SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 1996
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
___________
Exact Name of Registrant as
Specified in Its Charter: DDL ELECTRONICS, INC.
______________________________
DELAWARE 33-0213512
_____________________________ _____________
State or Other Jurisdiction of I.R.S. Employer
Incorporation or Organization No. Identification
Address of Principal Executive Offices: 2151 Anchor Court
Newbury Park, CA 91320
_________________________
Registrant's Telephone Number: (805) 376-9415
_________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
_________________________ ________________________________________
Common Stock, $.01 Par Value New York Stock Exchange
Pacific Stock Exchange
7% Convertible Subordinated
Debentures due May 15, 2001 New York Stock Exchange
8-1/2% Convertible Subordinated
Debentures due August 1, 2008 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant based on the closing price as reported by the New York Stock
Exchange on October 9, 1996 was $20,448,000. The registrant had 23,046,914
shares of Common Stock outstanding as of October 9, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
Specified parts of the registrant's Annual Report to Stockholders for its
fiscal year ended June 30, 1996 are incorporated by reference into Parts I
and II hereof. Specified parts of the registrant's Proxy Statement for its
1996 Annual Meeting of Stockholders are incorporated by reference into Part
III hereof.
EXHIBIT INDEX
See page 14
PART I
Item 1. 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 fabricates 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.
RECENT DEVELOPMENTS
Acquisition of SMTEK, Inc.
In January 1996, as the first step toward rebuilding a domestic
presence in the EMS industry, the Company acquired SMTEK, Inc. ("SMTEK"), a
provider of integrated electronic manufacturing services. SMTEK specializes
in the design and manufacture of complex printed circuit board assemblies
and modules utilizing surface mount technology ("SMT") for sale to
government-related and commercial customers. 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.
The consideration paid by the Company to purchase SMTEK consisted of
1,000,000 shares of common stock and $7,199,000 in cash. The cash portion
of the purchase price was financed principally by short-term bridge loans
extended to the Company in November 1995 and January 1996 in the aggregate
amount of $7,000,000, bearing interest at 10% per annum (the "Bridge
Loans"). The Company refinanced the Bridge Loans in February 1996 by issuing
$5,300,000 in aggregate amount of 10% Senior Secured Notes due July 1, 1997
(the "10% Senior Notes") and $3,500,000 in aggregate amount of 10%
Cumulative Convertible Debentures due February 28, 1997 (the "10%
Convertible Debentures"). As compensation for placing the Notes and the
Debentures, the Company paid to Rickel & Associates, Inc. ("Rickel") a fee
of $352,000 and issued to Rickel 572,683 shares of common stock valued at
$716,000. Rickel also received certain compensation for making and
arranging the Bridge Loans.
Changes in the Company's capitalization
The 10% Convertible Debentures, which were sold to offshore investors,
were convertible into common stock at any time after 60 days at a conversion
price equal to 82% of the market price of the Company's common stock at the
time of conversion. In May and June 1996, the holders of all of the 10%
Convertible Debentures elected to convert such debentures into common stock.
As a result of these conversions, a total of 2,698,275 new shares of common
stock were issued, and stockholders' equity increased by $3,188,000, net of
remaining unamortized issue costs.
Primarily as a result of the common stock issued in connection with
the acquisition of SMTEK and the conversion of the 10% Convertible
Debentures, the Company's outstanding common stock at June 30, 1996 amounted
to 22,998,879 shares, compared to 16,062,979 shares at the end of fiscal
1995.
Reduction of certain obligations
In March 1996, the Company entered into a settlement agreement with
certain of its former officers, key employees and directors (the
"Participants") to restructure its outstanding obligations under several
consulting programs and deferred fee arrangements which had provided for
payments to the Participants after their retirement from the Company or from
its board of directors. Under terms of the settlement, the Participants
agreed to relinquish all future payments due them under these consulting
programs and deferred fee arrangements in return for an aggregate of 595,872
common stock purchase warrants, Series G. The exercise price of these
warrants is $2.50 per warrant. 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. 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
future payments, which amounted to $941,000 at June 30, 1996. As a result
of this settlement agreement, the Company recorded an extraordinary gain of
$2,356,000, net of $197,000 of compensation expense related to the "call"
feature of the warrants.
FINANCIAL INFORMATION BY BUSINESS SEGMENT AND GEOGRAPHICAL AREA
The Company is engaged in two lines of business -- electronic
manufacturing services and printed circuit board fabrication. Information
with respect to these segments' sales, operating income (loss), identifiable
assets, depreciation and amortization, and capital expenditures for each of
the last three fiscal years is set forth in Note 11 to the consolidated
financial statements of the accompanying 1996 Annual Report to Stockholders.
Such information is incorporated herein by this reference and is made a part
hereof.
ELECTRONIC MANUFACTURING SERVICES AND PRINTED CIRCUIT BOARD
FABRICATION BUSINESSES
The EMS and PCB fabrication industries and the markets in which the
Company's customers compete are characterized by rapid technological
change and product obsolescence. As a result, the end services provided
and products made by the Company's EMS and PCB fabrication customers
have relatively short product lives. The Company believes that its
future success in these industries is dependent on its ability to
continue to incorporate new technology into its EMS and PCB fabrication
processes, to satisfy increasing customer demands for quality and timely
delivery and to be responsive to future changes in this dynamic market.
