrued Liabilities 3,023 3,992
Income Taxes Payable 262 --
Total Current Liabilities 11,512 10,143
Long-Term Debt 16,263 18,902
Deferred Income Taxes 1,580 1,259
Other Long-Term Liabilities 59 39
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: 4,144 and 4,138, Respectively 11,164 11,152
Deferred Stock Compensation (93) (110)
Retained Earnings 2,075 1,262
Total Stockholders' Equity 13,146 12,304
Total $42,560 $42,647
</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,
1997 1996
<S> <C> <C>
Net Sales $22,847 $18,802
Cost of Sales 18,324 16,484
Gross Profit 4,523 2,318
Selling, General and Administrative Expenses 2,688 1,966
Amortization of Goodwill 125 125
Facility Closing Costs (131) --
Operating Income 1,841 227
Interest Expense, Net 472 538
Income (Loss) Before Income Taxes 1,369 (311)
Provision (Benefit) for Income Taxes 556 (128)
Net Income (Loss) $ 813 $ (183)
Net Income (Loss) Per Share:
Primary $ .18 $ (.05)
Fully Diluted $ .17 $ (.05)
Number of Shares Used in Computing Per Share
Information:
Primary 4,603 4,001
Fully Diluted 5,067 4,001
</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,
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 813 $ (183)
Reconciliation to Cash Provided by Operating
Activities:
Depreciation and Amortization of Property and
Equipment 1,171 1,067
Amortization of Goodwill 125 125
Amortization of Deferred Stock Compensation 17 17
Amortization of Non-Compete Agreement 39 39
Loss on Disposal of Assets 28 151
Deferred Income Taxes 294 --
Facility Closing Costs (131) --
Changes in Assets and Liabilities:
Accounts Receivable 183 (535)
Inventories (961) 242
Prepaid Expenses and Other Assets (135) (435)
Accounts Payable 1,749 1,010
Accrued Liabilities (838) (1,488)
Income Taxes Payable / Receivable 351 --
Other Long-Term Liabilities 20 --
Cash Provided by Operating Activities 2,725 10
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Property and Equipment (645) (1,235)
Proceeds from Sale of Property and Equipment 27 15
Deposits and Other Assets 39 40
Cash Used for Investing Activities (579) (1,180)
CASH FLOWS FROM FINANCING ACTIVITIES:
Line of Credit (2,149) 1,901
Repayment of Long-Term Borrowings (163) (937)
Cash Overdraft -- 200
Proceeds from Issuance of Common Stock 12 6
Cash Provided by (Used for) Financing Activities (2,300) 1,170
DECREASE IN CASH AND EQUIVALENTS (154) --
CASH AND EQUIVALENTS:
Beginning of Period 1,633 --
End of Period $ 1,479 $ --
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid for Interest $ 485 $ 372
Cash Received for Income Taxes $ (88) $ --
</TABLE>
See notes to condensed financial statements.
</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 1997 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 for computing
per share information.
Inventories
Inventories consist of (in thousands):
<TABLE>
September 30, June 30,
1997 1997
<S> <C> <C>
Raw Materials $1,201 $ 877
Work in Process 2,001 1,416
Finished Goods 556 504
Inventories $3,758 $2,797
</TABLE>
Recent Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share". The Company is required to adopt this
standard in the second quarter of fiscal year 1998 and will
restate at that time earnings per share ("EPS") data for prior
periods to conform with the standard. Earlier application is not
permitted. This new standard replaces current EPS reporting
requirements and requires a dual presentation of basic and
diluted EPS. Basic EPS excludes dilution and is computed by
dividing net income by the weighted average amount of common
shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into
common stock. As with current EPS reporting requirements, the
standard requires common equivalent shares to be excluded in loss
periods as they are anti-dilutive.
</PAGE>
<PAGE> 7
Item 1: Financial Statements (continued)
SIGMA CIRCUITS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
If SFAS No. 128 had been in effect during the current fiscal
year, basic EPS would have been $.20 for the three month period
ended September 30, 1997. Basic EPS for the three month period
ended September 30, 1996 and diluted EPS for all periods
presented under SFAS No. 128 would not have been significantly
different than the EPS currently reported for the periods.
