UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the fiscal year ended April 30, 20052006.
Or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from ___________to___________.___________ to ___________.
Commission file number 0-23248
SIGMATRON INTERNATIONAL, INC.
-----------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3918470
- -------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
2201 Landmeier Rd., Elk Grove Village, IL 60007
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 847-956-8000
Securities registered pursuant to Section 12(g) of the Act: ___________________
Common Stock $0.01 par value per share
--------------------------------------
Title of each class
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. [ ] Yes [X] No
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. [ ] Yes [X] No
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. [X] Yes [X[ ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant'sRegistrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X ].10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer" and "large accelerated filer" in Rule 12b-2 of the Securities Exchange
Act of 1934.
Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer [X]
Indicate by check mark whether registrant is a shell company (as defined in Rule
12b-2 of the Act). YesAct. [ ] Yes [X] No
[X ]
The aggregate market value of the voting common equity held by non-affiliates of
the registrant as of October 31, 20042005 (the last business day of the registrant's
most recently completed second fiscal quarter) was $41,872,923$27,226,795 based on the
closing sale price of $11.16$7.25 per share as reported by Nasdaq Small CapCapital Market as of
such date.
The number of outstanding shares of the registrant's Common Stock, as of July
8,
2005,14, 2006, was 3,755,420.3,786,956.
DOCUMENTS INCORPORATED BY REFERENCE
Those sections or portions of the definitive proxy statement of SigmaTron
International, Inc., for use in connection with its 2006 annual meeting of
stockholders, which will be filed within 120 days of the fiscal year ended April
30, 2005,2006, are incorporated by reference into Part III of this Form 10-K.
2
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS........................................................... 3BUSINESS ...................................................... 4
ITEM 1A. RISK FACTORS .................................................. 10
ITEM 1B. UNRESOLVED STAFF COMMENTS ..................................... 14
ITEM 2. PROPERTIES......................................................... 11PROPERTIES .................................................... 14
ITEM 3. LEGAL PROCEEDINGS.................................................. 12PROCEEDINGS ............................................. 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................ 13
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT............................... 13HOLDERS ........... 16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES................ 14SECURITIES ........... 16
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA............................... 15DATA ....................................... 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.............................. 15OPERATIONS .................................. 17
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................................ 22RISK .... 25
ITEM 8. FINANCIAL STATEMENTSTATEMENTS AND SUPPLEMENTARY DATA......................... 22DATA ................... 25
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.............................. 22DISCLOSURE ....................................... 25
ITEM 9A. CONTROLS AND PROCEDURES............................................ 22PROCEDURES ....................................... 25
ITEM 9B. OTHER INFORMATION ............................................. 26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................. 22REGISTRANT ............ 26
ITEM 11. EXECUTIVE COMPENSATION............................................. 23COMPENSATION ........................................ 26
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS................... 23MATTERS ............................ 26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................... 23TRANSACTIONS ................ 26
ITEM 14. PRINCIPAL ACCOUNTINGACCOUNTANT FEES AND SERVICES............................. 23SERVICES ........................ 26
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K...................................................... 23
SIGNATURES............................................................................ 26.................... 27
SIGNATURES ................................................................ 30
3
PART 1
ITEM 1. BUSINESS
CAUTIONARY NOTE:
In addition to historical financial information, this discussion of the
business of SigmaTron International, Inc., its wholly owned subsidiarysubsidiaries
Standard Components de Mexico S.A., and AbleMex S.A. de C.V., its wholly owned
foreign enterprise Wujiang SigmaTron Electronics Co., Ltd. ("SigmaTron China"),
and its procurement branch SigmaTron Taiwan collectively (the "Company") and
other Items in this Annual Report on Form 10-K contain forward-looking
statements concerning the Company's business or results of operations. Words
such as "continue," "will," "expects," "believe," "plans," and similar
expressions identify forward-looking statements. These forward-looking
statements are based on the current expectations of management of the Company.
Because these forward-looking statements involve risks and uncertainties, the
Company's plans, actions and actual results could differ materially. Such
statements should be evaluated in the context of the risks and uncertainties
inherent in the Company's business, including the Company'sour continued dependence on
certain significant customers; the continued market acceptance of products and
services offered by the Company and its customers; pricing pressures from our
customers, suppliers and the market; the activities of competitors, some of
which may have greater financial or other resources than the Company; the
variability of the Company'sour operating results; the variability of our customers'
requirements; the availability and cost of necessary components;components and materials;
the Company's ability to manufacture lead-free assembliescontinue to produce products that are in compliance
with the European Standard of "Restriction of Use of Hazardous Substance
("RoHS") by mid-2006; the ability of the Company and our customers to keep
current with technological changes within our industries; regulatory compliance;
the continued availability and sufficiency of the Company'sour credit arrangements; changes
in U.S., Mexican, Chinese or Taiwanese regulations affecting the Company's
business; the continuedcontinue stability of the U.S., Mexican, Chinese and Taiwanese
economic systems, labor and political conditions; currency fluctuations; and the ability of the Company
to manage its growth;growth, including its expansion into China and its integration of
the Able Electronics operationsCorporation ("Able") operation acquired in July 2005. These
and other factors which may affect the Company's future business and results of
operations are identified throughout the Company's Annual Report on
this Form 10-K
and risk factors contained herein and may be detailed from time to time in the
Company's filings with the Securities and Exchange Commission. These statements
speak as of the date of this report and the Company undertakes no obligation to
update or revise such statements in light of new information, future events or otherwise.
OVERVIEW
The Company operates in one business segment as an independent provider of
electronic manufacturing services ("EMS"), which includes printed circuit board
assemblies and completely assembled (box-build) electronic products. In
connection with the production of assembled products, the Company also provides
services to its customers, including (1) automatic and manual assembly and
testing of products; (2) material sourcing and procurement; (3) design,
manufacturing and test engineering support; (4) warehousing and shipment
services; and (5) assistance in obtaining product approval from governmental and
other regulatory bodies. The Company provides these manufacturing services
through an international network of facilities located in North America, China
and Taiwan.
The Company provides manufacturing and assembly services ranging from the
assembly of individual components to the assembly and testing of box-build
electronic products. The Company has the ability to produce assemblies requiring
mechanical as well as electronic capabilities. The products assembled by the
Company are then incorporated into finished products sold in various industries,
particularly appliance, consumer electronics, gaming, fitness, industrial
electronics, life sciences, semiconductor, telecommunications and automotive.
InDuring August and September 2004 the Company acquired all the interests all of
the outside investors in its affiliate, SMT Unlimited L.P. ("SMTU"), and the
general partner of SMTU, SMT Unlimited, Inc. On October 1, 2004, SMT Unlimited,
Inc. was merged into the Company, and SMTU was liquidated, thereby
4
becoming an operating division of the Company. Prior to the acquisition by the
Company, SMTU was consolidated under FASB Interpretation No. 46 ("FIN46R")
Consolidation of Variable Interest Entities (Footnote H).Entities.
In July 2005 the Company closed on the purchase of all of the outstanding
stock of Able, a company headquartered in Hayward California and its wholly
owned subsidiary, AbleMex S.A. de C.V., located in Tijuana, Mexico. Able is an
ISO 9001:2000 certified EMS company serving Original Equipment Manufacturers in
the life sciences, telecommunications and industrial electronics industries. The
acquisition of Able has allowed the Company to make strides towards achieving
four objectives: (1) to further diversify its markets, capabilities and customer
base, (2) adding a third low-cost manufacturing facility in Tijuana, Mexico, (3)
creating an opportunity to consolidate the California operations into one
facility, and (4) to generate incremental revenue from Able's customers as they
become familiar with the Company's broader array of services. The effective date
of the transaction was July 1, 2005. Able was merged into the Company beginning
in November 2005 and operates as a division of the Company. The purchase price
was approximately $16,800,000 and was recorded as a stock purchase transaction
in the first quarter of fiscal year 2006. The transaction was financed by the
Company's amended credit facility and resulted in an increase of approximately
$8,500,000 in goodwill.
In June 2005 the Company closed on the sale of its Las Vegas, Nevada
operation. The Las Vegas facility operated as a complete EMS center specializing
in the assembly of electronic products and cables for a broad range of customers
primarily in the gaming industry. The effective date of the transaction was May
30, 2005. The transaction was structured as an asset purchase, and included a
$2,000,000 cash payment to the Company for the buyer's purchase of the
machinery, equipment and other assets of the Las Vegas operation. The
transaction was recorded by the Company in the first quarter of fiscal year 2006
and included a gain on the transaction of approximately $311,000. The gain was
offset by a loss of approximately $383,000 from discontinued operations for the
Las Vegas operation for the period ended April 30, 2006.
The Company operates manufacturing facilities in Elk Grove Village,
Illinois; Fremont,Hayward, California; Acuna and Tijuana, Mexico; and Wujiang, China.
The Company maintains materials sourcing offices in Elk Grove Village, Illinois;
Fremont,Hayward, California; Acuna, Mexico; and Taipei, Taiwan. The Company provides warehousing
services in Del Rio, Texas and Huntsville, Alabama.
3
The Company is a Delaware corporation which was organized on November 16,
1993, and commenced operations when it became the successor to all of the assets
and liabilities of SigmaTron L.P., an Illinois limited partnership, through a
reorganization on February 8, 1994.
PRODUCTS AND SERVICES
The Company provides a broad range of manufacturing related outsourcing
solutions for its customers on both a turnkey basis (material purchased by the
Company) and consignment basis (material provided by the customer). These
solutions incorporate the Company's knowledge and expertise in the EMS industry
to provide its customers with advanced manufacturing technologies and high
quality, responsive and flexible manufacturing services. The Company's EMS
solutions provide services from product inception through the ultimate delivery
of a finished good. Such technologies and services include the following:
Supply Chain Management. The Company is primarily a turnkey manufacturer
and directly sources all, or a substantial portion, of the components necessary
for its product assemblies, rather than receiving the raw materials from its
customers on consignment. Turnkey services involve a greater investment in
resources and an increased inventory risk compared to consignment services.
Supply chain management includes the purchasing, management, storage and
delivery of raw components required for the manufacture or assembly of a
customer's product based upon the customer's orders. The Company procures
components from a select group of vendors which meet its standards for timely
delivery, high quality and cost effectiveness, or as directed by its customers.
Raw materials used in the assembly and manufacture of printed circuit boards and
electronic assemblies are generally available from several suppliers, unless
restricted by the customer. The Company does not enter into purchase agreements
with the majority of its major or single-source suppliers. The Company believes
ad-hoc negotiations with its suppliers provides the flexibility needed to source
inventory based on the needs of its customers.
5
The Company believes that its ability to source and procure competitively
priced, quality components is critical to its ability to effectively compete. In
addition to obtaining materials in North America, the Company uses its Taiwanese
procurement office and agents to source materials from the Far East. The Company
believes this office allows it to more effectively manage its relationships with
key suppliers in the Far East by permitting it to respond more quickly to
changes in market dynamics, including fluctuations in price, availability and
quality.
Assembly and Manufacturing. The Company's core business is the assembly of
printed circuit boards through the automated and manual insertion of components
ontoon to raw printed circuit boards. The Company offers its assembly services using
both pin-through-hole ("PTH") and surface mount ("SMT") interconnect
technologies at all of its manufacturing locations. SMT is an assembly process
which allows the placement of a higher density of components directly on both
sides of a printed circuit board. The SMT process is an advancement over the
mature PTH technology, which normally permits electronic components to be
attached to only one side of a printed circuit board by inserting the component
into holes drilled through the board. The SMT process allows original equipment
manufacturers ("OEMs") to use advanced circuitry, while at the same time
permitting the placement of a greater number of components on a printed circuit
board without having to increase the size of the board. By allowing increasingly
complex circuits to be packaged with the components in closer proximity to each
other, SMT greatly enhances circuit processing speed, and thus, board and system
performance.
The Company performs PTH assembly both manually and with automated
component insertion and soldering equipment. Although SMT is a more
sophisticated interconnect technology, the Company intends to continue providing
PTH assembly services for its customers as the Company's customers continue to
require both PTH and SMT capabilities. SigmaTronThe Company is also capable of assembling
fine pitch and ball grid array ("BGA") components. BGA is used for more complex
circuit boards required to perform at higher speeds.
Manufacturing and Related Services. The Company offers The Restriction of
Use of Hazardous Substances ("RoHS") compliant assembly services in order to
comply with the European Union environmental mandate that takes effect July 1,
2006.became effective
Mid-2006 and is currently performing RoHS compliant assembly services at each of
its manufacturing locations. The Company also provides quick turnaround, turnkey
prototype services at all of its locations. In Elk Grove Village, the Company
offers touch screen / LCD assembly services 4
in a clean room environment. In
Acuna, Mexico, the Company offers parylene coating services. In Tijuana, Mexico,
the Company offers diagnostic, repair and rework services for power supplies. In
all locations, the Company offers box-build services, which integrate its
printed circuit board and other manufacturing and assembly technologies into
higher level sub-assemblies and end products. Finally, the Company designs and
manufactures DC to AC inverters.
Product Testing. The Company has the ability to perform both in-circuit and
functional testing of its assemblies and finished products. In-circuit testing
verifies that the correct components have been properly inserted and that the
electrical circuits are complete. Functional testing determines if a board or
system assembly is performing to customer specifications. In addition,
the Company provides X-ray laminography services. The Company seeks to
provide customers with highly sophisticated testing services that are at the
forefront of current test technology.
Warehousing and Distribution. In response to the needs of select customers,
the Company has the ability to provide in-house warehousing, shipping and
receiving and customer brokerage services in Del Rio, Texas for goods
manufactured or assembled in Acuna, Mexico. The Company also has the ability to
provide custom-tailored delivery schedules and services to fulfill the
just-in-time inventory needs of its customers.
MARKETS AND CUSTOMERS
The Company's customers are in the appliance, gaming, industrial
electronics, fitness, life sciences, semiconductor, telecommunications, consumer
electronics and automotive industries. As of April 30, 2005,2006, the Company had
approximately 225160 active customers ranging from Fortune 500 companies to small,
privately held enterprises.
6
The following table shows, for the periods indicated, the percentage of net
sales to the principal end-user markets it serves.
PERCENT OF NET SALES
----------------------------------------------
TYPICAL FISCAL FISCAL FISCAL
MARKETS OEM APPLICATION 2003 2004 2005 2006
- ---------------------- ------------------------------------------- --------------- ------ ------ ------
Appliances Household appliance controls 30.2% 36.4% 37.1% 37.6%
Fitness Treadmills, exercise bikes 13.7 13.4 18.5 20.0
Industrial Electronics Motor controls, power supplies 10.1 13.8 15.6 18.8
Telecommunications Routers 10.9 10.0 11.1
Life Sciences Clinical diagnostic systems and
instruments -- -- 5.0
Semiconductor Equipment Process control and yield management
solutions for semiconductor productions -- -- 3.9
Gaming Slot machines, lighting displays 21.3 17.9 11.6 Telecommunications Pagers, microphones and modems 9.5 10.9 10.02.3
Consumer Electronics Carbon monoxide alarms, tanning beds 13.3sprinkler systems,
battery backup sump pumps 7.1 6.4 1.1
Automotive Automobile interior lighting 1.9 .5 .80.5 0.8 0.2
---- ---- ----
Total 100% 100% 100%
---- ---- ----==== ==== ====
For the fiscal year ended April 30, 2006, Spitfire Controls, Inc. and Life
Fitness accounted for 30.1% and 19.7%, respectively, of the Company's net sales.
For the fiscal year ended April 30, 2005, Spitfire Controls, Inc. and Life
Fitness accounted for 31.5% and 17.5%, respectively, of the Company's net sales.
For the fiscal year ended April 30, 2004, Spitfire Controls, Inc. and Life
Fitness accounted for 35.7% and 13.0%, respectively, of the Company's net sales.
For the fiscal year ended April 30, 2003, Spitfire Controls, Inc. and Life
Fitness accounted for 27.2% and 13.3%, respectively, of the Company's net sales.
Although the Company does not have long term contracts with these two customers,
the Company expects that as a group these customers will continue to account for
a significant percentage of the Company's net sales, although the individual
percentages may vary from period to period.
5
SALES AND MARKETING
The Company markets its services through 2611 independent manufacturers'
representative organizations that together currently employ approximately 6036
sales personnel in the United States and Canada. Independent manufacturers'
representative organizations receive variable commissions based on orders
received by the Company and are assigned specific accounts, not territories. The
members of the Company's senior management are actively involved in sales and
marketing efforts and the Company has 5 direct sales people.employees.
Sales can be a misleading indicator of the Company's financial performance.
Sales levels can vary considerably among customers and products depending on the
mixtype of services consignment(consignment and turnkey,turnkey) rendered by the Company and demandedthe
demand by customers. Consignment orders require the Company to perform
manufacturing services on components and other materials supplied by a customer,
and the Company charges only for its labor, overhead and manufacturing costs,
plus a profit. In the case of turnkey orders, the Company provides, in addition
to manufacturing services, the components and other materials used in assembly.
Turnkey contracts, in general, have a higher dollar volume of sales for each
given assembly, owing to inclusion of the cost of components and other materials
in net sales and cost of goods sold. Variations in the number of turnkey orders
compared to consignment orders can lead to significant fluctuations in the
Company's revenue level.levels. However, the Company does not believe that such
variations are a meaningful indicator of the Company's gross margins.
Consignment orders accounted for less than 5% of the Company's revenues for the
fiscal year ended April 30, 2005.2006.
7
In the past, the timing and rescheduling of orders has caused the Company
to experience significant quarterly fluctuations in its revenue and earnings,
and the Company expectsearnings;
such fluctuations tomay continue.
MEXICO AND CHINA OPERATIONS
The Company's wholly owned subsidiary, Standard Components de Mexico, S.A,
a Mexican corporation, is located in Acuna, Coahuila Mexico, a border town
across the Rio Grande River from Del Rio, Texas, and is 155 miles west of San
Antonio. Standard Components de Mexico, S.A. was incorporated and commenced
operation in 1968. The Company's wholly owned subsidiary AbleMex S.A. de C.V., a
Mexican corporation, is located in Tijuana, Baja California Mexico, a border
town across south of San Diego, California. AbleMex S.A. de C.V. was
incorporated and commenced operations in 2000. The Company believes that one of
the key benefits to having operations in Mexico is its access to cost-effective
labor resources while having geographic proximity to the United States.
The Company provides funds for salaries, wages, overhead and capital
expenditure items as necessary to operate Standard Components de Mexico, S.A.its wholly-owned Mexican and Chinese
subsidiaries. The Company provides funding to Standard Components de Mexico, S.A.its Mexican and Chinese
subsidiaries in U.S. dollars, which are exchanged for pesos and RMB as needed.
The fluctuation of the pesocurrencies from time to time, without an equal or greater
increase in Mexican inflation, has not had a material impact on the financial results of
the Company. In the
fiscal year ended April 30, 20052006 the Company paid approximately $8,400,000$12,040,000 to
Standard Components de Mexico, S.A.its subsidiaries for services provided.
In May 2002 the Company acquired a plant in Acuna, Mexico through seller
financing. The loan of $1,950,000 is payable in equal monthly installments of
approximately $31,000 over six and a half years at a rate of 7% interest per
annum. Prior to acquiring that plant, the Company rented the facility. At April
30, 20052006, approximately $856,000 was outstanding in connection with the
Mexican operation had approximately 1,160 employees.
On July 14, 2005 the Company purchased Able Electronics, Corporation
("Able"). Ablefinancing of that facility.
The Company's wholly owned foreign enterprise SigmaTron China is headquartered in Hayward, California, with an additional
manufacturing facility located in
Tijuana, Mexico. AbleWujiang, China. Wujiang is an ISO 9001:2000
certified EMS company serving Original Equipment Manufacturers in the testlocated approximately 15 miles south of Suzhou, China
and measurement, medical instruments, telecommunications, computer peripherals,
industrial controls and genetic research industries.
CHINA OPERATIONS60 miles west of Shanghai, China.
The Company has entered into an agreement with governmental authorities in
the economic development zone of Wujiang, Jiangsu Province, Peoples Republic of
China, pursuant to which the Company became the lessee of a parcel of land of
approximately ten U.S.100 Chinese acres. The term of the land lease is 50 years.years
(Footnote K, contingencies). The Company built a manufacturing plant office
space and dormitories on this site during the fiscal year ended April 30, 2004. The manufacturing plant and
office space is approximately 80,000 square feet, which can be expanded if
conditions require. SigmaTron China operates at this site as the Company's
wholly owned foreign enterprise. At April 30, 20052006, this operation had 170192
employees.
6
SigmaTron China entered into a loan agreement in April 2005, which provides
for a line of credit from the China Construction Bank. The interest rate under
the agreement is 5.76% and at April 30, 2006, SigmaTron China had $1,237,753
outstanding under the line of credit. The line of credit is collateralized by
the Company's building in Suzhou-Wujiang China and 60 of the 100 Chinese acres
leased at the property (Footnote K, contingencies). The loan was paid in full in
July 2006.
COMPETITION
The EMS industry is highly competitive and subject to rapid change.
Furthermore, both large and small companies compete in the industry, and many
have significantly greater financial resources, more extensive business
experience and greater marketing and production capabilities than the Company.
The significant competitive factors in this industry include price, quality,
service, timeliness, reliability, the ability to source raw components, and
manufacturing and technological capabilities. The Company believes it can
competitively provide all of these services.
In addition, the Company may be operating at a cost disadvantage compared
to manufacturers who have greater direct buying power with component suppliers
or who have lower cost structures. Current and prospective customers continually
evaluate the merits of manufacturing products internally and will from time to
time offer manufacturing services to third parties in order to utilize excess
capacity. During downturns in the electronics industry, OEMs may become more
price sensitive.
8
There can be no assurance that competition from existing or potential
competitors will not have a material adverse impact on the Company's business,
financial condition or results of operations. The introduction of lower priced
competitive products, significant price reductions by the Company's competitors
or significant pricing pressures from its customers could result in price
reductions that would adversely affect the
Company's business, financial condition, and results of operations, as would the
introduction of new technologies which render the Company's manufacturing
process technology less competitive or obsolete.
CONSOLIDATION
The consolidated financial statements include the accounts and transactions
of the Company, its wholly-owned subsidiary,subsidiaries, Standard Components de Mexico,
S.A. and AbleMex S.A. de C.V., its wholly owned foreign enterprise Wujiang
SigmaTron Electronics Co., LTD. and its procurement branch, SigmaTron Taiwan.
