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, 1999
[ ] 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 2,269,049 shares of Common Stock outstanding as of
February 9, 2000.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31, June 30,
1999 1999
------ ------
Assets
Current assets:
Cash and cash equivalents $ 4,153,000 $ 4,997,000
Accounts receivable, net 8,458,000 10,606,000
Costs and estimated earnings
in excess of billings on
uncompleted contracts 8,001,000 6,283,000
Inventories, net 5,886,000 5,812,000
Prepaid expenses 314,000 201,000
---------- ----------
Total current assets 26,812,000 27,899,000
---------- ----------
Property, equipment and
improvements, at cost:
Buildings and improvements 2,834,000 6,507,000
Plant equipment 13,313,000 18,542,000
Office and other equipment 1,953,000 2,510,000
---------- ----------
18,100,000 27,559,000
Less: Accumulated depreciation
and amortization (11,946,000) (18,661,000)
---------- ----------
Property, equipment and
improvements, net 6,154,000 8,898,000
---------- ----------
Other assets:
Goodwill, net 1,778,000 2,430,000
Deposits and other assets 153,000 317,000
---------- -----------
1,931,000 2,747,000
---------- -----------
$ 34,897,000 $ 39,544,000
========== ==========
<PAGE>
SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited - continued)
December 31, June 30,
1999 1999
------ ------
Liabilities and Stockholders' Equity
Current liabilities:
Bank lines of credit payable $ 3,570,000 $ 3,933,000
Current portion of
long-term debt 1,554,000 2,042,000
Accounts payable 8,740,000 11,654,000
Accrued payroll and
employee benefits 976,000 1,296,000
Interest payable 663,000 821,000
Income taxes payable 1,858,000 1,963,000
Other accrued liabilities 1,492,000 1,378,000
---------- ----------
Total current liabilities 18,853,000 23,087,000
---------- ----------
Long-term debt 6,410,000 7,153,000
---------- ----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1 par value;
1,000,000 shares authorized;
no shares issued or outstanding - -
Common stock, $.01 par value;
3,750,000 shares authorized;
2,269,049 shares issued and
outstanding 23,000 23,000
Additional paid-in capital 36,948,000 36,948,000
Accumulated deficit (27,356,000) (26,789,000)
Accumulated other
comprehensive income (loss) 19,000 (878,000)
---------- ----------
Total stockholders' equity 9,634,000 9,304,000
---------- ----------
$ 34,897,000 $ 39,544,000
========== ==========
See accompanying Notes to Unaudited
Consolidated Financial Statements
<PAGE>
SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended
December 31,
1999 1998
------ ------
Revenues $ 14,441,000 $ 13,756,000
Cost of goods sold 12,576,000 11,646,000
---------- ----------
Gross profit 1,865,000 2,110,000
---------- ----------
Operating expenses:
Administrative and selling 1,426,000 1,455,000
Goodwill amortization 326,000 317,000
---------- ----------
1,752,000 1,772,000
---------- ----------
Operating income 113,000 338,000
---------- ----------
Non-operating income (expense):
Interest income 71,000 38,000
Interest expense (247,000) (236,000)
Other expense, net (9,000) 8,000
---------- ----------
(185,000) (190,000)
---------- ----------
Income (loss) from continuing
operations before income taxes (72,000) 148,000
Provision for income taxes (10,000) (31,000)
---------- ----------
Income (loss) from continuing operations (82,000) 117,000
Income from discontinued operations, less
applicable taxes 41,000 90,000
Loss on sale of discontinued operations,
net of tax (661,000) -
---------- ----------
Net income (loss) (702,000) 207,000
Other comprehensive income (loss):
Foreign currency translation adjustments (150,000) (108,000)
Reclassification of foreign currency
translation adjustments included in
loss on sale of discontinued operations 756,000 -
---------- ----------
Total other comprehensive income (loss) 606,000 (108,000)
---------- ----------
Comprehensive income (loss) $ (96,000) $ 99,000
========== ==========
Basic and diluted net income (loss) per share:
Income (loss) from continuing operations $ (0.04) $ 0.07
Income from discontinued operations 0.02 0.05
Loss on sale of discontinued operations (0.29) -
---- ----
Total $ (0.31) $ 0.12
==== ====
Shares used in computing basic and diluted
net income (loss) per share 2,268,319 1,704,406
========= =========
See accompanying Notes to Unaudited Consolidated Financial Statements.