The EMS industry, in general, has experienced increased customer demand
as customers move away from captive or in-house EMS capabilities and
out-source production. At the same time, the number of EMS providers is
growing, thus increasing competition, keeping margins low and forcing
sudden changes in the EMS customer base.
The PCB fabrication market is highly fragmented. Numerous factors,
however, have caused a shift toward consolidation in the PCB fabrication
industry, including extreme competition, substantial excess production
capacity experienced by the industry prior to the current fiscal year, the
greatly increased capital and technical requirements to service the advanced
multilayer PCB fabrication market and the inability of many PCB fabricators
to keep up with the changing demands and expectations of customers on
matters such as technical board characteristics, quality and timely delivery
of product.
Description of Products and Services--EMS
Production of electronic assemblies for a customer is only performed
when a firm order is received. Customer cancellations of orders are
infrequent and are subject to cancellation charges. More often, a customer
will delay shipment of orders based on its actual or anticipated needs.
Customer orders are produced based on one of two production methods, either
"turnkey" (where the Company provides all materials, labor and equipment
associated with producing the customers' product) or "consigned" (the
Company provides labor and equipment only for manufacturing product).
The Company's EMS operations provide turnkey electronic manufacturing
services using both surface mount and through-hole interconnection
technologies. The Company conducts the EMS portion of its business through
its SMTEK subsidiary in Southern California, which serves customers
primarily on the West Coast of the U.S., and through its DDL Electronics
Limited ("DDL-E") subsidiary, which serves customers primarily in Western
Europe. SMTEK and DDL-E do not fabricate any of the components or PCBs used
in these processes, but from time to time they have procured PCBs from the
Company's PCB fabricator, Irlandus Circuits Limited ("Irlandus"). EMS sales
represented approximately 67%, 47% and 59% of the Company's consolidated
sales for the fiscal years ended June 30, 1996, 1995 and 1994, respectively.
Since turnkey electronic contract manufacturing may be a substitute for
all or some portion of a customer's captive EMS capability, continuous
communication between the Company and the customer is critical. To
facilitate such communication, the Company's EMS businesses maintain
customer service departments whose personnel work closely with the customer
throughout the assembly process. The Company's engineering and service
personnel coordinate with the customer on the implementation of new and re-
engineered products, thereby providing the customer with feedback on such
issues as ease of assembly and anticipated production lead times. Component
procurement is commenced after component specifications are verified and
approved sources are confirmed with the customer. Concurrently, assembly
routing and procedures for conformance with the workmanship standards of the
Institute for Interconnecting and Packaging Electronic Circuits are defined
and planned. Additionally, in-circuit test fixtures are designed and
developed. In-circuit tests are normally performed on all assembled circuit
boards for turnkey projects. Such tests verify that components have been
properly inserted and meet certain functional standards and that electrical
circuits are properly completed. In addition, under protocols specified by
the customer, the Company performs customized functional tests designed to
ensure that the board or assembly will perform its intended function. The
Company's personnel monitor all stages of the assembly process in an effort
to provide flexible and rapid responses to the customer's requirements,
including changes in design, order size and delivery schedule.
The materials procurement element of the Company's turnkey services
consists of the planning, purchasing, expediting and financing of the
components and materials required to assemble a board-level or system-level
assembly. Customers have increasingly required the Company and other
independent providers of electronic manufacturing services to purchase some
or all components directly from component manufacturers or distributors and
to finance the components and materials. In establishing a turnkey
relationship with an independent provider of electronic manufacturing
services, a customer typically incurs costs in qualifying that EMS provider
and, in some cases, its sources of component supply, refining product design
and developing mutually compatible information and reporting systems. With
this relationship established, the Company believes that customers
experience significant difficulty in expeditiously and effectively
reassigning a turnkey project to a new assembler or in taking on the project
themselves. At the same time, the Company faces the obstacle of attracting
new customers away from existing EMS providers or from performing services
in-house.
Description of Products and Services--PCB Fabrication
The Company fabricates and sells advanced, multilayer PCBs based on
designs and specifications provided by the Company's customers. These
specifications are developed either solely through the design efforts of the
customer or through the design efforts of the customer working together with
the Company's design and engineering staff. Customers submit requests for
quotations on each job and the Company prepares bids based on its own cost
estimates. The Company conducts its PCB fabrication business through its
Irlandus subsidiary located in Northern Ireland. The Company's fabrication
facilities in Anaheim, California were shut down in fiscal year 1992 and its
Beaverton, Oregon facility was sold in fiscal 1995. PCB sales represented
approximately 33%, 53% and 41% of the Company's consolidated sales for the
fiscal years ended June 30, 1996, 1995 and 1994, respectively, with
multilayer boards constituting a substantial portion of the sales.
PCBs range from simple single- and double-sided boards to multilayer
boards with more than 20 layers. When PCBs are joined with electronic
components in the assembly process, they comprise the basic building blocks
for electronic equipment. Single-sided PCBs are used in electronic games
and automobile ignition systems, whereas multilayer PCBs are used in more
advanced applications such as computers, office equipment, communications,
instrumentation and defense systems.
