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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: MARCH 31, 2003
[ ] 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
May 5, 2003.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands except share amounts)
March 31, June 30,
2003 2002
------------- ---------
ASSETS
Current assets:
Cash and cash equivalents, including cash
of discontinued operations of $156 and $152, as
of March 31, 2003 and June 30, 2002, respectively $ 546 $ 816
Accounts receivable, less allowance for doubtful
accounts of $332 and $358, as of March 31,
2003 and June 30, 2002, respectively 11,518 8,390
Inventories, net 9,170 9,666
Prepaid expenses 807 809
Current assets - discontinued operations 3,360 5,572
-------- --------
Total current assets 25,401 25,253
-------- --------
Property, equipment and improvements, net of
accumulated depreciation and amortization 5,991 7,260
Other assets 330 772
Property, equipment and improvements, net -
discontinued operations 1,486 1,549
-------- --------
$ 33,208 $ 34,834
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of bank line of credit payable $ 6,631 $ -
Current portion of long-term debt 2,113 2,104
Accounts payable 8,842 6,867
Other accrued liabilities 6,491 4,746
Current liabilities - discontinued operations 5,312 5,621
-------- --------
Total current liabilities 29,389 19,338
-------- --------
Long-term liabilities:
Long-term bank line of credit payable - 4,005
Long-term debt 3,945 5,194
Long-term debt - discontinued operations 65 872
Other long-term liabilities 594 -
-------- --------
Total long-term liabilities 4,604 10,071
-------- --------
Commitments and contingencies
Stockholders' equity (deficit):
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
March 31, 2003 and June 30, 2002 23 23
Additional paid-in capital 37,028 37,028
Accumulated deficit (37,745) (31,616)
Accumulated other comprehensive loss (91) (10)
-------- --------
Total stockholders' equity (deficit) (785) 5,425
-------- --------
$ 33,208 $ 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 Nine Months Ended
March 31, March 31,
------------------- -------------------
2003 2002 2003 2002
------- ------- ------- -------
Revenues $17,430 $13,463 $50,474 $48,345
Cost of goods sold 15,510 13,364 46,122 44,554
------- ------- ------- -------
Gross profit 1,920 99 4,352 3,791
------- ------- ------- -------
Operating expenses:
Administrative and selling 2,216 3,034 8,242 6,470
Goodwill amortization - 9 - 28
------- ------- ------- -------
Total operating expenses 2,216 3,043 8,242 6,498
------- ------- ------- -------
Operating loss (296) (2,944) (3,890) (2,707)
------- ------- ------- -------
Non-operating income (expense):
Interest expense, net (267) (236) (776) (707)
Other income, net 269 195 261 231
------- ------- ------- -------
Total non-operating income
(expense), net 2 (41) (515) (476)
------- ------- ------- -------
Loss from continuing operations
before income taxes (294) (2,985) (4,405) (3,183)
Income tax provision (benefit) - (182) 6 (155)
------- ------- ------- -------
Loss from continuing operations (294) (2,803) (4,411) (3,028)
Loss from discontinued operations,
net of taxes (756) (122) (1,300) (632)
------- ------- ------- -------
Loss before change in accounting
principle (1,050) (2,925) (5,711) (3,660)
Change in accounting principle,
net of taxes - - (420) -
------- ------- ------- -------
Net loss $(1,050) $(2,925) $(6,131) $(3,660)
======= ======= ======= =======
Other comprehensive income (loss):
Foreign currency
translation adjustments (28) 8 (9) 52
Change in unrealized gain (loss)
on forward contracts - - (72) -
------- ------- ------- -------
Comprehensive loss $(1,078) $(2,917) $(6,212) $(3,608)
======= ======= ======= =======
Basic and diluted loss per share:
Loss from continuing operations $ (0.13) $ (1.23) $ (1.93) $ (1.32)
