-----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, Fe3q7BoMV6B6a2++DZFHILMRBfIhJ7ZB76GZ3dbgHSlasB6H05FQTpkq/BjQvnXb E9VgcwSeMXyS/RWaxCIHoA== 0000026987-99-000010.txt : 19990623 0000026987-99-000010.hdr.sgml : 19990623 ACCESSION NUMBER: 0000026987-99-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990524 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: 99633299 BUSINESS ADDRESS: STREET 1: 2151 ANCHOR COURT CITY: NEWBURY PARK STATE: CA ZIP: 91320 BUSINESS PHONE: 8053762595 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: MARCH 31, 1999 [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to ----------- ------------ Commission File Number: 1-8101 Exact Name of Registrant as Specified in Its Charter: SMTEK INTERNATIONAL, INC. State or Other Jurisdiction of I.R.S. Employer Incorporation or Organization: DELAWARE Identification No.: 33-0213512 Address of Principal Executive Offices: 2151 Anchor Court Thousand Oaks, CA 91320 Registrant's Telephone Number: (805) 376-2595 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The registrant had 34,088,128 shares of Common Stock outstanding as of May 10, 1999. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) March 31, June 30, 1999 1998 ------ ------ Assets Current assets: Cash and cash equivalents $ 3,314,000 $ 4,413,000 Accounts receivable, net 10,939,000 9,786,000 Costs and estimated earnings in excess of billings on uncompleted contracts 7,508,000 4,785,000 Inventories, net 3,891,000 2,446,000 Prepaid expenses 357,000 103,000 ---------- ---------- Total current assets 26,009,000 21,533,000 ---------- ---------- Property, equipment and improvements, at cost: Buildings and improvements 6,494,000 6,084,000 Plant equipment 18,743,000 15,646,000 Office and other equipment 2,502,000 2,180,000 ---------- ---------- 27,739,000 23,910,000 Less: Accumulated depreciation and amortization (18,461,000) (17,035,000) ---------- ---------- Property, equipment and improvements, net 9,278,000 6,875,000 ---------- ---------- Other assets: Goodwill, net 2,988,000 3,171,000 Deposits and other assets 320,000 251,000 ---------- ----------- 3,308,000 3,422,000 ---------- ----------- $ 38,595,000 $ 31,830,000 ========== ========== SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited - continued) March 31, June 30, 1999 1998 ------ ------ Liabilities and Stockholders' Equity Current liabilities: Bank lines of credit payable $ 3,628,000 $ 4,441,000 Current portion of long-term debt 3,639,000 1,214,000 Accounts payable 12,016,000 7,795,000 Accrued payroll and employee benefits 1,269,000 1,211,000 Other accrued liabilities 2,636,000 2,427,000 ---------- ---------- Total current liabilities 23,188,000 17,088,000 ---------- ---------- Long-term debt 7,451,000 7,186,000 ---------- ---------- Commitments and contingencies Stockholders' equity: Common stock, $.01 par value; 75,000,000 shares authorized; 34,088,128 shares issued and outstanding in 1999 and 1998 341,000 341,000 Additional paid-in capital 32,159,000 32,159,000 Accumulated deficit (23,774,000) (24,294,000) Accumulated other comprehensive loss (770,000) (650,000) ---------- ---------- Total stockholders' equity 7,956,000 7,556,000 ---------- ---------- $ 38,595,000 $ 31,830,000 ========== ========== See accompanying Notes to Unaudited Consolidated Financial Statements SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended March 31, ----------------------- 1999 1998 ------ ------ Revenues $ 14,524,000 $ 13,600,000 Cost of goods sold 12,443,000 11,176,000 ---------- ---------- Gross profit 2,081,000 2,424,000 ---------- ---------- Operating expenses: Administrative and selling 1,592,000 1,515,000 Goodwill amortization 326,000 317,000 ---------- ---------- 1,918,000 1,832,000 ---------- ---------- Operating income 163,000 592,000 ---------- ---------- Non-operating income (expense): Interest income 27,000 25,000 Interest expense (221,000) (280,000) Other income (expense), net 138,000 (46,000) ---------- ---------- (56,000) (301,000) ---------- ---------- Income before income taxes 107,000 291,000 Provision for income taxes 27,000 - ---------- ---------- Net income $ 80,000 $ 291,000 ========== ========== Basic and diluted earnings per share $ 0.00 $ 0.01 ==== ==== Shares used in computing earnings per share: Basic 34,088,128 28,966,389 ========== ========== Diluted 34,088,128 29,050,650 ========== ========== See accompanying