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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended October 31, 2004
Commission File Number 0-23248
SIGMATRON INTERNATIONAL, INC.
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(Exact Name of Registrant, as Specified in its Charter)
Delaware 36-3918470
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(State or other Jurisdiction of Incorporation or Organization) (I.R.S. Employer
Identification Number)
2201 Landmeier Road, Elk Grove Village, Illinois 60007
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(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code:(847) 956-8000
No Change
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(Former Name, Former Address, and Former Fiscal Year, if Changed
Since Last Report)
Indicate, by check mark, whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No | |
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes | | No |X|
On December 10, 2004 there were 3,752,054 shares of the registrant's Common
Stock outstanding.
SigmaTron International, Inc.
Index
PART 1. FINANCIAL INFORMATION: Page No.
--------
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets - October 31, 2004
and April 30, 2004 3
Condensed Consolidated Statements of Operations - Three
and Six Months Ended October 31, 2004 and 2003 4
Condensed Consolidated Statements of Cash Flows -
Six Months Ended October 31, 2004 and 2003 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition 9
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
Item 4. Controls and Procedures 13
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits 15
SIGMATRON INTERNATIONAL, INC.
Condensed Consolidated Balance Sheets
OCTOBER 31, April 30,
2004 2004
UNAUDITED Audited
----------- ------------
CURRENT ASSETS:
Cash $ 252,997 $ 5,145,814
Restricted cash 100,000 100,000
Accounts receivable, less allowance for doubtful accounts
of $120,000 at Octrober 31, 2004 and April 30, 2004 14,366,650 12,651,272
Inventories -- net 20,191,637 14,168,357
Prepaid and other assets 926,806 1,315,127
Refundable taxes -- 275,583
Deferred income taxes 1,912,114 1,902,551
Other receivables 104,146 415,253
----------- -----------
Total current assets 37,854,350 35,973,957
Property, machinery and equipment, net 25,626,014 25,707,901
Goodwill 719,040 --
Other assets 1,920,444 1,316,814
----------- -----------
Total assets $66,119,848 $62,998,672
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 8,415,041 $ 7,475,026
Accrued expenses 3,780,817 4,540,744
Income taxes payable 1,551,610 --
Notes payable -- buildings 430,000 430,000
Notes payable -- other 965,000 --
Capital lease obligations 615,472 640,436
----------- -----------
Total current liabilities 15,757,940 13,086,206
Notes payable -- banks 234,260 1,118,514
Notes payable -- buildings, less current portion 4,307,456 4,536,159
Notes payable -- other 365,000 --
Capital lease obligations, less current portion 612,544 299,536
Subordinated debenture payable -- 1,050,000
Deferred income taxes 1,265,714 1,265,714
----------- -----------
Total liabilities 22,542,914 21,356,129
MINORITY INTEREST IN AFFILIATE -- 439,787
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 500,000 shares
authorized, none issued and outstanding -- --
Common stock, $.01 par value; 6,000,000 shares authorized,
3,752,054 and 3,750,954 shares issued and outstanding at
October 31, 2004 and April 30, 2004, respectively 37,521 37,510
Capital in excess of par value 19,062,945 19,056,525
Retained earnings 24,476,468 22,108,721
----------- -----------
Total stockholders' equity 43,576,934 41,202,756
----------- -----------
Total liabilities and stockholders' equity $66,119,848 $62,998,672
=========== ===========
See accompanying notes.
3
SIGMATRON INTERNATIONAL, INC.
