1 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, 2001 or [ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from ___________to___________. Commission file number 0-23248 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 Vlge., IL 60007 - --------------------------------------- ----- (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 whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No__ 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'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 ). The aggregate market value of the voting stock held by nonaffiliates of the registrant as of July 30, 2001(based on the closing sale price as reported by Nasdaq National Market as of such date) was approximately $1,960,000. The number of outstanding shares of the registrant's Common Stock, as of July 30, 2001, was 2,881,227. DOCUMENTS INCORPORATED BY REFERENCE Those sections or portions of the definitive proxy statement of SigmaTron International, Inc., for use in connection with its annual meeting of stockholders, which will be filed within 120 days of the fiscal year ended April 30, 2001, are incorporated by reference into Part III of this Form 10-K.
2 TABLE OF CONTENTS PART I ITEM 1. BUSINESS..................................................... 3 ITEM 2. PROPERTIES................................................... 12 ITEM 3. LEGAL PROCEEDINGS............................................ 14 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......... 14 ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT......................... 14 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS................................ 16 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA......................... 17 ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS....................... 17 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS......................................... 23 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................. 23 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE........................ 23 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........... 23 ITEM 11. EXECUTIVE COMPENSATION....................................... 23 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................................. 23 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............... 24 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K................................................ 24 SIGNATURES.................................................................. 28
3 - -------------------------------------------------------------------------------- PART 1 - -------------------------------------------------------------------------------- ITEM 1. BUSINESS CAUTIONARY NOTE: In addition to historical financial information, this discussion of SigmaTron International, Inc.'s ("Company") business and other Items in this Annual Report on Form 10-K contain forward-looking statements concerning the Company's business or results of operations. These statements should be evaluated in the context of the risks and uncertainties inherent in the Company's business, including the Company's continued dependence on certain significant customers; the continued market acceptance of products and services offered by the Company and its customers; the activities of competitors, some of which may have greater financial or other resources than the Company; the variability of the Company's operating results; the availability and cost of necessary components; the continued availability and sufficiency of the Company's credit arrangements; changes in U.S. or Mexican regulations affecting the Company's business; the continued stability of the Mexican economic, labor and political conditions and the ability of the Company to manage its growth and secure financing. These and other factors which may affect the Company's future business and results of operations are identified throughout this Annual Report on Form 10-K and in the prospectus issued in connection with the Company's February 1994 initial public offering of securities (Registration No. 33-72100), 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 is an independent provider of electronic manufacturing services ("EMS"), which includes printed circuit board assemblies and completely assembled (boxbuild) electronic products. Included among the wide range of services the Company offers its customers are (1) automatic and manual assembly and testing of OEM products and subassemblies, (2) material sourcing and procurement, (3) design, manufacturing and test engineering support, (4) warehousing and shipment services, and (5) assistance in obtaining product approvals from governmental and other regulatory bodies. The Company provides these services through facilities located in North America and the Far East. The Company provides manufacturing and assembly services ranging from the assembly of individual components to the assembly and testing of boxbuild 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 marketplaces, particularly consumer electronics, gaming, fitness, industrial electronics, telecommunications, home appliances and automotive. The Company operates manufacturing facilities in Elk Grove Village, Illinois; Las Vegas, Nevada; and Acuna, Mexico. The Company maintains materials sourcing offices in Elk Grove Village, Illinois; Las Vegas, Nevada, Acuna Mexico, and Taipei, Taiwan. The Company provides warehousing services in Del Rio, Texas and Huntsville, Alabama. In addition, the Company's 42.5% 3
4 owned affiliate, SMT Unlimited L.P. (SMTU), provides electronic manufacturing services in Fremont and Hollister, California. The Company is a Delaware corporation which was organized on November 16, 1993 and commenced business 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. On February 9, 1994, the Company and certain stockholders commenced an initial public offering for the sale of 1,265,000 shares of Common Stock. PRODUCTS AND SERVICES The Company provides a broad range of manufacturing-related outsourcing solutions for its customers on both a turnkey (material purchased by the Company) and consignment basis (material provided by the customer). These solutions incorporate the Company's knowledge and expertise in the electronic manufacturing services industry to provide its customers with advanced manufacturing technologies and high quality, responsive and flexible manufacturing services. SigmaTron's outsourcing solutions provide services from product inception through the ultimate delivery of a finished good. Such technologies and services include the following: Manufacturing and Related Services. As its customers experience greater competition and shorter product life cycles in their respective industries, the Company has responded by expanding its prototype services. The Company also provides quick-turnaround, turnkey prototype services at all of its locations, with an emphasis on this service through dedicated resources at the Company's Elk Grove Village facility and through SMTU. Materials Procurement. 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. Material procurement 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 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 utilizes its Taiwanese procurement office and agents to source materials from the Far East. SigmaTron believes this office allows the Company to more effectively manage its relationships with key suppliers in the Far East by allowing the Company 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 onto raw printed circuit boards. The Company offers its assembly services using both pin-through-hole ("PTH") and surface mount ("SMT") interconnect technologies. 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 a more recent 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 4
5 ("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 because it believes that SMT will not entirely eliminate the need for PTH technology. The Company believes that OEMs with products not limited by internal space constraints will continue to favor PTH over SMT. Through SMTU, SigmaTron possesses ball grid array ("BGA") technology and fine pitch SMT, which is used for more complex circuit boards required to perform at higher speeds. In addition to printed circuit board assemblies, the Company also manufactures DC-to-AC inverters, coils, transformers and cable and harness assemblies. These products are manufactured using both automated and semi-automated preparation and insertion equipment and manual assembly techniques. In response to the needs of its OEM customers, the Company also offers "boxbuild" services which integrate its printed circuit board and other manufacturing and assembly technologies into higher level sub-assemblies and end products. 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. The Company provides X-ray laminography services through its affiliate SMTU. Generally, the Company either designs or procures test fixtures. 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 Mexico and for goods manufactured for a customer in Huntsville, Alabama. The Company also has the ability to provide custom-tailored delivery schedules to fulfill the just-in-time inventory needs of its customers. MARKETS AND CUSTOMERS SigmaTron's customers are in the consumer electronics, gaming, industrial electronics, fitness, telecommunications, automotive and home appliance industries. As of April 30, 2001, the Company had approximately 140 active customers ranging from Fortune 500 companies to small, privately held enterprises. 5
6 The following table shows, for the periods indicated, the percentage of net sales to the principal end-user markets it serves. <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------- PERCENT OF NET SALES TYPICAL FISCAL FISCAL FISCAL MARKETS OEM APPLICATION 1999 2000 2001 - ------- --------------- ---- ---- ---- - ------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Consumer Electronics Carbon monoxide alarms, tanning beds 39.0% 29.8% 18.3% - ------------------------------------------------------------------------------------------------- Industrial Electronics Motor controls, power supplies 16.8 20.3 18.8% - ------------------------------------------------------------------------------------------------- Fitness Treadmills, exercise bikes 13.7 18.4 21.7% - ------------------------------------------------------------------------------------------------- Gaming Slot machines, lighting displays 18.9 17.6 20.6% - ------------------------------------------------------------------------------------------------- Appliances Household appliance controls 5.0 7.2 11.6% - ------------------------------------------------------------------------------------------------- Telecommunications Pagers, microphones and modems 3.9 3.9 6.9% - ------------------------------------------------------------------------------------------------- Automotive Automobile interior lighting 2.7 2.8 2.1% - ------------------------------------------------------------------------------------------------- Total 100% 100% 100% ---- ---- ---- - ------------------------------------------------------------------------------------------------- </TABLE> For the fiscal year ended April 30, 2001, Life Fitness and Nighthawk Systems Inc. ("NSI") accounted for 21.7% and 15.8% respectively, of the Company's net sales. For the fiscal year ended April 30, 2000 NSI and Life Fitness accounted for 28.8% and 18.4%, respectively, of the Company's net sales. In fiscal 1999, NSI and Life Fitness accounted for 36.2% and 13.7%, respectively, of net sales. The Company expects that these customers as a group will continue to account for a significant percentage of the Company's net sales, although the individual percentages may vary from period to period. NSI is a leading U.S. manufacturer of residential carbon monoxide detection systems. In May 2000 the Company entered into an agreement with NSI calling for the Company to function as a contract manufacturer for all models of NSI's proprietary carbon monoxide detectors on a turnkey basis through January 1, 2002, or after the sales of 3 million carbon monoxide detectors, whichever occurs first. The Company agreed that during the term of the agreement and for three months thereafter it will not produce carbon monoxide detectors for any other customer. The amount of sales to NSI beyond fiscal 2002 remains unclear and if the relationship is not continued it could significantly impact the Company's revenues and earnings. In addition, the Company expects that sales to NSI will continue to account for a significant percentage of the Company's net sales in fiscal 2002. Sales to NSI are seasonal due to the nature of the product and the Company experiences stronger sales to NSI in the second and third fiscal quarters. The carbon monoxide detector market continues to be an emerging market which could lead to volatility in NSI's forecast, having the effect of causing the Company's revenues to fluctuate significantly. 6
7 SALES AND MARKETING The Company markets its services through 28 independent manufacturers' representative organizations that together currently employ approximately 74 sales personnel in the United States and Canada. Independent manufacturers' representative organizations receive variable commissions based on orders received by the Company. The members of the Company's senior management are actively involved in sales and marketing efforts. Sales volume and gross profit margins can vary considerably among customers and products depending on the type of services rendered by the Company. Specifically, variations in orders for turnkey services versus consignment services and variations in the number of orders for products with high raw material costs can lead to significant fluctuations in the Company's operating results. Further, customers' orders can be delayed, rescheduled or canceled at any time, which can significantly impact the operating results of the Company. The ability to replace such delayed or lost sales in a short period of time is not assured. MEXICAN OPERATIONS The Company's wholly-owned subsidiary, Standard Components de Mexico, S.A. ("Standard Components"), a Mexican corporation, is located in Acuna, Mexico, a border town across the Rio Grande River from Del Rio, Texas, and is 155 miles west of San Antonio. Standard Components was incorporated and commenced operation in 1969. The Company believes that one of the key benefits to having operations in Mexico is its access to cost-effective labor resources. Standard Components is a maquiladora, which is the status afforded a corporation under a trade agreement between the United States of America and Mexico. The Company believes economic events affecting the Mexican economy and the implementation of NAFTA have not had a material impact on the Company or its financial position to date. In 1995 the Mexican Ministry of Finance and Public Credit (Hacienda) adopted rules which require arms length pricing for transactions between maquiladoras and their U.S. affiliated companies. The impact of these regulations requires Standard Components to allocate costs and profits on an arms length basis. Its operating results continue to be consolidated with the Company's financial results. The effect of the rules did not have a material impact on the Company's consolidated results. The Company provides funds for salaries, wages, overhead and capital expenditure items as necessary to operate Standard Components. Since the Company provides funding to Standard Components in U.S. dollars, which are exchanged for pesos as needed, the fluctuation of the peso 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 2001 the Company provided funding of approximately $7,800,000 to Standard Components. 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. Also, foreign companies, especially companies with production operations in the Far East, have substantially lower costs, and thus, are able to offer their services at lower prices. The 7
