SMTEK INTERNATIONAL INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
___________ ___________

Commission File Number 1-8101
___________
Exact Name of Registrant as
Specified in Its Charter: SMTEK INTERNATIONAL, INC.
______________________________
DELAWARE 33-0213512
_____________________________ _____________
State or Other Jurisdiction of I.R.S. Employer
Incorporation or Organization No. Identification

Address of Principal Executive Offices: 200 Science Drive
Moorpark, CA 93021
_________________________
Registrant's Telephone Number: (805) 532-2800
_________________________

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Name of each exchange on which registered
_________________________ ___________________________________________
Common Stock, $.01 Par Value Pacific Exchange

Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.01 Par Value

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

The aggregate market value of the voting stock held by non-affiliates of the
registrant based on the closing price as reported by the Nasdaq Small Cap
Market on September 20, 2002 was $2,170,100. The registrant had 2,284,343
shares of Common Stock outstanding as of September 20, 2002.

DOCUMENTS INCORPORATED BY REFERENCE

We are a reporting company and file annual, quarterly and special
reports, proxy statements and other information with the Securities and
Exchange Commission (the "SEC"). You may inspect and copy these materials at
the Public Reference Room maintained by the SEC at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330
for more information on the Public Reference Room. You may also find our SEC
filings at the SEC website at www.sec.gov. You may also inspect reports and
other information concerning us at the offices of the Nasdaq Stock Market at
1735 K Street, N.W., Washington, D.C. 20006. We intend to furnish our
stockholders with annual reports containing audited financial statements and
such other periodic reports as we may determine to be appropriate or as may
be required by law.

Specified parts of our Annual Report to Stockholders for our fiscal year
ended June 30, 2002 are incorporated by reference into Parts I and II hereof.
Specified parts of our Proxy Statement for our 2002 Annual Meeting of
Stockholders, which Proxy Statement will be filed within 120 days after the
end of our fiscal year, are incorporated by reference into Part III hereof.

Certain documents listed above in Part IV, Item 14 of this Report, as
exhibits to this Report are incorporated by reference from other documents
previously filed with the SEC.

THIS ANNUAL REPORT ON FORM 10-K, INCLUDING EXHIBITS HERETO, CONTAINS
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. THESE FORWARD-LOOKING STATEMENT ARE
TYPICALLY IDENTIFIED BY THE WORDS "ANTICIPATES", "BELIEVES", "EXPECTS",
"INTENDS", "FORECASTS", "PLANS", "FUTURE", "STRATEGY", OR WORDS OF SIMILAR
MEANING. VARIOUS IMPORTANT FACTORS COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE EXPRESSED IN THE FORWARD-LOOKING STATEMENTS, INCLUDING
THOSE DESCRIBED AS "RISK FACTORS" IN THIS REPORT AND IN OTHER DOCUMENTS THE
COMPANY HAS FILED AND FILES, FROM TIME TO TIME, WITH THE SECURITIES AND
EXCHANGE COMMISSION.

PART I

Item 1. BUSINESS

GENERAL

SMTEK International, Inc. (the "Company," "we," "us" or "our"), a
Delaware corporation, is an electronics manufacturing services ("EMS")
provider to original equipment manufacturers ("OEMs") primarily in the
industrial and instrumentation, medical, 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 low-
to-medium volume, high complexity segment of the EMS industry.

We have seven wholly owned subsidiaries: SMTEK, Inc. (aka SMTEK
Moorpark), located in Moorpark, California; Technetics, Inc. (dba SMTEK San
Diego), located in Poway, California; Jolt Technology, Inc. (aka SMTEK Fort
Lauderdale), located in Fort Lauderdale, Florida; SMTEK Europe Limited,
located in Craigavon, Northern Ireland; 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 October 24, 2001, we completed a transaction to purchase certain
assets, but not assume any liabilities, of Century Electronics Manufacturing,
Inc. ("Century"), an EMS company that filed for bankruptcy. As part of this
transaction, we also purchased substantially all of the common stock of
Century's subsidiary in Thailand. The aggregate purchase price of this
transaction was approximately $3.2 million.

In July 2001, SMTEK San Diego moved its entire operations into a 45,000
square foot facility in Poway, California under a ten year lease. In March
2002, SMTEK Moorpark moved its entire operations into an 115,000 square foot
facility in Moorpark, California under a ten year lease.

We were incorporated in California in 1959 and were reincorporated in
Delaware in 1986. We changed our name from Data-Design Laboratories, Inc. to
DDL Electronics, Inc. in December 1993, and in October 1998 our name was
changed to SMTEK International, Inc. Our executive office is currently
located at 200 Science Drive, Moorpark, California 93021, telephone (805)
532-2800.

