-----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, LjkI2JgbZHjfWt7hkLOeJV+2KBRyR04PA5QFHZ+1hGa+65Zwio6gZZa4biGxv5m7 SRYXlfadi52UoLBk6olQYg== 0000746549-97-000002.txt : 19970514 0000746549-97-000002.hdr.sgml : 19970514 ACCESSION NUMBER: 0000746549-97-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970513 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIGMA CIRCUITS INC CENTRAL INDEX KEY: 0000746549 STANDARD INDUSTRIAL CLASSIFICATION: PRINTED CIRCUIT BOARDS [3672] IRS NUMBER: 770107167 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-24170 FILM NUMBER: 97602740 BUSINESS ADDRESS: STREET 1: 393 MATHEW ST CITY: SANTA CLARA STATE: CA ZIP: 95050 BUSINESS PHONE: 4087279169 MAIL ADDRESS: STREET 1: 393 MATHEW STREET CITY: SANTA CLARA STATE: CA ZIP: 95050 10-Q 1 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 _____________ FORM 10-Q (Mark One) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended March 31, 1997 or Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from _______ to ______ Commission file number: 0-24170 SIGMA CIRCUITS, INC. (Exact name of registrant as specified in its charter) Delaware 77-0107167 (State or other jurisdiction (I.R.S. of Employer incorporation or Identification organization) Number) 393 Mathew Street Santa Clara, California 95050 (408) 727-9169 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of shares outstanding of the Registrant's common stock, $.001 par value, was 4,086,959 at May 8, 1997. 2 Sigma Circuits, Inc. INDEX Description Page Number Cover Page 1 Index 2 Part I: Financial Information Item 1: Condensed Financial Statements Condensed Balance Sheets as of March 31, 1997 and June 30, 1996 3 Condensed Statements of Operations for the Three and Nine Month Periods Ended March 31, 1997 and 1996 4 Condensed Statements of Cash Flows for the Nine Month Period Ended March 31, 1997 and 1996 5 Notes to Condensed Financial Statements 7 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Part II: Other Information Item 1: Legal Proceedings 18 Item 4 Submission of Matters to a Vote of Security Holders 19 Item 6: Exhibits and Reports on Form 8-K 19 Signatures 20
3 Part I: Financial Information Item 1: Condensed Financial Statements SIGMA CIRCUITS, INC. CONDENSED BALANCE SHEETS (Unaudited) (in thousands) March 31, June 30, 1997 1996 ASSETS Current Assets: Cash and Equivalents $ 569 $ -- Accounts Receivable (Net of Allowances of $700 and $598, Respectively) 11,417 11,987 Income Taxes Receivable 382 1,393 Other Receivables 73 46 Inventories 2,786 4,753 Prepaid Expenses 414 268 Deferred Income Taxes 3,228 2,660 Total Current Assets 18,869 21,107 Property and Equipment, Net 16,877 18,899 Goodwill (Net of Accumulated Amortization of $2,698 and $2,322, Respectively) 6,239 6,615 Deposits and Other Assets 207 339 Total $42,192 $46,960 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Cash Overdraft $ -- $ 297 Current Portion of Long-Term Debt 6,429 7,681 Accounts Payable 5,072 4,418 Accrued Liabilities 4,050 5,947 Total Current Liabilities 15,551 18,343 Long-Term Debt 13,576 14,345 Deferred Income Taxes 1,405 1,354 Stockholders' Equity: Preferred Stock, $0.001 Par Value: Shares Authorized: 5,000 Shares Outstanding: None -- -- Common Stock, $0.001 Par Value: Shares Authorized: 20,000 Shares Outstanding: 4,086 and 3,998, Respectively 10,939 10,604 Deferred Stock Compensation (128) (180) Retained Earnings 849 2,494 Total Stockholders' Equity 11,660 12,918 Total $42,192 $46,960
See notes to condensed financial statements. 4 Item 1: Condensed Financial Statements (continued) SIGMA CIRCUITS, INC. CONDENSED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except per share data) Three Months Ended Nine Months Ended March 31, March 31, 1997 1996 1997 1996 Net Sales $20,425 $24,330 $59,143 $67,117 Cost Of Sales 17,911 19,394 50,775 52,736 Gross Profit 2,514 4,936 8,368 14,381 Selling, General and Administrative Expenses 4,186 2,616 8,795 8,275 Amortization of Goodwill 125 157 376 364 Facility Closing Costs -- -- (250) -- Operating Income (Loss) (1,797) 2,163 (553) 5,742 Interest Expense, Net 479 497 1,531 1,171 Income (Loss) Before Income Taxes (2,276) 1,666 (2,084) 4,571 Provision (Benefit) For Income Taxes (541) 546 (439) 1,736 Net Income (Loss) $(1,735) $ 1,120 $(1,645) $ 2,835 Net Income (Loss) Per Share $ (.43) $ .23 $ (.41) $ .62 Number of Shares Used in Computing Per Share Information 4,074 4,845 4,030 4,587
See notes to condensed financial statements. 5 Item 1: Condensed Financial Statements (continued) SIGMA CIRCUITS, INC. CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Nine Months Ended March 31, 1997 1996 CASH FLOWS FROM OPERATING ACTIVITIES: Net Income (Loss) $(1,645) $ 2,835 Reconciliation to Cash Provided by Operating Activities: Depreciation and Amortization of Property and Equipment 3,551 3,146 Amortization of Goodwill 376 364 Amortization of Deferred Stock Compensation 52 81 Amortization of Non-Compete Agreement 113 -- (Gain) Loss on Disposal of Assets (108) 217 Deferred Income Taxes (517) (1,072) Facility Closing Costs (250) -- Changes in Assets and Liabilities: Accounts Receivable 570 128 Other Receivables (27) 349 Inventories 1,967 (1,536) Prepaid Expenses (146) (154) Accounts Payable 654 1,443 Accrued Liabilities (1,186) (467) Income Taxes Payable/Receivable 1,011 (552) Cash Provided by Operating Activities 4,415 4,782 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of Property and Equipment (2,202) (4,426) Proceeds from Sales of Property and Equipment 320 42 Deposits and Other Assets 19 (144) Purchase of Citation Companies, Net of Cash Acquired -- (9,092) Cash Used for Investing Activities (1,863) (13,620) CASH FLOWS FROM FINANCING ACTIVITIES: Line of Credit, Net 1,016 1,098 Proceeds from Long-Term Borrowings -- 11,066 Repayment of Long-Term Borrowings (3,037) (1,996) Proceeds from Issuance of Common Stock 335 131 Cash Overdraft (297) -- Cash Provided by (Used For) Financing Activities (1,983) 10,299 INCREASE IN CASH AND EQUIVALENTS: 569 1,461 CASH AND EQUIVALENTS: Beginning of Period -- 106 End of Period $ 569 $ 1,567
See notes to condensed financial statements. 6 Item 1: Condensed Financial Statements (continued) SIGMA CIRCUITS, INC. CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Nine Months Ended March 31, 1997 1996 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash Paid for Interest $ 1,194 $ 835 Cash (Received) Paid for Income Taxes $(1,005) $ 3,046 SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Tax Benefit from Employee Stock Transactions $ 71 $ -- Equipment Acquired Under Capital Lease Obligations $ -- $ 459 PURCHASE OF THE CITATION COMPANIES: Cash Paid, Net of Cash Acquired $ 9,092 Stock Issued to Seller 2,500 Debt Issued to Seller 4,092 Liabilities Assumed 5,278 Assets Acquired (including Goodwill of $6,133) $20,962
