-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IiNpDCSq6CH5WWoqOzxU8HpdmB05xdl2QV7ObcCyz6DQ0UEEm2FQkDaUn9LAExrW ckquyXFmluqNwfkwk+sd5g== 0000746549-97-000001.txt : 19970221 0000746549-97-000001.hdr.sgml : 19970221 ACCESSION NUMBER: 0000746549-97-000001 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970211 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIGMA CIRCUITS INC CENTRAL INDEX KEY: 0000746549 STANDARD INDUSTRIAL CLASSIFICATION: PRINTED CIRCUIT BOARDS [3672] IRS NUMBER: 770107167 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-24170 FILM NUMBER: 97524840 BUSINESS ADDRESS: STREET 1: 393 MATHEW ST CITY: SANTA CLARA STATE: CA ZIP: 95050 BUSINESS PHONE: 4087279169 MAIL ADDRESS: STREET 1: 393 MATHEW STREET CITY: SANTA CLARA STATE: CA ZIP: 95050 10-Q 1 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 _____________ FORM 10-Q (Mark One) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended December 31, 1996 or Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from _______ to ______ Commission file number: 0-24170 SIGMA CIRCUITS, INC. (Exact name of registrant as specified in its charter) Delaware 77-0107167 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 393 Mathew Street Santa Clara, California 95050 (408) 727-9169 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of shares outstanding of the Registrant's common stock, $.001 par value, was 4,062,889 at February 6, 1997. 2 Sigma Circuits, Inc. INDEX Description Page Number Cover Page 1 Index 2 Part I: Financial Information Item 1: Condensed Financial Statements Condensed Balance Sheets as of December 31, 1996 and June 30, 1996 3 Condensed Statements of Operations for the Three and Six Month Periods Ended December 31, 1996 and 1995 4 Condensed Statements of Cash Flows for the Six Month Period Ended December 31, 1996 and 1995 5 Notes to Condensed Financial Statements 6 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Part II: Other Information Item 1: Legal Proceedings 16 Item 6: Exhibits and Reports on Form 8-K 16 Signatures 17 3 Part I: Financial Information Item 1: Financial Statements SIGMA CIRCUITS, INC. CONDENSED BALANCE SHEETS (Unaudited) (in thousands) December 31, June 30, 1996 1996 ASSETS Current Assets: Cash and Equivalents $ 495 $ -- Accounts Receivable (Net of Allowances of $700 and $598, Respectively) 13,539 11,987 Income Taxes Receivable -- 1,393 Other Receivables 156 46 Inventories 3,589 4,753 Prepaid Expenses 434 268 Deferred Income Taxes 2,940 2,660 Total Current Assets 21,153 21,107 Property and Equipment, Net 17,952 18,899 Goodwill (Net of Accumulated Amortization of $2,573 and $2,322, Respectively) 6,364 6,615 Deposits and Other Assets 262 339 Total $45,731 $46,960 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Cash Overdraft $ -- $ 297 Current Portion of Long-Term Debt 6,850 7,681 Accounts Payable 6,376 4,418 Accrued Liabilities 3,993 5,947 Total Current Liabilities 17,219 18,343 Long-Term Debt 13,888 14,345 Deferred Income Taxes 1,349 1,354 Stockholders' Equity: Preferred Stock, $0.001 Par Value: Shares Authorized: 5,000 Shares Outstanding None -- -- Common Stock, $0.001 Par Value: Shares Authorized: 20,000 Shares Outstanding: 4,063 and 3,998, Respectively 10,836 10,604 Deferred Stock Compensation (145) (180) Retained Earnings 2,584 2,494 Total Stockholders' Equity 13,275 12,918 Total $45,731 $46,960
See notes to condensed financial statements. 4 Item 1: Financial Statements (continued) SIGMA CIRCUITS, INC. CONDENSED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except per share data) Three Months Ended Six Months Ended December 31, December 31, 1996 1995 1996 1995 Net Sales $19,916 $26,711 $38,718 $42,787 Cost Of Sales 16,380 20,829 32,864 33,342 Gross Profit 3,536 5,882 5,854 9,445 Selling, General and Administrative Expenses 2,643 3,280 4,609 5,660 Amortization of Goodwill 126 157 251 207 Facility Closing Costs (250) -- (250) -- Operating Income 1,017 2,445 1,244 3,578 Interest Expense, Net 514 530 1,052 674 Income Before Income Taxes 503 1,915 192 2,904 Provision For Income Taxes 230 767 102 1,190 Net Income $ 273 $ 1,148 $ 90 $ 1,714 Net Income Per Share $ .06 $ .24 $ .02 $ .38 Number of Shares Used in Computing Per Share Information 4,509 4,766 4,544 4,458
See notes to condensed financial statements. 5 Item 1: Financial Statements (continued) SIGMA CIRCUITS, INC. CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Six Months Ended December 31, 1996 1995 CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 90 $ 1,714 Reconciliation to Cash Provided by (Used for) Operating Activities: Depreciation and Amortization of Property and Equipment 2,218 1,839 Amortization of Goodwill 251 207 Amortization of Deferred Stock Compensation 35 54 Amortization of Non-Compete Agreement 75 -- (Gain)/Loss on Disposal of Assets (168) 282 Deferred Income Taxes (285) (573) Facility Closing Costs (250) -- Changes in Assets and Liabilities: Accounts Receivable (1,552) (1,568) Other Receivables (110) 278 Inventories 1,164 (947) Prepaid Expenses (166) (143) Accounts Payable 1,958 2,089 Accrued Liabilities (1,377) 259 Income Taxes Receivable/Payable 1,393 (337) Cash Provided by Operating Activities 3,276 3,154 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of Property and Equipment (1,731) (3,002) Proceeds from Sales of Property and Equipment 301 14 Deposits and Other Assets 2 (51) Purchase of Citation Companies, Net of Cash Acquired -- (9,092) Cash Used for Investing Activities (1,428) (12,131) CASH FLOWS FROM FINANCING ACTIVITIES: Line of Credit, Net 868 298 Proceeds from Long-Term Borrowings -- 10,926 Repayment of Long-Term Borrowings (2,156) (1,031) Common Stock Transactions 232 105 Cash Overdraft (297) -- Cash Provided by (Used for) Financing Activities (1,353) 10,298 INCREASE IN CASH AND EQUIVALENTS 495 1,321 CASH AND EQUIVALENTS: Beginning of Period -- 106 End of Period $ 495 $ 1,427
