1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended May 3, 1997 ---------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 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 -------------- No Change - ------------------------------------------------------------------------------ (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of shares outstanding of each of the issuer's classes of common stock was 7,234,826 shares common stock, par value $.01, as of June 2, 1997. 2 CONTINENTAL CIRCUITS CORP. PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONTINENTAL CIRCUITS CORP. CONDENSED STATEMENTS OF INCOME (Unaudited) (In thousands, except per share data) Three months ended Nine months ended May 3, April 30, May 3, April 30, ------- -------- ------- -------- 1997 1996 1997 1996 ------- -------- ------- -------- Net sales $31,862 $ 26,464 $88,547 $ 83,832 Cost of products sold 25,714 22,058 72,766 67,478 ------- -------- ------- -------- Gross profit 6,148 4,406 15,781 16,354 Selling, general and administrative expenses 2,295 2,002 6,134 6,099 ------- -------- ------- -------- Income from operations 3,853 2,404 9,647 10,255 Other (income) expense: Interest expense 83 153 206 446 Other 39 (29) 364 (4) ------- -------- ------- -------- Income before income taxes 3,731 2,280 9,077 9,813 Income taxes 1,352 900 3,448 3,880 ======= ======== ======= ======== Net income $ 2,379 $ 1,380 $ 5,629 $ 5,933 ======= ======== ======= ======== Net income per share $ 0.32 $ 0.19 $ 0.76 $ 0.80 ======= ======== ======= ======== Number of shares used in computing net income per share 7,457 7,413 7,450 7,428 ======= ======== ======= ======== See notes to condensed financial statements. 3 CONTINENTAL CIRCUITS CORP. CONDENSED BALANCE SHEETS (In thousands, except share data) May 3, July 31, 1997 1996 ------- ------- Assets (Unaudited) Current assets: Cash and cash equivalents $ 1,068 $ 3,851 Accounts receivable - net 16,686 15,114 Inventories 7,204 4,796 Prepaid expenses and other current assets 2,225 1,213 ------- ------- Total current assets 27,183 24,974 Property, plant, and equipment - net 44,520 34,117 Other assets 81 495 ------- ------- Total assets $71,784 $59,586 ======= ======= Liabilities and shareholders' equity Current liabilities: Accounts payable $12,510 $ 7,193 Accrued expenses and taxes 3,027 2,052 Current portion of long-term debt 1,000 1,000 ------- ------- Total current liabilities 16,537 10,245 Long-term debt, less current portion 3,583 3,333 Deferred income taxes 1,976 1,976 Shareholders' equity: Common stock 72 72 Additional paid-in capital 10,296 10,077 Retained earnings 39,320 33,883 ------- ------- Total shareholders' equity 49,688 44,032 ------- ------- Total liabilities and shareholders' equity $71,784 $59,586 ======= ======= See notes to condensed financial statements. 4 CONTINENTAL CIRCUITS CORP. STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Nine months ended May 3, April 30, ------------------------ 1997 1996 -------- ------- Operating activities Net income $ 5,629 $ 5,933 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 4,453 3,782 Deferred income taxes -- -- Provision for doubtful accounts (credit) (66) 318 Changes in operating assets and liabilities: Accounts receivable (1,506) (1,342) Inventories (2,158) (550) Prepaid expenses, income taxes and other (1,012) (825) Other assets 222 64 Accounts payable 5,317 (1,083) Accrued expenses and taxes 505 (178) -------- ------- Net cash provided by operating activities 11,384 6,119 Investing activities Purchases of property, plant, and equipment (12,036) (6,613) Purchase of a business (2,600) -- -------- ------- Net cash (used) by investing activities (14,636) (6,613) Financing activities Principal payments on long-term debt (750) (774) Borrowings under long-term debt and line of credit 1,000 1,857 Proceeds from issuance of common stock, net of issuance costs 219 140 -------- ------- Net cash provided by financing activities 469 1,223 -------- ------- Net increase in cash and cash equivalents (2,783) 729 Cash and cash equivalents at beginning of period 3,851 2,038 -------- ------- Cash and cash equivalents at end of period $ 1,068 $ 2,767 ======== ======= See notes to condensed financial statements 5 CONTINENTAL CIRCUITS CORP. Notes to Condensed Financial Statements (Unaudited) May 3, 1997 Note 1. Basis of Presentation