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, 1999 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 19, 1999 (based on the closing sale price as reported by Nasdaq National Market as of such date) was approximately $12,555,000. The number of outstanding shares of the registrant's Common Stock, as of July 19, 1999, 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, 1999, are incorporated by reference into Part III of this Form 10-K.
2 TABLE OF CONTENTS <TABLE> PART I <S> <C> ITEM 1. BUSINESS................................................ 3 ITEM 2. PROPERTIES.............................................. 11 ITEM 3. LEGAL PROCEEDINGS....................................... 12 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..... 13 ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.................... 13 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........................... 14 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.................... 15 ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS.................. 15 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.................................... 21 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............. 21 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE................... 21 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...... 21 ITEM 11. EXECUTIVE COMPENSATION.................................. 21 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................................ 21 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......... 21 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K........................................... 22 SIGNATURES ............................................................ 26 </TABLE>
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, including Nighthawk Systems, Incorporated/Kidde Safety ("NSI"); 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 products, (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 and Taipei, Taiwan. The Company provides warehousing services in Del Rio, Texas and Huntsville, Alabama. In addition, the Company's 42.5% owned 3
4 affiliate, SMT Unlimited L.P. (SMTU), provides electronic manufacturing services in Fremont, 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 from dedicated resources located within the Company's Elk Grove Village facility and through SMTU, its affiliate. 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 material 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 4
5 holes drilled through the board. The SMT process allows original equipment manufacturers ("OEMs") to use advanced circuitry, while at the same time permitting the placement of a greater number of components on a printed circuit board without having to increase the size of the board. By allowing increasingly complex circuits to be packaged with the components in closer proximity to each other, SMT greatly enhances circuit processing speed, and thus, board and system performance. The Company performs PTH assembly both manually and with automated component insertion and soldering equipment. Although SMT is a newer and 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 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, 1999, the Company had approximately 125 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 1997 1998 1999 - ------- --------------- ---- ---- ---- - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Consumer Electronics Carbon monoxide detectors, 38.0% 37.9% 39.0% dart board games - -------------------------------------------------------------------------------------------------------------------- Gaming Slot machines, lighting displays 21.8 22.0 18.9 - -------------------------------------------------------------------------------------------------------------------- Industrial Electronics Blower motors, elevators 18.3 14.2 16.8 - -------------------------------------------------------------------------------------------------------------------- Fitness Treadmills, exercise bikes 12.1 13.3 13.7 - -------------------------------------------------------------------------------------------------------------------- Telecommunications Pagers, microphones and modems 5.1 5.1 3.9 - -------------------------------------------------------------------------------------------------------------------- Appliances Irons, toasters, ranges and dryers 2.1 5.1 5.0 - -------------------------------------------------------------------------------------------------------------------- Automotive Automobile interior lighting 2.6 2.4 2.7 - -------------------------------------------------------------------------------------------------------------------- Total 100% 100% 100% ---- ---- ---- - ------------------------------------------------------------------------------------------------------------------- </TABLE> For the fiscal year ended April 30, 1999, NSI and Life Fitness accounted for 36.2% and 13.7% respectively, of the Company's net sales. In fiscal 1998 NSI and Life Fitness accounted for 29.4% and 13.3% respectively, of net sales. In addition, NSI, Bally Gaming and Life Fitness accounted for 29.8%, 13.5% and 10.8%, respectively, of the Company's net sales for the fiscal year ended April 30, 1997. 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. The Company's original agreement with NSI called for the Company to function as a contract manufacturer for all models of NSI's proprietary carbon monoxide detectors on a turnkey basis through June 1998. The Company agreed that during the term of the agreement and for three months thereafter it would not produce carbon monoxide detectors for any other customer. Although there has been no written extension of the agreement, the parties continue to operate under its terms. The amount of sales to NSI beyond fiscal 2000 remains unclear and if the relationship is not continued it could significantly impact the Company's revenues and earnings. However, the Company expects that sales to NSI will continue to account for a significant percentage of the Company's net sales in fiscal 2000. 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 NSI 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 on a seasonal basis. 6
7 SALES AND MARKETING The Company markets its services through 28 independent manufacturers' representative organizations, that together currently employ approximately 88 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. In addition, the Company attends trade shows related to the Company's industry and its major customer industries. 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 along the Rio Grande River next to Del Rio, Texas, which 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 effect on the Company or its financial position. 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 an 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 devaluation 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 1999 the Company provided funding of approximately $8,175,000 to Standard Components. 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 7
8 equipment. The manufacturing operation in Acuna was running at preflood levels and all raw material issues created by the flood were resolved by December 1998. 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 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 effect 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. 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 materially affected 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 adversely affect the Company's business, financial condition and results of operations. BACKLOG The Company's backlog as of April 30, 1999 was approximately $38,999,000. 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, 1999 backlog by the end of the