The functional currency of the Mexican subsidiaries, Chinese foreign enterprise
and Chinese subsidiaries andTaiwanese procurement branch, SigmaTron Taiwan is the U.S. dollar. The Company adopted the provisions of Financial Accounting
Standards Board ("FASB") Interpretation No. 46R, ("FIN 46R") "Consolidation of
Variable Interest Entities. The Company adopted FIN 46R as of November 1, 2003
as it relates to its former affiliate SMTU. On September 2, 2004, the remaining
minority interest in SMTU was acquired. On October 1, 2004 SMTU was liquidated,
thereby becoming an operating division of the Company.
As a result of consolidation and other transactions involving competitors
and other companies in the Company's markets, the Company occasionally reviews
potential transactions relating to its business, products and technologies. Such
transactions could include mergers, acquisitions, strategic alliances, joint
ventures, licensing agreements, co-promotion agreements, financing arrangements
or other types of transactions. The Company recently completed one such transaction in
July 2005 with the acquisition of Able. In the future, the Company may choose to
enter into other transactions at any time depending on available sources of
financing, and such transactions could have a material impact on the Company,
its business or operations. Recent transactions are disclosed in Footnote KL of
the financial statements included with this Annual Report on Form 10-K.
GOVERNMENTAL REGULATIONS
The Company's operations are subject to certain foreign, federal, state and
local regulatory requirements relating to environmental, waste management, labor
and health and safety matters. Management believes that the Company's business
is operated in material compliance with all such regulations. To date, the cost
to the Company of such compliance to date has not had a material impact on the Company's
business, financial condition or results of operations. However, there can be no
assurance that violations will not occur in the future as a result of human
error, equipment failure or other causes. Further, the Company cannot predict
the nature, scope or effect of environmental legislation or regulatory
requirements that could be imposed or how existing or future laws or regulations
will be administered or interpreted. Compliance with more stringent laws or
regulations, as well as more vigorous enforcement policies of regulatory
agencies, could require substantial expenditures by the Company and could have a
material impact on the Company's business, financial condition and results of
operations. In addition, effective mid-2006 the Company's customers must be in
compliance with 7
the European Standard: the "Restriction of Use of Hazardous
Substance" directive for all of their products that ship to the European
marketplace. The Company's
customers are also requesting that the Company have the lead-freehas RoHS dedicated manufacturing capability.capabilities at all of
its manufacturing operations.
BACKLOG
The Company's backlog as of April 30, 20052006, was approximately $44,000,000,
including approximately $950,000 in backlog for the Company's Las Vegas
operation which subsequently was sold on June 3, 2005 (Footnote K of the
Company's consolidated financial statements included with this Annual Report on
Form 10-K). Backlog consists of contracts or purchase orders with delivery dates
scheduled within the next twelve months.$52,875,000.
The Company currently expects to ship substantially all of the remaining April
30, 20052006, backlog by the end of the 20062007 fiscal year. Backlog as of April 30,
20042005, totaled approximately $38,600,000.$44,000,000. Variations in the magnitude and
duration of contracts and purchase orders received by the Company and delivery
requirements generally may result in substantial fluctuations in backlog from
period to period. Because customers may cancel or reschedule deliveries, backlog
may not be a meaningful indicator of future revenue.
9
EMPLOYEES
The Company employed approximately 1,7402,140 people as of April 30, 2005,2006,
including 56106 engaged in engineering or engineering related services, 1,5181,805 in
manufacturing and 166229 in administrative and marketing functions.
The Company has a labor contract with Production Workers Union Local No.
10, AFL-CIO, covering the Company's workers in Elk Grove Village, Illinois which
expires on November 30, 2006. The Company's Mexican subsidiary, Standard
Components de Mexico S.A., has a labor contract with Sindicato De Trabajadores
de la Industra Electronica, Similares y Conexos del Estado de Coahuila, C.T.M.
covering the Company's workers in Acuna, Mexico which expires on January 15,
2006.2007.
Since the time the Company commenced operations, it has not experienced any
union relatedunion-related work stoppages. The Company believes its relations with both
unions and its other employees are good.
EXECUTIVE OFFICERS OF THE REGISTRANTS
NAME AGE POSITION
- ---- --- --------
Gary R. Fairhead 54 President and Chief Executive Officer. Gary R.
Fairhead has been the President of the Company since
January 1990. Gary R. Fairhead is the brother of
Gregory A. Fairhead.
Linda K. Blake 45 Chief Financial Officer, Vice President - Finance,
Treasurer and Secretary since February 1994.
Gregory A. Fairhead 50 Executive Vice President - Operations and Assistant
Secretary. Gregory A. Fairhead has been Executive
Vice President since February 2000 and Assistant
Secretary since 1994. Mr. Fairhead was Vice
President - Mexican Operations for the Company from
February 1990 to February 2000. Gregory A. Fairhead
is the brother of Gary R. Fairhead.
John P. Sheehan 45 Vice President - Director of Materials and Assistant
Secretary since February 1994.
Daniel P. Camp 57 Vice President - China Operation since 2003, and
General Manager/Vice President of Mexican Operations
from 1994 to 2003.
Raj B. Upadhyaya 51 Executive Vice President - Hayward / Tijuana since
2005. Mr. Upadhyaya was the Executive President of
the California operation from 2001 until 2005.
ITEM 1 A. RISK FACTORS
In addition toThe following risk factors should be read carefully in connection with
evaluating our business and the other risks identified herein, the Company's business
is subject toforward-looking information contained in this
Annual Report on Form 10-K. Any of the following risks:risks could materially
adversely affect our business, operations, industry or financial position or our
future financial performance. While the Company believes it has identified and
discussed below the key risk factors affecting its business, there may be
additional risks and uncertainties that are not presently known or that are not
currently believed to be significant that may adversely affect its business,
operations, industry, financial position and financial performance in the
future.
THE COMPANY'S ABILITY TO SECURE AND MAINTAIN SUFFICIENT CREDIT ARRANGEMENTS IS
KEY TO ITS CONTINUED OPERATIONS.
The ability of the Company to secure and maintain sufficient credit
arrangements is key to its continued operations. The Company entered into an Amended Loan and Security Agreement in July
2005, subsequent to the end of the
2005 fiscal year, which providesprovided for a revolving credit facility. The maximum borrowing
limit under the amended revolving credit facility is limited to the lesser of:
(i) $17,000,000 or (ii) an amount equal to the sum of 85% of the receivable
borrowing base and the lesser of $8,500,000 or varying percentages of the
inventory base. The Amended Loan and Security Agreement expires on June 30,
2008, and is subject toincludes certain financial covenants. The Amended Loan and
10
Security Agreement also provides a four year term loan in the amount of
$3,000,000. Interest on the term loan accrues at 5.75% and interest only is due
each quarter through June 30, 2006. Quarterly principal payments of $250,000 are
due in years two through four.beginning June 30, 2006.
In September 2005 the Company further amended the above described credit
facility to increase the revolving credit facility from $17,000,000 to
$22,000,000. The amended revolving credit facility is limited to the lesser of:
(i) $22,000,000 or (ii) an amount equal to the sum of 85% of the receivable
borrowing base and the lesser of $11,000,000 or varying percentages of the
inventory base.
At April 30, 20052006, the Company was in compliance with its financial
covenants and had borrowings of $392,038$17,924,000 outstanding under this line of
credit.credit and a term note of $3,000,000 outstanding.
SigmaTron China entered into a loan agreement in April 2005, which provides
for a line of credit withfrom the China Construction Bank. The terms of the
agreement includes four draws on the line of credit of approximately $121,000,
$362,750, $362,750 and $362,750, on April 15, 2005, July 1, 2005, October 8,
2005, and January 3, 2006, respectively. The interest rate under
the agreement is 5.76% and at April 30, 20052006, SigmaTron China had $121,000$1,237,500
outstanding under the loan.line of credit. The loanline of credit is collateralized by
the Company's
8
building in Suzhou-Wujiang China and 60 of the 100 Chinese acres
(approximately
ten U.S. acres) leased at the property.property (Footnote K, contingencies).
The Company anticipates its credit facility,facilities, cash flow from operations and
leasing resources will be adequate to meet its working capital requirements in
fiscal 2006.year 2007. In the event the business grows rapidly or the Company
considers an acquisition, additional financing resources could be necessary in
the current or future fiscal years. There is no assurance that the Company will
be able to obtain equity or debt financing at acceptable terms in the future.
THE COMPANY EXPERIENCES VARIABLE OPERATING RESULTS.
The Company's results of operations have varied and may continue to
fluctuate significantly from period to period, including on a quarterly basis.
Consequently, results of operations in any period should not be considered
indicative of the results for any future period, and fluctuations in operating
results may also result in fluctuations in the price of the Company's Common
Stock.common
stock.
The Company's quarterly and annual results may vary significantly depending
on numerous factors, many of which are beyond the Company's control. These
factors include:
- Changes in sales mix to customers
- Changes in availability and cost of components
- Volume of customer orders relative to capacity
- Market demand and acceptance of our customers' products
- Price erosion within the EMS marketplace
- Capital equipment requirements needed to remain technologically
competitive
THE COMPANY'S CUSTOMER BASE IS CONCENTRATED.
Sales to the Company's five largest customers accounted for 63%64%, 68%63% and
59%68% of net sales for the fiscal years ended April 30, 2006, 2005 2004 and 2003,2004,
respectively. Further, the Company's two largest customers accounted for 31.5%30.1%
and 17.5%19.7% of net sales, respectively.respectively, for the fiscal year ended April 30, 2006.
Significant reduction in sales to any of the Company's major customers or the
loss of a major customer could have a material impact on the Company's
operations. If the Company cannot replace canceled or reduced orders, sales will
decline, which could have a material impact on the results of operations.
Although the Company believes its relationships with its large customers are
good, the Company generally does not enter into long-term contracts in
connection with the sale of its goods and services. There can be no assurance
that the Company will retain any or all of its large customers. This risk may be
further complicated by pricing pressures and intense competition prevalent in
our industry.
If the Company cannot replace
canceled or reduced orders, sales will decline, which could have a material
impact on the results of operations.11
THERE IS VARIABILITY IN THE REQUIREMENTS OF THE COMPANY'S CUSTOMERS.
The Company does not generally obtain long-term purchase contracts. The
timing of purchase orders placed by the Company's customers is affected by a
number of factors, including variation in demand for the customers' products,
regulatory changes affecting customer industries, customer attempts to manage
inventory, changes in the customers' manufacturing strategies and customers'
technical problems or issues. Many of these factors are outside the control of
the Company.
THE COMPANY AND ITS CUSTOMERS MAY BE UNABLE TO KEEP CURRENT WITH THE INDUSTRY'S
TECHNOLOGICAL CHANGES.
The market for the Company's manufacturing services is characterized by
rapidly changing technology and continuing product development. The future
success of the Company's business will depend in large part upon its customers'
ability to maintain and enhance their technological capabilities, develop and
market manufacturing services which meet changing customer needs and
successfully anticipate or respond to technological changes in manufacturing
processes on a cost-effective and timely basis.
9
Effective mid-2006 the Company's customers must be in compliance with the
European Standard; RoHS for all products shipped to the European marketplace.
The purpose of the directive is to restrict the use of hazardous substances in
electrical and electronic equipment and to contribute to the environmentally
sound recovery and disposal of electrical and electronic equipment waste. The
Company is in the initial stages of working in conjunction with its suppliers
and customers to prepare for the implementation of lead-free wave solder and
reflow systems. In
addition, electronic component manufacturers must produce electronic components
which are lead-free. The Company relies on numerous third-party suppliers for
components used in the Company's production process. Customers' specifications
may require the Company to obtain components from a single source or a small
number of suppliers. There is no assurance these suppliers will comply with
RoHS. The inability to utilize any such suppliers could have a material impact
on the Company's results of operations.
THE COMPANY FACES INTENSE INDUSTRY COMPETITION AND DOWNWARD PRICING PRESSURES.
The EMS industry is highly fragmented and characterized by intense
competition. Many of the Company's competitors have substantially greater
experience, as well as greater manufacturing, purchasing, marketing and
financial resources than the Company.
There can be no assurance that competition from existing or potential
competitors will not have a material adverse impact on the Company's business,
financial condition or results of operations. The introduction of lower priced
competitive products, significant price reductions by the Company's competitors
or significant pricing pressures from its customers could adversely affect the
Company's business, financial condition, and results of operations.
THE COMPANY HAS FOREIGN OPERATIONS THAT MAY POSE ADDITIONAL RISKS.
A substantial part of the Company's manufacturing operations is based in
Mexico. Therefore, the Company's business and results of operations are
dependent upon numerous related factors, including the stability of the Mexican
economy, the political climate in Mexico and Mexico's relations with the United
States, prevailing worker wages, the legal authority of the Company to own and
operate its business in Mexico and the ability to identify, hire, train and
retain qualified personnel and operating management in Mexico.
The Company has opened an operation in China in order to better support and
grow its customer base. It is uncertain whether the China operation will have a
material impact, either positive or negative, on the Company's business,
financial condition and results of operations. The success of the operation is
dependent on the Company's ability to obtain new business; to hire and train
qualified personnel; and to implement an efficient manufacturing environment.
Other factors could have a material impact on the business, including the
Chinese political climate and its relations with the United States, stability of
the Chinese economy and the need for additional capital to expand operations in
China.
The Company obtains many of its materials and components through its office
in Taipei, Taiwan and, therefore, the Company's access to these materials and
components is dependent on the continued success of its Asian suppliers.
12
INABILITY TO MANAGE GROWTH.
The Company may not effectively manage its growth and successfully
integrate the management and operations of its recent Able acquisition.
Acquisitions involve significant financial and operating risks that could have a
material adverse effect on the Company's results of operations.
DISCLOSURE AND INTERNAL CONTROLS.
The Company's management, including the CEO and CFO, do not believe that
its disclosure controls and internal controls will prevent all errors and all
fraud. Controls can provide only reasonable assurance that the procedures will
meet the control objectives. The limitations include errors and mistakes can be
made, including faulty judgments in decision-making. Further, controls can be
circumvented by collusion of two or more people or by management override of
controls. Because of the limitations of a cost effective control system, error
and fraud may occur and not be detected.
THERE IS A RISK OF FLUCTUATION OF VARIOUS CURRENCIES INTEGRAL TO THE COMPANY'S
OPERATIONS.
The Company purchases some of its material components and funds some of its
operations in foreign currencies. From time to time the currencies fluctuate
against the U.S. dollar. Such fluctuations could have a measurable impact on the
Company's operations and performance. These fluctuations are expected to
continue. The Company does not utilize derivatives or hedge foreign currencies
to reduce the risk of such fluctuations.
THE AVAILABILITY OF RAW COMPONENTS MAY AFFECT THE COMPANY'S OPERATIONS.
The Company relies on numerous third-party suppliers for components used in
the Company's production process. Certain of these components are available only
from single sources or a limited number of suppliers. In addition, a customer's
specifications may require the Company to obtain components from a single source
or a small number of suppliers. The loss of any such suppliers or increases in
component cost could have a material impact on the
10
Company's results of
operations. The Company could operate at a cost disadvantage compared to
competitors who have greater direct buying power from suppliers.
THE COMPANY IS DEPENDENT ON KEY PERSONNEL.
The Company depends significantly on its President and Chief Executive
Officer, Gary R. Fairhead, and on other executive officers. The loss of the
services of any of these key employees could have a material impact on the
Company's business and results of operations. In addition, despite significant
competition, continued growth and expansion of the Company's contract
manufacturingEMS business will
require that it attract, motivate and retain additional skilled and experienced
personnel. The inability to satisfy such requirements could have a negative
impact on the Company's ability to remain competitive in the future.
FAVORABLE LABOR RELATIONS ARE IMPORTANT TO THE COMPANY.
The Company currently has labor union contracts with certain of its employees
constituting approximately 70% of its workforce. Although the Company believes
its labor relations are good, any labor disruptions, whether union-related or
otherwise, could significantly impair the Company's business, substantially
increase the Company's costs or otherwise have a material impact on the
Company's results of operations.
FAILURE TO COMPLY WITH ENVIRONMENTAL REGULATIONS COULD SUBJECT THE COMPANY TO
LIABILITY.
The Company is subject to a variety of environmental regulations relating
to the use, storage, discharge and disposal of hazardous chemicals used during
its manufacturing process. Any failure by the Company to comply with present or
future regulations could subject it to future liabilities or the suspension of
production which could have a material negative impact on the Company's results
of operations.
13
THE PRICE OF THE COMPANY'S STOCK IS VOLATILE.
The price of the Company's Common Stockcommon stock historically has experienced
significant volatility due to fluctuations in the Company's revenue and
earnings, other factors relating to the Company's operations, the market's
changing expectations for the Company's growth, overall equity market conditions
and other factors unrelated to the Company's operations. In addition, the
limited float of the Company's Common Stockcommon stock and the limited number of market
makers also affect the volatility of the Company's Common Stock.common stock. Such
fluctuations are expected to continue.
BEING A PUBLIC COMPANY INCREASES THE COMPANY'S ADMINISTRATIVE COSTS.
The Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"), as well as rules
subsequently implemented by the Securities and Exchange Commission and listing
requirements subsequently adopted by Nasdaq in response to Sarbanes-Oxley, have
required changes in corporate governance practices, internal control policies
and audit committee practices of public companies. These new rules, regulations,
and requirements have significantly increased the company's legal, financial compliance and
administrative costs, and made many other activities more time consuming and
costly. Specifically, the Company's ability to become compliant with
Sarbanes-Oxley Section 404, Internal Control Over Financial Reporting, may be
very costly. These new rules and regulations have also made it more difficult
and more expensive for the Company to obtain director and officer liability insurance. These new
rules and regulations could also make it more difficult for us to attract and
retain qualified members of our board of directors, particularly to serve on its
audit committee.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
At April 30, 20052006, the Company had manufacturing facilities located in Elk
Grove Village, Illinois; Las Vegas, Nevada; Wujiang, China; Fremont,Hayward, California and Acuna Mexico.and Tijuana, Mexico and
Wujiang, China. In addition, the Company provides inventory management services
through its Del Rio, Texas, warehouse facilities and materials procurement
services through its Elk Grove Village, Illinois; Las Vegas, Nevada;
Acuna, Mexico; Hayward,
California; and Taipei, Taiwan offices and a warehouse facility in Huntsville,
Alabama.
1114
Certain information about the Company's manufacturing, warehouse and
purchasing facilities is set forth below:
SQUARE OWNED/
LOCATION FEET SERVICES OFFERED LEASED
- ----------------------------- ------- -------------------------------------------------------------------------------------------------------------------- ------
Suzhou-Wujiang, China 147,500 High volume assembly, and testing of PTH and SMT, box-build *
Hayward, CA 126,000 Assembly and testing of PTH, SMT and BGA, box-build, Leased
prototyping, warehousing
Elk Grove Village, IL 118,000 Corporate Headquarters,headquarters, assembly and testing of PTH, SMT and Owned
and
BGA, box-build, prototyping, warehousing
Acuna, Mexico 115,000 High volume assembly, and testing of PTH and SMT, ***
box-build, Owned
transformers Suzhou-Wujiang, China 147,500 High volume assembly, and testing of PTH and SMT, *
box-build**
Las Vegas, NV 38,250 Automatic insertion and cable assembly, PTH, SMT andN/A Leased
testing ****
Del Rio, TX 36,000 Warehouse, portion of which is bonded Leased
Fremont, CA 24,500 AssemblyTijuana, Mexico 26,500 High volume assembly, and testing of PTH SMT and BGA,SMT, box-build Leased
prototyping, warehousingFremont, CA 24,500 N/A Leased
****
Taipei, Taiwan 2,900 Materials procurement, alternative sourcing assistance and Leased
and
quality control
Huntsville, AL ** Just-in-time inventory management and delivery *****
*The* The Company's Wujiang, China building is owned by the Company and the land
is leased from the Chinese government for a 50 year term.term (Footnote K,
contingencies).
** A portion of the facility is leased.
*** During fiscal year 2006 the Las Vegas operation was sold. The Company
continues to be obligated under the primary lease agreement for the
facility and sublets the property to other occupants.
**** In fiscal year 2006 the Fremont operation was consolidated into the Hayward
operation. The Company continues to be obligated under the primary lease
until December 31, 2006.
***** There is no lease for this facility. The Company has entered into a
service agreement whereby contracted warehouse personnel provide services
for the Company and its customer.
***A portion of the facility is leased.
****Subsequent to the year ended April 30, 2005 the Las Vegas operation was
sold. The Company continues to be obligated under the primary lease agreement
for the facilityHayward, California and sublets the property to other occupants.
The Las Vegas, Nevada,Tijuana, Mexico properties and a portion of the
Del Rio, Texas and the Fremont,
California propertiesproperty are occupied pursuant to leases of the premises. The
lease agreements for the Nevada, Texas and California properties expire October
2009, December 2015 and September 2008,2010, respectively. The Alabama space is
provided under a service agreement. The Company's manufacturing facilities
located in Acuna, Mexico and Elk Grove Village, Illinois are owned by the
Company, except for a portion of the facility in Mexico, which is leased. The
properties in Acuna, Mexico and Illinois are financed under separate mortgage
agreements, which mature in November 2008. The Company, through an agent, leases
the purchasing and engineering office in Taipei, Taiwan to coordinate Far East
purchasing and design activities.
In connection with the Company's July 2005 acquisition of Able, which
occurred after the end ofThe Company is considering expanding its 2005Tijuana and Acuna manufacturing
operations during fiscal year, the Company also acquired a
lease for manufacturing space in Hayward, California and Tijuana, Mexico.2007. All facilities are adequately insured.
ITEM 3. LEGAL PROCEEDINGS
On May 25, 2001, Nancy Messina, a former employee of the Company, filed a
lawsuit against the Company in the United States District Court for the Northern
District of Illinois, Eastern Division, asserting claims of sexual harassment
and gender discrimination under Title VII of the Civil Rights Act of 1964 and
15
claims of violation of the Federal Equal Pay Act. The Company believes that it
has meritorious defenses to the claims and is defending itself vigorously in
this action. Although the complaint does not specify a dollar
12
amount, based on information presently available to the Company, the Company
believes that the resolution of these claims will not have a material adverse
effect on the financial condition or results of the operations of the Company.