See notes to condensed financial statements. 6 Item 1: Financial Statements (continued) SIGMA CIRCUITS, INC. CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Six Months Ended December 31, 1996 1995 NON-CASH INVESTING AND FINANCING ACTIVITIES: Equipment Acquired Under Capital Lease Obligations $ 542 PURCHASE OF THE CITATION COMPANIES: Cash Paid, Net of Cash Acquired $ 9,092 Stock Issued to Seller 2,500 Debt Issued to Seller 4,092 Liabilities Assumed 5,278 Assets Acquired (including Goodwill of $6,433) $20,962
See notes to condensed financial statements. 7 Item 1: Financial Statements (continued) SIGMA CIRCUITS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS Basis of Presentation While the quarterly financial information contained in this filing is unaudited, the financial statements presented reflect all adjustments (consisting only of normal recurring adjustments) which the Company considers necessary for a fair presentation of the results of operations for the interim periods covered and of the financial condition of the Company at the dates of the interim balance sheets. The results for interim periods are not necessarily indicative of the results of the entire year. The information included in this report should be read in conjunction with the Company's audited financial statements and notes thereto included in the Company's fiscal year 1996 Annual Report on Form 10 -K. Per Share Information Net income per share is based on the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares include common stock options and warrants (using the treasury stock method) and are excluded in loss periods as they are anti-dilutive. Inventories Inventories consist of (in thousands): December 31, June 30, 1996 1996 Raw Materials $1,692 $2,641 Work in Process 1,666 1,880 Finished Goods 231 232 Inventories $3,589 $4,753
Long-Term Debt and Capital Lease Obligations As of June 30, 1996, the Company was in non-compliance with the profitability and working capital convenants of its revolving line of credit agreement with Comerica Bank (the "Bank"). The Company obtained a waiver with respect to such convenants from the Bank as of that date, and an amendment of its working capital limits for the remaining term of the agreement. As of December 31, 1996, the Company was in non-compliance with the total liabilities to tangible effective net worth ratio covenant of its revolving line of credit agreement with the Bank. The Company obtained a waiver with respect to such covenants from the Bank as of that date. The Company believes it will remain in compliance with the agreement's terms during the remainder of fiscal year 1997; however, in the event that a covenant is violated and not cured to the Bank's satisfaction, the Bank would be entitled to accelerate the indebtedness owed by the Company. Cash paid for interest was approximately $835,000 and $694,000 for the six months ended December 31, 1996 and 1995, respectively. 8 Item 1: Financial Statements (continued) Provision for Income Taxes The Company incurred a combined federal and state effective income tax rate of 45.7% and 53.1% for the three and six month periods ended December 31, 1996, respectively, compared to an effective income tax rate of 40.1% and 41.0%, respectively, for the same periods of fiscal year 1996. Cash received from income taxes, net of payments, was approximately $1,006,000 for the six months ended December 31, 1996. Cash paid for income taxes was approximately $2,076,000 for the six months ended December 31, 1995. Business Developments On September 27, 1996, the Company signed a Letter of Intent whereby Continental Circuits Corp. would acquire all of the outstanding shares of the Company's common stock in exchange for Continental Circuits' stock. On December 19, 1996, the Company announced that its letter of intent to merge with Continental Circuits Corp. had expired and the two companies had mutually agreed to discontinue merger discussions. 9 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations This discussion contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences, include, but are not limited to, those discussed herein, as well as those discussed in the Company's fiscal year 1996 Annual Report on Form 10-K. