SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended: MARCH 31, 1996
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
----------- ------------
Commission File Number: 1-8101
Exact Name of Registrant as
Specified in Its Charter): DDL ELECTRONICS, INC.
State or Other Jurisdiction of I.R.S. Employer
Incorporation or Organization): DELAWARE Identification No.: 33-0213512
Address of Principal Executive Offices: 2151 Anchor Court
Newbury Park, CA 91320
Registrant's Telephone Number: (805) 376-9415
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 [ ]
The registrant had 20,322,532 shares of Common Stock outstanding as of
May 8, 1996.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DDL ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited, except June 30, 1995)
March 31, June 30,
1996 1995
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,649,000 $ 2,917,000
Accounts receivable 5,553,000 3,600,000
Inventories 7,621,000 2,188,000
Prepaid expenses and deposits 170,000 171,000
---------- ---------
Total current assets 15,993,000 8,876,000
---------- ---------
PROPERTY, EQUIPMENT AND
IMPROVEMENTS, AT COST
Buildings and improvements 5,538,000 5,217,000
Plant equipment 13,670,000 9,486,000
Office and other equipment 1,488,000 1,268,000
---------- ----------
20,696,000 15,971,000
Less: accumulated depreciation
and amortization (14,730,000) (12,662,000)
---------- ----------
Property, equipment and
improvements, net 5,966,000 3,309,000
---------- ----------
OTHER ASSETS
Goodwill 6,025,000 -
Debt issue costs 1,022,000 -
Deposits and other 922,000 405,000
---------- -----------
Total other assets 7,969,000 405,000
---------- -----------
Total assets $ 29,928,000 $ 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)
March 31, June 30,
1996 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of
long-term debt $ 4,203,000 $ 633,000
Accounts payable 7,708,000 5,283,000
Accrued payroll and
employee benefits 724,000 601,000
Other accrued liabilities 2,611,000 2,387,000
Income taxes payable 762,000 -
---------- ----------
Total current liabilities 16,008,000 8,904,000
---------- ----------
LONG-TERM DEBT
10% Senior Secured Notes 5,300,000 -
7% Convertible Subordinated
Debentures, less current
portion 441,000 621,000
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 3,713,000 4,829,000
---------- ----------
Total long-term debt 11,034,000 7,030,000
---------- ----------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock 202,000 161,000
Additional paid-in capital 25,828,000 20,983,000
Common stock held in escrow (1,325,000) -
Accumulated deficit (20,715,000) (23,598,000)
Foreign currency translation
adjustment (1,104,000) (890,000)
---------- ----------
Total stockholders'
equity (deficit) 2,886,000 (3,344,000)
---------- ----------
Total liabilities and
stockholders' deficit $ 29,928,000 $ 12,590,000
========== ==========
See accompanying Notes to Unaudited
Consolidated Financial Statements.
DDL ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Nine Months Ended
March 31,
1996 1995
SALES $ 22,722,000 $ 22,673,000
---------- ----------
COSTS AND EXPENSES
Cost of goods sold 19,985,000 20,629,000
Administrative and selling 3,027,000 4,146,000
Amortization of goodwill 317,000 -
Restructuring charges - 1,173,000
---------- ----------
Total costs and expenses 23,329,000 25,948,000
---------- ----------
OPERATING LOSS (607,000) (3,275,000)
---------- ----------
NONOPERATING INCOME (EXPENSE)
Investment income 208,000 85,000
Interest expense (584,000) (767,000)
Gain on sale of assets - 3,374,000
Other income 204,000 33,000
--------- ----------
Nonoperating income (expense), net (172,000) 2,725,000
--------- ----------
LOSS BEFORE INCOME TAX BENEFIT (779,000) (550,000)
BENEFIT FROM INCOME TAXES 1,110,000 -
--------- ----------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM 331,000 (550,000)
EXTRAORDINARY ITEM
Gain on debt extinguishment 2,552,000 2,441,000
--------- ---------
NET INCOME $ 2,883,000 $ 1,891,000
========= =========
PRIMARY EARNINGS (LOSS) PER SHARE
Income (loss) before
extraordinary item $ 0.02 ($ 0.03)
Extraordinary item 0.14 0.15
---- ----
Earnings per share $ 0.16 $ 0.12
==== ====
AVERAGE NUMBER OF PRIMARY
COMMON AND COMMON SHARE
EQUIVALENTS 17,677,831 15,790,737
========== ==========
See accompanying Notes to Unaudited
Consolidated Financial Statements.
