-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JY+SrJZvI7HgMtc+aPThE6T6dc2GA5/d9Uqpzk0o0YQ7VU8SK+GOjazd+fH/eWW5 S8rjTsqoyg55T/5IMdxv2g== 0000950137-05-009166.txt : 20050727 0000950137-05-009166.hdr.sgml : 20050727 20050727162552 ACCESSION NUMBER: 0000950137-05-009166 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20050430 FILED AS OF DATE: 20050727 DATE AS OF CHANGE: 20050727 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIGMATRON INTERNATIONAL INC CENTRAL INDEX KEY: 0000915358 STANDARD INDUSTRIAL CLASSIFICATION: PRINTED CIRCUIT BOARDS [3672] IRS NUMBER: 363918470 STATE OF INCORPORATION: DE FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-23248 FILM NUMBER: 05977608 BUSINESS ADDRESS: STREET 1: 2201 LANDMEIER RD CITY: ELK GROVE VILLAGE STATE: IL ZIP: 60007 BUSINESS PHONE: 7089568000 MAIL ADDRESS: STREET 1: 2201 LANDMEIER ROAD CITY: ELK GROVE VILLAGE STATE: IL ZIP: 60007 10-K 1 c96993e10vk.txt ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the fiscal year ended April 30, 2005 Or [ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from ___________to___________. Commission file number 0-23248 SIGMATRON INTERNATIONAL, INC. ----------------------------- (Exact name of registrant as specified in its charter) Delaware 36-3918470 - -------- ---------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 2201 Landmeier Rd., Elk Grove Village, IL 60007 - ----------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 847-956-8000 Securities registered pursuant to Section 12(g) of the Act: Common Stock $0.01 par value per share -------------------------------------- Title of each class Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [X ]. Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [ ] No [X ] The aggregate market value of the voting common equity held by non-affiliates of the registrant as of October 31, 2004 (the last business day of the registrant's most recently completed second fiscal quarter) was $41,872,923 based on the closing sale price of $11.16 per share as reported by Nasdaq Small Cap Market as of such date. The number of outstanding shares of the registrant's Common Stock, as of July 8, 2005, was 3,755,420. DOCUMENTS INCORPORATED BY REFERENCE Those sections or portions of the definitive proxy statement of SigmaTron International, Inc., for use in connection with its annual meeting of stockholders, which will be filed within 120 days of the fiscal year ended April 30, 2005, are incorporated by reference into Part III of this Form 10-K. TABLE OF CONTENTS
PART I ITEM 1. BUSINESS........................................................... 3 ITEM 2. PROPERTIES......................................................... 11 ITEM 3. LEGAL PROCEEDINGS.................................................. 12 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................ 13 ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT............................... 13 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES................ 14 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA............................... 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............................. 15 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................................ 22 ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA......................... 22 ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.............................. 22 ITEM 9A. CONTROLS AND PROCEDURES............................................ 22 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................. 22 ITEM 11. EXECUTIVE COMPENSATION............................................. 23 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS................... 23 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................... 23 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES............................. 23 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K...................................................... 23 SIGNATURES............................................................................ 26
PART 1 ITEM 1. BUSINESS CAUTIONARY NOTE: In addition to historical financial information, this discussion of the business of SigmaTron International, Inc. its wholly owned subsidiary Standard Components de Mexico S.A., its wholly owned foreign enterprise Wujiang SigmaTron Electronics Co., Ltd. ("SigmaTron China"), and its procurement branch SigmaTron Taiwan (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 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 U.S., Mexican, Chinese and Taiwanese economic, labor and political conditions; currency fluctuations; and the ability of the Company to manage its growth; including its expansion into China and its integration of the Able Electronics operations acquired in July 2005. These and other factors which may affect the Company's future business and results of operations are identified throughout the Company's Annual Report on this Form 10-K, and risk factors contained herein and may be detailed from time to time in the Company's filings with the Securities and Exchange Commission. These statements speak as of the date of this report and the Company undertakes no obligation to update or revise such statements in light of new information, future events or otherwise. OVERVIEW The Company operates in one business segment as an independent provider of electronic manufacturing services ("EMS"), which includes printed circuit board assemblies and completely assembled (box-build) electronic products. In connection with the production of assembled products the Company also provides services to its customers including (1) automatic and manual assembly and testing of products; (2) material sourcing and procurement; (3) design, manufacturing and test engineering support; (4) warehousing and shipment services; and (5) assistance in obtaining product approval from governmental and other regulatory bodies. The Company provides these manufacturing services through an international network of facilities located in North America, China and Taiwan. The Company provides manufacturing and assembly services ranging from the assembly of individual components to the assembly and testing of box-build electronic products. The Company has the ability to produce assemblies requiring mechanical as well as electronic capabilities. The products assembled by the Company are then incorporated into finished products sold in various industries, particularly appliance, consumer electronics, gaming, fitness, industrial electronics, telecommunications and automotive. In August and September 2004 the Company acquired the interests all of the outside investors in its affiliate SMT Unlimited L.P. ("SMTU") and the general partner of SMTU, SMT Unlimited, Inc. On October 1, 2004 SMT Unlimited, Inc. was merged into the Company, and SMTU was liquidated, thereby becoming an operating division of the Company. Prior to the acquisition by the Company, SMTU was consolidated under FASB Interpretation No. 46 ("FIN46R") Consolidation of Variable Interest Entities (Footnote H). The Company operates manufacturing facilities in Elk Grove Village, Illinois; Fremont, California; Acuna, Mexico; and Wujiang, China. The Company maintains materials sourcing offices in Elk Grove Village, Illinois; Fremont, California; Acuna, Mexico; and Taipei, Taiwan. The Company provides warehousing services in Del Rio, Texas and Huntsville, Alabama. 3 The Company is a Delaware corporation which was organized on November 16, 1993 and commenced operations when it became the successor to all of the assets and liabilities of SigmaTron L.P., an Illinois limited partnership, through a reorganization on February 8, 1994. PRODUCTS AND SERVICES The Company provides a broad range of manufacturing related outsourcing solutions for its customers on both a turnkey basis (material purchased by the Company) and consignment basis (material provided by the customer). These solutions incorporate the Company's knowledge and expertise in the EMS industry to provide its customers with advanced manufacturing technologies and high quality, responsive and flexible manufacturing services. The Company's EMS solutions provide services from product inception through the ultimate delivery of a finished good. Such technologies and services include the following: Supply Chain Management. The Company is primarily a turnkey manufacturer and directly sources all, or a substantial portion, of the components necessary for its product assemblies, rather than receiving the raw materials from its customers on consignment. Turnkey services involve a greater investment in resources and an increased inventory risk compared to consignment services. Supply chain management includes the purchasing, management, storage and delivery of raw components required for the manufacture or assembly of a customer's product based upon the customer's orders. The Company procures components from a select group of vendors which meet its standards for timely delivery, high quality and cost effectiveness, or as directed by its customers. Raw materials used in the assembly and manufacture of printed circuit boards and electronic assemblies are generally available from several suppliers, unless restricted by the customer. The Company does not enter into purchase agreements with the majority of its major or single-source suppliers. The Company believes ad-hoc negotiations with its suppliers provides the flexibility needed to source inventory based on the needs of its customers. The Company believes that its ability to source and procure competitively priced, quality components is critical to its ability to effectively compete. In addition to obtaining materials in North America, the Company uses its Taiwanese procurement office and agents to source materials from the Far East. The Company believes this office allows it to more effectively manage its relationships with key suppliers in the Far East by permitting it to respond more quickly to changes in market dynamics, including fluctuations in price, availability and quality. Assembly and Manufacturing. The Company's core business is the assembly of printed circuit boards through the automated and manual insertion of components 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 as the Company's customers continue to require both PTH and SMT capabilities. SigmaTron is also capable of assembling fine pitch and ball grid array ("BGA") components. BGA is used for more complex circuit boards required to perform at higher speeds. Manufacturing and Related Services. The Company offers The Restriction of Use of Hazardous Substances ("RoHS") compliant assembly services in order to comply with the European Union environmental mandate that takes effect July 1, 2006. The Company also provides quick turnaround, turnkey prototype services at all of its locations. In Elk Grove Village, the Company offers touch screen / LCD assembly services 4 in a clean room environment. In Mexico, the Company offers parylene coating services. In all locations, the Company offers box-build services, which integrate its printed circuit board and other manufacturing and assembly technologies into higher level sub-assemblies and end products. Finally, the Company designs and manufactures DC to AC inverters. Product Testing. The Company has the ability to perform both in-circuit and functional testing of its assemblies and finished products. In-circuit testing verifies that the correct components have been properly inserted and that the electrical circuits are complete. Functional testing determines if a board or system assembly is performing to customer specifications. In addition, the Company provides X-ray laminography services. The Company seeks to provide customers with highly sophisticated testing services that are at the forefront of current test technology. Warehousing and Distribution. In response to the needs of select customers, the Company has the ability to provide in-house warehousing, shipping and receiving and customer brokerage services in Del Rio, Texas for goods manufactured or assembled in Mexico. The Company also has the ability to provide custom-tailored delivery schedules and services to fulfill the just-in-time inventory needs of its customers. MARKETS AND CUSTOMERS The Company's customers are in the appliance, gaming, industrial electronics, fitness, telecommunications, consumer electronics and automotive industries. As of April 30, 2005, the Company had approximately 225 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.
PERCENT OF NET SALES ---------------------- TYPICAL FISCAL FISCAL FISCAL MARKETS OEM APPLICATION 2003 2004 2005 - ---------------------- ------------------------------------ ------ ------ ------ Appliances Household appliance controls 30.2% 36.4% 37.1% Fitness Treadmills, exercise bikes 13.7 13.4 18.5 Industrial Electronics Motor controls, power supplies 10.1 13.8 15.6 Gaming Slot machines, lighting displays 21.3 17.9 11.6 Telecommunications Pagers, microphones and modems 9.5 10.9 10.0 Consumer Electronics Carbon monoxide alarms, tanning beds 13.3 7.1 6.4 Automotive Automobile interior lighting 1.9 .5 .8 Total 100% 100% 100% ---- ---- ----
For the year ended April 30, 2005, Spitfire Controls, Inc. and Life Fitness accounted for 31.5% and 17.5%, respectively, of the Company's net sales. For the fiscal year ended April 30, 2004, Spitfire Controls, Inc. and Life Fitness accounted for 35.7% and 13.0%, respectively, of the Company's net sales. For the fiscal year ended April 30, 2003, Spitfire Controls, Inc. and Life Fitness accounted for 27.2% and 13.3%, respectively, of the Company's net sales. Although the Company does not have long term contracts with these two customers, the Company expects that as a group these customers will continue to account for a significant percentage of the Company's net sales, although the individual percentages may vary from period to period. 5 SALES AND MARKETING The Company markets its services through 26 independent manufacturers' representative organizations that together currently employ approximately 60 sales personnel in the United States and Canada. Independent manufacturers' representative organizations receive variable commissions based on orders received by the Company and are assigned specific accounts, not territories. The members of the Company's senior management are actively involved in sales and marketing efforts and the Company has 5 direct sales people. Sales can be a misleading indicator of the Company's financial performance. Sales levels can vary considerably among customers and products depending on the mix of services, consignment and turnkey, rendered by the Company and demanded by customers. Consignment orders require the Company to perform manufacturing services on components and other materials supplied by a customer, and the Company charges only for its labor, overhead and manufacturing costs, plus a profit. In the case of turnkey orders, the Company provides, in addition to manufacturing services, the components and other materials used in assembly. Turnkey contracts, in general, have a higher dollar volume of sales for each given assembly, owing to inclusion of the cost of components and other materials in net sales and cost of goods sold. Variations in the number of turnkey orders compared to consignment orders can lead to significant fluctuations in the Company's revenue level. However, the Company does not believe that such variations are a meaningful indicator of the Company's gross margins. Consignment orders accounted for less than 5% of the Company's revenues for the fiscal year ended April 30, 2005. In the past, the timing and rescheduling of orders has caused the Company to experience significant quarterly fluctuations in its revenue and earnings, and the Company expects such fluctuations to continue. MEXICO OPERATIONS The Company's wholly owned subsidiary, Standard Components de Mexico, S.A, 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 de Mexico, S.A. was incorporated and commenced operation in 1968. The Company believes that one of the key benefits to having operations in Mexico is its access to cost-effective labor resources while having geographic proximity to the United States. The Company provides funds for salaries, wages, overhead and capital expenditure items as necessary to operate Standard Components de Mexico, S.A. The Company provides funding to Standard Components de Mexico, S.A. 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 the fiscal year ended April 30, 2005 the Company paid approximately $8,400,000 to Standard Components de Mexico, S.A. for services provided. At April 30, 2005 the Mexican operation had approximately 1,160 employees. On July 14, 2005 the Company purchased Able Electronics, Corporation ("Able"). Able is headquartered in Hayward, California, with an additional manufacturing facility located in Tijuana, Mexico. Able is an ISO 9001:2000 certified EMS company serving Original Equipment Manufacturers in the test and measurement, medical instruments, telecommunications, computer peripherals, industrial controls and genetic research industries. CHINA OPERATIONS The Company has entered into an agreement with governmental authorities in the economic development zone of Wujiang, Jiangsu Province, Peoples Republic of China, pursuant to which the Company became the lessee of a parcel of land of approximately ten U.S. acres. The term of the land lease is 50 years. The Company built a manufacturing plant office space and dormitories on this site during the fiscal year ended April 30, 2004. The manufacturing plant and office space is approximately 80,000 square feet, which can be expanded if conditions require. SigmaTron China operates at this site as the Company's wholly owned foreign enterprise. At April 30, 2005 this operation had 170 employees. 6 COMPETITION The EMS industry is highly competitive and subject to rapid change. Furthermore, both large and small companies compete in the industry, and many have significantly greater financial resources, more extensive business experience and greater marketing and production capabilities than the Company. The significant competitive factors in this industry include price, quality, service, timeliness, reliability, the ability to source raw components, and manufacturing and technological capabilities. The Company believes it can competitively provide all of these services. In addition, the Company may be operating at a cost disadvantage compared to manufacturers who have greater direct buying power with component suppliers or who have lower cost structures. Current and prospective customers continually evaluate the merits of manufacturing products internally and will from time to time offer manufacturing services to third parties in order to utilize excess capacity. During downturns in the electronics industry, OEMs may become more price sensitive. There can be no assurance that competition from existing or potential competitors will not have a material adverse impact on the Company's business, financial condition or results of operations. The introduction of lower priced competitive products, significant price reductions by the Company's competitors or significant pricing pressures from its customers could result in price reductions that would adversely affect the Company's business, financial condition, and results of operations, as would the introduction of new technologies which render the Company's manufacturing process technology less competitive or obsolete. CONSOLIDATION The consolidated financial statements include the accounts and transactions of the Company, its wholly-owned subsidiary, Standard Components de Mexico, S.A., its wholly owned foreign enterprise Wujiang SigmaTron Electronics Co., LTD. and its procurement branch, SigmaTron Taiwan. The functional currency of the Mexican and Chinese subsidiaries and procurement branch, SigmaTron Taiwan is the U.S. dollar. The Company adopted the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 46R, ("FIN 46R") "Consolidation of Variable Interest Entities. The Company adopted FIN 46R as of November 1, 2003 as it relates to its former affiliate SMTU. On September 2, 2004, the remaining minority interest in SMTU was acquired. On October 1, 2004 SMTU was liquidated, thereby becoming an operating division of the Company. As a result of consolidation and other transactions involving competitors and other companies in the Company's markets, the Company occasionally reviews potential transactions relating to its business, products and technologies. Such transactions could include mergers, acquisitions, strategic alliances, joint ventures, licensing agreements, co-promotion agreements, financing arrangements or other types of transactions. The Company recently completed one such transaction in July 2005, with the acquisition of Able. In the future, the Company may choose to enter into other transactions at any time depending on available sources of financing, and such transactions could have a material impact on the Company, its business or operations. Recent transactions are disclosed in Footnote K of the financial statements included with this Annual Report on Form 10-K. GOVERNMENTAL REGULATIONS The Company's operations are subject to certain foreign, federal, state and local regulatory requirements relating to environmental, waste management, labor and health and safety matters. Management believes that the Company's business is operated in material compliance with all such regulations. To date, the cost to the Company of such compliance to date has not had a material impact on the Company's business, financial condition or results of operations. However, there can be no assurance that violations will not occur in the future as a result of human error, equipment failure or other causes. Further, the Company cannot predict the nature, scope or effect of environmental legislation or regulatory requirements that could be imposed or how existing or future laws or regulations will be administered or interpreted. Compliance with more stringent laws or regulations, as well as more vigorous enforcement policies of regulatory agencies, could require substantial expenditures by the Company and could have a material impact on the Company's business, financial condition and results of operations. In addition, effective mid-2006 the Company's customers must be in compliance with 7 the European Standard: the "Restriction of Use of Hazardous Substance" directive for all of their products that ship to the European marketplace. The Company's customers are also requesting that the Company have the lead-free manufacturing capability. BACKLOG The Company's backlog as of April 30, 2005 was approximately $44,000,000, including approximately $950,000 in backlog for the Company's Las Vegas operation which subsequently was sold on June 3, 2005 (Footnote K of the Company's consolidated financial statements included with this Annual Report on Form 10-K). Backlog consists of contracts or purchase orders with delivery dates scheduled within the next twelve months. The Company currently expects to ship substantially all of the remaining April 30, 2005 backlog by the end of the 2006 fiscal year. Backlog as of April 30, 2004 totaled approximately $38,600,000. Variations in the magnitude and duration of contracts and purchase orders received by the Company and delivery requirements generally may result in substantial fluctuations in backlog from period to period. Because customers may cancel or reschedule deliveries, backlog may not be a meaningful indicator of future revenue. EMPLOYEES The Company employed approximately 1,740 people as of April 30, 2005, including 56 engaged in engineering or engineering related services, 1,518 in manufacturing and 166 in administrative and marketing functions. The Company has a labor contract with Production Workers Union Local No. 10, AFL-CIO, covering the Company's workers in Elk Grove Village, Illinois which expires on November 30, 2006. The Company's Mexican subsidiary, Standard Components de Mexico S.A., has a labor contract with Sindicato De Trabajadores de la Industra Electronica, Similares y Conexos del Estado de Coahuila, C.T.M. covering the Company's workers in Acuna, Mexico which expires on January 15, 2006. Since the time the Company commenced operations, it has not experienced any union related 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 July 2005 subsequent to the end of the 2005 fiscal year, which provides for a revolving credit facility. The maximum borrowing limit under the revolving credit facility is limited to the lesser of: (i) $17,000,000 or (ii) an amount equal to the sum of 85% of the receivable borrowing base and the lesser of $8,500,000 or varying percentages of the inventory base. The Amended Loan and Security Agreement expires on June 30, 2008 and is subject to certain financial covenants. The Amended Loan and Security Agreement also provides a term loan in the amount of $3,000,000. Interest accrues at 5.75% and interest only is due each quarter through June 30, 2006. Quarterly principal payments of $250,000 are due in years two through four. At April 30, 2005 the Company was in compliance with its financial covenants and had borrowings of $392,038 outstanding under this line of credit. SigmaTron China entered into a loan agreement in April 2005, which provides for a line of credit with the China Construction Bank. The terms of the agreement includes four draws on the line of credit of approximately $121,000, $362,750, $362,750 and $362,750, on April 15, 2005, July 1, 2005, October 8, 2005, and January 3, 2006, respectively. The interest rate under the agreement is 5.76% and at April 30, 2005 SigmaTron China had $121,000 outstanding under the loan. The loan is collateralized by the Company's 8 building in Suzhou-Wujiang China and 60 of the 100 Chinese acres (approximately ten U.S. acres) leased at the property. The Company anticipates its credit facility, cash flow from operations and leasing resources will be adequate to meet its working capital requirements in fiscal 2006. In the event the business grows rapidly or the Company considers an acquisition, additional financing resources could be necessary in the current or future fiscal years. There is no assurance that the Company will be able to obtain equity or debt financing at acceptable terms in the future. THE COMPANY EXPERIENCES VARIABLE OPERATING RESULTS. The Company's results of operations have varied and may continue to fluctuate significantly from period to period, including on a quarterly basis. Consequently, results of operations in any period should not be considered indicative of the results for any future period, and fluctuations in operating results may also result in fluctuations in the price of the Company's Common Stock. The Company's quarterly and annual results may vary significantly depending on numerous factors, many of which are beyond the Company's control. These factors include: - Changes in sales mix to customers - Changes in availability and cost of components - Volume of customer orders relative to capacity - Market demand and acceptance of our customers' products - Price erosion within the EMS marketplace - Capital equipment requirements needed to remain technologically competitive THE COMPANY'S CUSTOMER BASE IS CONCENTRATED. Sales to the Company's five largest customers accounted for 63%, 68% and 59% of net sales for the fiscal years ended April 30, 2005, 2004 and 2003, respectively. Further, the Company's two largest customers accounted for 31.5% and 17.5% of net sales, 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. Although the Company believes its relationships with its large customers are good, the Company generally does not enter into long-term contracts in connection with the sale of its goods and services. There can be no assurance that the Company will retain any or all of its large customers. This risk may be further complicated by pricing pressures and intense competition prevalent in our industry. If the Company cannot replace canceled or reduced orders, sales will decline, which could have a material impact on the results of operations. THERE IS VARIABILITY IN THE REQUIREMENTS OF THE COMPANY'S CUSTOMERS. The Company does not generally obtain long-term purchase contracts. The timing of purchase orders placed by the Company's customers is affected by a number of factors, including variation in demand for the customers' products, regulatory changes affecting customer industries, customer attempts to manage inventory, changes in the customers' manufacturing strategies and customers' technical problems or issues. Many of these factors are outside the control of the Company. THE COMPANY AND ITS CUSTOMERS MAY BE UNABLE TO KEEP CURRENT WITH THE INDUSTRY'S TECHNOLOGICAL CHANGES. The market for the Company's manufacturing services is characterized by rapidly changing technology and continuing product development. The future success of the Company's business will depend in large part upon its customers' ability to maintain and enhance their technological capabilities, develop and market manufacturing services which meet changing customer needs and successfully anticipate or respond to technological changes in manufacturing processes on a cost-effective and timely basis. 9 Effective mid-2006 the Company's customers must be in compliance with the European Standard; RoHS for all products shipped to the European marketplace. The purpose of the directive is to restrict the use of hazardous substances in electrical and electronic equipment and to contribute to the environmentally sound recovery and disposal of electrical and electronic equipment waste. The Company is in the initial stages of working in conjunction with its suppliers and customers to prepare for the implementation of lead-free wave solder and reflow systems. In addition, electronic component manufacturers must produce electronic components which are lead-free. The Company relies on numerous third-party suppliers for components used in the Company's production process. Customers' specifications may require the Company to obtain components from a single source or a small number of suppliers. There is no assurance these suppliers will comply with RoHS. The inability to utilize any such suppliers could have a material impact on the Company's results of operations. THE COMPANY FACES INTENSE INDUSTRY COMPETITION AND DOWNWARD PRICING PRESSURES. The EMS industry is highly fragmented and characterized by intense competition. Many of the Company's competitors have substantially greater experience, as well as greater manufacturing, purchasing, marketing and financial resources than the Company. There can be no assurance that competition from existing or potential competitors will not have a material adverse impact on the Company's business, financial condition or results of operations. The introduction of lower priced competitive products, significant price reductions by the Company's competitors or significant pricing pressures from its customers could adversely affect the Company's business, financial condition, and results of operations. THE COMPANY HAS FOREIGN OPERATIONS THAT MAY POSE ADDITIONAL RISKS. A substantial part of the Company's manufacturing operations is based in Mexico. Therefore, the Company's business and results of operations are dependent upon numerous related factors, including the stability of the Mexican economy, the political climate in Mexico and Mexico's relations with the United States, prevailing worker wages, the legal authority of the Company to own and operate its business in Mexico and the ability to identify, hire, train and retain qualified personnel and operating management in Mexico. The Company has opened an operation in China in order to better support and grow its customer base. It is uncertain whether the China operation will have a material impact, either positive or negative, on the Company's business, financial condition and results of operations. The success of the operation is dependent on the Company's ability to obtain new business; to hire and train qualified personnel; and to implement an efficient manufacturing environment. Other factors could have a material impact on the business, including the Chinese political climate and its relations with the United States, stability of the Chinese economy and the need for additional capital to expand operations in China. The Company obtains many of its materials and components through its office in Taipei, Taiwan and, therefore, the Company's access to these materials and components is dependent on the continued success of its Asian suppliers. THERE IS A RISK OF FLUCTUATION OF VARIOUS CURRENCIES INTEGRAL TO THE COMPANY'S OPERATIONS. The Company purchases some of its material components and funds some of its operations in foreign currencies. From time to time the currencies fluctuate against the U.S. dollar. Such fluctuations could have a measurable impact on the Company's operations and performance. These fluctuations are expected to continue. The Company does not utilize derivatives or hedge foreign currencies to reduce the risk of such fluctuations. THE AVAILABILITY OF RAW COMPONENTS MAY AFFECT THE COMPANY'S OPERATIONS. The Company relies on numerous third-party suppliers for components used in the Company's production process. Certain of these components are available only from single sources or a limited number of suppliers. In addition, a customer's specifications may require the Company to obtain components from a single source or a small number of suppliers. The loss of any such suppliers could have a material impact on the 10 Company's results of operations. The Company could operate at a cost disadvantage compared to competitors who have greater direct buying power from suppliers. THE COMPANY IS DEPENDENT ON KEY PERSONNEL. The Company depends significantly on its President and Chief Executive Officer, Gary R. Fairhead, and on other executive officers. The loss of the services of any of these key employees could have a material impact on the Company's business and results of operations. In addition, despite significant competition, continued growth and expansion of the Company's contract manufacturing business will require that it attract, motivate and retain additional skilled and experienced personnel. The inability to satisfy such requirements could have a negative impact on the Company's ability to remain competitive in the future. FAVORABLE LABOR RELATIONS ARE IMPORTANT TO THE COMPANY. The Company currently has labor union contracts with certain of its employees constituting approximately 70% of its workforce. Although the Company believes its labor relations are good, any labor disruptions, whether union-related or otherwise, could significantly impair the Company's business, substantially increase the Company's costs or otherwise have a material impact on the Company's results of operations. FAILURE TO COMPLY WITH ENVIRONMENTAL REGULATIONS COULD SUBJECT THE COMPANY TO LIABILITY. The Company is subject to a variety of environmental regulations relating to the use, storage, discharge and disposal of hazardous chemicals used during its manufacturing process. Any failure by the Company to comply with present or future regulations could subject it to future liabilities or the suspension of production which could have a material negative impact on the Company's results of operations. 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. BEING A PUBLIC COMPANY INCREASES THE COMPANY'S ADMINISTRATIVE COSTS. The Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"), as well as rules subsequently implemented by the Securities and Exchange Commission and listing requirements subsequently adopted by Nasdaq in response to Sarbanes-Oxley, have required changes in corporate governance practices, internal control policies and audit committee practices of public companies. These new rules, regulations, and requirements have significantly increased the company's legal, financial compliance and administrative costs, and made many other activities more time consuming and costly. Specifically, the Company's ability to become compliant with Sarbanes-Oxley Section 404, Internal Control Over Financial Reporting, may be very costly. These new rules and regulations have also made it more difficult and more expensive for the Company to obtain director and officer liability insurance. These new rules and regulations could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on its audit committee. ITEM 2. PROPERTIES At April 30, 2005 the Company had manufacturing facilities located in Elk Grove Village, Illinois; Las Vegas, Nevada; Wujiang, China; Fremont, California and Acuna, Mexico. In addition, the Company provides inventory management services through its Del Rio, Texas, warehouse facilities and materials procurement services through its Elk Grove Village, Illinois; Las Vegas, Nevada; Acuna, Mexico; and Taipei, Taiwan offices and a warehouse facility in Huntsville, Alabama. 11 Certain information about the Company's manufacturing, warehouse and purchasing facilities is set forth below:
SQUARE OWNED/ LOCATION FEET SERVICES OFFERED LEASED - --------------------- ------- -------------------------------------------------------- ------ Elk Grove Village, IL 118,000 Corporate Headquarters, assembly and testing of PTH, SMT Owned and BGA, box-build, prototyping, warehousing Acuna, Mexico 115,000 High volume assembly, and testing of PTH and SMT, *** box-build, transformers Suzhou-Wujiang, China 147,500 High volume assembly, and testing of PTH and SMT, * box-build Las Vegas, NV 38,250 Automatic insertion and cable assembly, PTH, SMT and Leased testing **** Del Rio, TX 36,000 Warehouse, portion of which is bonded Leased Fremont, CA 24,500 Assembly and testing of PTH, SMT and BGA, box-build, Leased prototyping, warehousing Taipei, Taiwan 2,900 Materials procurement, alternative sourcing assistance Leased and quality control Huntsville, AL ** Just-in-time inventory management and delivery **