8 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. 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 or significant price reductions by the Company's competitors 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 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 or other types of transactions. The Company may choose to enter into such transactions at any time, and such transactions could have a material impact on the Company, its business or operations. GOVERNMENTAL REGULATIONS The Company's operations are subject to certain foreign, federal, state and local regulatory requirements relating to environmental, waste management and health and safety matters. Management believes that the Company's business is operated in material compliance with all such regulations. 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. 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. BACKLOG The Company's backlog as of April 30, 2001 was approximately $41,663,000. Backlog consists of contracts or purchase orders with delivery dates scheduled within the next twelve months. The Company currently expects to ship substantially all of the April 30, 2001 backlog by the end of the 2002 fiscal year. Backlog as of April 30, 2000 totaled $35,180,000. Variations in the magnitude and duration of contracts and purchase orders received by the Company and delivery requirements 8
9 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 financial results. EMPLOYEES The Company employed approximately 1,215 people as of April 30, 2001, including 30 engaged in engineering, 1,095 in manufacturing and 90 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, 2003. The Company's Mexican subsidiary 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, 2002. Since the time the Company commenced operations, it has not experienced any work stoppages. The Company believes its relations with both unions and its other employees are good. RISK FACTORS In addition to the other risks identified herein, the Company's business is subject to the following risks: AVAILABILITY AND SUFFICIENCY OF CREDIT ARRANGEMENTS; GOING CONCERN MATTERS The ability of the Company to secure and maintain sufficient credit arrangements is key to its continued operation. As of the date of this report, the Company was in violation of certain of its financial covenants with its lenders. The Company has entered into a forbearance agreement with its lenders under which the lenders agreed to forbear enforcing and exercising their rights until July 31, 2001. The Company has requested an additional extension of the forbearance agreement or another long-term solution. Its lenders have continued to lend to the Company pursuant to the terms of the existing credit agreements. The lenders have given the Company an informal indication that it has presented to their credit committees a proposal extending the forbearance agreement until October 31, 2001. There is no guaranty that the lenders' credit committees will approve this extension or that the Company can obtain any further extension from its lenders or secure other financing which could have a material impact on the Company's results of operations. The report of the Company's independent accountants, included in this annual report, contains an explanatory paragraph raising substantial doubt about the Company's ability to continue as a going concern due to the lack of a long term credit arrangement. RECENT LOSSES AND POSSIBLE LIQUIDITY ISSUES The Company has suffered a loss in the past fiscal year. The negative cash flow sustained by the Company in the past fiscal year has reduced working capital and available cash, which has impacted its abilities to fund current operations. The Company is exploring strategic opportunities to address liquidity, including the pursuit of additional financing and/or equity, and possible corporate transactions. However, there can be no assurance that the Company will be able to obtain the necessary financing and/or equity. The Company has taken measures to return to profitability, but there can be no assurance that the Company will return to profitability. 9
10 RISK OF NASDAQ DELISTING OF COMMON STOCK The Company is required to meet certain requirements to ensure continued listing on the NASDAQ SmallCap Market. One of these requirements is that the Company's common stock maintain a minimum bid price of $1 per share of common stock. The Company's common stock has traded with a closing bid price below $1 since June 22, 2001, and has received notification from NASDAQ that it must cure the listing deficiency by November 5, 2001 or be subject to delisting. In the event NASDAQ initiates delisting procedures after November 5, 2001, the Company may appeal the delisting determination. In the event NASDAQ delists the Company's stock, the Company may seek an alternative exchange or market list for the Company's stock. A delisting from the NASDAQ SmallCap Market may adversely affect the liquidity and market price of the common stock. 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. COMPANY'S CUSTOMER BASE IS CONCENTRATED The Company's customer base is concentrated, for the fiscal year ended April 30, 2001, two customers Life Fitness and NSI respectively accounted for 21.7% and 15.8% of the Company's net sales. The loss of any such customer or a reduction in business levels could have a material impact on the Company's results of operations. If the Company's contract with NSI expires on January 1, 2001 or after sales of 3 million carbon dioxide detectors, which ever occurs first, such expiration could adversely impact the Company's revenues and earnings. VARIABILITY OF CUSTOMER REQUIREMENTS 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. COMPANY MUST 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. 10
11 COMPANY HAS INTENSE INDUSTRY COMPETITION The electronics manufacturing services 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. From time to time, the Company reviews potential transactions relating to its business, products, and technologies. Such transactions could include mergers, acquisitions, strategic alliances, joint ventures or other types of arrangements. The Company may choose to enter into such transactions at any time, and such transactions could have a material effect on the Company's business or operations." FOREIGN OPERATION 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 factors, including the stability of the Mexican economy, the political climate in Mexico, 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 obtains many of its materials and components in Taipei, Taiwan and, therefore, the Company's access to these materials and components is dependent on the continued success of these Asian suppliers. It is uncertain whether these suppliers will continue to be able to serve as a supplier to the Company. RISK OF FLUCTUATION OF VARIOUS CURRENCIES INTEGRAL TO THE COMPANY'S OPERATIONS The Company purchases some of its materials and components 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. SEASONALITY OF RESULTS The Company currently experiences seasonality in quarterly results, with stronger net sales and demand for its products and services historically in its second and third fiscal quarters. AVAILABILITY OF RAW COMPONENTS MAY AFFECT 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 could have a material impact on the Company's results of operations. 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 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 manufacturing business will require that it attract, motivate, and retain additional skilled and experienced personnel. 11
12 FAVORABLE LABOR RELATIONS IS IMPORTANT The Company currently has labor contracts with certain of its employees. 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 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 impact on the Company's results of operations. VOLATILITY OF STOCK PRICE The price of the Company's Common 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 Stock and the limited number of market markers also affect the volatility of the Company's Common Stock. Such fluctuations are expected to continue. ITEM 2. PROPERTIES The Company, in combination with its wholly-owned subsidiary and affiliate, has manufacturing facilities located in Elk Grove Village, Illinois; Las Vegas, Nevada; Fremont and Hollister, California and Acuna, Mexico. 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 and Taipei, Taiwan offices.
13 Certain information about the Company's manufacturing, warehouse and purchasing facilities is set forth below: - -------------------------------------------------------------------------------- LOCATION SQUARE FEET SERVICES OFFERED - -------------------------------------------------------------------------------- Elk Grove Village, IL 95,000 Corporate Headquarters, assembly and testing of PTH and SMT, box-build, prototyping, warehousing - -------------------------------------------------------------------------------- Acuna, Mexico 156,000 High volume assembly, and testing of PTH and SMT, box-build, transformers - -------------------------------------------------------------------------------- Las Vegas, NV 33,360 Automatic insertion and cable assembly, PTH, SMT and testing - -------------------------------------------------------------------------------- Del Rio, TX 25,000 Warehouse, portion of which is bonded - -------------------------------------------------------------------------------- Fremont and Hollister, CA 134,030 High volume assembly and testing of both PTH and SMT, BGA and leading edge technology - -------------------------------------------------------------------------------- Taipei, Taiwan 2,900 Materials procurement, alternative sourcing assistance and quality control - -------------------------------------------------------------------------------- Huntsville, AL * Just-in-time inventory management and delivery - -------------------------------------------------------------------------------- *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. All of the above properties are occupied pursuant to leases of the premises except for the Huntsville, Alabama facility. The Company leases its executive offices and manufacturing facility in Elk Grove Village, Illinois from Circuit Systems, Inc. ("CSI"). The Company, through an agent, leases the purchasing and engineering office in Taipei, Taiwan to coordinate Far East purchasing and design activities. In addition, SMTU, leases two facilities in Fremont and Hollister, California. The Company has guaranteed lease payments of approximately $916,000 for SMTU, and has been indemnified by one of the SMTU limited partners to the extent of 50% of the lease payment guaranty. 13
14 ITEM 3. LEGAL PROCEEDINGS During the fiscal year ending April 30, 2001, four former employees of the Company independently filed charges with the Equal Employment Opportunity Commission that they had suffered unlawful discrimination or harassment based upon age, race or sex. Two of these charges are being investigated by the EEOC which has not yet issued its findings. Two others have resulted in lawsuits being filed against the Company. The Company believes that it has meritorious defenses to each of these charges and intends to defend itself vigorously in these actions. Although the charges do not specify dollar amounts, based on information presently available to the Company, the Company does not believe that the resolution of these charges will have a material adverse effect on the financial condition or results of the operations of the Company. 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 2001. ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT NAME AGE POSITION - ---- --- -------- Gary R. Fairhead 49 President and Chief Executive Officer. Gary R. Fairhead has been the President of the Company since January 1990. Linda K. Blake 40 Chief Financial Officer, Vice President - Finance Treasurer and Secretary. Linda K. Blake is the Company's Vice President Finance, Treasurer, Secretary and Chief Financial Officer and was Controller of the Company from June 1991 to February 1994. Daniel P. Camp 52 Vice President - Mexican Operations. Daniel P. Camp has been Vice President - Mexican Operations since February 2000. Mr. Camp was General Manager of Mexican Operations from February 1994 to February 2000. Gregory A. Fairhead 45 Executive Vice President - Mexican 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. 14
15 Stephen H. McNulty 47 Vice President - Sales. Stephen H. McNulty has been Vice President of Sales since February 2000. Mr. McNulty was National Sales Manager from April 1997 to February 2000. Andrew J. Saarnio 53 Vice President - Elk Grove Operations. Andrew J. Saarnio has been Vice President - Elk Grove Operations since November 1998. John P. Sheehan 40 Vice President - Director of Materials and Assistant Secretary. John P. Sheehan has been Vice President - Director of Materials of the Company since April 1990 and is Assistant Secretary. Nunzio A. Truppa 63 Vice President - Las Vegas Operations. Nunzio A. Truppa has been Vice President - Las Vegas Operations for the Company, or held equivalent management positions since January 1990. Thomas F. Rovtar 50 Vice President - Information Technology - Thomas F. Rovtar has been Vice President of Information Technology since July 2000. 15
16 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on the Nasdaq National Market System under the symbol SGMA. The following table sets forth the range of quarterly high and low bid information for the Common Stock for the periods ended April 30, 2001 and 2000. Common Stock as Reported by Nasdaq Period High Low ------ ---- --- Fiscal 2001: Fourth Quarter $1.750 $0.781 Third Quarter 2.250 0.813 Second Quarter 3.875 1.750 First Quarter 5.000 2.625 Fiscal 2000: Fourth Quarter 7.219 4.250 Third Quarter 8.750 5.313 Second Quarter 7.875 4.875 First Quarter 7.875 3.750 As of July 27, 2001, there were approximately 98 holders of record of the Company's Common Stock, which does not include shareholders whose stock is held through securities position listings. The Company estimates there to be approximately 1500 beneficial owners of the Company's Common Stock. The Company has not paid cash dividends on its Common 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, 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. 16
