[1996 ANNUAL REPORT TO STOCKHOLDERS]
DDL ELECTRONICS, INC. AND SUBSIDIARIES
FINANCIAL SUMMARY
(In thousands except per share amounts)
Year Ended June 30
--------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Sales $33,136 $29,576 $ 48,529 $ 57,883 $ 58,516
Operating Loss (1,167) (4,970) (6,948) (5,067) (22,703)
Extraordinary
Item 2,356 2,441 - 6,100 -
Net Income (Loss) 1,598 75 (8,354) 1,073 (22,305)
Earnings (Loss)
Per Share $ .09 $ .00 $ ( .55) $ .10 $ (3.34)
DESCRIPTION OF BUSINESS
DDL Electronics, Inc. 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.
To Our Stockholders:
These are very exciting times at DDL Electronics, Inc. With the
introduction of our new management team and the acquisition of SMTEK, Inc.,
a world class electronic manufacturing services (EMS) provider, DDL is
poised for continued revenue growth and improved earnings. DDL's difficult
history is well known and has presented some interesting challenges for the
new management team. A turnaround is clearly underway and we are on track
with our revitalization effort and rapid expansion into the EMS market.
For fiscal 1996, revenues were $33,136,000, an increase of 60% over
pro forma revenues for fiscal 1995 of $20,811,000 (after excluding 1995
sales of divested operations). DDL's balance sheet was strengthened
considerably during fiscal 1996, and we ended the year with stockholders'
equity at its highest level in nearly five years. And earlier this month
we obtained a $2.5 million bank line of credit for U.S. working capital
requirements.
Investment in equipment and facilities has made our operating units
capable of performing at a sales level several times greater than current
revenues. We are strengthening our sales and marketing efforts in both the
U.S. and Europe to take advantage of this available capacity. As we
increase the use of these facilities, we expect to see improvement in
profitability at each operating unit. Also encouraging is the fact that
the European printed circuit board market is emerging from a five-month
downturn.
Strong bookings and bidding activity in the first quarter of fiscal
1997 bode well for improved operating performance. At the end of this
latest quarter, total backlog exceeded $22 million. Growth in backlog is
due to strong market demand and a focus on key customer partnerships, with
a concerted effort to achieve total customer satisfaction. Repeat business
is becoming our greatest source of new bookings. Growth in backlog has
been accompanied by shortened cycle times and improved on-time delivery
performance, which has accelerated the conversion of backlog into revenue.
We are diligently pursuing strategic acquisitions in order to increase
our purchasing power and more effectively utilize our capabilities in the
areas of product engineering, design and test engineering. We are also
taking steps to increase the degree of vertical integration between the
Company's EMS and PCB operations, which should improve overall
profitability.
In the last six months, we have improved internal performance
measures, implemented a business team approach to managing contracts and
initiated employee motivation programs, the cumulative effect of which has
been to strengthen our ability to provide high quality product engineering,
design, automated production and post-production support services.
Looking ahead, we will focus on a broad spectrum of operational
improvements, including implementing paperless purchasing transactions and
electronic data interchange with suppliers and customers, enhancing
existing production tracking systems and statistical process controls, and
developing more automated job cost accounting systems and tighter controls
over material flows.
We are excited about the market demand for EMS and PCBs worldwide.
The Company has a diverse customer base, strong backlog, modern equipment,
dedicated staff and an international presence. We are committed to meeting
or exceeding customers' expectations, which we consider to be essential to
enhancing shareholder value.
/s/ GREGORY L. HORTON
Chairman, CEO and President
October 10, 1996
DDL ELECTRONICS, INC. AND SUBSIDIARIES
FIVE-YEAR FINANCIAL SUMMARY
(In thousands except per share amounts)
Year ended June 30
--------------------------------------------
OPERATING DATA 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Sales $ 33,136 $ 29,576 $ 48,529 $ 57,883 $ 58,516
Costs and expenses:
Cost of goods sold 29,494 26,516 47,860 55,052 57,688
Administrative and
selling expenses 4,175 6,497 7,617 7,898 9,692
Goodwill amortization 634 - - - -
Restructuring charges - 1,533 - - 13,839
------ ------ ------ ------ ------
Total costs and expenses 34,303 34,546 55,477 62,950 81,219
------ ------ ------ ------ ------
Operating loss (1,167) (4,970) (6,948) (5,067) (22,703)
Non-operating income(expense):
Investment income 246 109 168 280 639
Interest expense (911) (883) (1,110) (1,107) (1,830)
Gain on sale of assets - 3,317 2 264 1,589
Earthquake expenses - - (500) - -
Other income (expense), net (36) 61 34 - -
------ ------ ------ ------ ------
Total non-operating
income (expense) (701) 2,604 (1,406) (563) 398
------ ------ ------ ------ ------
Loss from continuing
operations before
income taxes (1,868) (2,366) (8,354) (5,630) (22,305)
Income tax benefit 1,110 - - - -
------ ------ ------ ------ ------
Loss from continuing
operations (758) (2,366) (8,354) (5,630) (22,305)
Income (loss) from
discontinued operations,
less applicable income
taxes - - - 603 -
------ ------ ------ ------ ------
Loss before extraordinary
item (758) (2,366) (8,354) (5,027) (22,305)
Extraordinary item - Gain
on debt extinguishment 2,356 2,441 - 6,100 -
------ ------ ------ ------ ------
Net income (loss) $ 1,598 $ 75 $(8,354) $ 1,073 $(22,305)
====== ====== ====== ====== ======
Earnings (loss) per share:
Primary:
Continuing operations $(0.04) $(0.15) $(0.55) $(0.56) $(3.34)
Discontinued operations - - - 0.06 -
Extraordinary item 0.13 0.15 - 0.60 -
----- ----- ----- ----- -----
Total $ 0.09 $ - $(0.55) $ 0.10 $(3.34)
===== ===== ===== ===== =====
Fully diluted:
Continuing operations $(0.03) $(0.15) $(0.55) $(0.37) $(3.34)
Discontinued operations - - - 0.04 -
Extraordinary item 0.12 0.15 - 0.42 -
----- ----- ----- ----- -----
Total $ 0.09 $ - $(0.55) $ 0.09 $(3.34)
===== ===== ===== ===== =====
June 30
------------------------------------------
BALANCE SHEET DATA 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Current assets $15,493 $ 8,876 $12,018 $20,085 $23,116
Current liabilities $11,979 $ 8,904 $21,277 $14,289 $16,950
Working capital (deficit) $ 3,514 $ (28) $(9,259) $ 5,796 $ 6,166
Current ratio 1.3 1.0 0.6 1.4 1.4
Total assets $28,087 $12,590 $23,258 $33,739 $46,626
Long-term debt $10,935 $ 7,030 $ 6,870 $20,393 $35,959
Stockholders' equity
(deficit) $ 5,173 $(3,344) $(4,889) $ (943) $(6,283)
Equity (deficit)
per share $ 0.22 $ (0.21) $ (0.34) $ (0.08) $ (0.92)
Shares outstanding (000s) 22,999 16,063 14,469 11,973 6,863
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Introductory Statement
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.
