<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 March 31, 1998
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 organiation) 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 4,251,524 at May 1, 1998.
</PAGE>
<PAGE> 2
Sigma Circuits, Inc.
INDEX
<TABLE>
<S> <C>
Description Page Number
Cover Page 1
Index 2
Part I: Financial Information
Item 1: Condensed Financial Statements
Condensed Balance Sheets as of
March 31, 1998 and June 30, 1997 3
Condensed Statements of Operations
for the Three and Nine Month Periods
Ended March 31, 1998 and 1997 4
Condensed Statements of Cash Flows for
the Nine Month Period Ended March 31, 1998
and 1997 5
Notes to Condensed Financial Statements 7
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Item 3: Quantitative and Qualitative Disclosures
about Market Risk 17
Part II: Other Information
Item 1: Legal Proceedings 18
Item 6: Exhibits and Reports on Form 8-K 18
Signatures 19
</TABLE>
</PAGE>
<PAGE> 3
Part I: Financial Information
Item 1: Condensed Financial Statements
SIGMA CIRCUITS, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
(in thousands)
March 31, June 30,
1998 1997
<S> <C> <C>
ASSETS
Current Assets:
Cash and Equivalents $ 1,802 $ 1,633
Accounts Receivable (Net of Allowances of
$515 and $630, Respectively) 12,383 12,432
Income Taxes Receivable 1,288 1,476
Inventories 3,563 2,797
Prepaid Expenses and Other Assets 605 330
Deferred Income Taxes 1,176 1,510
Total Current Assets 20,817 20,178
Property and Equipment, Net 15,946 15,874
Goodwill (Net of Accumulated Amortization of
$3,199 and $2,823, Respectively) 5,738 6,114
Deposits and Other Assets 483 481
Total $42,984 $42,647
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current Portion of Long-Term Debt $ 1,960 $ 1,633
Accounts Payable 7,114 4,518
Accrued Liabilities 3,332 3,992
Total Current Liabilities 12,406 10,143
Long-Term Debt 13,968 18,902
Deferred Income Taxes 977 1,259
Other Long-Term Liabilities 99 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: 4,251 and 4,138, Respectively 11,451 11,152
Deferred Stock Compensation (58) (110)
Retained Earnings 4,141 1,262
Total Stockholders' Equity 15,534 12,304
Total $42,984 $42,647
</TABLE>
See notes to condensed financial statements.
</PAGE>
<PAGE> 4
Item 1: Condensed Financial Statements (continued)
SIGMA CIRCUITS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
(in thousands, except per share data)
Three Months Ended Nine Months Ended
March 31, March 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net Sales $24,911 $20,425 $72,424 $59,143
Cost Of Sales 19,706 17,911 57,604 50,775
Gross Profit 5,205 2,514 14,820 8,368
Selling, General and 2,926 4,186 8,614 8,795
Administrative Expenses
Amortization of Goodwill 125 125 376 376
Facility Closing Costs -- -- (131) (250)
Operating Income (Loss) 2,154 (1,797) 5,961 (553)
Interest Expense, Net 361 479 1,245 1,531
Income (Loss) Before
Income Taxes 1,793 (2,276) 4,716 (2,084)
Provision (Benefit) For
Income Taxes 688 (541) 1,837 (439)
Net Income (Loss) $ 1,105 $(1,735) $ 2,879 $(1,645)
Net Income (Loss) Per
Share - Basic $ .26 $ (.43) $ .69 $ (.41)
Net Income (Loss) Per
Share - Diluted $ .21 $ (.43) $ .57 $ (.41)
Number of Shares Used in
Computing Per Share
Information - Basic 4,236 4,074 4,177 4,030
Number of Shares Used in
Computing Per Share
Information - Diluted 5,306 4,074 5,160 4,030
</TABLE>
See notes to condensed financial statements.