9 2000 fiscal year. Backlog as of April 30, 1998 totaled $46,184,000. Variations in the magnitude and duration of contracts and purchase orders received by the Company and delivery requirements generally may result in substantial fluctuations in backlog from period to period. Because customers may cancel or reschedule deliveries, backlog may not be a meaningful indicator of future financial results. EMPLOYEES The Company employed approximately 1,970 people as of April 30, 1999, including 27 engaged in engineering, 1,770 in manufacturing and 173 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, 2000. 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 February 15, 2000. 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: 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, 1999, two customers accounted for 36.2% and 13.7% of the Company's net sales, respectively. The loss of any such customer or a reduction in business levels could adversely affect the Company's results of operations. 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. 9
10 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. COMPANY HAS STEEP 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. 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 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 many 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 adversely affect the Company's results of operations. 10
11 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 material adverse effect 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. 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 adversely affect 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 adverse effect 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, 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 Taipei, Taiwan office. 11
12 Certain information about the Company's manufacturing, warehouse and purchasing facilities is set forth below: <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------- LOCATION SQUARE FEET SERVICES OFFERED - ------------------------------------------------------------------------------------------------------------- <S> <C> <C> Elk Grove Village, IL 79,300 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 - ------------------------------------------------------------------------------------------------------------- Del Rio, TX 25,000 Warehouse, portion of which is bonded - ------------------------------------------------------------------------------------------------------------- Fremont, CA 24,030 High volume assembly and testing of both PTH and SMT and ball grid array ("BGA") - ------------------------------------------------------------------------------------------------------------- Taipei, Taiwan 2,900 Materials procurement, alternative sourcing assistance and quality control - ------------------------------------------------------------------------------------------------------------- Huntsville, AL * Just-in-time inventory management and delivery - ------------------------------------------------------------------------------------------------------------- </TABLE> * 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 facility. The Company leases its executive offices and manufacturing facility in Elk Grove Village, Illinois from Circuit Systems, Inc. ("CSI"), a significant shareholder of the Company. The Company, through an agent, leases the purchasing and engineering office in Taipei, Taiwan to coordinate Far East purchasing and design activities. In addition, the Company's affiliate, SMTU, leases the facility in Fremont, California. The Company has guaranteed lease payments of approximately $1.41 million for SMTU, and has been indemnified by one of the SMTU limited partners to the extent of 50% of the lease payment guaranty. ITEM 3. LEGAL PROCEEDINGS To the Company's knowledge, there are no pending legal proceedings to which it is a party or to which any of its property is subject. 12
13 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 1999. ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT <TABLE> <CAPTION> NAME AGE POSITION - ---- --- -------- <S> <C> <C> Gary R. Fairhead 47 President and Chief Executive Officer. Gary R. Fairhead has been the President of the Company since January 1990. Linda K. Blake 38 Chief Financial Officer, Vice President- Finance, Treasurer and Secretary. Linda K. Blake is the Company's Vice President of Finance, Treasurer, Secretary and Chief Financial Officer and was Controller of the Company from June 1991 to February 1994. Nunzio A. Truppa 61 Vice President -- Las Vegas Operations. Nunzio A. Truppa has been Vice President -- Las Vegas Operations for the Company, or held equivalent management positions with the Company's predecessor, since January 1987. Gregory A. Fairhead 43 Vice President Mexican Operations and Assistant Secretary. Gregory A. Fairhead has been Vice President -- Mexican Operations for the Company since February 1990 and is Assistant Secretary. John P. Sheehan 38 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. Andrew J. Saarnio 51 Vice President -- Elk Grove Operations. Andrew J. Saarnio has been Vice President -- Elk Grove Operations since November 1998. </TABLE> 13
14 - -------------------------------------------------------------------------------- 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, 1998 and 1999. Common Stock as Reported by Nasdaq <TABLE> <CAPTION> Period High Low ------ ---- --- <S> <C> <C> Fiscal 1999: Fourth Quarter 5.875 2.125 Third Quarter 3.750 2.500 Second Quarter 8.625 0.938 First Quarter 9.000 5.500 Fiscal 1998: Fourth Quarter 10.875 10.750 Third Quarter 13.875 9.250 Second Quarter 17.500 11.625 First Quarter 17.125 11.891 </TABLE> As of July 19, 1999, there were approximately 128 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 3,000 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. 14
15 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA <TABLE> <CAPTION> Years Ended April 30 -------------------- (In thousands except per share data) 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> Net Sales $45,345 $69,558 $87,216 $85,651 $88,160 Income before income tax 3,032 3,752 5,161 837 2,750 Expense Net Income 1,891 2,367 3,255 526 1,697 Total Assets 28,235 38,378 42,088 48,641 55,276 Long-term debt and capital 12,763 16,528 18,593 20,975 23,194 lease obligations (including current maturities) Net income per common share- $0.69 $0.86 $1.16 $0.18 $0.59 Basic Net income per common share- $0.69 $0.86 $1.11 $0.18 $0.59 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. 15
16 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. 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. In June 1995, the Company signed a three-year 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 1999. Although there has been no written extension of the agreement, the parties continue to operate under its terms, and the Company expects sales to NSI will be significant in fiscal 2000. The amount of sales to NSI beyond fiscal 2000 remains unclear 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, 1999 Compared to Fiscal Year Ended April 30, 1998 Net sales for fiscal 1999 were $88,159,189 compared to $85,650,598 for fiscal 1998. The 3% increase in net sales was due to additional sales to some of the Company's key customers. NSI accounted for approximately $31,894,500 or 36.2% of the Company's fiscal 1999 net sales compared to $25,191,000 or 29.4% in fiscal 1998. Gross profit increased to $8,921,091 in fiscal 1999 from $8,456,834 in fiscal 1998. Gross profit as a percent of net sales was 10.1% and 9.9% for fiscal 1999 and 1998, respectively. The increase in gross profit for the fiscal year ended April 30, 1999 compared to the same period in the prior year is primarily due to product mix. 16
