SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended: SEPTEMBER 30, 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.
-------------------------
DELAWARE 33-0213512
------------------------------ ------------------
State or Other Jurisdiction of I.R.S. Employer
Incorporation or Organization: Identification No.
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 2,275,475 shares of Common Stock outstanding as of
November 10, 2000.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except share and per share amounts)
September 30, June 30,
2000 2000
------------- --------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 517 $ 532
Accounts receivable, less allowance
for doubtful accounts of $141 and $151 11,761 13,365
Costs and estimated earnings in excess
of billings on uncompleted contracts 11,413 10,257
Inventories, net 6,488 6,095
Prepaid expenses 284 180
-------- --------
Total current assets 30,463 30,429
-------- --------
Property, equipment and improvements, at cost:
Buildings and improvements 2,739 2,758
Plant equipment 13,671 12,875
Office and other equipment 2,347 2,307
-------- --------
18,757 17,940
Less: Accumulated depreciation
and amortization (11,351) (11,249)
-------- --------
Property, equipment and improvements, net 7,406 6,691
-------- --------
Other assets:
Goodwill, net 800 1,126
Deposits and other assets 186 282
-------- --------
986 1,408
-------- --------
$ 38,855 $ 38,528
======== ========
<PAGE>
SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(In thousands except share and per share amounts)
September 30, June 30,
2000 2000
------------- --------
(Unaudited)
Liabilities and Stockholders' Equity
Current liabilities:
Bank lines of credit payable $ 7,610 $ 7,583
Current portion of long-term debt 2,194 2,106
Accounts payable 8,795 9,240
Accrued payroll and employee benefits 1,134 1,150
Interest payable 758 761
Income taxes payable 1,439 1,419
Other accrued liabilities 2,123 1,797
-------- --------
Total current liabilities 24,053 24,056
-------- --------
Long-term debt 5,024 4,997
-------- --------
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; 2,275,475 and
2,272,012 shares issued and outstanding
at September 30, 2000 and June 30, 2000,
respectively 23 23
Additional paid-in capital 36,986 36,972
Accumulated deficit (27,115) (27,430)
Accumulated other comprehensive loss (116) (90)
-------- --------
Total stockholders' equity 9,778 9,475
-------- --------
$ 38,855 $ 38,528
======== ========
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS) (Unaudited)
(In thousands except per share amounts)
Three Months Ended
September 30,
-------------------
2000 1999
------- -------
Revenues $20,924 $15,211
Cost of goods sold 18,333 13,378
------- -------
Gross profit 2,591 1,833
------- -------
Operating expenses:
Administrative and selling expenses 1,582 1,350
Goodwill amortization 326 326
------- -------
Total operating expenses 1,908 1,676
------- -------
Operating income 683 157
------- -------
Non-operating income (expense):
Interest expense, net (316) (213)
Other expense, net (32) (2)
------- -------
Total non-operating expense (348) (215)
------- -------
Income (loss) from continuing
operations before income taxes 335 (58)
Income tax provision 20 20
------- -------
Income (loss) from continuing operations 315 (78)
Income from discontinued operations,
net of tax - 213
------- -------
Net income 315 135
Other comprehensive income (loss):
Foreign currency translation adjustments (26) 291
------- -------
Comprehensive income $ 289 $ 426
======= =======
Basic and diluted earnings per share:
Income (loss) from continuing operations $ 0.14 $ (0.03)
Income from discontinued operations - 0.09
------- -------
Earnings per share $ 0.14 $ 0.06
======= =======
Shares used in computing basic and diluted
earnings per share
Basic 2,275 2,267
======= =======
Diluted 2,307 2,267
======= =======
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Three Months Ended
September 30,
---------------------
2000 1999
------- -------
Cash flows from operating activities:
Net income $ 315 $ 135
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 808 906
(Increase) decrease in accounts receivable 1,495 (46)
Increase in costs and estimated earnings in
excess of earnings on uncompleted contracts (1,156) (675)
Increase in inventories (458) (380)
Decrease in accounts payable (361) (695)
Increase (decrease) in other accrued liabilities 337 (559)
Other, net 14 (223)
------- -------
Net cash provided by (used in) operating activities 994 (1,537)
------- -------
