10-Q 1 december.txt 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, 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 2,275,883 shares of Common Stock outstanding as of February 9, 2001. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands except share and per share amounts) December 31, June 30, 2000 2000 ------------ -------- (Unaudited) Assets Current assets: Cash and cash equivalents $ 204 $ 532 Accounts receivable, less allowance for doubtful accounts of $147 and $151 14,433 13,365 Costs and estimated earnings in excess of billings on uncompleted contracts 11,348 10,257 Inventories, net 9,729 6,095 Prepaid expenses 280 180 -------- -------- Total current assets 35,994 30,429 -------- -------- Property, equipment and improvements, at cost: Buildings and improvements 2,766 2,758 Plant equipment 14,367 12,875 Office and other equipment 2,449 2,307 -------- -------- 19,582 17,940 Less: Accumulated depreciation and amortization (11,919) (11,249) -------- -------- Property, equipment and improvements, net 7,663 6,691 -------- -------- Other assets: Goodwill, net 474 1,126 Deposits and other assets 168 282 -------- -------- 642 1,408 -------- -------- $ 44,299 $ 38,528 ======== ======== SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (continued) (In thousands except share and per share amounts) December 31, June 30, 2000 2000 ------------ -------- (Unaudited) Liabilities and Stockholders' Equity Current liabilities: Bank lines of credit payable $ 10,073 $ 7,583 Current portion of long-term debt 2,353 2,106 Accounts payable 11,003 9,240 Accrued payroll and employee benefits 1,202 1,150 Interest payable 979 761 Income taxes payable 1,217 1,419 Other accrued liabilities 1,521 1,797 -------- -------- Total current liabilities 28,348 24,056 -------- -------- Long-term debt 5,729 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; 2,275,833 and 2,272,012 shares issued and outstanding at December 31, 2000 and June 30, 2000, respectively 23 23 Additional paid-in capital 36,989 36,972 Accumulated deficit (26,696) (27,430) Accumulated other comprehensive loss (94) (90) -------- -------- Total stockholders' equity 10,222 9,475 -------- -------- $ 44,299 $ 38,528 ======== ======== See accompanying notes to unaudited consolidated financial statements. SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (Unaudited) (In thousands except per share amounts)
Three Months Ended Six Months Ended December 31, December 31, ------------------- ---------- --------- 2000 1999 2000 1999 ------- ------- ------- ------- Revenues $24,148 $14,441 $45,072 $29,652 Cost of goods sold 21,315 12,576 39,648 25,954 ------- ------- ------- ------- Gross profit 2,833 1,865 5,424 3,698 ------- ------- ------- ------- Operating expenses: Administrative and selling expenses 1,736 1,426 3,318 2,776 Goodwill amortization 326 326 652 652 ------- ------- ------- ------- Total operating expenses 2,062 1,752 3,970 3,428 ------- ------- ------- ------- Operating income 771 113 1,454 270 ------- ------- ------- ------- Non-operating income (expense): Interest expense, net (485) (176) (801) (389) Other expense, net (5) (9) (37) (11) ------- ------- ------- ------- Total non-operating expense (490) (185) (838) (400) ------- ------- ------- ------- Income (loss) from continuing operations before income taxes 281 (72) 616 (130) Income tax provision (benefit) (138) 10 (118) 30 ------- ------- ------- ------- Income (loss) from continuing operations 419 (82) 734 (160) Income from discontinued operations, net of tax - 41 - 254 Loss on sale of discontinued operations, net of tax - (661) - (661) ------- ------- ------- ------- Net income (loss) 419 (702) 734 (567) Other comprehensive income (loss): Foreign currency translation adjustments 22 (150) (4) 141 Reclassification of foreign currency translation adjustments included in loss on sale of discontinued operations - 756 - 756 ------- ------- ------- ------- Total other comprehensive income (loss) 22 606 (4) 897 ------- ------- ------- ------- Comprehensive income (loss) $ 441 $ (96) $ 730 $ 330 ======= ======= ======= ======= Basic and diluted earnings (loss) per share: Income (loss) from continuing operations $ 0.18 $ (0.04) $ 0.32 $ (0.07) Income from discontinued operations - 0.02 - 0.11 Loss on sale of discontinued operations - (0.29) - (0.29) ------- ------- ------- ------- Earnings (loss) per share $ 0.18 $ (0.31) $ 0.32 $ (0.25) ======= ======= ======= ======= Shares used in computing basic and diluted earnings (loss) per share Basic 2,276 2,268 2,275 2,268 ======= ======= ======= ======= Diluted 2,350 2,268 2,328 2,268 ======= ======= ======= ======= See accompanying notes