Condensed Consolidated Statements Of Operations
Unaudited
THREE MONTHS Three Months SIX MONTHS Six Months
ENDED Ended ENDED Ended
OCTOBER 31, 2004 October 31, 2003 OCTOBER 31, 2004 October 31, 2004
----------------- ---------------- ---------------- ----------------
Net sales $27,861,691 $26,526,879 $52,939,858 $51,360,675
Cost of products sold 22,668,658 20,968,331 43,121,127 41,088,186
----------- ----------- ----------- -----------
Gross profit 5,193,033 5,558,548 9,818,731 10,272,489
Selling and administrative expenses 2,949,772 2,520,746 5,661,847 5,028,669
----------- ----------- ----------- -----------
Operating income 2,243,261 3,037,802 4,156,884 5,243,820
Interest expense -- Banks and
capital lease obligations 53,630 10,037 120,313 52,585
----------- ----------- ----------- -----------
Income before income tax expense
and minority interest of
affiliate 2,189,631 3,027,765 4,036,571 5,191,235
Income tax expense 869,800 1,157,760 1,556,091 1,943,122
----------- ----------- ----------- -----------
Income before minority interest of
affiliate 1,319,831 1,870,005 2,480,480 3,248,113
Minority interest in income of
affiliate 10,654 57,269 134,334 127,879
----------- ----------- ----------- -----------
Net income $ 1,309,177 $ 1,812,736 $ 2,346,146 $ 3,120,234
=========== =========== =========== ===========
Net income per common share -- Basic $ 0.35 $ 0.54 $ 0.63 $ 0.99
=========== =========== =========== ===========
Net income per common share --
Assuming dilution $ 0.34 $ 0.52 $ 0.61 $ 0.92
=========== =========== =========== ===========
Weighted average shares of common
stock outstanding
Basic 3,752,054 3,367,289 3,751,534 3,165,511
=========== =========== =========== ===========
Diluted 3,840,442 3,478,249 3,837,379 3,403,659
=========== =========== =========== ===========
See accompanying notes.
4
SIGMATRON INTERNATIONAL, INC.
Condensed Consolidated Statements of Cash Flows
Unaudited
SIX MONTHS Six Months
ENDED Ended
10/31/04 10/31/03
----------- -----------
OPERATING ACTIVITIES:
Net income $ 2,346,146 $ 3,120,234
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,598,183 1,355,483
Changes in operating assets and liabilities:
Accounts receivable (1,715,378) 2,113,094
Inventories (6,023,280) 41,642
Prepaid expenses and other assets 59,091 (692,770)
Refundable taxes 275,583 (1,469,086)
Other receivables 311,107 (145,662)
Trade accounts payable 940,015 344,780
Income taxes payable 1,444,555 (1,422,212)
Deferred taxes (9,563) --
Accrued expenses (759,927) (1,169,574)
----------- -----------
Net cash (used in) provided by operating activities (1,533,468) 2,075,929
INVESTING ACTIVITIES:
Purchases of machinery and equipment (1,210,087) (833,225)
Purchase of SMTU interest (1,350,353) --
----------- -----------
Net cash used in investing activities (2,560,440) (833,225)
FINANCING ACTIVITIES:
Proceeds from exercise of options 6,431 3,626,857
Tax benefit from options exercised -- 3,368,263
Repurchase of options 19,574
Proceeds (payment) under note payable obligation (228,703) (1,783,314)
Proceeds (payments) under capital lease obligations 288,043 (549,360)
Payments under line of credit (884,254) (642,746)
----------- -----------
Net cash (used in) provided by financing activities (798,909) 4,019,700
----------- -----------
Change in cash (4,892,817) 5,262,404
Cash at beginning of period 5,145,814 424,844
----------- -----------
Cash at end of period $ 252,997 $ 5,687,248
=========== ===========
Supplementary disclosures of cash flow information
Cash paid for interest $ 202,009 $ 134,855
Cash paid for income taxes, net of (refunds) (265,910) 1,297,317
Non Cash Investing activities:
Acquisition of SMTU $ 2,620,353
Cash paid for acquisition ($1,350,353)
-----------
Notes issued for acquisition $ 1,270,000
Forgiveness of subordinated debenture 1,050,000
Forgiveness of accrued interest payable 525,000
Reduction of long lived assets from purchase of SMTU 306,236
Goodwill created 719,040
See accompanying notes.
5
SigmaTron International, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
October 31, 2004
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
SigmaTron International, Inc., its wholly owned subsidiary Standard Components
de Mexico S.A., its wholly owned foreign enterprise Wujiang SigmaTron
Electronics Co., Ltd., SMT Unlimited L.P. ("SMTU") and its procurement branch
SigmaTron Taiwan (collectively, the "Company") have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. The Company adopted the provisions of FASB
Interpretation No. 46, ("FIN 46R") Consolidation of Variable Interest Entities
as of November 1, 2003 as it relates to its affiliate SMTU and consolidated SMTU
from the earliest date reported.
Accordingly, the condensed consolidated financial statements do not include all
of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the three and six month period ended October 31, 2004 are not
necessarily indicative of the results that may be expected for the year ending
April 30, 2005. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended April 30, 2004.
