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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: DECEMBER 31, 2002
[ ] 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: Identification No.
Address of Principal Executive Offices: 200 Science Drive
Moorpark, CA 93021
Registrant's Telephone Number: (805) 532-2800
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [ ] No [x]
The registrant had 2,284,343 shares of common stock outstanding as of
February 7, 2003.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands except share amounts)
December 31, June 30,
2002 2002
------------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 628 $ 816
Accounts receivable, less allowance for doubtful
accounts of $175 and $380, as of December 31,
2002 and June 30, 2002, respectively 12,155 12,351
Inventories, net 10,082 11,223
Prepaid expenses 1,061 863
-------- --------
Total current assets 23,926 25,253
-------- --------
Property, equipment and improvements, net of
accumulated depreciation and amortization 8,115 8,809
Other assets 330 772
-------- --------
$ 32,371 $ 34,834
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of bank lines of credit payable $ 8,131 $ 3,223
Current portion of long-term debt 3,235 2,527
Accounts payable 8,343 8,652
Other accrued liabilities 7,099 4,936
-------- --------
Total current liabilities 26,808 19,338
-------- --------
Long-term liabilities:
Long-term bank lines of credit payable - 4,005
Long-term debt 4,618 6,066
Other long-term liabilities 710 -
-------- --------
Total long-term liabilities 5,328 10,071
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1 par value; 1,000,000 shares
authorized; no shares issued or outstanding - -
Common stock, $.01 par value; 3,750,000 shares
authorized; 2,284,343 issued and outstanding at
December 31, 2002 and June 30, 2002 23 23
Additional paid-in capital 37,028 37,028
Accumulated deficit (36,697) (31,616)
Accumulated other comprehensive loss (119) (10)
-------- --------
Total stockholders' equity 235 5,425
-------- --------
$ 32,371 $ 34,834
======== ========
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 Six Months Ended
December 31, December 31,
------------------- -------------------
2002 2001 2002 2001
------- ------- ------- -------
Revenues $17,299 $19,594 $38,035 $39,228
Cost of goods sold 16,501 17,632 35,540 35,262
------- ------- ------- -------
Gross profit 798 1,962 2,495 3,966
------- ------- ------- -------
Operating expenses:
Administrative and selling 4,357 2,438 6,526 4,146
Goodwill amortization - 9 - 19
------- ------- ------- -------
Total operating expenses 4,357 2,447 6,526 4,165
------- ------- ------- -------
Operating loss (3,559) (485) (4,031) (199)
------- ------- ------- -------
Non-operating income (expense):
Interest expense, net (330) (291) (654) (563)
Other income, net 12 26 30 54
------- ------- ------- -------
Total non-operating expense, net (318) (265) (624) (509)
------- ------- ------- -------
Loss from operations before income taxes (3,877) (750) (4,655) (708)
Income tax provision 1 12 6 27
------- ------- ------- -------
Loss from operations (3,878) (762) (4,661) (735)
Change in accounting principle,
net of taxes - - (420) -
------- ------- ------- -------
Net loss $(3,878) $ (762) $(5,081) $ (735)
======= ======= ======= =======
Other comprehensive income (loss):
Foreign currency
translation adjustments (2) 2 (72) 44
Change in unrealized gain/(loss)
on forward contracts (20) - (37) -
------- ------- ------- -------
Comprehensive loss $(3,900) $ (760) $(5,190) $ (691)
======= ======= ======= =======
Basic and diluted loss per share:
Loss from operations $ (1.70) $ (0.33) $ (2.04) $ (0.32)
Change in accounting principle - - (0.18) -
======= ======= ======= =======
Basic and diluted loss per share $ (1.70) $ (0.33) $ (2.22) $ (0.32)
======= ======= ======= =======
Shares used in computing basic and
diluted loss per share 2,284 2,284 2,284 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)
Six Months Ended
December 31,
---------------------
2002 2001
------- -------
Cash flows from operating activities:
Net loss $(5,081) $ (735)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 1,301 1,215
Loss on sale of assets 6 -
Facility consolidation costs 1,815 -
(Increase) decrease in accounts receivable 440 (469)
Decrease in costs and estimated earnings in
excess of billings on uncompleted contracts - 3,692
(Increase) decrease in inventories 1,195 (1,045)
Increase (decrease) in accounts payable (381) 515
Increase (decrease) in other accrued liabilities 1,834 (510)
Other, net (314) (518)
------- -------
Net cash provided by operating activities 815 2,145
------- -------
Cash flows from investing activities:
Capital expenditures (907) (2,717)
Purchase of Century Thailand, net of cash received - (129)
------- -------
Net cash used in investing activities (907) (2,846)
------- -------
Cash flows from financing activities:
Proceeds from (payments of) bank lines of credit 749 (60)
Proceeds from long-term debt - 2,452
Payments of long-term debt (810) (798)
Proceeds from the exercise of stock options - 7
------- -------
Net cash provided by (used in) financing activities (61) 1,601
------- -------
Effect of exchange rate changes on cash (35) 5
------- -------
Increase (decrease) in cash and cash equivalents (188) 905
Cash and cash equivalents at beginning of period 816 224
------- -------
Cash and cash equivalents at end of period $ 628 $ 1,129
======= =======
Supplemental cash flow information:
Interest paid $ 501 $ 426
Income taxes paid - 40
Non-cash investing activities:
Other obligations - 2
See accompanying notes to unaudited condensed consolidated financial statements
SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended December 31, 2002 and 2001
NOTE 1 - DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
SMTEK International, Inc. (the "Company," "we," "us" or "our") 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. (dba SMTEK
Moorpark), located in Moorpark, California; Technetics, Inc. (dba SMTEK San
Diego), located in Poway, California (see discussion in the next paragraph);
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 November 19, 2002, we announced that we are consolidating our Poway
facility into our other California operations in Moorpark and Santa Clara.
