Item 1. Business.
GENERAL
Continental Circuits Corp. (the "Company" or "Continental") manufactures 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 1997, multilayer surface mount circuit boards comprised approximately 97% 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 $29.7 billion in 1996, of which the U.S. market comprised $7.7 billion. According to the IPC, in 1996 OEMs purchased approximately 87% 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 United States 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, IBM, Rockwell International/Allen-Bradley and Compaq Computer and contract manufacturers such as Solectron, SCI Systems, Jabil Circuit and Electronic Assembly. During fiscal years 1995, 1996 and 1997, exports to the foreign operations of U.S.-based customers, primarily in Singapore, Puerto Rico, Ireland and the United Kingdom, accounted for 31.2%, 27.3% and 26.2% of net sales respectively.
The Company was redomesticated in Delaware by merger in September 1987 and is the successor to an Arizona corporation of the same name which was formed in 1972. The Company's executive offices are located at 3502 East Roeser Road, Phoenix, Arizona and its telephone number is (602) 268-3461.
In April 1997, the Company acquired the assets and assumed certain liabilities of a division of Radian International LLC. Radian owned and operated an electronic panel business in Austin, Texas. The Company periodically discusses with third parties the possible acquisition of technology, product lines and businesses in the circuit board business and from time to time enters into letters of intent that provide the Company with an exclusivity period during which it considers possible acquisitions.
CUSTOMERS AND MARKETS
Set forth below is a description of the Company's markets, representative customers (listed alphabetically) and end product applications:
* Serviced by the Company solely through one or more contract manufacturers.
Markets
Set forth below is a table showing the percentage of the Company's total net sales attributable to the indicated markets for fiscal years 1995, 1996 and 1997, together with a brief description of each market.
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 market, associated Internet applications and a variety of other on-line services.
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.
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.
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.
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 introduced more quickly. Continental's sales to contract manufacturers during fiscal 1997 were 28% of net sales.
The Company's principal contract manufacturing customers include Solectron Corporation, SCI Systems, Jabil Circuit, Electronic Assembly, Elex, Digital Equipment, and XeTel.
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. Ten sales people operate out of the Phoenix office. Additional sales offices are maintained in Salem, New Hampshire; Huntsville, Alabama; Santa Clara, California; Austin, Texas; Houston, Texas; 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 Compaq Computer represented approximately 20% and 15% of total net sales, respectively, in fiscal 1997 and the Company's ten largest customers accounted for approximately 75% 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 31.2%, 27.3% and 26.2% of total net sales in fiscal years 1995, 1996 and 1997 respectively. Substantially all the Company's international sales are direct sales to the foreign operations of United States-based customers, primarily in Singapore, Puerto Rico, Ireland and the United Kingdom. The Company maintains sales and technical support offices in 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 1997 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 (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 a 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, 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.
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, 1997, the Company's backlog was approximately $19.5 million as compared to $16.3 million at July 31, 1996. The increase reflects the strength 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 1997. 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 Praegitzer Incorporated plus a limited number of companies in the Far East such as Compeq and Topan. 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.
EMPLOYEES
As of July 31, 1997, the Company had 1,339 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.
Item 2. Properties
The Company's operations are centralized in a complex of seven adjacent modern manufacturing facilities owned by the Company located at 3502 East Roeser Road in Phoenix, Arizona. The Company leases one additional building in Austin, Texas, located at 15508 Bratton Lane, Austin, Texas. The facilities consist of an aggregate of approximately 250,000 square feet of floor space, of which 220,000 square feet are in Phoenix and 30,000 square feet are in Austin. 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 one building, are subject to a security interest in favor of the Company's principal lender.
Item 3.
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.
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, 1997.
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:
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 previous 15 years with IBM in Austin, Texas in a variety of circuit board manufacturing positions. He 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 in Austin.
MR. ANDERSEN joined the Company on September 3, 1996 as Vice President -- Finance, Chief Financial Officer, Secretary and Treasurer. Mr. Andersen served as 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. BUCHANAN joined the Company as Vice President -- Sales and Marketing on July 28, 1997. Before joining the Company, Mr. Buchanan served as Vice President of Sales and Marketing for Hadco Corporation, a supplier of advanced electronic interconnect products and services based in New Hampshire, from January 1997 to July 1997. From April 1991 to January 1997, Mr. Buchanan was Vice President of Sales of Zycon Corp., a California based competitor of Hadco which was acquired by Hadco in January 1997. Mr. Buchanan began his career with Zycon in 1984 and held several sales and marketing positions.