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The Company undertakes no obligation to publicly release the results of any revision to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Overview Beginning in fiscal year 1994, the Company adopted a strategy to service more of the electronic interconnect needs of its strategic customers by broadening its product offerings and increasing its capacity. The Company believed that its reputation as a high quality, reliable quick-turn supplier of PCBs would generate demand among its customers for additional product offerings. The Company also believed that the customer relationships established by providing quick-turn services during the prototype stage of the product life cycle would give it an advantage in securing the larger volume pre-production and production orders of such products. Assisted by the proceeds of a private equity financing and its initial public offering, the Company established its Systems Integration and Flexible Circuits divisions during the latter part of fiscal year 1994 in order to broaden its product offerings. The Company completed the acquisition of Stockton, California-based Citation Circuits, Inc. and its related companies (the "Citation Acquisition") during the first quarter of fiscal year 1996 in order to obtain the manufacturing capacity required to service its customers' higher volume production jobs in a lower cost operating environment. During the first half of fiscal year 1996, net sales and gross profit increased significantly as a result of the additional capacity obtained in the Citation Acquisition and the products offered by its two new divisions. During the second half of fiscal year 1996, the electronic interconnect industry experienced a softening period which adversely impacted the Company, along with many of its competitors, as evidenced by a decline in the demand for its products and services. As a result, the Company announced the closure of its Costa Mesa PCB division and the redeployment of certain assets and personnel into its existing Northern California PCB operations and recorded a one-time charge of approximately $3.8 million for facility closing costs during the fourth quarter of fiscal year 1996. The Company's operating results have been and are expected to continue to be affected by a number of factors, including the timing and volume of orders from and shipments to customers relative to the Company's manufacturing capacity, level of product and price competition, product mix, the number of working days in a particular quarter, economic conditions in the electronic interconnect industry and general economic factors. The lead times, volume levels and complexity of customer orders have also affected overall gross margins. Results of Operations The following table sets forth, for the periods indicated, certain statement of operations data expressed as a percentage of net sales. The table and the discussion below should be read in conjunction with the condensed financial statements and the notes thereto appearing elsewhere in this report. 10 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Three Months Six Months Ended Ended December 31, December 31, 1996 1995 1996 1995 Net Sales 100.0% 100.0% 100.0% 100.0% Cost of Sales 82.2 78.0 84.9 77.9 Gross Margin 17.8 22.0 15.1 22.1 Selling, General and Administrative Expenses 13.8 12.3 11.9 13.2 Amortization of Goodwill 0.6 0.5 0.6 0.5 Facility Closing Costs (1.2) -- (0.6) -- Operating Income 5.1 9.2 3.2 8.4 Interest Expense, Net 2.6 2.0 2.7 1.6 Income Before Income Taxes 2.5 7.2 0.5 6.8 Provision for Income Taxes 1.1 2.9 0.3 2.8 Net Income 1.4% 4.3% 0.2% 4.0%
Net Sales Net sales for the quarter ended December 31, 1996 were approximately $19.9 million, a decrease of $6.8 million or 25.4% from the same quarter in the prior fiscal year. The decrease is primarily attributable to a slowdown in demand in the PCB business in calendar year 1996 after a particularly strong quarter ended December 31, 1995. Net sales for the six months ended December 31, 1996 were approximately $38.7 million, a decrease of $4.1 million or 9.5% from the same period in the prior fiscal year. The decrease is primarily attributable to a slow down in demand in the PCB business and, to some extent, divisional consolidations. The decrease in net sales from the closure of the Costa Mesa PCB division and the Stockton backplane division was partially offset by an overall increase in net sales from the Systems Integration and Flexible Circuits divisions. Gross Profit Gross profit for the quarter ended December 31, 1996 was approximately $3.5 million, a decrease of $2.3 million or 39.9% from the same quarter in the prior fiscal year. Gross margins for the quarter ended December 31, 1996 and 1995 were 17.8% and 22.0%, respectively. Gross margins, as a percentage of net sales, in the PCB divisions improved to 22.7% in the second quarter of fiscal year 1997 as compared to 17.2% for the first quarter of fiscal year 1997, but were still below the 23.8% achieved on record PCB sales during the comparable quarter of the prior fiscal year. Gross profits and margins for the second quarter of fiscal year 1997 were also negatively impacted by net sales in the Systems Integration division. Gross profit for the six months ended December 31, 1996 was approximately $5.9 million, a decrease of $3.6 million or 38.0% from the same quarter in the prior fiscal year. Gross margins for the six months ended December 31, 1996 and 1995 were 15.1% and 22.1%, respectively. Gross margin for the six month period ended December 31, 1996 was adversely affected by the residual effects of the consolidation in the first quarter of fiscal year 1997, the general decline in the PCB divisions, and the write-off of obsolete inventory at the Systems Integration division. 