This transition is expected to be completed by the quarter ending March 2003.
We have experienced and may continue to experience an adverse effect on
our operating results and in our financial condition, especially if current
economic conditions continue for an extended period of time, despite our cost
reduction measures and efficiency improvements at our operating facilities.
We are focused on the consolidation and streamlining of operations so as to
reduce our excess capacity to better match market conditions. Recent actions
taken and strategies being pursued are as follows:
- Transitioning the San Diego facility and evaluating further
opportunities of consolidation, transition or sale of other
facilities.
- Continuing focus on cost reductions related to pertinent production
levels and reductions in administrative costs.
- Focusing our marketing efforts in the solicitation of customers in
nonecomically affected industries.
We remain dependent on our lines of credit for operations and growth.
Our domestic line of credit agreement is set to mature in September 2003. We
can provide no assurance that the agreement will be renewed or that any
renewal would occur on commercially reasonable terms. We may have to explore
alternative financing if the bank does not renew our line of credit.
We may require additional financing to satisfy our debt obligations.
However, there can be no assurance that we will be able to obtain additional
debt or equity financing when needed, or on acceptable terms. Any additional
debt or equity financing may involve substantial dilution to our stockholders,
restrictive covenants or high interest costs. The failure to raise needed
funds on sufficiently favorable terms could have a material adverse effect on
our business, operating results, and financial condition.
Although management believes our cash resources, cash from operations
and available borrowing capacity on our working capital lines of credit are
sufficient to fund operations, if we cannot refinance the domestic line of
credit upon its maturity or find alternative financing/funding of this
obligation, there is no assurance that we will continue as a going concern.
All significant intercompany transactions and accounts have been
eliminated in consolidation. In the opinion of the Company's management, the
accompanying condensed consolidated financial statements reflect all
adjustments (consisting of normal recurring accruals) necessary to present
fairly our financial position, results of operations and cash flows as of and
for the periods presented.
We utilize a 52-53 week fiscal year ending on the Friday closest to June
30, which for fiscal year 2002 fell on June 28, 2002. In the accompanying
condensed consolidated financial statements, the 2002 fiscal year end is shown
as June 30 and the interim period end for both years is shown as December 31
for clarity of presentation. The actual interim periods ended on December 27,
2002 and December 28, 2001.
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 2002 Annual Report on Form 10-K as filed with the Securities and
Exchange Commission on September 26, 2002.
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. The effect of the change in accounting principle to
the quarter ended September 30, 2002 is as follows (dollars in thousands
except per share amounts):
Three months ended
September 30, 2002
------------------
Net loss as originally reported $ (783)
Change in accounting principle, net of taxes (420)
-------
Net loss as restated $(1,203)
=======
Basic and diluted loss per share:
Net loss as originally reported $ (0.34)
Change in accounting principle (0.18)
-------
Net loss as restated $ (0.52)
=======
Goodwill amortization of $9,000 and $19,000 was recognized in the three
and six months ended December 31, 2001, respectively. Unaudited pro forma
results of operations for the three and six months ended December 31, 2001, as
if the change in accounting principle occurred at the beginning of the period
reported, are as follows (dollars in thousands, except for per share amounts):
Three Months Ended Six Months Ended
December 31, December 31,
------------------- -------------------
2002 2001 2002 2001
------- ------- ------- -------
Net loss $(3,878) $ (753) $(5,081) $ (716)
======= ======= ======= =======
Basic and diluted loss per share $ (1.70) $ (0.33) $ (2.22) $ (0.31)
======= ======= ======= =======
NOTE 3 - ACQUISITION OF THE ASSETS OF CENTURY ELECTRONICS MANUFACTURING, INC.
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 cash and was funded by our
existing bank lines of credit.
Specifically, we purchased from Century certain equipment and machinery
for approximately $1.4 million and inventory for approximately $900,000. We
have and will continue to utilize some of the purchased assets at our other
locations. We negotiated new facility leases in Marlborough, Massachusetts
and Santa Clara, California and began operations in Marlborough and Santa
Clara in connection with the purchase of these assets.