NOTE B -- INVENTORIES
The components of inventory consist of the following:
October 31, April 30,
2004 2004
----- ----
Finished products $ 4,195,292 $ 3,400,742
Work-in-process 2,021,349 1,221,160
Raw materials 13,974,996 9,546,455
--------------- --------------
$ 20,191,637 $ 14,168,357
=============== ==============
NOTE C -- PURCHASE OF AFFILIATE
On August 2, 2004 the Company acquired the interest of outside investors in its
affiliate SMTU and the general partner of SMTU, SMT Unlimited, Inc., thereby
bringing the
6
Company's interest in its affiliate SMTU to approximately 80%. On September 2,
2004 the Company acquired the remaining interests in its affiliate SMTU from its
managers. The aggregate price paid for all the interests was $2,620,353. This
aggregate price was paid with $1,270,000 in notes with terms of up to 2 years
and cash in the amount of $1,350,353. The acquisition was treated as a step
acquisition and resulted in goodwill of $719,040. On October 1, 2004 SMT
Unlimited, Inc. was merged into the Company, and SMTU was liquidated, thereby
becoming an operating division of the Company.
NOTE D -- STOCK INCENTIVE PLANS
The Company maintains various stock incentive 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 October 31, 2004 there are no issued restricted shares
or restricted stock units issued. 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.
Three Months Ended Six Months Ended
October 31, October 31, October 31, October 31,
2004 2003 2004 2003
----- ----- ----- ----
Net Income, as reported $ 1,309,177 $ 1,812,736 $ 2,346,146 $ 3,120,234
Deduct: total
stock-based employee
compensation expense
determined under fair
based method for
awards granted,
modified, or settled,
net of related tax
effects (100,116) (66,632) (200,232) (133,264)
---------- ---------- ---------- ----------
Pro forma net income $1,209,061 $1,746,104 $2,145,914 $2,986,970
========== ========== ========== ==========
7
Three Months Ended Six Months Ended
October 31, October 31, October 31, October 31,
2004 2003 2004 2003
----- ----- ----- -----
Earnings per share
Basic -- as reported $.35 $.54 $.63 $.99
Basic -- pro forma .32 .52 .57 .94
Diluted -- as reported .34 .52 .61 .92
Diluted -- pro forma .32 .50 .56 .88
==== ==== ==== ====
Options to purchase stock at exercise prices greater than the average fair
market value of the Company's stock for periods presented are excluded from the
calculation of diluted income because their inclusion would be anti-dilutive.
For the three month period ended October 31, 2004, 3,100 options were
anti-dilutive and not included in the diluted income per share calculations.
CRITICAL ACCOUNTING POLICES
Management Estimates and Uncertainties - The preparation of consolidated
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Significant estimates made in preparing the consolidated
financial statements include depreciation and amortization periods, the
allowance for doubtful accounts and reserves for inventory. Actual results could
materially differ from these estimates.
Revenue Recognition - Revenues from sales of product including the Company's
electronic manufacturing service business are recognized when the product is
shipped. In general it is the Company's policy to recognize revenue and related
costs when the order has been shipped from our facilities, which is also usually
the same point that title passes under the terms of the purchase order.
Periodically inventory is held on consignment and revenue is recognized when the
product is consumed by the Company's customer. Based on the Company's history of
providing contract manufacturing services, we believe that collectibility is
reasonably assured.
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.
8
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. The Company has adopted SFAS No. 144, which
establishes a single accounting model for the impairment or disposal of
long-lived assets, including discontinued operations.
Impairment of Goodwill - The Company assesses the recoverability of goodwill on
an annual basis or whenever adverse events or changes in circumstances or
business climate indicate that expected future undiscounted cash flows may be
sufficient to support recorded goodwill. If impairment exists, the carry amount
of goodwill would be reduced by the estimated shortfall of discounted cash
flows.
