**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM 10 -Q/A**

**AmendmentNo. 1**

 

| **(Mark One)** |
|----------------|
|           |
| ý         | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|           |
|           | **For the quarterly period ended:  MARCH 31, 2003** |
|           |
| **o**          | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|           |
|           | **For the transition period from                      to                 ** |

 

**Commission FileNumber:   1-8101**

 

| Exact Name of Registrant as  Specified in Its Charter:         | **SMTEK  INTERNATIONAL, INC.** |
|----------------------------------------------------------------|--------------------------------|
|                                                           |                           |   |
| **DELAWARE**                                                   |                           | **33-0213512** |
| State or Other Jurisdiction of  Incorporation or Organization: |                           | I.R.S. Employer  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 befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90days.                  Yes  ý   No   o

 

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

 

The registrant had 2,284,343 shares of common stock outstanding as ofMay 5, 2003.

 

 

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**ExplanatoryNote**

 

The financialstatements included in this quarterly report on Form 10Q/A (Amendment No. 1)have been restated to reflect the estimated fair value of restricted equitysecurities received by the Company as part of a settlement agreement enteredinto between the Company and a prior customer on December 17, 2002 as furtherdescribed in Note 2 to the financial statements herein.

 

This Amendmentincorporates certain revisions to historical financial data and relateddescriptions but is not intended to update other information presented in thisquarterly report as originally filed, except where noted.  In this regard, note that the certificationsof the Company’s officers included as exhibits hereto and the Company’sdisclosure under Part I, Item 4, Controls and Procedures, have been updated.

 

Theinformation contained in this Amendment is subject to update and supplement bythe Company’s reports filed with the Securities and Exchange Commission forperiods subsequent to the date of the original filing of our quarterly reporton Form 10-Q.

 

**PART I.  FINANCIAL INFORMATION**

 

**ITEM 1.  FINANCIAL STATEMENTS**

 

The financialstatements included in this quarterly report on Form 10Q/A (Amendment No. 1)have been restated to reflect the estimated fair value of restricted equitysecurities received by the Company as part of a settlement agreement enteredinto between the Company and a prior customer on December 17, 2002 as furtherdescribed in Note 2 to the financial statements herein.

 

2

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**SMTEKINTERNATIONAL, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)(In thousands except share amounts)**
|                                                                                                                                          |   | **March 31,  2003** |   | **June 30,  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                                                                                                                                  |   | 666                 |   | 772                |   |
| Property, equipment and improvements, net -  discontinued operations                                                                          |   | 1,486               |   | 1,549              |   |
|                                                                                                                                          |   | $                   | 33,544 |               | $      | 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                                                                                                                           |   | (37,409             | )      | (31,616            | )      |
| Accumulated other comprehensive loss                                                                                                          |   | (91                 | )      | (10                | )      |
| Total stockholders’ equity (deficit)                                                                                                     |   | (449                | )      | 5,425              |   |
|                                                                                                                                          |   | $                   | 33,544 |               | $      | 34,834 |   |

 

See accompanying notes to unaudited condensedconsolidated financial statements.

 

3

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**SMTEKINTERNATIONAL, INC. AND SUBSIDIARIES****CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS****AND OTHERCOMPREHENSIVE INCOME (LOSS) (Unaudited)****(Inthousands except per share amounts)**
|                                                       |   | **Three  Months EndedMarch 31,** |   | **Nine  Months EndedMarch 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                           |       | 7,906 |   | 6,470 |   |
| Goodwill amortization                                      |   | —                           |   | 9                               |       | — |   | 28 |   |
| Total operating expenses                                   |   | 2,216                            |   | 3,043                           |       | 7,906 |   | 6,498 |   |
| Operating loss                                             |   | (296                             | )      | (2,944                          | )          | (3,554 | ) | (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                          | )          | (4,069 | ) | (3,183 | ) |
| Income tax provision (benefit)                             |   | —                           |   | (182                            | )          | 6 |   | (155 | ) |
| Loss from continuing operations                            |   | (294                             | )      | (2,803                          | )          | (4,075 | ) | (3,028 | ) |
|                                                       |   |                             |   |                            |       |   |   |   |   |
| Loss from discontinued operations, net of  taxes           |   | (756                             | )      | (122                            | )          | (1,300 | ) | (632 | ) |
|                                                       |   |                             |   |                            |       |   |   |   |   |
| Loss before change in accounting principle                 |   | (1,050                           | )      | (2,925                          | )          | (5,375 | ) | (3,660 | ) |
|                                                       |   |                             |   |                            |       |   |   |   |   |
| Change in accounting principle, net of  taxes              |   | —                           |   | —                          |       | (420 | ) | — |   |
| Net loss                                                   |   | $                                | (1,050 | )                               | $          | (2,925 | ) | $ | (5,795 | ) | $ | (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 | ) | $ | (5,876 | ) | $ | (3,608 | ) |
|                                                       |   |                             |   |                            |       |   |   |   |   |
| Basic and diluted loss per share:                          |   |                             |   |                            |       |   |   |   |   |
| Loss from continuing operations                            |   | $                                | (0.13  | )                               | $          | (1.23 | ) | $ | (1.79 | ) | $ | (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 | ) | $ | (2.54 | ) | $ | (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 condensedconsolidated financial statements.

 

4

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**SMTEKINTERNATIONAL, INC. AND SUBSIDIARIES****CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)****(Inthousands)**
|                                                                                                    |   | **Nine  Months EndedMarch 31,** |   |
|---------------------------------------------------------------------------------------------------------|--------|---------------------------------|--------|
|                                                                                                    |   | **2003**                        |   | **2002** |   |
| Cash flows from operating activities:                                                                   |   |                            |   |   |   |
| Loss from continuing operations                                                                         |   | $                               | (4,075 | ) | $ | (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                           |   | — |   |
| Restricted equity securities received in  settlement of claims against former customer                  |   | (336                            | )      |   |   |
| (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 condensedconsolidated financial statements.

 

5

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**SMTEKINTERNATIONAL, INC. AND SUBSIDIARIES**

**NOTESTO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**NineMonths Ended March 31, 2003 and 2002**

 

**NOTE 1 - DESCRIPTIONOF BUSINESS AND BASIS OF PRESENTATION**

 

SMTEK International, Inc. (the “Company,” “we,” “us” or “our”) is anelectronics manufacturing services (“EMS”) provider to original equipmentmanufacturers (“OEMs”) primarily in the industrial and instrumentation,medical, telecommunications, security, financial services automation andaerospace and defense industries.  Weprovide integrated solutions to OEMs across the entire product life cycle, fromdesign to manufacturing to end-of-life services, for the worldwidelow-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 FortLauderdale, Florida; SMTEK New England, located in Marlborough, Massachusetts;SMTEK Santa Clara, located in Santa Clara, California; and SMTEK InternationalThailand Limited, located in Ayutthya, Thailand.

 

On November 19, 2002, we announced that we were consolidating our SanDiego facility into our other California operations in Moorpark and SantaClara.  This transition was completed asof March 31, 2003.

 

On April 9,2003, we sold our facility in Northern Ireland.  This is shown in the unaudited consolidated financial statementsas a discontinued operation.  Forfurther discussion, see Note 4.