<PAGE>
SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
Six Months Ended
December 31,
1999 1998
------ ------
Revenues $ 29,652,000 $ 25,877,000
Cost of goods sold 25,954,000 21,887,000
---------- ----------
Gross profit 3,698,000 3.990,000
---------- ----------
Operating expenses:
Administrative and selling 2,776,000 2,663,000
Goodwill amortization 652,000 634,000
---------- ----------
3,428,000 3,297,000
---------- ----------
Operating income 270,000 693,000
---------- ----------
Non-operating income (expense):
Interest income 110,000 63,000
Interest expense (499,000) (478,000)
Other expense, net (11,000) 6,000
---------- ----------
(400,000) (409,000)
---------- ----------
Income (loss) from continuing
operations before income taxes (130,000) 284,000
Provision for income taxes (30,000) (53,000)
---------- ----------
Income (loss) from continuing operations (160,000) 231,000
Income from discontinued operations, less
applicable taxes 254,000 208,000
Loss on sale of discontinued operations,
net of tax (661,000) -
---------- ----------
Net income (loss) (567,000) 439,000
Other comprehensive income:
Foreign currency translation adjustments 141,000 66,000
Reclassification of foreign currency
translation adjustments included in
loss on sale of discontinued operations 756,000 -
---------- ----------
Total other comprehensive income 897,000 66,000
---------- ----------
Comprehensive income $ 330,000 $ 505,000
========== ==========
Basic and diluted net income (loss) per share:
Income (loss) from continuing operations $ (0.07) $ 0.14
Income from discontinued operations 0.11 0.12
Loss on sale of discontinued operations (0.29) -
---- ----
Total $ (0.25) $ 0.26
==== ====
Shares used in computing basic and diluted
net income (loss) per share 2,267,887 1,704,406
========= =========
See accompanying Notes to Unaudited Consolidated Financial Statements
<PAGE>
SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
December 31,
-----------------------
1999 1998
------ ------
Cash flows from operating activities:
Net income (loss) $ (567,000) $ 439,000
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation expense 1,098,000 877,000
Amortization of goodwill 652,000 634,000
Loss on sale of
discontinued operations 661,000 -
Gain on sale of assets (111,000) -
Net increase in operating
working capital (4,261,000) (1,140,000)
Other 253,000 30,000
--------- ---------
Net cash provided by (used in) operating
activities (2,275,000) 840,000
--------- ---------
Cash flows from investing activities:
Capital expenditures (414,000) (452,000)
Net proceeds from sale of
discontinued operations 2,689,000 -
Proceeds from sale of assets 111,000 -
--------- ---------
Net cash provided by (used in) investing
activities 2,386,000 (452,000)
--------- ---------
Cash flows from financing activities:
Repayments of bank lines of credit (400,000) (584,000)
Payments of long-term debt (868,000) (530,000)
Proceeds from foreign government grants 251,000 -
--------- ---------
Net cash used in financing activities (1,017,000) (1,114,000)
--------- ---------
Effect of exchange rate changes on cash 62,000 33,000
--------- ---------
Decrease in cash and cash equivalents (844,000) (693,000)
Cash and cash equivalents at
beginning of period 4,997,000 4,413,000
--------- ---------
Cash and cash equivalents at
end of period $4,153,000 $3,720,000
========= =========
See accompanying Notes to Unaudited
Consolidated Financial Statements.
<PAGE>
SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended December 31, 1999 And 1998
Note 1 - DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
SMTEK International, Inc. provides customized, integrated electronics
manufacturing services ("EMS") to original equipment manufacturers ("OEMs")
in the computer, telecommunications, instrumentation, medical, industrial
and aerospace industries. The Company's EMS operations are located in
Southern California, Florida and Northern Ireland.