DDL ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
1996 1995
SALES $ 10,501,000 $ 6,079,000
---------- ---------
COSTS AND EXPENSES
Cost of goods sold 9,147,000 4,916,000
Administrative and selling 1,132,000 913,000
Amortization of goodwill 317,000 -
---------- ---------
Total costs and expenses 10,596,000 5,829,000
---------- ---------
OPERATING INCOME (LOSS) (95,000) 250,000
NONOPERATING INCOME (EXPENSE)
Investment income 8,000 28,000
Interest expense (355,000) (111,000)
Other income 37,000 -
---------- ---------
Nonoperating expense, net (310,000) (83,000)
---------- ---------
INCOME (LOSS) BEFORE
INCOME TAXES (405,000) 167,000
INCOME TAXES - -
---------- ---------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM (405,000) 167,000
EXTRAORDINARY ITEM
Gain on debt extinguishment 2,552,000 -
---------- ---------
NET INCOME $ 2,147,000 $ 167,000
========== =========
PRIMARY EARNINGS (LOSS)
PER SHARE
Income (loss) before
extraordinary item ($ 0.02) $ 0.01
Extraordinary item 0.13 -
---- ----
Earnings (loss) per share $ 0.11 $ 0.01
==== ====
AVERAGE NUMBER OF PRIMARY COMMON
AND COMMON SHARE EQUIVALENTS 19,064,501 16,012,801
========== ==========
See accompanying Notes to Unaudited
Consolidated Financial Statements.
DDL ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Nine Months Ended March 31,
1996 1995
Cash flows from operating activities:
Net income $ 2,883,000 $ 1,891,000
Adjustments to reconcile net income
to net cash provided (used) by
operating activities -
Depreciation and amortization 1,152,000 1,220,000
Gain on debt extinguishment (2,552,000) (2,441,000)
Gain on sale of property and other assets - (3,377,000)
Net (increase) decrease in
operating working capital (1,773,000) 2,064,000
(Increase) decrease in deposits
and other assets (500,000) 2,000
Benefit of noncapital grants (207,000) (33,000)
--------- ---------
Net cash used by operating activities (997,000) (674,000)
--------- ---------
Cash flows from investing activities:
Capital expenditures (696,000) (243,000)
Purchase of SMTEK, Inc., net of
cash acquired (7,638,000) -
Proceeds from disposition of
capital assets - 9,997,000
--------- ---------
Net cash provided (used) by
investing activities (8,334,000) 9,754,000
--------- ---------
Cash flows from financing activities:
Proceeds from long-term debt 8,800,000 166,000
Reductions of long-term debt (1,439,000) (10,603,000)
Debt issue costs (352,000) -
Proceeds from issuance of common stock 1,112,000 980,000
Proceeds from exercise of stock options 492,000 9,000
Proceeds from exercise of warrants 317,000 -
Proceeds from government grants 231,000 200,000
--------- ---------
Net cash provided (used)
by financing activities 9,161,000 (9,248,000)
--------- ---------
Effect of exchange rate changes on cash (98,000) 17,000
--------- ---------
Decrease in cash and cash equivalents (268,000) (151,000)
Cash and cash equivalents at
beginning of period 2,917,000 2,540,000
--------- ---------
Cash and cash equivalents at
end of period $ 2,649,000 $ 2,389,000
========= =========
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
financial 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 financial position at March 31, 1996 and June 30, 1995, the results
of operations for the three and nine month periods ended March 31, 1996 and
1995, and the cash flows for the nine months ended March 31, 1996 and 1995.