Loss from discontinued operations (0.33) (0.05) (0.57) (0.28)
Change in accounting principle - - (0.18) -
======= ======= ======= =======
Basic and diluted loss per share $ (0.46) $ (1.28) $ (2.68) $ (1.60)
======= ======= ======= =======
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)
Nine Months Ended
March 31,
---------------------
2003 2002
------- -------
Cash flows from operating activities:
Loss from continuing operations $(4,411) $(3,028)
Adjustments to reconcile loss from continuing
operations to net cash provided by operating
activities:
Depreciation and amortization 1,648 1,482
Loss (gain) on sale of assets 6 (203)
Facility consolidation costs 1,395 -
(Increase) decrease in accounts receivable (3,143) 3,366
Decrease in costs and estimated earnings in
excess of billings on uncompleted contracts - 4,302
Decrease (increase) in inventories 484 (689)
Increase (decrease) in accounts payable 1,996 (19)
Increase in other accrued liabilities 1,316 418
Other, net (39) 119
Cash provided by (used in) operating
activities - discontinued operations 2,080 (839)
------- -------
Net cash provided by operating activities 1,332 4,909
------- -------
Cash flows from investing activities:
Capital expenditures (756) (3,696)
Purchase of Century Thailand, net of cash received - (129)
Proceeds from sale of assets - 325
Cash used in investing activities -
discontinued operations (275) (134)
------- -------
Net cash used in investing activities (1,031) (3,634)
------- -------
Cash flows from financing activities:
Proceeds from (payments of) bank lines of credit 2,625 (2,648)
Proceeds from long-term debt - 2,452
Payments of long-term debt (1,253) (1,294)
Proceeds from the exercise of stock options - 7
Cash (used in) provided by financing activities -
discontinued operations (1,929) 806
------- -------
Net cash used in financing activities (557) (677)
------- -------
Effect of exchange rate changes on cash (14) 16
------- -------
(Decrease) increase in cash and cash equivalents (270) 614
Cash and cash equivalents at beginning of period 816 224
------- -------
Cash and cash equivalents at end of period $ 546 $ 838
======= =======
Supplemental cash flow information:
Interest paid $ 862 $ 677
Income taxes paid 2 45
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
Nine Months Ended March 31, 2003 and 2002
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 five wholly owned subsidiaries: SMTEK, Inc. (dba SMTEK
Moorpark), located in Moorpark, California; Jolt Technology, Inc. (aka SMTEK
Fort Lauderdale), located in Fort Lauderdale, Florida; 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 were consolidating our San
Diego facility into our other California operations in Moorpark and Santa
Clara. This transition was completed as of March 31, 2003.
On April 9, 2003, we sold our facility in Northern Ireland. This is
shown in the unaudited consolidated financial statements as a discontinued
operation. For further discussion, see Note 3.
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 our San Diego facility, selling our Northern Ireland
facility and evaluating further opportunities of consolidation,
transition or sale of other facilities.
- Continuing focus on cost reductions related to sizing our capacity
infrastructure to current production levels.
- 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. In addition, delisting
proceedings may also affect availability of equity financing. 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 unaudited 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 March 31 for
clarity of presentation. The actual interim periods ended on March 28, 2003
and March 29, 2002.
Certain reclassifications have been made to the fiscal 2002 financial
statements to conform with the fiscal year 2003 financial statement
presentation. Such reclassifications had no material effect on our results of
operations or stockholders' equity.
