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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended July 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _________ to _________
Commission file number: 0-25554
Continental Circuits Corp.
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(Exact name of registrant as specified in its charter)
Delaware 86-0267198
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3502 East Roeser Road, Phoenix, Arizona 85040
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 602-268-3461
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of class)
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
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of October 24, 1996, 7,194,725 shares of Common Stock were
outstanding, and the aggregate market value of the Common Stock (based upon the
$11.25 closing sale price on that date in the Nasdaq National Market) held by
nonaffiliates (excludes shares reported as beneficially owned by directors and
officers - does not constitute an admission as to affiliate status) was
approximately $80,940,656.25.
DOCUMENTS INCORPORATED BY REFERENCE
<TABLE>
<CAPTION>
Part of Form 10-K Into Which Portions of
Document Document are Incorporated
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<S> <C>
Annual Report to Shareholders for the fiscal ended year ended July 31, 1996 Part II
Proxy Statement for 1996 Annual Meeting of Shareholders Part III
</TABLE>
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PART I
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the Company's Financial Statements and the Notes
thereto included in the Company's Annual Report to Shareholders. Historical
results are not necessarily indicative of trends in operation results for any
future period.
Except for the historical information contained herein, the discussion
in this Form 10-K contains or may contain forward-looking statements that
involve risks and uncertainties that could cause actual results to differ from
the forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in the this Form
10-K, the Company's Annual Report to Shareholders, and the Company's Proxy
Statement for its 1996 Annual Meeting of Shareholders. The forward-looking
statements should be considered in light of these risks and uncertainties.
Item 1. Business.
GENERAL
Continental Circuits Corp. (the "Company" or "Continental") is a leading
manufacturer of complex multilayer, surface mount circuit boards used in
sophisticated electronic equipment in the computer, communications,
instrumentation and industrial controls industries. The Company's circuit boards
are used principally in workstations, desktop and notebook computers, computer
networking products, storage devices, medical equipment, cellular telephones and
pagers.
Circuit boards, also called printed circuit boards or printed wiring boards, are
essential components in virtually all sophisticated electronic products. The
circuit board is the basic platform used to interconnect and mount electronic
components such as microprocessors, resistor networks and capacitors. Circuit
boards consist of copper traces on an insulating (dielectric) base, which
provide electrical interconnections for electronic components. The development
of more sophisticated electronic equipment by original equipment manufacturers
("OEMs") combining higher performance and reliability with reduced size and cost
has created a demand for increased complexity, miniaturization and density in
the circuit traces. In response to this demand, multilayer boards have been
developed in which several layers of circuitry are laminated together to form a
single board with both horizontal and vertical electrical interconnections.
Further circuit board sophistication is currently being achieved by utilizing
advanced materials, decreasing the width and separation of the traces, drilling
smaller holes to connect the internal trace layers and precisely situating the
traces and pads on the board surface to accommodate surface mount components. In
fiscal 1996, multilayer surface mount circuit boards comprised approximately 98%
of the Company's net sales.
Suppliers to the worldwide circuit board market consist of independent merchant
manufacturers such as the Company ("merchant manufacturers") and captive
manufacturing facilities owned by OEMs ("captive manufacturers"). The Institute
for Interconnecting and Packaging Electronic Components ("IPC"), an
international trade association, estimates that the worldwide market for all
types of circuit boards was $26.4 billion in 1995, of which the U.S. market
comprised $7.1 billion. According to the IPC, in 1995 OEMs purchased
approximately 85% of their total circuit board requirements from merchant
manufacturers, compared to approximately 62% in 1988. This increasing market
share for merchant suppliers is the result of a trend among OEMs toward greater
outsourcing of their circuit board requirements.
The Company sells its products primarily to leading OEMs and contract
manufacturers in the U.S. and abroad. The Company has focused its marketing
efforts on the development of strategic relationships with key customers who are
leaders in their industries and who utilize the most advanced circuit board
technology. The Company's principal customers include OEMs such as
Hewlett-Packard, Digital Equipment, Apple Computer, IBM, Allen Bradley and
Northern Telecom and contract manufacturers such as Solectron, SCI Systems,
Jabil Circuit, Texas Instruments and Electronic Assembly. During fiscal years
1993, 1994, 1995 and 1996, exports to the foreign
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operations of U.S.-based customers, primarily in Singapore, Puerto Rico, Ireland
and the United Kingdom, accounted for 21.0%, 35.7%, 31.2% and 27.3% of net sales
respectively.
RECENT DEVELOPMENTS
On September 26, 1996, the Company entered into a Letter of Intent in connection
with the proposed acquisition by the Company of Sigma Circuits, Inc. proposed to
be accomplished by an exchange of stock. The transaction is subject to
completion of additional documentation and due diligence.
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CUSTOMERS AND MARKETS
Set forth below is a description of the Company's markets, representative
customers (listed alphabetically) and end product applications:
<TABLE>
<CAPTION>
MARKETS CUSTOMERS APPLICATIONS
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<S> <C> <C>
Computer Apple Computer, Inc. Workstations, desktop computers,
Bay Networks notebook and portable computers,
Bull Worldwide Information Systems servers and other computer network
Chipcom Corp.* products, midrange and mainframe
Cisco Systems computers
Compaq Computer
Digital Equipment Corporation
Hewlett-Packard Company
International Business Machines
Corporation
Ross Technology*
Sun Microsystems, Incorporated*
Texas Instruments Incorporated
Zenith Data Systems Corporation*
3-COM*
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Memory and Storage Apple Computer, Inc. 2.5", 3.5" and 5.25" disk drives,
Devices Digital Equipment Corporation PCMCIA products, tape drives,
EMC2 Corporation optical drives, SIMMs, mass storage
Exabyte Corporation products
Hewlett-Packard Company
International Business Machines
Corporation
Quantum Corporation
Western Digital
Xircom, Inc.
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Peripherals Apple Computer, Inc. Printers, office equipment, modems,
Global Village* option cards
International Business Machines
Corporation
QMS, Inc.
Xerox, Corp.
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Communications AT&T Corp./Lucent Technolgies Telephone switching and transmission
Dictaphone Corporation systems, global navigation products,
Digital Switch Americas/Asia, Inc. satellite and microwave transmission
Elex/Telrad products, cellular telephones, pagers,
Lasat Communications wireless communications products
Motorola, Inc.
Northern Telecom Ltd./Nortel
Olicom A/S
Qualcomm Inc.
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Instrumentation and Allen-Bradley Company, Inc. Test and measurement equipment,
Industrial Controls Hewlett-Packard Company flight controls, medical equipment,
Honeywell Avionics machine and process control systems
Martin Marietta Corporation*
Nellcor, Inc.
Rockwell International
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Serviced by the Company solely through one or more contract manufacturers.
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Markets
Set forth below is a table showing the portions of the Company's total
net sales attributable to the indicated markets for fiscal years 1994 through
1996, together with a brief description of each market.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
JULY 31,
-----------------------
MARKETS 1994 1995 1996
- ------- ---- ---- ----
<S> <C> <C> <C>
Computers.................................. 38% 37% 49%
Memory and storage devices................. 31 29 14
Communications............................. 12 14 21
Instrumentation and industrial controls.... 5 11 13
Peripherals................................ 14 9 3
--- --- ---
Totals............................ 100% 100% 100%
</TABLE>
Computers. This segment includes computer workstations, desktop
computers, notebook computers, docking stations and PDAs. The desktop computers
which have served as the link to local area networks (LANs) in offices,
factories and universities are being replaced by more powerful computers capable
of national and global networking. In addition, increased functionality and
portability is rapidly expanding the notebook computer segment, and the Internet
and a variety of other on-line services are rapidly expanding the home market
for computers.
Memory and Storage Devices. Disk drives are used in desktop computers,
disk array and mass storage systems. In addition, the increasing variety and
complexity of available software requires more memory capability, which is being
satisfied with more powerful disk drives, CD ROM and plug-in, "credit card" size
memory modules. The Personal Computer Memory Card International Association
("PCMCIA") has created standards for these memory modules, which are tailored to
the mobile computing market. An industry source projects that total shipments of
these memory modules will increase significantly through the year 2000.
Peripherals. This segment includes office equipment such as color laser
printers, scanners and sophisticated "copy centers" which are networked with
desktop computers and add-on option cards to expand graphics, sound, fax/modem
and networking capabilities. Approximately two-thirds of PCMCIA cards sold today
are for such peripheral applications.
Communications. The increasingly popular portable communications
products such as cellular phones and pagers require sophisticated circuit
boards. In addition, cellular telephones are expected to become a feature
incorporated into notebook computers. Global navigation systems and, with the
introduction of low level satellites, wireless communications and computing are
expected to further expand this market segment.
Instrumentation and Industrial Controls. This segment includes test and
measurement equipment widely used in the medical and avionics industries,
including monitoring equipment, flight controls, and navigational
instrumentation. The applications for machine and process control systems are
increasing as automation and monitoring continues to replace certain manual
processes.
Contract Manufacturing.
In addition to direct sales to OEMs, the Company also sells to contract
manufacturers. Contract manufacturing has experienced dramatic growth in recent
years as OEMs have determined that they can earn higher rates of return by
concentrating on research and development and product marketing rather than
manufacturing capabilities. In addition, contract manufacturers aid OEMs in
dealing with short product development and life cycles by providing the
specialized expertise and infrastructure to permit products to be
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introduced more quickly. Continental's sales to contract manufacturers during
fiscal 1996 were 24% of net sales.
The Company's principal contract manufacturing customers include
Solectron Corporation, SCI Systems, Jabil Circuit, Electronic Assembly,
Celestica Corporation, Digital Equipment, XeTel and DOVatron.
SALES AND MARKETING
The Company markets its products through a direct non-commissioned
sales force of 16 people who focus on specific customers without regard to
territory. Each sales person is teamed with a customer quality engineer to
provide additional technical support to the customer. Eleven sales people
operate out of the Phoenix office. Additional sales offices are maintained in
Salem, New Hampshire; Huntsville, Alabama; Santa Clara, California; Raleigh,
North Carolina; Austin, Texas; Cork, Ireland; and Singapore.
The Company concentrates its marketing activities on a select number of
OEMs with sizable complex multilayer, surface mount circuit board requirements.
Sales to Hewlett-Packard and Digital Equipment represented 21% and 11% of total
net sales, respectively, in fiscal 1996 and the Company's ten largest customers
accounted for 73% of net sales in that year. Concentrating on a selected number
of leading OEMs allows the Company to target a market and product mix which
enhances manufacturing efficiency and profitability.
International sales accounted for 21.0%, 35.7%, 31.2% and 27.3% of
total net sales in fiscal years 1993, 1994, 1995 and 1996, respectively.
Substantially all the Company's international sales are direct sales to the
foreign operations of U.S.-based customers, primarily in Singapore, Puerto Rico,
Ireland and the United Kingdom. The Company maintains sales and technical
support offices in Cork, Ireland and Singapore.
