SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended: SEPTEMBER 30, 1998
[ ] 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: 1-8101
Exact Name of Registrant as
Specified in Its Charter: SMTEK INTERNATIONAL, INC.
State or Other Jurisdiction of I.R.S. Employer
Incorporation or Organization: DELAWARE Identification No.: 33-0213512
Address of Principal Executive Offices: 2151 Anchor Court
Thousand Oaks, CA 91320
Registrant's Telephone Number: (805) 376-2595
Former Name, if Changed Since Last Report: DDL Electronics, Inc.
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 [ ]
The registrant had 34,088,128 shares of Common Stock outstanding as of
November 6, 1998.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, June 30,
1998 1998
------ ------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 4,059,000 $ 4,413,000
Accounts receivable, net 9,566,000 9,786,000
Costs and estimated earnings
in excess of billings on
uncompleted contracts 7,179,000 4,785,000
Inventories, net 3,104,000 2,446,000
Prepaid expenses 215,000 103,000
---------- ----------
Total current assets 24,123,000 21,533,000
---------- ----------
Property, equipment and
improvements, at cost:
Buildings and improvements 6,284,000 6,084,000
Plant equipment 16,015,000 15,646,000
Office and other equipment 2,242,000 2,180,000
---------- ----------
24,541,000 23,910,000
Less: Accumulated depreciation
and amortization (17,792,000) (17,035,000)
---------- ----------
Property, equipment and
improvements, net 6,749,000 6,875,000
---------- ----------
Other assets:
Goodwill, net 2,854,000 3,171,000
Deposits and other assets 250,000 251,000
---------- -----------
3,104,000 3,422,000
---------- -----------
$ 33,976,000 $ 31,830,000
========== ==========
SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
September 30, June 30,
1998 1998
------ ------
(Unaudited)
Liabilities and Stockholders' Equity
Current liabilities:
Bank lines of credit payable $ 4,225,000 $ 4,441,000
Current portion of
long-term debt 1,334,000 1,214,000
Accounts payable 10,281,000 7,795,000
Accrued payroll and
employee benefits 910,000 1,211,000
Other accrued liabilities 2,328,000 2,427,000
---------- ----------
Total current liabilities 19,078,000 17,088,000
---------- ----------
Long-term debt:
Note payable to related party 2,000,000 2,000,000
Other long-term debt,
less current portion 4,936,000 5,186,000
---------- ----------
Total long-term debt 6,936,000 7,186,000
---------- ----------
Commitments and contingencies
Stockholders' equity:
Common stock 341,000 341,000
Additional paid-in capital 32,159,000 32,159,000
Accumulated deficit (24,062,000) (24,294,000)
Accumulated other
comprehensive losses (476,000) (650,000)
---------- ----------
Total stockholders' equity 7,962,000 7,556,000
---------- ----------
$ 33,976,000 $ 31,830,000
========== ==========
See accompanying Notes to Unaudited
Consolidated Financial Statements
SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
September 30,
-----------------------
1998 1997
------ ------
Revenues $ 14,065,000 $ 13,413,000
Cost of goods sold 11,783,000 11,149,000
---------- ----------
Gross profit 2,282,000 2,264,000
---------- ----------
Operating expenses:
Administrative and selling 1,501,000 1,391,000
Goodwill amortization 317,000 317,000
---------- ----------
1,818,000 1,708,000
---------- ----------
Operating income 464,000 556,000
---------- ----------
Non-operating income (expense):
Interest income 30,000 16,000
Interest expense (242,000) (264,000)
Other income (expense), net 2,000 (7,000)
---------- ----------
(210,000) (255,000)
---------- ----------
Income before income taxes 254,000 301,000
Provision for income taxes 22,000 -
---------- ----------
Net income $ 232,000 $ 301,000
========== ==========
Basic and diluted earnings
per share $ 0.01 $ 0.01
==== ====
Shares used in computing
earnings per share:
Basic 34,088,128 28,947,347
========== ==========
Diluted 34,398,334 29,390,304
========== ==========
See accompanying Notes to Unaudited
Consolidated Financial Statements
SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
September 30,
-----------------------
1998 1997
------ ------
Cash flows from operating activities:
Net income $ 232,000 $ 301,000
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation expense 428,000 397,000
Amortization of goodwill 317,000 317,000
Eliminate duplicate period of pooled
company to conform year-ends - (322,000)
Net increase in operating
working capital (751,000) (2,562,000)
Other 16,000 18,000
--------- ---------
Net cash provided by (used in) operating
activities 242,000 (1,851,000)
--------- ---------
Cash flows from investing activities:
Capital expenditures (151,000) (189,000)
Proceeds from sale of assets - 19,000
--------- ---------
Net cash used in investing activities (151,000) (170,000)
--------- ---------
Cash flows from financing activities:
Proceeds from (repayments of) bank
lines of credit (270,000) 1,295,000
Proceeds from long-term debt - 2,000,000
Payments of long-term debt (242,000) (5,553,000)
Proceeds from foreign government grants - 122,000
--------- ---------
Net cash used in financing activities (512,000) (2,136,000)
--------- ---------
Effect of exchange rate changes on cash 67,000 2,000
--------- ---------
Decrease in cash and cash equivalents (354,000) (4,155,000)
Cash and cash equivalents at
beginning of period 4,413,000 5,398,000
--------- ---------
Cash and cash equivalents at
end of period $4,059,000 $1,243,000
========= =========
See accompanying Notes to Unaudited
Consolidated Financial Statements.
SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
The accompanying consolidated financial statements, which have not been
audited by independent accountants (except for the balance sheet as of June
30, 1998), include the accounts of SMTEK International, Inc. and its
subsidiaries (the "Company"). Effective October 9, 1998, the Company changed
its name to SMTEK International, Inc. from DDL Electronics, Inc. The Company
provides electronics manufacturing services ("EMS") to original equipment
manufacturers ("OEMs") in the computer, telecommunications, instrumentation,
medical, industrial and aerospace industries. The Company also manufactures
multilayer printed circuit boards ("PCBs") for use primarily in the computer,
communications and instrumentation industries. The Company's EMS operations
are located in Southern California, Florida and Northern Ireland. The
Company's PCB facilities are located in Northern Ireland.
The acquisition of Jolt Technology, Inc. ("Jolt") on June 30, 1998 was
accounted for under the pooling-of-interests method and accordingly, the
consolidated financial statements prior to the acquisition have been restated
to include the accounts and results of operations of Jolt for all periods
presented. All significant intercompany transactions and accounts have been
eliminated in consolidation. In the opinion of the Company's management, the
accompanying consolidated financial statements reflect all adjustments
(consisting of normal recurring accruals) necessary to present fairly the
Company's financial position at September 30, 1998 and its results of
operations and cash flows for the three months ended September 30, 1998 and
1997.
The Company uses a 52-53 week fiscal year ending on the Friday closest to June
30, which for fiscal year 1998 fell on July 3, 1998. In the accompanying
consolidated financial statements, the 1998 fiscal year end is shown as June
30 and the interim period end for both years is shown as September 30 for
clarity of presentation. The actual interim periods ended on October 2, 1998
and October 3, 1997. The three month period of fiscal 1999 consisted of 13
weeks compared to 14 weeks for the same period of fiscal 1998.
Certain notes and other information are condensed or omitted from the interim
financial statements presented in this Quarterly Report on Form 10-Q.
Therefore, these financial statements should be read in conjunction with the
Company's 1998 Annual Report to Stockholders as filed with the Securities and
Exchange Commission on August 31, 1998.
Certain reclassifications have been made to the interim fiscal 1998 financial
statements to conform with the fiscal 1999 financial statement presentation.
Such reclassifications had no effect on the Company's results of operations or
stockholders' equity.
Note 2 - EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share" ("SFAS 128"). SFAS 128 replaced the previously reported
primary and fully diluted earnings per share with basic and diluted earnings
per share. Basic earnings per share represents net income available to common
shareholders divided by the weighted average number of common shares
outstanding for the period. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants, and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented and, where necessary, restated to conform to
SFAS 128 requirements.