In June 1997, the Financial Accounting Standards Board issued
SFAS No. 130 "Reporting Comprehensive Income," which requires
that an entity report, by major components and as a single total,
the change in its net assets during the period from non-
shareholder sources; and SFAS No. 131 "Disclosures about Segments
of an Enterprise and Related Information," which establishes
annual and interim reporting standards for an entity's business
segments and related disclosures about its products, services,
geographic areas, and major customers. Adoption of these
statements will not impact the Company's financial position,
results of operations or cash flows. Both statements are
effective for fiscal years beginning after December 15, 1997,
with earlier application permitted.
</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 Annual Report on Form 10-K for the
year ending June 30, 1997. 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. During fiscal year 1995, the
Company's gross margin and operating expenses were negatively
affected by the underutilization and start-up costs of the
Systems Integration and Flexible Circuits divisions.
The Company completed the acquisition of Stockton-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. The Company, along with many of
its competitors, experienced a decline in the demand for its
products and services during calendar year 1996. As a result,
the Company announced on May 22, 1996, the closure of its Costa
Mesa PCB division and the consolidation of certain capital and
selected personnel into its Santa Clara PCB and Stockton PCB
divisions. During June 1996, the Company recorded a one-time
charge of approximately $3.8 million for facility closing costs.
During the first half of fiscal year 1997, the Company entered
into merger discussions with Continental Circuits Corp., which
were subsequently terminated in December 1996. Additionally, the
Company recorded charges to operations of approximately $3.4
million or $0.54 per share, after tax, attributable to bad debt
and related expenses pertaining to a lawsuit filed, excess and
obsolete inventory and equipment, and an unfavorable sales tax
ruling. Combined with the approximate one year recovery time
from the effects of the industry slowdown in calendar year 1996,
the Company's consolidation efforts of its PCB operations and
aforementioned charges to operations, the Company reported a net
loss of $1.2 million for fiscal year 1997. In May 1997, the
Company completed a long-term financing agreement with the CIT
Group/Business Credit, Inc. which proceeds were used to repay
substantially all of the Company's existing debt and capital
lease obligations.
</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,
1997 1996
<S> <C> <C>
Net Sales 100.0% 100.0%
Cost of Sales 80.2% 87.7
Gross Profit 19.8 12.3
Selling, General and 11.8 10.4
Administrative Expenses
Amortization of Goodwill 0.5 0.7
Facility Closing Costs (0.6) --
Operating Income 8.1 1.2
Interest Expense, Net 2.1 2.9
Income (Loss) Before Income Taxes 6.0 (1.7)
Provision (Benefit) for Income Taxes 2.4 (0.7)
Net Income (Loss) 3.6% (1.0)%
</TABLE>
Net Sales
Net sales for the quarter ended September 30, 1997 were
approximately $22.8 million, an increase of $4.0 million or 21.5%
from the same quarter in the prior fiscal year. All divisions
contributed to the increase. Net sales from the combined Rigid
Printed and Flexible Circuits divisions to the merchant market
increased more than 22.3%, and net sales from the value-added
Systems Integration division increased 18.8% over the same period
in the prior fiscal year.
Gross Profit
Gross profit for the quarter ended September 30, 1997 was
approximately $4.5 million, an increase of $2.2 million or 95.1%
from the same quarter in the prior fiscal year. Gross margin for
the same comparable quarters was 19.8% and 12.3% respectively.
The improvement in both gross profit and margin for the quarter
ended September 30, 1997 was partially due to a significant
improvement in manufacturing efficiencies and materials
management in the Systems Integration division. Additionally,
the revenues and efficiencies in the PCB operations were improved
over the same quarter in the prior fiscal year which was impacted
by inefficiencies associated with the closure of the Costa Mesa
PCB facility and consolidation of assets.
</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, 1997 were approximately $2.7 million, an
increase of $0.7 million or 36.7% from the same quarter in the
prior fiscal year. Selling, general and administrative expenses
increased from 10.4% to 11.8%, as a percentage of sales. The
overall increases are primarily attributable to performance-based
bonuses and higher commissions on increased levels of net sales.
Additionally, increased administrative infrastructure investment
was made in support of the revenue growth in all divisions as
compared to the same period of the prior year when the Company
was streamlining its administrative infrastructure consistent
with closure of the Costa Mesa PCB facility.