On November 12, 1999, the Company sold its printed circuit board (PCB)
operation, Irlandus Circuits Ltd. ("Irlandus") in a stock transaction. The
results of operations of Irlandus, which represented a separate segment of
the Company's business, are shown as a discontinued operation for all
periods presented in the accompanying unaudited Consolidated Statements of
Operations and Comprehensive Income. See Note 2 for additional details of
this transaction.
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, 1999 and its results of
operations and its cash flows for the three and six months ended December
31, 1999 and 1998.
The Company uses a 52-53 week fiscal year ending on the Friday closest to
June 30, which for fiscal year 1999 fell on July 2, 1999. In the
accompanying consolidated financial statements, the 1999 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 December 31, 1999 and January 1, 1999.
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 1999 Annual Report on Form 10-K as filed with the
Securities and Exchange Commission on October 15, 1999.
Certain reclassifications have been made to the interim fiscal 1999
financial statements to conform with the fiscal 2000 financial statement
presentation. Such reclassifications had no effect on the Company's results
of operations or stockholders' equity.
Note 2 - DISCONTINUED OPERATIONS
On November 12, 1999, the Company sold Irlandus, its PCB operation in
Northern Ireland. The purchaser was a management buy-out team which
included one manager from Irlandus and one manager from the Company's EMS
operation in Northern Ireland. The purchase price was negotiated on an arms
length basis between the Company and the purchaser. The sales proceeds in
the aggregate amount of 2,800,000 pounds sterling (approximately $4,523,000)
consisted of a cash dividend of 500,000 pounds sterling paid by Irlandus
just prior to closing and cash of 2,300,000 pounds sterling paid by the
purchaser at closing.
Irlandus was the sole operating unit comprising the Company's printed
circuit board segment. Accordingly, operating results for Irlandus have
been presented in the accompanying unaudited Consolidated Statements of
Operations and Comprehensive Income as a discontinued operation, and are
summarized as follows:
Three months ended Six months ended
December 31, December 31,
-------------------- --------------------
1999 1998 1999 1998
------ ------ ------ ------
Net sales $ 851,000 $1,964,000 $3,383,000 $4,059,000
========= ========= ========= =========
Operating income $ 41,000 $ 14,000 $ 131,000 $ 122,000
========= ========= ========= =========
Income from discontinued
operations, less
applicable taxes $ 41,000 $ 90,000 $ 254,000 $ 208,000
========= ========= ========= =========
Net assets of Irlandus consisted of the following:
Nov. 12, 1999 June 30,
(sale date) 1999
---- ----
Total assets $7,546,000 $6,980,000
Total liabilities 3,395,000 3,168,000
--------- ---------
Net assets $4,151,000 $3,812,000
========= =========
The loss on sale of Irlandus, shown in the accompanying unaudited
Consolidated Statements of Operation and Comprehensive Income as "Loss on
sale of discontinued operations", is comprised as follows:
Gross sales proceeds $4,523,000
Less disposal costs (277,000)
---------
Net sales proceeds 4,246,000
Less net assets of Irlandus (4,151,000)
---------
Gain on sale before elimination
of foreign currency translation
account balance 95,000
Elimination of Irlandus' foreign
currency translation account
balance (756,000)
---------
Loss on sale of discontinued
operations $ (661,000)
=========
Prior to the sale, Irlandus had an accumulated foreign currency translation
loss of $756,000, which was carried as a reduction of consolidated
stockholders' equity. In accordance with Statement of Financial Accounting
Standards No. 52, "Foreign Currency Translation", this amount has been
included in the determination of the loss on sale of discontinued
operations. In accordance with Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income", an equal and offsetting amount to
the $756,000 foreign currency translation account balance included in the
loss on sale of discontinued operations is reported as other comprehensive
income in the accompanying unaudited Consolidated Statements of Operations
and Comprehensive Income.
Note 3 - EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding during the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity.
Because the Company had a net loss for the six months ended December 31,
1999, outstanding stock options and warrants to purchase 385,211 shares of
common stock at exercise prices ranging from $3.38 to $70.00 would be anti-
dilutive and were therefore not included in the computation of diluted
earnings per share. Similarly, options and warrants to purchase 343,148
shares of common stock at exercise prices ranging from $10.00 to $70.00 were
not included in the computation of diluted earnings per share for the six
months ended December 31, 1998 because the exercise prices were greater than
the average market price of the common shares, and would therefore not be
dilutive.