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.
MR. LACH joined the Company as Vice President -- Manufacturing Operations on October 21, 1997. Before joining the Company, Mr. Lach served as Manager of Manufacturing for Via Systems, a manufacturer of printed circuit boards located in Richmond, Virginia, from December 1996 to October 1997. Mr. Lach joined AT&T Corp. in Richmond, Virginia in February 1995 and was employed by AT&T until the Richmond facility was spun off to Lucent Technologies in September 1995. Mr. Lach was then employed by Lucent from September 1995 until the Richmond facility was sold to Via Systems in December 1996. Prior to February 1995, Mr. Lach was Operations Manager of Hadco-Owego from June 1991 to February 1995, and held several positions with Parlex Nevada of Carson City, Nevada, including Plant Manager from June 1990 to May 1991 and Operations Manager from October 1986 to June 1990.
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.
PART II
Item 5.
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 1997 Annual Report to Shareholders.
Item 6.
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 1997 Annual Report to Shareholders.
Item 7.
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 1997 Annual Report to Shareholders.
Dependence on Electronics Industry. The Company's principal customers are OEMs and contract manufacturers. The Company's markets are computers, memory and storage devices, peripherals, communications and instrumentation and industrial controls. These markets in the electronics industry are subject to rapid technological change and product obsolescence. The electronics industry is also subject to economic cycles and has in the past experienced, and is likely to experience in the future, recessionary periods. A general recession or excess capacity in the electronics industry could have a material adverse effect on the Company's business, financial condition and results of operations.
The Company typically does not obtain long-term volume purchase contracts from its customers. The Company focuses on strategic business partnerships and on building long-term relationships to obtain repeat business. Nonetheless, customer orders may be cancelled or delayed and volume levels may decline. There is no assurance that the Company will be able to procure timely replacements of cancelled, delayed or reduced orders. See "Item 1 - Businsss - Customers and Markets."
Fluctuations in Operating Results. The Company's operating results are affected by a number of factors, including timing of orders from major customers, process yields, timing of expenditures in anticipation of future sales, economic conditions in the electronics industry and the mix of products, primarily variation in the average number of layers per circuit board. As a result, the Company's results of operations have varied and may continue to fluctuate significantly from period to period, including on a quarterly basis. Operating results can also be significantly influenced by development and introduction of new products.
The Company's customers generally require short delivery cycles, and a substantial portion of the Company's backlog is typically scheduled for delivery within 90 days. Quarterly sales and operating results therefore depend in large part on the volume and timing of bookings received during the quarter, which are difficult to forecast. Results of operations in any period should not be considered indicative of the results to be expected for any future period.
Customer Concentration. For fiscal 1997, the Company's two largest customers, Hewlett-Packard and Compaq Computer, accounted for approximately 20% and 15% of net sales, respectively, and the Company's ten largest customers accounted for approximately 75% of net sales in that year. Although there can be no assurance that the Company's principal customers will continue to purchase products from the Company at current levels, if at all, the Company expects to continue to depend on its principal customers for a significant portion of its net
sales. The loss of one or more major customers could have a material adverse effect on the Company's business, financial condition and results of operations.
Competition and Technological Change. The market for circuit boards in the United States is fragmented and very competitive. The Company competes primarily against other merchant manufacturers. Company's competitors in this market segment are primarily domestic merchant manufacturers. In addition, OEMs with captive circuit board manufacturing operations may seek orders in the open market to fill excess capacity, thereby increasing price competition. Although the Company generally does not pursue high volume, low margin circuit board business, it may be at a competitive disadvantage for such business with respect to price when compared to manufacturers with lower cost structures, particularly those with offshore facilities where labor, materials and other costs are lower.
The leading edge of circuit board manufacturing technology has continued to move toward smaller drilled holes, finer lines and spaces, and decreasing board thicknesses. While the Company believes itself to be a leader in the commercial volume production of these boards, technological change is rapid and continuous, and in the future, higher margin products will be the most demanding in terms of technological and manufacturing expertise. There is no assurance that the Company will be able to maintain its current technological position. In addition, the circuit board industry could in the future encounter competition from new technologies, including ceramic and/or deposited multichip modules and other technologies that may reduce the number of circuit boards required in electronic equipment. See "Item 1 - Business - Competition."