PCBs consist of fine lines of a conductive material, such as copper,
which are bonded to a non-conductive panel, typically rigid laminated epoxy
glass. The conductive pathways in the PCBs form electrical circuits and
replace wire as a means of connecting electronic components. On
technologically advanced multilayer boards, conductive pathways between
layers are connected with traditional plated through-holes and may
incorporate surface mount technology. "Through-holes" are holes drilled
entirely through the board that are plated with a conductive material and
constitute the primary connection between the circuitry on the different
layers of the board and the electronic components attached to the boards
later. "Surface mount" boards are boards on which electrical components are
soldered onto the surface instead of being inserted into through-holes.
Although substantially more complex and difficult to produce, surface mount
boards can substantially reduce wasted space associated with through-hole
technology and permit greatly increased surface and inner layer densities.
Complex boards may also have "via" or "blind-via" holes that connect inner
layers of a multilayer board or connect an inner layer to the outside of the
board.
The development of increasingly sophisticated electronic equipment,
which combines higher performance and reliability with reduced size and
cost, has created a demand for increased complexity, miniaturization and
density in electronic circuitry. In response to this demand, multilayer
technology is advancing rapidly on many fronts, including the widespread use
of surface mount technology. More sophisticated boards are being created by
decreasing the width of the tracks on the board and increasing the amount of
circuitry that can be placed on each layer. Fabricating advanced multilayer
PCBs requires high levels of capital investment and complex, rapidly
changing production processes.
As the sophistication and complexity of PCBs increase, manufacturing
yields typically fall. Historically, the Company relied on tactical quality
procedures, in which defects are assumed to exist and quality inspectors
examine product lot by lot and board by board to identify deficiencies,
using automated optical inspection and electrical test equipment. This
traditional approach to quality control is not adequate, however, to produce
acceptably high yields in an advanced multilayer PCB fabrication
environment, as it focuses on identifying, rather than preventing, defects.
In recognition of this limitation, Irlandus is striving to create a positive
environment encompassing management's awareness, process understanding, and
operator involvement in identifying and correcting production problems
before defects occur.
Quality standards
The International Standards Organization ("ISO") has published
internationally recognized standards of workmanship and quality. Both
Irlandus and DDL-E have achieved ISO 9002 certification, which the Company
believes will be increasingly necessary to attract business. SMTEK has been
certified for Mil-Q-9858A, which is the highest military quality standard,
and NHB-5300.4, which is the primary quality standard for products used in
the U.S. space program. SMTEK is currently working to obtain ISO 9001
certification, which it expects to receive by February 1997.
EMS Facilities
SMTEK conducts its operations from a 78,000 square foot facility, which
is leased from an unaffiliated party through May 31, 2000. The monthly rent
was approximately $28,500 during fiscal 1996 and is subject to a 4% increase
each year. SMTEK has the option to extend the lease term for three renewal
periods of three years each. The lease rate during the renewal periods is
subject to adjustment based on changes in the Consumer Price Index for the
local area.
DDL-E conducts its operations from a 67,000 square foot facility in
Northern Ireland that was purchased in 1989. Prior to DDL-E commencing
operations in the spring of 1990, approximately 1,600,000 pounds sterling
(approximately $2,700,000) was expended on auto-insertion equipment, surface
mount device placement equipment, wave solder equipment, visual inspection
equipment and automated test equipment. The Company believes that this
facility possesses the technology required to compete effectively and that
the facility is capable of supporting projected growth for up to the next
two years.
Fabrication Facilities
Irlandus occupies a 63,000 square foot production facility and an
adjacent 9,000 square foot office and storage facility. Irlandus' existing
capacity is expected to be adequate to meet anticipated order levels for the
next three years.
Markets and Customers
The Company's sales in the EMS and PCB fabrication businesses and the
percentage of its consolidated sales to the principal end-user markets it
serves for the last three fiscal years were as follows (dollars in
thousands):
Year Ended June 30,
----------------------------------------------------
Markets 1996 1995 1994
------------ ------------ ------------ ------------
Computer $ 4,049 12.2% $ 7,115 24.1% $23,905 49.3%
Communications 4,189 12.6 6,926 23.4 8,396 17.3
Commercial
aviation 2,277 6.9 - - - -
Financial 3,155 9.5 2,067 7.0 - -
Industrial &
Instrumentation 7,621 23.0 6,044 20.4 6,196 12.8
Medical 4,429 13.4 4,668 15.8 6,533 13.4
Government/
Military 4,847 14.6 1,362 4.6 1,411 2.9
Automotive - - 175 .6 889 1.8
Other 2,569 7.8 1,219 4.1 1,199 2.5
------ ----- ------ ----- ------ -----
Total $33,136 100.0% $29,576 100.0% $48,529 100.0%
====== ===== ====== ===== ====== =====
The Company markets its EMS and PCB fabrication services through both a
direct sales force and independent manufacturers' representatives. The
Company's marketing strategy is to develop close relationships with, and to
increase sales to, certain existing and new major EMS and PCB fabrication
customers. This includes becoming involved at an early stage in the design
of PCBs for these customers' new products. The Company believes that this
strategy is necessary to keep abreast of rapidly changing technological
needs and to develop new EMS and PCB fabrication processes, thereby
enhancing the Company's EMS and PCB capabilities and its position in the
industry. As a result of this strategy, however, fluctuations experienced
by one or more of these customers in demand for their products may have and
have had adverse effects on the Company's sales and profitability.