Convertible subordinated debentures aggregating $1,580,000, due in 2008 and
convertible at a price of $212.60 per share at any time prior to maturity,
were outstanding during the six months ended December 31, 1999 and 1998, but
were not included in the computation of diluted earnings per share because
the effect would not be dilutive.
Convertible subordinated debentures aggregating $323,000, due on May 15,
2001 and convertible at a price of $40.00 per share at any time prior to
maturity, were outstanding during the six months ended December 31, 1999 and
1998, but were not included in the computation of diluted earnings per share
because the effect would not be dilutive.
Note 4 - COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED
CONTRACTS
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 amount is expected to be billed within 90 days of the balance sheet
date. The components of costs and estimated earnings in excess of billings
on uncompleted contracts are as follows:
December 31, June 30,
1999 1999
---- ----
Costs incurred on uncompleted
contracts $39,830,000 $26,421,000
Estimated earnings 4,165,000 2,663,000
---------- ----------
43,995,000 29,084,000
Less: Billings to date (35,994,000) (22,801,000)
---------- ----------
$ 8,001,000 $ 6,283,000
========== ==========
Note 5 - INVENTORIES
Inventories consist of the following:
December 31, June 30,
1999 1999
---- ----
Raw materials $5,520,000 $5,326,000
Work in process 1,297,000 1,408,000
Finished goods 82,000 153,000
Less reserves (1,013,000) (1,075,000)
--------- ---------
$5,886,000 $5,812,000
========= =========
Note 6 - FINANCING ARRANGEMENTS
Bank Credit Agreements
The Company has a credit facility for its domestic operating units which
consists of an $8 million working capital line secured by accounts
receivable, inventory and equipment. Borrowings under the credit agreement
bear interest at the bank's prime rate (8.50% at December 31, 1999). At
December 31, 1999, borrowings under this credit facility amounted to
$1,050,000. This credit facility expires on July 6, 2001.
The Company also has a credit facility agreement with Ulster Bank Markets
for its Northern Ireland operating company. This agreement consists of an
accounts receivable revolver, with maximum borrowings equal to the lesser of
65% of eligible receivables or 2,000,000 pounds sterling (approximately
$3,260,000 at December 31, 1999), and bears interest at the bank's base rate
plus 2.0%. At December 31, 1999, borrowings outstanding under this credit
facility amounted to $2,520,000. This facility expires June 30, 2000.
Note 7 - INFORMATION RELATING TO STATEMENTS OF CASH FLOWS
"Net cash used by operating activities" includes cash payments for interest
and income taxes as follows:
Six months ended
December 31,
--------------------
1999 1998
------ ------
Interest paid $ 644,000 $ 335,000
Income taxes paid $ 850,000 $ -
"Net increase in operating working capital" is comprised of the following:
Six months ended
December 31,
--------------------
1999 1998
------ ------
(Increase)decrease in
accounts receivable $ 188,000 $ (581,000)
Increase in costs and estimated
earnings in excess of billings
on uncompleted contracts (1,718,000) (2,978,000)
Increase in inventories (565,000) (876,000)
Increase in prepaid expenses (172,000) (176,000)
Increase (decrease) in
accounts payable (1,772,000) 3,748,000
Decrease in accrued payroll
and employee benefits (114,000) (324,000)
Increase (decrease) in
other liabilities (108,000) 47,000
---------- ---------
Net increase in operating
working capital $(4,261,000) $(1,140,000)
========== =========
Following is the supplemental schedule of non-cash investing and financing
activities:
Six months ended
December 31,
--------------------
1999 1998
------ ------
Capital expenditures financed by
capital lease obligations $1,243,000 $ 327,000
========= =========
Note 8 - INCOME TAXES
In connection with the filing of its federal income tax returns for fiscal
year 1995, the Company filed for a refund to carry back losses described in
Section 172(f) of the Internal Revenue Code of 1986, as amended (the "IRC").
