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: DECEMBER 31, 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
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
February 10, 1999.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, June 30,
1998 1998
------ ------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 3,720,000 $ 4,413,000
Accounts receivable, net 10,435,000 9,786,000
Costs and estimated earnings
in excess of billings on
uncompleted contracts 7,763,000 4,785,000
Inventories, net 3,348,000 2,446,000
Prepaid expenses 279,000 103,000
---------- ----------
Total current assets 25,545,000 21,533,000
---------- ----------
Property, equipment and
improvements, at cost:
Buildings and improvements 6,196,000 6,084,000
Plant equipment 16,684,000 15,646,000
Office and other equipment 2,286,000 2,180,000
---------- ----------
25,166,000 23,910,000
Less: Accumulated depreciation
and amortization (17,591,000) (17,035,000)
---------- ----------
Property, equipment and
improvements, net 7,575,000 6,875,000
---------- ----------
Other assets:
Goodwill, net 2,537,000 3,171,000
Deposits and other assets 255,000 251,000
---------- -----------
2,792,000 3,422,000
---------- -----------
$ 35,912,000 $ 31,830,000
========== ==========
SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
December 31, June 30,
1998 1998
------ ------
(Unaudited)
Liabilities and Stockholders' Equity
Current liabilities:
Bank lines of credit payable $ 3,882,000 $ 4,441,000
Current portion of
long-term debt 3,248,000 1,214,000
Accounts payable 12,341,000 7,795,000
Accrued payroll and
employee benefits 894,000 1,211,000
Other accrued liabilities 2,476,000 2,427,000
---------- ----------
Total current liabilities 22,841,000 17,088,000
---------- ----------
Long-term debt 5,009,000 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 (23,854,000) (24,294,000)
Accumulated other
comprehensive loss (584,000) (650,000)
---------- ----------
Total stockholders' equity 8,062,000 7,556,000
---------- ----------
$ 35,912,000 $ 31,830,000
========== ==========
See accompanying Notes to Unaudited
Consolidated Financial Statements
SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
December 31,
-----------------------
1998 1997
------ ------
Revenues $ 15,568,000 $ 12,820,000
Cost of goods sold 13,147,000 10,400,000
---------- ----------
Gross profit 2,421,000 2,420,000
---------- ----------
Operating expenses:
Administrative and selling 1,754,000 1,446,000
Goodwill amortization 317,000 317,000
---------- ----------
2,071,000 1,763,000
---------- ----------
Operating income 350,000 657,000
---------- ----------
Non-operating income (expense):
Interest income 49,000 20,000
Interest expense (241,000) (269,000)
Other income (expense), net 80,000 (10,000)
---------- ----------
(112,000) (259,000)
---------- ----------
Income before income taxes 238,000 398,000
Provision for income taxes 31,000 -
---------- ----------
Net income $ 207,000 $ 398,000
========== ==========
Basic and diluted earnings
per share $ 0.01 $ 0.01
==== ====
Shares used in computing
earnings per share:
Basic 34,088,128 28,950,102
========== ==========
Diluted 34,088,128 29,058,891
========== ==========
See accompanying Notes to Unaudited
Consolidated Financial Statements.
SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Six Months Ended
December 31,
-----------------------
1998 1997
------ ------
Revenues $ 29,633,000 $ 26,233,000
Cost of goods sold 24,930,000 21,549,000
---------- ----------
Gross profit 4,703,000 4,684,000
---------- ----------
Operating expenses:
Administrative and selling 3,255,000 2,837,000
Goodwill amortization 634,000 634,000
---------- ----------
3,889,000 3,471,000
---------- ----------
Operating income 814,000 1,213,000
---------- ----------
Non-operating income (expense):
Interest income 79,000 36,000
Interest expense (483,000) (533,000)
Other income (expense), net 82,000 (17,000)
---------- ----------
(322,000) (514,000)
---------- ----------
Income before income taxes 492,000 699,000
Provision for income taxes 53,000 -
---------- ----------
Net income $ 439,000 $ 699,000
========== ==========
Basic and diluted earnings
per share $ 0.01 $ 0.02
==== ====
Shares used in computing
earnings per share:
Basic 34,088,128 28,948,673
========== ==========
Diluted 34,088,128 29,069,443
========== ==========
See accompanying Notes to Unaudited
Consolidated Financial Statements.
SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
December 31,
-----------------------
1998 1997
------ ------
Cash flows from operating activities:
Net income $ 439,000 $ 699,000
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation expense 877,000 815,000
Amortization of goodwill 634,000 634,000
Eliminate duplicate period of pooled
company to conform year-ends - (464,000)
Net increase in operating
working capital (1,140,000) (2,600,000)
Other 30,000 75,000
--------- ---------
Net cash provided by (used in) operating
activities 840,000 (841,000)
--------- ---------
Cash flows from investing activities:
Capital expenditures (452,000) (333,000)
--------- ---------
Cash flows from financing activities:
Proceeds from (repayments of) bank
lines of credit (584,000) 1,589,000
Proceeds from long-term debt - 2,000,000
Payments of long-term debt (530,000) (5,786,000)
Proceeds from foreign government grants - 123,000
--------- ---------
Net cash used in financing activities (1,114,000) (2,074,000)
--------- ---------
Effect of exchange rate changes on cash 33,000 32,000
--------- ---------
Decrease in cash and cash equivalents (693,000) (3,216,000)
Cash and cash equivalents at
beginning of period 4,413,000 5,398,000
--------- ---------
Cash and cash equivalents at
end of period $3,720,000 $2,182,000
========= =========
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 unaudited consolidated financial statements 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 December 31, 1998 and its results of
operations and cash flows for the three and six months ended December 31, 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 December 31 for
clarity of presentation. The actual interim periods ended on January 1, 1999
and January 2, 1998. The three and six month periods of fiscal 1999 consisted
of 13 weeks and 26 weeks, respectively, compared to 13 and 27 weeks for the
same periods 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 Six months ended
December 31, 1997 December 31, 1997
------------------ -----------------
Numerator:
Net income for basic
and diluted earnings
per share $ 398,000 $ 699,000
========== ==========
Denominator:
Weighted average number
of common shares
outstanding for basic
earnings per share 28,950,102 28,948,673
Assumed exercise of options
and warrants net of shares
assumed reacquired under
treasury stock method 108,789 120,770
---------- ----------
Total shares for diluted
earnings per share 29,058,891 29,069,443
========== ==========
Options and warrants to purchase 4,626,480 shares of common stock at prices
ranging from $0.50 to $3.50 were outstanding during the three and six months
ended December 31, 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.
Convertible subordinated debentures aggregating $1,580,000, due in 2008 and
convertible at a price of $10.63 per share at any time prior to maturity, were
outstanding during the three and six months ended December 31, 1998 and 1997,
but were not included in the computation of diluted earnings per share because
the effect would be antidilutive.
Convertible subordinated debentures aggregating $323,000, due on May 15, 2001
and convertible at a price of $2.00 per share at any time prior to maturity,
were outstanding during the three and six months ended December 31, 1998 and
1997, but were not included in the computation of diluted earnings per share
because the effect would be antidilutive.
Note 3 - ACCOUNTS RECEIVABLE
The components of accounts receivable are as follows:
December 31, June 30,
1998 1998
---- ----
Trade receivables $9,942,000 $9,890,000
Other receivables 635,000 63,000
Less allowance for doubtful
accounts (142,000) (167,000)
--------- ---------
$10,435,000 $9,786,000
========== =========
Included in other receivables at December 31, 1998 are grants due from the
Industrial Development Board for Northern Ireland of $83,000.
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:
December 31, June 30,
1998 1998
---- ----
Costs incurred on uncompleted
contracts $43,457,000 $32,324,000
Estimated earnings 4,723,000 5,802,000
---------- ----------
48,180,000 38,126,000
Less: Billings to date (40,417,000) (33,341,000)
---------- ----------
$ 7,763,000 $ 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:
December 31, June 30,
1998 1998
---- ----
Raw materials $2,668,000 $2,014,000
Work in process 755,000 643,000
Finished goods 319,000 278,000
Less reserves (394,000) (489,000)
--------- ---------
$3,348,000 $2,446,000
========= =========
Note 6 - OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
December 31, June 30,
1998 1998
---- ----
Environmental liabilities $ 506,000 $ 528,000
Accrued interest payable 351,000 237,000
Other 1,619,000 1,662,000
--------- ---------
$2,476,000 $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 operating unit located in Thousand Oaks, California ("SMTEK
T.O."), which provides for borrowings of up to $2,750,000 at an interest rate
of prime (7.75% at December 31, 1998) plus 1.25%. At December 31, 1998,
borrowings outstanding under this credit facility amounted to $2,747,000.