*The Company's Wujiang, China building is owned by the Company and the land is leased from the Chinese government for a 50 year term. **There is no lease for this facility. The Company has entered into a service agreement whereby contracted warehouse personnel provide services for the Company and its customer. ***A portion of the facility is leased. ****Subsequent to the year ended April 30, 2005 the Las Vegas operation was sold. The Company continues to be obligated under the primary lease agreement for the facility and sublets the property to other occupants. The Las Vegas, Nevada, a portion of the Del Rio, Texas and the Fremont, California properties are occupied pursuant to leases of the premises. The lease agreements for the Nevada, Texas and California properties expire October 2009, December 2015 and September 2008, respectively. The Alabama space is provided under a service agreement. The Company's manufacturing facilities located in Acuna, Mexico and Elk Grove Village, Illinois are owned by the Company, except for a portion of the facility in Mexico, which is leased. The properties in Mexico and Illinois are financed under separate mortgage agreements, which mature in November 2008. The Company, through an agent, leases the purchasing and engineering office in Taipei, Taiwan to coordinate Far East purchasing and design activities. In connection with the Company's July 2005 acquisition of Able, which occurred after the end of its 2005 fiscal year, the Company also acquired a lease for manufacturing space in Hayward, California and Tijuana, Mexico. ITEM 3. LEGAL PROCEEDINGS On May 25, 2001, Nancy Messina, a former employee of the Company, filed a lawsuit against the Company in the United States District Court for the Northern District of Illinois, Eastern Division, asserting claims of sexual harassment and gender discrimination under Title VII of the Civil Rights Act of 1964 and claims of violation of the Federal Equal Pay Act. The Company believes that it has meritorious defenses to the claims and is defending itself vigorously in this action. Although the complaint does not specify a dollar 12 amount, based on information presently available to the Company, the Company believes that the resolution of these claims will not have a material adverse effect on the financial condition or results of the operations of the Company. On September 3, 2002, a lawsuit was filed by the liquidating trustee of Circuit Systems, Inc. ("CSI") in the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division, against Gary R. Fairhead, President and Chief Executive Officer of the Company and a former director of CSI and other former directors of CSI, alleging in part, that Mr. Fairhead and the named directors had breached their fiduciary duty to CSI and its stockholders in a number of respects, and corporate counsel had committed malpractice. Although the Compliant did not quantify the relief sought, the initial settlement demand against all defendants was $12 million. On January 9, 2005, the parties to this suit entered into a settlement agreement, which was approved by the court on January 26, 2005 and was dismissed on February 15, 2005. The financial settlement which provides that the plaintiff will be paid $1,750,000 was satisfied, for the most part, from CSI's directors and officers liability insurance and from legal malpractice insurance. Mr. Fairhead and the Company did not contribute to the financial settlement. No defendant admitted to any liability regarding the claims asserted in the complaint. The Company determined that it has a duty under Delaware law to indemnify Mr. Fairhead for his expenses not covered by CSI's directors and officers liability policy, which consisted of immaterial advancements of legal costs. From time to time the Company is also involved in legal proceedings, claims or investigations that are incidental to the conduct of the Company's business. In future periods, the Company could be subjected to cash cost or non-cash charges to earnings if any of these matters is resolved on unfavorable terms. However, although the ultimate outcome of any legal matter cannot be predicted with certainty, based on present information, including our assessment of the merits of the particular claim, the Company does not expect that these legal proceedings or claims will have any material adverse impact on its future consolidated financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders in the fourth quarter of fiscal 2005. ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION - ------------------- --- -------------------------------------------------------------------------- Gary R. Fairhead 53 President and Chief Executive Officer. Gary R. Fairhead has been the President of the Company since January 1990. Gary R. Fairhead is the brother of Gregory A. Fairhead. Linda K. Blake 44 Chief Financial Officer, Vice President - Finance, Treasurer and Secretary since February 1994. Gregory A. Fairhead 49 Executive Vice President - Operations and Assistant Secretary. Gregory A. Fairhead has been Executive Vice President since February 2000 and is Assistant Secretary. Mr. Fairhead was Vice President - Mexican Operations for the Company from February 1990 to February 2000. Gregory A. Fairhead is the brother of Gary R. Fairhead. John P. Sheehan 44 Vice President - Director of Materials and Assistant Secretary since February 1994. Daniel P. Camp 56 Vice President - China Operation since 2003, Mr. Camp was the General Manager/Vice President of Mexican Operations from 1994 to 2003. Raj B. Upadhyaya 50 Executive Vice President - Fremont
13 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 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, 2005 and 2004. Common Stock as Reported by Nasdaq
Period High Low - -------------- ------- ------- Fiscal 2005: Fourth Quarter $12.930 $10.700 Third Quarter 14.730 10.830 Second Quarter 11.740 8.520 First Quarter 14.600 8.750 Fiscal 2004: Fourth Quarter $25.890 $ 9.900 Third Quarter 33.860 16.000 Second Quarter 28.500 12.800 First Quarter 14.990 5.630
As of July 8, 2005, there were approximately 70 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 1,650 beneficial owners of the Company's Common Stock. The Company has not paid cash dividends on its Common Stock since completing its February 1994 initial public offering and does not intend to pay any dividends in the foreseeable future. So long as any indebtedness remains unpaid under the Company's revolving loan facility, the Company is prohibited from paying or declaring any cash or other dividends on any of its capital stock, except stock dividends, without the written consent of the lender under the facility. 14 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Years Ended April 30 ----------------------------------- (In thousands except per share data) 2001 2002 2003 2004 2005 -------- -------- -------- -------- -------- Net Sales $120,798 $102,293 $105,824 $100,494 $106,078 Income (loss) before income tax expense (benefit) and minority interest <1,856> 2,486 9,023 9,219 7,916 Net income (loss) <1,156> 1,542 5,715 5,406 4,699 Total Assets 68,818 51,809 53,400 62,998 66,543 Long-term debt and capital lease obligations (including current maturities) 30,930 17,514 9,911 7,025 7,194 Net income (loss) per common share- Basic $ <0.40> $ 0.54 $ 1.98 $ 1.58 $ 1.25 Net income (loss) per common share- Diluted $ <0.40> $ 0.52 $ 1.70 $ 1.53 $ 1.23
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 accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates made in preparing the consolidated financial statements include depreciation and amortization periods, the allowance for doubtful accounts and reserves for inventory and valuation of goodwill. Actual results could materially differ from these estimates. Revenue Recognition - Revenues from sales of product including the Company's electronic manufacturing service business are recognized when the product is shipped. In general it is the Company's policy to recognize revenue and related costs when the order has been shipped from our facilities, which is also the same point that title passes under the terms of the purchase order except for consignment inventory. Consignment inventory is shipped from the Company to an independent warehouse for storage or shipped directly to the customer and stored in a segregated part of the customer's own facility. Upon the customer's request for inventory, the consignment inventory is shipped to the customer if the inventory was stored offsite or transferred from the segregated part of the customer's facility for consumption, or use, by the customer. The Company recognizes revenue upon such transfer. The Company does not earn a fee for storing the consignment inventory. The Company provides a ninety (90) day warranty for workmanship only and does not have any installation, acceptance or sales incentives, although the Company has negotiated extended warranty terms in certain instances. The Company assembles and tests assemblies based on customers specifications. Historically the amount of returns for workmanship issues has been de minimus under the Company's standard or extended warranties. Any returns for workmanship issues received after each period end are accrued in the respective financial statements. 15 Inventories - Inventories are valued at the lower of cost or market. Cost is determined by the first-in, first-out method. The Company establishes inventory reserves for valuation, shrinkage, and excess and obsolete inventory. The Company records provisions for inventory shrinkage based on historical experience to account for unmeasured usage or loss. Actual results differing from these estimates could significantly affect the Company's inventories and cost of products sold. The Company records provisions for excess and obsolete inventories for the difference between the cost of inventory and its estimated realizable value based on assumptions about future product demand and market conditions. Actual product demand or market conditions could be different than that projected by management. Impairment of Long-Lived Assets - The Company reviews long-lived assets for impairment, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An asset is considered impaired if its carrying amount exceeds the future net cash flow the asset is expected to generate. If such asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset, if any, exceeds its fair market value. The Company has adopted SFAS No. 144, which establishes a single accounting model for the impairment or disposal of long-lived assets, including discontinued operations. Goodwill and Other Intangibles - The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets" effective January 1, 2002. Under SFAS No. 142, goodwill is recognized as the excess cost of an acquired entity over the net amount assigned to assets acquired and liabilities assumed. Goodwill is not amortized, but rather tested for impairment on an annual basis and more often if circumstances require. Impairment losses are recognized whenever the implied fair value of goodwill is less than its carrying value. NEW ACCOUNTING STANDARDS In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment ("SFAS 123R"). The Company is required to adopt SFAS 123R on May 1, 2006. SFAS 123R requires the Company to measure the cost of employee services received in exchange for an equity award based on the grant date fair value. The cost will be recognized in financial statements as an expense over the period during which an employee is required to provide service. As regulations are still pending, the Company has not been able to determine whether the impact will be material. On December 21, 2004, the Financial Accounting Standards Board ("FASB") Staff Position ("FSP") FAS 109-I, "Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004" was issued. FSP FAS 109-I clarifies that this tax deduction must be accounted for as a special deduction in accordance with Statement 109. As such, the special deduction has no effect on deferred tax assets and liabilities existing at the date of enactment. Rather, the impact of this deduction would be reported in the period in which the deduction is claimed on the Company's tax return beginning in 2005. As regulations are still pending, the Company has not been able to determine whether the impact will be material; the Company believes that the impact will not be material. On December 21, 2004, FSP FAS 109-2, "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 ("Act")," was issued. FSP FAS 109-2 provides companies additional time, beyond the financial reporting period during which the Act took effect, to evaluate the Act's impact on a company's plan for reinvestment or repatriation of certain foreign earnings for purposes of applying Statement 109. FSP FAS 109-2 was effective upon issuance. Based on management's analysis of the repatriation provision of the Act , although not yet finalized, it is unlikely that the Company had any foreign earnings to repatriate and accordingly, the financial statements do not reflect any provisions for taxes on unremitted foreign earnings. The Company does not believe the impact of the Act will be material. In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an amendment of ARB No. 43, Chapter 4." This statement amends the guidance in Accounting Research Bulletin (ARB) No. 43, Charter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage) and requires that those items be recognized as current-period charges 16 regardless of whether they meet the criterion of "abnormal." The statement also requires that allocation of fixed production overheads to the cost of conversion be based on the normal capacity of the production facilities. The provisions of this statement are effective for inventory costs incurred during fiscal years beginning after June 15, 2005 (as of February 1, 2006 for the Company) and are to be applied prospectively. The Company anticipates the impact will not be material. On October 22, 2004, the President signed the American Jobs Creation Act of 2004 ("the Act"). The Act provides a deduction from income from qualified domestic production activities, which will be phased in from 2005 through 2010. In return, the Act also provides for a two-year phase-out (except for certain pre-existing binding contracts) of the existing Extraterritorial Income ("ETI") exclusion tax benefit for foreign sales which the World Trade Organization ("WTO") ruled was an illegal export subsidy. The European Union ("EU") believes that the Act fails to adequately repeal the illegal export subsidies because of the transitional provisions and has asked the WTO to review whether these transitional provisions are in compliance with their prior ruling. This will have no material impact on the Company. Additionally, the Act creates a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85% dividend received deduction for certain dividends from controlled foreign corporations. The impact on the Company in the future will not be material. 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 and the risk factors which appear at the end of Item 1. OVERVIEW The Company operates in one business segment as an independent provider of electronic manufacturing services ("EMS"), which includes printed circuit board assemblies and completely assembled (box-build) electronic products. In connection with the production of assembled products the Company also provides services to its customers including (1) automatic and manual assembly and testing of products; (2) material sourcing and procurement; (3) design, manufacturing and test engineering support; (4) warehousing and shipment services; and (5) assistance in obtaining product approval from governmental and other regulatory bodies. The Company provides these manufacturing services through an international network of facilities located in the United States, Mexico, China and Taiwan. Sales can be a misleading indicator of the Company's financial performance. Sales levels can vary considerably among customers and products depending on the mix of services, consignment and turnkey, rendered by the Company and demanded by its customers. Consignment orders require the Company to perform manufacturing services on components and other materials supplied by a customer, and the Company charges only for its labor, overhead and manufacturing costs, plus a profit. In the case of turnkey orders, the Company provides, in addition to manufacturing services, the components and other materials used in assembly. Turnkey contracts, in general, have a higher dollar volume of sales for each given assembly, owing to inclusion of the cost of components and other materials in net sales and cost of goods sold. Variations in the number of turnkey orders compared to consignment orders can lead to significant fluctuations in the Company's revenue level. However, the Company does not believe that such variations are a meaningful indicator of the Company's gross margins. Consignment orders accounted for less than 5% of the Company's revenues for the year ended April 30, 2005. In the past, the timing and rescheduling of orders has caused the Company to experience significant quarterly fluctuations in its revenue and earnings, and the Company expects such fluctuations to continue. 17 RESULTS OF OPERATIONS: FISCAL YEAR ENDED APRIL 30, 2005 COMPARED TO FISCAL YEAR ENDED APRIL 30, 2004 Net sales increased 5.6% to $106,076,965 in fiscal 2005 from $100,494,122 in the prior year. The Company's sales increased in the fitness, industrial electronics and appliance marketplaces during fiscal 2005 as compared to the prior year. The increase in sales volume in the fitness and appliance industries was partially offset by price reductions to customers. The Company anticipates pricing pressures from customers will continue in fiscal 2006. Sales in the gaming industry decreased by 6.3% due to a reduction in orders placed by the Company's customers. Subsequent to the year ended April 30, 2005, the Company sold its Las Vegas operation, which primarily serviced the gaming industry. The decline in this business has served to further concentrate the Company's business within the other industries it serves. The Company will continue to sell into the gaming marketplace out of its remaining operations. The acquisition of Able will give the Company a presence in a number of new markets, diversify its current customer base and expand the number of industries it serves. Concentration of sales by the Company into a specific industry increases the Company's risks related to business and economic factors within that industry. The Company's sales in a particular industry are driven by the fluctuating forecasts and end-market demand of the customers within that industry. Sales to customers are subject to variations from period to period depending on customer order terminations, the life cycle of customer products and product transition. There can be no assurance that sales levels or gross margins will remain stable in future periods. Sales to the Company's five largest customers accounted for 63% and 68% of net sales for fiscal years 2005 and 2004, respectively. Gross profit decreased to $18,567,574 or 17% of net sales in fiscal year 2005 compared to $19,115,930 or 19.0% of net sales in the prior period. The decrease is due to an increase in price concessions, manufacturing costs and component pricing. There can be no assurance gross margins will not decrease in the future. Selling and administrative expenses increased in fiscal year 2005 to $10,919,006 or 10.3% of net sales compared to $9,664,903 or 9.6% of net sales in fiscal 2004. The increase is due to additional personnel in the sales and purchasing departments, advertising expenditures and increased legal fees. The increase in selling and administrative expenses is partially offset by a reduction in bonus expense. The Company anticipates it will incur additional professional fees related to Sarbanes-Oxley, specifically Section 404, Internal Control Over Financial Reporting. Interest expense increased to $283,137 in fiscal 2005 compared to $239,792 in fiscal 2004. The interest expense increased due to increased borrowings under the Company's lines of credit, additional capital leases for machinery and equipment, interest for notes payable in connection with the acquisition of SMTU and notes payable associated with the purchase of the Company's corporate and manufacturing facility in Elk Grove Village, Illinois. In fiscal 2005 tax expense was $3,082,568 which resulted in an effective rate of 38.9% compared to $3,550,038 in income tax expense and an effective rate of $39.6% in fiscal 2004. Net income decreased to $4,698,799 in fiscal 2005 compared to $5,405,732 in fiscal 2004. Diluted earnings per share for the year ended April 30, 2005 was $1.25 compared to $1.53 in fiscal 2004. Basic earnings per share was $1.23 and $1.58 for the year ended April 30 2005 and 2004, respectively. 18 FISCAL YEAR ENDED APRIL 30, 2004 COMPARED TO FISCAL YEAR ENDED APRIL 30, 2003 Net sales decreased 5% to $100,494,122 in fiscal 2004 from $105,824,257 in the prior year. The Company's sales decreased in the consumer electronics, gaming and fitness industries during fiscal 2004. The Company continued to experience sales growth within the appliance industry in fiscal 2004. The Company's concentration in a specific industry increases the Company's risk due to business and economic factors within that specific industry. The Company's five largest customers accounted for 68% and 62% of net sales in fiscal 2004 and 2003, respectively. Sales to the Company's largest customers can vary from period to period. In addition, the Company generally does not obtain long-term purchase contracts. Any significant change in orders from these customers could materially impact the Company's operating results. Gross profit decreased to $19,115,930 in fiscal 2004 from $19,919,683 in the prior year. The reduction in absolute dollars of gross profit is primarily due to lower sales volume for the fiscal year ended 2004. Gross profit increased as a percent to net sales to 19.0% compared to 18.8% in fiscal 2003. The overall increase as a percentage is due to product life cycles, product mix and component pricing. The Company's gross profit margin can vary considerably due to price erosion within the EMS industry, product mix, component pricing, overall capacity utilization, product life cycle, the mix of turnkey and consignment orders and labor cost. There can be no assurance that gross profit margins will not decrease in the future. Selling and administrative expenses decreased in fiscal 2004 to $9,664,903 from $10,048,229 in fiscal 2003. The decrease is primarily due to the receipt of approximately $283,000 in settlement of an insurance claim, and a reduction in commission and legal expenses. The Company anticipates administrative expenses and professional fees in conjunction with Sarbanes-Oxley compliance will increase significantly in future periods. Interest expense decreased to $239,792 from $847,846. The decrease is primarily attributed to the reduction in the loan balance of the Company's credit facility and lower interest rates. In fiscal 2004 tax expense was $3,550,038, which resulted in an effective rate of 39.6% compared to $3,251,511 in income tax expense and an effective rate of 36.2% in fiscal 2003. Net income for fiscal 2004 was $5,405,732, which resulted in basic earnings per share of $1.58 and dilutive earnings per share of $1.53. Net income for fiscal 2003 was $5,714,924. Basic and dilutive earnings per share were $1.98 and $1.70, respectively for fiscal 2003. LIQUIDITY AND CAPITAL RESOURCES: Cash flow provided by operating activities was $1,337,081 for the year ended April 30, 2005 compared to $9,368,628 for the prior fiscal year. During fiscal 2005, cash provided by operations was the result of net income, the non-cash effect of depreciation and amortization and an increase in income taxes payable. The Company has applied its income tax receivable to estimated tax payments due for fiscal 2004 and part of fiscal 2005. The balance of income taxes due resulted in an accrual for income taxes for the year ended April 30, 2005. Cash provided by operating activities was partially offset by an increase in receivables of approximately $1,624,000 and an increase of approximately $6,980,000 in inventories. The increase in inventories is primarily attributable to an increase in customer required safety stock, the start up of the Company's China facility and new product programs driven by customers. STRATEGIC ACTIVITIES. In fiscal 2005 the Company made several strategic decisions that will be important to the Company going forward. These included acquiring the portion of SMTU previously owned by outside investors, selling our Las Vegas operation and acquiring Able. On July 14, 2005, the Company closed on the purchase of all of the outstanding stock of Able, a company headquartered in Hayward California, with an additional manufacturing facility located in Tijuana, Mexico. Able is an ISO 9001:2000 certified EMS company serving Original Equipment Manufacturers in the test and measurement, medical instruments, telecommunications, computer peripherals, industrial controls and 19 genetic research industries. Able's long-term relationships with its customers will give the Company a presence in a number of new markets, diversify its current customer base and expand the number of industries it serves. The effective date of the transaction was July 1, 2005. The purchase price was $12,800,000 plus the assumption of approximately $3,700,000 in debt and was recorded as stock purchase transaction in first quarter of fiscal 2006. The transaction was financed by the Company's amended credit facility and resulted in an increase of approximately $9,000,000 in goodwill. On June 3, 2005 the Company closed on the sale of its Las Vegas, Nevada operation. The Las Vegas facility operated as a complete electronic manufacturing services ("EMS") center specializing in the assembly of electronic products and cables for a broad range of customers primarily in the gaming industry. The effective date of the transaction was May 30, 2005. The transaction was structured as an asset purchase, and included a $2,000,000 cash payment to the Company for the buyer's purchase of the machinery, equipment and other assets of the Las Vegas operation. The transaction will be recorded by the Company in the first quarter of fiscal 2006 and will include a gain on the transaction of approximately $140,000. The Company continues to be obligated under the primary lease agreement for the Las Vegas facility and subleases the facility in part to Grand Products, Inc., the buyer of the Company's Las Vegas operation and in part to Western Money Systems. 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 $2,814,699. This aggregate price was paid with $1,330,000 in notes with terms of up to 2 years and cash in the amount of $1,338,858 and forgiveness of interest payable. The acquisition was treated as a step acquisition and resulted in goodwill of $756,959. On October 1, 2004 SMT Unlimited, Inc. was merged into the Company, and SMTU was liquidated, thereby becoming an operating division of the Company. The Company expects all three of its strategic decisions; the acquisition of the outstanding portion STMU, sale of our Las Vegas operation and acquisition of Able will be important to the Company's future. In particular, the Able acquisition directly achieves the Company's strategic goals of diversifying our markets served, diversifying our customer base and expanding the range of services we offer. FINANCING TRANSACTIONS. The Company entered into an Amended Loan and Security Agreement in July 2005, which provides for a revolving credit facility. The maximum borrowing limit under the amended revolving credit facility is limited to the lesser of: (i) $17,000,000 or (ii) an amount equal to the sum of 85% of the receivable borrowing base and the lesser of $8,500,000 or varying percentages of the inventory base. The Amended Loan and Security Agreement expires on June 30, 2008 and is subject to certain financial covenants. The Amended Loan and Security Agreement also provides a term loan in the amount of $3,000,000. Interest accrues at 5.75% and interest only is due each quarter through June 30, 2006. Quarterly principal payments of $250,000 are due in years two through four. At April 30, 2005 the Company was in compliance with its financial covenants and had borrowings of $392,038 outstanding under this line of credit. The revolving credit facility is collateralized by substantially all of the domestically located assets of the Company and contains certain financial covenants, including specific covenants pertaining to the maintenance of minimum tangible net worth and net income. The agreement also restricts annual lease rentals and capital expenditures and the payment of dividends or distributions of any cash or other property on any of its capital stock. SigmaTron China entered into a loan agreement in April 2005, which provides for a line of credit with the China Construction Bank. The agreement provides for four draws on the line of credit of approximately $121,000, $362,750, $362,750 and $362,750, on April 15, 2005, July 1, 2005, October 8, 2005, and January 3, 2006, respectively. The interest rate under the agreement is 5.76% and at April 30, 2005 SigmaTron China had $121,000 outstanding under the loan. The loan is collateralized by the Company's building in Suzhou-Wujiang China and 60 of the 100 Chinese acres leased at the property. 20 SigmaTron China had its first production during fiscal 2005, making a positive contribution to SigmaTron's margins while it continues to ramp up its sales activities. The Company believes that certain of Able's customers may be interested in doing business with SigmaTron China, which could provide opportunities for added growth. In fiscal 2005, the Company purchased approximately $3,800,000 in machinery and equipment and it anticipates it will make additional machinery and equipment purchases during fiscal 2006. The Company executed three to five year capital leases to finance the majority of the purchases. The machinery and equipment purchases were necessary to assist with capacity constraints and the Company commenced its lead-free manufacturing program in the fourth quarter of fiscal 2005. Effective mid-2006 the Company's customers that provide products to the European Union must be in compliance with the European Standard: the "Restriction of Use of Hazardous Substance" directive for all of their products that ship to the European marketplace. The Company's customers are also requesting that the Company have the lead-free manufacturing capability. The Company anticipates its credit facility, cash flow from operations and leasing resources will be adequate to meet its working capital requirements in fiscal 2006. In the event the business grows rapidly or the Company considers an acquisition, additional financing resources could be necessary in the current or future fiscal years. There is no assurance that the Company will be able to obtain equity or debt financing at acceptable terms in the future. The Company provides funds for salaries, wages, overhead and capital expenditure items as necessary to operate its wholly owned subsidiary Standard Components de Mexico, S.A. The Company provides funding to Standard Components de Mexico, S.A. 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 2005 the Company paid approximately $8,400,000 to Standard Components de Mexico, S.A. for services provided. On May 2002, the Company acquired a plant in Mexico through seller financing. The loan of $1,950,000 is payable in equal monthly installments of approximately $31,000 over six and a half years at a rate of 7% interest per annum. Prior to acquiring this the plant, the Company rented the facility. At April 30, 2005, $1,158,828 was outstanding in connection with the financing of that facility. The impact of inflation for the past three fiscal years has been minimal. CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS: The following table summarizes the Company's contractual obligations at April 30, 2005 and the effect such obligations are expected to have on its liquidity and cash flows in future periods. Payment Obligations
Total 4/30/06 4/30/08 4/30/10 ---------- ---------- ---------- ---------- Notes Payable, including current maturities $4,503,829 $ 482,740 $1,032,717 $2,988,372 Capital Leases, including current maturities 1,876,957 637,766 923,051 316,140 SMTU purchase 300,000 300,000 0 0 ---------- ---------- ---------- ---------- Total contractual cash obligations $6,680,786 $1,420,506 $1,955,768 $3,304,512 ========== ========== ========== ==========
21 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS Interest Rate Risk The Company's exposure to market risk for changes in interest rates is due to primarily to its short-term investments and borrowings under its credit agreements. As of April 30, 2005 the Company had no short-term investments and approximately $513,000 in borrowings under its credit agreements. The Company does not use derivative financial investments. The Company's cash equivalents if any, are invested in overnight commercial paper. The Company does not have any significant cash flow exposure due to rate changes for its cash equivalents, as these instruments are short-term. ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA The response to this item is included in Item 15(a) of this Report. ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. ITEM 9A. CONTROLS AND PROCEDURES Our management, including our President and Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of April 30, 2005. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports filed by the Company under the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to our management, including our President and Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our President and Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of April 30, 2005. There has been no change in our internal control over financial reporting during the quarter ended April 30, 2005, that has materially affected or is reasonably likely to materially affect, our internal control over financial reporting. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required under this item is incorporated herein by reference to the Company's definitive proxy statement, filed with the Securities and Exchange Commission not later than 120 days after the close of the Company's fiscal year ended April 30, 2005. 22 ITEM 11. EXECUTIVE COMPENSATION The information required under this item is incorporated herein by reference to the Company's definitive proxy statement, filed with the Securities and Exchange Commission not later than 120 days after the close of the Company's fiscal year ended April 30, 2005. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required under this item is incorporated herein by reference to the Company's definitive proxy statement, filed with the Securities and Exchange Commission not later than 120 days after the close of the Company's fiscal year ended April 30, 2005. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required under this item is incorporated herein by reference to the Company's definitive proxy statement, filed with the Securities and Exchange Commission not later than 120 days after the close of the Company's fiscal year ended April 30, 2005. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information required under this item is incorporated herein by reference to the Company's definitive proxy statement, filed with the Securities and Exchange Commission not later than 120 days after the close of the Company's fiscal year ended April 30, 2005. PART IV 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 this Annual Report on Form 10-K beginning on Page F-1. 23 INDEX TO EXHIBITS (a)(3) 3.1 Certificate of Incorporation of the Company, incorporated herein by reference to Exhibit 3.1 to Registration Statement on Form S-1, File No. 33-72100, dated February 9, 1994. 3.2 Amended and Restated By-laws of the Company, adopted on September 24, 1999, filed as Exhibit 3.2 to the Company's Form 10-K for year ended April 30, 2000 and hereby incorporated by reference. 10.1 Form of 1993 Stock Option Plan - filed as Exhibit 10.4 to the Company's Registration Statement on Form S-1, File No. 33-72100, and hereby incorporated by reference. * 10.2 Form of Incentive Stock Option Agreement for the Company's 1993 Stock Option Plan - filed as Exhibit 10.5 to the Company's Registration Statement on Form S-1, File No. 33-72100, and hereby incorporated by reference. * 10.3 Form of Non-Statutory Stock Option Agreement for the Company's 1993 stock Option Plan - filed as Exhibit 10.6 to the Company's Registration Statement on Form S-1, File No. 33-72100, and hereby incorporated by reference. * 10.4 2000 Outside Directors' Stock Option Plan and hereby incorporated by reference - filed as Appendix 1 to the Company's 2000 Proxy Statement filed on August 21, 2000. 10.5 Loan and Security Agreement between SigmaTron International, Inc. and LaSalle National Bank dated August 25, 1999 filed as Exhibit 10.26 to the Company's Form 10-Q for the quarter ended October 31, 1999 and hereby incorporated by reference. 10.6 Amended and Restated Agreement between Nighthawk Systems, Inc. and SigmaTron International Inc., dated January 1, 2000, filed as Exhibit 10.25 to the Company's Form 10-K for the year ended April 30, 2000 and hereby incorporated by reference. 10.7 Lease Agreement # 00-190 between SigmaTron International, Inc. and International Financial Services dated July 18, 2000, filed as Exhibit 10.27 to the Company's Form 10-Q for the quarter ended October 31, 2000 and hereby incorporated by reference. 10.8 Lease Agreement # 00-280 between SigmaTron International, Inc. and International Financial Services dated December 12, 2000, filed as Exhibit 10.27 to the Company's Form 10-K for the year ended April 30, 2001 and hereby incorporated by reference. 10.9 Amended Loan and Security Agreement between SigmaTron International, Inc. and LaSalle Bank National Association, dated October 16, 2002, filed as Exhibit 10.27 to the Company's Form 10-Q for the quarter ended October 31, 2002 and hereby incorporated by reference. 10.10 Mortgage and Security Agreement between SigmaTron International, Inc. and LaSalle Bank National Association, dated November 17, 2003, filed as Exhibit 10.19 to the Company's Form 10-Q for the quarter ended October 31, 2003 and hereby incorporated by reference. 10.11 Mortgage Note between SigmaTron International, Inc. and LaSalle Bank National Association, dated November 17, 2003, filed as Exhibit 10.20 to the Company's Form 10-Q for the quarter ended October 31, 2003 and hereby incorporated by reference. 10.12 Amended Loan and Security Agreement between SigmaTron International, Inc. and LaSalle Bank National Association, dated January, 2004, filed as Exhibit 10.21 to the Company's Form 10-Q for the quarter ended January 31, 2004 and hereby incorporated by reference. 24 * 10.13 2004 Directors' Stock Option Plan and hereby incorporated by reference - filed as Appendix C to the Company's 2004 Proxy Statement filed on August 16, 2004. * 10.14 2004 Employee Stock Option Plan and hereby incorporated by reference - filed as Appendix B to the Company's 2004 Proxy Statement filed on August 16, 2004. * 10.15 Change in Control Plan dated May 30, 2002, filed as Exhibit 10.15. 10.16 Ninth Amendment to Loan and Security Agreement between SigmaTron International, Inc. and LaSalle Bank National Association, dated March 11, 2005, filed as Exhibit 10.16. 10.17 Stock Purchase Agreement, dated the 14th day of July, 2005, between SigmaTron International, Inc. and Able Electronics Corporation, filed as Exhibit 10.17. 22.1 Subsidiaries of the Registrant - filed as Exhibit 22.1 of the Company's Registration Statement on Form S-1, File No. 33-72100, and hereby incorporated by reference. 23.1 Consent of Grant Thornton LLP. 31.1 Certification of Principal Executive Officer of the Company Pursuant to Rule 13a-14(a) under the Exchange Act, as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Principal Financial Officer of the Company Pursuant to Rule 13a-14(a) under the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification by the Principal Executive Officer of SigmaTron International, Inc. Pursuant to Rule 13a-14(b) under the Exchange Act and Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). 32.2 Certification by the Principal Financial Officer of SigmaTron International, Inc. Pursuant to Rule 13a-14(b) under the Exchange Act and Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). * Indicates management contract or compensatory plan. (c) Exhibits The Company hereby files as exhibits to this Report the exhibits listed in Item 15(a)(3) above, which are attached hereto or incorporated herein. (d) Financial Statements Schedules The Company hereby files a schedule to this Report the financial schedules in Item 15, which are attached hereto. 25 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. SIGMATRON INTERNATIONAL, INC. By: /s/ Gary R. Fairhead ---------------------------------- Gary R. Fairhead, President and Chief Executive Officer Dated: July 27, 2005 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.