The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period and nine month period ended May 3, 1997 are not necessarily indicative of the results that may be expected for the year ended July 31, 1997. Note 2. Inventories The components of inventory consist of the following: May 3, July 31, 1997 1996 ------ ------ (In thousands) Raw material $ 784 $ 649 Work in process 4,635 2,487 Finished goods 1,785 1,660 ------ ------ $7,204 $4,796 ====== ====== 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Comparison of Three Months ended May 3, 1997 and April 30, 1996 Net sales increased 20.4% to $31.9 million for the three months ended May 3, 1997 from $26.5 million for the three months ended April 30, 1996. The combination of the effects of production levels, pricing per layer, and a continuing mix shift toward higher layer count, more complex products resulted in the increase. The Company's principal customers are OEM manufacturers and contract manufacturers of electronic devices that are subject to rapid technological change, product obsolescence and economic cycles. Gross profit as a percent of net sales increased to 19.3% for the three months ended May 3, 1997 from 16.6% for the three months ended April 30, 1996. The improvement was attributable to labor productivity increases, cost recovery efforts and improved fixed cost utilization due to the increased production volume. Selling, general and administrative expenses increased 14.6% to $2.3 million for the three months ended May 3, 1997 from $2.0 million for the three months ended April 30, 1996. This increase was due to additional marketing and sales costs associated with higher shipment levels, and administrative expenses supporting the recruiting and training of additional personnel. Income from operations increased 60.3% to $3.9 million, or 12.1% of net sales, for the three months ended May 3, 1997 from $2.4 million, or 9.1% of net sales, for the three months ended April 30, 1996 as a result of the above factors. Net interest expense decreased 45.8% to $83,000 for the three months ended May 3, 1997 from $153,000 for the three months ended April 30, 1996. This decrease was a result of higher interest earned during the three months ended May 3, 1997 than during the three months ended April 30, 1996, and $1.0 million of long-term debt financed at a favorable interest rate. Income before income taxes was unfavorably impacted by an other expense increase of $40,000 as a result of a final charge of legal and other professional costs associated with the abandoned acquisition of Sigma Circuits, Inc. Income taxes increased 50.2 % to $1.4 million for the three months ended May 3, 1997 from $900,000 for the three months ended April 30, 1996 as a result of higher income before taxes. Taxes for the three month period ending May 3, 1997 reflect a year-to-date adjustment for tax benefits associated with the Company's foreign sales corporation. This adjustment reduces the effective tax rate by one percent to approximately 38% for the 1997 period. Comparison of Nine Months ended May 3, 1997 and April 30, 1996 Net sales increased 5.6% to $88.6 million for the nine months ended May 3, 1997 versus $83.8 million for the nine months ended April 30, 1996 due to shipments of higher layer count, more complex, higher priced products. Gross profit as a percent of net sales decreased to 17.8% for the nine months ended May 3, 1997 from 19.5% for the nine months ended April 30, 1996. Gross profit was negatively impacted during the 1997 period by the cancellation of a high margin customer program and lower productivity and training costs associated with direct labor increases to support business growth. 7 Selling, general and administrative expenses remained flat at $6.1 million during both reporting periods, with no significant spending variations. Income from operations decreased 5.9% to $9.6 million for the nine months ended May 3, 1997 from $10.3 million for the nine months ended April 30, 1996 as a result of the above factors. Net interest expense decreased 53.8% to $206,000 for the nine months ended May 3, 1997 from $446,000 for the nine months ended April 30, 1996. This decrease was a result of higher interest earned during the nine months ended May 3, 1997 due to a larger average cash balance than during the nine months ended April 30, 1996, and $1.0 million of long-term debt financed at a favorable interest rate. Other expense increased $340,000 as a result of the one-time charge of legal and other professional costs associated with the abandoned acquisition of Sigma Circuits, Inc. Income taxes decreased 11.1% to $3.4 million for the nine months ended May 3, 1997 compared to $3.9 million for the nine months ended April 30, 1996 as a result of lower income before taxes and an adjustment reducing the effective tax rate by one percent to approximately 38% to reflect benefits associated with the Company's foreign sales corporation. 