During fiscal 1996, the Company's EMS and PCB businesses served
approximately 55 and 175 customers, respectively. The Company's five
largest customers accounted for 37%, 21% and 45% of consolidated sales
during fiscal years 1996, 1995 and 1994, respectively. The Company's largest
customer accounted for approximately 9.5% of consolidated sales in fiscal
1996.
Raw Materials and Suppliers
In its EMS business, the Company uses numerous suppliers of electronic
components and other materials. The Company's customers may specify the
particular manufacturers and components, such as the Intel 80486
microprocessor, to be used in the EMS process. To the extent these
components are not available on a timely basis or are in short supply
because of allocations imposed by the component manufacturer, and the
customer is unwilling to accept a substitute component, delays may occur.
Such delays are experienced in the EMS business from time to time and have
caused sales and inventory fluctuations in the Company's EMS business.
The principal materials used by the Company in its PCB fabrication
processes are copper laminate, epoxy glass, copper alloys, gold and various
chemicals, all of which are readily available to the Company from various
sources. The Company believes that its sources of materials for its
fabrication business are adequate for its needs and that it is not
substantially dependent upon any one supplier.
Industry Conditions and Competition
The markets in which the EMS and PCB fabrication businesses operate are
intensely competitive and have experienced excess production capacity during
the past few years. Seasonality is not a factor in the EMS and PCB
fabrication businesses. There has been significant downward pressure on the
prices that the Company is able to charge for its EMS and PCB fabrication
services. More recently, market conditions have improved, resulting in an
increase in product demand. While the Company believes that market
conditions will continue to improve, it does not believe that prices will
increase as quickly. EMS and PCB fabrication customers are increasing their
orders, but are reluctant to pay more for such services, primarily due to
the industry's excess capacity and price competition. Additionally,
competition is principally based on price, product quality, technical
capability and the ability to deliver products on schedule. Both the price
of and the demand for EMS and PCBs are sensitive to economic conditions,
changing technologies and other factors. The technology used in EMS and
fabrication of PCBs is widely available, and there are a large number of
domestic and foreign competitors. Many of these firms are larger than the
Company and have significantly greater financial, marketing and other
resources. In addition, the Company faces a competitive disadvantage
against better financed competitors because the Company's current financial
situation causes certain customers to be reluctant to do business with the
Company's operating units. Many of the Company's competitors have also made
substantial capital expenditures in recent years and operate technologically
advanced EMS and fabrication facilities. In addition, some of the Company's
customers have substantial in-house EMS capability, and to a lesser extent,
PCB fabrication capacity. There is a risk that when these customers are
operating at less than full capacity they will use their own facilities
rather than purchase from the Company. Despite this risk, management
believes that the Company has not experienced a significant loss of business
to in-house fabricators or assemblers. There also are risks that other
customers, particularly in the EMS market, will develop their own in-house
capabilities, that additional competitors will acquire the ability to
produce advanced, multilayer boards in commercial quantities, or the ability
to provide EMS, and that foreign firms, including large, technologically
advanced Japanese firms, will increase their share of the United States or
European market.
Price competition is particularly intense in the computer market, which
in fiscal years 1995 and 1994 was the Company's largest market segment.
This has caused price erosion and lower margins, particularly in the
Company's PCB fabrication business. Significant improvement in the
Company's PCB gross margins may not be achieved in the near future due to
excess PCB production capacity worldwide and substantial competitive
pressures in the Company's principal markets. Generally, the Company's
customers are reducing inventory levels and seeking lower prices from their
vendors, such as the Company, to compete effectively.
GENERAL
Backlog
At June 30, 1996, 1995 and 1994, the Company's EMS and PCB fabrication
businesses had combined backlogs of $17,669,000, $9,247,000 and $6,902,000,
respectively. Backlog is comprised of orders believed to be firm for
products that have scheduled shipment dates during the next 12 months. Some
orders in the backlog may be canceled under certain conditions.
Historically, a substantial portion of the Company's orders have been for
shipment within 90 days of the placement of the order and, therefore,
backlog information as of the end of a particular period is not necessarily
indicative of trends in the Company's business. In addition, the timing of
orders from major customers may result in significant fluctuations in the
Company's backlog and operating results from period to period.
Backlog at June 30, 1996 includes SMTEK, the EMS business acquired by
the Company in January 1996. The Company's backlog at June 30, 1995
consisted only of the backlog of the Company's European subsidiaries. The
increase from fiscal year 1994 to fiscal 1995 reflected higher order demand
from existing EMS customers and new outstanding orders from new EMS
customers.