On September 3, 2002, a lawsuit was filed by the liquidating trustee of
Circuit Systems, Inc. ("CSI") in the United States Bankruptcy Court for the
Northern District of Illinois, Eastern Division, against Gary R. Fairhead,
President and Chief Executive Officer ofIn November 2005 the Company
and a former director of
CSI and other former directors of CSI, alleging in part, that Mr. Fairhead and
the named directors had breached their fiduciary duty to CSI and its
stockholders in a number of respects, and corporate counsel had committed
malpractice. Although the Compliant did not quantify the relief sought, the
initial settlement demand against all defendants was $12 million. On January 9,
2005, the parties to this suit entered into a settlement agreement, which was
approved by the court on January 26, 2005 and was dismissed on February 15,
2005. The financial settlement which provides that the plaintiff willsettled the lawsuit upon the Company's payment of a nominal
amount to be paid
$1,750,000 was satisfied, for the most part, from CSI's directors and officers
liability insurance and from legal malpractice insurance. Mr. Fairhead and the
Company did not contributeapplied to the financial settlement. No defendant admitted to
any liability regarding the claims asserted in the complaint. The Company
determined that it has a duty under Delaware law to indemnify Mr. Fairhead for
his expenses not covered by CSI's directors and officers liability policy, which
consisted of immaterial advancements ofplaintiff's legal costs.expenses.
From time to time the Company is also involved in legal proceedings, claims or
investigations that are incidental to the conduct of the Company's business. In
future periods, the Company could be subjected to cash cost or non-cash charges
to earnings if any of these matters is resolved on unfavorable terms. However,
although the ultimate outcome of any legal matter cannot be predicted with
certainty, based on present information, including our assessment of the merits
of the particular claim, the Company does not expect that these legal
proceedings or claims will have any material adverse impact on its future
consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders in the fourth quarter
of fiscal 2005.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION
- ------------------- --- --------------------------------------------------------------------------
Gary R. Fairhead 53 President and Chief Executive Officer.
Gary R. Fairhead has been the President of the Company since January 1990.
Gary R. Fairhead is the brother of Gregory A. Fairhead.
Linda K. Blake 44 Chief Financial Officer, Vice President - Finance, Treasurer and
Secretary since February 1994.
Gregory A. Fairhead 49 Executive Vice President - Operations and Assistant Secretary.
Gregory A. Fairhead has been Executive Vice President since February
2000 and is Assistant Secretary. Mr. Fairhead was Vice President -
Mexican Operations for the Company from February 1990 to February
2000. Gregory A. Fairhead is the brother of Gary R. Fairhead.
John P. Sheehan 44 Vice President - Director of Materials and Assistant Secretary since
February 1994.
Daniel P. Camp 56 Vice President - China Operation since 2003, Mr. Camp was the General
Manager/Vice President of Mexican Operations from 1994 to 2003.
Raj B. Upadhyaya 50 Executive Vice President - Fremont
13
year 2006.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The Company's Common Stockcommon stock is traded on the Nasdaq SmallCapCapital Market System
under the symbol SGMA. The following table sets forth the range of quarterly
high and low bid information for the Common Stockcommon stock for the periods ended April
30, 20052006, and 2004.2005.
Common Stock as Reported
by Nasdaq
Period High Low
- -------------- ------- ------------- ------ ------
Fiscal 2006:
Fourth Quarter $12.03 $ 8.60
Third Quarter 12.34 6.61
Second Quarter 11.17 6.15
First Quarter 11.96 9.75
Fiscal 2005:
Fourth Quarter $12.930 $10.700$12.93 $10.70
Third Quarter 14.730 10.83014.73 10.83
Second Quarter 11.740 8.52011.74 8.52
First Quarter 14.600 8.750
Fiscal 2004:
Fourth Quarter $25.890 $ 9.900
Third Quarter 33.860 16.000
Second Quarter 28.500 12.800
First Quarter 14.990 5.63014.60 8.75
As of July 8, 2005,14, 2006, there were approximately 7065 holders of record of the
Company's Common Stock,common stock, which does not include shareholders whose stock is held
through securities position listings. The Company estimates there to be
approximately 1,6502,550 beneficial owners of the Company's Common Stock.common stock.
The Company has not paid cash dividends on its Common Stockcommon stock since
completing its February 1994 initial public offering and does not intend to pay
any dividends in the foreseeable future. So long as any indebtedness remains
unpaid under the Company's revolving loan facility (Footnote G), the Company is
prohibited from paying or declaring any cash or other dividends on any of its capital stock,
except stock dividends, without the written consent of the lender under the
facility.
1416
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Years Ended April 30
-----------------------------------
(In thousands except per share data)
2001------------------------------------------------
2002 2003 2004 2005 -------- -------- -------- --------*2006
------- ------- ------- ------- --------
Net Sales $120,798 $102,293 $105,824 $100,494 $106,078$84,798 $84,342 $84,178 $94,312 $124,786
Income (loss) before income tax
expense (benefit) and, minority
interest <1,856> 2,486 9,023 9,219 7,916and discontinued operations 745 6,432 8,446 8,150 2,862
Net incomeIncome from continuing
operations 315 4,063 4,934 4,840 1,926
Net Income (loss) <1,156>from discontinued
operation 1,227 1,651 467 (141) (44)
Net Income 1,542 5,7155,714 5,406 4,699 1,882
Earnings (loss) per share-basic
Continuing operations 0.11 1.41 1.44 1.29 0.51
Discontinued operations 0.43 0.57 0.14 (0.04) (0.01)
------- ------- ------- ------- --------
Total Assets 68,8180.54 1.98 1.58 1.25 0.50
======= ======= ======= ======= ========
Earnings (loss) per share-diluted
Continuing operations 0.11 1.21 1.39 1.27 0.49
Discontinued operations 0.41 0.49 0.14 (0.04) (0.01)
------- ------- ------- ------- --------
Total 0.52 1.70 1.53 1.23 0.48
======= ======= ======= ======= ========
Total assets 51,809 53,400 62,998 66,543 98,940
Long-term debt and capital lease
obligations (including current
maturities) 30,930maturities 17,514 9,911 7,025 7,194 Net income (loss) per common share-
Basic $ <0.40> $ 0.54 $ 1.98 $ 1.58 $ 1.25
Net income (loss) per common share-
Diluted $ <0.40> $ 0.52 $ 1.70 $ 1.53 $ 1.2330,396
* The financial data for 2006 includes the Hayward and Tijuana operation,
which were acquired in July 2005.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In addition to historical financial information, this discussion of the
business of the Company and other Items in this Annual Report on Form 10-K
contain forward-looking statements concerning the Company's business or results
of operations. Words such as "continue," "will," "expects," "believe," "plans,"
and similar expressions identify forward-looking statements. These
forward-looking statements are based on the current expectations of management
of the Company. Because these forward-looking statements involve risks and
uncertainties, the Company's plans, actions and actual results could differ
materially. Such statements should be evaluated in the context of the risks and
uncertainties inherent in the Company's business, including our continued
dependence on certain significant customers; the continued market acceptance of
products and services offered by the Company and its customers; pricing
pressures from our customers, suppliers and the market; the activities of
competitors, some of which may have greater financial or other resources than
the Company; the variability of our operating results; the variability of our
customers' requirements; the availability and cost of necessary components and
materials; the Company's ability to continue to produce products that are in
compliance with the European Standard of "Restriction of Use of Hazardous
Substance ("RoHS") by mid-2006; the ability of the Company and our customers to
keep current with technological changes within our industries; regulatory
compliance; the continued availability and sufficiency of our credit
arrangements; changes in U.S., Mexican, Chinese or Taiwanese regulations
affecting the Company's business; the continue stability of the U.S., Mexican,
Chinese and Taiwanese economic systems, labor and political conditions; and the
ability of
17
the Company to manage its growth, including its expansion into China and its
integration of the Able Electronic Corporation ("Able") operation acquired in
July 2005. These and other factors which may affect the Company's future
business and results of operations are identified throughout the Company's
Annual Report on Form 10-K and risk factors contained herein and may be detailed
from time to time in the Company's filings with the Securities and Exchange
Commission. These statements speak as of the date of this report and the Company
undertakes no obligation to update such statements in light of future events or
otherwise.
OVERVIEW
The Company operates in one business segment as an independent provider of
EMS, which includes printed circuit board assemblies and completely assembled
(box-build) electronic products. In connection with the production of assembled
products, the Company also provides services to its customers, including (1)
automatic and manual assembly and testing of products; (2) material sourcing and
procurement; (3) design, manufacturing and test engineering support; (4)
warehousing and shipment services; and (5) assistance in obtaining product
approval from governmental and other regulatory bodies. The Company provides
these manufacturing services through an international network of facilities
located in the North America, China and Taiwan.
As the demand for electronic products has continued to increase over the
past several months, the lead-time for many components has increased. Pricing
for some components and related commodities has escalated due to the increased
demand and the transition to RoHS components and may continue to increase in the
future periods. The impact of these price increases could have a negative effect
on the Company's gross margins and operating results.
The Company relies on numerous third-party suppliers for components used in
the Company's production process. Certain of these components are available only
from single sources or a limited number of suppliers. In addition, a customer's
specifications may require the Company to obtain components from a single source
or a small number of suppliers. The loss of any such suppliers could have a
material impact on the Company's results of operations, and the Company may be
required to operate at a cost disadvantage compared to competitors who have
greater direct buying power from suppliers. The Company does not enter into
purchase agreements with major or single-source suppliers. The Company believes
that ad-hoc negotiations with its suppliers provides flexibility, given that the
Company's orders are based on the needs of its customers, which constantly
change.
The Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"), as well as new rules
subsequently implemented by the Securities and Exchange Commission and new
listing requirements subsequently adopted by Nasdaq in response to
Sarbanes-Oxley, have required changes in corporate governance practices,
internal control policies and audit committee practices of public companies.
These new rules, regulations, and requirements have increased the company's
legal expenses, financial compliance and administrative costs, made many other
activities more time consuming and costly and diverted the attention of senior
management. These new rules and regulations have also made it more difficult for
the Company to obtain director and officer liability insurance. These new rules
and regulations could also make it more difficult for us to attract and retain
qualified members for our board of directors, particularly to serve on our audit
committee. In addition, if the Company receives a qualified opinion on the
adequacy of its internal control over financial reporting, shareholders could
lose confidence in the reliability of the Company's financial statements, which
could have a material adverse impact on the value of the Company's stock.
Sales can be a misleading indicator of the Company's financial performance.
Sales levels can vary considerably among customers and products depending on the
type of services (consignment and turnkey) rendered by the Company and the
demand by customers. Consignment orders require the Company to perform
manufacturing services on components and other materials supplied by a customer,
and the Company charges only for its labor, overhead and manufacturing costs,
plus a profit. In the case of turnkey orders, the Company provides, in addition
to manufacturing services, the components and other materials used in assembly.
Turnkey contracts, in general, have a higher dollar volume of sales for each
given assembly, owing to inclusion of the cost of components and other materials
in net sales and cost of goods sold. Variations in the number of turnkey orders
compared to consignment orders can lead to significant fluctuations in the
Company's revenue levels. However, the Company does not believe that such
variations are a meaningful indicator of the Company's gross
18
margins. Consignment orders accounted for less than 5% of the Company's revenues
for the year ended April 30, 2006.
In the past, the timing and rescheduling of orders have caused the Company
to experience significant quarterly fluctuations in its revenues and earnings,
and the Company expects such fluctuations to continue.
CRITICAL ACCOUNTING POLICESPOLICIES
Management Estimates and Uncertainties - The preparation of consolidated
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Significant estimates made in preparing the consolidated
financial statements include depreciation and amortization periods, the
allowance for doubtful accounts and reserves for inventory and valuation of
goodwill. Actual results could materially differ from these estimates.
Revenue Recognition - Revenues from sales of product including the
Company's electronic manufacturing service business are recognized when the
product is shipped.shipped to the customer. In general it is the Company's policy to
recognize revenue and related costs when the order has been shipped from our
facilities, which is also the same point that title passes under the terms of
the purchase order except for consignment inventory. Consignment inventory is
shipped from the Company to an independent warehouse for storage or shipped
directly to the customer and stored in a segregated part of the customer's own
facility. Upon the customer's request for inventory, the consignment inventory
is shipped to the customer if the inventory was stored offsite or transferred
from the segregated part of the customer's facility for consumption, or use, by
the customer. The Company recognizes revenue upon such transfer. The Company
does not earn a fee for storing the consignment inventory. The Company provides
a ninety (90) day warranty for workmanship only and does not have any
installation, acceptance or sales incentives, although the Company has
negotiated extended warranty terms in certain instances. The Company assembles
and tests assemblies based on customerscustomers' specifications. Historically the amount
of returns for workmanship issues has been de minimus under the Company's
standard or extended warranties. Any returns for workmanship issues received
after each period end are accrued in the respective financial statements.
15
Inventories - Inventories are valued at the lower of cost or market. Cost
is determined by the first-in, first-out method. The Company establishes
inventory reserves for valuation, shrinkage, and excess and obsolete inventory.
The Company records provisions for inventory shrinkage based on historical
experience to account for unmeasured usage or loss. Actual results differing
from these estimates could significantly affect the Company's inventories and
cost of products sold. The Company records provisions for excess and obsolete
inventories for the difference between the cost of inventory and its estimated
realizable value based on assumptions about future product demand and market
conditions. Actual product demand or market conditions could be different than
that projected by management.
Impairment of Long-Lived Assets - The Company reviews long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. An asset is considered
impaired if its carrying amount exceeds the future net cash flow the asset is
expected to generate. If such asset is considered to be impaired, the impairment
to be recognized is measured by the amount by which the carrying amount of the
asset, if any, exceeds its fair market value. The Company has adopted SFAS No.
144, which establishes a single accounting model for the impairment or disposal
of long-lived assets, including discontinued operations.
Goodwill and Other Intangibles - The Company adopted on June 1, 2001, SFAS
No. 141 "Business Combinations". Under SFAS No. 141, a purchaser must allocate
the total consideration paid in a business combination to the acquired tangible
and intangible assets based on their fair value. The Company adopted SFAS No.
142, "Goodwill and Other Intangible Assets" effective January 1, 2002. Under SFAS No.
142, goodwill is recognized asGoodwill
represents the purchase price in excess cost of an acquired entity over the
net amount assigned to assets acquired and liabilities assumed. Goodwill is not
amortized, but rather tested for impairment on an annual basis and more often if
circumstances require. Impairment losses are recognized whenever the implied fair value of assets acquired in
business combinations. Statement of Financial Accounting Standards (SFAS) No.
142, "Goodwill and Other Intangible Assets", requires the Company to assess
goodwill is less thanfor impairment at least annually in the absence of an indicator of
possible impairment and immediately upon an indicator of possible impairment.
During the fourth quarter of 2006 the Company
19
completed its carrying value.annual assessment of impairment regarding the goodwill recorded.
That assessment, supported by independent appraisals did not identify any
impairment as of April 30, 2006.
NEW ACCOUNTING STANDARDS
In June 2006 FASB Interpretation 48 "Accounting for Uncertainty in Income
Taxes" was issued which clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements in accordance with FASB
Statement No. 109, Accounting for Income Taxes. This Interpretation prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. This Interpretation also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition.
This Interpretation is effective for fiscal years beginning after December
15, 2006, and earlier application of the provisions of this Interpretation is
encouraged if the enterprise has not yet issued financial statements, including
interim financial statements, in the period this Interpretation is adopted. The
Company has not yet determined the impact of FASB Interpretation 48 on its
financial statements.
On June 1, 2005, the FASB issued Statement No. 154, Accounting Changes and
Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3
(SFAS 154). The statement applies to all voluntary changes in accounting
principles, and changes the requirements for accounting for and reporting of a
change in accounting principles. The Company adopted SFAS 154 at December 31,
2005, there is no material change to the Company's operating results as a result
of this adoption.
In December 2004 the Financial Accounting Standards Board issued Statement of Financial Accounting StandardsSFAS No.
123 (revised 2004), Share-Based Payment ("SFAS 123R"123(R)"). The Company is required to adoptadopted
SFAS 123R123(R) on May 1, 2006. SFAS 123R123(R) requires the Company to measure the cost
of employee services received in exchange for an equity award based on the grant
date fair value. The cost will be recognized in financial statements as an
expense over the period during which an employee is required to provide service.
As regulations are
still pending, theThe Company has determined that the adoption SFAS 123(R) will not been able to determine whether thehave a
significant impact will be material.
On December 21, 2004, the Financial Accounting Standards Board ("FASB")
Staff Position ("FSP") FAS 109-I, "Applicationon its financial position, results of FASB Statement No. 109,
Accounting for Income Taxes, to the Tax Deduction on Qualified Production
Activities Provided by the American Jobs Creation Act of 2004" was issued. FSP
FAS 109-I clarifies that this tax deduction must be accounted for asoperations, EPS and
cash flows. However, SFAS 123(R) could have a special
deduction in accordance with Statement 109. As such, the special deduction has
no effect on deferred tax assets and liabilities existing at the date of
enactment. Rather, thematerial impact of this deduction would be reported in the period
in which the deduction is claimed on the Company's
tax return beginning in 2005.
As regulationsresults of operation if additional options are still pending, the Company has not been able to determine
whether the impact will be material; the Company believes that the impact will
not be material.granted.
On December 21, 2004, FSP FAS 109-2, "Accounting and Disclosure Guidance
for the Foreign Earnings Repatriation Provision within the American Jobs
Creation Act of 2004 ("Act")," was issued. FSP FAS 109-2 provides companies
additional time, beyond the financial reporting period during which the Act took
effect, to evaluate the Act's impact on a company's plan for reinvestment or
repatriation of certain foreign earnings for purposes of applying Statement 109.
FSP FAS 109-2 was effective upon issuance. Based on management'sthe Company's analysis of
the repatriation provision of the Act, , although not yet finalized, it is
unlikely that the Company had any foreign earnings to repatriate, and
accordingly, the financial statements do not reflect any provisions for taxes on
unremitted foreign earnings. The impact on the Company doeshas not believe the impact of the Act will bebeen material.
In November 2004 the FASB issued SFAS No. 151, "Inventory Costs - an
amendment of ARB No. 43, Chapter 4." This statement amends the guidance in
Accounting Research Bulletin (ARB) No. 43, Charter 4, "Inventory Pricing," to
clarify the accounting for abnormal amounts of idle facility expense, freight,
handling costs and wasted material (spoilage) and requires that those items be
recognized as current-period charges 16
regardless of whether they meet the
criterion of "abnormal." The statement also requires that allocation of fixed
production overheads to the cost of conversion be based on the normal capacity
of the production facilities. The provisions of this statement are effective for
inventory costs incurred during fiscal years beginning after June 15, 2005 (as
of FebruaryMay 1, 2006, for the Company) and are to be applied prospectively. The
Company anticipatesdoes not believe the impact will not be material.
On October 22, 2004, the President signed the American Jobs Creation Act of
2004 ("the Act"). The Act provides a deduction from income from qualified
domestic production activities, which will be phased in from 2005 through 2010.
In return, the Act also provides for a two-year phase-out (except for certain
pre-existing binding contracts) of the existing Extraterritorial Income ("ETI")
exclusion tax benefit for foreign sales which the World Trade Organization
("WTO") ruled was an illegal export subsidy. The European Union ("EU") believes
that the Act fails to adequately repeal the illegal export subsidies because of
the transitional
20
provisions and has asked the WTO to review whether these transitional provisions
are in compliance with their prior ruling. This will
have no material impact on the Company. Additionally, the Act creates a
temporary incentive for U.S. corporations to repatriate accumulated income
earned abroad by providing an 85% dividend received deduction for certain
dividends from controlled foreign corporations. The impact on the Company has
not been material.
RESULTS OF OPERATIONS:
FISCAL YEAR ENDED APRIL 30, 2006 COMPARED
TO FISCAL YEAR ENDED APRIL 30, 2005
Net sales increased 32.3% to $124,786,476 in fiscal year 2006 from
$94,312,573 in the futureprior year. The Company's sales increased in the industrial
electronics, fitness, life sciences, semiconductor and appliance marketplaces
during fiscal year 2006 as compared to the prior year. The increase in sales
volume in the appliance and fitness industries was partially offset by price
reductions to customers. The Company anticipates pricing pressures from
customers will not be material.
CAUTIONARY NOTE:continue in fiscal year 2007. The following discussion providesincrease in the industrial
electronics, life sciences and semiconductor industries is primarily due to
sales to new customers as the results of acquisition of Able. The acquisition of
Able has allowed the Company to make strides towards achieving four objectives:
(1) to further diversify its markets, capabilities and customer base, (2) adding
a third low-cost manufacturing facility in Tijuana, Mexico, (3) creating an
analysisopportunity to consolidate the California operations into one facility, and (4)
to generate incremental revenue from Able's customers as they become familiar
with the Company's broader array of services.
The Company's sales in a particular industry are driven by the fluctuating
forecasts and end-market demand of the customers within that industry. Sales to
customers are subject to variations from period to period depending on customer
order terminations, the life cycle of customer products and product transition.
There can be no assurance that sales levels or gross margins will remain stable
in future periods. Sales to the Company's financial
conditionfive largest customers accounted for
64% and results63% of operations,net sales for fiscal years 2006 and should be read2005, respectively.
Gross profit decreased to $14,800,099 or 11.9% of net sales in fiscal year
2006 compared to $17,958,154 or 19.0% of net sales in the prior period. The
decrease in the Company's gross profit is the result of pricing pressures within
the EMS industry, an increase in manufacturing supplies and component pricing
and inefficiencies related to the integration of the Able operation acquired in
July 2005. The consolidation of the Fremont and Able Hayward locations was
completed in March 2006. The Company believes operational efficiencies will
improve at both the Hayward and Tijuana manufacturing facilities during fiscal
year 2007. In addition, the Company is currently expanding its Tijuana
manufacturing operation and will transfer specific production from Hayward to
Tijuana. The Company believes this realignment of production will assist in
increasing the operating margins for the Hayward and Tijuana operations.
Selling and administrative expenses increased in fiscal year 2006 to
$10,925,646 or 8.8% of net sales compared to $10,076,082 or 10.6% of net sales
in fiscal year 2005. The increase is primarily due to additional personnel in
the sales department and increased insurance costs incurred in conjunction with
the Selected Consolidatedacquisition of Able. The increase in selling and administrative expenses is
partially offset by a $1,053,000 reduction in bonus expense. The Company
anticipates it will incur additional professional fees related to
Sarbanes-Oxley, specifically Section 404, Internal Control Over Financial
DataReporting.
Interest expense increased to $1,421,455 in fiscal year 2006 compared to
$283,137 in fiscal year 2005. The interest expense increased due to significant
increased borrowings under the Company's lines of credit, primarily due to the
Able acquisition, additional capital leases for machinery and equipment and
rising interest rates. Interest expense for fiscal year 2007 is expected to be
comparable to the Consolidated Financial Statementsamount of interest expense recorded in fiscal year 2006 or
possibly higher.