Cash flows from investing activities:
Capital expenditures (801) (260)
Proceeds from sale of assets 2 110
------- -------
Net cash used in investing activities (799) (150)
------- -------
Cash flows from financing activities:
Proceeds from bank lines of credit 86 849
Payments of long-term debt (296) (425)
Proceeds from foreign government grants - 249
------- -------
Net cash provided by (used in) financing activities (210) 673
------- -------
Effect of exchange rate changes on cash - 66
------- -------
Decrease in cash and cash equivalents (15) (948)
Cash and cash equivalents at beginning of period 532 4,997
------- -------
Cash and cash equivalents at end of period $ 517 $ 4,049
======= =======
Supplemental cash flow information:
Interest paid $ 320 $ 442
Income taxes paid - 573
Non-cash investing activities:
Capital expenditures financed by lease
obligations and notes payable 440 433
Other 3 -
See accompanying notes to unaudited consolidated financial statements
<PAGE>
SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended September 30, 2000 and 1999
Note 1 - DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
SMTEK International, Inc. (the "Company") is an electronics manufacturing
services ("EMS") provider to original equipment manufacturers ("OEMs")
primarily in the computer, telecommunications, instrumentation, medical,
financial services automation, 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 Craigavon, Northern Ireland.
On November 12, 1999, the Company sold its printed circuit board ("PCB")
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 the three months ended September 30,
1999 in the accompanying unaudited consolidated statements of operations and
comprehensive income.
All significant intercompany transactions and accounts have been
eliminated in consolidation. In the opinion of the Company's management, the
accompanying consolidated financial statements reflect all adjustments
(consisting of normal recurring accruals) necessary to present fairly the
Company's financial position at September 30, 2000 and its results of
operations and its cash flows for the three months ended September 30, 2000
and 1999.
The Company uses a 52-53 week fiscal year ending on the Friday closest to
June 30, which for fiscal year 2000 fell on June 30, 2000. In the
accompanying consolidated financial statements, the 2000 fiscal year end is
shown as June 30 and the interim period end for both years is shown as
September 30 for clarity of presentation. The actual interim periods ended on
September 29, 2000 and October 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 2000 Annual Report on Form 10-K as filed with the
Securities and Exchange Commission on August 20, 2000.
Certain reclassifications have been made to the interim fiscal 2000
financial statements to conform with the interim fiscal 2001 financial
statement presentation. Such reclassifications had no effect on the Company's
results of operations or stockholders' equity.
Note 2 EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income available to
common stockholders 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 Company. The
following is a summary of the calculation of earnings per share (dollars in
thousands, except per share data):
Three months ended
September 30, 2000
==================
Net income $ 315
=========
Weighted average shares:
Basic weighted average number of
common shares outstanding 2,275,101
Dilutive effect of outstanding
common stock equivalents 31,474
---------
Diluted weighed average number of
common shares outstanding 2,306,575
=========
Earnings per share:
Basic $ 0.14
=========
Diluted $ 0.14
=========
At September 30, 2000, options and warrants to purchase 400,303 shares of
Common Stock at prices ranging from $3.38 to $30.20 were outstanding. Because
the Company had a loss from continuing operations for the three months ended
September 30, 1999, outstanding stock options and warrants to purchase
approximately 247,841 shares of Common Stock at exercise prices ranging from
$5.38 to $70.00 would be antidilutive and were therefore not included in the
computation of diluted earnings per share.
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 three months ended September 30, 2000 and 1999,
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 $40.00 per share at any time prior to
maturity, were outstanding during the three months ended September 30, 2000
and 1999, but were not included in the computation of diluted earnings per
share because the effect would be antidilutive.