Section 172(f) of the IRC provides for a ten year net operating loss
carryback for specific losses attributable to (1) a product liability or (2)
a liability arising under a federal or state law or out of any tort if the
act giving rise to such liability occurs at least three years before the
beginning of the taxable year. As a result of these refund filings, in
September and October 1995 the Company received federal income tax refunds
totaling $1,871,000, net of costs associated with applying for such refunds,
and recognized an income tax benefit of $1,110,000 in the quarter ended
December 31, 1995. The balance of the net refunds received, $761,000, was
recorded as income taxes payable, pending resolution by the IRS of the
appropriateness and the amount of the 172(f) carryback.
Beginning in May 1997, the Company came under IRS audit with respect to such
refund claims. In September 1998, the Company received tax deficiency
notices from the IRS in which the IRS advised the Company that it was
disallowing substantially all of the tax refunds received by the Company in
1995 which had been recorded as an income tax benefit. In January 1999, the
Company filed a protest letter with the IRS to appeal the disallowance.
Subsequent to filing the protest letter, the U.S. Tax Court upheld the
disallowance of refund claims made by another taxpayer involving Section
172(f) issues similar to those on which the Company had based certain of its
refund claims. The Company can give no assurance that it will prevail in
its appeal, and in light of the recent Tax Court ruling, the Company
determined that it was appropriate to establish a full reserve for the
contested tax refund amounts and interest thereon.
In connection with the IRS audit, and the subsequent internal review by the
Company, the Company determined that the net refund of $761,000 which had
been received in 1995, and which was recorded as income taxes payable upon
receipt, needed to be returned to the IRS. Accordingly, on July 30, 1999,
the Company repaid this amount to the IRS plus accrued interest of $272,000.
As of December 31, 1999, the Company's remaining recorded federal tax
liability is $1,387,000, and accrued interest thereon is approximately
$583,000.
Note 9 - COMMITMENTS AND CONTINGENCIES
On October 20, 1999, a lawsuit was filed against the Company by two of its
shareholders. The action purports to arise out of the merger of the Company
with Jolt Technology, Inc. The complaint asserts claims against the Company
and certain of its present and former officers and directors for breach of
contract, common law fraud, and violation of the California Corporate
Securities Act, and seeks damages in the amount of $3,500,000. The Company
denies the allegations of the complaint, and intends a vigorous defense. No
amounts have been accrued in the financial statements for the potential
outcome of such lawsuit.
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, 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 is an electronics manufacturing services (EMS) provider serving
original equipment manufacturers (OEMs) in the computer, telecommunications,
instrumentation, medical, industrial and aerospace industries. The Company
provides integrated solutions to OEMs across the entire product life cycle,
from design to manufacturing to end-of-life services, for the worldwide low-
to-medium volume, high complexity segment of the EMS industry. EMS
operations are located in Thousand Oaks, California; San Diego, California;
Fort Lauderdale, Florida; and Craigavon, Northern Ireland.
RECENT DEVELOPMENT
As more fully described in Note 2 to the accompanying unaudited consolidated
financial statements, on November 12, 1999 the Company sold Irlandus
Circuits, Ltd., its printed circuit board fabrication operation in Northern
Ireland, to a management buy-out team. Accordingly, the results of
operations of Irlandus, which represented a separate segment of business,
have been presented as a discontinued operation in the accompanying
unaudited Consolidated Statements of Operations and Comprehensive Income for
the three and six months ended December 31, 1999 and 1998.
RESULTS OF OPERATIONS
The Company uses a 52-53 week fiscal year ending on the Friday closest to
June 30, which for fiscal year 1999 fell on July 2, 1999. In the
accompanying consolidated financial statements, the 1999 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 December 31, 1999 and January 1, 1999.
Consolidated revenues of continuing operations for the three and six months
ended December 31, 1999 were $14,441,000 and $29,652,000, respectively,
compared to $13,756,000 and $25,877,000 for the same periods in the previous
fiscal year, respectively. This increase is primarily attributable to sales
by our San Diego operating unit, acquired under the purchase method on
January 29, 1999, and to new contracts in Europe.