Facility Closing Costs
Facility closing costs credited for the first quarter ended
September 30, 1997 were approximately $131,000 and are
attributable to a reduction of the associated reserve recorded in
the fourth quarter of fiscal year 1996 pertaining to the closure
of the Company's Costa Mesa PCB facility. On July 25, 1997, the
Company successfully sold the building on behalf of the owner
(and landlord), therefore, eliminating any future lease and
operating obligations.
Interest Expense, Net
Net interest expense for the quarter ended September 30, 1997 was
approximately $472,000, a decrease of $66,000 or 12.3% from the
same quarter in the prior fiscal year. The decrease is primarily
attributable to an overall decrease in long-term obligations,
partially offset by comparatively higher interest rates.
Provision (Benefit) for Income Taxes
The Company's effective income tax (benefit) rate was 40.6% and
(41.2)% for the quarters ended September 30, 1997 and 1996,
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. Further impacting
the fiscal year 1998 state effective rate is the State of
California's Machinery and Equipment and Enterprise Zone tax
credits.
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 $2.7 millions and $10,000 in the three months ended
September 30, 1997 and 1996, respectively. Cash generated in the
three months ended September 30, 1997 and 1996 was primarily
attributable to net income (loss) of $813,000 and $(183,000),
respectively, as adjusted for non-cash expenses, primarily
depreciation and amortization.
The Company used cash in investing activities of approximately
$579,000 and $1.2 million in the three months ended September 30,
1997 and 1996, respectively. Cash used in the three months ended
September 30, 1997 and 1996 was primarily attributable to 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 used cash in financing activities of approximately
$2.3 million and generated cash from financing activities of $1.2
million in the three months ended September 30, 1997 and 1996,
respectively. Cash used in financing activities during the three
months ended September 30, 1997 was attributable to net
repayments of approximately $2.3 million under the long-term
revolving line of credit and debt obligations. Cash generated in
the three months ended September 30, 1996 was attributable to
approximately $1.0 million in net borrowings under the long-term
revolving line of credit and debt and capital lease obligations.
As of September 30, 1997 the Company had long-term debt
outstanding of approximately $18.2 million, consisting primarily
of $6.2 million outstanding under the Company's revolving line of
credit, a $9.6 million term loan, a $1.8 million convertible
subordinated note and $0.6 million of real estate obligations.
The Company has a $13.7 million revolving line of credit, a $9.8
million term loan and a $1.5 million capital expenditure
("CAPEX") term loan. The revolving line of credit is limited to
a maximum amount of $13.7 million or the sum of 90.0% and 50.0%
of the Company's eligible trade accounts receivable and raw
materials inventory, respectively, as contractually defined. The
revolving line of credit expires on May 21, 2001 and currently
bears interest at 9.0%. The $9.8 million term expires on May 21,
2002 and currently bears interest at 9.75%. Principal payments
of approximately $0.2 are due monthly in equal installments with
the first installment due on September 1, 1997. The CAPEX term
loan has a maximum amount of $1.5 million in which the Company's
financing agreement limits borrowings to this maximum or the
amount determined as the sum of $500,000 plus 50.0% of cumulative
earnings before interest, taxes, depreciation and amortization
for a contractually defined period of time. The $1.5 million
CAPEX term loan expires on May 1, 2001 and as of September 30,
1997, there were no outstanding borrowings under this loan.
Additionally, the Company has a $1.8 million convertible
subordinated note with the seller of the Citation Companies.
This note expires on May 21, 2001 and currently bears interest at
10.0%. The note is convertible into a maximum of 400,000 shares
of common stock at the option of the holder based upon certain
defined criteria. Further, the Company has a real estate note of
approximately $0.6 million that was assumed in the Citation
Acquisition. The real estate note is due, as a balloon payment,
on December 31, 2005 and currently bears interest at 8.5%. As of
September 30, 1997, the Company was in compliance with the
convenants of its financing agreement.
The Company believes that its existing funds, borrowings
available under its revolving line of credit and CAPEX term loan
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, cash flows and results
of operations may be materially and adversely affected.