INDUSTRY OVERVIEW

EMS Industry

The EMS industry can be classified into two general segments: high-
volume/low complexity and low-to-medium volume/high complexity. We focus on
the low-to-medium volume/high complexity segment. Manufacturers in this
segment are highly fragmented and competitive. Customer bases tend to be
highly concentrated, with two or three customers typically accounting for a
significant portion of an EMS provider's total revenue.

Two principal assembly techniques are employed in the EMS industry:
surface mount technology ("SMT"), which accounts for the majority of
manufacturing; and through-hole technology. We believe that the low-to-
medium volume/high complexity EMS market is continuing to move toward SMT as
the preferred manufacturing technique, due in part to the fact that
semiconductors have continued to shrink in size, which tightens manufacturing
tolerances and necessitates the use of automation for efficient production.
Our production processes are predominantly SMT.

Description of EMS Products and Services

Production of electronic assemblies for a customer is only performed
when a firm order is received and accepted. Electronic assemblies are
produced based on one of two general methods, either "turnkey" (where we
provide all materials, labor and equipment associated with producing the
customers' product) or "consigned" (where we provide only labor and equipment
for manufacturing electronic assemblies and the customer provides the
materials).

Our EMS operations provide both turnkey and consignment electronics
manufacturing services using surface mount and through-hole interconnection
technologies. We conduct our domestic business through our facilities in
Moorpark, San Diego, Fort Lauderdale, Marlborough and Santa Clara and our
foreign operations in our SMTEK Europe Limited subsidiary in Northern Ireland
and our SMTEK International Thailand Limited subsidiary in Ayutthya,
Thailand. Our EMS operations do not fabricate any of the components used in
these processes.

The materials procurement element of our turnkey services consists of the
planning, purchasing, expediting, warehousing and financing of the components
and materials required to assemble a board-level or system-level assembly.
Customers have increasingly required us and other EMS providers to purchase
some or all components directly from component manufacturers or distributors
and to finance the components and materials. Customers usually incur costs
in qualifying EMS providers and there is a learning curve for both the
customer and the EMS provider in terms of producing the product, redesigns
and refinements of products. Once a relationship is established, we believe
that customers experience difficulty in expeditiously and effectively
reassigning a turnkey project to a new assembler or in taking on the project
themselves.

As a consequence of the relative difficulty of a customer to change EMS
providers, our company faces the obstacle of attracting new customers away
from their existing EMS providers, or from the customers' in-house assembly
operations.

MARKETS AND CUSTOMERS

Our sales and the percentage of our consolidated sales to the principal
end-user markets we serve for the last three fiscal years are as follows
(dollars in thousands):

See Note 11 to the consolidated financial statements for information on
our revenues and long-lived assets by geographical area.

We market our EMS services through both direct sales personnel and
through independent representatives. Our marketing strategy is to develop
close relationships with, and to increase sales to, certain existing and new
major OEM customers. This includes becoming involved at an early stage in
the design of these customers' new products. We believe this strategy is
necessary to keep abreast of rapidly changing technological needs and to
develop new EMS processes, so as to enhance our EMS capabilities and our
position in the industry. As a result of this strategy, however,
fluctuations experienced by one or more of our customers in demand for their
products may have and have had adverse effects on our sales and
profitability. (See "Risk Factors that May Affect Your Decision to Invest in
Us").

BACKLOG

At June 30, 2002, 2001 and 2000, our backlog was $45.4 million, $59.0
million and $53.4 million, respectively. Backlog is comprised of orders
believed to be firm for products that have scheduled shipment dates within
the next six to twelve months. We expect to ship a substantial portion of
the backlog within 90 days, although the continuation of current economic
conditions or other risk factors may alter those expectations.

Some orders in the backlog may be cancelled under certain conditions.
In addition, the timing of orders from major customers may result in
significant fluctuations in our backlog and operating results from period to
period.

Accordingly, we believe that backlog may not be a reliable indicator of
future operating results.

RISK FACTORS THAT MAY AFFECT YOUR DECISION TO INVEST IN US

There are a variety of risk factors noted below and elsewhere in this
Report on Form 10-K (the "Report" or "Form 10-K") and our other filings with
the SEC that may affect your investment with us. In evaluating our business,
you should carefully review the risk factors cited below as well as all other
statements, notes and figures in this Form 10-K. Our business presents a
risk due to, among other considerations, the significant volatility of our
stock, particularly on a quarterly basis. Our business is also part of a
highly dynamic and competitive industry, which can also result in the
volatility of our stock price.