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 March 31 for clarity of
presentation. The actual periods ended on March 29, 1996 and March 31, 1995.
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 - ACQUISITION OF SMTEK, INC.
- -----------------------------------
On January 12, 1996, the Company acquired 100% of the outstanding stock of
SMTEK, Inc., a provider of integrated electronic manufacturing services. The
purchase price of $8,000,000 was paid in cash of $7,199,000 and 1,000,000
shares of unregistered common stock. The Company also incurred acquisition-
related fees and other costs totaling $495,000. The cash portion of the
purchase price was financed through the issuance of short-term 10% bridge
loans in the aggregate amount of $7,000,000 (the "Bridge Loans"). The Bridge
Loans were repaid in February 1996 through the issuance of 10% Senior Secured
in the aggregate amount of $5,300,000 and 10% Cumulative Convertible
Debentures in the aggregate amount of $3,500,000. As further described in
Note 8 herein, subsequent to March 31, 1996 the holders of $3,300,000 of the
10% Cumulative Convertible Debentures elected to convert their debentures to
equity.
The acquisition has been accounted for using the purchase method. In
accordance with Accounting Principles Board Opinion No. 16, the total
investment made in SMTEK of $8,495,000 has been allocated to the assets and
liabilities acquired at their estimated fair values at the acquisition date,
which resulted in the recognition of goodwill of $6,342,000. The Company is
amortizing the goodwill amount over five years.
NOTE 3 - REVENUE RECOGNITION
- ----------------------------
The Company's European operating units recognize revenue upon shipment of
products.
SMTEK, Inc., the Company's U.S. operating unit, has historically generated
the majority of its sales through long-term contracts with suppliers of
electronic components and products to the federal government. Consequently,
SMTEK uses the percentage of completion method to recognize revenue. SMTEK
determines percentage complete on the basis of costs incurred to total
estimated costs. In the period in which it is determined that a loss will
result from the performance of a contract, the entire amount of the estimated
loss is charged to income. Other changes in contract price and estimates of
costs and profits at completion are recognized prospectively. This method
recognizes in the current period the cumulative effect of the changes on
current and prior periods.
NOTE 4 - INVENTORIES
- --------------------
Inventories are comprised of the following:
March 31, June 30,
1996 1995
---- ----
Raw materials $4,258,000 $1,634,000
Work in process 4,353,000 710,000
Less advances and progress
payments (735,000) -
Less reserves (255,000) (156,000)
--------- ---------
$7,621,000 $2,188,000
========= =========
NOTE 5 - FINANCING ARRANGEMENTS
- -------------------------------
Bank Credit Agreement:
In December 1995, the Company entered into an agreement with Ulster Bank
Group which provides for multiple credit facilities for its Northern Ireland
operations. This agreement includes a working capital line of credit of
500,000 pounds sterling (approximately $750,000), and provides for interest
on borrowings at 1-1/2% over the Bank's base rate. The credit facilities are
available to the Company until November 30, 1996, and are subject to renewal
thereafter. There were no borrowings outstanding under this credit facility
at March 31, 1996. The Company is currently negotiating with a bank for a
U.S. credit facility to provide working capital financing for SMTEK, Inc.
However, there can be no assurance that the Company will be successful in
obtaining a bank credit facility for its U.S. operations.
Acquisition indebtedness:
In February 1996 the Company issued 10% Senior Secured Notes due July 1, 1997
in the aggregate amount of $5,300,000 (the "10% Senior Notes") and 10%
Cumulative Convertible Debentures due February 28, 1997 in the aggregate
amount of $3,500,000 (the "10% Convertible Debentures"). The proceeds of
these borrowings were used to pay off the principal and accrued interest of
the $7,000,000 Bridge Loans which had been taken out to finance the
acquisition of SMTEK, pay acquisition costs, and provide working capital for
SMTEK.
