-----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, UF36SjmaKC+RgTN9k6MjdHL1Bm4YdyfpzeZosxBFIA7YVjT9Rku5tG/UmyDWRtZx YqM3Kxsvzvr5mBoXDfL58w== 0000026987-99-000021.txt : 19991117 0000026987-99-000021.hdr.sgml : 19991117 ACCESSION NUMBER: 0000026987-99-000021 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19990702 FILED AS OF DATE: 19991015 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SMTEK INTERNATIONAL INC CENTRAL INDEX KEY: 0000026987 STANDARD INDUSTRIAL CLASSIFICATION: 3672 IRS NUMBER: 330213512 STATE OF INCORPORATION: DE FISCAL YEAR END: 0702 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-08101 FILM NUMBER: 99729329 BUSINESS ADDRESS: STREET 1: 2151 ANCHOR COURT CITY: THOUSAND OAKS STATE: CA ZIP: 91320 BUSINESS PHONE: 8053762595 MAIL ADDRESS: STREET 1: 2151 ANCHOR COURT CITY: HOUSAND OAKS 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-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1999 OR [ ] 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 No. Identification Address of Principal Executive Offices: 2151 Anchor Court Thousand Oaks, CA 91320 _________________________ Registrant's Telephone Number: (805) 376-2595 _________________________ Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered _________________________ ________________________________________ Common Stock, $.01 Par Value Pacific Exchange Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 Par Value 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant based on the closing price as reported by Nasdaq on October 7, 1999 was $5,076,000. The registrant had 2,267,455 shares of Common Stock outstanding as of October 7, 1999. DOCUMENTS INCORPORATED BY REFERENCE Specified parts of the registrant's Annual Report to Stockholders for its fiscal year ended June 30, 1999 are incorporated by reference into Parts I and II hereof. Specified parts of the registrant's Proxy Statement for its 1999 Annual Meeting of Stockholders are incorporated by reference into Part III hereof. THIS ANNUAL REPORT ON FORM 10-K, INCLUDING EXHIBITS THERETO, CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THESE FORWARD-LOOKING STATEMENT ARE TYPICALLY IDENTIFIED BY THE WORDS "ANTICIPATES", "BELIEVES", "EXPECTS", "INTENDS", "FORECASTS", "PLANS", "FUTURE", "STRATEGY", OR WORDS OF SIMILAR MEANING. VARIOUS IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN THE FORWARD-LOOKING STATEMENTS ARE DESCRIBED AS "RISK FACTORS" IN THE COMPANY'S REGISTRATION STATEMENT ON FORM S-3 (NO. 333- 62621) FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AND DECLARED EFFECTIVE ON SEPTEMBER 17, 1998 AND IN OTHER DOCUMENTS THE COMPANY HAS FILED AND FILES, FROM TIME TO TIME, WITH THE SECURITIES AND EXCHANGE COMMISSION. PART I Item 1. BUSINESS GENERAL SMTEK International, Inc. (the "Company") is a provider of electronics manufacturing services ("EMS") to original equipment manufacturers ("OEMs") in the computer, telecommunications, instrumentation, medical, industrial and aerospace industries. The Company also fabricates printed circuit boards ("PCBs") for use primarily in the computer, communications and instrumentation industries. Its EMS facilities are located in Southern California, Florida and Northern Ireland. Its PCB facilities are located in Northern Ireland and primarily serve customers in Western Europe. On January 29, 1999, the Company acquired Technetics, Inc. ("Technetics"), an EMS provider in San Diego, California, in order to enhance the Company's presence in the Orange County and San Diego areas. The acquisition of Technetics was accounted for under the purchase method of accounting. The Company was incorporated in California in 1959 and was reincorporated in Delaware in 1986. The Company's executive office is located at 2151 Anchor Court, Thousand Oaks, California 91320, telephone (805) 376-2595. FINANCIAL INFORMATION BY BUSINESS SEGMENT AND GEOGRAPHICAL AREA As indicated above, the Company operates in two business segments: electronics manufacturing services and printed circuit board fabrication. Information with respect to these segments' sales, operating income, and depreciation and amortization for each of the last three fiscal years is set forth in Note 11 to the consolidated financial statements of the accompanying 1999 Annual Report to Stockholders. In addition, Note 11 sets forth revenues and long-lived assets by geographic area. Such information is incorporated herein by reference and is made a part hereof. INDUSTRY OVERVIEW Electronics Manufacturing Services Industry The EMS industry can be classified into two general segments: high- volume and low-to-medium volume. The Company focuses on the low-to-medium volume segment. Manufacturers in this segment are highly fragmented and competitive. Customer bases tend to be highly concentrated, with two or three customers typically accounting for a significant portion of an EMS provider's total revenue. Two principal assembly techniques are employed in providing higher- margin, higher-complexity contract manufacturing in the low-to-medium volume EMS market segment: surface mount technology ("SMT"), which accounts for the majority of manufacturing; and through-hole technology. Management believes that the low-to-medium volume EMS market is continuing to move toward SMT as the preferred manufacturing technique, mainly because semiconductors have continued to decline in size, thereby lowering manufacturing tolerances. The Company's production processes are predominantly SMT. Description of Products and Services - EMS Production of electronic assemblies for a customer is only performed when a firm order is received. Customer cancellations of orders are infrequent and are usually subject to cancellation charges. More often, a customer will delay shipment of orders based on its actual or anticipated needs. Electronic assemblies are produced based on one of two general methods, either "turnkey" (where the Company provides all materials, labor and equipment associated with producing the customers' product) or "consigned" (where the Company provides only labor and equipment for manufacturing electronic assemblies and the customer provides the materials). The Company's EMS operations provide both turnkey and consignment electronics manufacturing services using surface mount and through-hole interconnection technologies. The Company conducts the EMS portion of its business through its facilities in Thousand Oaks, San Diego and Fort Lauderdale and through its DDL Electronics Limited ("DDL-E") subsidiary in Northern Ireland. The Company's EMS operations do not fabricate any of the components or PCBs used in these processes. EMS sales represented approximately 86%, 84% and 80% of the Company's consolidated sales for the fiscal years ended June 30, 1999, 1998 and 1997, respectively. The materials procurement element of the Company's turnkey services consists of the planning, purchasing, expediting, warehousing and financing of the components and materials required to assemble a board-level or system- level assembly. Customers have increasingly required the Company and other providers of electronics manufacturing services to purchase some or all components directly from component manufacturers or distributors and to finance the components and materials. In establishing a turnkey relationship with a provider of electronics manufacturing services, a customer typically incurs costs in qualifying that EMS provider and, in some cases, its sources of component supply, to refine product design and develop mutually compatible information and reporting systems. With this relationship established, the Company believes that customers experience significant difficulty in expeditiously and effectively reassigning a turnkey project to a new assembler or in taking on the project themselves. At the same time, the Company faces the obstacle of attracting new customers away from existing EMS providers or from performing services in-house. Printed Circuit Board Industry The PCB fabrication industry historically served as additional capacity to electronic equipment OEMs' captive manufacturing facilities. However, as electronic products have become more sophisticated, the board manufacturing processes have become much more advanced, requiring greater capital investment and manufacturing expertise. As a result, many OEMs have outsourced substantially all of their PCB manufacturing requirements. Description of Products and Services--PCB Fabrication Printed circuit boards are the basic platforms used to interconnect microprocessors, integrated circuits and other components essential to the functioning of electronic products. PCBs range from simple single- and double-sided boards to multilayer boards with more than 20 layers. Single-sided PCBs are used in electronic games and automobile ignition systems, whereas multilayer PCBs are used in more advanced applications such as computers, office equipment, communications, instrumentation and defense systems. The Company fabricates and sells advanced, multilayer PCBs based on designs and specifications provided by the Company's customers. These specifications are developed either solely through the design efforts of the customer or through the design efforts of the customer working together with the Company's design and engineering staff. The development of increasingly sophisticated electronic equipment, which combines higher performance and reliability with reduced size and cost, has created a demand for increased complexity, miniaturization and density in electronic circuitry. In response to this demand, multilayer technology is advancing rapidly on many fronts, including the widespread use of surface mount technology. More sophisticated boards are being created by decreasing the width of the tracks on the board and increasing the amount of circuitry that can be placed on each layer. Fabricating advanced multilayer PCBs requires high levels of capital investment and complex, rapidly changing production processes. The Company conducts its PCB fabrication business through its Irlandus Circuits Limited ("Irlandus") subsidiary located in Northern Ireland. PCB sales represented approximately 14%, 16% and 20% of the Company's consolidated sales for the fiscal years ended June 30, 1999, 1998 and 1997, respectively, with multilayer boards constituting a majority of the sales. MARKETS AND CUSTOMERS The Company's sales in the EMS and PCB fabrication businesses and the percentage of its consolidated sales to the principal end-user markets it serves for the last three fiscal years were as follows (dollars in thousands): Year ended June 30 ---------------------------------------------------- Markets 1999 1998 1997 - - ------------ ------------ ------------ ------------ Computer $ 3,036 5.1% $ 4,935 9.3% $ 4,622 9.0% Telecommunications 11,628 19.5 10,062 18.9 7,233 14.0 Commercial avionics 15,130 25.6 11,333 21.3 9,838 19.1 Space and satellites 1,540 2.6 2,729 5.1 2,065 4.0 Banking automation 3,464 5.8 7,344 13.8 8,089 15.6 Industrial controls & instrumentation 8,400 14.1 3,934 7.4 7,189 13.9 Medical 4,883 8.2 3,428 6.4 2,609 5.1 Defense 7,156 12.0 4,802 9.0 4,666 9.0 Other 4,255 7.1 4,698 8.8 5,329 10.3 ------ ----- ------ ----- ------ ----- Total $59,492 100.0% $53,265 100.0% $51,640 100.0% ====== ===== ====== ===== ====== ===== The Company markets its EMS and PCB fabrication services through both a direct sales force and independent manufacturers' representatives. The Company's marketing strategy is to develop close relationships with, and to increase sales to, certain existing and new major EMS and PCB fabrication customers. This includes becoming involved at an early stage in the design of PCBs for these customers' new products. The Company believes that this strategy is necessary to keep abreast of rapidly changing technological needs and to develop new EMS and PCB fabrication processes, thereby enhancing the Company's EMS and PCB capabilities and its position in the industry. As a result of this strategy, however, fluctuations experienced by one or more of these customers in demand for their products may have and have had adverse effects on the Company's sales and profitability. The Company's EMS segment had sales to one customer which accounted for 18.2% of revenues in fiscal 1999, sales to three customers which accounted for 19.9%, 13.8% and 13.8% of revenues in fiscal 1998, and sales to two customers which accounted for 17.8% and 15.7% of revenues in fiscal 1997. RAW MATERIALS AND SUPPLIERS In its EMS business, the Company uses numerous suppliers of electronic components and other materials. The Company's customers may specify the particular manufacturers and components, such as the Intel Pentium microprocessor, to be used in the EMS process. To the extent these components are not available on a timely basis or are in short supply because of allocations imposed by the component manufacturer, and the customer is unwilling to accept a substitute component, delays may occur. Such delays are experienced in the EMS business from time to time and have caused sales and inventory fluctuations in the Company's EMS business. As the result of a recent earthquake in Taiwan, there may be supply shortages of tantalum capacitors, a key component used in many electronic assemblies. The Company is taking steps to minimize disruption of its operations by locating alternative sources of supply and, where necessary, acquiring such capacitors in advance of need. The principal materials used by the Company in its PCB fabrication processes are copper laminate, epoxy glass, copper alloys, gold and various chemicals, all of which are readily available to the Company from various sources. The Company believes that its sources of materials for its fabrication business are adequate for its needs and that it is not substantially dependent upon any one supplier. INDUSTRY CONDITIONS AND COMPETITION The markets in which the EMS and PCB fabrication businesses operate are intensely competitive and have experienced excess production capacity for many years. Seasonality is not a significant factor in the EMS and PCB fabrication businesses. Competition is principally based on price, product quality, technical capability and the ability to deliver products on schedule. Both the price of and the demand for EMS and PCBs are sensitive to economic conditions, changing technologies and other factors. The technology used in EMS and fabrication of PCBs is widely available, and there are a large number of domestic and foreign competitors. Many of these firms are larger than the Company and have significantly greater financial, marketing and other resources. Many of the Company's competitors have also made substantial capital expenditures in recent years and operate technologically advanced EMS and PCB fabrication facilities. Furthermore, some of the Company's customers have substantial in-house EMS capabilities. There is a risk that when these customers are operating at less than full capacity they will use their own facilities rather than contract with the Company. Despite this risk, management believes that the Company has not experienced a significant loss of business to OEMs' captive assembly operations. BACKLOG At June 30, 1999, 1998 and 1997, the Company's backlog was $39,523,000, $36,209,000 and $28,587,000, respectively. Backlog is comprised of orders believed to be firm for products that have scheduled shipment dates during the next 12 months. Some orders in the backlog may