</PAGE>
<PAGE> 5
Item 1: Condensed Financial Statements (continued)
SIGMA CIRCUITS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
(in thousands)
Nine Months Ended
March 31,
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 2,879 $(1,645)
Reconciliation to Cash Provided by Operating
Activities:
Depreciation and Amortization of Property and
Equipment 3,604 3,551
Amortization of Goodwill 376 376
Amortization of Deferred Stock Compensation 52 52
Amortization of Non-Compete Agreement 113 113
(Gain) Loss on Disposal of Assets 132 (108)
Deferred Income Taxes 5 (517)
Facility Closing Costs (131) (250)
Changes in Assets and Liabilities:
Accounts Receivable 49 570
Inventories (766) 1,967
Prepaid Expenses and Other Assets (388) (173)
Accounts Payable 2,596 654
Accrued Liabilities (529) (1,186)
Income Taxes Receivable 198 1,011
Other Long-Term Liabilities 60 --
Cash Provided by Operating Activities 8,297 4,415
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Property and Equipment (3,836) (2,202)
Proceeds from Sales of Property and Equipment 28 320
Deposits and Other Assets (2) 19
Cash Used for Investing Activities (3,810) (1,863)
CASH FLOWS FROM FINANCING ACTIVITIES:
Line of Credit, Net (3,464) 1,016
Repayment of Long-Term Borrowings (1,143) (3,037)
Proceeds from Issuance of Common Stock 289 335
Cash Overdraft -- (297)
Cash Used For Financing Activities (4,318) (1,983)
INCREASE IN CASH AND EQUIVALENTS: 169 569
CASH AND EQUIVALENTS:
Beginning of Period 1,633 --
End of Period $ 1,802 $ 569
</TABLE>
See notes to condensed financial statements.
</PAGE>
<PAGE> 6
Item 1: Condensed Financial Statements (continued)
SIGMA CIRCUITS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
(in thousands)
Nine Months Ended
March 31,
1998 1997
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid for Interest $1,289 $ 1,194
Cash Paid (Received) for Income Taxes $1,583 $(1,005)
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Tax Benefit from Employee Stock Transactions $ 10 $ 71
</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 1997 Annual Report on Form
10-K.
Per Share Information
During December 1997, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 128, "Earnings Per Share" and,
retroactively, restated prior period earnings per share ("EPS")
for the change. SFAS 128 requires a dual presentation of basic
and diluted EPS. Basic EPS for the period presented is computed
by dividing net income or loss by the weighted average of
common shares outstanding. Diluted EPS reflects potential
dilution from outstanding stock options and warrants, using the
treasury stock method. Potential dilutive securities are excluded
in loss periods as they are antidilutive.
<TABLE>
Three Months Nine Months
Ended Ended
March 31, March 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
DILUTED EPS:
Net Income (Loss) $1,105 $(1,735) $2,879 $(1,645)
Interest Expense, Net of Tax,
Related to Convertible
Subordinated Note 27 -- 81 --
Net Income (Loss) As Adjusted $1,132 $(1,735) $2,960 $(1,645)
Weighted Average Common Stock
Outstanding 4,236 4,074 4,177 4,030
Common Stock Equivalents:
Dilutive Effect of Stock
Options 546 -- 472 --
Dilutive Effect of
Underwriter's Warrant 124 -- 111 --
Convertible Subordinated Note,
Assumed Conversion 400 -- 400 --
Number of Shares 5,306 4,074 5,160 4,030
Net Income (Loss) Per Share $ .21 $ (.43) $ .57 $ (.41)
Antidilutive Common Stock
Equivalents -- 421 -- 465
</TABLE>
</PAGE>
<PAGE> 8
Item 1: Financial Statements (continued)
Inventories
Inventories consist of (in thousands):
<TABLE>
March 31, June 30,
1998 1997
<S> <C> <C>
Raw Materials $1,529 $ 877
Work in Process 1,499 1,416
Finished Goods 535 504
Inventories $3,563 $2,797
</TABLE>
Debt Obligations
On December 8, 1997, the Company's lender amended the financing
agreement to delete the provision in regards to the quarterly
maximum amount of $1,000,000 for capital expenditures.