17 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA <TABLE> <CAPTION> Years Ended April 30 (In thousands except per share data) 1997 1998 1999 2000 2001 ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> Net Sales $87,216 $85,651 $88,160 $88,885 $80,891 Income (loss) before income tax 5,161 837 2,750 1,360 (1,855.6) expense (benefit) and extraordinary item Net Income 3,255 526 1,697 767 (1,156) Total Assets 42,088 48,641 55,276 49,341 50,936 Long-term debt and capital 18,593 20,975 23,194 18,364 20,004 lease obligations (including current maturities) Net income (loss) per common share-basic $1.16 $0.18 $0.59 $0.27 $(0.40) Net income (loss) per common $1.11 $0.18 $0.59 $0.27 $(0.40) share-assuming dilution </TABLE> ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY NOTE: The following discussion provides an analysis of the Company's financial condition and results of operations, and should be read in conjunction with the Selected Consolidated Financial Data and the Consolidated Financial Statements 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. OVERVIEW The Company is an independent provider of EMS, which includes, printed circuit board assemblies, and boxbuild (completely assembled) electronic products. Included among the wide range of services the Company offers its customers are (1) automatic and manual assembly and testing of customer products, (2) material sourcing, procurement and control, (3) design, manufacturing and test engineering support, (4) warehousing and shipment services, and (5) assistance in obtaining product approvals from governmental and other regulatory bodies. The Company provides these services through facilities located in North America and the Far East. 17
18 Sales volume can be misleading as an indication of the Company's financial performance. Gross profit margins can vary considerably among customers and products depending on the type of services rendered by the Company. Specifically, the variation of orders for turnkey services versus consignment services. Variations in the number of turnkey orders compared to consignment orders can lead to significant fluctuations in the Company's revenue levels and margins. Further, generally customers' orders can be delayed, rescheduled or canceled at any time, which can significantly impact the operating results of the Company. In addition, the ability to replace such delayed or lost sales in a short period of time cannot be assured. As a manufacturing company, the Company includes all fixed manufacturing overhead in cost of goods sold. The inclusion of fixed manufacturing overhead in cost of goods sold magnifies the fluctuations in gross profit margin percentages caused by fluctuations in net sales and capital expenditures. Specifically, fluctuations in the mix of consignment and turnkey contracts could have an effect on the cost of goods sold and the resulting gross profit as a percentage of net sales. 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. However, turnkey contracts typically have lower gross margins due to the large material content. Historically, more than 90% of the Company's sales have been from turnkey orders. The Company renewed, through January 1, 2002, its manufacturing agreement with NSI relating to the production of carbon monoxide detection systems. Sales to NSI accounted for a significant percentage of the Company's net sales from fiscal 1996 through 2001. The Company expects sales to NSI will be significant in fiscal 2002. The amount of sales to NSI beyond fiscal 2002 is not certain and if the relationship is not continued it could significantly impact the Company's revenues and earnings. In the past, the timing and rescheduling of orders has caused the Company to experience significant quarterly fluctuations in its revenues and earnings and the Company expects such fluctuations to continue. In addition, the Company's fourth and first quarters have historically been the weakest periods. RESULTS OF OPERATIONS: Fiscal Year Ended April 30, 2001 Compared to Fiscal Year Ended April 30, 2000 Net sales for fiscal 2001 were $80,890,699 compared to $88,884,591 for fiscal 2000. NSI accounted for approximately $12,775,500 or 15.8% of the Company's fiscal 2001 net sales compared to $25,703,137 or 28.8% in fiscal 2000. The economic slowdown in some of the industries the Company serves has caused a decrease in the Company's sales for fiscal 2001. Gross profit decreased to $5,065,107 in fiscal 2001 from $8,196,589 in fiscal 2000. Gross profit as a percent of net sales was 6.3% and 9.2% for fiscal 2001 and 2000, respectively. The decrease in the Company's gross margin is the result of a number of factors, including price erosion within the electronics industry, labor cost and inefficiencies, component pricing and capacity utilization. Management has taken steps to align its overhead structure with current customer 18
19 demands, including workforce reductions. The Company continues to evaluate its current manufacturing issues, which could result in additional workforce and overhead reductions. Selling and administrative expenses increased from $5,721,593 in fiscal 2000 to $5,752,984 in fiscal 2001. The increase is primarily due to the addition of an information technology department. Selling and administrative expenses as a percent of net sales increased to 7.1% in fiscal 2001 compared to 6.4% in fiscal 2000. The increase as a percent of sales is primary due to the reduction in sales volume from fiscal 2000 to fiscal 2001. Interest expense decreased in fiscal 2001 to $1,963,282 from $2,125,292 in fiscal 2000. The overall decrease was primarily due to the lower interest rates on the Company's line of credit. Interest expense as a percent of net sales remained unchanged at 2.4% for fiscal 2001 and fiscal 2000. In fiscal 2001 the pre-tax loss of $1,855,630 resulted in a tax benefit of $699,866. In fiscal 2000 tax expense was $506,122, which resulted in an effective tax rate of 37.2% As a result of the foregoing, the Company recorded a net loss of $1,155,764 in fiscal 2001 compared to net income of $766,647 in fiscal 2000. Basic and diluted earnings per share for the year ended April 30, 2001 was $(0.40) compared to $0.27 in fiscal 2000. FISCAL YEAR ENDED APRIL 30, 2000 COMPARED TO FISCAL YEAR ENDED APRIL 30, 1999 Net sales for fiscal 2000 were $88,884,591 compared to $88,159,189 for fiscal 1999. NSI accounted for approximately $25,703,137 or 28.8% of the Company's fiscal 2000 net sales compared to $31,894,500 or 36.2% in fiscal 1999. Gross profit decreased to $8,196,859 in fiscal 2000 from $8,921,091 in fiscal 1999. Gross profit as a percent of net sales was 9.2% and 10.1% for fiscal 2000 and 1999, respectively. The decrease in gross profit for the fiscal year ended April 30, 2000 compared to the same period in the prior year is due to product mix and value added services required by customers in the EMS industry. Selling and administrative expenses decreased from $5,890,752 in fiscal 1999 to $5,721,593 in fiscal 2000. The decrease is primarily due to a decrease in bonus accrual in fiscal 2000 compared to fiscal 1999. Selling and administrative expenses as a percent of net sales decreased to 6.4% in fiscal 2000 and fiscal 1999. Interest expense increased in fiscal 2000 to $2,125,292 from $2,049,396 in fiscal 1999. The overall increase was primarily due to the higher interest rates on the Company's line of credit. Interest expense as a percent of net sales remained unchanged at 2.3% for fiscal 2000 and fiscal 1999. In fiscal 1999 a gain of approximately $1,391,000 was recognized on settlement of the insurance reimbursement related to the flood at the Del Rio, Texas and Acuna, Mexico locations. This gain is reported as a reduction of cost of products sold of $259,000 and gain on insurance reimbursement of $1,132,000 in the accompanying 1999 statement of income operations. In fiscal 2000 an extraordinary item for the early extinguishment of debt related to the change of banks was recorded in the amount of $87,500, net of taxes of $58,333. 19
20 Income tax expense decreased to $506,122 in fiscal 2000 from $1,052,784 in fiscal 1999. The effective tax rate for fiscal 2000 and 1999 was 37.2% and 38.3%, respectively. As a result of the foregoing, net income decreased to $766,647 in fiscal 2000 from $1,697,101 in fiscal 1999. Basic earnings per share for the year ended April 30, 2000 was $0.27 compared to $0.59 in fiscal 1999. Diluted earnings per share for fiscal 2000 was $0.27. QUARTERLY RESULTS AND SEASONALITY Historically, the Company's highest levels of sales are achieved in its second and third quarters. This is due to the seasonal nature of the business for several of the Company's customers. In particular, NSI's sales of carbon monoxide detectors generally coincide with the heating season, and several other customers have sales tied to the holidays. This trend has caused the Company to experience generally stronger second and third quarters in each fiscal year. However, regardless of seasonal fluctuations, there can be no assurance that the Company will be profitable in any particular quarter. The Company's results of operations have varied significantly and may continue to fluctuate from quarter to quarter. Operating results are affected by a number of factors, including timing of orders from and shipments to major customers, component pricing and shortages, the volume of orders as related to the Company's capacity, timing of expenditures in anticipation of future sales, price erosion within the electronics industry, capacity utilization, the mix of turnkey and consignment business, competition within the electronic industry, the gain or loss of significant customers and variations in the demand for products in the industries served by the Company. A significant portion of the Company's expenses are relatively fixed in nature and planned expenditures are based in part on anticipated orders. The inability to adjust expenditures to compensate for a decline in net sales may magnify the adverse impact of such decline on the Company's results of operations. The Company's customers generally require short delivery cycles. In the absence of substantial backlog, quarterly sales and operating results depend on the volume and timing of orders received during the quarter, which can be difficult to forecast. In addition, variations in the size and delivery schedules of purchase orders received by the Company, as well as changes in customers' delivery requirements or the rescheduling or cancellations of orders and commitments, may result in substantial fluctuations in backlog from period to period. Accordingly, the Company believes that backlog cannot be considered a meaningful indicator of future operating results. LIQUIDITY AND CAPITAL RESOURCES: In fiscal 2001 the Company financed operations through cash provided by operating activities and borrowings under the line of credit. During the period, cash provided by operating activities was primarily related to a reduction in accounts receivable and the effect of non-cash expense items such as depreciation. The Company has a loan and security agreement which provides for a revolving credit facility, an $800,000 equipment loan facility, and a $2,000,000 letter of credit facility. In conjunction with the new agreement in 2000, the Company paid $87,000, net of taxes of $58,333, as part of the extinguishment of the prior debt agreement. This amount is reflected on the 2000 statement of operations as a loss from an extraordinary item. The maximum borrowing limit under the revolving line-of-credit facility is limited to the lesser of; (I) $25,000,000; or (ii) an amount equal 20
21 to the sum of up to 60% of the inventory borrowing base, as defined. At April 30, 2001, the Company had outstanding borrowings of $16,406,414. The agreement is collateralized by substantially all of the assets of the Company and contains certain financial convenants, 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 or distributions of any cash or other property on any of its capital stock, except that common stock dividends may be distributed by a stock split or dividends pro rata to its stockholders. As of the date of this report the Company was in violation of its pre-tax income and interest coverage ratio covenants for the quarters ended July 31, 2000, October 31, 2000, January 31, 2001 and April 30, 2001. On February 1, 2001, the Company entered into a forbearance agreement with its lenders. Under the terms of the agreement the lenders agreed to forbear from exercising and enforcing their rights until May 31, 2001. In July 2001, the lenders agreed to extend the forbearance agreement until July 31, 2001. Under the forbearance agreement, the Company is required to pay additional interest of 50 basis point on LIBOR-based borrowings and 25 basis points on prime-based borrowings. The outstanding loan balance of $16,406,414 has been classified as short-term in the Company's balance sheet at April 30, 2001. The Company has requested an additional extension of the forbearance agreement or another long-term solution. Its lenders have continued to lend to the Company pursuant to the terms of the existing credit agreements. The lenders have given the Company an informal indication that it has presented to their credit committees a proposal extending the forbearance agreement until October 31, 2001. There is no guaranty that the lenders' credit committees will approve this extension or that the Company can obtain any further extension from its lenders or secure other financing which could have a material impact on the Company's results of operations. The report of the Company's independent accountants, included in this annual report, contains an explanatory paragraph raising substantial doubt about the Company's ability to continue as a going concern due to the lack of a long term credit arrangement. To the extent that the Company provides funds for salaries, wages, overhead and capital expenditure items necessary to operate its Mexican operations, the amount of funds available for use in the Company's domestic operations may be depleted. The funds, provided to its Mexican operations which ordinarily derive from the Company's cash from operations and borrowings under its revolving credit facility, were approximately $7,800,000 for fiscal 2001. The Company provides funding in U.S. dollars, which are exchanged for pesos as needed. The Company has a 42.5% ownership interest in SMTU, which was formed on September 15, 1994, as a joint venture to provide surface mount technology assembly services primarily to electronic original equipment manufactures. The Company owns 50% of the outstanding stock of SMT Unlimited, Inc. (SMT, Inc.), which is the general partner of SMTU. One of the limited partners of SMTU is also an equal shareholder of SMT, Inc., along with the Company. The Company holds subordinated debentures totaling $1,050,000 from SMTU. Payments of principal and interest on the debentures is subordinated to prior payment in full of SMTU's revolving line of credit. At April 30, 2001, debentures totaling $650,000 bear interest at 8%, and debentures totaling $400,000 bear interest at 12%. During fiscal 2001, the Company extended the repayment date of the debentures from May 1, 2001 to August 1, 2003. The principal and interest under the debentures are to be repaid on August 1, 2003. The Company also has guaranteed lease obligations of approximately $916,000 for SMTU. The Company has been indemnified by one of the other limited partners in the amount of $457,770 for the guaranteed lease obligations. SMTU incurs a $28,500 monthly administrative fee for administrative services provided by the Company (see also Note 14). 21