be canceled under certain conditions. Historically, a substantial portion of the Company's orders have been for shipment within 90 days of the placement of the order and, therefore, backlog information as of the end of a particular period is not necessarily indicative of long-term trends in the Company's business. In addition, the timing of orders from major customers may result in significant fluctuations in the Company's backlog and operating results from period to period. ENVIRONMENTAL REGULATION The Company is currently involved in certain remediation and investigative studies regarding soil and groundwater contamination at the site of a former printed circuit board manufacturing plant in Anaheim, California which was leased by one of the Company's former subsidiaries, Aeroscientific Corp. Under the terms of a cost sharing agreement entered into several years ago, the remaining remediation costs will be borne on a 50-50 basis between the Company and the property owner. At June 30, 1999, the Company had a reserve of $465,000 for future remediation costs. Management, based in part on consultations with outside environmental engineers and scientists, believes that this reserve is adequate to cover its share of future remediation costs at this site. It is possible, however, that these future remediation costs could differ significantly from the estimates, and that the Company's portion could exceed the amount of its reserve. The Company's liability for remediation in excess of its reserve could have a material adverse impact on its business, financial condition and results of operations. EMPLOYEES At June 30, 1999, the Company had approximately 620 employees. Item 2. PROPERTIES SMTEK conducts its operations from a 45,000 square foot facility in Thousand Oaks, California which is leased through May 31, 2000. The monthly rent was approximately $30,800 during fiscal 1999 and is subject to a 4% increase each year. SMTEK has the option to extend the lease term for three renewal periods of three years each. The lease rate during the renewal periods is subject to adjustment based on changes in the Consumer Price Index for the local area. Technetics conducts its business in an 18,000 square foot facility in San Diego, California which is leased through January 2005. The current monthly rent is approximately $9,600, and is subject to annual increases based on the local Consumer Price Index. Jolt occupies an 8,400 square foot facility in Fort Lauderdale, Florida which is leased through October 31, 2000 for $7,957 per month. DDL-E conducts its operations from a 67,000 square foot facility in Northern Ireland that was purchased in 1989. Irlandus owns and occupies a 63,000 square foot production facility and an adjacent 9,000 square foot office and storage facility in Northern Ireland. The following table lists principal plants and properties of the Company and its subsidiaries: Owned Square or Location Footage Leased ------------ ------ ------ Thousand Oaks, California 45,000 Leased San Diego, California 18,000 Leased Fort Lauderdale, Florida 8,400 Leased Craigavon, Northern Ireland 67,000 Owned Craigavon, Northern Ireland 63,000 Owned Craigavon, Northern Ireland 9,000 Owned The Northern Ireland properties are pledged as security for installment loans payable to the Industrial Development Board for Northern Ireland, from which the properties were purchased. These loans had an aggregate outstanding balance of approximately $1,093,000 at June 30, 1999. Item 3. LEGAL PROCEEDINGS No material legal proceedings are currently pending as to which the Company or any of its properties is subject. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On May 20, 1999, a special meeting of stockholders was held at which the stockholders approved (1) a $4.5 million private placement sale of 562,500 post split shares of common stock to Thomas M. Wheeler, the Company's largest stockholder, who after the sale held 38.9% of the outstanding common stock of the Company, and (2) a 1-for-20 reverse stock split. There were 34,088,128 pre-split shares of common stock outstanding and entitled to vote at this meeting. Following is a summary of the voting (in pre-split shares): Votes Against or Votes Votes For Withheld Abstained Unvoted -------- ------- ------- ------- Private placement sale of Common stock to Thomas M. Wheeler 19,080,872 1,997,799 84,624 12,924,833 1-for-20 reverse stock split 28,967,442 2,176,970 80,286 2,863,430 PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information set forth under the caption "Market and Dividend Information" in the Company's 1999 Annual Report to Stockholders is incorporated herein by reference and made a part hereof. Item 6. SELECTED FINANCIAL DATA The information set forth under the caption "Five-Year Financial Summary" in the Company's 1999 Annual Report to Stockholders is incorporated herein by reference and made a part hereof. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information set forth under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" ("MD&A") in the Company's 1999 Annual Report to Stockholders is incorporated herein by reference and made a part hereof. Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's financial instruments include cash and cash equivalents, and short-term and long-term debt. At June 30, 1999, the carrying amount of long-term debt (including current portion thereof) was $9,195,000 and the fair value was $8,879,000. 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. See Note 6 to the accompanying consolidated financial statements for maturities of long-term debt for the next five years. 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 June 30, 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. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Reference is made to the financial statements later in this Report under Item 14(a)(1). Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT This information is incorporated by reference to the Company's proxy statement for its 1999 Annual Meeting of Stockholders. Item 11. EXECUTIVE COMPENSATION This information is incorporated by reference to the Company's proxy statement for its 1999 Annual Meeting of Stockholders. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT This information is incorporated by reference to the Company's proxy statement for its 1999 Annual Meeting of Stockholders. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS This information is incorporated by reference to the Company's proxy statement for its 1999 Annual Meeting of Stockholders. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS OF FORM 8-K 1999 Annual Report to Stockholders ------ (a)(1) List of Financial Statements List of data incorporated by reference: Report of KPMG LLP on consolidated financial statements 15 Consolidated balance sheets as of June 30, 1999 and 1998 16 Consolidated statements of operations for the years ended June 30, 1999, 1998 and 1997 18 Consolidated statements of cash flows for the years ended June 30, 1999, 1998 and 1997 19 Consolidated statements of stockholders' equity and comprehensive income (loss) for the years ended June 30, 1999, 1998 and 1997 20 Notes to consolidated financial statements 21 (a)(2) Financial Statement Schedules The financial statement schedules are omitted because they are either not applicable or the information is included in the notes to consolidated financial statements. Form 10-K ------- (a)(3) List of Exhibits: Exhibit Index 12 (b) Reports on Form 8-K: On February 16, 1999, a Form 8-K was filed regarding the acquisition of Technetics, Inc. This Form 8-K was amended by the filing of a Form 8-K/A on April 14, 1999 to provide the required audited financial statements of Technetics and the unaudited pro forma financial information for this acquisition. On May 28, 1999, a Form 8-K was filed announcing the approval at the special stockholders meeting held on May 20, 1999 of a $4.5 million private placement sale of common stock to Thomas M. Wheeler, the Company's largest stockholder, and a 1-for-20 reverse stock split. On July 1, 1999, a Form 8-K was filed announcing that the Company's common stock listing had been transferred from the New York Stock Exchange to the Nasdaq SmallCap Market. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, on October 15, 1999. SMTEK INTERNATIONAL, INC. /s/ Gregory L. Horton ----------------------- Gregory L. Horton Chief Executive Officer, President and Chairman of the Board of Directors Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Gregory L. Horton Chief Executive Officer, October 15, 1999 - - ----------------------- President and Chairman ------------------ Gregory L. Horton of the Board /s/ Richard K. Vitelle Vice President-Finance and October 15, 1999 - - ----------------------- Administration, Chief ------------------ Richard K. Vitelle Financial Officer, Treasurer and Secretary /s/ James P. Burgess Director October 12, 1999 - - ----------------------- ------------------ James P. Burgess /s/ Bruce E. Kanter Director October 12, 1999 - - ----------------------- ------------------ Bruce E. Kanter /s/ Oscar B. Marx III Director October 15, 1999 - - ----------------------- ------------------ Oscar B. Marx III EXHIBIT INDEX Exhibit Number Description - - ------ ----------- 2.1 Stock Purchase Agreement dated January 24, 1999 between SMTEK International, Inc. and the shareholders of Technetics, Inc. (incorporated by reference to Exhibit 99-1 of the Company's Current Report on Form 8-K filed on February 12, 1999). 3.1 Amended and Restated Certificate of Incorporation of SMTEK International, Inc. 3.2 Bylaws of the Company, amended and restated effective March 1995 (incorporated by reference to Exhibit 3-b of the Company's 1995 Annual Report on Form 10-K). 4.1 Indenture dated July 15, 1988, applicable to the Company's 8-1/2% Convertible Subordinated Debentures due August 1, 2008 (incorporated by reference to Exhibit 4-c of the Company's 1988 Annual Report on Form 10-K). 4.1.1 Supplemental Indenture relating to the Company's 8-1/2% Convertible Subordinated Debentures due August 1, 2008 (incorporated by reference to Exhibit 4-b of the Company's 1991 Annual Report on Form 10-K). 4.2 Indenture relating to the Company's 7% Convertible Subordinated Debentures due 2001 (incorporated by reference to Exhibit 4-c of the Company's 1991 Annual Report on Form 10-K). 4.3 Form of Series C Warrant Agreement dated as of July 1, 1995 and expiring on June 30, 2000 (incorporated by reference to Exhibit 4-f of the Company's Registration Statement on Form S-3, Commission File No. 333-02969). 4.4 Series D Warrant Agreement dated as of July 1, 1995 between the Company and Charles Linn Haslam covering 12,500 shares and expiring on June 30, 2000 (incorporated by reference to Exhibit 4-i of the Company's Registration Statement on Form S-3, Commission File No. 333-02969). 4.5 Form of Series E Warrant dated February 29, 1996 covering an aggregate 1,500,000 shares and expiring on February 28, 2001 (incorporated by reference to Exhibit 4-n of the Company's Registration Statement on Form S-3, Commission File No. 333-02969). 4.6 Form of Warrant and Contingent Payment Agreement for Series G Warrants dated as of March 31, 1996 between the Company and each of several former officers, key employees and directors of the Company under various consulting agreements and deferred fee arrangements covering an aggregate 198,624 shares expiring on June 1, 1998 (incorporated by reference to Exhibit 4-l of the Company's Registration Statement on Form S-3, Commission File No. 333-02969). 4.7 Form of Warrant Agreement for Series H Warrants dated July 1, 1995 among the Company and each of several former non-employee directors covering an aggregate of 15,000 shares expiring on June 30, 2000 (incorporated by reference to Exhibit C of the Company's Definitive Proxy Statement dated June 14, 1996). 4.8 Stock Subscription Agreement dated March 4, 1999 between the Company and TMW Enterprises Inc. (incorporated by reference to Appendix A of the Company's Definitive Proxy Statement dated April 16, 1999). 10.1 1993 Stock Incentive Plan (incorporated by reference to Exhibit 4.7 of the Company's Registration Statement on Form S-8, Commission file No. 33-74400). 10.2 1996 Stock Incentive Plan (incorporated by reference to Exhibit A of the Company's Proxy Statement for the fiscal 1995 Annual Stockholders Meeting). 10.3 1996 Non-Employee Directors Stock Option Plan (incorporated by reference to Exhibit B of the Company's Proxy Statement for the fiscal 1995 Annual Stockholders Meeting). 10.4 Form of Indemnity Agreement with officers and directors (incorporated by reference to Exhibit 10-o of the Company's 1987 Annual Report on Form 10-K). 10.5 Standard Industrial Lease-Net dated August 1, 1984, among the Company, Aeroscientific Corp., and Bradmore Realty Investment Company, Ltd. (incorporated by reference to Exhibit 10-w of the Company's 1990 Annual Report on Form 10-K). 10.5.1 Second Amendment to Lease among Bradmore Realty Investment Company, Ltd., the Company and the Company's Aeroscientific Corp. subsidiary, dated July 2, 1993 (incorporated by reference to Exhibit 10-cd of Registration Statement No. 33-63618). 10.6 Grant Agreement dated August 29, 1989, between DDL Electronics Limited and the Industrial Development Board for Northern Ireland ("IDB") (incorporated by reference to Exhibit 10.29 of the Company's Registration Statement No. 33-39115). 10.6.1 Agreement dated May 2, 1996, between DDL Electronics Limited and the IDB amending the Grant Agreement dated August 29, 1989, between DDL Electronics and the IDB (incorporated by reference to Exhibit 10.11.1 filed with the Company's 1996 Annual Report on Form 10-K). 10.7 Form of Land Registry for the Company's Northern Ireland subsidiaries dated November 4, 1993 (incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report of Form 10-Q for the quarter ended September 30, 1993). 10.8 Employment Agreement and Letter of Understanding and Agreement dated October 15, 1995 between the Company and Gregory L. Horton (incorporated by reference to Exhibit 99.2 filed with the Company's Current Report on Form 8-K dated January 12, 1996). 10.9 Employment Agreement dated September 12, 1996 between the Company and Richard K. Vitelle (incorporated by reference to Exhibit 10.15 filed with the Company's 1996 Annual Report on Form 10-K). 11 Statement re Computation of Per Share Earnings (incorporated by reference to Note 9 to the consolidated financial statements of the 1999 Annual Report to Stockholders). 13 Annual Report to security holders. 21 Subsidiaries of the Registrant. 23 Consent of KPMG LLP. 27 Financial Data Schedule. 99 Undertaking for Form S-8 Registration Statement. EX-3 2 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF SMTEK INTERNATIONAL, INC. SMTEK International, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Corporation"), does hereby certify the following: 1. The name of the Corporation is SMTEK, International, Inc. SMTEK International, Inc. was originally incorporated as DDL Companies, Inc., and the original Certificate of Incorporation was filed with the Secretary of State of the State of Delaware on September 24, 1986. 2. That pursuant to Sections 242 and 245 of the General Corporation Law of the State of Delaware, this Amended and Restated Certificate of Incorporation has been duly adopted by the Corporation's board of directors and stockholders, and that this Amended and Restated Certificate of Incorporation restates and integrates and further amends the provisions of the Restated Certificate of Incorporation of this Corporation. 