As part of the Century agreement we purchased the common stock of the
Century subsidiary in Thailand ("Century Thailand") for approximately
$900,000. The acquisition of the Thailand subsidiary provides us with a low
cost manufacturing facility in Southeast Asia. The acquisition of Century
Thailand was accounted for using the purchase method of accounting and,
accordingly, the statements of condensed consolidated operations include the
results of the Thailand subsidiary from the date of acquisition. The assets
acquired and liabilities assumed were recorded at fair value as determined by
us based on information currently available. A summary of the assets acquired
and the liabilities assumed in the acquisition is as follows (in thousands):
Estimated fair values:
Assets acquired $1,392
Liabilities assumed 476
Purchase price $ 916
Less cash received 787
------
Net cash paid $ 129
======
Unaudited pro forma results of operations for the three and six months
ended December 31, 2001, as if the acquisition of the Thailand subsidiary had
occurred at the beginning of the period reported, follow (dollars in
thousands). The unaudited pro forma results are not necessarily indicative of
the results which would have occurred if the business combination had occurred
on the date indicated:
Three Months Ended Six Months Ended
December 31, 2001 December 31, 2001
------------------ -----------------
Revenue $19,608 $40,548
======= =======
Net loss $ (788) $ (672)
======= =======
Loss per share:
Basic and diluted $ (0.35) $ (0.29)
======= =======
NOTE 4 - 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 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 and the 8-1/2% Convertible Subordinated Debentures
(which are convertible into 7,435 shares of common stock at $212.50 per share
of common stock). 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 Six Months Ended
December 31, December 31,
---------------------- ----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Net loss $ (3,878) $ (762) $ (5,081) $ (735)
========= ========= ========= =========
Weighted average shares:
Basic weighted average
number of common shares
outstanding 2,284,343 2,284,343 2,284,343 2,283,693
Dilutive effect of
outstanding common
stock equivalents - - - -
--------- --------- --------- ---------
Diluted weighed average
number of common
shares outstanding 2,284,343 2,284,343 2,284,343 2,283,693
========= ========= ========= =========
Basic and diluted loss per share $ (1.70) $ (0.33) $ (2.22) $ (0.32)
========= ========= ========= =========
Because we had a net loss for the three and six months ended December
31, 2002, there were no common stock equivalents which had a dilutive effect
on earnings per share. However, if we had reported net income rather than a
loss for the three and six months ended December 31, 2002, the additional
diluted shares outstanding would have been 3,704 and 3,002 for the three and
six months ended December 31, 2002, respectively. Further, options to
purchase approximately 657,200 of common stock at prices ranging from $1.05 to
$10.00 which were outstanding at December 31, 2002, would not have been
included in the computation of diluted earnings per share for the three and
six months ended December 31, 2002, because the exercise prices of these
options were greater than the average market price of the common stock. If we
had reported net income rather than a loss for the three and six months ended
December 31, 2001, the additional diluted shares outstanding would have been
87,213 and 132,497 for the three and six months ended December 31, 2001,
respectively. Options to purchase approximately 157,800 shares of common
stock at prices ranging from $5.80 to $10.00 were outstanding at December 31,
2001, but were not included in the computation of diluted earnings per share
for the three and six months ended December 31, 2001, because the exercise
prices of these options were 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 six months ended December 31, 2002 and
2001, but were not included in the computation of diluted earnings per share
because the effect would be antidilutive.
NOTE 5 - REVENUE RECOGNITION
All of our subsidiaries recognize revenues and cost of sales upon
shipment of products. We ship products FOB shipping point and accordingly,
title and risk of ownership pass to the customer upon shipment.
Prior to June 30, 2002, the Moorpark facility historically generated a
significant portion of its revenue through long-term contracts with suppliers
of electronic components and products. Consequently, this operating unit
historically used the percentage of completion method to recognize revenues
and cost of sales. Percentage of completion was determined on the basis of
costs incurred to total estimated costs. Contract costs include direct
material and direct labor costs and those indirect costs related to the
assembly process, such as indirect labor, supplies, tools, repairs and
depreciation costs. Selling and administrative costs were charged to expense
as incurred. In the period in which it was determined that a loss would
result from the performance of a contract, the entire amount of the estimated
loss was charged to cost of goods sold. Other changes in contract price and
estimates of costs and profits at completion were recognized prospectively.
The asset "costs and estimated earnings in excess of billings on uncompleted
contracts" represented revenues recognized in excess of amounts billed.
During fiscal 2002, our Moorpark facility entered into sales contracts
consistent with our other locations, and as such, recognized revenue on these
new arrangements upon shipment of products rather than on a percentage of
completion method. As a result, during most of fiscal 2002, the Moorpark
facility was recognizing revenue upon shipment of product as well as under the
percentage of completion method. Since June 30, 2002, no sales contracts have
been accounted for using the percentage of completion method of accounting.
NOTE 6 - INVENTORIES
Inventories consist of the following (in thousands):
December 31, June 30,
2002 2002
------------- --------
Raw materials $ 6,587 $ 7,553
Work in process 3,288 3,174
Finished goods 207 496
------- -------
$10,082 $11,223
Total inventories ======= =======
Note 7 - PROPERTY, EQUIPMENT AND IMPROVEMENTS
Property, equipment and improvements consist of the following (in
thousands):
December 31, June 30,
2002 2002
------------- --------
Buildings and improvements $ 4,076 $ 3,980
Plant equipment 17,172 16,243
Office and other equipment 3,091 2,941
Less accumulated depreciation and amortization (16,224) (14,355)
-------- --------
Total property, equipment and improvements $ 8,115 $ 8,809
======== ========
NOTE 8 - CREDIT AGREEMENTS
At December 31, 2002, borrowings under our working capital facility for
our domestic operating units amounted to $5.2 million. This credit facility
is collateralized by accounts receivable, inventory and equipment for our
domestic operating units and matures September 25, 2003. At December 31,
2002, the weighted average interest rate on the line of credit was 4.91%. The
line of credit agreement contains certain financial covenants, with which we
were not in compliance at December 31, 2002. However, the terms of our line
of credit have been amended as of February 5, 2003. Under the new terms, our
line of credit is at $8.5 million, bears interest at either the bank's prime
rate (4.25% at December 31, 2002) plus 1.00% or a Eurodollar-base rate (1.37%
at December 31, 2002) plus 3.75%, and the covenants have been amended. We are
currently and expect to be in compliance with the amended bank covenants. Our
available borrowing capacity as of December 31, 2002, after giving effect to
the amendment, was approximately $1.8 million.
In addition, during fiscal 2002, we borrowed $1.6 million on our
equipment line of credit to finance our capital expenditures. This advance
has a maturity date of October 24, 2006. At December 31, 2002, the balance
outstanding was $945,000 and the weighted average interest rate was 4.87%.
Under the amended credit facility terms, interest is at either the bank's
prime rate plus 1.00% or at a Eurodollar-base rate plus 3.75%. Additional
advances under our equipment line of credit will not be available to us until
a review by the bank at a future date.
