-----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, PZFKS45zSIgJMA/0GCeB5RzQ0gp8uu8uahMZFOw2BjOY9DbyUW0Hf4+7GhHZvlP5 bLOTUd2a3G9Bq5ceB96noQ== 0000746549-98-000005.txt : 19980211 0000746549-98-000005.hdr.sgml : 19980211 ACCESSION NUMBER: 0000746549-98-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980210 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: SEC FILE NUMBER: 000-24170 FILM NUMBER: 98526719 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) x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended December 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 of (I.R.S Employer incorporation or organization) Identification Number) 393 Mathew Street Santa Clara, California 95050 (408) 727-9169 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No The number of shares outstanding of the Registrant's common stock, $.001 par value, was 4,132,192 at February 4, 1998. 2 Sigma Circuits, Inc. INDEX Description Page Number Cover Page 1 Index 2 Part I: Financial Information Item 1: Condensed Financial Statements Condensed Balance Sheets as of December 31, 1997 and June 30, 1997 3 Condensed Statements of Operations for the Three and Six Month Periods Ended December 31, 1997 and 1996 4 Condensed Statements of Cash Flows for the Six Month Period Ended December 31, 1997 and 1996 5 Notes to Condensed Financial Statements 6 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3: Quantitative and Qualitative Disclosures about Market Risk 16 Part II: Other Information Item 1: Legal Proceedings 17 Item 4: Submission of Matters to a Vote of Security Holders 18 Item 6: Exhibits and Reports on Form 8-K 18 Signatures 19 3 Part I: Financial Information Item 1: Financial Statements SIGMA CIRCUITS, INC. CONDENSED BALANCE SHEETS (Unaudited) (in thousands) December 31, June 30, 1997 1997 ASSETS Current Assets: Cash and Equivalents $ 1,227 $ 1,633 Accounts Receivable (Net of Allowances of $560 and $630, Respectively) 12,008 12,432 Income Taxes Receivable 1,360 1,476 Inventories 3,429 2,797 Prepaid Expenses and Other Assets 673 330 Deferred Income Taxes 1,299 1,510 Total Current Assets 19,996 20,178 Property and Equipment, Net 15,172 15,874 Goodwill (Net of Accumulated Amortization of $3,074 and $2,823, Respectively) 5,863 6,114 Deposits and Other Assets 453 481 Total $41,484 $42,647 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current Portion of Long-Term Debt $ 1,960 $ 1,633 Accounts Payable 5,814 4,518 Accrued Liabilities 3,670 3,992 Income Taxes Payable 287 -- Total Current Liabilities 11,731 10,143 Long-Term Debt 14,365 18,902 Deferred Income Taxes 953 1,259 Other Long-Term Liabilities 79 39 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: 4,217 and 4,138, Respectively 11,395 11,152 Deferred Stock Compensation (75) (110) Retained Earnings 3,036 1,262 Total Stockholders' Equity 14,356 12,304 Total $41,484 $42,647
See notes to condensed financial statements 4 Item 1: Financial Statements (continued) SIGMA CIRCUITS, INC. CONDENSED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except share and per share data) Three Months Ended Six Months Ended December 31, December 31, 1997 1996 1997 1996 Net Sales $24,666 $19,916 $47,513 $38,718 Cost Of Sales 19,574 16,380 37,898 32,864 Gross Profit 5,092 3,536 9,615 5,854 Selling, General and Administrative Expenses 3,001 2,643 5,688 4,609 Amortization of Goodwill 125 126 251 251 Facility Closing Costs -- (250) (131) (250) Operating Income 1,966 1,017 3,807 1,244 Interest Expense, Net 412 514 884 1,052 Income Before Income Taxes 1,554 503 2,923 192 Provision For Income Taxes 594 230 1,149 102 Net Income $ 960 $ 273 $ 1,774 $ 90 Net Income Per Share: Basic $ .23 $ .07 $ .43 $ .02 Diluted $ .19 $ .06 $ .36 $ .02 Number of Shares: Basic 4,156 4,014 4,148 4,007 Diluted 5,172 4,706 5,088 4,494
See notes to condensed financial statements. 5 Item 1: Financial Statements (continued) SIGMA CIRCUITS, INC. CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Six Months Ended December 31, 1997 1996 CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 1,774 $ 90 Reconciliation to Cash Provided by Operating Activities: Depreciation and Amortization of Property and Equipment 2,371 2,218 Amortization of Goodwill 251 251 Amortization of Deferred Stock Compensation 35 35 Amortization of Non-Compete Agreement 75 75 (Gain)/Loss on Disposal of Assets 131 (168) Deferred Income Taxes (95) (285) Facility Closing Costs (131) (250) Changes in Assets and Liabilities: Accounts Receivable 424 (1,552) Inventories (632) 1,164 Prepaid Expenses and Other Assets (418) (276) Accounts Payable 1,296 1,958 Accrued Liabilities (191) (1,377) Income Taxes Receivable/Payable 403 1,393 Other Long-Term Liabilities 40 -- Cash Provided by Operating Activities 5,333 3,276 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of Property and Equipment (1,829) (1,731) Proceeds from Sales of Property and Equipment 29 301 Deposits and Other Assets 28 2 Cash Used for Investing Activities (1,772) (1,428) CASH FLOWS FROM FINANCING ACTIVITIES: Line of Credit, Net (3,557) 868 Repayment of Long-Term Borrowings (653) (2,156) Common Stock Transactions 243 232 Cash Overdraft -- (297) Cash Used for Financing Activities (3,967) (1,353) INCREASE (DECREASE) IN CASH AND EQUIVALENTS (406) 495 CASH AND EQUIVALENTS: Beginning of Period 1,633 -- End of Period $ 1,227 $ 495 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash Paid for Interest $ 937 $ 835 Cash Paid / (Received) for Income Taxes $ 842 $(1,006)
See notes to condensed financial statements. 6 Item 1: Financial Statements (continued) SIGMA CIRCUITS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS Basis of Presentation While the quarterly financial information contained in this filing is unaudited, the financial statements presented reflect all adjustments (consisting only of normal recurring adjustments) which the Company considers necessary for a fair presentation of the results of operations for the interim periods covered and of the financial condition of the Company at the dates of the interim balance sheets. The results for interim periods are not necessarily indicative of the results of the entire year. The information included in this report should be read in conjunction with the Company's audited financial statements and notes thereto included in the Company's fiscal year 1997 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). In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share". This new standard replaces prior 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. The Company adopted this standard in the current quarter and restated earnings per share ("EPS") data for prior periods to conform with this standard. Three Months Ended Six Months Ended December 31, December 31, 1997 1996 1997 1996 > BASIC EPS: Net Income $ 960 $ 273 $1,774 $ 90 Weighted Average Common Stock Outstanding 4,156 4,014 4,148 4,007 Number of Shares 4,156 4,014 4,148 4,007 Net Income Per Share $ .23 $ .07 $ .43 $ .02
7 Item 1: Financial Statements (continued) Three Months Ended Six Months Ended December 31, December 31, 1997 1996 1997 1996 DILUTED EPS: Net Income $ 960 $ 272 $1,774 $ 90 Interest Expense, Net, Related to Convertible Subordinate Note 27 27 54 -- Net Income As Adjusted $ 987 $ 300 $1,828 $ 90 Weighted Average Common Stock Outstanding 4,156 4,014 4,148 4007 Common Stock Equivalents: Dilutive Effect of Stock Options 500 396 435 398 Dilutive Effect of Underwriter's Warrant 116 96 105 89 Convertible Subordinated Note, Assumed Conversion 400 200 400 -- Number of Shares 5,172 4,706 5,088 4,494 Net Income Per Share $ .19 $ .06 $ .36 $ .02
Inventories Inventories consist of (in thousands): December 31, June 30, 1997 1997 Raw Materials $ 983 $ 877 Work in Process 1,731 1,416 Finished Goods 715 504 Inventories $3,429 $2,797