See notes to condensed financial statements. 7 Item 1: Condensed Financial Statements (continued) SIGMA CIRCUITS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS Basis of Presentation While the quarterly financial information contained in this filing is unaudited, the financial statements presented reflect all adjustments (consisting only of normal recurring adjustments) which the Company considers necessary for a fair presentation of the results of operations for the interim periods covered and of the financial condition of the Company at the dates of the interim balance sheets. The results for interim periods are not necessarily indicative of the results of the entire year. The information included in this report should be read in conjunction with the Company's audited financial statements and notes thereto included in the Company's fiscal year 1996 Annual Report on Form 10-K. Per Share Information Net income per share is based on the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares include common stock options and warrants (using the treasury stock method) and are excluded in loss periods as they are anti-dilutive. Inventories Inventories consist of (in thousands): March 31, June 30, 1997 1996 Raw Materials $1,051 $2,641 Work in Process 1,394 1,880 Finished Goods 341 232 Inventories $2,786 $4,753
Long-Term Debt and Capital Lease Obligations As of June 30, 1996, the Company was in non-compliance with the profitability and working capital convenants of its revolving line of credit agreement with Comerica Bank (the "Bank"). The Company obtained a waiver with respect to such convenants from the Bank as of that date, and an amendment of its working capital limits for the remaining term of the agreement. As of December 31, 1996, the Company was in non-compliance with the total liabilities to tangible effective net worth ratio covenant of its revolving line of credit agreement with the Bank. The Company obtained a waiver with respect to such covenants from the Bank as of that date. As of March 31 and April 30, 1997, the Company was in non-compliance with the tangible effective net worth and liabilities to tangible effective net worth ratios and the profitability covenants of its revolving line of credit with the Bank. The Company obtained a waiver with respect to such covenants from the Bank as of each date. The Company believes it will remain in compliance with the agreement's terms during the remainder of fiscal year 1997; however, in the event that a covenant is violated and not cured to the Bank's satisfaction, the Bank would be entitled to accelerate the indebtedness owed by the Company. The provisions of the subordinated notes between the Company and the seller of the Citation Companies required payment of accrued interest through September 30, 1996 as of that date. The Company elected to defer any payment of interest as of that date. Any unpaid interest is due in June 1997 along with the related subordinated notes. 8 Item 1: Condensed Financial Statements (continued) Provision (Benefit) for Income Taxes The Company incurred a combined federal and state effective benefit tax rate of 23.8% and 21.1% for the three and nine month periods ended March 31, 1997, respectively, compared to an effective income tax rate of 32.8% and 38.0%, respectively, for the same periods of fiscal year 1996. Business Developments On September 27, 1996, the Company signed a Letter of Intent whereby Continental Circuits Corp. would acquire all of the outstanding shares of the Company's common stock in exchange for Continental Circuits' common stock. On December 19, 1996, the Company announced that its letter of intent to merge with Continental Circuits Corp. had expired and the two companies had mutually agreed to discontinue merger discussions. Recently Issued Accounting Standard In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share". The Company is required to adopt this standard in the second quarter of fiscal year 1998 and will restate at that time earnings per share ("EPS") data for prior periods to conform with the standard. Earlier application is not permitted. This new standard replaces current EPS reporting requirements and requires a dual presentation of basic and diluted EPS. Basic EPS excludes dilution and is computed by dividing net income by the weighted average amount of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. As with current EPS reporting requirements, the standard requires common equivalent shares to be excluded in loss periods as they are anti-dilutive. If SFAS No. 128 had been in effect during the prior fiscal year, basic EPS would have been $.29 and $.76 for the three and nine month periods ended March 31, 1996, respectively. Basic EPS for the three and nine month periods ended March 31, 1997 and diluted EPS for all periods presented under SFAS No. 128 would not have been significantly different than the EPS currently reported for the periods. 9 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations This discussion contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences, include, but are not limited to, those discussed herein, as well as those discussed in the Company's fiscal year 1996 Annual Report on Form 10-K. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The Company undertakes no obligation to publicly release the results of any revision to these forward- looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Overview Beginning in fiscal year 1994, the Company adopted a strategy to service more of the electronic interconnect needs of its strategic customers by broadening its product offerings and increasing its capacity. The Company believed that its reputation as a high quality, reliable quick-turn supplier of PCBs would generate demand among its customers for additional product offerings. The Company also believed that the customer relationships established by providing quick-turn services during the prototype stage of the product life cycle would give it an advantage in securing the larger volume pre-production and production orders of such products. Assisted by the proceeds of a private equity financing and its initial public offering, the Company established its Systems Integration and Flexible Circuits divisions during the latter part of fiscal year 1994 in order to broaden its product offerings. The Company completed the acquisition of Stockton, California-based Citation Circuits, Inc. and its related companies (the "Citation Acquisition") during the first quarter of fiscal year 1996 in order to obtain the manufacturing capacity required to service its customers' higher volume production jobs in a lower cost operating environment. During the first half of fiscal year 1996, net sales and gross profit increased significantly as a result of the additional capacity obtained in the Citation Acquisition and the products offered by its two new divisions. During the second half of fiscal year 1996, the electronic interconnect industry experienced a softening period which adversely impacted the Company, along with many of its competitors, as evidenced by a decline in the demand for its products and services. As a result, the Company announced the closure of its Costa Mesa PCB division and the redeployment of certain assets and personnel into its existing Northern California PCB operations and recorded a one-time charge of approximately $3.8 million for facility closing costs during the fourth quarter of fiscal year 1996. During the quarter ended March 31, 1997, the Company filed a lawsuit against one of its customers. The suit asserts a breach of contract by the customer relating to custom-made assembled circuit boards and other services provided by the Company under purchase orders received by the Company from the customer. As the extent of recovery is unknown at this time, the Company wrote off the customer's receivable amount, as well as excess and obsolete inventory relating to the manufacture of this customer's product. Additionally, the Company accrued other costs associated with the suit. During the quarter ended March 31, 1997, the Company recorded a charge of approximately $1,500,000 to its operations related to this lawsuit. The Company's operating results have been and are expected to continue to be affected by a number of factors, including the timing and volume of orders from, and shipments to, customers relative to the Company's manufacturing capacity, level of product and price competition, product mix, the number of working days in a particular quarter, economic conditions in the electronic interconnect industry and general economic factors. The lead times, volume levels and complexity of customer orders have also affected overall gross margin. 