SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
/X/ Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1995 or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number 1-8101
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DDL Electronics, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 33-0213512
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
7320 SW Hunziker Road Suite #300, Tigard, Oregon 97223-2302
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(Address of Principal Executive Offices) (Zip Code)
503/620-1789
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(Registrant's Telephone Number, Including Area Code)
(Former Name - Former Address and Former Fiscal Year, if Changed Since Last
Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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The registrant had 16,312,349 shares of Common Stock outstanding as of
November 6, 1995.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DDL ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited, Except June 30, 1995)
September 30, June 30,
1995 1995
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ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,464,000 $ 2,917,000
Accounts receivable 5,234,000 3,600,000
Inventories 2,608,000 2,188,000
Prepaid expenses 289,000 171,000
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Total current assets 10,595,000 8,876,000
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PROPERTY, EQUIPMENT AND IMPROVEMENTS, AT COST
Buildings and improvements 5,196,000 5,217,000
Plant equipment 9,518,000 9,486,000
Office and other equipment 1,324,000 1,268,000
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16,038,000 15,971,000
Less: accumulated depreciation
and amortization (12,747,000) (12,662,000)
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Property, equipment and improvements, net 3,291,000 3,309,000
OTHER ASSETS
Total other assets 404,000 405,000
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$ 14,290,000 $ 12,590,000
========== ==========
See accompanying Notes to Unaudited
Consolidated Financial Statements.
DDL ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Continued)
(Unaudited, Except June 30, 1995)
September 30, June 30,
1995 1995
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LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Current portion of long-term debt $ 388,000 $ 633,000
Accounts payable 6,046,000 5,283,000
Accrued payroll and employee benefits 427,000 601,000
Other accrued liabilities 2,432,000 2,387,000
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Total current liabilities 9,293,000 8,904,000
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LONG-TERM DEBT
7% Convertible Subordinated Debentures,
less current portion 621,000 621,000
8-1/2% Convertible Subordinated Debentures 1,580,000 1,580,000
Notes payable, capitalized lease
obligations and other long-term debt,
less current portion 4,943,000 4,829,000
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Total long-term debt 7,144,000 7,030,000
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STOCKHOLDERS' DEFICIT
Common stock 163,000 161,000
Additional paid-in capital 21,200,000 20,983,000
Accumulated deficit (22,514,000) (23,598,000)
Foreign currency translation adjustment (996,000) (890,000)
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Total stockholders' equity (deficit) (2,147,000) (3,344,000)
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$ 14,290,000 $ 12,590,000
========== ==========
See accompanying Notes to Unaudited
Consolidated Financial Statements.
DDL ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Ended
September 30,
1995 1994
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SALES $ 6,192,000 $ 8,940,000
COSTS AND EXPENSES
Cost of goods sold 5,466,000 8,616,000
Administrative and selling expenses 864,000 1,577,000
Restructuring charges - 1,244,000
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6,330,000 11,437,000
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OPERATING LOSS (138,000) (2,497,000)
NONOPERATING INCOME (EXPENSE)
Investment income 127,000 22,000
Interest expense (115,000) (340,000)
Other income (expense) 100,000 (47,000)
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112,000 (365,000)
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LOSS FROM CONTINUING OPERATIONS BEFORE
INCOME TAX BENEFIT (26,000) (2,862,000)
BENEFIT FROM INCOME TAXES 1,110,000 -
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NET INCOME (LOSS) $ 1,084,000 $ (2,862,000)
========== ==========
EARNINGS (LOSS) PER SHARE
Loss before income taxes $0.00 ($0.19)
Income tax benefit 0.07 -
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Net income (loss) $0.07 ($0.19)
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AVERAGE NUMBER OF PRIMARY COMMON AND
COMMON SHARE EQUIVALENTS 16,842,733 15,380,134
========== ==========
See accompanying Notes to Unaudited
Consolidated Financial Statements.