11 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Selling, General and Administrative Expenses Selling, general and administrative expenses for the quarter ended December 31, 1996 were approximately $2.6 million, a decrease of $637,000 or 19.4% from the same quarter in the prior fiscal year. The overall decrease is primarily attributable to ongoing cost reduction efforts of the Company. Selling, general and administrative expenses increased from 12.3% to 13.3%, as a percentage of net sales, as the overall reduction in applicable expenses was not offset by the reduction in net sales. Selling, general and administrative expenses for the six months ended December 31, 1996 were approximately $4.6 million, a decrease of $1.1 million or 18.6% from the same period in the prior fiscal year. Selling, general and administrative expenses decreased from 13.2% to 11.9%, as a percentage of net sales, as a result of the overall reduction in applicable expenses. Facility Closing Costs Facility closing costs for the quarter and six months ended December 31, 1996 were approximately $250,000 and are attributable to a reduction of the associated reserve recorded in the fourth quarter of fiscal year 1996 pertaining to the closure of the Company's Costa Mesa PCB division. Interest Expense, Net Net interest expense for the quarter ended December 31, 1996 was approximately $514,000, a decrease of $16,000 or 3.0% from the same quarter in the prior fiscal year. The overall decrease is primarily attributable to repayment of the Company's various debt and capital lease obligations. Net interest expense for the six months ended December 31, 1996 was approximately $1.1 million, an increase of $378,000 or 56.1% from the same period in the prior fiscal year. The overall increase is attributable to the debt incurred in connection with the Citation Acquisition completed at the end of the first quarter of fiscal year 1996. Approximately $10.7 million of debt, incurred in connection with the Citation Acquisition, bears interest at rates ranging from 9.3% to 12.0%. Provision for Income Taxes The Company's effective income tax rate was 45.7% and 40.1% for the quarters ended December 31, 1996 and 1995, respectively. The Company's effective income tax rate was 53.1% and 41.0% for the six months ended December 31, 1996 and 1995, respectively. These rates differ from statutory rates primarily due to state taxes, net of federal benefit, amortization of goodwill and deferred stock compensation, as well as other amounts which are not deductible in determining taxable income or loss. Additionally, the amount of pre-tax income or loss can have a material effect on the Company's effective income tax rate. Financial Condition The Company has historically financed its operations primarily through bank borrowings, issuances of debt and equity securities and cash generated from operations. 12 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Liquidity The Company generated cash from operating activities of approximately $3.3 million and $3.2 million in the six months ended December 31, 1996 and 1995, respectively. Cash generated in the six months ended December 31, 1996 was primarily attributable to net income of $2.7 million adjusted for non-cash depreciation and amortization charges of approximately $2.6 million, as well as other working capital changes. Cash generated in the six months ended December 31, 1995 was primarily attributable to net income of approximately $3.8 million adjusted for non-cash depreciation and amortization charges of approximately $2.1 million, as well as other working capital changes. During the six months ended Decmber 31, 1996, the Company has paid approximately $522,000, $234,000, $188,000, and $59,000 for severance and termination benefits, operating leases, environmental clean up and remediation, and other payments, respectively, in connection with the closure of the Costa Mesa PCB division. The Company used cash in investing activities of approximately $1.4 million and $12.2 million in the six months ended December 31, 1996 and 1995, respectively. Cash used in the six months ended December 31, 1996 was primarily attributable to to approximately $1.7 million used for the purchase of property and equipment. Cash used in the six months ended December 31, 1995 was primarily attributable to approximately $9.1 million in expenditures in connection with the Citation Acquisition and approximately $3.0 million used for the purchase of property and equipment. The Company used cash for and generated cash from financing activities of approximately $1.4 million and $10.3 million in the six months ended December 31, 1996 and 1995, respectively. Cash used in the six months ended December 31, 1996 was primarily attributable to approximately $1.3 million in repayments of debt and capital lease obligations, net of borrowings under the long-term revolving line of credit. Cash generated in the six months ended December 31, 1995 was primarily attributable to $10.9 million in long-term borrowings of which $10.0 million was used to finance the Citation Acquisition. As of December 31, 1996 the Company had total debt outstanding of approximately $20.7 million, consisting primarily of $6.6 million outstanding under the Company's long-term revolving line of credit, $10.7 million of debt issued in connection with the Citation Acquisition and $3.4 million of real estate and other equipment obligations. The Company has an $8.0 million long-term revolving line of credit with Comerica Bank ( the "Bank"). The Company's credit agreement limits borrowings under the line of credit to the maximum of $8.0 million or 75% of the Company's eligible trade accounts receivable as contractually defined. On October 14, 1996, the current line of credit was amended to expire on October 2, 1998 and bears interest at the Bank's base rate plus 0.25%.. Additionally, the Company was granted a temporary increase in the amount of $1.2 million, thus making $9.2 million the total maximum line of credit. The additional borrowings are limited to the maximum of $1.2 million or 29% of the Company's combined raw materials and finished goods valued at the lower of cost or market. This temporary increase expires on April 2, 1997, at which time the maximum borrowing amount returns to $8.0 million. In connection with the Citation Acquisition, the Company borrowed $8.5 million and $1.5 million from the Bank under two variable rate installment notes, which have terms of five and two years, respectively, and bear interest at the Bank's base rate plus 1.0%. Under both notes, principal and interest payments are due monthly. Additionally, in connection with the Citation Acquisition, the Company issued two 12.0% subordinated notes to the seller of the Citation Companies in the amounts of approximately $2.6 million and $1.5 million. These notes and accrued interest are payable in June 1997. As of June 30, 1996, the Company was in non-compliance with the profitability and working capital convenants of its revolving line of credit agreement with the Bank. The Company obtained a waiver with respect to such convenants from the Bank as of that date, and an amendment of its working capital limits for the 13 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) remaining term of the agreement. As of December 31, 1996, the Company was in non-compliance with the total liabilities to tangible effective net worth ratio covenant of its revolving line of credit agreement with the Bank. The Company obtained a waiver with respect to such covenants from the Bank as of that date. The Company believes it will remain in compliance with the agreements terms during the remainder of fiscal year 1997;however, in the event that a covenant is violated and not cured to the Bank's satisfaction, the Bank would be entitled to accelerate the indebtedness owed by the Company. The Company believes that its existing funds, borrowings available under its revolving line of credit and funds expected to be generated from operations will be sufficient to meet its working capital needs for the next twelve months. There can be no assurance, however, that events in the future will not require the Company to seek additional capital sooner or, if so required, that it will be available on terms acceptable to the Company. To the extent that cash generated from operations is not sufficient to meet the Company's projected capital expenditures or future working capital needs, the Company's business, financial condition and results of operations would be materially and adversely affected. Capital Resources During the six months ended December 31, 1996, the Company purchased approximately $1.7 million of property and equipment which was funded through cash generated from operations. Management expects the Company's level of future capital expenditures to remain at levels consistent with the Company's operational projections mitigated by the redeployment of selected capital equipment from the closed Costa Mesa PCB division. Excluding the financial impact of any acquisition or establishment of new facilities, the Company expects to incur capital expenditures of approximately $1.5 million in the remaining six months of fiscal year 1997. Inflation The Company recognizes that inflationary pressures may have an adverse effect on its operations through increased production costs. The Company attempts to minimize the effect of inflation through productivity improvements as well as price increases that assist in maintaining reasonable profit margins. Although the Company believes that the impact of inflation on its operating results has been moderate in recent years, there can be no assurance that, in the future, it could not have a material adverse effect on the Company's business, financial condition and results of operations. Seasonality The Company believes that its net sales have not historically been subject to significant seasonal fluctuations. Factors That May Affect Future Results Dependence on Electronics Industry The Company's principal customers are original equipment manufacturers (OEM) and contract manufacturers in the data communications, telecommunications, computer and computer peripherals, industrial and medical industries. These industry segments, and the electronics industry as a whole, are characterized by intense competition, relatively short product-life cycles and significant fluctuations in product demand. In addition, the electronics industry is generally subject to rapid technological change and product obsolescence. Discontinuance or modifications of products containing components 14 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) manufactured by the Company could