10 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Results of Operations The following table sets forth, for the periods indicated, certain statement of operations data expressed as a percentage of net sales. The table and the discussion below should be read in conjunction with the condensed financial statements and the notes thereto appearing elsewhere in this report. Three Months Nine Months Ended Ended March 31, March 31, 1997 1996 1997 1996 Net Sales 100.0% 100.0% 100.0% 100.0% Cost of Sales 87.7 79.7 85.8 78.6 Gross Margin 12.3 20.3 14.2 21.4 Selling, General and 20.5 10.7 14.9 12.3 Administrative Expenses Amortization of Goodwill 0.6 0.7 0.6 0.5 Facility Closing Costs -- -- (0.4) -- Operating Income (Loss) (8.8) 8.9 (0.9) 8.6 Interest Expense, Net 2.3 2.0 2.6 1.8 Income (Loss) Before (11.1) 6.9 (3.5) 6.8 Income Taxes Provision (Benefit) for (2.6) 2.3 (0.7) 2.6 Income Taxes Net Income (Loss) (8.5)% 4.6% (2.8)% 4.2%
Net Sales Net sales for the quarter ended March 31, 1997 were approximately $20.4 million, a decrease of $3.9 million or 16.1% from the same quarter in the prior fiscal year. The decrease was primarily attributable to a slowdown in the PCB industry in calendar year 1996 and the Company's subsequent consolidation of its PCB operations in June 1996. Although the Company has experienced recent quarter to quarter net sales growth, it has still not achieved pre-consolidation net sales levels through the current quarter. Net sales for the nine months ended March 31, 1997 were approximately $59.1 million, a decrease of $8.0 million or 11.9% from the same period in the prior fiscal year. The decrease is primarily attributable to the aforementioned slowdown in the PCB industry. Gross Profit Gross profit for the quarter ended March 31, 1997 was approximately $2.5 million, a decrease of $2.4 million or 49.1% from the same quarter in the prior fiscal year. Gross margin for the quarter ended March 31, 1997 and 1996 were 12.3% and 20.3%, respectively. The decrease is primarily attributable to a charge of $1.2 million relating to excess and obsolete inventory and equipment, an unfavorable sales tax ruling, as well as lower PCB net sales and associated under-utilization of capacity. Gross profit for the nine months ended March 31, 1997 was approximately $8.4 million, a decrease of $6.0 million or 41.8% from the same period in the prior fiscal year. Gross margin for the nine months ended March 31, 1997 and 1996 were 14.2% and 21.4%, respectively. The decrease is primarily attributable to a charge of $1.9 million relating to excess and obsolete inventory and equipment, as well as an unfavorable sales tax ruling. Additionally, under-utilization of capacity negatively impacted gross margin. 11 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Selling, General and Administrative Expenses Selling, general and administrative expenses for the quarter ended March 31, 1997 were approximately $4.2 million, an increase of $1.6 million or 60.0% from the same quarter in the prior fiscal year. Selling, general and administrative expenses increased from 10.7% to 20.5%, as a percentage of net sales. The increase is primarily attributable to a charge of $1.2 million pertaining to bad debt and related expenses pertaining to the lawsuit filed during the quarter. This charge represents 5.9% of the 20.5% amount of selling, general and administrative expenses as a percentage of net sales. Selling, general and administrative expenses for the nine months ended March 31, 1997 were approximately $8.8 million, an increase of $520,000 or 6.3% from the same period in the prior fiscal year. Selling, general and administrative expenses increased from 12.3% to 14.9%, as a percentage of net sales. The increase is primarily attributable to a charge of $1.2 million pertaining to bad debt and related expenses associated with the aforementioned lawsuit. This charge represents 2.0% of the 14.9% amount of selling, general and administrative expenses as a percentage of net sales. Facility Closing Costs Facility closing costs credited for the nine months ended March 31, 1997 were approximately $250,000 and are attributable to a reduction of the associated reserve recorded in the fourth quarter of fiscal year 1996 pertaining to the closure of the Company's Costa Mesa PCB division. Interest Expense, Net Net interest expense for the quarter ended March 31, 1997 was approximately $479,000, a decrease of $18,000 or 3.6% from the same quarter in the prior fiscal year. The overall decrease is primarily attributable to repayment of the Company's various debt and capital lease obligations. Net interest expense for the nine months ended March 31, 1997 was approximately $1.5 million, an increase of $360,000 or 30.7% from the same period in the prior fiscal year. The overall increase is attributable to the debt incurred in connection with the Citation Acquisition completed at the end of the first quarter of fiscal year 1996. Provision (Benefit) for Income Taxes The Company incurred a combined federal and state effective benefit tax rate of 23.8% and 21.1% for the three and nine month periods ended March 31, 1997, respectively, compared to an effective income tax rate of 32.8% and 38.0%, respectively, for the same periods of fiscal year 1996. These rates differ from statutory rates primarily due to state taxes, net of federal benefit, amortization of goodwill and deferred stock compensation, as well as other amounts which are not deductible in determining taxable income or loss. Additionally, the amount of pre-tax income or loss can have a material effect on the Company's effective income tax rate. Financial Condition The Company has historically financed its operations primarily through bank borrowings, issuances of debt and equity securities and cash generated from operations. 