EXHIBIT 13
ANNUAL REPORT TO STOCKHOLDERS
SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS
(In thousands except per share amounts)
Year Ended June 30
-----------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Revenues $59,492 $ 53,265 $ 51,640 $ 35,490 $ 31,393
Operating income (loss) $ 23 $ 1,545 $ 1,036 $ (552) $ (4,592)
Income (loss) before
income taxes $(1,293)(A) $ 493 $ (868) $ (1,377) $ (2,145)
Income tax (expense)
benefit $(1,202)(B) $ - $ - $ 1,110 $ -
Extraordinary item - $ - $ - $ 2,356 $ 2,441
Net income (loss) $(2,495) $ 493 $ (868) $ 2,089 $ 296
Earnings (loss)
per common share(C) $ (1.41) $ 0.34 $ (0.63) $ 1.85 $ 0.30
EBITDA (D) $ 3,674 $ 4,567 $ 4,052 $ 1,673 $ 446
(A) Includes $725,000 of accrued interest expense related to an income tax
assessment, as further described in Note 7 to the accompanying
consolidated financial statements.
(B) Includes income tax expense of $1,110,000 to provide for the expected
repayment to the Internal Revenue Service of tax refunds received in
fiscal 1996 which were substantially disallowed in fiscal 1999, as
further described in Note 7 to the accompanying consolidated financial
statements.
(C) Restated to give retroactive application to the 1-for-20 reverse stock
split effected by the Company on May 24, 1999, as further described in
Note 1 to the accompanying consolidated financial statements.
(D) EBITDA consists of pretax income (loss) plus net interest expense,
depreciation and amortization. While EBITDA is not intended
to represent cash flow from operations as defined by generally accepted
accounting principles ("GAAP") and should not be considered as an
indicator of operating performance or an alternative to cash flow (as
measured by GAAP) as a measure of liquidity, it is included herein
because some investors believe it provides additional information with
respect to the ability of the Company to meet its future debt service,
capital expenditure and working capital requirements.
DESCRIPTION OF BUSINESS
SMTEK International, Inc. is an electronics manufacturing services
(EMS) provider serving original equipment manufacturers (OEMs) in the
computer, telecommunications, instrumentation, medical, industrial and
aerospace industries. The Company provides integrated solutions to OEMs
across the entire product life cycle, from design to manufacturing to end-
of-life services, for the worldwide low-to-medium volume, high complexity
segment of the EMS industry.
The Company also fabricates multilayer printed circuit boards (PCBs)
for use in the computer, telecommunications, instrumentation, medical,
industrial and aerospace industries. EMS operations are located in
Thousand Oaks, California; San Diego, California; Fort Lauderdale, Florida
and Craigavon, Northern Ireland. Its PCB facilities are located in
Craigavon, Northern Ireland.
PRESIDENT'S LETTER TO STOCKHOLDERS
Dear Fellow Stockholders:
Our fiscal year ended June 30, 1999 presented formidable challenges
owing to factors that included weak market demand, dramatic fluctuations
in existing customer requirements, Asian pricing pressures, and a
substantial shift in product mix. These difficult conditions impacted our
financial results as well as those of our major competitors. In response,
management took swift and appropriate actions which were focused on
booking new business and partnership accounts, strengthening financial
controls, building infrastructure, and improving performance with current
accounts.
In my letter a year ago, I outlined our aggressive strategy for
profitable growth, which as discussed below will continue to be the road
map for the Company's future. While we made substantial progress toward
some of our key goals - increasing revenues and building our industry
presence - our primary objective of earnings growth proved elusive in an
industry climate of pervasive challenge. In addition to industry and
market challenges, the financial results were also impacted by a special
tax charge associated with a tax refund received by the Company four years
ago, which was disallowed in fiscal 1999.
Financial Results
- - - Fiscal 1999 revenue increased 11.7% to $59,492,000, compared to
$53,265,000 for fiscal 1998
- - - Fiscal 1999 gross profit was $7,969,000 or 13.4% of revenues as
compared to $9,332,000, or 17.5% for fiscal 1998
- - - Operating income was $23,000 for fiscal 1999, compared to
$1,545,000 in fiscal 1998
- - - In the fourth quarter of fiscal 1999, the Company recorded special
charges of $1,835,000 for an income tax assessment and associated
interest expense and $487,000 for increased inventory reserves
- - - The fiscal 1999 net loss after special charges was $2,495,000,
compared to net income of $493,000 in fiscal 1998
- - - Fiscal 1999 EBITDA was $3,674,000, compared to $4,567,000 in fiscal
1998.
- - - Stockholders' equity increased from $7,556,000 at the end of fiscal
1998 to $9,304,000 at the close of fiscal 1999.
Perspective on Financial Results
In fiscal 1999, despite clear indications of an industry-wide
downturn, we managed to post modest profits in each of the first three
quarters. Much to our frustration, however, we experienced a fourth
quarter loss that eclipsed the year's earnings. These difficult
conditions, mostly in the European market, have persisted into the first
quarter of our fiscal year 2000. Operating income declined 83% from
fiscal 1998 in our European subsidiaries, compared with a decrease of 17%
in our domestic subsidiaries. Excluding the previously mentioned increase
in inventory reserves, domestic operating income increased 7% over fiscal
1998.
Significantly lower demand for our customers' products in fiscal 1999
caused substantial contract reductions and rescheduling of orders by our
five largest customers, resulting in excess inventory conditions.
Accordingly, we increased inventory reserves at year-end, which was a
major factor in the year's loss.
In this climate, we took aggressive action to secure replacement
business and successfully booked several substantial new programs, which
have been building momentum during the year. To an extent, however, this
resulted in a shift in our product mix, which negatively impacted gross
profit margins last year.
On a more encouraging note, we have seen a recent improvement in
customer demand consistent with the rest of the industry. Certain new
accounts acquired late in fiscal 1999, after allowing for substantial
start-up costs, are expected to contribute positively to the bottom line
in the current fiscal year. Beginning in January 2001, just 14 months
away, a large portion of our goodwill will become fully amortized and we
will see a reduction in goodwill amortization expense of $1,268,000 per
year. Furthermore, we ended fiscal 1999 with a record backlog of $40
million, up 9% from a year earlier.
Executing Our Business Plan
In January 1999, the Company acquired Technetics, Inc. in San Diego,
California, providing us with a service presence in a burgeoning market
with many new companies in the wireless and telecommunications business.
Based on the purchase price and the strategic position and capabilities of
Technetics, we felt the opportunity was a good one for long-term Company
growth and market position. The San Diego facility is ISO-9002 certified
and can perform production and express services for high-end commercial,
military and space customers.
However, it is taking some time to get this operation on track. At
the time it was acquired, Technetics was under-booked and poised to lose
money, adding further pressure on corporate earnings. We are successfully
booking new business for the operation and anticipate it will become
profitable in the second quarter of fiscal 2000.
The Company's expansion plans have the objective of creating a
network of medium to small EMS providers with the ability to offer local
expertise for complex prototype and production needs in the high-mix
market segment. In our view, customers in this market segment are less
likely to subcontract their work to the very large off-shore manufacturers
due to relationships, complexity and level of service needs. We also
believe that there is a higher percentage of value-added revenue (sales
less cost of materials) in this market allowing for greater profit margins
than experienced by the high-volume producers.
Underpinning this strategy is the conviction that we can provide
large company capabilities to our growing family of small companies,
thereby making them more competitive and capable than their local
competitors. SMTEK is working to provide its operating units with shared
services, including banking services, on-line enterprise resource planning
software and server capabilities, manufacturing engineering services, test
engineering services, design services, volume purchasing agreements,
global manufacturing capabilities, employee benefits programs, and
eventually a more comprehensive marketing effort.
Without having to support the overhead necessary to maintain all of
these capabilities and skills, we believe each small business will
therefore be more profitable. As we continue to build critical mass, the
Company should benefit from economies of scale associated with spreading
public company costs across a much larger sales base. Over the next
several years, as the Company's capital structure improves, we hope to add
a dozen companies to the family. The Company was fortunate to have
attracted additional investment this past year from its largest
stockholder, Thomas M. Wheeler, who has indicated his support and provided
financial backing to help the Company grow through customer partnerships
and strategic acquisitions.
Maintaining Visibility and Marketability for Our Common Stock
As you may know, the Company has long been listed on the New York
Stock Exchange (NYSE). In May 1999, in response to increasingly
stringent listing requirements by the NYSE, management and the Board of
Directors felt that it was critical to facilitate the orderly transfer of
our listing to the Nasdaq system in order to maintain a listing on a major
market for the long-term benefit of the Company and its stockholders.
In connection with maintaining a market for its stock, the Company
asked for and received stockholder approval for a 1-for-20 reverse stock
split. The reverse stock split and transfer between stock exchanges at a
time when we were experiencing earnings pressure had a dramatic impact on
the liquidity of our stock in the short-term, but we are convinced that
proactive action was far better than accepting the consequences of
inaction. By successfully executing our strategic plan and building
earnings growth, we expect to have the opportunity to improve stock
valuations over the next several years.
Setting the Stage for Longer-Term Progress
The past year required the best efforts of our people in a daunting
environment, and we thank them for their valued contributions. Employee
retention during periods of low unemployment is difficult at best and
remains a major challenge for the Company and our industry. We will be
submitting a request to the stockholders for replenishment of the
Company's stock option pool in order to provide non-cash incentive for our
key employees to stay with the Company in a climate of tremendous
opportunity. Strategic use of employee stock options can reduce the
extraordinary cost of employee turnover and create strong incentive for
employees to improve stockholder value.
Out of a difficult year should come gains as we capitalize on our
efforts to cut costs, increase operating efficiencies and create the
infrastructure to support a larger company with an expanded sales base and
geographic positioning. Having accomplished the complex and time-
consuming work related to such matters as transferring the common stock
listing, we can now fully direct our energies toward implementing our
growth strategy. Hopefully, early indications of an improving business
climate will continue and gain strength, and we are well fortified with a
record backlog position.