We also have a credit facility agreement with Ulster Bank Markets for
our Northern Ireland operating company. This agreement consists of an
accounts receivable revolver, with maximum borrowings equal to the lesser of
75% of eligible receivables or 2,500,000 British pounds sterling
(approximately $4,025,000 at December 31, 2002), of which 500,000 British
pounds sterling (approximately $805,000 at December 31, 2002) consists of an
overdraft facility, and bears interest at the bank's base rate (4.00% at
December 31, 2002) plus 2.00%. At December 31, 2002, borrowings outstanding
under this credit facility amounted to approximately $2.9 million, of which
the overdraft facility was fully utilized, and there was nominal available
borrowing capacity. The credit facility agreement matures on November 30,
2003.
We also have a mortgage note secured by real property at Northern
Ireland with an outstanding balance of $732,000 at December 31, 2002. At
December 31, 2002, we were in arrears and we are currently seeking to
negotiate a payment plan.
NOTE 9 - BUSINESS SEGMENT AND 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 Six Months Ended
December 31, December 31,
------------------- -------------------
2002 2001 2002 2001
------- ------- ------- -------
Revenues:
United States $14,526 $16,590 $31,358 $34,532
Northern Ireland 1,842 2,655 4,991 4,347
Thailand 931 349 1,686 349
------- ------- ------- -------
Total revenues $17,299 $19,594 $38,035 $39,228
======= ======= ======= =======
December 31, June 30,
2002 2002
------------- --------
Long-lived assets:
United States $6,262 $7,487
Northern Ireland 1,672 1,549
Thailand 181 193
------ ------
Total long-lived assets $8,115 $9,229
====== ======
NOTE 10 - FOREIGN CURRENCY FORWARD CONTRACTS
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
are recognized as assets or liabilities with gains or losses recognized in
current results of operations. At December 31, 2002, we did not have any open
forward foreign currency contracts.
NOTE 11 - COMMITMENTS AND CONTINGENCIES - 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 in July 1993, 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 December 31, 2002,
we had a reserve of $416,000 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 estimates and our portion could 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 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS QUARTERLY REPORT ON FORM 10-Q, INCLUDING THE DISCLOSURES BELOW,
CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE SUBSTANTIAL RISKS AND
UNCERTAINTIES. WHEN USED HEREIN, THE TERMS "ANTICIPATES," "EXPECTS,"
"ESTIMATES," "BELIEVES," "WILL" AND SIMILAR EXPRESSIONS, AS THEY RELATE TO US
OR OUR MANAGEMENT, ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS.
FORWARD-LOOKING STATEMENTS IN THIS REPORT OR HEREAFTER INCLUDED IN OTHER
PUBLICLY AVAILABLE DOCUMENTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
("SEC"), REPORTS TO THE STOCKHOLDERS OF SMTEK INTERNATIONAL, INC., A DELAWARE
CORPORATION (THE "COMPANY," "WE," "US" OR "OUR") AND OTHER PUBLICLY AVAILABLE
STATEMENTS ISSUED OR RELEASED BY US INVOLVE KNOWN AND UNKNOWN RISKS,
UNCERTAINTIES AND OTHER FACTORS WHICH COULD CAUSE OUR ACTUAL RESULTS,
PERFORMANCE (FINANCIAL OR OPERATING) OR ACHIEVEMENTS TO DIFFER FROM THE FUTURE
RESULTS, PERFORMANCE (FINANCIAL OR OPERATING) OR ACHIEVEMENTS EXPRESSED OR
IMPLIED BY FORWARD-LOOKING STATEMENTS. THESE RISKS INCLUDE, BUT ARE NOT
LIMITED TO, THE RISKS SET FORTH HEREIN AND IN OTHER DOCUMENTS FILED WITH THE
SEC, EACH OF WHICH COULD ADVERSELY AFFECT OUR BUSINESS AND THE ACCURACY OF THE
FORWARD-LOOKING STATEMENTS CONTAINED HEREIN. FUTURE EXPECTED RESULTS ARE
BASED UPON MANAGEMENT'S BEST ESTIMATES BASED UPON CURRENT CONDITIONS AND THE
MOST RECENT RESULTS OF OPERATIONS. OUR ACTUAL RESULTS, PERFORMANCE OR
ACHIEVEMENTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING 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.
UPDATE OF RISK FACTORS
The following updates the risk factors identified in our 2002 Annual
Report on Form 10-K which was filed with the SEC on September 26, 2002.
Our Debt Agreements Contain Certain Financial Covenants That Must Be Met.
As a result of consolidating our San Diego facility and the related
costs incurred during the second quarter of 2003, we were in violation of
certain covenants on our domestic line of credit agreement as of December 31,
2002. In February 2003, the bank either removed or amended the related
restricted covenants in an amendment to the credit agreement which enabled us
to regain compliance with the terms of the credit agreement. If we are unable
to comply with the terms of our revised financial covenants, our lender may
declare a default and immediately accelerate the due date of our outstanding
loans. If we are unable to repay our outstanding loans when asked to do so by
the lender, the lender may exercise any one or more of the remedies available
to it, including foreclosing on the assets pledged to support the facility,
which includes virtually all of our assets.
Our domestic line of credit agreement is set to mature in September
2003. Our borrowings on this line of credit at December 31, 2002 amounted to
$5.2 million. We can provide no assurance that the agreement will be renewed
or that any renewal would occur on commercially reasonable terms. We remain
dependent on our line of credit for operations and growth and may have to
explore alternative financing if the bank does not renew our line of credit or
if amounts outstanding become immediately payable as a result of future
covenant violations.