Environmental Regulation
Federal, state and local provisions relating to the protection of the
environment affect the Company's PCB fabrication operations. In 1983, the
United States and the State of California filed a legal action against the
owners and operators of the Stringfellow hazardous waste disposal site
located near Riverside, California, as well as against a number of
generators and transporters of chemical substances who allegedly disposed of
waste at the site (the "Primary Defendants"). The action seeks to cause the
Primary Defendants to clean up the site, to reimburse government plaintiffs
for remediation costs incurred by them and to recover compensation for
alleged damage to natural resources. The Primary Defendants have initiated
a defense of the case. The State of California also has been found liable
for, among other things, its negligent selection, inspection, design,
construction, operation and failure to remedy the site. In 1988, the
Primary Defendants filed third-party complaints against the Company's
Anaheim, California-based Aeroscientific Corp. subsidiary ("Aero Anaheim")
and about 185 other alleged responsible parties. The U.S. Environmental
Protection Agency ("EPA") has estimated that about 34 million gallons of
waste were disposed of at the Stringfellow site and has estimated that Aero
Anaheim may have been responsible for having generated about 9,300 gallons
or 0.0273 percent of the total waste disposed. The government plaintiffs,
however, have been unable to estimate the value of their principal claims.
EPA's cleanup estimates have ranged from $400 million to $1 billion,
depending on which cleanup proposal is selected. At the present time, the
Company cannot determine how the allocation of responsibility in this case
will ultimately be made or what share of responsibility might be imposed on
state and local governments. The EPA contends that site owners and
operators and waste generators are jointly and severally liable under
federal law. In 1994, the Company was given the opportunity to participate
in a de minimis settlement negotiated with the EPA and the Primary
Defendants. The Company's share of the settlement and administration costs
would have been approximately $120,000. The Company decided not to
participate in the settlement at that time because of its limited cash
resources. However, the Company accrued this amount as its estimate of the
liability it will ultimately bear in this matter. The Company is currently
exploring the feasibility of entering into a settlement with the Primary
Defendants in which that same amount would be paid over several years. No
assurances can be given, however, that any such settlement will be achieved.
The Company is aware of certain chemicals that exist in the ground at
Aero Anaheim's previously leased facility in Anaheim. 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 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 implemented beginning
in 1995. Investigative work to determine the full extent of potential
groundwater pollution has not yet been completed. The Company retained the
services of an environmental engineering firm in May 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 cleanup of the
potential groundwater 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,
however, that the resolution of these matters will require a significant
cash outlay. Initial estimates from environmental engineering firms
indicate that it could cost from $1,000,000 to $3,000,000 to fully clean up
the site and could take as long as ten years to complete. The Company and
Aero Anaheim entered into an agreement to share the costs of environmental
remediation with the owner of the Anaheim property. 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 $580,000 share) with any costs above
$725,000 being shared equally between the Company and the property owner.
Through June 30, 1996, the Company has paid $420,000 as its share of the
remediation costs (including cash placed in an escrow account for payment of
expenses). At June 30, 1996, the Company has a reserve of $608,000, which
represents its estimated share of future remediation costs at this site.
Based on consultation with the environmental engineering firms, management
believes that the Company has made adequate provision for the liability
based on probable loss. It is possible, however, that the future remediation
costs at this site may differ significantly from the estimates, and may exceed
the amount of the reserve.
From time to time the Company is also involved in other waste disposal
remediation efforts and proceedings associated with its other facilities.
Based on information currently available to the Company, management does not
believe that the costs of such efforts and proceedings will have a material
adverse effect on the Company's business or financial condition.
Employees
At June 30, 1996, the Company had approximately 480 employees.
Item 2. Properties
The following table lists principal plants and properties of the Company
and its subsidiaries:
Owned
Square or
Location Footage Leased
------------ ------ ------
Newbury Park, California 78,000 Leased
Craigavon, Northern Ireland 63,000 Owned
Craigavon, Northern Ireland 67,000 Owned
Craigavon, Northern Ireland 9,000 Owned
The Northern Ireland properties are pledged as security for installment
loans payable to the Industrial Development Board for Northern Ireland, from
which the properties were purchased. These loans had an aggregate
outstanding balance of approximately $1,265,000 at June 30, 1996.
Item 3. Legal Proceedings
As to other litigation matters that are not specifically described
under the caption "General - Environmental Regulation" in Item 1 above, no
material legal proceedings are presently pending to which the Company or any
of its property is subject, other than ordinary routine litigation
incidental to the Company's business.
Item 4. Submission of Matters to a Vote of Security Holders
At the 1995 Annual Meeting of Stockholders held on July 11, 1996,
Richard K. Vitelle was elected a Class III director by the stockholders.
Directors whose terms of office continued after the meeting were Erven P.
Tallman, Gregory L. Horton, Melvin Foster, Bernee D.L. Strom and Robert G.
Wilson. In addition to the election of a director, the stockholders approved
the Company's 1996 Stock Incentive Plan, the 1996 Non-Employee Directors
Stock Option Plan and a plan of warrant compensation for non-employee
directors who had joined the Board of Directors on May 31, 1995 and had
served since that date without other compensation from the Company.