Notes to Unaudited Consolidated Financial Statements. SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Nine Months Ended March 31, ----------------------- 1999 1998 ------ ------ Revenues $ 44,157,000 $ 39,833,000 Cost of goods sold 37,373,000 32,725,000 ---------- ---------- Gross profit 6,784,000 7,108,000 ---------- ---------- Operating expenses: Administrative and selling 4,847,000 4,352,000 Goodwill amortization 960,000 951,000 ---------- ---------- 5,807,000 5,303,000 ---------- ---------- Operating income 977,000 1,805,000 ---------- ---------- Non-operating income (expense): Interest income 106,000 61,000 Interest expense (704,000) (813,000) Other income (expense), net 220,000 (63,000) ---------- ---------- (378,000) (815,000) ---------- ---------- Income before income taxes 599,000 990,000 Provision for income taxes 80,000 - ---------- ---------- Net income $ 519,000 $ 990,000 ========== ========== Basic and diluted earnings per share $ 0.02 $ 0.03 ==== ==== Shares used in computing earnings per share: Basic 34,088,128 28,954,431 ========== ========== Diluted 34,088,128 29,063,031 ========== ========== See accompanying Notes to Unaudited Consolidated Financial Statements. SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended March 31, ----------------------- 1999 1998 ------ ------ Cash flows from operating activities: Net income $ 519,000 $ 990,000 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation expense 1,463,000 1,258,000 Amortization of goodwill 960,000 954,000 Eliminate duplicate period of pooled company to conform year-ends - (464,000) Net increase in operating working capital (1,171,000) (2,832,000) Gain on sale of assets (152,000) (22,000) Other (34,000) 83,000 --------- --------- Net cash provided by (used in) operating activities 1,585,000 (33,000) --------- --------- Cash flows from investing activities: Capital expenditures (992,000) (432,000) Proceeds from sale of assets 152,000 16,000 Purchase of subsidiary, net of cash acquired (113,000) - --------- --------- Net cash used in investing activities (953,000) (416,000) --------- --------- Cash flows from financing activities: Proceeds from (repayments of) bank lines of credit (817,000) 1,883,000 Proceeds from long-term debt - 2,000,000 Payments of long-term debt (897,000) (5,995,000) Proceeds from foreign government grants - 123,000 S Corporation dividends paid - (100,000) --------- --------- Net cash used in financing activities (1,714,000) (2,089,000) --------- --------- Effect of exchange rate changes on cash (17,000) 86,000 --------- --------- Decrease in cash and cash equivalents (1,099,000) (2,452,000) Cash and cash equivalents at beginning of period 4,413,000 5,398,000 --------- --------- Cash and cash equivalents at end of period $3,314,000 $2,946,000 ========= ========= 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 unaudited consolidated financial statements 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 March 31, 1999 and its results of operations and cash flows for the three and nine months ended March 31, 1999 and 1998. The Company uses a 52-53 week fiscal year ending on the Friday closest to June 30, which for fiscal year 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 March 31 for clarity of presentation. The actual interim periods ended on April 2, 1999 and April 3, 1998. The three and nine month periods of fiscal 1999 consisted of 13 weeks and 39 weeks, respectively, compared to 13 and 40 weeks for the same periods 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 - SUBSEQUENT EVENTS On May 21, 1999, the Company sold 11,250,000 shares of common stock to Thomas M. Wheeler, the Company's largest shareholder, for an aggregate price of $4,500,000. Giving effect to this transaction, Mr. Wheeler now owns approximately 39% of the Company's outstanding common stock. Also on May 21, the Company paid off a $2,000,000 note payable to Mr. Wheeler and accrued interest thereon of $302,000. Following is pro forma information for certain consolidated balance sheet items presented as if the sale of common stock and repayment of the note and accrued interest had occurred on March 31, 1999. March 31, 1999 -------------------------- As Reported Pro forma ----------- ----------- Assets: Cash and cash equivalents $ 3,314,000 $ 5,533,000 Liabilities: Current portion of long-term debt $ 3,639,000 $ 1,639,000 Other accrued