A reconciliation of the numerator and denominator used in the computation of
earnings per share follows:
Three months ended
September 30,
---------------------
1998 1997
------ ------
Numerator:
Net income for basic earnings per share $ 232,000 $ 301,000
Add back net interest related to
convertible subordinated debentures 34,000 34,000
---------- ----------
Net income for diluted earnings computation $ 266,000 $ 335,000
========== ==========
Denominator:
Weighted average number of common shares
outstanding for basic earnings per share 34,088,128 28,947,347
Assumed exercise of options and warrants
net of shares assumed reacquired under
treasury stock method -- 132,751
Assumed conversion of convertible
subordinated debentures 310,206 310,206
---------- ----------
Total shares for diluted earnings per share 34,398,334 29,390,304
========== ==========
Options and warrants to purchase 4,626,480 shares of common stock at prices
ranging from $0.75 to $3.50 were outstanding during the three months ended
September 30, 1998, but were not included in the computation of diluted
earnings per share because the option and warrant exercise prices were greater
than the average market price of the common shares, and would therefore be
antidilutive.
Note 3 - ACCOUNTS RECEIVABLE
The components of accounts receivable are as follows:
September 30, June 30,
1998 1998
---- ----
Trade receivables $9,440,000 $9,890,000
Other receivables 277,000 63,000
Less allowance for doubtful
accounts (151,000) (167,000)
--------- ---------
$9,566,000 $9,786,000
========= =========
Note 4 - COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED
CONTRACTS
The components of costs and estimated earnings in excess of billings on
uncompleted contracts are as follows:
September 30, June 30,
1998 1998
---- ----
Costs incurred on uncompleted
contracts $36,841,000 $32,324,000
Estimated earnings 5,880,000 5,802,000
---------- ----------
42,721,000 38,126,000
Less: Billings to date (35,542,000) (33,341,000)
---------- ----------
$ 7,179,000 $ 4,785,000
========== ==========
Costs and estimated earnings in excess of billings on uncompleted contracts
consists of revenue recognized under electronics assembly contracts which
amounts were not billable at the balance sheet date. Essentially all of the
unbilled receivables are expected to be billed within 90 days of the balance
sheet date.
Note 5 - INVENTORIES
Inventories consist of the following:
September 30, June 30,
1998 1998
---- ----
Raw materials $2,563,000 $2,014,000
Work in process 604,000 643,000
Finished goods 379,000 278,000
Less reserves (442,000) (489,000)
--------- ---------
$3,104,000 $2,446,000
========= =========
Note 6 - OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
September 30, June 30,
1998 1998
---- ----
Environmental liabilities $ 511,000 $ 528,000
Accrued interest payable 257,000 237,000
Other 1,560,000 1,662,000
--------- ---------
$2,328,000 $2,427,000
========= =========
Note 7 - FINANCING ARRANGEMENTS
Bank Credit Agreements
The Company has an accounts receivable-based working capital bank line of
credit for its subsidiary, SMTEK, Inc. ("SMTEK California"), which provides
for borrowings of up to $2,750,000 at an interest rate of prime (8.50% at
September 30, 1998) plus 1.25%. At September 30, 1998, borrowings outstanding
under this credit facility amounted to $2,444,000. SMTEK California's line of
credit expires September 1, 1999. The Company also has a credit facility
agreement with Ulster Bank Markets for its Northern Ireland operations. This
agreement includes a working capital line of credit of 3,000,000 pounds
sterling (approximately $5,100,000), and provides for interest on borrowings
at the bank's base rate (6.65% at September 30, 1998) plus 1.50%. At
September 30, 1998, borrowings outstanding under this credit facility amounted
to $1,781,000. The credit facility agreement with Ulster Bank Markets expires
July 31, 1999.
Note payable to related party
The note payable to related party of $2,000,000 is payable to Thomas M.
Wheeler, the Company's largest stockholder. The note bears interest at 8%,
matures on October 31, 1999, and is secured by the common stock of the
Company's subsidiary, SMTEK California.
Note 8 - PRO FORMA INCOME TAX EXPENSE
Effective June 30, 1998, the Company acquired Jolt, which was an S Corporation
for income tax purposes prior to its acquisition by the Company. Following
are pro forma consolidated operating results, which present state income taxes
(the Company's federal NOLs are assumed to be utilized to shelter Jolt's
federal taxable income) as a pro forma adjustment as if Jolt had filed C
Corporation tax returns for the pre-acquisition periods:
Three months ended
September 30, 1997
--------------------
Net income before pro forma
adjustments, per consolidated
statements of operations $ 301,000
Pro forma provision for income taxes 18,000
--------
Pro forma net income $ 283,000
========
Note 9 - COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130"), as of the first quarter of
fiscal 1999. SFAS 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of financial statements.