We look forward to the future with a sense of optimism and
enthusiasm.
/s/Gregory L. Horton
- - ---------------------
Gregory L. Horton
Chairman, CEO and President
SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES
FIVE-YEAR FINANCIAL SUMMARY
(In thousands except per share amounts)
Year ended June 30
--------------------------------------------
OPERATING DATA 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Revenues $ 59,492 $ 53,265 $ 51,640 $ 35,490 $ 31,393
------ ------ ------ ------ ------
Costs and expenses:
Cost of goods sold 51,523 43,933 43,894 30,906 27,598
Administrative and
selling expenses 6,662 5,910 5,442 4,502 6,854
Goodwill amortization 1,284 1,268 1,268 634 -
Acquisition expenses - 609 - - -
Restructuring charges - - - - 1,533
------ ------ ------ ------ ------
Total costs and expenses 59,469 51,720 50,604 36,042 35,985
------ ------ ------ ------ ------
Operating income (loss) 23 1,545 1,036 (552) (4,592)
------ ------ ------ ------ ------
Non-operating income (expense):
Interest income 129 97 96 255 117
Interest expense (1,678)(A) (1,101) (1,227) (1,045) (1,048)
Debt issue cost amortization - - (937) (281) -
Gain on sale of assets 158 22 142 - 3,317
Other income (expense), net 75 (70) 22 246 61
------ ------ ------ ------ ------
Total non-operating
income (expense) (1,316) (1,052) (1,904) (825) 2,447
------ ------ ------ ------ ------
Income (loss) before
income taxes (1,293) 493 (868) (1,377) (2,145)
Income tax (expense)
benefit (1,202)(B) - - 1,110 -
------ ------ ------ ------ ------
Income (loss) before
extraordinary item (2,495) 493 (868) (267) (2,145)
Extraordinary item - Gain
on debt extinguishment - - - 2,356 2,441
------ ------ ------ ------ ------
Net income (loss) $ (2,495) $ 493 $ (868) $ 2,089 $ 296
====== ====== ====== ====== ======
(A) Includes $725,000 of accrued interest expense related to an income tax
assessment, as further described in Note 7 to the accompanying
consolidated financial statements.
(B) Includes income tax expense of $1,110,000 to provide for the expected
repayment to the Internal Revenue Service of tax refunds received in
fiscal 1996, which were substantially disallowed in fiscal 1999, as
further described in Note 7 to the accompanying consolidated financial
statements.
SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES
FIVE-YEAR FINANCIAL SUMMARY
(In thousands except per share amounts)
(Continued)
Year ended June 30
--------------------------------------------
OPERATING DATA 1999 1998 1997 1996 1995
(Continued) ---- ---- ---- ---- ----
Earnings (loss) per share:
Basic and diluted:
Income (loss) before
extraordinary item $(1.41) $ 0.34 $(0.63) $(0.24) $ (2.20)
Extraordinary item - - - 2.09 2.50
----- ----- ----- ----- ------
Total $(1.41) $ 0.34 $(0.63) $ 1.85 $ 0.30
===== ===== ===== ===== ======
Year ended June 30
--------------------------------------------
BALANCE SHEET DATA 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Current assets $ 27,899 $ 21,533 $ 21,673 $ 16,443 $ 9,778
Current liabilities $ 23,087 $ 17,088 $ 18,585 $ 12,301 $ 9,238
Working capital $ 4,812 $ 4,445 $ 3,088 $ 4,142 $ 540
Current ratio 1.2 1.3 1.2 1.3 1.1
Total assets $ 39,544 $ 31,830 $ 33,669 $ 29,498 $ 13,962
Long-term debt $ 7,153 $ 7,186 $ 9,445 $ 12,560 $ 8,772
Stockholders' equity
(deficit) $ 9,304 $ 7,556 $ 5,639 $ 4,637 $ (4,048)
Equity (deficit)
per share $ 4.10 $ 4.43 $ 3.90 $ 3.53 $ (3.96)
Shares outstanding (000s) 2,267 1,704 1,447 1,315 1,021
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Basis of Presentation
The Company utilizes a 52-53 week fiscal year ending on the Friday
closest to June 30 which, for fiscal years 1999, 1998 and 1997, fell on
July 2, July 3, and June 27, respectively. In the accompanying
consolidated financial statements, the fiscal year-end for all years is
shown as June 30 for clarity of presentation. Fiscal years 1999 and 1997
consisted of 52 weeks compared to 53 weeks for fiscal year 1998.
As more fully described in the accompanying financial statements, the
Company's acquisition of Technetics, Inc. on January 29, 1999 was
accounted for under the purchase method of accounting, and the operations
of this facility have been included in the accompanying consolidated
financial statements since the date of acquisition.
Results of Operations
The following table sets forth the Company's revenues and other
operating data as percentages of revenues:
Year Ended June 30
-----------------------------
1999 1998 1997
---- ---- ----
Revenues 100.0% 100.0% 100.0%
Cost of goods sold 86.6 82.5 85.0
----- ----- -----
Gross profit 13.4 17.5 15.0
Administrative and selling expenses 11.2 11.1 10.5
Goodwill amortization 2.2 2.4 2.5
Acquisition expenses - 1.1 -
----- ----- -----
Operating income 0.0 2.9 2.0
Interest income 0.2 0.2 0.2
Interest expense (2.8) (2.1) (2.4)
Debt issue cost amortization - - (1.8)
Gain on sale of assets 0.3 - 0.3
Other income (expense), net 0.1 (0.1) -
----- ----- -----
Income (loss) before income taxes (2.2) 0.9 (1.7)
Income tax expense (2.0) - -
----- ----- -----
Net income (loss) (4.2)% 0.9% (1.7)%
===== ===== =====
Fiscal 1999 vs. 1998
Consolidated revenues for fiscal 1999 were $59,492,000 compared to
$53,265,000 for fiscal 1998. Revenues for the Company's EMS operations for
fiscal 1999 increased by $6,485,000 over fiscal 1998, primarily due to
several new contracts obtained by the Thousand Oaks operating unit. Also
contributing to the increase in EMS revenues was $1,669,000 of sales by
Technetics, Inc., acquired on January 29, 1999. Revenues for fiscal 1999 for
the PCB operations declined by 3% from the prior year.
Consolidated gross profit for fiscal 1999 was $7,969,000 (13.4% of
revenues) compared to $9,332,000 (17.5% of revenues) for fiscal 1998. Gross
profit of the EMS operations was $6,638,000 for fiscal 1999, compared to
$7,272,000 for the prior year, due to the following factors: the ramp-up of
several new contracts in the current fiscal year, an increase in inventory
reserves for excess raw materials, and a change in the mix of business, with
higher direct material costs as a percentage of revenues in the latest year.
For fiscal 1999, gross profit from PCB operations declined by 35% from fiscal
1998 as a result of the impact on manufacturing overhead of a decline in
revenues and a decrease in higher margin quick-turn orders.
Administrative and selling expenses for fiscal 1999 were $6,662,000,
compared to $5,910,000 in the previous year. The increase is attributable to
the inclusion of Technetics, Inc., which was acquired in January 1999, an
increase in consulting fees, and administrative and sales staff additions.
Operating income was $23,000 for fiscal 1999, compared to $1,545,000 for
fiscal 1998. This decline is primarily attributable to the decreased gross
profit for the reasons cited above.
Interest expense (excluding interest expense of $725,000 related to an
income tax assessment as discussed below) decreased from $1,101,000 in fiscal
1998 to $953,000 in fiscal 1999. The decrease in interest expense is
primarily due to the fact that notes of $1,625,000 that were payable by Jolt
Technology, Inc. ("Jolt") to a Jolt shareholder were converted to Jolt common
stock on June 30, 1998 as a condition of and prior to the acquisition of Jolt
by the Company. Jolt's pre-acquisition interest expense is included is the
Company's consolidated statement of operations pursuant to the pooling-of-
interests accounting method.
As more fully described in Note 7 to the accompanying consolidated
financial statements, in the fourth quarter of fiscal 1999 the Company
accrued income tax expense of $1,110,000 for tax refunds received in
fiscal 1996 which were substantially disallowed by the IRS in fiscal 1999.
Also in the fiscal 1999 fourth quarter, the Company accrued interest
expense of $725,000 on the fiscal 1996 income tax refunds which are
repayable to the IRS. The tax filings which resulted in the Company
receiving these refunds in fiscal 1996 were made after extensive
consultation with a prominent tax advisor.
Net loss for fiscal 1999 was $2,495,000, or ($1.41) per share, compared
to net income of $493,000, or $0.34 per share for fiscal 1998.
Fiscal 1998 vs. 1997
Consolidated revenues for fiscal 1998 were $53,265,000 compared to
$51,640,000 for fiscal 1997. Revenues for the Company's EMS operations for
fiscal 1998 increased by $3,355,000 over fiscal 1997, and such increase is
attributable primarily to higher levels of business with existing customers.
Revenues for fiscal 1998 for the PCB operations declined by 16.8% from the
comparable period in the prior year as a result of a decline in business from
a major customer as well as the fact that fiscal 1997 revenues included a
relatively large quick-turn contract that was not recurring business.
Consolidated gross profit for fiscal 1998 was $9,332,000 (17.5% of
revenues) compared to $7,746,000 (15.0% of revenues) for fiscal 1997. Gross
profit of the EMS operations was $7,272,000 for fiscal 1998, compared to
$5,662,000 for the prior year. A change in the mix of business, with lower
direct material costs as a percentage of revenues in fiscal 1998, contributed
to the increase in EMS gross profit, along with higher sales volume and
increased productivity. For fiscal 1998, gross profit from PCB operations
declined by $24,000 from fiscal 1997 as a result of the decline in revenues.
Gross profit as a percentage of revenues for the PCB operations was 24.0% for
fiscal 1998, compared to 20.2% for fiscal 1997. This improvement is
attributable primarily to an increase in higher margin quick-turn orders,
material price reductions and processing cost savings.
