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: MARCH 31, 2000
[ ] 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 2,271,598 shares of Common Stock outstanding as of
May 5, 2000.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, June 30,
2000 1999
------ ------
Assets
Current assets:
Cash and cash equivalents $ 594,000 $ 4,997,000
Accounts receivable, net 10,460,000 10,606,000
Costs and estimated earnings
in excess of billings on
uncompleted contracts 10,298,000 6,283,000
Inventories, net 7,225,000 5,812,000
Prepaid expenses 414,000 201,000
---------- ----------
Total current assets 28,991,000 27,899,000
---------- ----------
Property, equipment and
improvements, at cost:
Buildings and improvements 2,802,000 6,507,000
Plant equipment 12,523,000 18,542,000
Office and other equipment 1,852,000 2,510,000
---------- ----------
17,177,000 27,559,000
Less: Accumulated depreciation
and amortization (11,378,000) (18,661,000)
---------- ----------
Property, equipment and
improvements, net 5,799,000 8,898,000
---------- ----------
Other assets:
Goodwill, net 1,452,000 2,430,000
Deposits and other assets 160,000 317,000
---------- -----------
1,612,000 2,747,000
---------- -----------
$ 36,402,000 $ 39,544,000
========== ==========
<PAGE>
SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(Unaudited)
March 31, June 30,
2000 1999
------ ------
Liabilities and Stockholders' Equity
Current liabilities:
Bank lines of credit payable $ 2,912,000 $ 3,933,000
Current portion of
long-term debt 1,800,000 2,042,000
Accounts payable 11,608,000 11,654,000
Accrued payroll and
employee benefits 960,000 1,296,000
Interest payable 661,000 821,000
Income taxes payable 1,456,000 1,963,000
Other accrued liabilities 1,917,000 1,378,000
---------- ----------
Total current liabilities 21,314,000 23,087,000
---------- ----------
Long-term debt 5,703,000 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;
2,271,598 and 2,267,455 shares
issued and outstanding at
March 31, 2000 and June 30,
1999, respectively 23,000 23,000
Additional paid-in capital 36,965,000 36,948,000
Accumulated deficit (27,590,000) (26,789,000)
Accumulated other
comprehensive loss (13,000) (878,000)
---------- ----------
Total stockholders' equity 9,385,000 9,304,000
---------- ----------
$ 36,402,000 $ 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
March 31,
2000 1999
------ ------
Revenues $ 19,213,000 $ 12,219,000
Cost of goods sold 17,344,000 10,446,000
---------- ----------
Gross profit 1,869,000 1,773,000
---------- ----------
Operating expenses:
Administrative and selling 1,539,000 1,245,000
Goodwill amortization 326,000 326,000
---------- ----------
1,865,000 1,571,000
---------- ----------
Operating income 4,000 202,000
---------- ----------
Non-operating income (expense):
Interest income 43,000 21,000
Interest expense (269,000) (258,000)
Other income, net 2,000 36,000
---------- ----------
(224,000) (201,000)
---------- ----------
Income (loss) from continuing
operations before income taxes (220,000) 1,000
Provision for income taxes (15,000) (27,000)
---------- ----------
Loss from continuing operations (235,000) (26,000)
Income from discontinued operations, less
applicable taxes - 106,000
---------- ----------
Net income (loss) (235,000) 80,000
Other comprehensive loss - foreign currency
translation adjustments (32,000) (186,000)
---------- ----------
Comprehensive loss $ (267,000) $ (106,000)
========== ==========
Basic and diluted net income (loss) per share:
Loss from continuing operations $ (0.10) $ (0.01)
Income from discontinued operations - 0.06
---- ----
Total $ (0.10) $ 0.05
==== ====
Shares used in computing basic and diluted
net income (loss) per share 2,271,587 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)
Nine Months Ended
March 31,
2000 1999
------ ------
Revenues $ 48,865,000 $ 38,096,000
Cost of goods sold 43,298,000 32,333,000
---------- ----------
Gross profit 5,567,000 5,763,000
---------- ----------
Operating expenses:
Administrative and selling 4,315,000 3,908,000
Goodwill amortization 978,000 960,000
---------- ----------
5,293,000 4,868,000