In fiscal year 2006 tax expense from continuing operations was $935,589
which resulted in an effective rate of 32.7% compared to $3,173,635 in income
tax expense and an effective rate of 38.9% in fiscal year 2005. The effective
tax rate in fiscal year 2006 has decreased compared to prior periods due to
income earned in China. The Company has tax incentives related to its wholly
owned foreign enterprise in China. The Company is currently using an estimate to
calculate the amount of profits for tax purposes generated in China.
21
In June 2005 the Company closed on the sale of its Las Vegas, Nevada
operation. The Las Vegas facility operated as a complete EMS center specializing
in the assembly of electronic products and cables for a broad range of customers
primarily in the gaming industry. The effective date of the Company, and the Notes thereto, appearing in this Annual Report on Form
10-K, as well as in conjunction with the cautionary note concerning
forward-looking information which appears at the beginning of Item 1 and the
risk factors which appear at the end of Item 1.
OVERVIEWtransaction was May
30, 2005. The Company operates in one business segmenttransaction was structured as an independent provider of
electronic manufacturing services ("EMS"), which includes printed circuit board
assembliesasset sale, and completely assembled (box-build) electronic products. In
connection with the production of assembled productsincluded a
$2,000,000 cash payment to the Company also provides
services to its customers including (1) automatic and manual assembly and
testingfor the buyer's purchase of products; (2) material sourcing and procurement; (3) design,
manufacturing and test engineering support; (4) warehousing and shipment
services; and (5) assistance in obtaining product approval from governmentalthe
machinery, equipment and other regulatory bodies. The Company provides these manufacturing services
through an international network of facilities located in the United States,
Mexico, China and Taiwan.
Sales can be a misleading indicatorassets of the Company's financial
performance. Sales levels can vary considerably among customers and products
depending on the mix of services, consignment and turnkey, renderedLas Vegas operation. The
transaction was recorded by the Company in the first quarter of fiscal year 2006
and demanded by its customers. Consignment orders requireincluded a gain on the Company to
perform manufacturing services on components and other materials suppliedtransaction of approximately $311,000. The gain was
offset by a customer,loss of approximately $383,000 on discontinued operations for the
Las Vegas operation for the period ended April 30, 2006.
The following amounts related to the discontinued operation and the Company charges only for its labor, overheadhave been
segregated from continuing operations and manufacturing
costs, plus a profit. In the casereflected as discontinued operations
in each periods consolidated statement of turnkey orders, the Company provides,income (in thousands):
2006 2005 2004
---- ------ ------
Sales 522 11,764 16,316
Income (loss) before tax expense (benefit) (383) (234) 773
Net Income (loss) from discontinued operation 355 (142) 467
Gain on sale of business 311 -- --
Net income (loss) from discontinued operation (44) (142) 467
Net income decreased to $1,882,132 in addition to manufacturing services, the components and other materials used in
assembly. Turnkey contracts, in general, have a higher dollar volume of sales
for each given assembly, owing to inclusion of the cost of components and other
materials in net sales and cost of goods sold. Variations in the number of
turnkey ordersfiscal year 2006 compared to
consignment orders can lead to significant
fluctuations$4,698,799 in the Company's revenue level. However, the Company does not
believe that such variations are a meaningful indicator of the Company's gross
margins. Consignment orders accounted for less than 5% of the Company's revenuesfiscal year 2005. Diluted earnings per share for the year ended
April 30, 2006, was $0.48 compared to $1.23 in fiscal year 2005. InBasic earnings
per share was $0.50 and $1.25 for the past, the timingyear ended April 30 2006, and rescheduling of orders has caused the Company
to experience significant quarterly fluctuations in its revenue and earnings,
and the Company expects such fluctuations to continue.
17
RESULTS OF OPERATIONS:2005,
respectively.
FISCAL YEAR ENDED APRIL 30, 2005 COMPARED
TO FISCAL YEAR ENDED APRIL 30, 2004
Net sales increased 5.6%12.0% to $106,076,965$94,312,573 in fiscal year 2005 from
$100,494,122$84,178,206 in the prior year. The Company's sales increased in the fitness,
industrial electronics and appliance marketplaces during fiscal year 2005 as
compared to the prior year. The increase in sales volume in the fitness and
appliance industries was partially offset by price reductions to customers. The
Company anticipates pricing pressures from customers will continue in fiscal
2006.
Sales in the gaming industry decreased by 6.3% due to a reduction in
orders placed by the Company's customers. Subsequent to the year ended April 30,
2005, the Company sold its Las Vegas operation, which primarily serviced the
gaming industry. The decline in this business has served to further concentrate
the Company's business within the other industries it serves. The Company will
continue to sell into the gaming marketplace out of its remaining operations.
The acquisition of Able will give the Company a presence in a number of new
markets, diversify its current customer base and expand the number of industries
it serves. Concentration of sales by the Company into a specific industry
increases the Company's risks related to business and economic factors within
that industry.2006.
The Company's sales in a particular industry are driven by the fluctuating
forecasts and end-market demand of the customers within that industry. Sales to
customers are subject to variations from period to period depending on customer
order terminations, the life cycle of customer products and product transition.
There can be no assurance that sales levels or gross margins will remain stable
in future periods. Sales to the Company's five largest customers accounted for
63% and 68% of net sales for fiscal years 2005 and 2004, respectively.
Gross profit decreased to $18,567,574$17,958,154 or 17%19% of net sales in fiscal year
2005 compared to $19,115,930$17,992,982 or 19.0%21.4% of net sales in the prior period. The
decrease is due to an increase in price concessions, manufacturing costs and
component pricing. There can be no assurance gross margins will not decrease in
the future.
Selling and administrative expenses increased in fiscal year 2005 to
$10,919,006$10,076,082 or 10.3%10.7% of net sales compared to $9,664,903$9,314,600 or 9.6%11.1% of net sales
in fiscal year 2004. The increase is due to additional personnel in the sales
and purchasing departments, advertising expenditures and increased legal fees.
The increase in selling and administrative expenses is partially offset by a
reduction in bonus expense. The Company anticipates it will incur additional
professional fees related to Sarbanes-Oxley, specifically Section 404, Internal
Control Over Financial Reporting.
Interest expense increased to $283,137 in fiscal year 2005 compared to
$239,792$283,137 in fiscal year 2004. The interest expense increased due to increased
borrowings under the Company's lines of credit, additional capital leases for
machinery and equipment, interest for notes payable in connection with the
acquisition of SMTU and notes payable associated with the purchase of the
Company's corporate and manufacturing facility in Elk Grove Village, Illinois.
22
In fiscal year 2005 tax expense from continuing operations was $3,082,568$3,173,635
which resulted in an effective rate of 38.9% compared to $3,550,038$3,248,706 in income
tax expense and an effective rate of $39.6%$38.5% in fiscal year 2004.
Net income decreased to $4,698,799 in fiscal year 2005 compared to
$5,405,732 in fiscal year 2004. Diluted earnings per share for the year ended
April 30, 2005, was $1.25$1.23 compared to $1.53 in fiscal year 2004. Basic earnings
per share was $1.23$1.25 and $1.58 for the year ended April 30, 2005, and 2004,
respectively.
18
FISCAL YEAR ENDED APRIL 30, 2004 COMPARED
TO FISCAL YEAR ENDED APRIL 30, 2003
Net sales decreased 5% to $100,494,122 in fiscal 2004 from $105,824,257 in
the prior year. The Company's sales decreased in the consumer electronics,
gaming and fitness industries during fiscal 2004. The Company continued to
experience sales growth within the appliance industry in fiscal 2004. The
Company's concentration in a specific industry increases the Company's risk due
to business and economic factors within that specific industry. The Company's
five largest customers accounted for 68% and 62% of net sales in fiscal 2004 and
2003, respectively. Sales to the Company's largest customers can vary from
period to period. In addition, the Company generally does not obtain long-term
purchase contracts. Any significant change in orders from these customers could
materially impact the Company's operating results.
Gross profit decreased to $19,115,930 in fiscal 2004 from $19,919,683 in
the prior year. The reduction in absolute dollars of gross profit is primarily
due to lower sales volume for the fiscal year ended 2004. Gross profit increased
as a percent to net sales to 19.0% compared to 18.8% in fiscal 2003. The overall
increase as a percentage is due to product life cycles, product mix and
component pricing. The Company's gross profit margin can vary considerably due
to price erosion within the EMS industry, product mix, component pricing,
overall capacity utilization, product life cycle, the mix of turnkey and
consignment orders and labor cost. There can be no assurance that gross profit
margins will not decrease in the future.
Selling and administrative expenses decreased in fiscal 2004 to $9,664,903
from $10,048,229 in fiscal 2003. The decrease is primarily due to the receipt of
approximately $283,000 in settlement of an insurance claim, and a reduction in
commission and legal expenses. The Company anticipates administrative expenses
and professional fees in conjunction with Sarbanes-Oxley compliance will
increase significantly in future periods.
Interest expense decreased to $239,792 from $847,846. The decrease is
primarily attributed to the reduction in the loan balance of the Company's
credit facility and lower interest rates.
In fiscal 2004 tax expense was $3,550,038, which resulted in an effective
rate of 39.6% compared to $3,251,511 in income tax expense and an effective rate
of 36.2% in fiscal 2003.
Net income for fiscal 2004 was $5,405,732, which resulted in basic
earnings per share of $1.58 and dilutive earnings per share of $1.53. Net income
for fiscal 2003 was $5,714,924. Basic and dilutive earnings per share were $1.98
and $1.70, respectively for fiscal 2003.
LIQUIDITY AND CAPITAL RESOURCES:
Cash flow provided by operating activities was $1,337,081$1,997,144 for the year
ended April 30, 20052006, compared to $9,368,628$1,337,081 for the prior fiscal year. During
fiscal 2005,year 2006, cash provided by operations was the result of net income, the
non-cash effect of depreciation and amortization and an increase in income taxestrade
accounts payable. The Company has applied its income tax receivable to estimated tax
payments due for fiscal 2004 and part of fiscal 2005. The balance of income
taxes due resulted in an accrual for income taxes for the year ended April 30,
2005. Cash provided by operating activities was partially offset by
an increase in receivablesinventories of approximately $1,624,000 and an increase of approximately
$6,980,000 in inventories.$6,092,000. The increase in
inventories is primarily attributable to an increase in customer required safety
stock and the start up of the Company's China facility and new product programs driven by customers.
STRATEGICfacility.
INVESTING ACTIVITIES.
In fiscal 2005 the Company made several strategic decisions that will be
important to the Company going forward. These included acquiring the portion of
SMTU previously owned by outside investors, selling our Las Vegas operation and
acquiring Able.
On July 14, 2005, the Company closed on the purchase of all of the
outstanding stock of Able, a company headquartered in Hayward California, with
an additional manufacturing facility located in Tijuana, Mexico. Able is an ISO
9001:2000 certified EMS company serving Original Equipment Manufacturers in the
test and measurement, medical instruments, telecommunications, computer
peripherals, industrial controls and
19
genetic research industries. Able's long-term relationships with its customers
will give the Company a presence in a number of new markets, diversify its
current customer base and expand the number of industries it serves. The
effective date of the transaction was July 1, 2005. The purchase price was
$12,800,000 plus the assumption of approximately $3,700,000 in debt and was
recorded as stock purchase transaction in first quarter of fiscal 2006. The
transaction was financed by the Company's amended credit facility and resulted
in an increase of approximately $9,000,000 in goodwill.
On June 3, 2005 the Company closed on the sale of its Las Vegas, Nevada
operation. The Las Vegas facility operated as a complete electronic
manufacturing services ("EMS")EMS center specializing
in the assembly of electronic products and cables for a broad range of customers
primarily in the gaming industry. The effective date of the transaction was May
30, 2005. The transaction was structured as an asset purchase,sale, and included a
$2,000,000 cash payment to the Company for the buyer's purchase of the
machinery, equipment and other assets of the Las Vegas operation. The
transaction will bewas recorded by the Company in the first quarter of fiscal year 2006
and will includeincluded a gain on the transaction of approximately $140,000.$311,000. The Company continues to be obligated
under the primary lease agreementgain was
offset by a loss of approximately $383,000 on discontinued operations for the
Las Vegas operation for the period ended April 30, 2006
In July 2005 the Company closed on the purchase of all of the outstanding
stock of Able, a company headquartered in Hayward California and its wholly
owned subsidiary, AbleMex S.A. de C.V., located in Tijuana, Mexico. Able is an
ISO 9001:2000 certified EMS company serving Original Equipment Manufacturers in
the life sciences, telecommunications and industrial electronics industries. The
acquisition of Able has allowed the Company to make strides towards achieving
four objectives: (1) to further diversify its markets, capabilities and customer
base, (2) adding a third low-cost manufacturing facility in Tijuana, Mexico, (3)
creating an opportunity to consolidate the California operations into one
facility, and subleases(4) to generate incremental revenue from Able's customers as they
become familiar with the facility in part to Grand Products, Inc., the buyerCompany's broader array of services. The effective date
of the transaction was July 1, 2005. Able was merged into the Company beginning
in November 2005 and operates as a division of the Company. The purchase price
was approximately $16,800,000 and was recorded as a stock purchase transaction
in the first quarter of fiscal year 2006. The transaction was financed by the
Company's Las Vegas
operationamended credit facility and resulted in part to Western Money Systems.
Onan increase of approximately
$8,500,000 in goodwill.
In August 2, 2004 the Company acquired the interest of outside investors in
its affiliate SMTU and the general partner of SMTU, SMT Unlimited, Inc., thereby
bringing the Company's interest in its affiliate SMTU to approximately 80%. On
September 2, 2004, the Company acquired the remaining interests in its affiliate
SMTU from its managers. The aggregate price paid for all the interests was
$2,814,699. This aggregate price was paid with $1,330,000 in notes with terms of
up to 2 years and cash in the amount of $1,338,858 and forgiveness of interest
payable. The acquisition was treated as a step acquisition and resulted in
goodwill of $756,959. On October 1, 2004, SMT Unlimited, Inc. was merged into
the Company, and SMTU was liquidated, thereby becoming an operatingthe Fremont division of
the Company. In March 2006 the Fremont location was consolidated into the
Hayward operation.
In fiscal year 2006 the Company purchased approximately $6,300,000 in
machinery and equipment and it anticipates it will make additional machinery and
equipment purchases during fiscal year 2007. The Company expects allexecuted three of its strategic decisions; the acquisitionto five
year capital leases to finance several of the outstanding portion STMU, sale of our Las Vegas operation and acquisition
of Able will be important to the Company's future. In particular, the Able
acquisition directly achieves the Company's strategic goals of diversifying our
markets served, diversifying our customer base and expanding the range of
services we offer.purchases in fiscal year 2006.
23
FINANCING TRANSACTIONS.
The Company entered into an Amended Loan and Security Agreement in July
2005, which providesprovided for a revolving credit facility. The maximum borrowing
limit under the amended revolving credit facility is limited to the lesser of:
(i) $17,000,000 or (ii) an amount equal to the sum of 85% of the receivable
borrowing base and the lesser of $8,500,000 or varying percentages of the
inventory base. The Amended Loan and Security Agreement expires on June 30, 2008
and is subject toincludes certain financial covenants. The Amended Loan and Security
Agreement also provides a four year term loan in the amount of $3,000,000.
Interest accrueson the term loan accrued at 5.75%5.41% to 6.46% and interest only is due
each quarter through June 30, 2006. Quarterly principal payments of $250,000 are
due in years two through four.beginning June 30, 2006. At April 30, 2006, and 2005, $3,000,000 and $0 was
outstanding under the term loan, respectively.
In September 2005 the Company further amended the above described credit
facility to increase the revolving credit facility from $17,000,000 to
$22,000,000. The amended revolving credit facility is limited to the lesser of:
(i) $22,000,000 or (ii) an amount equal to the sum of 85% of the receivable
borrowing base and the lesser of $11,000,000 or varying percentages of the
inventory base.
At April 30, 2006, the Company was in compliance with its financial
covenants and had borrowings of $392,038$17,924,000 outstanding under this line of
credit.credit and a term note of $3,000,000 outstanding. The revolvingsignificant increase under
the line of credit facility is collateralized by substantially alland term note was primarily the result of the domestically located assets of the CompanyAble
transaction and contains certain financial
covenants, including specific covenants pertaining to the maintenance of minimum
tangible net worth and net income. The agreement also restricts annual lease
rentals andfund working capital expenditures and the payment of dividends or distributions
of any cash or other property on any of its capital stock.requirements.
SigmaTron China entered into a loan agreement in April 2005, which provides
for a line of credit withfrom the China Construction Bank. The agreement
provides for four draws on the line of credit of approximately $121,000,
$362,750, $362,750 and $362,750, on April 15, 2005, July 1, 2005, October 8,
2005, and January 3, 2006, respectively. The interest rate under
the agreement is 5.76% and at April 30, 20052006, SigmaTron China had $121,000$1,237,500
outstanding under the loan.line of credit. The loanline of credit is collateralized by
the Company's building in Suzhou-Wujiang China and 60 of the 100 Chinese acres
leased at the property.
20
SigmaTron China had its first production during fiscal 2005, making a
positive contribution to SigmaTron's margins while it continues to ramp up its
sales activities.property (Footnote K, contingencies). The Company believes that certain of Able's customers may be
interestedloan was paid in doing business with SigmaTron China, which could provide
opportunities for added growth.
In fiscal 2005, the Company purchased approximately $3,800,000full in
machinery and equipment and it anticipates it will make additional machinery and
equipment purchases during fiscal 2006. The Company executed three to five year
capital leases to finance the majority of the purchases. The machinery and
equipment purchases were necessary to assist with capacity constraints and the
Company commenced its lead-free manufacturing program in the fourth quarter of
fiscalJuly 2005.
Effective mid-2006 the Company's customers that provide products to the
European Union must be in compliance with the European Standard: the
"Restriction of Use of Hazardous Substance" directive for all of their products
that ship to the European marketplace. The Company's customers are also
requesting that the Company have the lead-free manufacturing capability.
The Company anticipates its credit facility,facilities, cash flow from operations and
leasing resources will be adequate to meet its working capital requirements in
fiscal 2006.year 2007. In the event the business grows rapidly or the Company
considers an acquisition, additional financing resources could be necessary in
the current or future fiscal years. There is no assurance that the Company will
be able to obtain equity or debt financing at acceptable terms in the future.
The Company provides funds for salaries, wages, overhead and capital
expenditure items as necessary to operate its wholly owned subsidiary Standard
Components de Mexico, S.A.wholly-owned Mexican and Chinese
subsidiaries. The Company provides funding to Standard Components
de Mexico, S.A.its Mexican and Chinese
subsidiaries in U.S. dollars, which are exchanged for pesos and RMB as needed.
The fluctuation of the pesocurrencies from time to time, without an equal or greater
increase in Mexican inflation, has not had a material impact on the financial results of
the Company. In fiscal 2005year 2006 the Company paid approximately $8,400,000$12,040,000 to
Standard Components de Mexico, S.A.its subsidiaries for services provided.
OnIn May 2002 the Company acquired a plant in Acuna, Mexico through seller
financing. The loan of $1,950,000 is payable in equal monthly installments of
approximately $31,000 over six and a half years at a rate of 7% interest per
annum. Prior to acquiring this thethat plant, the Company rented the facility. At April
30, 2005, $1,158,8282006, approximately $856,000 was outstanding in connection with the
financing of that facility. Approximately $303,000 was paid under the agreement
during fiscal year 2006.
The impact of inflation for the past three fiscal years has been minimal.
OFF-BALANCE SHEET TRANSACTIONS:
The Company has no off-balance sheet transactions.
24
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS:
The following table summarizes the Company's contractual obligations at
April 30, 20052006, and the effect such obligations are expected to have on its
liquidity and cash flows in future periods.
Payment Obligations
Less than After 5
Total 4/30/06 4/30/08 4/30/101 Year 1-3 Years 3-5 Years Years
---------- --------- ---------- ---------- ------------------- -------
Notes Payable, including
current maturities $4,503,829 $ 482,740 $1,032,717 $2,988,3724,521,049 724,704 3,796,345 0 0
Capital Leases, including
current maturities 1,876,957 637,766 923,051 316,140
SMTU purchase 300,000 300,0004,745,743 1,681,459 2,955,774 108,510 0
Operating leases 6,370,006 1,673,339 4,230,432 466,235 0
Bank debt 22,597,306 2,235,477 20,361,829 0 0
---------- --------- ---------- ---------- ----------------- ---
Total contractual cash
obligations $6,680,786 $1,420,506 $1,955,768 $3,304,51238,234,104 6,314,979 31,344,380 574,745 0
========== ========= ========== ========== ================= ===
21
Maturities for notes payable and bank debt include estimated interest payments
based on prevailing interest rates at April 30, 2006.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Interest Rate Risk
The Company's exposure to market risk for changes in interest rates is due
to primarily to its short-term investments and borrowings under its credit
agreements. The Company's borrowings are at a variable rate and an increase in
interest rates of 1% would result in interest expense increasing by
approximately $222,000 for the year ended April 30, 2006. As of April 30, 20052006,
the Company had no short-term investments and approximately $513,000 in$22,162,000
borrowings under its credit agreements. The Company does not use derivative
financial investments. The Company's cash equivalents, if any, are invested in
overnight commercial paper. The Company does not have any significant cash flow
exposure due to rate changes for its cash equivalents, as these instruments are
short-term.
ITEM 8. FINANCIAL STATEMENTSTATEMENTS AND SUPPLEMENTARY DATA
The response to this item is included in Item 15(a) of this Report.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Our management, including our President and Chief Executive Officer and
Chief Financial Officer, evaluated the effectiveness of the design and operation
of our disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) as of April 30, 2005.2006. Our disclosure controls and
procedures are designed to ensure that information required to be disclosed by
the Company in the reports filed by the Company under the Securities Exchange
Act of 1934 (the "Exchange Act") is recorded, processed, summarized
25
and reported within the time periods specified in the Securities and Exchange
Commission's rules and forms and that such information is accumulated and
communicated to our management, including our President and Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure. Based on this evaluation, our President and Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective as of April 30, 2005.2006.
There has been no change in our internal control over financial reporting
during the quarter ended April 30, 2005,2006, that has materially affected or is
reasonably likely to materially affect, our internal control over financial
reporting.
ITEM 9B OTHER INFORMATION
Not Applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required under this item is incorporated herein by
reference to the Company's definitive proxy statement, filed with the Securities
and Exchange Commission not later than 120 days after the close of the Company's
fiscal year ended April 30, 2005.