Certain notes and other information are condensed or omitted from the
interim financial statements presented in this Quarterly Report on Form 10-Q
pursuant to applicable rules and regulations. 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 from continuing operations,
as originally reported $ (649)
Loss from discontinued operations (134)
Change in accounting principle, net of taxes (420)
-------
Net loss as restated $(1,203)
=======
Basic and diluted loss per share:
Net loss from continuing operations,
as originally reported $ (0.28)
Loss from discontinued operations (0.06)
Change in accounting principle (0.18)
-------
Net loss as restated $ (0.52)
=======
Goodwill amortization of $9,000 and $28,000 was recognized in the three
and nine months ended March 31, 2002, respectively. Unaudited pro forma
results of operations for the three and nine months ended March 31, 2002, 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 Nine Months Ended
March 31, 2002 March 31, 2002
------------------- -------------------
Net loss from continuing operations,
as reported $(2,803) $(3,028)
Add back amortization of goodwill 9 28
------- -------
Pro forma net loss from continuing operations (2,794) (3,000)
Loss from discontinued operations,
net of taxes (122) (632)
------- -------
Pro forma net loss $(2,916) $(3,632)
======= =======
Pro forma net loss per share,
basic and diluted:
Loss from continuing operations $ (1.23) $ (1.31)
Loss from discontinued operations (0.05) (0.28)
======= =======
Pro forma net loss per share,
basic and diluted $ (1.28) $ (1.59)
======= =======
NOTE 3 - DISCONTINUED OPERATIONS
On April 9, 2003, we sold 100% of the outstanding stock of our Northern
Ireland facility, SMTEK Europe, for consideration of $1. The purchaser was a
Northern Ireland investor group, which included a director from SMTEK Europe.
The gain on the sale is not material and will be recorded in the fourth
quarter of fiscal 2003. We incurred transaction costs of approximately
$170,000.
Accordingly, operating results for SMTEK Europe have been presented in
the accompanying unaudited Condensed Consolidated Statements of Operations and
Other Comprehensive Income (Loss) as a discontinued operation, and are
summarized as follows (in thousands):
Three Months Ended Nine Months Ended
March 31, March 31,
------------------- -------------------
2003 2002 2003 2002
------- ------- ------- -------
Revenues $ 1,286 $ 2,604 $ 6,277 $ 6,950
======= ======= ======= =======
Operating loss $ (648) $ (44) $ (991) $ (386)
======= ======= ======= =======
Loss from discontinued operations,
less applicable taxes $ (756) $ (122) $(1,300) $ (632)
======= ======= ======= =======
The net assets of SMTEK Europe are as follows (in thousands):
March 31, June 30,
2003 2002
------------- ---------
Current assets $ 3,516 $ 5,724
Property, equipment and improvements, net of
accumulated depreciation and amortization 1,486 1,549
Current liabilities (5,312) (5,621)
Long-term debt (65) (872)
------- -------
Net (liabilities) assets $ (375) $ 780
======= =======
At March 31, 2003, SMTEK Europe had an accumulated foreign currency
translation loss of $121,000 which was carried as a reduction of consolidated
stockholders' equity. In accordance with SFAS No. 52, "Foreign Currency
Translation," this amount will be included in the determination of the gain on
sale of discontinued operations.
NOTE 4 - 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 nine months ended
March 31, 2002, 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:
Nine Months Ended
March 31, 2002
------------------
Revenues from continuing operations $49,665
=======
Net loss $(3,597)
=======
Loss per share:
Basic and diluted $ (1.57)
=======
NOTE 5 - EARNINGS PER SHARE
Basic earnings (loss) per share is computed by dividing net income
(loss) available to common stockholders by the weighted average number of
common shares 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 Nine Months Ended
March 31, March 31,
---------------------- ----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net loss $ (1,050) $ (2,925) $ (6,131) $ (3,660)
========= ========= ========= =========
Weighted average shares:
Basic weighted average
number of common shares
outstanding 2,284,343 2,284,343 2,284,343 2,283,910
Dilutive effect of
outstanding common
stock equivalents - - - -
--------- --------- --------- ---------
Diluted weighed average
number of common
shares outstanding 2,284,343 2,284,343 2,284,343 2,283,910
========= ========= ========= =========
Basic and diluted loss per share $ (0.46) $ (1.28) $ (2.68) $ (1.60)
========= ========= ========= =========
Because we had a net loss for the three and nine months ended March 31,
2003, 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 nine months ended March 31, 2003, the diluted shares
outstanding would have increased by 6,430 and 4,145 shares for the three and
nine months ended March 31, 2003, respectively. Further, options to purchase
approximately 613,900 shares of common stock at prices ranging from $1.05 to
$10.00 which were outstanding at March 31, 2003, would not have been included
in the computation of diluted earnings per share for the three and nine months
ended March 31, 2003, because the exercise prices of these options were
greater than the average market price of our common stock. If we had
reported net income rather than a loss for the three and nine months ended
March 31, 2002, the diluted shares outstanding would have increased by 2,960
and 89,228 shares for the three and nine months ended March 31, 2002,
respectively. Options to purchase approximately 571,700 shares of common
stock at prices ranging from $3.75 to $10.00 were outstanding at March 31,
2002, but were not included in the computation of diluted earnings per share
for the three and nine months ended March 31, 2002, because the exercise
prices of these options were greater than the average market price of our
common stock.
