<PAGE> 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.
</PAGE>
<PAGE> 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
</PAGE>
<PAGE> 3
Part I: Financial Information
Item 1: Financial Statements
SIGMA CIRCUITS, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
(in thousands)
December 31, June 30,
1997 1997
<S> <C> <C>
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
</TABLE>
See notes to condensed financial statements
<PAGE> 4
Item 1: Financial Statements (continued)
SIGMA CIRCUITS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
(in thousands, except share
and per share data)
Three Months Ended Six Months Ended
December 31, December 31,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
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
</TABLE>
See notes to condensed financial statements.
</PAGE>
<PAGE> 5
Item 1: Financial Statements (continued)
SIGMA CIRCUITS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
(in thousands)
Six Months Ended
December 31,
1997 1996
<S> <C> <C>
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)
</TABLE>
See notes to condensed financial statements.
</PAGE>
<PAGE> 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.
<TABLE>
Three Months Ended Six Months Ended
December 31, December 31,
1997 1996 1997 1996
<S> <C> <C> <C> <C> >
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
</TABLE>
</PAGE>
<PAGE> 7
Item 1: Financial Statements (continued)
<TABLE>
Three Months Ended Six Months Ended
December 31, December 31,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
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
</TABLE>
Inventories
<TABLE>
Inventories consist of (in thousands):
December 31, June 30,
1997 1997
<S> <C> <C>
Raw Materials $ 983 $ 877
Work in Process 1,731 1,416
Finished Goods 715 504
Inventories $3,429 $2,797
</TABLE>
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.
</PAGE>
<PAGE>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.
</PAGE>
<PAGE> 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.
<TABLE>
Three Months Ended Six Months Ended
December 31, December 31,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
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%
</TABLE>
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
</PAGE>
<PAGE> 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.
</PAGE>
<PAGE> 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
</PAGE>
<PAGE>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.
</PAGE>
<PAGE>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.
</PAGE>
<PAGE> 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
</PAGE>
<PAGE> 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
</PAGE>
<PAGE> 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.
</PAGE>
<PAGE> 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.
</PAGE>
<PAGE> 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
</PAGE>
<PAGE> 19
INDEX OF EXHIBITS
<TABLE>
Exhibit
<S> <C>
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)
</TABLE>
</PAGE>
<PAGE> 20
INDEX OF EXHIBITS
<TABLE>
Exhibit
Number Description
<S> <C>
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.
</TABLE>
____________________________________
(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).
</PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 1,227
<SECURITIES> 0
<RECEIVABLES> 12,568
<ALLOWANCES> 560
<INVENTORY> 3,429
<CURRENT-ASSETS> 19,996
<PP&E> 33,730
<DEPRECIATION> 18,558
<TOTAL-ASSETS> 41,484
<CURRENT-LIABILITIES> 11,731
<BONDS> 0
0
0
<COMMON> 11,320
<OTHER-SE> 3,036
<TOTAL-LIABILITY-AND-EQUITY> 41,484
<SALES> 24,666
<TOTAL-REVENUES> 24,666
<CGS> 19,574
<TOTAL-COSTS> 19,574
<OTHER-EXPENSES> 3,126
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 412
<INCOME-PRETAX> 1,554
<INCOME-TAX> 594
<INCOME-CONTINUING> 960
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 960
<EPS-PRIMARY> .23
<EPS-DILUTED> .19
</TABLE>
<PAGE> 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.
</PAGE>
<PAGE> 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.
</PAGE>
<PAGE> 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.
</PAGE>
<PAGE> 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.
</PAGE>
<PAGE> 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.
</PAGE>
<PAGE> 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.
</PAGE>
<PAGE> 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.
</PAGE>
<PAGE> 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.
</PAGE>
<PAGE> 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
</PAGE>
<PAGE> 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:
</PAGE>
<PAGE> 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.
</PAGE>
<PAGE> 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.
</PAGE>