12 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Liquidity The Company generated cash from operating activities of approximately $4.4 million and $4.8 million in the nine months ended March 31, 1997 and 1996, respectively. Cash generated in the nine months ended March 31, 1997 was primarily attributable to net loss of $1.6 million adjusted for non-cash depreciation and amortization charges of approximately $4.1 million, as well as other working capital changes. Cash generated in the nine months ended March 31, 1996 was primarily attributable to net income of approximately $2.8 million adjusted for non-cash depreciation and amortization charges of approximately $3.6 million, as well as other working capital changes. During the nine months ended March 31, 1997, the Company has paid approximately $564,000, $326,000, $227,000, and $118,000 for severance and termination benefits, operating leases, environmental clean up and remediation, and other payments, respectively, in connection with the closure of the Costa Mesa PCB division. The Company used cash in investing activities of approximately $1.9 million and $13.6 million in the nine months ended March 31, 1997 and 1996, respectively. Cash used in the nine months ended March 31, 1997 was primarily attributable to approximately $2.2 million used for the purchase of property and equipment. Cash used in the nine months ended March 31, 1996 was primarily attributable to approximately $9.1 million in expenditures in connection with the Citation Acquisition and approximately $4.4 million used for the purchase of property and equipment. The Company used cash for and generated cash from financing activities of approximately $2.0 million and $10.3 million in the nine months ended March 31, 1997 and 1996, respectively. Cash used in the nine months ended March 31, 1997 was primarily attributable to approximately $2.0 million in repayments of debt and capital lease obligations, net of borrowings under the long- term revolving line of credit. Cash generated in the nine months ended March 31, 1996 was primarily attributable to $10.2 million in net long-term borrowings of which $10.0 million was used to finance the Citation Acquisition. As of March 31, 1997 the Company had total debt outstanding of approximately $20.0 million, consisting primarily of $6.7 million outstanding under the Company's long-term revolving line of credit, $10.1 million of debt issued in connection with the Citation Acquisition and $3.2 million of real estate and other equipment obligations. The Company has an $8.0 million long-term revolving line of credit with Comerica Bank (the "Bank"). The Company's credit agreement limits borrowings under the line of credit to the maximum of $8.0 million or 75% of the Company's eligible trade accounts receivable as contractually defined. On October 14, 1996, the current line of credit was amended to expire on October 2, 1998 and bears interest at the Bank's base rate plus 0.25%. Additionally, the Company was granted a temporary increase in the amount of $1.2 million, thus making $9.2 million the total maximum line of credit. The additional borrowings are limited to the maximum of $1.2 million or 29% of the Company's combined raw materials and finished goods valued at the lower of cost or market. This temporary increase expires on April 2, 1997, at which time the maximum borrowing amount returns to $8.0 million. In connection with the Citation Acquisition, the Company borrowed $8.5 million and $1.5 million from the Bank under two variable rate installment notes, which have terms of five and two years, respectively, and bear interest at the Bank's base rate plus 1.0%. Under both notes, principal and interest payments are due monthly. Additionally, in connection with the Citation Acquisition, the Company issued two 12.0% subordinated notes to the seller of the Citation Companies in the amounts of approximately $2.6 million and $1.5 million. These notes and related accrued interest are payable in June 1997. The 13 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) provisions of the subordinated notes between the Company and the seller of the Citation Companies required payment of accrued interest through September 30, 1996 as of that date. The Company elected to defer any payment of interest on that date. Any unpaid interest is due in June 1997 along with the related subordinated notes. As of June 30, 1996, the Company was in non-compliance with the profitability and working capital convenants of its revolving line of credit agreement with the Bank. The Company obtained a waiver with respect to such convenants from the Bank as of that date, and an amendment of its working capital limits for the remaining term of the agreement. As of December 31, 1996, the Company was in non-compliance with the total liabilities to tangible effective net worth ratio covenant of its revolving line of credit agreement with the Bank. The Company obtained a waiver with respect to such covenants from the Bank as of that date. As of March 31 and April 30, 1997, the Company was in non-compliance with the tangible effective net worth and liabilities to tangible effective net worth ratios and the profitability covenants of its revolving line of credit with the Bank. The Company obtained a waiver with respect to such covenants from the Bank as of each date. The Company believes it will remain in compliance with the agreements terms during the remainder of fiscal year 1997; however, in the event that a covenant is violated and not cured to the Bank's satisfaction, the Bank would be entitled to accelerate the indebtedness owed by the Company. The ability of the Company to meet its debt service requirements will depend upon achieving significant and sustained growth in the Company's profitability and cash flow, which will be affected by its success in implementing its business strategy, prevailing economic and industry conditions and financial, business and other factors, certain of which are beyond the Company's control. Accordingly, there can be no assurance as to whether or when the Company's operations will generate sufficient cash flow or whether the Company will at any time have sufficient resources to meet its debt service or debt repayment obligations. If the Company is unable to generate sufficient cash flow to service or repay its indebtedness, it will have to reduce or delay planned capital expenditures, sell assets, restructure or refinance its indebtedness or seek additional equity capital. A substantial portion of the Company's debt obligations and accrued interest is due in June 1997. The Company is currently negotiating with lenders to restructure all or a portion of its debt obligations. There can be no assurance that such negotiations will be successful or that the Company will be able to restructure its debt obligation on terms satisfactory to the Company, or at all. To the extent the Company is unable to restructure its indebtedness, its business, financial condition and results of operations could be materially adversely affected. Capital Resources During the nine months ended March 31, 1997, the Company purchased approximately $2.2 million of property and equipment which was funded through cash generated from operations. Management expects the Company's level of future capital expenditures to remain at levels consistent with the Company's operational projections mitigated by the redeployment of selected capital equipment from the closed Costa Mesa PCB division. Excluding the financial impact of any acquisition or establishment of new facilities, the Company expects to incur capital expenditures of approximately $500,000 in the remaining three months of fiscal year 1997. 