Consolidated gross profit from continuing operations for the three months
ended December 31, 1999 was $1,865,000 (12.9% of sales), compared to
$2,110,000 (15.3% of sales) for the same period of the prior year.
Consolidated gross profit from continuing operations for the six months
ended December 31, 1999 was $3,698,000 (12.5% of sales), compared to
$3,990,000 (15.4% of sales) for the same period of the prior year. The
decline in the gross profit as a percentage of sales was primarily due to a
change in the mix of business, with higher direct material costs as a
percentage of revenues in the latest periods.
Administrative and selling expenses of continuing operations for the three
and six months ended December 31, 1999 were $1,426,000 and $2,776,000,
respectively, compared to $1,455,000 and $2,663,000 for the same periods in
the previous year. The net change from fiscal 1999 to fiscal 2000 is due
mainly to the inclusion in the latest three- and six-month periods of the
results of the San Diego facility, acquired in January 1999, largely offset
by decreases in administrative and selling expenses at the Company's
Thousand Oaks and European operating units.
In the three and six months ended December 31, 1999, operating income from
continuing operations was $113,000 and $270,000, compared to $338,000 and
$693,000 for the same periods in the previous fiscal year.
In the three and six months ended December 31, 1999, interest expense was
$247,000 and $499,000, compared to $236,000 and $478,000 for the same
periods in the previous fiscal year. The increase is primarily attributable
to the acquisition of the San Diego EMS operation in January 1999.
The provision for income taxes of $30,000 and $53,000 for the six months
ended December 31, 1999 and 1998, respectively, represents state income tax.
The Company does not have a federal or foreign income tax provision for the
three- or six-month periods ended December 31, 1999 and 1998 due to the
existence and utilization of net operating loss carryforwards for U.S. and
United Kingdom income tax purposes.
Net income (loss) for the six months ended December 31, 1999 was ($567,000)
or ($.25) per share, compared to $439,000 or $.26 per share for the six
months ended December 31, 1998.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133")
was issued, 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, as amended by SFAS No. 137, in the first quarter of its
fiscal year ending June 30, 2001. Management has not completed an
evaluation of the effects this standard will have on the Company's
consolidated financial statements, but does not anticipate that such effects
will be material.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are its cash and cash
equivalents, which amounted to $4,153,000 at December 31, 1999, and its bank
lines of credit. During the six months ended December 31, 1999, cash and
cash equivalents decreased by $844,000. This decrease consisted of cash
used by operating activities of $2,275,000, capital expenditures of
$414,000, repayments of bank line of credit borrowings of $400,000 and
reductions of long-term debt of $868,000, partially offset by net proceeds
from the sale of discontinued operations of $2,689,000, proceeds from the
sale of assets of $111,000, foreign government grants of $251,000, and the
effect of exchange rate changes on cash of $62,000.
Components of operating working capital increased by $4,261,000 during the
first six months of fiscal 2000, comprised of a $1,718,000 increase in costs
and earnings in excess of billings on uncompleted contracts, a $565,000
increase in inventories, a $172,000 increase in prepaid expenses, a
$1,772,000 decrease in accounts payable, a $114,000 decrease in accrued
payroll and employee benefits and a $108,000 decrease in other liabilities,
partially offset by an decrease in accounts receivable of $188,000.
The Company has a credit facility for its domestic operating units which
consists of an $8 million working capital line secured by accounts
receivable, inventory and equipment. Borrowings under the credit agreement
bear interest at the bank's prime rate (8.50% at December 31, 1999). At
December 31, 1999, borrowings under this credit facility amounted to
$1,050,000, and the amount available to borrow based on the advance rates
against receivables and inventory was approximately $3.4 million. This
credit facility expires on July 6, 2001.
The Company also has a credit facility agreement with Ulster Bank Markets for
its Northern Ireland EMS operating company. This agreement consists of an
accounts receivable revolver, with maximum borrowings equal to the lesser of
65% of eligible receivables or 2,000,000 pounds sterling (approximately
$3,260,000 at December 31, 1999), and bears interest at the bank's base rate
(5.75% at December 31, 1999) plus 2.0%. At December 31, 1999, borrowings
outstanding under this credit facility amounted to $2,520,000, which
represented the borrowing limit based on 65% of eligible receivables. This
facility expires June 30, 2000.
