-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M7V1901yeSYficFw4ZONAQ4012Om8cX6BhQLb3J8R5kDITsNLPkpG1a6n52ryErM UApqhVnV2WwlyO7T9H9xZw== 0000026987-98-000038.txt : 19981118 0000026987-98-000038.hdr.sgml : 19981118 ACCESSION NUMBER: 0000026987-98-000038 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SMTEK INTERNATIONAL INC CENTRAL INDEX KEY: 0000026987 STANDARD INDUSTRIAL CLASSIFICATION: PRINTED CIRCUIT BOARDS [3672] IRS NUMBER: 330213512 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08101 FILM NUMBER: 98751576 BUSINESS ADDRESS: STREET 1: 2151 ANCHOR COURT CITY: NEWBURY PARK STATE: CA ZIP: 91320 BUSINESS PHONE: 805-376-94 MAIL ADDRESS: STREET 1: 2151 ANCHOR COURT CITY: NEWBURY PARK STATE: CA ZIP: 91320 FORMER COMPANY: FORMER CONFORMED NAME: DDL ELECTRONICS INC DATE OF NAME CHANGE: 19940119 FORMER COMPANY: FORMER CONFORMED NAME: DATA DESIGN LABORATORIES INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: DATA DESIGN LABORATORIES DATE OF NAME CHANGE: 19880817 10-Q 1 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, 1998 [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to ----------- ------------ Commission File Number: 1-8101 Exact Name of Registrant as Specified in Its Charter: SMTEK INTERNATIONAL, INC. State or Other Jurisdiction of I.R.S. Employer Incorporation or Organization: DELAWARE Identification No.: 33-0213512 Address of Principal Executive Offices: 2151 Anchor Court Thousand Oaks, CA 91320 Registrant's Telephone Number: (805) 376-2595 Former Name, if Changed Since Last Report: DDL Electronics, Inc. Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The registrant had 34,088,128 shares of Common Stock outstanding as of November 6, 1998. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30, June 30, 1998 1998 ------ ------ (Unaudited) Assets Current assets: Cash and cash equivalents $ 4,059,000 $ 4,413,000 Accounts receivable, net 9,566,000 9,786,000 Costs and estimated earnings in excess of billings on uncompleted contracts 7,179,000 4,785,000 Inventories, net 3,104,000 2,446,000 Prepaid expenses 215,000 103,000 ---------- ---------- Total current assets 24,123,000 21,533,000 ---------- ---------- Property, equipment and improvements, at cost: Buildings and improvements 6,284,000 6,084,000 Plant equipment 16,015,000 15,646,000 Office and other equipment 2,242,000 2,180,000 ---------- ---------- 24,541,000 23,910,000 Less: Accumulated depreciation and amortization (17,792,000) (17,035,000) ---------- ---------- Property, equipment and improvements, net 6,749,000 6,875,000 ---------- ---------- Other assets: Goodwill, net 2,854,000 3,171,000 Deposits and other assets 250,000 251,000 ---------- ----------- 3,104,000 3,422,000 ---------- ----------- $ 33,976,000 $ 31,830,000 ========== ========== SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued) September 30, June 30, 1998 1998 ------ ------ (Unaudited) Liabilities and Stockholders' Equity Current liabilities: Bank lines of credit payable $ 4,225,000 $ 4,441,000 Current portion of long-term debt 1,334,000 1,214,000 Accounts payable 10,281,000 7,795,000 Accrued payroll and employee benefits 910,000 1,211,000 Other accrued liabilities 2,328,000 2,427,000 ---------- ---------- Total current liabilities 19,078,000 17,088,000 ---------- ---------- Long-term debt: Note payable to related party 2,000,000 2,000,000 Other long-term debt, less current portion 4,936,000 5,186,000 ---------- ---------- Total long-term debt 6,936,000 7,186,000 ---------- ---------- Commitments and contingencies Stockholders' equity: Common stock 341,000 341,000 Additional paid-in capital 32,159,000 32,159,000 Accumulated deficit (24,062,000) (24,294,000) Accumulated other comprehensive losses (476,000) (650,000) ---------- ---------- Total stockholders' equity 7,962,000 7,556,000 ---------- ---------- $ 33,976,000 $ 31,830,000 ========== ========== See accompanying Notes to Unaudited Consolidated Financial Statements SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended September 30, ----------------------- 1998 1997 ------ ------ Revenues $ 14,065,000 $ 13,413,000 Cost of goods sold 11,783,000 11,149,000 ---------- ---------- Gross profit 2,282,000 2,264,000 ---------- ---------- Operating expenses: Administrative and selling 1,501,000 1,391,000 Goodwill amortization 317,000 317,000 ---------- ---------- 1,818,000 1,708,000 ---------- ---------- Operating income 464,000 556,000 ---------- ---------- Non-operating income (expense): Interest income 30,000 16,000 Interest expense (242,000) (264,000) Other income (expense), net 2,000 (7,000) ---------- ---------- (210,000) (255,000) ---------- ---------- Income before income taxes 254,000 301,000 Provision for income taxes 22,000 - ---------- ---------- Net income $ 232,000 $ 301,000 ========== ========== Basic and diluted earnings per share $ 0.01 $ 0.01 ==== ==== Shares used in computing earnings per share: Basic 34,088,128 28,947,347 ========== ========== Diluted 34,398,334 29,390,304 ========== ========== See accompanying Notes to Unaudited Consolidated Financial Statements SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended September 30, ----------------------- 1998 1997 ------ ------ Cash flows