<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 December 31, 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. Employer
of incorporation or organization) 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 4,062,889 at February 6, 1997.
</PAGE>
<PAGE> 2
Sigma Circuits, Inc.
INDEX
Description Page Number
Cover Page 1
Index 2
Part I: Financial Information
Item 1: Condensed Financial Statements
Condensed Balance Sheets as of December 31,
1996 and June 30, 1996 3
Condensed Statements of Operations for the
Three and Six Month Periods Ended December
31, 1996 and 1995 4
Condensed Statements of Cash Flows for the Six
Month Period Ended December 31, 1996 and
1995 5
Notes to Condensed Financial Statements 6
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9
Part II: Other Information
Item 1: Legal Proceedings 16
Item 6: Exhibits and Reports on Form 8-K 16
Signatures 17
</PAGE>
<PAGE> 3
Part I: Financial Information
Item 1: Financial Statements
SIGMA CIRCUITS, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
(in thousands)
December 31, June 30,
1996 1996
<S> <C> <C>
ASSETS
Current Assets:
Cash and Equivalents $ 495 $ --
Accounts Receivable (Net of Allowances of
$700 and $598, Respectively) 13,539 11,987
Income Taxes Receivable -- 1,393
Other Receivables 156 46
Inventories 3,589 4,753
Prepaid Expenses 434 268
Deferred Income Taxes 2,940 2,660
Total Current Assets 21,153 21,107
Property and Equipment, Net 17,952 18,899
Goodwill (Net of Accumulated Amortization of
$2,573 and $2,322, Respectively) 6,364 6,615
Deposits and Other Assets 262 339
Total $45,731 $46,960
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Cash Overdraft $ -- $ 297
Current Portion of Long-Term Debt 6,850 7,681
Accounts Payable 6,376 4,418
Accrued Liabilities 3,993 5,947
Total Current Liabilities 17,219 18,343
Long-Term Debt 13,888 14,345
Deferred Income Taxes 1,349 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: 4,063 and 3,998,
Respectively 10,836 10,604
Deferred Stock Compensation (145) (180)
Retained Earnings 2,584 2,494
Total Stockholders' Equity 13,275 12,918
Total $45,731 $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 Six Months Ended
December 31, December 31,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net Sales $19,916 $26,711 $38,718 $42,787
Cost Of Sales 16,380 20,829 32,864 33,342
Gross Profit 3,536 5,882 5,854 9,445
Selling, General and
Administrative Expenses 2,643 3,280 4,609 5,660
Amortization of Goodwill 126 157 251 207
Facility Closing Costs (250) -- (250) --
Operating Income 1,017 2,445 1,244 3,578
Interest Expense, Net 514 530 1,052 674
Income Before Income Taxes 503 1,915 192 2,904
Provision For Income Taxes 230 767 102 1,190
Net Income $ 273 $ 1,148 $ 90 $ 1,714
Net Income Per Share $ .06 $ .24 $ .02 $ .38
Number of Shares Used in
Computing Per Share
Information 4,509 4,766 4,544 4,458
</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)
Six Months Ended
December 31,
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 90 $ 1,714
Reconciliation to Cash Provided by (Used for)
Operating Activities:
Depreciation and Amortization of Property and
Equipment 2,218 1,839
Amortization of Goodwill 251 207
Amortization of Deferred Stock Compensation 35 54
Amortization of Non-Compete Agreement 75 --
(Gain)/Loss on Disposal of Assets (168) 282
Deferred Income Taxes (285) (573)
Facility Closing Costs (250) --
Changes in Assets and Liabilities:
Accounts Receivable (1,552) (1,568)
Other Receivables (110) 278
Inventories 1,164 (947)
Prepaid Expenses (166) (143)
Accounts Payable 1,958 2,089
Accrued Liabilities (1,377) 259
Income Taxes Receivable/Payable 1,393 (337)
Cash Provided by Operating Activities 3,276 3,154
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Property and Equipment (1,731) (3,002)
Proceeds from Sales of Property and Equipment 301 14
Deposits and Other Assets 2 (51)
Purchase of Citation Companies, Net of Cash
Acquired -- (9,092)
Cash Used for Investing Activities (1,428) (12,131)
CASH FLOWS FROM FINANCING ACTIVITIES:
Line of Credit, Net 868 298
Proceeds from Long-Term Borrowings -- 10,926
Repayment of Long-Term Borrowings (2,156) (1,031)
Common Stock Transactions 232 105
Cash Overdraft (297) --
Cash Provided by (Used for) Financing
Activities (1,353) 10,298
INCREASE IN CASH AND EQUIVALENTS 495 1,321
CASH AND EQUIVALENTS:
Beginning of Period -- 106
End of Period $ 495 $ 1,427
</TABLE>
See notes to condensed financial statements.