DDL ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Three Months
Ended September 30,
1995 1994
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Cash flows from operating activities:
Net income (loss) $ 1,084,000 $ (2,862,000)
Adjustments to reconcile net loss to
net cash used by operating activities
Depreciation and amortization 178,000 559,000
Restructuring charge - 1,244,000
Net (increase) decrease in operating
working capital (1,528,000) 318,000
Decrease in deposits and other assets - 4,000
Benefit of noncapital grants (16,000) -
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Net cash used by operating activities (282,000) (737,000)
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Cash flows from investing activities:
Capital expenditures (127,000) (89,000)
Proceeds from disposition of capital assets - 2,000
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Net cash used by investing activities (127,000) (87,000)
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Cash flows from financing activities:
Proceeds from long-term debt 39,000 44,000
Reductions of long-term debt (282,000) (128,000)
Proceeds from stock option exercise 219,000 -
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Net cash used by financing activities (24,000) (84,000)
Effect of exchange rate changes on cash (20,000) (11,000)
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Increase (decrease) in cash and cash
equivalents (453,000) (919,000)
Cash and cash equivalents at
beginning of period 2,917,000 2,540,000
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Cash and cash equivalents at
end of period $ 2,464,000 $ 1,621,000
========== ==========
See accompanying Notes to Unaudited
Consolidated Financial Statements.
DDL ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - PRINCIPLES OF CONSOLIDATION
In the opinion of the Company's management, the accompanying consolidated finan-
cial statements, which have not been audited by independent accountants (except
for the balance sheet as of June 30, 1995), reflect all adjustments (consisting
of normal recurring accruals) necessary to present fairly the Company's finan-
cial position at September 30, 1995 and June 30, 1995, and the results of
operations and the cash flows for the three month period ended September 30,
1995 and 1994.
The Company uses a 52-53 week fiscal year ending on the Friday closest to June
30. In the accompanying interim consolidated financial statements, the interim
period end for both years is shown as September 30 for clarity of presentation.
The actual periods ended on September 29, 1995 and September 30, 1994. Certain
notes and other information are condensed or omitted from the interim financial
statements presented in this Quarterly Report on Form 10-Q. Therefore, these
financial statements should be read in conjunction with the Company's 1995
Annual Report to Stockholders as filed with the Securities and Exchange
Commission on or about September 30, 1995.
NOTE 2 - INVENTORIES
Inventories are comprised of the following:
September 30 June 30,
1995 1995
Raw materials $2,023,000 $1,634,000
Work in process 748,000 710,000
Less reserves (163,000) (156,000)
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$2,608,000 $2,188,000
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NOTE 3 - FINANCING ARRANGEMENTS
Subordinated debt:
The Company carries previously issued 7% and 8-1/2% Convertible Subordinated
Debentures ("CSDs"). In fiscal 1993, the Company exchanged a portion of the
CSDs for stock and warrants. 223,500 warrants remain outstanding and are
exercisable at $1.42 per share through the extended due date of December 29,
1995. The Company can accelerate the termination date of the warrants if the
closing market price of the common stock for 10 business days within any 20
business day trading period is at least $3.00 per share. The warrants are
separately tradable. The Company may effect similar exchanges with holders of
the remaining outstanding debentures in the future.
NOTE 4 - INFORMATION RELATING TO STATEMENT OF CASH FLOWS
"Net cash used by operating activities" includes cash payments for interest as
follows:
Three months ended
September 30,
1995 1994
Interest paid $ 115,000 $ 330,000
"Net change in operating working capital" is comprised of the following:
(Changes in operating working capital accounts may not equal differences
derived by comparing balance sheet accounts due to fluctuations in the exchange
rate between reported balance sheet dates.)