The Company's operating units require continuing investment in plant and
equipment to remain competitive. Capital expenditures during fiscal 1999,
1998 and 1997 were approximately $3,426,000, $1,424,000 and $2,372,000,
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 31, 1999,
including amounts financed by capital leases, were $1,657,000. Management
estimates that additional capital expenditures of approximately $1.5 million
will be required in the second half of fiscal 2000. Of this amount, the
substantial majority is expected to be financed by capital leases and/or
secured loans.
As more fully described in Note 8 to the accompanying unaudited consolidated
financial statements, on July 30, 1999 the Company repaid $761,000 of income
tax refunds to the Internal Revenue Service plus accrued interest of $272,000.
In addition, the Company may have to repay to the IRS additional income tax
refunds of up to $1,387,000 plus accrued interest.
On November 12, 1999, the Company sold Irlandus for approximately $4.5
million, as more fully described in Note 2 to the accompanying unaudited
consolidated financial statements. After giving consideration to disposal
costs and to the cash which stayed with the divested operation, the net cash
proceeds of this transaction amounted to approximately $2.7 million.
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 year.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's financial instruments include cash and cash equivalents, and
short-term and long-term debt. At December 31, 1999, the carrying amount of
long-term debt (including current portion thereof) was $6,410,000 and the
fair value was $6,094,000. 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, from time to time, may
enter into foreign currency forward exchange contracts in an effort 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 banks believed to be creditworthy 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 at December 31, 1999.
A portion of the Company's operations consists of investments in foreign
subsidiaries. As a result, the Company's financial results could be
affected by changes in foreign currency exchange rates.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 20, 1999, a lawsuit was filed against the Company by two of its
shareholders in the Superior Court of Ventura County, California. The
action purports to arise out of the merger of the Company with Jolt
Technology, Inc. The complaint asserts claims against the Company and
certain of its present and former officers and directors for breach of
contract, common law fraud, and violation of the California Corporate
Securities Act, and seeks damages in the amount of $3,500,000. The Company
denies the allegations of the complaint, and intends a vigorous defense. No
amounts have been accrued in the financial statements for the potential
outcome of such lawsuit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the 1999 Annual Meeting of Stockholders held on December 16, 1999, James P.
Burgess was elected a Class I director. Directors whose terms of office
continued after the meeting were Gregory L. Horton, Bruce E. Kanter, and Oscar
B. Marx III. In addition to the election of director, the stockholders approved
an amendment to the 1996 Stock Incentive Plan to increase the number of shares
of common stock that can be issued thereunder by 250,000, and approved certain
amendments to the 1998 Non-Employee Directors Stock Plan. There were 2,267,455
shares of common stock outstanding and entitled to vote at this meeting.
Following is a summary of the results of voting:
Votes
Against or Votes
Votes For Withheld Abstained Unvoted
-------- ------- ------- -------
Election of James P. Burgess
as director 1,950,378 21,939
Amendment to the 1996 Stock
Incentive Plan 1,151,815 98,659 13,353 1,003,628
Amendments to the 1998 Non-
Employee Directors Stock Plan 1,854,919 104,882 12,517 295,137
ITEM 5. SALE OF IRLANDUS CIRCUITS LTD.
On November 12, 1999, the Company sold its printed circuit board (PCB)
operation, Irlandus Circuits Ltd. The purchaser was a management buy-out
team which included one manager from Irlandus and one manager from the
Company's EMS operation in Northern Ireland. The sales consideration
was 2.8 million pounds sterling (approximately $4.5 million), paid in cash.
See Note 2 to the accompanying notes to unaudited financial statements
for additional information on this transaction.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
27 Financial Data Schedule (electronic filing only)
b. Reports on Form 8-K:
On December 28, 1999, a Form 8-K was filed concerning the sale of
Irlandus, which included pro forma financial information for the
transaction.
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 14, 2000 /s/ Richard K. Vitelle
- --------------------------------- -----------------------------------
Date Richard K. Vitelle
Vice President -Finance
(Principal Financial Officer)
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