3. The text of the Restated Certificate of Incorporation as heretofore amended or supplemented is hereby restated and further amended to read in its entirety as follows: ARTICLE ONE The name of the Corporation is SMTEK International, Inc. (the "Corporation"). ARTICLE TWO The name and address of the registered agent of the Corporation in the State of Delaware is: The Corporation Trust Company 1209 Orange Street Wilmington, Delaware 19801 County of New Castle ARTICLE THREE The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. ARTICLE FOUR The Corporation is authorized to issue two classes of shares of stock to be designated respectively, 'Common' and 'Preferred'; the total number of such shares shall be 4,750,000; the total number of Common shares shall be 3,750,000 and the par value of each Common share shall be one cent ($.01); and the total number of Preferred shares shall be One Million (1,000,000) and the par value of each Preferred share shall be one dollar ($1.00). The Preferred shares may be issued from time to time in one or more series. The Board of Directors is hereby vested with authority to fix by resolution or resolutions the designations and the powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, including without limitation the dividend rate, conversion rights, redemption price and liquidation preference, of any series of Preferred shares, and to fix the number of shares constituting any such series, and to increase or decrease the number of shares of any such series (but not below the number of shares thereof then outstanding). In case the number of shares of any such series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution or resolutions originally fixing the number of shares of such series. Reverse Stock Split On the effective date of this Amended and Restated Certificate of Incorporation, the number of outstanding shares of Common stock shall be reduced so that each 20 shares of Common stock issued and outstanding will be automatically combined and changed into one share of Common stock (the "Reverse Stock Split"). No fractions of shares will be issued, and, as of the effective date of this Amended and Restated Certificate of Incorporation, stockholders otherwise entitled to receive fractions of shares shall have no further interest as a stockholder with respect to such fractions of shares. The Corporation will pay in cash the fair value, as determined by the Board of Directors, of fractions of shares which would otherwise result from the Reverse Stock Split. As a result of the Reverse Stock Split, the authorized Common stock of the Corporation will be reduced to 3,750,000 shares. ARTICLE FIVE In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, repeal, alter, amend and rescind the Bylaws of the Corporation. ARTICLE SIX The number of directors which shall constitute the whole Board of Directors of the Corporation shall be specified in the Bylaws of the Corporation, subject to the provisions of Article Five hereof and this Article Six. The Board of Directors is divided into three classes Class I, Class II and Class III. Such classes shall be as nearly equal in number of directors as possible. Each director shall serve for a term ending on the third annual meeting following the annual meeting at which such director was elected; provided, however, that the directors first elected to Class I shall serve for a term ending at the annual meeting to be held in 1987, the directors first elected to Class II shall serve for a term ending at the annual meeting to be held in 1988 and the directors first elected to Class III shall serve for a term ending at the annual meeting to be held in 1989. The foregoing notwithstanding, each director shall serve until his successor shall have been duly elected and qualified unless he shall resign, become disqualified, disabled or shall otherwise be removed. At each annual election, the directors chosen to succeed those whose terms then expire shall be of the same class as the directors they succeed, unless, by reason of any intervening changes in the authorized number of directors, the Board of Directors shall designate one or more directorships whose terms then expire as directorships of another class in order to more nearly achieve equality of number of directors among the classes. Notwithstanding the rule that the three classes shall be as nearly equal in number of directors as possible, in the event of any change in the authorized number of directors, each director then continuing to serve as such shall nevertheless continue as a director of the class of which he is a member until the expiration of his current term, or his prior death, resignation or removal. ARTICLE SEVEN Elections of directors need not be by written ballot unless the Bylaws of the Corporation shall so provide. ARTICLE EIGHT At all elections of directors of the Corporation, a holder of any class or series of stock then entitled to vote in such election shall be entitled to as many votes as shall equal the number of votes which (except for this Article as to cumulative voting) such holder would be entitled to cast for the ordinary election of directors with respect to such holder's shares of stock multiplied by the number of directors to be elected in the election in which such holder's class or series of stock is entitled to vote, and each stockholder may cast all of such votes for a single nominee for director or may distribute them among the number to be voted for, or for any two or more of them as such holder may see fit. ARTICLE NINE Special meetings of the stockholders of the Corporation for any purpose or purposes may be called at any time by the Board, or by a majority of the members of the Board. Such special meetings may not be called by any other person or persons or in any other manner. ARTICLE TEN No action may be taken by the stockholders except at an annual or special meeting of stockholders. No action may be taken by the stockholders by written consent. ARTICLE ELEVEN To the fullest extent permitted by the Delaware General Corporation Law as the same exists or may hereafter be amended, a director of the Corporation shall not be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. ARTICLE TWELVE The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Amended and Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred on stockholders herein are granted subject to this reservation. In witness whereof, this Amended and Restated Certificate of Incorporation has been executed this 20th day of May, 1999 by Gregory L. Horton, its authorized officer. SMTEK International, Inc. By: /s/ Gregory L. Horton Gregory L. Horton President EX-13 3 EXHIBIT 13 ANNUAL REPORT TO STOCKHOLDERS SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES FINANCIAL HIGHLIGHTS (In thousands except per share amounts) Year Ended June 30 ----------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Revenues $59,492 $ 53,265 $ 51,640 $ 35,490 $ 31,393 Operating income (loss) $ 23 $ 1,545 $ 1,036 $ (552) $ (4,592) Income (loss) before income taxes $(1,293)(A) $ 493 $ (868) $ (1,377) $ (2,145) Income tax (expense) benefit $(1,202)(B) $ - $ - $ 1,110 $ - Extraordinary item - $ - $ - $ 2,356 $ 2,441 Net income (loss) $(2,495) $ 493 $ (868) $ 2,089 $ 296 Earnings (loss) per common share(C) $ (1.41) $ 0.34 $ (0.63) $ 1.85 $ 0.30 EBITDA (D) $ 3,674 $ 4,567 $ 4,052 $ 1,673 $ 446 (A) Includes $725,000 of accrued interest expense related to an income tax assessment, as further described in Note 7 to the accompanying consolidated financial statements. (B) Includes income tax expense of $1,110,000 to provide for the expected repayment to the Internal Revenue Service of tax refunds received in fiscal 1996 which were substantially disallowed in fiscal 1999, as further described in Note 7 to the accompanying consolidated financial statements. (C) Restated to give retroactive application to the 1-for-20 reverse stock split effected by the Company on May 24, 1999, as further described in Note 1 to the accompanying consolidated financial statements. (D) EBITDA consists of pretax income (loss) plus net interest expense, depreciation and amortization. While EBITDA is not intended to represent cash flow from operations as defined by generally accepted accounting principles ("GAAP") and should not be considered as an indicator of operating performance or an alternative to cash flow (as measured by GAAP) as a measure of liquidity, it is included herein because some investors believe it provides additional information with respect to the ability of the Company to meet its future debt service, capital expenditure and working capital requirements. DESCRIPTION OF BUSINESS SMTEK International, Inc. is an electronics manufacturing services (EMS) provider serving original equipment manufacturers (OEMs) in the computer, telecommunications, instrumentation, medical, industrial and aerospace industries. The Company provides integrated solutions to OEMs across the entire product life cycle, from design to manufacturing to end- of-life services, for the worldwide low-to-medium volume, high complexity segment of the EMS industry. The Company also fabricates multilayer printed circuit boards (PCBs) for use in the computer, telecommunications, instrumentation, medical, industrial and aerospace industries. EMS operations are located in Thousand Oaks, California; San Diego, California; Fort Lauderdale, Florida and Craigavon, Northern Ireland. Its PCB facilities are located in Craigavon, Northern Ireland. PRESIDENT'S LETTER TO STOCKHOLDERS Dear Fellow Stockholders: Our fiscal year ended June 30, 1999 presented formidable challenges owing to factors that included weak market demand, dramatic fluctuations in existing customer requirements, Asian pricing pressures, and a substantial shift in product mix. These difficult conditions impacted our financial results as well as those of our major competitors. In response, management took swift and appropriate actions which were focused on booking new business and partnership accounts, strengthening financial controls, building infrastructure, and improving performance with current accounts. In my letter a year ago, I outlined our aggressive strategy for profitable growth, which as discussed below will continue to be the road map for the Company's future. While we made substantial progress toward some of our key goals - increasing revenues and building our industry presence - our primary objective of earnings growth proved elusive in an industry climate of pervasive challenge. In addition to industry and market challenges, the financial results were also impacted by a special tax charge associated with a tax refund received by the Company four years ago, which was disallowed in fiscal 1999. Financial Results - - - Fiscal 1999 revenue increased 11.7% to $59,492,000, compared to $53,265,000 for fiscal 1998 - - - Fiscal 1999 gross profit was $7,969,000 or 13.4% of revenues as compared to $9,332,000, or 17.5% for fiscal 1998 - - - Operating income was $23,000 for fiscal 1999, compared to $1,545,000 in fiscal 1998 - - - In the fourth quarter of fiscal 1999, the Company recorded special charges of $1,835,000 for an income tax assessment and associated interest expense and $487,000 for increased inventory reserves - - - The fiscal 1999 net loss after special charges was $2,495,000, compared to net income of $493,000 in fiscal 1998 - - - Fiscal 1999 EBITDA was $3,674,000, compared to $4,567,000 in fiscal 1998. - - - Stockholders' equity increased from $7,556,000 at the end of fiscal 1998 to $9,304,000 at the close of fiscal 1999. Perspective on Financial Results In fiscal 1999, despite clear indications of an industry-wide downturn, we managed to post modest profits in each of the first three quarters. Much to our frustration, however, we experienced a fourth quarter loss that eclipsed the year's earnings. These difficult conditions, mostly in the European market, have persisted into the first quarter of our fiscal year 2000. Operating income declined 83% from fiscal 1998 in our European subsidiaries, compared with a decrease of 17% in our domestic subsidiaries. Excluding the previously mentioned increase in inventory reserves, domestic operating income increased 7% over fiscal 1998. Significantly lower demand for our customers' products in fiscal 1999 caused substantial contract reductions and rescheduling of orders by our five largest customers, resulting in excess inventory conditions. Accordingly, we increased inventory reserves at year-end, which was a major factor in the year's loss. In this climate, we took aggressive action to secure replacement business and successfully booked several substantial new programs, which have been building momentum during the year. To an extent, however, this resulted in a shift in our product mix, which negatively impacted gross profit margins last year. On a more encouraging note, we have seen a recent improvement in customer demand consistent with the rest of the industry. Certain new accounts acquired late in fiscal 1999, after allowing for substantial start-up costs, are expected to contribute positively to the bottom line in the current fiscal year. Beginning in January 2001, just 14 months away, a large portion of our goodwill will become fully amortized and we will see a reduction in goodwill amortization expense of $1,268,000 per year. Furthermore, we ended fiscal 1999 with a record backlog of $40 million, up 9% from a year earlier. Executing Our Business Plan In January 1999, the Company acquired Technetics, Inc. in San Diego, California, providing us with a service presence in a burgeoning market with many new companies in the wireless and telecommunications business. Based on the purchase price and the strategic position and capabilities of Technetics, we felt the opportunity was a good one for long-term Company growth and market position. The San Diego facility is ISO-9002 certified and can perform production and express services for high-end commercial, military and space customers. However, it is taking some time to get this operation on track. At the time it was acquired, Technetics was under-booked and poised to lose money, adding further pressure on corporate earnings. We are successfully booking new business for the operation and anticipate it will become profitable in the second quarter of fiscal 2000. The Company's expansion plans have the objective of creating a network of medium to small EMS providers with the ability to offer local expertise for complex prototype and production needs in the high-mix market segment. In our view, customers in this market segment are less likely to subcontract their work to the very large off-shore manufacturers due to relationships, complexity and level of service needs. We also believe that there is a higher percentage of value-added revenue (sales less cost of materials) in this market allowing for greater profit margins than experienced by the high-volume producers. Underpinning this strategy is the conviction that we can provide large company capabilities to our growing family of small companies, thereby making them more competitive and capable than their local competitors. SMTEK is working to provide its operating units with shared services, including banking services, on-line enterprise resource planning software