 

We have experienced and may continue to experience an adverse effect onour operating results and in our financial condition, especially if currenteconomic conditions continue for an extended period of time, despite our costreduction measures and efficiency improvements at our operatingfacilities.  We are focused on the consolidation and streamlining of operations so asto reduce our excess capacity to better match market conditions.  Recent actions taken and strategies beingpursued are as follows:

 

•                  Transitioningour San Diego facility, selling our Northern Ireland facility and evaluatingfurther opportunities of consolidation, transition or sale of other facilities.

 

•                  Continuingfocus on cost reductions related to sizing our capacity infrastructure tocurrent production levels.

 

•                  Focusingour marketing efforts in the solicitation of customers in nonecomicallyaffected industries.

 

We remaindependent on our lines of credit for operations and growth.  Our domestic line of credit agreement is setto mature in September 2003.  We canprovide no assurance that the agreement will be renewed or that any renewalwould occur on commercially reasonable terms. We may have to explore alternative financing if the bank does not renewour line of credit.

 

We may requireadditional financing to satisfy our debt obligations.  However, there can be no assurance that we will be able to obtainadditional debt or equity financing when needed, or on acceptable terms.  Any additional debt or equity financing mayinvolve substantial dilution to our stockholders, restrictive covenants or highinterest costs.  In addition, delistingproceedings may also affect availability of equity financing.  The failure to

 

6

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raise needed funds onsufficiently favorable terms could have a material adverse effect on ourbusiness, operating results, and financial condition.

 

Althoughmanagement believes our cash resources, cash from operations and availableborrowing capacity on our working capital lines of credit are sufficient tofund operations, if we cannot refinance the domestic line of credit upon itsmaturity or find alternative financing/funding of this obligation, there is noassurance that we will continue as a going concern.

 

Allsignificant intercompany transactions and accounts have been eliminated inconsolidation.  In the opinion of theCompany’s management, the accompanying unaudited condensed consolidatedfinancial statements reflect all adjustments (consisting of normal recurringaccruals) necessary to present fairly our financial position, results ofoperations and cash flows as of and for the periods presented.

 

We utilize a 52-53 week fiscal year ending on the Friday closest toJune 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 forboth years is shown as March 31 for clarity of presentation.  The actual interim periods ended on March28, 2003 and March 29, 2002.

 

Certainreclassifications have been made to the fiscal 2002 financial statements toconform with the fiscal year 2003 financial statement presentation.  Such reclassifications had no materialeffect on our results of operations or stockholders’ equity.

 

Certain notes and other information are condensed or omitted from theinterim financial statements presented in this Quarterly Report on Form 10-Qpursuant to applicable rules and regulations. Therefore, these condensed financial statements should be read inconjunction with our 2002 Annual Report on Form 10-K as filed with theSecurities and Exchange Commission on September 26, 2002.

 

**NOTE 2 – RESTATEMENTOF FINANCIAL STATEMENTS**

 

The balance sheet at March 31, 2003 and the results of operations forthe nine months ended March 31, 2003 included in this quarterly report on Form10-Q/A have been restated to reflect the transaction described below.  The impact of the restatement was asfollows:

 
|                                    |   | **Nine  Months EndedMarch 31, 2003  (000’s)** |    |
|-----------------------------------------|--------|----------------------------------------------------|---------|
| Administrative and selling expense:     |   |                                               |    |
| As previously reported                  |   | $                                                  | 8,242   |   |
| Adjustment                              |   | (336                                               | )       |
| As restated                             |   | $                                                  | 7,906   |   |
|                                    |   |                                               |    |
| Net loss:                               |   |                                               |    |
| As previously reported                  |   | $                                                  | (6,131  | ) |
| Adjustment                              |   | 336                                                |    |
| As restated                             |   | $                                                  | (5,795  | ) |
|                                    |   |                                               |    |
| Net loss per share - basic and diluted: |   |                                               |    |
| As  previously reported                 |   | $                                                  | (2.68   | ) |
| Adjustment                              |   | 0.14                                               |    |
| As restated                             |   | $                                                  | (2.54   | ) |
|                                    |   |                                               |    |
| Other assets:                           |   |                                               |    |
| As  previously reported                 |   | $                                                  | 330     |   |
| Adjustment                              |   | 336                                                |    |
| As restated                             |   | $                                                  | 666     |   |
|                                    |   |                                               |    |
| Accumulated deficit:                    |   |                                               |    |
| As previously reported                  |   | $                                                  | (37,745 | ) |
| Adjustment                              |   | 336                                                |    |
| As restated                             |   | $                                                  | (37,409 | ) |
|                                    |   |                                               |    |
| Total stockholders’ equity:        |   |                                               |    |
| As previously reported                  |   | $                                                  | (785    | ) |
| Adjustment                              |   | 336                                                |    |
| As restated                             |   | $                                                  | (449    | ) |

 

7

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On December17, 2002, the Company entered into a settlement agreement with a formercustomer.  In full and final settlementof all claims by the Company against its former customer, the former customerpaid the Company $25,000 in cash and issued the Company 175,000 shares ofrestricted common stock.  The Company’sinitial estimate of fair value for such stock was zero due to the restrictednature of the shares. However, upon consultation with a third-party appraisalfirm, the Company has revised its estimate of the fair value of the shares to$336,000 as of the date of settlement. This bad debt recovery has been reflected as a reduction ofAdministrative and Selling expense for the nine months ended March 31, 2003 inthe accompanying financial statements. The investment has been included in other noncurrent assets.  Once the restriction on the shares has beenremoved, or the shares have been registered under the Securities Exchange Act,their carrying value will be “marked to market” on a quarterly basis.

 

**NOTE 3 - CHANGE INACCOUNTING PRINCIPLE**

 

We adoptedStatement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and OtherIntangible Assets,” as of July 1, 2002. SFAS No. 142 requires that goodwill and intangible assets withindefinite useful lives no longer be amortized, but instead tested forimpairment, at least annually, in accordance with the provisions of SFAS No.142.  SFAS No. 142 also requires thatintangible assets with definite useful lives be amortized over their respectiveestimated useful lives to their estimated residual values, and reviewed forimpairment in accordance with SFAS No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets.”  Inaccordance with SFAS No. 142, during the December 2002 quarter we completed ourinitial assessment of impairment and determined that our goodwill was fullyimpaired and have recognized an impairment loss of $420,000, net of taxes, inthe condensed consolidated statement of operations as a change in accountingprinciple, effective July 1, 2002.  Theeffect of the change in accounting principle to the quarter ended September 30,2002 is as follows (dollars in thousands except per share amounts):

 

8

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|                                                         |   | **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  | ) |

 

Goodwillamortization of $9,000 and $28,000 was recognized in the three and nine monthsended March 31, 2002, respectively. Unaudited pro forma results of operations for the three and nine monthsended March 31, 2002, as if the change in accounting principle occurred at thebeginning of the period reported, are as follows (dollars in thousands, exceptfor per share amounts):

 
|                                              |   | **Three  Months EndedMarch 31, 2002** |   | **Nine  Months EndedMarch 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 4 - DISCONTINUEDOPERATIONS**

 

On April 9, 2003, we sold 100% of the outstanding stock of our NorthernIreland facility, SMTEK Europe, for consideration of $1.  The purchaser was a Northern Ireland investorgroup, which included a director from SMTEK Europe.  The gain on the sale is not material and will be recorded in thefourth quarter of fiscal 2003.  Weincurred transaction costs of approximately $170,000.