</PAGE>
<PAGE> 6
Item 1: Financial Statements (continued)
SIGMA CIRCUITS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
(in thousands)
Six Months Ended
December 31,
1996 1995
<S> <C> <C>
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 5,278
Assets Acquired (including Goodwill of $6,433) $20,962
</TABLE>
See notes to condensed financial statements.
</PAGE>
<PAGE> 7
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 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>
December 31, June 30,
1996 1996
<S> <C> <C>
Raw Materials $1,692 $2,641
Work in Process 1,666 1,880
Finished Goods 231 232
Inventories $3,589 $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. As of December 31, 1996, the Company was in non-compliance with
the total liabilities to tangible effective net worth ratio covenant of its
revolving line of credit agreement with the Bank. The Company obtained a
waiver with respect to such covenants from the Bank as of that date. The
Company believes it will remain in compliance with the agreement's 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.
Cash paid for interest was approximately $835,000 and $694,000 for the six
months ended December 31, 1996 and 1995, respectively.
</PAGE>
<PAGE> 8
Item 1: Financial Statements (continued)
Provision for Income Taxes
The Company incurred a combined federal and state effective income tax rate
of 45.7% and 53.1% for the three and six month periods ended December 31,
1996, respectively, compared to an effective income tax rate of 40.1% and
41.0%, respectively, for the same periods of fiscal year 1996.
Cash received from income taxes, net of payments, was approximately
$1,006,000 for the six months ended December 31, 1996. Cash paid for
income taxes was approximately $2,076,000 for the six months ended December
31, 1995.
Business Developments
On September 27, 1996, the Company signed a Letter of Intent whereby
Continental Circuits Corp. would acquire all of the outstanding shares of
the Company's common stock in exchange for Continental Circuits' stock. On
December 19, 1996, the Company announced that its letter of intent to merge
with Continental Circuits Corp. had expired and the two companies had
mutually agreed to discontinue merger discussions.
</PAGE>
<PAGE> 9
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.
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.
</PAGE>
<PAGE> 10
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
<TABLE>
Three Months Six Months
Ended Ended
December 31, December 31,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Sales 82.2 78.0 84.9 77.9
Gross Margin 17.8 22.0 15.1 22.1
Selling, General and
Administrative Expenses 13.8 12.3 11.9 13.2
Amortization of Goodwill 0.6 0.5 0.6 0.5
Facility Closing Costs (1.2) -- (0.6) --
Operating Income 5.1 9.2 3.2 8.4
Interest Expense, Net 2.6 2.0 2.7 1.6
Income Before Income Taxes 2.5 7.2 0.5 6.8
Provision for Income Taxes 1.1 2.9 0.3 2.8
Net Income 1.4% 4.3% 0.2% 4.0%
</TABLE>
Net Sales
Net sales for the quarter ended December 31, 1996 were approximately $19.9
million, a decrease of $6.8 million or 25.4% from the same quarter in the
prior fiscal year. The decrease is primarily attributable to a slowdown in
demand in the PCB business in calendar year 1996 after a particularly
strong quarter ended December 31, 1995.
Net sales for the six months ended December 31, 1996 were approximately
$38.7 million, a decrease of $4.1 million or 9.5% from the same period in
the prior fiscal year. The decrease is primarily attributable to a slow
down in demand in the PCB business and, to some extent, divisional
consolidations. The decrease in net sales from the closure of the Costa
Mesa PCB division and the Stockton backplane division was partially offset
by an overall increase in net sales from the Systems Integration and
Flexible Circuits divisions.
Gross Profit
Gross profit for the quarter ended December 31, 1996 was approximately $3.5
million, a decrease of $2.3 million or 39.9% from the same quarter in the
prior fiscal year. Gross margins for the quarter ended December 31, 1996
and 1995 were 17.8% and 22.0%, respectively. Gross margins, as a
percentage of net sales, in the PCB divisions improved to 22.7% in the
second quarter of fiscal year 1997 as compared to 17.2% for the first
quarter of fiscal year 1997, but were still below the 23.8% achieved on
record PCB sales during the comparable quarter of the prior fiscal year.