The Company's products are typically sold on 30-day terms. The Company
offers no formal warranty but generally adheres to a 30-day replacement policy
of products with defects in materials or workmanship. Replacement costs in
fiscal 1996 were less than $250,000.
MANUFACTURING AND ENGINEERING.
The production of complex multilayer, surface mount circuit boards is a
complicated sequential process. This process requires the extensive use of a
variety of manufacturing operations including graphic operations such as
photoprinting, screen printing, and phototool generation; chemical operations
such as electroplating and etching; mechanical operations such as drilling and
routing; and electronic operations such as CAD/CAM, automated optical inspection
and electrical testing. The equipment and processes used are highly specialized,
and the Company believes its equipment is among the most modern and advanced in
the United States.
The Company embraces Total Quality Management (TQM) techniques in its
daily operations. The Company's quality management system has been ISO-9002
certified since 1992, including recertification to the stricter 1994 standards
in December 1994.
The Company believes that its high level of capital investment and its
manufacturing expertise in a number of specialized areas has contributed to its
position as a leader in the production of commercial volumes of complex
multilayer, surface mount circuit boards in the United States. The Company
believes that its capabilities in the following areas are of special importance:
CAD/CAM. Continental receives customer generated CAD (computer aided
design) data by telephonic data transmission directly to its CAM (computer aided
manufacturing) system. This enables the Company to incorporate customer design
modifications more effectively and to enhance manufacture ability and board
quality on an interactive basis. It also improves customer service and enhances
the Company's ability to work closely with its customers early in the product
design phase. After modification, design data is transferred to a phototool
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(film or glass) using a laser plotter. In addition, the CAD data provides the
information in digital format for phototooling and to program the drilling
machines, automated optical inspection equipment, routing machines and
electrical test equipment.
Sophisticated Tooling System. The dimensional accuracy and
layer-to-layer registration precision required to produce complex multilayer,
surface mount circuit boards often necessitates the use of an image medium
unaffected by variations in temperature and humidity. To achieve this accuracy
and precision, the Company fabricates glass phototooling for use in the
manufacturing imaging process.
Drilling Equipment. Complex multilayer, surface mount circuit boards
require a large number of small (from .020" to .007" diameter) holes. The
Company has highly sophisticated drilling equipment capable of drilling more
than 50 million holes daily.
Automatic Inspection and Test Equipment. The Company utilizes automatic
optical inspection ("AOI") and electrical test equipment to ensure the circuit
patterns meet customer specifications. In the AOI process, customer data is used
as the criteria to compare the optical findings on the production circuit board
to the digitized pattern in memory. The key parameters inspected are line
widths, pad sizes and line spacing.
Management Information System. The Company has recently installed a new
management information system designed to provide the information necessary for
improving quality, delivery and throughput in the production process. The
Company utilizes this system to track products on a real time basis (as opposed
to batch processing) and to record product process history. The electronically
stored information provides the data necessary for analysis and continual
process improvement.
The Company has developed proprietary techniques and manufacturing
expertise, particularly in the area of complex multilayer, surface mount circuit
boards. The Company has no patents for these proprietary techniques and chooses
to rely on trade secret protection. The Company believes that although such
techniques and expertise are subject to misappropriation or obsolescence,
development of improved methods and processes and new techniques by the Company
will continue on an ongoing basis as dictated by the technological needs of the
business. Current areas of manufacturing process development include reducing
circuit widths and hole sizes, providing increased registration control,
developing processes for ultra-fine pitch surface mount applications and thinner
multilayer product, increasing the plating aspect ratio, implementing
alternative surface finishes, and developing new materials applications.
The circuit boards manufactured by the Company require clean
environments to ensure high yields. The Company utilizes clean rooms in areas
where tiny particles can create defects on the circuit pattern. As circuit
densities increase and line widths and spaces decrease, only those manufacturers
having extremely clean manufacturing areas, such as those used by the Company,
will be capable of producing these technologically complex products.
Manufacturing occurs primarily on a three-shift, five-day-a-week
schedule with the weekend used for routine preventive maintenance and limited
production as required, although testing and innerlayer operations are conducted
on a seven-day-a-week schedule. The manufacturing workforce is well-trained and
has relatively low turnover providing a solid foundation for improvements in
cycle time, cost and quality.
SUPPLIER RELATIONSHIPS
In order to reduce lead times and inventory carrying costs, to enhance
the quality and reliability of its supply of raw materials and to reduce
transportation and other logistics costs, the Company has entered into strategic
relationships with certain of its suppliers of laminates, drill bits and other
raw materials which result in annual fixed price agreements.
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The Company's raw materials inventory is small in comparison to sales
and must be regularly and rapidly replenished. The Company uses "just-in-time"
procurement practices to maintain its raw materials inventory at low levels. The
raw materials used on the Company's products consist mainly of laminate and
partially cured epoxy glass, copper-clad epoxy glass, copper foil, and inorganic
chemicals. The Company works closely with its suppliers to incorporate
technological advances in the raw materials it purchases. Although the Company
prefers certain suppliers for some raw materials, multiple sources exist for all
materials. Adequate amounts of all raw material have been available in the past
and the Company believes this will continue in the future.
BACKLOG
The Company defines backlog as orders for products which the Company
believes to be firm with shipment dates within the next twelve months, the
majority of which is scheduled for shipment within 90 days. At July 31, 1996,
the Company's backlog was approximately $16.3 million as compared to $21.7
million at July 31, 1995. The decrease reflects the slowdown experienced during
the latter half of the fiscal year. Backlog has increased, as the book to bill
ratio has exceeded 1.0 since the end of fiscal 1996. The backlog is subject to
various cancellation terms depending primarily on percent of completion and
material purchased or utilized.
COMPETITION
The market for printed circuit boards in the United States is
fragmented and very competitive. According to the IPC, there are approximately
700 companies producing circuit boards in the United States. The Company
competes primarily against other merchant manufacturers. There are no dominant
manufacturers in the segment of the industry served by Continental, and the
Company believes that relatively few producers in the United States have the
technological competence and facilities to produce complex multilayer, surface
mount circuit boards in commercial volumes. Primary merchant competitors of the
Company are domestic and include Johnson Matthey (Advance Circuits, Inc.), Hadco
Corporation, Merix Corporation and Zycon Corporation, plus a limited number of
companies in the Far East. A number of the Company's competitors are larger
than the Company and have greater financial, marketing and other resources.
The market for printed circuit boards is characterized by competitive
factors such as product quality, technological capability, responsiveness to
customers in delivery and service, and price. The Company believes that
competition in the market segments served by the Company is based on product
quality, delivery and price. The Company competes on the basis of the customer's
total cost of acquisition, which includes tangibles such as unit cost and
quality, and intangibles such as flexibility, capacity forecasting,
responsiveness and dedication to customer satisfaction.
ENVIRONMENTAL MATTERS
Circuit board manufacturing requires the use of metals and chemicals.
Water used in the manufacturing process must be treated and neutralized to
remove metals and other contaminants before it can be discharged into the
municipal sanitary sewer system. Therefore, the Company operates and maintains
effluent water treatment systems and utilizes municipally approved laboratory
testing procedures. The Company's operations generate other hazardous waste,
consisting substantially of spent etchant and copper hydroxide sludge for
recycling.
The process to manufacture circuit boards also requires adherence to
city, county, state and federal environmental regulations regarding the storage,
use, handling and disposal of chemicals, solid wastes and other hazardous
materials as well as air quality standards. The Company believes that its
facilities are currently in compliance with applicable environmental laws.
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EMPLOYEES
As of July 31, 1996, the Company had 1,014 full-time employees. None
of the employees is represented by a union and the Company believes there is an
adequate pool of labor available to satisfy its foreseeable hiring needs. The
Company considers relations with its employees to be good. The Company has not
experienced any labor-related work stoppage.
Item 2. Properties
The Company's operations are centralized in a complex of six adjacent
modern manufacturing facilities owned by the Company located at 3502 East Roeser
Road in Phoenix, Arizona. The facilities consist of an aggregate of
approximately 156,000 square feet of floor space. The sixth building, with
approximately 25,000 square feet of floor space, was purchased by the Company in
early August of 1996. In addition, the Company owns approximately four acres of
land adjacent to existing facilities which is currently used for parking. The
foregoing facilities, with the exception of the recently-purchased building,
are subject to a security interest in favor of the Company's principal lender.
Item 3. Legal Proceedings
The Company is not involved in any material pending legal proceedings
other than ordinary routine litigation incidental to its business.
Item 4. Submission to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended July 31, 1996.
EXECUTIVE OFFICERS OF THE REGISTRANT
Executive officers of Continental are elected by the Board of Directors
to serve until their successors are elected and qualified. The following table
sets forth certain information about the Company's executive officers:
NAME AGE POSITION
---- --- --------
Frederick G. McNamee, III 39 Chairman of the Board, President and Chief
Executive Officer
Joseph G. Andersen 39 Vice President -- Finance, Chief Financial
Officer, Secretary and Treasurer
John W. Maddux 58 Vice President-- Quality and Engineering
Mark R. Hollinger 38 Vice President-- Operations
Lee A. Small 48 Vice President-- Sales and Marketing
Robert A. Kosciusko 47 Vice President-- Human Resources
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MR. MCNAMEE joined the Company as President and Chief Executive Officer in
September 1994, and has served as a director since November 11, 1994, and as
Chairman of the Board since December 16, 1994. He spent the past 15 years with
IBM in Austin, Texas in a variety of circuit board manufacturing positions. He
most recently was manager of the IBM circuit board facility in Austin from
November 1992 to September 1994 during its transition from a captive
manufacturer with sales solely to IBM to a significant merchant manufacturer
with sales to other OEMs. From 1989 to 1992, Mr. McNamee served as Volume
Production Manager of the IBM facility.
MR. ANDERSEN joined the Company in September 1996 as Vice President -- Finance,
Chief Financial Officer, Secretary and Treasurer. Mr. Andersen served as a
vice-president and chief financial officer of Comptronix Corp., a Brentwood,
Tennessee based printed circuit Board assembler with operations in the United
States and Mexico from July 1994 to August 1996, and as Director of Accounting
from July 1993 to July 1994. Prior to July 1993, he served in a variety of
senior financial management positions with Augat, Inc., a manufacturer of
connectors, chip carriers and board testers.
MR. HOLLINGER joined the Company as Vice President -- Operations in October
1994. He spent the previous nine years with IBM in manufacturing management
positions for both circuit boards and assemblies, including the following
assignments at the IBM circuit board facility in Austin, Texas: Manufacturing
Superintendent from May through September 1994; Program Manager from January
1994 until May 1994; Model Parts and Services Manager from April 1993 until
January 1994; and OEM Operations Manager from August 1992 until April 1993. Mr.