 

Accordingly,operating results for SMTEK Europe have been presented in the accompanyingunaudited Condensed Consolidated Statements of Operations and

 

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Other Comprehensive Income(Loss) as a discontinued operation, and are summarized as follows (inthousands):

 
|                                                      |   | **Three  Months Ended  March 31,** |   | **Nine  Months Ended  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 31,2003** |   | **June 30,2002** |   |
|-----------------------------------------------------------------------------------------|--------|-------------------|--------|------------------|--------|
| 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 currencytranslation loss of $121,000 which was carried as a reduction of consolidatedstockholders’ equity.  In accordancewith SFAS No. 52, “Foreign Currency Translation,” this amount will be includedin the determination of the gain on sale of discontinued operations.

 

**NOTE 5 – ACQUISITIONOF THE ASSETS OF CENTURY ELECTRONICS MANUFACTURING, INC.**

 

On October 24, 2001, we completed a transaction to purchase certainassets, but not assume any liabilities, of Century Electronics Manufacturing,Inc. (“Century”), an EMS company that filed for bankruptcy.  As part of this transaction, we alsopurchased substantially all of the common stock of Century’s subsidiary inThailand.  The aggregate purchase priceof this transaction was approximately $3.2 million in cash and was funded byour existing bank lines of credit.

 

Specifically, we purchased from Century certain equipment and machineryfor approximately $1.4 million and inventory for approximately $900,000.  We have and will continue to utilize some ofthe purchased assets at our other locations. We negotiated new facility leases in Marlborough, Massachusetts andSanta Clara, California and began operations in Marlborough and Santa Clara inconnection with the purchase of these assets.

 

As part of the Century agreement we purchased the common stock of theCentury subsidiary in Thailand (“Century Thailand”) for approximately$900,000.  The acquisition of theThailand subsidiary provides us with a low cost manufacturing facility inSoutheast Asia.  The acquisition ofCentury Thailand was accounted for using the purchase method of accounting and,accordingly, the statements of condensed consolidated operations include theresults of the Thailand subsidiary from the date of acquisition.  The assets

 

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acquired and liabilities assumed were recorded at fair value asdetermined by us based on information currently available.  A summary of the assets acquired and theliabilities 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 endedMarch 31, 2002, as if the acquisition of the Thailand subsidiary had occurredat the beginning of the period reported, follow (dollars in thousands).  The unaudited pro forma results are notnecessarily indicative of the results which would have occurred if the businesscombination had occurred on the date indicated:

 
|                                |   | **Nine  Months EndedMarch 31, 2002** |   |
|-------------------------------------|--------|--------------------------------------|--------|
|                                |   |                                 |   |
| Revenues from continuing operations |   | $                                    | 49,665 |   |
|                                |   |                                 |   |
| Net loss                            |   | $                                    | (3,597 | ) |
|                                |   |                                 |   |
| Loss per share:                     |   |                                 |   |
| Basic and diluted                   |   | $                                    | (1.57  | ) |

 

**NOTE 6 – EARNINGS PERSHARE**

 

Basic earnings (loss) per share is computed by dividing net income(loss) available to common stockholders by the weighted average number ofcommon shares outstanding during the period. Diluted earnings (loss) per share reflects the potential dilution thatcould occur if securities or other contracts to issue common stock wereexercised or converted into common stock or resulted in the issuance of commonstock that then shared in our earnings (losses).

 

Common stock equivalents used in the determination of diluted earningsper share include the effect, when such effect is dilutive, of our outstandingemployee stock options and the 8-1/2% Convertible Subordinated Debentures(which are convertible into 7,435 shares of common stock at $212.50 per shareof common stock).  The following is asummary of the calculation of basic and diluted earnings per share (dollars inthousands, except per share data):

 

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|                                                         |   | **Three  Months EndedMarch 31,** |   | **Nine  Months EndedMarch 31,** |   |
|--------------------------------------------------------------|--------|----------------------------------|--------|---------------------------------|--------|
|                                                         |   | **2003**                         |   | **2002**                        |   | **2003** |   | **2002** |   |
|                                                         |   |                             |   |                            |   |   |   |   |   |
| Net loss                                                     |   | $                                | (1,050 | )                               | $      | (2,925 | ) | $ | (5,795 | ) | $ | (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 | ) | $ | (2.54 | ) | $ | (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 onearnings per share.  However, if we hadreported net income rather than a loss for the three and nine months endedMarch 31, 2003, the diluted shares outstanding would have increased by 6,430and 4,145 shares for the three and nine months ended March 31, 2003,respectively.  Further, options topurchase 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 beenincluded in the computation of diluted earnings per share for the three andnine months ended March 31, 2003, because the exercise prices of these optionswere greater than the average market price of our common stock.  If we hadreported net income rather than a loss for the three and nine months endedMarch 31, 2002, the diluted shares outstanding would have increased by 2,960and 89,228 shares for the three and nine months ended March 31, 2002,respectively.  Options to purchaseapproximately 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 thecomputation of diluted earnings per share for the three and nine months endedMarch 31, 2002, because the exercise prices of these options were greater thanthe average market price of our common stock.

 

We apply theprovisions of APB Opinion No. 25 and related interpretations in accounting forour stock option plans.  Accordingly, nocompensation expense has been recognized for our employee stock option plansand awards of options to non-employee directors.  Had compensation expense for stock-based awards been determinedconsistent with SFAS No. 123 as amended by SFAS No. 148, our results ofoperations would have been reduced to the pro forma amounts indicated below (inthousands except per share amounts):

 

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|                                                                                                             |   | **Three  Months EndedMarch 31,** |   | **Nine  Months EndedMarch 31,** |   |
|------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|---------------------------------|--------|
|                                                                                                             |   | **2003**                         |   | **2002**                        |   | **2003** |   | **2002** |   |
|                                                                                                             |   |                             |   |                            |   |   |   |   |   |
| Net loss as reported                                                                                             |   | $                                | (1,050 | )                               | $      | (2,925 | ) | $ | (5,795 | ) | $ | (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 | ) | $ | (6,092 | ) | $ | (3,951 | ) |
|                                                                                                             |   |                             |   |                            |   |   |   |   |   |
| Pro forma net loss per share, basic and  diluted:                                                                |   | $                                | (0.50  | )                               | $      | (1.32 | ) | $ | (2.67 | ) | $ | (1.73 | ) |

 

**NOTE 7 - REVENUERECOGNITION**

 

All of our subsidiaries recognize revenues and cost of sales uponshipment of products.  We ship productsFOB shipping point and accordingly, title and risk of ownership pass to thecustomer upon shipment.

 

Prior to June 30, 2002, the Moorpark facility historically generated asignificant portion of its revenue through long-term contracts with suppliersof electronic components and products. Consequently, this operating unit historically used the percentage ofcompletion method to recognize revenues and cost of sales.  Percentage of completion was determined onthe basis of costs incurred to total estimated costs.  Contract costs include direct material and direct labor costs andthose 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 asincurred.  In the period in which it wasdetermined that a loss would result from the performance of a contract, theentire amount of the estimated loss was charged to cost of goods sold.  Other changes in contract price andestimates of costs and profits at completion were recognizedprospectively.  The asset “costs andestimated earnings in excess of billings on uncompleted contracts” representedrevenues recognized in excess of amounts billed.