Our results of operations may be affected by the above, or with the risk
factors described below:

General Industry Conditions and Competition

The markets in which the EMS industry operates are intensely
competitive. Seasonality is not a significant factor in the EMS business.
Competition is principally based primarily on price with secondary factors
including product quality, technical capability and the ability to deliver
products on schedule. Both the price of and the demand for EMS are sensitive
to economic conditions, changing technologies and other factors. The
technology used in EMS is widely available, and there are a large number of
domestic and foreign competitors. Many of these firms are larger than we are
and have significantly greater financial, marketing and other resources.

Many of our competitors have also made substantial capital expenditures
in recent years and operate technologically advanced EMS facilities.
Further, some of our customers have substantial in-house EMS capabilities.
There is a risk that, in periods when these customers are operating at less
than full capacity, they will use their own facilities rather than contract
with us. Despite this risk, we believe we have not currently experienced a
significant loss of business to OEMs' captive assembly operations. However,
there can be no assurance that future losses in this regard will not occur.

Another factor that presents a continuing risk is the inability of EMS
companies to have their customers take back unneeded inventory (See the risk
factor below dealing with "Components And Materials May Be Expensive,
Unavailable, Or Difficult To Timely Purchase; Components And Materials May
Also Be Difficult To Sell"). This has also affected us and may occur more
frequently if the current economic conditions do not appreciably improve. We
can provide no assurance that we will not be forced to sell our customers'
unneeded inventory that we hold. If we sell the excess inventory, we may
have to sell any or all of the inventory for a loss. This situation, if it
comes to pass, may adversely affect our business, operating results and
financial condition.

If the Market for Our Services Does Not Improve, or If General Economic
Conditions Continue to Adversely Affect Our Business or Industry, We
Expect To Continue To Suffer Losses.

Since the end of our third quarter of fiscal 2001, and then more
recently since the event of September 11, 2001, our existing customers
scheduled out and/or canceled orders. As we begin our new fiscal year, we
are uncertain whether the soft demand for goods and services, including those
goods and services our customers provide, will improve. We believe this is a
result of the general downturn in economic conditions and continued effects
of the event of September 11, 2001.

Further, we have opened new facilities and moved existing subsidiary
businesses into larger facilities. This has caused us an increase in costs
and excess capacity. When combined with the current economic conditions, this
presents a significant risk to our operating results and financial condition.
(See also Risk Factor below entitled: "Our New Facilities and Strategic
Expansion Have Not Yielded the Benefits We Expected and Could Adversely
Affect Our Financial Condition.")

While we have taken cost reduction measures and attempted to improve
efficiencies in our subsidiaries' facilities, we may continue to experience a
material adverse effect on our operating results and in our financial
condition if the current economic conditions continue for an extended period
of time, or if we do not manage the facilities toward profitability. We may
also be unable to assimilate the new facilities into our operations, or we
may have to close one or more of our existing facilities which may further
adversely affect our operating results and our financial condition.

Our Domestic Line of Credit Agreement Contains Certain Financial
Covenants That Must Be Met. Our Northern Ireland Line of Credit
Agreement Renews in November 2002.

At December 31, 2001, we violated certain covenants in our domestic line
of credit agreement with our bank. In February 2002, the bank waived these
covenant violations. At March 31, 2002, we violated certain covenants in our
domestic line of credit agreement. In May 2002, the bank either removed or
amended the related restricted covenants in an amendment to the credit
agreement. At June 30, 2002, we were in compliance with the amended
covenants to the credit agreement. In anticipation of future projected
covenant violations, during September 2002, we amended the May 2002 covenants
with the bank. This line of credit agreement renews in September 2003. In
the event of default under our line of credit agreement, any and all
outstanding borrowings could be immediately due and payable. This may create
significant operating and financial restrictions on us, further causing an
adverse effect to our financial condition and operating results.

Our Northern Ireland line of credit agreement is also set to renew in
November 2002. We can provide no assurance that the agreement will be
renewed and on what terms any renewal could occur. However, at this time the
bank has not indicated that it will not renew our line of credit agreement.

Our New Facilities and Strategic Expansion Have Not Yielded the Benefits
We Expected and Could Adversely Affect Our Financial Condition.