We also have a mortgage note secured by real property at Northern
Ireland with an outstanding balance of $732,000 at December 31, 2002. At
December 31, 2002, we were in arrears and we are currently seeking to
negotiate a payment plan.
We may require additional financing to satisfy our debt obligations.
However, there can be no assurance that we will be able to obtain additional
debt or equity financing when needed, or with acceptable terms. Any
additional debt or equity financing may involve substantial dilution to our
stockholders, restrictive covenants or high interest costs. The failure to
raise needed funds on sufficiently favorable terms could have a material
adverse effect on our business, operating results and financial condition.
Although management believes our cash resources, cash from operations
and available borrowing capacity on our working capital lines of credit are
sufficient to fund operations, if we cannot refinance the domestic line of
credit upon its maturity or find alternative financing/funding of this
obligation, there is no assurance that we will continue as a going concern.
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:
- our public 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;
- continued losses in each quarter;
- acquisition-related announcements; and
- general market conditions.
In addition, in recent years, our stock price has experienced
significant price fluctuations for a variety of reasons, both internal to us
and due to external conditions.
Under Nasdaq rules, if our stock trades below $1.00 per share for 30
consecutive days, or if we are below $2.5 million in shareholders' equity, we
face delisting proceedings from Nasdaq. Our common stock has traded below
$1.00 per share for 30 consecutive days starting in October 2002. It has
traded below $1.00 per share for much of the time since October 2002.
Further, we are now below $2.5 million in shareholders' equity. Therefore, we
are not in compliance with two Nasdaq Small Cap Market criteria for continued
listing.
In November 2002, we received a deficiency notice from Nasdaq relating
to our stock trading below $1.00 per share for 30 consecutive days. The
notice indicated that we have until May 2003 in which to show 10 consecutive
trading days where the closing minimum bid is $1.00 per share or more. We
have not yet satisfied that requirement at this time. However, even if we met
this criterion at any time before May 2003, we are still likely to be delisted
if we continue to fail to meet the $2.5 million minimum level of stockholders'
equity criterion that Nasdaq has established. While we have not yet received
any deficiency or other similar notice from Nasdaq with reference to our
failure to meet the criterion of having $2.5 million in stockholders' equity,
we expect to receive a notice from Nasdaq in this regard after the filing of
this Form 10-Q.
If we are delisted from the Nasdaq Small Cap Market, we may be
transferred to the over-the-counter market on the NASD Electronic Bulletin
Board or to the "pink sheets" maintained by the National Quotation Bureau,
Inc. There is also a risk that we will not continue to be listed at all.
Non-prominent trading markets are generally considered to be less efficient
than markets such as Nasdaq or other national exchanges, and may cause us
difficulty in obtaining future financing. If our stock is no longer traded in
a prominent trading market, or at all, it may be difficult for you to sell
shares that you own, and the price of the stock may be negatively affected.
For companies whose securities are traded in the Over-The-Counter
Market, it is more difficult: (i) to obtain accurate quotations and (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.
DESCRIPTION OF THE BUSINESS
SMTEK International, Inc. (the "Company," "we," "us" or "our") 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. (dba SMTEK
Moorpark), located in Moorpark, California; Technetics, Inc. (dba SMTEK San
Diego), located in Poway, California (see discussion in next paragraph); 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 November 19, 2002, we announced that we are consolidating our Poway
facility into our other California operations in Moorpark and Santa Clara. As
a result, we will record during fiscal year 2003 a one-time charge of
approximately $2.3 million to $3.0 million for severance and other costs
related to facilities consolidation. As of December 31, 2002, costs of
approximately $2.2 million, related to the consolidation, have been recognized
in the condensed consolidated statement of operations. This transition is
expected to be completed by the quarter ending March 2003.
CRITICAL ACCOUNTING POLICIES
In response to SEC Release No. 33-8040, "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies," we have identified our most
critical accounting policies that require significant management judgment or
involve complex estimates upon which our financial status depends. The
consolidated condensed financial statements and related notes within this
Quarterly Report on Form 10-Q contain information that is pertinent to our
accounting policies and to management's discussion and analysis and should
also be read in conjunction with our 2002 Annual Report on Form 10-K as filed
with the SEC on September 26, 2002. The information that follows describes
specific disclosures about our accounting policies regarding risks, estimates,
subjective decisions, or assessments under which materially different results
of operations and financial condition could have been reported had different
assumptions been used or different conditions existed.
REVENUE AND COST RECOGNITION--We recognize revenues and cost of sales
upon shipment of products. Prior to June 30, 2002, our Moorpark subsidiary
historically generated a significant portion of its revenue through long-term
contracts with suppliers of electronic components and products. Consequently,
this operating unit historically used the percentage of completion method to
recognize revenues and cost of sales. Percentage of completion was determined
on the basis of costs incurred to total estimated costs. Contract costs
include direct material and direct labor costs and those indirect costs
related to the assembly process, such as indirect labor, supplies, tools,
repairs and depreciation costs. Selling and administrative costs were charged
to expense as incurred. In the period in which it was determined that a loss
would result from the performance of a contract, the entire amount of the
estimated loss was charged to cost of goods sold. Other changes in contract
price and estimates of costs and profits at completion were recognized
prospectively. A change in our estimate of costs to complete may have
resulted in lower earnings than currently recorded. A portion of the asset
"costs and estimated earnings in excess of billings on uncompleted contracts"
represented revenues recognized in excess of amounts billed.
During fiscal 2002, our Moorpark facility entered into sales contracts
consistent with our other locations, and as such, recognized revenue on these
new arrangements upon shipment of products rather than on a percentage of
completion method. As a result, during most of fiscal 2002, the Moorpark
facility was recognizing revenue upon shipment of products as well as under
the percentage of completion method. Since June 30, 2002, no sales contracts
have been accounted for using the percentage of completion method of
accounting.