The 10% Convertible Debentures were sold to offshore investors under
Regulation S provisions of U.S. securities laws. The Debentures are
convertible at the holders' option into the Company's common stock at any
time after 60 days at a conversion price equal to 82% of the average of the
lowest trade price for the Company's common stock on the New York Stock
Exchange for the three days immediately preceding the conversion date. Any
10% Convertible Debentures outstanding after 12 months will automatically be
converted into common stock. As further described in Note 8 herein,
subsequent to March 31, 1996 the holders of $3,300,000 of the 10% Cumulative
Convertible Debentures elected to convert their debentures to equity.
The 10% Senior Notes are secured by (i) 1,060,000 shares of common stock and
(ii) warrants to purchase 1,060,000 shares of common stock (the "Collateral
Warrants"), all of which have been placed into an escrow account. In the
event the Collateral Warrants are required to redeem the 10% Senior Notes,
each warrant would be exercisable into one share of common stock at a price
which is 6% less than the market value of the Company's common stock at the
time of exercise. If the 10% Senior Notes are repaid from sources other than
the Collateral Warrants, then the Collateral Warrants expire and can no
longer be exercised.
In connection with the sale of the 10% Senior Notes and 10% Convertible
Debentures, the Company paid $352,000 as a fee to the placement agent for
these financings. The Company also issued to the placement agent as
additional compensation 572,683 shares of common stock and warrants to
purchase 1,500,000 shares of common stock for $2.50 per share which are
exercisable for five years.
Other stock purchase warrants:
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 common stock purchase warrants. The remaining 223,500 of
these warrants were exercised during the nine months ended March 31, 1996 at
$1.42 per share. The Company may effect similar exchanges with holders of the
remaining outstanding CSDs in the future.
On March 29, 1996, the Company entered into a settlement agreement with
certain of its former officers, key employees and directors to restructure
its unfunded retirement obligations under several post-employment benefit
plans covering these individuals (the "Participants"). Under terms of the
settlement, the Participants agreed to relinquish all future payments due
them under these benefit plans in return for an aggregate of 595,872 stock
purchase warrants. The warrant exercise price will be equal to the New York
Stock Exchange closing price of the Company's common stock on May 31, 1996
minus $1.50, subject to a minimum exercise price of $2.50 and a maximum
exercise price of $6.00. The Company will subsidize the exercise of warrants
by crediting the Participants with $2.50 for each warrant exercised. The
warrants may be called for redemption by the Company at any time after June
1, 1996 if DDL's common stock closes above $4.00 per share, at a redemption
price of $.05 per warrant. Under a contingent payments provision of the
settlement agreement, the Company is obligated to pay the Participants $2.50
for each warrant which remains unexercised on the June 1, 1998 warrant
expiration date, payable in semiannual installments over two to ten years.
The Company has recorded a liability for the present value of these
contingent payments, which amounted to $919,000 at March 31, 1996. As the
result of this settlement agreement, the Company recorded an extraordinary
gain of $2,552,000 and had a net reduction of its liabilities of a
corresponding amount.
Stock sale:
In March 1996, the Company sold 600,000 shares of common stock to an offshore
investor under the provisions of Regulation S which generated net proceeds of
$1,112,000.
NOTE 6 - INFORMATION RELATING TO STATEMENT OF CASH FLOWS
- --------------------------------------------------------
"Net cash used by operating activities" includes cash payments for interest
as follows:
Nine months ended March 31,
1996 1995
---- ----
Interest paid $ 433,000 $ 767,000
======= =======
"Net (increase) decrease in operating working capital" is comprised of the
following:
Nine months ended March 31,
1996 1995
---- ----
Decrease in accounts receivable $ 226,000 $1,470,000
(Increase) decrease in
inventories (3,246,000) 1,520,000
(Increase) decrease in
prepaid expenses 57,000 (28,000)
Increase (decrease) in
accounts payable 312,000 (273,000)
Decrease in accrued payroll
and employee benefits (23,000) (290,000)
Increase (decrease) in other
liabilities 901,000 (335,000)
--------- ---------
Net (increase) decrease in
operating working capital $(1,773,000) $2,064,000
========= =========
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.