We moved the operations of two of our subsidiaries, SMTEK, Inc. and
Technetics, Inc., during fiscal year 2002 from Thousand Oaks, California and
El Cajon, California, respectively, to larger facilities in Moorpark,
California and Poway, California, respectively. The Poway and Moorpark
leases each have a term of ten years

While Technetics, Inc. was released from the El Cajon lease, SMTEK, Inc.
is still liable for the Thousand Oaks facility lease and continues paying
rent to the landlord without a subtenant on a lease which expires on May 31,
2004. While there are active measures being taken to sub-lease or re-lease
the premises in Thousand Oaks, there is no assurance that a sub-tenant or new
tenant will be found. The failure to secure a sub-tenant or new tenant may
cause an adverse result in our operating or financial conditions.

We also have entered into long-term leases for facilities related to our
new operations in Marlborough, Massachusetts and Santa Clara, California.

A majority of our facilities continue to have excess capacity. The
increased costs, rent, excess capacity and expenses are likely to continue to
adversely affect our business, operating results or financial conditions
regardless of whether any of the other risk factors occur, particularly
during fiscal year 2003. Our strategic direction in expanding during this
economic climate has given and may continue to give rise to unforeseen costs.

Our Industry is Often Described as Having Low Profit Margins.
The Current Economic Downturn May Result in Even Lower Profit Margins
For Our Company As Well as Our Industry.

The EMS industry is often described as having low profit margins.
Oftentimes, if not always, customers have sought and have continued to seek
price reductions. 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.

If We Lose Any One Of Our Larger Customers, It May Adversely Affect Our
Results And Financial Condition

The loss of one or more of our larger customers, or a reduction in their
level of orders, could have an adverse effect on our business, results of
operations and financial condition. See Note 11 to the consolidated
financial statements for information on our three largest customers.

Our Operating Results Are Likely To Materially Fluctuate

Our operating results are affected by a number of factors. These
include:

- the timing of orders from and shipments to major customers,

- availability and cost of materials and components,

- the volume of orders relative to our capacity,

- timing of expenditures in anticipation of future sales,

- the gain or loss of significant customers,

- variations in the mix between consignment and turnkey arrangements
with customers,

- variations in the demand for products in the industries we serve,

- quality issues and general economic conditions

- the development and introduction of new products and technologies by
our customers and our customers' competitors

In addition to fluctuations from day to day operations, our operating
results will also be affected by the following:

- excess capacity at the various subsidiary plants, which may entail
attempts to limit liabilities of leases, selling or subleasing
equipment, and other measures of that nature,

- our debt load is increasing and may rise to a point that
over-extends our cash-flow capacity,

- our domestic line of credit agreement contains certain financial
covenants that must be attained and our Northern Ireland line of
credit agreement with the bank renews during November 2002 (See
Risk Factor entitled "Our Domestic Line of Credit Agreement Contains
Certain Financial Covenants That Must Be Met. Our Northern Ireland
Line of Credit Agreement Renews in November 2002.")

- our fixed costs are significantly higher than the last fiscal
year due to the Century asset purchase, excess capacity in existing
plants, and the failure to sub-lease or re-lease the Thousand Oaks
facility.

A significant portion of our expenses is relatively fixed in nature and
planned expenditures are based in part on anticipated orders. Our inability
to adjust expenditures quickly enough to compensate for a decline in net
sales may magnify the adverse impact of a decline in our results of
operations.

Our Stock Price Has Been And Continues To Be Volatile. Based Upon Any
Number of Factors, We May Face Delisting Proceedings From Nasdaq.

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

- the stock 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, both internal to us
and due to external conditions.

Currently, we are trading near $1.00. Under Nasdaq rules, if we trade
below $1.00 for thirty consecutive days, or if any other events occur,
including falling below $2.5 million in shareholders' equity, we could face
delisting proceedings from Nasdaq and be listed on the over-the-counter
market on the NASD Electronic Bulletin Board or in the "pink sheets"
maintained by the National Quotation Bureau, Inc., which is generally
considered to be a less efficient market than markets such as Nasdaq or other
national exchanges, and which may cause difficulty in conducting trades and
difficulty in obtaining future financing. Further, for companies whose
securities are traded in the Over-The-Counter Market, it is more difficult:
(i) to obtain accurate quotations, (ii) to obtain coverage for significant
news events because major wire services, such as the Dow Jones News Service,
generally do not publish press releases about such companies, and (iii) to
obtain needed capital.

Components And Materials May Be Expensive, Unavailable, Or
Difficult To Timely Purchase; Components and Materials May Also Be
Difficult To Sell

For our surface mount assemblies and turnkey operations, we purchase
components and material from approved suppliers. Any failure on the part of
these suppliers to deliver required components to us or any failure of such
components to meet performance requirements could impair our ability to meet
scheduled shipment dates. This in turn could delay completing our sales and
receipt of payment, which may adversely affect our business, financial
condition and results of operations. From time to time, we have experienced,
and may in the future experience, shortages of certain types of electronic
components. These shortages may increase our costs and may also cause us to
experience delays in deliveries to our customers.