SMTEK T.O.'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 $4,980,000), and provides for
interest on borrowings at the bank's base rate (6.14% at December 31, 1998)
plus 1.50%. At December 31, 1998, borrowings outstanding under this credit
facility amounted to $1,135,000. The credit facility agreement with Ulster
Bank Markets expires July 31, 1999.
Note payable to related party
The Company has a $2,000,000 note 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
T.O. The Company is currently evaluating various alternatives for paying off
this note at or prior to maturity, as further discussed under "Liquidity and
Capital Resources" in the accompanying "Management's Discussion and Analysis
of Financial Condition and Results of Operation".
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 Six months ended
December 31, 1997 December 31, 1997
----------------- -----------------
Net income before pro forma
adjustments, per consolidated
statements of operations $ 398,000 $ 699,000
Pro forma provision for income taxes 8,000 26,000
-------- --------
Pro forma net income $ 390,000 $ 673,000
======== ========
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 Six months ended
December 31, December 31,
------------------- -----------------
1998 1997 1998 1997
------ ------ ------ ------
Net income $207,000 $398,000 $439,000 $699,000
Other comprehensive income
(loss), net of tax:
Foreign currency translation
adjustments (108,000) 83,000 66,000 (19,000)
-------- -------- -------- --------
Comprehensive income $ 99,000 $481,000 $505,000 $680,000
======== ======== ======== ========
"Accumulated other comprehensive loss" 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:
Six months ended
December 31,
---------------------
1998 1997
------ ------
Interest paid $ 335,000 $ 351,000
======= =======
"Net increase in operating working capital" is comprised of the following:
Six months ended
December 31,
---------------------
1998 1997
------ ------
(Increase)decrease in
accounts receivable $ (581,000) $ 246,000
Increase in costs and estimated
earnings in excess of billings
on uncompleted contracts (2,978,000) (96,000)
(Increase) decrease in inventories (876,000) 737,000
Increase in prepaid expenses (176,000) (293,000)
Increase (decrease) in
accounts payable 3,748,000 (2,897,000)
Decrease in accrued payroll
and employee benefits (324,000) (241,000)
Increase (decrease) in
other liabilities 47,000 (56,000)
--------- ---------
Net increase in operating
working capital $(1,140,000) $(2,600,000)
========= =========
Following is the supplemental schedule of non-cash investing and financing
activities:
Six months ended
December 31,
---------------------
1998 1997
------ ------
Capital expenditures financed by
lease obligations $ 327,000 $ 233,000
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 six months ended December 31, 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
Thousand Oaks, California operating unit ("SMTEK T.O.") 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 December 31 for clarity of presentation. The
actual periods ended on January 1, 1999 and January 2, 1998. The three and
six month periods of fiscal 1999 consisted of 13 weeks and 26 weeks,
respectively, compared to 13 and 27 weeks for the same periods of fiscal 1998.
Consolidated sales for the three months ended December 31, 1998 were
$15,568,000, compared to $12,820,000 for the same period in the previous
fiscal year. This increase is attributable to the Company's EMS operations,
for which sales increased by 32% from the second quarter of last year. The
increase in EMS revenues was offset by a 24% decline in PCB sales from the
same period in the previous fiscal year, which was attributable to softness in
the European PCB market.
Consolidated sales increased from $26,233,000 for the six months ended
December 31, 1997 to $29,633,000 for the latest six months. Sales for the
Company's EMS operations increased by 20% for the latest six months compared
to the six months ended December 31, 1997. The sales growth of the EMS
operations is attributable primarily to several new contracts obtained by
SMTEK T.O. Sales for the PCB operations for the six months ended December 31,
1998 decreased by 19% from the same period in the prior year, due to the same
reason cited above for the three month period.
Consolidated gross profit for the six months ended December 31, 1998 was
$4,703,000 (15.9% of sales), compared to $4,684,000 (17.9% of sales) for the
same period of the prior year. Gross profit of the EMS operations was
$3,981,000 (15.4% of sales) for the six months ended December 31, 1998,
compared to $3,577,000 (16.6% of sales) for the prior year, due to the ramp-up
of several new contracts in the six months ended December 31, 1998, as well as
a change in the mix of business, with higher direct material costs as a
percentage of revenues in the latest period. For the six months ended
December 31, 1998, gross profit from PCB operations decreased approximately
35% from gross profit for the comparable period of the prior year, due to the
decrease in sales and a decrease in higher margin quick-turn orders.