22 The investment in SMTU is carried at cost plus equity in undistributed earnings or losses since acquisition. The Company has recorded its share of the losses in SMTU as a reduction of the investment in SMTU. In August 1999, the Company entered into a guaranty agreement with SMTU's lenders to guaranty the obligation of SMTU under its revolving line of credit to a maximum of $2,000,000 plus interest and related costs associated with the enforcement of the guaranty. In connection with the guaranty agreement, one of the limited partners of SMTU and a Vice President of SMTU have each executed a guaranty to the lender to reimburse the Company for up to $500,000 of payments made by the Company under its guaranty to the lender in excess of $1,000,000. In addition, the limited partner has agreed to indemnify the Company for 50% of all payments made on behalf of SMTU to the lender. The limited partner's obligation to the Company under the indemnity is reduced dollar for dollar to the extent the limited partner would otherwise be obligated to pay more than $1,000,000 as a result of his guaranty to the lender. The Company's investment and advances to and receivables from SMTU totaled approximately $5,137,000 at April 30, 2001, and no liability has been recorded by the Company related to its guaranty of SMTU' credit agreement. 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 reserved to a net realizable value of $0 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. In April 2001, LC sold certain assets to a third party. In connection with the asset sale, LC made partial payments on the amounts owed to the Company of $356,500 in cash, endorsing a $400,000 promissory note receivable from a third party and by assigning existing accounts receivable totaling approximately $165,0000 and inventory totaling approximately $272,000 of LC to the Company. Payments are 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. Interest on the promissory note will accrue 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 the royalty payments. These royalty payments, if any will be recorded by the Company as received. As a result of these transactions, the Company has written off its investment in LC of $2,500 in the statement of operations for the year ended April 30, 2001. There was no other impact on the fiscal 2001 operating results. The impact of inflation for the past three fiscal years has been minimal. 22
23 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS Not applicable ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA The response to this item is included in Item 14(a) of this Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no changes in or disagreements with accountants on accounting or financial disclosure matters during the Company's fiscal years ended April 30, 2001 and 2000. - -------------------------------------------------------------------------------- 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 Commission not later than 120 days after the close of the Company's fiscal year ended April 30, 2001. 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 Commission not later than 120 days after the close of the Company's fiscal year ended April 30, 2001. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required under this item is incorporated herein by reference to the Company's definitive proxy statement, filed with the Commission not later than 120 days after the close of the Company's fiscal year ended April 30, 2001. 23
24 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 Commission not later than 120 days after the close of the Company's fiscal year ended April 30, 2001. - -------------------------------------------------------------------------------- PART IV - -------------------------------------------------------------------------------- ITEM 14. EXHIBITS, 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 the Form 10-K on Page F-1. 24
25 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 Restated By-laws of the Company, adopted on September 24, 1999 and hereby incorporated by reference. 10.1 Lease Agreement dated as of February 13, 1990 between the Company and CSI and amendments and addenda thereto - filed as Exhibit 10.1 to the Company's Registration Statement on Form S-1, File No. 33-72100 and hereby incorporated by reference.* 10.2 401(K) Retirement Savings Plan of the Company - filed as Exhibit 10.3 to the Company's Registration Statement on Form S-1, File No. 33-72100 and hereby incorporated by reference.* 10.3 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.* 10.4 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.* 10.5 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.* 10.6 1994 Outside Directors Stock Option Plan - filed as Exhibit 10.15 to the Company's Registration Statement on Form S-1, File No. 33-72100 and hereby incorporated by reference. 10.7 The Company's 1997 Directors' Stock Option Plan - filed as Exhibit A to the Company's 1997 Proxy Statement filed on August 18, 1997 and hereby incorporated by reference. 10.8 Organization Agreement between the Company and other Partners of SMT Unlimited L.P. dated September 15, 1994 - filed as Exhibit 10.23 to the Company's Form 10-K for the fiscal year ended April 30, 1995 and hereby incorporated by reference. 10.9 Putnam Flexible 401(K) and Profit Sharing Plan Agreement #001 dated March 22, 1996 between SigmaTron International, Inc. and Putnam Defined Contribution Plans - filed as Exhibit 10.35 to the Company's Form 10-Q for the quarter ended July 31, 1996 and hereby incorporated by reference. 10.10 Amended 401(k) plan agreement between the Company and Putnam Investments dated May 1, 1996 filed as Exhibit 10.35 to the Company's Form 10-Q for the quarter ended July 31, 1996 and hereby incorporated by reference.* 25
26 10.11 2000 Outside Directors' Stock Option Plan - filed as Appendix 1 to the Company's 2000 Proxy Statement filed on August 21, 2000.* 10.12 2000 Employee Stock Option Plan - filed as Appendix 2 to the Company's 2000 Proxy Statement filed on August 21, 2000. 10.13 Lease Agreement between SigmaTron International, Inc. and Industrias Irvin DeMexico S.A. dated January 15, 1997 and filed as Exhibit 10.42 to the Company's Form 10-Q for the quarter ended January 31, 1997 and hereby incorporated by reference. 10.14 Lease Agreement between SigmaTron International, Inc. and G.E. Capital dated July 14, 1997 filed as Exhibit 10.34 to the Company's Form 10-Q for the quarter ended July 31, 1997 and hereby incorporated by reference. 10.15 Lease Agreement # 97-097 between SigmaTron International, Inc. and International Financial Services dated August 11, 1997 filed as Exhibit 10.37 to the Company's Form 10-Q for the quarter ended October 31, 1997 and hereby incorporated by reference. 10.16 Lease Agreement # 97-185 between SigmaTron International, Inc. and International Financial Services dated December 22, 1997 filed as Exhibit 10.38 to the Company's Form 10-Q for the quarter ended January 31, 1998 and hereby incorporated by reference. 10.17 Lease Agreement # E002 between SigmaTron International, Inc. and G.E. Capital dated December 31, 1997 filed as Exhibit 10.39 to the Company's Form 10-Q for the quarter ended January 31, 1998 and hereby incorporated by reference. 10.18 Lease Agreement # 98-10 between SigmaTron International, Inc. and International Financial Services dated February 2, 1998 filed as Exhibit 10.21 to the Company's Form 10-K for fiscal year ended April 30, 1998 and hereby incorporated by reference. 10.19 Lease Agreement # 98-106 between SigmaTron International, Inc. and International Financial Services dated June 30, 1998 and hereby incorporated by reference filed as Exhibit 10.42 to the Company's Form 10-Q for the quarter ended July 31, 1998 and hereby incorporated by reference. 10.20 Lease Agreement # E003 between SigmaTron International, Inc. and G.E. Capital dated November 10, 1998 filed as Exhibit 10.42 to the Company's Form 10-Q for the quarter ended January 31, 1999 and hereby incorporated by reference. 10.21 Lease Agreement # 99-048 between SigmaTron International, Inc. and International Financial Services dated April 30, 1999 and hereby incorporated by reference. 10.22 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. 26
27 10.23 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. 10.24 Lease Agreement # E004 between SigmaTron International, Inc. and G.E. Capital dated May 9, 2000. Filed as Exhibit 10.26 to the Company's Form 10-K for the year ended April 30, 2000 and hereby incorporated by reference. 10.25 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. 10.26 Lease Agreement # GE005 between SigmaTron International, Inc. and General Electric Capital Corporation dated December 21, 2000, filed as Exhibit 10.28 to the Company's Form 10-Q for the quarter ended January 31, 2001 and hereby incorporated by reference. 10.27 Lease Agreement # 00-280 between SigmaTron International, Inc. and International Financial Services dated December 12, 2000. 10.28 Lease Agreement # 200029352 between SigmaTron International, Inc. and Citicorp Vendor Finance, Inc. dated March 15, 2001. 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. 23.1 Consent of Ernst & Young LLP. * Indicates management contract or compensatory plan. (b) No reports on Form 8-K were filed during the 2001 fiscal year. (c) Exhibits The Company hereby files as exhibits to this Report the exhibits listed in Item 14 (a) (3) above, which are attached hereto. (d) Financial Statements Schedules The Company hereby files a schedule to this Report the financial schedules in Item 14, which are attached hereto. 27
28 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: August 13, 2001 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. <TABLE> <CAPTION> Signature Title Date --------- ----- ---- <S> <C> <C> /s/ Franklin D. Sove Chairman of the Board of Directors August 13, 2001 - -------------------- Franklin D. Sove /s/ Gary R. Fairhead President and Chief Executive Officer August 13, 2001 - -------------------- Gary R. Fairhead (Principal Executive Officer) /s/ Linda K. Blake Chief Financial Officer, Secretary and August 13, 2001 - -------------------- Linda K. Blake Treasurer (Principal Financial Officer and Principal Accounting Officer) /s/ D.S. Patel Director August 13, 2001 - -------------------- D.S. Patel /s/ John P. Chen Director August 13, 2001 - -------------------- John P. Chen /s/ Dilip S. Vyas Director August 13, 2001 - -------------------- Dilip S. Vyas /s/ Thomas W. Rieck Director August 13, 2001 - -------------------- Thomas W. Rieck /s/ Steven Rothstein Director August 13, 2001 - -------------------- Steven Rothstein </TABLE> 28
29 Index to Financial Statements and Schedules <TABLE> <S> <C> SigmaTron International, Inc. Report of Independent Auditors.........................................................................F-2 Consolidated Financial Statements Consolidated Balance Sheets at April 30, 2001 and 2000.................................................F-3 Consolidated Statements of Operations for the Years Ended April 30, 2001, 2000, and 1999......................................................................F-5 Consolidated Statements of Equity for the Years Ended April 30, 2001, 2000, and 1999......................................................................F-6 Consolidated Statements of Cash Flows for the Years Ended April 30, 2001, 2000, and 1999......................................................................F-7 Notes to Consolidated Financial Statements.............................................................F-9 Schedule II Valuation and Qualifying Accounts.....................................................................F-27 SMT Unlimited L.P. Report of Independent Auditors........................................................................F-28 Financial Statements Balance Sheets at April 30, 2001 and 2000.............................................................F-29 Statements of Income for the Years Ended April 30, 2001, 2000, and 1999.....................................................................F-30 Statements of Partners' Deficit for the Years Ended April 30, 2001, 2000, and 1999.....................................................................F-31 Statements of Cash Flows for the Years Ended April 30, 2001, 2000, and 1999.....................................................................F-32 Notes to Financial Statements.........................................................................F-33 Schedule II Valuation and Qualifying Accounts.....................................................................F-40 </TABLE> Financial statement schedules not listed above are omitted because they are not applicable or required. F-1
30 Report of Independent Auditors The Board of Directors and Stockholders SigmaTron International, Inc. We have audited the accompanying consolidated balance sheets of SigmaTron International, Inc. as of April 30, 2001 and 2000, and the related consolidated statements of operations, equity, and cash flows for each of the three years in the period ended April 30, 2001. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe 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 consolidated financial position of SigmaTron International, Inc., at April 30, 2001 and 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended April 30, 2001, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2, the Company has not complied with certain covenants of loan agreements with banks. In addition, the Company has significant receivables from, and has guaranteed debt and other obligations of, its equity method affiliate, SMTU, (see Note 6). SMTU's independent auditors added an explanatory paragraph to their report dated June 29, 2001, on SMTU's 2001 financial statements because of uncertainty due to SMTU not being in compliance with certain covenants of its bank loan agreements. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans with regard to this matter are also described in Note 2. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. Chicago, Illinois June 29, 2001, except for Note 8, as to which the date is July 11, 2001 F-2
