0001104659-04-013560.txt : 20040510 0001104659-04-013560.hdr.sgml : 20040510 20040510161446 ACCESSION NUMBER: 0001104659-04-013560 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040510 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SMTEK INTERNATIONAL INC CENTRAL INDEX KEY: 0000026987 STANDARD INDUSTRIAL CLASSIFICATION: PRINTED CIRCUIT BOARDS [3672] IRS NUMBER: 330213512 STATE OF INCORPORATION: DE FISCAL YEAR END: 0702 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08101 FILM NUMBER: 04793326 BUSINESS ADDRESS: STREET 1: 200 SCIENCE DRIVE CITY: MOORPARK STATE: CA ZIP: 93021 BUSINESS PHONE: 8055322800 MAIL ADDRESS: STREET 1: 200 SCIENCE DRIVE CITY: MOORPARK STATE: CA ZIP: 93021 FORMER COMPANY: FORMER CONFORMED NAME: DDL ELECTRONICS INC DATE OF NAME CHANGE: 19940119 FORMER COMPANY: FORMER CONFORMED NAME: DATA DESIGN LABORATORIES INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: DATA DESIGN LABORATORIES DATE OF NAME CHANGE: 19880817 10-Q 1 a04-5651_110q.htm 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10 - Q

(Mark One)

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF

For the quarterly period ended: MARCH 31, 2004

o 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: 1-08101

SMTEK INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

DELAWARE		33-0213512
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

200 Science Drive, Moorpark, CA 93021
(Address of principal executive offices)

805-532-2800
(Registrant’s telephone number, including area code)

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 ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes ý No o

The registrant had 2,383,516 shares of Common Stock outstanding as of May 6, 2004.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands, except share amounts)

	March 31, 2004			June 30, 2003
ASSETS
Current assets:
Cash and cash equivalents	$	501		$	583
Marketable securities	364			—
Accounts receivable, less allowance for doubtful accounts of $438 and $657, as of March 31,
2004 and June 30, 2003, respectively	13,030			11,096
Inventories	13,932			9,377
Prepaid expenses	1,061			446
Total current assets	28,888			21,502

Property, equipment and improvements, net of accumulated depreciation and amortization	5,071			5,541
Other assets, net	407			763
	$	34,366		$	27,806

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	1,515		$	2,495
Accounts payable	15,656			9,598
Other accrued liabilities	3,332			3,708
Total current liabilities	20,503			15,801

Long-term liabilities:
Long-term bank line of credit payable	6,264			5,452
Long-term debt	4,098			5,675

Total liabilities	30,865			26,928

Commitments and contingencies

Stockholders’ equity:
Preferred stock, $1 par value; 1,000,000 shares authorized; 250,000 shares issued and outstanding at March 31, 2004	475			—
Common stock, $.01 par value; 20,000,000 shares authorized; 2,383,516 and 2,284,343 issued and outstanding at March 31,2004 and June 30,2003	24			23
Additional paid-in capital	37,383			37,028
Accumulated deficit	(34,508		)	(36,232		)
Accumulated other comprehensive income	127			59
Total stockholders’ equity	3,501			878
	$	34,366		$	27,806

See accompanying notes to unaudited condensed consolidated financial statements.

SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND OTHER COMPREHENSIVE INCOME (LOSS) (Unaudited)

(In thousands, except per share amounts)

	Three Months Ended March 31,						Nine Months Ended March 31,
	2004			2003			2004			2003

Revenues	$	22,556		$	17,430		$	63,380		$	50,474
Cost of goods sold	20,168			15,510			56,098			46,122
Gross profit	2,388			1,920			7,282			4,352

Operating expenses:
Administrative and selling	1,860			2,216			5,922			7,906
Total operating expenses	1,860			2,216			5,922			7,906

Operating income (loss)	528			(296		)	1,360			(3,554		)

Non-operating income (expense):
Interest expense, net	(207		)	(267		)	(545		)	(776		)
Other income (expense), net	(170		)	269			945			261
Total non-operating income (expense), net	(377		)	2			400			(515		)

Income (loss) from continuing operations before income tax	151			(294		)	1,760			(4,069		)
Income tax provision	3			—			40			6

Income (loss) from continuing operations	148			(294		)	1,720			(4,075		)

Loss from discontinued operations, net of tax	—			(756		)	—			(1,300		)

Income (loss) before cumulative effect of change in accounting principle	148			(1,050		)	1,720			(5,375		)
Cumulative effect of change in accounting principle	—			—			—			(420		)
Net income (loss)	$	148		$	(1,050	)	$	1,720		$	(5,795	)

Other comprehensive income (loss):
Foreign currency translation adjustments	(2		)	(28		)	71			(9		)
Change in unrealized gain/(loss) on forward contracts	—			—			—			(72		)
Comprehensive income (loss)	$	146		$	(1,078	)	$	1,791		$	(5,876	)
Basic earnings (loss) per share:
Income (loss) from continuing operations	$	0.06		$	(0.13	)	$	0.69		$	(1.79	)
Loss from discontinued operations	—			(0.33		)	—			(0.57		)
Cumulative effect of change in accounting principle	—			—			—			(0.18		)
Net income (loss) per share	$	0.06		$	(0.46	)	$	0.69		$	(2.54	)

Diluted earnings (loss) per share:
Income (loss) from continuing operations	$	0.05		$	(0.13	)	$	0.63		$	(1.79	)
Loss from discontinued operations	—			(0.33		)	—			(0.57		)
Cumulative effect of change in accounting principle	—			—			—			(0.18		)
Net income (loss) per share	$	0.05		$	(0.46	)	$	0.63		$	(2.54	)

Shares used in computing basic and diluted earnings (loss) per share:
Basic	2,595			2,284			2,488			2,284
Diluted	2,912			2,284			2,721			2,284

See accompanying notes to unaudited condensed consolidated financial statements.

SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)

	Nine Months Ended March 31,
	2004			2003

Cash flows from operating activities:
Income (loss) from continuing operations	$	1,720		$	(4,075	)
Adjustments to reconcile income (loss) from continuing operations to net cash (used in) provided by operating activities:
Depreciation and amortization	1,353			1,648
Gain on extinguishment of debt	(880		)	—
Unrealized gain on marketable securities	(28		)	—
Loss on sale of subsidiary	85			—
Equity securities received in settlement of claim against prior customer	—			(336		)
Charge for leasehold abandonment	—			1,025
Write-off of leasehold improvements	—			370
Increase in accounts receivable	(2,563		)	(3,143		)
(Increase) decrease in inventories	(4,915		)	484
Increase in accounts payable	6,132			1,996
(Decrease) increase in other accrued liabilities	(423		)	1,316
Increase in other current assets	(488		)	(33		)
Cash provided by operating activities - discontinued operations	—			2,080
Net cash (used in) provided by operating activities	(7		)	1,332

Cash flows from investing activities:
Capital expenditures	(941		)	(756		)
Capital expenditures - discontinued operations	—			(275		)
Proceeds from sale of subsidiary	940			—
Net cash used in investing activities	(1		)	(1,031		)

Cash flows from financing activities:
Proceeds from bank lines of credit	812			2,625
Payments of long-term debt	(1,673		)	(1,253		)
Proceeds from the issuance of preferred stock	500			—
Costs related to new credit facility	(164		)	—
Proceeds from the exercise of stock options	383			—
Cash outflows from financing activities - discontinued operations	—			(1,929		)
Net cash used in financing activities	(142		)	(557		)

Effect of exchange rate changes on cash	68			(14		)

Decrease in cash and cash equivalents	(82		)	(270		)

Cash and cash equivalents at beginning of period	583			816

Cash and cash equivalents at end of period	$	501		$	546

Supplemental cash flow information:
Interest paid	$	598		$	862

See accompanying notes to unaudited condensed consolidated financial statements.

SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Nine Months Ended March 31, 2004 and 2003

NOTE 1 - DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

SMTEK International, Inc. (the “Company,” “we,” “us” or “our”), headquartered in Moorpark, California, is an electronics manufacturing services (“EMS”) provider serving original equipment manufacturers (“OEMs”) in the medical, industrial instrumentation, telecommunications, security, financial services automation and aerospace and defense industries. We provide integrated solutions to OEMs across the entire product life cycle, from design to manufacturing to end-of-life services, for the worldwide high criticality, high reliability, high complexity segment of the EMS industry.

We have four wholly owned subsidiaries: SMTEK, Inc. (dba SMTEK Moorpark), located in Moorpark, California; SMTEK New England, located in Marlborough, Massachusetts; SMTEK Santa Clara, located in Santa Clara, California; and SMTEK International Thailand Limited, located in Ayutthya, Thailand.

On January 9, 2004, we sold our subsidiary Jolt Technology, Inc. (aka SMTEK Fort Lauderdale), located in Fort Lauderdale, Florida, for approximately $940,000 in cash to the president of Jolt and an affiliated investor of the Company. The loss on the sale of Jolt was approximately $85,000 and has been recognized for the nine months ended March 31, 2004 in the accompanying unaudited Condensed Consolidated Statements of Operations and Other Comprehensive Income (Loss). The results of operations of Jolt through the date of sale and for the nine months ended March 31, 2003 are included in the accompanying unaudited Condensed Consolidated Statements of Operations and Other Comprehensive Income (Loss). For further discussion, see Note 3.

On April 9, 2003, we sold our facility in Northern Ireland. This is shown in our unaudited condensed financial statements as a discontinued operation. For further discussion, see Note 4.

On November 19, 2002, we announced that we were consolidating our San Diego facility into our other California operations in Moorpark and Santa Clara. This transition was completed as of March 31, 2003.

The unaudited consolidated financial information furnished herein has been prepared in accordance with generally accepted accounting principles and reflects all adjustments, consisting only of normal recurring adjustments, which in the opinion of management, are necessary to fairly state the Company’s financial position, the results of its operations and its cash flows for the periods presented.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates and such differences may be material to the financial statements. The results of operations for the three and nine months ended March 31, 2004 are not necessarily indicative of results for the entire fiscal year ending June 30, 2004.

As permitted under applicable rules and regulations of the Securities and Exchange Commission, certain notes and other information are condensed or omitted from the interim financial statements presented in this Quarterly Report on Form 10-Q. Therefore, these condensed financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended

June 30, 2003, as filed with the Securities and Exchange Commission on September 25, 2003.

Marketable Securities

Our marketable securities consist of an investment in common stock of a public company which, for accounting purposes, is classified as trading securities. Accordingly, the investment is marked to market quarterly with the change in value being recorded in the statement of operations. For the three and nine months ended March 31, 2004, we recognized an unrealized gain (loss) on marketable securities of ($255,000) and $28,000, respectively. Management’s intention is to sell off the shares of such public company over the next 12 months.

Restructuring Costs

In connection with the closure and transition of the Company’s San Diego facility in the second quarter of 2003, we incurred approximately $1.6 million in expenses consisting of severance costs of $287,000, write-off of leasehold improvements of $370,000 and accrual of remaining lease obligation of $4,011,000 less sublease income of $3,038,000. All severance costs were paid out and, of the $973,000 lease-related commitments, $448,000 has been paid out, resulting in a reserve at March 31, 2004 of $525,000.

Revenue Recognition

All of our subsidiaries recognize revenues once all of the following conditions have been met: a) an authorized purchase order has been received in writing, b) the customer’s credit worthiness has been established, c) shipment of the product has occurred, d) title and risk of ownership has transferred, e) if stipulated by the contract, customer acceptance has occurred and f) all significant vendor obligations, if any, have been satisfied. We ship products FOB shipping point and, accordingly, title and risk of ownership pass to the customer upon shipment.

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of SMTEK International, Inc. and its wholly owned subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation.

Stock Based Compensation

SFAS No. 123, “Accounting for Stock-Based Compensation” allows entities to continue to apply the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and provide pro forma net income and pro forma earnings per share disclosures for stock-based awards as if the fair-value-based method defined in SFAS No. 123 had been applied. In accordance with APB Opinion No. 25 and related interpretations, compensation expense would generally be recorded for fixed option grants only if, on the date of grant, the current market price of the underlying stock exceeded the exercise price. We have elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. Accordingly, no compensation expense has been recognized for our employee stock option plans and award of options to non-employee directors. Had compensation expense for stock-based awards been determined consistent with SFAS No.123, our results of operation would have been reduced to the unaudited pro forma amounts indicated below (in thousands, except per share amounts):

	Three Months Ended March 31						Nine Months Ended March 31
	2004			2003			2004			2003

Net income (loss) as reported	$	148		$	(1,050	)	$	1,720		$	(5,795	)

Deduct total stock-based employee compensation expense under fair value-based method for all awards, net of tax	(204		)	(99		)	(538		)	(297		)

Pro forma net income (loss)	$	(56	)	$	(1,149	)	$	1,182		$	(6,092	)

Pro forma earnings (loss) per share:
Earnings (loss) per share - basic	$	(0.02	)	$	(0.50	)	$	0.48		$	(2.67	)
Earnings (loss) per share - diluted	$	(0.02	)	$	(0.50	)	$	0.43		$	(2.67	)

For purposes of the pro forma disclosure under SFAS No. 123, 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 2004 and 2003: dividend yield of 0.0% for all years; expected volatility of 120% and 100% for 2004 and 2003, respectively; risk-free interest rates ranging from 2.75% to 3.38% for 2004 and 2.24% to 3.11% for 2003, and expected lives of five years for both years.

The weighted average fair value of options granted during the nine months ended March 31, 2004 and 2003 was $4.98 and $1.19, respectively.