17 Selling and administrative expenses increased from $5,704,346 in fiscal 1998 to $5,890,752 in fiscal 1999. The increase is generally consistant with the increase in net sales, but is also due to a write down of $462,000 for Lighting Components, L.P. ("LC") receivables in fiscal 1999. LC distributes a variety of electronic and molded plastic components for use in the sign and lighting industries. The Company owns approximately 12% of LC. Selling and administrative expenses as a percent of net sales remained at 6.7% for fiscal 1999 and fiscal 1998. Interest expense increased in fiscal 1999 to $2,049,396 from $1,898,488 in fiscal 1998. The overall increase was primarily due to the higher outstanding balance on the Company's line of credit due to the Company's increased working capital requirements. Interest expense as a percent of net sales increased from 2.2% in fiscal 1998 to 2.3% 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 statements of income. The inventory, machinery, and equipment and building contents segments of the loss have been settled in full. In June 1999, the Company collected the total flood insurance receivable of $2,453,000 which was included on the April 30, 1999 balance sheet. The business interruption and extra expense segments of the claim have not been finalized. The results for the year ended April 30, 1999, include expenses and a reduction in revenue that management believes is covered by its business interruption insurance. Since there is no agreement with the insurance company on the business interruption and extra expense segments of the loss, the Company has not recognized any net proceeds related to these items. The settlement of the business interruption and extra expense claim is expected to result in additional income for fiscal 2000. Income tax expense increased to $1,052,784 in fiscal 1999 from $310,962 in fiscal 1998. The effective tax rate for fiscal 1999 and 1998 was 38.3% and 37.2%, respectively. As a result of the foregoing, net income increased to $1,697,101 in fiscal 1999 from $525,892 in fiscal 1998. Basic earnings per share for the year ended April 30, 1999 was $0.59 compared to $.18 in fiscal 1998. Diluted earnings per share for fiscal 1999 was $0.59. FISCAL YEAR ENDED APRIL 30, 1998 COMPARED TO FISCAL YEAR ENDED APRIL 30, 1997 Net sales for fiscal 1998 were $85,650,598 compared to $87,216,343 for fiscal 1997. The 2% decrease in net sales was due to softer sales to some of the Company's key customers. NSI accounted for approximately $25,191,000 or 29.4% of the Company's fiscal 1998 net sales compared to $25,952,000 or 29.8% in fiscal 1997. 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. Gross profit decreased to $8,456,834 in fiscal 1998 from $12,639,082 in fiscal 1997. Gross profit as a percent of net sales was 9.9% and 14.5% for fiscal 1998 and 1997, respectively. The decrease is partly due to the increase in the Company's overhead structure over the past 18 months and partly due to the lower sale volume. This expansion included increased manufacturing space, manufacturing personnel and equipment which was necessary in order to competitively position the Company for the future. 17
18 Selling and administrative expenses decreased from $5,704,346 in fiscal 1998 to $5,961,184 in fiscal 1997. The decrease is due to a reduction in bonus accruals and a decrease in commission expense related to the lower sales volume. Selling and administrative expenses as a percent of net sales decreased for fiscal 1998 to 6.6% from 6.8% for fiscal 1997. Interest expense increased in fiscal 1998 to $1,898,488 from $1,836,967 in fiscal 1997. The overall increase was primarily due to the higher outstanding balance on the Company's line of credit due to the Companys increased working capital requirements. Interest expense as a percent of net sales increased from 2.1% in fiscal 1997 to 2.2% in fiscal 1998. The Company recorded a $360,000 loss in investment and receivables for LC in fiscal 1998. LC distributes a variety of electronic and molded plastic components for use in the sign and lighting industries. The Company owns approximately 12% of LC. Income tax expense decreased to $310,962 in fiscal 1998 from $1,905,584 in fiscal 1997. The effective tax rate for fiscal 1998 and 1997 was 37.2% and 36.9%, respectively. As a result of the foregoing, net income decreased to $525,892 in fiscal 1998 from $3,255,058 in fiscal 1997. Basic earnings per share for the year ended April 30, 1998 was $0.18 compared to $1.16 in fiscal 1997. Diluted earnings per share for fiscal 1998 was $0.18 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, availability of materials and components, the volume of orders as related to the Company's capacity, timing of expenditures in anticipation of future sales, 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 in 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. 18
19 LIQUIDITY AND CAPITAL RESOURCES: In fiscal 1999 the Company financed its growth and operations through cash flow generated from borrowings from its secured lender and cash provided by operating activities. The Company had working capital of $20,666,932 as of April 30, 1999 and $20,708,686 at April 30, 1998. This represents a current ratio of 2.5 and 2.8 for the years ended April 30, 1999 and 1998, respectively. The Company has a credit arrangement in place which is comprised of a revolving loan facility and a term loan. Under the revolving loan facility, the Company may borrow certain percentages of the Company's accounts receivable and inventory, up to a maximum of $25.0 million. At April 30, 1999, based upon those percentages, there was approximately $1,406,000 of unused credit available under the revolving loan facility. Outstanding borrowings under the revolving loan facility bear interest at the Company's option of either the London Interbank Offered Rate ("LIBOR") plus 2.0% or the bank's prime rate of interest. The revolving loan facility is collateralized under a loan and security agreement by substantially all of the domestically located assets of the Company. The agreement contains certain financial covenants pertaining to the maintenance of tangible net worth and net income. The revolving loan facility matures on September 30, 2000 and automatically renews from year to year thereafter, unless otherwise terminated at the option of the Company or the lender in writing with at least 90 days notice. 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, which ordinarily derive from the Company's cash from operations and borrowings under its revolving credit facility, is approximately $8,175,000 for a typical 12 month period. The Company provides funding in U.S. dollars, which are exchanged for pesos as needed. The Company is a 42.5% limited partner in SMTU, a California limited partnership, based in Fremont, California. SMTU has negative working capital of approximately $3,324,000 as of April 30, 1999, and an accumulated deficit of approximately $1,472,000. From the formation of SMTU in September 1994 until January 1995, SMTU had no sales. Since fiscal 1995, sales have increased so that SMTU was profitable for the year ended April 30, 1999 . In January 1998, 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 $500,000 plus interest and related costs associated with the enforcement of the guaranty. The Company has been indemnified by one of the limited partners for 50% of the obligation under this guaranty. The Company's investment and advances to and receivables from SMTU totaled approximately $6,162,000 at April 30, 1999, which has been classified as long-term assets in the Company's April 30, 1999 balance sheet. At April 30, 1999, SMTU was in violation of various covenants under its revolving line of credit, which were waived by its lender. The SMTU credit facility expires July 31, 1999. During 1996, the Company invested $1,200 in exchange for a 12% limited partnership interest in LC and invested $1,300 in LC, 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. Approximately $60,000 in subordinated debentures are due at various dates beginning on October 15, 2000, and approximately $220,000 of promissory notes are due on August 1, 2000. Both the subordinated debentures and promissory notes bear interest at 12% with interest payments beginning on August 1, 2000. The 19