In addition, our customers may specify that we purchase parts or
materials from particular manufacturers of components for use in the assembly
process. Certain components used in a number of our customer programs are
obtained from sole source suppliers. To the extent these components are not
available on a timely basis or are in short supply because of allocations
imposed by the component manufacturer, and the customer is unwilling to
accept a substitute component, delays may occur. Such delays are experienced
in the EMS business from time to time and have caused sales and inventory
fluctuations in our business.

To the extent our customers do not absorb the costs associated with
parts or materials shortages or price increases, whether by agreement or to
maintain a business relationship with a customer, this could have a material
adverse effect on our business, financial condition and results of
operations.

In fiscal 2002, we entered into several inventory consignment programs
with several of our vendors. These programs were designed to reduce the lead
time on program parts, reduce the quotation process timetable, provide
competitive pricing, provide protection during periods of shortages and
reduce overhead costs. However, the programs do not necessarily avoid
shortages or price fluctuations with regard to certain important parts or
materials nor do the programs protect against all circumstances facing our
customer, our supplier or us.

If Our Customers' Vary Their Requirements, This May Affect Our Results
And Our Financial Condition

The level and timing of purchase orders placed by our customers are
affected by a number of factors, including variation in demand for the
customer's products, customer attempts to manage inventory and changes in the
customer's manufacturing strategies. Many of these factors are outside of
our control. Generally, customers may cancel, reduce or delay purchase
orders and commitments without penalty, except for payment for services
rendered, materials purchased or procured and, in certain circumstances,
charges associated with such cancellation, reduction or delay. The current
economic conditions, however, may affect our ability to recover such costs,
penalties and charges.

Significant or numerous cancellations, reductions or delays in orders by
customers, or inability by customers to pay for services provided or to pay
for components and materials purchased on such customer's behalf, have, in
the past adversely affected our business, financial condition and results of
operations. Such events or conditions could have a material adverse effect
on our business, financial condition and results of operations in the future.

Our Debt Profile May Change and May Affect Our Operations And Financial
Condition

At June 30, 2002, our debt-to-equity ratio was 2.92 to 1.00. Several
factors, including but not limited to, a continued prolonged economic
downturn, capital investment to increase production or acquisition of other
EMS companies, may significantly change our debt profile. Such events or
conditions could have a material adverse effect on our business, financial
condition and results of operations in the future.

Our Northern Ireland Subsidiary Has Economic Challenges and Faces
Additional Risks Different From Our Domestic Subsidiaries

Our subsidiary in Northern Ireland, SMTEK Europe, has largely, though
not completely, avoided the turmoil in that area over the years of its
operation. However, we are unable to provide any assurance that our
subsidiary will not be affected by the continued political instability in
that area.

Further, we are a guarantor on our subsidiary's $3.8 million line of
credit with Ulster Bank Markets. Also, SMTEK Europe is subject to a
government loan, which is subject to covenants and conditions, including the
number of employees that must be employed at the facility. This government
loan, as well as the existence of a labor union at SMTEK Europe, may
adversely affect the ability of SMTEK Europe to be flexible in cutting labor
and other costs. There may be an adverse effect on our operating results and
financial condition, as well as our business, if SMTEK Europe does not meet
its economic challenges.

Our Thailand Facility Has Economic Challenges and Faces Additional Risks
Different from Our Domestic Subsidiaries

We own 4,999,992 out of 5,000,000 shares of stock in the Thailand
facility. Thailand is generally considered to have less economic stability
than most mainland European nations or the United States of America.
Further, the facility in Thailand has essentially one customer, a
telecommunications company which, if it defers or cancels orders, will have a
material effect on the Thailand facility performance. This in turn could
adversely impact our operating results and financial condition.

Our Foreign Facilities in Thailand and Northern Ireland Face Unique
Challenges That Our Domestic Facilities Do Not Face

Our foreign operations have risks that may affect our operating results
and financial condition. These risks include:

- the fluctuations of foreign currencies against the U.S. dollar in our
reported results,

- import and export duties, and value added taxes,

- import and export regulation changes that could increase costs,
increase losses or erode any profitability that may exist,

- potential restrictions on the transfer of funds,

- inflexible employee contracts in the event of business downturns, and

- the burden and cost of interaction between foreign and U.S. laws.

