ITEM 1. BUSINESS
CAUTIONARY NOTE:
In addition to historical financial information, this discussion of the business of SigmaTron International, Inc. (the "Company") and other Items in this Annual Report on Form 10-K contain forward-looking statements concerning the Company's business or results of operations. These statements should be evaluated in the context of the risks and uncertainties inherent in the Company's business, including the Company's continued dependence on certain significant customers; the continued market acceptance of products and services offered by the Company and its customers; the activities of competitors, some of which may have greater financial or other resources than the Company; the variability of the Company's operating results; the availability and cost of necessary components; the continued availability and sufficiency of the Company's credit arrangements; changes in U.S. or Mexican regulations affecting the Company's business; the continued stability of the Mexican economic, labor and political conditions and the ability of the Company to manage its growth; including expansion into China and securing financing for the operation in China. 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 may be detailed from time to time in the Company's filings with the Securities and Exchange Commission. These statements speak as of the date of this Report and the Company undertakes no obligation to update such statements in light of future events or otherwise.
OVERVIEW
The Company operates primarily in one business segment as an independent provider of electronic manufacturing services, which includes printed circuit board assemblies and completely assembled (boxbuild) electronic products. In connection with the production of its assembled products the Company, its wholly owned subsidiary, Standard Components de Mexico, S.A., its affiliate, SMT Unlimited L.P. ("SMTU") and its operating branch SigmaTron Taiwan also provides services to their customers including (1) automatic and manual assembly and testing of products; (2) material sourcing and procurement; (3) design, manufacturing and test engineering support; (4) warehousing and shipment services; and (5) assistance in obtaining product approval from governmental and other regulatory bodies. The Company provides these manufacturing services through an international network of facilities located in North America and Asia.
The Company provides manufacturing and assembly services ranging from the assembly of individual components to the assembly and testing of boxbuild electronic products. The Company has the ability to produce assemblies requiring mechanical as well as electronic capabilities. The products assembled by the Company are then incorporated into finished products sold in various marketplaces, particularly consumer electronics, gaming, fitness, industrial electronics, telecommunications, home appliances and automotive.
The Company operates manufacturing facilities in Elk Grove Village, Illinois; Las Vegas, Nevada; and Acuna, Mexico. The Company maintains materials sourcing offices in Elk Grove Village, Illinois; Las Vegas, Nevada, Acuna Mexico, and Taipei, Taiwan. The Company provides warehousing services in Del Rio, Texas and Huntsville, Alabama. In addition, the Company's 42.5% owned affiliate, SMT Unlimited L.P. ("SMTU"), provides EMS in Fremont and Hollister, California.
The Company expects to expand its manufacturing capabilities to include a facility in China. The Company expects the facility to be operational by January 2004.
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.
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 EMS industry to provide its customers with advanced manufacturing technologies, high quality, and 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 existing prototype services. The Company provides quick-turnaround, turnkey prototype services at all of its locations.
Materials Procurement. The Company is primarily a turnkey manufacturer and directly sources all, or a substantial portion, of the components necessary for its product assemblies, rather than receiving the raw materials from its customers on consignment. Material procurement includes the purchasing, management, storage and delivery of raw components required for the manufacture or assembly of a customer's product based upon the customer's orders. The Company procures components from a select group of vendors which meet its standards for timely delivery, high quality and cost effectiveness, or as directed by its customers. Raw materials used in the assembly and manufacture of printed circuit boards and electronic assemblies are generally available from several suppliers, unless restricted by the customer.
The Company believes that its ability to source and procure competitively priced, quality components is critical to its ability to effectively compete. In addition to obtaining materials in North America, the Company utilizes its Taiwanese procurement office and agents to source materials from the Far East. SigmaTron believes this office allows the Company to more effectively manage its relationships with key suppliers in the Far East by allowing the Company to respond more quickly to changes in market dynamics, including fluctuations in price, availability and quality.
Assembly and Manufacturing. The Company's core business is the assembly of printed circuit boards through the automated and manual insertion of components onto raw printed circuit boards. The Company offers its assembly services using both pin-through-hole ("PTH") and surface mount ("SMT") interconnect technologies at all of its manufacturing locations. SMT is an assembly process which allows the placement of a higher density of components directly on both sides of a printed circuit board. The SMT process is an advancement over the mature PTH technology, which normally permits electronic components to be attached to only one side of a printed circuit board by inserting the component into holes drilled through the board. The SMT process allows original equipment manufacturers ("OEMs") to use advanced circuitry, while at the same time permitting the placement of a greater number of components on a printed circuit board without having to increase the size of the board. By allowing increasingly complex circuits to be packaged with the components in closer proximity to each other, SMT greatly enhances circuit processing speed, and thus, board and system performance.
The Company performs PTH assembly both manually and with automated component insertion and soldering equipment. Although SMT is a more sophisticated interconnect technology, the Company intends to continue providing PTH assembly services for its customers 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. SigmaTron possesses ball grid array ("BGA") technology and fine pitch SMT at several locations and through SMTU. BGA 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. 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. The Company seeks to provide customers with highly sophisticated testing services that are at the forefront of current test technology.
Warehousing and Distribution. In response to the needs of select customers, the Company has the ability to provide in-house warehousing, shipping and receiving and customer brokerage services in Del Rio, Texas for goods manufactured or assembled in Mexico and for goods manufactured for a customer in Huntsville, Alabama. The Company also has the ability to provide custom-tailored delivery schedules to fulfill the just-in-time inventory needs of its customers.
MARKETS AND CUSTOMERS
SigmaTron's customers are in the consumer electronics, gaming, industrial electronics, fitness, telecommunications, automotive and home appliance industries. As of April 30, 2003, the Company had approximately 110 active customers ranging from Fortune 500 companies to small, privately held enterprises.
The following table shows, for the periods indicated, the percentage of net sales to the principal end-user markets it serves.
For the fiscal year ended April 30, 2003, Spitfire Controls, Inc. and Life Fitness accounted for 27.6% and 15.6%, respectively, of the Company's net sales. For the fiscal year ended April 30, 2002 Spitfire Controls, Inc. and Life Fitness accounted for 21.9% and 18.3%, respectively, of the Company's net sales. In fiscal 2001, Life Fitness and Kidde Safety/Nighthawk Systems Inc. ("NSI") accounted for 21.7% and 15.8%, respectively, of net sales. The Company expects that these customers as a group will continue to account for a significant percentage of the Company's net sales, although the individual percentages may vary from period to period.
NSI is a leading U.S. manufacturer of residential carbon monoxide detection systems. NSI and the Company have had a relationship since 1995. Currently NSI and the Company work under a year to year contract. Much of NSI's high volume business has migrated to its wholly owned operation in China. Therefore, NSI's sales to the Company have declined over the past several years. NSI remains an important customer of the Company, but there is no guaranty that business will continue beyond the current expiration of the contract, which is December 31, 2003.
SALES AND MARKETING
The Company markets its services through 18 independent manufacturers' representative organizations that together currently employ approximately 49 sales personnel in the United States and Canada. Independent manufacturers' representative organizations receive variable commissions based on orders received by the Company. The members of the Company's senior management are actively involved in sales and marketing efforts.
Sales volume and gross profit margins can vary considerably among customers and products depending on the type of services rendered by the Company. Specifically, variations in orders for turnkey services versus consignment services and variations in the number of orders for products with high raw material costs can lead to significant fluctuations in the Company's operating results. Further, customers' orders can be delayed, rescheduled or canceled at any time, which can significantly impact the operating results of the Company. The ability to replace such delayed or lost sales in a short period of time is not assured.
MEXICAN OPERATIONS
The Company's wholly-owned subsidiary, Standard Components de Mexico, S.A. ("Standard Components"), a Mexican corporation, is located in Acuna, Mexico, a border town across the Rio Grande River from Del Rio, Texas, and is 155 miles west of San Antonio. Standard Components was incorporated and commenced operation in 1969. The Company believes that one of the key benefits to having operations in Mexico is its access to cost-effective labor resources.
The Company provides funds for salaries, wages, overhead and capital expenditure items as necessary to operate Standard Components. The Company provides funding to Standard Components in U.S. dollars, which are exchanged for pesos as needed. The fluctuation of the peso from time to time, without an equal or greater increase in Mexican inflation, has not had a material impact on the financial results of the Company. In fiscal 2003 the Company paid approximately $10,360,000 to Standard Components for services provided.
CHINA OPERATIONS
The Company has entered into an agreement with governmental authorities in the economic development zone of Wujiang, Republic of China, pursuant to which the Company became the lessee of approximately nine U.S. acres. The construction of a manufacturing facility of approximately 80,000 square feet including dormitories will commence soon. The facility is expected to be completed and ready for manufacturing to commence around January 1, 2004.
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, may be 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 impact on the Company's business, financial condition, or results of operations. The introduction of lower priced competitive products or significant price reductions by the Company's competitors
could result in price reductions that would adversely affect the Company's business, financial condition, and results of operations, as would the introduction of new technologies which render the Company's manufacturing process technology less competitive or obsolete.
CONSOLIDATION
As a result of consolidation and other transactions involving competitors and other companies in the Company's markets, the Company occasionally reviews potential transactions relating to its business, products and technologies. Such transactions could include mergers, acquisitions, strategic alliances, joint ventures, licensing agreements, co-promotion agreements, financing arrangements or other types of transactions. The Company may choose to enter into such transactions at any time, and such transactions could have a material impact on the Company, its business or operations.
GOVERNMENTAL REGULATIONS
The Company's operations are subject to certain foreign, federal, state and local regulatory requirements relating to environmental, waste management and health and safety matters. Management believes that the Company's business is operated in material compliance with all such regulations. The cost to the Company of such compliance to date has not had a material impact on the Company's business, financial condition or results of operations. However, there can be no assurance that violations will not occur in the future as a result of human error, equipment failure or other causes. The Company cannot predict the nature, scope or effect of environmental legislation or regulatory requirements that could be imposed or how existing or future laws or regulations will be administered or interpreted. Compliance with more stringent laws or regulations, as well as more vigorous enforcement policies of regulatory agencies, could require substantial expenditures by the Company and could have a material impact on the Company's business, financial condition and results of operations.