Additionally, on February 10, 1998, the Company's lender further
amended the financing agreement to allow for a maximum amount of
$8,000,000 for capital expenditures during fiscal year 1998 and
$6,000,000 for each fiscal year thereafter.
Recently Issued Accounting Standards
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.
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 ended 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
</PAGE>
<PAGE> 9
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
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 May 1996, the Company announced
the closure of its Costa Mesa PCB division and 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,
expenses pertaining to a lawsuit filed to recover such bad debt,
excess and obsolete inventory and equipment, and an unfavorable
sales tax ruling. Combined with the lingering 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.
During the first half of fiscal year 1998, the Company has
entered into real property leases for three additional buildings
at its Santa Clara PCB Division. The addition of these buildings
expanded the division's size to approximately 75,000 square feet
from 45,000 square feet. Approximately 55,000 square feet will
be used for manufacturing and warehousing with the remaining
square footage used for office space. The expansion should be
completed by the first quarter of fiscal year 1999 and will
increase the Company's quick-turn capacity and allow for
enhancement of manufacturing capabilities. Additionally, changes
in the operations and sales organizations have helped the
Company's financial performance improve through the nine months
ended March 31, 1998. Further, management has hired a Director
of Engineering Services to expand the Company's growth in
assisting its customers with their electronic interconnect
design, simulation and engineering requirements.
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 Nine Months
Ended Ended
March 31, March 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Sales 79.1 87.7 79.5 85.8
Gross Margin 20.9 12.3 20.5 14.2
Selling, General and 11.7 20.5 12.0 14.9
Administrative Expenses
Amortization of Goodwill 0.5 0.6 0.5 0.6
Facility Closing Costs -- -- (0.2) (0.4)
Operating Income (Loss) 8.7 (8.8) 8.2 (0.9)
Interest Expense, Net 1.5 2.3 1.7 2.6
Income (Loss) Before
Income Taxes 7.2 (11.1) 6.5 (3.5)
Provision (Loss) for
Income Taxes 2.8 (2.6) 2.5 (0.7)
Net Income (Benefit) 4.4% (8.5)% 4.0% (2.8)%
</TABLE>
Net Sales
Net sales for the quarter ended March 31, 1998 were approximately
$24.9 million, an increase of $4.5 million or 22.0% over the same
quarter of the prior fiscal year. All of the Company's divisions
contributed to this increase. Net sales from the combined Rigid
PCB and Flexible Circuit divisions to the merchant market
increased 10.7%, while net sales from the value-added Systems
Integration division increased 67.5% over the same quarter of the
prior fiscal year.
Net sales for the nine months ended March 31, 1998 were
approximately $72.4 million, an increase of $13.3 million or
22.5% over the same period of the prior fiscal year. Net sales
from the combined Rigid PCB and Flexible Circuit divisions to the
merchant market increased 17.8%, while net sales from the value-
added Systems Integration division increased 40.4% over the same
period of the prior fiscal year.
Gross Profit
Gross profit for the quarter ended March 31, 1998 was $5.2
million, an increase of $2.7 million or 107.0% from the same
quarter of the prior fiscal year on higher net sales. Gross
margin for the quarter period ended March 31, 1998 increased to
20.9% of net sales as compared to 12.3% in the same quarter of
the prior fiscal year. In addition to higher sales, gross profit
and margin for the prior year fiscal quarter ended March 31, 1997
reflects a charge of $1.2 million relating to excess and obsolete
inventory and equipment, an unfavorable sales tax ruling, as well
as lower PCB net sales and associated under-utilization of
capacity. In addition, gross profit and gross margin
improvements were the significant operational and materials
management efficiency gains made by the Systems Integration
division during the past year.
Gross profit for the nine months ended March 31, 1998 was
$14.8 million, an increase of $6.5 million or 77.1% from the same
nine month period of the prior fiscal year on higher net sales.