Long-Term Debt Obligations On December 8, 1997, the Company's lender amended the financing agreement to delete the provision in regards to the quarterly maximum amount of $1,000,000 for capital expenditures. However, the financing agreement does provide an annual maximum amount of $4,000,000 for capital expenditures. Recently Issued Accounting Standards In June 1997, the Financial Accounting Standards Board issued SFAS No. 130 "Reporting Comprehensive Income," which requires that an entity report, by major components and as a single total, the change in its net assets during the period from non- shareholder sources; and SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information," which establishes annual and interim reporting standards for an entity's business segments and related disclosures about its products, services, geographic areas, and major customers. Adoption of these statements will not impact the Company's financial position, results of operations or cash flows. Both statements are effective for fiscal years beginning after December 15, 1997, with earlier application permitted. 8 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 Annual Report on Form 10-K for the year ended June 30, 1997. 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. During fiscal year 1995, the Company's gross margin and operating expenses were negatively affected by the underutilization and start-up costs of the Systems Integration and Flexible Circuits divisions. The Company completed the acquisition of Stockton-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. The Company, along with many of its competitors, experienced a decline in the demand for its products and services during calendar year 1996. As a result, the Company announced on May 22, 1996, the closure of its Costa Mesa PCB division and the consolidation of certain capital and selected personnel into its Santa Clara PCB and Stockton PCB divisions. During June 1996, the Company recorded a one-time charge of approximately $3.8 million for facility closing costs. During the first half of fiscal year 1997, the Company entered into merger discussions with Continental Circuits Corp., which were subsequently terminated in December 1996. Additionally, the Company recorded charges to operations of approximately $3.4 million or $0.54 per share, after tax, attributable to bad debt and related expenses pertaining to a lawsuit filed to recover such bad debt, excess and obsolete inventory and equipment, and an unfavorable sales tax ruling. Combined with the lingering effects of the industry slowdown in calendar year 1996, the Company's consolidation efforts of its PCB operations and aforementioned charges to operations, the Company reported a net loss of $1.2 million for fiscal year 1997. In May 1997, the Company completed a long-term financing agreement with the CIT Group/Business Credit, Inc. which proceeds were used to repay substantially all of the Company's existing debt and capital lease obligations. 9 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) The Company's operating results have been and are expected to continue to be affected by a number of factors, including the timing and volume of orders from and shipments to customers relative to the Company's manufacturing capacity, level of product and price competition, product mix, the number of working days in a particular quarter, economic conditions in the electronic interconnect industry and general economic factors. The lead times, volume levels and complexity of customer orders have also affected overall gross margins. Results of Operations The following table sets forth, for the periods indicated, certain statement of operations data expressed as a percentage of net sales. The table and the discussion below should be read in conjunction with the condensed financial statements and the notes thereto appearing elsewhere in this report. Three Months Ended Six Months Ended December 31, December 31, 1997 1996 1997 1996 Net Sales 100.0% 100.0% 100.0% 100.0% Cost of Sales 79.3 82.2 79.8 84.9 Gross Margin 20.7 17.8 20.2 15.1 Selling, General and Administrative Expenses 12.2 13.3 12.0 11.9 Amortization of Goodwill 0.5 0.6 0.5 0.6 Facility Closing Costs 0.0 (1.2) (0.3) (0.6) Operating Income 8.0 5.1 8.0 3.2 Interest Expense, Net 1.7 2.6 1.9 2.7 Income Before Income Taxes 6.3 2.5 6.1 0.5 Provision for Income Taxes 2.4 1.1 2.4 0.3 Net Income 3.9% 1.4% 3.7% 0.2%
Net Sales Net sales for the second quarter ended December 31, 1997 were approximately $24.7 million, an increase of $4.8 million or 23.9% over the same quarter of the prior fiscal year. All of the Company's divisions contributed to this increase. Net Sales from the combined Rigid PCB and Flexible Circuits divisions to the merchant market increased 21.0%, while net sales from the value- added Systems Integration division increased 35.5% over the same period one year ago. Net sales for the six months ended December 31, 1997 were $47.5 million, an increase of $8.8 million or 22.7% over the same period of the prior fiscal year. Net sales from the combined Rigid PCB and Flexible Circuits divisions to the merchant market increased 21.6%, while net sales from the value-added Systems Integration division increased 26.8% over the same six month period one year ago. Gross Profit Gross profit for the quarter ended December 31, 1997 was $5.1 million, an increase of $1.6 million or 44.1% from the same quarter of the prior fiscal year on higher net sales. Gross margin for the period ended December 31, 1997 increased to 20.7% of net sales as compared to 17.8% in the same quarter of the prior fiscal year. In addition to higher sales, the primary reason for the gross profit and gross margin improvements were the significant operational and materials management efficiency gains made by the 10 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Systems Integration division management team during the past year. Additionally, the Company was partially successful in defending its position with regard to the potential liability accrued during the quarter ended March 31, 1997 for its most recent sales tax audit resulting in reduced sales tax liability. The Company offset this amount with an increase in accrued performance bonuses and other balance sheet reserves due to the Company's current financial performance and projected growth plans. Gross profit for the six month period ended December 31, 1997 was $9.6 million, an increase of $3.8 million or 64.2% from the same six month period one year ago on higher net sales. Gross margin for the six month period ended December 31, 1997 increased to 20.2% of net sales as compared to 15.1% in the same period one year ago. In addition to higher sales, the primary reason for the gross profit and gross margin improvements were the significant operational and materials management efficiency gains made by the Systems Integration division management team during the past year. Additionally, the quick-turn PCB division was negatively impacted during the first quarter ended September 30, 1996 by consolidation activities following closure of the Company's Costa Mesa facility during the fourth quarter ended June 31, 1996. Selling, General and Administrative Expenses Selling, general and administrative expenses for the quarter ended December 31, 1997 were $3.0 million, an increase of $358,000 or 13.5% over the same quarter of the prior fiscal year. The increase was primarily due to increased commissions on higher net sales, as well as performance bonuses associated with the Company's improved profitability. Selling, general and administrative expenses decreased from 13.3% to 12.2% of net sales, over the same periods as expenses did not increase as quickly as net sales. Selling, general and administrative expenses for the six months ended December 31, 1997 were $5.7 million, an increase of $1.1 million or 23.4% over the same period of the prior fiscal year. The increase was primarily due to increased commissions and performance bonuses associated with the Company's financial performance. Selling, general and administrative expenses increased from 11.9% to 12.0%, of net sales, and remained consistent over the periods. Facility Closing Costs Facility closing costs credited for the six months ended December 31, 1997 were approximately $131,000 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 facility. On July 25, 1997, the Company successfully sold the building on behalf of the owner (and landlord); therefore, eliminating any future lease and operating obligations. Interest Expense, Net Net interest expense for the quarter ended December 31, 1997 was approximately $412,000, a decrease of $102,000 or 19.8% from the same quarter in the prior fiscal year. The overall decrease is primarily attributable to repayment of the Company's various debt obligations. Net interest expense for the six months ended December 31, 1997 was approximately $884,000, a decrease of $168,000 or 16.0% from the same period in the prior fiscal year. The overall decrease is attributable to repayment of the Company's various debt obligations subsequent to the May 1997 debt refinancing with the CIT Group. 