We apply the provisions of APB Opinion No. 25 and related interpretations
in accounting for our stock option plans. Accordingly, no compensation
expense has been recognized for our employee stock option plans and awards of
options to non-employee directors. Had compensation expense for stock-based
awards been determined consistent with SFAS No. 123 as amended by SFAS No.
148, our results of operations would have been reduced to the pro forma
amounts indicated below (in thousands except per share amounts):
Three Months Ended Nine Months Ended
March 31, March 31,
------------------- -------------------
2003 2002 2003 2002
------- ------- ------- -------
Net loss as reported $(1,050) $(2,925) $(6,131) $(3,660)
Deduct total stock-based
employee compensation expense
under fair value-based method
for all awards, net of tax (99) (97) (297) (291)
------- ------- ------- -------
Pro forma net loss $(1,149) $(3,022) $(6,428) $(3,951)
======= ======= ======= =======
Pro forma net loss per share,
basic and diluted: $ (0.50) $ (1.32) $ (2.81) $ (1.73)
======= ======= ======= =======
NOTE 6 - 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 7 - INVENTORIES
Inventories consist of the following (in thousands):
March 31, June 30,
2003 2002
------------- --------
Raw materials $ 5,938 $ 6,448
Work in process 2,744 2,733
Finished goods 488 485
------- -------
$ 9,170 $ 9,666
Total inventories ======= =======
Note 8 - PROPERTY, EQUIPMENT AND IMPROVEMENTS
Property, equipment and improvements consist of the following (in
thousands):
March 31, June 30,
2003 2002
------------- --------
Buildings and improvements $ 1,454 $ 2,324
Plant equipment 13,062 13,051
Office and other equipment 1,572 1,700
Less accumulated depreciation and amortization (10,097) (9,815)
-------- --------
Total property, equipment and improvements $ 5,991 $ 7,260
======== ========
NOTE 9 - CREDIT AGREEMENTS
At March 31, 2003, we have an $8.5 million working capital line of
credit collateralized by accounts receivable, inventory and equipment for our
domestic operating units which matures September 25, 2003. Borrowings under
the credit agreement bear interest at either the bank's prime rate (4.25% at
March 31, 2003) plus 1.00% or a Eurodollar-base rate (1.33% at March 31, 2003)
plus 3.75%. At March 31, 2003, borrowings outstanding under this credit
facility amounted to $6.6 million and the effective weighted average interest
rate was 5.11%. The line of credit agreement contains certain financial
covenants, with which we believe we were in compliance at March 31, 2003. Our
available borrowing capacity as of March 31, 2003, was approximately $1.9
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 and bears interest at either the
bank's prime rate (4.25% at March 31, 2003) plus 1.00% or a Eurodollar-base
rate (1.33% at March 31, 2003) plus 3.75%. At March 31, 2003, the balance
outstanding was $865,000 and the effective weighted average interest rate was
5.08%. Additional advances under our equipment line of credit will not be
available to us until a review by the bank at a future date.