Hollinger also served at the IBM Entry Systems Division as Technical Assistant
to Assistant Plant Manager from September 1990 until April 1991; and Production
Pull Line Manager from April 1991 until August 1992.
MR. SMALL joined the Company as Vice President -- Sales and Marketing in 1987.
He also served as a Director of the Company from November 1989 through April
1994. From 1978 through 1987, Mr. Small was a sales representative for the
Company's then exclusive independent sales representative.
MR. MADDUX has been the Vice President -- Quality and Engineering of the Company
since 1981. He joined the Company in 1979 as Manager of Quality Control. He also
served as a Director of the Company from November 1989 through November 1994.
Prior to 1979, Mr. Maddux served 19 years in manufacturing capacities relating
to circuit boards with General Electric Company and Honeywell Information
Systems in Phoenix, Arizona.
MR. KOSCIUSKO has served the Company as Vice President -- Human Resources since
August 1995 and as Director of Human Resources from February 1991 until August
1995. From 1984 to 1991, he was Human Resources Manager for Ringier
International, a printing company.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Information in response to this item is incorporated herein by
reference to the information under the heading "Securities Information" in the
Registrant's 1996 Annual Report to Shareholders.
Item 6. Selected Financial Data.
Information in response to this item is incorporated herein by
reference to the information under the heading "Financial Highlights" in the
Registrant's 1996 Annual Report to Shareholders.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
Information in response to this item is incorporated herein by
reference to the information under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Registrant's
1996 Annual Report to Shareholders.
Item 8. Financial Statements and Supplementary Data.
Information in response to this item is incorporated herein by
reference to "Report of Independent Auditors," "Balance Sheets," "Statements of
Income," "Statements of Shareholder's Equity," "Statements of Cash Flows" and
"Notes to Financial Statements" in the Registrant's 1996 Annual Report to
Shareholders.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information in response to this item is incorporated herein by
reference to (i) the information under the heading "Election of Directors" in
the Registrant's Proxy Statement for its 1996 Annual Meeting of Shareholders
(the "1996 Proxy Statement") and (ii) the information under the heading
"Executive Officers of the Registrant" in Part I hereof. The Company anticipates
filing the 1996 Proxy Statement within 120 days after July 31, 1996.
Item 11. Executive Compensation.
Information in response to this item is incorporated herein by
reference to the information under the heading "Executive Compensation" in the
1996 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information in response to this item is incorporated herein by
reference to the information under the heading "Voting Securities and Principal
Holders -- Security Ownership of Certain Beneficial Owners and Management" in
the 1996 Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
Information in response to this item is incorporated herein by
reference to the information under the heading "Certain Relationships and
Related Transactions" in the 1996 Proxy Statement.
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PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents filed:
1. Financial statements.
The financial statements required to be filed by Item 8 hereof
have been incorporated by reference to the Registrant's 1996 Annual
Report to Shareholders and consist of the following:
Report of Ernst & Young LLP, Independent Auditors Balance Sheets
as of July 31, 1995 and 1996 Statements of Income for each of the
three years ended July 31, 1994, 1995 and 1996 Statements of
Shareholders' Equity for each of the three years ended July 31,
1994, 1995 and 1996 Statements of Cash Flows for each of the
three years ended July 31, 1994, 1995 and 1996 Notes to Financial
Statements
2. Financial statement schedules.
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
3. Exhibits.
See Exhibit Index included as the last part of this report, which Index
is incorporated herein by this reference.
(b) Reports on Form 8-K:
No Current Reports on Form 8-K were filed during the quarter ended July
31, 1996.
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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.
CONTINENTAL CIRCUITS CORP.
By /s/ Frederick G. McNamee, III Dated October 28, 1996
-----------------------------------------
Frederick G. McNamee, III
Chairman of the Board, President,
Chief Executive Officer
and Director
By /s/ Joseph G. Andersen Dated October 28, 1996
------------------------------------------
Joseph G. Andersen
Vice President - Finance, Chief Financial
Officer, Secretary and Treasurer
(principal financial and accounting
officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Frederick G. McNamee, III Chairman of the October 28, 1996
- ----------------------------- Board, President,
Frederick G. McNamee, III Chief Executive
Officer and
Director
/s/ Angelo A. DeCaro, Jr. Director October 28, 1996
- -----------------------------
Angelo A. DeCaro, Jr.
/s/ Michael O. Flatt Director October 28, 1996
- -----------------------------
Michael O. Flatt
/s/ Albert A. Irato, Jr. Director October 28, 1996
- -----------------------------
Albert A. Irato
/s/ Michael F. Jarko Director October 28, 1996
- -----------------------------
Michael F. Jarko
/s/ John Nance Director October 28, 1996
- -----------------------------
John Nance
/s/ David C. Wetmore Director October 28, 1996
- -----------------------------
David C. Wetmore
<PAGE> 14
CONTINENTAL CIRCUITS CORP.
Exhibit Index to Report on Form 10-K
for the fiscal year ended July 31, 1996
<TABLE>
<CAPTION>
Filed
-----
Exhibit Description Incorporated herein by reference Herewith
- ------- ----------- -------------------------------- --------
No. to:
- --- ---
<S> <C> <C> <C>
3.1 Articles of Incorporation, as amended Exhibit 3.1 to Registrant's
Registration Statement on Form
S-1 declared effective on March
14, 1995 (SEC File 33-88368)
("March 1995 S-1")
3.2 By-Laws, as amended Exhibit 3.2 to March 1995 S-1
4.1 Article fifth of Certificate of Incorporation Exhibit 4.1 to March 1995 S-1
of Registrant
10.1 Loan Agreement by and between Exhibit 10.1 to Registrant's
Registrant and Bank One, Arizona, NA Quarterly Report on From 10-Q
dated October 31, 1995 (including for the Quarter Ended October
Arbitration Resolution and Consent and 31, 1995 ("October 1995 10-Q")
Agreement of Guarantor between
Continental Circuits Corp. and Bank One
Arizona, NA)
10.2 Promissory Note between Registrant and Exhibit 10.2 to October 1995
Bank One, Arizona, NA dated October 31, 10-Q
1995
10.3 Revolving Promissory Note between Exhibit 10.3 to October 1995
Registrant and Bank One, Arizona, NA 10-Q
dated October 31, 1995
10.4 Deed of Trust, Assignment of Rents, Exhibit 10.4 to March 1995 S-1
Security Agreement, and Fixture Filing by
and among Registrant, Arizona Trust
Deed Corporation, an Arizona
Corporation, and Bank One, Arizona, NA
dated April 28, 1994
10.5 Security Agreement by Registrant in favor Exhibit 10.5 to March 1995 S-1
of Bank One, Arizona, NA dated April 28,
1994
10.6 Pledge and Irrevocable Proxy Security Exhibit 10.6 to March 1995 S-1
Agreement by Registrant in favor of Bank
One, Arizona, NA dated April 28, 1994
</TABLE>
- --------------------
* Management contract or compensatory plan or arrangement required to be filed
pursuant to Item 14(c) of Form 10-K.
<PAGE> 15
<TABLE>
<CAPTION>
Filed
-----
Exhibit Description Incorporated herein by reference Herewith
- ------- ----------- -------------------------------- --------
No. to:
- --- ---
<S> <C> <C> <C>
10.7 Environmental Indemnity Agreement by Exhibit 10.7 to March 1995 S-1
Registrant in favor of Bank One, Arizona,
NA dated April 28, 1994
10.8* Form of Indemnification Agreement for Exhibit 10.9 to March 1995 S-1
Directors and Officers
10.9* Registrant's 1987 Stock Option Plan Exhibit 10.10 to March 1995 S-1
10.10* Form of Letter of Grant of options Exhibit 10.11 to March 1995 S-1
pursuant to Registrant's 1987 Stock
Option Plan (including Share Repurchase
Agreement and Consent of Spouse)
10.11* Form of Share Repurchase Agreement Exhibit 10.12 to March 1995 S-1
pursuant to Registrant's 1985 Stock
Option Plan (including Consent of
Spouse)
10.12* Form of Letter of Grant of options to Exhibit 10.13 to March 1995 S-1
Frederick G. McNamee, III
10.13* Compensation Agreement between Exhibit 10.14 to March 1995 S-1
Registrant and Robert F. Lutz dated June
30, 1993
10.14* Confidentiality and Non-Competition Exhibit 10.15 to March 1995 S-1
Agreement between Registrant and Robert
F. Lutz dated January 1, 1995
10.15* Compensation Agreement between Exhibit 10.16 to March 1995 S-1
Registrant and Frederick G. McNamee, III
dated as of September 12, 1994
10.16* Separation Agreement and Release Exhibit 10.17 to March 1995 S-1
between Registrant and Michael O. Flatt
dated as of October 2, 1994
10.17* Compensation Agreement between Exhibit 10.18 to March 1995 S-1
Registrant and Mark R. Hollinger dated
September 26, 1994
10.18* Termination Agreement between X
Registrant and Thomas E. Linnen
effective as of July 23, 1996
10.19* Employment Offer Letter for X
Joseph G. Andersen
</TABLE>
- --------------------
* Management contract or compensatory plan or arrangement required to be filed
pursuant to Item 14(c) of Form 10-K.
<PAGE> 16
<TABLE>
<CAPTION>
Filed
-----
Exhibit Description Incorporated herein by reference Herewith
- ------- ----------- -------------------------------- --------
No. to:
- --- ---
<S> <C> <C> <C>
10.20 Letter regarding Agreement to Settle Exhibit 10.19 to March 1995 S-1
Action dated September 20, 1993 by C.W.
Jackson and Steven D. Fisher
10.21 Settlement Agreement and Release entered Exhibit 10.20 to March 1995 S-1
into September 30, 1993 by and among
C.W. Jackson, Marguerite L. Jackson,
Steven D. Fisher, Lynn Ann Fisher, Fisher
Research, Inc., an Arizona corporation,
Registrant, Robert F. Lutz, Patricia Lutz,
Michael O. Flatt, Joanie Flatt, Leo A.
Small, Shelle Small, John W. Maddux,
Thomas Linnen, Barbara Linnen, Joan
Carr and Leatrice Carr
10.22 Registration Rights Agreement dated as of Exhibit 10.21 to March 1995 S-1
October 1, 1993 by and among Registrant,
Steven D. Fisher and C.W. Jackson
(included as Exhibit D in Exhibit 10.20)
10.23 Standstill Agreement effective as of Exhibit 10.22 to March 1995 S-1
October 1, 1993 by and among Registrant,
Steven D. Fisher and C.W. Jackson
(included as Exhibit D in Exhibit 10.20)
10.24 Preemptive Rights Agreement dated Exhibit 10.23 to March 1995 S-1
October 1, 1993 by and among Registrant,
C.W. Jackson, Marguerite L. Jackson,
Steven D. Fisher, and Lynn An Fisher
(included as Exhibit F in Exhibit 10.20)
11.1 Statement re computation of per share X
earnings
13.1 Annual Report to Shareholders X
21.1 Subsidiaries of Registrant Exhibit 21.1
to March
1995 S-1
23.1 Consent to Ernst & Young LLP X
27.1 Financial Data Schedule X
</TABLE>
- --------------------
* Management contract or compensatory plan or arrangement required to be filed
pursuant to Item 14(c) of Form 10-K.