Note 3 - 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. Substantially all
of the unbilled amount is expected to be billed and collected within 180 days
of the balance sheet date. The components of costs and estimated earnings in
excess of billings on uncompleted contracts are as follows (in thousands):
September 30, June 30,
2000 2000
------------- --------
Costs incurred to date on
uncompleted contracts $ 65,864 $ 56,381
Estimated earnings based on
percentage of completion 8,027 6,889
-------- --------
73,891 63,270
Less: Billings to date (62,478) (53,013)
-------- --------
Total costs and estimated
earnings in excess of billings
on uncompleted contracts $ 11,413 $ 10,257
======== ========
Note 4 - INVENTORIES
Inventories consist of the following (in thousands):
September 30, June 30,
2000 2000
------------- --------
Raw materials $4,269 $3,894
Work in process 2,109 2,129
Finished goods 110 72
------ ------
$6,488 $6,095
Total inventories ====== ======
Note 5 - FINANCING ARRANGEMENTS
The Company has a credit facility for its domestic operating units which
consists of a $7 million working capital line secured by accounts receivable,
inventory and equipment. Borrowings under the credit agreement bear an
interest rate at the bank's prime rate (9.50% at September 30, 2000). At
September 30, 2000, borrowings under this credit facility amounted to
$5,007,000. The Company's available borrowing capacity as of September 30,
2000 was approximately $2.5 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
70% of eligible receivables or 2,250,000 pounds sterling (approximately
$3,300,000 at September 30, 2000), and bears interest at the bank's base rate
(6.00% at September 30, 2000) plus 2.00%. At September 30, 2000, borrowings
outstanding under this credit facility amounted to approximately $2,603,000
and the amount available to borrow based on the advance rate against
receivables was approximately $700,000. The Company is currently negotiating
a renewal and extension of this credit facility with Ulster Bank through
October 31, 2001.
Note 6 - INCOME TAXES
In connection with the filing of its federal income tax return for fiscal
year 1995, and acting on advice of its tax advisor, the Company filed for
refunds 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 ("NOL") 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 fiscal 1996 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. The balance of the net refunds received, $761,000, was
recorded as income taxes payable, pending resolution by the Internal Revenue
Service ("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 and its tax advisor 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 U.S. Tax Court ruling, the Company
determined that it was appropriate to establish a full reserve for the
contested tax refund amounts and interest thereon. Accordingly, in the fourth
quarter of fiscal 1999 the Company recorded income tax expense, net of fee
amounts refunded to the Company from its tax advisor, of $1,110,000 plus
accrued interest expense of $725,000.
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.
After giving effect to the July 1999 repayment, the Company's remaining
recorded federal tax liability is $1,387,000, and accrued interest thereon as
of September 30, 2000 is approximately $679,000. 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 7 COMMITMENTS AND CONTINGENCIES
In October 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.
in June 1998. The lawsuit asserts claims against the Company and certain of
its present and former officers and directors and an income tax advisor for
breach of contract, common law fraud, and violation of the California
Corporate Securities Act. The lawsuit seeks damages in the amount of
$3,500,000.
Certain individual director or officer defendants have been dismissed or
the court has ordered them to be dismissed. The action is now proceeding in
discovery against the Company, the remaining officers and directors, and the
income tax advisor. The matter is currently scheduled for trial in April
2001.
The Company denies the allegations asserted in the lawsuit and is engaged
in a vigorous defense of the matter. The Company believes that the
plaintiffs' claims lack merit. Consequently, no amounts have been accrued in
the consolidated financial statements for the potential outcome of this
litigation.
Although the Company denies the allegations in the matter, there can be
no assurance the Company will prevail. An unfavorable result could adversely
affect the Company's business, results of operations and/or financial
condition.