Following is a summary of the voting:
Votes Votes
Votes For Against Abstained Unvoted
-------- ------- ------- -------
Election of Richard K. Vitelle
as Class III director 19,929,689 258,381 - -
Approval of 1996 Stock
Incentive Plan 10,303,288 841,857 93,126 8,949,799
Approval of 1996 Non-Employee
Directors Stock Option Plan 11,715,005 513,083 103,716 7,856,266
Approval of plan of warrant
compensation for non-employee
directors 11,088,984 526,350 111,489 8,461,247
At a Board of Directors meeting immediately following the 1995 Annual
Meeting, Mr. Tallman resigned from the board, and Karen Beth Brenner was
elected a director to fill Mr. Tallman's seat.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
The information set forth under the caption "Market and Dividend
Information" in the Company's 1996 Annual Report to Stockholders is
incorporated herein by reference and made a part hereof.
Item 6. Selected Financial Data
The information set forth under the caption "Five-Year Financial
Summary" in the Company's 1996 Annual Report to Stockholders is incorporated
herein by reference and made a part hereof.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information set forth under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the
Company's 1996 Annual Report to Stockholders is incorporated herein by
reference and made a part hereof.
Item 8. Financial Statements and Supplementary Data
Reference is made to the financial statements and financial schedules
included later in this Report under Item 14.
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
This information is incorporated by reference to the Company's proxy
statement for its 1996 Annual Meeting of Stockholders.
Item 11. Executive Compensation
This information is incorporated by reference to the Company's proxy
statement for its 1996 Annual Meeting of Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management
This information is incorporated by reference to the Company's proxy
statement for its 1996 Annual Meeting of Stockholders.
Item 13. Certain Relationships and Related Transactions
This information is incorporated by reference to the Company's proxy
statement for its 1996 Annual Meeting of Stockholders.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
1996 Annual
Report to
Stockholders
------
(a)(1) List of Financial Statements
List of data incorporated by reference:
Report of KPMG Peat Marwick LLP on consolidated
financial statements 12
Consolidated balance sheets as of June 30, 1996
and 1995 13
Consolidated statements of operations for the
years ended June 30, 1996, 1995 and 1994 15
Consolidated statements of cash flows for the
years ended June 30, 1996, 1995 and 1994 16
Consolidated statements of stockholders'
equity (deficit) for the years ended June 30,
1996, 1995 and 1994 17
Notes to consolidated financial statements 18
(a)(2) List of Financial Statement Schedules for the
years ended June 30, 1996, 1995 and 1994:*
VIII - Valuation and Qualifying
Accounts and Reserves 32
IX - Short-Term Bank Borrowings N/A
Form 10-K
-------
(a)(3) List of Exhibits:
Exhibit Index 14
(b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the quarter
ended June 30, 1996.
* Schedules other than those listed are omitted since they are
not applicable, not required, or the information required to be
set forth therein is included in the consolidated financial
statements or in the notes thereto.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on
October 10, 1996.
DDL ELECTRONICS, INC.
/s/ Gregory L. Horton
-----------------------
Gregory L. Horton
Chief Executive Officer,
President and Chairman
of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
Signature Title Date
/s/ Gregory L. Horton Chief Executive Officer, October 10, 1996
- ----------------------- President and Chairman ------------------
Gregory L. Horton of the Board
/s/ Richard K. Vitelle Vice President-Finance and October 10, 1996
- ----------------------- Administration, Chief ------------------
Richard K. Vitelle Financial Officer, Treasurer,
Secretary and Director
/s/ Karen B. Brenner Director October 10, 1996
- ----------------------- ------------------
Karen B. Brenner
/s/ Melvin Foster Director October 10, 1996
- ----------------------- ------------------
Melvin Foster
Director
- ----------------------- ------------------
Robert G. Wilson
Director
- ----------------------- ------------------
Bernee D. L. Strom
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
3.1 Amended and Restated Certificate of Incorporation of the
Company (incorporated by reference to Exhibit 4.1 of the
Company's Registration Statement on Form S-8, Commission File
No. 33-7440).
3.2 Bylaws of the Company, amended and restated effective March
1995 (incorporated by reference to Exhibit 3-b of the
Company's 1995 Annual Report on Form 10-K).
4.1 Certificate of Designation, Preferences and Rights of Series A
Junior Participating Preferred Stock of the Company
(incorporated by reference to Exhibit 4.2 of the Company's
Registration Statement on Form S-8, Commission File No. 33-7440).
4.2 Certificate of Designation, Preferences and Rights of Series B
Convertible Preferred Stock of the Company (incorporated by
reference to Exhibit 4.3 of the Company's Registration
Statement on Form S-8, Commission File No. 33-7440).
4.3 Indenture dated July 15, 1988, applicable to the Company's
8-1/2% Convertible Subordinated Debentures due August 1, 2008
(incorporated by reference to Exhibit 4-c of the Company's 1988
Annual Report on Form 10-K).
4.3.1 Supplemental Indenture relating to the Company's 8-1/2%
Convertible Subordinated Debentures due August 1, 2008
(incorporated by reference to Exhibit 4-b of the Company's
1991 Annual Report on Form 10-K).
4.4 Indenture relating to the Company's 7% Convertible
Subordinated Debentures due 2001 (incorporated by reference to
Exhibit 4-c of the Company's 1991 Annual Report on Form 10-K).