adversely affect the Company's business, financial condition and results of operations. In addition, the electronics industry has in the past experienced, and is likely in the future to experience, recessionary periods. A recession or any other event leading to excess capacity in the electronics industry would likely result in intensified price competition and a decrease in unit volume, both of which would have a material adverse effect on the Company's business, financial condition and results of operations. Fluctuations in Quarterly Operating Results The Company's quarterly operating results have varied and may continue to fluctuate significantly. At times in the past, the Company's net sales and net income have decreased from the prior quarter. Operating results are affected by a number of factors, including timing and volume of orders from and shipments to customers relative to the Company's manufacturing capacity, level of product and price competition, product mix, the number of working days in a particular quarter and general economic factors. In recent years, the Company's gross margins have varied primarily as a result of capacity utilization, product mix, start-up costs in its two new divisions, lead times, volume levels and complexity of customer orders. There can be no assurance that the Company will be able to manage the utilization of manufacturing capacity or product mix in a manner that would maintain or improve gross margins or the Company's business, financial condition and results of operations. The timing and volume of orders placed by the Company's OEM customers vary due to customer attempts to manage inventory, changes in the OEM's manufacturing strategy and variation in demand for customer products. An interruption in manufacturing resulting from shortages of parts or equipment, fire, natural disaster, equipment failure or otherwise would have a material adverse effect on the Company's business, financial condition and results of operations. Due to all of the foregoing factors, it is likely that in some future quarter the Company's operating results will be below the expectations of public market analysts and investors. In such event, the price of the Company's common stock would likely be materially adversely affected. Customer Concentration The Company's growth has resulted, in part, from its ability to identify and attract customers in rapidly growing segments of the electronics industry. The Company has manufactured products for some of these customers for a relatively short period of time. There can be no assurance that the Company will continue to be able to identify, attract and retain customers with high growth rates or that the customers that they do attract and retain will continue to grow at their historical rates or at all. Although there can be no assurance that the Company's principal customers will continue to purchase products and services from the Company at current levels, if at all, the Company expects to continue to depend upon its principal customers for a significant portion of its net sales. The decrease in or loss of orders from one or more major customers could have a material adverse effect on the Company's business, financial condition and results of operations. Variability of Orders The Company does not obtain long term purchase commitments from its customers and a substantial portion of net sales in a given quarter depends on obtaining orders for products to be manufactured and shipped in the same quarter in which those orders are received. Customers may cancel orders and change or delay delivery schedules at any time. The timely replacement of canceled, delayed or reduced orders with new orders cannot be assured. Significant or numerous cancellations, reduction or delays in order by a customer or group of customers could have a material adverse effect on the Company's business, financial condition and results of operations. Because the Company operates with virtually no backlog, net sales for any quarter are substantially dependent on orders booked in that quarter and net 15 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) sales for any future quarter are not predictable with any significant degree of certainty. The Company's expense levels are relatively fixed and are based, in part, on expectations of future net sales. Consequently, if net sales levels are below expectations, the Company's business, financial condition and results of operations are likely to be adversely affected. Competition The electronic interconnect industry is characterized by intense competition. The Company faces significant competition in its quick-turn, PCB and flexible circuits product lines primarily from a number of regional privately-held manufacturers. As the Company increasingly expands its volume production of PCBs, backplane assemblies and flexible circuits, it will continue to face much larger competitors. Many of these competitors have significantly greater financial, technical and marketing resources, greater name recognition and a larger installed customer base than the Company. In addition, these competitors may have the ability to respond more quickly to new or emerging technologies and may adapt more quickly to changes in customer requirements and may devote greater resources to the development, promotion and sale