11 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Provision for Income Taxes The Company's effective income tax rate was 38.2% and 45.7% for the quarters ended December 31, 1997 and 1996, respectively. The Company's effective income tax rate was 39.3% and 53.1% for the six months ended December 31, 1997 and 1996, respectively. These rates differ from statutory rates primarily due to state taxes, net of federal benefit, amortization of goodwill and deferred stock compensation, as well as other amounts which are not deductible in determining taxable income or loss. Additionally, the amount of pre-tax income 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. Liquidity The Company generated cash from operating activities of approximately $5.3 and $3.3 million in the six months ended December 31, 1997 and 1996, respectively. Cash generated from operations in the six months ended December 31, 1997 and 1996 was primarily attributable to net income of $1.8 million and $90,000, respectively, as adjusted for non-cash expenses, primarily depreciation and amortization. The Company used cash in investing activities of approximately $1.8 and $1.4 million in the six months ended December 31, 1997 and 1996, respectively. Cash used in investing activities in the six months ended December 31, 1997 and 1996 was primarily attributable to purchases of property and equipment. The Company used cash in financing activities of approximately $4.0 and $1.4 million in the six months ended December 31, 1997 and 1996, respectively. Cash used in financing activities during the six months ended December 31, 1997 and 1996 was primarily attributable to net repayments under its credit facility. As of December 31, 1997 the Company had long-term debt outstanding of approximately $16.3 million, consisting primarily of $4.7 million outstanding under the Company's revolving line of credit, a $9.2 million term loan, a $1.8 million convertible subordinated note and a $0.6 million real estate obligation. The Company has a $25.0 million credit facility with the CIT Group/Business Credit, Inc. (the "CIT Group"), an asset-based lender, and consists of a $13.7 million revolving line of credit, a $9.8 million term loan and a $1.5 million capital expenditure ("CAPEX") term loan. The revolving line of credit is limited to a maximum amount of $13.7 million or the sum of 90.0% and 50.0% of the Company's eligible trade accounts receivable and raw materials inventory, respectively, as contractually defined. The revolving line of credit expires on May 21, 2001 and currently bears interest at 8.75%. The $9.8 million term expires on May 21, 2002 and currently bears interest at 9.25%. Principal payments of approximately $0.2 are due monthly in equal installments with the first installment due on September 1, 1997. The CAPEX term loan has a maximum amount of $1.5 million in which the Company's financing agreement limits borrowings to this maximum or the amount determined as the sum of $500,000 plus 50.0% of cumulative earnings before interest, taxes, depreciation and amortization for a contractually defined period of time. The $1.5 million CAPEX term loan expires on May 1, 2001 and as of December 31, 1997 there were no outstanding borrowings under this loan. Additionally, the Company has a $1.8 million convertible subordinated note with the seller of the Citation Companies. This note expires on 12 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) May 21, 2001 and currently bears interest at 10.0%. The note is convertible into a maximum of 400,000 shares of common stock at the option of the holder based upon certain defined criteria. Further, the Company has a real estate note of approximately $0.6 million that was assumed in the Citation Acquisition. The real estate note is due, as a balloon payment, on December 31, 2005 and currently bears interest at 8.5%. As of December 31, 1997, the Company was in compliance with the convenants of its financing agreement. The Company believes that its existing funds, borrowings available under its revolving line of credit and CAPEX term loan and funds expected to be generated from operations will be sufficient to meet its working capital needs for the next twelve months. There can be no assurance, however, that events in the future will not require the Company to seek additional capital sooner or, if so required, that it will be available on terms acceptable to the Company. To the extent that cash generated from operations is not sufficient to meet the Company's projected capital expenditures or future working capital needs, the Company's business, financial condition, cash flows and results of operations may be materially and adversely affected. Capital Resources During the six months ended December 31, 1997 the Company purchased approximately $1.8 million of property and equipment which was funded through long-term borrowings. On December 18, 1997, the CIT Group amended the financing agreement to relieve the quarterly maximum amount of $1.0 million for capital expenditures. The financing agreement allows for capital expenditures up to an aggregate maximum amount of $4.0 million. Any expenditures exceeding this maximum annual amount would require prior lender approval. Therefore, excluding the financial impact of any acquisition or establishment of new facilities, the Company expects to incur capital expenditures of approximately $2.2 million, in the remaining six months of fiscal year 1998. 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 In evaluating the Company's business, prospective investors should carefully consider the following factors in addition to the other information presented in this report an din the Company's other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect the Company's business. 13 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Dependence on Electronics Industry The Company's principal customers are original equipment manufacturers (OEM) and contract manufacturers in the telecommunications, networking, computers, peripherals, industrial instrumentation, medical, and semiconductor equipment segments of the electronics 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, cash flows 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, lead times, volume levels and complexity of customer orders, start-up costs in its two new divisions and costs associated with the closure of the Costa Mesa facility. 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, cash flows and results of operations. Due to all of the foregoing factors, it is likely that in some future quarter the Company's operating results will be below the expectations of public market analysts and investors. In such event, the price of the Company's common stock would likely be materially adversely affected. Customer Concentration The Company's past 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, cash flows and results of operations. 