Capital Resources
During the three months ended September 30, 1997 the Company
purchased approximately $617,000 of property and equipment which
was funded through long-term borrowings. The Company's financing
agreement allows for capital expenditures up to a maximum amount
of $1.0 million per quarter with an aggregate amount of $4.0
million per year. Any expenditures exceeding this maximum
quarterly and annual amounts would require prior lender approval.
Therefore, excluding the financial impact of any acquisition or
establishment of new facilities, the Company expects to incur
capital expenditures of approximately $3.4 million, in the
remaining nine months of fiscal year 1998.
</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
In evaluating the Company's business, prospective investors
should carefully consider the following factors in addition to
the other information presented in this report an din the
Company's other reports filed with the Securities and Exchange
Commission that attempt to advise interested parties of the risks
and factors that may affect the Company's business.
Dependence on Electronics Industry
The Company's principal customers are original equipment
manufacturers (OEM) and contract manufacturers in the
telecommunications, networking, computers, peripherals,
industrial instrumentation, medical, and semiconductor equipment
segments of the electronics 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,
cash flows 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, lead times, volume levels and complexity of customer orders,
start-up costs in its two new divisions and costs associated with
the closure of the Costa Mesa facility. The timing and
</PAGE>
<PAGE> 13
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
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 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, cash flows
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 past 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, cash flows 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 significant 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, cash flows 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, cash flows and results of
operations.
Management of Growth
Over the past several years, 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 was
compounded by the Citation Acquisition. 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, cash flows and results of
operations.
Substantial Leverage and Ability to Service Debt
The Company has substantial debt service obligations. The
ability of the Company to meet its debt service requirements will
depend upon achieving significant and sustained growth in the
Company's profitability and cash flow, which will be affected by
its success in implementing its business strategy, prevailing
economic and industry conditions and financial, business and
other factors, certain of which are beyond the Company's control.
Accordingly, there can be no assurance as to whether or when the
Company's operations will generate sufficient cash flow or
whether the Company will at any time have sufficient resources to
meet its debt service or debt repayment obligations. If the
Company is unable to generate sufficient cash flow to service or
repay its indebtedness, it will have to reduce or delay planned
capital expenditures, sell assets, restructure or refinance its
indebtedness or seek additional equity capital. There can be no
assurance that any of these strategies could be effected on
satisfactory terms, if at all, particularly in light of the
Company's high levels of indebtedness. In addition, the degree
</PAGE>
<PAGE> 15
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
to which the Company is leveraged could have significant
consequences, including, but not limited to, the following: (i)
the Company's ability to obtain additional financing in the
future for working capital,capital expenditures,and other general
corporate purposes may be materially limited or impaired, (ii) a
substantial portion of the Company's cash flow from operations
may need to be dedicated to the payment of principal and interest
on its indebtedness and therefore, not available to finance the
Company's business and (iii) the Company's high degree of
leverage may make it more vulnerable to economic downturns, may
limit its ability to withstand competitive pressures and may
reduce its flexibility in responding to changing business and
economic conditions.
</PAGE>
<PAGE> 16
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, 1997,
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,
cash flows 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, 1997, the Company had incurred approximately
$288,000 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.
On March 13, 1997, the Company filed a lawsuit against one of its
customers. The suit asserts a breach of contract by the customer
relating to custom-made assembled circuit boards and other
services provided by the Company under purchase orders received
by the Company from the customer. The suit was filed in the
Superior Court of the State of California, Santa Clara County,
with the Company seeking damages in excess of approximately
$1,000,000, the customer's outstanding accounts receivable
balance, plus additional damages, late charges and related
interest. Additionally, the Company is seeking payment or
reimbursement of costs of the suit, as well as attorneys' fees,
and any other appropriate relief. The customer filed a cross
complaint, on April 10, 1997, relating to breach of contract,
intentional and negligent misrepresentation, intentional and
negligent interference with contractual relationships, and
intentional and negligent interference with prospective economic
advantage. The customer is seeking damages in excess of
$10,000,000, an unspecified amount of punitive damages, as well
as payment or reimbursement of costs of the suit, attorneys'
fees, and any other appropriate relief. The Company filed an
application for a writ of attachment on March 13, 1997, which was
subsequently denied. Although no assurances can be given, the
Company believes the customer's claims are without merit and will
defend itself vigorously, therefore, no provision for any
liability has been made in the financial statements. As the
extent of recovery is unknown at this time, the Company wrote off
the customer's receivable amount, as well as purchased inventory
in support of this customer relating to the manufacture of its
product and accrued other costs associated with the suit. The
Company has not established a reserve for this contingency and in
the opinion of its management, any settlement would not likely
results in a loss that would have a material adverse effect on
the Company's business, financial condition, cash flows and
results from operations.