Recent Accounting Pronouncements

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Instruments with Characteristics of Both Liabilities and Equity.” This standard requires that certain financial instruments embodying an obligation to transfer assets or to issue equity securities be classified as liabilities. This standard is effective for financial instruments entered into or modified after May 31, 2003. The adoption of SFAS No. 150 did not have an effect on the Company’s financial position or results of operations.

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities — an Interpretation of ARB No. 51”. The Interpretation clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The provisions of the Interpretation are effective for all enterprises with variable interests in variable interest entities created after January 31, 2003 and is effective October 9, 2003. The adoption of this interpretation did not have an impact on the Company’s financial position or results of operations.

Accounting Period

We utilize a 52-53 week fiscal year ending on the Friday closest to June 30, which for fiscal year 2003 fell on June 27, 2003. In the accompanying condensed consolidated financial statements, the 2003 fiscal year end is shown as June 30 and the interim period end for both years is shown as March 31 for clarity of presentation. The actual interim periods ended on March 26, 2004 and March 28, 2003.

NOTE 2 – CHANGE IN ACCOUNTING PRINCIPLE

We adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” as of July 1, 2002. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment, at least annually, in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” In accordance with SFAS No. 142, during the December 2002 quarter we completed our initial assessment of impairment and determined that our goodwill was fully impaired and have recognized an impairment loss of $420,000, net of taxes, in the condensed consolidated statement of operations as a change in accounting principle, effective July 1, 2002.

NOTE 3 – SALE OF SUBSIDIARY

Net assets of Jolt as of the sale date of January 9, 2004 consisted of the following (in thousands):

Current assets	$	1,026
Property, equipment and improvements	58
Other assets	20
Current liabilities	(79		)
Net assets	$	1,025

There were no results of operations for Jolt in the current quarter ended March 31, 2004. Revenues were $1.7 million for the nine months ended March 31, 2004 and operating income was $109,000 for the nine months ended March 31, 2004.

NOTE 4 - DISCONTINUED OPERATIONS

On April 9, 2003, we sold 100% of the outstanding stock of our Northern Ireland facility, SMTEK Europe. The purchaser also assumed all liabilities of SMTEK Europe. The purchaser was a Northern Ireland investor group, which included a director from SMTEK Europe.

Accordingly, operating results for SMTEK Europe for the nine months ended March 31, 2003 have been presented in the accompanying unaudited Condensed Consolidated Statements of Operations and Other Comprehensive Income (Loss) as discontinued operations, and are summarized as follows (in thousands):

	Nine Months Ended March 31, 2003
Net sales	$	6,277
Cost of goods sold	(6,542		)
Operating expenses	(867		)
Other income (expense), net	(168		)
Loss from discontinued operations, net of tax	$	(1,300	)

Net assets of SMTEK Europe as of the sale date of April 9, 2003 consisted of the following (in thousands):

Current assets	$	3,516
Property, equipment and improvements	1,486
Current liabilities	(5,312		)
Long-term debt	(65		)
Net liabilities	$	(375	)

NOTE 5 – EARNINGS 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 and participating preferred shares on an as converted basis outstanding during the period. 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 our earnings (losses).

Common stock equivalents used in the determination of diluted earnings per share include the effect, when such effect is dilutive, of our outstanding employee stock options, the 8-1/2% Convertible Subordinated Debentures (that are convertible into 4,988 shares of common stock at $212.50 per share of common stock) and warrants to purchase 15,000 shares of common stock at $7.95 per share. The following is a summary of the calculation of basic and diluted earnings per share (dollars in thousands, except per share data):

	Three Months ended March 31,					Nine Months Ended March 31,
	2004		2003			2004		2003

Net income (loss)	$	148	$	(1,050	)	$	1,720	$	(5,795	)

Weighted average shares:
Basic weighted average number of common shares outstanding	2,594,527		2,284,343			2,487,818		2,284,343
Dilutive effect of outstanding common stock equivalents	317,337		—			233,601		—
Diluted weighted average number of common shares outstanding	2,911,864		2,284,343			2,721,419		2,284,343
Earnings (loss) per share - basic	$	0.06	$	(0.46	)	$	0.69	$	(2.54	)
Earnings (loss) per share - diluted	$	0.05	$	(0.46	)	$	0.63	$	(2.54	)

Options to purchase approximately 18,542 shares of common stock at prices ranging from $8.36 to $10.00 that were outstanding at March 31, 2004, are not included in the computation of diluted earnings per share for the three months

ended March 31, 2004, because the exercise prices of these options were greater than the average market price of our common stock. Options to purchase approximately 197,884 shares of common stock at prices ranging from $5.78 to $10.00 that were outstanding at March 31, 2004, are not included in the computation of diluted earnings per share for the nine months ended March 31, 2004, because the exercise prices of these options were greater than the average market price of our common stock. Warrants to purchase 15,000 shares of common stock at $7.95 per share which were outstanding at March 31, 2004, are not included in the computation of diluted earnings per share for the nine months ended March 31, 2004, because the exercise price of these warrants was greater than the average market price of our common stock. Because we had a net loss for the three and nine months ended March 31, 2003, there were no common stock equivalents that had a dilutive effect on earnings per share. However, if we had reported net income rather than a loss for the three and nine months ended March 31, 2003, the additional diluted shares outstanding would have been 6,430 and 4,145 shares for the three and nine months ended March 31, 2003, respectively. Further, options to purchase approximately 613,900 shares of common stock at prices ranging from $1.05 to $10.00 that were outstanding at March 31, 2003, would not have been included in the computation of diluted earnings per share for the three and nine months ended March 31, 2003, because the exercise price of these options and warrants were greater than the average market price of our common stock.

Convertible subordinated debentures aggregating $1,060,000, due in 2008 and convertible at a price of $212.50 per share at any time prior to maturity, were outstanding during the three and nine months ended March 31, 2004 but were not included in the computation of diluted earnings per share because the conversion price was greater than the average market price of the common stock. Convertible subordinated debentures aggregating $1,580,000, due in 2008 and convertible at a price of $212.50 per share at any time prior to maturity were outstanding during the three and nine months ended March 31, 2003 but were not included in the computation of diluted earnings per share because we had a net loss and because the conversion price was greater than the average market price of the common stock.

NOTE 6 - INVENTORIES

Inventories consist of the following (in thousands):

	March 31, 2004		June 30, 2003
Raw materials	$	8,445	$	5,810
Work in process	5,192		3,298
Finished goods	295		269
Total inventories	$	13,932	$	9,377

Note 7 – PROPERTY, EQUIPMENT AND IMPROVEMENTS

Property, equipment and improvements consist of the following (in thousands):

	March 31, 2004			June 30, 2003
Buildings and improvements	$	1,475		$	1,450
Plant equipment	12,719			13,075
Office and other equipment	1,602			1,581
Less accumulated depreciation and amortization	(10,725		)	(10,565		)
Total property, equipment and improvements	$	5,071		$	5,541

NOTE 8 – CREDIT AGREEMENTS AND DEBT RESTRUCTURING

At March 31, 2004, as one component of our credit facility, we have a $10 million working capital line collateralized by accounts receivable, inventory and equipment for our domestic operating units that matures September 19, 2006. Borrowings under the working capital line bear interest, at our option, at either the bank’s prime rate (4.0% at March 31, 2004) plus 1.0% or a Libor-base rate (1.125% at March 31, 2004) plus 3.75%. At March 31, 2004, borrowings under our working capital line amounted to $6.3 million and the effective weighted average interest rate was 4.91%. Borrowings under our working capital line at March 31, 2004 have been classified as long-term. In addition, in September 2003 we borrowed $1 million on our term credit facility, the second component of our credit facility. This advance has a maturity date of September 19, 2006 and bears interest, at our option, at either the bank’s prime rate (4.0% at March 31, 2004) plus 1.0% or a Libor-base rate (1.125% at March 31, 2004) plus 3.75%. At March 31, 2004, the balance outstanding was $833,000 and the effective interest rate was 4.89%. The third component of our credit facility, the capital expenditure credit facility of $1 million, will be used to finance our capital expenditures. Each advance under the capital expenditure credit facility will have a three year term at either the Bank’s prime rate or, at our option, at a fixed rate equal to the Libor rate plus 3.75%. There were no borrowings under the capital expenditure credit facility as of March 31, 2004. We were in compliance with all covenants on the above credit facilities at March 31, 2004.

Also during the nine months ended March 31, 2004, we settled obligations to former officers, employees and directors under consulting and deferred fee agreements by paying approximately $440,000 and fully retiring $972,000 in debt resulting in a $532,000 gain from extinguishment of debt. We also reached settlement with certain subordinated debt holders by paying an aggregate of $172,000 to fully retire an aggregate of $520,000 in debt resulting in a $348,000 gain from extinguishment of debt. The aggregate $880,000 gain on extinguishment of debt is a component of other income (expense), net in the unaudited condensed consolidated statements of operations.

NOTE 9 – PREFERRED STOCK

In September 2003, we sold in a private placement 250,000 shares of convertible Series A Preferred Stock at $2.00 per share for gross offering proceeds of $500,000. The shares are convertible into common stock initially on a one-to-one basis and are redeemable, solely at the Company’s option, at 1.5 times the purchase price after 180 days from the date of issuance. Holders of Series A Preferred Stock have voting rights equal to holders of common stock on an as converted basis and enjoy a liquidation preference to any junior stock whereby preferred holders receive 1.5 times their initial investment plus any accrued dividends before any distributions to junior stockholders. Preferred holders are entitled to receive, on January 1 of each year, out of any assets legally available therefor, payable when, as and if declared by the Board, prior and in preference to any declaration or payment of any dividend on Junior Securities, dividends at the rate of 9% of the Purchase Price plus any accrued an unpaid dividends per annum. Such dividends shall accrue annually in arrears whether or not

declared by the Board of Directors and shall be cumulative. If the Company declares and pays dividends or distributions on common stock then the holders of shares of Series A Preferred Stock are entitled to share in such dividends or distributions on a pro rata basis as if their shares had been converted into shares of common stock. Dividends accrued on the preferred stock amounted to $26,000 at March 31, 2004.

NOTE 10 – GEOGRAPHIC INFORMATION

We operate in a single business segment – the EMS industry. Our revenues and long-lived assets, net of accumulated depreciation, by geographic area are as follows (in thousands):

	Three Months Ended March 31,				Nine Months Ended March 31,
	2004		2003		2004		2003

Revenues:
United States	$	20,132	$	15,973	$	56,270	$	47,331
Thailand	2,424		1,457		7,110		3,143
Total revenues	$	22,556	$	17,430	$	63,380	$	50,474

	March 31, 2004		June 30, 2003
Long-lived assets:
United States	$	4,537	$	5,324
Thailand	534		217
Total long-lived assets	$	5,071	$	5,541

NOTE 11 – SUBSEQUENT EVENT

On May 6, 2004, we finalized a Credit Facility Agreement between SMTEK International Thailand Company Limited (our Thailand subsidiary) and BankThai Public Company Limited and an unconditional guarantee by SMTEK International, Inc. for the purpose of funding the growth and expansion of our Thailand facility. The credit facility includes a $725,000 mortgage loan for the purchase of the building and land at our Thailand facility. The mortgage has a seven year term with an initial interest rate of 5.75%, based on Thailand Prime Rate, and a monthly payment of approximately $9,000. The Credit Facility Agreement also includes a $440,000 construction loan for the expansion of the Thailand facility. The construction loan has a 78 month term with interest at Thailand Prime Rate and a monthly payment of approximately $5,000. The Credit Facility Agreement also includes a working capital line of approximately $500,000 with interest at Thailand Prime rate, a one year term and it is secured by all the assets of the Thailand facility. All liabilities and obligation under the Credit Facility are denominated in Baht, the currency of Thailand.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

References in this report to “the Company”, “SMTEK”, “we”, “our”, or “us” mean SMTEK International, Inc. together with its subsidiaries, except where the context otherwise requires. This Quarterly Report on Form 10-Q contains

certain statements that are, or may be deemed to be, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and are made in reliance upon the protections provided by such acts for forward-looking statements. These forward-looking statements (such as when we describe what “will,” “may” or “should” occur, what we “plan,” “intend,” “estimate,” “believe,” “expect” or “anticipate” will occur, and other similar statements) include, but are not limited to, statements regarding future sales and operating results, future prospects, anticipated benefits of proposed (or future) acquisitions and new facilities, growth, the capabilities and capacities of business operations, any financial or other guidance and all statements that are not based on historical fact, but rather reflect our current expectations concerning future results and events. We make certain assumptions when making forward-looking statements, any of which could prove inaccurate, including, but not limited to, statements about our future operating results and business plans. The ultimate correctness of these forward-looking statements is dependent upon a number of known and unknown risks and events, and is subject to various uncertainties and other factors that may cause our actual results, performance or achievements to be different from any future results, performance or achievements expressed or implied by these statements.

The following important factors, among others, could affect future results and events, causing those results and events to differ materially from those expressed or implied in our forward-looking statements: business conditions and growth in our customers’ industries, the electronic manufacturing services industry and the general economy, variability of operating results, our dependence on a limited number of major customers, the potential consolidation of our customer base, availability of components, dependence on certain industries, seasonality, variability of customer requirements, our ability to successfully negotiate definitive agreements and consummate acquisitions, and to integrate operations following consummation of acquisitions, our ability to take advantage of our restructuring to improve utilization and realize savings, other economic, business and competitive factors affecting our customers, our industry and business generally and other factors that we may not have currently identified or quantified. For a further list and description of various risks, relevant factors and uncertainties that could cause future results or events to differ materially from those expressed or implied in our forward-looking statements, see “Factors that May Affect our Results” below, as well as in our Annual Report on Form 10-K for the fiscal year ended June 30, 2003, any subsequent Reports on Form 10-Q and Form 8-K and other filings with the Securities and Exchange Commission.

All forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date of this Quarterly Report on Form 10-Q, and we do not intend to publicly update or correct any forward-looking statements to reflect events or circumstances that subsequently occur or which we hereafter become aware of. You should read this document and the documents, if any, that we incorporate by reference into this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We may not update these forward-looking statements, even if our situation changes in the future. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.

The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this report.

FACTORS THAT MAY AFFECT OUR RESULTS

The following factors update certain risk factors identified in our 2003 Annual Report on Form 10-K which was filed with the SEC on September 25, 2003. We direct readers to the documents we file with the SEC, including our most recent Reports on Forms 10-K, 10-Q and 8-K, each as it may be amended from time to time, for a more complete description of important risk factors affecting our Company.

Our Industry is Characterized by Low Profit Margins.

Competition in the EMS industry is primarily driven by price often resulting in lower profit margins for EMS providers. In this regard, customers have sought and continue to seek price reductions. In addition, designing and manufacturing products for new customers can result in higher costs and lower profit margins than we typically experience with our established customers since initial production runs do not reflect full production efficiencies. Unless we successfully achieve further material cost reductions, efficiencies and productivity gains, we may experience a material adverse effect on our operating results and our financial condition. There can be no assurance, however, whether reductions in materials costs will be effective or adequate to compensate for such price reductions or that we will be successful in furthering efficiencies and productivity gains.

The Loss of Any One of Our Larger Customers May Adversely Affect Our Results and Financial Condition.

Sales to three customers accounted for 12.1%, 11.5% and 10.1% of revenues in the nine months ended March 31, 2004. The loss of one or more of our larger customers, or a significant reduction in sales to any of our major customers, could have an adverse effect on our business, results of operations and financial condition.

Our Liquidity is Currently Limited and Our Debt Profile May Change and May Affect Our Operations and Financial Condition.

Our cash is currently limited, and, at March 31, 2004, our debt-to-equity ratio, excluding bank letter of credit classified as long-term, was 1.6 to 1.00. Although our debt load recently decreased and we have taken certain cost reduction measures, several factors, including but not limited to, a continued prolonged economic downturn, capital investment to increase production, acquisitions of other EMS companies or our inability to move the Company toward profitability, may significantly change our debt profile, resulting in an increase in debt to a point that over-extends our cash-flow capacity. Also, under such circumstances, we may have future capital requirements and our ability to obtain additional financing will be subject to a number of factors, including market conditions, our operating performance and investor sentiment. These factors may make the timing, amount, terms and conditions of additional financing unavailable or unattractive to us. Any of these events or conditions could have a material adverse effect on our business, financial condition and results of operations.

Our Lines of Credit Contain Certain Financial Covenants That Must Be Met.

In September 2003, we entered into a new domestic credit facility (See Note 8 to the unaudited condensed consolidated financial statements for a more detailed discussion of the new credit facility). This new credit facility matures September 19, 2006 and includes certain covenants that we are required to comply with. On May 6, 2004, we entered into a new Thailand credit facility (See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – New Thailand Credit

Facility”). In the event of default under our line of credit agreements, any and all outstanding borrowings could become immediately due and payable which would likely create significant operating and financial restrictions on us, further causing an adverse effect upon our business, operating results and financial condition.

Our Stock Price Has Been And Continues To Be Volatile.

The market price for our common stock continues to be volatile due to various factors. These factors include, but are not limited to:

• the public float being relatively small and thinly traded;

• announcements by us or our competitors of new contracts or technological innovations;

• fluctuations in our quarterly and annual operating results;

• acquisition-related announcements; and

• general market conditions.

In addition, our stock price in recent years has experienced significant price fluctuations for a variety of reasons, including conditions that are both internal and external to us.

The Expansion of our Foreign Facility in Thailand May Not Proceed as Planned and Cost Overruns or Delays May Have a Negative Impact on Our Operating Results.

We are beginning a process of expanding our facility in Thailand and are also transitioning certain production from the Moorpark facility to the Thailand facility. If the expansion faces significant delays or if we do not effectively transition production to make efficient use of the increased capacity, our fixed costs could increase as a percentage of revenues. Cost overruns in the expansion process could also negatively impact our operating results and financial condition.

The Reserve Established for the Closure and Transition of Our San Diego Facility Was Based on Estimates and, Therefore, May Not Fully Represent All Future Costs For That Facility.

In the second quarter of fiscal 2003, we established a reserve for future costs related to the closure and transition to Moorpark of our San Diego facility. In estimating these future costs, we considered the cost of our lease obligation net of estimated future proceeds from subleasing the facility. If the facility were to be vacant for an extended period of time during the remaining term of the lease, we may be required to increase the reserve and this could negatively impact our operating results and financial condition.

DESCRIPTION OF THE BUSINESS

We are an electronics manufacturing services (“EMS”) provider to original equipment manufacturers (“OEMs”) in the medical, industrial instrumentation, telecommunications, security, financial services automation and aerospace and defense industries. We provide integrated solutions to OEMs across the entire product life cycle, from design to manufacturing to end-of-life services, for the worldwide high criticality, high reliability, high complexity segment of the EMS industry.

We have four wholly-owned subsidiaries: SMTEK, Inc. (dba SMTEK Moorpark), located in Moorpark, California; SMTEK New England, located in Marlborough, Massachusetts; SMTEK Santa Clara, located in Santa Clara, California; and SMTEK International Thailand Limited, located in Ayutthya, Thailand.

The EMS industry experienced rapid change and growth over most of the past decade as an increasing number of OEMs outsourced an increasing portion, and, in some cases, all of their manufacturing requirements. In mid-2001, the industry’s revenue declined as a result of significant cut-backs in its customers’ production requirements, which was consistent with the overall global economic downturn. In response to this industry and global economic downturn, we implemented restructuring programs to reduce our cost structure and further align our manufacturing capacity with the geographic production demands of our customers. Our restructuring activities included reductions in workforce, closure and re-sizing of certain facilities and the transition of certain facilities into new customer development sites. Additionally, we have made concentrated efforts to diversify our customer base through organic growth. Industry revenues have slowly increased over the last year as customer production requirements generally began to stabilize.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of our financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and judgments that affect our reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates and assumptions based upon historical experience and various other factors and circumstances. Management believes that our estimates and assumptions are reasonable under the circumstances; however, actual results may vary from these estimates and assumptions under different future circumstances. We have identified the following critical accounting policies that affect the more significant judgments and estimates used in the preparation of our consolidated financial statements.

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts related to receivables not expected to be collected from our customers. This allowance is based on management’s assessment of specific customer balances, considering the age of receivables and financial stability of the customer. If there is an adverse change in the financial condition of our customers, or if actual defaults are higher than provided for, an addition to the allowance may be necessary.

Inventory Valuation

We purchase inventory based on forecasted demand and record inventory at the lower of cost or market. Management regularly assesses inventory valuation based on current and forecasted usage and other lower of cost or market

considerations. If actual market conditions or our customers’ product demands are less favorable than those projected, additional valuation adjustments may be necessary.

Long-Lived Assets

We review property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of property, plant and equipment is measured by comparing its carrying value to the projected cash flows the property, plant and equipment are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying value of the property exceeds its fair market value. The impairment analysis is based on significant assumptions of future results made by management, including revenue and cash flow projections. Circumstances that may lead to impairment of property, plant and equipment include unforeseen decreases in future performance or industry demand and the restructuring of our operations resulting from a change in our business strategy.

Restructuring and Impairment Charges

We recognized restructuring and impairment charges in fiscal year 2003 related to reductions in workforce, re-sizing and closure of facilities. These charges were recorded pursuant to formal plans developed and approved by management. The recognition of restructuring and impairment charges requires that we make certain judgments and estimates regarding the nature, timing and amount of costs associated with these plans. The estimates of future liabilities may change, requiring additional restructuring and impairment charges or the reduction of liabilities already recorded. At the end of each reporting period, we evaluate the remaining accrued balances to ensure that no excess accruals are retained and the utilization of the provisions are for their intended purpose in accordance with the restructuring programs. For further discussion of our restructuring programs, refer to Note 1 — “Description of Business and Basis of Presentation - Restructuring Costs” and Note 2 — “Change in Accounting Principle” to the Consolidated Financial Statements.

RESULTS OF OPERATIONS – THREE AND NINE MONTHS ENDED MARCH 31, 2004

Revenues

(dollars in thousands)

	Three Months Ended March 31						Nine Months Ended March 31
	2004				2003		2004				2003
Revenues	$	22,556			$	17,430	$	63,380			$	50,474
Percentage Increase			29.4	%					25.6	%

The increase in revenues primarily represents stronger demand from existing programs. We experienced continuing strong demand particularly in the medical, industrial instrumentation, telecommunications and security industries. Revenues attributable to new customers represent approximately 8%

of the total revenue increase and occurred most significantly in the medical and security industries.

Gross profit

(dollars in thousands)

	Three Months Ended March 31						Nine Months Ended March 31
	2004			2003			2004			2003
Gross Profit	$	2,388		$	1,920		$	7,282		$	4,352
Gross Margin	10.6		%	11.0		%	11.5		%	8.6		%

The fluctuations in the Company’s gross profit margin for the three and nine month periods are the result of a number of factors including labor cost and overhead efficiencies, customer mix, increased capacity utilization and component pricing. The increase in gross profit margin for the nine month period of fiscal 2004, as compared to the nine month period in fiscal 2003, is largely attributable to the decrease in excess capacity which resulted from the closure and subsequent transition of the San Diego facility and the sale of our European manufacturing facility in the prior year. The relatively flat gross margin for the comparable three month periods ended March 31 resulted from an increase in material cost as a percentage of sales counteracting our improved variable and fixed cost margins related to better utilization of excess capacity. We cannot be sure that our capacity utilization will remain at its current level and any decrease in revenues with the resultant under-utilization of capacity could negatively impact our gross profit margin.

Administrative and selling expense

(dollars in thousands)

	Three Months Ended March 31						Nine Months Ended March 31
	2004			2003			2004			2003
Administrative and selling expense	$	1,860		$	2,216		$	5,922		$	7,906
Percent of sales	8.2		%	12.7		%	9.3		%	15.7		%

Expenses related to closure of San Diego facility										$	(1,630	)
Nine months ended March 2003 as adjusted										$	6,276
										12.4%

Administrative and selling expenses have decreased as a percentage of sales as we continue to closely monitor our expenditures even as sales volume increases. (Note that the $1.6 million restructuring costs related to the closure and transition of our San Diego facility in the second quarter of fiscal 2003 consisted of severance cost of $287,000, write-off of leasehold improvements of $370,000 and accrual of remaining lease obligation of $4,011,000 less sublease income of $3,038,000.)

Interest expense

(dollars in thousands)

	Three Months Ended March 31						Nine Months Ended March 31
	2004				2003		2004				2003
Interest expense	$	207			$	267	$	545			$	776
Percentage reduction			22.5	%					29.8	%

The decrease in interest expense was the result of lower levels of debt outstanding during the three and nine months ended March 31, 2004 as compared to the three and nine months ended March 31, 2003. The reduction in debt included the settlement of approximately $1.5 million of obligations at a discount (see Note 8 to the Unauditied Condensed Consolidated Financial Statements).

Other income (expense)

(dollars in thousands)

	Three Months Ended March 31					Nine Months Ended March 31
	2004			2003		2004		2003
Other income (expense)	$	(170	)	$	269	$	945	$	261

Other expense of $170,000 for the three months ended March 31, 2004 consists primarily of an unrealized loss on marketable securities classified as trading securities of $255,000 offset by a gain on extinguishment of debt of $63,000 and other income of $22,000. During the nine months ended March 31, 2004, we recognized a gain on extinguishment of debt of $880,000, an unrealized gain on marketable securities classified as trading securities of $28,000, a currency transaction gain of $85,000 and other income of $37,000, offset by the loss on the sale of our Florida subsidiary of $85,000. Other income for the three and nine months ended March 31, 2003, consists primarily of a gain on the extinguishment of debt of $175,000 and income of $96,000 from the settlement of contingent liabilities.

Income tax provision

(dollars in thousands)

	Three Months Ended March 31				Nine Months Ended March 31
	2004		2003		2004		2003
Income tax provision	$	3	$	—	$	40	$	6

The income tax provision is primarily related to state franchise taxes.

Net income (loss)

(dollars in thousands)

	Three Months Ended March 31					Nine Months Ended March 31
	2004		2003			2004		2003
Net income (loss)	$	148	$	(1,050	)	$	1,720	$	(5,795	)

Our net income increases are primarily attributable to higher revenues and control of our expenses. As discussed above under the heading “Other income (expense)”, there were also certain non-recurring items contributing to net income for the nine months ended March 31, 2004, most significantly, a $880,000 gain on extinguishment of debt. This gain is non-recurring. In addition, we cannot assure that we will maintain our current revenue and gross profit margin levels.

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity are our cash and cash equivalents, which amounted to $501,000 at March 31, 2004, and amounts available under our bank lines of credit, which provided approximately $3.7 million of availability in excess of current borrowings at March 31, 2004.