Administrative and selling expenses for fiscal 1998 were $5,910,000,
compared to $5,442,000 in the previous year. The increase is attributable to
the addition of a key management position in the Company's European
operations and other increases in administrative staff.
In fiscal 1998, the Company incurred acquisition-related expenses of
$609,000 related to the acquisition of Jolt.
Operating income was $1,545,000 for fiscal 1998, compared to $1,036,000
for fiscal 1997. This improvement is primarily attributable to the increased
gross profit of the Company's EMS operations.
Net non-operating expense decreased from $1,904,000 for the year ended
June 30, 1997 to $1,052,000 for fiscal 1998. This decrease is primarily
attributable to debt issue cost amortization expense of $937,000 in fiscal
1997 related to the 10% Senior Notes of $5,300,000 which were repaid on June
30, 1997.
Net income for 1998 was $493,000, or $0.34 per share, compared to net
loss of $868,000, or ($0.63) per share for fiscal 1997.
Recent Accounting Pronouncements
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133") was issued, which will require recognition of all derivatives as
either assets or liabilities on the balance sheet at fair value. The
Company will adopt SFAS 133, as amended by SFAS No. 137, in the first
quarter of its fiscal year ending June 30, 2001. Management has not
completed an evaluation of the effects this standard will have on the
Company's consolidated financial statements.
Liquidity and Capital Resources
The Company's primary sources of liquidity are its cash and cash
equivalents, which amounted to $4,997,000 at the end of fiscal 1999, and its
bank lines of credit. During fiscal 1999, cash and cash equivalents
increased by $584,000. Such increase is primarily attributable to a $4.5
million private stock placement. Specifically, this net cash inflow
consisted of net cash provided by operating activities of $1,151,000,
proceeds from the issuance of common stock of $4,463,000 and proceeds from
the sale of assets of $158,000, partially offset by outflows comprised of
capital expenditures of $1,633,000, purchase of subsidiary net of cash
acquired of $113,000, debt reductions of $3,386,000 and the effect of
exchange rate changes on cash of $56,000.
Components of operating working capital decreased by $311,000 during
fiscal 1999, which consisted of a $3,977,000 increase in accounts payable
and an increase of $1,376,000 in other current liabilities, partially
offset by a $412,000 increase in accounts receivable, a $1,498,000
increase in costs and estimated earnings in excess of billings on
uncompleted contracts, a $3,088,000 increase in inventories and a $44,000
increase in prepaid expenses.
At June 30, 1999, the Company had a working capital bank line of
credit for its Thousand Oaks, California operating unit which provided
for borrowings of up to $3,250,000 at an interest rate of prime (7.75%
at June 30, 1999) plus 1.25%. At June 30, 1999, borrowings outstanding
under this credit facility amounted to $3,225,000. This line was
replaced in July 1999 by a new credit facility for the Company's
domestic operating units which was entered into with Wells Fargo Bank.
Borrowings under the new credit agreement bear interest at the bank's
prime rate and the facility consists of an $8 million working capital
line secured by accounts receivable, inventory and equipment. This
credit facility expires on July 6, 2001.
The Company also has a credit facility agreement with Ulster Bank
Markets for its Northern Ireland operations. This agreement includes a
working capital line of credit of 3,000,000 pounds sterling
(approximately $4,740,000), and provides for interest on borrowings at
the bank's base rate (6.68% at June 30, 1999) plus 1.50%. At June 30,
1999, borrowings outstanding under this credit facility amounted to
$708,000. The credit facility agreement with Ulster Bank Markets
expires July 31, 2000.
The Company's EMS and PCB fabrication businesses require continuing
investment in plant and equipment to remain competitive. Capital
expenditures during fiscal 1999, 1998 and 1997 were approximately
$3,426,000, $1,424,000 and $2,372,000, respectively. The Company
anticipates it will need to increase its capital spending in the coming
years in order to stay competitive as technology evolves. Management
estimates that capital expenditures of as much as $3 million may be
required in fiscal 2000. Of that amount, the substantial majority is
expected to be financed by a combination of capital leases, secured loans
and foreign government grants.
As more fully described in Note 7 to the accompanying consolidated
financial statements, on July 30, 1999 the Company repaid $761,000 of
income tax refunds to the Internal Revenue Service plus accrued interest
of $272,000. In addition, as further described in Note 7, the Company may
have to repay to the IRS additional income tax refunds of up to $1,110,000
plus accrued interest.
Management believes that the Company's cash resources and borrowing
capacity on its working capital lines of credit are sufficient to fund
operations for at least the next year.
Year 2000 Issues
Many computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without
considering the impact of the upcoming change in the century. If not
corrected, many computer applications could fail or create erroneous
results beginning January 1, 2000. The potential impact of the Year
2000 problem is not yet known, and if not timely corrected, it could
adversely affect the economy and the Company.
The Company's Year 2000 compliance program includes the following
phases: identifying systems that need to be replaced or fixed;
carrying out remediation work to modify existing systems or convert to
new systems; and conducting validation testing of systems and
applications to ensure compliance. The Company has nearly completed
these three phases of its Year 2000 compliance program at all locations
except for certain information systems at the Company's operating unit
in San Diego, California. Remediation and validation testing of
critical systems at the San Diego facility is expected to be completed
by the end of November 1999. In the event these information systems at
the San Diego facility cannot be determined to be Year 2000 compliant
by November 30, 1999, the Company will implement a contingency plan
which would include the possible transfer of material procurement
and/or information processing functions to the Company's Thousand Oaks
facility.
The Company also has contacted its major suppliers to assess their
preparations for the year 2000. Based on the results of these
assessments, and to mitigate the effects of significant suppliers'
potential failure to remediate Year 2000 issues in a timely manner, the
Company may arrange for alternate suppliers or stockpiling of critical
components. If this becomes necessary, it is uncertain, until the
contingency plans are finalized, whether this would result in
significant delays in business operations. Furthermore, it is
impossible to fully assess the potential consequences if service
interruptions occur from suppliers or in such infrastructure areas as
utilities, communications, transportation, banking and government. If
the remediation efforts of the Company's key suppliers are
unsuccessful, or if one or more of the Company's critical systems fail
despite its efforts to remediate and validate these systems, there may
be a material adverse impact on the Company's consolidated results and
financial condition.
Management estimates that the total cost of its Year 2000
compliance program, most of which has already been incurred, will not
exceed $250,000.
Quantitative And Qualitative Disclosures About Market Risk
The Company's financial instruments include cash and cash
equivalents, and short-term and long-term debt. At June 30, 1999, the
carrying amount of long-term debt (including current portion thereof)
was $9,195,000 and the fair value was $8,879,000. The carrying values
of the Company's other financial instruments approximated their fair
values. The fair value of the Company's financial instruments is
estimated based on quoted market prices for the same or similar issues.
See Note 6 to the accompanying consolidated financial statements for
maturities of long-term debt for the next five years.
It is the policy of the Company not to enter into derivative
financial instruments for speculative purposes. The Company, from time
to time, may enter into foreign currency forward exchange contracts in
an effort to protect itself from adverse currency rate fluctuations on
foreign currency commitments entered into in the ordinary course of
business. These commitments are generally for terms of less than one
year. The foreign currency forward exchange contracts are executed
with banks believed to be creditworthy and are denominated in
currencies of major industrial countries. Any gain or loss incurred on
foreign currency forward exchange contracts is offset by the effects of
currency movements on the respective underlying hedged transactions.
The Company did not have any open foreign currency forward exchange
contracts at June 30, 1999.
A portion of the Company's operations consists of investments in
foreign subsidiaries. As a result, the Company's financial results
could be affected by changes in foreign currency exchange rates.
Independent Auditors' Report
The Board of Directors and Stockholders
SMTEK International, Inc.:
We have audited the accompanying consolidated balance sheets of SMTEK
International, Inc. and subsidiaries as of June 30, 1999 and 1998, and the
related consolidated statements of operations, cash flows and
stockholders' equity and comprehensive income (loss) for each of the years
in the three-year period ended June 30, 1999. These consolidated
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of SMTEK
International, Inc. and subsidiaries as of June 30, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in
the three-year period ended June 30, 1999 in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
Los Angeles, California
October 11, 1999
SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands except share amounts)
June 30
-----------------
1999 1998
---- ----
Assets
Current assets:
Cash and cash equivalents $ 4,997 $ 4,413
Accounts receivable, net (Notes 3 and 6) 10,606 9,786
Costs and estimated earnings in excess
of billings on uncompleted
contracts (Notes 4 and 6) 6,283 4,785
Inventories, net (Note 5) 5,812 2,446
Prepaid expenses 201 103
------ ------
Total current assets 27,899 21,533
------ ------
Property, equipment and improvements,
at cost (Notes 6 and 10):
Buildings and improvements 6,507 6,084
Plant equipment 18,542 15,646
Office and other equipment 2,510 2,180
------ ------
27,559 23,910
Less: Accumulated depreciation
and amortization (18,661) (17,035)
------ ------
Property, equipment and
improvements, net 8,898 6,875
------ ------
Other assets:
Goodwill, net (Note 2) 2,430 3,171
Deposits and other assets (Note 6) 317 251
------ ------
2,747 3,422
------ ------
$ 39,544 $ 31,830
====== ======
SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands except share amounts)
(Continued)
June 30
-----------------
1999 1998
---- ----
Liabilities and Stockholders' Equity
Current liabilities:
Bank lines of credit payable (Note 6) $ 3,933 $ 4,441
Current portion of long-term
debt (Note 6) 2,042 1,214
Accounts payable 11,654 7,795
Accrued payroll and employee benefits 1,296 1,211
Interest payable (Note 7) 821 237
Income taxes payable (Note 7) 1,963 810
Other accrued liabilities (Note 9) 1,378 1,380
------ ------
Total current liabilities 23,087 17,088
------ ------
Long-term debt (Note 6):
Notes payable to related party - 2,000
Other long-term debt, less current
portion 7,153 5,186
------ ------
Total long-term debt 7,153 7,186
------ ------
Commitments and contingencies (Note 10)
Stockholders' equity (Note 8):
Preferred stock, $1 par value; 1,000,000
shares authorized; no shares issued
or outstanding - -
Common stock, $.01 par value; 3,750,000
shares authorized; 2,267,455 and
1,704,406 shares issued and outstanding
in 1999 and 1998, respectively 23 17
Additional paid-in capital 36,948 32,483
Accumulated deficit (26,789) (24,294)
Accumulated other comprehensive loss (878) (650)
------ ------
Total stockholders' equity 9,304 7,556
------ ------
$ 39,544 $ 31,830
====== ======
See accompanying notes to consolidated financial statements.
SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands except per share amounts)
Year ended June 30
-----------------------------
1999 1998 1997
---- ---- ----
Revenues $ 59,492 $ 53,265 $ 51,640
------ ------ ------
Costs and expenses:
Cost of goods sold 51,523 43,933 43,894
Administrative and selling expenses 6,662 5,910 5,442
Goodwill amortization 1,284 1,268 1,268
Acquisition expenses (Note 2) - 609 -
------ ------ ------
59,469 51,720 50,604
------ ------ ------
Operating income 23 1,545 1,036
------ ------ ------
Non-operating income (expense):
Interest income 129 97 96
Interest expense (953) (1,101) (1,227)
Interest expense related to tax
assessment (Note 7) (725) - -
Debt issue cost amortization - - (937)
Gain on sale of assets 158 22 142
Other income (expense), net 75 (70) 22
------ ------ ------
(1,316) (1,052) (1,904)
------ ------ ------
Income (loss) before income taxes (1,293) 493 (868)
Income tax provision (Note 7) (1,202) - -
------ ------ ------
Net income (loss) $ (2,495) $ 493 $ (868)
====== ====== ======
Basic and diluted earnings (loss)
per share $ (1.41) $ 0.34 $ (0.63)
====== ====== ======
Shares used in computing basic and
diluted earnings (loss) per share:
Basic 1,771 1,451 1,375
===== ===== =====
Diluted 1,771 1,472 1,375
===== ===== =====
See accompanying notes to consolidated financial statements.
SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Year ended June 30
-----------------------------
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ (2,495) $ 493 $ (868)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation 2,130 1,720 1,584
Amortization 1,288 1,272 2,205
Acquisition expenses settled with stock - 138 -
Eliminate duplicate period of pooled
company to conform year ends - (464) -
Gain on sale of assets (157) (22) (142)
Net (increase) decrease in operating working
capital, net of effects of business acquired 311 (2,178) (1,897)
(Increase) decrease in deposits
and other assets (3) 55 124
Other 77 108 84
------ ------ ------
Net cash provided by operating activities 1,151 1,122 1,090
------ ------ ------
Cash flows from investing activities:
Capital expenditures (1,633) (785) (1,151)
Acquisition of subsidiary, net of cash acquired (113) - -
Proceeds from sale of assets 158 16 202
------ ------ ------
Net cash used in investing activities (1,588) (769) (949)
------ ------ ------
Cash flows from financing activities:
Proceeds from (repayments of) bank
lines of credit (481) 3,074 1,366
Proceeds from long-term debt - 2,000 -
Payments of long-term debt (2,905) (6,232) (787)
Proceeds from issuance of common stock, net 4,463 - 1,385
Proceeds from exercise of stock options - 138 75
Proceeds from foreign government grants - 123 605
S Corporation dividends paid - (529) (600)
------ ------ ------
Net cash provided by (used in)
financing activities 1,077 (1,426) 2,044
------ ------ ------
Effect of exchange rate changes on cash (56) 88 80
------ ------ ------
Increase (decrease) in cash and cash equivalents 584 (985) 2,265
Cash and cash equivalents at beginning of year 4,413 5,398 3,133
------ ------ ------
Cash and cash equivalents at end of year $ 4,997 $ 4,413 $ 5,398
====== ====== ======
See accompanying notes to consolidated financial statements.
SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
and Comprehensive Income (Loss)
Years ended June 30, 1999, 1998 and 1997
(In thousands except share amounts)
Common Stock Accumulated
-------------- Additional Other Total
Par paid-in Accumulated Comprehensive stockholders'
Shares value capital deficit Income (Loss) equity
------ ------ ----- ------- ------- -------
Balance at June 30, 1996 1,314,756 $ 13 $27,660 $(22,000) $(1,036) $ 4,637
Net loss - - - (868) - (868)
Translation adjustments - - - - 345 345
-----
Comprehensive loss - - - - - (523)
-----
Stock issued as debt
placement fee 17,667 - 442 - - 442
Sale of common stock 100,000 1 1,384 - - 1,385
Exercise of stock options
and warrants 14,732 - 298 - - 298
S Corporation dividends and
other equity transactions
of pooled company - - 210 (810) - (600)
---------- ---- ------ ------ ----- -----
Balance at June 30, 1997 1,447,155 14 29,994 (23,678) (691) 5,639
Net income - - - 493 - 493
Translation adjustments - - - - 41 41
-----
Comprehensive income 534
-----
Conversion of debt of
pooled company 232,188 3 2,052 - - 2,055
Stock issued as brokerage fee 10,000 - 138 - - 138
Exercise of stock options
and warrants 15,063 - 183 - - 183
Elimination of duplicate
period of pooled company
to conform year ends - - - (464) - (464)
S Corporation dividends and
other equity transactions
of pooled company - - 116 (645) - (529)
---------- ---- ------ ------ ----- -----
Balance at June 30, 1998 1,704,406 17 32,483 (24,294) (650) 7,556
Net loss - - - (2,495) - (2,495)
Translation adjustments - - - - (228) (228)
-----
Comprehensive loss (2,723)
-----
Sale of common stock 562,500 6 4,457 - - 4,463
Other 549 - 8 - - 8
---------- ---- ------- ------- ------ ------
Balance at June 30, 1999 2,267,455 $ 23 $36,948 $(26,789) $ (878) $9,304
========== ==== ======= ======= ====== ======
See accompanying notes to consolidated financial statements.
SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
SMTEK International, Inc. provides customized, integrated electronics
manufacturing services ("EMS") to original equipment manufacturers ("OEMs")
in the computer, telecommunications, instrumentation, medical, industrial
and aerospace industries. The Company also manufactures multilayer printed
circuit boards ("PCBs") for use primarily in the computer, communications
and instrumentation industries. The Company's EMS operations are located in
Southern California, Florida and Northern Ireland. The Company's PCB
facilities are located in Northern Ireland.
Accounting Period
The Company utilizes a 52-53 week fiscal year ending on the Friday
closest to June 30 which, for fiscal years 1999, 1998 and 1997, fell on July
2, July 3, and June 27, respectively. In these consolidated financial
statements, the fiscal year-end for all years is shown as June 30 for
clarity of presentation, except where the context dictates a more specific
reference to the actual year-end date. Fiscal 1998 consisted of 53 weeks
compared to 52 weeks for the fiscal years 1999 and 1997.
As more fully described Note 2, the Company's acquisition of
Technetics, Inc. on January 29, 1999 was accounted for under the purchase
method of accounting, and the operations of this facility have been
included in the consolidated financial statements since the date of
acquisition.
Cash Equivalents
For financial reporting purposes, cash equivalents consist primarily of
money market instruments and bank certificates of deposit that have original
maturities of three months or less.
Fair Value of Financial Instruments
As of June 30, 1999, the carrying amount of the Company's cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities
approximate their fair value because of the short maturity of those
instruments. At June 30, 1999 and 1998, the carrying amount of long-term
debt (including current portion thereof) was $9,195,000 and $8,400,000,
respectively, and the fair value was $8,879,000 and $8,222,000,
respectively. The fair value of the Company's long-term debt is estimated
based on the quoted market prices for the same or similar issues or on the
current rates offered to the Company for debt of the same remaining
maturities. All financial instruments are held for purposes other than
trading.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of money market
instruments and trade receivables. The Company invests its excess cash in
money market instruments and certificates of deposit with high credit
quality financial institutions and, by policy, limits the amount of credit
exposure to any one issuer. Concentrations of credit risk with respect to
trade receivables exist because the Company's EMS and PCB operations rely
heavily on a relatively small number of customers. The Company performs
ongoing credit evaluations of its customers and generally does not require
collateral. The Company maintains reserves for potential credit losses and
such losses, to date, have been within management's expectations.
Inventories
Inventories are stated at the lower of cost or net realizable value,
with cost determined principally by use of the first-in, first-out method.
Long-Lived Assets
Property, equipment and improvements are stated at cost. Depreciation
and amortization are computed on the straight-line method. The principal
estimated useful lives are: buildings - 20 years; improvements - 10 to 18
years; and plant, office and other equipment - 3 to 7 years. Upon the
retirement of assets, costs and the related accumulated depreciation are
eliminated from the accounts and any gain or loss is included in income.
Property, equipment and improvements acquired by the Company's foreign
subsidiaries are recorded net of capital grants received from the Industrial
Development Board for Northern Ireland.
Goodwill represents the excess of acquisition cost over the fair value
of net assets of a purchased business, and is being amortized over 5 to 15
years.
The recoverability of long-lived assets is evaluated whenever
events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable, and if future undiscounted cash flows
are believed insufficient to recover the remaining carrying value of
the asset, the carrying value is written down to fair market value in
the period the impairment is identified.
Revenue and Cost Recognition
All of the Company's subsidiaries, except for its Thousand Oaks
operating unit, recognize revenues and cost of sales upon shipment of
products.
The Thousand Oaks facility has historically generated a significant
portion of its revenue through long-term contracts with suppliers of
electronic components and products. Consequently, this operating unit uses
the percentage of completion method to recognize revenues and cost of sales.