 

During fiscal 2002, our Moorpark facility entered into sales contractsconsistent with our other locations, and as such, recognized revenue on thesenew arrangements upon shipment of products rather than on a percentage ofcompletion method.  As a result, duringmost of fiscal 2002, the Moorpark facility was recognizing revenue uponshipment of product as well as under the percentage of completion method.  Since June 30, 2002, no sales contracts havebeen accounted for using the percentage of completion method of accounting.

 

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**NOTE 8 - INVENTORIES**

 

Inventoriesconsist of the following (in thousands):

 
|              |   | **March 31,2003** |   | **June 30,2002** |   |
|-------------------|--------|-------------------|--------|------------------|--------|
| Raw materials     |   | $                 | 5,938  |             | $      | 6,448 |   |
| Work in process   |   | 2,744             |   | 2,733            |   |
| Finished goods    |   | 488               |   | 485              |   |
| Total inventories |   | $                 | 9,170  |             | $      | 9,666 |   |

 

**Note 9 - PROPERTY,EQUIPMENT AND IMPROVEMENTS**

 

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

 
|                                            |   | **March 31,2003** |   | **June 30,2002** |   |
|-------------------------------------------------|--------|-------------------|--------|------------------|--------|
| 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 10 - CREDITAGREEMENTS**

 

At March 31, 2003, we have an $8.5 million working capital line ofcredit collateralized by accounts receivable, inventory and equipment for ourdomestic operating units which matures September 25, 2003.  Borrowings under the credit agreement bearinterest 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 outstandingunder this credit facility amounted to $6.6 million and the effective weightedaverage interest rate was 5.11%.  Theline of credit agreement contains certain financial covenants, with which webelieve 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 ourequipment line of credit to finance our capital expenditures.  This advance has a maturity date of October24, 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) plus3.75%.  At March 31, 2003, the balanceoutstanding was $865,000 and the effective weighted average interest rate was5.08%.  Additional advances under our equipmentline of credit will not be available to us until a review by the bank at afuture date.

 

At March 31, 2003, we also have a credit facility agreement with UlsterBank Markets for our Northern Ireland operating company.  This agreement consists of an accountsreceivable revolver, with maximum borrowings equal to the lesser of 75% ofeligible 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)

 

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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 wasnominal available borrowing capacity. The credit facility agreement matures on November 30, 2003.  This credit facility was assumed by thepurchaser of SMTEK Europe.

 

We also have a mortgage note secured by real property at NorthernIreland 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 thepurchaser of SMTEK Europe.

 

**NOTE 11 - BUSINESSSEGMENT AND GEOGRAPHIC INFORMATION**

 

We operate in a single business segment - the EMS industry.  Our revenues from continuing operations andlong-lived assets, net of accumulated depreciation, by geographic area are asfollows (in thousands):

 
|           |   | **Three  Months Ended  March 31,** |   | **Nine  Months Ended  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,  2003** |   | **June 30,  2002** |   |
|--------------------------|--------|---------------------|--------|--------------------|--------|
| Long-lived  assets:      |   |                |   |               |   |
| United  States           |   | $                   | 5,775  |               | $      | 7,487 |   |
| Thailand                 |   | 216                 |   | 193                |   |
| Total  long-lived assets |   | $                   | 5,991  |               | $      | 7,680 |   |

 

**NOTE 12 - FOREIGNCURRENCY FORWARD CONTRACTS**

 

It is our policy not to enter into derivative financial instruments forspeculative purposes.  We may, from timeto time, enter into foreign currency forward exchange contracts in an effort toprotect us from adverse currency rate fluctuations on foreign currencycommitments entered into in the ordinary course of business.  These commitments are generally for terms ofless than one year.  The foreigncurrency forward exchange contracts are executed with banks believed to becreditworthy and are denominated in currencies of major industrialcountries.  In accordance with SFAS No.133, “Accounting for Derivative Instruments and Hedging Activities,” allderivative financial instruments are measured at fair value and are recognizedas either assets or liabilities in the balance sheet.  The accounting treatment of changes in fair value is dependentupon whether or not a derivative financial instrument is designated as a hedgeand, if so, the type of hedge.  Changesin fair value are recognized in current results of operations for fair valuehedges and in other comprehensive income for cash flow hedges.  Derivative financial instruments notqualifying for hedge accounting treatment under SFAS No. 133 are recognized asassets or liabilities with gains or losses recognized in current results ofoperations.  At March 31, 2003, we didnot have any open forward foreign currency contracts.

 

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**NOTE 13 - COMMITMENTS AND CONTINGENCIES -ENVIRONMENTAL MATTERS**

 

Since theearly 1990s, we have been, and continue to be, involved in certain remediationand investigative studies regarding soil and groundwater contamination at thesite of a former printed circuit board manufacturing plant in Anaheim,California.  One of our formersubsidiaries, Aeroscientific Corp., leased the Anaheim facility.  Under the terms of a cost sharing agreemententered into in July 1993, the remaining remediation costs are currently beingshared 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 environmentalengineers and scientists, believes that this reserve is adequate to cover itsshare of future remediation costs at this site.  However, the future actual remediation costs could differsignificantly from the estimates and our portion could exceed the amount of ourreserve.  Our liability for remediationin excess of our reserve could have a material adverse effect on our business,financial condition, results of operations and cash flows.

 

**ITEM2.****          MANAGEMENT’S DISCUSSIONAND 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 ANDUNCERTAINTIES.  WHEN USED HEREIN, THETERMS “ANTICIPATES,” “EXPECTS,” “ESTIMATES,” “BELIEVES,” “WILL” AND SIMILAREXPRESSIONS, AS THEY RELATE TO US OR OUR MANAGEMENT, ARE INTENDED TO IDENTIFYSUCH FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS IN THIS REPORT OR HEREAFTER INCLUDED IN OTHERPUBLICLY AVAILABLE DOCUMENTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION(“SEC”), REPORTS TO THE STOCKHOLDERS OF SMTEK INTERNATIONAL, INC., A DELAWARECORPORATION (THE “COMPANY,” “WE,” “US” OR “OUR”) AND OTHER PUBLICLY AVAILABLESTATEMENTS 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 FUTURERESULTS, PERFORMANCE (FINANCIAL OR OPERATING) OR ACHIEVEMENTS EXPRESSED ORIMPLIED BY FORWARD-LOOKING STATEMENTS. THESE RISKS INCLUDE, BUT ARE NOT LIMITED TO, THE RISKS SET FORTH HEREINAND IN OTHER DOCUMENTS FILED WITH THE SEC, EACH OF WHICH COULD ADVERSELY AFFECTOUR BUSINESS AND THE ACCURACY OF THE FORWARD-LOOKING STATEMENTS CONTAINEDHEREIN.  FUTURE EXPECTED RESULTS AREBASED UPON MANAGEMENT’S BEST ESTIMATES, CURRENT CONDITIONS AND THE MOST RECENTRESULTS OF OPERATIONS.  OUR ACTUALRESULTS, PERFORMANCE OR ACHIEVEMENTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSEDOR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. WE DO NOT UNDERTAKE, AND SPECIFICALLY DISCLAIM, ANY OBLIGATION TO UPDATETHESE FORWARD-LOOKING STATEMENTS.

 

THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTIONWITH THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES INCLUDEDELSEWHERE IN THIS REPORT.

 

**UPDATE OF RISKFACTORS**

 

The following risk factors update certain risk factors identified inour 2002 Annual Report on Form 10-K which was filed with the SEC on September26, 2002.  Readers are referred to thedocuments filed by us with the SEC, including our most recent Reports on Forms10-K, 10-Q and 8-K, each as it may be amended from time to time, for a morecomplete description of important risk factors.