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.
Historically, DDL was a diversified holding company with operations
in the areas of EMS and PCB fabrication, broadband communications
equipment and other businesses. In the past several years, the Company
focused its activities in the area of advanced EMS and PCB fabrication.
During fiscal 1995 the Company sold substantially all the assets of its
U.S. EMS and PCB operations. The sales enabled the Company to pay off
senior debt, thereby reducing the Company's future financing costs.
The Company has incurred operating losses in recent years. These
operating losses amounted to $1,167,000, $4,970,000 and $6,948,000 in
the fiscal years ended June 30, 1996, 1995 and 1994, respectively.
Although the Company had net income for the years ended June 30, 1996
and 1995 of $1,598,000 and $75,000, respectively, fiscal 1996's net
income included an extraordinary gain of $2,356,000 and an income tax
benefit of $1,110,000, while fiscal 1995's net income included an
extraordinary gain of $2,441,000 and a gain of on sales of assets of
$3,317,000.
Results of Operations
The following table sets forth the Company's sales and other
operating data as percentages of revenues:
Year Ended June 30
-----------------------
1996 1995 1994
---- ---- ----
Sales 100.0% 100.0% 100.0%
Cost of goods sold 89.0 89.7 98.6
----- ----- -----
Gross profit 11.0 10.3 1.4
Administrative and selling expenses 12.6 21.9 15.7
Goodwill amortization 1.9 - -
Restructuring charges - 5.2 -
----- ----- -----
Operating loss (3.5) (16.8) (14.3)
Investment income .8 .4 .3
Interest expense (2.8) (3.0) (2.3)
Gain on sale of assets - 11.2 -
Earthquake expenses - - (1.0)
Other income (expense), net (.1) .2 .1
----- ----- -----
Loss before income taxes (5.6) (8.0) (17.2)
Income tax benefit 3.3 - -
----- ----- -----
Loss before extraordinary item (2.3) (8.0) (17.2)
Extraordinary item - Gain on
debt extinguishment 7.1 8.3 -
----- ----- -----
Net income (loss) 4.8% .3% (17.2)%
===== ===== =====
Earnings (loss) per share:
Loss before extraordinary
item $(0.04) $(0.15) $(0.55)
Extraordinary item 0.13 0.15 -
---- ---- ----
$ 0.09 $ - $(0.55)
==== ==== ====
During fiscal 1995, the Company closed the operations of its A.J.
Electronics, Inc. subsidiary ("A.J."). The Company recorded restructuring
charges of $1,533,000 for the costs associated with the shut down and
disposal of the assets of A.J., including asset write-downs of $552,000,
additional bad debt write-offs of $136,000, lease termination costs of
$211,000 and all other exit costs totaling $634,000. Substantially all of
the operating assets of A.J. were sold in January 1995 for total
consideration, in the form of cash and debt assumption, of approximately
$1,041,000.
In December 1994, the Company sold essentially all the assets of its
Aeroscientific Oregon subsidiary ("Aero Oregon") for proceeds of
approximately $9,200,000 in cash and the assumption by the purchaser of
approximately $300,000 of capitalized lease obligations, which resulted in a
gain of $3,317,000. With the proceeds of this sale, the Company
paid off $5,300,000 of industrial revenue bonds and settled a $6,941,000
bank term loan for a cash payment of $4,500,000, which resulted in an
extraordinary gain on debt extinguishment of $2,441,000.
Following are the Company's unaudited pro forma consolidated
operating results for the years ended June 30, 1995 and 1994, which
exclude the operations of Aero Oregon and A.J., the gain on sale of
Aero Oregon's assets and the A.J. restructuring charges, as compared
with actual operating results for the year ended June 30, 1996 (in
thousands):
Year ended June 30
-------------------------------
1996 1995 1994
---- ---- ----
(Pro forma) (Pro forma)
Sales $33,136 $20,811 $20,958
------ ------ ------
Cost of goods sold 29,494 17,873 19,653
Administrative and
selling expenses 4,175 5,062 4,214
Goodwill amortization 634 - -
------ ------ ------
Total costs and expenses 34,303 23,037 23,867
------ ------ ------
Operating loss (1,167) (2,226) (2,909)
Non-operating expense, net (701) (538) (641)
------ ------ ------
Loss before income taxes (1,868) (2,764) (3,550)
Income tax benefit 1,110 - -
------ ------ ------
Loss before extraordinary item (758) (2,764) (3,550)
Extraordinary item - Gain on
debt extinguishment 2,356 2,441 -
------ ------ ------
Net income (loss) $ 1,598 $ (323) $(3,550)
====== ====== ======
Fiscal 1996 vs. 1995
Sales for fiscal 1996 were $33,136,000, compared to $29,576,000
for fiscal 1995. Included in fiscal 1995 sales are revenues from A.J.
and Aero Oregon. A.J.'s operations were discontinued and ultimately
liquidated in fiscal 1995, and Aero Oregon's manufacturing facility and
related assets were sold in December 1994. Aero Oregon and A.J.
represented $8,765,000 of fiscal 1995 sales. After giving effect to a
pro forma adjustment to exclude sales of Aero Oregon and A.J. from
prior year's revenues, sales in fiscal 1996 increased $12,325,000 over
sales of fiscal 1995. Of this increase, $8,668,000 represents revenues
of SMTEK, which was acquired in January 1996. Sales growth at DDL
Electronics, Ltd. ("DDL-E") accounted for most of the remaining
increase in consolidated sales. DDL-E added several new turnkey
customers that have contributed to sales growth in 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.
Material costs typically represent about 70% of the turnkey method's
sales price. Thus, a shift in order mix from consigned to turnkey can
result in higher sales but lower gross profit margins.