from operating activities: Net income $ 232,000 $ 301,000 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation expense 428,000 397,000 Amortization of goodwill 317,000 317,000 Eliminate duplicate period of pooled company to conform year-ends - (322,000) Net increase in operating working capital (751,000) (2,562,000) Other 16,000 18,000 --------- --------- Net cash provided by (used in) operating activities 242,000 (1,851,000) --------- --------- Cash flows from investing activities: Capital expenditures (151,000) (189,000) Proceeds from sale of assets - 19,000 --------- --------- Net cash used in investing activities (151,000) (170,000) --------- --------- Cash flows from financing activities: Proceeds from (repayments of) bank lines of credit (270,000) 1,295,000 Proceeds from long-term debt - 2,000,000 Payments of long-term debt (242,000) (5,553,000) Proceeds from foreign government grants - 122,000 --------- --------- Net cash used in financing activities (512,000) (2,136,000) --------- --------- Effect of exchange rate changes on cash 67,000 2,000 --------- --------- Decrease in cash and cash equivalents (354,000) (4,155,000) Cash and cash equivalents at beginning of period 4,413,000 5,398,000 --------- --------- Cash and cash equivalents at end of period $4,059,000 $1,243,000 ========= ========= See accompanying Notes to Unaudited Consolidated Financial Statements. SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 1 - DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION The accompanying consolidated financial statements, which have not been audited by independent accountants (except for the balance sheet as of June 30, 1998), include the accounts of SMTEK International, Inc. and its subsidiaries (the "Company"). Effective October 9, 1998, the Company changed its name to SMTEK International, Inc. from DDL Electronics, Inc. The Company provides electronics manufacturing services ("EMS") to original equipment manufacturers ("OEMs") in the computer, telecommunications, instrumentation, medical, industrial and aerospace industries. The Company also manufactures multilayer printed circuit boards ("PCBs") for use primarily in the computer, communications and instrumentation industries. The Company's EMS operations are located in Southern California, Florida and Northern Ireland. The Company's PCB facilities are located in Northern Ireland. The acquisition of Jolt Technology, Inc. ("Jolt") on June 30, 1998 was accounted for under the pooling-of-interests method and accordingly, the consolidated financial statements prior to the acquisition have been restated to include the accounts and results of operations of Jolt for all periods presented. All significant intercompany transactions and accounts have been eliminated in consolidation. In the opinion of the Company's management, the accompanying consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) necessary to present fairly the Company's financial position at September 30, 1998 and its results of operations and cash flows for the three months ended September 30, 1998 and 1997. The Company uses a 52-53 week fiscal year ending on the Friday closest to June 30, which for fiscal year 1998 fell on July 3, 1998. In the accompanying consolidated financial statements, the 1998 fiscal year end is shown as June 30 and the interim period end for both years is shown as September 30 for clarity of presentation. The actual interim periods ended on October 2, 1998 and October 3, 1997. The three month period of fiscal 1999 consisted of 13 weeks compared to 14 weeks for the same period of fiscal 1998. Certain notes and other information are condensed or omitted from the interim financial statements presented in this Quarterly Report on Form 10-Q. Therefore, these financial statements should be read in conjunction with the Company's 1998 Annual Report to Stockholders as filed with the Securities and Exchange Commission on August 31, 1998. Certain reclassifications have been made to the interim fiscal 1998 financial statements to conform with the fiscal 1999 financial statement presentation. Such reclassifications had no effect on the Company's results of operations or stockholders' equity. Note 2 - EARNINGS PER SHARE In 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Basic earnings per share represents net income available to common shareholders divided by the weighted average number of common shares outstanding for the period. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants, and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented and, where necessary, restated to conform to SFAS 128 requirements. A reconciliation of the numerator and denominator used in the computation of earnings per share follows: Three months ended September 30, --------------------- 1998 1997 ------ ------ Numerator: Net income for basic earnings per share $ 232,000 $ 301,000 Add back net interest related to convertible subordinated debentures 34,000 34,000 ---------- ---------- Net income for diluted earnings computation $ 266,000 $ 335,000 ========== ========== Denominator: Weighted average number of common shares outstanding for basic earnings per share 34,088,128 28,947,347 Assumed exercise of options and warrants net of shares assumed reacquired under treasury stock method -- 132,751 Assumed conversion of convertible subordinated debentures 310,206 310,206 ---------- ---------- Total shares for diluted earnings per share 34,398,334 29,390,304 ========== ========== Options and warrants to purchase 4,626,480 shares of common stock at prices ranging from $0.75 to $3.50 were outstanding during the three months ended September 30, 1998, but were not included in the computation of diluted earnings per share because the option and warrant exercise prices were greater than the average market price of the common shares, and would therefore be antidilutive. Note 3 - ACCOUNTS RECEIVABLE The components of accounts receivable are as follows: September 30, June 30, 1998 1998 ---- ---- Trade receivables $9,440,000 $9,890,000 Other receivables 277,000 63,000 Less allowance for doubtful accounts (151,000) (167,000) --------- --------- $9,566,000 $9,786,000 ========= ========= Note 4 - COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED CONTRACTS The components of costs and estimated earnings in excess of billings on uncompleted contracts are as follows: September 30, June 30, 1998 1998 ---- ---- Costs incurred on uncompleted contracts $36,841,000 $32,324,000 Estimated earnings 5,880,000 5,802,000 ---------- ---------- 42,721,000 38,126,000 Less: Billings to date (35,542,000) (33,341,000) ---------- ---------- $ 7,179,000 $ 4,785,000 ========== ========== Costs and estimated earnings in excess of billings on uncompleted contracts consists of revenue recognized under electronics assembly contracts which amounts were not billable at the balance sheet date. Essentially all of the unbilled receivables are expected to be billed within 90 days of the balance sheet date. Note 5 - INVENTORIES Inventories consist of the following: September 30, June 30, 1998 1998 ---- ---- Raw materials $2,563,000 $2,014,000 Work in process 604,000 643,000 Finished goods 379,000 278,000 Less reserves (442,000) (489,000) --------- --------- $3,104,000 $2,446,000 ========= ========= Note 6 - OTHER ACCRUED LIABILITIES Other accrued liabilities consist of the following: September 30, June 30, 1998 1998 ---- ---- Environmental liabilities $ 511,000 $ 528,000 Accrued interest payable 257,000 237,000 Other 1,560,000 1,662,000 --------- --------- $2,328,000 $2,427,000 ========= ========= Note 7 - FINANCING ARRANGEMENTS Bank Credit Agreements The Company has an accounts receivable-based working capital bank line of credit for its subsidiary, SMTEK, Inc. ("SMTEK California"), which provides for borrowings of up to $2,750,000 at an interest rate of prime (8.50% at September 30, 1998) plus 1.25%. At September 30, 1998, borrowings outstanding under this credit facility amounted to $2,444,000. SMTEK California's line of credit expires September 1, 1999. The Company also has a credit facility agreement with Ulster Bank Markets for its Northern Ireland operations. This agreement includes a working capital line of credit of 3,000,000 pounds sterling (approximately $5,100,000), and provides for interest on borrowings at the bank's base rate (6.65% at September 30, 1998) plus 1.50%. At September 30, 1998, borrowings outstanding under this credit facility amounted to $1,781,000. The credit facility agreement with Ulster Bank Markets expires July 31, 1999. Note payable to related party The note payable to related party of $2,000,000 is payable to Thomas M. Wheeler, the Company's largest stockholder. The note bears interest at 8%, matures on October 31, 1999, and is secured by the common stock of the Company's subsidiary, SMTEK California. Note 8 - PRO FORMA INCOME TAX EXPENSE Effective June 30, 1998, the Company acquired Jolt, which was an S Corporation for income tax purposes prior to its acquisition by the Company. Following are pro forma consolidated operating results, which present state income taxes (the Company's federal NOLs are assumed to be utilized to shelter Jolt's federal taxable income) as a pro forma adjustment as if Jolt had filed C Corporation tax returns for the pre-acquisition periods: Three months ended September 30, 1997 -------------------- Net income before pro forma adjustments, per consolidated statements of operations $ 301,000 Pro forma provision for income taxes 18,000 -------- Pro forma net income $ 283,000 ======== Note 9 - COMPREHENSIVE INCOME The Company has adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), as of the first quarter of fiscal 1999. SFAS 130 establishes standards for reporting and display of comprehensive income and its components in a full set of financial statements. The Company plans to display comprehensive income and its components in the Consolidated Statement of Stockholders' Equity in the year-end 1999 financial statements. Comprehensive income is comprised of the following: Three months ended September 30, --------------------- 1998 1997 ------ ------ Net income $ 232,000 $ 301,000 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments 174,000 (102,000) -------- -------- Comprehensive income $ 406,000 $ 199,000 ======== ======== Accumulated other comprehensive losses presented on the accompanying consolidated