ACCOUNTS RECEIVABLE--We perform ongoing credit evaluations of our
customers and adjust credit limits based upon each customer's payment history
and current credit worthiness, as determined by credit information available
at that time. We continuously monitor collections and payments from our
customers and we maintain allowances for doubtful accounts for estimated
losses resulting from the inability of our customers to make required
payments. If the condition of our customers were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances may be
required.
INVENTORIES--Inventories are stated at the lower of cost or net
realizable value, with cost determined principally by use of the first-in,
first-out method. We write down inventory for slow-moving and obsolete
inventory based on assessments of future demands, market conditions and
customers who may be experiencing financial difficulties. If these factors
are less favorable than those projected, additional inventory write downs may
be required.
LONG-LIVED ASSETS--Property, equipment and improvements are stated at
cost. Depreciation and amortization are computed on the straight-line method.
The principal estimated useful lives are: buildings - 20 years; improvements
- - 5 to 10 years; and plant, office and other equipment - 3 to 7 years.
Property, equipment and improvements acquired by our Northern Ireland
operating unit are recorded net of capital grants received from the Industrial
Development Board for Northern Ireland. Goodwill represents the excess of
acquisition cost over the fair value of net assets of a purchased business,
and has been amortized over 5 to 15 years through June 30, 2002. Amortization
of goodwill ceased on July 1, 2002 when we adopted Statement of Financial
Accounting Standards ("SFAS") No. 142. As a result of implementing SFAS No.
142, we determined that our goodwill was fully impaired and recognized an
impairment loss of $420,000, net of taxes, in the condensed consolidated
statement of operations, effective July 1, 2002. The recoverability of long-
lived assets is evaluated whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable, and if future
undiscounted cash flows expected to result from the use of such assets are
believed insufficient to recover the carrying value of the asset, the carrying
value is written down to fair value in the period the impairment is
identified. Factors we consider important which could trigger an impairment
review include, but are not limited to, the following:
- - the asset's ability to continue to generate income;
- - loss of legal ownership or title to the asset;
- - significant changes in our strategic business objectives and
utilization of the asset;
- - the impact of significant negative industry or economic trends; or
- - significant decrease in the market value of the asset.
RESULTS OF OPERATIONS
We utilize a 52-53 week fiscal year ending on the Friday closest to June
30, which for fiscal year 2002 fell on June 28, 2002. In the accompanying
condensed consolidated financial statements, the 2002 fiscal year end is shown
as June 30 and the interim period end for both years is shown as December 31
for clarity of presentation. The actual interim periods ended on December 27,
2002 and December 28, 2001.
Consolidated revenues for the three and six months ended December 31,
2002 were $17.3 million and $38.0 million, respectively, compared to $19.6
million and $39.2 million for the three and six months ended December 31,
2001, respectively. The decrease in revenues was mainly due to the current
downward economic and EMS market trends in the United States, slightly offset
by an increase in revenues generated at our three new facilities. Starting in
the third quarter of fiscal 2001, existing customers began to defer shipments,
and some cancelled orders.
Consolidated gross profit for the three and six months ended December
31, 2002 was $798,000 (4.6% of sales) and $2.5 million (6.6% of sales),
respectively, compared to $2.0 million (10.0% of sales) and $4.0 million
(10.1% of sales) for the three and six months ended December 31, 2001,
respectively. Gross profit for the three and six months ended December 31,
2001 was positively impacted by the benefit received from inventory used
during the period that was purchased at a discount from Century Electronics
Manufacturing, Inc. ("Century"). Excluding the positive impact from these
reduced inventory costs, we estimate that the consolidated gross profit for
the three and six months ended December 31, 2001 would have been approximately
$1.2 million (6.0% of sales) and $3.2 million (8.1% of sales), respectively.
The decrease in gross profit and gross profit margin, excluding the purchase
benefit, was due to an increase in fixed costs, primarily due to our new
facilities and lower revenues, partially offset by a decrease in headcount and
decrease in material costs.
Administrative and selling expenses were $4.4 million and $6.5 million
for the three months and six months of December 31, 2002, respectively,
compared to $2.4 million and $4.1 million for the three and six months of
December 31, 2001, respectively. The increase in administrative and selling
expenses included the recognition, during the second quarter of 2003, of
approximately $1.6 million in expenses related to the closing of our San Diego
facility. These costs are detailed as follows: $1.0 million loss related to
the lease of the building, $370,000 related to write-off of leasehold
improvements and $200,000 related to severance and other related costs. In
the second quarter of 2003, we also recognized a $600,000 loss related to the
lease at our former Thousand Oaks facility. Also contributing to the increase
in expenses for the six months ended December 31, 2002 were costs incurred by
our three new facilities that were created upon the completion of the Century
transaction in mid-October 2001.
Total non-operating expense was $318,000 and $624,000 for the three and
six months ended December 31, 2002, respectively, compared to $265,000 and
$509,000 for the three and six months ended December 31, 2001, respectively.
The primary reason for this increase was due to the increase in interest
expense as a result of higher levels of debt outstanding during the three and
six months ended December 31, 2002 as compared to the three and six months
ended December 31, 2001. The increased debt level is a result of the
acquisition costs of the new facilities and from supporting their working
capital requirements.
We had an income tax provision of $1,000 and $6,000 for the three and
six months ended December 31, 2002, respectively, as compared to $12,000 and
$27,000 for the three and six months ended December 31, 2001, respectively.