Administrative and selling expenses for the three and six months ended
December 31, 1998 were $1,754,000 and $3,255,000, respectively, compared to
$1,446,000 and $2,837,000 for the same periods in the previous year. The
increase is attributable principally to administrative and sales staff
additions.
In the three and six months ended December 31, 1998, consolidated operating
income was $350,000 and $814,000, respectively, compared to $657,000 and
$1,213,000 for the same periods in the previous fiscal year.
Interest expense decreased from $533,000 in the six months ended December 31,
1997 to $483,000 in the six months ended December 31, 1998. The decrease in
interest expense is partly due to the fact that notes payable of $1,625,000
that were due from Jolt Technology, Inc. ("Jolt") to a Jolt shareholder were
converted to Jolt common stock on June 30, 1998 as a condition of and prior to
the consummation of the Jolt acquisition by the Company. Jolt's pre-
acquisition interest expense is included in the Company's consolidated
statement of operations pursuant to the pooling-of-interests accounting
method. The additional week of operations included in the six months ended
December 31, 1997 as a result of the Company's 52-53 week fiscal year also
contributed to the decrease.
The provision for income taxes of $53,000 for the six months ended December
31, 1998 represents federal alternative minimum tax and state income tax. The
federal alternative minimum tax is imposed at a 20% rate on the Company's
alternative minimum taxable income, which is determined by making statutory
adjustments to the Company's regular taxable income. Federal net operating
loss carryforwards offset 90% of the Company's alternative minimum taxable
income. The Company does not have a foreign income tax provision or liability
due to the existence of net operating loss carryforwards for United Kingdom
income tax purposes.
Net income for the six months ended December 31, 1998 was $439,000 or $.01 per
share, compared to $699,000 or $.02 per share for the six months ended
December 31, 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 $3,720,000 at December 31, 1998, and its bank lines of
credit. During the six months ended December 31, 1998, cash and cash
equivalents decreased by $693,000. This decrease consisted of capital
expenditures of $452,000, repayments of bank lines of credit of $584,000 and
reductions of long-term debt of $530,000, partially offset by cash provided by
operating activities of $840,000 and the effect of exchange rate changes on
cash of $33,000.
Components of operating working capital increased by $1,140,000 during the
first six months of fiscal 1998, comprised of a $581,000 increase in accounts
receivable, a $2,978,000 increase in costs and earnings in excess of billings
on uncompleted contracts, a $876,000 increase in inventories, a $176,000
increase in prepaid expenses, and a $324,000 decrease in accrued payroll and
employee benefits, partially offset by a $3,748,000 increase in accounts
payable and a $47,000 increase in other liabilities.
The Company has an accounts receivable-based working capital bank line of
credit for its subsidiary, SMTEK T.O., which provides for borrowings of up to
$2,750,000 at an interest rate of prime (7.75% at December 31, 1998) plus
1.25%. At December 31, 1998, borrowings outstanding under this credit
facility amounted to $2,747,000. SMTEK T.O.'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 $4,980,000), and provides for interest on borrowings at the
bank's base rate (6.14% at December 31, 1998) plus 1.50%. At December 31,
1998, borrowings outstanding under this credit facility amounted to
$1,135,000. 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 six months ended December, 1998 were
$1,526,000. Management estimates that capital expenditures of as much as $1.5
million may be required in the second half of 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.
The Company has a $2,000,000 note 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
T.O. The Company is currently evaluating various alternatives for paying off
this note at or prior to maturity. Those alternatives include the possible
private placement sale of common stock to raise part or all of the funds
needed to retire the note. While no assurance can be given that the Company
would be able to sell stock on acceptable terms or at all, management believes
that the Company has the resources to pay off this note by its maturity date.
Management believes that the Company's cash resources, borrowing capacity on
its working capital lines of credit and its equity raising capability 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 and validation phases. 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. 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
$200,000. If the Company is unsuccessful or if the remediation efforts of its
key suppliers 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.
The Company plans to create a Year 2000 contingency plan if validation testing
of the systems is not satisfactorily completed by September 30, 1999.
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
December 31, 1998, the carrying amount of long-term debt (including current
portion thereof) was $8,257,000 and the fair value was $8,079,000. 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 face amount of all the Company's
outstanding foreign currency forward exchange contracts aggregated $740,000 at
December 31, 1998.
Based on the Company's overall currency rate exposure at December 31, 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.
February 11, 1999 /s/ Richard K. Vitelle
- --------------------------------- -----------------------------------
Date Richard K. Vitelle
Vice President -Finance
(Principal Financial Officer)
16
2
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