14 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Inflation The Company recognizes that inflationary pressures may have an adverse effect on its operations through increased production costs. The Company attempts to minimize the effect of inflation through productivity improvements, as well as price increases that assist in maintaining reasonable profit margins. Although the Company believes that the impact of inflation on its operating results has been moderate in recent years, there can be no assurance that, in the future, it could not have a material adverse effect on the Company's business, financial condition and results of operations. Seasonality The Company believes that its net sales have not historically been subject to significant seasonal fluctuations. Factors That May Affect Future Results Dependence on Electronics Industry The Company's principal customers are original equipment manufacturers (OEM) and contract manufacturers in the data communications, telecommunications, computer and computer peripherals, industrial and medical industries. These industry segments, and the electronics industry as a whole, are characterized by intense competition, relatively short product- life cycles and significant fluctuations in product demand. In addition, the electronics industry is generally subject to rapid technological change and product obsolescence. Discontinuance or modifications of products containing components manufactured by the Company could adversely affect the Company's business, financial condition and results of operations. In addition, the electronics industry has in the past experienced, and is likely in the future to experience, recessionary periods. A recession or any other event leading to excess capacity in the electronics industry would likely result in intensified price competition and a decrease in unit volume, both of which would have a material adverse effect on the Company's business, financial condition and results of operations. Fluctuations in Quarterly Operating Results The Company's quarterly operating results have varied and may continue to fluctuate significantly. At times in the past, the Company's net sales and net income have decreased from the prior quarter. Operating results are affected by a number of factors, including timing and volume of orders from and shipments to customers relative to the Company's manufacturing capacity, level of product and price competition, product mix, the number of working days in a particular quarter and general economic factors. In recent years, the Company's gross margins have varied primarily as a result of capacity utilization, product mix, start-up costs in its two new divisions, lead times, volume levels, complexity of customer orders, and the costs associated with non-recurring charges. There can be no assurance that the Company will be able to manage the utilization of manufacturing capacity or product mix in a manner that would maintain or improve gross margins or the Company's business, financial condition and results of operations. The timing and volume of orders placed by the Company's OEM customers vary due to customer attempts to manage inventory, changes in the OEM's manufacturing strategy and variation in demand for customer products. An interruption in manufacturing resulting from shortages of parts or equipment, fire, natural disaster, equipment failure or otherwise would have a material adverse effect on the Company's business, financial condition and results of operations. Due to all of the foregoing factors, it is likely that in some future quarter the Company's operating results will be below the expectations of public market analysts and investors. In such event, the price of the Company's common stock would likely be materially adversely affected. 15 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Customer Concentration The Company's growth has resulted, in part, from its ability to identify and attract customers in rapidly growing segments of the electronics industry. The Company has manufactured products for some of these customers for a relatively short period of time. There can be no assurance that the Company will continue to be able to identify, attract and retain customers with high growth rates or that the customers that they do attract and retain will continue to grow at their historical rates or at all. Although there can be no assurance that the Company's principal customers will continue to purchase products and services from the Company at current levels, if at all, the Company expects to continue to depend upon its principal customers for a significant portion of its net sales. The decrease in or loss of orders from one or more major customers could have a material adverse effect on the Company's business, financial condition and results of operations. Variability of Orders The Company does not obtain long term purchase commitments from its customers and a substantial portion of net sales in a given quarter depends on obtaining orders for products to be manufactured and shipped in the same quarter in which those orders are received. Customers may cancel orders and change or delay delivery schedules at any time. The timely replacement of canceled, delayed or reduced orders with new orders cannot be assured. Significant or numerous cancellations, reduction or delays in orders by a customer or group of customers could have a material adverse effect on the Company's business, financial condition and results of operations. Because the Company operates with virtually no backlog, net sales for any quarter are substantially dependent on orders booked in that quarter and net sales for any future quarter are not predictable with any significant degree of certainty. The Company's expense levels are relatively fixed and are based, in part, on expectations of future net sales. Consequently, if net sales levels are below expectations, the Company's business, financial condition and results of operations are likely to be adversely affected. Competition The electronic interconnect industry is characterized by intense competition. The Company faces significant competition in its quick-turn, PCB and flexible circuits product lines primarily from a number of regional privately-held manufacturers. As the Company increasingly expands its volume production of PCBs, backplane assemblies and flexible circuits, it will continue to face much larger competitors. Many of these competitors have significantly greater financial, technical and marketing resources, greater name recognition and a larger installed customer base than the Company. In addition, these competitors may have the ability to respond more quickly to new or emerging technologies and may adapt more quickly to changes in customer requirements and may devote greater resources to the development, promotion and sale of their products than the Company. The Company believes that when it competes in the standard lead- time volume production of its PCB, backplane and flexible circuits products, it encounters greater price sensitivity from current and potential customers. From time to time the Company operates in the lower technology, higher volume segments of the PCB market, where the Company may be at a competitive disadvantage when competing with manufacturers with lower cost structures, particularly those with offshore facilities where labor and other costs are generally lower. During periods of recession or economic slowdown in the electronics industry, the Company's competitive advantages in the areas of quick-turn manufacturing and responsive customer service