condensed balance sheets consists of the foreign currency translation adjustment. Note 10 - INFORMATION RELATING TO STATEMENTS OF CASH FLOWS "Net cash used by operating activities" includes cash payments for interest as follows: Three months ended September 30, --------------------- 1998 1997 ------ ------ Interest paid $ 206,000 $ 244,000 ======= ======= "Net increase in operating working capital" is comprised of the following: Three months ended September 30, --------------------- 1998 1997 ------ ------ Decrease in accounts receivable $ 392,000 $ 1,024,000 Increase in costs and estimated earnings in excess of billings on uncompleted contracts (2,394,000) (407,000) Increase in inventories (576,000) (369,000) Increase in prepaid expenses (108,000) (125,000) Increase (decrease) in accounts payable 2,353,000 (2,285,000) Decrease in accrued payroll and employee benefits (314,000) (186,000) Decrease in other liabilities (104,000) (214,000) --------- --------- Net increase in operating working capital $ (751,000) $(2,562,000) ========= ========= Following is the supplemental schedule of non-cash investing and financing activities: Three months ended September 30, --------------------- 1998 1997 ------ ------ Capital expenditures financed by lease obligations $ 29,000 $ 36,000 Conversion of debt to equity $ - $ 10,000 Note 11 - COMMITMENTS AND CONTINGENCIES In September 1998, the Company received tax deficiency notices from the Internal Revenue Service in the total amount of $1,312,000 relating to income tax refunds received by the Company in 1995. Of this amount, $1,110,000 was recorded as an income tax benefit in fiscal 1996. Management believes the Company had a legitimate basis under Section 172(f) of the Internal Revenue Code to apply for and receive the amounts which have now been disallowed, and plans to appeal the tax deficiency notices and vigorously contest the assessment. Accordingly, no provision has been made in the financial statements for the three months ended September 30, 1998 for any amount which may ultimately have to be paid back to the government. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements made below are forward-looking in nature and reflect the Company's current expectations and plans. Such statements involve various risks and uncertainties that could cause actual results to differ materially from those currently expected by the Company. Meaningful factors that might cause such differences include, but are not limited to, significant historical losses, limited capital resources and a continuing need for financing, dependence on key personnel, concentration of revenues among major customers, historical dependence on government business on the part of the Company's California operating subsidiary, SMTEK, Inc. ("SMTEK California") and its recent shift into commercial business, industry conditions, competition, environmental matters, dependence on suppliers and other factors, as described in more detail in the section titled "Risk Factors" in the Company's Registration Statement on Form S-3 (No. 333-62621) on file with the Securities and Exchange Commission. DESCRIPTION OF THE BUSINESS The Company provides electronics manufacturing services ("EMS") to original equipment manufacturers ("OEMs") in the computer, telecommunications, instrumentation, medical, industrial and aerospace industries. The Company also manufactures multilayer printed circuit boards ("PCBs") for use primarily in the computer, communications, and instrumentation industries. The Company's EMS operations are located in Southern California, Florida and Northern Ireland. Its PCB facilities are located in Northern Ireland. RESULTS OF OPERATIONS The Company uses a 52-53 week fiscal year ending on the Friday closest to June 30. In the accompanying consolidated financial statements, the interim period end for both years is shown as September 30 for clarity of presentation. The actual periods ended on October 2, 1998 and October 3, 1997. The three month period of fiscal 1999 consisted of 13 weeks compared to 14 weeks for the comparable period of fiscal 1998. Consolidated sales for the three months ended September 30, 1998 were $14,065,000, compared to $13,413,000 for the same period in the previous fiscal year. This increase is attributable to the Company's EMS operations, for which sales increased by 9% from the first quarter of last year. The increase in EMS revenues was offset by a 14% decline in PCB sales from the same period in the previous fiscal year, which was attributable to softness in the European PCB market. Consolidated gross profit for the three months ended September 30, 1998 was $2,282,000 (16.2% of sales), compared to $2,264,000 (16.9% of sales) for the same period of the prior year. Gross profit of the EMS operations was $1,888,000 (15.6% of sales) for the three months ended September 30, 1998, compared to $1,805,000 (16.2% of sales) for the prior year, due to a change in the mix of business, with higher direct material costs as a percentage of revenues in the latest quarter. For the three months ended September 30, 1998, gross profit from PCB operations decreased approximately 14% from gross profit for the comparable