Our Services, To The Extent We Perform Sub-Contracts Relating To
Government Work, Are Subject To Government Audit And Control

Our sub-contracting electronic manufacturing services include aerospace
and military work for customers who do business with the U.S. government. If
a customer complains to the government reporting the services we or our
customers perform for the government, the government may subject us or our
customer to an investigation, audit or lawsuit.

The government may enforce civil and criminal penalties if it finds that
contracts are intentionally breached or if there is intentional misconduct.
In the absence of intentional misconduct, we may have to pay contract or
other applicable and statutory damages to the government or the military
contracting customer.

As every investigation, audit or lawsuit stands on its own merits, we
can provide no assurance as to whether any investigation, audit or lawsuit,
if one occurs, will not adversely affect our business, operating results or
financial condition.

Our Success Depends On Our Ability To Retain and Recruit Key Personnel

Our success depends in large part on our ability to recruit and retain
highly skilled technical, managerial, sales, and other administrative and
staff personnel. In spite of the economic slowdown, competition for such
personnel remains intense. In addition, our workforce reductions over fiscal
year 2002 have increased our dependence on the remaining personnel, as we are
relying on our current personnel to assume additional responsibilities. The
loss of services of any of our key personnel or our failure to retain and
attract qualified personnel in the future could make it difficult for us to
meet our key objectives, such as timely manufacture and delivery of products,
among other objectives.

OUR ENVIRONMENTAL CLEAN-UP CONTINUES AT ANAHEIM, CALIFORNIA FACILITY

See Note 10 to the consolidated financial statements for information
regarding environmental matters.

OUR TAX ISSUES WITH THE IRS CONTINUES

See Note 6 to the consolidated financial statements for information
relating to our tax liabilities.

EMPLOYEES

At August 23, 2002, we had approximately 650 employees. Given the
growth of our business and the quick response time required by our customers,
we seek to maintain labor flexibility to scale up or down our operations as
necessary to maximize efficiency. We also use skilled temporary labor. In
Europe, approximately 30 of our employees are members of a union. None of
our employees in the United States and Thailand are covered by union
agreements. We have no history of labor disputes at any of our facilities.
We believe that our employee relationships are good.

Item 2. PROPERTIES

The following table lists our principal plants and properties:

(A) The operations and corporate headquarters moved from the Thousand Oaks
facility into the Moorpark facility in March 2002. A tenant for the
Thousand Oaks building is currently being sought. The San Diego
facility moved from El Cajon to Poway, both in San Diego County.
A new tenant began leasing the El Cajon facility in November 2001.

(B) The Northern Ireland property is pledged as security for an installment
loan payable to the Industrial Development Board ("IDB") for Northern
Ireland, from which the property was purchased. This loan had an
outstanding balance of approximately $697,000 as of June 30, 2002.

(C) An eight-year lease was signed for the Marlborough facility during
fiscal year 2002. It is attached as an exhibit to our December 31, 2001
Form 10-Q.

(D) A new three-year lease was signed for the Santa Clara facility after
fiscal year 2002, in July 2002. It is attached as an exhibit to this
Form 10-K.

For further discussion on our new facilities in Moorpark, San Diego,
Marlborough and Santa Clara, see "Risk Factors that May Affect Your Decision
to Invest in Us-Our New Facilities and Strategic Expansion Have Not Yielded
the Benefits We Expected and Could Adversely Affect Our Financial Condition."

Item 3. LEGAL PROCEEDINGS

In the ordinary course of business, we experience various types of
claims which 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of the security holders during
the three months ended June 30, 2002.

PART II

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

The information set forth under the caption "Market and Dividend
Information" in the our 2002 Annual Report to Stockholders is incorporated
herein by reference and made a part hereof.

Item 6. SELECTED FINANCIAL DATA

The information set forth under the caption "Five-Year Financial
Summary" in our 2002 Annual Report to Stockholders is incorporated herein by
reference and made a part hereof.

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The information set forth under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in our 2002 Annual
Report to Stockholders is incorporated herein by reference and made a part
hereof.

Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

This information is set forth under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Quantitative
and Qualitative Disclosures About Market Risk" in our 2002 Annual Report to
Stockholders is incorporated herein by reference and made a part hereof.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Reference is made to the financial statements later in this Report under
Item 14(a)(1).

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

This information is incorporated by reference to our proxy statement for
our 2002 Annual Meeting of Stockholders, to be filed with the SEC, on or
before 120 days following June 30, 2002, or if not filed by such date, as an
amendment to this Report to be filed on or before such date.