BACKLOG
The Company's backlog as of April 30, 2003 was approximately $39,000,000. 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, 2003 backlog by the end of the 2004 fiscal year. Backlog as of April 30, 2002 totaled $38,236,000. 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 1,400 people as of April 30, 2003, including 8 engaged in engineering, 1,310 in manufacturing and 82 in administrative and marketing functions.
The Company has a labor contract with Production Workers Union Local No. 10, AFL-CIO, covering the Company's workers in Elk Grove Village, Illinois which expires on November 30, 2003. The Company's Mexican subsidiary has a labor contract with Sindicato De Trabajadores de la Industra Electronica, Similares y Conexos del Estado de Coahuila, C.T.M. covering the Company's workers in Acuna, Mexico which expires on January 15, 2004.
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:
THE COMPANY'S ABILITY TO SECURE AND MAINTAIN SUFFICIENT CREDIT ARRANGEMENTS IS KEY TO ITS CONTINUED OPERATIONS.
The ability of the Company to secure and maintain sufficient credit arrangements is key to its continued operations. The Company entered into an Amended Loan and Security Agreement in October 2002, which provides for a revolving credit facility. The maximum borrowing limit under the revolving line-of-credit facility is limited to the lesser of: (i) $20,000,000 or (ii) an amount equal to the sum of 85% of the receivable borrowing base and the lesser of $9,000,000 or varying percentages of the inventory base. The Amended Loan and Security Agreement expires on September 30, 2004. At April 30, 2003 the Company was in compliance with its financial covenants.
THE COMPANY EXPERIENCES VARIABLE OPERATING RESULTS.
The Company's results of operations have varied and may continue to fluctuate significantly from period to period, including on a quarterly basis. Consequently, results of operations in any period should not be considered indicative of the results for any future period, and fluctuations in operating results may also result in fluctuations in the price of the Company's Common Stock.
The Company's quarterly and annual results may vary significantly depending on numerous factors, many of which are beyond the Company's control. These factors include:
- Changes in sales mix to customers
- Changes in availability and cost of components
- Volume of customer orders relative to capacity
- Market demand and acceptance of our customers' products
THE COMPANY'S CUSTOMER BASE IS CONCENTRATED.
Sales to the Company's five largest customers accounted for 68%, 62% and 66% of net sales for the fiscal years ended 2003, 2002 and 2001, respectively. Significant reduction in sales to any of the Company's major customers or the loss of a major customer could have a material impact on the Company's operations. If the Company cannot replace canceled or reduced orders sales will decline, which could have a material impact on the results of operations.
THERE IS VARIABILITY IN THE REQUIREMENTS OF THE COMPANY'S CUSTOMERS.
The timing of purchase orders placed by the Company's customers is affected by a number of factors, including variation in demand for the customers' products, regulatory changes affecting customer industries, customer attempts to manage inventory, changes in the customers' manufacturing strategies and customers' technical problems or issues. Many of these factors are outside the control of the Company.
THE COMPANY 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.
THE COMPANY HAS INTENSE INDUSTRY COMPETITION.
The EMS industry is highly fragmented and characterized by intense competition. Many of the Company's competitors have substantially greater experience, as well as greater manufacturing, purchasing, marketing and financial resources than the Company. From time to time, the Company reviews potential transactions relating to its business, products and technologies. Such transactions could include mergers, acquisitions, strategic alliances, joint ventures, financing arrangements or other types of arrangements. The
Company may choose to enter into such transactions at any time, and such transactions could have a material effect on the Company's business or operations.
THE COMPANY HAS FOREIGN OPERATIONS THAT MAY POSE ADDITIONAL RISKS.
A substantial part of the Company's manufacturing operations is based in Mexico. Therefore, the Company's business and results of operations are dependent upon numerous related factors, including the stability of the Mexican economy, the political climate in Mexico, prevailing worker wages, the legal authority of the Company to own and operate its business in Mexico and the ability to identify, hire, train and retain qualified personnel and operating management in Mexico. The Company obtains many of its materials and components in Taipei, Taiwan and, therefore, the Company's access to these materials and components is dependent on the continued success of these Asian suppliers.
The Company is in the process of expanding its manufacturing operations and is opening an operation in China in order to better support and grow its customer base. It is uncertain whether the China operation will have a material impact, either positive or negative, on the Company's business, financial condition and results of operations. The successful startup of the operation is dependent on the Company's ability to secure financing for the operation in China, to hire and train qualified personnel and to implement an efficient manufacturing environment within a relative short period of time. Other factors could have a material impact on the business, including the political climate, stability of the economy, the need for additional capital to expand operations in China, and effects of public health issues (e.g., Severe Acute Respiratory Syndrome or SARS).
THERE IS A RISK OF FLUCTUATION OF VARIOUS CURRENCIES INTEGRAL TO THE COMPANY'S OPERATIONS.
The Company purchases some of its material components and funds some of its operations in foreign currencies. From time to time the currencies fluctuate against the U.S. dollar. Such fluctuations could have a measurable impact on the Company's operations and performance. These fluctuations are expected to continue.
THE COMPANY'S EXPERIENCES SEASONALITY OF RESULTS.
The Company has generally experienced seasonality in quarterly results, with stronger net sales and demand for its products and services historically in its second and third fiscal quarters.
THE AVAILABILITY OF RAW COMPONENTS MAY AFFECT THE COMPANY'S OPERATIONS.
The Company relies on numerous third-party suppliers for components used in the Company's production process. Certain of these components are available only from single sources or a limited number of suppliers. In addition, a customer's specifications may require the Company to obtain components from a single source or a small number of suppliers. The loss of any such suppliers could have a material impact on the Company's results of operations. The Company could operate at a cost disadvantage compared to competitors who have greater direct buying power from suppliers.
THE COMPANY IS DEPENDENT ON KEY PERSONNEL.
The Company depends significantly on its President and Chief Executive Officer, Gary R. Fairhead, and on other executive officers. The loss of the services of these key employees could have a material impact on the Company's business and results of operations. In addition, despite significant competition, continued growth and expansion of the Company's contract manufacturing business will require that it attract, motivate and retain additional skilled and experienced personnel.
FAVORABLE LABOR RELATIONS IS IMPORTANT TO THE COMPANY.
The Company currently has labor union contracts with certain of its employees. Although the Company believes its labor relations are good, any labor disruptions, whether union-related or otherwise, could significantly impair the Company's business, substantially increase the Company's costs or otherwise have a material impact on the Company's results of operations.
FAILURE TO COMPLY WITH ENVIRONMENTAL REGULATIONS COULD SUBJECT THE COMPANY TO LIABILITY.
The Company is subject to a variety of environmental regulations relating to the use, storage, discharge and disposal of hazardous chemicals used during its manufacturing process. Any failure by the Company to comply with present or future regulations could subject it to future liabilities or the suspension of production which could have a material impact on the Company's results of operations.
THE PRICE OF THE COMPANY'S STOCK IS VOLATILE.
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 makers also affect the volatility of the Company's Common Stock. Such fluctuations are expected to continue.
THE COMPANY HAS MADE INVESTMENTS IN AND ADVANCES TO AFFILIATES.
The Company has a 42.5% ownership interest in SMTU, which was formed on September 15, 1994, as a joint venture to provide surface mount technology assembly services primarily to electronic original equipment manufacturers. The Company owns 50% of the outstanding stock of SMT Unlimited, Inc. ("SMT, Inc."), which is the general partner of SMTU. One of the limited partners of SMTU is also an equal shareholder of SMT, Inc., along with the Company.
The Company holds subordinated debentures totaling $1,050,000 from SMTU. Debentures totaling $650,000 bear interest at 8%, and debentures totaling $400,000 bear interest at 12%. On November 1, 2002 the Company waived all additional subordinated interest charges until further notice. On May 27, 2003, the Company amended the debenture agreement extending the repayment date from August 1, 2003 to August 1, 2005. As a result of the cancellation of future interest expense and the extension of the loan repayment date the subordinated debentures were deemed to be impaired. The Company determined that the fair value of the future cash flows exceeded the investment by $329,208 at April 30, 2002 and recorded an impairment provision of this amount. Payment of principal and interest on the debentures is subordinated to prior payment in full of SMTU's revolving line of credit.
SMTU incurred a $13,680 monthly administrative fee in fiscal year 2003, a $24,000 monthly administrative fee for November 2001 through April 2002, and a $28,500 monthly administrative fee prior to November 2001 for administrative services provided by the Company.
The investment in SMTU is carried at a cost plus equity in undistributed earnings or losses since acquisition. The Company has recorded its share of the income or losses in SMTU as an increase or reduction, respectively, of the investment in SMTU.
In August 1999, the Company entered into a guaranty agreement with SMTU's lender to guarantee the obligation of SMTU under its revolving line of credit to a maximum of $2,000,000 plus interest and related costs associated with the enforcement of the guaranty. In connection with the guaranty agreement Gary R. Fairhead, President and CEO of the Company and Vice President of SMT, Inc. has executed a guaranty to the lender to reimburse the Company for up to $500,000 of payments made by the Company under its guaranty to the lender in excess of $1,000,000. In conjunction with the Company's guaranty agreement one of SMTU's limited partners has agreed to indemnify the Company for 50% of all payments made on behalf of SMTU to the lender.
The Company also has guaranteed lease obligations of approximately $388,000 for SMTU. The Company has been indemnified by one of the other limited partners in the amount of $194,000 for the guaranteed lease obligations.
The Company's investment and advances to and receivables from SMTU totaled approximately $3,582,000 at April 30, 2003, and no liability has been recorded by the Company related to its guaranty of SMTU's credit agreement.
ITEM 2.
ITEM 2. PROPERTIES
The Company, in combination with its wholly-owned subsidiary and affiliate, has manufacturing facilities located in Elk Grove Village, Illinois; Las Vegas, Nevada; Fremont and Hollister, California and Acuna, Mexico. In addition, the Company provides inventory management services through its Del Rio, Texas, warehouse facilities and materials procurement services through its Elk Grove Village, Illinois; Las Vegas, Nevada; Acuna, Mexico and Taipei, Taiwan offices.
Certain information about the Company's manufacturing, warehouse and purchasing facilities is set forth below:
*There is no lease for this facility. The Company has entered into a service agreement whereby contracted warehouse personnel provide services for the Company and its customer.