Current assets, current liabilities and long-term debt

The following table sets forth certain debt and liquidity measurements (dollars in thousands):

	At March 31, 2004		At June 30, 2003

Working capital	$	8,385	$	5,701
Long-term borrowings, including current portion	$	5,613	$	8,170
Ratio of current assets to current liabilities	1.41		1.36

The increase in the working capital and decrease in debt are related to our improved earnings as well as the settlement of certain debt obligations as described below. The outstanding balance of our bank line of credit, classified as long-term, increased by $812,000 during the first nine months of fiscal 2004.

During the nine months ended March 31, 2004, we settled obligations to former officers, employees and directors under consulting and deferred fee agreements by paying approximately $440,000 and fully retiring $972,000 in debt resulting in a $532,000 gain from extinguishment of debt. We also reached settlement with certain sub-debt holders by paying an aggregate of $172,000 to fully retire an aggregate of $520,000 in debt resulting in a $348,000 gain from extinguishment of debt. During the current quarter ended March 31, 2004, we also paid approximately $190,000 as accelerated payoff of several equipment notes with interest rates of 5.4% to 8.9%.

Cash flows provided by /(used for):

The following table sets forth, for the periods indicated, selected consolidated cash flow information (dollars in thousands):

	Nine Months Ended March 31
	2004			2003
Operating Activities	$	(7	)	$	1,332
Investing Activities	(1		)	(1,031		)
Financing Activities	(142		)	(557		)
Effect of exchange rate changes on cash	68			(14		)
Net (decrease) increase in cash and cash equivalents	$	(82	)	$	(270	)

March 2004 revenues resulted in a significant increase in accounts receivable for the nine months ended March 31, 2004. In addition, our inventories are higher in preparation for our fourth quarter production. An increase in accounts payable did not entirely compensate for these uses of operating funds and the $1.7 million in income from continuing operations before depreciation and amortization of $1.4 million was partially offset by the non-cash gain on extinguishment of debt of $880,000. Although inventory

levels are higher compared to 2003, inventory turns have improved due to increased revenue.

Net cash used in investing activities for the nine months ended March 31, 2004 includes capital expenditures of $941,000. In addition to ongoing upgrades to manufacturing and computer equipment, approximately $354,000 of the capital equipment investment is attributable to equipment upgrades in our Thailand facility. Investing activities also include proceeds of $940,000 from the sale of our Florida subsidiary.

The most significant use of funds for financing purposes was the repayment of debt as described in more detail above and in Note 8 to the Unaudited Condensed Consolidated Financial Statements. In-flows included borrowing against our bank line of credit at a lower rate than the debt retired, proceeds from the first quarter issuance of preferred stock and proceeds from the exercise of stock options.

New Thailand credit facility

Subsequent to March 31, 2004, on May 6, 2004, we finalized a Credit Facility Agreement between our subsidiary SMTEK International Thailand Limited (“SMTEK Thailand”) and BankThai Public Company Limited and we unconditionally guaranteed SMTEK Thailand’s liabilities and obligations under the Credit Facility Agreement for the purpose of funding the growth and expansion of our Thailand facility. The credit facility includes a $725,000 mortgage loan for the purchase of the building and land at our Thailand facility. The mortgage has a seven year term with an initial interest rate of 5.75%, based on Thailand Prime Rate, and a monthly payment of approximately $9,000. The Credit Facility Agreement also includes a $440,000 construction loan for the expansion of the Thailand facility. The construction loan has a 78 month term with interest at Thailand Prime Rate and a monthly payment of approximately $5,000. The Credit Facility Agreement also includes a working capital line of approximately $500,000 with interest at Thailand Prime rate, a one year term and it is secured by all the assets of the Thailand facility. All liabilities and obligations under the Credit Facility are denominated in Baht, the currency of Thailand, and therefore the above estimates fluctuate with changes in the Baht exchange rate.

Wells Fargo credit facility and other liquidity and capital resources issues

In September 2003, we entered into a new long-term credit facility. This new credit facility consists of a $10 million working capital line, a term credit facility in the amount of up to $1.0 million and a capital expenditure facility of $1.0 million. The $10 million working capital line is collateralized by accounts receivable, inventory and equipment and matures September 19, 2006. Borrowings under the working capital line bear interest, at our option, at either the bank’s prime rate (4.0% at March 31, 2004) plus 1.0% or a Libor-base rate (1.125% at March 31, 2004) plus 3.75%. At March 31, 2004, borrowings under our working capital line amounted to $6.3 million and the effective weighted average interest rate was 4.91%. Borrowings under our working capital line at March 31, 2004 have been classified as long-term. In addition, in September 2003 we borrowed $1 million on our term credit facility, the second component of our credit facility. This advance has a maturity date of September 19, 2006 and bears interest, at our option. at either the bank’s prime rate (4.0% at March 31, 2004) plus 1.0% or a Libor-base rate (1.125% at March 31, 2004) plus 3.75%. At March 31, 2004, the balance outstanding was $833,000 and the effective interest rate was 4.89%. The third component of our credit facility, the capital expenditure credit facility of $1 million, will be used to finance our capital expenditures. Each advance under the capital expenditure credit facility will have a three

year term at either the Bank’s prime rate or, at our option, at a fixed rate equal to the Libor rate plus 3.75%. There were no borrowings under the capital expenditure credit facility as of March 31, 2004. We were in compliance with all covenants on the above credit facilities at March 31, 2004 and as of the date of this filing on Form 10Q.

We anticipate that we may incur additional capital expenditures of as much as $300,000 during the remainder of fiscal 2004, primarily to improve production efficiency at all our subsidiaries. A substantial portion of these capital expenditures are expected to be financed by our new line of credit or other notes and leases payable.

We previously recorded a liability for a federal tax assessment, including accrued interest, of $2.5 million per a December 2001 settlement with the Appeals division of the IRS. We finalized a payment plan in July 2003 and at March 31, 2004, the note payable to the IRS is $2.1 million, payable in monthly installments of $45,000 through July 2008.

Management believes that our cash resources, cash from operations and available borrowing capacity on our working capital lines of credit are sufficient to fund operations for at least the next 12 months. Long term, however, if economic conditions weaken for an extended period of time or if we are unable to maintain profitability, we may have to obtain additional debt or equity financing. There can be no assurance that we will be able to obtain additional debt or equity financing, if and when needed, on terms acceptable to us.

RECENT ACCOUNTING PRONOUNCEMENTS

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities — an Interpretation of ARB No. 51”. The Interpretation clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The provisions of the Interpretation are effective for all enterprises with variable interests in variable interest entities created after January 31, 2003 and is effective October 9, 2003. The adoption of this Interpretation did not have an impact on the Company’s financial position or results of operations.

ENVIRONMENTAL MATTERS

Since the early 1990s, we have been and continue to be 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. One of our former subsidiaries, Aeroscientific Corp., leased the Anaheim facility. Under the terms of a cost sharing agreement entered into several years ago, the remaining remediation costs are currently being shared on a 50-50 basis with the landlord. There is no environmental insurance coverage for this remediation. At March 31, 2004, we reserved $421,000 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. However, the future actual remediation costs could differ significantly from the estimate. Further, our portion could potentially exceed the amount of our reserve. Our liability for remediation in excess of our reserve could have a material adverse impact on our business, financial condition, results of operations and cash flows.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our financial instruments include cash and cash equivalents, accounts receivable and short-term and long-term debt. At March 31, 2004, the carrying amount of long-term debt (including current portion thereof but excluding bank lines of credit) was $5.6 million and the fair value was $5.1 million. The carrying values of our other financial instruments approximated their fair values. The fair value of our financial instruments is estimated based on quoted market prices for the same or similar issues. A change in interest rates of one percent would result in an annual impact on interest expense of approximately $120,000.

It is our policy not to enter into derivative financial instruments for speculative purposes. We may, from time to time, enter into foreign currency forward exchange contracts in an effort to protect us 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. In accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” all derivative financial instruments are measured at fair value and are recognized as either assets or liabilities in the balance sheet. The accounting treatment of changes in fair value is dependent upon whether or not a derivative financial instrument is designated as a hedge and, if so, the type of hedge. Changes in fair value are recognized in current results of operations for fair value hedges and in other comprehensive income for cash flow hedges. Derivative financial instruments not qualifying for hedge accounting treatment under SFAS No. 133, as amended by FAS 149, are recognized as assets or liabilities with gains or losses recognized in current results of operations. At March 31, 2004, we had no forward foreign currency contracts.

Our operations include investments in a foreign operating unit. Our foreign subsidiary represents approximately 11% of our revenues and 9% of our total assets. As a result, our financial results have been and may continue to be affected by changes in foreign currency exchange rates.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures.

Based on management’s evaluation (with the participation of our principal executive officer and principal financial officer), as of the end of the period covered by this report, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”)) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and regulations.

Changes in internal control over financial reporting.

There was no change in our internal control over financial reporting during our third fiscal quarter of 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Limitation on the Effectiveness of Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.

The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In the ordinary course of business, we experience various types of claims that sometimes result in litigation or other legal proceedings. We do not anticipate that any of these claims or proceedings that are currently pending will have a material adverse effect on us.

ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

On March 1, 2004, we agreed to issue a warrant to purchase 15,000 shares of our Common Stock at an exercise price of $7.95 per share to one entity, Silverman Heller Associates. The warrant becomes exercisable on and after May 1, 2005 and expires on April 1, 2010. In issuing the warrants, we relied on an exemption from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a. Exhibits:

2.1		Stock Purchase Agreement (incorporated by reference to Exhibit 2.1 of the Company’s current report on Form 8-K filed with the SEC on January 20, 2004).

10.1		Credit Facility Agreement, dated May 6, 2004, by and between

		BankThai Public Company Limited and SMTEK International (Thailand) Company Limited.

10.2		Guarantee Agreement, dated May 6, 2004, by and between BankThai Public Company Limited and SMTEK International, Inc.

31.1		Rule 13a-14(a)/15a-14(a) Certification of Chief Executive Officer.

31.2		Rule 13a-14(a)/15a-14(a) Certification of Chief Financial Officer.

32.1		Section 1350 Certification of Chief Executive Officer.

32.2		Section 1350 Certification of Chief Financial Officer.

b. Current reports on Form 8-K:

On January 20, 2004, we filed a current report on Form 8-K announcing that we sold our Florida facility, Jolt Technology, Inc.

On February 10, 2004, we filed a current report on Form 8-K announcing our financial results for the second fiscal quarter ended December 31, 2003.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

May 10, 2004		/s/ Kirk A. Waldron
Date		Kirk A. Waldron
		Senior Vice President and Chief Financial Officer (Principal Financial Officer)

EX-10.1 2 a04-5651_1ex10d1.htm EX-10.1

EXHIBIT 10.1

Dated May 6, 2004

SMTEK INTERNATIONAL (THAILAND) COMPANY LIMITED

as Borrower

BANKTHAI PUBLIC COMPANY LIMITED

as Lender

CREDIT FACILITY AGREEMENT

TABLE OF CONTENTS

CLAUSE	HEADING

1.	Interpretation
2.	Facilities
3.	Purpose
4.	Unavailability
5.	Conditions Precedent
6.	Drawdown
7.	Normal Practise Banking
8.	Interest
9.	Fees
10.	Repayment
11.	Change in Circumstances
12.	Representations and Warranties
13.	Events of Default
14.	Security
15.	Currency Indemnity
16.	Stamp, Duties and Taxes
17.	Taxes
18.	Assignment
19.	Notices
20.	Partial Invalidity
21.	Amendment
22.	Waivers
23.	Confidentiality
24.	Governing Law
SCHEDULE 1		LENDER, ADDRESS AND COMMITMENTS
SCHEDULE 2		DRAWDOWN NOTICE
SCHEDULE 3		FORM OF RECEIPT
SCHEDULE 4		TRANSACTION DOCUMENTS
SCHEDULE 5		FORM OF LAND MORTGAGE
SCHEDULE 6		FORM OF MACHINERY MORTGAGE
SCHEDULE 7		FORM OF GUARANTEE
SCHEDULE 8		LIST OF MACHINERY

CREDIT FACILITY AGREEMENT

This Agreement is made at BankThai Public Company Limited, Bangkok, Thailand on this 6th day of May, 2004 by and between BankThai Public Company Limited at 44 North Sathorn Road, Silom Sub district, Bangrak District, Bangkok, Thailand (hereinafter referred to as the “Lender”) of one part; and SMTEK International (Thailand) Company Limited located at 592, Moo 2 Bangpa-in Industrial Estate, Tambol Klongjig, Amphor Bangpa-in, Phranakornsriayudhaya Province, Thailand (hereinafter referred to as the “Borrower”) of the other part.

Both parties do hereby agree as follows:

WHEREAS:

The Lender has agreed to provide the Facilities, as defined here below, to the Borrower for the purposes of (i) investment and (iii) expansion its project at Bangpa-in Industrial Estate.