Signature Title Date --------- ----- ---- /s/ Franklin D. Sove Chairman of the Board of Directors July 27, 2005 - -------------------- Franklin D. Sove /s/ Gary R. Fairhead President and Chief Executive Officer July 27, 2005 - -------------------- Gary R. Fairhead (Principal Executive Officer) /s/ Linda K. Blake Chief Financial Officer, Secretary and Treasurer July 27, 2005 - ------------------ Linda K. Blake (Principal Financial Officer and Principal Accounting Officer) /s/ John P. Chen Director July 27, 2005 - ---------------- John P. Chen /s/ W.L. McClelland Director July 27, 2005 - ------------------- W.L. McClelland /s/ Thomas W. Rieck Director July 27, 2005 - ------------------- Thomas W. Rieck /s/ Dilip S. Vyas Director July 27, 2005 - ----------------- Dilip S. Vyas /s/ Carl Zemenick Director July 27, 2005 - ----------------- Carl Zemenick
26 INDEX TO FINANCIAL STATEMENTS
PAGE SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM..................................... F-2 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS ASSETS................................................................................. F-3 LIABILITIES AND STOCKHOLDERS' EQUITY................................................... F-4 CONSOLIDATED STATEMENTS OF INCOME........................................................ F-5 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY................................................................... F-6 CONSOLIDATED STATEMENTS OF CASH FLOWS.................................................... F-7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................................... F-8
Financial statement schedules not listed above are omitted because they are not applicable or required. F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders SigmaTron International, Inc. We have audited the accompanying consolidated balance sheets of SigmaTron International, Inc. and subsidiaries (a Delaware corporation) as of April 30, 2005 and 2004, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended April 30, 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SigmaTron International, Inc. and subsidiaries as of April 30, 2005 and 2004, and the results of its operations and its cash flows for the each of the three years in the period ended April 30, 2005 in conformity with accounting principles generally accepted in the United States of America. GRANT THORNTON LLP Chicago, Illinois July 8, 2005 F-2 SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS APRIL 30,
ASSETS 2005 2004 ------------- ------------- CURRENT ASSETS Cash and cash equivalents $ 184,014 $ 5,145,814 Restricted cash - 100,000 Accounts receivable, less allowance for doubtful accounts of $120,000 at April 30, 2005 and 2004. 14,275,308 12,651,272 Inventories, net 21,468,506 14,168,357 Prepaid and other assets 1,168,366 1,315,127 Refundable income taxes - 275,583 Deferred income taxes 429,528 1,902,551 Other receivables 183,666 415,253 ------------- ------------- Total current assets 37,709,388 35,973,957 PROPERTY, PLANT AND EQUIPMENT, NET 26,689,940 25,707,901 LONG-TERM ASSETS Other assets 1,386,770 1,316,814 Goodwill 756,959 - ------------- ------------- Total long-term assets 2,143,729 1,316,814 ------------- ------------- TOTAL ASSETS $ 66,543,057 $ 62,998,672 ============= =============
The accompanying notes are an integral part of these statements. F-3 SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - CONTINUED APRIL 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 2005 2004 ------------ ------------ CURRENT LIABILITIES Trade accounts payable $ 7,395,111 $ 7,475,026 Accrued expenses 2,269,703 2,987,889 Accrued payroll 1,675,788 1,552,855 Income taxes payable 407,710 - Notes payable - buildings 430,000 430,000 Notes payable - other 300,000 - Capital lease obligations 637,766 640,436 ------------ ------------ Total current liabilities 13,116,078 13,086,206 NOTES PAYABLE - BANKS 512,958 1,118,514 NOTES PAYABLE - BUILDINGS, LESS CURRENT PORTION 4,073,828 4,536,159 CAPITAL LEASE OBLIGATIONS, LESS CURRENT PORTION 1,239,190 299,536 SUBORDINATED DEBENTURE PAYABLE - 1,050,000 DEFERRED INCOME TAXES 1,668,909 1,265,714 ------------ ------------ Total liabilities 20,610,963 21,356,129 MINORITY INTEREST IN AFFILIATE - 439,787 STOCKHOLDERS' EQUITY Preferred stock, $.01 par value; 500,000 shares authorized, none issued and outstanding - - Common stock, $.01 par value; 12,000,000 shares authorized, 3,755,420 and 3,750,954 shares issued and outstanding at April 30, 2005 and 2004, respectively 37,554 37,510 Capital in excess of par value 19,087,020 19,056,525 Retained earnings 26,807,520 22,108,721 ------------ ------------ Total stockholders' equity 45,932,094 41,202,756 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 66,543,057 $ 62,998,672 ============ ============
The accompanying notes are an integral part of these statements. F-4 SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED APRIL 30,
2005 2004 2003 -------------- -------------- -------------- Net sales $ 106,076,965 $ 100,494,122 $ 105,824,257 Cost of products sold 87,509,391 81,378,192 85,904,574 -------------- -------------- -------------- Gross profit 18,567,574 19,115,930 19,919,683 Selling and administrative expenses 10,919,006 9,664,903 10,048,229 -------------- -------------- -------------- Operating income 7,648,568 9,451,027 9,871,454 Other income (550,270) - - Interest expense - banks and capital lease obligations 283,137 232,292 847,846 -------------- -------------- -------------- Income before income tax expense and minority interest of affiliate 7,915,701 9,218,735 9,023,608 Income tax expense 3,082,568 3,550,038 3,251,551 -------------- -------------- -------------- Income before minority interest of affiliate 4,833,133 5,668,697 5,772,057 Minority interest in income of affiliate 134,334 262,965 57,133 -------------- -------------- -------------- NET INCOME $ 4,698,799 $ 5,405,732 $ 5,714,924 ============== ============== ============== Net income per common share Basic $ 1.25 $ 1.58 $ 1.98 ============== ============== ============== Diluted $ 1.23 $ 1.53 $ 1.70 ============== ============== ============== Weighted-average shares of common stock outstanding Basic 3,751,792 3,423,999 2,885,652 ============== ============== ============== Diluted 3,815,549 3,541,297 3,355,076 ============== ============== ==============
The accompanying notes are an integral part of these statements. F-5 SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY THREE YEARS ENDED APRIL 30, 2003, 2004 AND 2005
Capital in Total Preferred Common excess of Retained stockholders' stock stock par value earnings equity ------------ ------------ ------------ ------------ ------------ Balance at May 1, 2002 $ - $ 28,812 $ 9,436,554 $ 10,988,065 $ 20,453,431 Exercise of options - 528 123,787 - 124,315 Net income - - - 5,714,924 5,714,924 ------------ ------------ ------------ ------------ - ----------- Balance at April 30, 2003 - 29,340 9,560,341 16,702,989 26,292,670 Exercise of options - 8,170 4,310,695 - 4,318,865 Tax benefit of exercise of option - - 5,185,489 - 5,185,489 Net income - - - 5,405,732 5,405,732 ------------ ------------ ------------ ------------ - ----------- Balance at April 30, 2004 - 37,510 19,056,525 22,108,721 41,202,756 Exercise of options - 44 17,774 - 17,818 Tax benefit of exercise of option - - 12,721 - 12,721 Net income - - - 4,698,799 4,698,799 ------------ ------------ ------------ ------------ ------------- Balance at April 30, 2005 $ - $ 37,554 $ 19,087,020 $ 26,807,520 $ 45,932,094 ============ ============ ============ ============ =============
The accompanying notes are an integral part of these statements. F-6 SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED APRIL 30,
2005 2004 2003 ------------- ------------- ------------- Cash flows from operating activities Net income $ 4,698,799 $ 5,405,732 $ 5,714,924 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 3,249,055 2,682,530 3,456,773 Provision for doubtful accounts - - (124,786) Reduction in provision for inventory obsolescence (319,445) (169,926) - Deferred income taxes 1,876,218 (1,607,756) 69,780 Forgiveness of SMTU interest payable (145,841) - - Changes in assets and liabilities Accounts receivable (1,624,036) 981,616 (2,219,235) Inventories (6,980,704) 109,594 233,995 Prepaid expenses and other assets 408,394 (1,015,409) 349,221 Refundable income taxes 275,583 (128,761) - Minority interest in affiliate (439,787) 205,241 (272,075) Trade accounts payable (79,915) (444,749) 1,588,230 Tax benefits of options exercised 12,721 5,185,489 - Accrued expenses and wages (1,671) (412,761) 1,496,498 Income taxes 407,710 (1,422,212) 1,405,119 ------------- ------------- ------------- Net cash provided by operating activities 1,337,081 9,368,628 11,698,444 Cash flows from investing activities Proceeds from sale of machinery and equipment - - 1,282 Purchases of machinery and equipment (3,816,935) (9,231,061) (1,666,103) Purchase of SMTU interest (1,338,858) - - ------------- ------------- ------------- Net cash used in investing activities (5,155,793) (9,231,061) (1,664,821) Cash flows from financing activities Proceeds from exercise of options 17,774 4,318,865 124,315 Proceeds under building notes payable - 3,600,000 - Payments under building notes payable (462,289) (1,992,258) (245,546) Payments from other notes payable (1,030,000) - (58,749) Proceeds under capital lease obligations 1,729,073 - 894,612 Payments under capital lease obligations (792,090) (985,275) (2,077,256) Net payments under line of credit (605,556) (357,929) (8,593,535) ------------- ------------- ------------- Net cash (used in) provided by financing activities (1,143,088) 4,583,403 (9,956,159) ------------- ------------- ------------- (DECREASE) INCREASE IN CASH (4,961,800) 4,720,970 77,464 Cash at beginning of year 5,145,814 424,844 347,380 ------------- ------------- ------------- Cash at end of year $ 184,014 $ 5,145,814 $ 424,844 ============= ============= ============= Supplementary disclosures of cash flow information Cash paid for interest $ 412,324 $ 341,212 $ 1,117,848 Cash paid for income taxes, net of (refunds) 333,518 1,322,633 1,881,210 Acquisition of buildings financed under bank notes - 3,600,000 1,950,000 Non Cash Investing Activities Acquisition of SMTU $ 2,814,699 Forgiveness of interest payable of SMTU (145,841) Cash paid for acquisition (1,338,858) ----------- Notes issued for acquisition $ 1,330,000 Forgiveness of subordinated debenture 1,050,000 Forgiveness of accrued interest payable 593,582 Reduction of long lived assets from purchase of SMTU 452,087 Goodwill created 756,959
The accompanying notes are an integral part of these statements. F-7 SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS APRIL 30, 2005, 2004 AND 2003 NOTE A - DESCRIPTION OF THE BUSINESS The Company operates in one business segment as an independent provider of electronic manufacturing services ("EMS"), which includes printed circuit board assemblies and completely assembled (box-build) electronic products. In connection with the production of assembled products the Company also provides services to its customers including (1) automatic and manual assembly and testing of products; (2) material sourcing and procurement; (3) design, manufacturing and test engineering support; (4) warehousing and shipment services; and (5) assistance in obtaining product approval from governmental and other regulatory bodies. The Company provides these manufacturing services through an international network of facilities located in the United States, Mexico, China and Taiwan. 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., its wholly owned foreign enterprise Wujiang SigmaTron Electronics Co., LTD. ("SigmaTron China") and its procurement branch, SigmaTron Taiwan. The functional currency of the Mexican and Chinese subsidiaries and procurement branch, SigmaTron Taiwan is the U.S. dollar. The Company adopted the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 46R, ("FIN 46R") "Consolidation of Variable Interest Entities. The Company adopted FIN 46R as of November 1, 2003 as it relates to its former affiliate SMTU. On September 2, 2004, the remaining minority interest in SMTU was acquired. On October 1, 2004 SMTU was liquidated, thereby becoming an operating division of the Company. USE OF ESTIMATES The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates made in preparing the consolidated financial statements include depreciation and amortization periods, the allowance for doubtful accounts and reserves for inventory. Actual results could materially differ from these estimates. F-8 SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED APRIL 30, 2005, 2004 AND 2003 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash and all highly liquid short-term investments maturing within three months of the purchase date. RESTRICTED CASH Restricted cash represents amounts held in escrow as it relates to the acquisition of the Company's corporate headquarters and midwestern manufacturing facility. The amounts become unrestricted upon settlement of all matters related to the acquisition of the facility. ACCOUNTS RECEIVABLE The majority of the Company's accounts receivable are due from companies in the consumer electronics, gaming, fitness, industrial electronics, 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 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 inventory includes an allocation of labor and overhead, including direct and indirect labor, freight and other overhead costs. The Company establishes inventory reserves for valuation, shrinkage, and excess and obsolete inventory. The Company records provisions for inventory shrinkage based on historical experience to account for unmeasured usage or loss. Actual results differing from these estimates could significantly affect the Company's inventories and cost of products sold. The Company records provisions for excess and obsolete inventories for the difference between the cost of inventory and its estimated realizable value based on assumptions about future product demand and market conditions. Actual product demand or market conditions could be different than projected by management. F-9 SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED APRIL 30, 2005, 2004 AND 2003 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED PLANT PROPERTY AND EQUIPMENT Machinery and equipment are valued at cost. The Company provides for depreciation and amortization using the straight-line method over the estimated useful life of the assets: Buildings 20 years Machinery and equipment 5-12 years Office equipment 5 years Leasehold improvements 15 years INCOME TAXES Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. EARNINGS PER SHARE Basic earnings per share 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 Revenues from sales of product including the Company's electronic manufacturing service business are recognized when the product is shipped. In general it is the Company's policy to recognize revenue and related costs when the order has been shipped from its facilities, which is also the same point that title passes under the terms of the purchase order except for consignment inventory. Consignment inventory is shipped from the Company to an independent warehouse for storage or shipped directly to the customer and stored in a segregated part of the customer's own facility. Upon the customer's request for inventory, the consignment inventory is shipped to the customer if the inventory was stored offsite or transferred from the segregated part of the customer's facility for consumption, or use, by the customer. The Company recognizes revenues upon such transfer. The Company does not earn a fee for storing the consignment inventory. The Company provides a ninety (90) day warranty for workmanship only and does not have any installation, acceptance or sales incentives, although the Company has negotiated extended F-10 SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED APRIL 30, 2005, 2004 AND 2003 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED REVENUE RECOGNITION - CONTINUED warranty terms in certain instances. The Company assembles and tests assemblies based on customers specifications. Historically the amount of returns for workmanship issues has been de minimus under the Company's standard or extended warranties. Any returns for workmanship issues received after each period end are accrued in the respective financial statements. SHIPPING AND HANDLING COSTS The Company records shipping and handling costs net, within selling and administrative expenses. Customers are typically invoiced for shipping costs. Shipping and handling costs totaled $136,008, $77,495 and $113,238 in fiscal 2005, 2004 and 2003, respectively. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments include receivables, notes payable, accounts payable, stock warrants and accrued liabilities. The fair values of financial instruments are not materially different from their carrying values. WARRANTS The Company accounts for warrants in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The Company determines the appropriate classification of all warrants as available-for-sale at the time of award and at April 30, 2005, all of the Company's investments were reported at fair value. Unrealized gains and losses are reported in other income (expense). LONG-LIVED ASSETS The Company reviews long-lived assets for impairment, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An asset is considered impaired if its carrying amount exceeds the future net cash flow the asset is expected to generate. If such asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset, if any, exceeds its fair market value. The Company has adopted SFAS No 144, which establishes a single accounting model for the impairment or disposal of long-lived assets, including discontinued operations. There were no impairments for the fiscal years ended April 30, 2005, 2004 and 2003. F-11 SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED APRIL 30, 2005, 2004 AND 2003 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 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 not 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. There was no impairment for the fiscal year ended April 30, 2005. STOCK INCENTIVE PLANS The Company maintains various stock incentive plans. See Note P for additional information regarding these plans. The Company accounts for these plans under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. The Company is in compliance with disclosure provisions of SFAS 123, Accounting for Stock-Based Compensation and SFAS 148 Accounting for Stock-Based Compensation-Transition and Disclosure. The Company recognizes compensation cost for restricted shares and restricted stock units to employees. As of April 30, 2005, 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. The following table also provides the amount of stock-based compensation cost included in net earnings as reported.