Percentage of completion is determined on the basis of costs incurred to
total estimated costs. Contract costs include all direct material and labor
costs and those indirect costs related to contract performance, such as
indirect labor, supplies, tools, repairs and depreciation costs. Selling,
general and administrative costs are charged to expense as incurred. In the
period in which it is determined that a loss will result from the
performance of a contract, the entire amount of the estimated loss is
charged to cost of goods sold. Other changes in contract price and
estimates of costs and profits at completion are recognized prospectively.
The asset "Costs and estimated earnings in excess of billings on uncompleted
contracts" represents revenues recognized in excess of amounts billed.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the expected future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. In estimating future
tax consequences, all expected future events other than enactments of
changes in tax law or statutorily imposed rates are considered. The effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. A
valuation allowance is recorded to reduce deferred tax assets to their
estimated realizable amount.
Reverse Stock Split
On May 24, 1999, the Company effected a 1-for-20 reverse stock split of
the Company's authorized and outstanding shares of Common Stock (the
"Reverse Stock Split"). As a result of the Reverse Stock Split, the
Company's authorized shares of Common Stock was reduced from 75,000,000 to
3,750,000. Par value of Common Stock did not change as a result of the
Reverse Stock Split. Shareholders' equity has been restated to give
retroactive application to the Reverse Stock Split in prior periods by
reclassifying from Common Stock to additional paid in capital the par value
of the eliminated shares arising from the Reverse Stock Split. In addition,
all references in the financial statements and accompanying footnotes to the
number of shares, per share amounts and stock option and warrant data of the
Company's Common Stock have been restated.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income
(loss) available to common stockholders by the weighted average number
of common shares outstanding during the period in accordance with
Financial Accounting Standards No. 128, "Earnings per Share". Diluted
earnings (loss) per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings (loss) of the entity.
Diluted earnings (loss) per share is computed similarly to fully
diluted earnings (loss) per share pursuant to Accounting Principles
Board Opinion No. 15.
Comprehensive Income (Loss)
The Company has adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes
standards for reporting and display of comprehensive income and its
components in a full set of financial statements. "Accumulated other
comprehensive loss" presented on the accompanying consolidated balance
sheets consists of foreign currency translation adjustments.
Foreign Currency Translation
The financial statements of SMTEK's foreign subsidiaries have been
translated into U.S. dollars from their functional currency, British pounds
sterling, in the accompanying statements in accordance with Statement of
Financial Accounting Standards No. 52. Balance sheet amounts have been
translated at the exchange rate on the balance sheet date and income
statement amounts have been translated at average exchange rates in effect
during the period. The net translation adjustment is recorded as a
component of stockholders' equity.
Use Of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Stock Based Compensation
Prior to July 1, 1996, the Company accounted for its employee stock
compensation plans in accordance with Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense would be recorded only if,
on the date of grant, the current market price of the underlying stock
exceeded the exercise price. On July 1, 1996, the Company adopted Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") which permits entities to recognize as expense
over the vesting period the fair value of all stock-based awards on the date
of grant. Alternatively, SFAS 123 allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro
forma earnings per share disclosures for stock-based awards made in fiscal
1996 and future years as if the fair-value-based method defined in SFAS 123
had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS 123.
Recent Accounting Pronouncements
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133") was issued, which will require recognition of all derivatives as
either assets or liabilities on the balance sheet at fair value. The
Company will adopt SFAS 133, as amended by SFAS No. 137, in the first
quarter of its fiscal year ending June 30, 2001. Management has not
completed an evaluation of the effects this standard will have on the
Company's consolidated financial statements.
Note 2 - ACQUISITIONS
Technetics, Inc. - Purchase Method
On January 29, 1999, the Company acquired 100% of the outstanding stock
of Technetics, Inc., a provider of electronics manufacturing services
located in San Diego, California. The purchase price of $452,000 was paid
in cash of $113,000 (net of cash acquired), including acquisition-related
costs of $28,000, and a note payable of $148,000 bearing interest at 8.0%
due in quarterly installments through July, 2002. The acquisition was
accounted for using the purchase method of accounting. In accordance with
Accounting Principles Board Opinion No. 16, the total investment made in
Technetics, Inc. of $452,000 was allocated to the acquired net liabilities
at their estimated fair values at the acquisition date, which resulted in
the recognition of goodwill of $543,000. The goodwill arising from this
transaction is being amortized over 15 years. The operations of this
facility have been included in the consolidated financial statements since
the date of acquisition.
The following unaudited pro forma financial information presents
the combined results of operations of SMTEK International, Inc. and
Technetics, Inc. as if the acquisition had occurred as of the beginning
of fiscal 1999 and fiscal 1998, after giving effect to certain
adjustments, including amortization of goodwill and increased interest
expense on debt related to the acquisition. The pro forma financial
information does not necessarily reflect the results of operations that
would have occurred had SMTEK International and Technetics constituted
a single entity during such periods.
Year ended June 30
----------------------
1999 1998
------- --------
Net sales $62,788,000 $61,342,000
Net income (loss) $(2,209,000) $ 1,414,000
Earnings (loss)
per share $ (1.59) $ .97
Jolt - Pooling-of-Interests Method
On June 30, 1998, the Company issued 450,000 shares of Common Stock in
exchange for all of the outstanding shares of Jolt, a provider of
electronics manufacturing services located in Fort Lauderdale, Florida.
This acquisition was accounted for under the pooling-of-interests method of
accounting.
Prior to the combination, Jolt's fiscal year ended on December 31. In
recording the pooling-of-interests combination, Jolt's financial statements
for the twelve months ended June 30, 1998 were combined with SMTEK's
financial statements for the same period. Jolt's financial statements for
the years ended December 31, 1997 were combined with SMTEK's financial
statements for the years ended June 30, 1997. An adjustment of $464,000 has
been made to stockholders' equity as of June 30, 1998 to eliminate the
effect of including Jolt's results of operations for the six months ended
December 31, 1997 in both the fiscal years ended June 30, 1998 and June 30,
1997.
Jolt's S Corporation status terminated upon consummation of the
acquisition. Jolt's undistributed earnings at June 30, 1998, and all prior
periods, have been reclassified to additional paid-in-capital in the
accompanying consolidated financial statements in accordance with pooling-
of-interests accounting. Accordingly, dividend distributions by Jolt to
Jolt shareholders have been charged to additional paid-in-capital.
Acquisition expenses of $609,000 related to the combination with Jolt
were recognized upon consummation of the transaction, and are included in
the accompanying 1998 consolidated statement of operations.
Note 3 - ACCOUNTS RECEIVABLE
The components of accounts receivable are as follows (in thousands):
June 30
--------------------
1999 1998
---- ----
Trade receivables $ 10,380 $ 9,890
Other receivables 382 63
Less allowance for doubtful
accounts (156) (167)
------ ------
$ 10,606 $ 9,786
====== ======
Note 4 - COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON
UNCOMPLETED CONTRACTS
Costs and estimated earnings in excess of billings on uncompleted
contracts consists of revenue recognized under electronics assembly
contracts which amounts were not billable at the balance sheet date.
Essentially all of the unbilled amount is expected to be billed within 90
days of the balance sheet date. The components of costs and estimated
earnings in excess of billings on uncompleted contracts are as follows (in
thousands):
June 30
--------------------
1999 1998
---- ----
Costs incurred on uncompleted
contracts $26,421 $32,324
Estimated earnings 2,663 5,802
------ ------
29,084 38,126
Less: Billings to date (22,801) (33,341)
------ ------
$ 6,283 $ 4,785
====== ======
Note 5 - INVENTORIES
Inventories consist of the following (in thousands):
June 30
------------------
1999 1998
---- ----
Raw materials $ 5,326 $2,014
Work in process 1,408 643
Finished goods 153 278
Less reserves (1,075) (489)
----- -----
$ 5,812 $2,446
====== ======
In the fourth quarter of fiscal 1999, the Company recorded a provision
of $487,000 for excess inventory.
Note 6 - FINANCING ARRANGEMENTS
Bank Credit Agreements
At June 30, 1999, the Company had a working capital bank line of
credit for its Thousand Oaks, California operating unit which provided
for borrowings of up to $3,250,000 at an interest rate of prime (7.75%
at June 30, 1999) plus 1.25%. At June 30, 1999, borrowings outstanding
under this credit facility amounted to $3,225,000. This line was
replaced in July 1999 by a new credit facility for the Company's
domestic operating units which was entered into with Wells Fargo Bank.
Borrowings under the new credit agreement bear interest at the bank's
prime rate and the facility consists of an $8 million working capital
line secured by accounts receivable, inventory and equipment. This
credit facility expires on July 6, 2001.
The Company also has a credit facility agreement with Ulster Bank
Markets for its Northern Ireland operations. This agreement includes a
working capital line of credit of 3,000,000 pounds sterling
(approximately $4,740,000), and provides for interest on borrowings at
the bank's base rate (6.68% at June 30, 1999) plus 1.50%. At June 30,
1999, borrowings outstanding under this credit facility amounted to
$708,000. The credit facility agreement with Ulster Bank Markets
expires July 31, 2000.
Notes Payable to Related Party
The note payable to related party of $2,000,000 at June 30, 1998
was payable to Thomas M. Wheeler, the Company's largest stockholder.
On May 21, 1999, the Company paid off the $2,000,000 note payable and
accrued interest thereon of $302,000 from the proceeds of a $4.5
million private placement of common stock to Mr. Wheeler.