Gross profit (sales less cost of goods sold) for fiscal 1996
improved by $582,000 compared to fiscal 1995. The acquisition of SMTEK
in January 1996 accounted for $1,600,000 of the increase, offset by a
decline in gross profit of the Northern Ireland operations of
approximately $800,000. Gross profit as a percentage of sales declined
from 14.1% (on a pro forma basis without Aero Oregon and A.J.) for
fiscal 1995 to 11.0% for fiscal 1996. DDL-E's gross profit declined by
$705,000, and its gross profit as a percentage of sales declined from
14.5% in fiscal 1995 to 5.9% in fiscal 1996 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. Gross
profit of Irlandus Circuits Limited ("Irlandus") decreased by $88,000
and its gross profit percentage declined from 12.7% to 11.4% from 1995
to 1996. Irlandus' gross profit declined primarily due to changes in
product mix.
The operating loss for fiscal 1996 improved by $3,803,000, from a
loss in fiscal 1995 of $4,970,000 to a loss of $1,167,000 in fiscal
1996. The fiscal 1996 operating loss includes goodwill amortization
expense of $634,000 arising from the acquisition of SMTEK in January
1996. On a pro forma basis, after giving effect to the exclusion of
Aero Oregon and A.J. from fiscal 1995 operating results, the
improvement in the operating loss was $1,059,000. 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
$1,533,000 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 non-operating income (expense) declined from $2,604,000 in
fiscal 1995 to ($701,000) in fiscal 1996. This change is attributable
principally to a non-recurring gain of $3,317,000 on the sale of assets
of Aero Oregon in fiscal 1995.
During fiscal 1996, the Company recognized an income tax benefit
associated with its 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 June 30, 1996, the
Company had 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 fiscal 1995, the loss before extraordinary item was
$2,366,000, or ($0.15) per share. On a pro forma basis, excluding the
non-recurring gain on sale of assets and the operations of A.J. and
Aero Oregon, fiscal 1995 would have shown a loss before extraordinary
item of $2,764,000. For fiscal 1996, the loss before extraordinary item
was $758,000, or ($0.04) per share, which includes the effect of the
$1,110,000 income tax benefit discussed above.
Net income for fiscal 1996 was $1,598,000, or $0.09 per share,
compared to $75,000, or $0.00 per share, for fiscal 1995. Net income
for fiscal 1996 includes an extraordinary gain on debt extinguishment
of $2,356,000 associated with the reduction of the Company's
outstanding obligations to certain former officers, employees and
directors in March 1996, as further described in Note 6 to the
accompanying consolidated financial statements. Net income for fiscal
1995 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.
Fiscal 1995 vs. 1994
Sales for fiscal 1995 were $29,576,000, a decrease of $18,953,000
from fiscal 1994. The reduction in sales resulted from the closure of
A.J.'s operations in November 1994 and the sale of Aero Oregon's
facility in December 1994. Approximately $13,550,000 and $5,256,000 of
the decline in sales was due to the reduced business volume at A.J. and
Aero Oregon, respectively. After giving effect to the pro forma
adjustment of sales for fiscal years 1995 and 1994 to eliminate A.J. and
Aero Oregon, sales declined by $147,000. Gross profit improved by
$2,391,000 to $3,060,000 or, as a percentage of sales, to 10.3% in 1995
from 1.4% in 1994. The low gross profit percentage in fiscal 1994 was
the result of disruptions to A.J.'s EMS operations caused by the Los
Angeles earthquake in January 1994, and by the Company's decision to
seek high volume, low margin orders in an effort to fill its PCB
facilities during fiscal 1994. Subsequently, the Company refocused its
PCB business to concentrate on higher margin, quick-turn prototype
boards.
A.J.'s continuing operations were severely damaged by the 1994 Los
Angeles earthquake. After the earthquake A.J. met its existing customer
commitments, but lost new business from existing customers and potential
customers while the plant was being reconstructed. Because of A.J.'s
substantial decline in business, cash outflow and no opportunity for
relief financing, management ceased operations and liquidated A.J.'s
assets in fiscal 1995.
The Company's PCB business, in both the United States and Europe,
continued to be adversely affected by underutilization of existing
capacity which, together with intense competition from companies within
the PCB industry, has contributed to a reduction in sales. The
Company's domestic PCB production, formerly performed at Aero Oregon's
facility, was particularly impacted by its underutilization. In late
1994, Aero Oregon changed its product mix and service strategy,
concentrating on higher margin, quick-turn or prototype business. Aero
Oregon's operating results improved but could not improve quickly enough
to take advantage of improvements in the PCB industry's market. As a
result, management decided to sell its Oregon facility to a Japanese PCB
company interested in acquiring a production facility in the United
States. Consideration for the sale of Aero Oregon's assets included
approximately $9,200,000 in cash and assumption by the buyer of
approximately $300,000 of capitalized lease obligations. The sale
resulted in a gain of $3,317,000. Proceeds from the sale of Aero
Oregon's assets were used to pay off all of the Company's senior debt
with two banks. This included negotiating a reduction in the amount
owed to one of the banks of $2,441,000, resulting in an extraordinary
gain in that amount in fiscal 1995.
The Company's operating loss for fiscal 1995 was lower by
$1,978,000 than its fiscal 1994 operating loss. The fiscal 1995
operating loss included $1,533,000 in restructuring charges associated
with the shut down and liquidation of A.J., and approximately $1,400,000
of non-recurring general and administrative expenses associated with the
Company's change in board and management as the result of a proxy
contest, increases in expected remediation costs associated with the
Company's former Anaheim facility and an increase in the obligation to
certain former officers, key employees and directors of the Company
under consulting agreements and deferred fee arrangements.
Investment income declined in fiscal 1995 by $59,000 due to a lower
average monthly balance of investable funds, despite a higher ending
cash balance. Interest expense declined during fiscal 1995 as compared
to fiscal 1994 as a result of the payoff of the Company's senior debt.
The current year's net loss before extraordinary item was
$5,988,000 lower than in fiscal 1994 due to the $3,317,000 gain
resulting from the sale of Aero Oregon's assets, and reduced interest
expense resulting from the complete payoff of the Company's senior debt
in December 1994.