to unaudited consolidated financial statements. SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Six Months Ended December 31, --------------------- 2000 1999 ------- ------- Cash flows from operating activities: Net income (loss) $ 734 $ (567) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 1,636 1,750 Loss on sale of discontinued operations - 661 (Increase) decrease in accounts receivable (1,117) 188 Increase in costs and estimated earnings in excess of billings on uncompleted contracts (1,090) (1,694) Increase in inventories (3,665) (565) Increase (decrease) in accounts payable 1,814 (1,772) Decrease in other accrued liabilities (208) (246) Other, net 68 (30) ------- ------- Net cash used in operating activities (1,828) (2,275) ------- ------- Cash flows from investing activities: Capital expenditures (1,974) (414) Net proceeds from sale of discontinued operations - 2,689 Proceeds from sale of assets 2 111 ------- ------- Net cash provided by (used in) investing activities (1,972) 2,386 ------- ------- Cash flows from financing activities: Proceeds from (repayments of) bank lines of credit 2,519 (400) Proceeds from long-term debt 1,663 - Repayments of long-term debt (705) (868) Proceeds from foreign government grants - 251 ------- ------- Net cash provided by (used in) financing activities 3,477 (1,017) ------- ------- Effect of exchange rate changes on cash (5) 62 ------- ------- Decrease in cash and cash equivalents (328) (844) Cash and cash equivalents at beginning of period 532 4,997 ------- ------- Cash and cash equivalents at end of period $ 204 $ 4,153 ======= ======= Supplemental cash flow information: Interest paid $ 588 $ 644 Income taxes paid 47 850 Non-cash investing activities: Capital expenditures financed by lease obligations and notes payable - 1,243 Other 22 - See accompanying notes to unaudited consolidated financial statements. SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Six Months Ended December 31, 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 and six months ended December 31, 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 December 31, 2000 and its results of operations and its cash flows for the three and six months ended December 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 2000 fell on June 30, 2000. The actual interim periods ended on December 29, 2000 and December 31, 1999. 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 December 31 for clarity of presentation. 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 - DISCONTINUTED OPERATIONS On November 12, 1999, the Company sold Irlandus, its PCB fabrication operation in Northern Ireland. The purchaser was a management buy-out team. 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. After giving consideration to disposal costs and the cash of approximately $1.5 million which stayed with the divested operation, the net cash proceeds of this transaction amounted to approximately $2.7 million. Irlandus was the sole operating unit comprising the Company's PCB segment. Accordingly, operating results for Irlandus have been presented in the accompanying consolidated statements of operations and comprehensive income (loss) as a discontinued operation, and are summarized as follows (in thousands): Three months ended Six months ended December 31, 1999 December 31, 1999 ------------------ ----------------- Net sales $ 851 $3,383 ====== ====== Operating income $ 41 $ 131 ====== ====== Income from discontinued operations, net of tax $ 41 $ 254 ====== ====== Net assets of Irlandus consisted of the following (in thousands): November 12, 1999 (sale date) ----------------- Current assets $ 4,099 Property, equipment and improvements 3,447 Current liabilities (2,081) Long-term debt (1,314) ------- Net assets $ 4,151 ======= The loss on sale of Irlandus, shown in the accompanying consolidated statements of operation and comprehensive income (loss) as "Loss on sale of discontinued operations," is comprised as follows (in thousands): Gross sales proceeds $ 4,523 Less disposal costs (277) ------- Net sales proceeds 4,246 Less net assets of Irlandus (4,151) ------- Gain on sale before elimination of foreign currency translation account balance 95 Elimination of Irlandus' foreign currency translation account balance (756) ------- Loss on sale of discontinued operations $ (661) ======= 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 ("SFAS") No. 52, "Foreign Currency Translation," this amount has been included in the determination of the loss on sale of discontinued operations and in accordance with SFAS No. 130, "Reporting Comprehensive Income," an equal and offsetting amount is reported as other comprehensive income in the accompanying consolidated statements of operations and comprehensive income (loss). 