20 subordinated debentures and promissory notes totaling $280,000 had been written down at April 30, 1998. The accrued interest on these subordinated debentures and promissory notes totaling approximately $88,000 is included in other long-term assets in the accompanying balance sheet. In addition, the Company also has miscellaneous and trade receivables recorded in the accompanying balance sheet from LC at April 30, 1999, totaling approximately $889,000. The Company's miscellaneous and trade receivables are secured by a security interest in substantially all of LC assets. At April 30, 1999, the Company adjusted the carrying value of assets recorded in the Company's balance sheet by approximately $550,000 leaving approximately $339,000 of assets in the accompanying balance sheet at April 30, 1999. The impact of inflation for the past three fiscal years has been minimal. YEAR 2000 COMPLIANCE: In early 1998 the Company formed a committee of executive officers and others to examine Year 2000 compliance issues. The scope of the program is focused on the Company's primary business applications, including both IT and non-IT applications. This stage has been completed and management believes that these systems are currently Year 2000 compliant. In addition, the Company has reviewed other systems including production equipment, to determine possible risk. Based on assurances received to date provided by vendors, the Company does not believe significant modifications to production equipment or information systems is required. However, the Company cannot verify assurances it has been provided by third parties. The Company has implemented a review process to ensure that the delivery of raw material and services will not be disrupted due to non-compliance by a key third party supplier. Communications with these suppliers have been favorable. The Company is receiving assurances that no interruptions of delivery for product or services will occur; however, the Company cannot ensure third parties will be compliant. Non-compliance by any supplier of products or services for a prolonged period could have an adverse effect on the Company and its results of operations or financial condition. The Company has developed a limited contingency plan as third party suppliers for components are customer mandated. There can be no assurance that such plans will fully mitigate any problems. Furthermore, there may be certain suppliers, such as utilities, telecommunication companies, or material vendors where alternative resources are limited or unavailable. In addition, the Company cannot anticipate if a significant portion of its key customers will be Year 2000 compliant. The Company's customers inability to process timely payments could have an adverse effect on the Company's cash flow and liquidity. Based on its internal review the Company does not anticipate that current or future costs related to the Year 2000 issue will have a material impact on its financial condition. To date the Company has incurred approximately $20,000 in Year 2000 compliance costs. The foregoing is a Year 2000 readiness disclosure entitled to protection as provided in the Year 2000 Information and Readiness Disclosure Act. 20
21 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, 1999 and 1998. - -------------------------------------------------------------------------------- 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, 1999. 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, 1999. 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, 1999. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required under this item is incorporated herein by reference to the 21
22 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, 1999. - -------------------------------------------------------------------------------- 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 Consolidated Financial Statements and Financial Schedule filed as part of the Form 10-K on Page F-1. 22
23 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 By-laws of the Company, incorporated herein by reference to Exhibit 3.2 to Registration Statement on Form S-1, File No. 33-72100 dated February 9, 1994. 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 Agreement between SigmaTron International, Inc. and Nighthawk Systems, Incorporated dated July 9, 1995 - Filed as Exhibit 10.33 to the Company's Form 10-Q for the quarter ended July 31, 1995 and hereby incorporated by reference. 10.10 Putnam Flexible 401(K) and Profit Sharing Plan Agreement #001 dated March 22, 1996 between SigmaTron International, Inc. and Putnam Defined 23
24 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. 10.11 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. 10.12 Amended and Restated Agreement between SigmaTron International, Inc. and Nighthawk Systems, Incorporated dated November 15, 1996 - filed as Exhibit 10.41 to the Company's Form 10-Q for the quarter ended January 31, 1997 and hereby incorporated by reference. 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 # 97-054 between SigmaTron International, Inc. and International Financial Services dated June 6, 1997 filed as Exhibit 10.37 to the Company's Form 10-Q for the quarter ended October 31, 1996 and hereby incorporated by reference. 10.16 Lease Agreement # 97-087 between SigmaTron International, Inc. and International Financial Services dated June 26, 1997 filed as Exhibit 10.36 to the Company's Form 10-Q for the quarter ended October 31, 1997 and hereby incorporated by reference. 10.17 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. 10.18 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. 10.19 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. 10.20 Guaranty and Surety Agreement between SigmaTron International, Inc. and HSBC Business Loans Inc. dated January 31, 1998 filed as Exhibit 10.40 to the Company's Form 10-Q for the quarter ended January 31, 1998 and hereby incorporated by reference. 10.21 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. 24
25 10.22 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. 10.23 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. 10.24 Lease Agreement # 99-048 between SigmaTron International, Inc. and International Financial Services dated April 30, 1999. 10.25 Lease Agreement between the Company and International Financial Services # 96-049 dated April 18, 1996 filed as Exhibit 10.36 to the Company's Form 10-Q for the quarter ended October 31, 1996 and hereby incorporated by reference. 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. 27.1 Financial Data Schedule (EDGAR only) * Indicates management contract or compensatory plan. (b) No reports on Form 8-K were filed during the 1999 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 schedule in Item 14, which are attached hereto. 25
26 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SIGMATRON INTERNATIONAL, INC. By: /s/ Gary R. Fairhead ----------------------------------------- Gary R. Fairhead, President and Chief Executive Officer Dated: July 28, 1999 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 July 28, 1999 - -------------------------- Franklin D. Sove /s/ Gary R. Fairhead President and Chief Executive Officer July 28, 1999 - -------------------------- (Principal Executive Officer) Gary R. Fairhead /s/ Linda K. Blake Chief Financial Officer, Secretary and July 28, 1999 - -------------------------- Treasurer (Principal Financial Officer and Linda K. Blake Principal Accounting Officer) /s/ D.S. Patel Director July 28, 1999 - -------------------------- D.S. Patel /s/ John P. Chen Director July 28, 1999 - -------------------------- John P. Chen /s/ Dilip S. Vyas Director July 28, 1999 - -------------------------- Dilip S. Vyas /s/ William C. Mitchell Director July 28, 1999 - -------------------------- William C. Mitchell /s/ Thomas W. Rieck Director July 28, 1999 - -------------------------- Thomas W. Rieck /s/ Steven Rothstein Director July 28, 1999 - -------------------------- Steven Rothstein </TABLE> 26
27 SigmaTron International, Inc. Consolidated Financial Statements Contents Report of Independent Auditors..............................................F-2 Consolidated Financial Statements Consolidated Balance Sheets at April 30, 1999 and 1998......................F-3 Consolidated Statements of Income for the Years Ended April 30, 1999, 1998, and 1997...........................................F-5 Consolidated Statements of Equity for the Years Ended April 30, 1999, 1998, and 1997...........................................F-6 Consolidated Statements of Cash Flows for the Years Ended April 30, 1999, 1998, and 1997...........................................F-7 Notes to Consolidated Financial Statements..................................F-9 Schedule II Valuation and Qualifying Accounts..........................................F-25 Financial statement schedules not listed above are omitted because they are not applicable or required. F-1