 

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**Our Debt AgreementsContain Certain Financial Covenants That Must Be Met.**

 

At March 31,2003, we were in compliance with our debt covenants on our domestic line ofcredit.  However, if we are unable tocomply with the terms of our financial covenants, our lender may declare adefault and immediately accelerate the due date of our outstanding loans.  If we are unable to repay our outstandingloans when asked to do so by the lender, the lender may exercise any one ormore of the remedies available to it, including foreclosing on the assetspledged to support the facility, which includes virtually all of our assets.

 

Our domesticline of credit agreement is set to mature in September 2003.  Our borrowings on this line of credit atMarch 31, 2003 amounted to $6.6 million. We can provide no assurance that the agreement will be renewed or thatany renewal would occur on commercially reasonable terms.  We remain dependent on our line of creditfor operations and growth and may have to explore alternative financing if thebank does not renew our line of credit or if amounts outstanding becomeimmediately payable as a result of future covenant violations.

 

We may requireadditional financing to satisfy our debt obligations.  However, there can be no assurance that we will be able to obtainadditional debt or equity financing when needed, or with acceptable terms.  Any additional debt or equity financing mayinvolve substantial dilution to our stockholders, restrictive covenants or highinterest costs.  The failure to raiseneeded funds on sufficiently favorable terms could have a material adverseeffect on our business, operating results and financial condition.

 

Althoughmanagement believes our cash resources, cash from operations and availableborrowing capacity on our working capital lines of credit are sufficient tofund operations, if we cannot refinance the domestic line of credit upon itsmaturity or find alternative financing/funding of this obligation, there is noassurance that we will continue as a going concern.

 

**OurStock Price Has Been And Continues To Be Volatile.  Based Upon Any Number of Factors, We May Face DelistingProceedings From Nasdaq.**

 

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

 

•     our publicstock float being relatively small and thinly traded;

 

•     announcementsby us or our competitors of new contracts or  technological innovations;

 

•     fluctuationsin our quarterly and annual operating results;

 

•     continuedlosses in each quarter;

 

•     acquisition-relatedannouncements; and

 

•     general marketconditions.

 

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

 

In November 2002, we received a deficiency notice from Nasdaq relatingto our stock trading below $1.00 per share for 30 consecutive days.  We have

 

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until May29, 2003 to regain compliance, which requires that the closing minimum bid ofour common stock be $1.00 per share or more for 10 consecutive tradingdays.  We have not yet satisfied thatrequirement at this time.  However, evenif we met this requirement at any time before May 29, 2003, we are still likelyto be delisted if we continue to fail to meet the $2.5 million minimum level ofstockholders’ equity requirement that Nasdaq has established.  In this regard, in February 2003, wereceived a deficiency notice from Nasdaq with reference to our failure to meetNasdaq’s $2.5 million in stockholders’ equity requirement.

 

In April 2003, we received formal written notice fromNasdaq that our common stock is subject to delisting effective upon the openingof business on April 23, 2003.  We haverequested a hearing before a Nasdaq Listing Qualifications Panel to appeal thedetermination, which has been scheduled for May 29, 2003 by Nasdaq.  The Company’s common stock will continue tobe listed on The Nasdaq SmallCap Market pending the outcome of thehearing.  There can be no assurance thatthe Company’s request for continued listing on The Nasdaq SmallCap Market willbe granted.

 

If we are delisted from the Nasdaq SmallCap Market, we may betransferred to the over-the-counter market on the NASD Electronic BulletinBoard or to the “pink sheets” electronic quotation service maintained by theNational Quotation Bureau, Inc.  Thereis also a risk that we will not continue to be listed at all.  Non-prominent trading markets are generallyconsidered to be less efficient than markets such as Nasdaq or other nationalexchanges, and may cause us difficulty in obtaining future financing.  If our stock is no longer traded in aprominent trading market, or at all, it may be difficult for you to sell sharesthat you own, and the price of the stock may be negatively affected.

 

For companies whose securities are traded in the Over-The-CounterMarket, additional difficulties include: (i) obtaining accurate quotations and(ii) obtaining coverage for significant news events because major wireservices, such as the Dow Jones News Service, generally do not publish pressreleases about such companies.

 

**DESCRIPTION OF OURBUSINESS**

 

SMTEKInternational, Inc. (the “Company,” “we,” “us” or “our”) is an electronicsmanufacturing services (“EMS”) provider to original equipment manufacturers(“OEMs”) primarily in the industrial and instrumentation, medical,telecommunications, security, financial services automation and aerospace anddefense industries.  We provideintegrated solutions to OEMs across the entire product life cycle, from designto manufacturing to end-of-life services, for the worldwide low-to-mediumvolume, high complexity segment of the EMS industry.

 

We have fivewholly owned subsidiaries:  SMTEK, Inc.(dba SMTEK Moorpark), located in Moorpark, California; Jolt Technology, Inc.(aka SMTEK Fort Lauderdale), located in Fort Lauderdale, Florida; SMTEK NewEngland, located in Marlborough, Massachusetts; SMTEK Santa Clara, located inSanta Clara, California; and SMTEK International Thailand Limited, located inAyutthya, Thailand.

 

On November19, 2002, we announced that we were consolidating our San Diego facility intoour other California operations in Moorpark and Santa Clara.  As a result, costs of approximately $2.0million, related to the consolidation, have been recognized in the condensedconsolidated statement of operations. This transition was completed as of March 31, 2003.

 

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On April 9,2003, we sold our facility in Northern Ireland.  This is shown in the unaudited consolidated financial statementsas a discontinued operation.  Forfurther discussion, see Note 4.

 

**CRITICAL ACCOUNTINGPOLICIES**

 

In response toSEC Release No. 33-8040, “Cautionary Advice Regarding Disclosure About CriticalAccounting Policies,” we have identified our most critical accounting policiesthat require significant management judgment or involve complex estimates uponwhich our financial status depends.  Theconsolidated condensed financial statements and related notes within this QuarterlyReport on Form 10-Q contain information that is pertinent to our accountingpolicies and to management’s discussion and analysis and should also be read inconjunction with our 2002 Annual Report on Form 10-K as filed with the SEC onSeptember 26, 2002.  The informationthat follows describes specific disclosures about our accounting policiesregarding risks, estimates, subjective decisions, or assessments under whichmaterially different results of operations and financial condition could havebeen reported had different assumptions been used or different conditionsexisted.

 

REVENUE ANDCOST RECOGNITION—We recognize revenues and cost of sales upon shipment ofproducts.  Prior to June 30, 2002, ourMoorpark subsidiary historically generated a significant portion of its revenuethrough long-term contracts with suppliers of electronic components andproducts.  Consequently, this operatingunit historically used the percentage of completion method to recognizerevenues and cost of sales.  Percentageof completion was determined on the basis of costs incurred to total estimatedcosts.  Contract costs include directmaterial and direct labor costs and those indirect costs related to theassembly process, such as indirect labor, supplies, tools, repairs and depreciationcosts.  Selling and administrative costswere charged to expense as incurred.  Inthe period in which it was determined that a loss would result from theperformance of a contract, the entire amount of the estimated loss was chargedto cost of goods sold.  Other changes incontract price and estimates of costs and profits at completion were recognizedprospectively.  A change in our estimateof costs to complete may have resulted in lower earnings than currentlyrecorded.  A portion of the asset “costsand estimated earnings in excess of billings on uncompleted contracts”represented revenues recognized in excess of amounts billed.