At March 31, 2003, 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 $3,925,000 at March 31, 2003), of which 500,000 British pounds
sterling (approximately $785,000 at March 31, 2003) consists of an overdraft
facility, and bears interest at the bank's base rate (3.75% at March 31, 2003)
plus 2.00%. At March 31, 2003, borrowings outstanding under this credit
facility amounted to approximately $1.7 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. This
credit facility was assumed by the purchaser of SMTEK Europe.
We also have a mortgage note secured by real property at Northern
Ireland with an outstanding balance of $657,000 at March 31, 2003. At March
31, 2003, we were in arrears. This mortgage note was assumed by the purchaser
of SMTEK Europe.
NOTE 10 - BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
We operate in a single business segment - the EMS industry. Our
revenues from continuing operations and long-lived assets, net of accumulated
depreciation, by geographic area are as follows (in thousands):
Three Months Ended Nine Months Ended
March 31, March 31,
------------------- -------------------
2003 2002 2003 2002
------- ------- ------- -------
Revenues:
United States $15,973 $13,171 $47,331 $47,704
Thailand 1,457 292 3,143 641
------- ------- ------- -------
Total revenues $17,430 $13,463 $50,474 $48,345
======= ======= ======= =======
March 31, June 30,
2003 2002
------------- --------
Long-lived assets:
United States $5,775 $7,487
Thailand 216 193
------ ------
Total long-lived assets $5,991 $7,680
====== ======
NOTE 11 - 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 March 31, 2003, we did not have any open
forward foreign currency contracts.
NOTE 12 - 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 March 31, 2003, we
had a reserve of $421,000 for future remediation costs. Management, based in
part on consultations with outside environmental engineers and scientists,
believes that this reserve is adequate to cover its share of future
remediation costs at this site. However, the future actual remediation costs
could differ significantly from the 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 effect 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, 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. WE DO NOT UNDERTAKE, AND SPECIFICALLY DISCLAIM, ANY OBLIGATION TO
UPDATE THESE 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 risk factors update certain risk factors identified in our
2002 Annual Report on Form 10-K which was filed with the SEC on September 26,
2002. Readers are referred to the documents filed by us with the SEC,
including our most recent Reports on Forms 10-K, 10-Q and 8-K, each as it may
be amended from time to time, for a more complete description of important
risk factors.
Our Debt Agreements Contain Certain Financial Covenants That Must Be Met.
At March 31, 2003, we were in compliance with our debt covenants on our
domestic line of credit. However, if we are unable to comply with the terms
of our 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 March 31, 2003 amounted to
$6.6 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 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, including conditions
that are both internal and external to us.
In November 2002, we received a deficiency notice from Nasdaq relating
to our stock trading below $1.00 per share for 30 consecutive days. We have
until May 29, 2003 to regain compliance, which requires that the closing
minimum bid of our common stock be $1.00 per share or more for 10 consecutive
trading days. We have not yet satisfied that requirement at this time.
However, even if we met this requirement at any time before May 29, 2003, we
are still likely to be delisted if we continue to fail to meet the $2.5
million minimum level of stockholders' equity requirement that Nasdaq has
established. In this regard, in February 2003, we received a deficiency
notice from Nasdaq with reference to our failure to meet Nasdaq's $2.5 million
in stockholders' equity requirement.
In April 2003, we received formal written notice from Nasdaq that our
common stock is subject to delisting effective upon the opening of business on
April 23, 2003. We have requested a hearing before a Nasdaq Listing
Qualifications Panel to appeal the determination, which has been scheduled for
May 29, 2003 by Nasdaq. The Company's common stock will continue to be listed
on The Nasdaq SmallCap Market pending the outcome of the hearing. There can
be no assurance that the Company's request for continued listing on The Nasdaq
SmallCap Market will be granted.