All of the above properties are occupied pursuant to leases of the premises except for the Huntsville, Alabama facility and one manufacturing operation in Acuna, Mexico. The Alabama space is provided under a service agreement. One of the Company's manufacturing facility located in Acuna, Mexico is owned by 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, SMTU leases two facilities in Fremont and Hollister, California totaling 134,000 square feet. The Company has guaranteed lease payments of approximately $388,000 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.
ITEM 3. LEGAL PROCEEDINGS
During the fiscal year ended April 30, 2002, the Company received a Charge of Discrimination from the Equal Employment Opportunity Commission regarding a former employee claiming unspecified damages resulting in a lawsuit being filed against the Company. The Company believes that it has meritorious defenses to the charges and is defending itself vigorously in this action. Although the charges do not specify a dollar amount, based on information presently available to the Company, the Company believes that the resolution of these charges will not have a material adverse effect on the financial condition or results of the operations of the Company.
During the fiscal year ended April 30, 2003, a lawsuit was filed by the liquidating trustee of Circuit Systems, Inc. ("CSI") against Gary R. Fairhead, President and CEO of the Company and a former director of CSI ("Fairhead"), and other former directors of CSI, alleging, in part, that Fairhead had breached his fiduciary duty to CSI and its stockholders in a number of respects. Fairhead joined the CSI Board in 1995, resigning in early 2002. Fairhead has requested that the Company (i) indemnify him against all expenses, including legal fees, judgments and amounts paid in settlement actually incurred by him in connection with the SigmaTron lawsuit, and (ii) advance his costs incurred in defending against these claims. The Company is reviewing Fairhead's request, but has not decided under what basis, if any, to provide indemnification or advancement of expenses.
ITEM 4.
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 2003.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
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ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq SmallCap 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, 2003 and 2002.
Common Stock as Reported by Nasdaq
As of July 18, 2003, there were approximately 88 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 1,217 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.
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICES
Management Estimates and Uncertainties - The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates made in preparing the consolidated financial statements include depreciation and amortization periods, the allowance for doubtful accounts, and reserves for inventory. Actual results could materially differ from these estimates.
Revenue Recognition - The company's net sales are comprised of product sales and other service revenue. Revenue from electronic manufacturing services, which generally includes cost of material unless the customer provides the material, is recognized upon shipment of goods, which is when title passes to the customer, or in the case of consigned inventory, when placed into the customer's manufacturing process. Certain service revenues are directly related to product assembly and, as such, recognized upon shipment of goods. Other service revenue is recognized as the services are performed and is generally immaterial. The Company allows product returns for repair or replacement. Product returns have historically not been significant.
Inventories - Inventories are stated at the lower of cost (first-in, first-out method) or market. Cost includes labor, material and manufacturing overhead. Provisions are based on assumptions about future product life cycles, product demand and market conditions. When required, provisions are made to reduce excess inventories to their estimated net realizable values. It is possible that estimates of net realizable values can change in the near term.
Impairment of Long-Lived Assets - The Company reviews long-lived assets for impairment, including its investment and assets related to its affiliate SMTU whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An asset is considered impaired if its carrying amount exceeds the future net cash flow the asset is expected to generate. If such asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset, if any, exceeds its fair market value.
In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which establishes a single accounting model for the impairment or disposal of long-lived assets, including discontinued operations. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of" and APB Option No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions for the Disposal of a Segment of a Business." The provisions of SFAS No. 144 are effective in fiscal years beginning after December 15, 2001, with early adoption permitted and, in general, are to be applied prospectively. The Company adopted SFAS No. 144 at May 1, 2002, and has determined that adoption did not have a material effect on its results of operations or financial position.
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
SigmaTron International, Inc. (the "Company") operates primarily in one business segment as an independent provider of electronic manufacturing services, which includes printed circuit board assemblies and completely assembled (boxbuild) electronic products. In connection with the production of its assembled products the Company, its wholly-owned subsidiary, Standard Components de Mexico, S.A., its affiliate, SMT Unlimited L.P. ("SMTU") and its operating branch SigmaTron Taiwan, provide services to their customers including (1) automatic and manual assembly and testing of products; (2) material sourcing and procurement; (3) design, manufacturing and test engineering support; (4) warehousing and shipment services; and (5) assistance in obtaining product approval from governmental and other regulatory bodies. The Company provides these manufacturing services through an international network of facilities located in North America and Asia.
Sales volume can be misleading as an indication of the Company's financial performance. Gross profit margins can vary considerably among customers and products depending on the type of services rendered by the Company. Variations in the number of turnkey orders compared to consignment orders can lead to significant fluctuations in the Company's revenue levels and margins. Further, generally customers' orders can be delayed, rescheduled or canceled at any time, which can significantly impact the operating results of the Company. In addition, the ability to replace such delayed or lost sales in a short period of time cannot be assured.
As a manufacturing company, the Company includes all fixed manufacturing overhead in cost of products 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 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 second and third quarters have historically been the strongest periods.
RESULTS OF OPERATIONS:
FISCAL YEAR ENDED APRIL 30, 2003 COMPARED TO FISCAL YEAR ENDED APRIL 30, 2002
Net sales increased 10% to $93,165,149 in fiscal 2003 from $84,770,921 in the prior year. The primary reason for the increase in sales was due to the increased sales volume in the appliance market. Sales can be misleading as an indication of the Company's financial performance. Gross profit margins can vary considerably among customers and products depending on the type of services rendered by the Company, specifically the variation of orders for turnkey services versus consignment services. Variations in the number of turnkey orders compared to consignment orders can lead to significant fluctuations in the Company's revenue levels and margins. Further, generally, customers' orders can be delayed, rescheduled or canceled at any time, which can significantly impact the operating results of the Company. In addition, the ability to replace such delayed or lost sales in a short period of time cannot be assured.
Gross profit increased to $17,432,533 in fiscal 2003 compared to $10,108,524 in fiscal 2002. The increase in gross profit is primarily related to higher revenue volume and increased capacity utilization. Other factors contributing to the increase in gross profit include product mix, labor cost and component pricing. Gross profit can vary significantly from quarter to quarter. Management continues to re-evaluate and align its overhead structure with current customer requirements.
Selling and administrative expenses increased from $6,775,308 or 8% of net sales in fiscal 2002 to $8,581,932 or 9.2% of net sales in fiscal 2003. The increase is primarily due to an increase in insurance and bad debt expense and bonus accruals, which was partially offset by a reduction in bank and professional fees.
Interest expense decreased in fiscal 2003 to $595,673 from $1,434,563 in fiscal 2002. The overall decrease was primarily due to a reduction in the loan balance of the Company's line of credit and a lower interest rate. Interest expense as a percent of sales decreased to .6% of sales compared to 1.7% in the prior fiscal year.
In fiscal 2003 tax expense was $3,251,551 which resulted in an effective tax rate of 39.1% compared to $943,603 in income tax expense and an effective tax rate of 38% in fiscal 2002.
As a result of the forgoing, the Company recorded net income of $5,385,716 in fiscal 2003 compared to $1,542,056 in fiscal 2002. Diluted earnings per share for the year ended April 30, 2003 was $1.61 compared to $0.52 in fiscal 2002.
FISCAL YEAR ENDED APRIL 30, 2002 COMPARED TO FISCAL YEAR ENDED APRIL 30, 2001
Net sales increased 5% to $84,770,921 in fiscal 2002 from $80,890,699 in the prior year. The primary reason for the increase in sales was due to the increased sales volume in the appliance market. Sales decreased to many of the Company's existing customers in fiscal 2002. The Company's sales in fiscal 2002 have been affected by the overall slow-down in the economy. Sales to the Company's significant customers may vary from time to time depending on timing of customers' orders, including delays, modifications or cancellations.
Gross profit increased to $10,108,524 or 12% of net sales in fiscal 2002 compared to $5,065,017 or 6% of net sales in fiscal 2001. The increase in gross profit is the result of several factors including, increased capacity utilization, product mix, labor cost and overhead efficiencies and component pricing. Management continues to re-evaluate and align its overhead structure with current customer requirements.
Selling and administrative expenses increased from $5,752,984 or 7.1% of net sales in fiscal 2001 to $6,775,308 or 8% of net sales in fiscal 2002. The increase is primarily due to an increase in sales commission expense and bonus accruals, which was partially offset by a reduction in certain insurance expenses.
Interest expense decreased in fiscal 2002 to $1,434,563 from $1,963,282 in fiscal 2001. The overall decrease was primarily due to a lower interest rate and a reduction in the loan balance of the Company's line of credit. Interest expense as a percent of sales decreased to 1.7% of sales compared to 2.4% on the prior fiscal year.
In fiscal 2002 tax expense was $943,603, which resulted in an effective tax rate of 38%. In fiscal 2001 the pre-tax loss resulted in a tax benefit of $699,866, which resulted in an effective tax benefit of 37.7%
As a result of the forgoing, the Company recorded net income of $1,542,056 in fiscal 2002 compared to a net loss of $1,155,764 in fiscal 2001. Diluted earnings per share for the year ended April 30, 2002 was $0.52 compared to a loss of $(.40) in fiscal 2001.
QUARTERLY RESULTS AND SEASONALITY
Historically, the Company's highest levels of sales are achieved in its second and third quarters. This was due to the seasonal nature of the business for several of the Company's customers. This trend caused the Company to generally experience stronger second and third quarters in each fiscal year. The Company experienced less seasonality in fiscal 2003 compared to prior fiscal years. However, regardless of seasonal fluctuations, there can be no assurance that the Company will be profitable in any particular quarter.
The Company's results of operations have varied significantly and may continue to fluctuate from quarter to quarter. Operating results are affected by a number of factors, including timing of orders from and shipments to major customers, component pricing and shortages, the volume of orders as related to the Company's capacity, timing of expenditures in anticipation of future sales, price erosion within the electronics industry, capacity utilization, the mix of turnkey and consignment business, competition within the electronic industry, the gain or loss of significant customers and variations in the demand for products in the industries served by the Company. A significant portion of the Company's expenses are relatively fixed in nature and planned expenditures are based in part on anticipated orders. The inability to adjust expenditures to compensate for a decline in net sales may magnify the adverse impact of such decline on the Company's results of operations. The Company's customers generally require short delivery cycles. In the absence of substantial backlog, quarterly sales and operating results depend on the volume and timing of orders received during the quarter, which can be difficult to forecast. In addition, variations in the size and delivery schedules of purchase orders received by the Company, as well as changes in customers' delivery requirements or the rescheduling or cancellations of orders and commitments, may result in substantial fluctuations in backlog from period to period. Accordingly, the Company believes that backlog may not be a meaningful indicator of future operating results.