22
2006.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this item is incorporated herein by
reference to the Company's definitive proxy statement, filed with the Securities
and Exchange Commission not later than 120 days after the close of the Company's
fiscal year ended April 30, 2005.2006.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required under this item is incorporated herein by
reference to the Company's definitive proxy statement, filed with the Securities
and Exchange Commission not later than 120 days after the close of the Company's
fiscal year ended April 30, 2005.2006.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this item is incorporated herein by
reference to the Company's definitive proxy statement, filed with the Securities
and Exchange Commission not later than 120 days after the close of the Company's
fiscal year ended April 30, 2005.2006.
ITEM 14. PRINCIPAL ACCOUNTINGACCOUNTANT FEES AND SERVICES
The information required under this item is incorporated herein by
reference to the Company's definitive proxy statement, filed with the Securities
and Exchange Commission not later than 120 days after the close of the Company's
fiscal year ended April 30, 2005.2006.
26
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a)(1) and (a)(2)
The financial statements, including required supporting schedule, are
listed in the index to Financial Statements and Financial Schedule filed as part
of this Annual Report on Form 10-K beginning on Page F-1.
2327
INDEX TO EXHIBITS
(a)(3)
3.1 Certificate of Incorporation of the Company, incorporated herein by
reference to Exhibit 3.1 to Registration Statement on Form S-1, File No.
33-72100, dated February 9, 1994.
3.2 Amended and Restated By-laws of the Company, adopted on September 24,
1999, filed as Exhibit 3.2 to the Company's Form 10-K for the fiscal
year ended April 30, 2000, and hereby incorporated by reference.
10.1 Form of 1993 Stock Option Plan - filed as Exhibit 10.4 to the Company's
Registration Statement on Form S-1, File No. 33-72100, and hereby
incorporated by reference. *
10.2 Form of Incentive Stock Option Agreement for the Company's 1993 Stock
Option Plan - filed as Exhibit 10.5 to the Company's Registration
Statement on Form S-1, File No. 33-72100, and hereby incorporated by
reference. *
10.3 Form of Non-Statutory Stock Option Agreement for the Company's 1993
stock Option Plan - filed as Exhibit 10.6 to the Company's Registration
Statement on Form S-1, File No. 33-72100, and hereby incorporated by
reference. *
10.4 2000 Outside Directors' Stock Option Plan and hereby incorporated by
reference - filed as Appendix 1 to the Company's 2000 Proxy Statement
filed on August 21, 2000.
10.5 Loan and Security Agreement between SigmaTron International, Inc. and
LaSalle National Bank dated August 25, 1999, filed as Exhibit 10.26 to
the Company's Form 10-Q for the quarter ended October 31, 1999, and
hereby incorporated by reference.
10.6 Lease Agreement # 00-190 between SigmaTron International, Inc. and
International Financial Services dated July 18, 2000, filed as Exhibit
10.27 to the Company's Form 10-Q for the quarter ended October 31, 2000,
and hereby incorporated by reference.
10.7 Lease Agreement # 00-280 between SigmaTron International, Inc. and
International Financial Services dated December 12, 2000, filed as
Exhibit 10.27 to the Company's Form 10-K for the fiscal year ended April
30, 2001, and hereby incorporated by reference.
10.8 Mortgage and Security Agreement between SigmaTron International, Inc.
and LaSalle Bank National Association, dated November 17, 2003, filed as
Exhibit 10.19 to the Company's Form 10-Q for the quarter ended October
31, 2003, and hereby incorporated by reference.
10.9 Mortgage Note between SigmaTron International, Inc. and LaSalle Bank
National Association, dated November 17, 2003, filed as Exhibit 10.20 to
the Company's Form 10-Q for the quarter ended October 31, 2003, and
hereby incorporated by reference.
10.10 2004 Directors' Stock Option Plan and hereby incorporated by reference -
filed as Appendix C to the Company's 2004 Proxy Statement filed on
August 16, 2004. *
10.11 2004 Employee Stock Option Plan and hereby incorporated by reference -
filed as Appendix B to the Company's 2004 Proxy Statement filed on
August 16, 2004. *
10.12 Change in Control Plan dated May 30, 2002, filed as Exhibit 10.15 to the
Company's Form 10-K for the fiscal year ended April 30, 2005, and hereby
incorporated by reference.
10.13 Stock Purchase Agreement, dated the 14th day of July 2005, between
SigmaTron International, Inc. and Able Electronics Corporation, filed as
Exhibit 10.17 to the Company's Form 10-K for the fiscal year ended April
30, 2005, and hereby incorporated by reference.
10.1 Form of 1993 Stock Option Plan - filed as Exhibit 10.4 to the Company's
Registration Statement on Form S-1, File No. 33-72100, and hereby
incorporated by reference.
*
10.2 Form of Incentive Stock Option Agreement for the Company's 1993 Stock
Option Plan - filed as Exhibit 10.5 to the Company's Registration
Statement on Form S-1, File No. 33-72100, and hereby incorporated by
reference.
*
10.3 Form of Non-Statutory Stock Option Agreement for the Company's 1993 stock
Option Plan - filed as Exhibit 10.6 to the Company's Registration
Statement on Form S-1, File No. 33-72100, and hereby incorporated by
reference.
*
10.4 2000 Outside Directors' Stock Option Plan and hereby incorporated by
reference - filed as Appendix 1 to the Company's 2000 Proxy Statement
filed on August 21, 2000.
10.5 Loan and Security Agreement between SigmaTron International, Inc. and
LaSalle National Bank dated August 25, 1999 filed as Exhibit 10.26 to the
Company's Form 10-Q for the quarter ended October 31, 1999 and hereby
incorporated by reference.
10.6 Amended and Restated Agreement between Nighthawk Systems, Inc. and
SigmaTron International Inc., dated January 1, 2000, filed as Exhibit
10.25 to the Company's Form 10-K for the year ended April 30, 2000 and
hereby incorporated by reference.
10.7 Lease Agreement # 00-190 between SigmaTron International, Inc. and
International Financial Services dated July 18, 2000, filed as Exhibit
10.27 to the Company's Form 10-Q for the quarter ended October 31, 2000
and hereby incorporated by reference.
10.8 Lease Agreement # 00-280 between SigmaTron International, Inc. and
International Financial Services dated December 12, 2000, filed as
Exhibit 10.27 to the Company's Form 10-K for the year ended April 30,
2001 and hereby incorporated by reference.
10.9 Amended Loan and Security Agreement between SigmaTron International, Inc.
and LaSalle Bank National Association, dated October 16, 2002, filed as
Exhibit 10.27 to the Company's Form 10-Q for the quarter ended October
31, 2002 and hereby incorporated by reference.
10.10 Mortgage and Security Agreement between SigmaTron International, Inc. and
LaSalle Bank National Association, dated November 17, 2003, filed as
Exhibit 10.19 to the Company's Form 10-Q for the quarter ended October
31, 2003 and hereby incorporated by reference.
10.11 Mortgage Note between SigmaTron International, Inc. and LaSalle Bank
National Association, dated November 17, 2003, filed as Exhibit 10.20 to
the Company's Form 10-Q for the quarter ended October 31, 2003 and hereby
incorporated by reference.
10.12 Amended Loan and Security Agreement between SigmaTron International, Inc.
and LaSalle Bank National Association, dated January, 2004, filed as
Exhibit 10.21 to the Company's Form 10-Q for the quarter ended January
31, 2004 and hereby incorporated by reference.
24
28
*
10.13 2004 Directors' Stock Option Plan and hereby incorporated by reference -
filed as Appendix C to the Company's 2004 Proxy Statement filed on August
16, 2004.
*
10.14 2004 Employee Stock Option Plan and hereby incorporated by reference -
filed as Appendix B to the Company's 2004 Proxy Statement filed on August
16, 2004.
*
10.15 Change in Control Plan dated May 30, 2002, filed as Exhibit 10.15.
10.16 Ninth Amendment to Loan and Security Agreement between SigmaTron
International, Inc. and LaSalle Bank National Association, dated March
11,
10.14 Tenth Amendment to Loan and Security Agreement between SigmaTron
International, Inc. and LaSalle Bank National Association, dated July
14, 2005, filed as Exhibit 10.18 to the Company's Form 10-Q for the
quarter ended October 31, 2005, filed as Exhibit 10.16.
10.17 Stock Purchase Agreement, dated the 14th day of July, 2005, between
SigmaTron International, Inc. and Able Electronics Corporation, filed as
Exhibit 10.17.
22.1 Subsidiaries of the Registrant - filed as Exhibit 22.1 of the Company's
Registration Statement on Form S-1, File No. 33-72100, and hereby incorporated by reference.
10.15 Eleventh Amendment to Loan and Security Agreement between SigmaTron
International, Inc. and LaSalle Bank National Association, dated
September 12, 2005, filed as Exhibit 10.19 to the Company's Form 10-Q
for the quarter Ended October 31, 2005, and hereby incorporated by
reference.
10.16 Lease Agreement, Number 12, between SigmaTron International, Inc. and
General Electric Capital Corporation, dated November 22, 2005, filed as
Exhibit 10.20 to the Company's Form 10-Q for the quarter ended January
31, 2006, and hereby incorporated by reference.
16.1 Letter regarding change in certifying accountant dated March 15, 2006,
filed as Exhibit 16.1 to the Company's current report on Form 8-K on
March 15, 2006, and hereby incorporated by reference.
21.1 Subsidiaries of the Registrant.
23.1 Consent of BDO Seidman, LLP.
23.2 Consent of Grant Thornton LLP.
31.1 Certification of Principal Executive Officer of the Company Pursuant to
Rule 13a-14(a) under the Exchange Act, as adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer of the Company Pursuant to
Rule 13a-14(a) under the Exchange Act, as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification by the Principal Executive Officer of SigmaTron
International, Inc. Pursuant to Rule 13a-14(b) under the Exchange Act
and Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
32.2 Certification by the Principal Financial Officer of SigmaTron
International, Inc. Pursuant to Rule 13a-14(b) under the Exchange Act
and Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
* Indicates management contract or compensatory plan.
(c) Exhibits
The Company hereby files as exhibits to this Report the exhibits
listed in Item 15(a)(3) above, which are attached hereto or
incorporated herein.
(d) Financial Statements Schedules
The Company hereby files a schedule to this Report the financial
schedules in Item 15, which are attached hereto.
2529
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.
SIGMATRON INTERNATIONAL, INC.
By: /s/ Gary R. Fairhead
----------------------------------------------------------------------
Gary R. Fairhead, President
and Chief Executive Officer
Dated: July 27, 20052006
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned directors and
officers of SigmaTron International, Inc., a Delaware corporation, which is
filing an Annual Report on Form 10-K with the Securities and Exchange Commission
under the provisions of the Securities Exchange Act of 1934 as amended, hereby
constitute and appoint Gary R. Fairhead and Linda K. Blake, and each of them,
each of their true and lawful attorneys-in fact and agents;agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
all capacities, to sign any or all amendments to the report to be filed with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as each of them might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities, and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Franklin D. Sove Chairman of the Board of Directors July 27, 20052006
- -----------------------------------------------
Franklin D. Sove
/s/ Gary R. Fairhead President and Chief Executive Officer July 27, 20052006
- ----------------------------------------------- (Principal Executive Officer)
Gary R. Fairhead (Principal Executive Officer)
/s/ Linda K. Blake Chief Financial Officer, Secretary and Treasurer July 27, 20052006
- ------------------
Linda K. Blake--------------------------- (Principal Financial Officer and Principal
Linda K. Blake Accounting Officer)
/s/ John P. Chen Director July 27, 20052006
- -------------------------------------------
John P. Chen
/s/ W.L. McClelland Director July 27, 20052006
- ----------------------------------------------
W.L. McClelland
/s/ Thomas W. Rieck Director July 27, 20052006
- ----------------------------------------------
Thomas W. Rieck
/s/ Dilip S. Vyas Director July 27, 20052006
- --------------------------------------------
Dilip S. Vyas
/s/ Carl Zemenick Director July 27, 20052006
- --------------------------------------------
Carl Zemenick
2630
INDEX TO FINANCIAL STATEMENTS
PAGE
----
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES
REPORTREPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM..................................... F-2FIRMS............. F-2/F-3
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
ASSETS................................................................................. F-3ASSETS.......................................................... F-4
LIABILITIES AND STOCKHOLDERS' EQUITY................................................... F-4EQUITY............................ F-5
CONSOLIDATED STATEMENTS OF INCOME........................................................ F-5INCOME.................................. F-6
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY................................................................... F-6EQUITY.......... F-7
CONSOLIDATED STATEMENTS OF CASH FLOWS.................................................... F-7FLOWS.............................. F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................................... F-8STATEMENTS......................... F-9
Financial statement schedules not listed above are omitted because they are not
applicable or required.
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
BOARD OF DIRECTORS AND STOCKHOLDERS
SIGMATRON INTERNATIONAL, INC.
ELK GROVE, ILLINOIS
We have audited the accompanying consolidated balance sheet of SigmaTron
International, Inc. as of April 30, 2006 and the related consolidated statements
of income, stockholders' equity and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements and schedule. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SigmaTron
International, Inc. at April 30, 2006 and the results of its operations and its
cash flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America.
/s/ BDO Seidman, LLP
Chicago, Illinois
July 7, 2006
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
SigmaTron International, Inc.
We have audited the accompanying consolidated balance sheets of SigmaTron
International, Inc. and subsidiaries (a Delaware corporation) as of April 30,
2005, and 2004, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the threetwo years in the period ended April 30, 2005.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SigmaTron
International, Inc. and subsidiaries as of April 30, 2005 and 2004, and the
results of its operations and its cash flows for the each of the threetwo years in
the period ended April 30, 2005 in conformity with accounting principles
generally accepted in the United States of America.
GRANT THORNTON LLP
Chicago, Illinois
July 8, 2005, F-2
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30,
ASSETS 2005 2004
------------- -------------
CURRENT ASSETS
Cash and cash equivalents $ 184,014 $ 5,145,814
Restricted cash - 100,000
Accounts receivable, less allowance for doubtful
accounts of $120,000 at April 30, 2005
and 2004. 14,275,308 12,651,272
Inventories, net 21,468,506 14,168,357
Prepaid and other assets 1,168,366 1,315,127
Refundable income taxes - 275,583
Deferred income taxes 429,528 1,902,551
Other receivables 183,666 415,253
------------- -------------
Total current assets 37,709,388 35,973,957
PROPERTY, PLANT AND EQUIPMENT, NET 26,689,940 25,707,901
LONG-TERM ASSETS
Other assets 1,386,770 1,316,814
Goodwill 756,959 -
------------- -------------
Total long-term assets 2,143,729 1,316,814
------------- -------------
TOTAL ASSETS $ 66,543,057 $ 62,998,672
============= =============
The accompanying notes are an integral part of these statements.except for Note C, related to "discontinued operations" which is
dated July 19, 2006
F-3
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- CONTINUED
APRILApril 30,
LIABILITIES AND STOCKHOLDERS' EQUITY2006 2005
2004
------------ ----------------------- -----------
ASSETS
CURRENT LIABILITIES
TradeASSETS
Cash and cash equivalents $ 3,269,925 $ 184,014
Accounts receivable, less allowance for doubtful
accounts payable $ 7,395,111 $ 7,475,026
Accrued expenses 2,269,703 2,987,889
Accrued payroll 1,675,788 1,552,855
Income taxes payable 407,710 -
Notes payable - buildings 430,000 430,000
Notes payable - other 300,000 -
Capital lease obligations 637,766 640,436
------------ ------------
Total current liabilities 13,116,078 13,086,206
NOTES PAYABLE - BANKS 512,958 1,118,514
NOTES PAYABLE - BUILDINGS,
LESS CURRENT PORTION 4,073,828 4,536,159
CAPITAL LEASE OBLIGATIONS,
LESS CURRENT PORTION 1,239,190 299,536
SUBORDINATED DEBENTURE PAYABLE - 1,050,000
DEFERRED INCOME TAXES 1,668,909 1,265,714
------------ ------------
Total liabilities 20,610,963 21,356,129
MINORITY INTEREST IN AFFILIATE - 439,787
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 500,000 shares
authorized, none issuedof $269,000 and outstanding - -
Common stock, $.01 par value; 12,000,000 shares
authorized, 3,755,420 and 3,750,954 shares issued and
outstanding$120,000 at April 30,
2006 and 2005 17,747,414 14,275,308
Inventories, net 31,250,050 21,468,506
Prepaid and 2004, respectively 37,554 37,510
Capital in excessother assets 1,329,774 1,168,366
Refundable income taxes 476,000 --
Deferred income taxes 957,069 429,528
Other receivables 332,298 183,666
----------- -----------
Total current assets 55,362,530 37,709,388
MACHINERY AND EQUIPMENT, NET 30,544,307 26,689,940
LONG-TERM ASSETS
Other assets 1,548,240 1,386,770
Intangible assets, net of par value 19,087,020 19,056,525
Retained earnings 26,807,520 22,108,721
------------ ------------amortization of $583,650 2,186,350 --
Goodwill 9,298,945 756,959
----------- -----------
Total stockholders' equity 45,932,094 41,202,756
------------ ------------long-term assets 13,033,535 2,143,729
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 66,543,057 $ 62,998,672
============ ============ASSETS $98,940,372 $66,543,057
=========== ===========
The accompanying notes are an integral part of these statements.
F-4
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED APRILBALANCE SHEETS - CONTINUED
April 30,
2006 2005
2004 2003
-------------- -------------- ------------------------- -----------
Net salesLIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $13,444,928 $ 106,076,965 $ 100,494,122 $ 105,824,257
Cost of products sold 87,509,391 81,378,192 85,904,574
-------------- -------------- --------------
Gross profit 18,567,574 19,115,930 19,919,683
Selling and administrative7,395,111
Accrued expenses 10,919,006 9,664,903 10,048,229
-------------- -------------- --------------
Operating income 7,648,568 9,451,027 9,871,454
Other income (550,270)2,163,542 2,269,703
Accrued payroll 1,743,076 1,675,788
Income taxes payable 839,438 407,710
Notes payable - bank 1,000,000 --
Notes payable - Interest expensebuildings 430,000 430,000
Notes payable - banks and capitalother -- 300,000
Capital lease obligations 283,137 232,292 847,846
-------------- -------------- --------------
Income before income tax expense1,408,485 637,766
----------- -----------
Total current liabilities 21,029,469 13,116,078
NOTES PAYABLE - BANKS 21,161,900 512,958
NOTES PAYABLE - BUILDINGS,
LESS CURRENT PORTION 3,591,088 4,073,828
CAPITAL LEASE OBLIGATIONS,
LESS CURRENT PORTION 2,804,345 1,239,190
DEFERRED INCOME TAXES 2,458,759 1,668,909
----------- -----------
Total liabilities 51,045,561 20,610,963
COMMITMENTS AND CONTINGENCIES: -- --
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 500,000 shares
authorized, none issued and minority interestoutstanding -- --
Common stock, $.01 par value; 12,000,000 shares
authorized, 3,786,956 and 3,755,420 shares issued and
outstanding at April 30, 2006 and 2005, respectively 37,870 37,554
Capital in excess of affiliate 7,915,701 9,218,735 9,023,608
Income tax expense 3,082,568 3,550,038 3,251,551
-------------- -------------- --------------
Income before minority interest of affiliate 4,833,133 5,668,697 5,772,057
Minority interest in income of affiliate 134,334 262,965 57,133
-------------- -------------- --------------
NET INCOME $ 4,698,799 $ 5,405,732 $ 5,714,924
============== ============== ==============
Net income per common share
Basic $ 1.25 $ 1.58 $ 1.98
============== ============== ==============
Diluted $ 1.23 $ 1.53 $ 1.70
============== ============== ==============
Weighted-average shares of common
stock outstanding
Basic 3,751,792 3,423,999 2,885,652
============== ============== ==============
Diluted 3,815,549 3,541,297 3,355,076
============== ============== ==============par value 19,167,289 19,087,020
Retained earnings 28,689,652 26,807,520
----------- -----------
Total stockholders' equity 47,894,811 45,932,094
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $98,940,372 $66,543,057
=========== ===========
The accompanying notes are an integral part of these statements.
F-5
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTSTATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREEINCOME
YEARS ENDED APRIL 30,
2003, 2004 AND 2005
Capital in Total
Preferred Common excess of Retained stockholders'
stock stock par value earnings equity2006 2005 2004
------------ ------------ ------------ ------------ ----------------------- -----------
Balance at May 1, 2002Net sales $124,786,476 $94,312,573 $84,178,206
Cost of products sold 109,986,377 76,354,419 66,185,224
------------ ----------- -----------
Gross profit 14,800,099 17,958,154 17,992,982
Selling and administrative expenses 10,925,646 10,076,082 9,314,600
------------ ----------- -----------
Operating income 3,874,453 7,882,072 8,678,382
Other income (408,889) (550,270) --
Interest expense - banks and capital lease obligations 1,421,455 283,137 232,292
------------ ----------- -----------
Income from continuing operations before income tax expense 2,861,887 8,149,205 8,446,090
Income tax expense 935,589 3,173,635 3,248,706
------------ ----------- -----------
Income before minority interest of affiliate 1,926,298 4,975,570 5,197,384
Minority interest in income of affiliate -- 134,334 262,965
------------ ----------- -----------
Income before discontinued operations 1,926,298 4,841,236 4,934,419
------------ ----------- -----------
Discontinued operations
Gain on sale of Las Vegas operation (310,731) -- --
(Income) loss from operations of discontinued Las Vegas location 383,134 233,504 (772,645)
Income tax (benefit) expense (28,237) (91,067) 301,332
------------ ----------- -----------
(Loss) income on discontinued operation (44,166) (142,437) 471,313
------------ ----------- -----------
NET INCOME $ 1,882,132 $ 4,698,799 $ 5,405,732
============ =========== ===========
Earnings (loss) per share - basic
Continuing operations $ 28,8120.51 $ 9,436,5541.29 $ 10,988,0651.44
Discontinuing operations (0.01) (0.04) 0.14
------------ ----------- -----------
Total $ 20,453,431
Exercise0.50 $ 1.25 $ 1.58
============ =========== ===========
Earnings (loss) per share - diluted
Continuing operations $ 0.49 $ 1.27 $ 1.39
Discontinuing operations (0.01) (0.04) 0.13
------------ ----------- -----------
Total $ 0.48 $ 1.23 $ 1.53
============ =========== ===========
Weighted-average shares of options - 528 123,787 - 124,315
Net income - - - 5,714,924 5,714,924
------------ ------------ ------------ ------------ - -----------
Balance at April 30, 2003 - 29,340 9,560,341 16,702,989 26,292,670
Exercise of options - 8,170 4,310,695 - 4,318,865
Tax benefit of exercise of option - - 5,185,489 - 5,185,489
Net income - - - 5,405,732 5,405,732
------------ ------------ ------------ ------------ - -----------
Balance at April 30, 2004 - 37,510 19,056,525 22,108,721 41,202,756
Exercise of options - 44 17,774 - 17,818
Tax benefit of exercise of option - - 12,721 - 12,721
Net income - - - 4,698,799 4,698,799
------------ ------------ ------------ ------------ -------------
Balance at April 30, 2005 $ - $ 37,554 $ 19,087,020 $ 26,807,520 $ 45,932,094common stock outstanding
Basic 3,756,804 3,751,792 3,423,999
============ =========== ===========
Diluted 3,894,731 3,815,549 3,541,297
============ ============ ============ ======================== ===========
The accompanying notes are an integral part of these statements.