The Company plans to display comprehensive income and its components in the
Consolidated Statement of Stockholders' Equity in the year-end 1999 financial
statements. Comprehensive income is comprised of the following:
Three months ended
September 30,
---------------------
1998 1997
------ ------
Net income $ 232,000 $ 301,000
Other comprehensive income
(loss), net of tax:
Foreign currency translation
adjustments 174,000 (102,000)
-------- --------
Comprehensive income $ 406,000 $ 199,000
======== ========
Accumulated other comprehensive losses presented on the accompanying
consolidated condensed balance sheets consists of the foreign currency
translation adjustment.
Note 10 - INFORMATION RELATING TO STATEMENTS OF CASH FLOWS
"Net cash used by operating activities" includes cash payments for interest as
follows:
Three months ended
September 30,
---------------------
1998 1997
------ ------
Interest paid $ 206,000 $ 244,000
======= =======
"Net increase in operating working capital" is comprised of the following:
Three months ended
September 30,
---------------------
1998 1997
------ ------
Decrease in accounts receivable $ 392,000 $ 1,024,000
Increase in costs and estimated
earnings in excess of billings
on uncompleted contracts (2,394,000) (407,000)
Increase in inventories (576,000) (369,000)
Increase in prepaid expenses (108,000) (125,000)
Increase (decrease) in
accounts payable 2,353,000 (2,285,000)
Decrease in accrued payroll
and employee benefits (314,000) (186,000)
Decrease in other liabilities (104,000) (214,000)
--------- ---------
Net increase in operating
working capital $ (751,000) $(2,562,000)
========= =========
Following is the supplemental schedule of non-cash investing and financing
activities:
Three months ended
September 30,
---------------------
1998 1997
------ ------
Capital expenditures financed by
lease obligations $ 29,000 $ 36,000
Conversion of debt to equity $ - $ 10,000
Note 11 - COMMITMENTS AND CONTINGENCIES
In September 1998, the Company received tax deficiency notices from the
Internal Revenue Service in the total amount of $1,312,000 relating to income
tax refunds received by the Company in 1995. Of this amount, $1,110,000 was
recorded as an income tax benefit in fiscal 1996. Management believes the
Company had a legitimate basis under Section 172(f) of the Internal Revenue
Code to apply for and receive the amounts which have now been disallowed, and
plans to appeal the tax deficiency notices and vigorously contest the
assessment. Accordingly, no provision has been made in the financial
statements for the three months ended September 30, 1998 for any amount which
may ultimately have to be paid back to the government.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements made below are forward-looking in nature and reflect the
Company's current expectations and plans. Such statements involve various
risks and uncertainties that could cause actual results to differ materially
from those currently expected by the Company. Meaningful factors that might
cause such differences include, but are not limited to, significant historical
losses, limited capital resources and a continuing need for financing,
dependence on key personnel, concentration of revenues among major customers,
historical dependence on government business on the part of the Company's
California operating subsidiary, SMTEK, Inc. ("SMTEK California") and its
recent shift into commercial business, industry conditions, competition,
environmental matters, dependence on suppliers and other factors, as described
in more detail in the section titled "Risk Factors" in the Company's
Registration Statement on Form S-3 (No. 333-62621) on file with the Securities
and Exchange Commission.
DESCRIPTION OF THE BUSINESS
The Company provides electronics manufacturing services ("EMS") to original
equipment manufacturers ("OEMs") in the computer, telecommunications,
instrumentation, medical, industrial and aerospace industries. The Company
also manufactures multilayer printed circuit boards ("PCBs") for use primarily
in the computer, communications, and instrumentation industries. The
Company's EMS operations are located in Southern California, Florida and
Northern Ireland. Its PCB facilities are located in Northern Ireland.
RESULTS OF OPERATIONS
The Company uses a 52-53 week fiscal year ending on the Friday closest to June
30. In the accompanying consolidated financial statements, the interim period
end for both years is shown as September 30 for clarity of presentation. The
actual periods ended on October 2, 1998 and October 3, 1997. The three month
period of fiscal 1999 consisted of 13 weeks compared to 14 weeks for the
comparable period of fiscal 1998.