THEREFORE, both parties do hereby agree as follows:

1. INTERPRETATION

1.1 Definitions

In this Agreement:

“Advance” means the amount of any Drawdown from time to time under the Facilities;

“Authorizations” including any authorization, approval, consent, license, permit or permission granted by, and any filing and registration made at, any government authority, state enterprise or bureau, and any resolution passed by shareholders and by the board of directors to the relevant limited company, and any approval required from the Lender or other persons;

“Authorized Officer” means (a) one or more directors who are authorized, whether singly or jointly, to act to bind a limited company; or (b) any person having authority to act to bind a limited company by virtue of a power of attorney granted by the director(s) mentioned in (a) on behalf of such limited company;

“Baht” means the lawful currency of Thailand;

“BOT Announcement” means the announcement of the Bank of Thailand regarding instructions for commercial banks and financial institutions to perform with respect to interest and discount;

“Building” means any buildings or structures constructed or to be constructed on the Land (including, without limitation, the factories);

“Business Day” means a day upon which banks are open in Bangkok for the transaction of the business contemplated by this Agreement;

“Capital Expenditures” means any expenditure of a capital nature made by the Borrower to acquire, construct, improve, modify, repair or replace fixed assets, plant or equipment (including renewals, improvements and replacements);

“Default Interest Rate” means the interest rate (s) per annum as quoted by the Lender as a maximum default rate from time to time chargeable on any or all of defaulted Facilities in accordance with the notification of BOT Announcement (as a matter of reference only, the maximum default rate quoted by the Lender as at the date of this Agreement is 15% per annum);

“Drawdown” means the utilization of any of the Facilities by the Borrower under this Agreement;

“Drawdown Notice” means a request for the Advance, substantially in the form of Schedule 2;

“Event of Default” means any event specified in Clause 13;

“Facilities” means Tranche A, Tranche B, Tranche C, Tranche D and Tranche E Facility and “Facility” means any of them.

“Facility Office” means in respect of the Lender identified with the signature below, or such other office of the Lender as may from time to time be notified to the Borrower;

“Final Maturity Date” means each of the following dates, as the case may be:

(i) in relation to Tranche A Facility, one (1) year from the execution date of this Agreement, unless otherwise extended at the sole discretion of the Lender in accordance with the terms of this Agreement;

(ii) in relation to Tranche B Facility, on the maturity date of each promissory note (s) issued;

(iii) in relation to Tranche C Facility, one (1) year from the execution date of this Agreement, unless otherwise extended at the sole discretion of the Lender in accordance with the terms of this Agreement;

(iv) in relation to Tranche D, within seven (7) years from the first Drawdown date of Tranche D Facility;

(v) in relation to Tranche E Facility, within seven (7) years (inclusively of Grace Period) from the first Drawdown date of Tranche E Facility.

“Grace Period” means six (6) months of suspension for repayment of the Indebtedness under Tranche E Facility by the Lender, which is commencing from the first Drawdown date of Tranache E Faciltiy and ending six (6) months thereafter;

“Guarantee Agreement” means a guarantee agreement duly signed by the Guarantor substantially in the form set out in Schedule 7 including all of its amendment and/or supplement made or to be made from time to time as prescribed by the Lender;

“Guarantor” means SMTEK International, Inc, a company incorporated under the laws of the United States of America, having its registered office at 200 Science Drive, Moorpark, California, the United States of America;

“Indebtedness” of any person or entity shall mean:

(a) any indebtedness for borrowed money or overdraft (whether principal, interest, fee or otherwise;

(b) any indebtedness (actual or contingent) under any obligation to reimburse or indemnify any other person for or against any liability which what other person may have or any payment that other person may have made under any guarantee, aval, indemnity, security or other assurance against loss;

(c) any indebtedness (actual or contingent) under swaps, derivatives and forward contracts and swap, derivatives and forward transactions;

(d) any indebtedness under any acceptance credit; and

(e) any rental payment under any lease entered into primarily for the purpose of raising or obtaining financing;

(f) any liability under any bond, debenture, note, bill of exchange, trust receipt, letter of credit, note purchase, bill discount or commercial paper;

(g) any amount under any agreement for the hire-purchase or conditional sale of goods or equipment or deferred terms which agreement was entered into primarily for the purpose of raising or obtaining financing;

(h) any other obligation generally considered to constitute a debt of the obligor;

(i) the principal amount of any debts factored with recourse;

in so far as not otherwise included within any or all of the forgoing paragraphs, amounts utilized, Drawdown or borrowed under or in connection with any of the Transaction Documents;

“Insurance” means all material policies and contracts of insurance which are now or may hereafter be taken out or effected in respect to or in connection with the Building to secure the Indebtedness to the Lender at the values as set out in the Insurance Policy , and in relation to the Machinery to secure the Indebtedness to the Lender only or any part thereof by the Borrower in compliance with its obligations under Clause 12 and shall include rights in any reinsurance taken out in relation to such Insurance;

“Insurance Policy” means the policy derived from the Insurance and related reinsurance;

“Interest Payment Date” means the last day of the Interest Period, as the context may require. If an Interest Payment Date falls on a day that is not a Business Day, such Interest Payment Date shall be the preceding Business Day;

“Interest Period” means one (1) month (or any other period as may be agreed between the Borrower and the Lender) ascertained in accordance with Clause 8;

“Land” means a plot of land in Bangpain Industrial Estate Authority of Thailand (Export Zone) under land title deeds No. 33685 located at Tambol Klongjig, Amphur Bangpa-in, Phranakornsriayudhaya Province, having approximate area of 4 rai 27 square wahs, where the Building situated;

“Land Mortgage Agreement” means an agreement to be made between the Borrower and the Lender, pursuant to which the Land and all Building and structures thereon are mortgaged in the first-ranking mortgage to the Lender as security for the Indebtedness, for the mortgage value of Baht 100,000,000 substantially in the form set out in Schedule 5 including all of its amendment and/or supplement made or to be made from time to time;

“Machinery” means all items of the machineries and equipments as per details set forth in Schedule 8 hereto;

“Machinery Mortgage Agreement” means an agreement to be made between the Borrower and the Lender, pursuant to which the existing Machinery are mortgaged in the first-ranking mortgage to the Lender as security for the Indebtedness, for the mortgage value of Bath 100,000,000 substantially in the form set out in Schedule 6, including all of its amendment and/or supplement made or to be made from time to time;

“Material Adverse Effect” means a material adverse effect on:

(a) the perfection, priority or enforceability of the Security; or

(b) the financial condition or business of the Borrower; or

(d) the legality, validity, or enforceability of any of the Transaction Documents.

“MLR” means a rate per annum of the interest rate which is announced from time to time by the Lender for charging on Baht loans granted to its prime customers in Thailand and which prevails on the day the interest is calculated pursuant to the terms of this Agreement.

“MOR” means a rate per annum of the interest which is announced from time to time by the Lender for charging on overdraft facility granted to its prime customers in Thailand and which prevail on the day the interest is calculated pursuant to the terms of this Agreement;

“Receipt” means a receipt evidencing the receipt of an Advance, substantially in the form set out in Schedule 3;

“Security” means the security set out in Clause 14;

“Security Documents” means the Guarantee Agreement, the Land Mortgage Agreement, the Machinery Mortgage Agreement and all security interests and collateral rights granted to the Lender pursuant to Clause 14 and any other security which is provided to secure the Indebtedness.

“Tranche A” means overdraft facility up to the amount of Baht 5,000,000 ;

“Tranche A Availability Period” means the period commencing on the date hereof and ending one (1) year from the date hereof;

“Tranche B” means short-term loan facility up to the amount of Baht 15,000,000 ;

“Tranche B Availability Period” means the period commencing on the date hereof and ending one (1) year from the date hereof;

“Tranche C” means the performance guarantee issued by the Lender in favor of the government authorities to secure the use of electricity or other utilities of the Borrower up to the amount of Baht 3,000,000;

“Tranche C Availability Period” means the period commencing on the date hereof and ending one (1) year from the date hereof;

“Tranche D” means seven (7) years term loan facility in the total amount up to Baht 28,000,000 provided to the Borrower in accordance with the terms and conditions hereof;

“Tranche D Availability Period” means the period commencing on the date hereof and ending on 30 June 2004;

“Tranche E” means seven (7) years term loan facility in the total amount up to Baht 17,000,000 provided to the Borrower in accordance with the terms and conditions hereof;

“Tranche E Availability Period” means the period commencing on the date hereof and ending on 31 December 2004;

“Transaction Documents” means this Agreement, the Drawdown Notice, all of the Receipts, the request for Tranche A, Tranche B and Tranche C Facilities, Security Documents and related documents;

1.2. Any reference in this Agreement to:

(a) an “authorization” means an authorization, approval, consent, license, permit, franchise, permission, exemption or resolution of any governmental or other authority or any other person;

(b) “indebtedness” shall be construed so as to include any obligation for the payment or repayment of money, whether present or future, actual or contingent;

(c) a “month”, unless the context requires otherwise, is a reference to a period starting on one day in a calendar month and ending on the numerically corresponding day in the next calendar month, except that if there is no numerically corresponding day in the month in which that period ends, that period shall end on the last day in that calendar month.

(d) a “person” means any person, partnership, company, state enterprise, government, agency or any joint venture association or partnership (whether or not having separate legal personality) of two or more of the foregoing;

(e) “Tax” means any tax, levy, import duty, stamp duty or other charge of a similar nature (including, without limitation, any interest or penalty payable in connection with any failure to pay or any delay in paying any of the same).

1.3. Headings are for reference convenience only and shall not be construed as an interpretation of the provisions of this Agreement.

2. The Facilities

2.1. Facilities

(a) Subject to the terms and conditions of this Agreement, the Borrower agrees to borrow or utilize the Facilities and the Lender agrees to make available the Facilities under this Agreement to the Borrower which shall consist of;

2.1.1. Tranche A: overdraft Facility up to Baht 5,000,000;

2.1.2. Tranche B: short term loan Facility up to Baht 15,000,000;

2.1.3. TrancheC : letter of guarantee Facility up to Baht 3,000,000 ;

2.1.4 Tranche D: long term loan Facility up to Baht 28,000,000; and

2.1.5 Tranche E: long term loan Facility up to Baht 17,000,000;

(b) Tranche A Facility, Tranche B Facility and Tranche C Facility shall be subject to review on the yearly basis or at any time as the Lender deems appropriate. In case of the Borrower’s credit problem incurred with other financial institutions or the review of the financial status of the Borrower is unsatisfactory to the Lender, then the Lender reserves the right to forthwith amend, alter or cancel any or all of the said Facility for whatsoever reasons and without notifying the Borrower in advance.

(c) Any Advance of the Facilities that remains undrawn, and in respect of which no Drawdown Notice has been delivered, at the close of business on the last day on which a Drawdown Notice is permitted to be delivered shall be automatically cancelled on the last day of each of Tranche A Availability Period, Tranche B Availability Period, Tranche C Availability Period, Tranche D Availability Period or Tranche E Availability Period, as the case may be.

3. Purpose

(a) The Borrower shall use the Facility under Tranche A exclusively for the purpose of financing its ongoing working capital;

(b) The Borrower shall use the Facility under Tranche B exclusively for the purpose of financing its ongoing working capital;

(c) The Borrower shall use the Facility under Tranche C Facility exclusively for the purpose of guarantee the use of electricity and utilities;

(d) The Borrower shall use the Facility under Tranche D Facility exclusively for the purpose of purchasing the Land and Building from Thai Factory Development Public Company Limited; and

(e) The Borrower shall use the Facility under Tranche E Facility exclusively for the purpose of expansion the Building.

The Borrower shall apply the proceeds of this Agreement as provided herein. For the avoidance of doubt, the Borrower shall only utilize the Facilities for the purposes permitted by this Agreement.

4. Unavailability

If, for whatsoever reason, the Facilities in whole or any part thereof is not fully utilized or is unavailable, it shall neither affect nor impair the liabilities of the Borrower to perform any and all of its obligations. And if such unavailability occurs the Lender may consider ceasing the undrawn portion or the Lender may provide the Borrower with any credit Facilities other than as stipulated in this Agreement.

5. Conditions Precedent

5.1 General Condition Precedent

The obligation of the Lender to make available the Facilities to the Borrower shall be subject to the following conditions precedent being fulfilled to the satisfaction of the Lender or waived, on or the fifth (5^th) Business Day of any Facilities:

(i) The Lender shall have received all documents listed in Clause 5.2;

(ii) All Transaction Documents shall have been executed by the Borrower and shall be in full force and effect; and

(iii) As at the date the Drawdown Notice is given and as at the relevant Drawdown date:

(i) no Event of Default has occurred;

(ii) all representations and warranties made by the Borrower under this Agreement are true and correct with reference to the facts and circumstances then subsisting;

(iii) the Borrower shall to the extent applicable, have been in full compliance with the covenants specified in Clause 12;

(iv) all fees (including, without limitation, the front-end fee, if any) and any other charges and expenses which are due and payable on any Facility under this Agreement;

(iv) the Land Mortgage Agreement has been duly executed by the Borrower and the first-ranking mortgage over the Land and Building has been duly registered and is in full force and effect in favor of the Lender for the mortgage value of Baht 100,000,000;

(v) the Machinery Mortgage Agreement has been duly executed by the Borrower and the first-ranking mortgage over the existing Machinery has been duly registered and is in full force and effect in favor of the Lender for the mortgage value of Baht 100,000,000; and

(vi) the Guarantee has been duly executed by the Guarantor.

5.2. Documents which are General Conditions Precedent

The Lender shall have received the following documents and /or shall have been satisfied that the following conditions are fulfilled on or before the Drawdown date :

(a) each of the following documents in relation to the Borrower:

(i) a copy of the Memorandum of Association,

(ii) a copy of the Articles of Association,

(iii) a copy of the list of shareholders, and

(iv) an original certification document (affidavit) issued by the Ministry of Commerce.