LIQUIDITY AND CAPITAL RESOURCES:
In fiscal 2003 the Company financed operations through cash provided by operating activities. During the period, cash provided by operating activities was primarily related to net income and an increase in accounts payable, which was partially offset by an increase in accounts receivable. Net income increased to $5,385,716 in fiscal 2003 compared to an increase of $1,542,056 in the prior fiscal year.
The Company paid $1,636,621 in cash for machinery and equipment in fiscal 2003, compared to $724,766 in fiscal 2002. The Company wrote off $515,721 in machinery and equipment in fiscal 2003.
Net cash used in financing activities of $8,139,335 was primarily used for payments under the line of credit and capital lease obligations.
The Company entered into an Amended Loan and Security Agreement in October 2002, which provides for a revolving credit facility. The maximum borrowing limit under the revolving line-of-credit facility is limited to the lesser of: (i) $20,000,000 or (ii) an amount equal to the sum of 85% of the receivable borrowing base and the lesser of $9,000,000 or varying percentages of the inventory base. The Amended Loan and Security Agreement expires in September 2004. At April 30, 2003 the Company was in compliance with its financial covenants. The outstanding loan balance of $1,653,963 has been classified as a long-term liability in the Company's balance sheet at April 30, 2003.
The loan facility is collateralized by substantially all of the assets of the Company and contains certain financial covenants, including specific covenants pertaining to the maintenance of minimum tangible net worth and net income. The agreement also restricts annual lease rentals and capital expenditures and the payment of dividends or distributions of any cash or other property on any of its capital stock, other than by common stock dividends or stock splits.
The Company provides funds for salaries, wages, overhead and capital expenditure items as necessary to operate Standard Components. The Company provides funding to Standard Components in U.S. dollars, which are exchanged for pesos as needed. The fluctuation of the peso from time to time, without an equal or greater increase in Mexican inflation, has not had a material impact on the financial results of the Company. In fiscal 2003 the Company paid approximately $10,360,000 to Standard Components for services provided.
The Company has a 42.5% ownership interest in SMTU, which was formed on September 15, 1994, as a joint venture to provide surface mount technology assembly services primarily to electronic original equipment manufacturers. The Company owns 50% of the outstanding stock of SMT Unlimited, Inc. ("SMT, Inc."), which is the general partner of SMTU. One of the limited partners of SMTU is also an equal shareholder of SMT, Inc., along with the Company.
The Company holds subordinated debentures totaling $1,050,000 from SMTU. Debentures totaling $650,000 bear interest at 8%, and debentures totaling $400,000 bear interest at 12%. On November 1, 2002 the Company waived all additional subordinated interest charges until further notice. On May 27, 2003, the Company amended the debenture agreement extending the repayment date from August 1, 2003 to August 1, 2005. As a result of the cancellation of future interest expense and the extension of the loan repayment date the subordinated debentures were deemed to be impaired. The Company determined that the fair value of the future cash flows exceeded the investment by $329,208 at April 30, 2002 and recorded an impairment provision of this amount. Payment of principal and interest on the debentures is subordinated to prior payment in full of SMTU's revolving line of credit.
The Company also has guaranteed lease obligations of approximately $388,000 for SMTU. The Company has been indemnified by one of the other limited partners in the amount of $194,000 for the guaranteed lease obligations. SMTU incurred a $13,680 monthly administrative fee in fiscal year 2003, a $24,000 monthly administrative fee for November 2001 through April 2002, and a $28,500 monthly administrative fee prior to November 2001 for administrative services provided by the Company.
The investment in SMTU is carried at a cost plus equity in undistributed earnings or losses since acquisition. The Company has recorded its share of the income or losses in SMTU as an increase or reduction, respectively, of the investment in SMTU.
In August 1999, the Company entered into a guaranty agreement with SMTU's lender to guarantee the obligation of SMTU under its revolving line of credit to a maximum of $2,000,000 plus interest and related costs associated with the enforcement of the guaranty. In connection with the guaranty agreement, one of the limited partners of SMTU and a Vice President of SMTU have each executed a guaranty to the lender to reimburse the Company for up to $500,000 of payments made by the Company under its guaranty to the lender in excess of $1,000,000. In addition, the limited partner has agreed to indemnify the Company for 50% of all payments made on behalf of SMTU to the lender. The limited partner's obligation to the Company under the indemnity is
reduced dollar for dollar to the extent the limited partner would otherwise be obligated to pay more than $1,000,000 as a result of his guaranty to the lender. The revolving line of credit expires on July 31, 2004.
The Company's investment and advances to and receivables from SMTU totaled approximately $3,582,000 at April 30, 2003, and no liability has been recorded by the Company related to its guaranty of SMTU's credit agreement.
The impact of inflation for the past three fiscal years has been minimal.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Not applicable.
ITEM 8.
ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA
The response to this item is included in Item 15(a) of this Report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On October 31, 2001, Registrant's Board of Directors elected to appoint Grant Thornton LLP as its independent auditors, and dismissed Ernst & Young LLP. Such election and dismissal was previously reported in the Company's 8-K dated November 6, 2001. There has been no disagreements with the accountants on accounting or financial disclosure matters during the Company's fiscal years ended April 30, 2003 and 2002.
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ITEM 10.
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, 2003.
ITEM 11.
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, 2003.
ITEM 12.
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, 2003.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this item is incorporated herein by reference to the Company's definitive proxy statement, filed with the Commission not later than 120 days after the close of the Company's fiscal year ended April 30, 2003.
ITEM 14.
ITEM 14. CONTROLS AND PROCEDURES
The Company maintains a set of disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in the reports filed by the Company under the Securities Exchange Act of 1934, as amended ("Exchange Act"), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Within the 90 days prior to the date of this Report, the Company carried out an evaluation, under the supervision of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Rule 13a-14 of the Exchange Act. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective.
There have been no significant changes in the Company's internal controls or other factors that could significantly affect those controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
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ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (a)(2)
The financial statements, including required supporting schedule, are listed in the index to Financial Statements and Financial Schedule filed as part of the Form 10-K on Page.
INDEX TO EXHIBITS
* Indicates management contract or compensatory plan.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the last quarter of the period covered by this Report.
(c) Exhibits
The Company hereby files as exhibits to this Report the exhibits listed in Item 15(a)(3) above, which are attached hereto or incorporated herein.
(d) Financial Statements Schedules
The Company hereby files a schedule to this Report the financial schedules in Item 15, which are attached hereto.
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 21, 2003
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned directors and officers of SigmaTron International, Inc., a Delaware corporation, which is filing an Annual Report on Form 10-K with the Securities and Exchange Commission under the provisions of the Securities Exchange Act of 1934 as amended, hereby constitute and appoint Gary R. Fairhead and Linda K. Blake, and each of them, each of their true and lawful attorneys-in fact and agents; with full power of substitution and resubstitution, for him and in his name, place and stead, in all capacities, to sign any or all amendments to the report to be filed with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as each of them might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities, and on the dates indicated.
CERTIFICATIONS
I, Gary R. Fairhead, President and Chief Executive of SigmaTron International, Inc., certify that:
1. I have reviewed this Annual Report on Form 10-K of SigmaTron International, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: July 21, 2003
/s/ Gary R. Fairhead ------------------------------------------ Gary R. Fairhead President and Chief Executive Officer of SigmaTron International, Inc.
I, Linda K. Blake, Chief Financial Officer, Secretary and Treasurer of SigmaTron International, Inc., certify that:
1. I have reviewed this Annual Report on Form 10-K of SigmaTron International, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: July 21, 2003
/s/ Linda K. Blake ------------------------------------------ Linda K. Blake Chief Financial Officer, Secretary and Treasurer of SigmaTron International, Inc.
AND FINANCIAL STATEMENT SCHEDULES
Financial statement schedules not listed above are omitted because they are not applicable or required.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders SigmaTron International, Inc.
We have audited the accompanying consolidated balance sheets of SigmaTron International, Inc. (a Delaware corporation) and subsidiary as of April 30, 2003 and 2002, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 that our audits provide a reasonable basis for our opinion.
In our opinion, the 2003 and 2002 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of SigmaTron International, Inc. and subsidiary as of April 30, 2003 and 2002, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
We have also audited Schedule II of SigmaTron International, Inc. and subsidiary for the years ended April 30, 2003 and 2002. In our opinion this schedule presents fairly, in all material respects, the information required to be set forth therein.
GRANT THORNTON LLP
Chicago, Illinois June 27, 2003
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders SigmaTron International, Inc.
We have audited the accompanying consolidated statements of operations, changes in stockholders' equity and cash flows of SigmaTron International, Inc. for the year ended April 30, 2001. Our audit also included the financial statement schedule listed in the Index at Item 14(a) for the year ended April 30, 2001. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of SigmaTron International, Inc. for the year ended April 30, 2001, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule for the year ended April 30, 2001, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in paragraph three of note R, the Company has not complied with certain covenants of loan agreements with banks. In addition, the Company has significant receivables from, and has guaranteed debt and other obligations of, its equity method affiliate, SMTU (see note F and paragraph four of note R). SMTU's independent auditors added an explanatory paragraph to their report dated June 29, 2001, on SMTU's 2001 financial statements because of uncertainty due to SMTU not being in compliance with certain covenants of its bank loan agreements. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans with regard to this matter are also described in note R. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
ERNST & YOUNG LLP
Chicago, Illinois June 29, 2001, except for the third paragraph of note R, as to which the date is July 11, 2001
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS APRIL 30,
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SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS - CONTINUED APRIL 30,
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The accompanying notes are an integral part of these statements.
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED APRIL 30,
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The accompanying notes are an integral part of these statements.
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY THREE YEARS ENDED APRIL 30, 2003
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The accompanying notes are an integral part of these statements.
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED APRIL 30,
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The accompanying notes are an integral part of these statements.