</PAGE>
<PAGE> 17
Item 6: Exhibits and Reports on Form 8-K
A. Exhibits
See Index to Exhibits at page 19 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, 1997.
</PAGE>
<PAGE> 18
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 10th day of
November, 1997.
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> 19
<TABLE>
INDEX OF EXHIBITS
Sequentially
Exhibit Numbered
Number Description Page
<S> <C> <C>
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) --
10.21 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) --
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, 1997.(5) --
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) --
10.31 Convertible Subordinated Promissory Note granted to
Citation Enterprise, Inc., dated May 21, 1997.(5) --
</TABLE>
</PAGE>
<PAGE> 20
INDEX OF EXHIBITS
<TABLE>
Sequentially
Exhibit Numbered
Number Description Page
<S> <C> <C>
10.33 Asset Purchase Agreement between the Registrant,
Citation Circuits, Inc., Citation Enterprises, Inc.,
Citron Inc. and Carl Brockl, dated September 8,
1995.(3) --
10.34 Financing Agreement between the Registrant and the
CIT Group/Business Credit, Inc., dated May 21,
1997 and exhibits thereto. (5) --
10.35 Lease Agreement between the Registrant and G.B.G.,
dated April 23, 1997, as amended. (5) --
11.1 Statements Regarding Calculation of Net Income
(Loss) Per Share. 21
</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).
(5) Incorporated by reference to the corresponding exhibit previously filed
as an exhibit to the Company's Form 10-K, filed September 25, 1997
(File No. 0-24170).
</PAGE>
<PAGE> 21
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,
1997 1996
<S> <C> <C>
PRIMARY EARNINGS
Net Income (Loss) $ 813 $ (183)
Weighted Average Common Stock Outstanding 4,141 4,001
Common Stock Equivalents:
Dilutive Effect of Stock Options 370 --(1)
Dilutive Effect of Underwriter's Warrant 92 --(1)
Number of Shares Used in Computing Per Share
Information 4,603 4,001
Net Income (Loss) Per Share $ .18 $ (.05)
FULLY DILUTED EARNINGS
Net Income (Loss) $ 813 $ (183)
Interest Expense, Net, Related to Convertible
Subordinate Note 27 --
Net Income (Loss) As Adjusted $ 840 $ (183)
Weighted Average Common Stock Outstanding 4,141 4,001
Common Stock Equivalents:
Dilutive Effect of Stock Options 424 --(1)
Dilutive Effect of Underwriter's Warrant 102 --(1)
Convertible Subordinated Note, Assumed
Conversion 400 --
Number of Shares Used in Computing Per Share
Information 5,067 4,001
Net Income (Loss) Per Share $ .17 $ (.05)
</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
<LEGEND>
This schedule contains summary financial information extracted from the Balance
Sheet and Statement of Operations filed as part of the Report on Form 10-Q and
is qualified in its entirety by reference to such Report on Form 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> SEP-30-1997
<CASH> 1,479
<SECURITIES> 0
<RECEIVABLES> 12,762
<ALLOWANCES> 513
<INVENTORY> 3,758
<CURRENT-ASSETS> 20,836
<PP&E> 32,595
<DEPRECIATION> 17,302
<TOTAL-ASSETS> 42,560
<CURRENT-LIABILITIES> 11,512
<BONDS> 0
0
0
<COMMON> 11,164
<OTHER-SE> 1,982
<TOTAL-LIABILITY-AND-EQUITY> 42,560
<SALES> 22,847
<TOTAL-REVENUES> 22,847
<CGS> 18,324
<TOTAL-COSTS> 18,324
<OTHER-EXPENSES> 2,682
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 472
<INCOME-PRETAX> 1,369
<INCOME-TAX> 556
<INCOME-CONTINUING> 813
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 813
<EPS-PRIMARY> .18
<EPS-DILUTED> .17
</TABLE>