of their products than the Company. The Company believes that when it competes in the standard lead-time volume production of its PCB, backplane and flexible circuits products, it will encounter greater price sensitivity from potential customers. From time to time the Company operates in the lower technology, higher volume segments of the PCB market, where the company may be at a competitive disadvantage when competing with manufacturers with lower cost structures, particularly those with offshore facilities where labor and other costs are generally lower. During periods of recession or economic slowdown in the electronics industry, the Company's competitive advantages in the areas of quick-turn manufacturing and responsive customer service may be of reduced importance to the Company's customers, who may become more price sensitive. Although capital barriers to entry are relatively high for manufacturing technologically complex electronic interconnect products, the basic interconnect technology is generally not protected by patents or copyrights , and companies with significant resources or international operations may enter the market. Consolidation of smaller competitors may also result in increased competition. Increased competition could result in price reductions, reduced margins or loss of market share, any of which could materially and adversely affect the Company's business, financial condition and results of operations. Management of Growth The Company has in the past experienced periods of rapid growth that have placed a significant strain on the Company's management, operational and financial resources. The Company's ability to manage growth effectively, particularly given the increasing scope of its operations, will require it to continue to implement and improve its management, operational, and financial information systems, as well as to develop the management skills of its managers and supervisors and to train, motivate and manage its employees. The Company's failure to effectively manage growth could have a material adverse effect on the Company's business, financial condition and results of operations. Competition for personnel is intense and there can be no assurance that the Company will be able to attract, assimilate or retain additional highly qualified employees in the future. The failure to hire and retain such personnel could have a material adverse effect on the Company's business, financial condition and results of operations. 16 Part II: Other Information Item 1. Legal Proceedings In connection with the Citation Acquisition on September 30, 1995, the Company assumed certain environmental contingent liabilities pertaining to operations prior to that date. As of the acquisition date, Citation had accrued $303,000 for the two known claims. The first contingent liability relates to allegations by the City of Stockton of violations of its City Code regarding discharge of waste water into the City's sewer system in excess of allowed limits during several months in 1992. As of December 31, 1996, no further action has taken place between the City of Stockton and the Company. The Company has established a reserve for this contingency and in the opinion of its management, any settlement would not likely result in a loss that would have a material adverse effect on the Company's business, financial condition and results of operations. The second contingent liability relates to the United States Environmental Protection Agency ("EPA") issuance of an administrative civil complaint regarding the timely submission of required federal forms under the Emergency Planning and Community Right-to-Know Act of 1986 ("EPCRA"). On April 15, 1996, the Company entered into a tentative "Consent Agreement and Consent Order" ("CACO") with the EPA pertaining to its complaint. In the CACO, the Company has certified that it has completed and submitted all required federal forms to the EPA under the EPCRA, and that it has complied with all other EPCRA requirements at all of its facilities. In addition, the Company will also purchase and test certain equipment to aid in its environmental regulatory requirements within twelve months of the effective date of the CACO. The minimum aggregate cost associated with the purchase, installation and testing of this equipment is $220,250 and if the actual aggregate cost is lower, the difference between the actual cost and such minimum threshold, will be remitted to the EPA. As of December 31, 1996, the Company had incurred approximately $146,000 of costs associated with the minimum threshold. In relation to the testing of the equipment, the Company is subject to additional filing requirements with the EPA pertaining to the functionality of the equipment. Further, the Company paid a civil penalty of $65,000 upon execution of and as required by the CACO in July 1996. Terms of the CACO constitute a full and final settlement of the complaint. Item 6: Exhibits and Reports on Form 8-K A. Exhibits See Index to Exhibits at page 18 of this filing and is incorporated by reference herein. B. Reports on Form 8-K One report on Form 8-K was filed during the quarter ended December 31, 1996. One report on Form 8-K was filed, pursuant to Item 5 of that Form on September 30, 1996 reporting on the pending acquisition of Continental Circuits Corp. No financial statements were filed as part of that report. 