The income tax provision for the three and six months ended December 31, 2002
was lower than that for the three and six months ended December 31, 2001, due
mainly to minimum state and federal taxes that were incurred.
Net loss from operations was $3.9 million and $4.7 million for the three
and six months ended December 31, 2002, or $1.70 and $2.04 loss per diluted
share, respectively, compared to net loss from operations of $762,000 and
$735,000 for the three and six months ended December 31, 2001, or $0.33 or
$0.32 loss per diluted share, due mainly to lower gross profit and higher
administrative and selling expenses and non-operating expense.
CHANGE IN ACCOUNTING PRINCIPLE
We adopted SFAS No. 142, "Goodwill and Other Intangible Assets," as of
July 1, 2001. 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 replaces SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." The primary objectives of SFAS No. 144 were to
develop one accounting model, based on the framework established in SFAS No.
121, for long-lived assets to be disposed of by sale and to address other
significant implementation issues. While SFAS No. 144 supersedes SFAS No.
121, it retains many of the fundamental provisions of SFAS No. 121. SFAS No.
144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001. We have adopted SFAS No. 144 as of July 1, 2002.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires
recognition of a liability for a cost associated with an exit or disposal
activity when the liability is incurred, as opposed to when the entity commits
to an exit plan under previous guidance. SFAS No. 146 is effective for exit
or disposal activities initiated after December 31, 2002. We believe that the
adoption of SFAS No. 146 will not have a material impact on our results of
operations or financial position.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are our cash and cash equivalents,
which amounted to $628,000 at December 31, 2002, and amounts available under
our bank lines of credit, which provided approximately $1.8 million of
availability in excess of current borrowings at December 31, 2002, after
giving effect to the amendment to the credit agreement discussed below.
During the six months ended December 31, 2002, cash and cash equivalents
decreased by $188,000. This decrease resulted from purchases of equipment of
$907,000 and financing activities of $61,000, partially offset by cash
provided by operations of $815,000.
Net cash provided by operating activities of $815,000 for the six months
ended December 31, 2002 was attributable primarily to facility consolidation
costs of $1.8 million, a decrease in inventories of $1.2 million and an
increase in accrued liabilities of $1.8 million offset by our net loss before
depreciation and amortization of $3.8 million.
Net cash used in investing activities was $907,000 for the six months
ended December 31, 2002 compared to $2.8 million for the six months ended
December 31, 2001. The cash used was for the purchase of capital expenditures
mainly for production purposes.
Net cash used in financing activities was $61,000 for the six months
ended December 31, 2002 compared to net cash provided by financing activities
of $1.6 million for the six months ended December 31, 2001. At December 31,
2002, we had approximately $1.8 million available to borrow under our bank
lines of credit, after giving effect to the amendment to the credit agreement
discussed below.
At December 31, 2002, borrowings under our working capital facility for
our domestic operating units amounted to $5.2 million. This credit facility
is collateralized by accounts receivable, inventory and equipment for our
domestic operating units and matures September 25, 2003. At December 31,
2002, the weighted average interest rate on the line of credit was 4.91%. The
line of credit agreement contains certain financial covenants, with which we
were not in compliance at December 31, 2002. However, the terms of our line
of credit have been amended as of February 5, 2003. Under the new terms, our
line of credit is at $8.5 million, bears interest at either the bank's prime
rate (4.25% at December 31, 2002) plus 1.00% or a Eurodollar-base rate (1.37%
at December 31, 2002) plus 3.75%, and the covenants have been amended. We are
currently and expect to be in compliance with the amended bank covenants. Our
available borrowing capacity as of December 31, 2002, after giving effect to
the amendment, was approximately $1.8 million.
In addition, during fiscal 2002 we borrowed $1.6 million on our
equipment line of credit to finance our capital expenditures. This advance
has a maturity date of October 24, 2006. At December 31, 2002, the balance
outstanding was $945,000 and the weighted average interest rate was 4.87%.
Under the amended credit facility terms, interest is at either the bank's
prime rate plus 1.00% or at a Eurodollar-base rate plus 3.75%. Additional
advances under our equipment line of credit will not be available to us until
a review by the bank at a future date.
We also have a credit facility agreement with Ulster Bank Markets for
our Northern Ireland operating company. This agreement consists of an
accounts receivable revolver, with maximum borrowings equal to the lesser of
75% of eligible receivables or 2,500,000 British pounds sterling
(approximately $4,025,000 at December 31, 2002), of which 500,000 British
pounds sterling (approximately $805,000 at December 31, 2002) consists of an
overdraft facility, and bears interest at the bank's base rate (4.00% at
December 31, 2002) plus 2.00%. At December 31, 2002, borrowings outstanding
under this credit facility amounted to approximately $2.9 million, of which
the overdraft facility was fully utilized, and there was nominal available
borrowing capacity. The credit facility agreement matures on November 30,
2003.
We also have a mortgage note secured by real property at Northern
Ireland with an outstanding balance of $732,000 at December 31, 2002. At
December 31, 2002, we were in arrears and we are currently seeking to
negotiate a payment plan.
We anticipate that additional expenditures of as much as $125,000 may be
made during the remainder of fiscal 2003, primarily to improve production
efficiency at our subsidiaries. A substantial portion of these capital
expenditures is expected to be financed by our line of credit or other
notes/leases payable.
At December 31, 2002, the ratio of current assets to current liabilities
was 0.9 to 1.0 compared to 1.3 to 1.0 at June 30, 2002. At December 31, 2002,
we had $2.9 million of negative working capital compared to $5.9 million of
working capital at June 30, 2002. At December 31, 2002, we had long-term
borrowings of $4.6 million compared to $10.1 million at June 30, 2002. The
decreases in the working capital and long-term debt is due to the
reclassification of our domestic line of credit of $5.2 million from long-term
debt to current liabilities as this matures in less than 12 months. In
addition, contributing to the decrease in working capital is an increase in
lease reserves recognized in the second quarter of 2003.