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
SMTEK International, Inc. (the "Company") is an electronics manufacturing
services ("EMS") provider to original equipment manufacturers ("OEMs")
primarily in the computer, telecommunications, instrumentation, medical,
financial services automation, 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 Craigavon, Northern Ireland.
RESULTS OF OPERATIONS
The Company uses a 52-53 week fiscal year ending on the Friday closest to
June 30, which for fiscal year 2000 fell on June 30, 2000. In the
accompanying consolidated financial statements, the 2000 fiscal year end is
shown as June 30 and the interim period end for both years is shown as
September 30 for clarity of presentation. The actual interim periods ended on
September 29, 2000 and October 1, 1999.
Consolidated revenues for the three months ended September 30, 2000 were
$20,924,000 compared to $15,211,000 for the three months ended September 30,
1999. The increase in revenues of $5,713,000, or 38%, was primarily due to an
increase in business from existing customers and new contracts, particularly
at the Company's Thousand Oaks and San Diego operating units. Although the
Company experienced significant revenue growth in the latest quarter compared
to last year's first quarter, on a sequential quarter basis revenues in the
latest quarter declined 2% from the preceding quarter. The Company's
operations continue to be impacted by material procurement and production
inefficiencies caused by the industry-wide shortages of certain electronic
components. Management believes that this situation could continue to
constrain revenue growth through the remainder of fiscal 2001.
Consolidated gross profit for the three months ended September 30, 2000
was $2,591,000 (12.4% of sales) compared to $1,833,000 (12.1% of sales) for
the three months ended September 30, 1999. Although the significant revenue
increase in the latest quarter compared to last year's first quarter caused
fixed costs to be spread over a larger volume of production, the resultant
beneficial effects on the Company's gross profit percentage were largely
diluted by the production inefficiencies associated with the aforementioned
part shortages.
Administrative and selling expenses increased to $1,582,000 for the three
month ended September 30, 2000 from $1,350,000 for the three months ended
September 30, 1999. The increase of $232,000, or 17%, is due primarily to
expansion of the Company's corporate staff and increased legal expenses
associated with the pending litigation discussed in Note 7 to the accompanying
unaudited consolidated financial statements.
Total non-operating expense was $348,000 for the three months ended
September 30, 2000 compared to $215,000 for the three months ended September
30, 1999. The primary reason for the $133,000 increase is due to an increase
in borrowings on the Company's lines of credit from $4,861,000 at September
30, 1999 to $7,610,000 at September 30, 2000 and also due to increases in
interest rates of over 1% during this same period. The increase in the line
of credit borrowings is due mainly to increases in material procurement caused
by the industry-wide shortages of certain electronic components. For more
discussion on the Company's liquidity, refer to section titled "Liquidity and
Capital Resources."
The income tax provisions for the three months ended September 30, 2000
and 1999, after taking into account the nondeductibility of the Company's
goodwill amortization, are less than the statutory income tax rates due to the
utilization of net operating loss carryforwards. Based on its level of
historical losses, the Company continues to carry a full valuation allowance
for its net deferred income tax assets.
Income from continuing operations was $315,000 for the three months ended
September 30, 2000, or $0.14 per share, compared to a loss from continuing
operations of $78,000, or $0.03 per share, for the three months ended
September 30, 1999. The improvement is due to the $758,000 increase in gross
profit which was partially offset by increases in administrative and selling
expenses and non-operating expenses.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities" was
issued, which will require recognition of all derivatives as either assets or
liabilities on the balance sheet at fair value. The Company adopted SFAS No.