Gross profits and margins for the second quarter of fiscal year 1997 were
also negatively impacted by net sales in the Systems Integration division.
Gross profit for the six months ended December 31, 1996 was approximately
$5.9 million, a decrease of $3.6 million or 38.0% from the same quarter in
the prior fiscal year. Gross margins for the six months ended December 31,
1996 and 1995 were 15.1% and 22.1%, respectively. Gross margin for the six
month period ended December 31, 1996 was adversely affected by the residual
effects of the consolidation in the first quarter of fiscal year 1997, the
general decline in the PCB divisions, and the write-off of obsolete
inventory at the Systems Integration division.
</PAGE>
<PAGE> 11
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 December
31, 1996 were approximately $2.6 million, a decrease of $637,000 or 19.4%
from the same quarter in the prior fiscal year. The overall decrease is
primarily attributable to ongoing cost reduction efforts of the Company.
Selling, general and administrative expenses increased from 12.3% to 13.3%,
as a percentage of net sales, as the overall reduction in applicable
expenses was not offset by the reduction in net sales.
Selling, general and administrative expenses for the six months ended
December 31, 1996 were approximately $4.6 million, a decrease of $1.1
million or 18.6% from the same period in the prior fiscal year. Selling,
general and administrative expenses decreased from 13.2% to 11.9%, as a
percentage of net sales, as a result of the overall reduction in applicable
expenses.
Facility Closing Costs
Facility closing costs for the quarter and six months ended December 31,
1996 were approximately $250,000 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 division.
Interest Expense, Net
Net interest expense for the quarter ended December 31, 1996 was
approximately $514,000, a decrease of $16,000 or 3.0% from the same quarter
in the prior fiscal year. The overall decrease is primarily attributable
to repayment of the Company's various debt and capital lease obligations.
Net interest expense for the six months ended December 31, 1996 was
approximately $1.1 million, an increase of $378,000 or 56.1% from the same
period in the prior fiscal year. The overall increase is attributable to
the debt incurred in connection with the Citation Acquisition completed at
the end of the first quarter of fiscal year 1996. Approximately $10.7
million of debt, incurred in connection with the Citation Acquisition,
bears interest at rates ranging from 9.3% to 12.0%.
Provision for Income Taxes
The Company's effective income tax rate was 45.7% and 40.1% for the
quarters ended December 31, 1996 and 1995, respectively. The Company's
effective income tax rate was 53.1% and 41.0% for the six months ended
December 31, 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, as well as other
amounts 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 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.
</PAGE>
<PAGE> 12
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Liquidity
The Company generated cash from operating activities of approximately $3.3
million and $3.2 million in the six months ended December 31, 1996 and
1995, respectively. Cash generated in the six months ended December 31,
1996 was primarily attributable to net income of $2.7 million adjusted for
non-cash depreciation and amortization charges of approximately $2.6
million, as well as other working capital changes. Cash generated in the
six months ended December 31, 1995 was primarily attributable to net income
of approximately $3.8 million adjusted for non-cash depreciation and
amortization charges of approximately $2.1 million, as well as other
working capital changes. During the six months ended Decmber 31, 1996, the
Company has paid approximately $522,000, $234,000, $188,000, and $59,000
for severance and termination benefits, operating leases, environmental
clean up and remediation, and other payments, respectively, in connection
with the closure of the Costa Mesa PCB division.
The Company used cash in investing activities of approximately $1.4 million
and $12.2 million in the six months ended December 31, 1996 and 1995,
respectively. Cash used in the six months ended December 31, 1996 was
primarily attributable to to approximately $1.7 million used for the
purchase of property and equipment. Cash used in the six months ended
December 31, 1995 was primarily attributable to approximately $9.1 million
in expenditures in connection with the Citation Acquisition and
approximately $3.0 million used for the purchase of property and equipment.
The Company used cash for and generated cash from financing activities of
approximately $1.4 million and $10.3 million in the six months ended
December 31, 1996 and 1995, respectively. Cash used in the six months
ended December 31, 1996 was primarily attributable to approximately $1.3
million in repayments of debt and capital lease obligations, net of
borrowings under the long-term revolving line of credit. Cash generated in
the six months ended December 31, 1995 was primarily attributable to $10.9
million in long-term borrowings of which $10.0 million was used to finance
the Citation Acquisition.