With respect to documents in item (i), (ii) and (iii) to be certified by the Ministry of Commerce within one (1) month prior to the first Drawdown date;

(b) copies of the minutes of the board of directors’ meeting of the Borrower approving the execution and delivery of the relevant Transaction Documents to which it is a party and the performance thereunder in the form acceptable to the Lender, at which the resolution was adopted and certified by the Authorized Officer of the Borrower, as being a true, complete and up-to-date copy of resolutions duly adopted and in full force and effect;

( c) specimen signatures of the Authorized Officer of the Borrower together with or providing herein copies of their identification cards or passports, house registration certificates;

(d) this Agreement duly executed by all parties thereto and duly affixed with applicable stamp duty;

(e) evidence to the satisfaction of the Lender that the Borrower has maintained the Insurance in full force and effect on the insurable assets of the Borrower pursuant to Clause 12;

(f) copies of all Authorizations which are necessary for the execution and delivery of the relevant Transaction Documents, the obtaining of the Facilities under this Agreement, and the performance of the obligations under the Transaction Documents of the Borrower;

(g) an appraisal report on the value of the Land, Building and Machinery provided by the Borrower; and

(h) relevant Insurance policies.

6. Drawdown

6.1 Tranche A

(a) The Borrower may request the Advance under Tranche A, if the Lender receives Drawdown Notice not later than 11:00 a.m. on the first (1) Business Day prior to the Drawdown date, provided that:

(i) the conditions precedent under Clause 5.1.have been satisfied and being fulfilled to the Lender; and

(ii) the Lender shall have received the overdraft facility agreement in such form as prescribed by the Lender, duly signed by the Borrower and duly affixed with applicable stamp duty prior to the first Drawdown.

(b) The outstanding debit balance in Tranche A Facility account shall in any event be reduced to zero no later than the last day of the Tranche A Final Maturity Date.

6.2 Tranche B

(a) The Borrower may request the Advance under Tranche B, if the Lender receives Drawdown Notice not later than 11:00 a.m. on the first (1) Business Day prior to the Drawdown date, provided that:

(i) the conditions precedent under Clause 5.1.have been satisfied and being fulfilled to the Lender;

(ii) the Lender shall have received the short term facility agreement in such form as prescribed by the Lender, duly signed by the Borrower and duly affixed with applicable stamp duty prior to the first Drawdown; and

(iii) the Borrower shall, on each Drawdown date, issue to the Lender a promissory note in the form prescribed by the Lender, provided that the maturity date of each promissory not exceed 180 days from the date issued.

(b) The outstanding debit balance in Tranche B Facility account shall in any event be reduced to zero no later than the last day of the Tranche B Final Maturity Date.

6.3 Tranche C

(a) The Borrower may request the Advance under Tranche C, if the Lender receives Drawdown Notice not later than 11:00 a.m. on the first (1) Business Day prior to the Drawdown date, provided that:

(i) the conditions precedent under Clause 5.1.have been satisfied and being fulfilled to the Lender;

(ii) the Lender shall have received any agreement or documentation in relation to the Tranche C Facility in such form as prescribed by the Lender, duly signed by the Borrower prior to the utilization of Tranche C Facility;

(iii) the Borrower has paid the fee for issuance of the letter of guarantee at the rate of 1.5% per year to the Lender; and

(iv) the validity of the letter of guarantee issued by the Lender shall not exceed Tranche C Final Maturity Date.

(b) The outstanding debit balance in Tranche C Facility account shall in any event be reduced to zero no later than the last day of the Tranche C Final Maturity Date.

6.4. Tranche D

(a) The Borrower may request the Advance under Tranche D during the Tranche D Availability Period if the Lender receives not later than 11:00 a.m. on the fifth (5) Business Day prior to the Drawdown date, provided that:

(i) the conditions precedent under Clause 5.1 have been satisfied and being fulfilled to the Lender;

(ii) the Lender shall have received a duly completed Drawdown Notice in respect of each Drawdown on the fifth (5) Business Day prior to the Drawdown date; and

(iii) the Lender shall have received the original of the Land and Building purchase and sale agreement duly signed by the Borrower and the seller of Land and Building.

(b) Any remaining sum under Tranche D undrawn at the expiry of Tranche D Availability Period shall be no longer available for any further Drawdown.

6.5 Tranche E

(a) The Borrower may request the Advance under Tranche E during the Tranche E Availability Period, if the Lender receives not later than 11:00 a.m. on the fifth (5) Business Day prior to the Drawdown date, provided that:

(i) the conditions precedent under Clause 5.1 have been satisfied and being fulfilled to the Lender;

(ii) the Lender shall have received a duly completed Drawdown Notice in respect of each Drawdown on the fifth (5) Business Day prior to the Drawdown date; and

(iii) the written report showing the progress of the construction, duly signed by the engineer responsible for the project.

(iv) the Lender shall have received a written report showing the progress of the construction, duly certified by the engineer responsible, before each Drawdown.

(b) Any remaining sum under Tranche E undrawn at the expiry of Tranche E Availability Period shall be no longer available for any further Drawdown.

6.7 Utilization of Facilities

The Drawdown Notice issued by the Borrower shall be irrevocable and have legal bindings on the Borrower to make a Drawdown in accordance with the terms and conditions thereunder and under this Agreement.

7. Normal Banking Practices

The Drawdown of the Facilities shall be effected in accordance with normal practice of the Bank and customary banking practices in Thailand as determined by the Bank of Thailand. The Borrower shall for such purposes comply with such administrative requirements in relation to utilization of the Facilities as the Lender shall notify to it from time to time.

8. Interest

8.1. Interest Period and Calculation of Interest

(a) The Borrower shall pay interest and other amounts falling due under any of the Facilities in accordance with the terms of this Agreement.

(b) Interest Period applicable to the Facilities under this Agreement shall be as follows:

(i) each Interest Period shall have a duration of one (1) month;

(ii) the first Interest Period for each Advance on the relevant Drawdown date shall commence on the day that such Advance is drawn, and shall end on the last day of the subsisting calendar month in which such Drawdown occurs; and

(iii) Interest shall accrue from day to day, and shall be calculated, and a 365 days year (including the first day of the relevant period during which it accrues but excluding the last).

If any interest dues and unpaid to the Lender on the relevant Interest Payment Date, it shall be deemed that the Borrower is in default under Clause 13. The Borrower hereby agrees to pay the Default Interest Rate of the overdue sums to the Lender for the duration of the said overdue period.

8.2 Interest Rate for Facilities

(a) The interest rate applicable to the Facilities under Tranche A and Tranche B will be calculated at the MOR rate per annum. The payment of interest shall be made the last Business Day of every month through the term of this Agreement or until such time as the outstanding balance is amortized in full.

(b) The interest rate applicable to the Facility under Tranche D will be calculated as follows:

(i) On the 1^st and 2^nd year, it shall be calculated at the fixed rate at 5.75% per annum.

(ii) From the 3^rd year until the Final Maturity Date, it shall be calculated at the MLR rate per annum.

The payment of interest shall be made the last Business Day of every month through the term of this Agreement or until such time as the outstanding balance is amortized in full

(c) The interest rate applicable to the Facility under Tranche E will be calculated at the MLR rate per annum. The payment of interest shall be made the last Business Day of every month through the term of this Agreement or until such time as the outstanding balance is amortized in full

8.3. Interest Payment

The Borrower shall pay to the Lender interest on the relevant Interest Payment Date which shall be the last day of the Interest Period ascertained in accordance with Clause 8.1 through the term of this Agreement or until such time as the outstanding balance is amortized in full.

8.4. Default Interest

If the Borrower fails to pay when due any money payable under Facilities or in case of the occurrence of an Event of Default, the Borrower shall on a joint and several basis pay interest on the total outstanding Indebtedness during the period after the relevant date the occurrence of the said Event of Default, as the case may be, to the date of actual payment (after as well as before judgment) at the Default Interest Rate quoted by the Lender, provided that in case of failure to pay interest on the relevant due date, the Default Interest Rate determined as aforesaid shall be charged on the outstanding Indebtedness to which such interest relates.

9. Fees

9.1 Tranche A, Tranche C Fees

The Borrower shall pay fees to the Lender in respect to the utilization of Tranche A, Tranche C at the standard practice rate of the Lender.

9.2 Prepayment Penalty Fee

The Borrower shall pay to the Lender for all the amounts prepaid of the Facilities under Tranche D and/or Tranche E, a prepayment fee, at the rate of two percent (2%) of each the prepaid amount under Tranche D and/or Tranche E, unless such prepaid amount is derived from the Borrower’s operation (excess cash flow) and payable on the prepayment date.

10. Repayment

10.1. Repayment and Reduction of Indebtedness

10.1.1 Tranche A

The Borrower shall reduce the Indebtedness under Tranche A to zero no later than the Tranche A Final Maturity Date.

10.1.2 Tranche B

Except the renewal of the promissory note(s) issued has been approved by the Lender, the Borrower shall pay to the Lender the Indebtedness of each promissory note(s) issued on the Final Maturity Date.

If the Lender approves the renewal of any or all of the promissory notes(s), such promissory note (s) shall be due and payable on the following Final Maturity Date. In case the Lender cancels any or all of Tranche B Facility, the Indebtedness under the promissory notes(s) shall be repaid in full to Lender on the Final Maturity Date under the promissory note (s) issued.

Subject to Clauses 10.1.1 and 10.1.2 above, the Lender shall inform the Borrower thirty (30) days in advance prior to the Final Maturity Date, if the Lender extends the Tranch A Final Maturity Date or approves the renewal of the promissory note(s), at the specified address of the Borrower given herein.

10.1.3 Tranche C

The Borrower shall reduce the Indebtedness under Tranche C to zero no later than the Tranche C Final Maturity Date.

10.1.4 Tranche D and Tranche E

Tranche D:

Except as otherwise agreed by the Lender, the Borrower shall reduce the Indebtedness under Tranche D by repayment to Lender in 84 monthly installments as follows:

Installment		Baht/month
1-83		333,500
84		319,500

The first repayment date shall be made on the following month after the first Drawdown.

Tranche E:

Except as otherwise agreed by the Lender, the Borrower shall reduce the Indebtedness under Tranche E by repayment to Lender in 78 monthly installments as follows

Installment		Baht/month
1-77		218,000
78		214,000

The first repayment date shall be made on the following month after the end of grace period.

10.2. Demand Repayment

At any time upon the occurrence of an Event of Default or at any time as the Lender deems appropriate, the Lender may, at any time declare all amounts outstanding at such time due and payable whereupon any Advance not drawn shall be immediately reduced to zero (0).

10.3. Business Day

Subject as otherwise provided for in this Agreement, if any sum would otherwise become due for payment on a day which is not a Business Day, that sum shall become due on the next succeeding Business Day, and interest shall be adjusted accordingly.

10.4. Payment made by the Borrower

All sum payable by the Borrower under or pursuant to this Agreement and the other Transaction Documents (whether of principal, interest or otherwise) shall be paid in full without set-off or counterclaim or withholding.

10.5. Currency

Except as otherwise expressly provided for in this Agreement and the other Transaction Documents, all amounts to be paid by the Borrower under this Agreement and the other Transaction Documents shall be paid in the currency which the Indebtedness is then denominated or determined by the Lender. The Borrower hereby irrevocably waives any rights it may have under Section 196 of the Civil and Commercial Code of Thailand (or any modification or re-enactment thereof for the time being in force) to make payment in Baht of any sum due, which is then denominated in foreign currency in lieu of payment in such foreign currency.

11. Change In Circumstances

11.1. Unlawfulness or Impracticality

If the Lender determines that:

(a) any change of law or regulation in the interpretation or application thereof: or

(b) any compliance in good faith by the Lender with any application guideline direction, request or requirement (whether or not having the force of law) of the Bank of Thailand or of any other governmental agency or authority, make it unlawful or impractical for the Lender to make, fund or maintain the Facilities or any part thereof or to otherwise give effect to any provision of this Agreement, the Lender shall notify the Borrower of such unlawfulness or impracticability and thereupon the Lender’s obligation to make, fund or maintain

the Facilities or any part thereof which shall have been affected by such unlawfulness and impracticability shall terminate and the Borrower shall, at the end of the then relevant Interest Period, prepay all the affected Facilities or reduce to zero the all of the affected Indebtedness together with interest accrued thereon and other sum due and payable in relation to the affected Facilities.

11.2. Increased Costs

If the Lender determines that:

(a) any change of Law or regulation or in the interpretation or application thereof; or

(b) any compliance in good faith by the Lender with any application guideline, direction, request or requirement (whether or not having the force of law) of the Bank of Thailand or of any other governmental agency or authority, shall (i) increase the cost of the Lender for making, funding or maintaining the Facilities or any part thereof; or (ii) reduce any fee or amount of any payment received or receivable by the Lender under this Agreement or the effective return to the Lender under this Agreement, the Borrower shall, on the date the Borrower receives written notification of the increased cost or reduction from such increased cost or reduction and, subject to payment necessary to compensate if for such increased cost or reduction and, subject to payment thereof, the Borrower may prepay all or part of the affected Facilities or reduce to zero all of the affected Indebtedness together with interest accrued thereon and any sum due and payable in relation to the affected Facilities.