As more fully described in Note 6 to the notes to our consolidated
financial statements in our June 30, 2002 Form 10-K, at December 31, 2002, we
have a federal tax assessment liability of approximately $1.1 million and a
related accrued interest liability of approximately $1.3 million, which
reflect the results of a settlement with the IRS Appeals Division in December
2001. We are currently seeking an installment payment plan with the IRS.
We have experienced and may continue to experience an adverse effect on
our operating results and our financial condition, especially if current
economic conditions continue for an extended period of time, despite our cost
reduction measures and efficiency improvements at our operating subsidiaries.
We are focused on the consolidation and streamlining of operations so as to
reduce our excess capacity to better match market conditions. Recent actions
taken and strategies being pursued are as follows:
- Transitioning the San Diego facility and evaluating further
opportunities of consolidation, transition or sale of other
facilities.
- Continuing focus on cost reductions related to pertinent production
levels and reductions in administrative costs.
- Focusing our marketing efforts in the solicitation of customers in
nonecomically affected industries.
For further discussion, see section entitled "Risk Factors That May
Affect Your Decision to Invest in Us" in our 2002 Form 10-K, which was filed
with the SEC on September 26, 2002 and to the discussion in this Form 10-Q
under the heading "Update of Risk Factors."
We remain dependent on our lines of credit for operations and growth.
Our domestic line of credit agreement is set to mature in September 2003. We
can provide no assurance that the agreement will be renewed or that any
renewal would occur on commercially reasonable terms. We may have to explore
alternative financing if the bank does not renew our line of credit.
We may require additional financing to satisfy our debt obligations.
However, there can be no assurance that we will be able to obtain additional
debt or equity financing when needed, or on acceptable terms. Any additional
debt or equity financing may involve substantial dilution to our stockholders,
restrictive covenants or high interest costs. The failure to raise needed
funds on sufficiently favorable terms could have a material adverse effect on
our business, operating results, and financial condition.
Although management believes our cash resources, cash from operations
and available borrowing capacity on our working capital lines of credit are
sufficient to fund operations, if we cannot refinance the domestic line of
credit upon its maturity or find alternative financing/funding of this
obligation, there is no assurance that we will continue as a going concern.
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 in July 1993, 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 December 31, 2002,
we had a reserve of $416,000 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 estimates and our portion could 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 December 31, 2002, the
carrying amount of long-term debt (including the current portion thereof but
excluding bank lines of credit) was $7.9 million and the fair value was $7.4
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 $110,000.
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
are recognized as assets or liabilities with gains or losses recognized in
current results of operations. At December 31, 2002, we did not have any open
forward foreign currency contracts.
Our operations consist of investments in foreign operating units. Our
foreign subsidiaries represent approximately 18% of our revenues and 26% 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
Within the 90 days prior to the filing date of this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon that evaluation, the Company's Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to
be included in the Company's periodic SEC filings. There have been no
significant changes in the Company's internal controls or in other factors
that could significantly affect these internal controls subsequent to the date
of their most recent evaluation.
PART II. OTHER INFORMATION
ITEM 1. 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 3. DEFAULTS UPON SENIOR SECURITIES
This information is set forth in this report under the captions "Update
of Risk Factors - Our Debt Agreements Contain Financial Covenants That Must Be
Met" and "Management's Discussion and Analysis - Liquidity" and is
incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the 2002 Annual Meeting of Stockholders, held on November 12, 2002,
James P. Burgess was elected as Class I director. Directors whose terms of
office continued after the meeting were Kimon Amenogiannis, Clay M. Biddinger,
Oscar B. Marx, III and Steven M. Waszak. There were 2,284,343 shares of
common stock outstanding and entitled to vote at this meeting. Following is a
summary of the results of voting:
Votes
Against or
Votes For Withheld
--------- ----------
Election of James P. Burgess as director 2,094,964 66,588
ITEM 5. OTHER INFORMATION
PRE-APPROVAL OF NON-AUDIT SERVICES
In accordance with Section 10A of the Securities Exchange Act of 1934,
as amended by Section 202 of the Sarbanes-Oxley Act of 2002, the members of
the Audit Committee approved non-audit, tax-related services by our auditors
during this reported fiscal quarter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
10.1 Amendment No. 4 to Credit Agreement, dated February 5, 2003,
between the Company and Comerica Bank.
99.1 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
b. Reports on Form 8-K:
On October 14, 2002, the Board of Directors and the Audit Committee
dismissed KPMG LLP as our principal independent auditors and engaged
PricewaterhouseCoopers LLP as our principal independent auditors.
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.
February 7, 2003 /s/ Edward J. Smith
Date Edward J. Smith
Chief Executive Officer and
President (Principal Executive
Officer)
/s/ Kirk A. Waldron
Kirk A. Waldron
Senior Vice President and Chief
Financial Officer (Principal
Financial Officer)
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Edward J. Smith, certify that:
1. I have reviewed this quarterly report on Form 10-Q of SMTEK International,
Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 7, 2003
/s/ Edward J. Smith
Edward J. Smith
Chief Executive Officer and President
SMTEK International, Inc.
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Kirk A. Waldron, certify that:
1. I have reviewed this quarterly report on Form 10-Q of SMTEK International,
Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 7, 2003
/s/ Kirk A. Waldron
Kirk A. Waldron
Senior Vice President and Chief Financial Officer
SMTEK International, Inc.
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