Gross margin for the nine month period ended March 31, 1998
increased to 20.5% of net sales as compared to 14.2% in the same
period of the prior fiscal year. In addition to higher sales,
gross profit and margin for the prior year comparable nine month
period ended March 31, 1997 included total charges of $1.9
million relating to excess and obsolete inventory and equipment,
an unfavorable sales tax ruling, as well as lower PCB net sales
and associated under-utilization of capacity. In addition, gross
profit and gross margin improvements were the significant
operational and materials management efficiency gains made by the
Systems Integration division during the past year.
</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 March 31, 1998 were $2.9 million, a decrease of $1.3
million or 30.1% over the same quarter of the prior fiscal year.
During the quarter, selling, general and administrative expenses
decreased to 11.8% of net sales compared to 20.5% one year ago.
The decrease was primarily due to a prior year comparable quarter
charge of $1.2 million for bad debt and related expenses
pertaining to a specific customer lawsuit filed during the
quarter ended March 31, 1997. This charge represented 5.9% of
the 20.5% amount of selling, general and administrative expenses
as a percent of net sales.
Selling, general and administrative expenses for the nine months
ended March 31, 1998 were $8.6 million, a decrease of $181,000 or
2.1% over the same nine month period of the prior fiscal year.
During the nine months ended March 31, 1998, selling, general and
administrative expenses decreased to 12.0% of net sales compared
to 14.9% for the same period of the prior fiscal year. The
percentage decrease was primarily due to a prior year comparable
period charge of $1.2 million for bad debt and related expenses
pertaining to a specific customer lawsuit filed during the
quarter ended March 31, 1997. This charge represented 2.0% of
the 14.9% amount of selling, general and administrative expenses
as a percent of net sales.
Facility Closing Costs
Facility closing costs credited for the nine months ended March
31, 1998 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 March 31, 1998 was
approximately $361,000, a decrease of $118,000 or 24.6% from the
same quarter in the prior fiscal year. The overall decrease is
primarily attributable to repayment of the Company's term loan,
as well as an overall reduction in the revolving line of credit's
outstanding balance during the current fiscal year.
Net interest expense for the nine months ended March 31, 1998 was
approximately $1.2 million, a decrease of $286,000 or 18.7% from
the same period in the prior fiscal year. The overall decrease
is attributable to repayment of the Company's various debt
obligations subsequent to the May 1997 debt refinancing with the
CIT Group.
Provision (Benefit) for Income Taxes
The Company's effective income tax rate was 38.4% and 39.0% for
the quarter and nine months ended March 31, 1998, respectively.
The Company's effective benefit tax rate was 23.8% and 21.1% for
the quarter and nine months ended March 31, 1997, 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 that 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 rate.
</PAGE>
<PAGE> 12
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
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 $8.3 and $4.4 million in the nine months ended
March 31, 1998 and 1997, respectively. Cash generated from
operations in the nine months ended March 31, 1998 and 1997 was
primarily attributable to net income (loss) of $2.9 million and
$(1.6) million, respectively, as adjusted for non-cash expenses,
primarily depreciation and amortization. Additionally, the
Company's working capital has decreased to $8.4 million at March
31, 1998 from $10.0 million at June 30, 1997 primarily as a
result of its operations and property and equipment acquisitions.
The Company used cash in investing activities of approximately
$3.8 and $1.9 million in the nine months ended March 31, 1998 and
1997, respectively. Cash used in investing activities in the
nine months ended March 31, 1987 and 1997 was primarily
attributable to purchases of property and equipment net of
proceeds from sales of equipment.
The Company used cash in financing activities of approximately
$4.3 and $2.0 million in the nine months ended March 31, 1998 and
1997, respectively. Cash used in financing activities during the
nine months ended March 31, 1998 and 1997 was primarily
attributable to net repayments under its credit facility.
As of March 31, 1998 the Company had total debt obligations
outstanding of approximately $15.9 million, consisting primarily
of $4.9 million outstanding under the Company's revolving line of
credit, a $8.6 million term loan, a $1.8 million convertible
subordinated note and a $0.6 million real estate obligation.