4.5 Rights Agreement dated as of June 10, 1989, between the
Company and Bank of America, as Rights Agent (incorporated by
reference to Exhibit 1 to the Company's Report on Form 8-K
dated June 15, 1989).
4.5.1 Amendment to Rights Agreement dated as of February 21, 1991,
amending the Rights Agreement dated as of June 10, 1989,
between the Company and Bank of America, as Rights Agent
(incorporated by reference to Exhibit 4.7 of Registration
Statement No. 33-39115).
4.6 Warrant Agreement for Series A Warrants by and between the
Company and American Stock Transfer & Trust Company (the
"Transfer Agent") dated as of November 11, 1992 (incorporated
by reference to Exhibit 28.2 of the Company's Current Report
on Form 8-K dated January 7, 1993).
4.6.1 Second Amendment to the Warrant Agreement for Series A
Warrants by and between the Company and the Transfer Agent
dated as of July 31, 1995 (incorporated by reference to
Exhibit 4-e of the Company's Registration Statement on Form
S-3, Commission File No. 333-02969).
4.7 Series C Warrant Agreement dated as of July 1, 1995 between
the Company and Fechtor, Detwiler & Co., Inc. covering 250,000
shares and expiring on June 30, 2000 (incorporated by reference to
Exhibit 4-f of the Company's Registration Statement on Form
S-3, Commission File No. 333-02969).
4.8 Series C Warrant Agreement dated as of July 1, 1995 between
the Company and Fortuna Capital Management covering 100,000
shares and expiring on June 30, 2000 (incorporated by reference to
Exhibit 4-g of the Company's Registration Statement on Form
S-3, Commission File No. 333-02969).
4.9 Series C Warrant Agreement dated as of July 1, 1995 between
the Company and Karen Brenner covering 50,000 shares and expiring
on June 30, 2000 (incorporated by reference to Exhibit 4-h of
the Company's Registration Statement on Form S-3, Commission
File No. 333-02969).
4.10 Series C Warrant Agreement dated as of July 1, 1995 between
the Company and Barry Kaplan covering 15,000 shares and expiring
on June 30, 2000 (incorporated by reference to Exhibit 4-k of
the Company's Registration Statement on Form S-3, Commission
File No. 333-02969).
4.11 Series D Warrant Agreement dated as of July 1, 1995 between
the Company and Charles Linn Haslam covering 250,000 shares
and expiring on June 30, 2000 (incorporated by reference to
Exhibit 4-i of the Company's Registration Statement on Form
S-3, Commission File No. 333-02969).
4.12 Form of Warrant and Contingent Payment Agreement for Series G
Warrants dated as of March 31, 1996 between the Company and
each of several former officers, key employees and directors
of the Company under various consulting agreements and
deferred fee arrangements covering an aggregate 595,872 shares
expiring on June 1, 1998 (incorporated by reference to Exhibit
4-l of the Company's Registration Statement on Form S-3,
Commission File No. 333-02969).
4.13 Form of Warrant Agreement for Series H Warrants dated July 1,
1995 among the Company and each of several current or former
non-employee directors covering an aggregate of 300,000 shares
expiring on June 30, 2000 (incorporated by reference to
Exhibit C of the Company's Proxy Statement for the fiscal 1995
Annual Stockholders Meeting).
4.14 Securities Purchase Agreement dated February 29, 1996
relating to the Company's 10% Senior Secured Notes due July 1,
1997 issued February 29, 1996 in the aggregate amount of
$5,300,000 ("Securities Purchase Agreement") (incorporated by
reference to Exhibit 4-m of the Company's Registration
Statement on Form S-3, Commission File No. 333-02969).
4.14.1 Form of 10% Senior Secured Notes due July 1, 1997 in the
aggregate amount of $5,300,000 ("10% Senior Secured Notes")
(incorporated by reference to Exhibit 10.1 filed with the
Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996).
4.14.2 Form of Series E Warrant dated February 29, 1996 covering an
aggregate 1,500,000 shares and expiring on February 28, 2001
(incorporated by reference to Exhibit 4-n of the Company's
Registration Statement on Form S-3, Commission File No.
333-02969).
4.14.3 Form of Series F Warrant dated February 29, 1996 covering an
aggregate 1,060,000 shares and expiring on July 1, 1997,
exercisable in the event of default on the Company's 10%
Senior Secured Notes.
4.14.4 Registration Rights Agreement dated as of February 29, 1996
between the Company and Rickel & Associates, Inc. ("Rickel")
(incorporated by reference to Exhibit 4-o of the Company's
Registration Statement on Form S-3, Commission File No.
333-02969).
4.14.5 Registration Rights Agreement dated as of February 29, 1996
among the Company and each of the Purchasers referred to
therein (incorporated by reference to Exhibit 4-p of the
Company's Registration Statement on Form S-3, Commission File
No. 333-02969).
4.14.6 Pledge Agreement dated as of February 29, 1996 among Rickel,
First Union National Bank ("FUNB") and the Company
(incorporated by reference to Exhibit 4-q of the Company's
Registration Statement on Form S-3, Commission File No.