If we are delisted from the Nasdaq SmallCap Market, we may be
transferred to the over-the-counter market on the NASD Electronic Bulletin
Board or to the "pink sheets" electronic quotation service 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, additional difficulties include: (i) obtaining accurate quotations and
(ii) obtaining 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 OUR 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 five wholly owned subsidiaries: SMTEK, Inc. (dba SMTEK
Moorpark), located in Moorpark, California; Jolt Technology, Inc. (aka SMTEK
Fort Lauderdale), located in Fort Lauderdale, Florida; 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 were consolidating our San
Diego facility into our other California operations in Moorpark and Santa
Clara. As a result, costs of approximately $2.0 million, related to the
consolidation, have been recognized in the condensed consolidated statement of
operations. This transition was completed as of March 31, 2003.
On April 9, 2003, we sold our facility in Northern Ireland. This is
shown in the unaudited consolidated financial statements as a discontinued
operation. For further discussion, see Note 3.
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 March 31 for
clarity of presentation. The actual interim periods ended on March 28, 2003
and March 29, 2002.
Consolidated revenues for the three months ended March 31, 2003 were
$17.4 million compared to $13.5 million for the three months ended March 31,
2002, due primarily to customers deferring shipments in the 2002 quarter.
Consolidated revenues for the nine ended March 31, 2003 were $50.5 million
compared to $48.3 million for the nine months ended March 31, 2002. The
increase in revenues was mainly due to increases in business activity from our
current and new customers.
Consolidated gross profit for the three and nine months ended March 31,
2003 was $1.9 million (11.0% of sales) and $4.4 million (8.6% of sales),
respectively, compared to $99,000 (0.7% of sales) and $3.8 million (7.8% of
sales) for the three and nine months ended March 31, 2002, respectively.
Gross profit for the three and nine months ended March 31, 2002 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 nine
months ended March 31, 2002 would have been approximately a loss of $340,000
(-2.5% of sales) and a profit of $2.6 million (5.3% of sales), respectively.
The increase in gross profit and gross profit margin, excluding the purchase
benefit, was due to an increase in revenues as well as to decreases in
headcount and material costs.
Administrative and selling expenses were $2.2 million and $8.2 million
for the three months and nine months of March 31, 2003, respectively, compared
to $3.0 million and $6.5 million for the three and nine months of March 31,
2002, respectively. The decrease in administrative and selling expenses in
the three months ended March 31, 2003 was mainly due to reduction of fixed
costs, offset by expenses related to the closing of our San Diego facility of
$127,000. The increase in administrative and selling expenses in the nine
months ended March 31, 2003 is due to the recognition, during the second and
third quarters of 2003, of approximately $2.0 million in expenses related to
the closing of our San Diego facility. These costs include: $1.0 million
loss related to the lease of the building, $370,000 related to write-off of
leasehold improvements and $300,000 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.
Total non-operating income (expense) was $2,000 and ($515,000) for the
three and nine months ended March 31, 2003, respectively, compared to
($41,000) and ($476,000) for the three and nine months ended March 31, 2002,
respectively. During the three months ended March 31, 2003, we recognized a
gain on the extinguishment of long-term debt of $175,000. Additionally, we
recognized income of $96,000 from the settlement of contingent liabilities
during the three months ended March 31, 2003. Excluding the non-operating
income from these two items, total non-operating expense would have been
$269,000 and $786,000 for the three and nine months ended March 31, 2003,
respectively, compared to $41,000 and $476,000 for the three and nine months
ended March 31, 2002, 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 nine months ended March 31, 2003 as compared
to the three and nine months ended March 31, 2002.
We had an income tax provision of $0 and $6,000 for the three and nine
months ended March 31, 2003, respectively, as compared to income tax benefits
of $182,000 and $155,000 for the three and nine months ended March 31, 2002,
respectively. For the three and nine months ended March 31, 2002, amounts
reflect a $164,000 income tax benefit resulting from passage of the 2002
Stimulus Package providing for the recovery of our alternative minimum taxes
paid in fiscal years 2000 and 2001. Without this item, we would have reported
an income tax benefit of $18,000 and income tax expense of $9,000 for the
three and nine months ended March 31, 2002, respectively.