14 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Variability of Orders The Company does not obtain long term purchase commitments from its customers and a substantial portion of net sales in a given quarter depends on obtaining orders for products to be manufactured and shipped in the same quarter in which those orders are received. Customers may cancel orders and change or delay delivery schedules at any time. The timely replacement of canceled, delayed or reduced orders with new orders cannot be assured. Significant or numerous cancellations, reduction or delays in order by a customer or group of customers could have a material adverse effect on the Company's business, financial condition and results of operations. Because the Company operates with limited 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, cash flows 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 potential customers. From time to time the Company operates in the lower technology, higher volume segments of the PCB market, where the Company may be at a competitive disadvantage when competing with manufacturers with lower cost structures, particularly those with offshore facilities where labor and other costs are generally lower. During periods of recession or economic slowdown in the electronics industry, the Company's competitive advantages in the areas of quick-turn manufacturing and responsive customer service may be of reduced importance to the Company's customers, who may become more price sensitive. Although capital barriers to entry are relatively high for manufacturing technologically complex electronic interconnect products, the basic interconnect technology is generally not protected by patents or copyrights, and companies with significant resources or international operations may enter the market. Consolidation of smaller competitors may also result in increased competition. Increased competition could result in price reductions, reduced margins or loss of market share, any of which could materially and adversely affect the Company's business, financial condition, cash flows and results of operations. Management of Growth Over the past several years, the Company has experienced a period of rapid growth that has placed, and is expected to continue to place, a significant strain on the Company's management, operational and financial resources. This situation was compounded by the Citation Acquisition. The Company's growth 15 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) is expected to require the addition of new management personnel, the development of additional expertise by existing management personnel and additional manufacturing space. 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, cash flows and results of operations. Substantial Leverage and Ability to Service Debt 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 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. Uncertainty of Effects of Year 2000 on Computer Programs and Systems The Year 2000 Issue is the result of computer programs being written using two rather than four digits to define the applicable year. Any of the Company's computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including but not limited to, a temporary inability to process transactions or engage in normal business activities. Such failure or errors could occur prior to the actual change in century. Based upon a recent assessment, the Company's management believes that it has determined that all of its existing computer programs will properly utilize dates beyond December 31, 1999. The Company has received written confirmation from all of its significant computer program manufacturers that specific software purchased by the Company is Year 2000 compliant. The Company's customers, suppliers and 16 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) service providers (including financial institutions) are reliant upon computer applications, some of which may contain software that may fail as a result of the upcoming change in century, with respect to functions that materially affect their interactions with the Company. The Company currently has plans to initiate formal communications with all of its significant suppliers and customers to determine the extent to which the Company is vulnerable to those third parties' failure to remediate their own Year 2000 issues. Failure of the software of its customers, suppliers or service providers could have a material adverse impact on the Company's business, financial condition and result of operations. The Company will utilize both internal and external resources in continuing its plan, which include testing its computer systems, and anticipates completion of the Year 2000 project by no later than December 31, 1998. The Company has, and will continue to expense all costs associated with its Year 2000 plans. The total anticipated cost is not expected to have a material effect on the results of operations. The Company's assessments and plans to complete its Year 2000 project are based upon management's best estimates, which were derived utilizing presently available information and numerous assumptions of future events including the continued availability of certain resources, third party communications and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those plans. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct relevant computer codes and similar uncertainties. The failure of the Company to successfully execute its Year 2000 plan could have a material adverse effect on the Company's business, financial condition, cash flows and results of operations. Item 3: Quantitative and Qualitative Disclosures about Market Risk Not applicable. 17 Part II: Other Information Item 1. Legal Proceedings See discussion under Item 3 "Legal Proceedings" in the Company's Form 10-K filed for the fiscal year ended June 30, 1997. Item 4: Submission of Matters to a Vote of Security Holders The Annual Meeting of Stockholders of Sigma Circuits, Inc. was held on December 16, 1997. The matters voted upon at the meeting and the voting of stockholders with respect thereto are as follows: 1. The election of Philip S. Bushnell and Carl H. R. Brockl to the Board of Directors to hold office until the 2000 Annual Meeting of Stockholders and until such director's successor is elected and has qualified, or until such director's earlier death, resignation or removal: For Withheld Philip S. Bushnell 3,663,157 332,095 Carl H. R. Brockl 3,827,157 168,095 2. The amendment and restatement of the Company's 1997 Stock Option Plan, including provisions for (i) transferability of Supplemental Stock Options, (ii) acceleration of vesting and exercisability of options for employees involuntary terminated without cause within thirteen months after a change in control, (iii) extension of the term of the plan until October 2007, and (iv) an increase in the number of shares of Common Stock authorized for issuance under such plan by 200,000 shares. For: 1,618,290 Against: 548,608 Abstain: 21,158 Broker Non-Votes: 1,807,196 3. The amendment of the Company's 1994 Employee Stock Purchase Plan to increase the aggregate number of shares of Common Stock authorized for issuance under such plan by 159,092 shares from 290,908 to 450,000 shares. For: 1,787,373 Against: 381,295 Abstain: 19,388 Broker Non-Votes: 1,807,196 4. The ratification of Deloitte & Touche LLP as the independent auditors of the Company for its fiscal year ending June 30, 1998: For: 3,953,344 Against: 28,200 Abstain: 13,708 Item 6: Exhibits and Reports on Form 8-K A. Exhibits See Index to Exhibits at page 20 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 December 31, 1997. 18 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 6th day of February, 1998. 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 19 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 Amended and Restated 1997 Stock Option Plan.(6) 10.3 Registrant's 1994 Non-Employee Directors' Stock Option Plan, as amended to date.(1) 10.4 Registrant's 1994 Employee Stock Purchase Plan, as amended to date.(6) 10.5 Form of Stock Warrant granted to Cruttenden & Company.(1) 10.6 Lease Agreement between the Registrant and The Kontrabecki Group, dated May 3, 1994, and attachments thereto.(1) 10.7 Lease Agreement between the Registrant and The Kontrabecki Group, dated June 9, 1995, and attachments thereto.(2) 10.8 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) 10.9 Consulting Agreement between the Registrant and Robert P. Cummins, dated July 1, 1997.(5) 10.10 Change-in-Control Severance Agreement between the Registrant and B. Kevin Kelly, dated October 26, 1995.(4) 10.11 Change-in-Control Severance Agreement between the Registrant and Philip S. Bushnell, dated October 26, 1995.(4) 10.12 Convertible Subordinated Promissory Note granted to Citation Enterprise, Inc., dated May 21, 1997.(5)
20 INDEX OF EXHIBITS Exhibit Number Description 10.13 Asset Purchase Agreement between the Registrant, Citation Circuits, Inc., Citation Enterprises, Inc., Citron Inc. and Carl Brockl, dated September 8, 1995.(3) 10.14 Financing Agreement between the Registrant and the CIT Group/Business Credit, Inc., dated May 21, 1997 and exhibits thereto. (5) 10.15 Lease Agreement between the Registrant and G.B.G., dated April 23, 1997, as amended. (5) 10.16 Change-in-Control Severance Agreement between the Registrant and W. Kent Hardwick, dated October 2, 1997.