2005 2004 2003 ------------ ------------ ------------ Net income as reported $ 4,698,799 $ 5,405,732 $ 5,714,924 Deduct total stock-based employee compensation expense determined under fair value based method for awards granted, modified, or settled, net of related tax effects (217,322) (266,528) (563,018) ------------ ------------ ------------ Pro forma net income $ 4,481,477 $ 5,139,204 $ 5,151,906 ============ ============ ============
F-12 SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED APRIL 30, 2005, 2004 AND 2003 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED STOCK INCENTIVE PLANS - CONTINUED
2005 2004 2003 ------------ ------------ ------------ Earnings per share Basic - as reported $ 1.25 $ 1.58 $ 1.98 Basic - pro forma 1.19 1.50 1.78 Diluted - as reported 1.23 1.53 1.70 Diluted - pro forma 1.17 1.45 1.54
RISKS AND UNCERTAINTIES The Company's inventories include parts and components that may be specialized in nature or subject to customers' future usage requirements. The Company has programs to minimize the required inventories on hand and actively monitors customer purchase orders and backlog. The Company uses estimated allowances to reduce recorded amounts to market values; such estimates could change in the future. NEW ACCOUNTING STANDARDS In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share- Based Payment ("SFAS 123R"). The Company is required to adopt SFAS 123R on May 1, 2006. SFAS 123R requires the Company to measure the cost of employee services received in exchange for an equity award based on the grant date fair value. The cost will be recognized as an expense in financial statements over the period during which an employee is required to provide service. As regulations are still pending, the Company has not been able to determine whether the impact will be material. On December 21, 2004, the Financial Accounting Standards Board ("FASB") Staff Position ("FSP") FAS 109-I, "Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004" was issued. FSP FAS 109-I clarifies that this tax deduction should be accounted for as a special deduction in accordance with Statement 109. As such, the special deduction has no effect on deferred tax assets and liabilities existing at the date of enactment. Rather, the impact of this deduction would be reported in the period in which the deduction is claimed on the Company's tax return beginning in 2005. As regulations are still pending, the Company has not been able to determine whether the impact will be material; however, the Company believes that the impact will not be material. F-13 SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED APRIL 30, 2005, 2004 AND 2003 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED NEW ACCOUNTING STANDARDS - CONTINUED On December 21, 2004, FSP FAS 109-2, "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004" was issued. FSP FAS 109-2 provides companies additional time, beyond the financial reporting period during which the Act took effect, to evaluate the Act's impact on a company's plan for reinvestment or repatriation of certain foreign earnings for purposes of applying Statement 109. FSP FAS 109-2 was effective upon issuance. As of December 31, 2004 based on management's analysis of the Act, although not yet finalized, it is unlikely that under the repatriation provision of the Act the Company had any foreign earnings to repatriate and accordingly, the financial statements do not reflect any provisions for taxes on unremitted foreign earnings. The Company does not believe the impact will be material. In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an amendment of ARB No. 43, Chapter 4." This statement amends the guidance in Accounting Research Bulletin (ARB) No. 43, Charter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage) and requires that those items be recognized as current-period charges regardless of whether they meet the criterion of "abnormal." The statement also requires that allocation of fixed production overheads to the cost of conversion be based on the normal capacity of the production facilities. The provisions of this statement are effective for inventory costs incurred during fiscal years beginning after June 15, 2005 (as of February 1, 2006 for the Company) and are to be applied prospectively. The Company anticipates the impact will not be material. On October 22, 2004, the President signed the American Jobs Creation Act of 2004. The Act provides a deduction from income from qualified domestic production activities, which will be phased in from 2005 through 2010. In return, the Act also provides for a two-year phase-out (except for certain pre-existing binding contracts) of the existing Extraterritorial Income exclusion tax benefit for foreign sales which the World Trade Organization ("WTO") ruled was an illegal export subsidy. The European Union ("EU") believes that the Act fails to adequately repeal the illegal export subsidies because of the transitional provisions and has asked the WTO to review whether these transitional provisions are in compliance with their prior ruling. This will have no material impact on the Company. Additionally, the Act creates a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85% dividend received deduction for certain dividends from controlled foreign corporations. The impact on the Company in the future will not be material. RECLASSIFICATIONS Certain amounts in the 2003 and 2004 financial statements have been reclassified to conform with the 2005 presentation. F-14 SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED APRIL 30, 2005, 2004 AND 2003 NOTE C - ALLOWANCE FOR DOUBTFUL ACCOUNTS Changes in the Company's allowance for doubtful accounts are as follows:
2005 2004 2003 --------- --------- --------- Beginning balance $ 120,000 $ 120,000 $ 276,470 Bad debt expense 22,281 2,650 77,759 Write-offs (22,281) (2,650) (234,229) Recoveries - - - --------- --------- --------- Ending balance $ 120,000 $ 120,000 $ 120,000 ========= ========= =========
NOTE D - INVENTORIES Inventories consist of the following at April 30:
2005 2004 ----------- ----------- Finished products $ 7,205,332 $ 3,400,742 Work in process 1,007,594 1,221,160 Raw materials 13,635,029 10,245,349 ----------- ----------- 21,847,955 14,867,251 Less obsolescence reserve 379,449 698,894 ----------- ----------- $21,468,506 $14,168,357 =========== ===========
Changes in the Company's inventory obsolescence reserve are as follows:
2005 2004 2003 --------- --------- --------- Beginning balance $ 698,894 $ 868,820 $ 754,644 Write-offs - - 114,176 Recoveries (319,445) (169,926) - --------- --------- --------- Ending balance $ 379,449 $ 698,894 $ 868,820 ========= ========= =========
F-15 SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED APRIL 30, 2005, 2004 AND 2003 NOTE E - PROPERTY, PLANT AND EQUIPMENT, NET Machinery and equipment consist of the following at April 30:
2005 2004 ----------- ----------- Land and buildings $10,380,359 $ 8,832,653 Property, plant and equipment 30,591,691 29,948,005 Office equipment 2,745,155 2,578,362 Tools and dies 268,630 268,630 Leasehold improvements 1,861,508 1,838,958 Equipment under capital leases 4,215,171 2,364,813 ----------- ----------- 50,062,514 45,831,421 Less accumulated depreciation and amortization, including amortization of assets under capital leases of $922,946 and $759,136 at April 30, 2005 and 2004, respectively 23,372,574 20,123,520 ----------- ----------- Property, plant and equipment, net $26,689,940 $25,707,901 =========== ===========
NOTE F - NOTES PAYABLE The Company entered into an Amended Loan and Security Agreement in July 2005, which provides for a revolving credit facility. The maximum borrowing limit under the amended revolving credit facility is limited to the lesser of: (i) $17,000,000 or (ii) an amount equal to the sum of 85% of the receivable borrowing base and the lesser of $8,500,000 or varying percentages of the inventory base. The Amended Loan and Security Agreement expires on June 30, 2008 and is subject to certain financial covenants. At April 30, 2005 the Company was in compliance with its financial covenants and had borrowings of $392,038 outstanding under this line of credit. The amended Loan and Security Agreement also provides a term loan in the amount of $3,000,000. Interest only is due in year one and quarterly principal payments of $250,000 are due in years two through four. Interest accrues at 5.75% and interest only is due each quarter through June 30, 2006. Quarterly principal payments of $250,000 are due in years two through four. F-16 SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED APRIL 30, 2005, 2004 AND 2003 NOTE F - NOTES PAYABLE - CONTINUED Borrowings under the revolving line of credit bear interest at the prime rate up to prime rate minus 0.5% (4.25% - 5.75% at April 30, 2005). The Company must also pay an unused commitment fee equal to 0.25% on the revolving credit facility. As of April 30, 2005, the Company had an available line of credit of approximately $12,608,000. The revolving credit facility matures June 30, 2008. At April 30, 2005, the Company was in compliance with its financial covenants. The loan and security agreement is collateralized by substantially all of the domestically located assets of the Company and contains certain financial covenants, including specific covenants pertaining to the maintenance of minimum tangible net worth and net income. The agreement also restricts annual lease rentals and capital expenditures and the payment of dividends. SigmaTron China entered into a loan agreement in April 2005, which provides for a line of credit with the China Construction Bank. The terms of the agreement includes four draws on the line of credit of approximately $121,000, $362,750, $362,750 and $362,750, on April 15, 2005, July 1, 2005, October 8, 2005, and January 3, 2006, respectively. The interest rate under the agreement is 5.76% and at April 30, 2005 SigmaTron China had $121,000 outstanding under the loan. The loan is collateralized by the Company's building in Suzhou-Wujiang China and 60 of the 100 Chinese acres leased at the property. On November 19, 2003 the Company purchased the property that serves as the Company's corporate headquarters and its Midwestern manufacturing facility. The Company executed a note with LaSalle Bank N.A. in the amount of $3,600,000. The note bears a fixed interest rate of 5.43% and is payable in sixty monthly installments. A final payment of approximately $2,700,000 is due on or before November 30, 2008. At April 30, 2005, $3,345,000 was outstanding. On May 2002, the Company acquired a plant in Mexico through seller financing. The loan of $1,950,000 is payable in equal monthly installments of approximately $31,000 over six and a half years at a rate of 7% interest per annum. Prior to the acquisition of the plant the Company rented the facility. At April 30, 2005, $1,158,828 was outstanding. F-17 SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED APRIL 30, 2005, 2004 AND 2003 NOTE G - ACCRUED EXPENSES Accrued expenses consist of the following at April 30:
2005 2004 ---------- ---------- Bonuses 1,454,204 1,941,402 Interest payable 139,810 542,200 Commissions 43,054 49,905 Professional fees 632,635 454,382 ---------- ---------- $2,269,703 $2,987,889 ========== ==========
NOTE H - RELATED-PARTY TRANSACTIONS AND COMMITMENTS The Company had a related-party transaction with Circuit Systems, Inc., a former shareholder of the Company who filed for protection under Chapter 11 of the Federal bankruptcy code, and is now known as Circuit Systems, Inc. Liquidating Grantor's Trust, dated October 14, 2001 ("CSI"). CSI divested itself of the investment in common stock of the Company in April 2001. The transaction primarily involved the leasing of operating space. The Company leased space in Elk Grove Village, Illinois, at a base rental of $33,800 per month, with an additional $7,000 per month for property taxes. The lease required the Company to pay maintenance and utility expenses. Subsequent to the renewal agreement, CSI sold the building to a non-related party. Rent and property tax expense related to the agreement totaled approximately $270,000 from May 2003 through mid-November 2003 and $495,000 for the year ended April 30, 2003. During 1996, the Company invested $1,200 in exchange for a 12% limited partnership interest in Lighting Components, L.P. ("LC") and invested $1,300 in Lighting Components, Inc., which is the general partner of LC, in exchange for 13% of its capital stock. At April 30, 1998, the Company had also made advances to LC in exchange for subordinated debentures and promissory notes totaling $280,000. The subordinated debentures and promissory notes totaling $280,000 were fully reserved at April 30, 1998. In addition to the subordinated debentures and promissory notes, at April 30, 2000, the Company had recorded miscellaneous receivables, interest and trade receivables from LC of $1,560,000, against which a reserve of $789,000 was recorded. The Company wrote off its investment in LC of $2,500 in the statement of operations for the year ended April 30, 2001. In April 2001, LC sold certain assets to a third party. In connection with the asset sale, the Company received a F-18 SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED APRIL 30, 2005, 2004 AND 2003 NOTE H - RELATED-PARTY TRANSACTION AND COMMITMENTS - CONTINUED $400,000 promissory note receivable from a third party. Payments were due on the promissory note as follows: $125,000 plus accrued interest due January 1, 2002, $125,000 plus accrued interest due January 1, 2003, and $150,000 plus accrued interest due January 1, 2004. The payment obligations for $125,000 due January 1, 2003, and 2002, plus accrued interest were paid in December 2002 and 2001, respectively. The payment obligation of $150,000 due January 1, 2004 was paid in January 2004 plus accrued interest. Interest on the promissory note accrued at 5% per annum. The third party also agreed to pay LC royalties on certain sales derived from the purchase of the acquired assets as defined in the agreement. LC or its successor will receive royalty payments through April 30, 2007. Per the terms of a separate agreement, the Company will receive its share of the royalty payments. These royalty payments, if any, will be recorded by the Company as received and reflected as payments on the notes. At April 30, 2005 a royalty receivable of $50,740 was recorded. The receivable was paid subsequent to the fiscal year ended April 30, 2005. In August and September 2004 the Company acquired the interests of all the outside investors in its affiliate SMT Unlimited L.P. ("SMTU") and the general partner of SMTU, SMT Unlimited, Inc., including voting interest. On October 1, 2004 SMT Unlimited, Inc. was merged into the Company, and SMTU was liquidated, thereby becoming an operating division of the Company. Prior to the acquisition by the Company, SMTU was consolidated under FASB Interpretation No. 46, ("FIN46R") Consolidation of Variable Interest Entities. The aggregate price paid for all the interests was $2,814,699. This aggregate price was paid with $1,330,000 in notes with terms of up to 2 years and cash in the amount of $1,338,858 and the forgiveness of interest expense of $145,841. The acquisition was treated as a step acquisition and resulted in goodwill of $756,959 from one step and negative goodwill of $452,087 from the second transaction. The negative goodwill was treated as a reduction in the acquired long lived assets from SMTU. On October 1, 2004 SMT Unlimited, Inc. was merged into the Company, and SMTU was liquidated, thereby becoming an operating division of the Company. Prior to the Company's acquisition, SMTU was consolidated under FASB Interpretation No. 46, Consolidation of Variable Interest Entities. The Company purchased the outstanding interest of SMTU in order to provide seamless service to its customers. F-19 SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED APRIL 30, 2005, 2004 AND 2003 CONDENSED BALANCE SHEET OF SMTU AT THE DATE OF MERGER, OCTOBER 1, 2005
September 30, 2004 ------------------ Assets Current assets $ 4,009,305 Machinery & Equipment-net 3,917,418 Other assets 11,755 ----------- Total Assets $ 7,938,478 =========== Liabilities Current liabilities 5,225,840 Total long term liabilities 2,100,000 Owner's Equity 612,638 ----------- Total Liabilities and Shareholder's Equity $ 7,938,478 ===========
NOTE I - BLOCK SHIELD WARRANTS The Company expended $25,000 to investigate the feasibility of manufacturing a product for WaveZero, Inc., the owner of design rights to certain shielding products. In exchange the Company received warrants convertible into 153,781 shares of common stock of Block Shield Corporation, PLC (BLS; London Stock Exchange), the parent of WaveZero, Inc. Those warrants were subject to forfeiture upon the occurrence of certain events. During the quarter ending January 31, 2005, the risk of forfeiture terminated. Upon such termination SFAS No. 138 provides that this security be marked to market. Accordingly, the Company has recognized a gain of $303,810 to reflect the increase in the fair market value of said warrants since the date of acquisition through April 30, 2005. NOTE J - CONTINGENCIES On July 16, 2003, the Company signed a land use rights contract with the Wujiang Land Administration Bureau to obtain the use rights of land in Yao Jiazhuang Village, Wujiang Province, People's Republic of China. This particular contract covered the 40 Chinese acres of land that was adjacent to 60 Chinese acres of land for which the Company had already signed a separate land use rights contract. For the 40 acre parcel, the Company paid the transfer fee for the land and subsequently built a dormitory, canteen and power station on the land. In December F-20 SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED APRIL 30, 2005, 2004 AND 2003 NOTE J - CONTINGENCIES - CONTINUED 2004, the Company received an administration penalty notice of approximately $16,000 from the Wujiang Land Resources Bureau which stated that the Company was occupying the 40 acres without its permission. Under Chinese law the Wujiang Land Resources Bureau may seek penalties for this violation, which includes one or more of the following: 1) levying a fine, 2) confiscating any Company property on the land and 3) requiring the land to be returned. The Company has not received any other administrative notifications other than the penalty notice. The Company estimates the value of the land and building to be $1,100,000 to $1,200,000. The Company received a letter from the Business Development Department of Wujiang Developing District under the Management Committee of Wujiang Developing District which stated that the Company acted properly and that it will indemnify the Company against any penalties assessed against it by the Wujiang Land Resources Bureau. On January 5, 2005 the Company paid the penalty which was assessed against it by the Wujiang Land Resources Bureau. Prior to its payment, the Wujiang Financial Bureau paid the Company the amount of the fine, which is consistent with the terms of the indemnity letter. The Company anticipates the issue will be resolved with the Wujiang Land Resources Bureau without any liability to the Company. NOTE K - SUBSEQUENT EVENTS On June 3, 2005 the Company sold its Las Vegas Nevada operation to Grand Products, Nevada, Inc. The facility is a complete electronic manufacturing services ("EMS") center specializing in the assembly of electronic products and cables for a broad range of customers primarily in the gaming industry. The effective date of the transaction was May 31, 2005. The transaction was treated as an asset sale and included a $2,000,000 cash payment to the Company for the purchase of the machinery and equipment and other assets of the operation. The transaction will be recorded by the Company in the first quarter of fiscal 2006 and will include a gain on the transaction of approximately $140,000. The Company continues to be obligated under the primary lease agreement and subleases the facility in part to Grand Products Inc., the buyer of the Las Vegas operation and in part to Western Money Systems. On July 14, 2005 the Company purchased Able Electronics Corporation ("Able"). Able is headquartered in Hayward California, with an additional manufacturing facility located in Tijuana, Mexico. Able is an ISO 9001:2000 certified EMS company serving Original Equipment Manufacturers in the test and measurement, medical instruments, telecommunications, computer peripherals, industrial controls and genetic research industries. Able's long-term relationships with its customers will give the Company a presence in a number of new markets, diversify its current customer base and expand the number of industries it serves. The effective date of the transaction was July 1, 2005. The purchase price was $12,800,000 plus debt of approximately F-21 SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED APRIL 30, 2005, 2004 AND 2003 NOTE K - SUBSEQUENT EVENTS - CONTINUED $3,700,000 and will be recorded as stock purchase transaction in first quarter of fiscal 2006. The transaction was financed through the Company's credit facility and resulted in approximately $9,000,000 in goodwill. NOTE L - INCOME TAXES The income tax provision (benefit) for the years ended April 30 consists of the following:
2005 2004 2003 ---------- ---------- ---------- Current Federal $ 739,920 $2,763,249 $2,654,888 State 338,686 483,944 421,535 Foreign 168,395 102,200 105,348 Deferred Federal 1,600,258 174,922 59,313 State 235,309 25,723 10,467 ---------- ---------- ---------- $3,082,568 $3,550,038 $3,251,551 ========== ========== ==========
As a result of the redemption of stock options, in fiscal year 2005 and 2004 the Company was able to obtain an income tax benefit related to stock issued to employees in the amount of approximately $13,000 and $5,200,000, respectively. This tax benefit did not affect net income, but rather was added to additional paid in capital. As a result the Company generated a net tax operating loss, which offset taxes already paid in fiscal years 2004 and 2005. Since a portion of the benefit is not recognized in the current period, it is netted against the income tax payable and was recorded as a deferred tax asset in fiscal year 2004. The entire amount of the benefit from the net operating loss was utilized in fiscal year 2005, reversing the tax deferred asset and reducing current federal taxes payable. The reason for the differences between the income tax provision and the amounts computed by applying the statutory Federal income tax rates to income before income tax expense for the years ended April 30 are as follows: F-22 SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED APRIL 30, 2005, 2004 AND 2003 NOTE L - INCOME TAXES - CONTINUED
2005 2004 2003 ---------- ---------- ---------- Income tax at Federal rate $2,691,338 $3,134,369 $3,068,026 State income tax, net of federal 384,703 (227,136) 278,213 Benefit of Chinese tax holiday (100,675) - - Benefit of stock option exercise 12,721 275,583 - Other, net 94,481 367,222 (94,688) ---------- ---------- ---------- $3,082,568 $3,550,038 $3,251,551 ========== ========== ==========
Significant temporary differences that result in deferred tax assets and (liabilities) at April 30, 2005 and 2004, are as follows:
2005 2004 --------- ---------- Allowance for doubtful accounts $ 46,799 $ 27,300 Inventory obsolescence reserve 147,983 101,399 Net operating loss carry-forward - 1,738,924 Accruals not currently deductible 191,707 92,248 Inventory 242,462 110,846 --------- ---------- Current deferred tax asset 628,951 2,070,717 Prepaid insurance (199,423) (168,166) --------- ---------- Current deferred tax liability (199,423) (168,166) --------- ---------- Net current deferred tax asset $ 429,528 $1,902,551 ========= ==========
F-23 SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED APRIL 30, 2005, 2004 AND 2003 NOTE L - INCOME TAXES - CONTINUED
2005 2004 ----------- ----------- Ownership in SMTU $ - $ 20,352 Impairment reserve - 71,098 ----------- ----------- Long-term deferred tax asset - 91,450 Machinery and equipment (1,668,909) (1,357,165) ----------- ----------- Net long-term deferred tax liability $(1,668,909) $(1,265,715) =========== ===========
NOTE M - 401(k) RETIREMENT SAVINGS PLAN The Company sponsors 401(k) retirement savings plans, which are available to all non-union U.S. employees. The Company may elect to match participant contributions ranging from $300 - $500 annually. The Company contributed $82,961, $68,252 and $52,848 to the plans during the fiscal years ended April 30, 2005, 2004 and 2003, respectively. The Company paid total expenses of $15,063, $10,932 and $11,589 for the fiscal years ended April 30, 2005, 2004 and 2003, respectively, relating to costs associated with the administration of the plans. NOTE N - MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to concentration of credit risk consist principally of uncollateralized accounts receivable. For the year ended April 30, 2005, two customers accounted for 32% and 18%, of net sales of the Company, and 32% and 7%, of accounts receivable at April 30, 2005. For the fiscal year ended April 30, 2004, two customers accounted for 36% and 13%, of net sales of the Company, and 26% and 6%, of accounts receivable at April 30, 2004. F-24 SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED APRIL 30, 2005, 2004 AND 2003 NOTE O - LEASES The Company leases certain facilities under various operating leases. The Company also leases various machinery and equipment under capital leases. Future minimum lease payments under leases with terms of one year or more are as follows at April 30, 2005:
Capital Operating Years ending April 30, leases leases - --------------------- ---------- ---------- 2006 $ 753,432 $ 640,839 2007 542,583 692,876 2008 493,548 663,483 2009 325,066 561,357 2010 - 252,690 Thereafter - 72,900 ---------- ---------- $2,114,629 $2,884,145 ========== ========== Less amounts representing interest 237,638 ---------- 1,876,991 Less current portion 637,780 ---------- $1,239,211 ==========
Rent expense incurred under operating leases was approximately $669,000, $659,000 and $886,000 for the years ended April 30, 2005, 2004 and 2003, respectively. During fiscal 2005 and subsequent to the year ended April 30, 2005, the Company refinanced machinery and equipment under two separate sale/leaseback arrangements. The equipment was sold for approximately $2,137,000 in cash. The Company has the option to purchase the equipment at the end of the lease term for $1. The transactions have been accounted for as a financing lease, wherein the property remains on the balance sheet and will continue to be depreciated, and a financing obligation equal to the proceeds has been recorded. F-25 SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED APRIL 30, 2005, 2004 AND 2003 NOTE P - STOCK OPTIONS The Company has stock option plans ("Option Plans") under which certain employees and outside non-employee directors may acquire up to 1,603,500 shares of common stock. Options to be granted under the employee plans total 1,207,500, with the non-employee director plans allowing for a total of 396,000 options to be granted. At April 30, 2005, the Company has 417,854 shares reserved for future issuance to employees under the Option Plans. The Option Plans are interpreted and administered by the Compensation Committee of the Board of Directors. The maximum term of options granted under the Option Plans is generally 10 years. Options granted under the Option Plans are either incentive stock options or nonqualified options. Options forfeited under the Option Plans are available for reissuance. Options granted under these plans are granted at an exercise price equal to the fair market value of a share of the Company's common stock on the date of grant. employee options of 138,953 vest over five years with the remaining 3,100 employee options vesting over three years from the date of grant, provided the optionee remains an employee of the Company. Options granted to non-employee directors are vested on the date of grant. The Company has elected to 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 2005, 2004 and 2003 was $7.06, $0 and $2.84, respectively. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-valuation model with the following assumptions:
2005 2004 2003 ------ ---- ------ Expected dividend yield .0% N/A .0% Expected stock price volatility 0.800 N/A 0.794 Average risk-free interest rate 2.20% N/A 2.78% Weighted-average expected life of options 5 years N/A 5 years
F-26 SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED APRIL 30, 2005, 2004 AND 2003 NOTE P - STOCK OPTIONS - CONTINUED Option-valuation models require the input of highly subjective assumptions. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate in management's opinion, the existing method does not necessarily provide a reliable single measure of the fair value of the Company's employee stock options. The table below summarizes option activity through April 30, 2005:
Number of Weighted- options average exercisable Number of exercise at end options price of year ---------- --------- ----------- Outstanding at April 30, 2002 1,130,493 5.16 748,497 Options granted during 2003 72,500 4.36 Options exercised during 2003 (52,757) 2.36 Options cancelled during 2003 (179,000) 7.09 Options forfeited during 2003 (1,866) 4.66 --------- Outstanding at April 30, 2003 969,370 4.89 833,304 Options exercised during 2004 (818,751) 5.63 --------- Outstanding at April 30, 2004 150,619 2.71 137,284 Options granted during 2005 45,000 10.88 Options exercised during 2005 (4,466) 3.99 Options forfeited during 2005 (15,000) 10.64 --------- 176,153 169,485 =========
Information with respect to stock options outstanding and stock options exercisable at April 30, 2005, follows:
Options outstanding ----------------------------------------------------------- Number Weighted-average Weighted- outstanding at remaining average Range of exercise prices April 30, 2005 contractual life exercise price - ------------------------ -------------- ---------------- -------------- $ 2.20 - 5.63 143,053 6.76 years $ 2.47 10.25 - 14.50 33,100 8.99 years 11.12 ------- 176,153 =======
F-27 SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED APRIL 30, 2005, 2004 AND 2003 NOTE P - STOCK OPTIONS - CONTINUED
Options exercisable ---------------------------------- Number Weighted- exercisable at average Range of exercise prices April 30, 2005 exercise price - ------------------------ -------------- -------------- $ 2.20 - 5.63 136,385 $ 2.39 10.25 - 14.50 33,100 11.12 ------- 169,485 =======
NOTE Q - EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
2005 2004 2003 ---------- ---------- ---------- Net income $4,698,799 $5,405,732 $5,714,924 ========== ========== ========== Weighted-average shares Basic 3,751,792 3,423,999 2,885,652 Effect of dilutive stock options 63,757 117,298 469,424 ---------- ---------- ---------- Diluted 3,815,549 3,541,297 3,355,076 ========== ========== ========== Basic earnings per share $ 1.25 $ 1.58 $ 1.98 Diluted earnings per share $ 1.23 $ 1.53 $ 1.70
Options to purchase 176,153, 150,619 and 969,370 shares of common stock were outstanding at April 30, 2005, 2004 and 2003, respectively. F-28 SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED APRIL 30, 2005, 2004 AND 2003 NOTE R - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of unaudited quarterly financial data for fiscal 2005, 2004 and 2003:
First Second Third Fourth quarter quarter quarter quarter ----------- ----------- ----------- ----------- 2005 Net sales $25,078,167 $28,310,243 $28,301,593 $24,386,992 Gross margin 4,625,698 5,193,033 4,782,756 3,966,087 Net income 1,036,969 1,309,177 1,437,342 915,311 Net income per common share Basic 0.28 0.35 0.38 0.24 Diluted 0.27 0.34 0.38 0.24 2004 Net sales $24,833,797 $26,526,879 $23,906,181 $25,227,265 Gross margin 4,713,943 5,558,548 4,447,000 4,396,439 Net income 1,307,497 1,812,736 1,192,840 1,092,658 Net income per common share Basic 0.44 0.54 0.33 0.29 Diluted 0.38 0.52 0.33 0.29 2003 Net sales $22,983,430 $26,148,122 $27,879,095 $28,813,610 Gross margin 3,621,139 4,625,818 5,068,980 6,603,746 Net (loss) income 616,201 1,137,368 1,642,944 2,318,411 Net (loss) income per common share Basic 0.21 0.39 0.58 0.79 Diluted 0.19 0.34 0.49 0.58