<PAGE> 1
Exhibit 10.18
AGREEMENT
This Agreement is made and entered into freely and voluntarily and is
effective as of July 23, 1996, by and between Thomas E. Linnen (hereinafter
referred to as "Linnen") and Continental Circuits Corp. (hereinafter referred to
as "Continental").
WHEREAS, the parties mutually wish to modify their current employment
relationship and provide for an orderly termination of Linnen's employment by
Continental, all on terms satisfactory to both Linnen and Continental:
IN CONSIDERATION of the acts, payments, covenants and mutual agreements
herein described and agreed to be performed, Continental and Linnen agree as
follows:
1. Termination of Current Relationship. The parties acknowledge that
Linnen's employment by Continental terminated as of June 11, 1996 (the "Date of
Termination"). As of the Date of Termination, Linnen resigned as an officer of
Continental.
2. No Continuing Duties. Linnen acknowledges that from and after the
Date of Termination, he has had and shall have no further duties for or on
behalf of Continental.
3. Severance Payment. So long as Linnen continues to comply with all
requirements of this Agreement, Continental agrees to pay Linnen an amount equal
to 12 months base salary, over a 12-month period, at the times and in the
amounts that are presently paid to Linnen in accordance with the normal payroll
procedures of Continental.
4. Benefits.
a. Continental agrees to pay premiums for medical benefits (COBRA)
for Linnen and Linnen's dependents, if any, for coverage similar to those
benefits currently provided by Continental for 90 days following the Date of
Termination.
b. From and after July 31, 1996, Linnen shall be responsible for all
expenses relating to Linnen's Lincoln automobile, including without limitation
all lease payments and costs of maintenance, fuel and insurance.
c. Continental will pay up to $10,000 for costs of outplacement
services for Linnen which are incurred by Linnen within 90 days of the Date of
Termination.
5. Stock Options. Effective as of the date of Termination, all of
Linnen's 6,000 outstanding stock options shall be fully vested.
6. Release and Covenant Not to Sue. Linnen hereby releases, acquits and
forever discharges Continental, its subsidiaries, affiliates, directors,
officers, employees and agents of and from any and all actions, claims, damages,
expenses or costs of whatever nature arising out of Linnen's employment and the
termination of such relationship, or Linnen's service as an officer or director
of Continental (or any subsidiary) including, but not limited to, any rights or
claims to any vacation, sick leave, severance, medical, dental or any other
benefits under the Company's internal policies, under any federal, state or
local statute or regulation, or under common law. Linnen further covenants and
agrees not to join in or commence any action, suit or proceeding, in law or in
equity, or before any administrative agency, or to incite, encourage, or
participate in any such action, suit or proceedings, against Continental, its
subsidiaries, affiliates, directors, officers, employees or agents in any way
pertaining to or arising out of his employment by or service as an employee,
consultant, officer or director of Continental (or any subsidiary) or the
termination of any of such relationships.
<PAGE> 2
Linnen acknowledges that the consideration afforded him under this
Agreement, including the payments described in Paragraph 3 above, are in full
and complete satisfaction of any claims Linnen may have, or may have had,
arising out of his employment with Continental (or any subsidiary) or the
termination thereof.
Continental hereby releases, acquits and forever discharges Linnen of
and from any and all actions, claims, damages, expenses or costs of whatever
nature arising out of Linnen's employment by or service as an employee,
consultant, officer or director of Continental (or any subsidiary), except for
those matters as to which Linnen is not entitled to indemnification, as
contemplated by Paragraph 17 below.
7. Time Period for Considering or Canceling this Agreement. Linnen
acknowledges that Continental has encouraged him to consult with an attorney of
his choice with respect to this Agreement. Linnen further acknowledges that he
has been offered a period of time of at least 21 days to consider whether to
sign this Agreement, and Continental agrees that Linnen may cancel this
Agreement at any time during the seven days following the date on which this
Agreement has been signed by all parties to this Agreement. In order to cancel
or revoke this Agreement, Linnen must deliver to Continental at 3502 East Roeser
Road, Phoenix, AZ 85040, written notice stating that Linnen is canceling or
revoking this Agreement. If this Agreement is timely canceled or revoked, none
of the provisions of this Agreement shall be effective or enforceable and
Continental shall not be obligated to make the payments to Linnen or to provide
Linnen with the other benefits described in this Agreement.
8. Confidentiality of Agreement. Linnen and Continental agree to
maintain in confidence the terms and existence of this Agreement and the
discussions that let to its creation and execution, with the exception that
Continental may disclose this Agreement and its terms to the extent required or
appropriate under applicable securities laws or other laws and that Linnen may
disclose such matters to any attorney who is providing advice to Linnen, to any
accountant or federal or state tax agency for purposes of complying with any tax
laws, or as otherwise required by law. Further, Linnen acknowledges that any
duties of confidentiality imposed upon Linnen by agreement or by law, including
without limitation those imposed by Paragraphs 8 and 10 of this Agreement, shall
survive the termination of Linnen's employment.
9. Reliance. Linnen warrants and represents that (i) he has relied
on his own judgment regarding the consideration for and language of this
Agreement; that (ii) Continental has not in any way coerced or unduly influenced
him to execute this Agreement; and (iii) that this Agreement is written in a
manner that is understandable to him and he has read an understood all
paragraphs of this Agreement.
10. Confidential Information. Linnen acknowledges that, during his
employment by Continental, Linnen has received and also contributed to the
production of, Confidential Information. For purposes of this Agreement, Linnen
agrees that "Confidential Information" shall mean information or material
proprietary to Continental or designated as Confidential Information by
Continental and not generally known by non-Continental personnel, which Linnen
developed or of or to which Linnen obtained knowledge or access through or as a
result of Linnen's relationship with Continental (including information
conceived, originated, discovered or developed in whole or in part by Linnen).
Linnen further agrees:
10.1 To furnish Continental on demand, a complete list of the names
and addresses of all present, former and potential customers and
other contacts gained while an employee of Continental, whether
or not in the possession or within the knowledge of Continental.
10.2 That all notes, memoranda, documentation and records in any way
incorporating or reflecting any Confidential Information shall
belong exclusively to Continental, and Linnen agrees promptly to
turn over all copies of such materials in Linnen's control to
Continental.
10.3 That Linnen will hold in confidence and not directly or
indirectly reveal, report, publish, disclose or transfer any of
the Confidential Information to any person or entity, or utilize
any of the Confidential Information for any purpose, except in
the course of Linnen's work for Continental.
<PAGE> 3
10.4 That any ideas in whole or in part conceived of or made by Linnen
during the term of his employment or relationship with
Continental which were made through the use of any of the
Confidential Information of Continental or any of Continental's
equipment, facilities, trade secrets or time, or which result
from any work performed by Linnen for Continental, belong
exclusively to Continental and shall be deemed a part of the
Confidential Information for purposes of this Agreement. Linnen
hereby assigns and agrees to assign to Continental all rights in
and to such Confidential Information whether for purposes of
obtaining patent or copyright protection or otherwise. Linnen
shall acknowledge and deliver to Continental, without charge to
Continental (but at its expense) such written instruments and do
such other acts, including giving testimony in support of
Linnen's authorship or inventorship, as the case may be,
necessary in the opinion of Continental to obtain patents or
copyrights or to otherwise protect or vest in Linnen the entire
right and title in and to the Confidential Information.
11. Non-Compete After Employment Term. The parties acknowledge that
Linnen has acquired much knowledge and information concerning the business of
Continental and its affiliates as the result of Linnen's employment. The parties
further acknowledge that the scope of business in which Continental is engaged
as of the date of execution of this Agreement is world-wide and very competitive
and one in which few companies can successfully compete. Competition by Linnen
in that business would severely injure Continental. Accordingly, until one year
after the Date of Termination, Linnen will not:
11.1 Within any jurisdiction or marketing area in which Continental or
any of its affiliates is doing business or is qualified to do
business, directly or indirectly own, manage, operate, control,
be employed by or participate in the ownership, management,
operation or control of, or be connected in any manner with, any
business of the type and character engaged in and competitive
with that conducted by Continental or any of its affiliates. For
these purposes, ownership of securities of not in excess of 1% of
any class of securities of a public company shall not be
considered to be competition with Continental or any of its
affiliates;
11.2 Persuade or attempt to persuade any potential customer or client
to which Continental or any of its affiliates has made a proposal
or sale, or with which Continental or any of its affiliates has
been having discussions, not to transact business with Linnen or
such affiliate, or instead to transact business with another
person or organization;
11.3 Solicit the business of any company which is a customer or client
of Continental or any of its affiliates at any time during
Linnen's employment by the Continental, or was its customer or
client within two years prior to the date of this Agreement,
provided, however, if Linnen becomes employed by or represents a
business that exclusively sells products that do not compete with
products then marketed or intended to be marketed by Continental,
such contact shall be permissible; or
11.4 Solicit, endeavor to entice away from Continental or any of its
affiliates, or otherwise interfere with the relationship of
Continental or any of its affiliates with, any person who is
employed by or otherwise engaged to perform services for
Continental or any of its affiliates, whether for Linnen's
account or for the account of any other person or organization.
12. Common Law of Torts or Trade Secrets. Nothing in this Agreement
shall be construed to limit or negate the common law of torts or trade secrets
where such common law provides Continental with broader protection than the
protection provided by this Agreement.
13. Nature of the Agreement. This Agreement and all provisions
hereof, including all representations and promises contained herein, are
contractual and not a mere recital and shall continue in permanent force and
effect. This Agreement and all attachments constitute the sole and entire
agreement of the parties with respect to the subject matter hereof, superseding
all prior agreements and understandings between the parties, and there are no
agreements of any nature whatsoever between the parties hereto except as
expressly stated herein. This Agreement may not be modified or changed except by
means of a written instrument signed by both parties. If any portion of this
Agreement is found to be unenforceable for any reason whatsoever, the
unenforceable provision shall be considered to be severable, and the remainder
of the Agreement shall
<PAGE> 4
continue to be in full force and effect. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of Arizona.
14. No Admission of Liability. Nothing contained in this Agreement
shall be construed in any manner as an admission by Continental or Linnen that
he or it has violated any statute, law or regulation, or breached any contract
or agreement.
15. Remedies. Any and all remedies set forth herein are intended to
be nonexclusive and either party may, in addition to such remedies, seek any
additional remedies available either in law or in equity in the event of default
or breach by the other party.