NEW ACCOUNTING STANDARDS
Consolidation of variable interest entities -- FIN 46R is an interpretation of
Accounting Research Bulletin No. 51 and revises the requirements for
consolidation by business enterprises of variable interest entities. FIN 46R
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 ending
after December 15, 2003, to variable interest entities in which an enterprise
holds a variable interest acquired before February 1, 2003. FIN 46R 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 adopted FIN 46R as
of November 1, 2003 as it relates to its affiliate SMTU.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NOTE: To the extent any statements in this quarterly statement may be deemed to
be forward looking, such 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
Company's ability to manufacture lead-free assemblies by mid-2006; regulatory
compliance; the continued availability and sufficiency of the Company's credit
arrangements; changes in U.S., Mexican, Chinese or Taiwanese regulations
affecting the Company's business; the continued stability of the Mexican and
Chinese economic systems, labor and political conditions; currency
9
fluctuations; and the ability of the Company to manage its growth; including its
recent expansion into China. These and other factors which may affect the
Company's future business and results of operations are identified throughout
the Company's Annual Report on Form 10-K and risk factors contained therein and
may be detailed from time to time in the Company's filings with the Securities
and Exchange Commission. These statements speak as of the date of this report
and the Company undertakes no obligation to update such statements in light of
future events or otherwise.
OVERVIEW:
The Company operates in one business segment as an independent provider of
electronic manufacturing services ("EMS"), which includes printed circuit board
assemblies and completely assembled (boxbuild) electronic products. In
connection with the production of assembled products the Company also provides
services to its customers including (1) automatic and manual assembly and
testing of products; (2) material sourcing and procurement; (3) design,
manufacturing and test engineering support; (4) warehousing and shipment
services; and (5) assistance in obtaining product approval from governmental and
other regulatory bodies. The Company provides these manufacturing services
through an international network of facilities located in North America, China
and Taiwan.
As services provided by the EMS industry have continued to increase over the
past several months lead-time for components have increased. Pricing for
components and related commodities has escalated and may continue to increase in
the future periods. The impact of these price increases could have a negative
effect on the Company's gross margins and operating results.
The Company relies on numerous third-party suppliers for components used in the
Company's production process. Certain of these components are available only
from single sources or a limited number of suppliers. In addition, a customer's
specifications may require the Company to obtain components from a single source
or a small number of suppliers. The loss of any such suppliers could have a
material impact on the Company's results of operations, and the Company may be
required to operate at a cost disadvantage compared to competitors who have
greater direct buying power from suppliers.
The Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"), as well as new rules
subsequently implemented by the Securities and Exchange Commission and new
listing requirements subsequently adopted by Nasdaq in response to
Sarbanes-Oxley, have required changes in corporate governance practices,
internal control policies and audit committee practices of public companies.
These new rules, regulations, and requirements have significantly increased the
company's legal, financial compliance and administrative costs, made many other
activities more time consuming and costly and diverted the attention of senior
management. These new rules and regulations have also made it more difficult and
more expensive for the Company to obtain director and officer liability
insurance. These new rules and regulations could also make it more difficult for
us to attract and retain qualified members of our board of directors,
particularly to serve on its audit committee. In addition, if the Company
receives a qualified opinion on the adequacy of its internal control over
financial
10
reporting shareholders, could lose confidence in the reliability of the
Company's financial statements, which could result in a decrease in the value of
its stock.
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.
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.
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.
RESULTS OF OPERATIONS:
Net sales increased for the three month period ended October 31, 2004 to
$27,861,691 from $26,526,879 for the three month period ended October 31, 2003.
Net sales for the six months ended October 31, 2004 increased to $52,939,858
from $51,360,675 for the same period in the prior fiscal year. Sales volume
increased for the three month period ended October 31, 2004 as compared to the
same period in the prior year in the telecommunications marketplace. Sales
volume increased for the three month period ended October 31, 2004 in the
appliance industry, which was partially offset by price reductions. Sales volume
increased in the telecommunications and fitness industries for the six month
period ended October 31, 2004 compared to the same period in the prior year. The
increase for each of the periods was due primarily to an increase in the number
of units sold.
Gross profit decreased during the three month period ended October 31, 2004 to
$5,193,033 or 18.6% of net sales, compared to $5,558,548 or 21.0% of net sales
for the same period in the prior fiscal year. Gross profit decreased for the six
month period ended October 31, 2004 to $9,818,731 or 18.5% of net sales,
compared to $10,272,489 or 20.0% of net sales for the same period in the prior
fiscal year. The decrease in the Company's gross margin for the three and six
month periods is the result of pricing pressures within the EMS industry,
product life
11
cycle issues and component pricing. The Company's focus remains on expanding its
customer base through advertising and potential acquisitions. There can be no
assurance that sales levels or gross margins will remain stable in future
quarters.