____________________________________ (1) Incorporated by reference from the exhibit filed with the Company's Registration Statement on Form S-1, as amended, filed May 26, 1994 (File No. 33-76606). (2) Incorporated by reference from the exhibit filed with the Company's Form 10-K, as amended, filed September 28, 1995 (File No. 0-24170). (3) Incorporated by reference from the exhibit filed with the Company's Form 8-K, as amended, filed October 11, 1995 (File No. 0-24170). (4) Incorporated by reference from the exhibit filed with the Company's Registration Statement on Form S-1, as amended, filed February 16, 1996 (File No. 333-1262). (5) Incorporated by reference from the exhibit filed with the Company's Form 10-K, filed September 25, 1997 (File No. 0-24170). (6) Incorporated by reference from the exhibit previously filed with the Company's Registration Statement on Form S-8 filed February 5, 1998 (File No. 333-45641). EX-27 2
5 This schedule contains summary financial information extracted from the Balance Sheet and Statement of Operations filed as part of the Report on Form 10-Q and is qualified in its entirety by reference to such Report on Form 10-Q. 1,000 3-MOS JUN-30-1998 DEC-31-1997 1,227 0 12,568 560 3,429 19,996 33,730 18,558 41,484 11,731 0 0 0 11,320 3,036 41,484 24,666 24,666 19,574 19,574 3,126 0 412 1,554 594 960 0 0 0 960 .23 .19
EX-10 3 1 CHANGE-IN-CONTROL SEVERANCE AGREEMENT WITH W. KENT HARDWICK This Change-in-Control Severance Agreement (the "Agreement") is entered into this 2nd day of October, 1997 (the "Effective Date") between W. Kent Hardwick ("Executive") and Sigma Circuits, Inc., a Delaware corporation (the "Company"). This Agreement is intended to provide Executive with the compensation and benefits described herein upon the occurrence of specific events following a change-in-control of the ownership of the Company. Certain capitalized terms used in this Agreement are defined in Article VII. The Company and Executive hereby agree as follows: Article I Employment by the Company I.1 Executive is currently employed as the Vice President of Sales and Marketing of the Company. I.2 This Agreement shall remain in full force and effect so long as Executive is employed by Company; provided, however, that the rights and obligations of the parties hereto contained in Articles III through VIII shall survive any termination for the longer of (i) twelve months following a Termination Event (as hereinafter defined) (the "Term") or (ii) such longer period provided for in this Agreement. I.3 The Company and Executive each agree and acknowledge that Executive is employed by the Company as an "at-will" employee and that either Executive or the Company has the right at any time to terminate Executive's employment with the Company, with or without cause or advance notice, for any reason or for no reason. The Company and Executive wish to set forth the compensation and benefits which Executive shall be entitled to receive in the event that Executive's employment with the Company terminates under the circumstances described in Article II of this Agreement. I.4 The duties and obligations of the Company to Executive under this Agreement shall be in consideration for Executive's past services to the Company, Executive's continued employment with the Company and Executive's execution of the general waiver and release described in Section 4.3. 2 Article II Termination Events II.1 Involuntary Termination Following Change-in-Control. (a) In the event Executive's employment is involuntarily terminated at any time by the Company without Cause either at the time of or within thirteen (13) months following the occurrence of a Change-in-Control, such termination of employment will be a Termination Event and the Company shall pay Executive the compensation and benefits described in Article III. (b) In the event Executive's employment is either involuntarily terminated by the Company with Cause at any time, or is involuntarily terminated by the Company without Cause at any time other than either at the time of or within thirteen (13) months following the occurrence of a Change-in-Control, then such termination of employment will not be a Termination Event, Executive will not be entitled to receive any payments or benefits under the provisions of this Agreement, except as otherwise specifically set forth herein, and the Company will cease paying compensation or providing benefits to Executive as of Executive's termination date, except as otherwise provided by a written agreement between Executive and the Company. II.2 Voluntary Termination Following Change-in-Control. (a) Executive may voluntarily terminate his employment with the Company at any time. In the event Executive voluntarily terminates his employment for Good Reason either at the time of or within thirteen (13) months following the occurrence of a Change-in-Control, then such termination of employment will be a Termination Event and the Company shall pay Executive the compensation and benefits described in Article III. (b) In the event Executive voluntarily terminates his employment for any reason other than Good Reason, or Executive voluntarily terminates his employment for Good Reason at any time other than either at the time of or within thirteen (13) months following the occurrence of a Change-in-Control, or the Executive's employment terminates on account of either death or physical or mental disability, then such termination of employment will not be a Termination Event, Executive will not be entitled to receive any payments or benefits under the provisions of this Agreement, except as otherwise specifically set forth herein, and the Company will cease paying compensation or providing benefits to Executive as of the Executive's termination date. In the event that Executive's continued employment relationship changes in any manner at a time when an event constituting Good Reason has not occurred, such change in the continued employment relationship will not be a Termination Event, and Executive will not be entitled to receive any payments or benefits under the provisions of this Agreement as a result of such change. 3 Article III Compensation and Benefits Payable III.1 Right to Benefits. If a Termination Event occurs, Executive shall be entitled to receive the benefits described in this Agreement subject to the restrictions and limitations set forth in Article IV. If a Termination Event does not occur, Executive shall not be entitled to receive any benefits described in this Agreement, except as otherwise specifically set forth herein. III.2 Salary Continuation. Upon the occurrence of a Termination Event, Executive shall receive salary continuation benefits in a total amount equal to thirteen (13) months of Executive's Base Salary, less any applicable withholding of federal, state or local taxes. Such salary continuation shall be paid in a single lump sum no later than thirty (30) days following the date of the Termination Event. III.3 Health Insurance Coverage. Following the occurrence of a Termination Event, to the extent permitted by the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") and by the Company's group health insurance policies, Executive and his covered dependents will be eligible to continue their health insurance benefits at their own expense, and later, to convert to an individual policy if they wish. If Executive elects COBRA continuation, the Company shall pay Executive and his covered dependents' COBRA continuation premiums for thirteen (13) months following the date of the Termination Event, provided that the Company's obligation to make such payments shall cease immediately if Executive becomes eligible for other health insurance benefits at the expense of a new employer. Executive agrees to notify a duly authorized officer of the Company, in writing, immediately upon acceptance of any employment following the Termination Event which provides health insurance benefits. This Section 3.3 provides only for the Company's payment of COBRA continuation premiums for the periods specified above. This Section 3.3 is not intended to affect, nor does it affect, the rights of Executive, or Executive's covered dependents, under any applicable law with respect to health insurance continuation coverage. III.4 Stock Option Acceleration. Executive's stock options which are outstanding as of the date of the Termination Event (the "Stock Options") shall become fully vested and exercisable upon the occurrence of the Termination Event. The period of time during which the Stock Options shall remain exercisable, and all other terms and conditions of the Stock Options, shall be as specified in the relevant Stock Option agreements. 