may be of reduced importance to the Company's customers, who may become more price sensitive. Although capital barriers to entry are relatively high for manufacturing technologically complex electronic 16 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) interconnect products, the basic interconnect technology is generally not protected by patents or copyrights, and companies with significant resources or international operations may enter the market. Consolidation of smaller competitors may also result in increased competition. Increased competition could result in price reductions, reduced margins or loss of market share, any of which could materially and adversely affect the Company's business, financial condition and results of operations. Management of Growth The Company has in the past experienced periods of rapid growth that have placed a significant strain on the Company's management, operational and financial resources. The Company's ability to manage growth effectively, particularly given the increasing scope of its operations, will require it to continue to implement and improve its management, operational, and financial information systems,as well as to develop the management skills of its managers and supervisors and to train, motivate and manage its employees.The Company's failure to effectively manage growth could have a material adverse effect on the Company's business, financial condition and results of operations. Competition for personnel is intense and there can be no assurance that the Company will be able to attract, assimilate or retain additional highly qualified employees in the future. The failure to hire and retain such personnel could have a material adverse effect on the Company's business, financial condition and results of operations. Substantial Leverage and Ability to Service Debt The Company had outstanding indebtedness as of March 31, 1997, of approximately $20.0 million, consisting primarily of $6.7 million outstanding under the Company's long-term revolving line of credit, $10.1 million of debt issued in connection with the Citation Acquisition and $3.2 million of real estate and other equipment obligations. The Company has an $8.0 million long-term revolving line of credit with Comerica Bank (the "Bank"). The Company's credit agreement limits borrowings under the line of credit to the maximum of $8.0 million or 75% of the Company's eligible trade accounts receivable as contractually defined. On October 14, 1996, the current line of credit was amended to expire on October 2, 1998 and bears interest at the Bank's base rate plus 0.25%. In connection with the Citation Acquisition, the Company borrowed $8.5 million and $1.5 million from the Bank under two variable rate installment notes, which have terms of five and two years, respectively, and bear interest at the Bank's base rate plus 1.0%. Under both notes, principal and interest payments are due monthly. Additionally, in connection with the Citation Acquisition, the Company issued two 12.0% subordinated notes to the seller of the Citation Companies in the amounts of approximately $2.6 million and $1.5 million. These notes and related accrued interest are payable in June 1997. The provisions of the subordinated notes between the Company and the seller of the Citation Companies required payment of accrued interest through September 30, 1996 as of that date. The Company elected to defer any payment of interest as of that date. Any unpaid interest is due in June 1997 along with the related subordinated notes. As a result, the Company has substantial debt service obligations. The ability of the Company to meet its debt service requirements will depend upon achieving significant and sustained growth in the Company's profitability and cash flow, which will be affected by its success in implementing its business strategy, prevailing economic and industry conditions and financial, business and other factors, certain of which are beyond the Company's control. Accordingly, there can be no assurance as to whether or when the Company's operations will generate sufficient cash flow or whether the Company will at any time have sufficient resources to meet its debt service or debt repayment obligations. If the Company is unable to generate sufficient cash flow to service or repay its indebtedness, it will have to reduce or delay planned capital expenditures, sell assets, restructure or refinance its indebtedness or seek additional equity 17 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) capital. There can be no assurance that any of these strategies could be effected on satisfactory terms, if at all, particularly in light of the Company's high levels of indebtedness. In addition, the degree to which the Company is leveraged could have significant consequences, including, but not limited to, the following: (i) the Company's ability to obtain additional financing in the future for working capital, capital expenditures, and other general corporate purposes may be materially limited or impaired, (ii) a substantial portion of the Company's cash flow from operations may need to be dedicated to the payment of principal and interest on its indebtedness and therefore, not available to finance the Company's business and (iii) the Company's high degree of leverage may make it more vulnerable to economic downturns, may limit its ability to withstand competitive pressures and may reduce its flexibility in responding to changing business and economic conditions. 18 PART II: Other Information Item 1. Legal Proceedings In connection with the Citation Acquisition on September 30, 1995, the Company assumed certain environmental contingent liabilities pertaining to operations prior to that date. As of the acquisition date, Citation had accrued $303,000 for the two known claims. The first contingent liability relates to allegations by the City of Stockton of violations of its City Code regarding discharge of waste water into the City's sewer system in excess of allowed limits during several months in 1992. As of March 31, 1997, no further action has taken place between the City of Stockton and the Company. The Company has established a reserve for this contingency and in the opinion of its management, any settlement would not likely result in a loss that would have a material adverse effect on the Company's business, financial condition and results of operations. The second contingent liability relates to the United States Environmental Protection Agency ("EPA") issuance of an administrative civil complaint regarding the timely submission of required federal forms under the Emergency Planning and Community Right-to-Know Act of 1986 ("EPCRA"). On April 15, 1996, the Company entered into a tentative "Consent Agreement and Consent Order" ("CACO") with the EPA pertaining to its complaint. In the CACO, the Company has certified that it has completed and submitted all required federal forms to the EPA under the EPCRA, and that it has complied with all other EPCRA requirements at all of its facilities. In addition, the Company will also purchase and test certain equipment to aid in its environmental regulatory requirements within twelve months of the effective date of the CACO. The minimum aggregate cost associated with the purchase, installation and testing of this equipment is $220,250 and if the actual aggregate cost is lower, the difference between the actual cost and such minimum threshold, will be remitted to the EPA. As of March 31, 1997, the Company had incurred approximately $146,000 of costs associated with the minimum threshold. In relation to the testing of the equipment, the Company is subject to additional filing requirements with the EPA pertaining to the functionality of the equipment. Further, the Company paid a civil penalty of $65,000 upon execution of and as required by the CACO in July 1996. Terms of the CACO constitute a full and final settlement of the complaint. During the quarter ended March 31, 1997, the Company filed a lawsuit against one of its customers. The suit asserts a breach of contract by the customer relating to custom-made assembled circuit boards and other services provided by the Company under purchase orders received by the Company from the customer. The suit was filed on March 13, 1997 in the Superior Court of the State of California, Santa Clara County, with the Company seeking damages in excess of approximately $992,000, the customer's outstanding accounts receivable balance, plus additional damages, late charges and related interest. Additionally, the Company is seeking payment or reimbursement of costs of the suit, as well as attorneys' fees, and any other appropriate relief. The customer filed a cross complaint, on April 10, 1997, relating to breach of contract, intentional and negligent misrepresentation, intentional and negligent interference with contractual relationships, and intentional and negligent interference with prospective economic advantage. The customer is seeking damages in excess of $10,000,000, an unspecified amount of punitive damages, as well as payment or reimbursement of costs of the suit, attorneys' fees, and any other appropriate relief. The Company filed an application for a writ of attachment on March 13, 1997, which was subsequently denied. Although no assurances can be given, the Company believes the customer's claims are without merit and will defend itself vigorously, therefore, no provision for any liability has been made in the financial statements. As the extent of recovery is unknown at this time, the Company wrote off the customer's receivable amount, as well as purchased inventory in support of this customer relating to the manufacture of its product and accrued other costs associated with the suit. During the quarter ended March 31, 1997, the Company recorded a charge of approximately $1,500,000 to its operations related to this lawsuit. 19 Item 4: Submission of Matters to a Vote of Security Holders The Annual Meeting of Stockholders of Sigma Circuits, Inc. was held on February 13, 1997. The matters voted upon at the meeting and the voting of stockholders with respect thereto are as follows: 1. The election of Thomas J. Bernard and William J. Boyle to the Board of Directors to hold office until the 1999 Annual Meeting of Stockholders and until his successor is elected and has qualified, or until such director's earlier death, resignation or removal: For Withheld Thomas J. Bernard 3,483,590 59,614 William J. Boyle 3,484,822 58,383 2. The ratification of Deloitte & Touche LLP as the independent auditors of the Company for its fiscal year ending June 30, 1997: For: 3,530,852 Against: 8,882 Abstain: 3,470 Item 6: Exhibits and Reports on Form 8-K A. Exhibits See Index to Exhibits at page 21 of this filing and is incorporated by reference herein. B. Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended March 31, 1997. 20 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Santa Clara, County of Santa Clara, State of California, on the 13th day of May, 1997. Sigma Circuits, Inc. (Registrant) By /s/ B. Kevin Kelly B. Kevin Kelly President, Chief Executive Officer and Director By /s/ Philip S. Bushnell Philip S. Bushnell Senior Vice President, Finance and Administration, Chief Financial Officer, Secretary and Director 21 INDEX OF EXHIBITS Exhibit Number Description 3.1 Restated Certificate of Incorporation of the Registrant.(1) 3.2 Bylaws of the Registrant.(1) 4.1 Reference is made to Exhibits 3.1 and 3.2 4.2 Registration Agreement among the Registrant and certain other parties named therein, dated April 15, 1986.(1) 4.3 Series C Registration Rights Agreement among the Registrant and certain other parties named therein, dated September 30, 1993.(1) 4.5 Specimen stock certificate.(1) 10.1 Form of Indemnity Agreement entered into between the Registrant and its directors and officers, with related schedule.(1) 10.2 Registrant's 1988 Stock Option Plan, as amended to date.(1) 10.3 Form of Incentive Stock Option under the 1988 Stock Option Plan.(1) 10.4 Form of Nonstatutory Stock Option under the 1988 Stock Option Plan.(1) 10.5 Form of Notice of Exercise under the 1988 Stock Option Plan.(1) 10.6 Registrant's 1994 Non-Employee Directors' Stock Option Plan, as amended to date.(1) 10.7 Registrant's 1994 Employee Stock Purchase Plan, as amended to date.(1) 10.9 Form of Stock Warrant granted to Cruttenden & Company.(1) 10.10 Note Secured by Deed of Trust granted to Plaza Bank of Commerce, dated March 29, 1990.(1) 10.11 Promissory Notes granted Comerica Bank-California, dated June 1, 1993 and November 12, 1993.(1) 10.13 Master Lease between the Registrant and CIT Group/Equipment Financing, Inc., dated October 6, 1993, and Schedule 1 thereto.(1) 10.15 Lease Agreement between the Registrant and Anthony and Cydelle Drago, dated December 30, 1986, as amended to date.(1) 10.17 Equipment Lease between the Registrant and Copelco Leasing Corporation, dated January 9, 1993.(1) 10.19 Lease Agreement between the Registrant and Retail Control Systems, Inc., dated December 15, 1984, as amended to date.(1) 10.21 Lease Agreement between the Registrant and The Kontrabecki Group, dated May 3, 1994, and attachments thereto.(1) 10.22 Lease Agreement between the Registrant and The Kontrabecki Group, dated June 9, 1995, and attachments thereto.(2)
22 INDEX OF EXHIBITS (Continued) Exhibit Number Description 10.24 Lease Agreement Extension and Modification dated September 30, 1995, between the Registrant and Anthony and Cydelle Drago to Lease Agreement dated December 30, 1986, as amended.(2) 10.25 Consulting Agreement between the Registrant and Robert P. Cummins dated March 1, 1997. 10.26 Change-in-Control Severance Agreement between the Registrant and B. Kevin Kelly, dated October 26, 1995.(4) 10.27 Change-in-Control Severance Agreement between the Registrant and Philip S. Bushnell, dated October 26, 1995.(4) 10.28 Revolving Credit Loan & Security Agreement between the Registrant and Comerica Bank - California, with exhibits, dated September 29, 1995.(4) 10.29 Variable Rate Installment Notes granted to Comerica Bank-California, dated September 29, 1995.(4) 10.30 Subordinated Promissory Note granted to Citation Circuits, Inc., dated September 30, 1995.(4) 10.31 Convertible Subordinated Promissory Note granted to Citation Circuits, Inc., dated September 30, 1995.(4) 10.32 Lease Agreement between Registrant and Dockside, dated June 23, 1989.(4) 10.33 Asset Purchase Agreement between the Registrant, Citation Circuits, Inc., Citation Enterprises, Inc., Citron Inc. and Carl Brockl, dated September 8, 1995.(3) 11.1 Statements Regarding Calculation of Net Income (Loss) Per Share.