and server capabilities, manufacturing engineering services, test engineering services, design services, volume purchasing agreements, global manufacturing capabilities, employee benefits programs, and eventually a more comprehensive marketing effort. Without having to support the overhead necessary to maintain all of these capabilities and skills, we believe each small business will therefore be more profitable. As we continue to build critical mass, the Company should benefit from economies of scale associated with spreading public company costs across a much larger sales base. Over the next several years, as the Company's capital structure improves, we hope to add a dozen companies to the family. The Company was fortunate to have attracted additional investment this past year from its largest stockholder, Thomas M. Wheeler, who has indicated his support and provided financial backing to help the Company grow through customer partnerships and strategic acquisitions. Maintaining Visibility and Marketability for Our Common Stock As you may know, the Company has long been listed on the New York Stock Exchange (NYSE). In May 1999, in response to increasingly stringent listing requirements by the NYSE, management and the Board of Directors felt that it was critical to facilitate the orderly transfer of our listing to the Nasdaq system in order to maintain a listing on a major market for the long-term benefit of the Company and its stockholders. In connection with maintaining a market for its stock, the Company asked for and received stockholder approval for a 1-for-20 reverse stock split. The reverse stock split and transfer between stock exchanges at a time when we were experiencing earnings pressure had a dramatic impact on the liquidity of our stock in the short-term, but we are convinced that proactive action was far better than accepting the consequences of inaction. By successfully executing our strategic plan and building earnings growth, we expect to have the opportunity to improve stock valuations over the next several years. Setting the Stage for Longer-Term Progress The past year required the best efforts of our people in a daunting environment, and we thank them for their valued contributions. Employee retention during periods of low unemployment is difficult at best and remains a major challenge for the Company and our industry. We will be submitting a request to the stockholders for replenishment of the Company's stock option pool in order to provide non-cash incentive for our key employees to stay with the Company in a climate of tremendous opportunity. Strategic use of employee stock options can reduce the extraordinary cost of employee turnover and create strong incentive for employees to improve stockholder value. Out of a difficult year should come gains as we capitalize on our efforts to cut costs, increase operating efficiencies and create the infrastructure to support a larger company with an expanded sales base and geographic positioning. Having accomplished the complex and time- consuming work related to such matters as transferring the common stock listing, we can now fully direct our energies toward implementing our growth strategy. Hopefully, early indications of an improving business climate will continue and gain strength, and we are well fortified with a record backlog position. We look forward to the future with a sense of optimism and enthusiasm. /s/Gregory L. Horton - - --------------------- Gregory L. Horton Chairman, CEO and President SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES FIVE-YEAR FINANCIAL SUMMARY (In thousands except per share amounts) Year ended June 30 -------------------------------------------- OPERATING DATA 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Revenues $ 59,492 $ 53,265 $ 51,640 $ 35,490 $ 31,393 ------ ------ ------ ------ ------ Costs and expenses: Cost of goods sold 51,523 43,933 43,894 30,906 27,598 Administrative and selling expenses 6,662 5,910 5,442 4,502 6,854 Goodwill amortization 1,284 1,268 1,268 634 - Acquisition expenses - 609 - - - Restructuring charges - - - - 1,533 ------ ------ ------ ------ ------ Total costs and expenses 59,469 51,720 50,604 36,042 35,985 ------ ------ ------ ------ ------ Operating income (loss) 23 1,545 1,036 (552) (4,592) ------ ------ ------ ------ ------ Non-operating income (expense): Interest income 129 97 96 255 117 Interest expense (1,678)(A) (1,101) (1,227) (1,045) (1,048) Debt issue cost amortization - - (937) (281) - Gain on sale of assets 158 22 142 - 3,317 Other income (expense), net 75 (70) 22 246 61 ------ ------ ------ ------ ------ Total non-operating income (expense) (1,316) (1,052) (1,904) (825) 2,447 ------ ------ ------ ------ ------ Income (loss) before income taxes (1,293) 493 (868) (1,377) (2,145) Income tax (expense) benefit (1,202)(B) - - 1,110 - ------ ------ ------ ------ ------ Income (loss) before extraordinary item (2,495) 493 (868) (267) (2,145) Extraordinary item - Gain on debt extinguishment - - - 2,356 2,441 ------ ------ ------ ------ ------ Net income (loss) $ (2,495) $ 493 $ (868) $ 2,089 $ 296 ====== ====== ====== ====== ====== (A) Includes $725,000 of accrued interest expense related to an income tax assessment, as further described in Note 7 to the accompanying consolidated financial statements. (B) Includes income tax expense of $1,110,000 to provide for the expected repayment to the Internal Revenue Service of tax refunds received in fiscal 1996, which were substantially disallowed in fiscal 1999, as further described in Note 7 to the accompanying consolidated financial statements. SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES FIVE-YEAR FINANCIAL SUMMARY (In thousands except per share amounts) (Continued) Year ended June 30 -------------------------------------------- OPERATING DATA 1999 1998 1997 1996 1995 (Continued) ---- ---- ---- ---- ---- Earnings (loss) per share: Basic and diluted: Income (loss) before extraordinary item $(1.41) $ 0.34 $(0.63) $(0.24) $ (2.20) Extraordinary item - - - 2.09 2.50 ----- ----- ----- ----- ------ Total $(1.41) $ 0.34 $(0.63) $ 1.85 $ 0.30 ===== ===== ===== ===== ====== Year ended June 30 -------------------------------------------- BALANCE SHEET DATA 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Current assets $ 27,899 $ 21,533 $ 21,673 $ 16,443 $ 9,778 Current liabilities $ 23,087 $ 17,088 $ 18,585 $ 12,301 $ 9,238 Working capital $ 4,812 $ 4,445 $ 3,088 $ 4,142 $ 540 Current ratio 1.2 1.3 1.2 1.3 1.1 Total assets $ 39,544 $ 31,830 $ 33,669 $ 29,498 $ 13,962 Long-term debt $ 7,153 $ 7,186 $ 9,445 $ 12,560 $ 8,772 Stockholders' equity (deficit) $ 9,304 $ 7,556 $ 5,639 $ 4,637 $ (4,048) Equity (deficit) per share $ 4.10 $ 4.43 $ 3.90 $ 3.53 $ (3.96) Shares outstanding (000s) 2,267 1,704 1,447 1,315 1,021 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Basis of Presentation The Company utilizes a 52-53 week fiscal year ending on the Friday closest to June 30 which, for fiscal years 1999, 1998 and 1997, fell on July 2, July 3, and June 27, respectively. In the accompanying consolidated financial statements, the fiscal year-end for all years is shown as June 30 for clarity of presentation. Fiscal years 1999 and 1997 consisted of 52 weeks compared to 53 weeks for fiscal year 1998. As more fully described in the accompanying financial statements, the Company's acquisition of Technetics, Inc. on January 29, 1999 was accounted for under the purchase method of accounting, and the operations of this facility have been included in the accompanying consolidated financial statements since the date of acquisition. Results of Operations The following table sets forth the Company's revenues and other operating data as percentages of revenues: Year Ended June 30 ----------------------------- 1999 1998 1997 ---- ---- ---- Revenues 100.0% 100.0% 100.0% Cost of goods sold 86.6 82.5 85.0 ----- ----- ----- Gross profit 13.4 17.5 15.0 Administrative and selling expenses 11.2 11.1 10.5 Goodwill amortization 2.2 2.4 2.5 Acquisition expenses - 1.1 - ----- ----- ----- Operating income 0.0 2.9 2.0 Interest income 0.2 0.2 0.2 Interest expense (2.8) (2.1) (2.4) Debt issue cost amortization - - (1.8) Gain on sale of assets 0.3 - 0.3 Other income (expense), net 0.1 (0.1) - ----- ----- ----- Income (loss) before income taxes (2.2) 0.9 (1.7) Income tax expense (2.0) - - ----- ----- ----- Net income (loss) (4.2)% 0.9% (1.7)% ===== ===== ===== Fiscal 1999 vs. 1998 Consolidated revenues for fiscal 1999 were $59,492,000 compared to $53,265,000 for fiscal 1998. Revenues for the Company's EMS operations for fiscal 1999 increased by $6,485,000 over fiscal 1998, primarily due to several new contracts obtained by the Thousand Oaks operating unit. Also contributing to the increase in EMS revenues was $1,669,000 of sales by Technetics, Inc., acquired on January 29, 1999. Revenues for fiscal 1999 for the PCB operations declined by 3% from the prior year. Consolidated gross profit for fiscal 1999 was $7,969,000 (13.4% of revenues) compared to $9,332,000 (17.5% of revenues) for fiscal 1998. Gross profit of the EMS operations was $6,638,000 for fiscal 1999, compared to $7,272,000 for the prior year, due to the following factors: the ramp-up of several new contracts in the current fiscal year, an increase in inventory reserves for excess raw materials, and a change in the mix of business, with higher direct material costs as a percentage of revenues in the latest year. For fiscal 1999, gross profit from PCB operations declined by 35% from fiscal 1998 as a result of the impact on manufacturing overhead of a decline in revenues and a decrease in higher margin quick-turn orders. Administrative and selling expenses for fiscal 1999 were $6,662,000, compared to $5,910,000 in the previous year. The increase is attributable to the inclusion of Technetics, Inc., which was acquired in January 1999, an increase in consulting fees, and administrative and sales staff additions. Operating income was $23,000 for fiscal 1999, compared to $1,545,000 for fiscal 1998. This decline is primarily attributable to the decreased gross profit for the reasons cited above. Interest expense (excluding interest expense of $725,000 related to an income tax assessment as discussed below) decreased from $1,101,000 in fiscal 1998 to $953,000 in fiscal 1999. The decrease in interest expense is primarily due to the fact that notes of $1,625,000 that were payable by 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 is the Company's consolidated statement of operations pursuant to the pooling-of- interests accounting method. As more fully described in Note 7 to the accompanying consolidated financial statements, in the fourth quarter of fiscal 1999 the Company accrued income tax expense of $1,110,000 for tax refunds received in fiscal 1996 which were substantially disallowed by the IRS in fiscal 1999. Also in the fiscal 1999 fourth quarter, the Company accrued interest expense of $725,000 on the fiscal 1996 income tax refunds which are repayable to the IRS. The tax filings which resulted in the Company receiving these refunds in fiscal 1996 were made after extensive consultation with a prominent tax advisor. Net loss for fiscal 1999 was $2,495,000, or ($1.41) per share, compared to net income of $493,000, or $0.34 per share for fiscal 1998. Fiscal 1998 vs. 1997 Consolidated revenues for fiscal 1998 were $53,265,000 compared to $51,640,000 for fiscal 1997. Revenues for the Company's EMS operations for fiscal 1998 increased by $3,355,000 over fiscal 1997, and such increase is attributable primarily to higher levels of business with existing customers. Revenues for fiscal 1998 for the PCB operations declined by 16.8% from the comparable period in the prior year as a result of a decline in business from a major customer as well as the fact that fiscal 1997 revenues included a relatively large quick-turn contract that was not recurring business. Consolidated gross profit for fiscal 1998 was $9,332,000 (17.5% of revenues) compared to $7,746,000 (15.0% of revenues) for fiscal 1997. Gross profit of the EMS operations was $7,272,000 for fiscal 1998, compared to $5,662,000 for the prior year. A change in the mix of business, with lower direct material costs as a percentage of revenues in fiscal 1998, contributed to the increase in EMS gross profit, along with higher sales volume and increased productivity. For fiscal 1998, gross profit from PCB operations declined by $24,000 from fiscal 1997 as a result of the decline in revenues. Gross profit as a percentage of revenues for the PCB operations was 24.0% for fiscal 1998, compared to 20.2% for fiscal 1997. This improvement is attributable primarily to an increase in higher margin quick-turn orders, material price reductions and processing cost savings. Administrative and selling expenses for fiscal 1998 were $5,910,000, compared to $5,442,000 in the previous year. The increase is attributable to the addition of a key management position in the Company's European operations and other increases in administrative staff. In fiscal 1998, the Company incurred acquisition-related expenses of $609,000 related to the acquisition of Jolt. Operating income was $1,545,000 for fiscal 1998, compared to $1,036,000 for fiscal 1997. This improvement is primarily attributable to the increased gross profit of the Company's EMS operations. Net non-operating expense decreased from $1,904,000 for the year ended June 30, 1997 to $1,052,000 for fiscal 1998. This decrease is primarily attributable to debt issue cost amortization expense of $937,000 in fiscal 1997 related to the 10% Senior Notes of $5,300,000 which were repaid on June 30, 1997. Net income for 1998 was $493,000, or $0.34 per share, compared to net loss of $868,000, or ($0.63) per share for fiscal 1997. Recent Accounting Pronouncements In June 1998, Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") was issued, which will require recognition of all derivatives as either assets or liabilities on the balance sheet at fair value. The Company will adopt SFAS 133, as amended by SFAS No. 137, in the first quarter of its fiscal year ending June 30, 2001. Management has not completed an evaluation of the effects this standard will have on the Company's consolidated financial statements. Liquidity and Capital Resources The Company's primary sources of liquidity are its cash and cash equivalents, which amounted to $4,997,000 at the end of fiscal 1999, and its bank lines of credit. During fiscal 1999, cash and cash equivalents increased by $584,000. Such increase is primarily attributable to a $4.5 million private stock placement. Specifically, this net cash inflow consisted of net cash provided by operating activities of $1,151,000, proceeds from the issuance of common stock of $4,463,000 and proceeds from the sale of assets of $158,000, partially offset by outflows comprised of capital expenditures of $1,633,000, purchase of subsidiary net of cash acquired of $113,000, debt reductions of $3,386,000 and the effect of exchange rate changes on cash of $56,000. Components of operating working capital decreased by $311,000 during fiscal 1999, which consisted of a $3,977,000 increase in accounts payable and an increase of $1,376,000 in other current liabilities, partially offset by a $412,000 increase in accounts receivable, a $1,498,000 increase in costs and estimated earnings in excess of billings on uncompleted contracts, a $3,088,000 increase in inventories and a $44,000 increase in prepaid expenses. At June 30, 1999, the Company had a working capital bank line of credit for its Thousand Oaks, California operating unit which provided for borrowings of up to $3,250,000 at an interest rate of prime (7.75% at June 30, 1999) plus 1.25%. At June 30, 1999, borrowings outstanding under this credit facility amounted to $3,225,000. This line was replaced in July 1999 by a new credit facility for the Company's domestic operating units which was entered into with Wells Fargo Bank. Borrowings under the new credit agreement bear interest at the bank's prime rate and the facility consists of an $8 million working capital line secured by accounts receivable, inventory and equipment. This credit facility expires on July 6, 2001. 