---------- ----------
Operating income 274,000 895,000
---------- ----------
Non-operating income (expense):
Interest income 153,000 84,000
Interest expense (768,000) (736,000)
Other income (expense), net (9,000) 42,000
---------- ----------
(624,000) (610,000)
---------- ----------
Income (loss) from continuing
operations before income taxes (350,000) 285,000
Provision for income taxes (45,000) (80,000)
---------- ----------
Income (loss) from continuing operations (395,000) 205,000
Income from discontinued operations, less
applicable taxes 254,000 314,000
Loss on sale of discontinued operations,
net of tax (661,000) -
---------- ----------
Net income (loss) (802,000) 519,000
Other comprehensive income (loss):
Foreign currency translation adjustments 109,000 (120,000)
Reclassification of foreign currency
translation adjustments included in
loss on sale of discontinued operations 756,000 -
---------- ----------
Total other comprehensive income (loss) 865,000 (120,000)
---------- ----------
Comprehensive income $ 63,000 $ 399,000
========== ==========
Basic and diluted net income (loss) per share:
Income (loss) from continuing operations $ (0.17) $ 0.12
Income from discontinued operations 0.11 0.18
Loss on sale of discontinued operations (0.29) -
---- ----
Total $ (0.35) $ 0.30
==== ====
Shares used in computing basic and diluted
net income (loss) per share 2,269,121 1,704,406
========= =========
See accompanying Notes to Unaudited Consolidated Financial Statements
<PAGE>
SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
March 31,
2000 1999
------ ------
Cash flows from operating activities:
Net income (loss) $ (802,000) $ 519,000
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation expense 1,544,000 1,463,000
Amortization of goodwill 978,000 960,000
Loss on sale of discontinued operations 661,000 -
Gain on sale of assets (108,000) (152,000)
Net increase in operating working
capital (7,205,000) (1,171,000)
Other 275,000 (34,000)
--------- ---------
Net cash provided by (used in) operating
activities (4,657,000) 1,585,000
--------- ---------
Cash flows from investing activities:
Capital expenditures (684,000) (992,000)
Net cash proceeds from sale of
discontinued operations 2,689,000 -
Proceeds from sale of assets 117,000 152,000
Purchase of subsidiary, net of cash
acquired - (113,000)
--------- ---------
Net cash provided by (used in) investing
activities 2,122,000 (953,000)
--------- ---------
Cash flows from financing activities:
Repayments of bank lines of credit (1,001,000) (817,000)
Payments of long-term debt (1,178,000) (897,000)
Proceeds from foreign government grants 250,000 -
--------- ---------
Net cash used in financing activities (1,929,000) (1,714,000)
--------- ---------
Effect of exchange rate changes on cash 61,000 (17,000)
--------- ---------
Decrease in cash and cash equivalents (4,403,000) (1,099,000)
Cash and cash equivalents at
beginning of period 4,997,000 4,413,000
--------- ---------
Cash and cash equivalents at end of period $ 594,000 $ 3,314,000
========= =========
See accompanying Notes to Unaudited
Consolidated Financial Statements.
<PAGE>
SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended March 31, 2000 And 1999
Note 1 - DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
SMTEK International, Inc. provides electronics manufacturing services
("EMS") to original equipment manufacturers ("OEMs") in the computer,
telecommunications, instrumentation, medical, industrial and aerospace
industries. The Company's operating units are located in Southern
California, Florida and Northern Ireland.
On November 12, 1999, the Company sold its printed circuit board (PCB)
fabrication operation, Irlandus Circuits Ltd. ("Irlandus"). 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 March 31, 2000 and its results of operations
and its cash flows for the three and nine months ended March 31, 2000 and
1999.
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 March
31 for clarity of presentation. The actual interim periods ended on March
31, 2000 and April 2, 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.