____________________________________ (1) Incorporated by reference to the corresponding Exhibit previously filed as an Exhibit to the Company's Registration Statement on Form S-1, as amended, filed May 26, 1994 (File No. 33-76606). (2) Incorporated by reference to the corresponding Exhibit previously filed as an Exhibit to the Company's Form 10-K,as amended, filed September 28, 1995 (File No. 0-24170). (3) Incorporated by reference to the corresponding Exhibit previously filed as an Exhibit to the Company's Form 8-K, as amended, filed October 11, 1995 (File No. 0-24170). (4) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Company's Registration Statement on Form S-1, as amended, filed February 16, 1996 (File No. 333-1262). 23 EXHIBIT 11.1 SIGMA CIRCUITS, INC. STATEMENTS REGARDING CALCULATION OF NET INCOME (LOSS) PER SHARE (in thousands, except per share amounts) Three Months Nine Months Ended Ended March 31, March 31, 1997 1996 1997 1996 Net Income (Loss) $(1,735) $1,120 $(1,645) $2,835 Weighted Average Common Stock Outstanding 4,074 3,904 4,030 3,751 Common Stock Equivalents: Dilutive Effect of Stock Options --(1) 799 --(1) 713 Dilutive Effect of Underwriter's Warrant --(1) 142 --(1) 123 Number Of Shares Used in Computing Per Share Information 4,074 4,845 4,030 4,587 Net Income (Loss) Per Share $ (.43) $ .23 $ (.41) $ .62
(1) Excludes common stock equivalents as they are anti-dilutive for computing net loss per share. EX-27 2
5 9-MOS JUN-30-1997 MAR-31-1997 569 0 12,117 700 2,786 18,869 31,885 (15,008) 42,192 15,551 0 0 0 10,939 721 42,192 59,143 59,143 50,775 50,775 0 0 1,531 (2,084) (439) (1,645) 0 0 0 (1,645) (.43) (.43)
EX-10 3 Sigma Circuits, Inc. CONSULTING AGREEMENT THIS AGREEMENT ("Agreement") is by and between ROBERT P. CUMMINS, an independent contractor and consultant ("Consultant") and SIGMA CIRCUITS, INC. ("Company") and is effective as of March 1, 1997 ("Effective Date"). In consideration of the mutual promises stated in the paragraphs that follow, the Company and Consultant agree as follows: 1. Engagement of Services. Consultant is hereby retained by the Company to complete the services described in Exhibit A (the "Services"). The manner and means by which Consultant chooses to complete the Projects are in Consultant's sole discretion and control. Consultant agrees to exercise the highest degree of professionalism, and utilize its expertise and creative talents in performing such Services. In performing the Services, Consultant agrees to provide his own equipment, tools and other materials at his own expense. The Company will make its facilities and equipment available to Consultant when necessary. Consultant shall be responsible for all expenses incurred in performing services under this Agreement, except for reasonable preapproved travel expenses, which shall be reimbursed by the Company. Consultant shall perform the services necessary to satisfy his obligations under this Agreement in a timely and professional manner consistent with industry standards at a location, place and time which the Consultant deems appropriate. Nothing in this Agreement shall restrict the ability of Consultant to serve as a member of the Company's Board of Directors and to receive such compensation and benefits as the Company determines to provide to the members of its Board of Directors who are not employees of the Company. 2. Fees and Taxes. On the Effective Date, the Company shall pay Consultant twenty thousand dollars ($20,000) for work performed to date. Thereafter, Consultant shall be paid fees for work performed for Services at the rate of $2500 dollars per month. Consultant shall be entitled to no additional compensation, except for the reimbursement of expenses described above, for services performed under the terms of this Agreement. Consultant agrees to submit invoices to the Company on a monthly basis. The Company accepts no responsibilities for the expenditure by Consultant of more dollars than this Agreement authorizes. As an independent contractor, the Company will not withhold or make payments for state or federal income tax or social security; make unemployment insurance or disability insurance contributions; or obtain workers' compensation insurance on Consultant's behalf. The Company will issue Consultant a 1099 form with respect to Consultant's fees. Consultant agrees to accept exclusive liability for complying with all applicable state and federal laws governing self-employed individuals, including obligations such as payment of quarterly taxes, social security, disability and other contributions based on the fees paid to Consultant, its agents or employees under this Agreement. Consultant hereby indemnifies and defends the Company against any and all such taxes or contributions. 3. Consultant not an Employee. Consultant agrees that it is the express intention of both Consultant and the Company that Consultant is an independent contractor and not an employee, agent, joint venturer or partner of the Company. Consultant agrees not to hold itself out as, or give any person or entity any reason to believe, that Consultant is an employee, agent, joint venturer or partner of the Company. Consultant agrees not to bind the Company, unless expressly authorized by the Company in writing. Consultant will not receive any employee benefits such as paid holidays, vacations, sick leave or other such paid time off, or participate in Company-sponsored health insurance or other employee benefit plans. 4. Proprietary Information and Noncompetition. As a condition of this Agreement, Consultant hereby agrees to sign and abide by the Company's Proprietary Information and Inventions Agreement, attached hereto as Exhibit B. Consultant retains the right to engage in work activities for entities other than the Company. However, Consultant agrees that, throughout the independent contractor relationship, Consultant will not, without obtaining the Company's prior written approval, directly or indirectly engage or prepare to engage in any activity in competition with the Company, accept employment or provide services to, or establish a business relationship with a business or individual engaged in or preparing to engage in competition with the Company. 5. Workforce. Consultant may maintain a qualified workforce which may perform services under this Agreement. The Company will not control, direct or supervise Consultant's workforce. Consultant agrees that all of its employees or agents who perform any work for the Company under this Agreement will sign the Company's Proprietary Information and Inventions Agreement. Consultant further agrees that it will provide the Company with the original signed copy of such agreements prior to such individuals' commencement of work for the Company. Consultant assumes full and sole responsibility for the payment of all compensation, tax withholding, social security contributions, workers' compensation payments, disability insurance contributions, unemployment insurance contributions and expenses of its workforce. Consultant hereby indemnifies the Company from any and all claims or liabilities arising out of any of Consultant's obligations to its workforce, including but not limited to injury, disability or death of Consultant's employees or agents. 6. Termination. This Agreement shall be effective on the Effective Date and shall continue in effect until June 30, 1997, unless terminated earlier as set forth in this paragraph. Either the Company or Consultant may terminate this Agreement at any time by giving the other party fifteen (15) days written notice. In the event Consultant materially breaches any of the covenants in this Agreement, the Company may terminate this Agreement immediately upon written notice, provided that if the reason for termination is failure to timely perform the Services set forth in Exhibit A, the Company shall provide Consultant with fifteen (15) days advance written notice and an opportunity to cure the breach during the notice period. 7. General. This Agreement shall bind the heirs, personal representatives, successors, assigns, executors and administrators of both Consultant and the Company, and inure to the benefit of both Consultant and the Company, their heirs, successors and assigns. This Agreement, including Exhibits A and B, constitutes the complete, final and exclusive embodiment of the entire agreement between Consultant and the Company with respect to the terms and conditions of the subject matter hereof. This Agreement is entered into without relying upon any promise, warranty or representation, written or oral, other than those expressly contained in this Agreement, and it supersedes any other such promises, warranties, representations or agreements. This Agreement may not be amended or modified except by a written instrument signed by both Consultant and a duly authorized officer of the Company. This Agreement shall be construed and interpreted in accordance with the laws of the State of California. If any provision of this Agreement is determined to be invalid or unenforceable, in whole or in part, this determination will not affect any other provision of this Agreement. A failure of either Consultant or the Company to enforce at any time or for any period of time the provisions of this Agreement shall not be construed to be a waiver of such provisions or of the right of Consultant or the Company to enforce each and every such provision. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. SIGMA CIRCUITS, INC. CONSULTANT By: Date: Date: Taxpayer I.D. #: -----END PRIVACY-ENHANCED MESSAGE-----