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 have been to pay operating expenses, make capital expenditures and service debt. Cash generated from operations totaled $11.4 million and $6.1 million for the nine months ended May 3, 1997 and April 30, 1996 respectively. Major cash uses include inventory growth of $2.2 million, and accounts receivable of $1.5 million for the nine months ended May 3, 1997, accounts receivable growth of $1.3 million and accounts payable of $1.1 million for the nine months ended April 30, 1996. The 1997 inventory increase was in work in process to support the sales growth. Accounts receivable growth for the nine month period ended May 3, 1997 was consistent with increasing sales. The accounts receivables growth during the period ending April 30, 1996 was primarily a single customer which represented less than 1.5% of overall sales. Capital expenditures totaled $14.6 million and $6.6 million for the nine months ended May 3, 1997 and April 30, 1996 respectively. Capital expenditures for the nine months ended May 3, 1997 were for purchase and initial fit up of two additional buildings in Phoenix, routine replacements and purchase of a division of Radian International, LLC for $2.6 million in cash. Capital expenditures for the nine months ended April 30, 1996 resulted from routine replacements and completion of the fiscal 1995 planned capacity expansion. Purchases were financed using both cash generated from operations and the Company's credit facility. The Company believes that funds generated from operations and borrowing availability under the existing line of credit agreement will be sufficient for routine equipment replacement through fiscal 1997. The Company is evaluating the need to increase its credit facility to finance its growth strategy over 1997 and 1998. The Company believes it will be successful in negotiating the increased credit facilities. FORWARD-LOOKING STATEMENTS The statements contained in this document regarding management's anticipation of sufficiency of funds and negotiation of credit facilities constitute "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995. Management's anticipation is based upon assumptions regarding the 8 market in which the Company operates, the cost and amount of equipment required for replacements and growth, and the availability and qualification for credit. Any of these assumptions could prove inaccurate, and therefore there can be no assurance that the forward-looking information will prove to be accurate. 9 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits See Exhibit Index following the signature page, which is incorporated herein by this reference. 10 Signatures Pursuant to the requirements 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. (Registrant) Date: June 17, 1997 By: /s/ Frederick G. McNamee, III ----------------------------- Frederick G. McNamee, III Chairman of the Board, President and Chief Executive Officer Date: June 17, 1997 By: /s/ Joseph G. Andersen ----------------------------- Joseph G. Andersen Vice-President of Finance, Chief Financial Officer, Secretary and Treasurer 11 EXHIBIT INDEX TO CONTINENTAL CIRCUITS CORP. FORM 10-Q QUARTERLY REPORT FOR THE QUARTER ENDED MAY 3, 1997 (Commission File 0-25554) Exhibit Description - ------- ----------- 3.1 Certificate of Incorporation of Registrant, as amended (1) 3.2 Bylaws of Registrant, as amended (1) 10 Purchase Agreement dated April 7, 1997 between Radian International, LLC and CCIR of Texas Corp. 11 Statement re: computation of net income per share 27 Financial Data Schedule - ---------------------- (1) Incorporated by reference to identically numbered exhibit in Registrant's registration statement on Form S-1 (SEC File No. 33-88368), as amended, initially filed on January 9, 1995.