28 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, 1999 and 1998, and the related consolidated statements of income, equity, and cash flows for each of the three years in the period ended April 30, 1999. 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 generally accepted auditing standards. 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, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended April 30, 1999, in conformity with generally accepted accounting principles. 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. /s/ Ernst & Young LLP Chicago, Illinois June 25, 1999 F-2
29 SigmaTron International, Inc. Consolidated Balance Sheets <TABLE> <CAPTION> April 30 1999 1998 ----------------------------- <S> <C> <C> Assets Current assets: Cash $ 280,071 $ 284,679 Accounts receivable, less allowance for doubtful accounts of $575,000 at April 30, 1999 13,563,836 11,977,973 Inventories 16,240,502 18,972,587 Prepaid and other assets 864,895 706,771 Deferred income taxes 147,514 218,788 Receivable from insurance reimbursement 2,453,235 - Other receivables 1,013,982 43,154 ----------------------------- Total current assets 34,564,035 32,203,952 Machinery and equipment, net 13,434,789 11,249,550 Due from SMTU: Investment and advances 448,545 311,107 Equipment lease receivables 4,201,823 3,207,691 Other receivables 1,511,372 650,695 ----------------------------- 6,161,740 4,169,493 Other assets 1,115,893 1,018,211 ----------------------------- Total assets $55,276,457 $48,641,206 ============================= </TABLE> F-3
30 <TABLE> <CAPTION> April 30 1999 1998 ----------------------------- <S> <C> <C> Liabilities and stockholders' equity Current liabilities: Notes payable - Banks $ - $ 111,108 Trade accounts payable 8,003,377 6,751,886 Trade accounts payable - Related parties 1,256,000 915,475 Accrued expenses 1,721,932 1,575,434 Income tax payable 644,101 60,025 Capital lease obligations 2,271,693 2,081,338 ----------------------------- Total current liabilities 13,897,103 11,495,266 Notes payable - Banks, less current portion 17,382,681 15,177,695 Capital lease obligations, less current portion 3,538,721 3,604,793 Deferred income taxes 1,157,460 760,061 ----------------------------- Total liabilities 35,975,965 31,037,815 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 9,835,126 8,138,025 ----------------------------- Total stockholders' equity 19,300,492 17,603,391 ----------------------------- Total liabilities and stockholders' equity $55,276,457 $48,641,206 ============================= </TABLE> See accompanying notes. F-4
31 SigmaTron International, Inc. Consolidated Statements of Income <TABLE> <CAPTION> Year ended April 30 1999 1998 1997 ----------------------------------------------- <S> <C> <C> <C> Net sales $88,159,189 $85,650,598 $87,216,343 Cost of sales 79,238,098 77,193,764 74,577,261 ----------------------------------------------- 8,921,091 8,456,834 12,639,082 Selling and administrative expenses 5,890,752 5,704,346 5,961,184 ----------------------------------------------- Operating income 3,030,339 2,752,488 6,677,898 Equity in net income (loss) of SMTU 137,439 (216,131) (75,036) Interest expense - Banks and capital lease obligations (2,049,396) (1,898,488) (1,836,967) Interest expense - Related parties - (523) (9,961) Interest income - SMTU and LC 587,304 479,508 404,708 Loss on investment and receivables with LC (88,000) (280,000) - Gain on insurance reimbursement 1,132,199 - - ----------------------------------------------- Income before income tax expense 2,749,885 836,854 5,160,642 Income tax expense (1,052,784) (310,962) (1,905,584) ----------------------------------------------- Net income $ 1,697,101 $ 525,892 $ 3,255,058 =============================================== Net income per common share - Basic $ .59 $ .18 $ 1.16 =============================================== Net income per common share - Assuming dilution $ .59 $ .18 $ 1.11 =============================================== </TABLE> See accompanying notes. F-5
32 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, 1996 - $ - 2,737,500 $27,375 $8,384,089 $4,357,075 $12,768,539 Issuance of common stock for exercise of options and warrants - - 137,727 1,377 471,123 - 472,500 Net income - - - - - 3,255,058 3,255,058 Tax benefit from options and warrants exercised - - - - 518,547 - 518,547 ---------------------------------------------------------------------------------------------- Balance at April 30, 1997 - - 2,875,227 28,752 9,373,759 7,612,133 17,014,644 Issuance of common stock for exercise of options - - 6,000 60 41,940 - 42,000 Net income - - - - - 525,892 525,892 Tax benefit from options exercised - - - - 20,855 - 20,855 ---------------------------------------------------------------------------------------------- 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 ============================================================================================== </TABLE> See accompanying notes. F-6
33 SigmaTron International, Inc. Consolidated Statements of Cash Flows <TABLE> <CAPTION> Year ended April 30 1999 1998 1997 ------------------------------------------------------ <S> <C> <C> <C> OPERATING ACTIVITIES Net income $1,697,101 $ 525,892 $3,255,058 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,481,336 1,262,297 1,047,262 Equity in net (income) loss of SMTU (137,439) 216,131 75,036 Amortization - 14,136 23,778 Gain on insurance reimbursement (1,391,124) - - Provision for doubtful accounts - 113,454 - Loss on investment and receivables with LC 550,000 360,000 - Deferred income taxes 468,673 (46,335) 382,844 Changes in operating assets and liabilities: Accounts receivable (2,135,863) (3,400,970) 2,310,028 Inventories 2,732,085 (1,306,987) (2,811,550) Prepaid expenses and other assets (2,087,347) (943,788) (476,855) Trade accounts payable 1,251,491 3,507,349 (2,881,853) Trade accounts payable - Related parties 340,525 178,582 (57,417) Accrued expenses 146,498 (105,287) 237,687 Income taxes 584,113 179,546 353,645 ------------------------------------------------------ Net cash provided by operating activities 3,500,049 554,020 1,457,663 INVESTING ACTIVITIES Insurance reimbursement - Net 485,011 - - Purchases of machinery and equipment (3,765,490) (934,692) (2,950,725) Proceeds from the sale and leaseback of machinery - 1,429,898 - Proceeds from SMTU subleases - 196,895 424,412 Advances to SMTU - - (100,000) Proceeds from the sale of investment in SMTU - - 250 ------------------------------------------------------ Net cash provided by (used in) investing activities (3,280,479) 692,101 (2,626,063) </TABLE> F-7
34 SigmaTron International, Inc. Consolidated Statements of Cash Flows (continued) <TABLE> <CAPTION> Year ended April 30 1999 1998 1997 ------------------------------------------------------ <S> <C> <C> <C> FINANCING ACTIVITIES Repayment of term loan and other notes payable $ - $ (42,596) $ (151,860) Proceeds from exercise of stock options and warrants - 42,000 472,500 Net proceeds under line of credit 2,093,878 407,192 2,181,772 Net payments under capital lease obligations (2,318,056) (1,691,261) (1,013,289) ------------------------------------------------------ Net cash (used in) provided by financing activities (224,178) (1,284,665) 1,489,123 ------------------------------------------------------ Change in cash (4,608) (38,544) 320,723 Cash at beginning of period 284,679 323,223 2,500 ------------------------------------------------------ Cash at end of period $ 280,071 $ 284,679 $ 323,223 ====================================================== Supplementary disclosure of cash flow information: Cash paid for interest $ 2,038,638 $ 1,900,073 $ 1,834,946 ====================================================== Cash paid for income taxes $ - $ 177,750 $ 1,169,854 ====================================================== Acquisition of machinery and equipment financed under capital leases $ 2,526,088 $ 1,234,095 $ 840,429 ====================================================== </TABLE> See accompanying notes. F-8