3.5 Bonus. If a Termination Event occurs, Executive shall receive a bonus for the fiscal year in which the Termination Event occurs. The amount of the bonus shall be equal to the amount of the bonus the Executive would have been paid had the Executive continued his employment with the Company until the end of such fiscal year multiplied by a fraction in which (i) the numerator is the number of days from and including the first day of the fiscal year until and including the date of the Termination Event, and (ii) the denominator is three hundred sixty-five (365). Such bonus shall be paid on the date Executive would have received the bonus if the Termination Event had not occurred during such fiscal year. Executive's rights to the payment provided in this Section 3.5 shall not be terminated by the application of Section 4.2 of this Agreement. 4 3.6 Mitigation. Except as otherwise specifically provided herein, Executive shall not be required to mitigate damages or the amount of any payment provided under this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided for under this Agreement be reduced by any compensation earned by Executive as a result of employment by another employer or by retirement benefits after the date of the Termination Event, or otherwise. Article IV Limitations And Conditions On Benefits; Amendment Of Agreement IV.1 Reduction in Payments and Benefits; Withholding Taxes. The benefits provided under this Agreement are in lieu of any other benefit provided under any group severance plan of the Company in effect at the time of a Termination Event. The Company shall withhold appropriate federal, state or local income and employment taxes from any payments hereunder. IV.2 Obligations of the Executive. (a) During the Term, Executive agrees not to personally solicit any of the Company's employees to become employed elsewhere or provide the names of such employees to any other company which Executive has reason to believe will solicit such employees. (b) Following the occurrence of a Termination Event, Executive agrees to continue to satisfy his obligations under the terms of the Company's standard form of Proprietary Information and Non-Disclosure Agreement previously executed by Executive (or any comparable agreement subsequently executed by Executive in substitution or supplement thereof). Executive's obligations under this subsection 4.2(b) shall not be limited to the Term. IV.3 Employee Agreement and Release Prior to Receipt of Benefits. Upon the occurrence of a Termination Event, and prior to the receipt of any benefits under this Agreement on account of the occurrence of a Termination Event, Executive shall, as of the date of a Termination Event, execute an employee agreement and release in the form attached hereto as Exhibit A. Such employee agreement and release shall specifically relate to all of Executive's rights and claims in existence at the time of such execution. It is understood that Executive has twenty-one (21) days to consider whether to execute such employee agreement and release and Executive may revoke such employee agreement and release within seven (7) business days after execution of such employee agreement and release. In the event Executive does not execute such employee agreement and release within the twenty-one (21) day period, or if Executive revokes such employee agreement and release within the seven (7) business day period, no benefits shall be payable under this Agreement and this Agreement shall be null and void. Nothing in this Agreement shall limit the scope or time of applicability of such employee agreement and release once it is executed and not timely revoked. 5 IV.4 Certain Reductions in Payments. (a) In the event that any payment received or to be received by Executive pursuant to this Agreement ("Payment") would (i) constitute a "parachute payment" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") and (ii) but for this subsection (a), be subject to the excise tax imposed by Section 4999 of the Code (the "Excise Tax"), then, subject to the provisions of subsection (b) hereof, such Payment shall be reduced, if at all, to the largest amount which Executive, in his discretion, determines would result in maximizing Executive's net proceeds with respect to such Payments (after taking into account the payment of any Excise Tax imposed on such Payment). The determination by Executive of any required reduction pursuant to this subsection (a) shall be conclusive and binding upon the Company. The Company shall reduce a Payment in accordance with this subsection (a) only upon written notice by Executive indicating the amount of such reduction, if any. If the Internal Revenue Service (the "IRS") determines that a Payment is subject to the Excise Tax, then subsection (b) hereof shall apply, and the enforcement of subsection (b) shall be the exclusive remedy to the Company for a failure by Executive to reduce the Payment so that no portion thereof is subject to the Excise Tax. (b) If, notwithstanding any reduction described in subsection (a) hereof (or in the absence of any such reduction), the IRS determines that Executive is liable for the Excise Tax as a result of the receipt of one or more Payments, then Executive shall be obligated to pay back to the Company, within 30 days after final IRS determination, an amount of such Payments equal to the "Repayment Amount." The Repayment Amount with respect to such Payments shall be the smallest such amount, if any, as shall be required to be paid to the Company so that Executive's net proceeds with respect to such Payments (after taking into account the payment of the Excise Tax imposed on such Payments) shall be maximized. Notwithstanding the foregoing, the Repayment Amount with respect to such Payments shall be zero if a Repayment Amount of more than zero would not eliminate the Excise Tax imposed on such Payments. If the Excise Tax is not eliminated pursuant to this subsection (b), Executive shall pay the Excise Tax. IV.5 Amendment or Termination of This Agreement. This Agreement may be changed or terminated only upon the mutual written consent of the Company and Executive. The written consent of the Company to a change or termination of this Agreement must be signed by the Company's Chief Executive Officer, after such change or termination has been approved by the Compensation Committee of the Company's Board of Directors. 6 Article V Other Rights And benefits Not Affected V.1 Nonexclusivity. Nothing in the Agreement shall prevent or limit Executive's continuing or future participation in any benefit, bonus, incentive or other plans, programs, policies or practices provided by the Company and for which Executive may otherwise qualify, nor shall anything herein limit or otherwise affect such rights as Executive may have under any stock option or other agreements with the Company; provided, however, that in accordance with Section 4.1, any benefits provided hereunder shall be in lieu of any other severance payments to which Executive may otherwise be entitled, including without limitation, under any employment contract or severance plan. Except as otherwise expressly provided herein, amounts which are vested benefits or which Executive is otherwise entitled to receive under any plan, policy, practice or program of the Company at or subsequent to the date of a Termination Event shall be payable in accordance with such plan, policy, practice or program. V.2 Employment Status. This Agreement does not constitute a contract of employment or impose on Executive any obligation to remain as an employee, or impose on the Company any obligation (i) to retain Executive as an employee, (ii) to change the status of Executive as an at-will employee, or (iii) to change the Company's policies regarding termination of employment. Article VI Non-alienation Of Benefits No benefit hereunder shall be subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, and any attempt to do so shall be void. Article VII Definitions For purposes of the Agreement, the following terms shall have the meanings set forth below: VII.1 "Agreement" means this Change-in-Control Severance Agreement. VII.2 "Base Salary" means Executive's salary (excluding bonus, any other incentive or other payments and stock option exercises) paid by the Company in consideration for Executive's service during the thirteen (13) months ended on the date of occurrence of a Termination Event, which is includable in the gross income of Executive for federal income tax purposes or which would have been includable in gross income except for an election either under Section 125 or 402(e)(3) of the Code or under the terms of a nonqualified deferred compensation arrangement sponsored by the Company. 