Improvement in the Company's loss before extraordinary item for
fiscal 1995 was due to the Company's sale or liquidation of
unprofitable operations, improved operating margins at the Company's
continuing subsidiaries, lower debt costs resulting from payoff of the
Company's senior debt and gain realized from the sale of Aero Oregon's
facility and manufacturing assets. This was partially offset by
restructuring charges associated with the liquidation of A.J. and
additional general and administrative costs recorded in the last quarter
of fiscal 1995.
Inflation
Changes in product mix from year to year and highly competitive
markets make it difficult to accurately assess the impact of inflation
on profit margins. Management generally believes that business has not
been affected materially and adversely by inflationary increases in
costs and expenses. On the other hand, the current low inflationary
environment has inhibited the Company's ability to increase the price of
its products and services.
Liquidity and Capital Resources
The Company's primary source of liquidity is its cash and cash
equivalents, which amounted to $2,519,000 at June 30, 1996. During the
year ended June 30, 1996, cash and cash equivalents decreased by
$398,000. This net cash outflow consisted of cash used to acquire SMTEK
of $7,638,000, cash used by operating activities of $555,000, capital
expenditures of $910,000, and the effect of exchange rate changes on
cash of $79,000, partially offset by cash inflows of $6,558,000 from new
borrowings net of debt repayments and debt issue costs, proceeds from
issuances of common stock of $1,997,000, and proceeds from government
grants of $229,000.
Components of operating working capital, net of the effects of the
business acquired, increased by $1,508,000 during fiscal 1996, which
consisted of a $726,000 increase in costs and estimated earnings in
excess of billings on uncompleted contracts, a $1,881,000 increase in
inventories and an $86,000 increase in prepaid expenses and other
current assets, partially offset by increases in current liabilities of
$915,000 and a decrease in accounts receivable of $270,000. The
increase in operating working capital is primarily the result of the
acquisition of SMTEK in 1996.
The Company's EMS and PCB fabrication businesses require continuing
investment in plant and equipment to remain competitive. Recently,
however, the Company's financial position has severely restricted its
ability to make capital investments in its facilities. Capital
expenditures during fiscal 1996, 1995 and 1994 were approximately
$1,599,000, $643,000 and $805,000, respectively. The Company
anticipates it will need to increase its capital spending in the coming
years in order to stay competitive as technology improves. Management
estimates that capital expenditures of as much as $1,500,000 may be
required in fiscal 1997. Of that amount, the substantial majority is
expected to be financed by a combination of capital leases, secured
loans and other borrowings.
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 of and accrued interest on the $7,000,000 bridge loans which
had been taken out to finance the acquisition of SMTEK, to pay
acquisition costs and to 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 which generated
net proceeds of $1,112,000.
The 10% Senior Notes are secured by (i) 1,060,000 shares of common
stock and (ii) warrants, Series F, 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 retire
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. The Company also deposited
$375,000 into a restricted cash account maintained by an escrow agent, such
amount to be used for interest payments on the 10% Senior Notes. At June
30, 1996, this restricted cash amounted to $208,000, and is included in
prepaid expenses and other current assets in the accompanying Consolidated
Balance Sheet.
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 the remaining unamortized issue
costs.
As indicated above, the 10% Senior Notes mature on July 1, 1997. The
Company plans to retire this $5,300,000 indebtedness at or prior to maturity
by issuing new common stock. The note holders have the option to accept
common stock in lieu of cash. If the note holders do not so elect, then the
Company plans to issue stock to other parties to raise the payoff amount.
Under certain circumstances, as set forth in the agreements governing the
10% Senior Notes, the Company can apply some or all of the 1,060,000 common
stock shares held in escrow toward the payoff of these notes. The total
number of new shares of common stock which will need to be issued to fund
the retirement of these notes depends on several factors, including: (i)
whether the notes are paid off prior to the maturity date; (ii) if paid
prior to maturity, whether the prepayment is partial or complete; and (iii)
the market price of the Company's common stock at the time of issuance.
The Company's financial statements are presented on a going concern
basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. The Company incurred
operating losses of $1,167,000, $4,970,000 and $6,948,000 and negative cash
flows from operating activities of $555,000, $264,000 and $2,710,000 for the
years ended June 30, 1996, 1995 and 1994, respectively.
The achievement of sustained operating profitability is the most
significant internal factor bearing on 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 improve the Company's results of
operations, the Company is actively pursuing strategic acquisition
candidates that might better assure growth of the Company in the markets and
industries in which it has expertise.
Management anticipates that the Company will continue to incur
operating losses for at least the near term future due to its current level
of fixed costs for manufacturing overhead relative to its current sales
volume, as well as amortization expense of the goodwill arising from the
acquisition of SMTEK. Operating losses are expected to continue until such
time as sales increase to a level necessary to absorb fixed costs and offset
goodwill amortization. No assurance can be given as to whether or when
sales increases may be achieved. Sales increases will depend in part upon
strengthening the Company's sales and marketing functions for its existing
operations and improving its price competitiveness in the EMS industry by
achieving economies of scale in the procurement of electronic components.
At June 30, 1996, the Company's total cash and cash equivalents
amounted to $2,519,000. As of September 30, 1996, total cash and cash
equivalents had declined to $1,349,000 due primarily to working capital
requirements at the Company's EMS operation in Northern Ireland. In
October 1996, the Company finalized an accounts receivable-based working
capital bank line of credit for its U.S. EMS operation, which provides
for borrowings of up to $2,500,000 at an interest rate of prime plus
1.25%. Management believes that the Company's cash resources and
borrowing capacity on its working capital lines of credit are sufficient
to fund operations for at least the next year.