Item 11. EXECUTIVE COMPENSATION

This information is incorporated by reference to our proxy statement for
our 2002 Annual Meeting of Stockholders, to be filed with the SEC, on or
before 120 days following June 30, 2002, or if not filed by such date, as an
amendment to this Report to be filed on or before such date.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

This information is incorporated by reference to our proxy statement for
our 2002 Annual Meeting of Stockholders, to be filed with the SEC, on or
before 120 days following June 30, 2002, or if not filed by such date, as an
amendment to this Report to be filed on or before such date.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

This information is incorporated by reference to our proxy statement for
our 2002 Annual Meeting of Stockholders, to be filed with the SEC, on or
before 120 days following June 30, 2002, or if not filed by such date, as an
amendment to this Report to be filed on or before such date

PART IV

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS OF FORM 8-K

2002 Annual
Report to
Stockholders
------------
(a)(1) List of Financial Statements

List of data incorporated by reference:
Report of KPMG LLP on consolidated
financial statements 16
Consolidated balance sheets as of June 30, 2002
and 2001 17
Consolidated statements of operations for the
years ended June 30, 2002, 2001 and 2000 18
Consolidated statements of cash flows for the
years ended June 30, 2002, 2001 and 2000 19
Consolidated statements of stockholders'
equity and comprehensive income for the years
ended June 30, 2002, 2001, and 2000 20
Notes to consolidated financial statements 21

(a)(2) Financial Statement Schedules
The financial statement schedules are omitted
because they are either not applicable or the
information is included in the notes to
consolidated financial statements.
Form 10-K
---------
(a)(3) List of Exhibits:
Exhibit Index 19

(b) Reports on Form 8-K:

On May 15, 2002 we filed a Form 8-K announcing a change in
management, including the announcement of Edward J. Smith becoming President
and Chief Executive Officer of SMTEK International, Inc.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on September 3,
2002.

SMTEK INTERNATIONAL, INC.

/s/ Edward J. Smith
-----------------------
Edward J. Smith
Chief Executive Officer,
and President

Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.

Signature Title Date

/s/ Edward J. Smith Chief Executive Officer, September 3, 2002
- ----------------------- and President -------------------
Edward J. Smith

/s/ Kirk A. Waldron Senior Vice President September 3, 2002
- ----------------------- and Chief Financial -------------------
Kirk A. Waldron Officer (principal
financial officer)

/s/ Clay M. Biddinger Director September 3, 2002
- ----------------------- -------------------
Clay M. Biddinger

/s/ James P. Burgess Chairman of the Board September 3, 2002
- ----------------------- -------------------
James P. Burgess

/s/ Oscar B. Marx Director September 3, 2002
- ----------------------- -------------------
Oscar B. Marx III

EXHIBIT INDEX

Exhibit
Number Description
- ------- -----------

2.1 Agreement and Plan of Merger dated May 28, 1998 among the Company,
Jolt Technology, Inc. and the shareholders of Jolt Technology, Inc.
(incorporated by reference to Appendix A of the Company's
Definitive Proxy Statement dated June 12, 1998)

2.2 Stock Purchase Agreement dated January 24, 1999 between SMTEK
International, Inc. and the shareholders of Technetics, Inc.
(incorporated by reference to Exhibit 99-1 of the Company's
Current Report on Form 8-K filed on February 12, 1999).

2.3 Agreement dated November 12, 1999 between DDL Europe, Ltd. (a
subsidiary of the Company) and Fast Track Circuits, Ltd. for the
sale of the capital stock of Irlandus Circuits, Ltd. (incorporated
by reference to Exhibit 10.1 of the Company's Current Report on
Form 8-K filed on December 28, 1999.)

3.1 Amended and Restated Certificate of Incorporation of SMTEK
International, Inc. (incorporated by reference to Exhibit 3.1
of the Company's 1999 Annual Report on Form 10-K).

3.2 Bylaws of the Company, amended and restated effective August
23, 2000 (incorporated by reference to Exhibit 3.2 of the Company's
2000 Annual Report on Form 10-K).

4.1 Indenture dated July 15, 1988, applicable to the Company's
8-1/2% Convertible Subordinated Debentures due August 1, 2008
(incorporated by reference to Exhibit 4-c of the Company's 1988
Annual Report on Form 10-K).

4.1.1 Supplemental Indenture relating to the Company's 8-1/2%
Convertible Subordinated Debentures due August 1, 2008
(incorporated by reference to Exhibit 4-b of the Company's
1991 Annual Report on Form 10-K).

10.1 1993 Stock Incentive Plan (incorporated by reference to
Exhibit 4.7 of the Company's Registration Statement on Form
S-8, Commission file No. 33-74400).