Consolidated sales for the three months ended September 30, 1998 were
$14,065,000, compared to $13,413,000 for the same period in the previous
fiscal year. This increase is attributable to the Company's EMS operations,
for which sales increased by 9% from the first quarter of last year. The
increase in EMS revenues was offset by a 14% decline in PCB sales from the
same period in the previous fiscal year, which was attributable to softness in
the European PCB market.
Consolidated gross profit for the three months ended September 30, 1998 was
$2,282,000 (16.2% of sales), compared to $2,264,000 (16.9% of sales) for the
same period of the prior year. Gross profit of the EMS operations was
$1,888,000 (15.6% of sales) for the three months ended September 30, 1998,
compared to $1,805,000 (16.2% of sales) for the prior year, due to a change in
the mix of business, with higher direct material costs as a percentage of
revenues in the latest quarter. For the three months ended September 30,
1998, gross profit from PCB operations decreased approximately 14% from gross
profit for the comparable period of the prior year, commensurate with the
decrease in sales.
Administrative and selling expenses for the three months ended September 30,
1998 were $1,501,000 compared to $1,391,000 for the same period in the
previous year. The increase is attributable to administrative and sales staff
additions.
In the three months ended September 30, 1998, consolidated operating income
was $464,000 compared to $556,000 for the same period in the previous fiscal
year.
Interest expense decreased from $264,000 in the three months ended September,
30 1997 to $242,000 in the three months ended September 30, 1998. The
decrease is primarily attributable to the additional week of operations
included in the three months ended September 30, 1997 as a result of the
Company's 52-53 week fiscal year.
The provision for income taxes of $22,000 for the three months ended September
30, 1998 represents state income tax. The Company does not have a federal or
foreign income tax provision or liability due to the existence of net
operating loss carryforwards for U.S. and United Kingdom income tax purposes.
Net income for the three months ended September 30, 1998 was $232,000 or $.01
per share, compared to $301,000 or $.01 per share for the three months ended
September 30, 1997.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131") in June 1997. SFAS 131 establishes standards for the way public
business enterprises are to report information about operating segments in
annual financial statements and requires enterprises to report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. It replaces the
"industry segment" concept of Statement of Financial Accounting Standards No.
14, "Financial Reporting for Segments of a Business Enterprise", with a
"management approach" basis for identifying reportable segments. SFAS 131 is
effective for financial statements for fiscal years beginning after December
15, 1997. The Company will adopt SFAS 131 in its annual financial statements
for the fiscal year ending June 30, 1999. Management believes that the
adoption of SFAS 131 will not have a material impact on the Company's
financial position or results of operations.
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133") which will require
recognition of all derivatives as either assets or liabilities on the balance
sheet at fair value. The Company will adopt SFAS 133 in the first quarter of
its fiscal year ending June 30, 2000. Management has not completed an
evaluation of the effects this standard will have on the Company's
consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are its cash and cash equivalents,
which amounted to $4,059,000 at September 30, 1998, and its bank lines of
credit. During the three months ended September 30, 1998, cash and cash
equivalents decreased by $354,000. This decrease consisted of capital
expenditures of $151,000, repayments of bank lines of credit of $270,000 and
reductions of long-term debt of $242,000, partially offset by cash provided by
operating activities of $242,000 and the effect of exchange rate changes on
cash of $67,000.
Components of operating working capital increased by $751,000 during the first
three months of fiscal 1998, comprised of a $2,394,000 increase in costs and
earnings in excess of billings on uncompleted contracts, a $576,000 increase
in inventories, a $108,000 increase in prepaid expenses, and a $418,000
decrease in other accrued liabilities, partially offset by a $392,000 decrease
in accounts receivable and a $2,353,000 increase in accounts payable.
The Company has an accounts receivable-based working capital bank line of
credit for its subsidiary, SMTEK California, which provides for borrowings of
up to $2,750,000 at an interest rate of prime (8.50% at September 30, 1998)
plus 1.25%. At September 30, 1998, borrowings outstanding under this credit
facility amounted to $2,444,000. SMTEK California's line of credit expires
September 1, 1999. The Company also has a credit facility agreement with
Ulster Bank Markets for its Northern Ireland operations. This agreement
includes a working capital line of credit of 3,000,000 pounds sterling
(approximately $5,100,000), and provides for interest on borrowings at the
bank's base rate (6.65% at September 30, 1998) plus 1.50%. At September 30,
1998, borrowings outstanding under this credit facility amounted to
$1,781,000. The credit facility agreement with Ulster Bank Markets expires
July 31, 1999.