F-6
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
THREE YEARS ENDED APRIL 30, 2004, 2005 AND 2006
Capital in Total
Preferred Common excess of par Retained stockholders'
stock stock value earnings equity
--------- -------- ------------- ----------- -------------
Balance at May 1, 2003 $-- $29,340 $ 9,560,341 $16,702,989 $26,292,670
Exercise of options -- 8,170 4,310,695 -- 4,318,865
Tax benefit of exercise of option -- -- 5,185,489 -- 5,185,489
Net income -- -- -- 5,405,732 5,405,732
--- ------- ----------- ----------- -----------
Balance at April 30, 2004 -- 37,510 19,056,525 22,108,721 41,202,756
Exercise of options -- 44 17,774 -- 17,818
Tax benefit of exercise of option -- -- 12,721 -- 12,721
Net income -- -- -- 4,698,799 4,698,799
--- ------- ----------- ----------- ------------
Balance at April 30, 2005 -- 37,554 19,087,020 26,807,520 45,932,094
Exercise of options -- 316 80,269 -- 80,585
Net income -- -- -- 1,882,132 1,882,132
--- ------- ----------- ----------- ------------
Balance at April 30, 2006 $-- $37,870 $19,167,289 $28,689,652 $47,894,811
=== ======= =========== =========== ============
The accompanying notes are the integral part of this statement.
F-7
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED APRIL 30,
2006 2005 2004
2003
------------- ------------- ------------------------- ----------- -----------
Cash flows from operating activities
Net income $ 1,882,132 $ 4,698,799 $ 5,405,732 $ 5,714,924
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 4,231,543 3,249,055 2,682,530 3,456,773
Provision for doubtful accounts - - (124,786)296,918 -- --
Reduction in provision for inventory
obsolescence 390,087 (319,445) (169,926) -
Deferred income taxes (358,435) 1,876,218 (1,607,756)
69,780Gain on sale of discontinued operation (310,731) -- --
Forgiveness of SMTU interest payable -- (145,841) - ---
Changes in operating assets and liabilities, net
of acquisition
Accounts receivable (559,175) (1,624,036) 981,616
(2,219,235)
Inventories (6,121,916) (6,980,704) 109,594 233,995
Prepaid expenses and other assets (146,594) 408,394 (1,015,409) 349,221
Refundable income taxes (476,000) 275,583 (128,761) -
Minority interest in affiliate -- (439,787) 205,241 (272,075)
Trade accounts payable 3,207,340 (79,915) (444,749) 1,588,230
Tax benefits of options exercised -- 12,721 5,185,489 -
Accrued expenses and wages (469,753) (1,671) (412,761)
1,496,498
Income taxes 431,728 407,710 (1,422,212)
1,405,119
------------- ------------- ------------------------- ----------- -----------
Net cash provided by operating activities 1,997,144 1,337,081 9,368,628 11,698,444
Cash flows from investing activities
Acquisition of Able, net of cash (16,771,755) -- --
Proceeds from sale of machinery and equipment - - 1,282182,244 -- --
Proceeds from sale of Las Vegas operation 1,705,695 -- --
Purchases of machinery and equipment (6,372,467) (3,816,935) (9,231,061) (1,666,103)
Purchase of SMTU interest -- (1,338,858) - -
------------- ------------- ---------------
------------ ----------- -----------
Net cash used in investing activities (21,256,283) (5,155,793) (9,231,061) (1,664,821)
Cash flows from financing activities
Proceeds from exercise of options 80,587 17,774 4,318,865 124,315
Proceeds under building notes payable --- -- 3,600,000 -
Payments under building notes payable (482,740) (462,289) (1,992,258) (245,546)
Payments from other notes payable (300,000) (1,030,000) - (58,749)--
Proceeds under capital lease obligations 2,720,415 1,729,073 - 894,612--
Payments under capital lease obligations (1,322,154) (792,090) (985,275)
(2,077,256)Proceeds under term loan 3,000,000 -- --
Net paymentsproceeds (payments) under linelines of credit 18,648,942 (605,556) (357,929)
(8,593,535)
------------- ------------- ------------------------- ----------- -----------
Net cash provided by (used in)
provided by
financing activities 22,345,050 (1,143,088) 4,583,403
(9,956,159)
------------- ------------- ------------------------- ----------- -----------
INCREASE (DECREASE) INCREASE IN CASH 3,085,911 (4,961,800) 4,720,970 77,464
Cash at beginning of year 184,014 5,145,814 424,844
347,380
------------- ------------- ------------------------- ----------- -----------
Cash at end of year $ 3,269,925 $ 184,014 $ 5,145,814
$ 424,844
============= ============= ========================= =========== ===========
Supplementary disclosures of cash flow information
Cash paid for interest $ 886,652 $ 412,324 $ 341,212 $ 1,117,848
Cash paid for income taxes, net of (refunds) 1,135,078 333,518 1,322,633 1,881,210
Acquisition of buildings financed under bank notes --- -- 3,600,000 1,950,000
Non Cash Investing Activities 2005
Acquisition of SMTU $ 2,814,699
Forgiveness of interest payable of SMTU (145,841)
Cash paid for acquisition (1,338,858)
-----------
Notes issued for acquisition $ 1,330,000
Forgiveness of subordinated debenture 1,050,000
Forgiveness of accrued interest payable 593,582
Reduction of long lived assets from purchase of SMTU 452,087344,155
Goodwill created 756,959826,962
The accompanying notes are an integral part of these statements.
F-7F-8
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
APRIL 30, 2006, 2005 2004 AND 20032004
NOTE A - DESCRIPTION OF THE BUSINESS
The Company operates in one business segment as an independent provider of
electronic manufacturing services ("EMS"), which includes printed circuit board
assemblies and completely assembled (box-build) electronic products. In
connection with the production of assembled products the Company also provides
services to its customers including (1) automatic and manual assembly and
testing of products; (2) material sourcing and procurement; (3) design,
manufacturing and test engineering support; (4) warehousing and shipment
services; and (5) assistance in obtaining product approval from governmental and
other regulatory bodies. The Company provides these manufacturing services
through an international network of facilities located in the United States,
Mexico,North America, China
and Taiwan. Approximately 16% of the consolidated assets of the Company are
located in foreign jurisdictions outside the United States.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION POLICY
The consolidated financial statements include the accounts and transactions of
the Company, its wholly-owned subsidiary,subsidiaries, Standard Components de Mexico, S.A.,
and AbleMex S.A. DE C.V., its wholly owned foreign enterprise Wujiang SigmaTron
Electronics Co., LTD. ("SigmaTron China") and its procurement branch, SigmaTron
Taiwan. The functional currency of the Mexican and Chinese subsidiaries and
procurement branch, SigmaTron Taiwan, is the U.S. dollar. The Company adopted
the provisions of Financial Accounting Standards Board ("FASB") Interpretation
No. 46R ("FIN 46R"), "Consolidation of Variable Interest Entities. The Company
adopted FIN 46R as of November 1, 2003, as it relates to its former affiliate
SMTU.SMT Unlimited L.P. ("SMTU"). On September 2, 2004, the remaining minority
interest in SMTU was acquired. On October 1, 2004, SMTU was liquidated, thereby
becoming an operating division of the Company.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period.
Significant estimates made in preparing the consolidated financial statements
include depreciation and amortization periods, the allowance for doubtful
accounts and reserves for inventory.inventory and estimates used in goodwill impairment
test. Actual results could materially differ from these estimates.
F-8F-9
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
APRIL 30, 2006, 2005 2004 AND 20032004
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and all highly liquid short-term
investments maturing within three months of the purchase date.
RESTRICTED CASH
Restricted cash represents amounts held in escrow as it relates to the
acquisition of the Company's corporate headquarters and midwestern manufacturing
facility. The amounts become unrestricted upon settlement of all matters related
to the acquisition of the facility.
ACCOUNTS RECEIVABLE
The majority of the Company's accounts receivable are due from companies in the
consumer electronics, gaming, fitness, industrial electronics, life sciences,
semiconductor, telecommunications, home appliancesappliance and automotive industries. Credit
is extended based on evaluation of a customer's financial condition, and,
generally, collateral is not required. Accounts receivable are due in accordance
with agreed upon terms, and are stated at amounts due from customers net of an
allowance for doubtful accounts. Accounts outstanding longer than the
contractual payments terms are considered past due. The Company determines its
allowance by considering a number of factors, including the length of time trade
accounts receivable are past due, the Company's previous loss history, the
customer's current ability to pay its obligation to the Company, and the
condition of the general economy and the industry as a whole. The Company writes
off accounts receivable when they become uncollectible, and payments
subsequently received on such receivables are credited to the allowance for
doubtful accounts.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company's allowance for doubtful accounts related to receivables not
expected to be collected from our customers. This allowance is based on
management's assessment of specific customer balances, considering the age of
receivables and financial stability of the customer and a five year average of
prior uncollectible amounts. If there is an adverse change in the financial
condition of the Company's customers, or if actual defaults are higher than
provided for, an addition to the allowance may be necessary.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined by the
first-in, first-out method. The inventory includes an allocation of labor and
overhead, including direct and indirect labor, freight and other overhead costs.
The Company establishes inventory reserves for valuation, shrinkage, and excess
and obsolete inventory. The Company records provisions for inventory shrinkage
based on historical experience to account for unmeasured usage or loss. Actual
results differing from these estimates could significantly affect the Company's
inventories and cost of products sold. The Company records provisions for excess
and obsolete inventories for the difference between the cost of inventory and
its estimated realizable value based on assumptions about future product demand
and market conditions. Actual product demand or market conditions could be
different than projected by management.
F-9F-10
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
APRIL 30, 2006, 2005 2004 AND 20032004
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
PLANT PROPERTYMACHINERY AND EQUIPMENT
Machinery and equipment are valued at cost. The Company provides for
depreciation and amortization using the straight-line method over the estimated
useful life of the assets:
Buildings 20 years
Machinery and equipment 5-12 years
Office equipment 5 years
Leasehold improvements 15 years
Machinery and equipment 5-12 years
Office equipment 5 years
Tools and dies 12 months
Leasehold improvements term of lease
INCOME TAXES
Deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities, and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. Valuation allowances are established when necessary to
reduce deferred tax assets to an amount more likely than not to be realized.
EARNINGS PER SHARE
Basic earnings per share are computed by dividing income available to common
stockholders (the numerator) by the weighted-average number of common shares
outstanding (the denominator) for the period. The computation of the diluted
earnings per share is similar to the basic earnings per share, except that the
denominator is increased to include the number of additional common shares that
would have been outstanding if the potentially dilutive common shares had been
issued. Approximately 3,100 and 33,100 shares were anti-dilutive for the years
ended April 30, 2005, and 2006, respectively.
REVENUE RECOGNITION
Revenues from sales of product including the Company's electronic manufacturing
service business are recognized when the product is shipped. In general it is
the Company's policy to recognize revenue and related costs when the order has
been shipped from its facilities, which is also the same point that title passes
under the terms of the purchase order except for consignment inventory.
Consignment inventory is shipped from the Company to an independent warehouse
for storage or shipped directly to the customer and stored in a segregated part
of the customer's own facility. Upon the customer's request for inventory, the
consignment inventory is shipped to the customer if the inventory was stored
offsite or transferred from the segregated part of the
F-11
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
APRIL 30, 2006, 2005 AND 2004
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
REVENUE RECOGNITION - CONTINUED
customer's facility for consumption, or use, by the customer. The Company
recognizes revenues upon such transfer. The Company does not earn a fee for
storing the consignment inventory.
The Company provides a ninety (90) day warranty for workmanship only and does
not have any installation, acceptance or sales incentives, although the Company
has negotiated extended
F-10
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
APRIL 30, 2005, 2004 AND 2003
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
REVENUE RECOGNITION - CONTINUED warranty terms in certain instances. The Company
assembles and tests assemblies based on customers specifications. Historically
the amount of returns for workmanship issues has been de minimus under the
Company's standard or extended warranties. Any returns for workmanship issues
received after each period end are accrued in the respective financial
statements.
SHIPPING AND HANDLING COSTS
The Company records shipping and handling costs net, within selling and
administrative expenses. Customers are typically invoiced for shipping costs.
Shipping and handling costs totaled $136,008, $77,495were not material to the financial statements for
fiscal years 2006 and $113,238 in fiscal
2005, 2004 and 2003, respectively.2005.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include receivables, notes payable, accounts
payable, stock warrants and accrued liabilities. The fair values of financial instruments are
not materially different from their carrying values.
WARRANTS
The Company accounts for warrantswarrant investments in accordance with SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. The Company
determines the appropriate classification of all warrants as available-for-sale
at the time of award and at April 30, 2005,2006, all of the Company's investments
were reported at fair value. UnrealizedRealized and unrealized gains and losses are
reported in other income (expense).
LONG-LIVED ASSETS
The Company reviews long-lived assets for impairment, whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. An asset is considered impaired if its carrying amount exceeds the
future net cash flow the asset is expected to generate. If such asset is
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the asset, if any, exceeds its fair
market
F-12
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
APRIL 30, 2006, 2005 AND 2004
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
LONG-LIVED ASSETS - CONTINUED
value. The Company has adopted SFAS No 144, which establishes a single
accounting model for the impairment or disposal of long-lived assets, including
discontinued operations. There were no impairments for the fiscal years ended
April 30, 2006, 2005 2004 and 2003.
F-112004.
GOODWILL AND OTHER INTANGIBLES
In accordance with, SFAS No. 141 "Business Combinations" a purchaser must
allocate the total consideration paid in a business combination to the acquired
tangible and intangible assets based on their fair value. Goodwill represents
the purchase price in excess of the fair value of assets acquired in business
combinations. SFAS No. 142, requires the Company to assess goodwill for
impairment at least annually in the absence of an indicator of possible
impairment and immediately upon an indicator of possible impairment. During the
fourth quarter of fiscal year 2006 the Company completed its annual assessment
of impairment regarding the goodwill recorded. That assessment, supported by
independent appraisals, did not identify any impairment as of April 30, 2006.
Goodwill
----------
May 1, 2004 $ --
SMTU acquisition 756,959
----------
April 30, 2005 756,959
Able acquisition 8,541,986
----------
April 30, 2006 $9,298,945
==========
F-13
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
APRIL 30, 2006, 2005 2004 AND 20032004
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
GOODWILL AND OTHER INTANGIBLES - CONTINUED
The Company assessesfollowing are the recoverability of goodwill on an annual basis or
whenever adverse events or changes in circumstances or business climate indicate
that expected future undiscounted cash flows may not be sufficient to support
recorded goodwill. If impairment exists, the carrycarrying amount of goodwill would be
reduced by theintangible assets, net
of accumulated amortization:
Internally
Developed Non-competes Customer
Software and Backlog Relationships Total
---------- ------------ ------------- ----------
Balance as of April 30, 2005 $ -- $ -- $ -- $ --
Acquisition 115,000 260,000 2,395,000 2,770,000
Amortization Expense (115,000) (219,170) (249,480) (583,650)
Balance as of April 30, 2006 $ 0 $ 40,830 $2,145,520 $2,186,350
Amortization period 1 year 2 years 8 years N/A
F-14
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
APRIL 30, 2006, 2005 AND 2004
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
GOODWILL AND OTHER INTANGIBLES - CONTINUED
The estimated shortfall of discounted cash flows. There was no
impairmentintangible amortization expenses for the fiscal year ended April 30, 2005.next five years are as
follows:
Years Ended April 30,
2007 $ 724,582
2008 503,697
2009 349,186
2010 245,216
2011 163,998
Thereafter 199,671
----------
$2,186,350
==========
STOCK INCENTIVE PLANS
The Company maintains various stock incentive plans. See Note PQ for additional
information regarding these plans. The Company accounts for these plans under
the recognition and measurement principles of APB Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. The Company is in
compliance with disclosure provisions of SFAS 123, Accounting for Stock-Based
Compensation and SFAS 148 Accounting for Stock-Based Compensation-Transition and
Disclosure. The Company recognizes compensation costexpense for restricted shares
and restricted stock units to employees. As of April 30, 2005,2006, there are no
issued restricted shares or restricted stock units.
NoOn April 28, 2006, in response to the issuance of SFAS 123R, the Company's
Compensation Committee of the Board of Directors approved accelerating the
vesting of 349,695 unvested stock options held by current employees and
executive officers. Under FIN 44, a modification to accelerate the vesting of a
fixed award effectively results in the renewal of that award if, after the
modification, an employee is able to exercise/vest in an award that under the
original terms, would have expired unexercisable/vested. If the employee
continues to provide service and would have vested in the awards under the
original vesting provisions, the modification does not cause an effective
renewal of the awards and, accordingly, any incremental compensation cost isexpense
measured as of the modification date should not be recognized. The Company
determined approximately 15,900 options were effectively renewed and
compensation expense of $5,248 was recognized for stock option grants.in fiscal year 2006.
F-15
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
APRIL 30, 2006, 2005 AND 2004
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
STOCK INCENTIVE PLANS - CONTINUED
All options granted under the Company's plans had an exercise price equal to the
market value of the underlying common stock on the date of grant. The following
table illustrates the effect on net earnings and earnings per share if the
Company had applied the fair value recognition provisions.
The following table also provides the amount of stock-based compensation costexpense
included in net earnings as reported.
2006 2005 2004
2003
------------ ------------ ----------------------- ---------- ----------
Net income as reported $ 4,698,799 $ 5,405,732 $ 5,714,9241,882,132 $4,698,799 $5,405,732
Add total stock-based employee compensation
expense recorded in the period 5,248 -- --
Deduct total stock-based employee compensation
expense determined under fair value basedvalue-based
method for awards granted, modified, or
settled, net of related tax effects (2,342,955) (217,322) (266,528)
(563,018)
------------ ------------ ----------------------- ---------- ----------
Pro forma net income $ 4,481,477(455,575) $4,481,477 $5,139,204
=========== ========== ==========
2006 2005 2004
------ ----- -----
Earnings per share
Basic - as reported $ 5,139,204 $ 5,151,906
============ ============ ============0.50 $1.25 $1.58
Basic - pro forma (.12) 1.19 1.50
Diluted - as reported 0.48 1.21 1.53
Diluted - pro forma (.12) 1.17 1.45
F-12The Company adopted SFAS 123(R) on May 1, 2006, and implemented the new standard
utilizing the Modified Prospective Application transition method. SFAS 123(R)
requires
F-16
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
APRIL 30, 2006, 2005 2004 AND 20032004
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
STOCK INCENTIVE PLANS - CONTINUED
2005 2004 2003
------------ ------------ ------------
Earnings per share
Basic - as reported $ 1.25 $ 1.58 $ 1.98
Basic - pro forma 1.19 1.50 1.78
Diluted - as reported 1.23 1.53 1.70
Diluted - pro forma 1.17 1.45 1.54
the Company to measure the cost of employee services received in exchange for an
equity award based on the grant date fair value. Compensation expense for which
the requisite service requirement that has not been rendered and are outstanding
as of the adoption date will be recognized over the remaining service period. At
April 30, 2006, all equity awards have been vested. The Company has determined
that the adoption SFAS 123(R) will not have a significant impact on its
financial position, results of operations, EPS and cash flows as of April 30,
2006. However, SFAS 123 (R) could have a material impact on the Company's
results of operation if additional options are granted.
RISKS AND UNCERTAINTIES
The Company's inventories include parts and components that may be specialized
in nature or subject to customers' future usage requirements. The Company has
programs to minimize the required inventories on hand and actively monitors
customer purchase orders and backlog. The Company uses estimated allowances to
reduce recorded amounts to market values; such estimates could change in the
future.
NEW ACCOUNTING STANDARDS
In June 2006 FASB Interpretation 48 "Accounting for Uncertainty in Income Taxes"
was issued which clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements in accordance with FASB
Statement No. 109, Accounting for Income Taxes. This Interpretation prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. This Interpretation also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition.
This Interpretation is effective for fiscal years beginning after December 15,
2006, and earlier application of the provisions of this Interpretation is
encouraged if the enterprise has not yet issued financial statements, including
interim financial statements, in the period this Interpretation is adopted. The
Company has not yet determined the impact of FASB Interpretation 48 on its
financial statements.
On June 1, 2005, the FASB issued Statement No. 154, Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3 (SFAS
154). The statement applies to all voluntary changes in accounting principles,
and changes the requirements for accounting for and reporting of a change in
accounting principles. The Company adopted SFAS 154 at December 31, 2005, there
is no material change to the Company's operating results as a result of this
adoption.
F-17
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
APRIL 30, 2006, 2005 AND 2004
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
NEW ACCOUNTING STANDARDS - CONTINUED
In December 2004 the Financial Accounting Standards Board issued Statement of
Financial Accounting StandardsSFAS No. 123
(revised 2004), Share- BasedShare-Based Payment ("SFAS 123R"123(R)"). The Company is required to adoptadopted SFAS
123R123(R) on May 1, 2006. SFAS 123R123(R) requires the Company to measure the cost of
employee services received in exchange for an equity award based on the grant
date fair value. The cost will be recognized in financial statements as an
expense in financial statements over the period during which an employee is required to provide service.
As regulations are still pending,
theThe Company has determined that the adoption SFAS 123(R) will not been able to determine whether thehave a
significant impact will be material.