Certain reclassifications have been made to the interim fiscal 1999
financial statements to conform with the interim 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 fabrication
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 gross 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 PCB 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 Nine months ended
March 31, March 31,
-------------------- --------------------
2000 1999 2000 1999
------ ------ ------ ------
Net sales $ - $2,438,000 $3,383,000 $6,497,000
========= ========= ========= =========
Operating income $ - $ (40,000) $ 131,000 $ 82,000
========= ========= ========= =========
Income from discontinued
operations, less
applicable taxes $ - $ 106,000 $ 254,000 $ 314,000
========= ========= ========= =========
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 from continuing operations for the nine
months ended March 31, 2000, outstanding stock options and warrants to
purchase approximately 407,000 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 approximately 231,000 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 nine months ended
March 31, 1999 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 nine months ended March 31, 2000 and 1999, 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 nine months ended March 31, 2000 and
1999, 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 120 days of the balance
sheet date. The components of costs and estimated earnings in excess of
billings on uncompleted contracts are as follows:
March 31, June 30,
2000 1999
---- ----
Costs incurred on uncompleted
contracts $49,088,000 $26,421,000
Estimated earnings 5,508,000 2,663,000
---------- ----------
54,596,000 29,084,000
Less: Billings to date (44,298,000) (22,801,000)
---------- ----------
$10,298,000 $ 6,283,000
========== ==========
Note 5 - INVENTORIES
Inventories consist of the following:
March 31, June 30,
2000 1999
---- ----
Raw materials $5,579,000 $5,326,000
Work in process 2,546,000 1,408,000
Finished goods 131,000 153,000
Less reserves (1,031,000) (1,075,000)
--------- ---------
$7,225,000 $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 (9.0% at March 31, 2000). At March
31, 2000, borrowings under this credit facility amounted to $100,000. 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
$3,180,000 at March 31, 2000), and bears interest at the bank's base rate
(6.0% at March 31, 2000) plus 2.0%. At March 31, 2000, borrowings
outstanding under this credit facility amounted to $2,812,000. Although
this facility has an expiration date of June 30, 2000, management expects
the facility to be renewed in the ordinary course of business for another
year.
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:
Nine months ended
March 31,
--------------------
2000 1999
------ ------
Interest paid $ 902,000 $ 534,000
Income taxes paid $ 675,000 $ 16,000
"Net increase in operating working capital" is comprised of the following:
Nine Months Ended
March 31,
2000 1999
------ ------
Increase in accounts receivable $(1,914,000) $ (686,000)
Increase in costs and estimated
earnings in excess of billings
on uncompleted contracts (4,015,000) (2,723,000)
Increase in inventories (1,994,000) (1,149,000)
Increase in prepaid expenses (274,000) (202,000)
Increase in accounts payable 1,197,000 3,779,000
Decrease in accrued payroll
and employee benefits (125,000) (66,000)
Decrease in other liabilities (80,000) (124,000)
---------- ---------
Net increase in operating
working capital $(7,205,000) $(1,171,000)
========== =========
Following is the supplemental schedule of non-cash investing and financing
activities:
Nine months ended
March 31,
--------------------
2000 1999
------ ------
Capital expenditures financed by
capital lease obligations $1,130,000 $1,678,000
========= =========
Notes payable issued as partial
consideration for purchase of
subsidiary - $ 104,000
========= =========
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 Tax Court ruling, the Company established a
full reserve for the contested tax refund amounts and interest thereon in
the fourth quarter of its fiscal year ended June 30, 1999.
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 March 31, 2000, the Company's remaining recorded federal tax liability
is $1,387,000, and accrued interest thereon is approximately $610,000. The
Company expects the pending appeal of the disallowed refund claims to be
resolved with the IRS by the end of calendar year 2000.
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. In their initial response to the
complaint, the Company, and its officers and directors, filed motions to
dismiss most of plaintiffs' claims on the grounds that they failed to state a
viable claim. Those motions were granted by the Court with permission to
plaintiffs to amend. The plaintiffs each filed separate amended complaints
stating additional facts in support of their claims. Prior to filing amended
complaints, the plaintiffs dismissed voluntarily several of the named
individual defendants.