16. Injunctive Relief. Linnen agrees that it would be difficult to
measure the damage to Continental from any breach by Linnen of the covenants set
forth herein, that injury to Continental from any such breach would be
impossible to calculate, and that money damages would therefore be an inadequate
remedy for any such breach. Accordingly, Linnen agrees that if Linnen should
breach any term of this Agreement, Continental shall be entitled, in addition to
and without limitation of all other remedies it may have, to offset payments to
Linnen required by this Agreement and/or to injunctions or other appropriate
orders to restrain any such breach without showing or proving any actual damage
to Continental. This paragraph shall survive termination of Linnen's employment.
17. Indemnification. Continental will provide indemnification to
Linnen in accordance with the current Certificate and Bylaws of Continental.
These obligations shall survive the termination of Linnen's employment.
18. Testimony. If Linnen has knowledge of or is alleged to have
knowledge of any matters which are the subject of any pending, threatened or
future litigation involving Continental (or any subsidiary), he will make
himself available to testify if and as necessary. Linnen will also make himself
available to the attorneys representing Continental in connection with any such
litigation or dispute for such purposes as they may deem necessary or
appropriate, including but not limited to the review of documents, discussion of
the case and preparation for any legal proceedings. This Agreement is not
intended to and shall not be construed so as to in any way limit or affect the
testimony which Linnen gives in an such proceedings. Further, it is understood
and agreed that Linnen will at all times testify fully, truthfully and
accurately, whether in deposition, hearing, trial or otherwise.
19. No Disparagement. Each party agrees that as part of the
consideration for this Agreement, he or it will not make disparaging or
derogatory remarks, whether oral or written, about the other party or, in the
case of Continental, about its subsidiaries, affiliates, officers, directors,
employees or agents.
Dated this 23rd day of July, 1996.
/s/Thomas E. Linnen
-------------------
Thomas E. Linnen
CONTINENTAL CIRCUITS CORPORATION
By: /s/ Frederick G. McNamee, III
-----------------------------
Frederick G. McNamee, III
Its: President and CEO
<PAGE> 1
Exhibit 10.19
Mr. Joe Andersen
2951 Hampton Cove Way
Owens Crossroads, Alabama 35763
Dear Joe;
I am pleased that you have accepted the position of Chief Financial
Officer of Continental Circuits Corp. I consider this to be a critical addition
to the senior management team. On behalf of the team and the Board of Directors,
I welcome you to Phoenix.
Your annual base salary will be $150,000.00 (one hundred and fifty
thousand dollars) payable weekly. In addition you will be eligible for the
following incentives and benefits;
A. Continental will provide for your relocation from your present home
in Alabama to your new residence in the Phoenix area. Continental will
be responsible for packing, moving and unpacking of household good. In
addition Continental will assume the real estate fees on your current
home. In the event you are not able to sell your home in Alabama at an
appraised level within six months of your state date, the Company will
assist in securing a relocation service that will purchase the home.
The Company will assume up to 10% of the loss between the appraised
price and actual selling price, if the situation should occur.
B. You will be granted 75,000 options to purchase Continental Circuits
Corp. stock with an exercise price equal to the fair market value on
the date of the acceptance of this offer.
C. You will be immediately eligible to participate in the leased
automobile program.
D. Continental will be responsible for your temporary living expenses
in Phoenix until such time as you are able to relocate into your new
home. We have secured Corporate housing that will be available August
15, 1996.
E. You and your family will be eligible for the benefit package on your
first full day as a Continental employee.
Joe, I obviously think that Continental Circuits Corp. is a very
special Company with a bright future. If you have any questions please call me.
I believe with your experience, skills and talents this is a great match and I
am thrilled to have you on board. Congratulations!
Sincerely yours,
/s/ Rick McNamee
- --------------------------
Rick McNamee
President/CEO
Continental Circuits Corp.
<PAGE> 1
Exhibit 11.1
STATEMENT RE: COMPUTATION OF NET INCOME PER SHARE
CONTINENTAL CIRCUITS CORP.
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
-------------------------------------
1994 1995 1996
------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Historical weighted average shares outstanding (1) ......... 6,160 6,747 7,430
Common share options issued within twelve months of the
planned initial public offering(2) ......................... 157 -- --
------ ------ ------
Weighted average shares outstanding ........................ 6,317 6,747 7,430
====== ====== ======
Net income ................................................. $3,059 $6,654 $6,283
====== ====== ======
Net income per share ....................................... $ .48 $ .99 $ .85
====== ====== ======
</TABLE>
(1) Common stock equivalents, which were dilutive, were included in the
computation of weighted average number of shares outstanding.
(2) These items are treated as common stock equivalents from inception
since they were issued at prices below the expected initial public
offering price of the Company's common shares during the twelve month
period immediately preceding the offering, and are computed using the
treasury stock method assuming an estimated initial public offering
price of $10.50 per share.
<PAGE> 1
Exhibit 13
TABLE OF CONTENTS
2 Financial Highlights
3 Chairman's Letter
6 Management's Discussion and Analysis of
Financial Condition and Results of Operations
11 Balance Sheets
12 Statements of Income
12 Statements of Shareholders' Equity
13 Statements of Cash Flows
15 Notes to Financial Statements
22 Report of Independent Auditors
COMPANY PROFILE
Continental Circuits Corp. is a leading manufacturer of complex
multilayer, surface mount circuit boards used in sophisticated electronic
equipment in the computer, communications, instrumentation and industrial
controls industries. Our circuit boards are used principally in workstations,
desktop and notebook computers, computer networking products, storage devices,
medical equipment, cellular telephones and pagers. Our sales are primarily
direct sales to leading original equipment manufacturers and contract
manufacturers in the United States and abroad. Most of the market segments we
serve are characterized by high growth rates, rapid technological advances and
short product development times.
Continental's objective is to provide world-class manufacturing for its
customers and to be recognized as the leader in complex multilayer, surface
mount circuit boards by providing the maximum total value, defined as the
combination of cost efficiency, quick response times and high quality.
<PAGE> 2
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FOR YEARS ENDED JULY 31, 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Statement of Income Data
<S> <C> <C> <C> <C> <C>
Net sales $108,362 $ 95,372 $ 80,218 $ 77,177 $ 68,725
Income from operations 10,869 11,817 6,320 6,809 2,246
Net income 6,283 6,654 3,059 2,322 320
Net income per share 0.85 0.99 0.48 0.37 0.05
Balance Sheet Data
Working capital $ 14,729 $ 8,695 $ 9,464 $ 2,982 $ 1,057
Total assets 59,586 54,482 47,648 44,226 40,736
Long-term debt, less current portion 3,333 1,357 12,500 10,511 11,510
Shareholders' equity 44,032 37,736 21,635 18,373 16,003
</TABLE>
[LINE CHARTS 1, 2, AND 3]
02
<PAGE> 3
TO OUR SHAREHOLDERS
[PHOTO OF FREDERICK G. MCNAMEE, III]
CHANGES IN THE WORLD WE LIVE IN
The influence of technology pervades our every day lives in an ever
increasing number of ways. From PCs and the Internet to cellular telephones and
pagers, to "smart" household appliances and automobile engines, to medical
diagnostic equipment and industrial controls, electronics are being designed and
used in more and more ways. Indeed, estimates of the explosive growth of
electronics industries such as telecommunications, notebook computers and
networking products are forecasted at a compounded growth rate of over 15%. At
the heart of this electronics explosion is a basic building block, the printed
circuit board. At Continental Circuits, we are dedicated to manufacturing high
quality and high technology printed circuit boards.
[PIE CHART 1]
1996, THE YEAR IN REVIEW
In 1996, Continental Circuits continued its year over year improvement in
sales and strong net income, and EPS. For the year ended July 31, 1996, sales
increased to $108.4 million, or 13.6% above 1995 levels. Net income and earnings
per share were $6.3 million and $.85 respectively.
Our financial performance reflects our ability to competitively manufacture
high quality and high technology printed circuit boards. Gross margins of 17.4%
for 1996 were achieved through our materials and production management efforts.
Additionally during 1996, we invested over $8 million in facilities and capital
equipment to increase capacity and to offer our customers' the best in
technology and reliability.
As the complexity of electronic products increases, so does the density and
layer count of the circuit boards. Continental Circuits has become known as a
leader in the high volume, complex product segment.
Continental Circuits benefits from a diverse customer base and product mix.
Although we, along with the industry, experienced a slow down in customer demand
in mid 1996, the strength of our diversity has contributed to the return of a
positive book to bill ratio.
[LINE CHART 4]
WHAT'S IN STORE FOR 1997
Continental Circuits continually strives to be a world class value added
interconnect service provider with an emphasis on time to market, leading edge
technologies, and superior customer service.
To that end, I have developed and discussed a "4-Prong" strategy for
Continental Circuits Corp. to achieve this goal. The prongs of the strategy
include increasing our standard printed circuit board production capacity,
increasing our quick turn printed circuit board capacity, diversifying into
other interconnect products and services, and expanding Continental Circuits
presence globally. The 4-Prong strategy will continue to guide our
03
<PAGE> 4
CHAIRMAN'S LETTER (CONTINUED)
management efforts in 1997 as we grow Continental Circuits. The 4-Prong strategy
ensures that we continue to serve the ever increasing needs of our customers and
to manufacture the ever increasing types of products offered by our customer.
[PIE CHART 2]
NEW ARRIVALS
As I write this letter, Continental Circuits has entered into an agreement
to acquire Sigma Circuits, Inc. We are eagerly working to complete this
transaction and I would like to extend a warm welcome to the employees,
customers, suppliers and shareholders of Sigma. The acquisition of Sigma
Circuits is key to our strategic planning to expand Continental Circuits'
offerings into quick turn printed circuit board manufacturing, flexible circuit
manufacturing, and backplane assembly. The combined company will offer customers
"One Stop Shopping" for printed circuit boards and interconnect solutions. With
this acquisition, Continental Circuits is expected to be a $200 million company
with over 1,600 employees manufacturing high quality and high technology
electronics in five production facilities. In 1997, our efforts will be focused
on the integration, management, and growth of the new company into a world class
industry leader.
Additionally, Joe Andersen recently joined the management team at
Continental Circuits as Chief Financial Officer. Joe has over 15 years of
financial experience in the electronics industry. Please join me in welcoming
him to Continental Circuits' family.
GIVING CREDIT WHERE DUE
As Continental Circuits celebrates its 25th Anniversary this year, I would
like to thank our employees, customers, suppliers, and shareholders for their
continued support, in helping us achieve our increased growth and financial
performance in 1996.
As we enter 1997, the management team and employees at Continental Circuits
are stepping into the future with confidence.
Sincerely,
Frederick G. McNamee, III
Chairman, CEO and President
4
<PAGE> 5
[GRAPHIC 1]
SMALL PACKAGES
The communications world is accelerating at a staggering pace. Markets are
changing with the shift in communication products from analog to digital
systems. Cellular telephones, pagers, other wireless products and the global
network systems that support them, require complex lightweight circuit boards.