31 SigmaTron International, Inc. Consolidated Balance Sheets <TABLE> <CAPTION> April 30 2001 2000 ------------------------- <S> <C> <C> Assets Current assets: Cash $ 2,500 $ 2,500 Accounts receivable, less allowance for doubtful accounts of $124,782 and $932,459 at April 30, 2001 and April 30, 2000, respectively 10,441,857 10,609,481 Inventories 17,708,733 17,775,199 Prepaid and other assets 616,870 358,648 Refundable income taxes 680,825 136,200 Deferred income taxes 561,128 371,868 Other receivables 635,942 762,277 ------------------------- Total current assets 30,647,855 30,016,173 Machinery and equipment, net 13,762,439 13,327,430 Due from SMTU: Investment and advances 977,356 859,612 Equipment lease receivables 3,371,006 3,312,371 Other receivables 788,649 892,709 Other assets 1,388,485 932,597 ------------------------- Total assets $50,935,790 $49,340,892 ========================= </TABLE> F-3
32 SigmaTron International, Inc. Consolidated Balance Sheets (continued) <TABLE> <CAPTION> April 30 2001 2000 ------------------------- <S> <C> <C> Liabilities and stockholders' equity Current liabilities: Trade accounts payable $ 7,803,584 $ 6,841,875 Trade accounts payable - Related parties 767,075 874,169 Accrued expenses 1,930,194 1,916,815 Notes payable - Banks 16,406,414 -- Other liabilities - Related party 172,051 -- Capital lease obligations 1,612,613 1,893,486 ------------------------- Total current liabilities 28,691,931 11,526,345 Notes payable - Banks -- 14,654,320 Capital lease obligations, less current portion 1,984,921 1,816,073 Deferred income taxes 1,347,563 1,277,015 ------------------------- Total liabilities 32,024,415 29,273,753 Stockholders' equity: Preferred stock, $.01 par value; 500,000 shares authorized, none issued and outstanding -- -- Common stock, $.01 par value; 6,000,000 shares authorized, 2,881,227 shares issued and outstanding 28,812 28,812 Capital in excess of par value 9,436,554 9,436,554 Retained earnings 9,446,009 10,601,773 ------------------------- Total stockholders' equity 18,911,375 20,067,139 ------------------------- Total liabilities and stockholders' equity $50,935,790 $49,340,892 ========================= </TABLE> See accompanying notes. F-4
33 SigmaTron International, Inc. Consolidated Statements of Operations <TABLE> <CAPTION> Year ended April 30 2001 2000 1999 -------------------------------------------- <S> <C> <C> <C> Net sales $ 80,890,699 $ 88,884,591 $ 88,159,189 Cost of sales 75,825,592 80,688,002 79,238,098 -------------------------------------------- 5,065,107 8,196,589 8,921,091 Selling and administrative expenses 5,752,984 5,721,593 5,890,752 -------------------------------------------- Operating income (loss) (687,877) 2,474,996 3,030,339 Equity in net income of SMTU 286,468 411,067 137,439 Interest expense - Banks and capital lease obligations (1,963,282) (2,125,292) (2,049,396) Interest income - SMTU and LC 511,561 599,498 587,304 Loss on investment and receivables with LC (2,500) -- (88,000) Gain on insurance reimbursement -- -- 1,132,199 -------------------------------------------- (Loss) income before income tax benefit (expense) and extraordinary item (1,855,630) 1,360,269 2,749,885 Income tax benefit (expense) 699,866 (506,122) (1,052,784) -------------------------------------------- (Loss) income before extraordinary item (1,155,764) 854,147 1,697,101 Extraordinary item - Extinguishment of debt, net of taxes of $58,333 -- (87,500) -- -------------------------------------------- Net (loss) income $ (1,155,764) $ 766,647 $ 1,697,101 ============================================ Net (loss) income per common share - Basic $ (.40) $ .27 $ .59 ============================================ Net (loss) income per common share - Assuming dilution $ (.40) $ .27 $ .59 ============================================ </TABLE> See accompanying notes. F-5
34 SigmaTron International, Inc. Consolidated Statements of Equity <TABLE> <CAPTION> Capital in Excess Total Preferred Stock Common Stock of Par Retained Stockholders' Shares Amount Shares Amount Value Earnings Equity --------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> Balance at April 30, 1998 -- $ -- 2,881,227 $28,812 $9,436,554 $ 8,138,025 $17,603,391 Net income -- -- -- -- -- 1,697,101 1,697,101 ---------------------------------------------------------------------------------------------- Balance at April 30, 1999 -- -- 2,881,227 28,812 9,436,554 9,835,126 19,300,492 Net income -- -- -- -- -- 766,647 766,647 ---------------------------------------------------------------------------------------------- Balance at April 30, 2000 -- -- 2,881,227 28,812 9,436,554 10,601,773 20,067,139 Net loss -- -- -- -- -- (1,155,764) (1,155,764) ---------------------------------------------------------------------------------------------- Balance at April 30, 2001 -- $ -- 2,881,227 $28,812 $9,436,554 $ 9,446,009 $18,911,375 ============================================================================================== </TABLE> See accompanying notes. F-6
35 SigmaTron International, Inc. Consolidated Statements of Cash Flows <TABLE> <CAPTION> Year ended April 30 2001 2000 1999 ------------------------------------------ <S> <C> <C> <C> OPERATING ACTIVITIES Net (loss) income $(1,155,764) $ 766,647 $ 1,697,101 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation 1,994,084 1,799,065 1,481,336 Equity in net income of SMTU (286,468) (411,067) (137,439) Gain on insurance reimbursement -- -- (1,391,124) Provision for doubtful accounts -- 357,459 -- Provision for inventory obsolescence -- 50,000 -- Loss on investment and receivables with LC 2,500 238,524 550,000 Deferred income taxes (118,712) (104,799) 468,673 Changes in operating assets and liabilities: Accounts receivable 167,624 2,358,372 (2,135,863) Inventories 66,466 (1,584,697) 2,732,085 Prepaid expenses and other assets (920,751) 2,313,163 (2,087,347) Trade accounts payable 961,709 (1,161,502) 1,251,491 Trade accounts payable - Related parties (107,094) (381,831) 340,525 Accrued expenses 13,379 194,883 146,498 Other liabilities - Related parties 172,051 -- -- Income taxes -- (644,101) 584,113 ------------------------------------------ Net cash provided by operating activities 789,024 3,790,116 3,500,049 INVESTING ACTIVITIES Insurance reimbursement - Net -- 2,453,235 485,011 Purchases of machinery and equipment (1,509,625) (1,691,706) (3,765,490) ------------------------------------------ Net cash (used in) provided by investing activities (1,509,625) 761,529 (3,280,479) </TABLE> F-7
36 SigmaTron International, Inc. Consolidated Statements of Cash Flows (continued) <TABLE> <CAPTION> Year ended April 30 2001 2000 1999 ------------------------------------------ <S> <C> <C> <C> FINANCING ACTIVITIES Net proceeds (payments) under line of credit $ 1,752,094 $(2,728,361) $ 2,093,878 Net payments under capital lease obligations (1,031,493) (2,100,855) (2,318,056) ----------------------------------------- Net cash provided by (used in) financing activities 720,601 (4,829,216) (224,178) ----------------------------------------- Change in cash -- (277,571) (4,608) Cash at beginning of period 2,500 280,071 284,679 ----------------------------------------- Cash at end of period $ 2,500 $ 2,500 $ 280,071 ========================================= Supplementary disclosure of cash flow information: Cash paid for interest $ 2,046,348 $ 1,692,697 $ 2,038,638 ========================================= Cash paid for income taxes $ 35,161 $ 1,013,023 $ -- ========================================= Acquisition of machinery and equipment financed under capital leases $ 919,468 $ 168,429 $ 2,526,088 ========================================= </TABLE> See accompanying notes. F-8
37 SigmaTron International, Inc. Notes to Consolidated Financial Statements 1. Description of the Business SigmaTron International, Inc. (the Company), operates primarily in one business segment as an independent provider of electronic manufacturing services, which includes printed circuit board assemblies and completely assembled (boxbuild) electronic products. Included among the wide range of services the Company, its wholly owned subsidiary, Standard Components de Mexico, S.A., and its affiliate, SMT Unlimited L.P. (SMTU), offer their customers: (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 services through an international network of facilities located in North America and the Far East. 2. Financial Condition Due to the recent downturn in the economy, which has significantly affected the electronics industry, the Company experienced significantly lower sales and increased losses for the last several months of fiscal 2001. The Company is not anticipating a recovery of sales in the near term. In an effort to mitigate some of its losses, the Company substantially downsized its work force and reduced overhead expenses during fiscal 2001. The Company has not complied with certain covenants of loan agreements with banks and has begun a search for a new secured lender but has been unsuccessful to date (see Note 8). In addition, the Company has entered into discussions with third parties regarding a potential merger or sale of the Company or an equity investment in the Company. Talks are ongoing and, while significant levels of interest have been shown by several parties, it is too early to determine if any of the Company's discussions will result in a transaction. 3. Summary of Significant Accounting Policies Consolidation Policy The consolidated financial statements include the accounts and transactions of the Company and its wholly owned subsidiary, Standard Components de Mexico, S.A. Significant intercompany accounts and transactions have been eliminated in consolidation. F-9
38 SigmaTron International, Inc. Notes to Consolidated Financial Statements (continued) 3. Summary of Significant Accounting Policies (continued) Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Inventories Inventories are stated at the lower of cost or market. Cost is determined by the first in, first out (FIFO) method. Machinery and Equipment Machinery and equipment are stated at cost. The Company provides for depreciation and amortization using the straight-line method over the estimated useful life of the assets which range from 3 to 15 years. 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. Earnings Per Share Basic earnings per share is 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. Revenue Recognition The Company's net sales are comprised of product sales and service revenue. Revenue from product sales is recognized upon shipment of goods, which is when title passes to the customer. Service revenue is recognized as the services are performed. F-10
39 SigmaTron International, Inc. Notes to Consolidated Financial Statements (continued) 3. Summary of Significant Accounting Policies (continued) Shipping and Handling Costs The Company records shipping and handling costs in selling and administrative expenses. Shipping and handling costs totaled $68,600, $53,100, and $91,640 in fiscal 2001, 2000, and 1999, respectively. Fair Value of Financial Instruments The Company's financial instruments include receivables, notes payable, accounts payable, and accrued liabilities. The fair values of all financial instruments are not materially different from their carrying values. Risks and Uncertainties The Company's inventories include parts and components that may be specialized in nature or subject to customers' future usage requirements. While the Company has programs to minimize the required inventories on hand and actively monitors customer purchase orders and backlog in estimating required allowances to reduce recorded amounts to market values, such estimates could change in the future. Recently Issued Accounting Standards In December 1999, the Securities and Exchange Commission (SEC or Commission) issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." This bulletin provides guidance from the staff on applying generally accepted accounting principles to revenue recognition in financial statements. In June 2000, the SEC issued SAB No. 101B that delayed the implementation date. The Company adopted SAB No. 101 in 2001. The implementation of SAB No. 101 did not have a material effect on the financial position or results of operations of the Company. In March 2000, the FASB issued FASB Interpretation (FIN) No. 44, "Accounting for Certain Transactions Involving Stock Compensation--An Interpretation of APB Opinion No. 25." FIN No. 44 clarifies the application of APB Opinion No. 25 and among other issues clarified the following: the definition of an employee for purposes of applying APB Opinion No. 25; the criteria for determining whether a plan qualifies as a noncompensatory plan; the accounting consequence of various modifications to the terms of previously fixed stock options or awards; and the accounting for an exchange of stock compensation awards in a business combination. FIN No. 44 was effective July 1, 2000, but certain conclusions in FIN No. 44 cover specific events that occurred after either December 15, 1998 or January 12, 2000. The Company has adopted FIN No. 44 and the F-11
40 SigmaTron International, Inc. Notes to Consolidated Financial Statements (continued) 3. Summary of Significant Accounting Policies (continued) application of FIN No. 44 did not have a material impact on its results of operations or financial position. Reclassifications Certain amounts in the 2000 and 1999 financial statements have been reclassified to conform with the 2001 presentation. 4. Inventories Inventories consist of the following: April 30 2001 2000 ----------------------------- Finished products $ 3,428,346 $ 2,837,452 Work in process 2,152,894 1,713,691 Raw materials 12,127,493 13,224,056 ----------------------------- $ 17,708,733 $17,775,199 ============================= 5. Machinery and Equipment Machinery and equipment consist of the following: <TABLE> <CAPTION> April 30 2001 2000 ---------------------------- <S> <C> <C> Machinery and equipment $13,419,273 $12,819,959 Office equipment 1,732,572 1,532,722 Tools and dies 268,630 228,433 Leasehold improvements 2,577,295 1,907,031 Equipment under capital leases 5,675,143 4,755,675 ---------------------------- 23,672,913 21,243,820 Less: Accumulated depreciation and amortization, including amortization of assets under capital leases of $1,799,710 and $1,423,696 at April 30, 2001 and 2000, respectively 9,910,474 7,916,390 ---------------------------- $13,762,439 $13,327,430 ============================ </TABLE> F-12