F-29 SIGMATRON INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED APRIL 30, 2005, 2004 AND 2003 NOTE S - LITIGATION On May 25, 2001, Nancy Messina, a former employee of the Company, filed a lawsuit against the Company in the United States District Court for the Northern District of Illinois, Eastern Division, asserting claims of sexual harassment and gender discrimination under Title VII of the Civil Rights Act of 1964 and claims of violation of the Federal Equal Pay Act. The Company believes that it has meritorious defenses to the claims and is defending itself vigorously in this action. Although the compliant does not specify a dollar amount, based on information presently available to the Company, the Company believes that the resolution of these claims will not have a material adverse effect on the financial condition or results of the operations of the Company. On September 3, 2002, a lawsuit was filed by the liquidating trustee of Circuit Systems, Inc. ("CSI") in the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division, against Gary R. Fairhead, President and Chief Executive Officer of the Company and a former director of CSI and other former directors of CSI, alleging in part, that Mr. Fairhead and the named directors had breached their fiduciary duty to CSI and its stockholders in a number of respects, and corporate counsel had committed malpractice. Although the Compliant did not quantify the relief sought, the initial settlement demand against all defendants was $12 million. On January 9, 2005, the parties to this suit entered into a settlement agreement, which was approved by the court on January 26, 2005 and was dismissed on February 15, 2005. The financial settlement which provides that the plaintiff will be paid $1,750,000 was satisfied, for the most part, from CSI's directors and officers liability insurance and from legal malpractice insurance. Mr. Fairhead and the Company did not contribute to the financial settlement. No defendant admitted to any liability regarding the claims asserted in the complaint. The Company determined that it had a duty under Delaware law to indemnify Mr. Fairhead for his expenses not covered by CSI's directors and officers liability policy, which consisted of immaterial advancements of legal costs. F-30 EX-10.15 2 c96993exv10w15.txt CHANGE IN CONTROL PLAN Exhibit 10.15 SIGMATRON INTERNATIONAL, INC. AMENDED AND RESTATED CHANGE-IN-CONTROL SEVERANCE PAYMENT PLAN ARTICLE I PURPOSE OF THE PLAN This Amended and Restated Change-in-Control Severance Payment Plan (the "Plan") has been established by SigmaTron International, Inc., a Delaware corporation (the "Corporation"), to provide for the payment of severance pay primarily to selected management and highly compensated employees whose employment with the Corporation terminates due to certain conditions created by a change in control of the Corporation. ARTICLE II ELIGIBILITY 2.1. EMPLOYEES COVERED BY PLAN. Only those employees of the Corporation listed on Exhibit A are participants in the Plan ("Participants"). No other employees are covered by this Plan, unless designated for coverage by the Board. ARTICLE III DEFINITIONS 3.1. "BOARD" means the Board of Directors of the Corporation. 3.2. "CAP" is defined in Section 5.6(a). 3.3. "CAUSE" in connection with the termination of a Participant's employment with the Corporation means: (i) conviction of a felony; (ii) gross negligence in the performance of the Participant's duties; (iii) deliberate material injury to the Corporation; or (iv) refusal after at least ten (10) days written notice from the Board to carry out directions of the Board, provided that performance in accordance with such directions does not constitute a change in the terms and conditions of the Participant's employment as described in Section 4.1. If the Corporation could have terminated a Participant's employment for Cause, but lacked actual knowledge of any act or omission described above at the time of termination, the termination will nevertheless be deemed for Cause upon the later discovery of such act or omission. A determination that a termination is for Cause, as defined above, will be effective only for the purpose of this Plan and will not be determinative with respect to any other contract or arrangement between the Corporation and the Participant, unless the Board makes a specific determination to the contrary. 3.4. "CHANGE-IN-CONTROL" means a Change-in-Control of the Corporation. A Change-in-Control of the Corporation shall occur upon the happening of any one of the following: (a) THIRTY PERCENT VOTING SHARES. The acquisition by any entity, person, or group of beneficial ownership, as that term is defined in Rule 13d-3 under the Securities Exchange Act of 1934, of the ownership of more than 30% in the aggregate of the outstanding capital stock of the Corporation entitled to vote for the election of directors; acquisitions by Cyrus Tang, a stockholder who is currently the beneficial owner of more than 30% of the capital stock of the Corporation, or any affiliate of Cyrus Tang, shall not constitute a Change-in-Control. (b) CHANGE IN MAJORITY OF DIRECTORS. As a result of, or in connection with, any cash tender or exchange offer, merger or other business combination, sale of assets or contested election, or any combination of the foregoing transactions, the persons who are directors of the Corporation before the transaction shall cease to constitute a majority of the board or the board of directors of any successor to the Corporation; (c) MERGER, CONSOLIDATION OR SHARE EXCHANGE. The Corporation becomes a party to a merger, consolidation or share exchange in which either (i) the Corporation will not be the surviving corporation or (ii) the Corporation will be the surviving corporation and any outstanding shares of common stock of the Corporation will be converted into shares of any other company (other than a reincorporation or the establishment of a holding company involving no change of ownership of the Corporation) or other securities or cash or other property (excluding payments made solely for fractional shares); or (d) SALE OF ASSETS. All or substantially all of the assets and business of the Corporation are sold, transferred or assigned to, or otherwise acquired by, any other entity or entities. In no event shall the distribution by the Corporation to its shareholders of stock in a subsidiary be deemed a Change-in-Control. 3.5. "CODE" means the Internal Revenue Code of 1986, as amended. 3.6. "INVOLUNTARY TERMINATION OF EMPLOYMENT" means any termination of a Participant's employment with the Corporation unless the termination of employment is due to or is on account of: 2 (a) death; (b) resignation or retirement without the occurrence of one or more of the payment conditions described in Subsections (b), (c), (d), (e), (f) or (g) in Section 4.1 within sixty (60) days prior to the Participant's resignation or retirement date; (c) disability; or (d) Cause. 3.7. "MINIMUM PAYMENT" is defined in Section 5.6(b). ARTICLE IV PAYMENT CONDITIONS 4.1. CHANGE IN EMPLOYMENT TERMS AND CONDITIONS. Any Participant who, at any time within twenty-four (24) months immediately following the effective date of a Change-in-Control, sustains one or more of the following changes in the terms and conditions of their employment shall receive the Severance Payment described in Article V. The changes in the terms and conditions of employment causing a Severance Payment are: (a) Involuntary Termination of Employment; (b) reduction in salary or material reduction in the Participant's fringe benefits to which Participant is entitled, including a reduction in the number of paid vacation days in any year, unless such reduction in benefits is nondiscriminatory and the resulting level of benefits is consistent with that available to employees with similar authority and length of service, which as to a Participant shall include service with the Corporation before a Change-in-Control; (c) reduction in eligibility to participate in employee benefit plans or reduction in eligibility to participate in other compensation plans, including but not limited to, incentive bonus plans or stock option plans, unless such reduction in eligibility is non-discriminatory and the resulting level of eligibility is consistent with that available to employees with similar authority and length of service, which as to Participant shall include service with the Corporation before a Change-in-Control; (d) reduction in job responsibility and/or authority or the assignment of duties of a non-executive nature or for which the Participant is not reasonably equipped by his/her skills and experience; (e) request to relocate the Participant's principal business office or residence by 3 more than fifty (50) miles or assignment of duties that would reasonably require such relocation; (f) assignment of duties to the Participant which would reasonably require him/her to spend significantly more normal working days away from his/her principal business office or residence during any consecutive twelve-month period than such Participant was so required to spend on average during the three (3) consecutive twelve-month periods immediately preceding the date of a Change-in-Control; or (g) failure to provide office facilities, secretarial services, and other administrative services to the Participant which are substantially equivalent to the facilities and services provided to the Participant on the date of the Change-in-Control. 4.2. TERMINATION OF EMPLOYMENT. Notwithstanding Section 4.1, a Participant who sustains one or more of the changes described in Section 4.1 (b), (c), (d), (e), (f) and (g) above must terminate his/her employment by written notice to the Corporation within seven (7) days after the change in employment terms and conditions in order to receive a Severance Payment. Each Change-in-Control will renew a Participant's right to terminate employment and receive a Severance Payment. In no event shall a Participant be entitled to more than one Severance Payment under this Plan. ARTICLE V SEVERANCE PAYMENT 5.1. SEVERANCE PAY. A Participant who satisfies the payment conditions under Article IV will receive a Severance Payment equal to that amount set forth opposite such Participant's name on Exhibit A hereto, subject to adjustments as otherwise provided in this Article V. 5.2. GOLDEN PARACHUTE RESTRICTION. (a) REDUCTION FOR "PARACHUTE PAYMENT." Notwithstanding anything above in this Article V, if the Participant is a "disqualified individual" (as defined in Code Section 280G(c)), and the Severance Payment provided for in this Article, together with any other payments which the Participant has the right to receive from the Corporation (or its affiliates and subsidiaries), would constitute a "parachute payment" (as defined in Code Section 280G(b)(2)), the Severance Payment shall be reduced. The reduction shall be in an amount so that the present value of the total amount received by the Participant from the Corporation or its affiliates and subsidiaries will be one dollar ($1.00) less than three (3) times the Participant's base amount (as defined in Code Section 280G) and so that no portion of the 4 amounts received by the Participant shall be subject to the excise tax imposed by Code Section 4999. (b) REPAYMENT OF EXCESS AMOUNT. If through error or otherwise a Participant should receive payments under this Plan, together with other payments the Participant has the right to receive from the Corporation on account of a change in control as defined in Code Section 280G, excluding any qualified retirement plan payments, in excess of one dollar ($1.00) less than three times his/her base amount, the Participant shall immediately repay the excess to the Corporation upon notification that an overpayment has been made. 5.3. UNFUNDED PLAN. Payments under this Plan shall be made from the general funds of the Corporation. Nothing contained in this Plan shall give a Participant any right, title or interest in any property of the Corporation. 5.4. MODIFICATION OR WAIVER. A Participant's rights under the Plan may be waived or modified by the written agreement of the affected Participant and the Corporation. Nothing herein will prohibit a divergence between the terms and conditions of a waiver or modification agreed to by any one Participant and the terms and conditions agreed to by any other Participant. 5.5. LONGEVITY. To the extent the Participant has been a Participant in the Plan for less than thirty-six (36) months at the time of the Change-in-Control, the Participant's Severance Payment shall be reduced by multiplying the Severance Payment by a fraction, the numerator of which is represented by the number of full months the Participant has been a Participant in the Plan and the denominator is 36. For example, if a Change-in-Control occurs during the 31st month after a Participant has been selected as such by the Board and the Participant timely exercises his right to receive the Severance Payment, the Participant's Severance Payment shall be the amount resulting from multiplying the Severance Payment by 30/36. 5.6. CAP. (a) In the event the employment of one or more Participants is terminated voluntarily or involuntarily within seven (7) days after a Change-in-Control, the aggregate amount of Severance Payments paid to all such Participants relating to that Change-in-Control shall not exceed 15% of the market value of all of the Corporation's capital stock on the date of the Change-in-Control (the "Cap"). The market value shall, for publicly traded securities, be the mean average price of the security for the ten-day period immediately preceding the Change-in-Control determined for each of the said ten days by the average of the highest and lowest trades on that day times the total number of issued and outstanding shares. 5 (b) The amount of each of the Severance Payments subject to the Cap shall be calculated as follows: (i) If the Cap equals or exceeds $100,000 times the number of Participants sharing in the Severance Payments subject to the Cap, each Participant shall receive a minimum payment of $100,000 (the "Minimum Payment"). In addition, each Participant shall receive his/her pro rata share of the amount of the Cap exceeding the aggregate of the Minimum Payments, determined by multiplying the excess amount by a fraction, the numerator of which is the number of full months of employment of that Participant and the denominator is the sum of the full months of employment of all such Participants. If the resulting sum with respect to any Participant is greater than the Severance Payment for that Participant without regard to the Cap, the Severance Payment of that Participant shall not be increased above the amount provided by Exhibit A. The amount in excess of the Severance Payment generated by the formula of this Subsection for that Participant shall be distributed among the Participants whose Severance Payment is decreased by this Subsection pro rata by multiplying the excess amount by a fraction, the numerator of which is the number of full months of employment of each such Participant and the denominator of which is the sum of the full months of employment of all such Participants. This calculation shall be repeated as often as necessary to allow a distribution of the Cap prorated as described above so that no Participant receives greater than the Severance Payment to which that Participant is entitled under Exhibit A. (ii) If the Cap is less than $100,000 times the number of Participants sharing in the Severance Payments, the Severance Payment to each such Participant shall be the Cap divided by the number of such Participants. (iii) An example of the allocations described in this Subsection is set forth as Exhibit B, assuming hypothetically that the Cap equals $2,100,000. ARTICLE VI PAYMENT TERMS 6.1. FORM. Severance Payments shall be made in a single lump sum within fourteen (14) days after the date of the Participant's termination of employment. 6 6.2. LATE CHARGE AND INTEREST. In the event a Severance Payment or any portion thereof is not paid within fourteen (14) days after the later of the date provided for payment in Section 6.1 or the Participant's written request for payment under this Plan, and the payment remains unmade for five (5) days after written notice of such non-payment is given to the Corporation, the Corporation shall pay the affected Participant an additional twenty-five percent (25%) of the delinquent amount. In addition, the Corporation shall pay the affected Participant interest at a rate of twelve percent (12%) per annum in relation to the delinquent amount which interest shall accrue from the date provided for payment in Section 6.1 until such delinquent amount is paid. ARTICLE VII AMENDMENT AND TERMINATION 7.1. BEFORE CHANGE-IN-CONTROL. This Plan may be amended from time to time or terminated by action of the Board. This Plan will also automatically terminate if the Company (1) is legally dissolved, (2) makes a general assignment for the benefit of its creditors or (3) files for protection under the United States Bankruptcy Code. 7.2. UPON OR AFTER CHANGE-IN-CONTROL. Notwithstanding the foregoing, the Plan may not be amended or discontinued by the Corporation or the Board in conjunction with or after the effective date of a Change-in-Control. ARTICLE VIII ARBITRATION 8.1. Except as otherwise provided herein, any controversy or claim arising out of or relating to this Agreement or the breach hereof shall be settled by arbitration in accordance with such rules as may be agreed upon by the Corporation and Participant, or, failing agreement, in accordance with the Commercial Arbitration Rules of the American Arbitration Association (the "AAA") as such rules may be modified herein. 8.2. An award rendered in connection with an arbitration pursuant to this Section shall be final and binding, and judgment upon such an award may be entered and enforced in any court of competent jurisdiction. 8.3. The Forum for arbitration under this Section shall be Chicago, Illinois and the governing law for such arbitration shall be the laws of the State of Illinois. 7 8.4. Arbitration under this Section shall be conducted by a single arbitrator selected jointly by the Corporation and Participant. If within thirty (30) days after a demand for arbitration is made, the Corporation and Participant are unable to agree on a single arbitrator, three arbitrators shall be appointed. The Corporation and Participant shall each select one arbitrator and those two arbitrators shall then select within thirty (30) days a third neutral arbitrator. In connection with the selection of a single arbitrator or the third arbitrator, consideration shall be given to familiarity with the electronics manufacturing services industry and related products and experience in dispute resolution between parties, as a judge or otherwise. If the arbitrators selected by the Corporation and Participant cannot agree on a third arbitrator, they shall discuss the qualifications of such third arbitrator with the AAA prior to selection of such arbitrator, which selection shall be in accordance with the Commercial Arbitration Rules of AAA. 8.5. If an arbitrator cannot continue to serve, a successor to an arbitrator selected by the Corporation and Participant shall be also selected by the same party, and a successor to a neutral arbitrator shall be selected as specified in subsection 8.4 of this Section. A full rehearing will be held only if the neutral arbitrator is unable to continue to serve or if the remaining arbitrators unanimously agree that such a rehearing is appropriate. 8.6. The arbitrator or arbitrators shall be guided, but not bound, by the Federal Rules of Evidence and by the procedural rules, including discovery provisions, of the Federal Rules of Civil Procedure. Any discovery shall be limited to information directly relevant to the controversy or claim in arbitration. 8.7. The parties shall each be responsible for their own costs and expenses, except for the fees and expenses of the arbitrators, which shall be shared equally by the Corporation and Participant. Notwithstanding the above, the Corporation shall pay the arbitration expenses, including reasonable attorneys' fees, incurred by any Participant in arbitration hereunder in which such Participant successfully seeks to enforce his/her rights under the Plan. ARTICLE IX MISCELLANEOUS 9.1. NO GUARANTEES. Nothing in this Plan will give Participants a separate right to continued employment, compensation level or position with the Corporation. 9.2. APPLICABLE LAW. To the extent not preempted by federal law, this Plan will be construed in accordance with the laws (other than the conflict of laws provisions) of the State of Illinois. 8 9.3. PARTICIPANT ASSIGNMENT. No interest of any Participant under this Plan, or any right to receive any payment or distribution hereunder, shall be subject in any manner to sale, transfer, assignment, pledge, attachment, garnishment, or other alienation or encumbrance of any kind, nor may such interest or right to receive a payment or distribution be taken, voluntarily or involuntarily, for the satisfaction of the obligations or debts of, or other claims against, the Participant including claims for alimony, support, separate maintenance, and claims in bankruptcy proceedings. 9.4. SEVERABILITY. In the event any provision of this Plan is held illegal or invalid, the remaining provisions of this Plan shall not be affected thereby. 9.5. SUCCESSORS. The Plan shall be binding upon and inure to the benefit of the Corporation, the Participants and their respective heirs, representatives and successors. 9.6. NOTICE. Notices under this Plan shall be in writing and sent by registered mail, return receipt requested, to the following addresses or to such other address as the party being notified may have previously furnished to the other party by written notice: If to the Corporation: SigmaTron International, Inc. 2201 Landmeier Road Elk Grove Village, IL 60007 Attention: President If to a Participant: The address last indicated on the records of the Corporation. IN WITNESS WHEREOF, the Corporation has adopted this Amended and Restated Change-in-Control Severance Payment Plan as of this 30th day of May, 2002. SigmaTron International, Inc. Attest: By: /s/ Gary R. Fairhead ------------------------------ Its: President By: /s/ Linda K. Blake ------------------------------- Secretary 9 EX-10.16 3 c96993exv10w16.txt NINTH AMENDMENT TO LOAN AND SECURITY AGREEMENT Exhibit 10.16 NINTH AMENDMENT TO LOAN AND SECURITY AGREEMENT THIS NINTH AMENDMENT TO LOAN AND SECURITY AGREEMENT (this "Amendment") is entered into as of the 11th day of March, 2005 by and among the banks that are or may from time to time become parties hereto (individually a "Bank" and collectively, the "Banks"), LASALLE BANK NATIONAL ASSOCIATION, a national banking association (in its individual capacity, "LaSalle"), as agent ("Agent") for the Banks, and SIGMATRON INTERNATIONAL, INC., a Delaware corporation (the "Borrower"). W I T N E S S E T H: WHEREAS, Agent, the Banks and Borrower are parties to that certain Loan and Security Agreement dated as of August 25, 1999, as amended by that certain Amendment to Loan and Security Agreement dated as of August 31, 2000, that certain Forbearance Agreement and Second Amendment to Loan and Security Agreement dated as of February 1, 2001, that certain Forbearance Agreement and Third Amendment to Loan and Security Agreement dated as of May 31, 2001, that certain Forbearance Agreement and Fourth Amendment to Loan and Security Agreement dated as of July 31, 2001, that certain Fifth Amendment to Loan and Security Agreement dated as of November 30, 2001, that certain Sixth Amendment to Loan and Security Agreement dated as of April 22, 2002, that certain Seventh Amendment to Loan and Security Agreement dated as of October 16, 2002 and that certain Eighth Amendment to Loan and Security Agreement dated as of February 19, 2004 (the Original Agreement and all of the foregoing amendments are collectively referred to as the "Agreement"); and WHEREAS, the Borrower and the Banks have agreed to further amend the Agreement to, among other items, (i) extend the maturity date of the Revolving Credit Commitment (as defined in the Agreement), and (ii) modify certain interest rate provisions and financial covenants, all in accordance with the terms and conditions of this Amendment. NOW, THEREFORE, for and in consideration of the premises and mutual agreements herein contained and for the purposes of setting forth the terms and conditions of this Amendment, the parties, intending to be bound, hereby agree as follows: 1. Incorporation of the Agreement. All capitalized terms which are not defined hereunder shall have the same meanings as set forth in the Agreement, and the Agreement, to the extent not inconsistent with this Amendment, is incorporated herein by this reference as though the same were set forth in its entirety. To the extent any terms and provisions of the Agreement are inconsistent with the amendments set forth in Paragraph 2 below, such terms and provisions shall be deemed superseded hereby. Except as specifically set forth herein, the Agreement shall remain in full force and effect and its provisions shall be binding on the parties hereto. 2. Amendment of the Agreement. (a) The definition of the terms "Letter of Credit Limit", "Maturity Date" and "Revolving Note" appearing in Paragraph 1.1 of the Agreement are hereby amended and restated to read as follows: "Letter of Credit Limit" means Four Million Dollars ($4,000,000). "Maturity Date" means September 30, 2006 with respect to all Loans. "Revolving Note" means those certain Substitute Revolving Notes dated as of March 11, 2005 payable by Borrower to each of LaSalle Bank National Association and Charter One Bank in the maximum principal amounts of $7,800,000 and $5,200,000, respectively, as each may be amended, modified, substituted or restated from time to time, together with all renewals and exchanges therefore. (b) Paragraphs 11.2(f)(vi) and (v) of the Agreement are hereby amended and restated to read as follows: (vi) Maintain EBITDA of not less than the following amounts during the periods set forth below measured quarterly on a rolling twelve month basis:
PERIOD AMOUNT ------ ------ January 31, 2005 - October 31, 2005 $6,000,000 November 1, 2005 and at all times thereafter $5,000,000
(v) Not permit the aggregate amount of Capital Expenditures to exceed $6,000,000 in any fiscal year (excluding any Capital Expenditures associated with Borrower's plant located in China). (c) Schedule 1.1 to the Agreement is hereby amended and restated with Schedule 1.1 attached hereto. 3. Representations and Warranties. The representations and warranties set forth in Paragraph 11.1 and all covenants set forth in Paragraphs 11.2 and 11.3 of the Agreement shall be deemed remade and affirmed as of the date hereof by Borrower, except any and all references to the Agreement in such representations, warranties and covenants shall be deemed to include this Amendment. 4. Delivery of Documents/Information. Prior to entering into this Amendment, Agent shall have received from Borrower the following fully executed documents, in form and substance satisfactory to Agent and each Bank, and all of the transactions contemplated by each such document shall have been consummated or each condition contemplated by each such document shall have been satisfied: (a) this Amendment; (b) Substitute Revolving Note of each Bank; 2 (c) Secretary's Certificate of Borrower with resolutions and incumbency; (d) Officer's Certificate (Closing Bring-Down) of Borrower; and (e) such other documents, certificates and opinions as Agent may request. 5. Reference to the Effect on the Agreement. (a) References. Upon the date of this Amendment and on and after the date hereof, each reference in the Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of like import shall mean and be a reference to the Agreement, as amended hereby. (b) Ratification. As specifically modified above, the Agreement and all other documents, instruments and agreements executed and/or delivered in connection therewith shall remain in full force and effect, and are hereby ratified and confirmed. 6. Representations and Warranties of the Borrower. Borrower hereby represents and warrants to Agent and the Banks as of the date hereof as follows: (a) The execution and delivery of this Amendment and the performance by Borrower of its obligations hereunder are within the Borrower's powers and authority, have been duly authorized by all necessary corporate action and do not and will not contravene or conflict with the Articles of Incorporation or By-laws of Borrower. (b) The Agreement (as amended by this Amendment) and the Other Agreements constitute legal, valid and binding obligations enforceable in accordance with their terms by Agent and the Banks against Borrower, and Borrower expressly reaffirms each of its obligations under the Agreement (as amended by this Amendment) and each of the Other Agreements, including, without limitation, the Borrower's Liabilities. Borrower further expressly acknowledges and agrees that Agent has a valid, duly perfected, first priority and fully enforceable security interest in and lien against each item of Collateral except as otherwise set forth in the Agreement. Borrower agrees that it shall not dispute the validity or enforceability of the Agreement (as it was stated before and after this Amendment) or any of the Other Agreements or any of its respective obligations thereunder, or the validity, priority, enforceability or extent of Agent's security interest in or lien against any item of Collateral, in any judicial, administrative or other proceeding; (c) No consent, order, qualification, validation, license, approval or authorization of, or filing, recording, registration or declaration with, or other action in respect of, any governmental body, authority, bureau or agency or other Person is required in connection with the execution, delivery or performance of, or the legality, validity, binding effect or enforceability of, this Amendment; and (d) The execution, delivery and performance of this Amendment by Borrower does not and will not violate any law, governmental regulation, judgment, order or decree applicable to Borrower and does not and will not violate the provisions of, or constitute a default or any event of default under, or result in the creation of any security interest or lien upon any property of Borrower pursuant to, any indenture, mortgage, instrument, contract, agreement or 3 other undertaking to which Borrower is a party or is subject or by which Borrower or any of its real or personal property may be bound. 7. Releases; Indemnities. (a) In further consideration of the Banks' execution of this Amendment, Borrower, and on behalf of its successors, assigns, subsidiaries and Affiliates, hereby forever release Agent and each Bank and their respective successors, assigns, parents, subsidiaries, Affiliates, officers, employees directors, agents and attorneys (collectively, the "Releasees") from any and all debts, claims, demands, liabilities, responsibilities, disputes, causes, damages, actions and causes of action (whether at law or in equity) and obligations of every nature whatsoever, whether liquidated or unliquidated, known or unknown, matured or unmatured, fixed or contingent (collectively, "Claims"), that Borrower may have against the Releasees which arise from or relate to any actions which the Releasees may have taken or omitted to take prior to the date this Amendment was executed, including without limitation with respect to Borrower's Liabilities, any Collateral, the Agreement, any Other Agreement and any third parties liable in whole or in part for Borrower's Liabilities. This provision shall survive and continue in full force and effect whether or not Borrower shall satisfy all other provisions of this Amendment, the Other Agreements or the Agreement, including payment in full of Borrower's Liabilities. (b) Borrower hereby agrees that its obligation to indemnify and hold the Releasees harmless as set forth in Paragraph 7(a) of this Amendment shall include an obligation to indemnify and hold the Releasees harmless with respect to any and all liabilities, obligations, losses, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever incurred by the Releasees, or any of them, whether direct, indirect or consequential, as a result of or arising from or relating to any proceeding by, or on behalf of, any Person, including, without limitation, officers, directors, agents, trustees, creditors, partners or shareholders of Borrower, whether threatened or initiated, asserting any claim for legal or equitable remedy under any statute, regulation or common law principle arising from or in connection with the negotiation, preparation, execution, delivery, performance, administration and enforcement of this Amendment or any other document executed in connection herewith. The foregoing indemnity shall survive the payment in full of the Borrower's Liabilities and the termination of this Amendment, the Agreement and the Other Agreements. 8. Fees and Expenses. The Borrower agrees to pay on demand all costs, fees and expenses of or incurred by the Agent in connection with the evaluation, negotiation, preparation, execution and delivery of this Amendment and the other instruments and documents executed and delivered in connection with the transactions described herein (including the filing or recording thereof), including, but not limited to, the reasonable fees and expenses of counsel for the Agent, search fees and taxes payable in connection with this Amendment and any future amendments to the Agreement. 4 9. Counterparts. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. [SIGNATURE PAGE FOLLOWS] 5 (NINTH AMENDMENT TO LOAN AND SECURITY AGREEMENT SIGNATURE PAGE) IN WITNESS WHEREOF, the parties hereto have duly executed this Ninth Amendment to Loan and Security Agreement as of the date first above written. LASALLE BANK NATIONAL ASSOCIATION, for itself and as Agent By: /s/ Sara A. Huizinga ----------------------- Its: Assistant Vice President CHARTER ONE BANK, N.A., as a Bank By: /s/ Raullo M. Eanes ----------------------- Its: Vice President SIGMATRON INTERNATIONAL, INC. By: /s/ Linda K. Blake ---------------------- Its: Chief Financial Officer 6 EX-10.17 4 c96993exv10w17.txt STOCK PURCHASE AGREEMENT Exhibit 10.17 STOCK PURCHASE AGREEMENT AGREEMENT, dated the 14th day of July, 2005, by and among SigmaTron International, Inc., a Delaware corporation ("Buyer"), Able Electronics Corporation, a California corporation (the "Company"), and the shareholders of the Company, all of whom are listed on the signature page hereof (each a "Seller" and collectively, "Sellers"). W I T N E S S E T H: WHEREAS, Sellers collectively own the Shares (as herein defined), and each Seller individually owns the number of Shares set forth in Schedule 2.1; and WHEREAS, each Seller desires to sell to Buyer all of the Shares which such Seller owns, and Buyer desires to purchase such Shares from each Seller, upon the terms and subject to the conditions hereinafter set forth; The parties hereto agree as follows: ARTICLE 1 DEFINITIONS SECTION 1.1 Definitions. (a) The following terms, as used herein, have the following meanings: "Affiliate" means, with respect to any Person, any other Person directly or indirectly controlling, controlled by, or under common control with such Person; provided that neither the Company nor any Subsidiary shall be considered an Affiliate of any Seller. "Benefit Arrangement" means any employment, severance, change of control or similar contract or arrangement (whether or not written) or any plan, policy, fund, program, contract or arrangement (whether or not written) providing for compensation, bonus, profit-sharing, stock option, stock appreciation or other stock-related rights or other forms of incentive or deferred compensation, vacation benefits, insurance coverage (including any self-insured arrangements), health or medical benefits, disability benefits, workers' compensation, supplemental unemployment benefits, severance benefits and post-employment or retirement benefits (including compensation, pension, health, medical or life insurance or other benefits) that is not an Employee Plan, and is entered into, maintained, administered, sponsored or contributed to by the Company or any Subsidiary. "Closing Date" means the date of the Closing. "Closing Financial Statement Date" means April 3, 2005. "Common Stock" means the common stock, no par value, of the Company. "Company" means Able Electronics Corporation, formerly known as Brea Electronic Services & Test, Inc., a California corporation. "Employee Plan" means any "employee benefit plan", as defined in Section 3(3) of ERISA, that is subject to any provision of ERISA, and either (i) is maintained, administered, sponsored or contributed to by the Company or any Subsidiary, or (ii) covers any employee or former employee of the Company or any Subsidiary. "Environmental Laws" means any and all statutes, laws, ordinances, regulations and rules, in each case as in effect on the date hereof, that have as their principal purpose the protection of the environment. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations promulgated thereunder. "ERISA Affiliate" of any entity means any other entity which, together with such entity, would be treated as a single employer under Section 414 of the Code. "Hazardous Substances" means any pollutant, contaminant or any toxic, radioactive or otherwise hazardous substance, as such terms are defined in, or identified pursuant to, any Environmental Law. "Intellectual Property Right" means any trademark, service mark, trade name, mask work, invention, patent, trade secret, copyright, know-how (including any registrations or applications for registration of any of the foregoing), computer programs (including source codes) or any other similar type of proprietary intellectual property right. "Knowledge of Buyer" or any other similar knowledge qualification in this Agreement means to the actual knowledge of Buyer or as to any of the following individuals, what such individual knows or reasonably should have known in light of such individual's position and responsibilities at Buyer after reasonable inquiry: Gary R. Fairhead and Linda K. Blake. "Knowledge of the Company" or any other similar knowledge qualification in this Agreement means to the actual knowledge of the Company or as to any of the following individuals, what such individual knows or reasonably should have known in light of such individual's position and responsibilities at the Company or the Subsidiaries after reasonable inquiry: Roger Nordby, Dave Orosz, Peter Dennis and Roger Mitri. "Knowledge of Sellers" or any other similar knowledge qualification in this Agreement means to the actual knowledge of any Seller. "Lien" means, with respect to any property or asset, any mortgage, lien, pledge, charge, security interest or encumbrance in respect of such property or asset. 2 "Material Adverse Effect" means a material adverse effect on the assets, financial condition or result of operations of the Company and the Subsidiaries, except any such effect resulting from or arising in connection with (i) this Agreement or the transactions contemplated hereby; (ii) changes or conditions affecting the business of the Company generally; or (iii) changes in economic, regulatory or political conditions generally. "Material Adverse Effect on Buyer" means a material adverse effect on the assets, financial condition or result of operations of Buyer and its subsidiaries, except any such effect resulting from or arising in connection with (i) this Agreement or the transactions contemplated hereby; (ii) changes or conditions affecting the business of Buyer generally; or (iii) changes in economic, regulatory or political conditions generally. "Multiemployer Plan" means each Employee Plan that is a multiemployer plan, as defined in Section 3(37) of ERISA. "1934 Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. "Person" means an individual, corporation, partnership, limited liability company, association, trust or other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. "Shares" means two million (2,000,000) shares of Common Stock of the Company. "Subsidiary" means any entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by the Company. "Title IV Plan" means an Employee Plan subject to Title IV of ERISA other than any Multiemployer Plan. (b) Each of the following terms is defined in the Section set forth opposite such term:
