-----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, Nj442GYNoUF8BRqe4LWCL4DN7segqLQoSD/Wds/yXeTErow+1orBMa9To9Ld7PoC ot23q4CUxhMho5Htb+MWgw== 0000950153-96-000795.txt : 19961030 0000950153-96-000795.hdr.sgml : 19961030 ACCESSION NUMBER: 0000950153-96-000795 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19960731 FILED AS OF DATE: 19961029 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONTINENTAL CIRCUITS CORP CENTRAL INDEX KEY: 0000822973 STANDARD INDUSTRIAL CLASSIFICATION: PRINTED CIRCUIT BOARDS [3672] IRS NUMBER: 860267198 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-25554 FILM NUMBER: 96649321 BUSINESS ADDRESS: STREET 1: 3502 E ROESER RD CITY: PHOENIX STATE: AZ ZIP: 85040 BUSINESS PHONE: 6022683461 MAIL ADDRESS: STREET 1: 3502 E ROESER ROAD CITY: PHOENIX STATE: AZ ZIP: 85040 10-K405 1 FORM 10-K OF CONTINENTAL CIRCUITS F.T.Y.E. 7/31/96 1 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. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 86-0267198 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3502 East Roeser Road, Phoenix, Arizona 85040 - --------------------------------------- ----- (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 ---------------------------- (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
Part of Form 10-K Into Which Portions of Document Document are Incorporated -------- ------------------------- 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
2 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 2 3 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. 3 4 CUSTOMERS AND MARKETS Set forth below is a description of the Company's markets, representative customers (listed alphabetically) and end product applications:
MARKETS CUSTOMERS APPLICATIONS - ---------------------------------------------------------------------------------------------------------------------------- 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* - ---------------------------------------------------------------------------------------------------------------------------- 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. - ---------------------------------------------------------------------------------------------------------------------------- Peripherals Apple Computer, Inc. Printers, office equipment, modems, Global Village* option cards International Business Machines Corporation QMS, Inc. Xerox, Corp. - ---------------------------------------------------------------------------------------------------------------------------- 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. - ---------------------------------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------------------------------
* Serviced by the Company solely through one or more contract manufacturers. 4 5 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.
FISCAL YEAR ENDED JULY 31, ----------------------- MARKETS 1994 1995 1996 - ------- ---- ---- ---- 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%
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 5 6 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 6 7 (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. 7 8 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. 8 9 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 9 10 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. 10 11 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. 11 12 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. 12 13 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 14 CONTINENTAL CIRCUITS CORP. Exhibit Index to Report on Form 10-K for the fiscal year ended July 31, 1996
Filed ----- Exhibit Description Incorporated herein by reference Herewith - ------- ----------- -------------------------------- -------- No. to: - --- --- 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
- -------------------- * Management contract or compensatory plan or arrangement required to be filed pursuant to Item 14(c) of Form 10-K. 15
Filed ----- Exhibit Description Incorporated herein by reference Herewith - ------- ----------- -------------------------------- -------- No. to: - --- --- 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
- -------------------- * Management contract or compensatory plan or arrangement required to be filed pursuant to Item 14(c) of Form 10-K. 16
Filed ----- Exhibit Description Incorporated herein by reference Herewith - ------- ----------- -------------------------------- -------- No. to: - --- --- 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
- -------------------- * Management contract or compensatory plan or arrangement required to be filed pursuant to Item 14(c) of Form 10-K. EX-10.18 2 TERMINATION AGREEMENT WITH THOMAS E. LINNEN 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. 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. 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 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 EX-10.19 3 EMPLOYMENT LETTER AGREEMENT WITH JOSEPH ANDERSEN 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. EX-11.1 4 COMPUTATION OF PER SHARE EARNINGS 1 Exhibit 11.1 STATEMENT RE: COMPUTATION OF NET INCOME PER SHARE CONTINENTAL CIRCUITS CORP.