Manufacturing Capacity. The Company intends to expand its manufacturing capacity and improve its manufacturing technology; however, there can be no assurance that the Company will be able to use the expanded capacity for the production of higher margin, higher technology products, or increase its net sales or profits or maintain its manufacturing efficiencies at higher levels of operations. In addition, although the Company believes the concentration of its operations in Phoenix, Arizona has been an economic advantage to date, a local natural disaster or other business interruption represents a greater risk to the Company than it would if the Company operated multiple facilities in different geographic areas. See "Item 1 - Business - Facilities."
Management of Growth; Acquisitions. The Company has initiated significant expansion of its overall level of operations. To manage growth effectively, the Company must add manufacturing capacity while maintaining a high level of quality and manufacturing efficiency and expanding, training and managing its employee base. The Company's failure to add capacity and manage growth effectively could have a material adverse effect on the Company's results of operations.
The Company may from time to time pursue the acquisition of other companies, assets or product lines that complement or expand its existing business. Acquisitions involve a number of risks that could adversely affect the Company's operating results, including the diversion of management's attention, the assimilation of the operations and personnel of the acquired companies, the amortization of acquired intangible assets and the potential loss of key employees of the acquired companies. No assurance can be given that any acquisition by the Company will not materially and adversely affect the Company or that any such acquisition will enhance the Company's business.
Process Failure. The Company's business involves highly complex manufacturing processes that are subject to failure. In the past, process failures have occurred which have resulted in delays in product shipments. Although the Company attempts to utilize duplicate systems where practicable to reduce the risk of such failures, there can be no assurance that failures will not occur in the future. The loss of revenue and earnings to the Company from such a failure could have a materially adverse effect on its results of operations.
Borrowing Agreement Limitations. The Company is subject to various restrictions under its term loan and revolving credit facility, including a prohibition against the payment of cash dividends and a requirement that
the Company comply with certain financial covenants relating to current ratio and tangible equity. In addition, the facility is subject to acceleration in the event of a change in control of the Company.
Recent Management Changes. The Company's Vice President - Finance and Chief Financial Officer, Joseph G. Andersen joined the Company in September 1996, the Company's Vice President - Sales and Marketing, James Buchanan, joined the Company in July 1997, and the Company's Vice President Manufacturing Operations, Steven N. Lach, joined the Company in October 1997. The Company believes Messrs. Andersen, Buchanan and Lach are experienced managers capable of leading the Company's business efforts. However, there can be no assurance that Messrs. Andersen, Buchanan and Lach along with other members of senior management, will be successful in managing the Company's profitability or growth. In addition, the Company's future operating results depend in part upon its ability to retain other key members of management and attract and retain other qualified technical, sales and support personnel for its operations. There can be no assurance that the Company will be successful in attracting or retaining such personnel. The failure to attract or retain such persons could materially adversely effect the Company's business, financial condition and results of operations.
Intellectual Property. The Company's success depends in part on its proprietary techniques and manufacturing expertise, particularly in the area of complex multilayer, surface mount technology 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 industry.
International Sales. International sales accounted for, 31.2%, 27.3% and 26.2% of total net sales in fiscal years 1995, 1996 and 1997, respectively. Substantially all the Company's international sales are direct sales to the foreign operations of United States-based customers, primarily in Singapore, Puerto Rico, Ireland and the United Kingdom. The Company anticipates that international sales will continue to account for a significant portion of net sales. International sales are subject to certain risks, including unexpected changes in regulatory requirements, exchange rates, tariffs and other barriers, political and economic instability, and potentially adverse tax consequences. To date the Company has not experienced any material adverse consequences from its international sales operations, in part because substantially all its foreign sales are direct sales to the foreign operations of existing United States-based customers. The Company's international sales are also subject to certain governmental restrictions, including the Export Administration Act and the regulations promulgated thereunder. The Company's sales to date have been denominated in United States dollars and as a result, there have been no losses related to currency fluctuations. For the same reason, the Company has engaged in no hedging activities. There can be no assurance that any of these factors will not have a material adverse effect on the Company. See "Item 1 - Business - Sales and Marketing."