Independent Auditors' Report
The Board of Directors and Stockholders
DDL Electronics, Inc.:
We have audited the accompanying consolidated balance sheets of DDL
Electronics, Inc. and subsidiaries as of June 30, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for each of the years in the three-year period
ended June 30, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of DDL
Electronics, Inc. and subsidiaries as of June 30, 1996 and 1995, and the
results of their operations and cash flows for each of the years in the
three-year period ended June 30, 1996 in conformity with generally
accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
Los Angeles, California
September 6, 1996, except for
the last paragraph of Note 12,
which is as of October 9, 1996
DDL ELECTRONICS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
June 30
-----------------
1996 1995
---- ----
Assets
Current assets:
Cash and cash equivalents $ 2,519 $ 2,917
Accounts receivable, net (Note 3) 5,620 3,600
Costs and estimated earnings
in excess of billings on
uncompleted contracts (Note 4) 3,026 -
Inventories (Note 5) 4,014 2,188
Prepaid expenses and other
current assets 314 171
------ ------
Total current assets 15,493 8,876
------ ------
Property, equipment and improvements,
at cost (Notes 6 and 10):
Buildings and improvements 5,604 5,217
Plant equipment 13,999 9,486
Office and other equipment 1,444 1,268
------ ------
21,047 15,971
Less: Accumulated depreciation
and amortization (15,130) (12,662)
------ ------
Property, equipment and
improvements, net 5,917 3,309
------ ------
Other assets:
Goodwill, net 5,708 -
Debt issue costs 533 44
Deposits and other assets 436 361
------ ------
6,677 405
------ ------
$28,087 $12,590
====== ======
DDL ELECTRONICS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands except share amounts)
(continued)
June 30
-----------------
1996 1995
---- ----
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Current portion of long-term debt (Note 6) $ 603 $ 633
Accounts payable 7,485 5,283
Accrued payroll and employee benefits 777 601
Other accrued liabilities (Note 9) 3,114 2,387
------ ------
Total current liabilities 11,979 8,904
------ ------
Long-term debt, less current
portion (Note 6) 10,935 7,030
------ ------
Commitments and contingencies (Note 10)
Stockholders' equity (deficit) (Notes 6 and 8):
Preferred stock, $1 par value; 1,000,000
shares authorized; no shares issued
or outstanding - -
Common stock, $.01 par value; 50,000,000
shares authorized; 22,998,879 and
16,062,979 shares issued and outstanding
at June 30, 1996 and 1995, respectively 230 161
Additional paid-in capital 29,304 20,983
Common stock held in escrow (1,325) -
Accumulated deficit (22,000) (23,598)
Foreign currency translation adjustment (1,036) (890)
------ ------
Total stockholders' equity (deficit) 5,173 (3,344)
------ ------
$28,087 $12,590
====== ======
See accompanying notes to consolidated financial statements.
DDL ELECTRONICS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands except per share amounts)
Year ended June 30
------------------------------
1996 1995 1994
---- ---- ----
Sales $33,136 $29,576 $48,529
------ ------ ------
Costs and expenses:
Cost of goods sold 29,494 26,516 47,860
Administrative and selling expenses 4,175 6,497 7,617
Goodwill amortization 634 - -
Restructuring charges (Note 2) - 1,533 -
------ ------ ------
34,303 34,546 55,477
------ ------ ------
Operating loss (1,167) (4,970) (6,948)
------ ------ ------
Non-operating income (expense):
Interest income 246 109 168
Interest expense (911) (883) (1,110)
Gain on sale of assets (Note 2) - 3,317 2
Earthquake expenses - - (500)
Other income (expense), net (36) 61 34
------ ------ ------
(701) 2,604 (1,406)
------ ------ ------
Loss before income taxes (1,868) (2,366) (8,354)
Income tax benefit (Note 7) 1,110 - -
------ ------ ------
Loss before extraordinary item (758) (2,366) (8,354)
Extraordinary item -
Gain on debt extinguishment
(Notes 2 and 6) 2,356 2,441 -
------ ------ ------
Net income (loss) $ 1,598 $ 75 $(8,354)
====== ====== ======
Earnings (loss) per share:
Loss before extraordinary item $ (0.04) $ (0.15) $ (0.55)
Extraordinary item 0.13 0.15 -
------ ------ ------
Earnings (loss) per share $ 0.09 $ - $ (0.55)
====== ====== ======
Share used in computing
earnings (loss) per share 18,807 15,971 15,097
====== ====== ======
See accompanying notes to consolidated financial statements.
DDL ELECTRONICS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Year ended June 30
------------------------------
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ 1,598 $ 75 $(8,354)
Adjustments to reconcile net income
(loss) to net cash used by operating
activities:
Depreciation and amortization 2,028 1,505 3,120
Gain on debt extinguishment (2,356) (2,441) -
Gain on sale of assets - (3,317) (2)
Net (increase) decrease in operating
working capital, net of effects
of business acquired (Note 9) (1,508) 4,009 2,648
(Increase) decrease in deposits and
other assets (93) 2 27
Benefit of non-capital grants (265) (139) (150)
Other 41 42 1
------ ------ ------
Net cash used by operating activities (555) (264) (2,710)
------ ------ ------
Cash flows from investing activities:
Capital expenditures (910) (547) (711)
Purchase of SMTEK, Inc., net of
cash acquired (Note 2) (7,638) - -
Proceeds from sale of assets (Note 2) - 9,936 18
------ ------ ------
Net cash provided by (used in)
investing activities (8,548) 9,389 (693)
------ ------ ------
Cash flows from financing activities:
Proceeds from long-term debt 8,800 612 272
Payments of long-term debt (1,870) (10,819) (1,633)
Debt issue costs (372) - -
Proceeds from issuance of common
stock, net 1,112 980 -
Proceeds from exercise of stock options 437 287 94
Proceeds from exercise of stock warrants 448 - 3,455
Proceeds from issuance of preferred stock - - 675
Proceeds from foreign government grants 229 202 268
------ ------ ------
Net cash provided by (used in)
financing activities 8,784 (8,738) 3,131
------ ------ ------
Effect of exchange rate changes on cash (79) (10) 44
------ ------ ------
Increase (decrease) in cash
and cash equivalents (398) 377 (228)
Cash and cash equivalents at
beginning of year 2,917 2,540 2,768
------ ------ ------
Cash and cash equivalents at end of year $ 2,519 $ 2,917 $ 2,540
====== ====== ======
See accompanying notes to consolidated financial statements.