On December 21, 2004, the Financial Accounting Standards Board ("FASB") Staff
Position ("FSP") FAS 109-I, "Applicationon its financial position, results of FASB Statement No. 109, Accounting
for Income Taxes, to the Tax Deduction on Qualified Production Activities
Provided by the American Jobs Creation Act of 2004" was issued. FSP FAS 109-I
clarifies that this tax deduction should be accounted for asoperations, EPS and
cash flows. However, SFAS 123(R) could have a special deduction
in accordance with Statement 109. As such, the special deduction has no effect
on deferred tax assets and liabilities existing at the date of enactment.
Rather, thematerial impact of this deduction would be reported in the period in which
the deduction is claimed on the Company's
tax return beginning in 2005. As
regulationsresults of operation if additional options are still pending, the Company has not been able to determine
whether the impact will be material; however, the Company believes that the
impact will not be material.
F-13
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
APRIL 30, 2005, 2004 AND 2003
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
NEW ACCOUNTING STANDARDS - CONTINUEDgranted.
On December 21, 2004, FSP FAS 109-2, "Accounting and Disclosure Guidance for the
Foreign Earnings Repatriation Provision within the American Jobs Creation Act of
2004"2004 ("Act")," was issued. FSP FAS 109-2 provides companies additional time,
beyond the financial reporting period during which the Act took effect, to
evaluate the Act's impact on a company's plan for reinvestment or repatriation
of certain foreign earnings for purposes of applying Statement 109. FSP FAS
109-2 was effective upon issuance. AsBased on the Company's analysis of December 31, 2004 based on management's analysisthe
repatriation provision of the Act, although not yet finalized, it is unlikely
that under the
repatriation provision of the Act the Company had any foreign earnings to repatriate, and accordingly, the
financial statements do not reflect any provisions for taxes on unremitted
foreign earnings. The impact on the Company doeshas not believe the impact will bebeen material.
In November 2004 the FASB issued SFAS No. 151, "Inventory Costs - an amendment
of ARB No. 43, Chapter 4." This statement amends the guidance in Accounting
Research Bulletin (ARB) No. 43, Charter 4, "Inventory Pricing," to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs and wasted material (spoilage) and requires that those items be recognized
as current-period charges regardless of whether they meet the criterion of
"abnormal." The statement also requires that allocation of fixed production
overheads to the cost of conversion be based on the normal capacity of the
production facilities. The provisions of this statement are effective for
inventory costs incurred during fiscal years beginning after June 15, 2005 (as
of FebruaryMay 1, 2006, for the Company) and are to be applied prospectively. The
Company anticipatesdoes not believe the impact will not be material.
On October 22, 2004, the President signed the American Jobs Creation Act of 2004.2004
("the Act"). The Act provides a deduction from income from qualified domestic
production activities, which will be phased in from 2005 through 2010. In
return, the Act also provides for a two-year phase-out (except for certain
pre-existing binding contracts) of the existing Extraterritorial Income ("ETI")
exclusion tax benefit for foreign sales which the World Trade Organization
("WTO") ruled was an illegal export subsidy. The European Union ("EU") believes
that the Act fails to
F-18
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
APRIL 30, 2006, 2005 AND 2004
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
NEW ACCOUNTING STANDARDS - CONTINUED
adequately repeal the illegal export subsidies because of the transitional
provisions and has asked the WTO to review whether these transitional provisions
are in compliance with their prior ruling. This will
have no material impact on the Company. Additionally, the Act creates a
temporary incentive for U.S. corporations to repatriate accumulated income
earned abroad by providing an 85% dividend received deduction for certain
dividends from controlled foreign corporations. The impact on the Company in the
future willhas
not bebeen material.
RECLASSIFICATIONS
Certain amounts in the 20032004 and 20042005 financial statements have been reclassified
to conform with the 2006 presentation.
NOTE C - DISCONTINUED OPERATIONS
In June 2005 presentation.
F-14the Company closed on the sale of its Las Vegas, Nevada operation.
The Las Vegas facility operated as a complete EMS center specializing in the
assembly of electronic products and cables for a broad range of customers
primarily in the gaming industry. The effective date of the transaction was May
30, 2005. The transaction was structured as an asset sale, and included a
$2,000,000 cash payment to the Company for the buyer's purchase of the
machinery, equipment and other assets of the Las Vegas operation. The
transaction was recorded by the Company in the first quarter of fiscal year 2006
and included a gain on the transaction of approximately $311,000. The gain was
offset by a loss of approximately $383,000 on discontinued operations for the
Las Vegas operation for the period ended April 30, 2006.
The following amounts related to the discontinued operation and have been
segregated from continuing operations and reflected as discontinued operations
in each periods' consolidated statement of income (in thousands):
2006 2005 2004
----- ------- -------
Sales $ 522 $11,764 $16,316
Income (loss) before tax expense (benefit) (383) (234) 773
Net Income (loss) from discontinued operation 355 (142) 467
Gain on sale of business 311 -- --
Net income (loss) from discontinued operation $ (44) $ (142) $ 467
F-19
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
APRIL 30, 2006, 2005 AND 2004
AND 2003
NOTE CD - ALLOWANCE FOR DOUBTFUL ACCOUNTS
Changes in the Company's allowance for doubtful accounts are as follows:
2006 2005 2004
2003
--------- --------- ----------------- --------
Beginning balance $ 120,000 $ 120,000 $ 276,470$120,000 $120,000
Bad debt expense 296,918 22,281 2,650
77,759
Write-offs (148,001) (22,281) (2,650)
(234,229)
Recoveries - - -
--------- --------- ---------
Ending balance-------- --------
$ 120,000 $ 120,000 $ 120,000268,917 $120,000 $120,000
========= ========= ================= ========
NOTE DE - INVENTORIES
Inventories consist of the following at April 30:
2006 2005 2004
----------- -----------
Finished products $ 7,205,3328,216,317 $ 3,400,7427,205,332
Work in process 2,563,334 1,007,594 1,221,160
Raw materials 21,239,935 13,635,029 10,245,349
----------- -----------
32,019,586 21,847,955 14,867,251
Less obsolescence reserve 769,536 379,449 698,894
----------- -----------
$31,250,050 $21,468,506 $14,168,357
=========== ===========
Changes in the Company's inventory obsolescence reserve are as follows:
2005 2004 2003
--------- --------- ---------
Beginning balance $ 698,894 $ 868,820 $ 754,644
Write-offs - - 114,176
Recoveries (319,445) (169,926) -
--------- --------- ---------
Ending balance $ 379,449 $ 698,894 $ 868,820
========= ========= =========
F-15F-20
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
APRIL 30, 2006, 2005 2004 AND 20032004
NOTE E - PROPERTY, PLANTINVENTORIES - CONTINUED
Changes in the Company's inventory obsolescence reserve are as follows:
2006 2005 2004
-------- --------- ---------
Beginning balance $379,449 $ 698,894 $ 868,820
Write-offs 390,087 -- --
Recoveries -- (319,445) (169,926)
-------- --------- ---------
$769,536 $ 379,449 $ 698,894
======== ========= =========
NOTE F - MACHINERY AND EQUIPMENT, NET
Machinery and equipment consist of the following at April 30:
2006 2005 2004
----------- -----------
Land and buildings $10,941,318 $10,380,359
$ 8,832,653
Property, plantMachinery and equipment 32,488,194 30,591,691 29,948,005
Office equipment 3,303,053 2,745,155 2,578,362
Tools and dies 268,630262,916 268,630
Leasehold improvements 2,798,257 1,861,508 1,838,958
Equipment under capital leases 6,060,128 4,215,171 2,364,813
----------- -----------
55,853,866 50,062,514 45,831,421
Less accumulated depreciation and
amortization, including
amortization of assets under
capital leases of $922,946$1,317,681 and
$759,136$922,946 at April 30, 2006 and
2005, and 2004, respectively 25,309,559 23,372,574 20,123,520
----------- -----------
Property, plantMachinery and equipment, net $30,544,307 $26,689,940 $25,707,901
=========== ===========
F-21
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
APRIL 30, 2006, 2005 AND 2004
NOTE FG - NOTES PAYABLE
The Company entered into an Amended Loan and Security Agreement in July 2005,
which providesprovided for a revolving credit facility. The maximum borrowing limit
under the amended revolving credit facility is limited to the lesser of: (i)
$17,000,000 or (ii) an amount equal to the sum of 85% of the receivable
borrowing base and the lesser of $8,500,000 or varying percentages of the
inventory base. The Amended Loan and Security Agreement expires on June 30, 2008
and is subject toincludes certain financial covenants. At April 30, 2005 the Company was
in compliance with its financial covenants and had borrowings of $392,038
outstanding under this line of credit.
The amendedAmended Loan and Security
Agreement also provides a four year term loan in the amount of $3,000,000.
Interest only is due in year one and quarterly principal payments
of $250,000 are due in years two through four. Interest accrueson the term loan accrued at 5.75%5.41% to 6.46% and interest only is due
each quarter through June 30, 2006. Quarterly principal payments of $250,000 are
due in years two through four.
F-16
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
APRILbeginning June 30, 2006. At April 30, 2006, and 2005, 2004 AND 2003
NOTE F - NOTES PAYABLE - CONTINUED$3,000,000 and $0 was
outstanding under the term loan, respectively.
In September 2005 the Company further amended the above described credit
facility to increase the revolving credit facility from $17,000,000 to
$22,000,000. The amended revolving credit facility is limited to the lesser of:
(i) $22,000,000 or (ii) an amount equal to the sum of 85% of the receivable
borrowing base and the lesser of $11,000,000 or varying percentages of the
inventory base.
Borrowings under the revolving line of credit bear interest at the prime rate
up
to prime rate minus 0.5% (4.25% - 5.75%, or 7.25% at April 30, 2005).2006. The Company must also pay an unused
commitment fee equal to 0.25%0.20% on the revolving credit facility. As of April 30,
2005,2006, the Company had an availableexcess availability on the line of credit of approximately
$12,608,000.$4,076,000. The revolving credit facility matures June 30, 2008. AtThe outstanding
balance under the line of credit was $17,924,327 and $392,038 at April 30, 2006,
and 2005, the Company was in compliance with its financial covenants.respectively.
The loan and security agreement is collateralized by substantially all of the
domestically located assets of the Company and contains certain financial
covenants, including specific covenants pertaining to the maintenance of minimum
tangible net worth and net income. The agreement also restricts annual lease
rentals and capital expenditures and the payment of dividends. At April 30,
2006, the Company was in compliance with its financial covenants.
The amended Loan and Security Agreement also provides a term loan in the amount
of $3,000,000. Interest only is due in year one and quarterly principal payments
of $250,000 are due in years two through four. During fiscal year 2006 interest
accrued at 5.41%-6.46% and interest only is due each quarter through June 30,
2006. Quarterly principal payments of $250,000 are due beginning June 30, 2006.
At April 30, 2006, and 2005, $3,000,000 and $0 was outstanding under the term
loan, respectively.
SigmaTron China entered into a loan agreement in April 2005, which provides
forapproximately $1,300,000 U.S. dollars under a line of credit with the China
Construction Bank. The terms of the agreement
includes four draws on the line of credit of approximately $121,000, $362,750,
$362,750 and $362,750, on April 15, 2005, July 1, 2005, October 8, 2005, and
January 3, 2006, respectively. The interest rate under the agreement iswas 5.76% and at April 30, 2005during fiscal
year 2006. SigmaTron China had $121,000$1,237,753
F-22
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
APRIL 30, 2006, 2005 AND 2004
NOTE G - NOTES PAYABLE - CONTINUED
U.S. dollars outstanding under the loan. The loan is collateralized by the
Company's building in Suzhou-Wujiang China and 60 of the 100 Chinese acres
leased at the property. The loan was paid in full in July 2006.
On November 19, 2003, the Company purchased the property that serves as the
Company's corporate headquarters and its Midwestern manufacturing facility. The
Company executed a note with LaSalle Bank N.A. in the amount of $3,600,000. The
note bears a fixed interest rate of 5.43% and is payable in sixty monthly
installments. A final payment of approximately $2,700,000 is due on or before
November 30, 2008. At April 30, 2006, $3,165,000 and at April 30, 2005,
$3,345,000 was outstanding.
OnIn May 2002 the Company acquired a plant in Mexico through seller financing. The
loan of $1,950,000 is payable in equal monthly installments of approximately
$31,000 over six and a half years at a rate of 7% interest per annum. Prior to
the acquisition of the plant the Company rented the facility. At April 30, 2006,
$856,089 and at April 30, 2005, $1,158,828 was outstanding.
F-17The aggregate amount of debt maturing in each of the next five fiscal years and
thereafter is as follows:
Fiscal Year
- -----------
2007 $ 1,430,000
2008 2,840,290
2009 21,912,698
2010 0
2011 0
Thereafter 0
-----------
$26,182,988
===========
F-23
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
APRIL 30, 2006, 2005 AND 2004
AND 2003
NOTE GH - ACCRUED EXPENSES AND WAGES
Accrued expenses and wages consist of the following at April 30:
2006 2005 2004
---------- ----------
Wages $1,146,418 $ 221,584
Bonuses 596,658 1,454,204 1,941,402
Interest payable 168,097 139,810
542,200
Commissions 58,262 43,054 49,905
Professional fees 632,635 454,382306,505 315,279
Other 1,630,678 1,771,560
---------- ----------
$2,269,703 $2,987,889$3,906,618 $3,945,491
========== ==========
NOTE HI - RELATED-PARTY TRANSACTIONS AND COMMITMENTS
The Company had a related-party transaction with Circuit Systems, Inc., a former
shareholder of the Company who filed for protection under Chapter 11 of the
Federal bankruptcy code, and is now known as Circuit Systems, Inc. Liquidating
Grantor's Trust, dated October 14, 2001 ("CSI"). CSI divested itself of the
investment in common stock of the Company in April 2001. The transaction
primarily involved the leasing of operating space. The Company leased space in
Elk Grove Village, Illinois, at a base rental of $33,800 per month, with an
additional $7,000 per month for property taxes. The lease required the Company
to pay maintenance and utility expenses. Subsequent to the renewal agreement,
CSI sold the building to a non-related party. Rent and property tax expense
related to the agreement totaled approximately $270,000 from May 2003 through
mid-November 2003 and $495,000 for the year ended April 30, 2003.
During 1996, the Company invested $1,200 in exchange for a 12% limited
partnership interest in Lighting Components, L.P. ("LC") and invested $1,300 in
Lighting Components, Inc., which is the general partner of LC, in exchange for
13% of its capital stock. At April 30, 1998, the Company had also made advances
to LC in exchange for subordinated debentures and promissory notes totaling
$280,000. The subordinated debentures and promissory notes totaling $280,000
were fully reserved at April 30, 1998.
In addition to the subordinated debentures and promissory notes, at April 30,
2000, the Company had recorded miscellaneous receivables, interest and trade
receivables from LC of $1,560,000, against which a reserve of $789,000 was
recorded. The Company wrote off its investment in LC of $2,500 in the statement
of operations for the year ended April 30, 2001. In April 2001, LC sold certain
assets to a third party. In connection with the asset sale, the Company received
a
F-18
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
APRIL 30, 2005, 2004 AND 2003
NOTE H - RELATED-PARTY TRANSACTION AND COMMITMENTS - CONTINUED
$400,000 promissory note receivable from a third party. Payments were due on the
promissory note as follows: $125,000 plus accrued interest due January 1, 2002,
$125,000 plus accrued interest due January 1, 2003, and $150,000 plus accrued
interest due January 1, 2004. The payment obligations for $125,000 due January
1, 2003, and 2002, plus accrued interest were paid in December 2002 and 2001,
respectively. The payment obligation of $150,000 due January 1, 2004 was paid in
January 2004 plus accrued interest. Interest on the promissory note accrued at
5% per annum. The third party also agreed to pay LC royalties on certain sales
derived from the purchase of the acquired assets as defined in the agreement. LC
or its successor will receive royalty payments through April 30, 2007. Per the
terms of a separate agreement, the Company will receive its share of the royalty
payments. These royalty payments, if any, will be recorded by the Company as
received and reflected as payments on the notes. At April 30, 2005 a royalty
receivable of $50,740 was recorded. The receivable was paid subsequent to the
fiscal year ended April 30, 2005.
In August and September 2004 the Company acquired all the interests of all the
outside investors in its affiliate SMT Unlimited L.P. ("SMTU") and the general
partner of SMTU, SMT Unlimited, Inc., including voting interest. On October 1,
2004, SMT Unlimited, Inc. was merged into the Company, and SMTU was liquidated,
thereby becoming an operating division of the Company. Prior to the acquisition
by the Company, SMTU was consolidated under FASB Interpretation No. 46,
("FIN46R") Consolidation of Variable Interest Entities.FIN46R. The aggregate price paid for
all the interests was $2,814,699. This aggregate price was paid with $1,330,000
in notes with terms of up to 2 years and cash in the amount of $1,338,858 and
the forgiveness of interest expense of $145,841. The acquisition was treated as
a step acquisition and resulted in goodwill of $756,959 from one step and
negative goodwill of $452,087 from the second transaction. The negative goodwill
was treated as a reduction in the acquired long lived assets from SMTU. On
October 1, 2004, SMT Unlimited, Inc. was merged into the Company, and SMTU was
liquidated, thereby becoming an operating division of the Company. Prior to the
Company's acquisition, SMTU was consolidated under FASB Interpretation No. 46,
Consolidation of Variable Interest Entities. The Company
purchased the outstanding interest of SMTU in order to provide seamless service
to its customers.
F-19F-24
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
APRIL 30, 2006, 2005 AND 2004
NOTE I - RELATED-PARTY TRANSACTIONS AND 2003
CONDENSED BALANCE SHEET OF SMTU AT THE DATE OF MERGER, OCTOBER 1, 2005COMMITMENTS - CONTINUED
The assets and liabilities assumed in the transaction are summarized below:
September
30, 2004
----------------------------
Assets
Current assets $ 4,009,305$4,009,305
Machinery & Equipment-net 3,917,418
Other assets 11,755
---------------------
Total Assets $ 7,938,478
===========$7,938,478
==========
Liabilities
Current liabilities 5,225,840
Total long term liabilities 2,100,000
Owner's Equityequity 612,638
---------------------
Total Liabilities and Shareholder's Equity $ 7,938,478
===========$7,938,478
==========
NOTE IJ - BLOCK SHIELD WARRANTS
The Company expended $25,000 to investigate the feasibility of manufacturing a
product for WaveZero, Inc., the owner of design rights to certain shielding
products. In exchange the Company received warrants convertible into 153,781
shares of common stock of Block Shield Corporation, PLC (BLS; London Stock
Exchange), the parent of WaveZero, Inc. Those warrants were subject to
forfeiture upon the occurrence of certain events. During the quarter ending
January 31, 2005, the risk of forfeiture terminated. Upon such termination SFAS
No. 138 provides that this security be marked to market. Accordingly, the
Company has recognized arecorded an unrealized gain of approximately $303,810 to reflect the
increase in the fair market value of said warrants since the date of acquisition
through April 30, 2005. During fiscal year 2006 the Company exercised the
warrants and sold the underlying shares for $395,675, resulting in income of
$74,491 for fiscal year 2006.
F-25
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
APRIL 30, 2006, 2005 AND 2004
NOTE JK - CONTINGENCIES
On July 16, 2003, the Company signed a land use rights contract with the Wujiang
Land Administration Bureau to obtain the use rights of land in Yao Jiazhuang
Village, Wujiang Province, People's Republic of China. This particular contract
covered the 40 Chinese acres of land that was adjacent to 60 Chinese acres of
land for which the Company had already signed a separate land use rights
contract. For the 40 acre parcel, the Company paid the transfer fee for the land
and subsequently built a dormitory, canteen and power station on the land. In
December
F-20
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
APRIL 30, 2005, 2004 AND 2003
NOTE J - CONTINGENCIES - CONTINUED 2004 the Company received an administration penalty notice of
approximately $16,000 from the Wujiang Land Resources Bureau which stated that
the Company was occupying the 40 acres without its permission. Under Chinese law
the Wujiang Land Resources Bureau may seek penalties for this violation, which
includes one or more of the following: 1) levying a fine, 2) confiscating any
Company property on the land and 3) requiring the land to be returned. The
Company has not received any other administrative notifications other than the
penalty notice. The Company estimates the value of the land and building to be
$1,100,000 to $1,200,000. The Company received a letter from the Business
Development Department of Wujiang Developing District under the Management
Committee of Wujiang Developing District which stated that the Company acted
properly and that it will indemnify the Company against any penalties assessed
against it by the Wujiang Land Resources Bureau. On January 5, 2005, the Company
paid the penalty which was assessed against it by the Wujiang Land Resources
Bureau. Prior to its payment, the Wujiang Financial Bureau paid the Company the
amount of the fine, which is consistent with the terms of the indemnity letter.
The Company anticipates the issue will be resolved with the Wujiang Land
Resources Bureau without any liability to the Company.
NOTE KL - SUBSEQUENT EVENTS
On June 3,STRATEGIC TRANSACTIONS
In July 2005 the Company sold its Las Vegas Nevada operation to Grand
Products, Nevada, Inc. The facility is a complete electronic manufacturing
services ("EMS") center specializing in the assembly of electronic products and
cables for a broad range of customers primarily in the gaming industry. The
effective date of the transaction was May 31, 2005. The transaction was treated
as an asset sale and included a $2,000,000 cash payment to the Company forclosed on the purchase of the machinery and equipment and other assetsall of the operation. The
transaction will be recorded by the Company in the first quarteroutstanding stock
of fiscal 2006
and will includeAble, a gain on the transaction of approximately $140,000. The
Company continues to be obligated under the primary lease agreement and
subleases the facility in part to Grand Products Inc., the buyer of the Las
Vegas operation and in part to Western Money Systems.
On July 14, 2005 the Company purchased Able Electronics Corporation ("Able").
Able iscompany headquartered in Hayward California with an additional manufacturing
facilityand its wholly owned
subsidiary, AbleMex S.A. de C.V., located in Tijuana, Mexico. Able is an ISO
9001:2000 certified EMS company serving Original Equipment Manufacturers in the
testlife sciences, telecommunications and measurement,
medical instruments, telecommunications, computer peripherals, industrial controls and genetic researchelectronics industries. Able's long-term relationships with
its customers will giveThe
acquisition of Able has allowed the Company a presence in a number of new markets,to make strides towards achieving
four objectives: (1) to further diversify its currentmarkets, capabilities and customer
base, (2) adding a third low-cost manufacturing facility in Tijuana, Mexico, (3)
creating an opportunity to consolidate the California operations into one
facility, and expand(4) to generate incremental revenue from Able's customers as they
become familiar with the numberCompany's broader array of industries it
serves.services. The effective date
of the transaction was July 1, 2005. Able was merged into the Company beginning
in November 2005 and operates as a division of the Company. The purchase price
was $12,800,000 plus debtapproximately $16,800,000 and was recorded as a stock purchase transaction
in the first quarter of approximately
F-21fiscal year 2006. The transaction was financed by the
Company's amended credit
F-26
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
APRIL 30, 2006, 2005 AND 2004
AND 2003
NOTE KL - SUBSEQUENT EVENTSSTRATEGIC TRANSACTIONS - CONTINUED
$3,700,000 and will be recorded as stock purchase transaction in first quarter
of fiscal 2006. The transaction was financed through the Company's credit
facility and resulted in an increase of approximately $9,000,000$8,500,000 in goodwill.