period of the prior year, commensurate with the decrease in sales. Administrative and selling expenses for the three months ended September 30, 1998 were $1,501,000 compared to $1,391,000 for the same period in the previous year. The increase is attributable to administrative and sales staff additions. In the three months ended September 30, 1998, consolidated operating income was $464,000 compared to $556,000 for the same period in the previous fiscal year. Interest expense decreased from $264,000 in the three months ended September, 30 1997 to $242,000 in the three months ended September 30, 1998. The decrease is primarily attributable to the additional week of operations included in the three months ended September 30, 1997 as a result of the Company's 52-53 week fiscal year. The provision for income taxes of $22,000 for the three months ended September 30, 1998 represents state income tax. The Company does not have a federal or foreign income tax provision or liability due to the existence of net operating loss carryforwards for U.S. and United Kingdom income tax purposes. Net income for the three months ended September 30, 1998 was $232,000 or $.01 per share, compared to $301,000 or $.01 per share for the three months ended September 30, 1997. RECENT ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131") in June 1997. SFAS 131 establishes standards for the way public business enterprises are to report information about operating segments in annual financial statements and requires enterprises to report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. It replaces the "industry segment" concept of Statement of Financial Accounting Standards No. 14, "Financial Reporting for Segments of a Business Enterprise", with a "management approach" basis for identifying reportable segments. SFAS 131 is effective for financial statements for fiscal years beginning after December 15, 1997. The Company will adopt SFAS 131 in its annual financial statements for the fiscal year ending June 30, 1999. Management believes that the adoption of SFAS 131 will not have a material impact on the Company's financial position or results of operations. In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") which will require recognition of all derivatives as either assets or liabilities on the balance sheet at fair value. The Company will adopt SFAS 133 in the first quarter of its fiscal year ending June 30, 2000. Management has not completed an evaluation of the effects this standard will have on the Company's consolidated financial statements. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of liquidity are its cash and cash equivalents, which amounted to $4,059,000 at September 30, 1998, and its bank lines of credit. During the three months ended September 30, 1998, cash and cash equivalents decreased by $354,000. This decrease consisted of capital expenditures of $151,000, repayments of bank lines of credit of $270,000 and reductions of long-term debt of $242,000, partially offset by cash provided by operating activities of $242,000 and the effect of exchange rate changes on cash of $67,000. Components of operating working capital increased by $751,000 during the first three months of fiscal 1998, comprised of a $2,394,000 increase in costs and earnings in excess of billings on uncompleted contracts, a $576,000 increase in inventories, a $108,000 increase in prepaid expenses, and a $418,000 decrease in other accrued liabilities, partially offset by a $392,000 decrease in accounts receivable and a $2,353,000 increase in accounts payable. The Company has an accounts receivable-based working capital bank line of credit for its subsidiary, SMTEK California, which provides for borrowings of up to $2,750,000 at an interest rate of prime (8.50% at September 30, 1998) plus 1.25%. At September 30, 1998, borrowings outstanding under this credit facility amounted to $2,444,000. SMTEK California's line of credit expires September 1, 1999. The Company also has a credit facility agreement with Ulster Bank Markets for its Northern Ireland operations. This agreement includes a working capital line of credit of 3,000,000 pounds sterling (approximately $5,100,000), and provides for interest on borrowings at the bank's base rate (6.65% at September 30, 1998) plus 1.50%. At September 30, 1998, borrowings outstanding under this credit facility amounted to $1,781,000. The credit facility agreement with Ulster Bank Markets expires July 31, 1999. The Company's EMS and PCB fabrication businesses require continuing investment in plant and equipment to remain competitive. In recent years, however, the Company's financial position has severely restricted its ability to make capital improvements in its facilities. Capital expenditures during fiscal 1998, 1997 and 1996 were approximately $1,424,000, $2,372,000, and $1,825,000, respectively. The Company anticipates it will need to increase its capital spending in the coming years in order to stay competitive as technology evolves. Capital expenditures for the three months ended September, 1998 were $180,000. Management estimates that capital expenditures of as much as $3 million may be required in fiscal 1999. Of that amount, the substantial majority is expected to be financed by a combination of capital leases, secured loans and foreign government grants. 