Supplemental schedule of non-cash investing and financing activities:
Nine months ended March 31,
1996 1995
---- ----
Capital expenditures financed by
lease obligations $ 619,000 $ 75,000
========= =======
7% Convertible Subordinated
Debentures converted to equity $ 124,000 $ 20,000
========= =======
Common stock issued as a fee to
debt placement agent $ 716,000 -
========= =======
Common stock issued as collateral
for 10% Senior Notes $1,325,000 -
========= =======
Common stock issued as partial
consideration for SMTEK, Inc.
acquisition $ 801,000 -
========= =======
NOTE 7 - PRO FORMA FINANCIAL INFORMATION
- ----------------------------------------
Following are the Company's restated pro forma consolidated operating results
for the nine months ended March 31, 1995, excluding results of operations for
the Company's Aeroscientific Corp. and A.J. Electronics, Inc. subsidiaries,
and excluding any gain from sale of these subsidiaries' assets, as compared
with actual operating results for the nine months ended March 31, 1996 (in
thousands except per share amounts):
Nine months ended
March 31,
1996 1995
---- ----
Sales $22,722 $13,908
------ ------
Cost of sales 19,985 12,068
Operating expenses 3,344 2,733
------ ------
Total cost and expenses 23,329 14,801
------ ------
Operating loss (607) (893)
Nonoperating income
(expense), net (172) (474)
------ ------
Loss before income tax benefit (779) (1,367)
Benefit from income taxes 1,110 -
------ ------
Income (loss) before
extraordinary item 331 (1,367)
Extraordinary item - gain on
debt extinguishment 2,552 2,441
------ ------
Net income $ 2,883 $ 1,074
====== ======
Earnings (loss) per share:
Income (loss) before
extraordinary item $0.02 ($0.08)
Extraordinary item 0.14 0.15
---- ----
$0.16 $0.07
==== ====
NOTE 8 - EVENTS SUBSEQUENT TO MARCH 31, 1996
- --------------------------------------------
At March 31, 1996 the Company had outstanding warrants to purchase 100,000
shares of common stock at $1.31 per share which had been issued in May 1995.
These warrants were exercised in April 1996.
On May 9, 1996, the holders of an aggregate of $3,300,000 of the Company's
10% Convertible Debentures elected to convert their debentures to common
stock. The effective conversion price is approximately $1.29 per share,
which will result in the issuance of approximately 2,558,500 new shares of
common stock. After giving effect to this conversion, the Company will have
approximately 22,881,000 shares of common stock outstanding. The
accompanying consolidated balance sheet as of March 31, 1996 does not give
effect to this debt conversion.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
DESCRIPTION OF THE BUSINESS
The Company provides customized, integrated electronic manufacturing services
("EMS") to original equipment manufacturers (OEMs) in the computer,
telecommunications, instrumentation, medical, industrial and aerospace
industries. The Company also manufactures multilayer printed circuit boards
("PCBs") for use primarily in the computer, communications, and
instrumentation industries. The Company's EMS operations are located in
Southern California and Northern Ireland. Its PCB facilities are located in
Northern Ireland.
The Company entered the EMS business by acquiring its domestic EMS operations
in 1985 and by organizing its European EMS operations in 1990. Since 1985,
the Company has made substantial capital expenditures in its Northern Ireland
EMS and PCB fabrication facilities. In fiscal 1995, the Company liquidated
or sold all assets associated with its PCB and ECM operations in the United
States, which essentially eliminated its U.S.-based operations.