133, as amended by SFAS No. 137 and SFAS No. 138, in the first quarter of
fiscal 2001. The adoption of SFAS No. 133 had no impact on the Company's
consolidated financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." The objective of SAB No. 101 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 SAB No. 101 no later than the fourth
quarter of its fiscal year 2001. The Company believes the adherence to the
provisions of SAB No. 101 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 No. 44"), "Accounting for Certain
Transactions Involving Stock Compensation." Interpretation No. 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 No. 44 was effective July 1, 2000, with certain provisions that
are effective retroactively to December 15, 1998 and January 12, 2000. The
Company adopted Interpretation No. 44 effective July 1, 2000. The impact of
the adoption of Interpretation No. 44 on the Company's consolidated financial
statements was not material.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are its cash and cash
equivalents, which amounted to $517,000 at September 30, 2000, and itsbank
lines of credit. During the three months ended September 30, 2000, cash and
cash equivalents decreased by $15,000. This decrease resulted from capital
expenditures of $801,000 and a net reduction of bank lines of credit and other
debt of $210,000, offset by cash provided from operations of $994,000.
Cash provided by operating activities of $994,000 is attributable
primarily to income from operations and a decrease of $1,495,000 in accounts
receivable, offset by an increase of $1,156,000 in costs and estimated
earnings in excess of billings on uncompleted contracts during the three
months ended September 30, 2000. The increase in cost and estimated earnings
in excess of billings on uncompleted contracts is due to a ramp-up in
production volume to meet increased customer demand and to the current
electronics component shortages in the EMS industry, which is lengthening the
time necessary to complete assembly jobs. Substantially all of the costs and
estimated earnings in excess of billings on uncompleted contracts at September
30, 2000 is expected to be billed and collected prior to the end of the
current fiscal year.
As further discussed in Note 5 to the accompanying unaudited consolidated
financial statements, the Company has bank lines of credit to finance the
working capital requirements of its domestic and foreign operations. At
September 30, 2000, the Company had available borrowing capacity under these
bank lines of credit of approximately $3.2 million in the aggregate.
Capital expenditures during the three months ended September 30, 2000,
including amounts financed by capital leases, were $1,241,000. The Company
anticipates that additional capital expenditures of as much as $2 million may
be required during the remainder of fiscal 2001, 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 6 to the accompanying unaudited
consolidated financial statements, the Company may have to repay to the IRS
income tax refunds of up to $1,387,000 plus accrued interest. In the event
the Company is required to repay all or a substantial portion of such refunds,
the Company intends to seek an installment payment plan with the IRS.
Management believes that the Company's cash resources and borrowing
capacity on its working capital lines of credit are sufficient to fund its
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,
accounts receivable and short-term and long-term debt. At September 30, 2000,
the carrying amount of long-term debt (including current portion thereof) was
$7,218,000 and the fair value was $6,745,000. 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. A change in interest rates of
one percent would result in an annual impact on interest expense of
approximately $90,000.
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 September 30, 2000.
A portion of the Company's operations consists of investments in a
foreign operating unit. As a result, the Company's financial results have
been and may continue to be affected by changes in foreign currency exchange
rates.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In October 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.
in June 1998. The lawsuit asserts claims against the Company and certain of
its present and former officers and directors and an income tax advisor for
breach of contract, common law fraud, and violation of the California
Corporate Securities Act. The lawsuit seeks damages in the amount of
$3,500,000.
Certain individual director or officer defendants have been dismissed or
the court has ordered them to be dismissed. The action is now proceeding in
discovery against the Company, the remaining officers and directors, and the
income tax advisor. The matter is currently scheduled for trial in April
2001.
The Company denies the allegations asserted in the lawsuit and is engaged
in a vigorous defense of the matter. The Company believes that the
plaintiffs' claims lack merit. Consequently, no amounts have been accrued in
the consolidated financial statements for the potential outcome of this
litigation.
Although the Company denies the allegations in the matter, there can be
no assurance the Company will prevail. An unfavorable result could adversely
affect the Company's business, results of operations and/or financial
condition.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
27 Financial Data Schedule (electronic filing only)
b. Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the quarter
ended September 30, 2000.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
November 13, 2000 /s/ Richard K. Vitelle
--------------------------------- -----------------------------------
Date Richard K. Vitelle
Vice President - Finance
(as Duly Authorized and
Principal Financial Officer)
14