 

During fiscal2002, our Moorpark facility entered into sales contracts consistent with ourother locations, and as such, recognized revenue on these new arrangements uponshipment of products rather than on a percentage of completion method.  As a result, during most of fiscal 2002, theMoorpark facility was recognizing revenue upon shipment of products as well asunder the percentage of completion method. Since June 30, 2002, no sales contracts have been accounted for usingthe percentage of completion method of accounting.

 

ACCOUNTSRECEIVABLE—We perform ongoing credit evaluations of our customers and adjustcredit limits based upon each customer’s payment history and current creditworthiness, as determined by credit information available at that time.  We continuously monitor collections andpayments from our customers and we maintain allowances for doubtful accountsfor estimated losses resulting from the inability of our customers to makerequired payments.  If the condition ofour customers were to deteriorate, resulting in an impairment of their abilityto make payments, additional allowances may be required.

 

INVENTORIES—Inventoriesare stated at the lower of cost or net realizable value, with cost determinedprincipally by use of the first-in, first-out method.  We write down inventory for slow-moving and obsolete

 

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inventory based on assessmentsof future demands, market conditions and customers who may be experiencingfinancial difficulties.  If thesefactors are less favorable than those projected, additional inventory writedowns may be required.

 

LONG-LIVEDASSETS—Property, equipment and improvements are stated at cost.  Depreciation and amortization are computedon the straight-line method.  Theprincipal estimated useful lives are: buildings - 20 years; improvements - 5 to 10 years; and plant, officeand other equipment - 3 to 7 years. Property, equipment and improvements acquired by our Northern Irelandoperating unit are recorded net of capital grants received from the IndustrialDevelopment Board for Northern Ireland. Goodwill represents the excess of acquisition cost over the fair valueof net assets of a purchased business, and has been amortized over 5 to 15years through June 30, 2002. Amortization of goodwill ceased on July 1, 2002 when we adoptedStatement of Financial Accounting Standards (“SFAS”) No. 142.  As a result of implementing SFAS No. 142, wedetermined that our goodwill was fully impaired and recognized an impairmentloss of $420,000, net of taxes, in the condensed consolidated statement ofoperations, effective July 1, 2002.  Therecoverability of long-lived assets is evaluated whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable, and if future undiscounted cash flows expected to result from theuse of such assets are believed insufficient to recover the carrying value ofthe asset, the carrying value is written down to fair value in the period theimpairment is identified.  Factors weconsider important which could trigger an impairment review include, but arenot limited to, the following:

 

•             theasset’s ability to continue to generate income;

 

•             lossof legal ownership or title to the asset;

 

•             significantchanges in our strategic business objectives and utilization of the asset;

 

•             theimpact of significant negative industry or economic trends; or

 

•             significantdecrease in the market value of the asset.

 

**RESULTS OF OPERATIONS**

 

We utilize a52-53 week fiscal year ending on the Friday closest to June 30, which forfiscal year 2002 fell on June 28, 2002. In the accompanying  condensedconsolidated financial statements, the 2002 fiscal year end is shown as June 30and the interim period end for both years is shown as March 31 for clarity ofpresentation.  The actual interimperiods ended on March 28, 2003 and March 29, 2002.

 

Consolidatedrevenues for the three months ended March 31, 2003 were $17.4 million comparedto $13.5 million for the three months ended March 31, 2002, due primarily tocustomers 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 wasmainly due to increases in business activity from our current and newcustomers.

 

Consolidatedgross profit for the three and nine months ended March 31, 2003 was $1.9million (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 thethree and nine months ended March 31, 2002, respectively.  Gross profit for the three and nine monthsended March 31, 2002 was positively impacted by the benefit received frominventory used during the period that

 

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was purchased at a discountfrom Century Electronics Manufacturing, Inc. (“Century”).  Excluding the positive impact from thesereduced inventory costs, we estimate that the consolidated gross profit for thethree and nine months ended March 31, 2002 would have been approximately a lossof****$**340,000** (-**2.5**% of sales) and a profit of $**2.6**million (**5.3**%of sales), respectively.  The increasein gross profit and gross profit margin, excluding the purchase benefit, wasdue to an increase in revenues as well as to decreases in headcount andmaterial costs.

 

Administrative and selling expenses were $2.2 million and $7.9 millionfor the three months and nine months of March 31, 2003, respectively, comparedto $3.0 million and $6.5 million for the three and nine months of March 31,2002, respectively.  The decrease inadministrative and selling expenses in the three months ended March 31, 2003was mainly due to reduction of fixed costs, offset by expenses related to theclosing of our San Diego facility of $127,000. The increase in administrative and selling expenses in the nine monthsended March 31, 2003 is due to the recognition, during the second and thirdquarters of 2003, of approximately****$**2.0** million in expenses related to theclosing of our San Diego facility. These costs include:  $**1.0**million loss related to the lease ofthe building, $**370**,000 related towrite-off of leasehold improvements and $**300**,000related to severance and other related costs. In the second quarter of 2003, we also recognized a $600,000 lossrelated to the lease at our former Thousand Oaks facility.  Partially offsetting these costs, werecognized a recovery of bad debt of $336,000 in the second quarter due to thereceipt of restricted equity securities from a prior customer in settlement ofour outstanding claim.

 

Total non-operating income (expense) was $2,000 and ($515,000) for thethree 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 monthsended March 31, 2003, we recognized a gain on the extinguishment of long-termdebt of $175,000.  Additionally, werecognized income of $96,000 from the settlement of contingent liabilitiesduring the three months ended March 31, 2003. Excluding the non-operating income from these two items, totalnon-operating expense would have been $269,000 and $786,000 for the three andnine months ended March 31, 2003, respectively, compared to $41,000 and$476,000 for the three and nine months ended March 31, 2002, respectively. Theprimary reason for this increase was due to the increase in interest expense asa result of higher levels of debt outstanding during the three and nine monthsended 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 ninemonths ended March 31, 2003, respectively, as compared to income tax benefitsof $182,000 and $155,000 for the three and nine months ended March 31, 2002,respectively.  For the three and ninemonths ended March 31, 2002, amounts reflect a $164,000 income tax benefitresulting from passage of the 2002 Stimulus Package providing for the recoveryof our alternative minimum taxes paid in fiscal years 2000 and 2001.  Without this item, we would have reported anincome tax benefit of $18,000 and income tax expense of $9,000 for the threeand nine months ended March 31, 2002, respectively.

 

Loss from continuing operations was $294,000 or $0.13 loss per dilutedshare 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, duemainly to higher gross profit in the fiscal 2003 periods.  Loss from continuing operations was $4.1million or $1.79 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 ninemonths ended March 31, 2002 due mainly to higher gross profit, offset by higheradministrative and selling expenses related to the closing of our San Diegofacility.

 

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On April 9,2003, we sold our facility in Northern Ireland, and the results of thisfacility 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 discontinuedoperations, net of taxes, of $122,000 and $632,000 for the three and ninemonths ended March 31, 2002, or $0.05 and $0.28 loss per diluted share,respectively.

 

Net loss was$1.1 million and $5.8 million for the three and nine months ended March 31,2003, or $0.46 and $2.54 loss per diluted share, respectively, compared to netloss of $2.9 million and $3.7 million for the three and nine months ended March31, 2002, or $1.28 and $1.60 loss per diluted share, respectively.