The Company plans to continue its vigorous defense of this matter. The
Company believes that the plaintiffs' claims, as amended, continue to lack
merit and that the Company and the individual defendants will ultimately
prevail. Consequently, no amounts have been accrued in the financial
statements for the potential outcome of this litigation.
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. The
Company's operating units are located in Thousand Oaks, California; San
Diego, California; Fort Lauderdale, Florida; and Lurgan, 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 nine months ended March 31, 2000 and 1999.
RESULTS OF OPERATIONS
The following discussion relates to continuing operations only, and excludes
the results of Irlandus Circuits Ltd. which is shown as a discontinued
operation.
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 March
31 for clarity of presentation. The actual interim periods ended on March
31, 2000 and April 2, 1999.
Consolidated revenues for the three and nine months ended March 31, 2000
were $19,213,000 and $48,865,000, respectively, compared to $12,219,000 and
$38,096,000 for the same periods in the previous fiscal year, respectively.
Revenues in the latest quarter increased by $6,994,000, or 57%, over the
third quarter of last year primarily due to sales by the Company's San
Diego operating unit, which was acquired using the purchase method of
accounting on January 29, 1999; increased business from certain of domestic
customers; and new contracts in at the Company's European operating unit.
Consolidated gross profit for the three months ended March 31, 2000
increased $96,000 to $1,869,000 (9.7% of sales) from $1,773,000 (14.5% of
sales) for the same period of the prior year. Despite the 57% increase in
sales in the latest quarter, gross profit increased only modestly, and gross
margin declined significantly, because of a shift in business mix to
assembly contracts with higher direct material costs as a percentage of
revenues. Direct material costs as a percent of sales rose from 54% in the
quarter ended March 31, 1999 to 65% in the quarter ended March 31, 2000.
Consolidated gross profit for the nine months ended March 31, 2000 decreased
$196,000 to $5,567,000 (11.4% of sales) from $5,763,000 (15.1% of sales) for
the same period of the prior year. The decline in gross profit and gross
margin percentage in the latest nine-month period was primarily due to
difficulties experienced by the Company's European operating unit in ramping
up its production volume and manufacturing capacity for several new assembly
contracts. In the nine months ended March 31, 2000, the Company's gross
margin percentage was positively impacted as a result of the favorable
resolution of certain operating contingencies in the amount of approximately
$350,000.
Administrative and selling expenses increased from $1,245,000 for the three
months ended March 31, 1999 to $1,539,000 for the three months ended March
31, 2000, due primarily to legal expenses of approximately $120,000
associated with defending a lawsuit filed against the Company in October
1999. Administrative and selling expenses of continuing operations for the
nine months ended March 31, 2000 were $4,315,000 compared to $3,908,000 for
the same period in the previous year. The net change from fiscal 1999 to
fiscal 2000 is due mainly to the inclusion in the latest nine-month period
of the results of the San Diego facility, acquired in January 1999, and the
legal expenses in the latest quarter noted above, partially offset by
decreases in administrative and selling expenses at the Company's Thousand
Oaks and European operating units.
In the three and nine months ended March 31, 2000, operating income was
$4,000 and $274,000, respectively, compared to $202,000 and $895,000 for the
same periods in the previous fiscal year, respectively, due primarily to
losses at the Company's European subsidiary. The European operation was
unprofitable due to higher costs related to the ramp-up of production
capability for several new customer engagements.
The provision for income taxes of $45,000 and $80,000 for the nine months
ended March 31, 2000 and 1999, respectively, represents state income tax.
The Company does not have a federal or foreign income tax provision for the
three- or nine-month periods ended March 31, 2000 and 1999 due to the
existence and utilization of net operating loss carryforwards for U.S. and
United Kingdom income tax purposes.
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.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements". The objective of this SAB is to provide further guidance on
revenue recognition issues in the absence of authoritative literature
addressing a specific arrangement or a specific industry. The Company is
required to follow the guidance in the SAB no later than the first quarter
of its fiscal year 2001. The SEC has recently indicated it intends to issue
further guidance with respect to adoption of specific issues addressed by
SAB No. 101. Until such time as this additional guidance is issued, the
Company is unable to assess the impact, if any, it may have. However, based
on current guidance, the Company believes adoption of the SAB will not have
a material impact on the Company's financial position or results of
operations.