This goodwill is non-deductible for income tax purposes.
Assuming the purchase was recorded as of the first period reported, May 1, 2004,
unaudited revenues for the year ended April 30, 2006, and 2005 would have been
$128,050,591 and $122,908,102, respectively. Unaudited pro-forma net income
would have been $1,785,722 and $5,043,064 for the periods ended April 30, 2006,
and 2005, respectively. Dilutive earnings per share would have been $0.46 and
$1.32 for the periods ended April 30, 2006, and 2005, respectively.
The purchase price was allocated to the fair value of the assets and liabilities
acquired as follows (000s omitted):
Amount
-------
Cash $ 40
Trade receivables, net 3,210
Inventories 4,049
Other current assets 139
Property and equipment 2,707
Deferred tax asset 688
Goodwill 8,542
Intangible assets 2,770
Other assets 207
Accounts payable and accrued liabilities (3,407)
Obligations under capital leases (938)
Deferred tax liability (1,309)
-------
Total consideration $16,698
=======
F-27
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
APRIL 30, 2006, 2005 AND 2004
NOTE LM - INCOME TAXES
The income tax provision (benefit) for the income from continuing operations for
the years ended April 30 consists of the following:
2006 2005 2004
2003
------------------- ---------- ----------
Current
Federal $ 739,920 $2,763,249 $2,654,888892,477 $ 816,920 $2,507,249
State 338,686 483,944 421,535226,551 352,753 438,612
Foreign 174,996 168,395 102,200
105,348
Deferred
Federal (304,670) 1,600,258 174,922
59,313
State (53,765) 235,309 25,723
10,467--------- ---------- ----------
----------
$3,082,568 $3,550,038 $3,251,551
==========$ 935,589 $3,173,635 $3,248,706
========= ========== ==========
As a result of the redemptionpurchase of stock options, in fiscal year 2005 and 2004 the
Company was able to obtainAble, net income tax operating losses were
carried back, generating an income tax benefit related to stock issued to
employees in the amountreceivable of approximately $13,000 and $5,200,000, respectively.
This tax benefit did not affect net income, but rather was added to additional
paid in capital. As a result the Company generated a net tax operating loss,
which offset taxes already paid in fiscal years 2004 and 2005. Since a portion
of the benefit is not recognized in the current period, it is netted against the
income tax payable and was recorded as a deferred tax asset in fiscal year 2004.
The entire amount of the benefit from the net operating loss was utilized in
fiscal year 2005, reversing the tax deferred asset and reducing current federal
taxes payable.$476,000 at April 30, 2006.
The reason for the differences between the income tax provision for the income
from continuing operations and the amounts computed by applying the statutory
Federal income tax rates to income before income tax expense for the years ended
April 30 are as follows:
F-22
2006 2005 2004
-------- ---------- ----------
Income tax at
Federal rate $973,042 $2,770,729 $2,871,671
State income tax, net of federal 89,475 384,703 (227,136)
Benefit of Chinese tax holiday (66,197) (100,675) --
Benefit of stock option exercise 6,413 12,721 275,583
Other, net (67,144) 106,157 328,588
-------- ---------- ----------
$935,589 $3,173,635 $3,248,706
======== ========== ==========
F-28
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
APRIL 30, 2006, 2005 AND 2004
AND 2003
NOTE LM - INCOME TAXESTAX - CONTINUED
2005 2004 2003
---------- ---------- ----------
Income tax at
Federal rate $2,691,338 $3,134,369 $3,068,026
State income tax, net of federal 384,703 (227,136) 278,213
Benefit of Chinese tax holiday (100,675) - -
Benefit of stock option exercise 12,721 275,583 -
Other, net 94,481 367,222 (94,688)
---------- ---------- ----------
$3,082,568 $3,550,038 $3,251,551
========== ========== ==========
Significant temporary differences that result in deferred tax assets and
(liabilities) at April 30, 20052006, and 2004,2005, are as follows:
2006 2005
2004---------- --------- ----------
Allowance for doubtful accounts $ 46,799104,876 $ 27,30046,799
Inventory obsolescence reserve 300,116 147,983 101,399
Net operating loss carry-forward - 1,738,924from Able acquisition 115,440 --
Accruals not currently deductible 250,903 191,707
92,248
Inventory 302,480 242,462
110,846---------- --------- ----------
Current deferred tax asset 1,073,815 628,951 2,070,717
Prepaid insurance (116,746) (199,423)
(168,166)---------- --------- ----------
Current deferred tax liability (116,746) (199,423)
(168,166)---------- --------- ----------
Net current deferred tax asset $ 957,069 $ 429,528
$1,902,551========== ========= ==========
F-23
2006 2005
----------- -----------
Intangible assets - Able acquisition $ (852,665) $ --
Machinery and equipment (1,606,094) (1,668,909)
----------- -----------
Net long-term deferred tax liability $(2,458,759) $(1,668,909)
=========== ===========
The Company's wholly owned foreign enterprise, SigmaTron China, is subject to a
reduction in income taxes within China due to its foreign investment. The
reduction in taxes is for a five year period commencing in the period the
operation becomes profitable.
F-29
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
APRIL 30, 2006, 2005 AND 2004
AND 2003
NOTE LN - INCOME TAXES - CONTINUED
2005 2004
----------- -----------
Ownership in SMTU $ - $ 20,352
Impairment reserve - 71,098
----------- -----------
Long-term deferred tax asset - 91,450
Machinery and equipment (1,668,909) (1,357,165)
----------- -----------
Net long-term deferred tax liability $(1,668,909) $(1,265,715)
=========== ===========
NOTE M - 401(k)401(K) RETIREMENT SAVINGS PLAN
The Company sponsors 401(k) retirement savings plans, which are available to all
non-union U.S. employees. The Company may elect to match participant
contributions ranging from $300 - $500 annually. The Company contributed
$91,749, $82,961 $68,252 and $52,848$68,252 to the plans during the fiscal years ended April
30, 2006, 2005 2004 and 2003,2004, respectively. The Company paid total expenses of
$24,716, $15,063 $10,932 and $11,589$10,932 for the fiscal years ended April 30, 2006, 2005 2004 and
2003,2004, respectively, relating to costs associated with the administration of the
plans.
NOTE NO - MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration of
credit risk consist principally of uncollateralized accounts receivable. For the
year ended April 30, 2006, two customers accounted for 30.1% and 19.7% of net
sales of the Company, and 35.3% and 6.2% of accounts receivable at April 30,
2006. For the fiscal year ended April 30, 2005, two customers accounted for 32%
and 18%, of net sales of the Company, and 32% and 7%, of accounts receivable at
April 30, 2005.
For
the fiscal year ended April 30, 2004, two customers accounted for 36% and 13%,
of net sales of the Company, and 26% and 6%, of accounts receivable at April 30,
2004.
F-24F-30
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
APRIL 30, 2006, 2005 AND 2004
AND 2003
NOTE OP - LEASES
The Company leases certain facilities under various operating leases. The
Company also leases various machinery and equipment under capital leases.
Future minimum lease payments under leases with terms of one year or more are as
follows at April 30, 2005:2006:
Capital Operating
Years ending April 30, leases leases
- ------------------------------------------- ---------- ----------
2006 $ 753,432 $ 640,839
2007 542,583 692,876$1,681,459 $1,673,339
2008 493,548 663,4831,476,192 1,552,772
2009 325,066 561,3571,139,494 1,480,966
2010 - 252,690340,088 1,196,694
2011 108,510 414,935
Thereafter - 72,9000 51,300
---------- ----------
$2,114,629 $2,884,145
========== ==========4,745,743 $6,370,006
Less amounts representing interest 237,638532,913 ==========
----------
1,876,9914,212,830
Less current portion 637,7801,408,485
----------
$1,239,211$2,804,345
==========
Rent expense incurred under operating leases was approximately $1,272,000,
$669,000 $659,000 and $886,000$659,000 for the years ended April 30, 2005, 2004 and 2003,
respectively.
During fiscal2006, 2005 and subsequent to the year ended April 30, 2005, the Company
refinanced machinery and equipment under two separate sale/leaseback
arrangements. The equipment was sold for approximately $2,137,000 in cash. The
Company has the option to purchase the equipment at the end of the lease term
for $1. The transactions have been accounted for as a financing lease, wherein
the property remains on the balance sheet and will continue to be depreciated,
and a financing obligation equal to the proceeds has been recorded.
F-252004,
respectively.
F-31
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
APRIL 30, 2006, 2005 AND 2004
AND 2003
NOTE PQ - STOCK OPTIONS
The Company has stock option plans ("Option Plans") under which certain
employees and outside non-employee directors may acquire up to 1,603,500 shares
of common stock. Options to be granted under the employee plans total 1,207,500,
with the non-employee director plans allowing for a total of 396,000 options to
be granted. At April 30, 2005,2006, the Company has 417,85469,464 shares reserved for future
issuance to employees under the Option Plans. The Option Plans are interpreted
and administered by the Compensation Committee of the Board of Directors. The
maximum term of options granted under the Option Plans is generally 10 years.
Options granted under the Option Plans are either incentive stock options or
nonqualified options. Options forfeited under the Option Plans are available for
reissuance. Options granted under these plans are granted at an exercise price
equal to the fair market value of a share of the Company's common stock on the
date of grant.
employee options of 138,953 vest over five
years with the remaining 3,100 employee options vesting over three years from
the date of grant, provided the optionee remains an employee of the Company.
Options granted to non-employee directors are vested on the date of grant.
The Company has elected to followaccounts for these plans under the recognition and measurement
principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations. The Company is in accountingcompliance with disclosure
provisions of SFAS 123, Accounting for its
employeeStock-Based Compensation and SFAS 148
Accounting for Stock-Based Compensation-Transition and Disclosure. The Company
recognizes compensation expense for restricted shares and restricted stock units
to employees. As of April 30, 2006, there are no issued restricted shares or
restricted stock units.
On April 28, 2006, in response to the issuance of SFAS 123R, the Company's
Compensation Committee of the Board of Directors approved accelerating the
vesting of 349,695 unvested stock options because, as discussed below,held by current employees and
executive officers. Under FIN 44, a modification to accelerate the alternative fair value
accounting method provided forvesting of a
fixed award effectively results in the renewal of that award if, after the
modification, an employee is able to exercise/vest in an award that under SFAS No. 123 requires the
use of
option-valuation models that wereoriginal terms, would have expired unexercisable/vested. If the employee
continues to provide service and would have vested in the awards under the
original vesting provisions, the modification does not developed for use in valuing employee
stock options. Under APB Opinion No. 25, because the exercise pricecause an effective
renewal of the Company's employee stock options equals the market priceawards and, accordingly, any incremental compensation expense
measured as of the underlying stock
on themodification date of grant, noshould not be recognized. The Company
determined approximately 15,900 options were effectively renewed and
compensation expense is recognized. Pro forma
information regarding net income and earnings per share is required by SFAS No.
123 as if the Company had accounted for its employee stock options granted
subsequent to December 31, 1994, under the fair value method of that statement.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the option vesting period.$5,248 was recognized in fiscal year 2006.
The weighted-average grant date fair value of the options granted during fiscal
year 2006 and 2005 2004was $5.80 and 2003 was $7.06, $0 and $2.84, respectively. The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option-valuation model with the following assumptions:
2005 2004 2003
------ ---- ------
Expected dividend yield .0% N/A .0%
Expected stock price volatility 0.800 N/A 0.794
Average risk-free interest rate 2.20% N/A 2.78%
Weighted-average expected life of options 5 years N/A 5 years
F-26There were no options
granted during fiscal year 2004.
F-32
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
APRIL 30, 2006, 2005 AND 2004
AND 2003
NOTE PQ - STOCK OPTIONS - CONTINUED
The fair value of each option grant is estimated on the grant date using the
Black-Scholes option pricing model with the following assumptions:
2006 2005 2004
------- ------- ----
Expected dividend yield .0% 0% N/A
Expected stock price volatility .750 .800 N/A
Average risk-free interest rate 3.37% 2.20% N/A
Weighted-average expected life of options 5 years 5 years N/A
Option-valuation models require the input of highly subjective assumptions.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion the existing method does not necessarily provide a reliable single
measure of the fair value of the Company's employee stock options.
The table below summarizes option activity through April 30, 2005:2006:
Number of
Weighted- options
average exercisable
Number of exercise at end
options price of year
------------------- --------- -----------
Outstanding at April 30, 2002 1,130,493 5.16 748,497
Options granted during 2003 72,500 4.36
Options exercised during 2003 (52,757) 2.36
Options cancelled during 2003 (179,000) 7.09
Options forfeited during 2003 (1,866) 4.66
---------
Outstanding at April 30, 2003 969,370 4.89 833,304
Options exercised during 2004 (818,751) 5.63
-----------------
Outstanding at April 30, 2004 150,619 2.71 137,284
Options granted during 2005 45,000 10.88
Options exercised during 2005 (4,466) 3.99
Options forfeited during 2005 (15,000) 10.64
-----------------
176,153 169,485
=========Options granted during 2006 390,700 9.17
Options exercised during 2006 (31,537) 2.39
Options forfeited during 2006 (12,009) 9.17
--------
523,307 523,307
========
Information with respect to stock options outstanding and stock options
exercisable at April 30, 2005, follows:
Options outstanding
-----------------------------------------------------------
Number Weighted-average Weighted-
outstanding at remaining average
Range of exercise prices April 30, 2005 contractual life exercise price
- ------------------------ -------------- ---------------- --------------
$ 2.20 - 5.63 143,053 6.76 years $ 2.47
10.25 - 14.50 33,100 8.99 years 11.12
-------
176,153
=======
F-27F-33
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
APRIL 30, 2006, 2005 AND 2004
AND 2003
NOTE PQ - STOCK OPTIONS - CONTINUED
Information with respect to stock options outstanding and stock options
exercisable at April 30, 2006, follows:
Options outstanding
-----------------------------------------------------
Number Weighted-average Weighted-
outstanding at remaining average
Range of exercise prices April 30, 2006 contractual life exercise price
- ------------------------ -------------- ------------------- --------------
$2.20 - 5.63 111,517 5.12 years $2.49
9.17 - 12.25 411,790 8.01 years 9.33
-------
523,307
=======
Options exercisable
-----------------------------------------------------------------
Number Weighted-
exercisable at average
Range of exercise prices April 30, 20052006 exercise price
- ------------------------ -------------- --------------
$ 2.20$2.20 - 5.63 136,385 $ 2.39
10.25111,517 $2.49
9.17 - 14.50 33,100 11.1212.25 411,790 9.33
-------
169,485523,307
=======
F-34
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
APRIL 30, 2006, 2005 AND 2004
NOTE QR - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
2006 2005 2004 2003
---------- ---------- ----------
Net income $1,882,132 $4,698,799 $5,405,732 $5,714,924
========== ========== ==========
Weighted-average shares
Basic 3,756,804 3,751,792 3,423,999 2,885,652
Effect of dilutive stock options 63,757137,927 117,063 117,298 469,424
---------- ---------- ----------
Diluted 3,815,5493,894,731 3,868,855 3,541,297 3,355,076
========== ========== ==========
Basic earnings per share $ 0.50 $ 1.25 $ 1.58 $ 1.98
Diluted earnings per share $ 0.48 $ 1.23 $ 1.53 $ 1.70
Options to purchase 523,307, 176,153 150,619 and 969,370150,619 shares of common stock were
outstanding at April 30, 2006, 2005 and 2004, and 2003, respectively.
F-28F-35
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
APRIL 30, 2006, 2005 AND 2004
AND 2003
NOTE RS - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of unaudited quarterly financial data for fiscal
2005, 2004years 2006 and 2003:2005:
First Second Third Fourth
2006 quarter quarter quarter quarter
- ---- ----------- ----------- ----------- -----------
2005
Net sales $25,078,167 $28,310,243 $28,301,593 $24,386,992
Gross margin 4,625,698 5,193,033 4,782,756 3,966,087$21,312,693 $34,893,265 $34,061,657 $34,518,861
Income before income tax
expense (benefit), minority
interest and discontinued
operations 311,164 1,743,474 437,963 369,286
Income from continuing operations 189,798 1,223,893 287,335 225,272
Income (loss) from discontinued operation (24,731) (2,561) (9,159) (7,715)
Net income 1,036,969 1,309,177 1,437,342 915,311
Net income166,067 1,221,332 278,176 217,557
Earnings (loss) per common share
Basic 0.28 0.35 0.38 0.24
Diluted 0.27 0.34 0.38 0.24
2004
Net sales $24,833,797 $26,526,879 $23,906,181 $25,227,265
Gross margin 4,713,943 5,558,548 4,447,000 4,396,439
Net income 1,307,497 1,812,736 1,192,840 1,092,658
Net incomeshare-Basic
Continuing operations $ 0.05 $ 0.33 $ 0.08 $ 0.06
Discontinued operation (0.01) 0.00 (0.01) 0.00
----------- ----------- ----------- -----------
Total $ 0.04 $ 0.33 $ 0.07 $ 0.06
=========== =========== =========== ===========
Earnings (loss) per common share
Basic 0.44 0.54 0.33share-Diluted
Continuing operations $ 0.05 $ 0.29 Diluted 0.38 0.52 0.33$ 0.07 $ .06
Discontinued operation (0.01) 0.00 0.00 0.00
----------- ----------- ----------- -----------
Total $ 0.04 $ 0.29 2003
Net sales $22,983,430 $26,148,122 $27,879,095 $28,813,610
Gross margin 3,621,139 4,625,818 5,068,980 6,603,746
Net (loss) income 616,201 1,137,368 1,642,944 2,318,411
Net (loss) income per common share
Basic 0.21 0.39 0.58 0.79
Diluted 0.19 0.34 0.49 0.58$ 0.07 $ 0.06
=========== =========== =========== ===========
Total shares-Basic 3,755,420 3,755,420 3,755,420 3,759,958
Total shares-Diluted 3,822,577 4,187,632 4,192,229 3,905,791
F-29F-36
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
APRIL 30, 2006, 2005 2004 AND 20032004
NOTE S - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) - CONTINUED
The following is a summary of unaudited quarterly financial data for fiscal
years 2006 and 2005.
First Second Third Fourth
2005 quarter quarter quarter quarter
- ---- ----------- ----------- ----------- -----------
Net sales $21,460,858 $25,108,912 $25,085,493 $22,657,311
Income before income tax
expense (benefit), minority
interest and discontinued
operations 1,783,214 2,235,587 2,354,512 1,775,892
Income from continuing operations 998,096 1,337,210 1,436,289 1,069,640
Income (loss) from discontinued operation 38,873 (28,033) 1,053 (154,329)
Net income 1,036,969 1,309,177 1,437,342 915,311
Earnings (loss) per share-Basic
Continuing operations $ 0.27 $ 0.36 $ 0.38 $ 0.28
Discontinued operation 0.01 (0.01) 0.00 (0.04)
----------- ----------- ----------- -----------
Total $ 0.28 $ 0.35 $ 0.38 $ 0.24
=========== =========== =========== ===========
Earnings (loss) per share-Diluted
Continuing operations $ 0.26 $ 0.35 $ 0.38 $ 0.28
Discontinued operation 0.01 (0.01) (0.00) (0.04)
----------- ----------- ----------- -----------
Total $ 0.27 $ 0.34 $ 0.38 $ 0.24
=========== =========== =========== ===========
Total shares-Basic 3,751,014 3,752,054 3,752,054 3,753,967
Total shares-Diluted 3,787,897 3,840,442 3,822,157 3,815,255
F-37
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
APRIL 30, 2006, 2005 AND 2004
NOTE T - LITIGATION
On May 25, 2001, Nancy Messina, a former employee of the Company, filed a
lawsuit against the Company in the United States District Court for the Northern
District of Illinois, Eastern Division, asserting claims of sexual harassment
and gender discrimination under Title VII of the Civil Rights Act of 1964 and
claims of violation of the Federal Equal Pay Act. TheIn November 2005 the Company
believes that it
has meritorious defensesand the plaintiff settled the lawsuit upon the Company's payment of a nominal
amount to be applied to the plaintiff's legal expenses.
From time to time the Company is involved in legal proceedings, claims andor
investigations that are incidental to the conduct of the Company's business. In
future periods, the Company could be subjected to cash cost or non-cash charges
to earnings if any of these matters is defending itself vigorously in
this action. Althoughresolved on unfavorable terms. However,
although the compliantultimate outcome of any legal matter cannot be predicted with
certainty, based on present information, including the Company's assessment of
the merits of the particular claim, the Company does not specify a dollar amount, based on
information presently available to the Company, the Company believesexpect that the
resolution of these legal
proceedings or claims will not have aany material adverse effectimpact on theits future
consolidated financial conditionposition or results of the operations of the Company.
On September 3, 2002, a lawsuit was filed by the liquidating trustee of Circuit
Systems, Inc. ("CSI") in the United States Bankruptcy Court for the Northern
District of Illinois, Eastern Division, against Gary R. Fairhead, President and
Chief Executive Officer of the Company and a former director of CSI and other
former directors of CSI, alleging in part, that Mr. Fairhead and the named
directors had breached their fiduciary duty to CSI and its stockholders in a
number of respects, and corporate counsel had committed malpractice. Although
the Compliant did not quantify the relief sought, the initial settlement demand
against all defendants was $12 million. On January 9, 2005, the parties to this
suit entered into a settlement agreement, which was approved by the court on
January 26, 2005 and was dismissed on February 15, 2005. The financial
settlement which provides that the plaintiff will be paid $1,750,000 was
satisfied, for the most part, from CSI's directors and officers liability
insurance and from legal malpractice insurance. Mr. Fairhead and the Company did
not contribute to the financial settlement. No defendant admitted to any
liability regarding the claims asserted in the complaint. The Company determined
that it had a duty under Delaware law to indemnify Mr. Fairhead for his expenses
not covered by CSI's directors and officers liability policy, which consisted of
immaterial advancements of legal costs.
F-30operations.
F-38