YEAR ENDED JULY 31, ------------------------------------- 1994 1995 1996 ------ ------ ------ (IN THOUSANDS, EXCEPT PER SHARE DATA) 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 ====== ====== ======
(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. EX-13.1 5 ANNUAL REPORT TO SHAREHOLDERS 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. 2 FINANCIAL HIGHLIGHTS
FOR YEARS ENDED JULY 31, 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------------------------------------- (in thousands, except per share data) Statement of Income Data 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
[LINE CHARTS 1, 2, AND 3] 02 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 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 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. 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.
FISCAL YEAR ENDED JULY 31, 1996 1995 1994 - -------------------------------------------------------------------------------- MARKETS 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%
06 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.
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 - --------------------------------------------------------------------------------------------------------- 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
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 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 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 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 11 BALANCE SHEETS
JULY 31, 1996 1995 - ---------------------------------------------------------------------------------------------------- (In thousands, except share data) 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 - ----------------------------------------------------------------------------------------------------
See accompanying notes 11 12 STATEMENTS OF INCOME
YEAR ENDED JULY 31, 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------- (In thousands except earnings per share) 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
See accompanying notes. STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK ADDITIONAL ------------------ PAID-IN RETAINED SHARES AMOUNT CAPITAL EARNINGS TOTAL - -------------------------------------------------------------------------------------------------------------------------------- (In thousands) 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
See accompanying notes. 12 13 STATEMENTS OF CASH FLOWS
YEAR ENDED JULY 31, 1996 1995 1994 - -------------------------------------------------------------------------------------------------------- (In thousands) 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
See accompanying notes. 13 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. 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 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:
JULY 31, 1996 1995 - -------------------------------------------------------------------------------- (In thousands) Raw materials $ 649 $ 754 Work-in-process 2,487 3,201 Finished goods 1,660 1,161 - -------------------------------------------------------------------------------- $4,796 $5,116
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 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:
JULY 31, 1996 1995 - --------------------------------------------------------------------------------------------- (In thousands) $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
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 18 NOTES TO FINANCIAL STATEMENTS (CONTINUED) Information regarding stock options outstanding under the 1987 Plan is as follows:
SHARES EXERCISE PRICE - -------------------------------------------------------------------------------- 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
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:
JULY 31, 1996 1995 - ---------------------------------------------------------------------------------------------------- (In thousands) 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
18 19 NOTES TO FINANCIAL STATEMENTS (CONTINUED) Significant components of the federal and state income tax expense are:
YEAR ENDED JULY 31, 1996 1995 1994 - -------------------------------------------------------------------------------- (In thousands) 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
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:
YEAR ENDED JULY 31, 1996 1995 1994 - -------------------------------------------------------------------------------- Federal statutory rate 34% 34% 34% State tax net of federal benefit 7 7 7 Other (2) (2) (1) - -------------------------------------------------------------------------------- 39% 39% 40%
6 SIGNIFICANT CUSTOMERS AND EXPORT SALES The percentages of total sales to significant customers were as follows:
YEAR ENDED JULY 31, 1996 1995 1994 - -------------------------------------------------------------------------------- Customer A 4% 9% 13% Customer B 11 15 17 Customer C 21 15 16
The amount of total export sales by geographic area was as follows:
YEAR ENDED JULY 31, 1996 1995 1994 - -------------------------------------------------------------------------------- (In thousands) 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
19 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. 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 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 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.
FISCAL 1995 HIGH LOW - -------------------------------------------------------------------------------- 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
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 24 CONTINENTAL [LOGO] CIRCUITS CORP 3502 EAST ROESER ROAD PHOENIX, ARIZONA 85040 PHONE 602.268.3461 FAX 602.268.0208 HTTP//:WWW.CONTCIRC.COM EX-23.1 6 CONSENT OF ERNST & YOUNG LLP 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 EX-27.1 7 FINANCIAL DATA SCHEDULE
5 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. 1,000 U.S. DOLLARS YEAR JUL-31-1996 AUG-01-1995 JUL-31-1996 1 3851 0 15281 167 4796 24974 74317 40200 59586 10245 3333 0 0 72 43960 59586 108362 108362 89502 89502 7991 0 593 10276 3993 6283 0 0 0 6283 .85 .85
-----END PRIVACY-ENHANCED MESSAGE-----