Other Long-Term Debt
Other long-term debt consists of the following (in thousands):
June 30
------------------
1999 1998
---- ----
Mortgage notes secured by real property at the
Northern Ireland operations, with interest at
variable rates (6.63% at June 30, 1999),
payable in semiannual installments through 2009 $ 1,093 $ 1,214
Notes payable secured by equipment, interest
at 7.95% to 10.9%, payable in monthly
installments through June 2010 1,551 951
Capitalized lease obligations (Note 10) 3,406 1,215
8-1/2% Convertible Subordinated Debentures, due 2008,
interest payable semi-annually and convertible at
holders' option at a price of $212.50 per share at
any time prior to maturity 1,580 1,580
7% Convertible Subordinated Debentures, due
May 15, 2001, interest payable semi-annually and
convertible at holders' option at a conversion price
of $40.00 per share at any time prior to maturity 375 398
Obligations to former officers, employees and directors
under consulting and deferred fee agreements 927 859
Other 263 183
------ ------
9,195 6,400
Less current maturities 2,042 1,214
------ ------
$ 7,153 $ 5,186
====== ======
At June 30, 1999, one of the notes payable secured by equipment was
further collateralized by an irrevocable standby letter of credit, which in
turn is secured by the Company's restricted cash deposit of $167,000. This
amount is included in deposits and other assets in the accompanying
consolidated balance sheets at June 30, 1999 and 1998.
The aggregate amounts of minimum maturities of other long-term debt for
the indicated fiscal years (other than capitalized lease obligations, as
described in Note 10) are as follows: 2000 - $1,063,000; 2001 - $876,000;
2002 - $378,000; 2003 - $318,000; 2004 - $244,000; and thereafter -
$2,910,000.
In March 1996, the Company entered into a settlement agreement with
certain of its former officers, key employees and directors (the
"Participants") to restructure its outstanding obligations under several
consulting programs and deferred fee arrangements which had provided for
payments to the Participants after their retirement from the Company or from
its Board of Directors. Under terms of the settlement, the Participants
agreed to relinquish all future payments due them under these consulting
programs and deferred fee arrangements in return for an aggregate of 29,793
common stock purchase warrants, Series G. The Company is obligated to pay
the Participants $50.00 for each warrant which remained unexercised on the
June 1, 1998 warrant expiration date, payable in semiannual installments
over two to ten years. The Company has recorded a liability for the present
value of these future payments, which amounted to $904,000 and $836,000 at
June 30, 1999 and 1998, respectively.
Note 7 - INCOME TAXES
In connection with the filing of its federal income tax returns for
fiscal year 1995, the Company filed for a refund to carry back losses
described in Section 172(f) of the Internal Revenue Code of 1986, as
amended (the "IRC"). Section 172(f) of the IRC provides for a ten year
net operating loss carryback for specific losses attributable to (1) a
product liability or (2) a liability arising under a federal or state law
or out of any tort if the act giving rise to such liability occurs at
least three years before the beginning of the taxable year. As a result
of these refund filings, in September and October 1995 the Company
received federal income tax refunds totaling $1,871,000, net of costs
associated with applying for such refunds, and recognized an income tax
benefit of $1,110,000 in the quarter ended December 31, 1995. The
balance of the net refunds received, $761,000, was recorded as income
taxes payable, pending resolution by the IRS of the appropriateness and
the amount of the 172(f) carryback.
Beginning in May 1997, the Company came under IRS audit with respect
to such refund claims. In September 1998, the Company received tax
deficiency notices from the IRS in which the IRS advised the Company that
it was disallowing substantially all of the tax refunds received by the
Company in 1995 which had been recorded as an income tax benefit. In
January 1999, the Company filed a protest letter with the IRS to appeal
the disallowance. Subsequent to filing the protest letter, the U.S. Tax
Court upheld the disallowance of refund claims made by another taxpayer
involving Section 172(f) issues similar to those on which the Company had
based certain of its refund claims. The Company can give no assurance
that it will prevail in its appeal, and in light of the recent Tax Court
ruling, the Company determined that it is appropriate to establish a full
reserve for the contested tax refund amounts and interest thereon.
Accordingly, in the fourth quarter of fiscal 1999 the Company recorded
income tax expense of $1,110,000 plus accrued interest expense of
$725,000.
In connection with the IRS audit, and the subsequent internal review
by the Company, the Company determined that the net refund of $761,000
which had been received in 1995, and which was recorded as income taxes
payable upon receipt, needed to be returned to the IRS. Accordingly, on
July 30, 1999, the Company repaid this amount to the IRS plus accrued
interest of $272,000. After giving effect to this July 1999 repayment,
the Company's remaining recorded federal tax liability is $1,110,000, and
accrued interest thereon is approximately $450,000.
Income tax expense for fiscal 1999 consists of federal current
income tax expense of $1,110,000 as described above and state current
income tax expense of $92,000.
Temporary differences between financial statement carrying amounts
and the tax bases of assets and liabilities that give rise to significant
portions of the deferred tax assets and liabilities relate to the
following (in thousands):
June 30
---------------------
1999 1998
---- ----
Deferred tax assets:
Accrued employee benefits $ 512 $ 409
Reserves and allowances 622 508
Domestic net operating loss carryforwards 14,171 14,195
Foreign net operating loss carryforwards 3,422 3,582
Other 47 64
------ ------
Total deferred tax assets 18,774 18,758
Deferred tax liabilities:
Depreciation (132) (120)
------ ------
Net deferred tax assets before allowance 18,642 18,638
Less valuation allowance (18,642) (18,638)
------ ------
Net deferred tax assets after allowance $ - $ -
====== ======
In assessing the realizability of net deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
net deferred tax assets will be realized. The ultimate realization of net
deferred tax assets is dependent upon the generation of future domestic and
foreign taxable income of approximately $38,000,000 and $9,800,000,
respectively, prior to the expiration of the net operating loss
carryforwards. Based on the level of historical losses, management believes
that it is not more likely than not that the deferred tax assets will be
realized, and therefore, has recorded a 100% valuation allowance to offset
the assets. The valuation allowance was $18,642,000 and $18,638,000 as of
June 30, 1999 and 1998, respectively. The net change in the total valuation
allowance for the years ended June 30, 1999 and 1998 was an increase
(decrease) of $4,000 and ($339,000), respectively.
The provision for income taxes differs from an amount computed using
the statutory federal income tax rate as follows (in thousands):
Year ended June 30
---------------------------
1999 1998 1997
---- ---- ----
Federal tax expense computed
at statutory rate $ (440) $ 168 $ (293)
State income tax, net of Federal
benefit 61 - -
Reversal of fiscal 1996 income
tax benefit 1,110 - -
Untaxed S Corporation earnings - (377) (275)
Amortization of goodwill 437 431 431
Non-deductible acquisition expenses - 159 -
Net change in valuation allowance 4 (339) 132
Other 30 (42) 5
----- ----- -----
Income tax expense $1,202 $ - $ -
===== ===== =====
As of June 30, 1999, the Company has U.S. federal net operating loss
("NOL") carryforwards of $37,900,000, expiring in 2004 through 2018, and
state NOL carryforwards of $26,600,000, expiring in 2000 through 2012. The
NOL carryforward for federal alternative minimum tax purposes is
approximately $23,000,000.
The Company's ability to use its NOL carryforwards to offset future
taxable income may be subject to annual limitations due to certain
substantial stock ownership changes which have occurred in the current and
prior years. The Company maintains an ongoing analysis to determine if the
future utilization of the NOLs will be limited due to these ownership
changes.
Income of the Company's Northern Ireland subsidiaries is sheltered by
operating loss carryforwards for United Kingdom income tax purposes (the
"U.K. NOL"). The income tax benefit from the U.K. NOL was $60,000, $322,000
and $244,000 in fiscal 1999, 1998, and 1997, respectively, and has been
treated as a reduction in the provision for income taxes. At June 30, 1999,
the U.K. NOL amounted to approximately $9,776,000. Substantially all of
these net operating losses from prior years can be carried forward by the
Company's Northern Ireland subsidiaries for an indefinite period of time to
reduce future taxable income.
Pretax income (loss) from foreign operations for fiscal 1999, 1998 and
1997 was $385,000, $1,480,000, and $772,000, respectively. It is not
practicable to estimate the amount of tax that might be payable on the
eventual remittance of such earnings to the U.S. parent company. On
remittance, the United Kingdom imposes withholding taxes that would then be
available for use as a credit against the U.S. tax liability, if any,
subject to certain limitations.
Effective June 30, 1998, the Company acquired Jolt, which was an S
Corporation for income tax purposes prior to its acquisition by the Company.
Following are pro forma consolidated operating results, which present state
income taxes (the Company's federal NOLs are assumed to be utilized to
shelter Jolt's federal taxable income) as a pro forma adjustment as if Jolt
had filed C Corporation tax returns for the pre-acquisition periods (in
thousands):
Year ended June 30
------------------
1998 1997
---- ----
Net income (loss) before pro forma
adjustments, per consolidated
statements of operations $ 493 $ (868)
Pro forma provision for income taxes 61 45
----- ------
Pro forma net income (loss) $ 432 $ (913)
===== ======
Note 8 - STOCKHOLDERS' EQUITY
Sales of Common Stock
In May 1999, the Company sold 562,500 shares of common stock to Thomas
M. Wheeler, the Company's largest shareholder, for an aggregate price
$4,500,000. Costs of this issuance were $37,000.
In June 1997, the Company sold 100,000 shares of common stock to
various investors, generating proceeds of $1,385,000, which is net of
issuance costs of $115,000.
Common Stock Issued as Brokerage Fee
In June 1998, 10,000 shares of common stock were issued as a brokerage
fee in conjunction with the closing of the acquisition of Jolt. The
ascribed value of the 10,000 shares of $138,000 is included in acquisition
expenses in the accompanying 1998 consolidated statement of operations.
Common Stock Issued as Debt Placement Fee
In June 1997, 17,667 shares of common stock were issued as a debt
placement fee. The ascribed value of the 17,667 shares of $442,000 was
expensed in June 1997 and is included in fiscal 1997 debt issue cost
amortization expense in the accompanying consolidated statement of
operations.
Stock Option Plans
The Company has in effect several stock-based plans under which non-
qualified and incentive stock options and restricted stock awards have been
granted to employees and directors. Subject to the discretion of the Board
of Directors (the "Board"), employee stock options generally become
exercisable over a period of two to three years as determined by the Board,
and generally have a 10-year term when granted.
The exercise price of all incentive stock options must be equal to or
greater than the market value of the shares on the date of grant. The
exercise price of non-statutory stock options must be at least 85% of the
market value of the common stock on the date of grant.