 

**CHANGE IN ACCOUNTINGPRINCIPLE**

 

We adoptedSFAS No. 142, “Goodwill and Other Intangible Assets,” as of July 1, 2002.  SFAS No. 142 requires that goodwill andintangible assets with indefinite useful lives no longer be amortized, butinstead tested for impairment, at least annually, in accordance with theprovisions of SFAS No. 142.  SFAS No.142 also requires that intangible assets with definite useful lives be amortizedover their respective estimated useful lives to their estimated residualvalues, 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 theDecember 2002 quarter we completed our initial assessment of impairment anddetermined that our goodwill was fully impaired and have recognized animpairment loss of $420,000, net of taxes, in the condensed consolidatedstatement of operations as a change in accounting principle, effective July 1,2002.

 

**RECENT ACCOUNTINGPRONOUNCEMENTS**

 

In October2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposalof Long-Lived Assets.”  SFAS No. 144replaces SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets andfor Long-Lived Assets to be Disposed Of.” The primary objectives of SFAS No. 144 were to develop one accountingmodel, based on the framework established in SFAS No. 121, for long-livedassets to be disposed of by sale and to address other significantimplementation issues.  While SFAS No.144 supersedes SFAS No. 121, it retains many of the fundamental provisions ofSFAS No. 121.  SFAS No. 144 is effectivefor financial statements issued for fiscal years beginning after December 15,2001.  We have adopted SFAS No. 144 asof July 1, 2002.

 

In July 2002,the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit orDisposal Activities.”  SFAS No. 146requires recognition of a liability for a cost associated with an exit ordisposal activity when the liability is incurred, as opposed to when the entitycommits to an exit plan under previous guidance.  SFAS No. 146 is effective for exit or disposal activitiesinitiated after December 31, 2002.  Webelieve that the adoption of SFAS No. 146 will not have a material impact onour results of operations or financial position.

 

In December2002, 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 methodsof transition for a voluntary change to the fair value method of accounting forstock-based employee compensation.  Inaddition, this Statement amends the disclosure requirements of Statement No.123 to require prominent disclosures in both annual and interim financialstatements.  We adopted this Statementon January 1, 2003 and included the disclosure modifications in the thesecondensed

 

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consolidated financialstatements.  The adoption of thisStatement did not have a material effect on our financial statements.

 

**LIQUIDITY AND CAPITALRESOURCES**

 

Our primarysources of liquidity are our cash and cash equivalents, which amounted to$546,000 at March 31, 2003, and amounts available under our bank lines ofcredit, which provided approximately $1.9 million of availability in excess ofcurrent borrowings at March 31, 2003.  During the nine months ended March 31, 2003, cash and cash equivalentsdecreased by $270,000.  This decreaseresulted 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 cashprovided by operating activities of $1.3 million for the nine months endedMarch 31, 2003 was attributable primarily to facility consolidation costs of$1.4 million, cash provided by the operating activities of our discontinuedoperations of $2 million, a decrease in inventories of $484,000 and an increasein accounts payable and accrued liabilities of $3.3 million offset by our lossfrom continuing operations before depreciation and amortization of $4.4 millionand a decrease in accounts receivable of $3.1 million.

 

Net cash usedin investing activities was $1,031,000 for the nine months ended March 31, 2003compared to $3.6 million for the nine months ended March 31, 2002.  The cash used was for capital expendituresmainly for production purposes.

 

Net cash usedin financing activities was $557,000 for the nine months ended March 31, 2003compared to $677,000 for the nine months ended March 31, 2002.  At March 31, 2003, we had approximately $1.9million available to borrow under our bank lines of credit, after giving effectto the amendment to the credit agreement discussed below.

 

At March 31,2003, we have an $8.5 million working capital line of credit collateralized byaccounts receivable, inventory and equipment for our domestic operating unitswhich matures September 25, 2003. Borrowings under the credit agreement bear interest at either the bank’sprime 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 facilityamounted to $6.6 million and the effective weighted average interest rate was5.11%.  The line of credit agreementcontains certain financial covenants, with which we believe we were incompliance at March 31, 2003.  Ouravailable borrowing capacity as of March 31, 2003, was approximately $1.9million.

 

In addition,during fiscal 2002, we borrowed $1.6 million on our equipment line of credit tofinance our capital expenditures.  Thisadvance has a maturity date of October 24, 2006 and bears interest at eitherthe bank’s prime rate (4.25% at March 31, 2003) plus 1.00% or a Eurodollar-baserate (1.33% at March 31, 2003) plus 3.75%. At March 31, 2003, the balance outstanding was $865,000 and theeffective weighted average interest rate was 5.08%.  Additional advances under our equipment line of credit will notbe 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 ourNorthern Ireland operating company. This agreement consists of an accounts receivable revolver, with maximumborrowings equal to the lesser of 75% of eligible receivables or 2,500,000British pounds sterling (approximately $3,925,000 at March 31, 2003), of which 500,000British pounds sterling (approximately $785,000 at March 31, 2003) consists ofan overdraft

 

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facility, and bears interest atthe bank’s base rate (3.75% at March 31, 2003) plus 2.00%.  At March 31, 2003, borrowings outstandingunder this credit facility amounted to approximately $1.7 million, of which theoverdraft facility was fully utilized, and there was nominal availableborrowing capacity.  The credit facilityagreement matures on November 30, 2003. This credit facility was assumed by the purchaser of SMTEK Europe.

 

We also have amortgage note secured by real property at Northern Ireland with an outstandingbalance of $657,000 at March 31, 2003. At March 31, 2003, we were in arrears and we are currently seeking tonegotiate a payment plan.  This mortgagenote was assumed by the purchaser of SMTEK Europe.

 

We anticipatethat additional expenditures of as much as $100,000 may be made during theremainder of fiscal 2003, primarily to improve production efficiency at oursubsidiaries.  A substantial portion ofthese capital expenditures is expected to be financed by our line of credit orother notes/leases payable.

 

At March 31,2003, the ratio of current assets to current liabilities was 0.9 to 1.0compared to 1.3 to 1.0 at June 30, 2002. At March 31, 2003, we had $4.0 million of negative working capitalcompared to $5.9 million of working capital at June 30, 2002.  At March 31, 2003, we had long-termborrowings of $4.0 million compared to $10.1 million at June 30, 2002.  The decreases in the working capital andlong-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 lessthan 12 months.  In addition,contributing to the decrease in working capital is an increase in leasereserves recognized in the second quarter of 2003.

 

As more fullydescribed in Note 6 to the notes to our consolidated financial statements inour June 30, 2002 Form 10-K, at March 31, 2003, we have a federal taxassessment liability of approximately $1.1 million and a related accruedinterest liability of approximately $1.4 million, which reflect the results ofa settlement with the IRS Appeals Division in December 2001.  We are currently seeking an installmentpayment plan with the IRS.

 

We haveexperienced and may continue to experience an adverse effect on our operatingresults and our financial condition, especially if current economic conditionscontinue for an extended period of time, despite our cost reduction measuresand efficiency improvements at our operating subsidiaries.  We arefocused on the consolidation and streamlining of operations so as to reduce ourexcess capacity to better match market conditions.  Recent actions taken and strategies being pursued are as follows:

 

•                  Transitioningour San Diego facility, selling our Northern Ireland facility and evaluatingfurther opportunities of consolidation, transition or sale of other facilities.