Nine months ended
March 31,
1995 1994
Increase in accounts receivable $(1,640,000) $ (466,000)
(Increase) decrease in inventories (433,000) 547,000
Increase in prepaid expenses (119,000) (117,000)
Increase in accounts payable 789,000 522,000
Decrease in accrued payroll and
employee benefits (170,000) (167,000)
(Increase) decrease in other accrued
liabilities 45,000 (1,000)
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Net (increase) decrease in operating
working capital $(1,528,000) $ 318,000
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Supplemental schedule of noncash investing and financing activities:
Nine months ended
March 31,
1995 1994
Capital expenditures financed by
lease obligations $ 52,000 $ 34,000
7% Convertible Subordinated Debentures
converted to equity - 20,000
NOTE 5 - PROFORMA FINANCIAL INFORMATION:
The following is the Company's restated pro forma consolidated operating results
for the three month period ended September 30, 1994, excluding results of opera-
tions for the Company's Aeroscientific Corp. and A.J. Electronics, Inc subsidi-
aries and excluding any gain from these subsidiaries' sale of assets as compared
with the three-month period ended September 30, 1995:
1995 1994
Sales $ 6,192,000 $ 3,516,000
Total operating costs 6,330,000 4,161,000
Operating income (loss) (138,000) (645,000)
Nonoperating Income &
expense net 112,000 (179,000)
Loss before income taxes (26,000) (824,000)
Benefit from income taxes 1,110,000 -
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Net Income (loss) $ 1,084,000 $ (824,000)
========== =========
Earnings (loss) per share:
Loss before
income taxes $0.00 ($0.05)
benefit from income taxes 0.07 -
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$0.07 ($0.05)
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Three Month and Nine Month Periods Ended March 31, 1995, and 1994
Consolidated sales for the quarter ended September 30, 1995 were $6,192,000 com-
pared to $8,940,000 for the same period in fiscal 1995, a reduction of
$2,748,000. Included in prior year's sales are revenues from the Company's
former United States Electronic Contract Manufacturing ("ECM") operation, A.J.
Electronics, Inc. ("A.J."), and Printed Circuit Board operation ("PCB")
Aeroscientific Corp. ("Aero"). A.J.'s operation was discontinued and ultimately
liquidated in fiscal 1995 and Aero's operating facility was sold December 30,
1994. Aero and A.J. represented $5,424,000 of prior years sales. Pro forma
operating results excluding A.J. and Aero shows an increase in sales from the
Company's remaining operations of $2,676,000.
Current fiscal year sales are generated from the Company's Northern Ireland PCB
and ECM operations, Irlandus Circuits, Ltd ("Irlandus") and DDL Electronics,
Ltd. ("DDL-E"), respectively. Irlandus' sales for the current fiscal year
increased by $241,000 to $2,456,000 and DDL-E's sales increased nearly three
times prior year's sales, by $2,435,000, to $3,736,000. The company ended
fiscal 1995 with the highest backlog ever for its two European subsidiaries.
This has translated into higher sales in the first quarter of fiscal 1996.
DDL-E, in particular, has seen growth in contracts from existing customers as
well as sales to new customers. In the first quarter of fiscal 1995, DDL-E
sales to two of its largest customers was substantially reduced as a result of
lower demand for each entity's product by its European customers. Sales to
these two customers have increased in the second half of fiscal 1995 and
continue strong into 1996. DDL-E has added several new significant turnkey
customers that have contributed to backlog as well as first quarter sales
growth and have reduced the volume of sales on a consignment basis.
Consigned business uses more of the ECM's service without requiring the ECM to
acquire material for production as in turnkey sales.
Fiscal 1996 consolidated gross margin (sales less cost of sales) improved by
$402,000 compared with the first quarter of fiscal 1995. More importantly,
gross margin percentage improved from 3.6% (1.9% pro forma with Europe only) in
fiscal 1995 to 11.7% in fiscal 1996. DDL-E's gross margin improved by $361,000
and gross margin percentage improved from 2.8% to 10.6%. DDL-E's improvement
comes from improved efficiencies and volume margin benefits from increased
sales. At the same time DDL-E has added new higher margin business while
maintaining its business with existing customer. Margins have also improved
due to improved materials acquisition pricing and increased productivity.
Irlandus' gross margin improved by $298,000 and gross margin percentage improved
form 1.5% to 13.4%. Improved margins are due to improved product yields and
higher pricing margins on new business. Part of this higher pricing comes from
Irlandus' successful efforts to concentrate its marketing on customers wanting
prototype or quick turn (ten days of less to produce product) and short lead
time production.
The quarter's operating loss improved over fiscal 1995's by $2,359,000, from a
loss in fiscal 1995 of $2,497,000 to a loss of $138,000 in fiscal 1996. On a
consolidated pro forma basis the improvement in the operating loss is only
$507,000. A substantial portion of fiscal 1995's operating costs were attribut-
able to accrual of restructuring charges associated with the discontinuance and
disposal A.J. The restructuring charge of $1,244,000, represented write down of
assets to liquidation value, accrual of expected lease termination costs and
provision for operating expenses through A.J.'s ultimate and final disposal.