liabilities $ 2,636,000 $ 2,355,000 Stockholders' equity: Common stock $ 341,000 $ 454,000 Additional paid-in capital $32,159,000 $36,546,000 Note 3 - ACQUISITION OF TECHNETICS, INC. Effective January 29, 1999, the Company acquired all of the issued and outstanding capital stock of Technetics, Inc., a California corporation ("Technetics"). The purchase price of $379,000 was paid in cash of $275,000 and notes payable of $104,000. The Company also incurred acquisition-related fees and other costs totaling $29,000. The acquisition has been accounted for using the purchase method. In accordance with Accounting Principles Board Opinion No. 16, the total investment made in Technetics of $408,000 has been allocated to the assets and liabilities acquired at their estimated fair values at the acquisition date, which resulted in the recognition of goodwill of $776,000. The Company is amortizing the goodwill over 15 years. Note 4 - 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. The number of shares used in computing diluted earnings per share for the three and nine months ended March 31, 1999 is equal to the weighted average number of common shares outstanding for the period and excludes the effect of options, warrants and convertible securities since these derivative securities are antidilutive, as discussed below. Options and warrants to purchase 4,870,579 shares of common stock at prices ranging from $0.38 to $3.50 were outstanding during the three and nine months ended March 31, 1999, 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. Convertible subordinated debentures aggregating $1,580,000, due in 2008 and convertible at a price of $10.63 per share at any time prior to maturity, were outstanding during the three and nine months ended March 31, 1999 and 1998, 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 $2.00 per share at any time prior to maturity, were outstanding during the three and nine months ended March 31, 1999 and 1998, but were not included in the computation of diluted earnings per share because the effect would be antidilutive. A reconciliation of the numerator and denominator used in the computation of earnings per share for the fiscal 1998 periods presented in the accompanying statements of operations follows: Three months ended Nine months ended March 31, 1998 March 31, 1998 ------------------ ----------------- Numerator: Net income for basic and diluted earnings per share $ 291,000 $ 990,000 ========== ========== Denominator: Weighted average number of common shares outstanding for basic earnings per share 28,966,389 28,954,431 Assumed exercise of options and warrants net of shares assumed reacquired under treasury stock method 84,261 108,600 ---------- ---------- Total shares for diluted earnings per share 29,050,650 29,063,031 ========== ========== Note 5 - ACCOUNTS RECEIVABLE The components of accounts receivable are as follows: March 31, June 30, 1999 1998 ---- ---- Trade receivables $10,795,000 $9,890,000 Other receivables 265,000 63,000 Less allowance for doubtful accounts (121,000) (167,000) --------- --------- $10,939,000 $9,786,000 ========== ========= Included in other receivables at March 31, 1999 are grants due from the Industrial Development Board for Northern Ireland of $81,000 Note 6 - 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: March 31, June 30, 1999 1998 ---- ---- Costs incurred on uncompleted contracts $24,577,000 $32,324,000 Estimated earnings 2,466,000 5,802,000 ---------- ---------- 27,043,000 38,126,000 Less: Billings to date (19,535,000) (33,341,000) ---------- ---------- $ 7,508,000 $ 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 7 - INVENTORIES Inventories consist of the following: March 31, June 30, 1999 1998 ---- ---- Raw materials $3,171,000 $2,014,000 Work in process 1,058,000 643,000 Finished goods 214,000 278,000 Less reserves (552,000) (489,000) --------- --------- $3,891,000 $2,446,000 ========= ========= Note 8 - OTHER ACCRUED LIABILITIES Other accrued liabilities consist of the following: March 31, June 30, 1999 1998 ---- ---- Environmental liabilities $ 481,000 $ 528,000 Accrued interest payable 356,000 237,000 Other 1,799,000 1,662,000 --------- --------- $2,636,000 $2,427,000 ========= ========= Note 9 - FINANCING ARRANGEMENTS Bank Credit Agreements The Company has an accounts receivable-based working capital bank line of credit for its operating unit located in Thousand Oaks, California ("SMTEK T.O."), which provides for borrowings of up to $3,250,000 at an interest rate of prime (7.75% at March 31, 1999) plus 1.25%. At March 31, 1999, borrowings outstanding under this credit facility amounted to $3,241,000. SMTEK T.O.'