The Company has a $25.0 million credit facility with the CIT
Group/Business Credit, Inc. (the "CIT Group"), an asset-based
lender, and consists of 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 equal to the lesser 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 rates ranging from
8.38% to 8.75%. The $9.8 million term loan expires on May 21,
2002 and currently bears interest at rates ranging from 8.63 to
9.25%. 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 March 31, 1998 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
</PAGE>
<PAGE> 13
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
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 March 31, 1998, 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 nine months ended March 31, 1998 the Company purchased
approximately $3.8 million of property and equipment which was
funded through long-term borrowings. On December 18, 1997, the
CIT Group amended the financing agreement to relieve the
quarterly maximum amount of $1.0 million for capital
expenditures. Additionally, on February 10, 1998, the CIT Group
further amended the financing agreement to allow for a maximum
amount of $8.0 million for capital expenditures during fiscal
year 1998 and $6.0 million for each fiscal year thereafter. Any
expenditures exceeding this maximum annual amount 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
$2.5 million in the remaining three months of fiscal year 1998.
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 and in 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.
</PAGE>
<PAGE> 14
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
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 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, 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.
</PAGE>
<PAGE> 15
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
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 limited 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.
The Company believes that when it competes in the standard lead-
time volume production of its PCB, backplane and flexible
circuits products, it encounters 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
</PAGE>
<PAGE> 16
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
to require the addition of new management personnel, the
development of additional expertise by existing management
personnel and additional manufacturing space. 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
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.
Uncertainty of Effects of Year 2000 on Computer Programs and Systems
The Year 2000 Issue is the result of computer programs being
written using two rather than four digits to define the
applicable year. Any of the Company's computer programs that
have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing disruptions of
operations, including but not limited to, a temporary inability
to process transactions or engage in normal business activities.
Such failure or errors could occur prior to the actual change in
century.
Based upon a recent assessment, the Company's management believes
that all of its existing computer programs will properly utilize
dates beyond December 31, 1999. The Company has received written
confirmation from all of its significant computer program
manufacturers that specific software purchased by the Company is
Year 2000 compliant. The Company's customers, suppliers and
service providers (including financial institutions) are reliant
upon computer applications, some of which may contain software
that may fail as a result of the upcoming change in century, with
respect to functions that
</PAGE>
<PAGE> 17
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
materially affect their interactions with the Company. The
Company has started the process of communicating with all of its
significant suppliers and customers to determine the extent to
which the Company is vulnerable to those third parties' failure
to remediate their own Year 2000 issues. Failure of the software
of its customers, suppliers or service providers could have a
material adverse impact on the Company's business, financial
condition and result of operations.
The Company will utilize both internal and external resources in
continuing its plan, which include testing its computer systems,
and anticipates completion of the Year 2000 project by no later
than August 31, 1999. The Company has, and will continue to
expense all costs associated with its Year 2000 plans. The total
anticipated cost is not expected to have a material effect on the
results of operations.
The Company's assessments and plans to complete its Year 2000
project are based upon management's best estimates, which were
derived utilizing presently available information and numerous
assumptions of future events including the continued availability
of certain resources, third party communications and other
factors. However, there can be no guarantee that these estimates
will be achieved and actual results could differ materially from
those plans. Specific factors that might cause such material
differences include, but are not limited to, the availability and
cost of personnel trained in this area, the ability to locate and
correct relevant computer codes and similar uncertainties. The
failure of the Company to successfully execute its Year 2000 plan
could have a material adverse effect on the Company's business,
financial condition, cash flows and results of operations.
Item 3: Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
</PAGE>
<PAGE> 18
Part II: Other Information
Item 1. Legal Proceedings
See additional discussion under Item 3 "Legal Proceedings" in the
Company's Form 10-K filed for the fiscal year ended June 30,
1997.
On April 2, 1998, the Company entered into a settlement agreement
(the "Agreement") concerning a lawsuit filed against one of its
customers during March 1997 which had subsequently filed a cross-
complaint during April 1997. In the Agreement, the Company and
customer agreed to a mutual release of all parties with no
admission of liability and dismissed its suit and cross
complaint, with prejudice, in the respective court. The
agreement further required that the Company and customer bear
their own legal fees and costs arising from their legal actions.