DDL ELECTRONICS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Years ended June 30, 1996, 1995 and 1994
(In thousands except share amounts)
Common Stock Common Stock Foreign Total
Preferred -------------- held in escrow Additional currency stockholders'
Stock Par --------------- paid-in Accumulated translation equity
shares Shares value Shares Value capital deficit adjustment (deficit)
------ ------ ----- ------ ----- ------- ------- ------- -------
Balance at June 30, 1993 - 11,972,880 $ 120 - $ - $ 15,380 $(15,319) $(1,124) $ (943)
Net loss - - - - - - (8,354) - (8,354)
Exercise of warrants - 2,370,148 24 - - 3,431 - - 3,455
Issuance of preferred stock 450 - - - - 675 - - 675
Conversion of debentures - 30,500 - - - 61 - - 61
Exercise of stock options - 95,190 1 - - 93 - - 94
Compensation expense on
stock option grants - - - - - 6 - - 6
Translation adjustments - - - - - - - 117 117
---- ---------- ---- --------- ----- ------ ------ ------ ------
Balance at June 30, 1994 450 14,468,718 145 - - 19,646 (23,673) (1,007) (4,889)
Net income - - - - - - 75 - 75
Issuance of common stock - 760,000 8 - - 972 - - 980
Conversion of debentures - 43,000 - - - 86 - - 86
Exercise of stock options - 450,447 5 - - 282 - - 287
Shares retired - (27) - - - - - - -
Conversion of Series B
preferred stock to common (450) 340,841 3 - - (3) - - -
Translation adjustments - - - - - - - 117 117
---- ---------- ---- --------- ----- ------ ------ ------ ------
Balance at June 30, 1995 - 16,062,979 161 - - 20,983 (23,598) (890) (3,344)
Net income - - - - - - 1,598 - 1,598
Stock issued as partial pay-
ment for SMTEK acquisition - 1,000,000 10 - - 791 - - 801
Stock issued as debt
placement fee - 572,683 6 - - 710 - - 716
Stock issued as collateral
for 10% senior notes - 1,060,000 10 (1,060,000) (1,325) 1,315 - - -
Sale of common stock - 600,000 6 - - 1,106 - - 1,112
Conversion of debentures - 2,764,275 28 - - 3,292 - - 3,320
Exercise of stock options - 595,442 6 - - 431 - - 437
Exercise of warrants - 323,500 3 - - 445 - - 448
Warrant compensation costs - - - - - 196 - - 196
Other stock transactions - 20,000 - - - 35 - - 35
Translation adjustments - - - - - - - (146) (146)
---- ---------- ---- --------- ----- ------ ------ ------ ------
Balance at June 30, 1996 - 22,998,879 $ 230 (1,060,000) $(1,325) $29,304 $(22,000) $(1,036) $ 5,173
==== ========== ==== ========= ===== ====== ====== ====== ======
See accompanying notes to consolidated financial statements.
DDL ELECTRONICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
DESCRIPTION OF BUSINESS
DDL Electronics, Inc. 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. The Company's PCB facilities are
located in Northern Ireland.
The consolidated financial statements include the accounts of DDL
Electronics, Inc. and its subsidiaries (collectively, the "Company"). All
significant intercompany transactions and accounts have been eliminated in
consolidation.
ACCOUNTING PERIOD
The Company utilizes a 52-53 week fiscal year ending on the Friday
closest to June 30 which, for fiscal years 1996, 1995 and 1994, fell on June
28, June 30 and July 1, respectively. In these consolidated financial
statements, the fiscal year-end for all years is shown as June 30 for
clarity of presentation.
CASH EQUIVALENTS
For financial reporting purposes, cash equivalents consist primarily of
money market instruments and bank certificates of deposit that have original
maturities of three months or less.
FAIR VALUE OF FINANCIAL INSTRUMENTS
As of June 30, 1996, the carrying amount of the Company's cash and cash
equivalents, accounts receivable and accounts payable approximate their fair
value because of the short maturity of those instruments. The carrying
amount of long-term debt was $11,538,000 and the fair value was $11,159,000
as of June 30, 1996. The fair value of the Company's long-term debt is
estimated based on the quoted market prices for the same or similar issues
or on the current rates offered to the Company for debt of the same
remaining maturities. All financial instruments are held for purposes other
than trading.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of money market
instruments and trade receivables. The Company invests its excess cash in
money market instruments and certificates of deposit with high credit
quality financial institutions and, by policy, limits the amount of credit
exposure to any one issuer. Concentrations of credit risk with respect to
trade receivables exist because the Company's EMS and PCB operations rely
heavily on a relatively small number of customers. The Company performs
ongoing credit evaluations of its customers and generally does not require
collateral. The Company maintains reserves for potential credit losses and
such losses, to date, have been within management's expectations.
INVENTORIES
Manufacturing inventories are stated at the lower of cost or net
realizable value, with cost determined principally by use of the first-in,
first-out method.
LONG-LIVED ASSETS
Property, equipment and improvements are stated at cost. Depreciation
and amortization are computed on the straight-line and declining balance
methods. The principal estimated useful lives are: buildings - 20 years;
improvements - 10 years; plant, office and other equipment - 3 to 7 years.
Upon the retirement of assets, costs and the related accumulated
depreciation are eliminated from the accounts and any gain or loss is
included in income. Property, equipment and improvements acquired by the
Company's foreign subsidiaries are recorded net of capital grants received
from the Industrial Development Board for Northern Ireland.
Goodwill represents the excess of acquisition cost over the fair value
of net assets of a purchased business, and is being amortized over five
years, which is the expected period of benefit.
Statement of Financial Accounting Standards No. 121 (SFAS 121),
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to
be Disposed Of," was issued in March 1995. SFAS 121 requires that long-
lived assets and certain intangible assets be reviewed for impairment in
value, based upon undiscounted future cash flows, and that appropriate
losses be recognized whenever it is determined that the carrying amount of
an asset may not be recovered. The Company adopted SFAS 121 in fiscal year
1996 and such adoption did not have a material effect on the Company's
financial position or results of operations.
REVENUE AND COST RECOGNITION
The Company's Northern Ireland operating units recognize sales and cost
of sales upon shipment of products.
SMTEK, the Company's U.S. operating unit which was acquired during
1996, has historically generated the majority of its revenue 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 sales and cost of sales. SMTEK determines percentage
complete on the basis of costs incurred to total estimated costs. Contract
costs include all direct material and labor costs and those indirect costs
related to contract performance, such as indirect labor, supplies, tools,
repairs and depreciation costs. Selling, general and administrative costs
are charged to expense as incurred. In the period in which it is determined
that a loss will result from the performance of a contract, the entire
amount of the estimated loss is charged to 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. The asset
"Costs and estimated earnings in excess of billings on uncompleted
contracts" represents revenues recognized in excess of amounts billed.
Included in SMTEK's sales and cost of sales amounts are revenues from
engineering design and test services, which are immaterial in relation to
consolidated revenue from product sales.