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS APRIL 30, 2003, 2002 AND 2001
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NOTE A - DESCRIPTION OF THE BUSINESS
SigmaTron International, Inc. (the "Company") operates primarily in one business segment as an independent provider of electronic manufacturing services, which includes printed circuit board assemblies and completely assembled (boxbuild) electronic products. In connection with the production of its assembled products, the Company; its wholly-owned subsidiary, Standard Components de Mexico, S.A.; its affiliate, SMT Unlimited L.P. ("SMTU") and its operating branch, SigmaTron Taiwan, provide services to their customers including (1) automatic and manual assembly and testing of products; (2) material sourcing and procurement; (3) design, manufacturing and test engineering support; (4) warehousing and shipment services; and (5) assistance in obtaining product approval from governmental and other regulatory bodies. The Company provides these manufacturing services through an international network of facilities located in North America and Asia.
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NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION POLICY
The consolidated financial statements include the accounts and transactions of the Company, its wholly-owned subsidiary, Standard Components de Mexico, S.A., and its operating branch, SigmaTron Taiwan. The functional currency of the Mexican subsidiary is the U.S. dollar. Investment in the Company's affiliate, SMTU, is included based on the equity method of accounting, and the Company's share of the affiliate's operating results is included in the Consolidated Statement of Operations. Significant intercompany accounts and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
ACCOUNTS RECEIVABLE
The majority of the Company's accounts receivable are due from companies in the consumer electronics, gaming, fitness, industrial electronics, telecommunications, home appliances and automotive industries. Credit is extended based on evaluation of a customer's financial condition, and generally, collateral is not required. Accounts receivable are due in accordance with agreed upon terms, and are stated at amounts due from customers net of an allowance for
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED APRIL 30, 2003, 2002 AND 2001
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NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
ACCOUNTS RECEIVABLE - CONTINUED
doubtful accounts. Accounts outstanding longer than the contractual payments terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, the Company's previous loss history, the customer's current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. The Company writes off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined by the first-in, first-out method. The Company establishes inventory reserves for valuation, shrinkage, and excess and obsolete inventory. The Company records provisions for inventory shrinkage based on historical experience to account for unmeasured usage or loss. Actual results differing from these estimates could significantly affect the Company's inventories and cost of products sold. The Company records provisions for excess and obsolete inventories for the difference between the cost of inventory and its estimated realizable value based on assumptions about future product demand and market conditions. Actual product demand or market conditions could be different than projected by management.
MACHINERY AND EQUIPMENT
Machinery and equipment are valued at cost. The Company provides for depreciation and amortization using the straight-line method over the estimated useful life of the assets:
Buildings 20 years Machinery and equipment 12 years Office equipment 5 years Leasehold improvements 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.
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED APRIL 30, 2003, 2002 AND 2001
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NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
EARNINGS PER SHARE
Basic earnings per share are computed by dividing income available to common stockholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) for the period. The computation of the diluted earnings per share is similar to the basic earnings per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common shares had been issued.
REVENUE RECOGNITION
The Company's net sales are comprised of product sales and other service revenue. Revenue from electronic manufacturing services, which generally includes cost of material unless the customer provides the material, is recognized upon shipment of goods, which is when title passes to the customer, or in the case of consigned inventory, when placed into the customer's manufacturing process. Certain service revenues are directly related to product assembly and, as such, recognized upon shipment of goods. Other service revenue is recognized as the services are performed and is generally immaterial. The Company allows product returns for repair or replacement. Product returns have historically not been significant.
SHIPPING AND HANDLING COSTS
The Company records shipping and handling costs net, within selling and administrative expenses. Customers are typically invoiced for shipping costs. Shipping and handling costs totaled $112,380, $93,150 and $68,600 in fiscal 2003, 2002 and 2001, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include receivables, notes payable, accounts payable and accrued liabilities. The fair values of financial instruments are not materially different from their carrying values.
LONG-LIVED ASSETS
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," effective May 1, 2002. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of Accounting Principles Board ("APB") Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and
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NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
LONG-LIVED ASSETS - CONTINUED
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business. The adoption of this statement did not have a material effect on the Company's results of operations or financial position.
In accordance with SFAS No. 144, long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the fair value of an asset is determined to be less than the carrying amount of the asset, a loss is recognized for the difference.
The Company evaluates the impairment of its long-term receivable relating to the subordinated debenture due from SMTU (see note F) in accordance with SFAS No. 114, "Accounting by Creditors for Impairment of a Loan". If the Company determines that the fair value of the loan is less than the investment, an impairment loss is recorded.
STOCK INCENTIVE PLANS
The Company maintains various stock incentive plans. See note N for additional information regarding these plans. The Company accounts for these plans under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. The Company recognizes compensation cost for restricted shares and restricted stock units to employees. As of April 30, 2003 there are no issued restricted shares or restricted stock units. No compensation cost is recognized for stock option grants. All options granted under the Company's plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," to stock-based compensation. The following table also provides the amount of stock-based compensation cost included in net earnings as reported.
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED APRIL 30, 2003, 2002 AND 2001
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NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
STOCK INCENTIVE PLANS - CONTINUED
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RISKS AND UNCERTAINTIES
The Company's inventories include parts and components that may be specialized in nature or subject to customers' future usage requirements. The Company has programs to minimize the required inventories on hand and actively monitors customer purchase orders and backlog. The Company uses estimated allowances to reduce recorded amounts to market values, such estimates could change in the future.
NEW ACCOUNTING STANDARDS
On July 20, 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Intangible Assets." SFAS No. 141 is effective for all business combinations completed after June 30, 2001. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001; however, certain provisions of this statement apply to goodwill and other intangible assets acquired between July 1, 2001, and the effective date of SFAS No. 142. The implementation of SFAS No. 141 and SFAS No. 142 did not have a material effect on the financial position or results of operations of the Company.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statement Nos. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 addresses a variety of accounting practices. Its provisions related to the rescission of SFAS No. 4, "Reporting Gains and Losses From Extinguishment of Debt," are effective for fiscal years beginning after May 15, 2002. Its provisions related to SFAS No. 13, "Accounting for Leases," are effective for transactions occurring after May 15, 2002. All other provisions are effective for financial statements issued on or after May 15, 2002. SFAS No. 44 was titled "Accounting for Intangible Assets of Motor Carriers." SFAS No. 64 was titled "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements."
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NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
NEW ACCOUNTING STANDARDS - CONTINUED
The Company adopted the provisions of SFAS No. 145 that were effective as of May 15, 2002. This adoption did not have a material effect on the Company's results of operations or financial position. The Company does not expect adoption of the provisions that are effective for fiscal years beginning after May 15, 2002, to have a material effect on its results of operations or financial position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated With Exit or Disposal Activities." It requires recognition of costs associated with exit or disposal activities at the time they are incurred rather than at the date of a commitment to an exit or disposal plan. The statement is effective for exit or disposal activities initiated after December 31, 2002. The Company does not expect adoption of this statement to have a material effect on its results of operations or financial position.
In November 2002, the Emerging Issues Task Force of the FASB reached consensus on Issue 0216, "Accounting by a Customer for Certain Consideration Received From a Vendor." The consensus reached was that cash consideration from a vendor is presumed to be a reduction of the prices of the vendor's products and should be recognized as a reduction of cost of merchandise sold. It also reached consensus on when a customer should recognize a rebate or refund that is payable when the customer completes a specific level of purchases. Recognition should occur when the rebate or refund is probable and reasonably estimable, and should be based on a systematic and rational method. This is effective for arrangements entered into after November 21, 2002. The Company does not expect adoption to have a material effect on its results of operations or financial position.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." It is an interpretation of FASB Statement Nos. 5, 57 and 107 and rescission of FASB Interpretation No. 34. FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize at the inception of a guarantee a liability for the fair value of the obligation undertaken in issuing the guarantee. Initial recognition and measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor's fiscal year-end. Disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company has not yet determined whether this interpretation would have a material effect on its results of operations or financial position.
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED APRIL 30, 2003, 2002 AND 2001
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NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
NEW ACCOUNTING STANDARDS - CONTINUED
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." It amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair-value-based method of accounting for stock-based employee compensation. It also amends the disclosure requirements of SFAS No. 123 to require more prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method on reported amounts. The amendments to SFAS No. 123 in paragraphs 2(a)-2(e) were effective for financial statements for fiscal years ending after December 15, 2002, and were adopted by the Company in 2003. This adoption did not have a material effect on the Company's results of operations or financial position. The amendment to SFAS No. 123 in paragraph 2(f) and the amendment to Opinion 28 in paragraph 3 are effective for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002. The Company does not expect adoption of these portions of the statement to have a material effect on its results of operations or financial position.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities." It is an interpretation of Accounting Research Bulletin No. 51 and revises the requirements for consolidation by business enterprises of variable interest entities. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest acquired before February 1, 2003. FIN 46 applies to public enterprises as of the beginning of the applicable interim or annual period and to nonpublic enterprises as of the end of the applicable annual period. It may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated. The Company does not believe this interpretation will have a material effect on its results of operations or financial position.
In April 2003 the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative and when a derivative contains a financing component that warrants special reporting in the statement of cash flows. The Statement also amends other existing pronouncements in order to achieve more consistent reporting of contracts that are derivatives in their entirety or that contain embedded
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED APRIL 30, 2003, 2002 AND 2001
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NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
NEW ACCOUNTING STANDARDS - CONTINUED
derivatives that warrant special reporting. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The Company is not party to any derivative transactions and does not expect adoption of this statement to have a material effect on its results of operations or financial position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." This statement establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify a financial instrument that is within the scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim periods beginning after June 15, 2003, except for mandatory redeemable financial instruments of nonpublic entities. The Company does not expect the adoption of this statement will have a material effect on its results of operations or financial position.
RECLASSIFICATIONS
Certain amounts in the 2001 and 2002 financial statements have been reclassified to conform with the 2003 presentation.
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NOTE C - ALLOWANCE FOR DOUBTFUL ACCOUNTS
Changes in the Company's allowance for doubtful accounts are as follows:
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NOTE D - INVENTORIES
Inventories consist of the following at April 30:
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NOTE E - MACHINERY AND EQUIPMENT
Machinery and equipment consist of the following at April 30:
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NOTE F - INVESTMENT AND ADVANCES WITH SMTU
The Company has a 42.5% ownership interest in SMTU, which was formed on September 15, 1994, as a joint venture to provide surface mount technology assembly services primarily to electronic original equipment manufacturers. The Company owns 50% of the outstanding stock of SMT Unlimited, Inc. ("SMT, Inc."), which is the general partner of SMTU. One of the limited partners of SMTU is also an equal shareholder of SMT, Inc., along with the Company.