Additionally, the Company will receive a one-time payment from
the customer during April 1998. The Company has not recorded a
receivable for this payment as of March 31, 1998 due to certain
contingencies which are expected to be resolved in the fourth
quarter of fiscal year 1998. Any default relating to payment
would not likely result in a material adverse effect on the
Company's business, financial condition, cash flows and results
of operations.
Item 6: Exhibits and Reports on Form 8-K
A. Exhibits
See Index to Exhibits at page 20 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
March 31, 1998.
</PAGE>
<PAGE> 19
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 May, 1998.
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> 20
INDEX OF EXHIBITS
<TABLE>
Exhibt
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 Amended and Restated 1997 Stock Option Plan.(6)
10.3 Registrant's 1994 Non-Employee Directors' Stock Option Plan, as
amended to date.(1)
10.4 Registrant's 1994 Employee Stock Purchase Plan, as amended to date.(6)
10.5 Form of Stock Warrant granted to Cruttenden & Company.(1)
10.6 Lease Agreement between the Registrant and The Kontrabecki Group,
dated May 3, 1994, and attachments thereto.(1)
10.7 Lease Agreement between the Registrant and The Kontrabecki Group,
dated June 9, 1995, and attachments thereto.(2)
10.8 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)
10.9 Consulting Agreement between the Registrant and Robert P. Cummins,
dated July 1, 1997.(5)
10.10 Change-in-Control Severance Agreement between the Registrant and
B. Kevin Kelly, dated October 26, 1995.(4)
10.11 Change-in-Control Severance Agreement between the Registrant and
Philip S. Bushnell, dated October 26, 1995.(4)
10.12 Convertible Subordinated Promissory Note granted to Citation
Enterprise, Inc., dated May 21, 1997.(5)
</TABLE>
</PAGE>
<PAGE> 21
INDEX OF EXHIBITS
<TABLE>
Exhibit
Number Description
<C> <S>
10.13 Asset Purchase Agreement between the Registrant, Citation Circuits,
Inc., Citation Enterprises, Inc., Citron Inc. and Carl Brockl, dated
September 8, 1995.(3)
10.14 Financing Agreement between the Registrant and the CIT Group/Business
Credit, Inc., dated May 21, 1997 and exhibits thereto. (5)
10.15 Lease Agreement between the Registrant and G.B.G., dated April 23,
1997, as amended. (5)
10.16 Change-in-Control Severance Agreement between the Registrant and
W. Kent Hardwick, dated October 2, 1997. (7)
27.1 Financial Data Schedule (EDGAR filing only).
</TABLE>
____________________________________
(1) Incorporated by reference from the exhibit filed with the Company's
Registration Statement on Form S-1, as amended, filed May 26, 1994
(File No. 33-76606).
(2) Incorporated by reference from the exhibit filed with the Company's
Form 10-K, as amended, filed September 28, 1995 (File No. 0-24170).
(3) Incorporated by reference from the exhibit filed with the Company's
Form 8-K, as amended, filed October 11, 1995 (File No. 0-24170).
(4) Incorporated by reference from the exhibit filed with the
Company's Registration Statement on Form S-1, as amended, filed
February 16, 1996 (File No. 333-1262).
(5) Incorporated by reference from the exhibit filed with the Company's
Form 10-K filed September 25, 1997 (File No. 0-24170).
(6) Incorporated by reference from the exhibit previously filed with the
Company's Registration Statement on Form S-8 filed February 5, 1998
(File No. 333-45641).
(7) Incorporated by reference from the exhibit filed with the Company's
Form 10-Q filed February 11, 1997 (File No. 0-24170).
</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>
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<S> <C>
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<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> MAR-31-1998
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<DEPRECIATION> (19,757)
<TOTAL-ASSETS> 42,984
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0
0
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