Loss from continuing operations was $294,000 or $0.13 loss per diluted
share for the three months ended March 31, 2003 compared to $2.8 million or
$1.23 loss per diluted share for the three months ended March 31, 2002, due
mainly to higher gross profit in the fiscal 2003 periods. Loss from
continuing operations was $4.4 million or $1.93 loss per diluted share for the
nine months ended March 31, 2003 compared to $3.0 million or $1.32 loss per
diluted share for the nine months ended March 31, 2002 due mainly to higher
gross profit, offset by higher administrative and selling expenses related to
the closing of our San Diego facility.
On April 9, 2003, we sold our facility in Northern Ireland, and the
results of this facility are shown as a discontinued operation. Loss from
discontinued operations, net of taxes, was $756,000 and $1.3 million for the
three and nine months ended March 31, 2003, or $0.33 and $0.57 loss per
diluted share, respectively, compared to loss from discontinued operations,
net of taxes, of $122,000 and $632,000 for the three and nine months ended
March 31, 2002, or $0.05 and $0.28 loss per diluted share, respectively.
Net loss was $1.1 million and $6.1 million for the three and nine months
ended March 31, 2003, or $0.46 and $2.68 loss per diluted share, respectively,
compared to net loss of $2.9 million and $3.7 million for the three and nine
months ended March 31, 2002, or $1.28 and $1.60 loss per diluted share,
respectively.
CHANGE IN ACCOUNTING PRINCIPLE
We adopted 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.
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.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-
Based Compensation - Transition and Disclosure, an amendment of FASB Statement
No. 123". This Statement amends FASB Statement No. 123, "Accounting for
Stock-Based Compensation", to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of Statement No. 123 to require prominent disclosures in both
annual and interim financial statements. We adopted this Statement on January
1, 2003 and included the disclosure modifications in the these condensed
consolidated financial statements. The adoption of this Statement did not
have a material effect on our financial statements.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are our cash and cash equivalents,
which amounted to $546,000 at March 31, 2003, and amounts available under our
bank lines of credit, which provided approximately $1.9 million of
availability in excess of current borrowings at March 31, 2003. During the
nine months ended March 31, 2003, cash and cash equivalents decreased by
$270,000. This decrease resulted from purchases of equipment of $1,031,000
and financing activities of $557,000, partially offset by cash provided by
operations of $1.3 million.
Net cash provided by operating activities of $1.3 million for the nine
months ended March 31, 2003 was attributable primarily to facility
consolidation costs of $1.4 million, cash provided by the operating activities
of our discontinued operations of $2 million, a decrease in inventories of
$484,000 and an increase in accounts payable and accrued liabilities of $3.3
million offset by our loss from continuing operations before depreciation and
amortization of $4.4 million and a decrease in accounts receivable of $3.1
million.
Net cash used in investing activities was $1,031,000 for the nine months
ended March 31, 2003 compared to $3.6 million for the nine months ended March
31, 2002. The cash used was for capital expenditures mainly for production
purposes.
Net cash used in financing activities was $557,000 for the nine months
ended March 31, 2003 compared to $677,000 for the nine months ended March 31,
2002. At March 31, 2003, we had approximately $1.9 million available to
borrow under our bank lines of credit, after giving effect to the amendment to
the credit agreement discussed below.