In January 1996, as the first step toward reestablishing a domestic presence
in the EMS industry, the Company acquired SMTEK, Inc., a provider of
integrated electronic manufacturing services. In conjunction with this
acquisition, Gregory L. Horton, SMTEK's Chief Executive Officer and
President, was appointed Chief Executive Officer and President of the
Company. In addition, the Company's principal corporate office was relocated
from Oregon to SMTEK's facility in Newbury Park, California.
RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED MARCH 31, 1996 AND 1995
Consolidated sales for the three months ended March 31, 1996 were
$10,501,000, compared to $6,079,000 for the same period in the previous
fiscal year. The increase in sales results from the acquisition of SMTEK,
which contributed revenues of $4,871,000 in the current quarter. Sales for
the Northern Ireland operations, Irlandus Circuits, Ltd. ("Irlandus") and DDL
Electronics, Ltd. ("DDL-E"), declined approximately 7% in the current three
month period compared to the same period of the prior year.
Consolidated sales for the nine months ended March 31, 1996 were $22,722,000,
compared to $22,673,000 for the same period in the previous fiscal year.
Included in sales of the earlier nine month period are revenues from the
Company's former U.S. EMS operation, A.J. Electronics, Inc. ("A.J."), and PCB
operation, Aeroscientific Corp. ("Aero"). A.J.'s operations were
discontinued and ultimately liquidated in fiscal 1995, and Aero's
manufacturing facility and related assets were sold December 30, 1994. Aero
and A.J. represented $8,765,000 of sales for the nine months ended March 31,
1995. After giving effect to a pro forma adjustment to exclude sales of Aero
and A.J. from prior year's revenues, sales in the current nine month period
increased $8,814,000 over sales of the earlier nine month period. Of this
$8,814,000 increase, $4,871,000 represents revenues of SMTEK, which was
acquired in 1996. Sales growth at DDL-E accounted for most of the remaining
increase in consolidated sales. DDL-E has added several new significant
turnkey customers that have contributed to sales growth in the first half of
fiscal 1996 and have reduced the relative volume of sales made on a
consignment basis. For "turnkey" sales, DDL-E provides all materials, labor
and equipment associated with producing the customers' products, while
"consigned" sales are those in which the customers furnish the materials and
DDL-E provides only the labor and equipment to manufacture the product.
Consolidated gross profit (sales less cost of goods sold) for the first nine
months of fiscal 1996 improved by $693,000 compared with the first nine
months of fiscal 1995. The consolidated gross profit percentage declined from
13.2% (on a pro forma basis without Aero and A.J.) for the first nine months
of fiscal 1995 to 12.0% for the first nine months of fiscal 1996. DDL-E's
gross profit declined by $112,000, and its gross profit percentage declined
from 15.2% to 7.5% due to a decrease in consignment sales and an increase in
turnkey sales volume. Also, the cost of direct materials as a percent of
turnkey sales in fiscal 1996 was higher than in fiscal 1995. An increase in
the number of production employees handling the higher sales volume and
additional costs incurred for previously deferred equipment maintenance
further contributed to the decline in DDL-E's gross profit percentage.
Irlandus' gross profit improved by $142,000 and its gross profit percentage
improved from 11.5% to 12.8%. Improved margins at Irlandus were due to
improved product yields and higher profit margins on new business.
Consolidated gross profit for the three months ended March 31, 1996 was
$1,354,000, compared to $1,163,000 for the comparable period of the prior
year. The acquisition of SMTEK in January 1996 accounted for $979,000 of the
increase, offset by a decline in gross profit of the Northern Ireland
operations of approximately $800,000. Irlandus' gross profit declined
approximately $200,000 due to changes in product mix, while DDL-E's gross
profit declined by approximately $600,000. The lower gross profit at DDL-E
was attributable to the factors cited above for the nine month periods. The
consolidated gross percentage declined from 19.1% in the three months ended
March 31, 1995 to 12.9% in the three months ended March 31, 1996, primarily
due to the decline in gross profit at DDL-E.