41 SigmaTron International, Inc. Notes to Consolidated Financial Statements (continued) 6. Investment and Advances With SMTU The Company has a 42.5% ownership interest in SMTU, which was formed on September 15, 1994, as a joint venture to provide surface mount technology assembly services primarily to electronic original equipment manufacturers. The Company owns 50% of the outstanding stock of SMT Unlimited, Inc. (SMT, Inc.), which is the general partner of SMTU. One of the limited partners of SMTU is also an equal shareholder of SMT, Inc., along with the Company. The Company holds subordinated debentures totaling $1,050,000 from SMTU. Payments of principal and interest on the debentures is subordinated to prior payment in full of SMTU's revolving line of credit. At April 30, 2001, debentures totaling $650,000 bear interest at 8%, and debentures totaling $400,000 bear interest at 12%. During fiscal 2001, the Company extended the repayment date of the debentures from May 1, 2001 to August 1, 2003. The principal and interest under the debentures are to be repaid on August 1, 2003. The Company also has guaranteed lease obligations of approximately $916,000 for SMTU. The Company has been indemnified by one of the other limited partners in the amount of $457,770 for the guaranteed lease obligations. SMTU incurs a $28,500 monthly administrative fee for administrative services provided by the Company (see also Note 14). The investment in SMTU is carried at cost plus equity in undistributed earnings or losses since acquisition. The Company has recorded its share of the losses in SMTU as a reduction of the investment in SMTU. In August 1999, the Company entered into a guaranty agreement with SMTU's lender to guaranty the obligation of SMTU under its revolving line of credit to a maximum of $2,000,000 plus interest and related costs associated with the enforcement of the guaranty. In connection with the guaranty agreement, one of the limited partners of SMTU and a Vice President of SMTU have each executed a guaranty to the lender to reimburse the Company for up to $500,000 of payments made by the Company under its guaranty to the lender in excess of $1,000,000. In addition, the limited partner has agreed to indemnify the Company for 50% of all payments made on behalf of SMTU to the lender. The limited partner's obligation to the Company under the indemnity is reduced dollar for dollar to the extent the limited partner would otherwise be obligated to pay more than $1,000,000 as a result of his guaranty to the lender. The Company's investment and advances to and receivables from SMTU totaled approximately $5,137,000 at April 30, 2001, and no liability has been recorded by the Company related to its guaranty of SMTU's credit agreement. F-13
42 SigmaTron International, Inc. Notes to Consolidated Financial Statements (continued) 6. Investment and Advances With SMTU (continued) Summarized financial information for SMTU is as follows: April 30, April 30, 2001 2000 ----------------------------- Current assets $10,390,626 $10,882,086 Total assets 17,882,425 15,974,571 Current liabilities, including notes payable to bank of $5,348,099 in 2001 13,908,648 8,598,069 Total liabilities 18,014,553 16,379,017 Partners' deficit (132,128) (404,446) 2001 2000 1999 --------------------------------------------------- Net sales $39,907,208 $25,318,719 $14,239,561 Cost of sales 35,363,250 21,018,770 11,653,183 Gross profit 4,543,958 4,299,949 2,586,378 Net income 674,042 967,216 323,383 The report of independent auditors, dated June 29, 2001, pertaining to SMTU's financial statements for the year ended April 30, 2001, contains an explanatory paragraph regarding uncertainty concerning SMTU's ability to continue as a going concern because SMTU has not complied with certain covenants of loan agreements with a bank. 7. Flood Damage in Del Rio, Texas, and Acuna, Mexico In late August 1998, the Company's warehousing operation in Del Rio, Texas, and one of its manufacturing operations in Acuna, Mexico, were significantly damaged by a flash flood. The Company expedited replacement machinery and equipment and inventory to its damaged facilities. The majority of the damaged equipment used in the manufacturing process was replaced with new equipment. The manufacturing operation in Acuna and the warehousing operation in Del Rio were running at preflood levels, and all raw material issues created by the flood were resolved by December 1998. In fiscal 1999, a gain of approximately $1,391,000 was recognized on settlement of a portion of the insurance reimbursement and is reported as a reduction of cost of sales of $259,000 and gain on insurance reimbursement of approximately $1,132,000 in the accompanying 1999 statement of operations. The inventory, machinery, and equipment and building contents and extra expense segments of the loss have been settled in full. F-14
43 SigmaTron International, Inc. Notes to Consolidated Financial Statements (continued) 7. Flood Damage in Del Rio, Texas, and Acuna, Mexico (continued) The business interruption segment of the claim has not been finalized. Since there is no agreement with the insurance company on the business interruption segment of the loss, the Company has not recognized any future net proceeds related to this item. The business interruption recovery, if any, will be recorded when settlement has been reached. 8. Notes Payable The Company has a loan and security agreement which provides for a revolving line-of-credit facility, an $800,000 equipment loan facility, and a $2,000,000 letter of credit facility. In conjunction with the new agreement in 2000, the Company paid $87,500, net of taxes of $58,333, as part of the extinguishment of the prior debt agreement. This amount is reflected on the 2000 statement of operations as a loss from an extraordinary item. The maximum borrowing limit under the revolving line-of-credit facility is limited to the lesser of: (i) $25,000,000; or (ii) an amount equal to the sum of up to 85% of the receivables borrowing base and the lesser of $10,000,000 or up to 60% of the inventory borrowing base, as defined. At April 30, 2001, the Company had outstanding borrowings of $16,406,414. Borrowings under the revolving line of credit bear interest at rates equal to the London Interbank Offered Rate (LIBOR) plus 2.25% (7.68% at April 30, 2001) or at the prime rate (7.5% at April 30, 2001) at the option of the Company. The Company must also pay an unused commitment fee equal to 0.25% on the revolving credit facility. At April 30, 2001, there was approximately $300,000 of unused credit under the terms of the agreement. However, see discussion below of covenant violations under the agreement. The revolving credit facility matures August 25, 2001. Borrowings under the equipment loan bear interest at prime plus 0.5%. The equipment loan matures August 2004. No amounts were outstanding under the equipment loan facility at April 30, 2001. The agreement is collateralized by substantially all of the 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 or distributions of any cash or other property on any of its capital stock, except that common stock dividends may be distributed by a stock split or dividends pro rata to its stockholders. F-15
44 SigmaTron International, Inc. Notes to Consolidated Financial Statements (continued) 8. Notes Payable (continued) As described in Note 2, the Company was in violation of its pretax income and interest coverage ratio covenants for the quarters ended July 31, 2000, October 31, 2000, January 31, 2001, and April 30, 2001. On February 1, 2001, the Company entered into a forebearance agreement with its lenders. Under the terms of the agreement, the lenders agreed to forebear from exercising and enforcing their rights until May 31, 2001. On July 11, 2001, the lenders agreed to extend the forebearance agreement until July 31, 2001. Under the forebearance agreement, the Company is required to pay additional interest of 50 basis points on LIBOR-based borrowings and 25 basis points on prime-based borrowings. The outstanding loan balance of $16,406,414 has been classified as short-term in the Company's balance sheet at April 30, 2001. The Company is seeking alternative financing although there can be no assurance it will be obtained. 9. Accrued Expenses Accrued expenses consist of the following: April 30 2001 2000 ---------------------------- Payroll $1,667,898 $1,440,366 Bonuses 25,000 163,000 Interest payable 39,138 122,204 Commissions 48,750 35,833 Professional fees 149,408 155,412 ---------------------------- $1,930,194 $1,916,815 ============================ 10. Related Party Transactions and Commitments The Company has transactions with Circuit Systems, Inc. (CSI), a former shareholder of the Company. CSI sold its investment in common stock of the Company in April 2001. These transactions primarily involved the purchase of raw materials and the leasing of operating space. Purchases of raw materials were approximately $3,598,000, $6,660,000, and $6,325,000 for the years ended April 30, 2001, 2000, and 1999, respectively. The Company leases space in Elk Grove Village, Illinois, owned by CSI at a base rental of $35,670 per month, with an additional $7,000 per month for property taxes. The lease requires the Company to pay maintenance and utility expenses. In July 2000, the Company exercised its renewal option for an additional five-year period through February 2006. Rent and property tax expense totaled approximately $515,000, $495,000, and $466,000 for the years ended April 30, 2001, 2000, and 1999, respectively. F-16
45 SigmaTron International, Inc. Notes to Consolidated Financial Statements (continued) 10. Related Party Transactions and Commitments (continued) At April 30, 2001 and 2000, the Company had non-interest-bearing receivables of approximately $190,000 for advances to a company in which an officer of the Company is an investor. The balance has been recorded as an other long-term asset at April 30, 2001 and 2000. This outstanding receivable has been guaranteed by an officer of the Company. 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 reserved to a net realizable value of $0 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. In April 2001, LC sold certain assets to a third party. In connection with the asset sale, LC made partial payments on the amounts owed to the Company of $356,500 in cash, endorsing a $400,000 promissory note receivable from a third party and by assigning existing accounts receivable totaling approximately $165,000 and inventory totaling approximately $272,000 of LC to the Company. Payments are 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. Interest on the promissory note will accrue 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 the royalty payments. These royalty payments, if any, will be recorded by the Company as received. As a result of these transactions, the Company has written off its investment in LC of $2,500 in the statement of operations for the year ended April 30, 2001. There was no other impact on the fiscal 2001 operating results. F-17
46 SigmaTron International, Inc. Notes to Consolidated Financial Statements (continued) 11. Income Taxes The following is a summary of income (loss) before income taxes: 2001 2000 1999 ----------------------------------------------- Domestic operations $(2,471,611) $ 542,830 $2,207,347 Foreign operations 615,981 671,606 542,538 ----------------------------------------------- $(1,855,630) $1,214,436 $2,749,885 =============================================== The income tax provision (benefit) for the years ended April 30, 2001, 2000, and 1999, consists of the following: 2001 2000 1999 -------------------------------------------- Current: Federal $(703,734) $277,367 $ 273,878 State (127,672) 40,235 71,790 Foreign 250,252 235,062 189,888 Deferred: Federal (103,493) (91,430) 450,917 State (15,219) (13,445) 66,311 -------------------------------------------- $(699,866) $447,789 $1,052,784 ============================================ The reasons for the differences between the income tax provision (benefit) and the amounts computed by applying the statutory federal income tax rates to income (loss) before income tax expense for the years ended April 30, 2001, 2000, and 1999 are as follows: <TABLE> <CAPTION> 2001 2000 1999 ----------------------------------- <S> <C> <C> <C> Income tax at statutory federal rate $(630,914) $412,938 $ 934,960 Effect of: State income taxes, net of federal tax benefit (84,624) 26,556 127,046 Other, net 15,672 8,295 (9,222) ----------------------------------- $(699,866) $447,789 $1,052,784 =================================== </TABLE> F-18
47 SigmaTron International, Inc. Notes to Consolidated Financial Statements (continued) 11. Income Taxes (continued) Significant temporary differences which result in deferred tax assets and deferred tax liabilities at April 30, 2001 and 2000, are as follows: 2001 2000 ------------------------------ Net operating loss carryforward $ 169,330 $ -- Allowance for doubtful accounts 48,665 56,135 Inventory obsolescence reserve 148,785 148,785 Accruals not currently deductible 139,986 110,358 Inventory 54,362 56,590 ------------------------------ Net deferred tax asset $ 561,128 $ 371,868 ============================== Gain on involuntary conversion $ (252,319) $ (441,558) Machinery and equipment (1,072,391) (1,008,994) Other (22,853) 173,537 ------------------------------ Deferred tax liability $ (1,347,563) $ (1,277,015) ============================== At April 30, 2001, the Company has a net operating loss carryforward of approximately $434,000 which begins to expire in 2020. 12. 401(k) Retirement Savings Plan The Company sponsors a 401(k) retirement savings plan which is available to all nonunion employees who complete 1,000 hours of service annually. Participants are allowed to contribute up to 15% of their annual compensation, and the Company may elect to match participant contributions up to the greater of 6% of the participant's compensation or $300. The Company contributed $50,942, $50,232, and $46,954 to the plan during the fiscal years ended April 30, 2001, 2000, and 1999, respectively. The Company paid total expenses of $14,968, $12,400, and $10,960 for the fiscal years ended April 30, 2001, 2000, and 1999, respectively, relating to costs associated with the Plan's administration. F-19
48 SigmaTron International, Inc. Notes to Consolidated Financial Statements (continued) 13. Major Customers and Concentration of Credit Risks Financial instruments which potentially subject the Company to concentration of credit risk consist principally of uncollateralized accounts receivable. For the year ended April 30, 2001, two customers accounted for 22% and 16% of net sales of the Company, and 5% and 11%, respectively, of accounts receivable at April 30, 2001. For the year ended April 30, 2000, two customers accounted for 29% and 18% of net sales of the Company, and 29% and 6%, respectively, of accounts receivable at April 30, 2000. For the year ended April 30, 1999, two customers accounted for 36% and 14% of net sales of the Company, and 32% and 4% of accounts receivable at April 30, 1999. 14. Leases The Company leases its 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, 2001: Capital Operating Leases Leases ------------------------- 2002 $1,883,032 $1,075,162 2003 1,102,156 770,412 2004 743,032 688,812 2005 493,048 145,806 2006 142,175 10,800 Thereafter -- 104,400 ------------------------- 4,363,443 $2,795,392 ========== Less: Amounts representing interest 765,909 ---------- 3,597,534 Less: Current portion 1,612,613 ---------- $1,984,921 ========== F-20