Term Section - ---- ------- Accounting Referee 8.3(b) Basket Amount 10.2(a)
3
Term Section - ---- ------- Cap 10.2(a) Claim 10.3(a) Closing 2.2(a) Closing Date Balance Sheet 2.4(a) Closing Financial Statements 2.3 Code 8.1 Commission 4.9 Company Securities 3.1.5(b) Damages 10.2(a) Disclosee 12.11(a) Discloser 12.11(a) Environmental Condition 3.1.19(e) Federal Tax 8.1 Final Determination 8.1 Final Required Book Value 2.4(e) Indemnifiable Loss 10.4(b) Indemnified Party 10.3(a) Indemnifying Party 10.3(a) Indemnity Payment 10.4(b) Intellectual Property Rights 3.1.14(a)
4
Term Section - ---- ------- Liabilities 3.1.7(b) P-Com Claim 3.1.20 P-Com Escrow 2.2(b) P-Com Escrow Agreement 10.7(a) P-Com Escrow Amount 2.2(b) Permitted Liens 3.1.13(e) Pre-Closing Tax Period 8.1 Post-Closing Tax Period 8.1 Potential Contributor 10.5 Purchase Price 2.1 Regular Escrow 2.2(b) Regular Escrow Agreement 10.7(b) Regular Escrow Amount 2.2(b) Required Book Value 2.4(a) Returns 8.2(a) Seller's Interest 2.1 Subsidiary Securities 3.1.6(b) Tax or Taxes 8.1 Tax Asset 8.1 Taxing Authority 8.1
5
Term Section - ---- ------- Tax Loss 8.6(a) Third Party Claim 10.3(a) 2004 Financial Statements 3.1.7(a)
ARTICLE 2 PURCHASE AND SALE SECTION 2.1 Purchase and Sale. Upon the terms and subject to the conditions of this Agreement, each Seller agrees to sell to Buyer, and Buyer agrees to purchase from each Seller, at the Closing, the number of Shares set forth opposite that Seller's name on Schedule 2.1. The purchase price for the Shares being sold hereunder (the "Purchase Price") is $12,800,000. The Purchase Price shall be paid as provided in Section 2.2 and shall be subject to adjustment as provided in Section 2.4 and to the escrows described in Section 10.7. The allocation of the Purchase Price among the Sellers (the respective allocation to the Sellers is referred to herein as the "Seller's Interest") and the Sellers' addresses are set forth in Schedule 2.1. SECTION 2.2 Closing. (a) The closing (the "Closing") of the purchase and sale of the Shares hereunder shall take place through exchange of documents on agreed terms on July 12, 2005, and shall be considered completed on the date funded by Buyer's lender after satisfaction of the conditions set forth in Article 9, or at such other time or place as Buyer and Sellers may agree. The Closing shall be effective as of 12:01 a.m. on July 1, 2005. (b) At the Closing, Buyer shall deliver (i) to Sellers the Purchase Price, less the P-Com Escrow Amount and the Regular Escrow Amount (as defined in subsection (ii) below) in immediately available funds, which delivery shall be satisfied by wire transfer in the amounts and to the bank accounts as shall be designated in a pay proceeds letter addressed to Buyer and its lender prior to the Closing Date and (ii) the amount of Seven Hundred Eighty-Five Thousand Dollars ($785,000) (the "P-Com Escrow Amount") representing the escrow for the P-Com, Inc. account receivable and inventory as described in Section 10.7(a) (the "P-Com Escrow") and One Million Dollars ($1,000,000) (the "Regular Escrow Amount") representing the escrow described in Section 10.7(b) (the "Regular Escrow") in immediately available funds by wire transfer to the "Escrow Account" established pursuant to the Escrow Agreement. SECTION 2.3 Closing Financial Statements. Sellers will cause to be prepared and delivered to Buyer the consolidated financial statements of the Company and its Subsidiaries as of April 3, 2005 and the related consolidated statements of operations, change in shareholder equity and cash flow for the year then ended, together with an unqualified report of Armanino McKenna LLP thereon (the "Closing Financial Statements"). The Closing Financial Statements 6 shall (i) fairly represent the consolidated financial position of the Company and the Subsidiaries as at the close of business on the Closing Financial Statement Date and the consolidated results of operations and cash flows of the Company and the Subsidiaries for the period then ended in accordance with accounting principles generally accepted in the United States of America applied on a basis consistent with those used in preparation of the 2004 Financial Statements; (ii) include line items substantially consistent with those in the 2004 Financial Statements; and (iii) be prepared in accordance with accounting policies and practices described in Schedule 2.3-1, consistent with those used in the preparation of the 2004 Financial Statements. SECTION 2.4 Closing Date Balance Sheet. (a) Within thirty (30) days after the Closing Date, Sellers will cause to be prepared (with the assistance as requested of management of the Company and Buyer in accordance with Sections 2.4(d) and 6.2 hereof) a balance sheet of the Company and its Subsidiaries as of June 30, 2005 (the "Closing Date Balance Sheet") and a certificate of Sellers setting forth Sellers' calculation of adjusted book value of net worth as of June 30, 2005, which is required to be a minimum of $3.7 million ("Required Book Value"). The Closing Date Balance Sheet shall (i) fairly represent the consolidated financial position of the Company and the Subsidiaries as at the close of business on June 30, 2005 in accordance with accounting principles generally accepted in the United States of America applied on a basis consistent with those used in preparation of the Closing Financial Statements; (ii) include line items substantially consistent with those in the Closing Financial Statements; (iii) be prepared in accordance with accounting policies and practices described in Schedule 2.3-1, and consistent with those used in the preparation of the Closing Financial Statements; and (iv) reflect the Required Book Value calculated in a manner consistent with Schedule 2.3-2. (b) If Buyer disagrees with Sellers' calculation of Required Book Value delivered pursuant to Section 2.4(a), Buyer may, within 15 days after delivery of the documents referred to in Section 2.4(a), deliver a notice to Sellers disagreeing with such calculation and setting forth Buyer's calculation of such amount. Any such notice of disagreement shall specify those items or amounts as to which Buyer disagrees, and Buyer shall be deemed to have agreed with all other items and amounts contained in Sellers' calculation of Required Book Value delivered pursuant to Section 2.4(a). (c) If a notice of disagreement shall be duly delivered pursuant to Section 2.4(b), Buyer and Sellers shall, during the 15 days following such delivery, use their best efforts to reach agreement on the disputed items or amounts in order to determine, as may be required, the amount of Required Book Value, which amount shall not be more than the amount thereof shown in Sellers' calculation delivered pursuant to Section 2.4(a) nor less than the amount thereof shown in Buyer's calculation delivered pursuant to Section 2.4(b). If, during such period, Buyer and Sellers are unable to reach such agreement, they shall promptly thereafter cause independent accountants of nationally recognized standing reasonably satisfactory to Buyer and Sellers (who shall not have any material relationship with Buyer or Sellers) promptly to review this Agreement and the disputed items or amounts for the purpose of calculating Required Book Value. In making such calculation, such independent accountants shall consider only those items or amounts in the Closing Date Balance Sheet or Sellers' calculation of 7 Required Book Value as to which Buyer has disagreed. Such independent accountants shall deliver to Buyer and Sellers, as promptly as practicable, a report setting forth their calculation of Required Book Value. Such report shall be final and binding upon Buyer and Sellers. The cost of such review and report shall be borne (i) by Sellers if the difference between Final Required Book Value (as defined in Section 2.4(e)) and Sellers' calculation of Required Book Value delivered pursuant to Section 2.4(a) is greater than the difference between Final Required Book Value and Buyer's calculation of Required Book Value delivered pursuant to Section 2.4(b); (ii) by Buyer if the first such difference is less than the second such difference; and (iii) otherwise equally by Buyer and Sellers. (d) Buyer and Sellers agree that they will, and agree to cause their respective independent accountants and the Company and each Subsidiary to, cooperate and assist in the preparation of the Closing Date Balance Sheet and the calculation of Required Book Value and in the conduct of the audits and reviews referred to in this Section 2.4, including without limitation, the making available to the extent necessary of books, records, work papers and personnel (including those of accountants and consultants). (e) If Final Required Book Value as finally determined equals or exceeds $3.7 million, there shall be no adjustment to the Purchase Price. If Final Required Book Value is less than $3.7 million, the Purchase Price shall be adjusted to an amount equal to the deficiency and Sellers shall pay to Buyer the deficiency. Sellers shall pay Buyer such amount within 10 days after the Final Required Book Value has been finally determined by delivering a certified or official bank check payable in immediately available funds to Buyer or by causing such payments to be credited to such account of Buyer as Buyer may direct. "Final Required Book Value" means the Required Book Value (i) as shown in Sellers' calculation delivered pursuant to Section 2.4(a), if no notice of disagreement with respect thereto is duly delivered pursuant to Section 2.4(b), or (ii) if such a notice of disagreement is delivered, (A) as agreed by Buyer and Sellers pursuant to Section 2.4(c), or (B) in the absence of such agreement, as shown in the independent accountant's calculation delivered pursuant to Section 2.4(c); provided that in no event shall Final Required Book Value be more than Sellers' calculation of Required Book Value delivered pursuant to Section 2.4(a) or less than Buyer's calculation of Required Book Value delivered pursuant to Section 2.4(b). In no event shall any adjustment of the Purchase Price under this Section 2.4 cause an adjustment to the Required Book Value. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF COMPANY AND SELLERS SECTION 3.1 Representations and Warranties of the Company and Sellers. Each of the Company and Sellers represents and warrants to Buyer as of the date hereof that: SECTION 3.1.1 Existence and Power. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation and has all corporate powers and all governmental licenses, authorizations, permits, consents and approvals required to carry on its business as now conducted, except for those licenses, authorizations, permits, consents and approvals the absence of which would not have a Material Adverse Effect. The Company is duly qualified to do business as a foreign 8 corporation and is in good standing in each jurisdiction where such qualification is necessary, except for those jurisdictions where failure to be so qualified would not, individually or in the aggregate, have a Material Adverse Effect. SECTION 3.1.2 Authorization. The Company has all necessary corporate power and authority to enter into this Agreement and to perform its obligations hereunder and to consummate the transactions contemplated hereby. This Agreement has been duly executed and delivered by the Company and is the valid and binding obligation of the Company enforceable against it in accordance with its terms, except that such enforcement may be limited by any bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or other laws (whether statutory, regulatory or decisional), now or hereafter in effect, relating to or affecting the rights of creditors generally or by equitable principles (regardless of whether considered in a proceeding at law or in equity). SECTION 3.1.3 Government Authorization. The execution, delivery and performance by the Company and Sellers of this Agreement and the consummation of the transactions contemplated hereby require no action by or in respect of, or filing with, any governmental body, agency or official other than any such action or filing as to which the failure to make or obtain would not have a Material Adverse Effect. SECTION 3.1.4 Noncontravention. The execution, delivery and performance by the Company and Sellers of this Agreement and the consummation of the transactions contemplated hereby do not and will not (i) violate the articles of incorporation or bylaws of the Company or any Subsidiary; (ii) assuming compliance with the matters referred to in Section 3.1.3, violate any applicable law, rule, regulation, judgment, injunction, order or decree, except for any such violations which would not have a Material Adverse Effect; (iii) except as disclosed in Schedule 3.1.4 require any consent or other action by any Person under, constitute a default under, or give rise to any right of termination, cancellation or acceleration of any right or obligation of Sellers or the Company or any Subsidiary or to a loss of any benefit to which Sellers or the Company or any Subsidiary is entitled under any provision of any agreement or other instrument binding upon Sellers or the Company or any Subsidiary; or (iv) result in the creation or imposition of any Lien on any asset of the Company or any Subsidiary, except for any Permitted Liens. SECTION 3.1.5 Capitalization. (a) The authorized capital stock of the Company consists of five million (5,000,000) shares of Common Stock, all of which is voting stock. As of the date hereof, there are two million (2,000,000) shares of voting Common Stock issued and outstanding. (b) All outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and non-assessable. There are no outstanding (i) shares of capital stock or voting securities of the Company other than the Shares; (ii) securities of the Company convertible into or exchangeable for shares of capital stock or voting securities of the Company; or (iii) options or other rights to acquire from the Company, or other obligation of the Company to issue, any capital stock, voting securities or securities convertible into or 9 exchangeable for capital stock or voting securities of the Company (the items in clauses 3.1.5(b)(i), 3.1.5(b)(ii) and 3.1.5(b)(iii) being referred to collectively as the "Company Securities"). Except as disclosed in Schedule 3.1.5, there are no outstanding obligations of the Company or any Subsidiary to repurchase, redeem or otherwise acquire any Company Securities. SECTION 3.1.6 Subsidiaries. (a) Each corporate Subsidiary is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation. Each Subsidiary has all corporate or partnership powers, as the case may be, and all governmental licenses, authorizations, permits, consents and approvals required to carry on its business as now conducted, except for those licenses, authorizations, consents and approvals the absence of which would not have a Material Adverse Effect. All Subsidiaries and their respective jurisdictions of incorporation or formation are identified on Schedule 3.1.6(a). (b) Except as disclosed in Schedule 3.1.6(b) as to each of the representations of this Section 3.1.6, (i) all of the outstanding capital stock or other voting securities of each Subsidiary is owned by the Company, directly or indirectly, free and clear of any Lien, and (ii) there are no outstanding (y) securities of the Company or any Subsidiary convertible into or exchangeable for shares of capital stock or voting securities of any Subsidiary or (z) options or other rights to acquire from the Company or any Subsidiary, or other obligation of the Company or any Subsidiary to issue, any capital stock, voting securities or securities convertible into or exchangeable for capital stock or voting securities of any Subsidiary (the items in clauses 3.1.6(b)(i) and 3.1.6(b)(ii) being referred to collectively as the "Subsidiary Securities"). There are no outstanding obligations of the Company or any Subsidiary to repurchase, redeem or otherwise acquire any outstanding Subsidiary Securities. SECTION 3.1.7 Financial Statements. (a) The audited consolidated financial statements for the year ended April 4, 2004, and the related audited consolidated statements of income and cash flows for the year ended April 4, 2004 of the Company and the Subsidiaries (the "2004 Financial Statements"), the Closing Financial Statements and the Closing Date Balance Sheet each fairly present, in conformity with accounting principles generally accepted in the United States of America applied on a consistent basis (except as may be indicated in the notes thereto or in Schedule 2.3-1), the consolidated financial position of the Company and the Subsidiaries as of the dates thereof and the consolidated results of operations and cash flows of the Company and the Subsidiaries for the periods then ended. (b) Except as set forth on Schedule 3.1.7(b), as of the Closing Financial Statement Date, neither the Company nor any Subsidiary had any material liabilities of any nature, whether known or unknown, accrued, absolute, contingent or otherwise, whether due or to become due (the "Liabilities") which were required to be reflected in and that were not reflected or reserved against in the Closing Financial Statements. Since the Closing Financial Statement Date, neither the Company nor any Subsidiary has incurred Liabilities that would be required to be reflected in the Closing Financial Statements except Liabilities that were incurred in the usual and ordinary 10 course of business consistent with past practices. SECTION 3.1.8 Absence of Certain Changes. Except as disclosed in Schedule 3.1.8, since the Closing Financial Statement Date, the business of the Company and its Subsidiaries has been conducted in the ordinary course consistent with past practices and there has not been: (a) any event, occurrence or development which has had a Material Adverse Effect; (b) any declaration, setting aside or payment of any dividend or other distribution with respect to any shares of capital stock of the Company, or any repurchase, redemption or other acquisition by the Company or any Subsidiary of any outstanding shares of capital stock or other securities of the Company or any Subsidiary; (c) any amendment of any term of any outstanding security of the Company or any Subsidiary; (d) any incurrence, assumption or guarantee by the Company or any Subsidiary of any indebtedness for borrowed money in excess of $25,000 other than indebtedness incurred to pay purchase orders in the ordinary course of business consistent with past practices; (e) any making of any loan, advance or capital contributions to or investment in any Person other than loans, advances or capital contributions to or investments made in the ordinary course of business consistent with past practices; (f) any transaction or commitment made, or any contract or agreement entered into, by the Company or any Subsidiary relating to its assets or business, in either case, material to the Company and the Subsidiaries, taken as a whole, other than transactions and commitments in the ordinary course of business consistent with past practices and those contemplated by this Agreement; (g) any material change in any method of accounting or accounting practice by the Company or any Subsidiary except for any such change required by reason of a concurrent change in accounting principles generally accepted in the United States of America; (h) any (i) employment, deferred compensation, severance, retirement or other similar agreement entered into with any director, officer or employee of the Company or any Subsidiary (or any amendment to any such existing agreement); (ii) grant of any severance or termination pay to any director, officer or employee of the Company or any Subsidiary; or (iii) change in compensation or other benefits payable to any director, officer or employee of the Company or any Subsidiary pursuant to any severance or retirement plans or policies thereof, in each case other than in the ordinary course of business consistent with past practices; (i) any casualty loss in excess of $25,000 or termination of a contract involving consideration in excess of $25,000; or 11 (j) any execution of a contract in excess of $25,000, except for purchase orders in the ordinary course of business. SECTION 3.1.9 No Undisclosed Liabilities. There are no Liabilities other than: (a) Liabilities provided for in the Closing Financial Statements or disclosed in the notes thereto; (b) Liabilities not required under accounting principles generally accepted in the United States of America to be shown on the Closing Financial Statements; (c) Liabilities disclosed on Schedule 3.1.9; or (d) Liabilities disclosed in, related to or arising under any agreements, instruments or other matters disclosed in this Agreement or any Schedule hereto; or Liabilities incurred in the ordinary course of business since the Closing Financial Statement Date. SECTION 3.1.10 Contracts. (a) Except as disclosed in Schedule 3.1.10, neither the Company nor any Subsidiary is a party to or bound by: (i) any lease (whether of real or personal property) providing for annual rentals of $25,000 or more that cannot be terminated on not more than 60 days' notice without payment by the Company or any Subsidiary of any material penalty; (ii) any agreement for the purchase or license of materials, supplies, goods, services, equipment or other assets providing for either (i) annual payments by the Company and the Subsidiaries of $25,000 or more or (ii) aggregate payments by the Company and the Subsidiaries of $25,000 or more, in each case that cannot be terminated on not more than 60 days' notice without payment by the Company or any Subsidiary of any material penalty; (iii) any sales, distribution, lease or other similar agreement providing for the sale or lease by the Company or any Subsidiary of materials, supplies, goods, services, equipment or other assets (whether of real or personal property) that provides for annual payments to the Company and the Subsidiaries of $25,000 or more; (iv) any cooperative development agreement or partnership, joint venture or other similar agreement or arrangement; (v) any agreement relating to the acquisition or disposition of any material business (whether by merger, sale of stock, sale of assets or otherwise); (vi) any agreement relating to indebtedness for borrowed money or the deferred purchase price of property (in either case, whether incurred, assumed, 12 guaranteed or secured by any asset), except any such agreement (A) with an outstanding principal amount not exceeding $25,000 or (B) entered into subsequent to the date of this Agreement as permitted by Section 3.1.8(d); (vii) any agreement that limits the freedom of the Company or any Subsidiary to compete in any line of business or with any Person or in any area; or (viii) any agreement with any Seller or any Affiliate of any Seller that will bind the Company or any Subsidiary after the Closing. (b) Each agreement, contract, plan, lease, arrangement or commitment required to be disclosed pursuant to this Section is a valid and binding agreement of the Company or a Subsidiary, as the case may be, and is in full force and effect, and none of the Company, any Subsidiary or, to the Knowledge of the Company or Sellers, any other party thereto is in default or breach in any respect under the terms of any such agreement, contract, plan, lease, arrangement or commitment. SECTION 3.1.11 Litigation. Except as disclosed on Schedule 3.1.11, (a) there is no action, suit, investigation or proceeding pending, or to the Knowledge of the Company or Sellers threatened, against the Company or any Subsidiary or any of their respective properties before any court or arbitrator or any governmental body, agency or official, and (b) there is no action, suit, investigation or proceeding pending, or to the Knowledge of the Company or Sellers threatened, against any Seller or any of his respective properties before any court or arbitrator or any governmental body, agency or official with respect to the conduct of the Company's or any Subsidiary's business. SECTION 3.1.12 Compliance with Laws and Court Orders. Neither the Company nor any Subsidiary is in violation of any applicable law, rule, regulation, judgment, injunction, order or decree, except for violations that have not had and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. SECTION 3.1.13 Properties. The Company and the Subsidiaries have good title to, or in the case of leased property and assets have valid leasehold interests in, all property and assets (whether real, personal, tangible or intangible) reflected on the Closing Financial Statements or acquired after the Closing Financial Statement Date, except for properties and assets sold since the Closing Financial Statement Date in the ordinary course of business consistent with past practices. Schedule 3.1.13 is a complete list of all real property owned by the Company or any Subsidiary, and the Company has delivered to Buyer a complete list of each item of personal property with an original cost in excess of $1000 owned by the Company or any Subsidiary. None of such property or assets is subject to any Lien, except: (a) Liens disclosed on Schedule 3.1.13; (b) Liens disclosed on the Closing Financial Statements or notes thereto or securing liabilities reflected on the Closing Financial Statements or notes thereto; 13 (c) Liens for taxes, assessments and similar charges that are not yet due and payable or are being contested in good faith and in accordance with applicable law; (d) mechanic's, materialman's, workmen's, carrier's, repairer's and other similar Liens arising or incurred in the ordinary course of business or that are not yet due and payable or are being contested in good faith and in accordance with applicable law; and (e) Liens incurred in the ordinary course of business since the Closing Financial Statement Date (paragraphs (a)-(e) of this Section 3.1.13 are, collectively, the "Permitted Liens"). SECTION 3.1.14 Intellectual Property. (a) Schedule 3.1.14(a) contains a list of all intellectual property rights owned or licensed and used or held for use by the Company or any Subsidiary (without regard to registration) ("Intellectual Property Rights"), specifying as to each, as applicable: (i) the nature of the Intellectual Property Right; (ii) the owner of the Intellectual Property Right; (iii) the jurisdictions by or in which the Intellectual Property Right has been issued or registered or in which an application for such issuance or registration has been filed; (iv) the registration or application numbers; and (v) the filing or issue and expiration dates. (b) Except as disclosed in Schedule 3.1.14(b), there are no licenses, sublicenses or other agreements as to which the Company or any Subsidiary is a party and pursuant to which any Person is authorized to use any Intellectual Property Right. (c) No Intellectual Property Right is subject to any outstanding judgment, injunction, order, decree or agreement restricting the use thereof by the Company or any Subsidiary or restricting the licensing thereof by the Company or any Subsidiary to any Person. SECTION 3.1.15 Insurance Coverage. Schedule 3.1.15 is a complete list of (with coverage amounts and expiration dates), and the Company has made available to Buyer complete copies of, all insurance policies and fidelity bonds relating to the assets, business, operations, employees, officers or directors of the Company and the Subsidiaries. Each insurance policy is valid and binding and in full force and effect, no premiums due thereunder have not been paid and neither the Company nor any Subsidiary has received any notice of cancellation or termination in respect of any such policy or to its knowledge is in default thereunder. Within the past three (3) years neither the Company nor any Subsidiary has been denied insurance coverage for which it has applied. There are no claims by the Company or any Subsidiary pending under any of such policies or bonds as to which coverage has been questioned, denied or disputed by the underwriters of such policies or bonds or in respect of which such underwriters have reserved their rights. SECTION 3.1.16 Finders' Fees. Except for Needham & Company, Inc., whose fees will be paid by Sellers, there is no investment banker, broker, finder or other intermediary which has been retained by or is authorized to act on behalf of Sellers or the Company or any Subsidiary who might be entitled to any fee or commission in connection with the transactions 14 contemplated by this Agreement. SECTION 3.1.17 Employees. The Company has made available to Buyer a true and complete list of (a) the names, titles, annual salaries and other compensation of all officers of the Company and its Subsidiaries and all other employees of the Company and its Subsidiaries whose annual base salary equals or exceeds $75,000 and (b) the wage rates for all other employees of the Company and its Subsidiaries (by classification). There is no collective bargaining or similar labor contract covering any group of employees of the Company or any Subsidiary. SECTION 3.1.18 Employee Benefit Plans. (a) Schedule 3.1.18(a) identifies each Employee Plan. The Company has made available to Buyer complete copies of the Employee Plans (and, if applicable, related trust agreements) and all amendments thereto and written interpretations thereof together with the most recent annual report (Form 5500 including, if applicable, Schedule B thereto) and the most recent actuarial valuation report prepared in connection with any Employee Plan. Schedule 3.1.18(a) identifies each Employee Plan which is (i) a Title IV Plan or (ii) maintained in connection with any trust described in Section 501(c)(9) of the Code. No Employee Plan is a Multiemployer Plan. (b) Neither the Company nor any ERISA Affiliate of the Company has (i) engaged in, or is a successor or parent corporation to an entity that has engaged in, a transaction described in Sections 4069 or 4212(c) of ERISA or (ii) incurred, or reasonably expects to incur prior to the Closing Date, (A) any liability under Title IV of ERISA arising in connection with the termination of, or a complete or partial withdrawal from, any plan covered or previously covered by Title IV of ERISA, (B) any liability under Section 4971 of the Code, or (C) any liability for failure to make a contribution to any plan when due, that, in any of cases (A), (B) or (C), could become a liability of the Company or any Subsidiary or Buyer or any of its ERISA Affiliates after the Closing Date. (c) Each Employee Plan that is intended to be qualified under Section 401(a) of the Code has been determined by the Internal Revenue Service to be so qualified and, to the Knowledge of the Company, there has been no event since the date of such determination which would adversely affect such qualification; each trust created under any such Plan has been determined by the Internal Revenue Service to be exempt from tax under Section 501(a) of the Code and, to the Knowledge of the Company, there has been no event since the date of such exemption which would adversely affect such exemption. The Company has provided Buyer