10.2 Amended and Restated 1996 Stock Incentive Plan (incorporated by
reference to Exhibit A of the Company's Proxy Statement for the
fiscal 1999 Annual Stockholders Meeting).

10.3 Amended and Restated 1998 Non-Employee Directors Stock Plan
(incorporated by reference to Exhibit B of the Company's Proxy
Statement for the fiscal 2000 Annual Stockholders Meeting).

10.4 Standard Industrial Lease-Net dated August 1, 1984, among the
Company, Aeroscientific Corp., and Bradmore Realty Investment
Company, Ltd. (incorporated by reference to Exhibit 10-w of
the Company's 1990 Annual Report on Form 10-K).

10.4.1 Second Amendment to Lease among Bradmore Realty Investment
Company, Ltd., the Company and the Company's Aeroscientific
Corp. subsidiary, dated July 2, 1993 (incorporated by
reference to Exhibit 10-cd of Registration Statement No.
33-63618).

10.5 Grant Agreement dated August 29, 1989, between SMTEK Europe
Limited (fka DDL Electronics Limited) and the IDB for Northern
Ireland ("IDB") (incorporated by reference to Exhibit 10.29 of
the Company's Registration Statement No. 33-39115).

10.5.1 Agreement dated May 2, 1996, between SMTEK Europe Limited
and the IDB amending the Grant Agreement dated August 29,
1989 (incorporated by reference to Exhibit 10.11.1 filed with
the Company's 1996 Annual Report on Form 10-K).

10.6 Employment Agreement dated September 12, 1996 between the
Company and Richard K. Vitelle (incorporated by reference to
Exhibit 10.15 filed with the Company's 1996 Annual Report on
Form 10-K).

10.7 Employment Agreement dated January 1, 2001 between the Company
and Gregory L. Horton (incorporated by reference to Exhibit 10.7
filed with the Company's 2001 Annual Report on Form 10-K).

10.8 Standard Industrial/Commercial Multi-Tenant Lease - Modified Net
dated December 20, 2000 between Technetics, Inc. and Pomerado
Leasing No. 8 L.P. (including Addendum) (incorporated by reference
to Exhibit 10.8 filed with the Company's 2001 Annual Report on Form
10-K).

10.9 Standard Industrial/Commercial Tenant Lease - dated
July 20, 2001 between SMTEK, Inc. and Moorpark Venture, L.P.
(including Addendum, Sublease and Attornment/Non-Disturbance
Agreement Among Parker-Hannifan, SWS Partners, MVLP and
SMTEK, Inc.) (incorporated by reference to Exhibit 10.9 filed with
the Company's 2001 Annual Report on Form 10-K).

10.9.1 Amendment No. 1 of Standard Industrial/Commercial Tenant-Lease,
Dated May 6, 2002 between SMTEK, Inc. and Moorpark Venture, L.P.

10.10 Credit Agreement dated September 25, 2001, between the Company and
Comerica Bank (incorporated by reference to Exhibit 10.10 filed
with the Company's 2001 Annual Report on Form 10-K).

10.10.1 Amendment No. 2 to Credit Agreement, dated May 1, 2002, between the
Company and Comerica Bank (incorporated by reference to Exhibit
10.1 filed with the Company's March 31, 2002 Quarterly Report on
Form 10-Q).

10.10.2 Amendment No. 3 to Credit Agreement, dated September 24, 2002,
between the Company and Comerica Bank.

10.11 Lease between SMTEK New England and Cedar Marlboro Realty
Corporation dated November 1, 2002 (including Guaranty)
(incorporated by reference to Exhibit 10.1 filed with the Company's
December 31, 2001 Quarterly Report on Form 10-Q).

10.12 Single-Tenant Commercial Space Lease Between SMTEK Santa Clara and
Deerfield Scott LLC dated June 10, 2002.

10.13 Employment Agreement between the Company and Edward J. Smith.

10.14 Employment Agreement between the Company and Kirk A. Waldron.

10.15 Employment Agreement between the Company and Mitchell J. Freedman.

11 Statement re Computation of Per Share Earnings (incorporated by
reference to Note 8 to the consolidated financial statements of
the 2002 Annual Report to Stockholders).

13 Annual Report to security holders.

21 Subsidiaries of the Registrant.

23 Consent of KPMG LLP.

99 Undertaking for Form S-8 Registration Statement.

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

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

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

2. Based on my knowledge, this annual 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 annual report; and

3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report.

Date: September 24, 2002

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

CERTIFICATION OF CHIEF FINANCIAL OFFICER

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

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

2. Based on my knowledge, this annual 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 annual report; and

3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report.

Date: September 24, 2002

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

23