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 $4,740,000), and provides for interest on borrowings at the bank's base rate (6.68% at June 30, 1999) plus 1.50%. At June 30, 1999, borrowings outstanding under this credit facility amounted to $708,000. The credit facility agreement with Ulster Bank Markets expires July 31, 2000. The Company's EMS and PCB fabrication businesses require continuing investment in plant and equipment to remain competitive. Capital expenditures during fiscal 1999, 1998 and 1997 were approximately $3,426,000, $1,424,000 and $2,372,000, respectively. The Company anticipates it will need to increase its capital spending in the coming years in order to stay competitive as technology evolves. Management estimates that capital expenditures of as much as $3 million may be required in fiscal 2000. Of that amount, the substantial majority is expected to be financed by a combination of capital leases, secured loans and foreign government grants. As more fully described in Note 7 to the accompanying consolidated financial statements, on July 30, 1999 the Company repaid $761,000 of income tax refunds to the Internal Revenue Service plus accrued interest of $272,000. In addition, as further described in Note 7, the Company may have to repay to the IRS additional income tax refunds of up to $1,110,000 plus accrued interest. 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 year. Year 2000 Issues Many 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 beginning January 1, 2000. The potential impact of the Year 2000 problem is not yet known, and if not timely corrected, it could adversely affect the economy and the Company. 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 nearly completed these three phases of its Year 2000 compliance program at all locations except for certain information systems at the Company's operating unit in San Diego, California. Remediation and validation testing of critical systems at the San Diego facility is expected to be completed by the end of November 1999. In the event these information systems at the San Diego facility cannot be determined to be Year 2000 compliant by November 30, 1999, the Company will implement a contingency plan which would include the possible transfer of material procurement and/or information processing functions to the Company's Thousand Oaks facility. The Company also has contacted its major suppliers to assess their preparations for the year 2000. Based on the results of these assessments, and to mitigate the effects of significant suppliers' potential failure to remediate Year 2000 issues in a timely manner, the Company may arrange for alternate suppliers or stockpiling of critical components. If this becomes necessary, it is uncertain, until the contingency plans are finalized, whether this would result in significant delays in business operations. Furthermore, 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. If the remediation efforts of the Company's key suppliers are unsuccessful, or if one or more of the Company's critical systems fail despite its efforts to remediate and validate these systems, there may be a material adverse impact on the Company's consolidated results and financial condition. Management estimates that the total cost of its Year 2000 compliance program, most of which has already been incurred, will not exceed $250,000. Quantitative And Qualitative Disclosures About Market Risk The Company's financial instruments include cash and cash equivalents, and short-term and long-term debt. At June 30, 1999, the carrying amount of long-term debt (including current portion thereof) was $9,195,000 and the fair value was $8,879,000. 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. See Note 6 to the accompanying consolidated financial statements for maturities of long-term debt for the next five years. 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 June 30, 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. Independent Auditors' Report The Board of Directors and Stockholders SMTEK International, Inc.: We have audited the accompanying consolidated balance sheets of SMTEK International, Inc. and subsidiaries as of June 30, 1999 and 1998, and the related consolidated statements of operations, cash flows and stockholders' equity and comprehensive income (loss) for each of the years in the three-year period ended June 30, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SMTEK International, Inc. and subsidiaries as of June 30, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 1999 in conformity with generally accepted accounting principles. /s/ KPMG LLP Los Angeles, California October 11, 1999 SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands except share amounts) June 30 ----------------- 1999 1998 ---- ---- Assets Current assets: Cash and cash equivalents $ 4,997 $ 4,413 Accounts receivable, net (Notes 3 and 6) 10,606 9,786 Costs and estimated earnings in excess of billings on uncompleted contracts (Notes 4 and 6) 6,283 4,785 Inventories, net (Note 5) 5,812 2,446 Prepaid expenses 201 103 ------ ------ Total current assets 27,899 21,533 ------ ------ Property, equipment and improvements, at cost (Notes 6 and 10): Buildings and improvements 6,507 6,084 Plant equipment 18,542 15,646 Office and other equipment 2,510 2,180 ------ ------ 27,559 23,910 Less: Accumulated depreciation and amortization (18,661) (17,035) ------ ------ Property, equipment and improvements, net 8,898 6,875 ------ ------ Other assets: Goodwill, net (Note 2) 2,430 3,171 Deposits and other assets (Note 6) 317 251 ------ ------ 2,747 3,422 ------ ------ $ 39,544 $ 31,830 ====== ====== SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands except share amounts) (Continued) June 30 ----------------- 1999 1998 ---- ---- Liabilities and Stockholders' Equity Current liabilities: Bank lines of credit payable (Note 6) $ 3,933 $ 4,441 Current portion of long-term debt (Note 6) 2,042 1,214 Accounts payable 11,654 7,795 Accrued payroll and employee benefits 1,296 1,211 Interest payable (Note 7) 821 237 Income taxes payable (Note 7) 1,963 810 Other accrued liabilities (Note 9) 1,378 1,380 ------ ------ Total current liabilities 23,087 17,088 ------ ------ Long-term debt (Note 6): Notes payable to related party - 2,000 Other long-term debt, less current portion 7,153 5,186 ------ ------ Total long-term debt 7,153 7,186 ------ ------ Commitments and contingencies (Note 10) Stockholders' equity (Note 8): 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; 2,267,455 and 1,704,406 shares issued and outstanding in 1999 and 1998, respectively 23 17 Additional paid-in capital 36,948 32,483 Accumulated deficit (26,789) (24,294) Accumulated other comprehensive loss (878) (650) ------ ------ Total stockholders' equity 9,304 7,556 ------ ------ $ 39,544 $ 31,830 ====== ====== See accompanying notes to consolidated financial statements. SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES Consolidated Statements of Operations (In thousands except per share amounts) Year ended June 30 ----------------------------- 1999 1998 1997 ---- ---- ---- Revenues $ 59,492 $ 53,265 $ 51,640 ------ ------ ------ Costs and expenses: Cost of goods sold 51,523 43,933 43,894 Administrative and selling expenses 6,662 5,910 5,442 Goodwill amortization 1,284 1,268 1,268 Acquisition expenses (Note 2) - 609 - ------ ------ ------ 59,469 51,720 50,604 ------ ------ ------ Operating income 23 1,545 1,036 ------ ------ ------ Non-operating income (expense): Interest income 129 97 96 Interest expense (953) (1,101) (1,227) Interest expense related to tax assessment (Note 7) (725) - - Debt issue cost amortization - - (937) Gain on sale of assets 158 22 142 Other income (expense), net 75 (70) 22 ------ ------ ------ (1,316) (1,052) (1,904) ------ ------ ------ Income (loss) before income taxes (1,293) 493 (868) Income tax provision (Note 7) (1,202) - - ------ ------ ------ Net income (loss) $ (2,495) $ 493 $ (868) ====== ====== ====== Basic and diluted earnings (loss) per share $ (1.41) $ 0.34 $ (0.63) ====== ====== ====== Shares used in computing basic and diluted earnings (loss) per share: Basic 1,771 1,451 1,375 ===== ===== ===== Diluted 1,771 1,472 1,375 ===== ===== ===== See accompanying notes to consolidated financial statements.
SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands) Year ended June 30 ----------------------------- 1999 1998 1997 ---- ---- ---- Cash flows from operating activities: Net income (loss) $ (2,495) $ 493 $ (868) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 2,130 1,720 1,584 Amortization 1,288 1,272 2,205 Acquisition expenses settled with stock - 138 - Eliminate duplicate period of pooled company to conform year ends - (464) - Gain on sale of assets (157) (22) (142) Net (increase) decrease in operating working capital, net of effects of business acquired 311 (2,178) (1,897) (Increase) decrease in deposits and other assets (3) 55 124 Other 77 108 84 ------ ------ ------ Net cash provided by operating activities 1,151 1,122 1,090 ------ ------ ------ Cash flows from investing activities: Capital expenditures (1,633) (785) (1,151) Acquisition of subsidiary, net of cash acquired (113) - - Proceeds from sale of assets 158 16 202 ------ ------ ------ Net cash used in investing activities (1,588) (769) (949) ------ ------ ------ Cash flows from financing activities: Proceeds from (repayments of) bank lines of credit (481) 3,074 1,366 Proceeds from long-term debt - 2,000 - Payments of long-term debt (2,905) (6,232) (787) Proceeds from issuance of common stock, net 4,463 - 1,385 Proceeds from exercise of stock options - 138 75 Proceeds from foreign government grants - 123 605 S Corporation dividends paid - (529) (600) ------ ------ ------ Net cash provided by (used in) financing activities 1,077 (1,426) 2,044 ------ ------ ------ Effect of exchange rate changes on cash (56) 88 80 ------ ------ ------ Increase (decrease) in cash and cash equivalents 584 (985) 2,265 Cash and cash equivalents at beginning of year 4,413 5,398 3,133 ------ ------ ------ Cash and cash equivalents at end of year $ 4,997 $ 4,413 $ 5,398 ====== ====== ======
See accompanying notes to consolidated financial statements.
SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss) Years ended June 30, 1999, 1998 and 1997 (In thousands except share amounts) Common Stock Accumulated -------------- Additional Other Total Par paid-in Accumulated Comprehensive stockholders' Shares value capital deficit Income (Loss) equity ------ ------ ----- ------- ------- ------- Balance at June 30, 1996 1,314,756 $ 13 $27,660 $(22,000) $(1,036) $ 4,637 Net loss - - - (868) - (868) Translation adjustments - - - - 345 345 ----- Comprehensive loss - - - - - (523) ----- Stock issued as debt placement fee 17,667 - 442 - - 442 Sale of common stock 100,000 1 1,384 - - 1,385 Exercise of stock options and warrants 14,732 - 298 - - 298 S Corporation dividends and other equity transactions of pooled company - - 210 (810) - (600) ---------- ---- ------ ------ ----- ----- Balance at June 30, 1997 1,447,155 14 29,994 (23,678) (691) 5,639 Net income - - - 493 - 493 Translation adjustments - - - - 41 41 ----- Comprehensive income 534 ----- Conversion of debt of pooled company 232,188 3 2,052 - - 2,055 Stock issued as brokerage fee 10,000 - 138 - - 138 Exercise of stock options and warrants 15,063 - 183 - - 183 Elimination of duplicate period of pooled company to conform year ends - - - (464) - (464) S Corporation dividends and other equity transactions of pooled company - - 116 (645) - (529) ---------- ---- ------ ------ ----- ----- Balance at June 30, 1998 1,704,406 17 32,483 (24,294) (650) 7,556 Net loss - - - (2,495) - (2,495) Translation adjustments - - - - (228) (228) ----- Comprehensive loss (2,723) ----- Sale of common stock 562,500 6 4,457 - - 4,463 Other 549 - 8 - - 8 ---------- ---- ------- ------- ------ ------ Balance at June 30, 1999 2,267,455 $ 23 $36,948 $(26,789) $ (878) $9,304 ========== ==== ======= ======= ====== ====== See accompanying notes to consolidated financial statements.
SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business SMTEK International, Inc. provides customized, integrated 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. Accounting Period The Company utilizes a 52-53 week fiscal year ending on the Friday closest to June 30 which, for fiscal years 1999, 1998 and 1997, fell on July 2, July 3, and June 27, respectively. In these consolidated financial statements, the fiscal year-end for all years is shown as June 30 for clarity of presentation, except where the context dictates a more specific reference to the actual year-end date. Fiscal 1998 consisted of 53 weeks compared to 52 weeks for the fiscal years 1999 and 1997. As more fully described Note 2, the Company's acquisition of Technetics, Inc. on January 29, 1999 was accounted for under the purchase method of accounting, and the operations of this facility have been included in the consolidated financial statements since the date of acquisition. Cash Equivalents For financial reporting purposes, cash equivalents consist primarily of money market instruments and bank certificates of deposit that have original maturities of three months or less. Fair Value of Financial Instruments As of June 30, 1999, the carrying amount of the Company's cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair value because of the short maturity of those instruments. At June 30, 1999 and 1998, the carrying amount of long-term debt (including current portion thereof) was $9,195,000 and $8,400,000, respectively, and the fair value was $8,879,000 and $8,222,000, respectively. The fair value of the Company's long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. All financial instruments are held for purposes other than trading. Concentrations of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of money market instruments and trade receivables. The Company invests its excess cash in money market instruments and certificates of deposit with high credit quality financial institutions and, by policy, limits the amount of credit exposure to any one issuer. Concentrations of credit risk with respect to trade receivables exist because the Company's EMS and PCB operations rely heavily on a relatively small number of customers. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company maintains reserves for potential credit losses and such losses, to date, have been within management's expectations. Inventories Inventories are stated at the lower of cost or net realizable value, with cost determined principally by use of the first-in, first-out method. Long-Lived Assets Property, equipment and improvements are stated at cost. Depreciation and amortization are computed on the straight-line method. The principal estimated useful lives are: buildings - 20 years; improvements - 10 to 18 years; and plant, office and other equipment - 3 to 7 years. Upon the retirement of assets, costs and the related accumulated depreciation are eliminated from the accounts and any gain or loss is included in income. Property, equipment and improvements acquired by the Company's foreign subsidiaries are recorded net of capital grants received from the Industrial Development Board for Northern Ireland. Goodwill represents the excess of acquisition cost over the fair value of net assets of a purchased business, and is being amortized over 5 to 15 years. The recoverability of long-lived assets is evaluated whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, and if future undiscounted cash flows are believed insufficient to recover the remaining carrying value of the asset, the carrying value is written down to fair market value in the period the impairment is identified. Revenue and Cost Recognition All of the Company's subsidiaries, except for its Thousand Oaks operating unit, recognize revenues and cost of sales upon shipment of products. The Thousand Oaks facility has historically generated a significant portion of its revenue through long-term contracts with suppliers of electronic components and products. Consequently, this operating unit uses the percentage of completion method to recognize revenues and cost of sales. Percentage of completion is determined on the basis of costs incurred to total estimated costs. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation costs. Selling, general and administrative costs are charged to expense as incurred. In the period in which it is determined that a loss will result from the performance of a contract, the entire amount of the estimated loss is charged to cost of goods sold. Other changes in contract price and estimates of costs and profits at completion are recognized prospectively. The asset "Costs and estimated earnings in excess of billings on uncompleted contracts" represents revenues recognized in excess of amounts billed. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. In estimating future tax consequences, all expected future events other than enactments of changes in tax law or statutorily imposed rates are considered. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded to reduce deferred tax assets to their estimated realizable amount. Reverse Stock Split On May 24, 1999, the Company effected a 1-for-20 reverse stock split of the Company's authorized and outstanding shares of Common Stock (the "Reverse Stock Split"). As a result of the Reverse Stock Split, the Company's authorized shares of Common Stock was reduced from 75,000,000 to 3,750,000. Par value of Common Stock did not change as a result of the Reverse Stock Split. Shareholders' equity has been restated to give retroactive application to the Reverse Stock Split in prior periods by reclassifying from Common Stock to additional paid in capital the par value of the eliminated shares arising from the Reverse Stock Split. In addition, all references in the financial statements and accompanying footnotes to the number of shares, per share amounts and stock option and warrant data of the Company's Common Stock have been restated. Earnings (Loss) Per Share Basic earnings (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period in accordance with Financial Accounting Standards No. 128, "Earnings per Share". Diluted earnings (loss) 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 (loss) of the entity. Diluted earnings (loss) per share is computed similarly to fully diluted earnings (loss) per share pursuant to Accounting Principles Board Opinion No. 15. Comprehensive Income (Loss) The Company has adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for reporting and display of comprehensive income and its components in a full set of financial statements. "Accumulated other comprehensive loss" presented on the accompanying consolidated balance sheets consists of foreign currency translation adjustments. Foreign Currency Translation The financial statements of SMTEK's foreign subsidiaries have been translated into U.S. dollars from their functional currency, British pounds sterling, in the accompanying statements in accordance with Statement of Financial Accounting Standards No. 52. Balance sheet amounts have been translated at the exchange rate on the balance sheet date and income statement amounts have been translated at average exchange rates in effect during the period. The net translation adjustment is recorded as a component of stockholders' equity. Use Of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Stock Based Compensation Prior to July 1, 1996, the Company accounted for its employee stock compensation plans in accordance with Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. As such, compensation expense would be recorded only if, on the date of grant, the current market price of the underlying stock exceeded the exercise price. On July 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS 123 allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for stock-based awards made in fiscal 1996 and future years as if the fair-value-based method defined in SFAS 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS 123. Recent Accounting Pronouncements In June 1998, Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") was issued, which will require recognition of all derivatives as either assets or liabilities on the balance sheet at fair value. The Company will adopt SFAS 133, as amended by SFAS No. 137, in the first quarter of its fiscal year ending June 30, 2001. Management has not completed an evaluation of the effects this standard will have on the Company's consolidated financial statements. Note 2 - ACQUISITIONS Technetics, Inc. - Purchase Method On January 29, 1999, the Company acquired 100% of the outstanding stock of Technetics, Inc., a provider of electronics manufacturing services located in San Diego, California. The purchase price of $452,000 was paid in cash of $113,000 (net of cash acquired), including acquisition-related costs of $28,000, and a note payable of $148,000 bearing interest at 8.0% due in quarterly installments through July, 2002. The acquisition was accounted for using the purchase method of accounting. In accordance with Accounting Principles Board Opinion No. 16, the total investment made in Technetics, Inc. of $452,000 was allocated to the acquired net liabilities at their estimated fair values at the acquisition date, which resulted in the recognition of goodwill of $543,000. The goodwill arising from this transaction is being amortized over 15 years. The operations of this facility have been included in the consolidated financial statements since the date of acquisition. The following unaudited pro forma financial information presents the combined results of operations of SMTEK International, Inc. and Technetics, Inc. as if the acquisition had occurred as of the beginning of fiscal 1999 and fiscal 1998, after giving effect to certain adjustments, including amortization of goodwill and increased interest expense on debt related to the acquisition. The pro forma financial information does not necessarily reflect the results of operations that would have occurred had SMTEK International and Technetics constituted a single entity during such periods. Year ended June 30 ---------------------- 1999 1998 ------- -------- Net sales $62,788,000 $61,342,000 Net income (loss) $(2,209,000) $ 1,414,000 Earnings (loss) per share $ (1.59) $ .97 Jolt - Pooling-of-Interests Method On June 30, 1998, the Company issued 450,000 shares of Common Stock in exchange for all of the outstanding shares of Jolt, a provider of electronics manufacturing services located in Fort Lauderdale, Florida. This acquisition was accounted for under the pooling-of-interests method of accounting. Prior to the combination, Jolt's fiscal year ended on December 31. In recording the pooling-of-interests combination, Jolt's financial statements for the twelve months ended June 30, 1998 were combined with SMTEK's financial statements for the same period. Jolt's financial statements for the years ended December 31, 1997 were combined with SMTEK's financial statements for the years ended June 30, 1997. An adjustment of $464,000 has been made to stockholders' equity as of June 30, 1998 to eliminate the effect of including Jolt's results of operations for the six months ended December 31, 1997 in both the fiscal years ended June 30, 1998 and June 30, 1997. Jolt's S Corporation status terminated upon consummation of the acquisition. Jolt's undistributed earnings at June 30, 1998, and all prior periods, have been reclassified to additional paid-in-capital in the accompanying consolidated financial statements in accordance with pooling- of-interests accounting. Accordingly, dividend distributions by Jolt to Jolt shareholders have been charged to additional paid-in-capital. Acquisition expenses of $609,000 related to the combination with Jolt were recognized upon consummation of the transaction, and are included in the accompanying 1998 consolidated statement of operations. Note 3 - ACCOUNTS RECEIVABLE The components of accounts receivable are as follows (in thousands): June 30 -------------------- 1999 1998 ---- ---- Trade receivables $ 10,380 $ 9,890 Other receivables 382 63 Less allowance for doubtful accounts (156) (167) ------ ------ $ 10,606 $ 9,786 ====== ====== Note 4 - COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED CONTRACTS Costs and estimated earnings in excess of billings on uncompleted contracts consists of revenue recognized under electronics assembly contracts which amounts were not billable at the balance sheet date. Essentially all of the unbilled amount is expected to be billed within 90 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): June 30 -------------------- 1999 1998 ---- ---- Costs incurred on uncompleted contracts $26,421 $32,324 Estimated earnings 2,663 5,802 ------ ------ 29,084 38,126 Less: Billings to date (22,801) (33,341) ------ ------ $ 6,283 $ 4,785 ====== ====== Note 5 - INVENTORIES Inventories consist of the following (in thousands): June 30 ------------------ 1999 1998 ---- ---- Raw materials $ 5,326 $2,014 Work in process 1,408 643 Finished goods 153 278 Less reserves (1,075) (489) ----- ----- $ 5,812 $2,446 ====== ====== In the fourth quarter of fiscal 1999, the Company recorded a provision of $487,000 for excess inventory. Note 6 - FINANCING ARRANGEMENTS Bank Credit Agreements At June 30, 1999, the Company had a working capital bank line of credit for its Thousand Oaks, California operating unit which provided for borrowings of up to $3,250,000 at an interest rate of prime (7.75% at June 30, 1999) plus 1.25%. At June 30, 1999, borrowings outstanding under this credit facility amounted to $3,225,000. This line was replaced in July 1999 by a new credit facility for the Company's domestic operating units which was entered into with Wells Fargo Bank. Borrowings under the new credit agreement bear interest at the bank's prime rate and the facility consists of an $8 million working capital line secured by accounts receivable, inventory and equipment. This credit facility expires on July 6, 2001. 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 $4,740,000), and provides for interest on borrowings at the bank's base rate (6.68% at June 30, 1999) plus 1.50%. At June 30, 1999, borrowings outstanding under this credit facility amounted to $708,000. The credit facility agreement with Ulster Bank Markets expires July 31, 2000. Notes Payable to Related Party The note payable to related party of $2,000,000 at June 30, 1998 was payable to Thomas M. Wheeler, the Company's largest stockholder. On May 21, 1999, the Company paid off the $2,000,000 note payable and accrued interest thereon of $302,000 from the proceeds of a $4.5 million private placement of common stock to Mr. Wheeler. Other Long-Term Debt Other long-term debt consists of the following (in thousands): June 30 ------------------ 1999 1998 ---- ---- Mortgage notes secured by real property at the Northern Ireland operations, with interest at variable rates (6.63% at June 30, 1999), payable in semiannual installments through 2009 $ 1,093 $ 1,214 Notes payable secured by equipment, interest at 7.95% to 10.9%, payable in monthly installments through June 2010 1,551 951 Capitalized lease obligations (Note 10) 3,406 1,215 8-1/2% Convertible Subordinated Debentures, due 2008, interest payable semi-annually and convertible at holders' option at a price of $212.50 per share at any time prior to maturity 1,580 1,580 7% Convertible Subordinated Debentures, due May 15, 2001, interest payable semi-annually and convertible at holders' option at a conversion price of $40.00 per share at any time prior to maturity 375 398 Obligations to former officers, employees and directors under consulting and deferred fee agreements 927 859 Other 263 183 ------ ------ 9,195 6,400 Less current maturities 2,042 1,214 ------ ------ $ 7,153 $ 5,186 ====== ====== At June 30, 1999, one of the notes payable secured by equipment was further collateralized by an irrevocable standby letter of credit, which in turn is secured by the Company's restricted cash deposit of $167,000. This amount is included in deposits and other assets in the accompanying consolidated balance sheets at June 30, 1999 and 1998. The aggregate amounts of minimum maturities of other long-term debt for the indicated fiscal years (other than capitalized lease obligations, as described in Note 10) are as follows: 2000 - $1,063,000; 2001 - $876,000; 2002 - $378,000; 2003 - $318,000; 2004 - $244,000; and thereafter - $2,910,000. In March 1996, the Company entered into a settlement agreement with certain of its former officers, key employees and directors (the "Participants") to restructure its outstanding obligations under several consulting programs and deferred fee arrangements which had provided for payments to the Participants after their retirement from the Company or from its Board of Directors. Under terms of the settlement, the Participants agreed to relinquish all future payments due them under these consulting programs and deferred fee arrangements in return for an aggregate of 29,793 common stock purchase warrants, Series G. The Company is obligated to pay the Participants $50.00 for each warrant which remained unexercised on the June 1, 1998 warrant expiration date, payable in semiannual installments over two to ten years. The Company has recorded a liability for the present value of these future payments, which amounted to $904,000 and $836,000 at June 30, 1999 and 1998, respectively. Note 7 - INCOME TAXES In connection with the filing of its federal income tax returns for fiscal year 1995, the Company filed for a refund to carry back losses described in Section 172(f) of the Internal Revenue Code of 1986, as amended (the "IRC"). Section 172(f) of the IRC provides for a ten year net operating loss carryback for specific losses attributable to (1) a product liability or (2) a liability arising under a federal or state law or out of any tort if the act giving rise to such liability occurs at least three years before the beginning of the taxable year. As a result of these refund filings, in September and October 1995 the Company received