The change in nonoperating items from an expense in fiscal 1995 of $365,000 to
income of $112,000 in the current fiscal year is derived from $106,000 in inter-
est received in conjunction with federal tax refunds for net operating loss
carrybacks, $100,000 in other income realized from reduction of previously
accrued expenses associated with settlement of litigation with a former land
lord and a $225,000 reduction in interest expense due to the Company's payoff
or elimination of over $12,000,000 in senior debt during fiscal 1995.
Fiscal 1996 consolidated net income after taxes of $1,084,000 or $0.07 per
share, improved from fiscal 1995's loss of $2,862,000 or $0.19 per share.
The improvement is associated with improved operating margins and income from
certain non-operating items as noted above. Additionally, the Company
recognized $1,110,000 in net tax benefits associated with application for
federal tax refunds as permitted under section 172(f) of the internal revenue
code. In total the Company applied for federal tax refunds of $2,175,000, net
of costs associated with applying for such refunds. Through October 15, 1995,
the company received $1,110,000 of net refunds plus interest for such refunds
of $106,000. The timing and certainty of future refunds is unknown, and there
is a possibility that the tax returns underlying these refund may be subject to
audit by the Internal Revenue Service and a portion of the refunds disallowed.
The Company feels that its claim for refund and carry back of net operating
losses can be substantiated and is supported in fact in law, and that the
Company will ultimately collect and retain a substantial portion of such
refunds.
Liquidity and Capital Resources
For the three months ended September 30, 1995, cash and cash equivalents
decreased by 453,000. As illustrated in the Consolidated Statement of Cash
Flows, this decrease in cash included the following:
1. $282,000 was used in operating activities, principally from a
$1,528,000 increase in working capital at the Company's Northern
Ireland operations, partially offset by the Company's profitable
operations.
2. Investing activities required $127,000 for purchase of capital
equipment.
3. Financing activities used $24,000, representing $282,000 of reductions
in debt primarily from settlement of a law suit filed by a former land
lord of one of the Company's subsidiaries, net of additions to long-
term debt of $39,000 and proceeds from exercise of stock options under
the Company's employee and director stock option plans.
The Company's primary source of liquidity is its cash balances which amounted to
$2,464,000 at September 30, 1995. Components of working capital increased by
$1,528,000 during the first quarter. The resulting decrease in cash came
principally from $1,640,000 increase in accounts receivable, $433,000 increase
in inventory and a $119,000 increase in prepaid expenses, all partially offset
by a $664,000 increase in accounts payable and other liabilities. The Company's
increase in working capital comes from increases in operating activity at the
Company's Northern Ireland subsidiaries. Increased sales volumes have increased
the Company's working capital requirements.
The Company currently has no working capital lines of credit or other readily
available sources for future borrowing. In the past, the Company has success-
fully raised capital from private placement of equity instruments. The Company
is also in preliminary discussions with a European bank to provide a working
capital line of credit for possible use in financing the growth of the Company's
Northern Ireland operations.
The Company also has outstanding warrants to purchase the Company's common
stock. In fiscal 1993 the Company privately negotiated the exchange of a
portion of the 7% and 8-1/12% convertible subordinated debentures for common
stock and warrants of which 223,500 warrants remain unexercised. In August
1995, the Company's Board approved an extension of the exercise date of these
warrants to December 29, 1995 and reduced their exercise price to $1.42 per
share. The Company also has outstanding warrants to purchase 100,000 shares of
common stock at an exercise price of $1.31 until May 24, 1997.
The achievement of continued operating profitability is the most significant
internal factor to ensure the Company's long-term viability. No assurance can be
given that the Company will maintain operating profitability, or that cash
generated from non-operating will be adequate to fund future cash needs. As a
necessary step to ensure the Company's increased profitability the Company is
actively pursuing possible strategic acquisition candidates that will help
ensure growth of the Company in the markets and industries in which it has
expertise.
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
Item 5. OTHER INFORMATION
Federal, state, and local provisions relating to the protection of the
environment affect the Company's printed circuit board fabrication operations.
The Company's printed circuit board plants generate hazardous waste, some of
which is treated on site and some of which is removed from the Company's
facilities and disposed of elsewhere by arrangement with the owners or
operators of disposal sites. The Company's Aeroscientific-Anaheim subsidiary
has received notice from the United States Environmental Protection Agency
that it is regarded as a potentially responsible party ("PRP") under federal
environmental laws in connection with a waste disposal Site known as the
"Stringfellow Superfund site" in Riverside County, California, which is
presently being considered by governmental authorities for remediation.