35 SigmaTron International, Inc. Notes to Consolidated Financial Statements 1. Description of the Business SigmaTron International, Inc. (the Company), is an independent electronic manufacturing services provider, 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 are: (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. 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. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles 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. F-9
36 SigmaTron International, Inc. Notes to Consolidated Financial Statements (continued) 2. Summary of Significant Accounting Policies (continued) 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 In 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings Per Share. Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants, and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented and, where appropriate, restated to conform to the Statement 128 requirements. 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. Service revenue is recognized as the services are performed. Reclassifications Certain reclassifications were made to the 1998 consolidated financial statements to conform with the 1999 presentation. F-10
37 SigmaTron International, Inc. Notes to Consolidated Financial Statements (continued) 3. Inventories Inventories consist of the following: <TABLE> <CAPTION> April 30 1999 1998 -------------------------------- <S> <C> <C> Finished products $ 1,359,207 $ 3,292,442 Work in process 1,709,482 1,887,517 Raw materials 13,171,813 13,792,628 -------------------------------- $16,240,502 $18,972,587 ================================ </TABLE> 4. Machinery and Equipment Machinery and equipment consist of the following: <TABLE> <CAPTION> April 30 1999 1998 -------------------------------- <S> <C> <C> Machinery and equipment $11,475,094 $ 7,225,671 Office equipment 1,266,844 1,090,763 Tools and dies 115,362 123,251 Leasehold improvements 1,643,626 2,030,129 Equipment under capital leases 5,051,188 5,415,725 -------------------------------- 19,552,114 15,885,539 Less: Accumulated depreciation and amortization, including amortization of assets under capital leases of $1,038,187 and $852,836 at April 30, 1999 and 1998, respectively 6,117,325 4,635,989 -------------------------------- $13,434,789 $11,249,550 ================================ </TABLE> F-11
38 SigmaTron International, Inc. Notes to Consolidated Financial Statements (continued) 5. Investment and Advances With SMTU The Company's investment in SMTU consists of a 42.5% ownership interest in SMTU, which was formed on September 15, 1994, in Fremont, California, as a joint venture to provide surface mount technology assembly services primarily to electronic original equipment manufacturers. During fiscal year 1995, the Company invested $49,500 in exchange for a 45% limited partnership interest in SMTU and $2,500 in SMT Unlimited, Inc. (SMT, Inc.), which is the general partner of SMTU, in exchange for 50% of its capital stock. During fiscal year 1997, the Company sold 2.5% of its interest to a key employee of SMTU. One of the limited partners of SMTU is also an equal shareholder of SMT, Inc., along with the Company. The Company made advances to SMTU in exchange for subordinated debentures in the face amount of $100,000 and $50,000 in 1997 and 1996, respectively (none in 1999 or 1998). In 1996, the Company also made advances to SMTU in exchange for promissory notes in the face amount of $300,000. These promissory notes were converted into subordinated debentures during 1997. Debentures totaling $650,000 outstanding at April 30, 1999, bear interest at 8%, and are to be repaid on December 31, 1999. The remaining $400,000 of these debentures bears interest at 12% and is to be repaid on December 31, 2001. The Company guarantees lease payments of approximately $1,410,000 for SMTU. The Company has been indemnified by one of the other limited partners in the amount of $705,000 for the guaranteed lease payments. SMTU incurs a $12,500 monthly administrative fee for administrative services provided by the Company. See also Note 13. 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 first as a reduction of the investment in SMTU and then as a reduction in the carrying value of the subordinated debentures. In January 1998, 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 $500,000 plus interest and related costs associated with the enforcement of the guaranty. The Company may be released from its guaranty within 120 days of any fiscal year-end if SMTU attains $500,000 of net profit after partnership distributions and specific cash flow levels as defined in the agreement. The Company has been indemnified by one of the limited partners for 50% of the obligation under this guaranty. The SMTU credit facility expires July 31, 1999. The Company's investment and advances to and receivables from SMTU totaled approximately $6,162,000 at April 30, 1999, and no amount was recorded by the Company related to its guaranty of SMTU's revolving line of credit. SMTU has negative F-12
39 SigmaTron International, Inc. Notes to Consolidated Financial Statements (continued) 5. Investment and Advances With SMTU (continued) working capital of approximately $3,324,000 at April 30, 1999, and an accumulated deficit of approximately $1,472,000 at April 30, 1999. From the formation of SMTU in September 1994 until January 1995, SMTU had no sales. Since fiscal 1995, sales have increased so that SMTU was profitable for the year ended April 30, 1999. 6. 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 was running at preflood levels, and all raw material issues created by the flood were resolved by December 1998. 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 $1,132,000 in the accompanying 1999 statements of income. The inventory, machinery, and equipment and building contents segments of the loss have been settled in full. In June 1999, the Company collected the total flood insurance receivable of $2,453,000 recorded as of April 30, 1999. The business interruption and extra expense segments of the claim have not been finalized. The results for the year ended April 30, 1999, include expenses and a reduction in revenue that management believes is covered by its business interruption insurance. Since there is no agreement with the insurance company on the business interruption and extra expense segments of the loss, the Company has not recognized any future net proceeds related to these items. The business interruption and extra expense claim, if any, may result in additional income for fiscal 2000. 7. Notes Payable Notes payable consist of the following: <TABLE> <CAPTION> April 30 1999 1998 ------------------------- <S> <C> <C> Banks: Revolving line of credit, interest payable monthly $17,382,681 $15,177,695 Term loan, paid December 1, 1998 - 111,108 ------------------------- 17,382,681 15,288,803 Less: Current portion - 111,108 ------------------------- $17,382,681 $15,177,695 ========================= </TABLE> F-13
40 SigmaTron International, Inc. Notes to Consolidated Financial Statements (continued) 7. Notes Payable (continued) The Company's amended and restated loan and security agreement allow the maximum borrowing limit under the revolving line-of-credit agreement to be 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 $9,000,000 or the amount of the inventory borrowing base, as defined. Under the current terms, borrowings under the revolving line of credit bear interest at rates equal to the London Interbank Offered Rate (4.97% to 5.81% at April 30, 1999) plus 2% or at the prime rate (7.75% of April 30, 1999) at the option of the Company. At April 30, 1999, there was approximately $1,406,000 of unused credit available under the terms of the agreement. On July 14, 1998, the Company entered into an amendment to their loan and security agreement whereby the maturity date of the revolving line of credit was extended to September 30, 2000, and automatically renews from year to year thereafter, unless otherwise terminated at the option of the Company or the lender in writing with at least 90 days' notice. The revolving line-of-credit facility is collateralized by substantially all of the assets of the Company, except for the machinery and equipment acquired from a related party, machinery and equipment acquired through capital leases, and inventory and machinery and equipment located outside the United States. The agreement contains certain financial covenants, including specific covenants pertaining to the maintenance of minimum tangible net worth and net income. The agreement 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. 8. Accrued Expenses Accrued expenses consist of the following: April 30 1999 1998 ---------------------------- Payroll $1,028,804 $1,174,290 Bonuses 352,000 50,000 Interest payable 126,993 112,939 Commissions 94,119 142,791 Professional fees 120,016 95,414 ---------------------------- $1,721,932 $1,575,434 ============================ F-14