12. Representations and Warranties

12.1. Representations and Warranties

For so long as all or any sum of the Indebtedness remains outstanding, the Borrower hereby represents and warrants to the Lender as follows:

(1) Existence: the Borrower is a limited liability company, duly organized and validly existing under the laws of Thailand, with power to enter into this Agreement and the Security Documents to which it is a party and to exercise its rights and perform its obligations under them, and all corporate and other actions required to authorize its execution and delivery of this Agreement and the Transaction Documents to which it is a party and the performance of its obligations under them (except those which are not required until a later date) have been duly taken;

(2) Corporate power: it has full power and authority to own its assets and to carry on its business as it is presently being conducted and the Borrower and the Transaction Documents have full power and authority to enter into, to exercise the rights and to and perform the obligations and Transaction Documents;

(3) No Breach: the Borrower has not received any notice that it is in breach of any provision in this Agreement and the Security Agreements to which it is a party or which is binding on it or any of its assets or Revenues, which breach could have a Material Adverse Effect;

(4) No Proceeding: no legal, arbitration or administrative proceeding (other than those of a vexatious or frivolous nature) of or before any court, tribunal or agency has been commenced against the Borrower and the Guarantor which, if determined adversely to the Borrower, would result in a Material Adverse Effect, other than those otherwise disclosed to the Lender in writing;

(5) Authorizations: all authorizations necessary or advisable for or in connection with the execution, validity, performance or enforceability of the Transaction Documents and the conduct of the Borrower’s business have been obtained and are in full force and effect;

(6) No Litigation: no litigation, arbitration or administrative proceedings or other procedure for the resolution of dispute is taking place, pending or, to the knowledge of Borrower, threatened against the Borrower or its respective assets or revenues which will have a Material Adverse Effects;

(8) Taxes: all required tax returns have been filed and all taxes paid, except those contested in good faith;

(9) No Subsidiaries: the Borrower has no subsidiaries and holds no interest of any kind in the share capital of any other person;

(10) Bankruptcy: no bankruptcy, winding-up, liquidation, re-organization, re-adjustment of debt, dissolution or similar proceedings of or relating to the Borrower or the Guarantor has been filed or is pending under the law of Thailand or any other jurisdiction;

(11) Insurances: all material insurances required by this Agreement are in full force and effect, procure insurances on business risk and other insurance as required by the Lender and maintain the Lender as sole beneficiary;

(12) Compliance with Law: comply in all material respects with all applicable laws and material governmental approvals;

(13) Compliance: comply with any or all of the terms and conditions of the documentation or contract in relation to or in connection with the utilization of the Facilities of terms and conditions imposed by the Lender.

(14) Notice of Defaults: give prompt notice of Events of Default of which it is aware;

(15) Performance of Obligations: perform its material obligations under this Agreement;

(16) Notice of Proceedings: notify the Lender in writing of any legal, arbitration or administrative proceeding of or before any court, tribunal or agency which has been commenced against the Borrower which, if determined adversely to the Borrower, would result in a Material Adverse Effect;

(17) Notice of Breaches: notify the Lender in writing as soon as practicable after it receives any notice that it is in breach of any agreement to which it is a party, which breach could have a Material Adverse Effect;

(18) Constitutional Documents: procure that no amendment or supplement is made to its memorandum and articles of association which would give rise to a Material Adverse Effect;

(19) Appraisal Report: Delivery of appraisal report of Land, Building, and Machinery owned by the Borrower upon request of the Lender, which such request be made from time to time in accordance with the Bank of Thailand’s regulations;

(20) Land Mortgage: On the first Drawdown date of the Facilities, the Borrower shall complete the first ranking mortgage in relation to the Land and Building for the mortgage value of Bath 100,000,000 to secure the indebtedness of the Borrower under the Transaction Documents as represented by the agreement substantially in the form set out in Schedule 5;

(21) Machinery Mortgage : the Borrower shall complete, within four (4) months from the first Drawdown date of Tranche D Facility and Tranche E Facility, the first ranking mortgage in relation to the Machinery and equipments, which shall be appraised by the Lender or any appraisal firm acceptable to the Lender, for the mortgage value of not be less than Baht 100,000,000 substantially in the form set out in Schedule 6;

(22) Capital Expenditure: the Borrower shall inform the Lender at any time upon making any single capital expenditure in excess of Baht 20,000,000 at a time;

(23) Validity of Security: the Security provided under this Agreement shall become and in full force and effect until the Indebtedness under this Agreement shall have been performed in full.

(24) No Security Interest: no encumbrance exists over all or any of the present or future assets or revenues of the Borrower.;

(25) Ranking: the claims of the Lender against the Borrower under the Transaction Documents will rank at least pari passu with other unsecured claims of the Borrower.

12.2. Affirmative Covenants

The Borrower covenants that so long as this Agreement is in effect and until all of the obligations of the Borrower hereunder have been discharged in full, the Borrower, as the case may be, and as clearly specified shall:

(1) Existence: the Borrower shall maintain their corporate existence and conduct their business in a proper and efficient manner and in compliance with all laws, agreements and obligations binding upon them or applicable to their assets or revenues, except for such non-compliance as would not have a Material Adverse Effect;

(2) Financial Statements: as soon as the same become available, but in any event within ninety (90) days after the end of each financial year of the Borrower, deliver to the Lender in sufficient copies for the Lender the audited annual financial statements of the Borrower for such financial year; and as soon as it is available, but in any event within sixty (60) days after the end of each of its monthly and quarterly financial period, a copy of its financial account for such monthly and quarterly financial period;

(3) Records: maintain business and financial records in accordance with generally accepted accounting principals in Thailand and, upon a request from the Lender, provide the Lender with such other information about its business and financial condition (including, without limitation to, twelve (12) month projected cash flow statements) as the Lender may reasonably require;

(4) Notice of Event of Default: promptly inform the Lender of the occurrence of any Event of Default and of any steps being taken to remedy or mitigate the effect of such Event of Default and take such practical and reasonable steps to remedy such Event of Default and/or confirm to the Lender that no other Event of Default has occurred;

(5) Notice of Proceedings: promptly inform the Lender in writing of any legal, arbitration or administrative proceeding of or before any court, tribunal or agency which has been commenced against the Borrower

which, if determined adversely to the Borrower, would result in a Material Adverse Effect;

(6) Inspection: the Borrower shall allow the Lender or their representatives to inspect their operations and books and accounts upon reasonable notice;

(7) Insurances: the Borrower shall procure insurances on and in relation to their business and assets, including but not limited to Building, Machinery in operation (the “Insurance”) as well as procure endorsements of such Insurances in accordance with the terms as set out hereto and the Transaction Documents; it is agreed that the Borrower shall endorse and maintain the name of the Lender as sole beneficiary and loss payee of the Insurance relating to the Security at all time commencing no later than the Drawdown date;

(8) Accuracy of Disclosure: as of the date on which the latest financial statements were prepared the Borrower incurred no material liabilities (contingent or otherwise) which were not disclosed in such financial statement (or by the notes thereto) or reversed against therein nor have any unrealized or anticipated losses which were not so disclosed or reversed against and which will have a material adverse effect on the ability of the Borrower to perform its payment obligations under this Agreement;

(9) Law : the Borrower shall comply with all applicable laws, except for such non-compliance as would not have a Material Adverse Effect;

(10) Change of Major Shareholders : the Borrower shall inform to the Lender any change of major shareholders, provided that the Guarantor shall maintain the shares in the Borrower not less than seventy five percent (75%) of the total shares of the Borrower;

12.3. Negative Covenants

The Borrower’s negative covenants, for as long as any obligations remain outstanding under this Agreement, include but are not limited to the following:

(1) Sale of Assets: sell, lease, transfer or otherwise dispose of by one or more transactions (whether related or not), the whole or any material part of its assets or revenues, except for sales, leases, transfers or disposals which (a) are for good consideration in the ordinary course of business, (c) are of obsolete assets or raw materials, inventory, spare parts and supplies in the normal course of business, (d) could not reasonably be expected to a Material Adverse Affect the Borrower’s obligations under this Agreement,

(2) Merge: merge with or into or consolidate with any person or acquire all or substantially all of the assets, stock or any class of, or any

partnership or joint venture interest in, any person, or create or acquire any subsidiary;

(3) Reduction of Capital: cancel or reduce its share capital, provided however that the Borrower may reduce its par to offset retained losses;

(4) Settlements: consent to any settlement, resolution or compromise of any litigation, arbitration or other dispute which would be reasonably likely to have a Material Adverse Effect;

(5) Immunity: claim for itself or any of its assets, immunity from suit, execution, a attachment or legal process;

(6) Assignment: assign any or all of its rights under any this Agreement;

(7) Create Encumbrance: sell, transfer, dispose, pledge, mortgage or create any encumbrance over the Machinery to any creditor or any person without obtaining the prior approval in writing from the Lender.

(8) Dividend: declare or pay any dividend or any benefit in whatever form, directly or indirectly, to the shareholders or any persons, unless such payment of dividend is derived from the Borrower’s operation (excess cash flow)

(9) Create Indebtedness: incur any further liability or encumbrance (including grant any guarantee, third party indemnity) with any person and/or financial institution except incur any liability is for repayment of the Facilities under this Agreement

13. Events of Default

13.1. The following events shall be Events of Default:

(1) Non Payment: the Borrower fails to pay any sum payable under this Agreement and the Transaction Documents when due or otherwise in accordance with the provisions hereof;

(2) Breach of Agreement: the Borrower fails duly and punctually to perform or comply with any terms, conditions, covenants, obligations or agreement under the Transaction Documents which are material and, in respect of a failure which is capable of remedy, does not remedy such failure within thirty (30) days;

(3) Misrepresentation: any representations, warranties or covenants made or deemed to be made by the Borrower in this Agreement and the Transaction Documents or any other documents, notice, certificate or statement delivered by or on behalf of the Borrower pursuant hereto or thereto or in connection herewith or therewith is or proves to have been incorrect or misleading in any material respect;

(4) Breach of Covenant: failure by the Borrower to perform or observe any of its affirmative covenants or negative covenants under this Agreement, the consequence of which failure results in a Material Adverse Effect;

(5) Insolvency: the Borrower:

(i) is being declared bankrupt or other customary insolvency;

(ii) is unable to, or admit in writing of its inability to, pay its debts as they fall due;

(iii) enter into or seeks to enter into a material scheme for the rehabilitation, reorganization, arrangement, composition or rescheduling of any debt, an assignment for the benefit of its Lender, or a composition with the Lender under the law of Thailand or other jurisdiction;

(iv) assigns or transfers its assets or right to manage its assets in relation to this Agreement to third party or the receiver has been appointed to control over part or all of the business or assets of the Borrower;

(v) commits any act as a result of which it is presumed to be insolvent pursuant to the assumptions prescribed by bankruptcy law;

(6) Dissolution: any proceeding is commenced or any other action is taken for rehabilitation, reorganization, bankruptcy, liquidation, dissolution or winding up of the Borrower, or the Borrower commits an act of bankruptcy or and order is made or and effective resolution is passed or analogous proceeding is taken for amalgamation, dissolution or winding up of the Borrower or with respect to insolvency or bankruptcy of the Borrower;

(7) Receivership: any distress, attachment, execution or other legal process is levied, enforced or attempted or an encumbrance takes possession of, or any action is taken for or with a view to the appointment of a receiver, trustee, custodian or similar officer, in any such case, in relation to bankruptcy proceedings in respect of the Borrower, or a substantial part of the assets of the Borrower and such action is not dismissed within thirty (30) days;

(8) Litigation: Any action, proceeding or litigation is instituted in any courts or authorities to prohibit or sustain the performance of the Borrower under this Agreement in whatsoever nature which affects the legality, completeness, binding effect or enforceability of the Transaction Documents;

(9) Material Government Approval: a modification, revocation or cancellation of any governmental approval which has a Material Adverse Effect;

(10) Cross Default: any other Indebtedness of the Borrower which has a commercial effect of borrowing nature becomes due or is cancelled prior to its stated maturity or is subject to creditor action, based on a payment or non-payment default, or is capable of being declared due and payable prior to its specified maturity date due to the occurrence of an Event of Default;

(11) Material Adverse Effect: the occurrence of any material adverse change in the condition of the Borrower which, in the reasonable judgment of the Lender, may have material adverse effect on the ability of the Borrower to perform its obligations under the Transaction Documents;

(12) Nationalization: the Borrower’s assets are seized, nationalized, expropriated or compulsorily acquired by the governmental agency which would be likely to have a Material Adverse Effect or the ability of the Borrower to perform its obligations under the Transaction Documents;

(13) Cease the Business: The Borrower ceases or threaten to cease the business operation of the Borrower.

13.2. Consequences of Event of Default

Upon the happening of any Event of Default and at any time thereafter, the Lender may without prejudice to any other available rights and remedies, by written notice to the Borrower, take any or all of the following actions:

(a) declare all or part of the Indebtedness and all commissions, fees and other sums payable hereunder to be, whereupon the same shall become, immediately due and payable without further demand, notice or other legal formality of any kind in such case the Borrower shall be liable to forthwith repay all such amount together with all accrued interest thereon;

(b) declare any or all of the undrawn the Facilities terminated, whereupon the obligation of the Lender to make available the Facilities hereunder shall terminate immediately;

(c) accelerate all or part of the Indebtedness and all commissions, fees and other sums payable hereunder to be, whereupon the same become, due and payable at any time without further demand, notice or other legal formality of any kind in such case the Borrower shall be liable to forthwith repay all such amount together with all accrued interest thereon; and /or

(d) enforce any or all of the Transaction Documents.

14. Security

14.1. Detail of Security

The obligations of the Borrower to the Lender under this Agreement shall be secured by the following Security as evidenced by the Security Documents which shall continue to be valid enforceable until the Indebtedness under the Transaction Documents has been repaid in full:

(a) The first ranking mortgage over the Land and Building;

(b) The first ranking mortgage over the Machinery;

(d) Endorsement of Insurance over Building and the right to the Insurance Proceed; and

(e) Endorsement of Insurance over the Machinery and the right to the Insurance Proceed.