The Company holds subordinated debentures totaling $1,050,000 from SMTU. Debentures totaling $650,000 bear interest at 8%, and debentures totaling $400,000 bear interest at 12%. Accrued interest receivable on the debentures amounted to $525,962 and $474,850 at April 30, 2003 and 2002, respectively. On November 1, 2002 the Company waived all future subordinated interest charges until further notice. On May 27, 2003, the Company amended the debenture agreement extending the repayment date from August 1, 2003 to August 1, 2005. As a result of the waiver of future interest expense and the extension of the loan repayment date the subordinated debentures were deemed to be impaired. The Company determined that the fair value of the future cash flows exceeded the investment by $329,208 at April 30, 2003 and recorded an impairment provision for this amount. Payments of principal and interest on the debentures is subordinated to prior payment in full of SMTU's revolving line of credit.
SMTU incurred a $13,680 monthly administrative fee in fiscal year 2003, a $24,000 monthly administrative fee for November 2001 through April 2002, and a $28,500 monthly administrative fee prior to November 2001 for administrative services provided by the Company.
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 income or losses in SMTU as an increase or reduction, respectively, of the investment in SMTU.
In August 1999, the Company entered into a guaranty agreement with SMTU's lender to guarantee the obligation of SMTU under its revolving line of credit to a maximum of $2,000,000 plus interest and related costs associated with the enforcement of the guaranty. In conjunction with the guaranty agreement, Gary R. Fairhead, President and CEO of the Company and Vice President of SMT, Inc. has executed a guaranty to the lender to reimburse the Company for up to $500,000 of payments made by the Company under its guaranty to the lender in excess of $1,000,000. In conjunction, with the Company's guaranty agreement one of SMTU's limited partners has agreed to indemnify the Company for 50% of all payments made on behalf of SMTU to the lender.
The Company also has guaranteed lease obligations of approximately $388,000 for SMTU. The Company has been indemnified by one of the other limited partners in the amount of $194,000 for the guaranteed lease obligations.
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED APRIL 30, 2003, 2002 AND 2001
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NOTE F - INVESTMENT AND ADVANCES WITH SMTU - CONTINUED
The Company's investment and advances to and receivables from SMTU totaled approximately $3,582,000 and $4,680,000 at April 30, 2003 and 2002, respectively, and no liability has been recorded by the Company related to its guaranty of SMTU's credit agreement.
Summarized financial information for SMTU is as follows at April 30:
NOTE G - NOTES PAYABLE
The Company amended its loan and security agreement in October 2002, that provides for a revolving line-of-credit facility, an $800,000 equipment loan facility, and a $2,000,000 letter-of-credit facility. The maximum borrowing limit under the revolving line-of-credit facility is limited to the lesser of (i) $20,000,000 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 up to 50% of the inventory borrowing base, as defined. At April 30, 2003 and 2002, the Company had outstanding borrowings of $1,653,963 and $9,234,015, respectively.
Borrowings under the revolving line of credit bear interest at the prime rate plus 1.5% (5.75% at April 30, 2003). The Company must also pay an unused commitment fee equal to 0.25% on the revolving credit facility. As of April 30, 2003, the Company had an available line-of-credit of $12,508,691. The revolving line of credit facility matures September 30, 2004. At April 30, 2003, the Company was in compliance with its financial covenants.
Borrowings under the equipment loan bear interest at prime plus 0.5%. The equipment loan matures August 2004. No amounts were outstanding under the equipment loan facility at April 30, 2003.
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NOTE G - NOTES PAYABLE - CONTINUED
The loan and security agreement is collateralized by substantially all of the assets of the Company and contains certain financial covenants, including specific covenants pertaining to the maintenance of minimum tangible net worth and net income. The agreement also restricts annual lease rentals and capital expenditures and the payment of dividends or distributions of any cash or other property on any of its capital stock, except that common stock dividends may be distributed by a stock split or dividends pro rata to its stockholders.
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NOTE H - ACCRUED EXPENSES
Accrued expenses consist of the following at April 30:
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NOTE I - RELATED-PARTY TRANSACTIONS AND COMMITMENTS
The Company has transactions with Circuit Systems, Inc., which filed for protection under Chapter 11 of the Federal bankruptcy code, and is now known as Circuit Systems, Inc. Liquidating Grantor's Trust, dated October 14, 2001 ("CSI"), a former shareholder of the Company. CSI divested itself of the investment in common stock of the Company in April 2001. These transactions primarily involved the purchase of raw materials and the leasing of operating space. Purchases of raw materials were zero for the years ended April 30, 2003 and 2002, and approximately $3,598,000 for April 30, 2001. The Company leases space in Elk Grove Village, Illinois, at a base rental of $33,800 per month, with an additional $7,000 per month for property taxes. The lease requires the Company to pay maintenance and utility expenses. In July 2000, the Company exercised its renewal option for an additional five-year period through February
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED APRIL 30, 2003, 2002 AND 2001
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NOTE I - RELATED-PARTY TRANSACTIONS AND COMMITMENTS - CONTINUED
2006. Subsequent to the renewal agreement, CSI sold the building to a non-related party. The Company's exercise of the renewal option was acknowledged by the new owner. Rent and property tax expense related to the agreement totaled approximately $495,000, $493,000 and $515,000 for the years ended April 30, 2003, 2002 and 2001, respectively.
At April 30, 2003 and 2002, the Company had non-interest-bearing receivables of approximately $114,000 and $183,000, respectively, for advances to a company in which an officer of the Company is an investor. The balance has been recorded as other assets at April 30, 2003 and 2002. This outstanding receivable has been guaranteed by an officer of the Company.
During 1996, the Company invested $1,200 in exchange for a 12% limited partnership interest in Lighting Components, L.P. ("LC") and invested $1,300 in Lighting Components, Inc., which is the general partner of LC, in exchange for 13% of its capital stock. At April 30, 1998, the Company had also made advances to LC in exchange for subordinated debentures and promissory notes totaling $280,000. The subordinated debentures and promissory notes totaling $280,000 were fully reserved at April 30, 1998.
In addition to the subordinated debentures and promissory notes, at April 30, 2000, the Company had recorded miscellaneous receivables, interest and trade receivables from LC of $1,560,000, against which a reserve of $789,000 was recorded. The Company wrote off its investment in LC of $2,500 in the statement of operations for the year ended April 30, 2001. In April 2001, LC sold certain assets to a third party. In connection with the asset sale, the Company received a $400,000 promissory note receivable from a third party. Payments are due on the promissory note as follows: $125,000 plus accrued interest due January 1, 2002, $125,000 plus accrued interest due January 1, 2003, and $150,000 plus accrued interest due January 1, 2004. The payment obligations for $125,000 due January 1, 2003 and 2002, plus accrued interest were paid in December 2002 and 2001, respectively. Interest on the promissory note will accrue at 5% per annum. The third party also agreed to pay LC royalties on certain sales derived from the purchase of the acquired assets as defined in the agreement. LC or its successor will receive royalty payments through April 30, 2007. Per the terms of a separate agreement, the Company will receive its share of the royalty payments. These royalty payments, if any, will be recorded by the Company as received and reflected as payments on the notes.
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED APRIL 30, 2003, 2002 AND 2001
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NOTE J - INCOME TAXES
The income tax provision (benefit) for the years ended April 30 consists of the following:
The reasons for the differences between the income tax provision (benefit) and the amounts computed by applying the statutory Federal income tax rates to income (loss) before income tax expense for the years ended April 30 are as follows:
Significant temporary differences that result in deferred tax assets and (liabilities) at April 30, 2003 and 2002, are as follows:
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED APRIL 30, 2003, 2002 AND 2001
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NOTE J - INCOME TAXES - CONTINUED
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NOTE K - 401(k) RETIREMENT SAVINGS PLAN
The Company sponsors a 401(k) retirement savings plan, which is available to all non-union U.S. 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 $300. The Company contributed $40,445, $43,745 and $50,942 to the plan during the fiscal years ended April 30, 2003, 2002 and 2001, respectively. The Company paid total expenses of $7,978, $8,139 and $14,968 for the fiscal years ended April 30, 2003, 2002 and 2001, respectively, relating to costs associated with the Plan's administration.
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NOTE L - MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of uncollateralized accounts receivable. See note F for additional information. For the year ended April 30, 2003, two customers accounted for 28% and 16%, respectively, of net sales of the Company, and 21% and 7%, respectively, of accounts receivable at April 30, 2003. For the year ended April 30, 2002, two customers accounted for 22% and 18%, respectively, of net sales of the Company, and 35% and 4%, respectively, of accounts receivable at April 30, 2002. For the year ended April 30, 2001, two customers accounted for 22% and 16%, respectively, of net sales of the Company, and 5% and 11%, respectively, of accounts receivable at April 30, 2001.
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED APRIL 30, 2003, 2002 AND 2001
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NOTE M - 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, 2003:
The Company subleased the machinery and equipment relating to certain of the above capital lease agreements to its affiliate, SMTU, and recorded equipment financing lease receivables from SMTU. These lease receivables contain the same maturity dates as the minimum lease payments underlying the capital lease agreements. The effective interest rates on these receivables are approximately 2% higher than the effective interest rates (ranging from 9.43% to 14.05%) implicit in the capital lease agreements to cover various administrative expenses of the Company. The equipment lease receivables are collateralized by the underlying machinery and equipment. Management believes the machinery and equipment would be readily usable in the Company's manufacturing operations if necessary.
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED APRIL 30, 2003, 2002 AND 2001
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NOTE M - LEASES - CONTINUED
Future minimum rentals to be received under the subleases related to the equipment lease receivables from SMTU with terms of one year or more are as follows:
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, 2003 and 2002.
Rent expense incurred under operating leases was approximately $886,000, $836,000 and $851,000 for the years ended April 30, 2003, 2002 and 2001, 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.