As of December 31, 1996 the Company had total debt outstanding of
approximately $20.7 million, consisting primarily of $6.6 million
outstanding under the Company's long-term revolving line of credit, $10.7
million of debt issued in connection with the Citation Acquisition and $3.4
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. On October 14, 1996,
the current line of credit was amended to expire on October 2, 1998 and
bears interest at the Bank's base rate plus 0.25%.. Additionally, the
Company was granted a temporary increase in the amount of $1.2 million,
thus making $9.2 million the total maximum line of credit. The additional
borrowings are limited to the maximum of $1.2 million or 29% of the
Company's combined raw materials and finished goods valued at the lower of
cost or market. This temporary increase expires on April 2, 1997, at which
time the maximum borrowing amount returns to $8.0 million. 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
</PAGE>
<PAGE> 13
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
remaining term of the agreement. As of December 31, 1996, the Company was
in non-compliance with the total liabilities to tangible effective net
worth ratio covenant of its revolving line of credit agreement with the
Bank. The Company obtained a waiver with respect to such covenants from
the Bank as of that date. The Company believes it will remain in compliance
with the agreements 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 six months ended December 31, 1996, the Company purchased
approximately $1.7 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 division.
Excluding the financial impact of any acquisition or establishment of new
facilities, the Company expects to incur capital expenditures of
approximately $1.5 million in the remaining six months of fiscal year 1997.
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
</PAGE>
<PAGE> 14
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
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.
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
maintain or improve gross margins or the Company's business, financial
condition and results of operations. The timing and volume of orders
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 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
</PAGE>
<PAGE> 15
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
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.
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 in the past experienced periods of rapid growth that have
placed a significant strain on the Company's management, operational and
financial resources. 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.
</PAGE>
<PAGE> 16
Part II: Other Information
Item 1. Legal Proceedings
In connection with the Citation Acquisition on September 30, 1995, the
Company assumed certain environmental contingent liabilities pertaining to
operations prior to that date. As of the acquisition date, Citation 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 December 31, 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 December 31, 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 18 of this filing and is incorporated
by reference herein.
B. Reports on Form 8-K
One report on Form 8-K was filed during the quarter ended December 31,
1996.
One report on Form 8-K was filed, pursuant to Item 5 of that Form on
September 30, 1996 reporting on the pending acquisition of Continental
Circuits Corp. No financial statements were filed as part of that
report.
</PAGE>
<PAGE> 17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 11th day of February,
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> 17
<TABLE>
Exhibit
Number Description
<S> <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)
10.10 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> 19
<TABLE>
Exhibit
Number Description
<S> <C>
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 Citation
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 Per Share.
</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> 20
EXHIBIT 11.1
SIGMA CIRCUITS, INC.
STATEMENTS REGARDING CALCULATION
OF NET INCOME PER SHARE
(in thousands, except per share amounts)
<TABLE>
Three Months Ended Six Months Ended
December 31, December 31,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net Income $ 273 $1,148 $ 90 $1,714
Weighted Average Common Stock
Outstanding 4,014 3,884 4,007 3,674
Common Stock Equivalents:
Dilutive Effect of Stock Options 396 748 436 670
Dilutive Effect of Underwriter's
Warrant 96 134 101 114
Number Of Shares Used in Computing
Per Share Information 4,506 4,766 4,544 4,458
Net Income Per Share $ .06 $ .24 $ .02 $ .38
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> DEC-31-1996
<CASH> 495
<SECURITIES> 0
<RECEIVABLES> 14,239
<ALLOWANCES> 700
<INVENTORY> 3,589
<CURRENT-ASSETS> 21,153
<PP&E> 17,952
<DEPRECIATION> 0
<TOTAL-ASSETS> 45,731
<CURRENT-LIABILITIES> 17,219
<BONDS> 0
0
0
<COMMON> 10,836
<OTHER-SE> (145)
<TOTAL-LIABILITY-AND-EQUITY> 45,731
<SALES> 19,916
<TOTAL-REVENUES> 19,916
<CGS> 16,380
<TOTAL-COSTS> 16,380
<OTHER-EXPENSES> 2,519
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 514
<INCOME-PRETAX> 503
<INCOME-TAX> 230
<INCOME-CONTINUING> 273
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 273
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