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Continental Circuits Corp. is a leading manufacturer of complex multilayer,
surface mount circuit boards used in sophisticated electronic equipment in the
computer, communications, instrumentation and industrial controls industries.
The Company's circuit boards are used principally in workstations, desktop and
notebook computers, computer networking products, storage devices, medical
equipment, cellular telephones and pagers. The Company utilizes its advanced
manufacturing and engineering capability to assist OEMs in the early phases of
new product development, which allows Continental to maintain technological
leadership and provides prototype and volume manufacturing opportunities. Most
of the segments of the electronics industry served by the Company are
characterized by high growth rates, rapid technological advances and short
product development and market introduction times. The Company is committed to
assisting its customers in achieving the shortest possible time-to-market and
time-to-volume for new products.
The electronics industry, including the segments served by the Company, is
subject to economic cycles and from time to time experiences recessionary
periods. During past recessionary periods, the competitive pressures on merchant
manufacturers were intensified by OEMs with captive operations which could
substantially reduce outsourcing in favor of maintaining adequate volume at
their captive manufacturers. This effect has been diminished significantly by a
continuing decrease in the overall captive manufacturing capacity and the fact
that there are fewer manufacturers capable of producing complex multilayer,
surface mount circuit boards. The Company believes that these factors have
contributed to firmer price levels and will continue to do so in the future,
although there is no assurance that price levels will not fluctuate materially
in the future.
The Company is focusing on increasing manufacturing efficiency to achieve
continued improvement in profitability. This focus includes making capital
improvements, optimizing workflow and managing product mix in order to maximize
process yield and throughput.
Set forth below is a table showing the portions of the Company's total net
sales attributable to the indicated markets for fiscal years 1994 through 1996.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JULY 31, 1996 1995 1994
- --------------------------------------------------------------------------------
MARKETS
<S> <C> <C> <C>
Computers 49% 37% 38%
Memory and storage devices 14 29 31
Communications 21 14 12
Instrumentation and industrial controls 13 11 5
Peripherals 3 9 14
- --------------------------------------------------------------------------------
Totals 100% 100% 100%
</TABLE>
06
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
The following table sets forth operating results expressed as a percentage
of net sales for the periods indicated and the percentage change in such
operating results between periods. Results for any one or more periods are not
necessarily indicative of annual results or continuing trends.
<TABLE>
<CAPTION>
PERIOD TO PERIOD
INCREASE (DECREASE)
1996 1995
PERCENTAGE OF NET SALES COMPARED COMPARED
FISCAL YEAR ENDED JULY 31, 1996 1995 1994 TO 1995 TO 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 13.6% 18.9%
Cost of products sold 82.6 79.9 84.1 17.5 12.9
Gross profit 17.4 20.1 15.9 (1.8) 50.3
Selling, general and administrative expenses 7.4 7.7 8.0 8.3 14.3
Income from operations 10.0 12.4 7.9 (8.0) 87.0
Interest expense 0.4 0.9 1.6 (46.5) (30.4)
Other expense 0.1 0.0 0.0 NM NM
Income before income taxes 9.5 11.5 6.3 (5.8) 115.7
Income taxes 3.7 4.5 2.5 (6.3) 113.0
- ---------------------------------------------------------------------------------------------------------
Net income 5.8% 7.0% 3.8% (5.6) 117.5
</TABLE>
COMPARISON OF FISCAL YEARS ENDED JULY 31 1996 AND 1995
Net sales increased 13.6% to $108.4 million in fiscal 1996 from $95.4
million in fiscal 1995. This increase was the result of a 13% increase in unit
volume, primarily for products supporting the computer and communications
markets, two of the areas of focus of the marketing effort. Also, average prices
increased from 1995 to 1996 as product mix continued to shift toward more
complex, higher technology products.
Gross profit as a percent of net sales increased to 17.4% in fiscal 1996
from 20.1% in fiscal 1995. The decrease was driven primarily by a slowdown in
the second half of 1996 throughout the industry and the impact of fixed costs in
place to support higher sales being spread over a lower manufacturing volume.
Selling, general and administrative expenses increased 8.3% to $8.0 million
in fiscal 1996 from $7.4 million in fiscal 1995. The growth was driven primarily
by increased marketing expenses and a provision for doubtful accounts for a
single customer that represented less than 1% of sales.
Income from operations of $10.9 million for fiscal 1996 declined to 10.0% of
sales from $11.8 million, or 12.4% of sales in fiscal 1995 because of the above
factors.
Interest expense decreased 46.5% to $0.5 million in fiscal 1996 from $.9
million in fiscal 1995 as all of fiscal 1996 benefited from the prepayment of
approximately $9.0 million of long-term debt from the proceeds of the Company's
March 1995 initial public offering of Common Stock.
Income taxes of $4.0 million for fiscal 1996 were down from $4.3 million in
fiscal 1995, consistent with the reduced pretax earnings. The effective tax rate
was essentially unchanged at 39% for both periods.
COMPARISON OF FISCAL YEARS ENDED JULY 31 1995 AND 1994
Net sales increased 18.9% to $95.4 million in fiscal 1995 from $80.2 million
in fiscal 1994. This increase was the result of a 14% increase in unit volume,
primarily in products for instrumentation, computers and communications
07
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
equipment, due to the Company's marketing efforts and favorable trends in the
industry. In addition, price levels increased approximately 5% due to a shift in
product mix toward higher technology products.
Gross profit as a percent of net sales increased to 20.1% in fiscal 1995
from 15.9% in fiscal 1994. This increase was primarily due to the shift in
product mix toward higher technology products which have greater profit margins,
and the leveraging of fixed costs over a larger sales base.
Selling, general and administrative expenses increased 14.3% to $7.4 million
in fiscal 1995 from $6.5 million in fiscal 1994. This increase was due to
greater profit sharing expenses for the 1995 period resulting from higher
profitability and increased marketing and sales expenses.
Income from operations increased 87.0% to $11.8 million, or 12.4% of net
sales, in fiscal 1995 from $6.3 million, or 7.9% of net sales in fiscal 1994 as
a result of the above factors.
Interest expense decreased 30.4% to $0.9 million in fiscal 1995 from $1.3
million in fiscal 1994 due to the prepayment of approximately $9.0 million of
long-term debt from the proceeds of the Company's March 1995 initial public
offering of Common Stock.
Income taxes increased 113% to $4.3 million in fiscal 1995 from $2.0 million
in fiscal 1994. The increase was the result of a 116% increase in income before
income taxes. The effective tax rate was approximately 39% in both periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations primarily through cash
generated from operations, although such funds have been supplemented by
borrowings under a line of credit and term notes as needed. The Company's
principal uses of cash historically have been to pay operating expenses, make
capital expenditures and service debt.
Cash generated from operations totalled $9.5 million, $11.4 million and $6.1
million in fiscal years 1996, 1995 and 1994, respectively.
On October 31, 1995, the Company completed the renegotiation of both the
outstanding $15 million long term note payable and the $3 million long term line
of credit agreements. The new term note is a $5.0 million note payable over 5
years. The note payable is a fully amortizing obligation payable in 60 equal
monthly installments of principal in the amount of $83,333, plus accrued
interest at the rate of LIBOR (London Interbank Offered Rate) plus 2.75
percentage points (8.17% per annum at September 30, 1996) or prime. The
long-term line of credit agreement expires in October 1997 and provides for
maximum borrowings of $10 million or 75 percent of eligible accounts receivable.
The line of credit bears interest at LIBOR plus 2.5 percentage pints or prime
and at July 31, 1996, there were no amounts outstanding under the line. The long
term debt agreements are collateralized by substantially all available assets of
the Company.
The Company's borrowing agreements contain covenants which place various
restrictions on financial ratios, capital expenditures, minimum levels of
income, transactions with related parties, and the payment of dividends. In
addition, the borrowing agreements contain an event of default provision whereby
all outstanding amounts would be due and payable should there be any material
change in management or a change in control of the Company.
08
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Capital expenditures totalled $8.7 million, $11.7 million and $3.7 million in
fiscal years 1996, 1995 and 1994, respectively. The capital expenditures during
fiscal 1996 completed the Company's $12 million 1995 program to expand its
manufacturing capacity. The balance of capital expenditures made in fiscal 1996
and expenditures during fiscal 1994 resulted from routine replacements. These
capital expenditures were financed through cash generated from operations.
The Company believes that funds generated from operations and borrowing
availability under the renegotiated line of credit agreement will be sufficient
to satisfy the Company's operation expenses and capital expenditures through
fiscal 1997.
SEASONALITY
Historically, the Company's sales have not been subject to significant
seasonal fluctuations.
INFLATION
The impact of inflation on the Company's operating results has been moderate
in recent years, reflecting generally lower rates of inflation in the economy
and relative stability in the Company's cost of sales. While inflation has not
had, and the Company does not expect that it will have, a material impact upon
operating results, there is no assurance that the Company's business will not be
affected by inflation in the future.
The previous discussion should be read in conjunction with, and is qualified
in its entirety by, the Company's Financial Statements and the Notes thereto
included elsewhere herein. Historical results are not necessarily indicative of
trends in operation results for any future period.
Except for the historical information contained herein, the discussion in
this Annual Report contains or may contain forward-looking statements that
involve risks and uncertainties that could cause actual results to differ from
the forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in the Company's
1996 Report on Form 10-K and this Management's Discussion and Analysis of
Financial Condition and Results of Operations. The forward-looking statements
should be considered in light of these risks and uncertainties.
09
<PAGE> 10
[GRAPHIC 2]
REDUCED WEIGHT
REDUCED WAIT
Notebook computers are essential tools for the modern "Road Warrior."