In November 1998, following stockholder approval, the Company adopted a
stock plan for non-employee directors. Under this plan, each eligible
director will receive shares of Common Stock of the Company valued at $500
to $1,000 for attendance at each meeting of the Board and its committees.
In fiscal 1999, the Company recorded expense of $8,000 related to the
issuance of stock for attendance at such meetings. Additionally, annually
on July 1 each non-employee director is granted a non-statutory stock option
to purchase 1,500 shares of common stock at an exercise price equal to the
market price at the date of grant. In fiscal 1999 and 1998, options to
purchase a total of 8,872 and 4,500 shares, respectively, were granted to
the Company's non-employee directors at exercise prices ranging from $6.50
to $10.00 in 1999 and $16.25 to $21.25 in 1998.
Activity under the employee and non-employee director stock option
plans for fiscal years 1999, 1998 and 1997 was as follows:
Weighted average
exercise price
Shares per share
------ ---------
Shares under option, June 30, 1996 81,665 $27.40
Granted 92,638 24.60
Expired or canceled (56,953) 33.20
Exercised (7,500) 10.00
--------
Shares under option, June 30, 1997 109,850 $23.20
Granted 30,560 17.00
Expired or canceled (9,293) 20.80
Exercised (13,723) 10.00
--------
Shares under option, June 30, 1998 117,394 $23.40
Granted 130,766 9.40
Expired or canceled (114,969) 23.02
--------
Shares under option, June 30, 1999 133,191 $ 9.89
======== =====
In November 1998, pursuant to resolutions of the Board, 112,894 options
with exercise prices of $10.00 to $32.50 were canceled and were replaced by
new options for the same number of shares at an exercise price of $10.00,
the then market value of the common stock.
In fiscal 1997, pursuant to resolutions of the Board, 38,116 options
with exercise prices of $32.50 to $97.50 were canceled and were replaced by
new options for the same number of shares at an exercise price of $25.00,
the then market value of the common stock.
The following table summarizes information about shares under option at
June 30, 1999:
Outstanding Exercisable
------------------------------------- -----------------------
Weighted
average Weighted Weighted
Range of remaining average average
exercise Options contractual exercise Options exercise
prices outstanding life price exercisable price
- - --------- --------- --------- --------- --------- --------
$ 6.50- 8.13 20,935 9.7 years $ 7.24 7,040 $ 6.74
10.00 107,756 9.4 10.00 42,862 10.00
16.25- 21.25 4,500 8.5 19.58 4,500 19.58
-------- -------
133,191 $9.89 54,402 $10.37
======== =======
At June 30, 1999, under the employee and non-employee director stock
option plans there were 11,000 and 40,000 shares, respectively, available
for future grants.
Stock Based Compensation
The Company applies the provisions of APB Opinion No. 25 and related
interpretations in accounting for its stock option plans and the Series H
warrants granted to non-employee directors (see "Warrants" below).
Accordingly, no compensation cost has been recognized for its stock option
plans and awards of warrants to non-employee directors. Had compensation
cost for stock-based awards been determined consistent with SFAS 123, the
Company's results of operations would have been reduced to the pro forma
amounts indicated below:
Year ended June 30
--------------------------------------
1999 1998 1997
------- ------- ------
Net income (loss):
As reported $(2,495,000) $ 493,000 $ (868,000)
Pro forma $(3,047,000) $ ( 28,000) $(1,441,000)
Earnings (loss) per share:
As reported $(1.41) $ 0.34 $(0.63)
Pro forma $(1.72) $(0.02) $(1.05)
For purposes of this pro forma disclosure, the "fair value" of each
option and warrant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions used for grants in 1999,
1998 and 1997: dividend yield of 0.0% percent for all years; expected
volatility of 55%, 65% and 68% for 1999, 1998 and 1997, respectively; risk-
free interest rates ranging from 4.1% to 5.7% for 1999, 5.4% to 6.3% for
1998, and 6.1% to 6.8% for 1997; and expected lives of five years for all
years.
The weighted average fair value of options granted during the years
ended June 30, 1999, 1998 and 1997 was $9.40, $10.13 and $15.28,
respectively.
Preferred Stock Purchase Rights
At June 30, 1998, 1,000 preferred stock purchase rights were
outstanding and exercisable in the event that 20% or more of the Company's
outstanding common stock was acquired without prior approval from the
Company. The preferred stock purchase rights expired unexercised in June
1999.
Warrants
During fiscal 1996, the Company issued common stock purchase warrants
Series C, D, E, G and H. The provisions and activity of these warrants are
as follows. Unless otherwise specified, the exchange ratio of these
warrants into common stock is 1-to-1.
1. Series C warrants covering an aggregate of 22,750 shares were issued
to four parties, including an investment banking firm, for consulting
and financial advisory services. These warrants are exercisable at
$70.00 per share until the warrant expiration date on June 30, 2000.
These warrants had no intrinsic value on the date of grant.
2. Series D warrants covering 2,500 shares were issued to the Company's
former legal counsel as partial consideration for legal services
rendered. These warrants are exercisable at $50.00 per share until
the warrant expiration date on June 30, 2000. The warrants had no
intrinsic value on the date of grant.
3. In connection with the issuance of certain debt in fiscal 1996,
1,500,000 Series E warrants were issued to an investment banking
firm which served as the placement agent for this debt. The exchange
ratio of warrants to common stock shares is 20-to-1. The Series E
warrants are exercisable until their expiration on February 28, 2001,
and provided for an original exercise price of $50.00 per share,
subject to adjustment in the event the Company issues new common
stock at an effective price less than the effective exercise price on
the Series E warrants. The effective exercise price on the Series E
warrants was $30.20 per share as of June 30, 1999. The warrants had
no intrinsic value on the date of grant.
4. As further described in Note 6, the Series G warrants covering an
aggregate of 29,793 shares were issued in March 1996 to certain
former officers, key employees and directors of the Company. During
fiscal 1998 and 1997, 1,340 and 7,232 Series G warrants, respectively,
were exercised. The remaining unexercised Series G warrants expired
on June 1, 1998.
5. Series H warrants covering an aggregate 15,000 shares were issued
to the Company's non-employee directors who served on the Company's
board without other compensation during the period from May 31, 1995
to June 30, 1996. The Series H warrants are exercisable at $50.00
per share until the warrant expiration date on June 30, 2000. There
was no intrinsic value related to the warrants on the date of grant.
Note 9 - OTHER FINANCIAL INFORMATION
Earnings (Loss) Per Share
Because the Company reported a net loss for the years ended June
30, 1999 and 1997, the amount of shares used in computing diluted
earnings per share for these years is equal to the weighted average
number of common shares outstanding for the period, and excludes the
dilutive effect of options, warrants and convertible securities.
A reconciliation of the numerator and denominator used in the
computation of fiscal 1998 diluted earnings per share follows:
Year ended
June 30,
1998
------
NUMERATOR:
Net income $ 493,000
Add back net interest related to
convertible subordinated debentures 134,000
----------
Net income for diluted earnings computation $ 627,000
==========
DENOMINATOR:
Weighted average number of common
shares outstanding 1,451,323
Assumed exercise of options and warrants
net of shares assumed reacquired under
treasury stock method 5,325
Assumed conversion of convertible
subordinated debentures 15,510
---------
Total diluted shares 1,472,158
=========
During the years ended June 30, 1999, 1998 and 1997, options and
warrants to purchase 248,441, 232,644 and 247,661 shares of common
stock, respectively, at prices ranging from $6.50 to $70.00 for fiscal
1999, $15.00 to $70.00 for fiscal 1998, and $10.00 to $45.00 for fiscal
1997 were outstanding, but were not included in the computation of
diluted earnings per share because the option and warrant exercise
prices were greater than the average market price of the common shares,
and would therefore be antidilutive.
Information Relating to Consolidated Statements of Cash Flows
"Net cash provided by operating activities" includes cash payments for
interest and income taxes as follows (in thousands):
Year ended June 30
---------------------------
1999 1998 1997
---- ---- ----
Interest paid $ 1,025 $ 1,218 $ 1,081
Income taxes paid 25 - -
"Net (increase) decrease in operating working capital, net of effects
of business acquired" consists of the following (in thousands):
Year ended June 30
---------------------------
1999 1998 1997
---- ---- ----
Increase in accounts receivable $ (412) $ (333) $(3,807)
Increase in costs and estimated
earnings in excess of billings
on uncompleted contracts (1,498) (1,624) (135)
(Increase) decrease in inventories (3,088) 846 993
(Increase) decrease in prepaid expenses (44) 36 181
Increase (decrease)in accounts payable 3,977 (1,234) 1,220
Increase (decrease)in accrued payroll
and employee benefits (28) 74 328
Increase (decrease) in other
accrued liabilities 1,404 57 (677)
------ ------ ------
Net (increase) decrease $ 311 $(2,178) $(1,897)
====== ====== ======
Following is the supplemental schedule of non-cash investing and
financing activities (in thousands):
Year ended June 30
--------------------------
1999 1998 1997
---- ---- ----
Capital expenditures financed by lease
obligations and notes payable $ 1,793 $ 639 $1,221
Conversion of debt to equity - 2,100 223
Notes payable issued as partial
consideration for purchase of
Technetics, Inc. 148 - -
Common stock issued as debt placement fee - - 442
Other Accrued Liabilities
Other accrued liabilities consist of the following (in thousands):
June 30
------------------
1999 1998
---- ----
Environmental liabilities $ 465 $ 528
Other 913 852
------ ------
$1,378 $1,380
====== ======
Valuation and Qualifying Accounts and Reserves
Following is the Company's schedule of valuation and qualifying
accounts and reserves for the last three years (in thousands):
Beginning
Balance at Balance, Charged to Balance
beginning Acquired costs and at end
of period Company expenses Deductions of period
--------- --------- -------- ---------- ---------
Allowance for doubtful accounts:
- - -------------------------------
Fiscal 1997 $137 $ - $ 74 $ (48) $ 163
Fiscal 1998 163 - 57 (53) 167
Fiscal 1999 167 13 71 (95) 156
Inventory reserves:
- - ------------------
Fiscal 1997 $248 $ - $443 $(199) $ 492
Fiscal 1998 492 - 386 (389) 489
Fiscal 1999 489 239 711 (364) 1,075
Note 10 - COMMITMENTS AND CONTINGENCIES
Lease Commitments
Future minimum lease payments at June 30, 1999 were as follows (in
thousands):
Capital Operating
leases leases
------ ------
Fiscal 2000 $1,090 $ 575
Fiscal 2001 1,011 168
Fiscal 2002 787 138
Fiscal 2003 467 129
Fiscal 2004 253 123
Thereafter - 67
----- ------
Total 3,608 $1,200
======
Less: Interest (202)
-----
Present value of minimum
lease payments $3,406
======
The capitalized cost of the related assets (primarily plant equipment),
which are pledged as security under the capital leases, was $5,390,000 and
$1,483,000 at June 30, 1999 and 1998, respectively. Accumulated amortization
on assets under capital leases amounted to $1,803,000 and $447,000 at June
30, 1999 and 1998, respectively.