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NOTE N - STOCK OPTIONS
The Company has stock option plans ("Option Plans") under which certain members of management and outside nonmanagement directors may acquire up to 1,303,500 shares of common stock. Options to be granted under the management plans total 967,500, with the nonmanagement director plans allowing for a total of 336,000 options to be granted. At April 30, 2003, the Company has 176,373 shares reserved for future issuance to management under the Option Plans. The Option Plans are interpreted and administered by the Compensation Committee of the Board of Directors. The maximum term of options granted under the Option
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED APRIL 30, 2003, 2002 AND 2001
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NOTE N - STOCK OPTIONS - CONTINUED
Plans is generally 10 years. Options granted under the Option Plans are either incentive stock options or nonqualified options. Options forfeited under the Option Plans are available for reissuance. Options granted under these plans are granted at an exercise price equal to the fair market value of a share of the Company's common stock on the date of grant. Management options of 26,900 vest over five years with the remaining 663,470 management options vesting over three years from the date of grant, provided the optionee remains an employee of the Company. Options granted to nonemployee directors are vested on the date of grant.
The Company has elected to follow APB Opinion No. 25 in accounting for its employee stock options because, as discussed below, the alternative fair value accounting method provided for under SFAS No. 123 requires the use of option-valuation models that were not developed for use in valuing employee stock options. Under APB Opinion No. 25, because the exercise price of the Company's employee stock options equals 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 SFAS No. 123 as if the Company had accounted for its employee stock options granted subsequent to December 31, 1994, under the fair value method of that statement. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the option vesting period.
The weighted-average grant date fair value of the options granted during fiscal 2003, 2002 and 2001 was $2.84, $2.31 and $2.02, respectively.
The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-valuation model with the following assumptions:
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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.
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED APRIL 30, 2003, 2002 AND 2001
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NOTE N - STOCK OPTIONS - CONTINUED
The table below summarizes option activity through April 30, 2003:
Information with respect to stock options outstanding and stock options exercisable at April 30, 2003, follows:
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED APRIL 30, 2003, 2002 AND 2001
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NOTE N - STOCK OPTIONS - CONTINUED
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NOTE O - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings (loss) per share:
Options to purchase 969,370, 1,130,493 and 741,098 shares of common stock were outstanding at April 30, 2003, 2002 and 2001, respectively. The options outstanding during 2001 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; therefore, the effect would be antidilutive.
SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED APRIL 30, 2003, 2002 AND 2001
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NOTE P - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of unaudited quarterly financial data for fiscal 2003, 2002 and 2001.
Amounts for the first three quarters of 2001 differ from the amounts previously reported in 2001. These adjustments resulted in a reduction in revenue and gross margin, net income (loss) and net income (loss) per share of $641,224, $300,000 and $191,000; $359,415, $180,354 and $142,851; and $.13, $.07 and $.05; in the first, second and third quarters of 2001, respectively.
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NOTE Q - LITIGATION
In the normal course of business, the Company is involved in various legal and administrative proceedings. In the opinion of management, any liability resulting from such proceedings will not have a material adverse effect on the financial position or results of operation of the Company.
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NOTE R - FINANCIAL CONDITION
In fiscal 2002, the Company experienced an increase in sales as the economy began to recover. This increase in sales accelerated in fiscal 2003. The increase in sales and the Company's continued efforts to control overhead expenses resulted in a profit in fiscal 2003 and 2002. The Company entered into an amended loan agreement that extends to September 30, 2004, and is in compliance with all bank covenants at April 30, 2003.
The Company experienced significantly lower sales and increased losses for the last several months of fiscal 2001. In an effort to mitigate some of its losses, the Company substantially downsized its work force and reduced overhead expenses during fiscal 2001.
The Company was in violation of its pretax income and interest coverage ratio covenants under its bank agreement for the quarters ended July 31, 2000, October 31, 2000, January 31, 2001, and April 30, 2001. On February 1, 2001, the Company entered into a forbearance agreement with its lenders. Under the terms of the agreement, the lenders agreed to forbear from exercising and enforcing their rights until May 31, 2001. On July 11, 2001, the lenders agreed to extend the forbearance agreement until July 31, 2001. The Company operated under the forbearance agreement until November 30, 2001. On December 4, 2001, the original credit agreement was amended and extended to April 30, 2002.
The report of independent auditors, dated June 29, 2001, referring to SMTU's financial statements for the year ended April 30, 2001, contained an explanatory paragraph regarding uncertainty concerning SMTU's ability to continue as a going concern because SMTU had not complied with certain covenants of loan agreements with a bank at April 30, 2001. Subsequent to April 30, 2003, SMTU entered into an amended loan agreement expiring on July 31, 2004.
SCHEDULE II
SIGMATRON INTERNATIONAL, INC. VALUATION AND QUALIFYING ACCOUNTS THREE YEARS ENDED APRIL 30, 2003
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(1) Accounts receivable and investments written off in conjunction with the settlement of amounts with Lighting Components, L.P.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Partners SMT Unlimited L.P.
We have audited the accompanying balance sheets of SMT Unlimited L.P. as of April 30, 2003 and 2002, and the related statements of income, changes in partners' (deficit) equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. The financial statements of SMT Unlimited L.P. for the year ended April 30, 2001, were audited by other auditors, whose report dated June 29, 2001, included an explanatory paragraph relating to a substantial doubt about the Company's ability to continue as a going concern that described the Company's non-compliance with certain covenants of the loan agreements discussed in note L to the financial statements.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of SMT Unlimited L.P. as of April 30, 2003 and 2002, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
GRANT THORNTON LLP
Chicago, Illinois June 27, 2003, except for the fourth paragraph of note G and the second paragraph of note L, as to which the date is July 9, 2003
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Partners SMT Unlimited L.P.
We have audited the accompanying statements of income, partners' deficit, and cash flows of SMT Unlimited L.P. for the year ended April 30, 2001. Our audit also included the financial statement schedule listed in the Index at Item 14(a) for the year ended April 30, 2001. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of SMT Unlimited L.P. for the year ended April 30, 2001, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule for the year ended April 30, 2001, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in paragraphs three and four of note L, the Company has not complied with certain covenants of loan agreements with a bank. This condition raises substantial doubt about the Company's ability to continue as a going concern. Management's plans with regard to this matter are also described in paragraphs three and four of note L. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
ERNST & YOUNG LLP
Chicago, Illinois June 29, 2001
SMT UNLIMITED L.P. BALANCE SHEETS APRIL 30,
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SMT UNLIMITED L.P. BALANCE SHEETS - CONTINUED APRIL 30,
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The accompanying notes are an integral part of these statements.
SMT UNLIMITED L.P. STATEMENTS OF INCOME YEARS ENDED APRIL 30,
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The accompanying notes are an integral part of these statements.
SMT UNLIMITED L.P. STATEMENT OF CHANGES IN PARTNERS' (DEFICIT) EQUITY THREE YEARS ENDED APRIL 30, 2003
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The accompanying notes are an integral part of these statements.
SMT UNLIMITED L.P. STATEMENTS OF CASH FLOWS YEARS ENDED APRIL 30,
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The accompanying notes are an integral part of these statements.
SMT UNLIMITED L.P. NOTES TO FINANCIAL STATEMENTS APRIL 30, 2003, 2002 AND 2001
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NOTE A - DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
SMT Unlimited L.P. (the "Company") was formed as an Illinois limited partnership on September 15, 1994, by the Patel Group ("Patel"), SigmaTron International, Inc. ("SigmaTron") and a minority partner, and is located in Hollister and Fremont, California. The Company, which operates primarily in one segment, provides surface-mount technology assembly services, primarily to electronic original-equipment manufacturers in the United States. Patel and SigmaTron each contributed capital of $49,500 in exchange for 45% ownership of the Company, and additionally, Patel and SigmaTron formed a new corporation, SMT Unlimited Inc. ("SMT, Inc."), which is the general partner of the Company. SMT, Inc. contributed capital of $1,000 in exchange for a 1% ownership interest. The minority partner vested in the remaining ownership equally over the following five years. During fiscal 1997, Patel and SigmaTron each sold 2.5% of their interest to key employees of the Company.
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NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
ACCOUNTS RECEIVABLE
The majority of the Company's accounts receivable are due from companies in the original equipment manufacturers industries. Credit is extended based on evaluation of a customer's financial condition, and generally, collateral is not required. Accounts receivable are due in accordance with agreed upon terms and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding longer than the contractual payments terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, the Company's previous loss history, the customer's current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. The Company writes off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts.
SMT UNLIMITED L.P. NOTES TO FINANCIAL STATEMENTS - CONTINUED APRIL 30, 2003, 2002 AND 2001
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NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined by the first in, first out method. The Company establishes inventory reserves for valuation, shrinkage, and excess and obsolete inventory. The Company records provisions for inventory shrinkage based on historical experience to account for unmeasured usage or loss. Actual results differing from these estimates could significantly affect the Company's inventories and cost of goods sold. The Company records provisions for excess and obsolete inventories for the difference between the cost of inventory and its estimated realizable value based on assumptions about future product demand and market conditions. Actual product demand or market conditions could be different then that projected by management.
MACHINERY AND EQUIPMENT
Machinery and equipment are stated at cost. The Company provides for depreciation and amortization using the straight-line method over the useful life of the asset.
The estimated useful lives of the fixed assets are as follows:
Machinery and equipment 5 - 12 years Office equipment 5 years Leasehold improvements 15 years
INCOME TAXES
The Company makes no provision for income taxes, as the partners include their respective shares of the results of the operations on their tax returns.
DEFERRED FINANCING COSTS
Deferred financing costs are being amortized by the straight-line method over the life of the related debt.
REVENUE RECOGNITION
The Company's net sales are comprised of product sales and other service revenue earned from engineering and design services. Revenue from product sales is recognized upon shipment of goods, which is when title passes or, in the case of consigned inventory, when placed into the customer's manufacturing process. Certain service revenues are directly related to product assembly and, as such, recognized upon shipment of goods. Other service revenue is recognized as the services are performed. The Company allows product returns for repair or replacement. Product returns have historically not been significant.
SMT UNLIMITED L.P. NOTES TO FINANCIAL STATEMENTS - CONTINUED APRIL 30, 2003, 2002 AND 2001
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NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
LONG-LIVED ASSETS
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," effective May 1, 2002. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of Accounting Principles Board ("APB") Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business. The adoption of this statement did not have a material effect on the Company's results of operations or financial position.
In accordance with SFAS No. 144, long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the fair value of an asset is determined to be less than the carrying amount of the asset, a loss is recognized for the difference.