federal income tax refunds totaling $1,871,000, net of costs associated with applying for such refunds, and recognized an income tax benefit of $1,110,000 in the quarter ended December 31, 1995. The balance of the net refunds received, $761,000, was recorded as income taxes payable, pending resolution by the IRS of the appropriateness and the amount of the 172(f) carryback. Beginning in May 1997, the Company came under IRS audit with respect to such refund claims. In September 1998, the Company received tax deficiency notices from the IRS in which the IRS advised the Company that it was disallowing substantially all of the tax refunds received by the Company in 1995 which had been recorded as an income tax benefit. In January 1999, the Company filed a protest letter with the IRS to appeal the disallowance. Subsequent to filing the protest letter, the U.S. Tax Court upheld the disallowance of refund claims made by another taxpayer involving Section 172(f) issues similar to those on which the Company had based certain of its refund claims. The Company can give no assurance that it will prevail in its appeal, and in light of the recent Tax Court ruling, the Company determined that it is appropriate to establish a full reserve for the contested tax refund amounts and interest thereon. Accordingly, in the fourth quarter of fiscal 1999 the Company recorded income tax expense of $1,110,000 plus accrued interest expense of $725,000. In connection with the IRS audit, and the subsequent internal review by the Company, the Company determined that the net refund of $761,000 which had been received in 1995, and which was recorded as income taxes payable upon receipt, needed to be returned to the IRS. Accordingly, on July 30, 1999, the Company repaid this amount to the IRS plus accrued interest of $272,000. After giving effect to this July 1999 repayment, the Company's remaining recorded federal tax liability is $1,110,000, and accrued interest thereon is approximately $450,000. Income tax expense for fiscal 1999 consists of federal current income tax expense of $1,110,000 as described above and state current income tax expense of $92,000. Temporary differences between financial statement carrying amounts and the tax bases of assets and liabilities that give rise to significant portions of the deferred tax assets and liabilities relate to the following (in thousands): June 30 --------------------- 1999 1998 ---- ---- Deferred tax assets: Accrued employee benefits $ 512 $ 409 Reserves and allowances 622 508 Domestic net operating loss carryforwards 14,171 14,195 Foreign net operating loss carryforwards 3,422 3,582 Other 47 64 ------ ------ Total deferred tax assets 18,774 18,758 Deferred tax liabilities: Depreciation (132) (120) ------ ------ Net deferred tax assets before allowance 18,642 18,638 Less valuation allowance (18,642) (18,638) ------ ------ Net deferred tax assets after allowance $ - $ - ====== ====== In assessing the realizability of net deferred tax assets, management considers whether it is more likely than not that some portion or all of the net deferred tax assets will be realized. The ultimate realization of net deferred tax assets is dependent upon the generation of future domestic and foreign taxable income of approximately $38,000,000 and $9,800,000, respectively, prior to the expiration of the net operating loss carryforwards. Based on the level of historical losses, management believes that it is not more likely than not that the deferred tax assets will be realized, and therefore, has recorded a 100% valuation allowance to offset the assets. The valuation allowance was $18,642,000 and $18,638,000 as of June 30, 1999 and 1998, respectively. The net change in the total valuation allowance for the years ended June 30, 1999 and 1998 was an increase (decrease) of $4,000 and ($339,000), respectively. The provision for income taxes differs from an amount computed using the statutory federal income tax rate as follows (in thousands): Year ended June 30 --------------------------- 1999 1998 1997 ---- ---- ---- Federal tax expense computed at statutory rate $ (440) $ 168 $ (293) State income tax, net of Federal benefit 61 - - Reversal of fiscal 1996 income tax benefit 1,110 - - Untaxed S Corporation earnings - (377) (275) Amortization of goodwill 437 431 431 Non-deductible acquisition expenses - 159 - Net change in valuation allowance 4 (339) 132 Other 30 (42) 5 ----- ----- ----- Income tax expense $1,202 $ - $ - ===== ===== ===== As of June 30, 1999, the Company has U.S. federal net operating loss ("NOL") carryforwards of $37,900,000, expiring in 2004 through 2018, and state NOL carryforwards of $26,600,000, expiring in 2000 through 2012. The NOL carryforward for federal alternative minimum tax purposes is approximately $23,000,000. The Company's ability to use its NOL carryforwards to offset future taxable income may be subject to annual limitations due to certain substantial stock ownership changes which have occurred in the current and prior years. The Company maintains an ongoing analysis to determine if the future utilization of the NOLs will be limited due to these ownership changes. Income of the Company's Northern Ireland subsidiaries is sheltered by operating loss carryforwards for United Kingdom income tax purposes (the "U.K. NOL"). The income tax benefit from the U.K. NOL was $60,000, $322,000 and $244,000 in fiscal 1999, 1998, and 1997, respectively, and has been treated as a reduction in the provision for income taxes. At June 30, 1999, the U.K. NOL amounted to approximately $9,776,000. Substantially all of these net operating losses from prior years can be carried forward by the Company's Northern Ireland subsidiaries for an indefinite period of time to reduce future taxable income. Pretax income (loss) from foreign operations for fiscal 1999, 1998 and 1997 was $385,000, $1,480,000, and $772,000, respectively. It is not practicable to estimate the amount of tax that might be payable on the eventual remittance of such earnings to the U.S. parent company. On remittance, the United Kingdom imposes withholding taxes that would then be available for use as a credit against the U.S. tax liability, if any, subject to certain limitations. 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 (in thousands): Year ended June 30 ------------------ 1998 1997 ---- ---- Net income (loss) before pro forma adjustments, per consolidated statements of operations $ 493 $ (868) Pro forma provision for income taxes 61 45 ----- ------ Pro forma net income (loss) $ 432 $ (913) ===== ====== Note 8 - STOCKHOLDERS' EQUITY Sales of Common Stock In May 1999, the Company sold 562,500 shares of common stock to Thomas M. Wheeler, the Company's largest shareholder, for an aggregate price $4,500,000. Costs of this issuance were $37,000. In June 1997, the Company sold 100,000 shares of common stock to various investors, generating proceeds of $1,385,000, which is net of issuance costs of $115,000. Common Stock Issued as Brokerage Fee In June 1998, 10,000 shares of common stock were issued as a brokerage fee in conjunction with the closing of the acquisition of Jolt. The ascribed value of the 10,000 shares of $138,000 is included in acquisition expenses in the accompanying 1998 consolidated statement of operations. Common Stock Issued as Debt Placement Fee In June 1997, 17,667 shares of common stock were issued as a debt placement fee. The ascribed value of the 17,667 shares of $442,000 was expensed in June 1997 and is included in fiscal 1997 debt issue cost amortization expense in the accompanying consolidated statement of operations. Stock Option Plans The Company has in effect several stock-based plans under which non- qualified and incentive stock options and restricted stock awards have been granted to employees and directors. Subject to the discretion of the Board of Directors (the "Board"), employee stock options generally become exercisable over a period of two to three years as determined by the Board, and generally have a 10-year term when granted. The exercise price of all incentive stock options must be equal to or greater than the market value of the shares on the date of grant. The exercise price of non-statutory stock options must be at least 85% of the market value of the common stock on the date of grant. In November 1998, following stockholder approval, the Company adopted a stock plan for non-employee directors. Under this plan, each eligible director will receive shares of Common Stock of the Company valued at $500 to $1,000 for attendance at each meeting of the Board and its committees. In fiscal 1999, the Company recorded expense of $8,000 related to the issuance of stock for attendance at such meetings. Additionally, annually on July 1 each non-employee director is granted a non-statutory stock option to purchase 1,500 shares of common stock at an exercise price equal to the market price at the date of grant. In fiscal 1999 and 1998, options to purchase a total of 8,872 and 4,500 shares, respectively, were granted to the Company's non-employee directors at exercise prices ranging from $6.50 to $10.00 in 1999 and $16.25 to $21.25 in 1998. Activity under the employee and non-employee director stock option plans for fiscal years 1999, 1998 and 1997 was as follows: Weighted average exercise price Shares per share ------ --------- Shares under option, June 30, 1996 81,665 $27.40 Granted 92,638 24.60 Expired or canceled (56,953) 33.20 Exercised (7,500) 10.00 -------- Shares under option, June 30, 1997 109,850 $23.20 Granted 30,560 17.00 Expired or canceled (9,293) 20.80 Exercised (13,723) 10.00 -------- Shares under option, June 30, 1998 117,394 $23.40 Granted 130,766 9.40 Expired or canceled (114,969) 23.02 -------- Shares under option, June 30, 1999 133,191 $ 9.89 ======== ===== In November 1998, pursuant to resolutions of the Board, 112,894 options with exercise prices of $10.00 to $32.50 were canceled and were replaced by new options for the same number of shares at an exercise price of $10.00, the then market value of the common stock. In fiscal 1997, pursuant to resolutions of the Board, 38,116 options with exercise prices of $32.50 to $97.50 were canceled and were replaced by new options for the same number of shares at an exercise price of $25.00, the then market value of the common stock. The following table summarizes information about shares under option at June 30, 1999: Outstanding Exercisable ------------------------------------- ----------------------- Weighted average Weighted Weighted Range of remaining average average exercise Options contractual exercise Options exercise prices outstanding life price exercisable price - - --------- --------- --------- --------- --------- -------- $ 6.50- 8.13 20,935 9.7 years $ 7.24 7,040 $ 6.74 10.00 107,756 9.4 10.00 42,862 10.00 16.25- 21.25 4,500 8.5 19.58 4,500 19.58 -------- ------- 133,191 $9.89 54,402 $10.37 ======== ======= At June 30, 1999, under the employee and non-employee director stock option plans there were 11,000 and 40,000 shares, respectively, available for future grants. Stock Based Compensation The Company applies the provisions of APB Opinion No. 25 and related interpretations in accounting for its stock option plans and the Series H warrants granted to non-employee directors (see "Warrants" below). Accordingly, no compensation cost has been recognized for its stock option plans and awards of warrants to non-employee directors. Had compensation cost for stock-based awards been determined consistent with SFAS 123, the Company's results of operations would have been reduced to the pro forma amounts indicated below: Year ended June 30 -------------------------------------- 1999 1998 1997 ------- ------- ------ Net income (loss): As reported $(2,495,000) $ 493,000 $ (868,000) Pro forma $(3,047,000) $ ( 28,000) $(1,441,000) Earnings (loss) per share: As reported $(1.41) $ 0.34 $(0.63) Pro forma $(1.72) $(0.02) $(1.05) For purposes of this pro forma disclosure, the "fair value" of each option and warrant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 1999, 1998 and 1997: dividend yield of 0.0% percent for all years; expected volatility of 55%, 65% and 68% for 1999, 1998 and 1997, respectively; risk- free interest rates ranging from 4.1% to 5.7% for 1999, 5.4% to 6.3% for 1998, and 6.1% to 6.8% for 1997; and expected lives of five years for all years. The weighted average fair value of options granted during the years ended June 30, 1999, 1998 and 1997 was $9.40, $10.13 and $15.28, respectively. Preferred Stock Purchase Rights At June 30, 1998, 1,000 preferred stock purchase rights were outstanding and exercisable in the event that 20% or more of the Company's outstanding common stock was acquired without prior approval from the Company. The preferred stock purchase rights expired unexercised in June 1999. Warrants During fiscal 1996, the Company issued common stock purchase warrants Series C, D, E, G and H. The provisions and activity of these warrants are as follows. Unless otherwise specified, the exchange ratio of these warrants into common stock is 1-to-1. 1. Series C warrants covering an aggregate of 22,750 shares were issued to four parties, including an investment banking firm, for consulting and financial advisory services. These warrants are exercisable at $70.00 per share until the warrant expiration date on June 30, 2000. These warrants had no intrinsic value on the date of grant. 2. Series D warrants covering 2,500 shares were issued to the Company's former legal counsel as partial consideration for legal services rendered. These warrants are exercisable at $50.00 per share until the warrant expiration date on June 30, 2000. The warrants had no intrinsic value on the date of grant. 3. In connection with the issuance of certain debt in fiscal 1996, 1,500,000 Series E warrants were issued to an investment banking firm which served as the placement agent for this debt. The exchange ratio of warrants to common stock shares is 20-to-1. The Series E warrants are exercisable until their expiration on February 28, 2001, and provided for an original exercise price of $50.00 per share, subject to adjustment in the event the Company issues new common stock at an effective price less than the effective exercise price on the Series E warrants. The effective exercise price on the Series E warrants was $30.20 per share as of June 30, 1999. The warrants had no intrinsic value on the date of grant. 4. As further described in Note 6, the Series G warrants covering an aggregate of 29,793 shares were issued in March 1996 to certain former officers, key employees and directors of the Company. During fiscal 1998 and 1997, 1,340 and 7,232 Series G warrants, respectively, were exercised. The remaining unexercised Series G warrants expired on June 1, 1998. 