14.2. Insurance Policy

Throughout the period the Borrower remains indebted to the Lender under this Agreement or other agreements between the Lender and Borrower, the Borrower shall maintain the following conditions, unless prior written approval from the Lender is granted;

14.2.1 the Borrower shall obtain and maintain insurance with reputable insurance companies which are acceptable to the Lender which contain terms, conditions and coverage to all product risks insurance at the highest insured amount. The insurance policy must specify the Lender as the beneficiary in amount the Lender deems appropriate.

14.2.2 the Borrower shall pay the insurance premiums and the insurance policy must specify the Lender as the beneficiary including deliver the insurance policy to the Lender before the Drawdown date. If the Borrower fails to pay the insurance premium and the Lender pays the same in any amount, the Borrower shall, upon requested by the Lender, repay to the Lender such insurance premiums in full together with interest at the rate of 15% (fifteen percent) per annum from the date of payment by the Lender therefore.

14.3. Security Form

Each Transaction Documents shall be in a form prescribed by the Lender.

15. Currency Indemnity

(a) If any monies are paid by the Borrower or receives or recovered by the Lender pursuant the Transaction Documents in a currency other than the currency in which the Indebtedness of or payment by the Borrower is due, then the Borrower shall on a joint and several basis pay such additional amounts as may be necessary so that after conversion of all such monies into the currency in which the relevant Indebtedness or payment is due to the Lender shall have net in its hands and amount in that currency equal to that Indebtedness then outstanding and due to the Lender.

(b) Where any judgment or order of any court of competent jurisdiction in any country is given or made against the Borrower in respect of all or any part of the monies owing under the Transaction Documents in a currency other than that in which that payment by the Borrower is due, then the Borrower shall on a joint and several basis as a separate and independent liability continuing after such judgment or order indemnify to the Lender against any loss arising by reason of any difference between the rate of exchange at which the currency in which the payment due is converted into the currency of the judgment or order for the purposes thereof and that at which the Lender can convert any amount actually received by it pursuant to and in the currency of such judgment or order into the currency in which the payment due at the time of such receipt.

(c) For purposes of this Clause 15, monies shall be converted from the currency of receipt in to currency in which the payment is due at the Lender’s spot rate of exchange in accordance with its normal practice as at 11.00 am on the date of such receipt or, if that is not a Business Day, on the next succeeding Business Day.

16. Stamp, Duties and Taxes

The Borrower shall pay or cause to be paid all present and future stamp and other like duties and taxes and all registration, recording and other like fees, if any, to which this Agreement and the other Transaction Documents may be registrable or may be sought to be enforced and shall indemnify the Lender against any and all liabilities, costs, claims and expenses with respect to or resulting from any delay or omission in paying such duties, taxes or fees. A certificate as to the amount in respect of which the indemnity is so required submitted by the Lender shall be conclusive and binding on the Borrower (in the absence of manifest error).

17. Taxes

17.1. Net Payment

All sum payable by the Borrower under or pursuant to the Transaction Documents, whether principal, fees or otherwise, shall be paid in full without set-off or counterclaim and, to the extent permitted by law, without deduction or withholding for or on account of any tax, If the Borrower is required by law or regulation to make any deduction or withholding from any payment to the Lender, then:

(a) it shall ensure that such deduction or withholding does not exceed the minimum legal liability therefore, and shall pay over to the relevant taxation or other authorities the full amount of such deduction or withholding (including the full amount of any necessary deduction or withholding from the additional amounts paid as provided below) and shall simultaneously pay to the Lender, such additional amounts as will result in the receipt by the Lender of a net amount equal to the full amounts which would otherwise have been received had no such deduction or withholding been required; and

(b) it shall as soon as practicable (but in any event within thirty (30 ) days thereafter) forward to the Lender, as official receipt or other documentation with respect to such deduction and with respect to the payment of the tax adducted or withheld to the relevant taxation or other authorities as may from time to time be required by the Lender.

18. Assignment

18.1. This Agreement shall be binding upon and inure to the benefit of each party hereto and its successors and permitted assigns.

18.2. The Borrower may not assign or transfer all or any of its rights and obligations hereunder.

18.3. The Lender may assign all or any part of its rights and benefits under this Agreement to any one or more banks or other financial institutions.

19. Notices

19.1.All notices, certificates, receipts and other instruments provided for herein to be issued by each party hereto shall be binding up on each party and shall be validly signed by its respective authorized persons and shall be sent by hand delivery, registered mail, or facsimile or otherwise in writing and sent to the relevant party’s address, or facsimile number and marked for the attention of the persons as set out at the Facility’s office address or as from time to time notified by each party to the other.

19.2 Any notice, demand or other communication so addressed to such party shall be deemed to have been delivered and duly accepted by such party:

(a) in case of any notice, demand or other communication delivered by hand (e.g. by messenger) when actually received, or if sent by registered mail five (5) Business Day after mailing; or

(b) in case of any notice, demand or other communication made by facsimile, (i) when dispatched and received in legible form by the receiving party, and (ii) a printed facsimile confirmation of that transmission is received by the sending party.

However, a notice given in accordance with the above but received on a Saturday, Sunday, public holiday or day on which banks and the relevant financial markets are not open for business in the place of receipt or after business hours in the place of receipt will only be deemed to be given on the next day (other than a Saturday, Sunday or public holiday) on which banks and the relevant financial markets are open for business in that place.

20. Partial Invalidity

If at any time any provision hereof is or becomes invalid, illegal or unenforceable in any respect the validity, legality or enforceability of the remaining provisions hereof shall not in any way be affected or impaired thereby.

21. Amendment

No amendment or modification of the Agreement, shall in any event be effective unless the agreement among the parties in writing has been obtained. No waiver of any provision of the Agreement shall in any event be effective unless the prior approvals of the Lender have been obtained.

22. Waivers

No failure on the part of the Lender to exercise, and no delay by the Lender in exercising, any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise by the Lender of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any other remedies provided by law.

23. Confidentiality

This Agreement and all confidential information relating to the Borrower and the transactions contemplated by this Agreement is for the Lender’s confidential use only and the terms thereof will not be disclosed by the Lender to any person:

(a) other than its officers, directors, employees, accountants, attorneys and other advisors, and then only in connection with the transactions contemplated thereby and on a confidential basis; and

(b) other than to financial institutions, on a confidential basis, for their use in connection with an assignment or participation in the Facilities.

Notwithstanding the foregoing, the Lender may make such public disclosures of the terms and conditions hereof as it required by applicable law, in the opinion of its counsel, to make.

24. Governing Law

This Agreement shall be governed by and construed in accordance with the law of Thailand.

IN WITNESS WHEREOF the duly authorized representatives of the parties hereto have executed this Agreement the day and year first before written.

SIGNATURE PAGES

BORROWER :

SMTEK INTERNATIONAL (THAILAND) COMPANY LIMITED

By			By
	(	)		(	)

LENDER :

BANKTHAI PUBLIC COMPANY LIMITED

By
	(	)

WITNESSES:

By			By
	(	)		(	)

EX-10.2 3 a04-5651_1ex10d2.htm EX-10.2

EXHIBIT 10.2

		/s/ KIRK A. WALDRON
	[SEAL]	6/5/49

GUARANTEE AGREEMENT

THIS AGREEMENT is made on this day of at BankThai Public Company Limited witness:

SMTEK International, Inc. residing at 200 Science Drive Moorpark, California The United States of America (hereinafter referred to as the “Guarantor”) hereby guarantees the performance of all obligations of SMTEK International (Thailand), Co., Ltd. (hereinafter referred to as the “Borrower”) to the BankThai Public Company Limited (hereinafter referred to as the “Bank”) for the aggregate principal amount not exceeding Baht –68,000,000-(Baht Sixty eight Million only) under the facility agreementdated entered into by the Bank and the Borrower (hereinafter referred to as the “Facility Agreement”) in accordance with the following terms and conditions:

1. The obligations hereunder shall be the obligations under the overdraft, loan, letter of credit, trust receipt, promissory note, packing credit, FX forward contracts, discount or rediscount of bills, obligations arising from an aval/acceptance of bills given by the Bank at the request of the Borrower or any other obligations relating to bills, obligations under letters of guarantee issued by the Bank and all other indebtedness which the Borrower has towards the Bank of all kinds of obligations and liabilities at present and in the future.

It is hereby agreed that the Guarantor’s liabilities hereunder shall not be limited only to the aggregate principal amount specified above (Baht 68,000,000), but shall include any other accessories of the debts, such as interest, compensation due by the Borrower on account of such obligation, all charges accessory to it including all expenses and damages of any kinds incurred by the Bank in making demand of instituting legal proceeding against the Borrower for the enforcement of the performance of such obligations

2. The Guarantor agrees to bind itself as joint and primary obligor with the Borrower in respect of the obligations referred to in Clause 1 and agrees to immediately pay to the Bank for all indebtedness which remains outstanding.

3. This Guarantee shall be irrevocable and shall remain in full force and effect until all obligations referred to Clause 1 shall have been performed in full as described by the Bank

4. The Guarantor shall not be discharged from any or all obligations hereunder notwithstanding that such obligation shall be void, unrecoverable or unenforceable against the Borrower by reason of mistake or incapacity and regardless of whether or not the Guarantor is, at the time of execution of this Guarantee, aware of such mistake or incapacity.

		/s/ KIRK A. WALDRON
		KIRK A. WALDRON

5. The Bank reserves its right whether or not to make a demand against or to release or discharge any of the guarantor from any or all obligations hereunder without prior consent from the Guarantor, in which event the Guarantor agrees that its guarantee liabilities in respect of the Borrower’s obligations which remains outstanding and unpaid shall not be affected, reduced or impaired but shall remain in full force and effect.

6. The Guarantor hereby consents to any extension of time of payment granted by the Bank to the Borrower as the Bank deems appropriate and without prior notice to the Guarantor and in such event it shall be deemed that the Guarantor has agreed thereto. The Guarantor hereby waives any and all defense of the Borrower which may be raised against the Bank when making demand against the Guarantor.

7. The Guarantor hereby agrees that if, due to the Bank’s own acts, the Guarantor cannot be subrogated wholly or partially to the Bank’s right or mortgage, pledge or preferential rights given to the Bank prior to or at the time of this Guarantee, the Guarantor shall not be discharged from its guarantee obligations hereunder whether in whole or in part. In addition, the Guarantor will not exercise any rights which it may acquire by way of subrogation until all obligations to the Bank shall have been paid in full settlement.

8. The Guarantor hereby consents for the Bank to immediately set off any or all amounts from any accounts which the Guarantor may have with the Bank and apply the same as repayment of the indebtedness hereunder. If the credit balance in all such accounts is in sufficient to cover such indebtedness, the Guarantor consents to the Bank to include the amount of such indebtedness which shall be the remaining of outstanding unpaid from any or all of the Guarantor’s current accounts maintained at the Bank whereby the Guarantor shall be liable to pay off the outstanding amount in such current accounts in full.

9. The Guarantor hereby accepts that the interruption of prescription against the Borrower due to any acts of the Borrower or any third person shall be the interruption of prescription against the Guarantor as well.

10. Any correspondence, demand, notice or written instrument to be given to any or all the Guarantor whether sent by registered post or ordinary post or by hand, shall be deemed to have been duly served if it is sent to the Guarantor’s address as shown herein, whether or not it is actually received by any person. If it remains undelivered because such addresses have been changed or removed without any notice in writing from the Guarantor to the Bank or such place as indicated herein could not be found, it shall be deemed that the Guarantor have been informed of the contents of such correspondence, demand, notice or written instrument.

11. This Guarantee shall be governed and construed in accordance with the laws of Thailand.

IN WITNESS WHEREOF, the Guarantor has hereunto executed his signature(s) on the day, month and year as written hereabove.

[SEAL]

	SMTEK International, Inc

Signed	/s/ KIRK A. WALDRON	Guarantor
(		)


Signed		Witness
(		)


Signed		Witness
(		)

EX-31.1 4 a04-5651_1ex31d1.htm EX-31.1

EXHIBIT 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO
TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Edward J. Smith, Chief Executive Officer and President of SMTEK International, Inc., certify that:

1. I have reviewed this report on Form 10-Q of SMTEK International, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability

to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 10, 2004

By:	/s/ Edward J. Smith
Edward J. Smith
Chief Executive Officer and President
SMTEK International, Inc.

EX-31.2 5 a04-5651_1ex31d2.htm EX-31.2

EXHIBIT 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Kirk A. Waldron, Senior Vice President and Chief Financial Officer of SMTEK International, Inc., certify that:

1. I have reviewed this report on Form 10-Q of SMTEK International, Inc.;

to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 10, 2004

By:	/s/ Kirk A. Waldron
Kirk A. Waldron
Senior Vice President and Chief Financial Officer
SMTEK International, Inc.

EX-32.1 6 a04-5651_1ex32d1.htm EX-32.1

EXHIBIT 32.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of SMTEK International, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Edward J. Smith, Chief Executive Officer and President of the Company, certify, to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 10, 2004

By:	/s/ Edward J. Smith
Edward J. Smith
Chief Executive Officer and President
SMTEK International, Inc.

EX-32.2 7 a04-5651_1ex32d2.htm EX-32.2

EXHIBIT 32.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of SMTEK International, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Kirk A. Waldron, Senior Vice President and Chief Financial Officer of the Company, certify, to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 10, 2004

By:	/s/ Kirk A. Waldron
Kirk A. Waldron
Senior Vice President and Chief Financial Officer
SMTEK International, Inc.