17 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Santa Clara, County of Santa Clara, State of California, on the 11th day of February, 1997. Sigma Circuits, Inc. (Registrant) By /s/ B. Kevin Kelly B. Kevin Kelly President, Chief Executive Officer and Director By /s/ Philip S. Bushnell Philip S. Bushnell Senior Vice President, Finance and Administration, Chief Financial Officer, Secretary and Director 17 Exhibit Number Description 3.1 Restated Certificate of Incorporation of the Registrant.(1) 3.2 Bylaws of the Registrant.(1) 4.1 Reference is made to Exhibits 3.1 and 3.2 4.2 Registration Agreement among the Registrant and certain other parties named therein, dated April 15, 1986.(1) 4.3 Series C Registration Rights Agreement among the Registrant and certain other parties named therein, dated September 30, 1993.(1) 4.5 Specimen stock certificate.(1) 10.1 Form of Indemnity Agreement entered into between the Registrant and its directors and officers, with related schedule.(1) 10.2 Registrant's 1988 Stock Option Plan, as amended to date.(1) 10.3 Form of Incentive Stock Option under the 1988 Stock Option Plan.(1) 10.4 Form of Nonstatutory Stock Option under the 1988 Stock Option Plan.(1) 10.5 Form of Notice of Exercise under the 1988 Stock Option Plan.(1) 10.6 Registrant's 1994 Non-Employee Directors' Stock Option Plan, as amended to date.(1) 10.7 Registrant's 1994 Employee Stock Purchase Plan, as amended to date.(1) 10.9 Form of Stock Warrant granted to Cruttenden & Company.(1) 10.10 Note Secured by Deed of Trust granted to Plaza Bank of Commerce, dated March 29, 1990.(1) 10.11 Promissory Notes granted Comerica Bank-California, dated June 1, 1993 and November 12, 1993.(1) 10.13 Master Lease between the Registrant and CIT Group/Equipment Financing, Inc., dated October 6, 1993, and Schedule 1 thereto.(1) 10.15 Lease Agreement between the Registrant and Anthony and Cydelle Drago, dated December 30, 1986, as amended to date.(1) 10.17 Equipment Lease between the Registrant and Copelco Leasing Corporation, dated January 9, 1993.(1) 10.19 Lease Agreement between the Registrant and Retail Control Systems, Inc., dated December 15, 1984, as amended to date.(1) 10.21 Lease Agreement between the Registrant and The Kontrabecki Group, dated May 3, 1994, and attachments thereto.(1) 10.22 Lease Agreement between the Registrant and The Kontrabecki Group, dated June 9, 1995, and attachments thereto.(2)
19 Exhibit Number Description 10.24 Lease Agreement Extension and Modification dated September 30, 1995, between the Registrant and Anthony and Cydelle Drago to Lease Agreement dated December 30, 1986, as amended.(2) 10.25 Consulting Agreement between the Registrant and Robert P. Cummins, dated July 1, 1995.(4) 10.26 Change-in-Control Severance Agreement between the Registrant and B. Kevin Kelly, dated October 26, 1995.(4) 10.27 Change-in-Control Severance Agreement between the Registrant and Philip S. Bushnell, dated October 26, 1995.(4) 10.28 Revolving Credit Loan & Security Agreement between the Registrant and Comerica Bank-California, with exhibits, dated September 29, 1995.(4) 10.29 Variable Rate Installment Notes granted to Comerica Bank- California, dated September 29, 1995.(4) 10.30 Subordinated Promissory Note granted to Citation Circuits, Inc., dated September 30, 1995.(4) 10.31 Convertible Subordinated Promissory Note granted to Citation Circuits, Inc., dated September 30, 1995.(4) 10.32 Lease Agreement between Registrant and Dockside, dated June 23, 1989.(4) 10.33 Asset Purchase Agreement between the Registrant, Citation Circuits, Inc., Citation Enterprises, Inc., Citron Inc. and Carl Brockl, dated September 8, 1995.(3) 11.1 Statements Regarding Calculation of Net Income Per Share.
____________________________________ (1) Incorporated by reference to the corresponding Exhibit previously filed as an Exhibit to the Company's Registration Statement on Form S-1, as amended, filed May 26, 1994 (File No. 33-76606). (2) Incorporated by reference to the corresponding Exhibit previously filed as an Exhibit to the Company's Form 10-K, as amended, filed September 28, 1995 (File No. 0-24170). (3) Incorporated by reference to the corresponding Exhibit previously filed as an Exhibit to the Company's Form 8-K, as amended, filed October 11, 1995 (File No. 0-24170). (4) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Company's Registration Statement on Form S-1, as amended, filed February 16, 1996 (File No. 333-1262). 20 EXHIBIT 11.1 SIGMA CIRCUITS, INC. STATEMENTS REGARDING CALCULATION OF NET INCOME PER SHARE (in thousands, except per share amounts) Three Months Ended Six Months Ended December 31, December 31, 1996 1995 1996 1995 Net Income $ 273 $1,148 $ 90 $1,714 Weighted Average Common Stock Outstanding 4,014 3,884 4,007 3,674 Common Stock Equivalents: Dilutive Effect of Stock Options 396 748 436 670 Dilutive Effect of Underwriter's Warrant 96 134 101 114 Number Of Shares Used in Computing Per Share Information 4,506 4,766 4,544 4,458 Net Income Per Share $ .06 $ .24 $ .02 $ .38
EX-27 2
5 3-MOS JUN-30-1997 DEC-31-1996 495 0 14,239 700 3,589 21,153 17,952 0 45,731 17,219 0 0 0 10,836 (145) 45,731 19,916 19,916 16,380 16,380 2,519 0 514 503 230 273 0 0 0 273 .06 .06
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