The operating loss for the first nine months of fiscal 1996 improved over the
comparable period of fiscal 1995 by $2,668,000, from a loss in fiscal 1995 of
$3,275,000 to a loss of $607,000 in fiscal 1996. On a consolidated pro forma
basis, after giving effect to the exclusion of Aero and A.J. from fiscal 1995
operating results, the improvement in the operating loss was only $286,000. A
substantial portion of fiscal 1995's operating costs were attributable to
accrual of restructuring charges associated with the discontinuance of A.J.'s
operations and disposal of its assets. The restructuring charge of $1,173,000
in fiscal 1995 was comprised of a writedown of assets to liquidation value,
accrual of expected lease termination costs and provision for operating
expenses through A.J.'s ultimate and final disposal.
Net nonoperating expense for the three months ended March 31, 1996 and 1995
amounted to $310,000 and $83,000, respectively. This increase was
principally due to an increase in interest expense of $244,000 between these
two periods. The higher interest expense is associated with the new debt
issued in the current quarter to finance the acquisition of SMTEK. For the
year to date periods, net nonoperating income (expense) declined from
$2,725,000 in the nine months ended March 31, 1995 to ($172,000) in the nine
months ended March 31, 1996. This change is attributable principally to a
nonrecurring gain of $3,374,000 on the sale of assets of Aero and A.J. in the
earlier nine month period. Partially offsetting the effect of this gain was a
decrease in interest expense from $767,000 to $584,000 due to the payoff of
the Company's senior bank debt at the end of December 1994.
During the nine months ended March 31, 1996, the Company recognized an income
tax benefit associated with application for federal tax refunds as permitted
under section 172(f) of the Internal Revenue Code. In the aggregate the
Company applied for federal tax refunds of $2,175,000, net of costs
associated with applying for such refunds. Through March 31, 1996, the
Company has received $1,871,000 of net refunds plus interest on such refunds
of $106,000, and has recognized as an income tax benefit $1,110,000 net of
certain expenses. Because of the possibility that the tax returns underlying
these refunds may be subject to audit by the Internal Revenue Service and a
portion of the refunds disallowed, the Company has not yet recognized a tax
benefit for the remainder of the refunds received to date, or for the refunds
still expected to be received. Nonetheless, the Company feels that its claim
for refund and carry back of net operating losses can be substantiated and is
supported by law, and that the Company will ultimately collect and retain a
substantial portion of the refunds applied for.
For the nine months ended March 31, 1995, the loss before extraordinary item
was $550,000 or ($0.03) per share. On a pro forma basis, excluding the
nonrecurring gain on sale of assets and the operations of A.J. and Aero, the
first nine months of fiscal 1995 would have shown a loss before extraordinary
item of $1,367,000. For the nine months ended March 31, 1996, the income
before extraordinary item was $331,000, or $0.02 per share, which includes
the effect of the $1,110,000 income tax benefit discussed above.
Consolidated net income for the first nine months of fiscal 1996 was
$2,883,000 or $0.16 per share, compared to $1,891,000 or $0.12 per share for
the same period of fiscal 1995. Net income for the fiscal 1996 period
includes an extraordinary gain on debt extinguishment of $2,552,000
associated with the reduction of the Company's unfunded retirement
obligations to certain former employees and directors in March 1996. Net
income for the fiscal 1995 period includes an extraordinary gain on debt
extinguishment of $2,441,000 associated with the retirement of the Company's
senior bank debt in December 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity are its cash and cash equivalents,
which amounted to $2,649,000 at March 31, 1996. During the nine months ended
March 31, 1996, cash and cash equivalents decreased by $268,000. This net
cash outflow was comprised of cash used to acquire SMTEK of $7,638,000, cash
used by operating activities of $997,000, capital expenditures of $696,000,
and the effect of exchange rate changes on cash of $98,000, partially offset
by cash inflows of $7,009,000 from new borrowings net of debt repayments and
debt issue costs, proceeds from issuance of common stock of $1,921,000, and
proceeds from government grants of $231,000.