In March 2000, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 44 (Interpretation 44), "Accounting for Certain
Transactions Involving Stock Compensation". Interpretation 44 provides
criteria for the recognition of compensation expense in certain stock-based
compensation arrangements that are accounted for under Accounting Principles
Board Opinion No. 25, Accounting for Stock-Based Compensation.
Interpretation 44 is effective July 1, 2000, with certain provisions that
are effective retroactively to December 15, 1998 and January 12, 2000.
Interpretation 44 is not expected to have an impact on the Company's
financial statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are its cash and cash
equivalents, which amounted to $594,000 at March 31, 2000, and its bank
lines of credit.
During the nine months ended March 31, 2000, cash and cash equivalents
decreased by $4,403,000. This decrease consisted of cash used in operating
activities of $4,657,000, capital expenditures of $684,000, repayments of
bank line of credit borrowings of $1,001,000 and reductions of other debt of
$1,178,000, partially offset by net cash proceeds from the sale of
discontinued operations of $2,689,000, proceeds from the sale of assets of
$117,000, foreign government grants of $250,000, and the effect of exchange
rate changes on cash of $61,000. Cash used in operating activities of
$4,657,000 is attributable primarily to an increase of $4,015,000 in costs
and estimated earnings in excess of billings on uncompleted contracts during
the nine months ended March 31, 2000. Substantially all of the costs and
estimated earnings in excess of billings on uncompleted contracts at March
31, 2000 is expected to be billed within 120 days of that date.
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 (9.0% at March 31, 2000). At March
31, 2000, borrowings under this credit facility amounted to $100,000, and
the amount available to borrow based on the advance rates against
receivables and inventory was approximately $5.3 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 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
$3,180,000 at March 31, 2000), and bears interest at the bank's base rate
(6.0% at March 31, 2000) plus 2.0%. At March 31, 2000, borrowings outstanding
under this credit facility amounted to $2,812,000, and the amount available to
borrow based on the advance rate against receivables was approximately
$480,000. Although this facility has an expiration date of June 30, 2000,
management expects the facility to be renewed in the ordinary course of
business for another year.
The Company's operating units require continuing investment in plant and
equipment to remain competitive as technology evolves and to increase
production capacity to accommodate business growth and expansion. Capital
expenditures during fiscal years 1999, 1998 and 1997 were approximately
$3,426,000, $1,424,000 and $2,372,000, respectively. Capital expenditures
during the nine months ended March 31, 2000, including amounts financed by
capital leases, were $1,814,000, of which approximately $1.2 million was for
the Company's European operations. The Company anticipates that additional
capital expenditures of as much as $2 million may be made in the fourth
quarter of fiscal 2000, primarily to expand production capacity at its
Thousand Oaks and San Diego plants. The substantial majority of these capital
expenditures is expected to be financed by equipment leases and/or installment
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 12 months.
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 March 31, 2000, the carrying amount of
long-term debt (including current portion thereof) was $7,503,000 and the
fair value was $7,187,000. 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 March 31, 2000.
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
shareholder 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. In their initial response to the complaint, the Company, and its
officers and directors, filed motions to dismiss most of plaintiffs' claims on
the grounds that they failed to state a viable claim. Those motions were
granted by the Court with permission to plaintiffs to amend. The plaintiffs
each filed separate amended complaints stating additional facts in support of
their claims. Prior to filing amended complaints, the plaintiffs dismissed
voluntarily several of the named individual defendants.
The Company plans to continue its vigorous defense of this matter. The
Company believes that the plaintiffs' claims, as amended, continue to lack
merit and that the Company and the individual defendants will ultimately
prevail. Consequently, no amounts have been accrued in the financial
statements for the potential outcome of this litigation.
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.
May 12, 2000 /s/ Richard K. Vitelle
- --------------------------------- -----------------------------------
Date Richard K. Vitelle
Vice President - Finance
(Principal Financial Officer)
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