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 $4,830,000), and provides for interest on borrowings at the bank's base rate (5.39% at March 31, 1999) plus 1.50%. At March 31, 1999, borrowings outstanding under this credit facility amounted to $387,000. The credit facility agreement with Ulster Bank Markets expires July 31, 1999. Note payable to related party At March 31, 1999, the Company had a $2,000,000 note payable and accrued interest thereon of $281,000 due to Thomas M. Wheeler, the Company's largest stockholder. On May 21, 1999, the Company repaid this $2,000,000 note payable and accrued interest thereon, as discussed in Note 2. Note 10 - 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 Nine months ended March 31, 1998 March 31, 1998 ----------------- ----------------- Net income before pro forma adjustments, per consolidated statements of operations $ 291,000 $ 990,000 Pro forma provision for income taxes 17,000 43,000 -------- -------- Pro forma net income $ 274,000 $ 947,000 ======== ======== Note 11 - 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 (loss) is comprised of the following: Three months ended Nine months ended March 31, March 31, ------------------- ------------------- 1999 1998 1999 1998 ------ ------ ------ ------ Net income $ 80,000 $519,000 $291,000 $ 990,000 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments (186,000) 101,000 (120,000) 82,000 -------- -------- -------- --------- Comprehensive income (loss) $(106,000) $620,000 $171,000 $1,072,000 ======== ======== ======== ========= "Accumulated other comprehensive loss" presented on the accompanying consolidated condensed balance sheets consists of the foreign currency translation adjustment. Note 12 - INFORMATION RELATING TO STATEMENTS OF CASH FLOWS "Net cash used by operating activities" includes cash payments for interest as follows: Nine months ended March 31, --------------------- 1999 1998 ------ ------ Interest paid $ 534,000 $ 612,000 ======= ======= "Net increase in operating working capital" is comprised of the following: Nine months ended March 31, --------------------- 1999 1998 ------ ------ (Increase)decrease in accounts receivable $ (686,000) $ 311,000 Increase in costs and estimated earnings in excess of billings on uncompleted contracts (2,723,000) (1,251,000) (Increase) decrease in inventories (1,149,000) 658,000 Increase in prepaid expenses (202,000) (309,000) Increase (decrease) in accounts payable 3,779,000 (2,221,000) Decrease in accrued payroll and employee benefits (66,000) (24,000) Increase (decrease) in other liabilities (124,000) 4,000 ---------- --------- Net increase in operating working capital $(1,171,000) $(2,832,000) ========== ========= Following is the supplemental schedule of non-cash investing and financing activities: Nine months ended March 31, --------------------- 1999 1998 ------ ------ Capital expenditures financed by lease obligations $ 1,678,000 $ 237,000 Conversion of debt to equity $ - $ 44,000 Notes payable issued as partial consideration for purchase of subsidiary $ 104,000 $ - Note 13 - 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 is appealing the tax deficiency notices and plans to vigorously contest the assessment. Accordingly, no provision has been made in the financial statements for the nine months ended March 31, 1999 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 Thousand Oaks, California operating unit ("SMTEK T.O.") and its recent shift into commercial business, industry conditions, competition, environmental matters, dependence on suppliers, the effect of the year 2000 issue 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 March 31 for clarity of presentation. The actual interim periods ended on April 2, 1999 and April 3, 1998. The three and nine month periods of fiscal 1999 consisted of 13 weeks and 39 weeks, respectively, compared to 13 and 40 weeks for the same periods of fiscal 1998. Consolidated sales for the three months ended March 31, 1999 were $14,524,000, compared to $13,600,000 for the same period in the previous fiscal year. This increase is primarily attributable