333-02969).
4.14.7 Collateral Agency Agreement dated as of February 29, 1996
among Rickel, each Purchaser under the Securities Purchase
Agreement, FUNB and the Company (incorporated by reference to
Exhibit 4-r of the Company's Registration Statement on Form
S-3, Commission File No. 333-02969).
4.14.8 Engagement Letter dated as of January 30, 1996 between Rickel
and the Company (incorporated by reference to Exhibit 4-s of
the Company's Registration Statement on Form S-3, Commission
File No. 333-02969).
4.15 Form of Offshore Securities Subscription Agreement and Form of
Debenture dated as of February 28, 1996 covering the offer and
sale under Regulation S of $3,500,000 aggregate amount of the
Company's 10% Cumulative Convertible Debentures due February
28, 1997 (incorporated by reference to Exhibit 10.2 filed with
the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1996).
4.16 Offshore Securities Subscription Agreement dated as of March
1, 1996 covering the offer and sale under Regulation S of 600,000
shares of the Company's Common Stock (incorporated by reference to
Exhibit 10.3 filed with the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1996).
10.1 1985 Stock Incentive Plan (incorporated by reference to
Exhibit 4a of Registration Statement No. 33-3172).
10.2 1987 Stock Incentive Plan (incorporated by reference to
Exhibit 4a of Registration Statement No. 33-18356)
10.3 1991 General Nonstatutory Stock Option Plan (incorporated by
reference to Exhibit 10-cf of the Company's 1993 Annual Report
on Form 10-K).
10.4 1993 Stock Incentive Plan (incorporated by reference to
Exhibit 4.7 of the Company's Registration Statement on Form
S-8, Commission file No. 33-74400).
10.5 1996 Stock Incentive Plan (incorporated by reference to
Exhibit A of the Company's Proxy Statement for the fiscal 1995
Annual Stockholders Meeting).
10.6 1996 Non-Employee Directors Stock Option Plan (incorporated by
reference to Exhibit B of the Company's Proxy Statement for the
fiscal 1995 Annual Stockholders Meeting).
10.7 Form of Indemnity Agreement with officers and directors
(incorporated by reference to Exhibit 10-o of the Company's
1987 Annual Report on Form 10-K).
10.8 Standard Industrial Lease-Net dated August 1, 1984, among the
Company, Aeroscientific Corp., and Bradmore Realty Investment
Company, Ltd. (incorporated by reference to Exhibit 10-w of
the Company's 1990 Annual Report on Form 10-K).
10.8.1 Second Amendment to Lease among Bradmore Realty Investment
Company, Ltd., the Company and the Company's Aeroscientific
Corp. subsidiary, dated July 2, 1993 (incorporated by
reference to Exhibit 10-cd of Registration Statement No.
33-63618).
10.9 Standard Industrial Lease - Net dated October 15, 1992,
between L.N.M. Corporation-Desert Land Managing Corp. and the
Company's A.J. Electronics, Inc. subsidiary (incorporated by
reference to Exhibit 10.2 of the Company's Quarterly Report on
Form 10-Q for the quarter ended October 2, 1993).
10.10 Grant Agreement dated September 16, 1987 between Irlandus
Circuits Limited and the Industrial Development Board for
Northern Ireland ("IDB") (incorporated by reference to Exhibit
10.13 of the Company's Registration Statement No. 33-22856).
10.10.1 Agreement dated March 10, 1992 between Irlandus Circuits
Limited and the IDB amending the Grant Agreement dated
September 16, 1987, between Irlandus and the IDB (incorporated
by reference to Exhibit 10-br of the Company's 1992 Annual
Report on Form 10-K).
10.11 Grant Agreement dated August 29, 1989, between DDL Electronics
Limited and the IDB (incorporated by reference to Exhibit 10.29
of the Company's Registration Statement No. 33-39115).
10.11.1 Agreement dated May 2, 1996, between DDL Electronics Limited
and the IDB amending the Grant Agreement dated August 29,
1989, between DDL Electronics and the IDB.
10.12 Form of Land Registry for the Company's Northern Ireland
subsidiaries dated November 4, 1993 (incorporated by reference
to Exhibit 10.1 of the Company's Quarterly Report of Form 10-Q
for the quarter ended September 30, 1993).
10.13 Agreement for Purchase of Shares dated October 6, 1995 between
DDL Electronics, Inc., as buyer, and the shareholders of SMTEK
(incorporated by reference to Exhibit 99.1 filed with the
Company's Current Report on Form 8-K dated January 12, 1996).
10.14 Employment Agreement and Letter of Understanding and Agreement
dated October 15, 1995 between the Company and Gregory L.
Horton (incorporated by reference to Exhibit 99.2 filed with
the Company's Current Report on Form 8-K dated January 12,
1996).
10.15 Employment Agreement dated September 12, 1996 between the
Company and Richard K. Vitelle.
11 Statement re Computation of Per Share Earnings.
13 Annual Report to security holders.
21 Subsidiaries of the Registrant.
23 Consent of KPMG Peat Marwick, LLP.
27 Financial Data Schedule.
99 Undertaking for Form S-8 Registration Statement.