49 SigmaTron International, Inc. Notes to Consolidated Financial Statements (continued) 14. Leases (continued) The Company subleased the machinery and equipment relating to certain of the above capital lease agreements to its affiliate, SMTU, and recorded equipment financing lease receivables from SMTU. These lease receivables contain the same maturity dates as the minimum lease payments underlying the capital lease agreements. The effective interest rates on these receivables are approximately 2% higher than the effective interest rates (ranging from 9.430% to 14.05%) implicit in the capital lease agreements to cover various administrative expenses of the Company. The equipment lease receivables are collateralized by the underlying machinery and equipment. Management believes the machinery and equipment would be readily usable in the Company's manufacturing operations if necessary. Future minimum rentals to be received under the subleases related to the equipment lease receivables from SMTU with terms of one year or more are as follows: 2002 $2,112,268 2003 658,536 2004 562,999 2005 349,691 2006 147,384 ---------- 3,830,878 Less: Amounts representing interest 459,872 ---------- $3,371,006 ========== As a result of the uncertainty surrounding the timing of collection of these future minimum rentals, the Company has classified these equipment lease receivables as long-term at April 30, 2001 and 2000. Rent expense incurred under operating leases was approximately $851,000, $834,000, and $1,119,000 for the years ended April 30, 2001, 2000, and 1999, respectively. In July 1997, the Company refinanced some machinery and equipment under a sale/leaseback arrangement. The equipment was sold for approximately $1.4 million in cash. The Company has the option to purchase the equipment at the end of the lease term for $1. The transaction has 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-21
50 SigmaTron International, Inc. Notes to Consolidated Financial Statements (continued) 15. Stock Options The Company has stock option plans (Option Plans) under which certain members of management and outside nonmanagement directors may acquire up to 1,303,500 shares of common stock. At April 30, 2001, the Company has 1,198,500 shares reserved for future issuance to management and directors under the Option Plans. Options to be granted under the management plans total 967,500 with the nonmanagement director plans allowing for a total of 336,000 options to be granted. The Option Plans are interpreted and administered by the Compensation Committee. The maximum term of options granted under the Option Plans generally is ten 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. 207,100 of the management options vest over 5 years with the remaining 344,998 management options vesting over 3 years from the date of grant provided the optionee remains an employee of the Company. Options granted to nonemployee directors are vested on the date of grant. The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), in accounting for its employee stock options because, as discussed below, the alternative fair value accounting method provided for under FASB Statement No. 123, Accounting for Stock-Based Compensation, requires the use of option-valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options approximates the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net income and earnings per share is required by Statement 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. The Company's pro forma information follows: <TABLE> <CAPTION> 2001 2000 1999 ----------------------------------------- <S> <C> <C> <C> Net income (loss) $ (1,155,764) $ 766,647 $1,697,101 Pro forma net income (loss) (1,263,921) 716,789 1,558,152 Earnings (loss) per share - Basic and diluted $ (.40) $ .27 $ .59 Pro forma earnings (loss) per share - Basic and diluted $ (.44) $ .25 $ .51 </TABLE> F-22
51 SigmaTron International, Inc. Notes to Consolidated Financial Statements (continued) 15. Stock Options (continued) 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: 2001 2000 1999 -------------------------------- Expected dividend yield .0% .0% .0% Expected stock price volatility .612 0.601 0.608 Risk-free interest rate 5.60% 6.04% 5.43% Weighted-average expected life of options 5 years 5 years 5 years 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, 2001: <TABLE> <CAPTION> Weighted-Average Number of options Exercise exercisable at Number of Options Price end of year ------------------------------------------------------ <S> <C> <C> <C> Outstanding at April 30, 1998 555,500 $10.88 163,500 Options granted during 1999 93,000 6.20 ------- Outstanding at April 30, 1999 648,500 10.20 207,100 Options granted during 2000 348,500 6.22 Options canceled during 2000 (336,300) 12.23 ------- Outstanding at April 30, 2000 660,700 7.08 378,403 Options granted during 2001 91,000 3.54 Options canceled during 2001 (10,602) 7.31 ------- Outstanding at April 30, 2001 741,098 6.64 561,205 ======= </TABLE> The weighted-average grant date fair value of the options granted during fiscal 2001, 2000, and 1999 was $2.02, $3.49, and $3.50, respectively. F-23
52 SigmaTron International, Inc. Notes to Consolidated Financial Statements (continued) 15. Stock Options (continued) Information with respect to stock options outstanding and stock options exercisable at April 30, 2001, follows: <TABLE> <CAPTION> Options Outstanding ---------------------------------------------------------------- Weighted-Average Number Outstanding at Remaining Contractual Weighted-Average Range of Exercise Prices April 30, 2001 Life Exercise Price - -------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> $ 2.75 - 5.63 146,498 8.71 years $ 3.96 6.25 - 8.44 534,600 6.82 years 6.64 10.25 - 14.50 60,000 6.11 years 13.21 ------- 741,098 ======= </TABLE> <TABLE> <CAPTION> Options Exercisable ---------------------------------------- Number Exercisable Weighted-Average Range of Exercise Prices at April 30, 2001 Exercise Price - -------------------------------------------------------------------------------- <S> <C> <C> $ 2.75 - 5.63 97,667 $ 3.59 6.25 - 8.44 394,338 6.66 10.25 - 14.50 69,200 13.08 ------- 561,205 ======= </TABLE> F-24
53 SigmaTron International, Inc. Notes to Consolidated Financial Statements (continued) 16. Earnings Per Share The following table sets forth the computation of basic and diluted earnings (loss) per share: <TABLE> <CAPTION> 2001 2000 1999 ----------------------------------------- <S> <C> <C> <C> Net income (loss) available to common stockholders $(1,155,764) $ 766,647 $ 1,697,101 ========================================= Weighted-average shares: Basic 2,881,227 2,881,227 2,881,227 Effect of dilutive warrants and stock options -- -- 3,600 ----------------------------------------- Diluted 2,881,227 2,881,227 2,884,827 ========================================= Basic and diluted earnings (loss) per share before extraordinary item $ (.40) $ .30 $ .59 Basic and diluted earnings (loss) per share - Extraordinary item -- (.03) -- ----------------------------------------- Basic and diluted earnings (loss) per share $ (.40) $ .27 $ .59 ========================================= </TABLE> Options to purchase 741,098, 660,700, and 648,500 shares of common stock were outstanding at April 30, 2001, 2000, and 1999 respectively, but were not included in the computation of diluted earnings per share for all or part of the year because the options exercise price was greater than the average market price of the common shares and, therefore, the effect would be antidilutive. F-25
54 SigmaTron International, Inc. Notes to Consolidated Financial Statements (continued) 17. Selected Quarterly Financial Data (unaudited) The following is a summary of unaudited quarterly financial data for fiscal 2001 and 2000. <TABLE> <CAPTION> First Second Third Fourth Quarter Quarter Quarter Quarter ------------------------------------------------------------- <S> <C> <C> <C> <C> 2001 Net sales $ 16,824,889 $ 24,820,234 $ 20,524,857 $ 18,720,719 Gross margin (deficit) (129,439) 1,581,732 1,745,253 1,867,561 Net loss (938,104) (21,584) (57,774) (138,302) Net loss per common share - Basic and diluted (.33) (.01) (.02) (.05) 2000 Net sales 20,185,936 27,185,252 24,972,991 16,540,412 Gross margin 2,065,934 3,396,895 1,826,719 907,041 Income (loss) before extraordinary item 245,250 820,604 542,976 (754,683) Income (loss) per common share before extraordinary item- Basic and diluted .09 .29 .19 (.26) Extraordinary item -- 87,500 -- -- Net income (loss) 245,250 733,104 542,976 (754,683) Net income (loss) per common share - Basic and diluted .09 .25 .19 (.26) </TABLE> Quarterly per share information does not equal annual per share information due to rounding. Amounts for the first three quarters of 2001 differ from the amounts previously reported to correct timing and amount of revenue recognized in connection with certain customer agreements. These adjustments resulted in a reduction in revenue and gross margin, net income (loss) and net income (loss) per share of $641,224, $300,000, and $191,000, $359,415, $180,354, and $142,851 and $.13, $.07 and $.05 in the first, second, and third quarters of 2001, respectively. F-26
55 SigmaTron International, Inc. Schedule II - Valuation and Qualifying Accounts <Table> <Caption> Balance at Charges to Charges to Balance at Beginning Costs and Other End of Description of Period Expenses Accounts Deductions Period - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> Year ended April 30, 2001 Reserves and allowance deducted from asset accounts: Allowance for doubtful accounts $932,459 $ -- $ -- $807,677 (1) $124,782 Reserve for obsolete inventory 381,500 -- -- -- 381,500 Reserve against note receivable 280,000 -- -- 280,000 -- Year ended April 30, 2000: Reserves and allowance deducted from asset accounts: Allowance for doubtful accounts 575,000 357,459 -- -- 932,459 Reserve for obsolete inventory 331,500 50,000 -- -- 381,500 Reserve against note receivable 280,000 -- -- -- 280,000 Year ended April 30, 1999: Reserves and allowance deducted from asset accounts: Allowance for doubtful accounts -- 575,000 -- -- 575,000 Reserve for obsolete inventory 331,500 -- -- -- 331,500 Reserve against note receivable 280,000 -- -- -- 280,000 </Table> (1) Accounts receivable and investments written off in conjunction with the settlement of amounts with Lighting Components, LP. F-27
56 Report of Independent Auditors Partners SMT Unlimited L.P. We have audited the accompanying balance sheets of SMT Unlimited L.P. as of April 30, 2001 and 2000, and the related statements of income, partners' deficit, and cash flows for each of the three years in the period ended April 30, 2001. Our audits also included the financial statement schedule listed in the index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of SMT Unlimited L.P. at April 30, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended April 30, 2001, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects, the information set forth therein. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully discussed in Note 2, the Company has not complied with certain covenants of loan agreements with a bank. This condition raises substantial doubt about the Company's ability to continue as a going concern. Management's plans with regard to this matter are also described in Note 2. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. Chicago, Illinois June 29, 2001 F-28
57 SMT Unlimited L.P. Balance Sheets <TABLE> <CAPTION> April 30 2001 2000 ---------------------------- <S> <C> <C> Assets Current assets: Cash $ 2,500 $ 2,500 Accounts receivable, less allowance for doubtful accounts of $120,000 and $60,000 at April 30, 2001 and 2000, respectively 2,631,724 3,681,486 Inventories 7,288,317 7,017,811 Due from affiliate 172,051 -- Prepaid expenses 296,034 180,289 ---------------------------- Total current assets 10,390,626 10,882,086 Machinery and equipment, net 7,397,104 5,031,221 Deferred financing costs, net of amortization of $147,253 and $95,238 at April 30, 2001 and 2000, respectively 51,959 44,260 Deposits 42,736 17,004 ---------------------------- Total assets $ 17,882,425 $ 15,974,571 ============================ Liabilities and partners' deficit Current liabilities: Notes payable - Bank $ 5,348,099 $ -- Trade accounts payable 4,666,367 4,061,756 Accrued expenses 511,445 678,982 Accrued expenses - Related parties 1,162,095 1,364,783 Capital lease obligations 310,803 110,660 Capital lease obligations - Related party 1,909,839 2,381,888 ---------------------------- Total current liabilities 13,908,648 8,598,069 Notes payable - Bank -- 4,657,570 Capital lease obligations, less current portion 544,723 92,895 Subordinated debentures - Related party, less current portion 2,100,000 2,100,000 Capital lease obligations - Related party, less current portion 1,461,182 930,483 ---------------------------- Total liabilities 18,014,553 16,379,017 Partners' deficit: Partners' capital 100,000 100,000 Accumulated deficit (232,128) (504,446) ---------------------------- Total partners' deficit (132,128) (404,446) ---------------------------- Total liabilities and partners' deficit $ 17,882,425 $ 15,974,571 ============================ </TABLE> See accompanying notes. F-29
58 SMT Unlimited L.P. Statements of Income <TABLE> <CAPTION> Year ended April 30 2001 2000 1999 -------------------------------------------- <S> <C> <C> <C> Net sales $ 39,907,208 $ 25,318,719 $ 14,239,561 Cost of sales 35,363,250 21,018,770 11,653,183 -------------------------------------------- 4,543,958 4,299,949 2,586,378 Selling and administrative expenses 2,538,556 2,261,965 1,514,640 -------------------------------------------- Operating income 2,005,402 2,037,984 1,071,738 Other income (loss) (51,121) 1,183 27,409 Interest expense - Bank notes and capital lease obligations (694,530) (385,174) (170,930) Interest expense - Related parties (585,709) (686,777) (604,834) -------------------------------------------- Net income $ 674,042 $ 967,216 $ 323,383 ============================================ </TABLE> See accompanying notes. F-30
59 SMT Unlimited L.P. Statements of Partners' Deficit Total Partners' Accumulated Partners' Capital Deficit Deficit ----------------------------------------- Balance at April 30, 1998 $ 100,000 $(1,795,045) $(1,695,045) Net income -- 323,383 323,383 ---------------------------------------- Balance at April 30, 1999 100,000 (1,471,662) (1,371,662) Net income -- 967,216 967,216 ---------------------------------------- Balance at April 30, 2000 100,000 (504,446) (404,446) Net income -- 674,042 674,042 Distributions -- (401,724) (401,724) ---------------------------------------- Balance at April 30, 2001 $ 100,000 $ (232,128) $ (132,128) ======================================== See accompanying notes. F-31