EQUITY INCENTIVE PLANS
The Company maintains various equity incentive plans. See note K for additional information regarding these plans. The Company accounts for these plans under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. No compensation cost is recognized for equity option grants. All options granted under the Company's plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," to stock-based compensation. The following table also provides the amount of stock-based compensation cost included in net earnings as reported.
SMT UNLIMITED L.P. NOTES TO FINANCIAL STATEMENTS - CONTINUED APRIL 30, 2003, 2002 AND 2001
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NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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RECLASSIFICATIONS
Certain amounts in the 2001 and 2002 financial statements have been reclassified to conform to the 2003 presentations.
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NOTE C - ALLOWANCE FOR DOUBTFUL ACCOUNTS
Changes in the Company's allowance for doubtful accounts are as follows:
SMT UNLIMITED L.P. NOTES TO FINANCIAL STATEMENTS - CONTINUED APRIL 30, 2003, 2002 AND 2001
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NOTE D - INVENTORIES
Inventories consist of the following at April 30:
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NOTE E - OTHER INCOME
In 2002, other income primarily comprises compensation from one of the Company's customers relating to cancelled purchase order commitments.
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NOTE F - MACHINERY AND EQUIPMENT
Machinery and equipment consist of the following at April 30:
SMT UNLIMITED L.P. NOTES TO FINANCIAL STATEMENTS - CONTINUED APRIL 30, 2003, 2002 AND 2001
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NOTE G - DEBT
The Company has $1,300,000 of 8% subordinated debentures and $800,000 of 12% subordinated debentures, with principal and interest due August 1, 2003, to SigmaTron and Patel. Accrued interest on these debentures amounted to $1,051,923 and $949,701 at April 30, 2003 and 2002, respectively. On November 1, 2002 SigmaTron and Patel waived all future subordinated interest charges until further notice. On May 27, 2003, SigmaTron and Patel amended the debenture agreement extending the repayment date to August 1, 2005. The payment of principal and interest on the subordinated debentures is subordinated in right of payment to the prior payment in full of the revolving line of credit.
On July 10, 2002 the Company amended its Loan and Security Agreement ("Agreement") covering the Company's revolving line-of-credit facility. Under the amended terms of the Agreement, the maximum borrowing limit is the lesser of (i) $5,000,000, or (ii) an amount equal to the sum of up to 85% of the receivables borrowing base and the lesser of $2,500,000 or up to 50% of the inventory borrowing base. In conjunction with the amendment the covenant violations were waived. The amended revolving line of credit matures on July 31, 2003. Borrowings under the revolving line of credit bear interest at the bank's prime plus 2% (6.25% at April 30, 2003). The Company is obligated to pay an annual commitment fee of 1/4 of 1% on the average daily unused portion of the revolving line of credit. The available portion of the line of credit at April 30, 2003 is $210,084.
The Agreement is collateralized by substantially all of the assets of the Company and contains certain financial covenants, including specific covenants pertaining to the maintenance of tangible net worth and net income before partnership distributions. As of April 30, 2003 the Company is in compliance with these debt covenants. As described in note L, the Company was in violation of these debt covenants at April 30, 2002.
On July 9, 2003, the Company entered into an amended loan and security agreement extending its provisions to July 31, 2004. The amendment provides that, among other matters, the total commitment was reduced to $3,000,000, the cap on eligible inventory was reduced to $1,500,000 and covenant requirements were amended.
The Agreement also provides for letters of credit up to $500,000. There were no outstanding letters of credit at April 30, 2003 or 2002.
In August 1999, SigmaTron entered into a guaranty agreement with the Company's lender to guarantee the obligation of the Company under its revolving line of credit to a maximum of $2,000,000, plus interest and related costs associated with the enforcement of the guaranty. In connection with the guaranty agreement, one of the limited partners of SMTU and Vice President of SMTU have each executed a guaranty to the lender to reimburse SigmaTron for up
SMT UNLIMITED L.P. NOTES TO FINANCIAL STATEMENTS - CONTINUED APRIL 30, 2003, 2002 AND 2001
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NOTE G - DEBT - CONTINUED
to $500,000 of payments made by SigmaTron under its guaranty to the lender in excess of $1,000,000. In addition, the limited partner has agreed to indemnify SigmaTron for 50% of all the Company's payments to the lender. The limited partner's obligation to SigmaTron under the indemnity is reduced dollar for dollar to the extent the limited partner would otherwise be obligated to pay more than $1,000,000 as a result of his guaranty to the lender.
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NOTE H - LEASES
The Company leases its facilities under operating lease agreements expiring through February 2008. The Company also has various capital lease agreements with SigmaTron and two capital lease agreements with a third party to acquire machinery and equipment.
Future minimum lease payments under leases with terms of one year or more are as follows at April 30, 2003:
Rent expense, including maintenance, property taxes and insurance incurred under operating leases, was approximately $785,000, $762,000 and $572,000 for the years ended April 30, 2003, 2002 and 2001, respectively.
SMT UNLIMITED L.P. NOTES TO FINANCIAL STATEMENTS - CONTINUED APRIL 30, 2003, 2002 AND 2001
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NOTE I - RELATED-PARTY TRANSACTIONS
The Company is involved in transactions with SigmaTron. SigmaTron charged the Company a minimum of $28,500 per month from May 1, 2001 to September 30, 2001, and $24,000 per month from October 1, 2001 to April 30, 2002, and $13,680 per month in fiscal year 2003 in administrative fees for various services. The Company paid SigmaTron $210,760, $315,000 and $285,000 in administrative fees for the years ended April 30, 2003, 2002 and 2001, respectively. At April 30, 2003 and 2002, the Company has accrued $-0- for administrative fees not paid by year-end.
The Company paid $476,048 and $821,227 in principal and interest in connection with its capital lease agreements with SigmaTron in 2003 and 2002, respectively. At April 30, 2003, the Company was approximately 22 months delinquent in its lease payments to SigmaTron and has accrued overdue interest of approximately $12,240 in connection with these lease payments. At April 30, 2003 and 2002, the accrued interest related to these lease payments was $133,683 and $362,189, respectively. SigmaTron and Patel have equally guaranteed the Company's operating lease obligation for the Fremont manufacturing facility.
During 2001, SigmaTron received stock on behalf of the Company. The stock was given to SigmaTron by one of the Company's customers in lieu of cash for outstanding receivables. The Company has recorded the market value of the stock outstanding at April 30, 2001, as a due from affiliate on the balance sheet. The stock is classified as a trading security, and accordingly, the unrealized loss is recorded as "other loss" in the accompanying statement of income. During 2001, the Company recorded a realized loss of $8,000 and an unrealized loss of $43,000 related to this stock. As of April 30, 2002, the Company recorded a realized loss of $7,000, which brought the investment to zero.
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NOTE J - MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
For the year ended April 30, 2003, four customers accounted for 58% of net sales of the Company and 27% of accounts receivable at April 30, 2003.
For the year ended April 30, 2002, four customers accounted for 87% of net sales of the Company and 75% of accounts receivable at April 30, 2002.
For the year ended April 30, 2001, four customers accounted for 78% of net sales of the Company and 66% of accounts receivable at April 30, 2001.
SMT UNLIMITED L.P. NOTES TO FINANCIAL STATEMENTS - CONTINUED APRIL 30, 2003, 2002 AND 2001
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NOTE K - EMPLOYEE OPTION PLAN
In fiscal 2001, the Company adopted an employee option plan ("Option Plan") under which employees may acquire up to 500,000 units of limited partnership interests. At April 30, 2003, the Company has 157,000 units reserved for future issuance under the Option Plan.
The maximum term of options granted under the Option Plans generally is 10 years. Options granted under the plan shall be deemed to constitute non-qualified equity options. Options forfeited under the Option Plans are available for reissuance. Options granted under this plan are granted at an exercise price equal to or greater than the fair market value of a unit of the Company's limited partnership interest on the date of grant. The general partner administers the plan and determines the vesting period of the options, which may be immediate vesting.
The Company has elected to follow APB Opinion No. 25 in accounting for its employee equity options because, as discussed below, the alternative fair-value accounting method provided for under SFAS No. 123 requires the use of option-valuation models that were not developed for use in valuing employee options. Under APB Opinion No. 25, because the exercise price of the Company's employee options equals the market price of the underlying units on the date of grant, no compensation expense is recognized. For purposes of disclosure of pro forma net income, the estimated fair value of the options is amortized to expense over the option vesting period. See note B Equity Incentive Plan.
The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-valuation model with a dividend yield of zero, average risk-free interest rate of 6.28%, and weighted-average expected life of options of 5 years.
Option-valuation models require the input of highly subjective assumptions. Because the Company's employee equity options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate in management's opinion, the existing method does not necessarily provide a reliable single measure of the fair value of the Company's employee stock options.
The Company did not grant options during fiscal 2003. During fiscal 2003, 21,000 options were forfeited, leaving 322,000 options outstanding at April 30, 2003. The weighted-average remaining contractual life at April 30, 2003, was 7.13 years. At April 30, 2003, 190,564 options were exercisable at a weighted-average exercise price of $.14 per unit.
SMT UNLIMITED L.P. NOTES TO FINANCIAL STATEMENTS - CONTINUED APRIL 30, 2003, 2002 AND 2001
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NOTE L - FINANCIAL CONDITION
In fiscal 2002, the Company experienced a decrease in sales, which continued in 2003 as the Company continued its efforts to reduce overhead expenses. The continued reduction in overhead expenses and the addition of several orders of labor only services resulted in a profit in fiscal year 2003. The Company was in compliance with financial covenants as of April 30, 2003 and 2002.
On July 9, 2003, the Company entered into an amended loan and security agreement expiring on July 31, 2004. The amendment provides that, among other matters, the total commitment was reduced to $3,000,000 and the cap on eligible inventory was reduced to $1,500,000.
Due to the downturn in the economy, which significantly affected the electronics industry, the Company experienced significantly lower sales and increased losses for the last several months of fiscal 2001. The Company did not anticipate a recovery of sales in the near term. In an effort to mitigate some of its losses, the Company substantially downsized its work force and reduced overhead expenses.
At April 30, 2001, the Company had not complied with certain covenants of loan agreements with banks.
SCHEDULE II
SMT UNLIMITED L.P. VALUATION AND QUALIFYING ACCOUNTS THREE YEARS ENDED APRIL 30, 2003
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