to the Company's EMS operations, for which sales increased by 8% from the third quarter of last year. The acquisition of Technetics, Inc. in the latest quarter was a contributing factor to the increase in EMS revenues. PCB sales for the latest quarter also increased by 3% from the three months ended March 31, 1998. Consolidated sales increased from $39,833,000 for the nine months ended March 31, 1998 to $44,157,000 for the latest nine months. Sales for the Company's EMS operations increased by 16% for the latest nine months compared to the nine months ended March 31, 1998. The sales growth of the EMS operations is attributable primarily to several new contracts obtained by SMTEK T.O. Sales for the PCB operations for the nine months ended March 31, 1999 decreased by 12% from the same period in the prior year, which was attributable to softness in the European PCB market. Consolidated gross profit for the nine months ended March 31, 1999 was $6,784,000 (15.4% of sales), compared to $7,108,000 (17.8% of sales) for the same period of the prior year. Gross profit of the EMS operations was $5,815,000 (15.3% of sales) for the nine months ended March 31, 1999, compared to $5,391,000 (16.4% of sales) for the prior year, due to the ramp-up of several new contracts in the nine months ended March 31, 1999, as well as a change in the mix of business, with higher direct material costs as a percentage of revenues in the latest period. For the nine months ended March 31, 1999, gross profit from PCB operations decreased approximately 44% from gross profit for the comparable period of the prior year, due to the decrease in sales and a decrease in higher margin quick-turn orders. Administrative and selling expenses for the three and nine months ended March 31, 1999 were $1,592,000 and $4,847,000, respectively, compared to $1,515,000 and $4,352,000 for the same periods in the previous year. The increase is attributable principally to administrative and sales staff additions. The inclusion of the results of Technetics, Inc., which was acquired in the latest quarter, also contributed to the increase in administrative and selling expenses in the three and nine months ended March 31, 1999. In the three and nine months ended March 31, 1999, consolidated operating income was $163,000 and $977,000, respectively, compared to $592,000 and $1,805,000 for the same periods in the previous fiscal year. Interest expense decreased from $813,000 in the nine months ended March 31, 1998 to $704,000 in the nine months ended March 31, 1999. The decrease in interest expense is primarily due to the fact that notes payable of $1,625,000 that were due from Jolt Technology, Inc. ("Jolt") to a Jolt shareholder were converted to Jolt common stock on June 30, 1998 as a condition of and prior to the acquisition of Jolt by the Company. Jolt's pre-acquisition interest expense is included in the Company's consolidated statement of operations pursuant to the pooling-of-interests accounting method. The additional week of operations included in the nine months ended March 31, 1998 as a result of the Company's 52-53 week fiscal year also contributed to the decrease in interest expense. In the three and nine months ended March 31, 1999, other income (expense) was $138,000 and $220,000, respectively, compared to ($46,000) and ($63,000) for the three and nine months ended March 31, 1998. The 1999 amounts include a gain recognized upon the sale of assets of $93,000 and $152,000 for the three and nine months ended March 31, 1999, respectively. For the comparable periods of the prior year, the gain recognized upon the sale of assets was insignificant. Also contributing to the change in other income (expense) is the fact that the 1999 results include foreign currency exchange rate gains of $44,000 and $70,000 in the three and nine months ended March 31, 1999, while 1998 results include foreign currency exchange rate losses of $44,000 and $85,000 in the three and nine months ended March 31, 1998. The provision for income taxes of $80,000 for the nine months ended March 31, 1999 represents federal alternative minimum tax and state income tax. The federal alternative minimum tax is imposed at a 20% rate on the Company's alternative minimum taxable income, which is determined by making statutory adjustments to the Company's regular taxable income. Federal net operating loss carryforwards offset 90% of the Company's alternative minimum taxable income. Net operating loss carryforwards for United Kingdom income tax purposes offset substantially all of the Company's foreign taxable income. Net income for the nine months ended March 31, 1999 was $519,000 or $.02 per share, compared to $990,000 or $.03 per share for the nine months ended March 31, 1998. 