60 SMT Unlimited L.P. Statements of Cash Flows <TABLE> <CAPTION> Year ended April 30 2001 2000 1999 ----------------------------------------- <S> <C> <C> <C> Operating activities Net income $ 674,042 $ 967,216 $ 323,383 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 858,827 677,607 557,333 Changes in operating assets and liabilities: Accounts receivable 1,049,762 (346,562) (2,281,106) Inventories (270,506) (3,572,074) (3,135,961) Due from affiliate (172,051) -- -- Prepaid expenses (115,745) (140,694) (19,379) Deposits (25,732) (2,911) 36,058 Trade accounts payable 604,611 1,037,748 3,288,946 Accrued expenses (167,537) 533,972 53,540 Accrued expenses - Related parties (202,688) (533,733) 338,461 ----------------------------------------- Net cash provided by (used in) operating activities 2,232,983 (1,379,431) (838,725) Investing activities Purchases of machinery and equipment (965,897) (282,215) (247,335) ----------------------------------------- Net cash used in investing activities (965,897) (282,215) (247,335) Financing activities Partner distributions (401,724) -- -- Deferred financing costs (59,714) (64,787) -- Payments under capital lease obligations (1,496,177) (996,070) (84,965) Proceeds from subordinated notes payable - Related parties -- -- 1,000,000 Payment of subordinated notes payable - Related parties -- (1,000,000) -- Net proceeds under note payable - Bank 690,529 3,724,601 169,016 ----------------------------------------- Net cash (used in) provided by financing activities (1,267,086) 1,663,744 1,084,051 ----------------------------------------- Change in cash -- 2,098 (2,009) Cash at beginning of period 2,500 402 2,411 ----------------------------------------- Cash at end of period $ 2,500 $ 2,500 $ 402 ========================================= Supplementary disclosure of cash flow information: Cash paid for interest $ 1,482,402 $ 887,203 $ 558,491 ========================================= Acquisition of machinery and equipment financed under capital leases $ 2,206,798 $ 137,827 $ 994,133 ========================================= </TABLE> See accompanying notes. F-32
61 SMT Unlimited L.P. Notes to Financial Statements 1. Description of the Business and Basis of Presentation SMT Unlimited L.P. (the Company) was formed as an Illinois limited partnership on September 15, 1994, by the Patel Group (Patel), SigmaTron International, Inc., (SigmaTron), and a minority partner and is located in Hollister and Fremont, California. The Company, which operates primarily in one segment, provides surface-mount technology assembly services, primarily to electronic original-equipment manufacturers in the United States. Patel and SigmaTron each contributed capital of $49,500 in exchange for 45% ownership of the Company and, additionally, Patel and SigmaTron formed a new corporation, SMT Unlimited Inc. (SMT, Inc.), which is the general partner of the Company. SMT, Inc. contributed capital of $1,000 in exchange for a 1% ownership interest. The minority partner vested in the remaining ownership equally over the following five years. During fiscal 1997, Patel and SigmaTron each sold 2.5% of their interest to key employees of the Company. 2. Financial Condition Due to the recent downturn in the economy, which has significantly affected the electronics industry, the Company experienced significantly lower sales and increased losses for the last several months of fiscal 2001. The Company is not anticipating a recovery of sales in the near term. In an effort to mitigate some of its losses, the Company substantially downsized its work force and reduced overhead expenses. The Company has not complied with certain covenants of loan agreements with banks and has begun a search for a new secured lender but has been unsuccessful (see Note 6). In addition, the Company has entered into discussions with third parties regarding a potential merger or sale of the Company or an equity investment in the Company. Talks are ongoing and, while significant levels of interest have been shown by several parties, it is too early to determine if any of the Company's discussions will result in a transaction. 3. Summary of Significant Accounting Policies Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. F-33
62 SMT Unlimited L.P. Notes to Financial Statements (continued) 3. Summary of Significant Accounting Policies (continued) Inventories Inventories are stated at the lower of cost or market. Cost is determined by the first in, first out (FIFO) method. Machinery and Equipment Machinery and equipment are stated at cost. The Company provides for depreciation and amortization using the straight-line method over the useful life of the asset which ranges from 5 to 15 years. Income Taxes The Company makes no provision for income taxes as the partners include their respective shares of the results of the operations on their tax returns. Deferred Financing Costs Deferred financing costs are being amortized by the straight-line method over the life of the related debt. Revenue Recognition The Company's net sales are comprised of product sales and service revenue earned from engineering and design services. Revenue from product sales is recognized upon shipment of goods, which is when title passes. Service revenue is recognized as the services are performed. Shipping and Handling Costs The Company records shipping and handling costs in selling and administrative expenses. Shipping and handling costs totaled $38,814, $26,565, and $24,402 in fiscal 2001, 2000, and 1999, respectively. F-34
63 4. Inventories Inventories consist of the following: April 30 2001 2000 -------------------------- Finished goods $520,055 $ 84,019 Work in process 537,675 1,351,996 Raw material, less inventory reserve of $107,317 in 2001 and $150,000 in 2000 6,230,587 5,581,796 -------------------------- $7,288,317 $7,017,811 ========================== 5. Machinery and Equipment Machinery and equipment consist of the following: <TABLE> <CAPTION> April 30 2001 2000 ---------------------------- <S> <C> <C> Machinery and equipment $ 3,189,992 $ 1,005,188 Office equipment 564,949 374,820 Leasehold improvements 59,474 47,425 Equipment under capital leases 6,846,890 6,061,177 ---------------------------- 10,661,305 7,488,610 Accumulated depreciation and amortization, including amortization of assets under capital leases of $2,186,089 and $1,910,060 at April 30, 2001 and 2000, respectively (3,264,201) (2,457,389) ---------------------------- $ 7,397,104 $ 5,031,221 ============================ </TABLE> 6. Debt The Company has $1,300,000 of 8% subordinated debentures and $800,000 of 12% subordinated debentures, with principal and interest due August 1, 2003, to SigmaTron and Patel. The payment of principal and interest on the subordinated debentures is subordinated in right of payment to the prior payment in full of the revolving line of credit. F-35
64 SMT Unlimited L.P. Notes to Financial Statements (continued) 6. Debt (continued) The Company has a Loan and Security Agreement (Agreement) covering the Company's revolving line-of-credit facility. Under the terms of the Agreement, the maximum borrowing limit is the lesser of: (i) $8,500,000, or (ii) an amount equal to the sum of up to 85% of the receivables borrowing base and the lesser of $4,250,000 or up to 50% of the inventory borrowing base. The amended revolving line of credit matures on November 30, 2002. Borrowings under the revolving line of credit bear interest at the bank's prime plus 1% (8.5% at April 30, 2001). The Company is obligated to pay an annual commitment fee of 1/4 of 1% on the average daily, unused portion of the revolving line of credit. The unused portion of the line of credit at April 30, 2001, was $41,078. However, see discussion below of covenant violation existing under this agreement. The Agreement is collateralized by substantially all of the assets of the Company and contains certain financial covenants, including specific covenants pertaining to the maintenance of tangible net worth and net income before partnership distributions. As described in Note 2, the Company was in violation of these debt covenants at April 30, 2001. The outstanding loan balance of $5,348,099 has been classified as short-term in the Company's balance sheet at April 30, 2001. The Company is seeking alternative financing although there can be no assurance it will be obtained. The Agreement also provides for letters of credit up to $500,000. There were no outstanding letters of credit at April 30, 2001. In August 1999, SigmaTron entered into a guaranty agreement with the Company's lender to guaranty the obligation of the Company under its revolving line of credit to a maximum of $2,000,000, plus interest and related costs associated with the enforcement of the guaranty. In connection with the guaranty agreement, one of the limited partners of SMTU and a Vice President of SMTU have each executed a guaranty to the lender to reimburse SigmaTron for up to $500,000 of payments made by SigmaTron under its guaranty to the lender in excess of $1,000,000. In addition, the limited partner has agreed to indemnify SigmaTron for 50% of all the Company's payments to the lender. The limited partner's obligation to SigmaTron under the indemnity is reduced dollar for dollar to the extent the limited partner would otherwise be obligated to pay more than $1,000,000 as a result of his guaranty to the lender. F-36
65 7. Leases The Company leases its facilities under operating lease agreements expiring through February 2008. The Company also has various capital lease agreements with SigmaTron and one capital lease agreement with a third party to acquire machinery and equipment. Future minimum lease payments under leases with terms of one year or more are as follows at April 30, 2001: Capital Operating Leases Leases ----------------------------- 2002 $2,506,170 $ 630,468 2003 1,019,259 638,879 2004 758,450 644,886 2005 379,434 485,087 2006 154,417 370,944 Thereafter -- 680,064 --------------------------- 4,817,730 $3,450,328 ========== Less: Amounts representing interest 591,183 ---------- 4,226,547 Less: Current portion 2,220,642 ---------- $2,005,905 ========== Rent expense, including maintenance, property taxes, and insurance incurred under an operating lease, was approximately $572,000, $298,000, and $250,000 for the years ended April 30, 2001, 2000, and 1999, respectively. 8. Related Party Transactions The Company is involved in transactions with SigmaTron. SigmaTron charged the Company a minimum of $28,500, $12,500, and $12,500 per month in administrative fees for various services in the years ended April 30, 2001, 2000, and 1999, respectively. The Company paid SigmaTron $285,000, $375,000, and $0 in administrative fees for the years ended April 30, 2001, 2000, and 1999, respectively. At April 30, 2001 and 2000, the Company has accrued $57,000 and $0, respectively, for administrative fees not paid by year-end. The Company also paid approximately $1,547,000, $1,214,000 and $0 in principal and interest in connection with its capital lease agreements with SigmaTron in F-37
66 SMT Unlimited L.P. Notes to Financial Statements (continued) 8. Related Party Transactions (continued) 2001, 2000, and 1999 respectively. At April 30, 2001, the Company was approximately 20 months delinquent in its lease payments to SigmaTron and has accrued overdue interest of approximately $329,400 in connection with these lease payments. At April 30, 2001 and 2000, the accrued interest related to these lease payments was $460,000 and $514,000, respectively. SigmaTron and Patel have equally guaranteed the Company's operating lease obligation for the manufacturing facility. During 2001, SigmaTron received stock on behalf of the Company. The stock was received in lieu of cash for outstanding receivables owed to the Company by one of its customers. The Company has recorded the market value of the stock outstanding at April 30, 2001, as a due from affiliate on the balance sheet. The stock is classified as a trading security, and accordingly, the unrealized loss is recorded as "other loss" in the accompanying statement of income. During 2001, the Company recorded a realized loss of $8,000 and an unrealized loss of $43,000 related to this stock. 9. Major Customers and Concentration of Credit Risks For the year ended April 30, 2001, four customers accounted for 78% of net sales of the Company and 66% of accounts receivable at April 30, 2001. For the year ended April 30, 2000, five customers accounted for 66% of net sales of the Company and 66% of accounts receivable at April 30, 2000. For the year ended April 30, 1999, seven customers accounted for 66% of net sales of the Company and 71% of accounts receivable at April 30, 1999. 10. Employee Option Plan In fiscal 2001, the Company adopted an employee option plan (Option Plan) under which employees may acquire up to 500,000 units of limited partnership interests. At April 30, 2001, the Company has 139,000 units reserved for future issuance under the Option Plan. The maximum term of options granted under the Option Plans generally is ten years. Options granted under the plan shall be deemed to constitute non-qualified stock options. Options forfeited under the Option Plans are available for reissuance. Options granted under this plan are granted at an exercise price equal to or greater than the fair market value of a share of the Company's common stock on the date of grant. The general partner administers the plan and determines the vesting period of the options, which may be immediate vesting. F-38
67 10. Employee Option Plan (continued) The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), in accounting for its employee stock options because, as discussed below, the alternative fair value accounting method provided for under FASB Statement No. 123, Accounting for Stock-Based Compensation, requires the use of option-valuation models that were not developed for use in valuing employee options. Under APB 25, because the exercise price of the Company's employee options approximates the market price of the underlying units on the date of grant, no compensation expense is recognized. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the option vesting period. The Company's pro forma net income during fiscal 2001 was $638,579. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-valuation model with a dividend yield of zero, risk-free interest rate of 5.60% and weighted-average expected life of options of 5 years. 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. Options to purchase 377,500 units were granted during fiscal 2001 with exercise prices ranging from $.01 to $1.50 per unit and a weighted-average exercise price of $.79. 16,500 options were cancelled during fiscal 2001. The weighted-average grant date fair value of the options granted during fiscal 2001 was $.34 and the weighted-average remaining contractual life at April 30, 2001 was 9.1 years. At April 30, 2001, 68,500 options were exerciseable at a weighted-average exercise price of $.09 per unit. F-39
68 SMT Unlimited L.P. Schedule II - Valuation and Qualifying Accounts <Table> <Caption> Balance at Charges to Charges to Balance at Beginning Costs and Other End of Description Of Period Expenses Accounts Deductions Period - ------------------------------------------------ ---------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Year ended April 30, 2001: Reserves and allowance deducted from asset accounts: Allowance for doubtful accounts $ 60,000 $ 60,000 $ -- $ -- $ 120,000 Reserve for obsolete inventory 150,000 -- -- (42,683) 107,317 Year ended April 30, 2000: Reserves and allowance deducted from asset accounts: Allowance for doubtful accounts -- 60,000 -- -- 60,000 Reserve for obsolete inventory -- 150,000 -- -- 150,000 Year ended April 30, 1999: Reserves and allowance deducted from asset accounts: Allowance for doubtful accounts -- -- -- -- -- Reserve for obsolete inventory -- -- -- -- -- </Table> F-40