with the most recent determination letter of the Internal Revenue Service relating to each such Employee Plan. Each Employee Plan has been maintained in substantial compliance with its terms and with the requirements prescribed by any and all applicable statutes, orders, rules and regulations, including but not limited to ERISA and the Code. (d) Schedule 3.1.18(d) identifies each Benefit Arrangement. The Company has furnished to Buyer complete copies or descriptions of each Benefit Arrangement (and, if applicable, related trust agreements) and all amendments thereto and written descriptions thereof 15 provided to participants. Each Benefit Arrangement has been maintained in substantial compliance with its terms and with the requirements prescribed by any and all applicable statutes, orders, rules and regulations and has been maintained in good standing with applicable regulatory authorities. (e) Except as set forth in Schedule 3.1.18(e), neither the Company nor any Subsidiary has any current or projected liability in respect of post-employment or post-retirement health or medical or life insurance benefits for retired, former or current employees of the Company or any Subsidiary, except as required to avoid excise tax under Section 4980B of the Code. (f) Except as disclosed in Schedule 3.1.18(f), with respect to each Employee Plan and Benefit Arrangement, any fiduciary or plan administrator or other person dealing with any Employee Plan or Benefit Arrangement or the assets of any such Employee Plan or Benefit Arrangement, there are no actions, suits, Liabilities, investigations or claims pending or to the Knowledge of the Company threatened (other than routine claims for benefits and routine joinders in domestic cases) and, to the Knowledge of the Company, there is no basis to anticipate that any such actions, suits, Liabilities, investigations or claims will be made. SECTION 3.1.19 Environmental Matters. Except as disclosed on Schedule 3.1.19 and except for matters that would not reasonably be expected to have a Material Adverse Effect, (a) No claim, written notice, request for information, order, complaint or penalty has been received, and there are no judicial, administrative or other actions, suits or proceedings pending or to the Knowledge of the Company or Sellers threatened which allege a violation of any Environmental Law, in each case relating to the Company or any Subsidiary or affecting any real property owned or leased by the Company or any Subsidiary; (b) The Company and each Subsidiary have all environmental permits necessary for their operations to comply with all applicable Environmental Laws and are in compliance with the terms of such permits and with all other applicable Environmental Laws; (c) There has been no written environmental audit conducted within the past five years by Sellers, the Company or any Subsidiary of any real property currently owned or leased by the Company or any Subsidiary which has not been made available to Buyer prior to the date hereof; (d) The Company has not caused or permitted any Hazardous Substances to be, and the Company has no Knowledge that any Hazardous Substances were, generated, manufactured, refined, transported, treated, stored, disposed, handled, processed, produced, or released on any property owned or leased by the Company or any Subsidiary except in compliance with all applicable federal state and local laws and regulations; (e) Neither the Company nor Sellers have any Knowledge of any Environmental Condition (as that term is hereinafter defined) concerning any real property adjacent to any property owned or leased by the Company or any Subsidiary that would adversely affect any real property owned or leased by the Company or any Subsidiary. The Company has caused to be 16 delivered to Buyer complete copies of all data, sampling results, reports and other information regarding the Environmental Condition of any real property owned or leased by the Company or any Subsidiary, which as of the date of this Agreement are in the possession of the Company or any Subsidiary or of which as of said date the Company has Knowledge. For purposes of this Agreement, "Environmental Condition" means any condition that may exist or have existed with respect to soil, surface or ground waters, stream sediments, and every other environmental media, which condition could require investigation and/or remedial action of any kind under applicable Environmental Laws or which could result in claims, demands, orders or Liabilities by or to third parties, including without limitation, governmental entities; and (f) The Company has at all times complied with all Environmental Laws applicable to any property owned or leased by the Company or any Subsidiary, and any activities conducted thereon including, without limitation, those laws and regulations which require notification to the applicable federal, state, county or municipal agency. SECTION 3.1.20 P-Com Claims. As of June 30, 2005, the amount of the outstanding account receivable owed the Company by P-Com, Inc. is equal to $415,383.10, and the value of the Company's claim against P-Com, Inc. for inventory is $367,331.71 (collectively, "P-Com Claim"). SECTION 3.2 Representations and Warranties of Each Seller. Each of the Sellers represents and warrants to Buyer, solely with respect to such Seller, as of the date hereof that: SECTION 3.2.1 Authorization. Each Seller is competent to enter into this Agreement and to perform his obligations hereunder and to consummate the transactions contemplated hereby. This Agreement has been duly executed and delivered by each Seller and is the valid and binding obligation of such Seller, enforceable against such Seller in accordance with its terms, except that such enforcement may be limited by any bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or other laws (whether statutory, regulatory or decisional), now or hereafter in effect, relating to or affecting the rights of creditors generally or by equitable principles (regardless of whether considered in a proceeding at law or in equity). SECTION 3.2.2 Ownership of Shares. Each Seller is the record owner of the Shares set forth opposite his respective name in Schedule 2.1, free and clear of all Liens, except for restrictions imposed by federal and state securities laws. Each Seller will transfer and deliver to Buyer at the Closing valid title to the Shares free and clear of all Liens. SECTION 3.3 No Omission. To the Knowledge of the Company and Sellers, the Company's and Sellers' representations and warranties and all information made available to the Buyer by or on behalf of the Company and Sellers are complete and correct in all material respects and do not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the representations, warranties and information not misleading in light of the circumstances under which such statements were made. SECTION 3.4 Disclaimer of Other Representations and Warranties. Except as expressly set forth in Sections 3.1 through 3.3 hereof, Sellers and the Company disclaim all other 17 representations and warranties, whether express or implied. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF BUYER Buyer represents and warrants to the Company and Sellers as of the date hereof that: SECTION 4.1 Corporate Existence and Power. Buyer is a corporation duly incorporated, validly existing and in good standing under the laws of Delaware and has all corporate powers and all governmental licenses, authorizations, permits, consents and approvals required to carry on its business as now conducted, except for those licenses, authorizations, permits, consents and approvals the absence of which would not have a Material Adverse Effect on Buyer. SECTION 4.2 Authorization. Buyer has all necessary corporate power and authority to enter into this Agreement and to perform its obligations hereunder and to consummate the transactions contemplated hereby. This Agreement has been duly executed and delivered by Buyer and is the valid and binding obligation of Buyer, enforceable against Buyer in accordance with its terms except that such enforcement may be limited by any bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or other laws (whether statutory, regulatory or decisional), now or hereafter in effect, relating to or affecting the rights of creditors generally or by equitable principles (regardless of whether considered in a proceeding at law or in equity). SECTION 4.3 Government Authorization. The execution, delivery and performance by Buyer of this Agreement and the consummation of the transactions contemplated hereby require no material action by or in respect of, or filing with, any governmental body, agency or official other than (i) compliance with any applicable requirements of the 1934 Act and (ii) any such action or filing as to which the failure to make or obtain would not have a Material Adverse Effect on Buyer. SECTION 4.4 Noncontravention. The execution, delivery and performance by Buyer of this Agreement and the consummation of the transactions contemplated hereby do not and will not (i) violate the certificate of incorporation or bylaws of Buyer, (ii) assuming compliance with the matters referred to in Section 4.3, violate any applicable law, rule, regulation, judgment, injunction, order or decree, except for any such violations which would not have a Material Adverse Effect on Buyer, (iii) except as disclosed on Schedule 4.4, require any consent or other action by any Person under, constitute a default under, or give rise to any right of termination, cancellation or acceleration of any right or obligation of Buyer or to a loss of any benefit to which Buyer is entitled under any provision of any agreement or other instrument binding upon Buyer; or (iv) result in the creation or imposition of any Lien on any asset of Buyer, except in connection with the financing of the transaction contemplated in this Agreement. SECTION 4.5 Financing. Buyer has, or will have prior to the Closing, sufficient cash, available lines of credit or other sources of immediately available funds to enable it to make payment of the Purchase Price and any other amounts to be paid by it hereunder. 18 SECTION 4.6 Purchase for Investment. Buyer is purchasing the Shares for investment for its own account and not with a view to, or for sale in connection with, any distribution thereof. Buyer (either alone or together with its advisors) has sufficient knowledge and experience in financial and business matters so as to be capable of evaluating the merits and risks of its investment in the Shares and is capable of bearing the economic risks of such investment and agrees that the Shares may not be sold, transferred, encumbered or otherwise disposed of except in compliance with applicable federal and state securities laws. SECTION 4.7 Litigation. There is no action, suit, investigation or proceeding pending against, or to the Knowledge of Buyer threatened against or affecting, Buyer before any court or arbitrator or any governmental body, agency or official which in any manner challenges or seeks to prevent, enjoin, alter or materially delay the transactions contemplated by this Agreement. SECTION 4.8 Finders' Fees. There is no investment banker, broker, finder or other intermediary which has been retained by or is authorized to act on behalf of Buyer who might be entitled to any fee or commission from Sellers or any of their Affiliates upon consummation of the transactions contemplated by this Agreement. SECTION 4.9 No Omission. To Buyer's Knowledge, Buyer's representations and warranties and all information made available to the Company and Sellers by or on behalf of Buyer are complete and correct in all material respects and do not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the representations, warranties and information not misleading in light of the circumstances under which such statements were made. SECTION 4.10 Disclaimer of Other Representations and Warranties. Except as expressly set forth in Sections 4.1 through 4.9 hereof, the Buyer disclaims all other representations and warranties, whether express or implied. ARTICLE 5 COVENANTS OF SELLERS Sellers agree that: SECTION 5.1 Conduct of the Company. From the date hereof until the Closing Date, Sellers shall cause the Company and each Subsidiary to conduct its businesses in the ordinary course consistent with past practices and to use its reasonable efforts to preserve intact its business organization and relationships with third parties and to keep available the services of its present officers and employees. Without limiting the generality of the foregoing, from the date hereof until the Closing Date, except as disclosed on Schedule 5.1, Sellers will not permit the Company or any Subsidiary to do any of the following without the prior written consent of Buyer: (a) adopt or propose any change in the articles of incorporation or bylaws of the Company or any Subsidiary; 19 (a) merge or consolidate with any other Person; (b) sell, purchase, lease, license or otherwise dispose of or acquire any assets or property with a value in excess of $25,000 except (i) pursuant to existing contracts or commitments or (ii) otherwise in the ordinary course consistent with past practices; (c) authorize, issue, sell or otherwise dispose of any shares of capital stock of or any option with respect to the Company or any Subsidiary, or modify or amend any right of any holder of outstanding shares of capital stock of or option with respect to the Company or any Subsidiary; (d) declare, set aside or pay any dividend or other distribution in respect of the capital stock of the Company or any Subsidiary not wholly owned by the Company, or directly or indirectly redeem, purchase or otherwise acquire any capital stock of or any option with respect to the Company or any Subsidiary not wholly owned by the Company; or (e) agree or commit to do any of the foregoing. SECTION 5.2 Access to Information. From the date hereof until the Closing Date, Sellers will (a) give, and will cause the Company and each Subsidiary to give, Buyer, its counsel, financial advisors, auditors and other authorized representatives reasonable access to the offices, properties, books and records of the Company and the Subsidiaries; (b) furnish, and will cause the Company and each Subsidiary to furnish, to Buyer, its counsel, financial advisors, auditors and other authorized representatives such financial and operating data and other information relating to the Company or any Subsidiary as such Persons may reasonably request; and (c) instruct counsel and financial advisors of Sellers or the Company or any Subsidiary to cooperate with Buyer in its investigation of the Company or any Subsidiary. Any investigation pursuant to this Section shall be conducted in such manner as not to interfere unreasonably with the conduct of the business of Sellers, the Company or any Subsidiary. Notwithstanding the foregoing, Buyer shall not have access to personnel records of the Company and the Subsidiaries relating to individual performance or evaluation records, medical histories or other information which in Sellers' good faith opinion the disclosure of which could subject the Company or any Subsidiary to risk of liability. SECTION 5.3 Notices of Certain Events. The Company shall promptly notify Buyer of: (a) any notice or other communication from any Person alleging that the consent of such Person is or may be required in connection with the transactions contemplated by this Agreement; (b) any notice or other communication from any governmental or regulatory agency or authority in connection with the transactions contemplated by this Agreement; (c) any actions, suits, claims investigations or proceedings commenced relating to Sellers or the Company or any Subsidiary that, if pending on the date of this Agreement, would have been required to have been disclosed pursuant to Section 3.1.11; and 20 (d) any material change in the financial condition of the Company or any Subsidiary or in their properties, Liabilities or operations. SECTION 5.4 Resignations. The Company will deliver to Buyer the resignations of all directors and executive officers of the Company and each Subsidiary at the Closing Date. ARTICLE 6 COVENANTS OF BUYER SECTION 6.1 Confidentiality. Prior to the Closing Date and after any termination of this Agreement, Buyer and its Affiliates will hold, and will cause their respective officers, directors, employees, accountants, lenders, counsel, consultants, advisors and agents to hold, in confidence, unless compelled to disclose by judicial or administrative process or by other requirements of law, all documents and information concerning the Company or any Subsidiary furnished by Sellers in connection with the transactions contemplated by this Agreement, except to the extent that such information can be shown to have been (i) known on a nonconfidential basis by Buyer or an Affiliate of Buyer prior to its being furnished by the Company or a Subsidiary; (ii) in the public domain through no fault of Buyer or an Affiliate of Buyer; or (iii) acquired on a nonconfidential basis by Buyer or an Affiliate of Buyer from sources, other than Sellers, the Company or any Subsidiary, under no obligation to maintain the confidentiality thereof; provided that Buyer may disclose such information to its officers, directors, employees, accountants, lenders, counsel, consultants, advisors and agents in connection with the transactions contemplated by this Agreement so long as such Persons are informed by Buyer of the confidential nature of such information and agree to treat such information confidentially. Buyer shall be responsible for any failure to treat such information confidentially by such Persons. If this Agreement is terminated, Buyer and its Affiliates will, and will cause their respective officers, directors, employees, accountants, lenders, counsel, consultants, advisors and agents to, destroy or deliver to the Company, upon request, all documents and other materials, and all copies thereof, obtained by Buyer or its Affiliates or on their behalf from Sellers, the Company or any Subsidiary in connection with this Agreement. SECTION 6.2 Access; Assistance. (a) Buyer agrees that it will cause the Company and each Subsidiary, on and after the Closing Date, to afford promptly to Sellers, and each of them, and their agents reasonable access to their properties, books, records, employees and auditors to the extent necessary to permit Sellers to determine any matter relating to their rights and obligations hereunder or to any period ending on or before the Closing Date; provided that any such access by Sellers shall not unreasonably interfere with the conduct of the business of Buyer. Sellers may during such period, at their expense, make such copies thereof as they may reasonably request. Sellers agree that all documents that are retained by Sellers after the Closing Date and that are related to the Company or the Subsidiaries shall be open for inspection by representatives of Buyer at any time during regular business hours until such time as documents are destroyed or possession thereof is given up to the other party as provided for in Section 6.2(b), and that Buyer may during such period, at its expense, make such copies thereof as it may reasonably request. 21 (b) Without limiting the generality of Section 6.2(a), for the period described in Section 8.5 with respect to items related to the matters covered by Article 8 and on the sixth anniversary of the Closing Date with respect to all other items, neither Buyer nor Sellers shall destroy or give up possession of any item referred to in Section 6.2(a) without first offering to the other party, or in the case of items belonging to the Company or the Subsidiaries, to Sellers, the opportunity, at such other party's expense (but without any other payment) to obtain the same. Thereafter, each party shall be free to dispose of such properties, books and records as they see fit. (c) Buyer agrees that it will cause the management of the Company and the Subsidiaries to assist Sellers and Sellers' representatives in the preparation of the Closing Date Balance Sheet to be delivered by Sellers to Buyer in accordance with Section 2.4(a) hereof and the actions described in Article 8 hereof. ARTICLE 7 COVENANTS OF BUYER AND SELLERS Buyer and Sellers agree that: SECTION 7.1 Reasonable Efforts; Further Assurances. Subject to the terms and conditions of this Agreement, Buyer and Sellers will use their reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary or desirable under applicable laws and regulations to consummate the transactions contemplated by this Agreement. Sellers and Buyer agree, and Sellers, prior to the Closing, and Buyer, after the Closing, agree to cause the Company and each Subsidiary, to execute and deliver such other documents, certificates, agreements and other writings and to take such other actions as may be necessary or desirable in order to consummate or implement expeditiously the transactions contemplated by this Agreement. SECTION 7.2 Certain Filings. Sellers and Buyer shall cooperate with one another (i) in determining whether any action by or in respect of, or filing with, any governmental body, agency, official or authority is required, or any actions, consents, approvals or waivers are required to be obtained from parties to any material contracts, in connection with the consummation of the transactions contemplated by this Agreement and (ii) in taking such actions or making any such filings, furnishing information required in connection therewith and seeking timely to obtain any such actions, consents, approvals or waivers. SECTION 7.3 Public Announcements. The parties agree to consult with each other before issuing any press release or making any public statement with respect to this Agreement or the transactions contemplated hereby and, except as may be required by applicable law or any listing agreement with any national securities exchange, will not issue any such press release or make any such public statement prior to such consultation. If disclosure is required by applicable law, the disclosing party shall consult in advance with the other party and attempt in good faith to reflect such other party's concerns in the required disclosure. 22 ARTICLE 8 TAX MATTERS SECTION 8.1 Tax Definitions. The following terms, as used herein, have the following meanings: "Code" means the United States Internal Revenue Code of 1986, as amended. "Federal Tax" means any Tax imposed under the Code. "Final Determination" shall mean, for purposes of Section 8.6(d), (i) with respect to Federal Taxes, a "determination" as defined in Section 1313(a) of the Code or execution of an Internal Revenue Service Form 870AD and, with respect to Taxes other than Federal Taxes, any final determination of liability in respect of a Tax or (ii) the payment of Tax by Buyer, Sellers, the Company, any Subsidiary or any of their affiliates, whichever is responsible for payment of such Tax under applicable law, with respect to any item disallowed or adjusted by a Taxing Authority, provided that such responsible party determines that no action should be taken to recoup such payment and the other party agrees. "Post-Closing Tax Period" means any Tax period beginning after the Closing Date and, with respect to a Tax period that includes but does not end on the Closing Date, the portion of such Tax period beginning after the Closing Date. "Pre-Closing Tax Period" means any Tax period ending on or before the Closing Date and, with respect to a Tax period that includes but does not end on the Closing Date, the portion of such Tax period ending on the Closing Date. "Tax" or "Taxes" means (i) any and all federal, state, local and foreign taxes, charges, fees, levies, assessments or other governmental charges, duties, impositions and liabilities relating to taxes, including, but not limited to, taxes based upon or measured by income, profits, gross receipts, sales, use and occupation, and value added, services, ad valorem, alternative minimum, transfer, license, franchise, capital stock, withholding, payroll, occupancy, recapture, employment, unemployment, stamp, excise and property taxes, together with any and all interest, penalties, additions to tax or additional amounts due from, or in respect of, the Company or any Subsidiary imposed by any governmental authority (domestic or foreign) responsible for the imposition of any such tax or other amount (a "Taxing Authority"). SECTION 8.2 Tax Representations. (a) Sellers represent and warrant to Buyer as of the date of this Agreement and as of the Closing Date that, except as set forth in the Closing Date Balance Sheet (including the notes thereto) or on Schedule 8.2 provided on the date hereof, (i) all Tax returns, statements, estimates, declarations of estimated tax, information tax reports and forms (collectively, the "Returns") required to be filed with any Taxing Authority on or before the Closing Date with respect to any Pre-Closing Tax Period by, or with respect to, the Company or any Subsidiary have been filed or will be filed on or before the Closing Date in accordance with all applicable laws; (ii) the 23 Company and the Subsidiaries have timely paid or had paid on their behalf all Taxes due and payable with regard to the Company and its Subsidiaries; (iii) the charges, accruals and reserves for Taxes with respect to the Company and the Subsidiaries reflected on the Closing Date Balance Sheet and on the books of the Company and the Subsidiaries as of the Closing Date are adequate, under accounting principles generally accepted in the United States of America, to cover the Tax liabilities accruing through the Closing Date; and (iv) there is no action, suit, proceeding, investigation, audit or claim now pending against or with respect to the Company or any Subsidiary in respect of any Tax or any waiver of any statute of limitations. (b) Between the date hereof and the Closing Date, to the extent Sellers or the Company or any Subsidiary have Knowledge of the commencement or scheduling of any Tax audit, the assessment of any Tax, the issuance of any notice of Taxes due or any bill for collection of any Taxes due, or the commencement or scheduling of any other administrative or judicial proceeding with respect to the determination, assessment or collection of any Taxes of the Company or any Subsidiary, Sellers shall provide prompt notice to Buyer of such matter, setting forth information (to the extent known) describing any asserted Tax liability in reasonable detail and including copies of any notice or other documentation received from the applicable Taxing Authority with respect to such matter. (c) Between the date hereof and the Closing Date, Sellers shall not, and shall cause the Company and each Subsidiary not to, take any of the following actions: (i) make, revoke or amend any Tax election; (ii) execute any waiver of restrictions on assessment or collection of any Taxes; or (iii) enter into or amend any agreement or settlement with any Taxing Authority. SECTION 8.3 Tax Covenants. (a) Buyer covenants that it will not cause or permit the Company, any Subsidiary or any Affiliate of Buyer to amend any Return for a Pre-Closing Tax Period that could give rise to any Tax liability of the Sellers under this Agreement, except as otherwise agreed in writing by the parties. Buyer agrees that Sellers are to have no liability for Taxes for a Post-Closing Tax Period, and agrees to indemnify and hold harmless Sellers and their Affiliates against any such Tax, the parties agreeing in that event to follow the procedures described in Section 10.3. (b) Buyer shall have the right and obligation to timely prepare and file and cause to be timely prepared and filed when due all Returns that are required to be filed by the Company or any Subsidiary after the Closing Date. With respect to the Federal, state and local income tax returns for the tax period ended April 3, 2005 and for any tax period of the Company or any Subsidiary that includes (but does not end on) the Closing Date, all such Returns shall be prepared in a manner consistent with past practice in accordance with applicable law and without a change of any election or any accounting method and shall be submitted by Buyer to Sellers (together with schedules, statements and, to the extent requested by Sellers, supporting documentation) at least 15 business days prior to the due date (including extensions) for such Return. Sellers shall have the right to review all work papers and procedures used to prepare any such Return. If Sellers within 10 business days after delivery of any such Return notify Buyer in writing that they object to any item in such Return, the disputed items shall be resolved (within a reasonable time, taking into account the deadline for filing such Return) by independent 24 accountants of nationally recognized standing reasonably satisfactory to Buyer and Sellers (who shall not have any material relationship with Buyer or Sellers) (the "Accounting Referee"). Upon resolution of all such items, the relevant Return shall be adjusted to reflect such resolution and shall be binding upon the parties without further adjustment. The costs, fees and expenses of such Accounting Referee shall be borne one-half by Buyer and one-half by Sellers. SECTION 8.4 Other Taxes. All transfer, documentary, sales, use, stamp, registration and other such taxes and fees (including any penalties and interest) incurred in connection with this Agreement shall be borne and paid by Sellers, and Sellers will, at their own expense, file all necessary tax returns and other documentation with respect to all such taxes and fees, and, if required by applicable law, Buyer will, and will cause its Affiliates to, join in the execution of any such tax returns and other documentation. SECTION 8.5 Cooperation on Tax Matters. (a) Buyer and Sellers agree to furnish or cause to be furnished to each other, upon request, as promptly as practicable, such information (including access to books and records) and assistance relating to the Company, its Subsidiaries or affiliates as is reasonably necessary for the filing of any return, for the preparation for any audit, and for the prosecution or defense of any claim, suit or proceeding relating to any proposed adjustment. Buyer and Sellers agree to retain or cause to be retained all books and records pertinent to the Company and the Subsidiaries until the applicable period for assessment under applicable law (giving effect to any and all extensions or waivers) has expired, and to abide by or cause the abidance with all record retention agreements entered into with any Taxing Authority. Buyer and Sellers shall cooperate with each other in the conduct of any audit or other proceedings involving the Company for any Tax purposes and each shall execute and deliver such powers of attorney and other documents as are necessary to carry out the intent of this subsection. (b) Buyer and Sellers further agree, upon request, to provide the other party with all information that either party may be required to report pursuant to Section 6043 of the Code and all Treasury Regulations promulgated thereunder. SECTION 8.6. Indemnification by Sellers. (a) Sellers hereby indemnify Buyer and its Affiliates against and agree to hold each of them harmless from any (i) Tax of the Company or any Subsidiary, and (ii) liabilities, costs, expenses (including, without limitation, reasonable expenses of investigation and reasonable attorneys' fees and expenses), arising out of or incident to the imposition, assessment or assertion of any Tax, including those incurred in the contest in good faith in appropriate proceedings relating to the imposition, assessment or assertion of any Tax, in each case with respect to any Pre-Closing Tax Period to the extent not reflected on the Closing Date Balance Sheet (the sum of 8.6(a)(i) and 8.6(a)(ii) being referred to as a "Tax Loss"). (b) For purposes of this Section 8.6, in the case of any Tax that is imposed on a periodic basis and is payable for a Tax period that includes but does not end on the Closing Date, the portion of such Tax relating to the portion of such Tax period ending on the Closing Date 25 shall be deemed equal to the amount which would be payable if the relevant taxable period ended on the Closing Date. All determinations necessary to give effect to the foregoing allocation shall be made in a manner consistent with past practice of the Company and the Subsidiaries in accordance with applicable law. (c) If any claim or demand for a Tax Loss in respect of which indemnity may be sought pursuant to this Section 8.6 is assessed or asserted in writing against Buyer, any of its Affiliates, the Company or any Subsidiary, the parties shall follow the procedures described in Section 10.3. (d) Any amount paid by Sellers under Section 8.6 shall be treated as an adjustment to the Purchase Price unless a Final Determination causes any such amount to not constitute an adjustment to the Purchase Price for Federal Tax purposes. SECTION 8.7. Survival. Notwithstanding anything in this Agreement to the contrary, the provisions of this Article 8 shall survive until the third anniversary of the Closing Date. Notwithstanding the preceding sentence, any covenant, agreement, representation or warranty in respect of which indemnity may be sought under this Agreement shall survive the time at which it would otherwise terminate pursuant to the preceding sentence, if notice of the inaccuracy or breach thereof giving rise to such right of indemnity shall have been given to the party against whom such indemnity may be sought prior to such time. ARTICLE 9 CONDITIONS TO CLOSING SECTION 9.1 Conditions to Obligations of Buyer and Sellers. The obligations of Buyer and Sellers to consummate the Closing are subject to the satisfaction of the following conditions, any one or more of which may be waived by mutual agreement of Buyer and Sellers. (a) No provision of any applicable law or regulation and no judgment, injunction, order (including a temporary restraining order) or decree of any state or federal court or other governmental agency shall prohibit the consummation of the Closing or prohibits Buyer's ownership of the Shares shall have been issued and remain in effect. (b) All actions by or in respect of or filings with any governmental body, agency, official or authority required to permit the consummation of the Closing shall have been taken, made or obtained, except for any such actions or filings the failure to take, make or obtain would not reasonably be expected to have either a Material Adverse Effect or a Material Adverse Effect on Buyer. SECTION 9.2 Conditions to Obligation of Buyer. The obligation of