Rental expense for operating leases amounted to $680,000, $524,000 and
$489,000 for fiscal 1999, 1998 and 1997, respectively.
Government Grants
Pursuant to government grant agreements with the Industrial Development
Board for Northern Ireland ("IDB"), the Company's subsidiary, DDL
Electronics Limited ("DDL-E"), has been reimbursed for a portion of
qualifying capital expenditures and for certain employment and interest
costs. Approximately $128,000 of the government grants received by DDL-E
are subject to repayment in the event that DDL-E ceases business,
permanently discontinues production, or fails to pay to the IDB any amounts
due under its mortgage note payable (Note 6). Management does not expect
that the Company will be required to repay any grants under these
provisions.
Foreign Currency Exposure
The Company's investment in its Northern Ireland subsidiaries is
represented by operating assets and liabilities denominated in these
subsidiaries' functional currency of British pounds sterling. In addition,
in the normal course of business these operating units enter into
transactions denominated in European currencies other than British pounds
sterling. As a result, the Company is subject to transaction and
translation exposure from fluctuations in foreign currency exchange rates.
The Company uses a variety of strategies, including foreign currency forward
contracts and internal hedging in an effort to minimize or eliminate foreign
currency exchange rate risk associated with substantially all of its foreign
currency transactions. Gains and losses on these hedging transactions,
which were immaterial for 1999, 1998 and 1997, are generally recorded in
earnings in the same period as they are realized, which is usually in the
same period as the underlying or originating transactions. The Company does
not enter into speculative foreign currency transactions. At June 30, 1999,
the Company did not have any open foreign currency forward contracts.
Environmental Matters
The Company is currently involved in certain remediation and
investigative studies regarding soil and groundwater contamination
at the site of a former printed circuit board manufacturing plant in
Anaheim, California which was leased by one of the Company's former
subsidiaries, Aeroscientific Corp. Under the terms of a cost
sharing agreement entered into several years ago, the remaining
costs to be incurred to remediate this site will be borne on a 50-50
basis between the Company and the property owner. At June 30, 1999,
the Company had a reserve of $465,000 for future remediation costs.
Management, based in part on consultations with outside
environmental engineers and scientists, believes that this reserve
is adequate to cover its share of future remediation costs at this
site. It is possible, however, that these future remediation costs
could differ significantly from the estimates, and that the
Company's portion could exceed the amount of its reserve. The
Company's liability for remediation in excess of its reserve could
have a material adverse impact on its business, financial condition
and results of operations.
Note 11 - BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The Company adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information" during the fourth quarter of fiscal
1999. SFAS No. 131 establishes standards for reporting information about
operating segments in financial statements. Operating segments are defined
as components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker,
or chief decision making group, in deciding how to allocate resources and in
assessing performance. The Company operates and is managed internally by
two business segments -- electronics manufacturing services and printed
circuit board fabrication. A summary of the Company's operations by segment
follows (in thousands):
Year ended June 30
------------------------------
1999 1998 1997
---- ---- ----
Revenues from external customers:
Electronics Manufacturing Services $51,175 $44,690 $41,335
Printed Circuit Boards 8,317 8,575 10,305
------ ------ ------
$59,492 $53,265 $51,640
====== ====== ======
Intersegment sales:
Printed Circuit Boards $ 590 $ 894 $ 822
====== ====== ======
Operating income (loss):
Electronics Manufacturing Services $ 390 $ 1,886 $ 988
Printed Circuit Boards 112 677 589
General Corporate (479) (409) (541)
Acquisition expenses - (609) -
------ ------ ------
$ 23 $ 1,545 $ 1,036
====== ====== ======
Depreciation and amortization:
Electronics Manufacturing Services $ 2,653 $ 2,482 $ 2,353
Printed Circuit Boards 755 579 498
General Corporate 10 6 938
------ ------ ------
$ 3,418 $ 3,067 $ 3,789
====== ====== ======
The Company's external sales and long-lived assets net of accumulated
depreciation by geographic area are as follows (in thousands):
Year ended June 30
------------------------------
1999 1998 1997
---- ---- ----
Revenues:
United States $34,247 $23,029 $21,891
Northern Ireland 25,245 30,236 29,749
------ ------ ------
Total $59,492 $53,265 $51,640
====== ====== ======
Long-lived assets:
United States $ 3,468 $ 2,773
Northern Ireland 5,430 4,102
------ ------
Total $ 8,898 $ 6,875
====== ======
The Company's Electronics Manufacturing Services segment had sales to
one customer which accounted for 18.2% of revenues in fiscal 1999, sales
to three customers which accounted for 19.9%, 13.8% and 13.8% of revenues
in fiscal 1998, and sales to two customers which accounted for 17.8% and
15.7% of revenues in fiscal 1997.
Note 12 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Following is a summary of the quarterly results of operations (in
thousands except per share amounts):
Quarter ended
------------------------------------------------------
Sep 30 Dec 31 Mar 31 Jun 30 Total
-------- ------- ------- ------- -------
Fiscal 1999
Revenues $14,065 $15,568 $14,524 $15,335 $59,492
Net income (loss) $ 232 $ 207 $ 80 $(3,014)(A) $(2,495)
Basic earnings
(loss) per share $ 0.14 $ 0.12 $ 0.05 $ (1.53) $ (1.41)
Fiscal 1998
Revenues $13,413 $12,820 $13,600 $13,432 $53,265
Net income (loss) $ 301 $ 398 $ 291 $ (497)(B) $ 493
Basic earnings
(loss) per share $ 0.21 $ 0.27 $ 0.20 $ (0.34) $ 0.34
(A) Included in the net loss of for the three months ended June 30, 1999 is
(i) income tax expense of $1,110,000 to provide for the expected
repayment to the Internal Revenue Service of tax refunds that were
received in fiscal 1996 which were substantially disallowed in fiscal
1999, and accrued interest thereon of $725,000, as further described in
Note 7 herein, and (ii) a provision of $487,000 for excess inventory.
(B) Included in the net loss for the three months ended June 30, 1998 are
acquisition expenses of $609,000 related to the acquisition of Jolt on
June 30, 1998, as discussed in Note 2.
SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES
Market and Dividend Information
The Company's common shares are traded on Nasdaq Small Cap Market
(ticker symbol "SMTI") and the Pacific Exchange (ticker symbol "SMK"). The
Company transferred its common stock listing from the New York Stock
Exchange to Nasdaq effective July 1, 1999. The high and low closing sales
prices for the common stock for the last two fiscal years, as reported on
the composite tape, are set forth in the following table.
Fiscal 1999 Fiscal 1998
------------- ---------------
High Low High Low
----- ----- ----- ------
1st Quarter $16.25 $7.50 $23.75 $16.25
2nd Quarter 13.75 8.13 20.00 13.75
3rd Quarter 11.25 6.25 16.25 12.50
4th Quarter 11.56 5.63 17.50 12.50
There were approximately 1,300 stockholders of record at October 7,
1999.
The Company suspended dividend payments in 1989. A resumption of
dividend payments is not anticipated in the foreseeable future.
Form 10-K Annual Report
A copy of the Annual Report on Form 10-K (without exhibits) may be
obtained free of charge upon written request to SMTEK International, Inc.,
2151 Anchor Court, Thousand Oaks, California 91320 attention: Secretary.
SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES
DIRECTORS, EXECUTIVE OFFICERS, OPERATING UNITS
AND OTHER CORPORATE INFORMATION
DIRECTORS EXECUTIVE OFFICERS
James P. Burgess Gregory L. Horton
Vice President President and Chief Executive Officer
Trilogy Marketing Inc.
Naples, Florida Richard K. Vitelle
Vice President - Finance and
Gregory L. Horton Administration, Chief Financial Officer,
Chairman of the Board, Treasurer and Secretary
President and Chief
Executive Officer George R. Weatherford
SMTEK International, Inc. Vice President - Operations
Bruce E. Kanter OPERATING UNITS
Management Consultant SMTEK, Inc.
Thousand Oaks, California Thousand Oaks, California
Oscar B. Marx, III Jolt Technology, Inc.
President and CEO, Fort Lauderdale, Florida
TMW Enterprises, Inc.
Troy, Michigan Technetics, Inc.
(dba SMTEK San Diego)
San Diego, California
DDL Electronics Limited
Craigavon, Northern Ireland
United Kingdom
TRANSFER AGENT & REGISTRAR
American Stock Transfer & Irlandus Circuits Limited
Trust Company Craigavon, Northern Ireland
40 Wall Street United Kingdom
New York, New York 10005
INDEPENDENT AUDITORS LEGAL COUNSEL
KPMG LLP Gibson, Dunn & Crutcher LLP
Los Angeles, California Irvine, California
INVESTOR RELATIONS COUNSEL
Foley/Freisleben LLC
Los Angeles, California