41 SigmaTron International, Inc. Notes to Consolidated Financial Statements (continued) 8. Accrued Expenses (continued) Bonuses represent discretionary management and other employee bonuses, of which $250,000 and $50,000 was accrued during the fourth quarter of 1999 and 1998, respectively. 9. Related Party Transactions and Commitments During the years ended April 30, 1999, 1998, and 1997, the Company was involved in transactions with Circuit Systems, Inc. (CSI), a shareholder of the Company. These transactions primarily involved the purchase of raw materials and the leasing of operating space. Purchases of raw materials were approximately $6,325,000, $6,380,000, and $6,895,000, for the years ended April 30, 1999, 1998, and 1997, respectively. The Company leases space in Elk Grove Village, Illinois, owned by CSI at a base rental of $30,000 per month, with an additional $7,000 per month for property taxes. The lease requires the Company to pay maintenance and utility expenses. The lease expires in February 2001 and contains an option to renew for an additional five-year period. Rent and property tax expense totaled approximately $466,000, $486,000, and $423,000 for the years ended April 30, 1999, 1998, and 1997, respectively. At April 30, 1999 and 1998, 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, 1999 and 1998. 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. Approximately $60,000 in subordinated debentures are due at various dates beginning on October 15, 2000, and approximately $220,000 of promissory notes are due on August 1, 2000. Both the subordinated debentures and promissory notes bear interest at 12% with interest payments beginning on August 1, 2000. The subordinated debentures and promissory notes totaling $280,000 were reserved to a net realizable value of $0 at April 30, 1998. The accrued interest on these subordinated debentures and promissory notes totaling approximately $88,000 is included in other long-term assets in the accompanying balance sheet. In addition, the Company also has miscellaneous and trade receivables recorded in F-15
42 SigmaTron International, Inc. Notes to Consolidated Financial Statements (continued) the accompanying balance sheet from LC at April 30, 1999, totaling approximately $889,000. 9. Related Party Transactions and Commitments (continued) The Company's miscellaneous and trade receivables are secured by a security interest in substantially all of LC's assets. At April 30, 1999, the Company reduced the carrying value of assets recorded in the Company's balance sheet by approximately $550,000 to net realizable value. Accordingly, net assets in the accompanying balance sheet at April 30, 1999 and April 30, 1998, were: <TABLE> <CAPTION> Subordinated Miscellaneous Debentures and and Trade Receivables Promissory Notes -------------------------------------------- <S> <C> <C> April 30, 1998: Gross $ 280,000 $ 546,000 Reserve (280,000) (80,000) -------------------------------------------- Net $ - $ 466,000 ============================================ April 30, 1999: Gross $ 280,000 $ 889,000 Reserve (280,000) (550,000) -------------------------------------------- Net $ - $ 339,000 ============================================ </TABLE> 10. Income Taxes The income tax provision for the years ended April 30, 1999, 1998, and 1997 consists of the following: <TABLE> <CAPTION> 1999 1998 1997 --------------------------------------------------- <S> <C> <C> <C> Current: Federal $ 463,766 $292,536 $1,231,639 State 71,790 64,761 291,101 Deferred: Federal 450,917 (40,395) 333,761 State 66,311 (5,940) 49,083 --------------------------------------------------- $1,052,784 $310,962 $1,905,584 =================================================== </TABLE> F-16
43 SigmaTron International, Inc. Notes to Consolidated Financial Statements (continued) 10. Income Taxes (continued) The reasons for the differences between the income tax provision and the amounts computed by applying the statutory federal income tax rates to income before income tax expense for the years ended April 30, 1999, 1998, and 1997 are as follows: <TABLE> <CAPTION> 1999 1998 1997 -------------------------------------------------- <S> <C> <C> <C> Income tax at statutory federal rate $ 934,960 $284,530 $1,754,618 Effect of: State income taxes, net of federal tax benefit 127,046 38,663 238,421 Other, net (9,222) (12,231) (87,455) -------------------------------------------------- $1,052,784 $310,962 $1,905,584 ================================================== </TABLE> Significant temporary differences which result in deferred tax assets and deferred tax liabilities at April 30, 1999 and 1998 are as follows: <TABLE> <CAPTION> 1999 1998 ------------------------------- <S> <C> <C> Allowance for doubtful accounts $ (21,450) $ - Inventory obsolescence reserve 129,285 129,285 Accruals not currently deductible 58,824 75,856 Inventory 64,914 58,891 Other (84,059) (45,244) ------------------------------- Net deferred tax asset $ 147,514 $218,788 =============================== Gain on involuntary conversion $ (441,480) $ - Machinery and equipment (1,002,926) 835,556 Other 286,946 (75,495) ------------------------------- Net deferred tax liability $(1,157,460) $760,061 =============================== </TABLE> 11. 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 $46,954, $32,904, and $34,554 to the plan during the fiscal years ended April 30, 1999, 1998, and 1997, respectively. The Company paid total expenses of $10,960, $13,500, and $8,000 for the fiscal years ended F-17
44 SigmaTron International, Inc. Notes to Consolidated Financial Statements (continued) April 30, 1999, 1998, and 1997, respectively, relating to costs associated with the Plan's administration. 12. 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, 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. For the year ended April 30, 1998, four customers accounted for 9%, 13%, 29%, and 9% of net sales of the Company, and 21%, 4%, 24%, and 11% of accounts receivable at April 30, 1998. For the year ended April 30, 1997, three customers accounted for 30%, 14%, and 11% of net sales of the Company, and 20%, 10%, and 4% of accounts receivable at April 30, 1997. 13. 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, 1999: <TABLE> <CAPTION> Capital Operating Leases Leases -------------------------------- <S> <C> <C> 2000 $2,690,004 $1,036,884 2001 2,073,782 895,662 2002 1,202,863 423,792 2003 429,306 219,792 2004 144,607 219,792 Thereafter - 176,496 -------------------------------- 6,540,562 $2,972,418 ================== Less: Amounts representing interest 730,148 --------------- 5,810,414 Less: Current portion 2,271,693 --------------- $3,538,721 =============== </TABLE> F-18
45 SigmaTron International, Inc. Notes to Consolidated Financial Statements (continued) 13. Leases (continued) The Company subleased the machinery and equipment relating to 13 of the above capital lease agreements to its affiliate, SMTU. These sublease agreements contain the same maturity dates as the original underlying lease agreements. The effective interest rates on these leases are approximately 2% higher than the effective interest rates (ranging from 9.85% to 12.35%) implicit in the original lease 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 subleases with SMTU with terms of one year or more are as follows: 2000 $ 1,230,768 2001 630,775 2002 526,908 2003 308,845 2004 213,308 ------------ 2,910,604 Less: Amounts representing interest 447,639 ------------ $ 2,462,965 ============ 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, 1999. Rent expense incurred under operating leases was $1,118,901, $714,027, and $557,456 for the years ended April 30, 1999, 1998, and 1997, 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-19