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. Common stock equivalents used in the determination of diluted earnings per share include the effect, when such effect is not antidilutive, of the Company's outstanding employee stock options and stock purchase warrants, the 7% Convertible Subordinated Debentures (which are convertible into 8,075 shares of Common Stock at $40.00 per share of Common Stock), and the 8-1/2% Convertible Subordinated Debentures (which are convertible into 7,435 shares of Common Stock at $212.60 per share of Common Stock). The following is a summary of the calculation of basic and diluted earnings per share (dollars in thousands, except per share data): Three months ended Six months ended December 31, 2000 December 31, 2000 ----------------- ----------------- Net income $ 419 $ 734 ========= ========= Weighted average shares: Basic weighted average number of common shares outstanding 2,275,833 2,275,467 Dilutive effect of outstanding common stock equivalents 74,535 53,004 --------- --------- Diluted weighed average number of common shares outstanding 2,350,368 2,328,471 ========= ========= Earnings per share: Basic $ 0.18 $ 0.32 ========= ========= Diluted $ 0.18 $ 0.32 ========= ========= Options and warrants to purchase 362,744 shares of Common Stock at prices ranging from $5.75 to $30.20 were outstanding at December 31, 2000 but were not included in the computation of diluted earnings per share for the three and six months then ended because the exercise price of these securities was greater than the average market price of the Common Stock. Because the Company had a loss from continuing operations for the three and six months ended December 31, 1999, there were no common stock equivalents which had a dilutive effect on earnings per share for such periods. If the Company had reported income from continuing operations rather than a loss, outstanding stock options to purchase 1,112 shares of Common Stock at an exercise price of $3.38 would have been included in the computation of diluted earnings per share, and stock options and warrants to purchase 384,099 shares at exercise prices ranging from $3.88 to $70.00 per share would have been excluded from the computation of diluted earnings per share because such exercise prices were greater than the average market price of Common Stock. 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): December 31, June 30, 2000 2000 ------------ -------- Costs incurred to date on uncompleted contracts $ 77,239 $ 56,381 Estimated earnings based on percentage of completion 9,735 6,889 -------- -------- 86,974 63,270 Less: Billings to date (75,626) (53,013) -------- -------- Total costs and estimated earnings in excess of billings on uncompleted contracts $ 11,348 $ 10,257 ======== ======== Note 4 - INVENTORIES Inventories consist of the following (in thousands): December 31, June 30, 2000 2000 ------------ -------- Raw materials $6,791 $3,894 Work in process 2,835 2,129 Finished goods 103 72 ------ ------ $9,729 $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 interest at the bank's prime rate. The bank's prime rate was 9.50% at December 31, 2000, and was 8.50% as of February 1, 2001. At December 31, 2000, $7,534,000 was borrowed under this credit facility. Subsequent to December 31, 2000, the bank agreed to increase the borrowing limit to $10 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 $3,375,000 at December 31, 2000), and bears interest at the bank's base rate (6.00% at December 31, 2000) plus 2.00%. At December 31, 2000, borrowings outstanding under this credit facility amounted to approximately $2,539,000 and the amount available to borrow based on the advance rate against receivables was approximately $547,000. The credit facility agreement with Ulster Bank Markets expires on October 31, 2001. During the six months ended December 31, 2000 and December 31, 1999, the Company borrowed $1,663,000 and $1,243,000, respectively, under capital leases and notes payable to finance equipment purchases. Note 6 - INCOME TAXES The Company is currently appealing with the Internal Revenue Service ("IRS") a federal income tax assessment related to tax refunds received in 1995 which were subsequently disallowed by the IRS, as described in more detail in the Company's latest Annual Report on Form 10-K. The tax assessment and related interest expense were recorded by the Company in its financial statements for the year ended June 30, 1999. Additional interest expense has been accrued since that date. On the basis of information recently received from its tax advisor on this matter, as of December 31, 2000 the Company reduced its tax liability by $192,000, recognized an income tax benefit of $154,000, and increased its accrued interest expense by $132,000. After giving effect to these adjustments, at December 31, 2000 the Company's recorded federal tax liability associated with this assessment is approximately $1,195,000 and accrued interest thereon is approximately $850,000. 