Selling and administrative expenses increased to $2,949,772 or 10.6% of net
sales for the three month period ended October 31, 2004 compared to $2,520,746
or 9.5% of net sales in the same period last year. Selling and administrative
expenses increased to $5,661,847 or 10.7% of net sales for the six month period
ended October 31, 2004 compared to $5,028,669 or 9.8% of net sales in the same
period last year. The increase is primarily due to an increase in insurance,
legal fees and other professional fees for the three and six month period ended
October 31, 2004.
Interest expense for bank debt and capital lease obligations for the three month
period ended October 31, 2004 was $53,630 compared to $10,037 for the same
period in the prior year. Interest expense for the six month period ended
October 31, 2004 increased to $120,313 from $52,585 compared to the same period
in the prior year. This change was attributable to the increase in interest for
notes payable for the Company's corporate facility and manufacturing facility in
Elk Grove Village and its Mexican manufacturing facility.
As a result of the factors described above, net income decreased to $1,309,177
for the three month period ended October 31, 2004 compared to $1,812,736 for the
same period in the prior year. Basic and dilutive earnings per share for the
second fiscal quarter of 2004 were $0.35 and $0.34, respectively, compared to
basic and dilutive earnings per share of $0.54 and 0.52, respectively, for the
same period in the prior year. For the six months ended October 31, 2004, the
Company recorded net income of $2,346,146 compared to $3,120,234 for the same
period in the prior fiscal year. Basic and dilutive earnings per share for the
six month period ended October 31, 2004 were $0.63 and $0.61, respectively,
compared to basic and dilutive earnings per share of $0.99 and $0.92,
respectively, for the same period in the prior year.
LIQUIDITY AND CAPITAL RESOURCES:
During the first six months of fiscal 2005 cash used in operating activities was
$1,533,468. Cash used in operating activities was primarily related to an
increase of $6,023,280 in inventories and an increase of $1,715,378 in accounts
receivable, which was partially offset by net income of $2,346,146.
Working capital at October 31, 2004 totaled $22,096,410 compared to $22,887,751
in the same period in the prior year. At October 31, 2004 the Company had
$234,260 in borrowings outstanding under the $13,000,000 revolving credit
facility and unused availability was approximately $12,765,000. The maximum
borrowing limit under the revolving credit facility is limited to the lesser of
(i) $13,000,000 or (ii) an amount equal to the sum of up to 85% of the
receivables borrowing base and the lesser of $6,500,000 or up to 50% of the
inventory borrowing base.
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
12
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 stock splits or dividends pro
rata to its stockholders. At October 31, 2004 the Company was in compliance with
all financial covenants under the credit facility.
The Company used approximately $1,350,000 in cash for investing activities in
the six months ended October 31, 2004 for the purchase of its affiliate. On
August 2, 2004 the Company acquired the interest of outside investors in its
affiliate SMTU and the general partner of SMTU, SMT Unlimited, Inc., thereby
bringing the Company's interest in its affiliate SMTU to approximately 80%. On
September 2, 2004 the Company acquired the remaining interests in its affiliate
SMTU from its managers. The aggregate price paid for all the interests was $2.6
million. This aggregate price was paid with $1,270,000 in cash and notes in the
amount of $1,330,000 with terms of up to 2 years. The acquisition was treated as
a step acquisition and resulted in goodwill of $719,040. On October 1, 2004 SMT
Unlimited, Inc. was merged into the Company, and SMTU was liquidated, thereby
becoming an operating division of the Company.
In fiscal 2005 the Company plans to make additional machinery and equipment
purchases primarily to support its operation in Mexico. The Company plans to
execute a three to five year capital lease to fund such transactions, which it
estimates will be approximately $1,100,000 in the aggregate.
The Company anticipates its credit facility, cash flow from operations and
leasing resources will be adequate to meet its working capital requirements in
fiscal 2005. In the event the business grows rapidly or the Company considers an
acquisition, additional financing resources could be necessary. There is no
assurance that the Company will be able to obtain equity or debt financing at
acceptable terms in the future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure 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. The Company carried out an evaluation, under the supervision of the
President and Chief Executive Officer and the Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures pursuant to Rule 13a-15 of the Exchange Act as of October 31,
2004. Based on that evaluation, the President and Chief Executive Officer and
the Chief Financial Officer concluded that the Company's disclosure controls and
procedures were effective as of October 31, 2004.
13
(b) Changes in Internal Controls
There have been no material 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 material
weaknesses.
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 17, 2004, the Company held its 2004 Annual Meeting of Stockholders.