 

•                  Continuingfocus on cost reductions related to sizing our capacity infrastructure tocurrent production levels.

 

•                  Focusingour marketing efforts in the solicitation of customers in nonecomicallyaffected industries.

 

For furtherdiscussion, see section entitled “Risk Factors That May Affect Your Decision toInvest in Us” in our 2002 Form 10-K, which was filed with the SEC on September26, 2002 and to the discussion in this Form 10-Q under the heading “Update ofRisk Factors” as well as other reports we file with the SEC.

 

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We remaindependent on our lines of credit for operations and growth.  Our domestic line of credit agreement is setto mature in September 2003.  We canprovide no assurance that the agreement will be renewed or that any renewalwould occur on commercially reasonable terms. We may have to explore alternative financing if the bank does not renewour line of credit.

 

We may requireadditional financing to satisfy our debt obligations.  However, there can be no assurance that we will be able to obtainadditional debt or equity financing when needed, or on acceptable terms.  Any additional debt or equity financing mayinvolve substantial dilution to our stockholders, restrictive covenants or highinterest costs. In addition, delisting proceedings may also affect availabilityof equity financing.  The failure toraise needed funds on sufficiently favorable terms could have a materialadverse effect on our business, operating results, and financial condition.

 

Although managementbelieves our cash resources, cash from operations and available borrowingcapacity on our working capital lines of credit are sufficient to fundoperations, if we cannot refinance the domestic line of credit upon itsmaturity or find alternative financing/funding of this obligation, there is noassurance that we will continue as a going concern.

 

**ENVIRONMENTAL MATTERS**

 

Since theearly 1990s, we have been, and continue to be, involved in certain remediationand investigative studies regarding soil and groundwater contamination at thesite of a former printed circuit board manufacturing plant in Anaheim,California.  One of our formersubsidiaries, Aeroscientific Corp., leased the Anaheim facility.  Under the terms of a cost sharing agreemententered into in July 1993, the remaining remediation costs are currently beingshared 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 environmentalengineers and scientists, believes that this reserve is adequate to cover itsshare of future remediation costs at this site.  However, the future actual remediation costs could differsignificantly from the estimates and our portion could exceed the amount of ourreserve.  Our liability for remediationin excess of our reserve could have a material adverse impact on our business,financial condition, results of operations and cash flows.

 

**ITEM 3.****          QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Our financialinstruments include cash and cash equivalents, accounts receivable andshort-term and long-term debt.  At March31, 2003, the carrying amount of long-term debt (including the current portionthereof but excluding bank lines of credit) was $7.1 million and the fair valuewas $6.6 million.  The carrying valuesof our other financial instruments approximated their fair values.  The fair value of our financial instrumentsis estimated based on quoted market prices for the same or similar issues.  A change in interest rates of one percentwould result in an annual impact on interest expense of approximately $110,000.

 

It is ourpolicy not to enter into derivative financial instruments for speculativepurposes.  We may, from time to time,enter into foreign currency forward exchange contracts in an effort to protectus from adverse currency rate fluctuations on foreign currency commitmentsentered into in the ordinary course of business.  These commitments are generally for terms of less than oneyear.  The foreign currency forwardexchange contracts are executed with banks believed to be creditworthy and aredenominated in currencies of major industrial countries.  In accordance with SFAS No. 133, “Accountingfor

 

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Derivative Instruments andHedging Activities,” all derivative financial instruments are measured at fairvalue and are recognized as either assets or liabilities in the balancesheet.  The accounting treatment ofchanges in fair value is dependent upon whether or not a derivative financialinstrument is designated as a hedge and, if so, the type of hedge.  Changes in fair value are recognized incurrent results of operations for fair value hedges and in other comprehensiveincome for cash flow hedges.  Derivativefinancial instruments not qualifying for hedge accounting treatment under SFASNo. 133 are recognized as assets or liabilities with gains or losses recognizedin current results of operations.  AtMarch 31, 2003, we did not have any open forward foreign currency contracts.

 

Our continuingoperations consist of investments in foreign operating units.  Our foreign subsidiaries representapproximately 7% of our revenues from continuing operations and 8% of the totalassets of our continuing operations.  Asa result, our financial results have been and may continue to be affected bychanges in foreign currency exchange rates.

 

**ITEM4.****                             CONTROLSAND PROCEDURES**

 

**Evaluation ofdisclosure controls and procedures**.

 

Based onmanagement’s evaluation (with the participation of our principal executiveofficer and principal financial officer), as of the end of the period coveredby this report, our principal executive officer and principal financial officerhave concluded that our disclosure controls and procedures (as defined in Rules13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended,(the “Exchange Act”)) are effective to ensure that information required to bedisclosed by us in reports that we file or submit under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin Securities and Exchange Commission rules and forms.

 

**Changes in internalcontrol over financial reporting**.

 

There was nochange in our internal control over financial reporting during our mostrecently completed fiscal quarter that has materially affected, or isreasonably likely to materially affect, our internal control over financial reporting.

 

**PARTII.****                        OTHERINFORMATION**

 

**ITEM1.****                             LEGALPROCEEDINGS**

 

In theordinary course of business, we experience various types of claims whichsometimes result in litigation or other legal proceedings.  We do not anticipate that any of theseclaims or proceedings that are currently pending will have a material adverseeffect on us.

 

**ITEM3.****                             DEFAULTSUPON SENIOR SECURITIES**

 

Thisinformation is set forth in this report under the captions “Update of RiskFactors - Our Debt Agreements Contain Financial Covenants That Must Be Met” and“Management’s Discussion and Analysis - Liquidity” and is incorporated hereinby reference.

 

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**ITEM5.****                             OTHERINFORMATION**

 

**PRE-APPROVAL OFNON-AUDIT SERVICES**

 

In accordancewith Section 10A of the Securities Exchange Act of 1934, as amended by Section202 of the Sarbanes-Oxley Act of 2002, the members of the Audit Committeeapproved non-audit, tax-related services by our auditors during this reportedfiscal quarter.

 

**ITEM6.****                             EXHIBITSAND REPORTS ON FORM 8-K**

 

a. Exhibits:

 

10.1    ShareSale Agreement, dated March 21, 2003, by and among DDL Europe Limited, AlinaLimited and SMTEK International, Inc., incorporated by reference to Exhibit 2.1to the Company’s Form 8-K filed with the SEC on April 25, 2003.

 

10.2    Amendmentto Share Sale Agreement, dated April 9, 2003, by and among DDL Europe Limited,Alina Limited and SMTEK International, Inc., incorporated by reference toExhibit 2.3 to Company’s Form 8-K filed with the SEC on April 25, 2003.

 

31.1                                     Section302 Certification of Principal Executive Officer.

 

31.2                                     Section302 Certification of Principal Financial Officer.

 

32.1                                     Section906 Certification of Principal Executive Officer.

 

32.2                                     Section906 Certification of Principal Financial Officer.

 

b.  Reports on Form 8-K:

 

On April 21,2003, we filed a Form 8-K indicating that we received formal written noticefrom Nasdaq that our stock is subject to delisting from the Nasdaq SmallCapMarket.

 

On April 25,2003, we filed a Form 8-K reporting the sale of SMTEK Europe.

 

 

**SIGNATURE**

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
| October 2, 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)              |

 

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