INCOME TAXES
Effective July 1, 1993, the Company adopted, on a prospective basis,
Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting
for Income Taxes." SFAS 109 is an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, SFAS 109 generally considers all expected future events other
than enactments of changes in tax law or statutorily imposed rates. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share is computed by dividing net income by the
weighted average number of shares of common stock outstanding and common
stock equivalents. The determination of common stock equivalents assumes
exercise of those outstanding stock options and warrants to purchase stock
that have a dilutive effect on earnings per share (calculated by the
treasury stock method).
FOREIGN CURRENCY TRANSLATION
The financial statements of DDL's Northern Ireland subsidiaries have
been translated into U.S. dollars from their functional currency, British
pounds sterling, in the accompanying statements in accordance with Statement
of Financial Accounting Standards No. 52. Balance sheet amounts have been
translated at the exchange rate on the balance sheet date and income
statement amounts have been translated at average exchange rates in effect
during the period. The net translation adjustment is carried as a component
of stockholders' equity.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENT
Statement of Financial Accounting Standards No. 123 (SFAS 123),
"Accounting for Stock-Based Compensation," becomes effective for the
Company's fiscal year 1997. SFAS 123 establishes new financial accounting
and reporting standards for stock-based compensation plans. Entities will
be allowed to measure compensation expense for stock-based compensation to
employees under SFAS 123 or the existing standard, which is Accounting
Principles Board Opinion (APBO) No. 25, "Accounting for Stock Issued to
Employees." Entities electing to remain with the APBO 25 accounting method
will be required to make pro forma disclosures of net income and earnings
per share as if the SFAS 123 accounting method had been applied. The
Company plans to adopt only the disclosure requirements of SFAS 123;
accordingly, such adoption will not affect the Company's financial position,
results of operations or cash flows.
CHANGES IN CLASSIFICATION
Certain reclassifications have been made to the fiscal 1995 and 1994
financial statements to conform with the fiscal 1996 financial statement
presentation. Such reclassifications had no effect on the Company's results
of operations or stockholders' equity (deficit).
Note 2 - BUSINESS ACQUISITION, LIQUIDATION AND DIVESTITURE
LIQUIDATION AND DIVESTITURE
During fiscal 1995, the Company closed the operations of its A.J.
Electronics, Inc. subsidiary ("A.J."). The Company recorded restructuring
charges of $1,533,000 for the costs associated with the shut down and
disposal of the assets of A.J., including asset write-downs of $552,000,
additional bad debt write-offs of $136,000, lease termination costs of
$211,000, and all other exit costs totaling $634,000. Substantially all of
the operating assets of A.J. were sold in January 1995 for total
consideration, in the form of cash and debt assumption, of approximately
$1,041,000.
In December 1994, the Company sold essentially all the assets of its
Aeroscientific Oregon subsidiary ("Aero Oregon") for proceeds of
approximately $9,200,000 in cash and the assumption by the purchaser of
approximately $300,000 of capitalized lease obligations, which resulted in a
gain of $3,317,000. With the proceeds of this sale, the Company
paid off $5,300,000 of industrial revenue bonds and settled a $6,941,000
bank term loan for a cash payment of $4,500,000, which resulted in an
extraordinary gain on debt extinguishment of $2,441,000.
ACQUISITION
On January 12, 1996, the Company acquired 100% of the outstanding stock
of SMTEK, Inc. ("SMTEK"), a provider of integrated electronic contract
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 which was
valued at $801,000. 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 Notes 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 6, in
May and June 1996 the holders of the 10% Cumulative Convertible Debentures
converted these debentures to equity.
The acquisition of SMTEK 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. Accumulated amortization of goodwill was $634,000 as of June
30, 1996.
Following is unaudited pro forma information presented as if the
acquisition of SMTEK had occurred on July 1, 1995 and on July 1, 1994,
respectively (in thousands except per share amounts):
Year ended June 30
------------------
1996 1995 (A)
---- ----
Sales $ 40,918 $ 43,776
Loss before
extraordinary item $ (1,792) $ (4,793)
Net income (loss) $ 564 $ (2,352)
Earnings (loss) per share $ 0.03 $ (0.11)
(A) These pro forma results include the operations of Aero Oregon and
A.J., the assets of which were sold in fiscal 1995. Excluding
the fiscal 1995 operating results of Aero Oregon and A.J., and the
related gain on sale of Aero Oregon's assets and the A.J.
restructuring charges, the fiscal 1995 pro forma sales, loss before
extraordinary item, net loss and loss per share are $34,960,000,
$(5,191,000), $(2,750,000) and $(0.13), respectively.
Note 3 - ACCOUNTS RECEIVABLE
The components of accounts receivable are as follows (in thousands):
June 30
------------------
1996 1995
---- ----
Trade receivables $ 5,456 $ 3,511
Other receivables 296 270
Less allowance for doubtful accounts (132) (181)
------ ------
$ 5,620 $ 3,600
====== ======
Included in other receivables at June 30, 1996 and 1995 are grants due
from the Industrial Development Board for Northern Ireland of $251,000 and
$140,000, respectively (Note 10).
Note 4 - COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON
UNCOMPLETED CONTRACTS
The components of costs and estimated earnings in excess of billings on
uncompleted contracts at June 30, 1996 are as follows (in thousands):
Costs incurred on uncompleted
contracts $11,181
Estimated earnings 1,544
------
12,725
Less: Billings to date (9,613)
Customer advances and
progress payments (86)
------
$ 3,026
======
Costs and estimated earnings in excess of billings on uncompleted
contracts consists of revenue recognized under electronics assembly
contracts which amounts were not billable at the balance sheet date, net of
$52,000 of billings in excess of costs and estimated earnings. Essentially
all of the unbilled receivables are expected to be billed within 90 days of
the balance sheet date.
Note 5 - INVENTORIES
Inventories consist of the following (in thousands):
June 30
------------------
1996 1995
---- ----
Raw materials $ 2,853 $ 1,634
Work in process 1,263 710
Finished goods 146 -
Less reserves (248) (156)
------ ------
$ 4,014 $ 2,188
====== ======
Note 6 - FINANCING ARRANGEMENTS
BANK CREDIT AGREEMENT:
In December 1995, the Company entered into an agreement with Ulster
Bank Markets 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 the Bank's base rate (5.75% at June 30, 1996) plus
1.50%. The credit facilities are available to the Company until November 30,
1996, and are subject to renewal thereafter. At June 30, 1996, there were no
borrowings outstanding under this credit facility.
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, 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%
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 the
remaining unamortized issue costs associated with these debentures.