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 Company denies the allegations asserted in the lawsuit. In January 2001, an out-of-court-settlement was reached which is in the process of being finalized. There is no adverse financial impact on the Company as a result of this settlement. 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 Company's most recently filed Form 10-K and 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. RESULTS OF OPERATIONS Consolidated revenues for the three and six months ended December 31, 2000 were $24,148,000 and $45,072,000, respectively, compared to $14,441,000 and $29,652,000, respectively, for the three and six months ended December 31, 1999. The increases of $9,707,000, or 67%, for the three months ended December 31, 2000 and $15,420,000, or 52%, for the six months ended December 31, 2000, compared to the same periods of the prior year, were primarily due to an increase in business from existing 1999 customers. Although the significant revenue growth in the latest three and six month periods compared to the prior year caused fixed costs to be spread over a larger volume of production, the resultant beneficial effects on the Company's gross profit percentage were offset by higher material costs and manufacturing inefficiencies due to the non-level pattern of material receipts caused by the industry-wide part shortages of certain electronic components. Consolidated gross profit for the three months ended December 31, 2000 was $2,833,000 (11.7% of sales) compared to $1,865,000 (12.9% of sales) for the three months ended December 31, 1999. Consolidated gross profit for the six months ended December 31, 2000 was $5,424,000 (12.0% of sales) compared to $3,698,000 (12.5% of sales) for the six months ended December 31, 1999. Administrative and selling expenses increased to $1,736,000 and $3,318,000 for the three and six months ended December 31, 2000, respectively, from $1,426,000 and $2,776,000 for the three and six months ended December 31, 1999, respectively. The increase of $310,000, or 22%, for the three months ended December 31, 2000, and $542,000, or 20%, for the six months ended December 31, 2000 is due primarily to expansion of the Company's corporate staff and increased legal expenses associated with the litigation discussed in Note 7 to the accompanying unaudited consolidated financial statements. Total interest expense was $485,000 for the three months ended December 31, 2000 compared to $176,000 for the three months ended December 31, 1999, and $801,000 for the six months ended December 31, 2000 compared to $389,000 for the six months ended December 31, 1999. There are three reasons for the increases of $309,000 and $412,000 for the three and six months ended December 31, 2000, respectively, over the comparable periods of the prior year. First, the Company experienced an increase in the line of credit borrowings due mainly to the Company's growth and to increases in material purchases for inventory 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." Secondly, interest rates during this period increased over 1%. Third, as discussed in Note 6 to the accompanying unaudited consolidated financial statements, at December 31, 2000 the Company increased its accrued interest on a federal tax liability by $132,000 based on information received from its tax advisor. The Company had an income tax benefit of $138,000 and $118,000 in the three and six month periods ended December 31, 2000, respectively. These amounts reflect a $154,000 income tax benefit resulting from the reduction of the recorded liability for a federal tax assessment related to prior years, as discussed in Note 6 to the accompanying unaudited financial statements. Without this $154,000 tax benefit, the Company would have reported income tax expense of $16,000 and $36,000 in the three and six month periods ended December 31, 2000, respectively, compared to income tax expense of $10,000 and $30,000 in the three and six month periods ended December 31, 1999, respectively. These income tax expense amounts, 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 $419,000 for the three months ended December 31, 2000, or $0.18 per basic share, compared to a loss from continuing operations of $82,000, or $0.04 per basic share, for the three months ended September 30, 1999. Income from continuing operations was $734,000 for the six months ended December 31, 2000, or $0.32 per basic share, compared to a loss from continuing operations of $160,000, or $0.07 per share. The improvement is due to increased gross profit which was partially offset by increases in administrative and selling expenses and interest expense. 