Proxies for the meeting were solicited pursuant to Section 14(a) of the
Securities Exchange Act of 1934 and Regulation 14A thereunder for the purpose of
(i) electing two Class II directors to hold office until the 2007 Annual Meeting
of Stockholders, (ii) ratifying the selection of Grant Thornton LLP as
independent auditors of the Company, (iii) approving the adoption of the
Company's 2004 Employee Stock Option Plan, (iv) approving the adoption of the
Company's 2004 Directors' Stock Option Plan, and (v) approving an amendment to
the Company's Certificate of Incorporation to increase the number of authorized
shares of common stock of the Company. Each holder of common stock is entitled
to one vote for each share held on the record date.
The following persons were elected as directors to hold office until the 2007
Annual Meeting of Stockholders: John P. Chen and Carl Zemenick. The number of
shares cast for, withheld and abstained with respect to each of the nominees
were as follows:
Nominee For Against Abstained
-------- ---- -------- ---------
John P. Chen 3,578,059 106,514 0
Carl Zemenick 3,577,449 107,114 0
The following persons are directors of the Company whose current term extends
beyond the 2004 Annual Meeting of Stockholders: Thomas W. Rieck, William L.
McClelland, Gary R. Fairhead, Franklin D. Sove and Dilip S. Vyas. There was no
solicitation in opposition to management's nominees for directors.
The stockholders voted to approve the ratification of the selection of Grant
Thornton LLP as independent auditors for the Company for the fiscal year ended
April 30, 2005. A total of 3,653,092 shares were cast for such ratification,
27,170 shares were opposed and 4,301 shares abstained.
The stockholders voted to approve the ratification of the 2004 Employee Option
Plan. A total of 1,463,124 share were cast for such ratification, 339,644 shares
were opposed and 18,247 shares abstained.
14
The stockholders voted to approve the ratification of the 2004 Directors' Stock
Option Plan. A total of 1,465,352 shares were cast for such ratification,
337,882 were opposed and 17,961 shares abstained.
The stockholders voted to approve the amendment of the Certificate of
Incorporation of the Company to increase the number of Authorized Shares of
Common Stock of the Company to 12,000,000. A total of 1,463,124 shares were cast
for the amendment, 339,644 were opposed and 18,427 shares abstained.
ITEM 6. EXHIBITS
(a) Exhibits:
Exhibit 3.1 -- Certificate of Incorporation of the Company as amended
Effective September 21, 2004.
Exhibit 10.1 -- SigmaTron International, Inc. 2004 Employee Stock
Option Plan filed as Appendix B to the Company's Definitive Proxy
Statement filed on August 16, 2004, and hereby incorporated by
reference.
Exhibit 10.2 -- SigmaTron International, Inc. 2004 Directors' Stock
Option Plan filed as Appendix C to the Company's Definitive Proxy
Statement filed on August 16, 2004, and hereby incorporated by
reference.
Exhibit 10.22 -- SigmaTron International, Inc. Employee Stock Option
Plan Nonstatutory Stock Option Agreement.
Exhibit 31.1 -- Certification of Principal Executive Officer of
SigmaTron International, Inc. Pursuant to Rule 13a-14(a) under the
Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
Exhibit 31.2 -- Certification of Principal Financial Officer of
SigmaTron International, Inc. Pursuant to Rule 13a-14(a) under the
Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
Exhibit 32.1 -- Certification by the Principal Executive Officer of
SigmaTron International, Inc. Pursuant to Rule 13a-14(b) under the
Exchange Act and Section 906 of the Sarbanes-Oxley Act of 2002 (18
U.S.C. 1350).
Exhibit 32.2 -- Certification by the Principal Financial Officer of
SigmaTron International, Inc. Pursuant to Rule 13a-14(b) under the
Exchange Act and Section 906 of the Sarbanes-Oxley Act of 2002 (18
U.S.C. 1350).
15
SIGNATURES:
----------
Pursuant to the requirements 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
/s/ Gary R. Fairhead 12/13/04
- ------------------------------------------------- ---------------------
Gary R. Fairhead Date
President and CEO (Principal Executive Officer)
/s/ Linda K. Blake 12/13/04
- ------------------------------------------------- ---------------------
Linda K. Blake Date
Chief Financial Officer, Secretary and Treasurer
(Principal Financial Officer and Principal
Accounting Officer)