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. "YEAR 2000" ISSUES Many existing computer programs use only two digits to identify a year in the date field. These programs were designed and developed without considering the impact of the upcoming change in the century. If not corrected, many computer applications could fail or create erroneous results by or at the year 2000. The global extent of the potential impact of the Year 2000 problem is not yet known, and if not timely corrected, it could affect the economy and the Company. The Company uses computer information systems and manufacturing equipment which may be affected. It also relies on suppliers and customers who are also dependent on systems and equipment which use date dependent software. The Company's Year 2000 compliance program includes the following phases: identifying systems that need to be replaced or fixed; carrying out remediation work to modify existing systems or convert to new systems; and conducting validation testing of systems and applications to ensure compliance. The Company has essentially completed the first phase of the program and is now primarily in the remediation phase. The amount of work required is not expected to be extensive, because the Company has replaced certain of its financial and operational systems during the last two years to enhance or better meet its functional and operational requirements. The Company believes that such replacements substantially meet or address its Year 2000 issues. In addition to such normal replacement, the Company may be required to modify some of the existing software and hardware in order for its computer systems to function properly with respect to dates in the year 2000 and thereafter. The Company also has contacted its major suppliers to assess their preparations for the year 2000. Similar contacts also are planned for major customers. These actions are intended to help mitigate the possible external impact of Year 2000 issues. Even so, it is impossible to fully assess the potential consequences if service interruptions occur from suppliers or in such infrastructure areas as utilities, communications, transportation, banking and government. The Company anticipates that the remediation and validation phases of its Year 2000 compliance program will be completed by June 30, 1999. Management estimates that the total cost of its Year 2000 program will not exceed $250,000. If the Company is unsuccessful or if the remediation efforts of its key suppliers or customers are unsuccessful in dealing with Year 2000 problems, there may be a material adverse impact on the Company's consolidated results and financial condition. The Company is unable to quantify any potential adverse impact at this time, but will continue to monitor and evaluate the situation. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's financial instruments include cash and cash equivalents, short- term and long-term debt, and foreign currency forward exchange contracts. At September 30, 1998, the carrying amount of long-term debt (including current portion thereof) was $8,270,000 and the fair value was $8,092,000. The carrying values of the Company's other financial instruments approximated their fair values. The fair value of the Company's financial instruments is estimated based on quoted market prices for the same or similar issues. It is the policy of the Company not to enter into derivative financial instruments for speculative purposes. The Company enters into foreign currency forward exchange contracts to protect itself from adverse currency rate fluctuations on foreign currency commitments entered into in the ordinary course of business. These commitments are generally for terms of less than one year. The foreign currency forward exchange contracts are executed with creditworthy banks and are denominated in currencies of major industrial countries. Any gain or loss incurred on foreign currency forward exchange contracts is offset by the effects of currency movements on the respective underlying hedged transactions. The Company did not have any open foreign currency forward exchange contracts open at September 30, 1998. Based on the Company's overall currency rate exposure at September 30, 1998, a 10 percent change in currency rates would not have had a material effect on the financial position, results of operations, or cash flows of the Company. PART II. OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits: 27 Financial Data Schedule (electronic filing only) SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. November 13, 1998 /s/ Richard K. Vitelle - --------------------------------- ----------------------------------- Date Richard K. Vitelle Vice President -Finance (Principal Financial Officer) EX-27 2
5 3-MOS JUN-30-1999 SEP-30-1998 4059000 0 9440000 151000 3104000 24123000 24541000 17792000 33976000 19078000 0 341000 0 0 7621000 33976000 14065000 14065000 11783000 13601000 0 0 242000 254000 22000 254000 0 0 0 232000 0.01 0.01
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