The Company's EMS and PCB fabrication businesses require continuing investment
in plant and equipment to remain competitive. In recent years, however, the
Company's financial position has severely restricted its ability to make
capital improvements in its facilities. Capital expenditures during fiscal
1998, 1997 and 1996 were approximately $1,424,000, $2,372,000, and $1,825,000,
respectively. The Company anticipates it will need to increase its capital
spending in the coming years in order to stay competitive as technology
evolves. Capital expenditures for the three months ended September, 1998 were
$180,000. Management estimates that capital expenditures of as much as $3
million may be required in fiscal 1999. Of that amount, the substantial
majority is expected to be financed by a combination of capital leases,
secured loans and foreign government grants.
Management believes that the Company's cash resources and borrowing capacity
on its working capital lines of credit are sufficient to fund operations for
at least the next 12 months.
"YEAR 2000" ISSUES
Many existing computer programs use only two digits to identify a year in the
date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results by or at the year
2000. The global extent of the potential impact of the Year 2000 problem is
not yet known, and if not timely corrected, it could affect the economy and
the Company. The Company uses computer information systems and manufacturing
equipment which may be affected. It also relies on suppliers and customers
who are also dependent on systems and equipment which use date dependent
software.
The Company's Year 2000 compliance program includes the following phases:
identifying systems that need to be replaced or fixed; carrying out
remediation work to modify existing systems or convert to new systems; and
conducting validation testing of systems and applications to ensure
compliance. The Company has essentially completed the first phase of the
program and is now primarily in the remediation phase. The amount of work
required is not expected to be extensive, because the Company has replaced
certain of its financial and operational systems during the last two years to
enhance or better meet its functional and operational requirements. The
Company believes that such replacements substantially meet or address its Year
2000 issues. In addition to such normal replacement, the Company may be
required to modify some of the existing software and hardware in order for its
computer systems to function properly with respect to dates in the year 2000
and thereafter. The Company also has contacted its major suppliers to assess
their preparations for the year 2000. Similar contacts also are planned for
major customers. These actions are intended to help mitigate the possible
external impact of Year 2000 issues. Even so, it is impossible to fully
assess the potential consequences if service interruptions occur from
suppliers or in such infrastructure areas as utilities, communications,
transportation, banking and government.
The Company anticipates that the remediation and validation phases of its Year
2000 compliance program will be completed by June 30, 1999. Management
estimates that the total cost of its Year 2000 program will not exceed
$250,000. If the Company is unsuccessful or if the remediation efforts of its
key suppliers or customers are unsuccessful in dealing with Year 2000
problems, there may be a material adverse impact on the Company's consolidated
results and financial condition. The Company is unable to quantify any
potential adverse impact at this time, but will continue to monitor and
evaluate the situation.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's financial instruments include cash and cash equivalents, short-
term and long-term debt, and foreign currency forward exchange contracts. At
September 30, 1998, the carrying amount of long-term debt (including current
portion thereof) was $8,270,000 and the fair value was $8,092,000. The
carrying values of the Company's other financial instruments approximated
their fair values. The fair value of the Company's financial instruments is
estimated based on quoted market prices for the same or similar issues.
It is the policy of the Company not to enter into derivative financial
instruments for speculative purposes. The Company enters into foreign
currency forward exchange contracts to protect itself from adverse currency
rate fluctuations on foreign currency commitments entered into in the ordinary
course of business. These commitments are generally for terms of less than
one year. The foreign currency forward exchange contracts are executed with
creditworthy banks and are denominated in currencies of major industrial
countries. Any gain or loss incurred on foreign currency forward exchange
contracts is offset by the effects of currency movements on the respective
underlying hedged transactions. The Company did not have any open foreign
currency forward exchange contracts open at September 30, 1998.
Based on the Company's overall currency rate exposure at September 30, 1998, a
10 percent change in currency rates would not have had a material effect on
the financial position, results of operations, or cash flows of the Company.
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
27 Financial Data Schedule (electronic filing only)
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
November 13, 1998 /s/ Richard K. Vitelle
- --------------------------------- -----------------------------------
Date Richard K. Vitelle
Vice President -Finance
(Principal Financial Officer)
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