7 VII.3 "Cause" means misconduct, including but not limited to: (i) conviction of any felony or any crime involving moral turpitude or dishonesty, (ii) participation in a fraud or act of dishonesty against the Company, (iii) conduct by Executive which based upon a good faith and reasonable factual investigation and determination by the Board of Directors of the Company demonstrates gross unfitness to serve, or (iv) intentional, material violation by Executive of any contract between Executive and the Company or any statutory duty of Executive to the Company that is not corrected within thirty (30) days after written notice to Executive thereof. Physical or mental disability shall not constitute "Cause." VII.4 "Change-in-Control" means (i) a merger or consolidation in which the Company is not the surviving corporation, (ii) a reverse merger in which the Company is the surviving corporation but the shares of the Company's common stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise, (iii) a sale of all or substantially all of the Company's assets, (iv) any other capital reorganization in which the beneficial ownership of more than fifty percent (50%) of the shares of the Company entitled to vote changes, or (v) the acquisition by any person, entity or group (excluding any employee benefit plan, or related trust, sponsored or maintained by the Company or any subsidiary of the Company) of the beneficial ownership, directly or indirectly, of securities of the Company representing more than fifty percent (50%) of the combined voting power in the election of directors. VII.5 "Company" means Sigma Circuits, Inc., a Delaware corporation, and any successor thereto. VII.6 "Good Reason" means (i) reduction of Executive's rate of compensation as in effect immediately prior to the Effective Date of this Agreement or in effect immediately prior to the occurrence of a Change-in-Control event, whichever is greater, (ii) failure to provide a package of welfare benefit plans which, taken as a whole, provides substantially similar benefits to those in which the Executive is entitled to participate immediately prior to the occurrence of the Termination Event (except that employee contributions may be raised to the extent of any cost increases imposed by third parties) or any action by the Company which would adversely affect Executive's participation or reduce Executive's benefits under any of such plans, (iii) change in Executive's responsibilities, authority, title or office resulting in diminution of position, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith which is remedied by the Company promptly after notice thereof is given by Executive, (iv) request that Executive relocate to a worksite that is more than 35 miles from his prior worksite, unless Executive accepts such relocation opportunity, (v) material reduction in Executive's duties, (vi) failure or refusal of a successor to the Company to assume the Company's obligations under this Agreement, as provided in Section 8.7, or (vii) material breach by the Company or any successor to the Company of any of the material provisions of this Agreement. VII.7 "Termination Event" means an involuntary termination of employment described in Section 2.1(a) or a voluntary termination of employment described in Section 2.2(a). No other event shall be a Termination Event for purposes of this Agreement. 8 Article VIII General Provisions VIII.1 Notices. Any notices provided hereunder must be in writing and such notices or any other written communication shall be deemed effective upon the earlier of personal delivery (including personal delivery by telex or facsimile) or the third day after mailing by first class mail, to the Company at its primary office location and to Executive at his address as listed in the Company's payroll records. Any payments made by the Company to Executive under the terms of this Agreement shall be delivered to Executive either in person or at his address as listed in the Company's payroll records. VIII.2 Severability. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or any other jurisdiction, but this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provisions had never been contained herein. VIII.3 Waiver. If either party should waive any breach of any provisions of this Agreement, he or it shall not thereby be deemed to have waived any preceding or succeeding breach of the same or any other provision of this Agreement. VIII.4 Complete Agreement. This Agreement, including Exhibits A and B, constitutes the entire agreement between Executive and the Company and it is the complete, final, and exclusive embodiment of their agreement with regard to this subject matter. It is entered into without reliance on any promise or representation other than those expressly contained herein. VIII.5 Counterparts. This Agreement may be executed in separate counterparts, any one of which need not contain signatures of more than one party, but all of which taken together will constitute one and the same Agreement. VIII.6 Headings. The headings of the Articles and Sections hereof are inserted for convenience only and shall neither be deemed to constitute a part hereof nor to affect the meaning thereof. VIII.7 Successors and Assigns. This Agreement is intended to bind and inure to the benefit of and be enforceable by Executive and the Company, and their respective successors, assigns, heirs, executors and administrators, except that Executive may not delegate any of his duties hereunder and he may not assign any of his rights hereunder without the written consent of the Company, which consent shall not be withheld unreasonably. VIII.8 Attorney Fees. If either party hereto brings any action to enforce his or its rights hereunder, the prevailing party in any such action shall be entitled to recover his or its reasonable attorneys' fees and costs incurred in connection with such action. 9 VIII.9 Arbitration. In order to ensure rapid and economical resolution of any dispute which may arise under this Agreement, Executive and the Company agree that any and all disputes or controversies, arising from or regarding the interpretation, performance, enforcement or termination of this Agreement shall be resolved by final and binding arbitration under the procedures set forth in the Arbitration Procedure attached hereto as Exhibit B and the then existing Judicial Arbitration and Mediation Services Rules, Inc. ("JAMS") of Practice and Procedure or the rules of practice and procedure of any successor entity to JAMS (except insofar as they are inconsistent with the procedures set forth in the enclosed Arbitration Procedure). BY ENTERING INTO THIS AGREEMENT, THE COMPANY AND EXECUTIVE ACKNOWLEDGE THAT THEY ARE WAIVING THEIR RIGHT TO JURY TRIAL OF ANY DISPUTE COVERED BY THIS AGREEMENT. VIII.10 Choice of Law. All questions concerning the construction, validity and interpretation of this Agreement will be governed by the law of the State of California. VIII.11 Non-Publication. The parties mutually agree not to disclose publicly the terms of this Agreement except to the extent that disclosure is mandated by applicable law. VIII.12 Construction of Plan. In the event of a conflict between the text of the Agreement and any summary, description or other information regarding the Agreement, the text of the Agreement shall control. In Witness Whereof, the parties have executed this Agreement on the day and year written above. Sigma Circuits, Inc., W. Kent Hardwick a Delaware corporation By: /s/ Philip S. Bushnell /s/ W. Kent Hardwick Name: Philip S. Bushnell Title: Senior Vice President, Finance and Administration and Chief Financial Officer Exhibit A: Employee Agreement and