5. Series H warrants covering an aggregate 15,000 shares were issued to the Company's non-employee directors who served on the Company's board without other compensation during the period from May 31, 1995 to June 30, 1996. The Series H warrants are exercisable at $50.00 per share until the warrant expiration date on June 30, 2000. There was no intrinsic value related to the warrants on the date of grant. Note 9 - OTHER FINANCIAL INFORMATION Earnings (Loss) Per Share Because the Company reported a net loss for the years ended June 30, 1999 and 1997, the amount of shares used in computing diluted earnings per share for these years is equal to the weighted average number of common shares outstanding for the period, and excludes the dilutive effect of options, warrants and convertible securities. A reconciliation of the numerator and denominator used in the computation of fiscal 1998 diluted earnings per share follows: Year ended June 30, 1998 ------ NUMERATOR: Net income $ 493,000 Add back net interest related to convertible subordinated debentures 134,000 ---------- Net income for diluted earnings computation $ 627,000 ========== DENOMINATOR: Weighted average number of common shares outstanding 1,451,323 Assumed exercise of options and warrants net of shares assumed reacquired under treasury stock method 5,325 Assumed conversion of convertible subordinated debentures 15,510 --------- Total diluted shares 1,472,158 ========= During the years ended June 30, 1999, 1998 and 1997, options and warrants to purchase 248,441, 232,644 and 247,661 shares of common stock, respectively, at prices ranging from $6.50 to $70.00 for fiscal 1999, $15.00 to $70.00 for fiscal 1998, and $10.00 to $45.00 for fiscal 1997 were outstanding, 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. Information Relating to Consolidated Statements of Cash Flows "Net cash provided by operating activities" includes cash payments for interest and income taxes as follows (in thousands): Year ended June 30 --------------------------- 1999 1998 1997 ---- ---- ---- Interest paid $ 1,025 $ 1,218 $ 1,081 Income taxes paid 25 - - "Net (increase) decrease in operating working capital, net of effects of business acquired" consists of the following (in thousands): Year ended June 30 --------------------------- 1999 1998 1997 ---- ---- ---- Increase in accounts receivable $ (412) $ (333) $(3,807) Increase in costs and estimated earnings in excess of billings on uncompleted contracts (1,498) (1,624) (135) (Increase) decrease in inventories (3,088) 846 993 (Increase) decrease in prepaid expenses (44) 36 181 Increase (decrease)in accounts payable 3,977 (1,234) 1,220 Increase (decrease)in accrued payroll and employee benefits (28) 74 328 Increase (decrease) in other accrued liabilities 1,404 57 (677) ------ ------ ------ Net (increase) decrease $ 311 $(2,178) $(1,897) ====== ====== ====== Following is the supplemental schedule of non-cash investing and financing activities (in thousands): Year ended June 30 -------------------------- 1999 1998 1997 ---- ---- ---- Capital expenditures financed by lease obligations and notes payable $ 1,793 $ 639 $1,221 Conversion of debt to equity - 2,100 223 Notes payable issued as partial consideration for purchase of Technetics, Inc. 148 - - Common stock issued as debt placement fee - - 442 Other Accrued Liabilities Other accrued liabilities consist of the following (in thousands): June 30 ------------------ 1999 1998 ---- ---- Environmental liabilities $ 465 $ 528 Other 913 852 ------ ------ $1,378 $1,380 ====== ====== Valuation and Qualifying Accounts and Reserves Following is the Company's schedule of valuation and qualifying accounts and reserves for the last three years (in thousands): Beginning Balance at Balance, Charged to Balance beginning Acquired costs and at end of period Company expenses Deductions of period --------- --------- -------- ---------- --------- Allowance for doubtful accounts: - - ------------------------------- Fiscal 1997 $137 $ - $ 74 $ (48) $ 163 Fiscal 1998 163 - 57 (53) 167 Fiscal 1999 167 13 71 (95) 156 Inventory reserves: - - ------------------ Fiscal 1997 $248 $ - $443 $(199) $ 492 Fiscal 1998 492 - 386 (389) 489 Fiscal 1999 489 239 711 (364) 1,075 Note 10 - COMMITMENTS AND CONTINGENCIES Lease Commitments Future minimum lease payments at June 30, 1999 were as follows (in thousands): Capital Operating leases leases ------ ------ Fiscal 2000 $1,090 $ 575 Fiscal 2001 1,011 168 Fiscal 2002 787 138 Fiscal 2003 467 129 Fiscal 2004 253 123 Thereafter - 67 ----- ------ Total 3,608 $1,200 ====== Less: Interest (202) ----- Present value of minimum lease payments $3,406 ====== The capitalized cost of the related assets (primarily plant equipment), which are pledged as security under the capital leases, was $5,390,000 and $1,483,000 at June 30, 1999 and 1998, respectively. Accumulated amortization on assets under capital leases amounted to $1,803,000 and $447,000 at June 30, 1999 and 1998, respectively. Rental expense for operating leases amounted to $680,000, $524,000 and $489,000 for fiscal 1999, 1998 and 1997, respectively. Government Grants Pursuant to government grant agreements with the Industrial Development Board for Northern Ireland ("IDB"), the Company's subsidiary, DDL Electronics Limited ("DDL-E"), has been reimbursed for a portion of qualifying capital expenditures and for certain employment and interest costs. Approximately $128,000 of the government grants received by DDL-E are subject to repayment in the event that DDL-E ceases business, permanently discontinues production, or fails to pay to the IDB any amounts due under its mortgage note payable (Note 6). Management does not expect that the Company will be required to repay any grants under these provisions. Foreign Currency Exposure The Company's investment in its Northern Ireland subsidiaries is represented by operating assets and liabilities denominated in these subsidiaries' functional currency of British pounds sterling. In addition, in the normal course of business these operating units enter into transactions denominated in European currencies other than British pounds sterling. As a result, the Company is subject to transaction and translation exposure from fluctuations in foreign currency exchange rates. The Company uses a variety of strategies, including foreign currency forward contracts and internal hedging in an effort to minimize or eliminate foreign currency exchange rate risk associated with substantially all of its foreign currency transactions. Gains and losses on these hedging transactions, which were immaterial for 1999, 1998 and 1997, are generally recorded in earnings in the same period as they are realized, which is usually in the same period as the underlying or originating transactions. The Company does not enter into speculative foreign currency transactions. At June 30, 1999, the Company did not have any open foreign currency forward contracts. Environmental Matters The Company is currently involved in certain remediation and investigative studies regarding soil and groundwater contamination at the site of a former printed circuit board manufacturing plant in Anaheim, California which was leased by one of the Company's former subsidiaries, Aeroscientific Corp. Under the terms of a cost sharing agreement entered into several years ago, the remaining costs to be incurred to remediate this site will be borne on a 50-50 basis between the Company and the property owner. At June 30, 1999, the Company had a reserve of $465,000 for future remediation costs. Management, based in part on consultations with outside environmental engineers and scientists, believes that this reserve is adequate to cover its share of future remediation costs at this site. It is possible, however, that these future remediation costs could differ significantly from the estimates, and that the Company's portion could exceed the amount of its reserve. The Company's liability for remediation in excess of its reserve could have a material adverse impact on its business, financial condition and results of operations. Note 11 - BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION The Company adopted SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information" during the fourth quarter of fiscal 1999. SFAS No. 131 establishes standards for reporting information about operating segments in financial statements. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or chief decision making group, in deciding how to allocate resources and in assessing performance. The Company operates and is managed internally by two business segments -- electronics manufacturing services and printed circuit board fabrication. A summary of the Company's operations by segment follows (in thousands): Year ended June 30 ------------------------------ 1999 1998 1997 ---- ---- ---- Revenues from external customers: Electronics Manufacturing Services $51,175 $44,690 $41,335 Printed Circuit Boards 8,317 8,575 10,305 ------ ------ ------ $59,492 $53,265 $51,640 ====== ====== ====== Intersegment sales: Printed Circuit Boards $ 590 $ 894 $ 822 ====== ====== ====== Operating income (loss): Electronics Manufacturing Services $ 390 $ 1,886 $ 988 Printed Circuit Boards 112 677 589 General Corporate (479) (409) (541) Acquisition expenses - (609) - ------ ------ ------ $ 23 $ 1,545 $ 1,036 ====== ====== ====== Depreciation and amortization: Electronics Manufacturing Services $ 2,653 $ 2,482 $ 2,353 Printed Circuit Boards 755 579 498 General Corporate 10 6 938 ------ ------ ------ $ 3,418 $ 3,067 $ 3,789 ====== ====== ====== The Company's external sales and long-lived assets net of accumulated depreciation by geographic area are as follows (in thousands): Year ended June 30 ------------------------------ 1999 1998 1997 ---- ---- ---- Revenues: United States $34,247 $23,029 $21,891 Northern Ireland 25,245 30,236 29,749 ------ ------ ------ Total $59,492 $53,265 $51,640 ====== ====== ====== Long-lived assets: United States $ 3,468 $ 2,773 Northern Ireland 5,430 4,102 ------ ------ Total $ 8,898 $ 6,875 ====== ====== The Company's Electronics Manufacturing Services segment had sales to one customer which accounted for 18.2% of revenues in fiscal 1999, sales to three customers which accounted for 19.9%, 13.8% and 13.8% of revenues in fiscal 1998, and sales to two customers which accounted for 17.8% and 15.7% of revenues in fiscal 1997. Note 12 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) Following is a summary of the quarterly results of operations (in thousands except per share amounts): Quarter ended ------------------------------------------------------ Sep 30 Dec 31 Mar 31 Jun 30 Total -------- ------- ------- ------- ------- Fiscal 1999 Revenues $14,065 $15,568 $14,524 $15,335 $59,492 Net income (loss) $ 232 $ 207 $ 80 $(3,014)(A) $(2,495) Basic earnings (loss) per share $ 0.14 $ 0.12 $ 0.05 $ (1.53) $ (1.41) Fiscal 1998 Revenues $13,413 $12,820 $13,600 $13,432 $53,265 Net income (loss) $ 301 $ 398 $ 291 $ (497)(B) $ 493 Basic earnings (loss) per share $ 0.21 $ 0.27 $ 0.20 $ (0.34) $ 0.34 (A) Included in the net loss of for the three months ended June 30, 1999 is (i) income tax expense of $1,110,000 to provide for the expected repayment to the Internal Revenue Service of tax refunds that were received in fiscal 1996 which were substantially disallowed in fiscal 1999, and accrued interest thereon of $725,000, as further described in Note 7 herein, and (ii) a provision of $487,000 for excess inventory. (B) Included in the net loss for the three months ended June 30, 1998 are acquisition expenses of $609,000 related to the acquisition of Jolt on June 30, 1998, as discussed in Note 2. SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES Market and Dividend Information The Company's common shares are traded on Nasdaq Small Cap Market (ticker symbol "SMTI") and the Pacific Exchange (ticker symbol "SMK"). The Company transferred its common stock listing from the New York Stock Exchange to Nasdaq effective July 1, 1999. The high and low closing sales prices for the common stock for the last two fiscal years, as reported on the composite tape, are set forth in the following table. Fiscal 1999 Fiscal 1998 ------------- --------------- High Low High Low ----- ----- ----- ------ 1st Quarter $16.25 $7.50 $23.75 $16.25 2nd Quarter 13.75 8.13 20.00 13.75 3rd Quarter 11.25 6.25 16.25 12.50 4th Quarter 11.56 5.63 17.50 12.50 There were approximately 1,300 stockholders of record at October 7, 1999. The Company suspended dividend payments in 1989. A resumption of dividend payments is not anticipated in the foreseeable future. Form 10-K Annual Report A copy of the Annual Report on Form 10-K (without exhibits) may be obtained free of charge upon written request to SMTEK International, Inc., 2151 Anchor Court, Thousand Oaks, California 91320 attention: Secretary. SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES DIRECTORS, EXECUTIVE OFFICERS, OPERATING UNITS AND OTHER CORPORATE INFORMATION DIRECTORS EXECUTIVE OFFICERS James P. Burgess Gregory L. Horton Vice President President and Chief Executive Officer Trilogy Marketing Inc. Naples, Florida Richard K. Vitelle Vice President - Finance and Gregory L. Horton Administration, Chief Financial Officer, Chairman of the Board, Treasurer and Secretary President and Chief Executive Officer George R. Weatherford SMTEK International, Inc. Vice President - Operations Bruce E. Kanter OPERATING UNITS Management Consultant SMTEK, Inc. Thousand Oaks, California Thousand Oaks, California Oscar B. Marx, III Jolt Technology, Inc. President and CEO, Fort Lauderdale, Florida TMW Enterprises, Inc. Troy, Michigan Technetics, Inc. (dba SMTEK San Diego) San Diego, California DDL Electronics Limited Craigavon, Northern Ireland United Kingdom TRANSFER AGENT & REGISTRAR American Stock Transfer & Irlandus Circuits Limited Trust Company Craigavon, Northern Ireland 40 Wall Street United Kingdom New York, New York 10005 INDEPENDENT AUDITORS LEGAL COUNSEL KPMG LLP Gibson, Dunn & Crutcher LLP Los Angeles, California Irvine, California INVESTOR RELATIONS COUNSEL Foley/Freisleben LLC Los Angeles, California EX-21 4 EXHIBIT 21 SMTEK INTERNATIONAL, INC. SUBSIDIARIES OF THE REGISTRANT All subsidiaries are 100% owned by SMTEK International, Inc., except as otherwise indicated, and are included in the consolidated financial statements. Each subsidiary was organized in the jurisdiction specified under its name in the following list. DDL Europe Limited Northern Ireland DDL Electronics Limited (100%-owned by DDL Europe Limited) Northern Ireland Irlandus Circuits Limited (100% owned by DDL Europe Limited) Northern Ireland Jolt Techology, Inc. Delaware SMTEK, Inc. California Technetics, Inc. California EX-23 5 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS The Board of Directors SMTEK International, Inc. We consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-02969 and 333-31349) and the Registration Statements on Form S-8 (Nos. 33-74400, 333-08689 and 333- 72139) of SMTEK International, Inc. of our report dated October 11, 1999, relating to the consolidated balance sheets of SMTEK International, Inc. and subsidiaries as of June 30, 1999 and 1998 and the related consolidated statements of operations, cash flows and stockholders' equity and comprehensive income (loss) for each of the years in the three-year period ended June 30, 1999, which report appears in the June 30, 1999 Annual Report on Form 10-K of SMTEK International, Inc. /s/ KPMG LLP Los Angeles, California October 11, 1999 EX-27 6
5 12-MOS JUN-30-1999 JUN-30-1999 4997000 0 10762000 156000 5812000 27899000 27559000 18661000 39544000 23087000 0 23 0 0 9281000 39544000 59492000 59492000 51523000 59469000 0 0 1678000 (1293000) 1202000 (2495000) 0 0 0 (2495000) (1.41) (1.41)
EX-99 7 EXHIBIT 99 UNDERTAKING FOR FORM S-8 REGISTRATION STATEMENT With respect to the Registration Statements previously filed by the Company on Form S-8, the Company hereby undertakes as follows: Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding), is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. -----END PRIVACY-ENHANCED MESSAGE-----