Aeroscientific has been named as a third party defendant by other PRPs in a
case brought by the United States Government concerning this site.
Aeroscientific has also been named as a defendant together with a large number
of PRPs in a civil action filed by the residents and homeowners adjacent to
the Stringfellow site. The information developed during discovery and
investigation thus far indicates that Aeroscientific supplied relatively small
amounts of waste to the site as compared to the many other defendants. As part
of the currently proposed Settlement Agreement, small polluters would pay a
fixed amount plus an amount that varies based on volume of material dumped at
the site. Under these guidelines, the Company's probable liability will be
$120. Final settlement and timing of payment are currently indeterminable,
and no assurances can be given that any settlement will be achieved. The
Company, however, has accrued a sufficient liability to cover the proposed
settlement as of fiscal year end 1995. Any further remedial costs or damage
awards in these cases may be significant and management believes that the
Company's allocated share of such costs or damages could have a material
adverse effect on the Company's business or financial condition. The actions
are still in the pre-trial and discovery stages and a prediction of outcome is
difficult. There is, as in the case of most environmental litigation, the
theoretical possibility of joint and several liability being imposed upon
Aeroscientific for damages which may be awarded. Total estimated cleanup
costs for the Stringfellow site have been estimated at $600,000. The
Company's possible range of liability is indeterminable, and the reliability
and precision of estimated cleanup costs are subject to a myriad of factors
which are not currently measurable.
The Company is aware of certain chemicals that exist in the ground at its pre-
viously leased facility at 1240-1244 South Claudina Street, Anaheim, Califor-
nia. The Company has notified the appropriate governmental agencies and is
proceeding with remediation and investigative studies regarding soil and
groundwater contamination. The Company believes that it will be required to
implement a continuing remedial program for the site, the cost of which is
currently unknown. The installation of water and soil extraction wells was
completed in August 1994. A plan for soil remediation was completed about the
same time and was submitted to regulatory authorities. The full extent of
potential ground water pollution could not be determined given preliminary
estimates. The Company retained the services of Harding Lawson and Associates
in May of 1995 to begin the vapor extraction of pollutant from the soil and to
perform exploratory hydro-punch testing to determine the full extent and cost
of the potential ground water contamination. These processes are in their
preliminary stages and a complete and accurate estimate of the full and
potential costs cannot be determined at this time. The Company believes that
the resolution of these matters will require a significant cash outlay. Initial
estimates form Harding Lawson indicate that it could cost as much as $3,000,000
to fully clean-up the site and take over ten years to complete. The Company and
Aeroscientific Corp. entered into an agreement to share the costs of
environmental remediation with the landlord at the Anaheim facility. Under this
agreement, the Company is obligated to pay 80% of the site s total remediation
costs up to $725,000 (i.e., up to the Company s share of $580,000) with any
costs above $725,000 being shared equally between the company and the landlord.
To date the Company has paid $274,000 as its share of the remediation costs.
The Company has an account for $775,000 associated with this environmental
remediation, which represents its estimated share of the future discounted
remediation costs.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
None.
b. Reports on Form 8-K:
On July 12, 1995, a Form 8-K was filed pursuant to Item 5, Other Events, regard-
ing a press release indicating that the Company had retained Fechtor Detwiler as
its investment bankers.
On July 13, 1995, a Form 8-K was filed pursuant to Item 5, Other Events, regard-
ing a press release that indicated the appointment of corporate officers.
On August 15, 1995, a Form 8-K was filed pursuant to Item 5, Other Events, re-
garding a press release indicating that the Company's Board had approved extend-
ing the exercise period for the Company's 1993 Warrants and had decreased the
Warrant's exercise price.
On August 15, 1995, a Form 8-K was filed pursuant to Item 5, Other Events, re-
garding a press release indicating that the Company's European operations
experienced strong sales growth in the current quarter.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
November 10, 1995 /s/ Don A. Raig
- ---------------------------- ---------------------------
Date Don A. Raig
(Chief Operating Officer
and duly Authorized Officer)