Release Exhibit B: Arbitration Procedure 1 Exhibit A Employee Agreement and Release I understand and agree completely to the terms set forth in the foregoing agreement. I acknowledge that I have read and understand Section 1542 of the California Civil Code which reads as follows: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor." I hereby expressly waive and relinquish all rights and benefits under that section and any law of any jurisdiction of similar effect with respect to my release of any claims I may have against the Company. Except as otherwise set forth in this Agreement, I hereby release, acquit and forever discharge the Company, its parents and subsidiaries, and their officers, directors, agents, servants, employees, shareholders, successors, assigns and affiliates, of and from any and all claims, liabilities, demands, causes of action, costs, expenses, attorneys fees, damages, indemnities and obligations of every kind and nature, in law, equity, or otherwise, known and unknown, suspected and unsuspected, disclosed and undisclosed (other than any claim for indemnification I may have as a result of any third party action against me based on my employment with the Company), arising out of or in any way related to agreements, events, acts or conduct at any time prior to and including the Effective Date of this Agreement, including but not limited to: all such claims and demands directly or indirectly arising out of or in any way connected with my employment with the Company or the termination of that employment, including but not limited to, claims of intentional and negligent infliction of emotional distress, any and all tort claims for personal injury, claims or demands related to salary, bonuses, commissions, stock, stock options, or any other ownership interests in the Company, vacation pay, fringe benefits, expense reimbursements, severance pay, or any other form of compensation; claims pursuant to any federal, state or local law or cause of action including, but not limited to, the federal Civil Rights Act of 1964, as amended; the federal Age Discrimination in Employment Act of 1967, as amended ("ADEA"); the federal Americans with Disabilities Act of 1990; the California Fair Employment and Housing Act, as amended; tort law; contract law; wrongful discharge; discrimination; fraud; defamation; emotional distress; and breach of the implied covenant of good faith and fair dealing; provided, however, that nothing in this paragraph shall be construed in any way to release the Company from its obligation to indemnify me pursuant to the Company's Indemnification Agreement. I acknowledge that I am knowingly and voluntarily waiving and releasing any rights I may have under ADEA. I also acknowledge that the consideration given for the waiver and release in the preceding paragraph hereof is in addition to anything of value to which I was already entitled. I further acknowledge that I have been advised by this writing, as required by the ADEA, that: (A) my waiver and release do not apply to any rights or claims that may arise after the Effective Date of this Agreement; (B) I have the right to consult with an attorney prior to executing this Agreement; (C) I have twenty-one (21) days to consider this Agreement (although I may choose to voluntarily execute this Agreement earlier); (D) I have seven (7) days following the execution of this Agreement by the parties to revoke the Agreement; and (E) this Agreement shall not be effective until the date upon which the revocation period has expired, which shall be the eighth day after this Agreement is executed by me, provided that the Company has also executed this Agreement by that date ("Effective Date"). By: /s/ W. Kent Hardwick W. Kent Hardwick Date: 1 Exhibit B Arbitration Procedure 1. The parties agree that any dispute that arises in connection with this Agreement or the termination of this Agreement shall be resolved by binding arbitration in the manner described below. 2. A party intending to seek resolution of any dispute under the Agreement by arbitration shall provide a written demand for arbitration to the other party, which demand shall contain a brief statement of the issues to be resolved. 3. The arbitration shall be conducted in Santa Clara County, California, by a mutually acceptable retired judge from the panel of Judicial Arbitration and Mediation Services, Inc. or any entity performing the same type of services that succeeds to its business ("JAMS"). At the request of either party, arbitration proceedings will be conducted in the utmost secrecy and, in such case, all documents, testimony and records shall be received, heard and maintained by the arbitrator in secrecy under seal, available for inspection only by the parties to the arbitration, their respective attorneys, and their respective expert consultants or witnesses who shall agree, in advance and in writing, to receive all such information confidentially and to maintain such information in secrecy, and make no use of such information except for the purposes of the arbitration, unless compelled by legal process. 4. The arbitrator is required to disclose any circumstances that might preclude the arbitrator from rendering an objective and impartial determination. In the event the parties cannot mutually agree upon the selection of a JAMS arbitrator, the President of JAMS shall designate the arbitrator. 5. The party demanding arbitration shall promptly request that JAMS conduct a scheduling conference within fifteen (15) days of the date of that party's written demand for arbitration or on the first available date thereafter on the arbitrator's calendar. The arbitration hearing shall be held within thirty (30) days after the scheduling conference or on the first available date thereafter on the arbitrator's calendar. Nothing in this paragraph shall prevent a party from at any time seeking temporary equitable relief, from JAMS or any court of competent jurisdiction, to prevent irreparable harm pending the resolution of the arbitration. 6. Discovery shall be conducted as follows: (a) prior to the arbitration any party may make a written demand for lists of the witnesses to be called and the documents to be introduced at the hearing; (b) the lists must be served within fifteen days of the date of receipt of the demand, or one day prior to the arbitration, whichever is earlier; and (c) each party may take no more than two depositions (pursuant to the procedures set forth in the California Code of Civil Procedure) with a maximum of five hours of examination time per deposition, and no other form of pre- arbitration discovery shall be permitted. 7. It is the intent of the parties that the Federal Arbitration Act ("FAA") shall apply to the enforcement of this provision unless it is held inapplicable by a court with jurisdiction over the dispute, in which event the California Arbitration Act ("CAA") shall apply. 2 8. The arbitrator shall apply California law, including the California Evidence Code, and shall be able to decree any and all relief of an equitable nature, including but not limited to such relief as a temporary restraining order, a preliminary injunction, a permanent injunction, or replevin of Company property. The arbitrator shall also be able to award actual, general or consequential damages, but shall not award any other form of damage (e.g., punitive damages). 9. Each party shall pay its pro rata share of the arbitrator's fees and expenses, in addition to other expenses of the arbitration approved by the arbitrator, pending the resolution of the arbitration. The arbitrator shall have authority to award the payment of such fees and expenses to the prevailing party, as appropriate in the discretion of the arbitrator. Except as provided in the Change-in-Control Severance Agreement, each party shall pay its own attorneys' fees, witness fees and other expenses incurred for its own benefit. 10. The arbitrator shall render a written award setting forth the reasons for his or her decision. The decree or judgment of an award rendered by the arbitrator may be entered and enforced in any court having jurisdiction over the parties. The award of the arbitrator shall be final and binding upon the parties without appeal or review except as permitted by the FAA, or if the FAA is not applicable, as permitted by the CAA. -----END PRIVACY-ENHANCED MESSAGE-----