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 $3,314,000 at March 31, 1999, and its bank lines of credit. During the nine months ended March 31, 1999, cash and cash equivalents decreased by $1,099,000. This decrease consisted of capital expenditures of $992,000, cash used for the purchase of Technetics, Inc. (net of cash acquired) of $113,000, repayments of bank lines of credit of $817,000, reductions of long-term debt of $897,000, and the effect of exchange rate changes on cash of $17,000, partially offset by cash provided by operating activities of $1,585,000 and proceeds from the sale of assets of $152,000. Components of operating working capital increased by $1,171,000 during the first nine months of fiscal 1999, comprised of a $686,000 increase in accounts receivable, a $2,723,000 increase in costs and earnings in excess of billings on uncompleted contracts, a $1,149,000 increase in inventories, a $202,000 increase in prepaid expenses, a $66,000 decrease in accrued payroll and employee benefits and a $124,000 decrease in other liabilities, partially offset by a $3,779,000 increase in accounts payable. The Company has an accounts receivable-based working capital bank line of credit for its operating unit located in Thousand Oaks, California ("SMTEK T.O."), which provides for borrowings of up to $3,250,000 at an interest rate of prime (7.75% at March 31, 1999) plus 1.25%. At March 31, 1999, borrowings outstanding under this credit facility amounted to $3,241,000. SMTEK T.O.'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 $4,830,000), and provides for interest on borrowings at the bank's base rate (5.39% at March 31, 1999) plus 1.50%. At March 31, 1999, borrowings outstanding under this credit facility amounted to $387,000. 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 nine months ended March 31, 1999 were $2,670,000. At March 31, 1999, the Company had a $2,000,000 note payable and accrued interest thereon of $281,000 due to Thomas M. Wheeler, the Company's largest stockholder. On May 21, 1999, the Company repaid this $2,000,000 note payable and accrued interest thereon, as discussed in Note 2 to the accompanying unaudited consolidated financial statements. "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 and validation phases. 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. 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 substantially completed by June 30, 1999. The cost incurred to date on the Company's Year 2000 compliance program is approximately $125,000. Management estimates that the total cost of its Year 2000 program will not exceed $200,000. If the Company is unsuccessful or if the remediation efforts of its key suppliers 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. The Company plans to create a Year 2000 contingency plan if validation testing of the systems is not satisfactorily completed by September 30, 1999. 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 March 31, 1999, the carrying amount of long-term debt (including current portion thereof) was $11,090,000 and the fair value was $10,912,000. 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 March 31, 1999. A portion of the Company's operations consists of investments in foreign subsidiaries. As a result, the Company's financial results could be affected by changes in foreign currency exchange rates. PART II. OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits: 27 Financial Data Schedule (electronic filing only) SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. May 24, 1999 /s/ Richard K. Vitelle - --------------------------------- ----------------------------------- Date Richard K. Vitelle Vice President -Finance (Principal Financial Officer) 16 25 EX-27 2
5 9-MOS JUN-30-1999 MAR-31-1999 3314000 0 10795000 121000 3891000 26009000 27739000 18461000 38595000 23188000 0 341000 0 0 7615000 38595000 44157000 44157000 37373000 43180000 0 0 704000 599000 80000 519000 0 0 0 519000 0.02 0.02
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