Components of operating working capital increased by $1,773,000 during the
first nine months of fiscal 1996, comprised of a $226,000 decrease in
accounts receivable, a $3,246,000 increase in inventory and a $57,000
decrease in prepaid expenses, partially offset by an increase current
liabilities of $1,190,000. The increase in working capital is primarily the
result of the acquisition of SMTEK in 1996.
In December 1995, the Company finalized a renewable one year credit facility
with a European bank to provide a working capital line of credit of 500,000
pounds sterling (approximately $750,000) for use in financing the growth of
the Company's Northern Ireland operations. There were no borrowings
outstanding under this credit facility at March 31, 1996. The Company is
currently negotiating with a bank for a U.S. credit facility to provide
working capital financing for SMTEK, Inc. There can be no assurance, however,
that the Company will be successful in obtaining a bank credit facility for
its U.S. operations.
In February 1996, the Company issued 10% Senior Notes due July 1, 1997 in the
aggregate amount of $5,300,000 and 10% Convertible Debentures due February
28, 1997 in the aggregate amount of $3,500,000. The proceeds of these
borrowings were used to pay off the principal and accrued interest of the
$7,000,000 Bridge Loans which had been taken out to finance the acquisition
of SMTEK, pay acquisition costs, and provide working capital for SMTEK. In
March 1996, to raise additional working capital for SMTEK, the Company sold
600,000 shares of common stock to an offshore investor under the provisions
of Regulation S which generated net proceeds of $1,112,000.
The 10% Convertible Debentures were sold to offshore investors under
Regulation S provisions of U.S. securities laws. The Debentures are
convertible at the holders' option into the Company's common stock at any
time after 60 days at a conversion price equal to 82% of the average of the
lowest trade price for the Company's common stock on the New York Stock
Exchange for the three days immediately preceding the conversion date. Any
10% Convertible Debentures outstanding after 12 months will automatically be
converted into common stock.
On May 9, 1996, the holders of an aggregate of $3,300,000 of the Company's
10% Convertible Debentures elected to convert their debentures to common
stock. The effective conversion price is approximately $1.29 per share,
which will result in the issuance of approximately 2,558,500 new shares of
common stock. After giving effect to this conversion, the Company will have
approximately 22,881,000 shares of common stock outstanding. The
accompanying consolidated balance sheet as of March 31, 1996 does not give
effect to this debt conversion.
The achievement of sustained 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 attain operating profitability, or that cash
generated from non-operating sources will be adequate to fund future cash
needs. As a necessary step to ensure the Company's increased profitability
the Company is actively pursuing 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 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
10.1 Form of 10% Senior Secured Notes due July 1, 1997, issued as of
February 29, 1996 in the aggregate amount of $5,300,000
10.2 Form of Offshore Securities Subscription Agreement and Form of
Debenture dated as of February 28, 1996 covering the sale under
Regulation S of $3,500,000 aggregate amount of the Company's 10%
Cumulative Convertible Debentures due February 28, 1997
10.3 Offshore Securities Subscription Agreement dated as of March 1,
1996 covering the sale under Regulation S of 600,000 shares of the
Company's Common Stock
11 Computation of Earnings Per Share
27 Financial Data Schedule
b. Reports on Form 8-K:
On January 29, 1996, a Form 8-K was filed regarding the acquisition of
SMTEK, Inc. This Form 8-K was amended by the filing of a Form 8-K/A on
March 27, 1996 to provide the required audited financial statements of
SMTEK and the unaudited pro forma financial information for this
acquisition.
SIGNATURES
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.
March 13, 1996 /s/ Gregory L. Horton
_________________________________ ___________________________________
Date Gregory L. Horton
Chief Executive Officer and
President
March 13, 1996 /s/ Richard K. Vitelle
_________________________________ ___________________________________
Date Richard K. Vitelle
Vice President -Finance
(Principal Financial Officer)