Environmental Compliance. The process used to manufacture circuit boards 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, and although it regularly monitors its operations to avoid violations arising from human error or equipment failures, there can be no assurance that violations will not occur. In the event of a future violation of environmental laws, the Company could be held liable for damages and for the costs of remedial actions and could also be subject to revocation of its effluent discharge permits. Any such revocation could require the Company to cease or limit production at its facilities, thereby having an adverse impact on the Company's operations. Environmental laws could become more stringent over time, imposing greater compliance costs and increasing risks and penalties with a violation. See "Item 1 - Business - Environmental Matters."
Certain Restrictive Charter and Bylaw Provisions. The Company's Certificate of Incorporation and Bylaws empower the Board of Directors, without approval of the stockholders, to: fix the rights and preferences of and to issue shares of Preferred Stock; prohibit a substantial stockholder of the Company from entering into a business combination or otherwise significantly increasing its interest in the stock or assets of the Company without the consent of the Board of Directors or a two-thirds majority of the stockholders of the Company; and prohibit stockholders of the Company from calling a special meeting unless requested by at least 50% of the outstanding voting shares. The certificate does not provide for cumulative voting for election of directors and does require cause and the vote of a majority of stockholders to remove a director. These provisions could have the effect of deterring unsolicited takeovers or other business combinations or delaying or preventing changes in control or management of the Company, including transactions in which stockholders might otherwise receive a premium for their shares over then-current market prices. In addition, these provisions may limit the ability of stockholders to approve transactions that they may deem to be in their best interests.
Item 8.
Item 8. Financial Statements and Supplementary Data.
Information in response to this item is incorporated herein by reference to "Report of Independent Auditors," "Consolidated Balance Sheets," "Consolidated Statements of Income," "Consolidated Statements of Shareholder's Equity," "Consolidated Statements of Cash Flows" and "Notes to Consolidated Financial Statements" in the Registrant's 1997 Annual Report to Shareholders.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
PART III
Item 10.
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 1997 Annual Meeting of Shareholders (the "1997 Proxy Statement") and (ii) the information under the heading "Executive Officers of the Registrant" in Part I hereof. The Company anticipates filing the 1997 Proxy Statement within 120 days after July 31, 1997.
Item 11.
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 1997 Proxy Statement.
Item 12.
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 1997 Proxy Statement.
Item 13.
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 1997 Proxy Statement.
PART IV
Item 14.
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 1997 Annual Report to Shareholders and consist of the following:
Report of Ernst & Young LLP, Independent Auditors Consolidated Balance Sheets as of July 31, 1996 and Consolidated Statements of Income for each of the three years ended July 31, 1995, 1996 and 1997 Consolidated Statements of Shareholders' Equity for each of the three years ended July 31, 1995, 1996 and 1997 Consolidated Statements of Cash Flows for each of the three years ended July 31, 1995, 1996 and 1997 Notes to Consolidated 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, 1997.
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, 1997 --------------------------------------------- Frederick G. McNamee, III Chairman of the Board, President, Chief Executive Officer and Director
By /s/ Joseph G. Andersen Dated October 27, 1997 --------------------------------------------- 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, 1997 - ----------------------------- Board, President, Frederick G. McNamee, III Chief Executive Officer and Director
/s/ Angelo A. DeCaro, Jr. Director October 29, 1997 - ----------------------------- Angelo A. DeCaro, Jr.
/s/ Michael O. Flatt Director October 28, 1997 - ----------------------------- Michael O. Flatt
/s/ Albert A. Irato Director October 28, 1997 - ----------------------------- Albert A. Irato
Director October ___, 1997 - ----------------------------- Michael F. Jarko
/s/ John Nance Director October 26, 1997 - ----------------------------- John Nance
/s/ David C. Wetmore Director October 28, 1997 - ----------------------------- David C. Wetmore
CONTINENTAL CIRCUITS CORP.
Exhibit Index to Report on Form 10-K for the fiscal year ended July 31, 1997
- ---------- * Management contract or compensatory plan arrangement required to be filed pursuant to Item 14(c) of Form 10-K.
- ---------- * Management contract or compensatory plan arrangement required to be filed pursuant to Item 14(c) of Form 10-K.