46 SigmaTron International, Inc. Notes to Consolidated Financial Statements (continued) 14. Capital Stock At April 30, 1999, authorized but unissued shares have been reserved for future issuance as follows: Stock Option Plans 698,500 ============= 15. Warrants and Stock Options On February 9, 1994, the Company sold warrants, for nominal consideration, to purchase up to an aggregate of 55,000, 25,000, and 70,000 shares of common stock to certain underwriters, consultants, and directors, respectively. All warrants are exercisable during the five-year period commencing February 9, 1994. As of April 30, 1999, 35,000 warrants have expired and 115,000 warrants have been exercised. On February 8, 1994, the stockholders of the Company approved the formation of two stock option plans (Option Plans) under which certain members of management and outside nonmanagement directors may acquire up to 698,500 shares of common stock of the Company. The Option Plans are interpreted and administered by the Compensation Committee (the 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. The Committee approved grants to certain members of the Company's management effective February 9, 1994, of options to purchase all of the 625,000 shares of common stock available under the management option plan at an exercise price equal to $7.00. Of the options granted to management, options to purchase up to 200,000 shares of common stock will vest at a rate of 20% each year following the date of grant provided the optionee remains an employee of the Company. As of April 30, 1999 and 1998, management vested in options to purchase 200,000 and 160,000 shares, respectively. The remaining options to purchase up to 425,000 shares of common stock will vest only on the Company's attainment of certain earnings per share levels over the five fiscal years beginning with fiscal year 1995. None of these options became exercisable during fiscal year 1997 or 1996 as the earnings per share level goal was not met, and options to purchase 100,000 and 75,000 shares were forfeited in 1997 and 1996, respectively. On F-20
47 SigmaTron International, Inc. Notes to Consolidated Financial Statements (continued) 15. Warrants and Stock Options (continued) June 11, 1997, options to purchase up to 425,000 shares of common stock were canceled (225,000 of these options had been forfeited prior to April 30, 1998) and returned to the pool of ungranted options to be granted as service-based options at a date to be determined by the Committee. On December 18, 1998, July 1, 1998, and July 1, 1997, 7,500, 50,500, and 352,000 service-based options, respectively, were granted at an exercise price of $7.38, $7.38, and $12.25, respectively. The Company also has a stock option plan for the benefit of directors who are not salaried employees of the Company or full-time consultants to the Company. 73,500 shares of common stock were reserved for issuance upon exercise of such options. As of April 30, 1998, all options reserved for issuance under this plan have been granted. An option may be exercised at any time within ten years from the date of grant. On June 11, 1997, a new outside nonmanagement director option plan was adopted and later obtained shareholder approval to grant options to purchase up to 105,000 shares of common stock in a manner similar to the old plan. In September 1998 and 1997, 35,000 options were granted under this new plan at an exercise price equal to $4.25 and $14.50, respectively. 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 options vesting period. The Company's pro forma information follows: <TABLE> <CAPTION> 1999 1998 1997 ------------------------------------------------ <S> <C> <C> <C> Net income $1,697,101 $525,892 $3,255,058 Pro forma net income 1,558,152 302,389 3,167,740 Basic earnings per share $ .59 $ .18 $ 1.16 Pro forma basic earnings per share $ .51 $ .10 $ 1.13 </TABLE> F-21
48 SigmaTron International, Inc. Notes to Consolidated Financial Statements (continued) 15. Warrants and 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: <TABLE> <CAPTION> 1999 1998 1997 ---------------------------------------------- <S> <C> <C> <C> Expected dividend yield .0% .0% .0% Expected stock price volatility 0.608 0.512 0.529 Risk-free interest rate 5.43% 6.31% 6.54% Weighted-average expected life of options 5 years 5 years 5 years </TABLE> 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. F-22
49 SigmaTron International, Inc. Notes to Consolidated Financial Statements (continued) 15. Warrants and Stock Options (continued) A summary of the Company's stock option activity and related information for the years ended April 30 follows: <TABLE> <CAPTION> 1999 1998 1997 ----------------------------------------------------------------------------------------------- Weighted-Average Weighted-Average Weighted-Average Options Exercise Price Options Exercise Price Options Exercise Price ----------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Outstanding - Beginning of year 555,500 $10.88 374,500 $ 7.13 549,000 $ 7.06 Granted 93,000 6.20 387,000 12.45 24,500 10.25 Exercised - (6,000) 7.00 (99,000) 7.64 Forfeited - - - (100,000) 7.00 Canceled - (200,000) 7.00 - - ----------- ------------- ------------ Outstanding - End of year 648,500 10.20 555,500 10.88 374,500 7.13 =========== ============= ============ Exercisable at end of year 207,100 8.77 163,500 8.89 94,500 7.50 Weighted-average fair value of options granted during the year 3.50 6.47 5.40 </TABLE> Exercise prices for options outstanding as of April 30, 1999, ranged from $4.25 to $14.50 (50,500 and 7,500 of the options outstanding at April 30, 1999, have an exercise price of $7.38 with a remaining contractual life of 9.2 and 9.6 years, respectively, and 35,000 of the options outstanding at April 30, 1999, have an exercise price of $4.25 with a remaining contractual life of 9.4 years). The weighted-average remaining contractual life of all options outstanding at April 30, 1999, is 7.5 years. F-23
50 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 per share: <TABLE> <CAPTION> 1999 1998 1997 --------------------------------------------------- <S> <C> <C> <C> Net income available to common stockholders $1,697,101 $ 525,892 $3,255,058 =================================================== Weighted-average shares: Basic 2,881,128 2,881,128 2,808,848 Effect of dilutive warrants and stock options 3,600 91,264 131,441 --------------------------------------------------- Diluted 2,884,728 2,972,392 2,940,289 =================================================== Basic earnings per share $ .59 $ .18 $ 1.16 =================================================== Diluted earnings per share $ .59 $ .18 $ 1.11 =================================================== </TABLE> Options to purchase 648,500 and 397,500 shares of common stock were outstanding during 1999 and 1998, 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. The 425,000 shares reserved for issuance under the management stock option plan in 1997 were not considered common stock equivalents as the earnings per share goals were not reached. F-24
51 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, 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 Year ended April 30, 1998: Reserves and allowance deducted from asset accounts: Allowance for doubtful accounts 80,000 - - 80,000 (1) - Reserve for obsolete inventory 331,500 - - - 331,500 Reserve against note receivable - 280,000 - - 280,000 Year ended April 30, 1997: Reserves and allowance deducted from asset accounts: Allowance for doubtful accounts 492,126 80,000 - 492,126 (1) 80,000 Reserve for obsolete inventory 411,500 (80,000) - - 331,500 </TABLE> (1) Uncollectible accounts written off. F-25