At March 31, 2003, we have an $8.5 million working capital line of
credit collateralized by accounts receivable, inventory and equipment for our
domestic operating units which matures September 25, 2003. Borrowings under
the credit agreement bear interest at either the bank's prime rate (4.25% at
March 31, 2003) plus 1.00% or a Eurodollar-base rate (1.33% at March 31, 2003)
plus 3.75%. At March 31, 2003, borrowings outstanding under this credit
facility amounted to $6.6 million and the effective weighted average interest
rate was 5.11%. The line of credit agreement contains certain financial
covenants, with which we believe we were in compliance at March 31, 2003. Our
available borrowing capacity as of March 31, 2003, was approximately $1.9
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 and bears interest at either the
bank's prime rate (4.25% at March 31, 2003) plus 1.00% or a Eurodollar-base
rate (1.33% at March 31, 2003) plus 3.75%. At March 31, 2003, the balance
outstanding was $865,000 and the effective weighted average interest rate was
5.08%. Additional advances under our equipment line of credit will not be
available to us until a review by the bank at a future date.
At March 31, 2003, 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 $3,925,000 at March 31, 2003), of which 500,000 British pounds
sterling (approximately $785,000 at March 31, 2003) consists of an overdraft
facility, and bears interest at the bank's base rate (3.75% at March 31, 2003)
plus 2.00%. At March 31, 2003, borrowings outstanding under this credit
facility amounted to approximately $1.7 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. This
credit facility was assumed by the purchaser of SMTEK Europe.
We also have a mortgage note secured by real property at Northern
Ireland with an outstanding balance of $657,000 at March 31, 2003. At March
31, 2003, we were in arrears and we are currently seeking to negotiate a
payment plan. This mortgage note was assumed by the purchaser of SMTEK
Europe.
We anticipate that additional expenditures of as much as $100,000 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 March 31, 2003, 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 March 31, 2003, we
had $4.0 million of negative working capital compared to $5.9 million of
working capital at June 30, 2002. At March 31, 2003, we had long-term
borrowings of $4.0 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 $4.0 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 March 31, 2003, we
have a federal tax assessment liability of approximately $1.1 million and a
related accrued interest liability of approximately $1.4 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 our San Diego facility, selling our Northern Ireland
facility and evaluating further opportunities of consolidation,
transition or sale of other facilities.
- Continuing focus on cost reductions related to sizing our capacity
infrastructure to current production levels.
- 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" as well as other reports we file
with the SEC.
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. In addition, delisting
proceedings may also affect availability of equity financing. 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 March 31, 2003, we
had a reserve of $421,000 for future remediation costs. Management, based in
part on consultations with outside environmental engineers and scientists,
believes that this reserve is adequate to cover its share of future
remediation costs at this site. However, the future actual remediation costs
could differ significantly from the 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 March 31, 2003, the carrying
amount of long-term debt (including the current portion thereof but excluding
bank lines of credit) was $7.1 million and the fair value was $6.6 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 March 31, 2003, we did not have any open
forward foreign currency contracts.
Our continuing operations consist of investments in foreign operating
units. Our foreign subsidiaries represent approximately 7% of our revenues
from continuing operations and 8% of the total assets of our continuing
operations. 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
our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that these 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 our periodic SEC filings. There were no
significant changes in our 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 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 Share Sale Agreement, dated March 21, 2003, by and among DDL
Europe Limited, Alina Limited and SMTEK International, Inc., incorporated
by reference to Exhibit 2.1 to the Company's Form 8-K filed with the SEC on
April 25, 2003.
10.2 Amendment to Share Sale Agreement, dated April 9, 2003, by and
among DDL Europe Limited, Alina Limited and SMTEK International, Inc.,
incorporated by reference to Exhibit 2.3 to Company's Form 8-K filed with
the SEC on April 25, 2003.
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 April 21, 2003, we filed a Form 8-K indicating that we received
formal written notice from Nasdaq that our stock is subject to delisting from
the Nasdaq SmallCap Market.
On April 25, 2003, we filed a Form 8-K reporting the sale of SMTEK
Europe.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
May 9, 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: May 9, 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: May 9, 2003
/s/ Kirk A. Waldron
Kirk A. Waldron
Senior Vice President and Chief Financial Officer
SMTEK International, Inc.