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 adherence to the provisions of SAB No. 101 will not have an 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 $204,000 at December 31, 2000, and its bank lines of credit. During the six months ended December 31, 2000, cash and cash equivalents decreased by $328,000. This decrease resulted from cash used in operations of $1,828,000 and for capital expenditures of $1,974,000, offset by an increase in bank lines of credit and other debt of $3,477,000. Cash used by operating activities of $1,828,000 in the six months ended December 31, 2000 was caused primarily by an increase in the components of operating working capital (accounts receivable, cost and estimated earnings in excess of billings on uncompleted contracts, inventories and accounts payable) due to a ramp-up in production volume to meet increased customer demand, and also to the continuing shortages of certain electronic components, which has lengthened the time necessary to complete assembly jobs. There are signs that the electronic component shortages are beginning to ease. Substantially all of the costs and estimated earnings in excess of billings on uncompleted contracts at December 31, 2000 is expected to be billed 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 December 31, 2000, the Company had approximately $547,000 available to borrow under its European bank line of credit, while there was no borrowing availability under the U.S. bank line of credit. Subsequent to December 31, 2000, the Company's U.S. bank agreed to increase the Company's domestic line of credit from $7 million to $10 million. Capital expenditures during the six months ended December 31, 2000 were $1,974,000, of which $1,663,000 was financed by capital leases and notes payable. The Company anticipates that additional capital expenditures of as much as $2.5 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 capital leases and/or installment loans. As more fully described in Note 6 to the accompanying unaudited consolidated financial statements, at December 31, 2000 the Company has a federal tax assessment liability of approximately $1,195,000 and a related accrued interest liability of approximately $850,000. The Company has appealed the assessment, and the IRS appeals process is nearly complete. At the conclusion of the appeals process, 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 December 31, 2000, the carrying amount of long-term debt (including the current portion thereof) was $8,082,000 and the related fair value was $7,608,000. 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 $113,000. 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 December 31, 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 Company denies the allegations asserted in the lawsuit. In January 2001, an out-of-court-settlement was reached which is in the process of being finalized. There is no adverse financial impact on the Company as a result of this settlement. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the 2000 Annual Meeting of Stockholders held on November 9, 2000, Gregory L. Horton and Bruce E. Kanter were elected as Class II directors. Directors whose terms of office continued after the meeting were Clay M. Biddinger, James P. Burgess and Oscar B. Marx III. In addition to the election of directors, 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 300,000, and approved certain amendments to the 1998 Non-Employee Directors Stock Plan. There were 2,275,475 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 Gregory L. Horton as director 2,037,638 8,705 Election of Bruce E. Kanter as director 1,944,802 9,040 Amendment to the 1996 Stock Incentive Plan 1,223,159 85,101 3,299 963,916 Amendments to the 1998 Non-Employee Directors Stock Plan 1,210,321 96,475 4,763 963,916 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 December 31, 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. February 9, 2001 /s/ Richard K. Vitelle --------------------------------- ----------------------------------- Date Richard K. Vitelle Vice President - Finance (as Duly Authorized and Principal Financial Officer) 15