Buyer to consummate the Closing is subject to the satisfaction of the following further conditions, any one or more of which may be waived by Buyer: (a) (i) Sellers and the Company shall have performed in all material respects all of their obligations hereunder required to be performed by them on or prior to the Closing Date, (ii) 26 the representations and warranties of Sellers and the Company contained in this Agreement and in any certificate or other writing delivered by Sellers or the Company pursuant hereto shall be true at and as of the Closing Date, as if made at and as of such date, and (iii) Buyer shall have received a certificate signed by each of Sellers and the CEO or CFO of the Company to the foregoing effect. (b) Buyer shall have received an opinion of Silicon Valley Law Group, counsel to the Company and Sellers, dated the Closing Date to the effect specified in Sections 3.1.1, 3.1.2, 3.1.3, and 3.1.4. In rendering such opinion, such counsel may rely upon certificates of public officers; upon opinions of counsel reasonably satisfactory to Buyer as to matters governed by the laws of jurisdictions other than California, or the federal laws of the United States of America; and, as to matters of fact, upon certificates of officers of the Company or any Subsidiary, copies of which opinions and certificates shall be contemporaneously delivered to Buyer. (c) Sellers shall have received all consents, authorizations or approvals from the governmental agencies set forth in Section 9.1(b), in each case in form and substance reasonably satisfactory to Buyer, and no such consent, authorization or approval shall have been revoked. (d) Buyer shall have received all documents it may reasonably request relating to the existence of the Company and the Subsidiaries, all in form and substance reasonably satisfactory to Buyer. (e) Sellers shall have caused the Company's 401(k) plan to have been terminated effective immediately before the Closing. (f) Brea Industries, Inc., the owner of the premises occupied by the Company, shall have executed and delivered to the Company a new lease for said premises. (g) Buyer's lender shall have approved the transaction contemplated by this Agreement. (h) Buyer shall have received certificates for the Shares and for the Subsidiary's stock (as required to transfer all such stock that is not owned by the Company to Buyer or its nominee) duly endorsed or accompanied by stock powers duly endorsed in blank, with any required transfer stamps affixed thereto. (i) Buyer shall have received copies of resolutions of the Company's Board of Directors and Shareholders, authorizing the execution, delivery and performance of this Agreement and the transactions contemplated hereby. (j) Buyer shall have received the Company's and Subsidiaries' corporate minute books, seals and stock ledger books. (k) Buyer shall have received the resignations described in Section 5.4. (l) Buyer shall have received covenants not to compete from Roger Nordby, David 27 Orosz, Roger Mitri and Peter Dennis, all in form and substance satisfactory to Buyer. SECTION 9.3 Conditions to Obligation of Sellers. The obligation of Sellers to consummate the Closing is subject to the satisfaction of the following further conditions, any one or more of which may be waived by Sellers: (a) (i) Buyer shall have performed in all material respects all of its obligations hereunder required to be performed by it at or prior to the Closing Date; (ii) the representations and warranties of Buyer contained in this Agreement and in any certificate or other writing delivered by Buyer pursuant hereto shall be true in all material respects at and as of the Closing Date, as if made at and as of such date; and (iii) Sellers shall have received a certificate signed by the CEO or CFO of Buyer to the foregoing effect. (b) Sellers and the Company shall have received an opinion of Defrees & Fiske LLC, counsel to Buyer, dated the Closing Date to the effect specified in Sections 4.1, 4.2, 4.3, and 4.4. In rendering such opinion, such counsel may rely upon certificates of public officers; upon opinions of counsel reasonably satisfactory to Sellers as to matters governed by the laws of jurisdictions other than Illinois and Delaware (as to corporate law) or the federal laws of the United States of America; and, as to matters of fact, upon certificates of officers of Buyer, copies of which opinions and certificates shall be contemporaneously delivered to Sellers. (c) Buyer shall have received all consents, authorizations or approvals from governmental agencies referred to in Section 9.1(b), in each case in form and substance reasonably satisfactory to Sellers, and no such consent, authorization or approval shall have been revoked. (d) Sellers shall have received all documents they may reasonably request relating to the existence of Buyer and the authority of Buyer to execute and deliver this Agreement, all in form and substance reasonably satisfactory to Sellers. (e) Funds in the amounts and payable as set forth in Section 2.1 shall be available to Sellers. ARTICLE 10 SURVIVAL; INDEMNIFICATION SECTION 10.1 Survival. The covenants, agreements, representations and warranties of the parties hereto contained in this Agreement or in any certificate or other writing delivered pursuant hereto or in connection herewith shall survive the Closing until the second anniversary of the Closing Date; provided that the covenants, agreements, representations and warranties contained in (a) Section 3.1.19 shall survive until the fifth anniversary of the Closing Date; (b) Section 6.2 shall survive as set forth therein; (c) Article 8 shall survive as set forth in Section 8.6; (d) Sections 10.2(c) and 10.2(d) shall survive as set forth therein; and (e) Buyer's confidentiality letter agreement dated May 7, 2004 shall survive for the period set forth therein. Notwithstanding the preceding sentence, any covenant, agreement, representation or warranty in respect of which indemnity may be sought under this Agreement shall survive the time at which 28 it would otherwise terminate pursuant to the preceding sentence, if notice of the inaccuracy or breach thereof giving rise to such right of indemnity shall have been given to the party against whom such indemnity may be sought prior to such time. SECTION 10.2 Indemnification. (a) Sellers hereby indemnify Buyer and its Affiliates against and agrees to hold each of them harmless from any and all damage, loss, liability and expense (including, without limitation, reasonable expenses of investigation and reasonable attorneys' fees and expenses in connection with any action, suit or proceeding) ("Damages") incurred or suffered by Buyer or any of its Affiliates arising out of any misrepresentation or breach of warranty, covenant or agreement made or to be performed by the Company or Sellers pursuant to this Agreement (other than pursuant to Article 8); provided that Sellers shall not be liable under this Section 10.2(a) unless the aggregate amount of Damages with respect to all matters referred to in this Section 10.2(a) exceeds $50,000 (the "Basket Amount"), in which case Sellers shall be liable to Buyer for only such Damages in excess of the Basket Amount, but in no event shall Sellers be liable to Buyer in an aggregate amount in excess of the Purchase Price (the "Cap"), and in no event shall any individual Seller be liable to Buyer in an aggregate amount in excess of his respective portion of the Purchase Price. Notwithstanding anything to the contrary in this Agreement, Sellers shall not be liable for, and shall not be required to indemnify Buyer against, any Damages related to the Company's or the Subsidiary's inventory. (b) Buyer hereby indemnifies Sellers and their respective Affiliates against and agrees to hold each of them harmless from any and all Damages incurred or suffered by Sellers or any of their respective Affiliates arising out of any misrepresentation or breach of warranty, covenant or agreement made or to be performed by Buyer pursuant to this Agreement (other than pursuant to Article 8); provided that Buyer shall not be liable under this Section 11.2(b) unless the aggregate amount of Damages with respect to all matters referred to in this Section 11.2(b) exceeds the Basket Amount, in which case Buyer shall be liable to Sellers for only such Damages in excess of the Basket Amount, but in no event shall Buyer be liable to Sellers in an aggregate amount in excess of the Cap. (c) Notwithstanding anything to the contrary in this Agreement, and without regard to any disclosures made by Sellers or the Company hereunder, until the fifth anniversary of the Closing Date, Sellers hereby indemnify Buyer and its Affiliates against and agrees to hold each of them harmless from any and all Damages incurred or suffered by Buyer or any of its Affiliates arising out of any failure of the cash-in-lieu of coverage option (that is available to the Company's employees who decline health and dental insurance coverage under the Able Electronics Corporation Health and Welfare Plan) to be included in or subject to a cafeteria plan under Section 125 of the Code. Sellers' indemnification obligations under this Section 10(c) are not limited to (i) amounts in excess of the Basket Amount, or (ii) the Cap, and shall not reduce amounts available to Buyer under either the P-Com Escrow or the Regular Escrow. In no event shall any individual Seller be liable to Buyer in an aggregate amount in excess of his respective portion of the Purchase Price. (d) Notwithstanding anything to the contrary in this Agreement, and without regard to 29 any disclosures made by Sellers or the Company hereunder, until the first anniversary of the Closing Date, Sellers hereby indemnify Buyer and its Affiliates against and agree to hold each of them harmless from any and all Damages incurred or suffered by Buyer or any of its Affiliates arising out of claims by the Company's employee, Lillian Vargas, that the Company through its employee, Jennifer Kidwell, has a hostile work environment. SECTION 10.3 Procedures. (a) The party seeking indemnification under Article 8 or Section 10.2 (the "Indemnified Party") agrees to give prompt notice to the party against whom indemnity is sought (the "Indemnifying Party") of the assertion of any claim or Tax Loss, or the commencement of any action or proceeding (including a Tax audit) ("Claim") in respect of which indemnity may be sought under such Section and will provide the Indemnifying Party such information with respect thereto that the Indemnifying Party may reasonably request and the Indemnified Party's calculation of the Damages related to the Claim. The delay or failure to so notify the Indemnifying Party shall not relieve the Indemnifying Party of its obligations hereunder, except to the extent such delay or failure shall have adversely prejudiced the Indemnifying Party. The Indemnifying Party shall have a period of 30 days within which to give written notice of objection to the Claim or calculation of Damages under this Section 10.3. If the Indemnifying Party does not give written notice of objection or does not respond within said 30-day period, the Indemnified Party shall be paid the amount of Damages related to the Claim, in immediately available funds, either by the Escrow Agent from the Escrow Account to the extent available, or by the Indemnifying Party as soon as practicable but not later than 5 business days after the expiration of said 30-day period. If the Indemnifying Party gives written notice of objection to the Claim or Damages within said 30-day period, the parties shall resolve the dispute in accordance with the procedures set out in Article 15 of the Escrow Agreement. The Indemnifying Party shall be entitled to participate in the defense of any Claim asserted by any third party ("Third Party Claim") and, subject to the limitations set forth in this Section, shall be entitled to control and appoint lead counsel for such defense, in each case at its expense, which lead counsel shall be reasonably satisfactory to the Indemnified Party. If the Indemnifying Party assumes the control of the defense, the Indemnifying Party shall provide the Indemnified Party with such assurances as may be reasonably required by the Indemnified Party to assure that the Indemnified Party will assume and be responsible for the entire Third Party Claim. If the Indemnifying Party does not respond within the 30-day period set forth in Section 10.3(a), the Indemnified Party shall be free to pursue, without prejudice to any of its rights hereunder, such remedies as may be available to the Indemnified Party under applicable law. The Indemnified Party agrees to cooperate fully with the Indemnifying Party and its counsel in the defense against any such Third Party Claim. In any event, the Indemnified Party shall be entitled to employ counsel, at its expense, separate from the counsel employed by the Indemnifying Party. (b) If the Indemnifying Party shall assume the control of the defense of any Third Party Claim in accordance with the provisions of this Section 10.3, (i) the Indemnifying Party shall obtain the prior written consent of the Indemnified Party (which shall not be unreasonably withheld) before entering into any settlement or compromise of such Third Party Claim, if the 30 settlement or compromise does not release the Indemnified Party from all liabilities and obligations with respect to such Third Party Claim or the settlement or compromise imposes injunctive or other equitable relief against the Indemnified Party and (ii) the Indemnified Party shall be entitled to participate in the defense of such Third Party Claim and to employ separate counsel of its choice for such purpose. The fees and expenses of such separate counsel shall be paid by the Indemnified Party. If the Indemnified Party refuses to provide its prior written consent to a bona fide offer of settlement or compromise that the Indemnifying Party wishes to accept, the Indemnifying Party may continue to pursue such settlement or compromise, free of any participation by the Indemnified Party, at the sole expense of the Indemnifying Party. In such event, the obligation of the Indemnifying Party to the Indemnified Party shall be equal to the lesser of (y) the amount of the offer of settlement or compromise which the Indemnified Party refused to accept plus the costs and expense of the Indemnified Party prior to the date the Indemnifying Party notifies the Indemnified Party of the offer of settlement or compromise, and (z) the actual out-of-pocket amount the Indemnified Party is obligated to pay as a result of the Indemnified Party's continuing to pursue the underlying matter. The Indemnifying Party shall be entitled to recover from the Indemnified Party any additional expenses incurred by the Indemnifying Party as a result of the decision of the Indemnified Party to pursue such matter. (c) Each party shall cooperate, and cause their respective Affiliates to cooperate, in the defense or prosecution of any Third Party Claim and shall furnish or cause to be furnished such records, information and testimony, and attend such conferences, discovery proceedings, hearings, trials or appeals, as may be reasonably requested in connection therewith. SECTION 10.4 Calculation of Damages; Reduction for Insurance. (a) The Indemnifying Party shall not be liable under Section 10.2 for any (i) Damages relating to any matter to the extent that (a) there is included in the Closing Financial Statements a specific liability or reserve relating to such matter so long as such liability or reserve is not exceeded or (b) the Indemnified Party had otherwise been compensated for such matter pursuant to the Purchase Price adjustment under Section 2.4; (ii) consequential or punitive Damages; or (iii) Damages for lost profits. (b) The amount which an Indemnifying Party is required to pay to, for or on behalf of an Indemnified Party pursuant to this Article 10 shall be reduced (including, without limitation, retroactively) by any insurance proceeds actually recovered by or on behalf of the Indemnified Party in reduction of the related indemnifiable loss (the "Indemnifiable Loss"). Amounts required to be paid, as so reduced, are hereinafter sometimes called an "Indemnity Payment". If an Indemnified Party shall have received, or if an Indemnifying Party shall have paid on behalf of such Indemnified Party, an Indemnity Payment in respect of an Indemnifiable Loss and shall subsequently receive, directly or indirectly, insurance proceeds in respect of such Indemnifiable Loss, then such Indemnitee shall promptly pay to the Indemnifying Party the amount of such insurance proceeds or, if less, the amount of the Indemnity Payment. The parties hereto agree that the foregoing shall not affect the subrogation rights of any insurance companies making payments hereunder. (c) Notwithstanding any other provision of this Agreement to the contrary, if on the 31 Closing Date the Indemnified Party actually knows of any information that would cause one or more of the representations and warranties made by the Indemnifying Party to be inaccurate as of the date made, the Indemnified Party shall have no right or remedy after the Closing with respect to such inaccuracy and shall be deemed to have waived its rights to indemnification in respect thereof. (d) Payments not paid when due under Sections 10.3 and 10.4 hereof shall bear interest at the rate of 6% per annum for each day until paid. SECTION 10.5 Assignment of Claims. If the Indemnified Party receives any payment from an Indemnifying Party actually in respect of any Damages pursuant to Section 10.2 and the Indemnified Party could have recovered all or a part of such Damages from a third party (a "Potential Contributor") based on the underlying Claim asserted against the Indemnifying Party, the Indemnified Party shall assign such of its rights to proceed against the Potential Contributor as are necessary to permit the Indemnifying Party to recover from the Potential Contributor the amount of such payment. SECTION 10.6 Exclusivity. Except as specifically set forth in this Agreement, effective as of the Closing, Buyer waives any rights and claims Buyer may have against Sellers, whether in law or in equity, relating to the Company, any Subsidiary or the Shares or the transactions contemplated hereby. The rights and claims waived by Buyer include, without limitation, claims for contribution or other rights of recovery arising out of or relating to any Environmental Law, claims for breach of contract, breach of representation or warranty, negligent misrepresentation and all other claims for breach of duty. After the Closing, the provisions of Article 8 and Section 10.2 will provide the exclusive remedy for any misrepresentation, breach of warranty, covenant or other agreement (other than those contained in Sections 2.4 and 6.1) or other claim arising out of this Agreement or the transactions contemplated hereby. SECTION 10.7 Escrow Agreement. (a) At the Closing, Buyer shall pay the P-Com Escrow Amount into the escrow account established pursuant to the P-Com Escrow Agreement substantially in the form designated as Schedule 10.7(a) (the "P-Com Escrow Agreement"). The portion of the P-Com Escrow Amount equal to the amount received by the Company as payment for the P-Com, Inc. receivable or inventory shall be paid to Sellers in proportion to Sellers' interest, pursuant to the terms and conditions set forth in the P-Com Escrow Agreement. The P-Com, Inc. Series E Convertible Preferred Stock received by the Company (delivered by the method set forth in the P-Com Escrow Agreement) shall be held in escrow pursuant to the terms and conditions set forth in the P-Com Escrow Agreement. Any amount received by the Company as a payment by P-Com, Inc. related to a P-Com Claim that is required to be returned by the Company as a preference shall constitute a Claim that may be asserted against the Regular Escrow. (b) At the Closing, Buyer shall pay the Regular Escrow Amount into the Escrow Account established pursuant to the Escrow Agreement substantially in the form designated as Schedule 10.7 (b) (the "Regular Escrow Agreement"). Such cash may be reduced and paid back to Buyer pursuant to the terms and conditions of the Escrow Agreement. At the first anniversary of 32 the Closing Date, the amount in the Regular Escrow Agreement in excess of $500,000 shall be paid to Sellers in proportion to Seller's Interest. The Escrow Agreement provides, among other things, that (a) Buyer shall offset against such cash deposited in the escrow account indemnification payments due under this Article 10, and (b) there shall be released to Sellers on the second anniversary of the Closing Date the balance of the escrow account, less any indemnification payments made under this Article 10, subject to the holdback for unresolved claims for which a notice of claim has been given in accordance with the Escrow Agreement. ARTICLE 11 TERMINATION SECTION 11.1 Grounds for Termination. This Agreement may be terminated at any time prior to the Closing: (a) by mutual written agreement of Sellers, the Company and Buyer; (b) by either Sellers or Buyer if the Closing shall not have been consummated on or before July 31, 2005, so long as the party giving the notice is not in breach of its obligations hereunder; (c) by either Sellers or Buyer if consummation of the transactions contemplated hereby would violate any nonappealable final order, decree or judgment of any court or governmental body having competent jurisdiction; (d) by Buyer, if any of the conditions specified in Section 9.2 hereof shall not have been met by July 31, 2005 and shall not have been waived in writing by Buyer; (e) by Sellers, if any of the conditions specified in Section 9.3 hereof shall not have been met by July 31, 2005 and shall not have been waived in writing by Sellers; or (f) by Buyer, if the Company or Sellers amend or supplement the Schedules pursuant to Section 12.11(b) in a manner that would have a Material Adverse Effect, in Buyer's reasonable discretion, on the Company or the transactions contemplated hereunder. The party desiring to terminate this Agreement pursuant to clauses 11.1(b), 11.1(c), 11.1(d), 11.1(e) or 11.1(f) shall give notice of such termination to the other party. SECTION 11.2 Effect of Termination. If this Agreement is terminated as permitted by Section 12.1 such termination shall be without liability of either party (or any shareholder, director, officer, employee, agent, consultant or representative of such party) to the other party to this Agreement; provided that if such termination shall result from the willful (a) failure of either party to fulfill a condition to the performance of the obligations of the other party; (b) failure to perform a covenant of this Agreement; or (c) breach by either party hereto of any representation or warranty or agreement continued herein, such party shall be fully liable for any and all Damages incurred or suffered by the other party as a result of such failure or breach. The 33 provisions of Sections 6.1, 12.3, 12.5, 12.6, 12.7, 12.8, and 12.9 shall survive any termination hereof pursuant to Section 11.1. ARTICLE 12 MISCELLANEOUS SECTION 12.1 Notices. All notices, requests and other communications to any party hereunder shall be in writing (including facsimile transmission) and shall be given, if to Sellers, to: the addresses and fax numbers set forth next to their names on Schedule 2.1 with a copy to: Cathryn S. Gawne, Esq. Silicon Valley Law Group 25 Metro Drive, Suite 600 San Jose, CA 95110 Fax: 408/573-5701 if to Buyer, to: SigmaTron International, Inc. 220l Landmeier Road Elk Grove Village, IL 60007 Attn: Gary R. Fairhead Fax: 847/956-8709 with a copy to: Defrees & Fiske LLC 200 South Michigan Avenue Suite 1100 Chicago, IL 60604 Attention: Henry J. Underwood Fax: 312/939-5617 or at such other place as any party hereto shall furnish to each other party hereto in writing. All such notices, requests and other communications shall be deemed received on the date of receipt by the recipient thereof if delivered personally or by overnight courier or via facsimile, if received prior to 5:00 p.m. in the place of receipt and such day is a business day in the place of receipt. Otherwise, any such notice, request or communication shall be deemed received on the next succeeding business day in the place of receipt. 34 SECTION 12.2 Amendments and Waivers. (a) Any provision of this Agreement may be amended or waived if, but only if, such amendment or waiver is in writing and is signed, in the case of an amendment, by each party to this Agreement, or in the case of a waiver, by the party against whom the waiver is to be effective. (b) No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and no exclusive of any rights or remedies provided by law. SECTION 12.3 Expenses. All costs and expenses incurred in connection with this Agreement shall be paid by the party incurring such cost or expense. SECTION 12.4 Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided that no party may assign, delegate or otherwise transfer any of its rights or obligations under this Agreement without the consent of each other party hereto. SECTION 12.5 Joint and Several Obligations of Sellers. Except as provided in Section 10.2(a), the obligations and liabilities of Sellers hereunder shall be the joint and several obligations of all of the Sellers. SECTION 12.6 Governing Law. This Agreement shall be governed by and construed in accordance with the law of the State of California, without regard to the conflicts of law rules of such state. SECTION 12.7 WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. SECTION 12.8 Counterparts; Third-Party Beneficiaries. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement shall be deemed delivered when each party hereto shall have received a counterpart hereof signed by the other party hereto. No provision of this Agreement is intended to confer upon any Person other than the parties hereto any rights or remedies hereunder. SECTION 12.9 Entire Agreement. This Agreement, the Escrow Agreement and Buyer's confidentiality agreement dated May 7, 2004 constitute the entire agreement between the parties with respect to the subject matter of this Agreement and supersede all prior agreements and understandings, both oral and written, between the parties with respect to the subject matter of this Agreement, the Escrow Agreement and said letter agreement. 35 SECTION 12.10 Captions. The captions herein are included for convenience of reference only and shall be ignored in the construction or interpretation hereof. SECTION 12.11 Disclosure Schedules. (a) The parties acknowledge and agree that (i) the Schedules to this Agreement may include certain items and information solely for informational purposes for the convenience of the party or parties to whom disclosures are made (collectively, "disclosee") and (ii) the disclosure by the disclosing party or parties (collectively, "discloser") of any matter in the Schedules shall not be deemed to constitute an acknowledgment by discloser that the matter is required to be disclosed by the terms of this Agreement or that the matter is material. Where the terms of an agreement, contract or such other disclosure item have been summarized or described in a Disclosure Schedule, such summary or description does not purport to be a complete statement of the material terms of such agreement, contract or other item. If any Schedule discloses an item or information in such a way as to make its relevance to the disclosure required by another Schedule readily apparent, the matter shall be deemed to have been disclosed in such other Schedule, notwithstanding the omission of an appropriate cross-reference to such other Schedule. (b) From the date hereof until the Closing Date, discloser may amend and/or supplement its respective Schedules to this Agreement to reflect events or changes apparent after the execution of this Agreement. SECTION 12.12 Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transaction contemplated hereby is not affected in any manner adverse to any party. Upon such determination that any term or other provision is invalid, illegal or otherwise incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the extent possible. SECTION 12.13 Sellers' Representative. Roger Nordby (by virtue of the transaction contemplated by this Agreement) be, and he hereby is, irrevocably appointed attorney-in-fact and authorized and empowered to act for and on behalf of any or all of the Sellers (with full power of substitution in the premises) in connection with all matters required to be performed by the Sellers hereunder, including without limitation, deliveries to be made by the Sellers (except as may otherwise be agreed to in writing by all parties to this Agreement), indemnity provisions of Articles 8 or 10, the Escrow Agreement, the notices and consent provisions of this Agreement, and such other matters as are reasonably necessary for the consummation of the transaction. Buyer may rely on any certificate, statement, opinion, report, notice, request, consent or other document believed by it to be genuine and to have been signed or presented by said agent acting in accordance with this power of attorney. Buyer may assume the validity and accuracy of any statement or assertion contained in any of the above, and may assume that said agent purporting to give any writing, notice, advice or instruction in connection with the 36 provisions hereof has been duly authorized to do so. If Roger Nordby resigns or is otherwise unable or unwilling to act as Sellers' Representative hereunder, L. P. David Orosz shall immediately succeed him as Sellers' Representative with the same effect as if originally named. If L. P. David Orosz resigns or is otherwise unable or unwilling to act as Sellers' Representative hereunder, J. Peter Dennis shall immediately succeed him as Sellers' Representative with the same effect as if originally named. If J. Peter Dennis resigns or is otherwise unable or unwilling to act as Sellers' Representative hereunder, Roger Mitri shall immediately succeed him as Sellers' Representative with the same effect as if originally named. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. SIGMATRON INTERNATIONAL, INC. By: /s/ Gary R. Fairhead ---------------------------- Gary R. Fairhead, President and CEO ABLE ELECTRONICS CORPORATION By: /s/ J. Peter Dennis -------------------------- Title: President and Chief Financial Officer SELLERS: /s/ Roger Nordby --------------------------------- Roger Nordby /s/ L. P. David Orosz --------------------------------- L. P. David Orosz /s/ J. Peter Dennis --------------------------------- J. Peter Dennis /s/ Roger Mitri --------------------------------- Roger Mitri 37 EX-23.1 5 c96993exv23w1.txt CONSENT OF OF GRANT THORNTON LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors SigmaTron International, Inc. We have issued our report dated July 8, 2005, accompanying the consolidated balance sheet of SigmaTron International, Inc. and Subsidiaries as of April 30, 2005, and the related consolidated statements of income, stockholders' equity and cash flows for the year then ended, included in the Annual Report of SigmaTron International, Inc. and Subsidiaries on Form 10-K for the year ended April 30, 2005. We hereby consent to the incorporation by reference of said report in the Registration Statements of SigmaTron International, Inc. and Subsidiaries on Forms S-8 (File No. 33-20147 and 333-52044). /s/ Grant Thornton LLP Chicago, Illinois July 21, 2005 EX-31.1 6 c96993exv31w1.txt 302 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER 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 I, Gary R. Fairhead, President and Chief Executive Officer 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) an internal control over financial reporting as defined in Exchange Act Rules 13A-15(f) and 15d-15(f) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b. Paragraph omitted pursuant to SEC Release 34-479861; c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. Disclosed in this report any change in registrant's internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: July 27, 2005 /s/ Gary R. Fairhead ---------------------------------------- Gary R. Fairhead President and Chief Executive Officer of SigmaTron International, Inc. EX-31.2 7 c96993exv31w2.txt 302 CERTIFICATION OF PRINCIPAL FIANCIAL OFFICER 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 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting as defined in Exchange Act Rules 13A-15(f) and 15d-15(f) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b. Paragraph omitted pursuant to SEC Release 34-479861; c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. Disclosed in this report any change in registrant's internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: July 27, 2005 /s/ Linda K. Blake ------------------------------------------ Linda K. Blake Chief Financial Officer, Secretary and Treasurer of SigmaTron International, Inc. EX-32.1 8 c96993exv32w1.txt 906 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER 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) I, Gary R. Fairhead, am President and Chief Executive Officer of SigmaTron International, Inc. (the "Company"). This certification is being furnished pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in connection with the filing of the Company's Annual Report on Form 10-K for the year ended April 30, 2005 (the "Report"). I hereby certify that to the best of my knowledge: (a) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act (15 U.S.C. 78 m(a) or 78o(d)); and (b) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: July 27, 2005 /s/ Gary R. Fairhead ---------------------------------------- Gary R. Fairhead President and Chief Executive Officer of SigmaTron International, Inc. EX-32.2 9 c96993exv32w2.txt 906 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER 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) I, Linda K. Blake, am Chief Financial Officer, Secretary and Treasurer of SigmaTron International, Inc. (the "Company"). This certification is being furnished pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in connection with the filing of the Company's Annual Report on Form 10-K for the year ended April 30, 2005 (the "Report"). I hereby certify that to the best of my knowledge: (a) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act (15 U.S.C. 78 m(a) or 78o(d)); and (b) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: July 27, 2005 /s/ Linda K. Blake ------------------------------------------ Linda K. Blake Chief Financial Officer, Secretary and Treasurer of SigmaTron International, Inc. -----END PRIVACY-ENHANCED MESSAGE-----