Equipped with PCMCIA option cards for fax/modem, networking and wireless
communication capabilities, these portable offices provide a business advantage
through real time access to corporate data bases. These products require dense,
but
<PAGE> 11
BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 31, 1996 1995
- ----------------------------------------------------------------------------------------------------
(In thousands, except share data)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,851 $ 2,038
Accounts receivable, less allowance of $167 in 1996 and $143 in 1995 15,114 14,098
Inventories 4,796 5,116
Refundable income taxes 240 --
Prepaid expenses and other 259 624
Deferred income taxes 714 264
- ----------------------------------------------------------------------------------------------------
Total current assets 24,974 22,140
Property, plant, and equipment:
Land 2,899 2,764
Buildings and improvements 18,353 15,396
Machinery and equipment 53,065 50,031
------- -------
74,317 68,191
Accumulated depreciation 40,200 35,943
------- -------
34,117 32,248
Other assets 495 94
- ----------------------------------------------------------------------------------------------------
Total assets $59,586 $54,482
- ----------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,193 $ 8,706
Accrued vacation expense 720 602
Other accrued expenses 1,332 1,608
Income taxes -- 386
Current portion of long-term debt 1,000 2,143
------- -------
Total current liabilities 10,245 13,445
Long-term debt, less current portion 3,333 1,357
Deferred income taxes 1,976 1,944
Commitments and contingency
Shareholders' equity:
Preferred stock, $.01 par value:
Authorized shares--1,000,000
Issued and outstanding shares--none
Common stock, $.01 par value:
Authorized shares--20,000,000
Issued and outstanding shares--7,194,000 in 1996 and 7,130,000 in 1995 72 71
Additional paid-in capital 10,077 10,065
Retained earnings 33,883 27,600
------- -------
Total shareholders' equity 44,032 37,736
- ----------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $59,586 $54,482
- ----------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
11
<PAGE> 12
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED JULY 31, 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
(In thousands except earnings per share)
<S> <C> <C> <C>
Net sales $108,362 $ 95,372 $ 80,218
Cost of products sold 89,502 76,174 67,442
------------------------------------
Gross profit 18,860 19,198 12,776
Selling, general and administrative expenses 7,991 7,381 6,456
------------------------------------
Income from operations 10,869 11,817 6,320
Other expense:
Interest 470 878 1,261
Other 123 25 --
------------------------------------
Income before income taxes 10,276 10,914 5,059
Income taxes 3,993 4,260 2,000
- ----------------------------------------------------------------------------------------------------------
Net income $ 6,283 $ 6,654 $ 3,059
Earnings per share $ .85 $ .99 $ .48
- ----------------------------------------------------------------------------------------------------------
Weighted average common and common equivalent shares outstanding 7,430 6,747 6,317
</TABLE>
See accompanying notes.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------ PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
- --------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance at July 31, 1993 5,986 $ 60 $ 364 $ 17,949 $ 18,373
Shares issued in connection with options exercised158 1 237 -- 238
Shares repurchased and canceled (11) -- (20) (15) (35)
Net income -- -- -- 3,059 3,059
- --------------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1994 6,133 61 581 20,993 21,635
Cash proceeds from issuance of common stock,
net share of issuance costs 1,000 10 9,396 -- 9,406
Shares issued in connection with options exercised 10 -- 98 -- 98
Shares repurchased and canceled (13) -- (10) (47) (57)
Net income -- -- -- 6,654 6,654
- --------------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1995 7,130 71 10,065 27,600 37,736
Shares issued in connection with options exercised 64 1 199 -- 200
Share issuance costs -- -- (187) -- (187)
Net income -- -- -- 6,283 6,283
- --------------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1996 7,194 $ 72 $ 10,077 $ 33,883 $ 44,032
</TABLE>
See accompanying notes.
12
<PAGE> 13
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JULY 31, 1996 1995 1994
- --------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 6,283 $ 6,654 $ 3,059
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 6,572 5,612 4,759
(Gain) loss on sale of property, plant, and equipment 139 70 --
Deferred income taxes (418) 101 290
Provision for doubtful accounts 424 24 24
Changes in operating assets and liabilities:
Accounts receivable (1,040) (1,327) (2,409)
Inventories 320 (1,129) 943
Refundable income taxes (240) -- --
Prepaid expenses and other 365 (417) 44
Other assets (801) 77 (76)
Accounts payable (1,513) 1,135 719
Accrued expenses (158) 418 (1,459)
Income taxes (386) 164 227
--------------------------------------
Net cash provided by operating activities 9,547 11,382 6,121
INVESTING ACTIVITIES
Purchases of property, plant, and equipment (8,682) (11,676) (3,707)
Proceeds from disposal of property, plant, and equipment 102 31 35
--------------------------------------
Net cash used in investing activities (8,580) (11,645) (3,672)
FINANCING ACTIVITIES
Borrowings (payments) under line of credit agreement, net -- -- (7,404)
Principal payments on long-term debt (4,167) (11,143) (6,903)
Borrowings under long-term debt and line of credit 5,000 -- 15,000
Proceeds from issuance of common stock, net of issuance cost 13 9,504 238
Payments to repurchase common stock -- (57) (35)
--------------------------------------
Net cash provided (used) by financing activities 846 (1,696) 896
--------------------------------------
Net increase (decrease) in cash and cash equivalents 1,813 (1,959) 3,345
Cash and cash equivalents at beginning of year 2,038 3,997 652
- --------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 3,851 $ 2,038 $ 3,997
</TABLE>
See accompanying notes.
13
<PAGE> 14
[GRAPHIC 3]
DESKTOP COMPUTING
A new generation of powerful microprocessors is fueling this expanding
market. High performance personal computers and workstations offer enhanced 3-D
graphics, video, and faster data processing. The computer serves as a link to
local and wide area networks that provide access to vast amounts of information,
educational and entertainment applications. High-end disk drives and computer
require more advanced interconnection products.
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS
1 ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Company is in one line of business as a manufacturer of complex
multilayer, surface mount circuit boards used in sophisticated electronic
equipment in the computer, communications, instrumentation and industrial
controls industries. The Company sells its products primarily to leading
original equipment manufacturers and to contract assemblers in the United States
and abroad.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consists of checking accounts and funds invested in
overnight repurchase agreements and is stated at cost, which approximates market
value. The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
INVENTORIES
Inventories are carried at the lower of cost or market using the first-in,
first-out (FIFO) method.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment is stated at cost. Depreciation is computed
using the double declining balance and the straight-line methods based on the
estimated useful lives of the related assets ranging from five to forty years.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments" requires that the Company disclose estimated
fair values of financial instruments. Cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities are carried at amounts that
reasonably approximate their fair values.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes."
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense for the years
ended July 31, 1996, July 31, 1995, and July 31, 1994 were $54,000, $55,000, and
$35,000, respectively.
REVENUE RECOGNITION
Sales are recorded at the time individual items are shipped.
EARNINGS PER SHARE AND SUPPLEMENTAL EARNINGS PER SHARE
Earnings per share is computed using the weighted average number of shares of
common stock and common stock equivalents outstanding during the year. In
accordance with the accounting rules of the Securities and Exchange Commission,
options granted by the Company for the twelve month period prior to the
Company's initial public offering have been included in the calculation of
common and common equivalent shares as if they were outstanding for all periods
presented. Dilutive common equivalent shares subsequent to the initial public
offering are computed using the treasury stock method. Fully diluted earnings
per share are not presented since such amounts would not have a material
dilutive effect.
15
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Supplemental earnings per share--assuming the proceeds from the issuance of
922,000 common shares at the public offering of $10.50, net of issuance costs,
were used to repay $9.0 million of the Company's indebtedness as of August 1,
1994, earnings per share would have been reduced from $0.99 to $0.94 in 1995.
STOCK BASED COMPENSATION
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company accounts for stock option grants in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees, and, accordingly,
recognizes no compensation expense for the stock option grants.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the FASB issued Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undisclosed cash
flows estimated to be generated by those assets are less than the asset's
carrying amount. Statement 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company will adopt Statement 121
in the first quarter of 1997 and, based on current circumstances, does not
believe the effect of adoption will be material.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
2 INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
JULY 31, 1996 1995
- --------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Raw materials $ 649 $ 754
Work-in-process 2,487 3,201
Finished goods 1,660 1,161
- --------------------------------------------------------------------------------
$4,796 $5,116
</TABLE>
3 LONG-TERM DEBT
On October 31, 1995, the Company entered into a $5,000,000 long-term note
payable and $10,000,000 long-term line of credit agreement to a bank. The
long-term note payable is due in monthly installments of $83,333 plus interest.
The long-term note payable bears interest at LIBOR plus 2 .75 percent, and can
be converted by the Company, at any time to prime. The long-term line of credit
agreement expires in October 1997 and provides for maximum borrowings of the
lesser of $10,000,000 or 75 percent of eligible accounts receivable. The
long-term line of credit bears interest at LIBOR plus 2.5 percent, or prime, and
at July 31, 1996 there were no amounts outstanding. The above long-term debt
agreements are collateralized by substantially all available assets of the
Company. The Company estimates that the fair market value of the above long-term
debt approximates its recorded value since the interest rates vary with the
applicable index.
16
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company's borrowing agreements contain covenants which place various
restrictions on financial ratios, levels of indebtedness, minimum levels of
income, transactions with related parties, and prohibits the payment of
dividends. In addition the above borrowing agreements contain an event of
default provision whereby all outstanding amounts would be due and payable
should there be a change in ownership control and/or a material change in
management as judged by the lender.
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
JULY 31, 1996 1995
- ---------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
$15,000,000 long-term note payable to a bank,
paid in full during 1996 $ -- $3,500
$5,000,000 long-term note payable to a bank,
collateralized by available assets, payable in monthly
installments of $83,333, plus interest at LIBOR
plus 2.75 percent (8.235 percent at July 31, 1996) 4,333 --
------------------
4,333 3,500
Less current portion 1,000 2,143
- ---------------------------------------------------------------------------------------------
$3,333 $1,357
</TABLE>
Maturities of long-term debt for the five years succeeding July 31, 1996 are
as follows: 1997 - $1,000,000, 1998 - $1,000,000, 1999 - $1,000,000, 2000 -
$1,000,000, and 2001 - $333,000. Interest payments approximated interest expense
during the years ended July 31, 1996, 1995 and 1994.
4 STOCK OPTIONS
During 1987, the Company's stockholders adopted a new stock option plan (the
"1987 Plan") for employees (including officers) and nonemployee directors. The
1987 Plan provides for the issuance of options at fair value to purchase a
maximum of 750,000 shares of common stock. The Company has 398,360 options
outstanding at July 31, 1996.
All options are exercisable cumulatively, beginning on the third anniversary
of the date of grant. Generally, after three years from the date of grant, the
optionee may purchase 40 percent of the shares granted; an additional 20 percent
after four years; an additional 20 percent after five years; and the final 20
percent after six years. However, with respect to 200,000 options granted on
August 25, 1994, the options become exercisable at the rate of 15 percent a
year.
17
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Information regarding stock options outstanding under the 1987 Plan is as
follows:
<TABLE>
<CAPTION>
SHARES EXERCISE PRICE
- --------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at August 1, 1993 520,000 .67 - 7.00
Granted 11,000 2.50
Canceled (187,000) .67 - 7.00
Exercised (158,000) .67 - 1.83
--------------------------
Outstanding at July 31, 1994 186,000 2.50 - 7.00
Granted 225,000 3.25 - 4.00
Canceled (25,000) 2.50 - 4.00
Exercised (9,600) 2.50 - 7.00
--------------------------
Outstanding at July 31, 1995 376,400 2.50 - 4.00
Granted 110,000 14.50
Canceled (24,000) 2.50 -14.50
Exercised (64,040) 2.50 - 4.00
--------------------------
Outstanding at July 31, 1996 398,360 2.50 -14.50
- --------------------------------------------------------------------------------
Exercisable at July 31, 1996 78,564
</TABLE>
5 INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
JULY 31, 1996 1995
- ----------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation $1,970 $1,939
Other, net 52 152
---------------------------------
Total deferred tax liabilities 2,022 2,091
Deferred tax assets:
Receivables allowances 227 57
Reserves 116
Accrued vacation 227 162
Accrued expenses 80 65
Unicap and other 110 127
---------------------------------
Total deferred tax assets 760 411
- ----------------------------------------------------------------------------------------------------
Net deferred taxes $1,262 $1,680
</TABLE>
18
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Significant components of the federal and state income tax expense are:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31, 1996 1995 1994
- --------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Current:
Federal expense $ 3,486 $ 3,287 $ 1,300
State expense 925 872 410
----------------------------------------
Total current 4,411 4,159 1,710
Deferred:
Federal (347) 84 241
State (71) 17 49
----------------------------------------
Total deferred (418) 101 290
- --------------------------------------------------------------------------------
$ 3,993 $ 4,260 $ 2,000
</TABLE>
Total income tax payments, net of any refunds received, during the years ended
1996, 1995 and 1994, were approximately $5,037,000, $3,962,000, and $1,480,000,
respectively.
A reconciliation of the Company's effective income tax rate to the federal
statutory rate follows:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31, 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory rate 34% 34% 34%
State tax net of federal benefit 7 7 7
Other (2) (2) (1)
- --------------------------------------------------------------------------------
39% 39% 40%
</TABLE>
6 SIGNIFICANT CUSTOMERS AND EXPORT SALES
The percentages of total sales to significant customers were as follows:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31, 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Customer A 4% 9% 13%
Customer B 11 15 17
Customer C 21 15 16
</TABLE>
The amount of total export sales by geographic area was as follows:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31, 1996 1995 1994
- --------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Canada $ 3,800 $ 3,500 $ 600
Singapore 6,900 10,800 13,000
United Kingdom and others 9,600 10,100 9,100
- --------------------------------------------------------------------------------
Total export sales $20,300 $24,400 $22,700
</TABLE>
19
<PAGE> 20
[GRAPHIC 4]
GLOBAL REACH,
LOCAL SERVICE
With a worldwide customer base, Continental Circuits has developed the
ability to provide rapid on-site support to customers wherever they are located.
In addition to regular visits by the Phoenix-based team, regional offices are
staffed by local Continental sales engineers.
GLOBAL RESPONSIBILITY
As a recognized leader in water conservation, pollution prevention and
recycling, Continental is an active member of industry and governmental
committees for environmental quality.
<PAGE> 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company performs ongoing credit risk evaluations of its customers'
financial condition and generally does not require collateral. The Company's
significant customers are major, well-known businesses in the computer equipment
industry. Credit losses have been provided for in the financial statements and
have been within management's expectations. During 1996 the Company provided an
allowance of $400,000 against potentially uncollectible amounts from a customer
in reorganization. The balance due of $440,000 has been transferred to other
assets.
7 COMMITMENTS AND CONTINGENCY
The Company leases certain equipment and a building under noncancelable
operating leases that expire in various years through 1998. Total rental expense
for all operating leases was approximately $357,000, $122,000, and $298,000
during the years ended July 31, 1996, 1995 and 1994, respectively. Future
minimum payments under noncancelable operating leases with initial terms of one
year or more consisted of $54,000 in 1997 and $19,000 in 1998.
The Company is a party to certain litigation in the normal course of
business. Management does not anticipate any material adverse impact from the
resolution of such matters.
8 BENEFIT PLANS
During 1993, the Company's Board of Directors elected to establish the
Continental Circuits Corp. 401(k) Retirement Plan (Plan) covering all employees
who reside in the United States, have completed six months of service, and have
attained age 21. Under the terms of the Plan, employees may contribute up to 15
percent of their annual compensation, subject to Internal Revenue Service
limitations. The Company will match 25 percent of employee contributions up to 6
percent of the employee's annual compensation. Additional contributions to the
Plan can be made at the discretion of the Board of Directors. Company
contributions to the Plan during the years ended July 31, 1996, 1995, and 1994,
were approximately $198,000, $164,000, $130,000, respectively.
During 1996, the Company adopted the Continental Circuits Corp. Employee
Stock Purchase Plan. All employees who are regularly scheduled to work at least
20 hours per week and have completed at least six (6) months of continuous
service with the Company are eligible to participate in the plan. Eligible
employees are entitled to purchase shares of common stock through payroll
deductions of up to 10 percent of their compensation. The price paid for the
common stock is equal to 85 percent of the fair market value of the Company's
common stock on the last business day of the quarterly investment period. At the
Company's option, common stock can either be purchased on the open market or
through new shares issued. Total shares reserved for issuance are 200,000, with
12,100 purchased through July 1996 at a market price of either $11.875 or $15.50
per share.
9 SUBSEQUENT EVENT
Subsequent to July 31, 1996, a letter of intent was signed by the Company to
acquire all the outstanding stock of Sigma Circuits, Inc. in exchange for 0.70
shares of Company stock for each share of Sigma Circuits common stock. There is
no assurance that the acquisition will take place or that the terms will be the
same as those included in the letter of intent.
21
<PAGE> 22
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND SHAREHOLDERS
CONTINENTAL CIRCUITS CORP.
We have audited the balance sheets of Continental Circuits Corp. as of July
31, 1996 and 1995, and the related statements of income, shareholders' equity,
and cash flows for each of the three years in the period ended July 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Continental Circuits Corp. at
July 31, 1996 and 1995, and the results of its operations and its cash flows for
each of the three years in the period ended July 31, 1996 in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Phoenix, Arizona
August 16, 1996, except for
note 9 as to which the date is
September 30, 1996
22
<PAGE> 23
CORPORATE INFORMATION
BOARD OF DIRECTORS
Frederick G. McNamee, III
Chairman of the Board, President and
Chief Executive Officer
Angelo A. DeCaro (4)
President, Chief Executive Officer, and Director,
XeTel Corporation
Michael O. Flatt (3)
President, Michael O. Flatt, Ltd
Albert A. Irato (2)
President and Chief Executive Officer
Hypercom, Inc.
Michael F. Jarko (1)
Retired; Former Principal of Jarko Associates
John Nance (4)
Retired; former manager of Large Systems
Business Planning for Bull-HN Worldwide
David C. Wetmore (2)
Managing Director, The Updata Group
1. Chairman of the Compensation Committee
2. Member of the Compensation Committee
3. Chairman of the Audit Committee
4. Member of the Audit Committee
Annual Meeting of Shareholders
Friday, December 13, 1996 8:00 a.m.
The Buttes
2000 West Court Way
Tempe, AZ 85282
FORM 10-K
A COPY OF CONTINENTAL CIRCUITS CORP.'S
FORM 10-K ON FILE WITH THE SECURITIES
AND EXCHANGE COMMISSION (EXCLUDING
EXHIBITS) WILL BE FURNISHED WITHOUT
CHARGE UPON WRITTEN REQUEST TO:
Joseph G. Andersen
Vice President of Finance and
Chief Financial Officer
Continental Circuits Corp.
3502 East Roeser Road
Phoenix, AZ 85040
Visit Continental Circuits' web site at:
http://www.contcirc.com
OFFICERS
Frederick G. McNamee, III
Chairman of the Board, President and
Chief Executive Officer
Joseph G. Andersen
Vice President of Finance, Chief Financial
Officer, Secretary and Treasurer
John W. Maddux
Vice President-Quality and Engineering
Mark R. Hollinger
Vice President-Operations
Lee A. Small
Vice President-Sales and Marketing
Robert A. Kosciusko
Vice President-Human Resources
CORPORATE DATA
CORPORATE OFFICES
Continental Circuits Corp.
3502 East Roeser Road
Phoenix, AZ 85040
602.268.3461
LEGAL COUNSEL
Quarles & Brady
Phoenix, Arizona
INDEPENDENT AUDITORS
Ernst & Young LLP
Phoenix, Arizona
STOCK REGISTRAR & TRANSFER AGENT
Harris Trust and Savings Bank
Attn: Shareholder Services
P.O. Box 755
Chicago, IL 60690
312.461.2288
INVESTOR RELATIONS
Silverman Heller Associates
1100 Glendon Avenue
Suite 1801
Los Angeles, CA 90024
310.208.2550
SECURITIES INFORMATION
Continental Circuits Corp.'s common stock has traded on The Nasdaq National
Market under the symbol CCIR since the Company's initial public offering on
March 15, 1995. The high and low transaction prices for the Company's stock, as
reported on The Nasdaq National Market, for the quarters indicated are set forth
in the following table.
<TABLE>
<CAPTION>
FISCAL 1995 HIGH LOW
- --------------------------------------------------------------------------------
<S> <C> <C>
Third Quarter (March 15-April 30) $12 1/2 $9 3/4
Fourth Quarter (May 1-July 31) $17 1/2 $10 1/2
FISCAL 1996 HIGH LOW
- --------------------------------------------------------------------------------
First Quarter (August 1-October 31) $17 1/4 $13
Second Quarter (November 1-January 31) $17 1/2 $13 3/16
Third Quarter (February1-April 30) $16 1/4 $10 1/4
Fourth Quarter (May 1-July 31) $14 1/8 $ 9
</TABLE>
As of September 30, 1996 there were approximately 131 shareholders of record for
Continental Circuits' common stock.
The Company does not currently pay a cash dividend on its common stock and
intends to retain earnings, if any, for use in the operation and expansion of
its business.
23
<PAGE> 24
CONTINENTAL
[LOGO] CIRCUITS
CORP
3502 EAST ROESER ROAD
PHOENIX, ARIZONA 85040
PHONE 602.268.3461
FAX 602.268.0208
HTTP//:WWW.CONTCIRC.COM
<PAGE> 1
Exhibit 23.1
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Continental Circuits Corp. of our report dated August 16, 1996, except for
Note 9 as to which the date is September 30, 1996, included in the 1996 Annual
Report to Shareholders of Continental Circuits Corp.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-96658) pertaining to the Continental Circuits Corp. 1987 Stock
Option Plan of our report dated August 16, 1996, except for Note 9 as to which
the date is September 30, 1996, with respect to the financial statements
incorporated herein by reference.
ERNST & YOUNG LLP
Phoenix, Arizona
October 28, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S ANNUAL REPORT TO STOCKHOLDERS FOR THE FISCAL YEAR ENDED JULY 31,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH ANNUAL REPORT.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1996
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<PERIOD-END> JUL-31-1996
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<SECURITIES> 0
<RECEIVABLES> 15281
<ALLOWANCES> 167
<INVENTORY> 4796
<CURRENT-ASSETS> 24974
<PP&E> 74317
<DEPRECIATION> 40200
<TOTAL-ASSETS> 59586
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<BONDS> 3333
0
0
<COMMON> 72
<OTHER-SE> 43960
<TOTAL-LIABILITY-AND-EQUITY> 59586
<SALES> 108362
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