The 10% Senior Notes are secured by (i) 1,060,000 shares of common
stock and (ii) warrants, Series F, 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. The Company also deposited
$375,000 into a restricted cash account maintained by an escrow agent, such
amount to be used for interest payments on the 10% Senior Notes. At June
30, 1996, this restricted cash amounted to $208,000, and is included in
prepaid expenses and other current assets in the accompanying Consolidated
Balance Sheet.
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 valued at $716,000
and warrants, Series E, to purchase 1,500,000 shares of common stock for
$2.50 per share which are exercisable for five years. As further described
in Note 8, the Series E warrants contain an antidilution provision which has
lowered the exercise price.
LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
June 30
------------------
1996 1995
---- ----
10% Senior Secured Notes, interest payable
quarterly beginning on June 1, 1996,
secured by 1,060,000 shares of common
stock and 1,060,000 warrants, due
July 1, 1997 $ 5,300 $ -
Mortgage notes payable secured by real
property at the Northern Ireland
operations, with interest at variable
rates (8.375% at June 30, 1996) 1,265 1,346
Notes payable secured by equipment,
interest at 7.95% to 10.9%, payable
in monthly installments through
April 2001 1,523 -
Capitalized lease obligations (Note 10) 167 124
8-1/2% Convertible Subordinated Debentures
("CSDs"), due 2008, interest payable
semi-annually and convertible at holders'
option at a price of $10-5/8 per share
at any time prior to maturity; redeemable
by the Company at 101.7% of the principal
amount during the 12 months ending July 31,
1997 and subsequently at prices declining
to 100% at August 1, 1998, and thereafter 1,580 1,580
7% Convertible Subordinated Debentures, due
2001, interest payable semi-annually and
convertible at holders' option at a
conversion price of $2.00 per share at any
time prior to maturity 443 653
Obligations to former officers, employees and
directors under consulting and deferred fee
agreements 965 3,255
Other 295 705
------ ------
11,538 7,663
Less current maturities 603 633
------ ------
$10,935 $ 7,030
====== ======
At June 30, 1996, one of the notes payable secured by equipment was
further collateralized by an irrevocable standby letter of credit, which in
turn is secured by the Company's restricted cash deposit of $145,000. This
amount is included in deposits and other assets in the accompanying
Consolidated Balance Sheet at June 30, 1996.
The aggregate amounts of minimum maturities of long-term debt for the
indicated fiscal years (other than capitalized lease obligations, as
described in Note 10) are as follows: 1997 - $537,000; 1998 - $5,862,000;
1999 - $965,000; 2000 - $540,000; 2001 - $776,000; and thereafter -
$2,691,000.
During fiscal 1996, 1995 and 1994, holders of $132,000 $86,000 and
$61,000, respectively, in principal of 7% CSDs exchanged such CSDs for
common stock of 66,000, 43,000 and 30,500 shares, respectively. Accrued
interest related to the converted debentures was credited to income.
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 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 the 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.
Note 7 - INCOME TAXES
Temporary differences between financial statement carrying amounts and
the tax bases of assets and liabilities that give rise to significant
portions of the deferred tax assets and liabilities relate to the following
(in thousands):
June 30
---------------------
1996 1995
---- ----
Deferred tax assets:
Accrued employee benefits $ 394 $ 1,228
Warranty and loss reserves 547 780
Net operating loss carryforwards 13,240 19,890
Other 272 148
------ ------
Total deferred tax assets 14,453 22,046
Deferred tax liabilities:
Depreciation (53) (1,200)
------ ------
Net deferred tax assets before allowance 14,400 20,846
Less valuation allowance (14,400) (20,846)
------ ------
Net deferred tax assets after allowance $ - $ -
====== ======
In assessing the realizability of net deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
net deferred tax assets will be realized. The ultimate realization of net
deferred tax assets is dependent upon the generation of future taxable
income of approximately $36,000,000 prior to the expiration of the net
operating loss carryforwards. At June 30, 1996, the Company is uncertain
whether it will realize the benefits of the net deferred tax assets and,
therefore, has recorded a 100% valuation allowance to offset the assets.
Based on a carryback of prior year net operating losses and a current year
extraordinary gain on extinguishment of debt, the Company reduced its
valuation allowance by $6,446,000 during fiscal 1996. This change in
estimate regarding the realizability of certain net operating losses has
been reflected in the income tax benefit for fiscal 1996.
The provision (benefit) for income taxes differs from an amount
computed using the statutory federal income tax rate as follows (in
thousands):
Year ended June 30
------------------------
1996 1995 1994
---- ---- ----
Federal tax benefit computed at
statutory rate $ (635) $ (804) $(2,840)
State income tax, net of federal benefit - 5 -
Differences in taxation of foreign
earnings, net 114 (155) 807
Amortization of debt issue costs (108) - -
Utilization of net operating losses (1,110) - -
Deferred tax effect of temporary
differences 7,086 1,438 -
Net change in valuation allowance (6,446) (484) 2,049
Other (11) - (16)
------ ------ ------
Income tax benefit $(1,110) $ - $ -
====== ====== ======
During fiscal 1996, the Company recognized an income tax benefit
associated with its 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 June 30, 1996, the Company had 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 ("NOL") 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.
As of June 30, 1996, the Company has U.S. federal and state net
operating loss carryforwards of $35,307,000 and $29,909,000, respectively,
expiring in 2001 through 2011. The NOL carryforward for federal alternative
minimum tax purposes is approximately $26,998,000.
The Company's ability to use its NOL carryforwards to offset future
taxable income is subject to annual limitations due to certain substantial
stock ownership changes. Utilization of NOLs incurred through July 1993
became limited due to an ownership change. NOLs incurred subsequent to July
1993 are not subject to limitation. The amount of the NOL carryforward
arising prior to July 1993 which is subject to limitation is approximately
$21,877,000. The annual limitation is approximately $1,222,000.
Pretax income (loss) from foreign operations for fiscal 1996, 1995 and
1994 was $(338,000), $443,000 and $(5,430,000), respectively. It is not
practicable to estimate the amount of tax that might be payable on the
eventual remittance of such earnings. On remittance, the United Kingdom
imposes withholding taxes that would then be available for use as a credit
against the U.S. tax liability, if any, subject to certain limitations.
Income of the Company's Northern Ireland subsidiaries is sheltered by
operating loss carryforwards for United Kingdom income tax purposes (the
"U.K. NOL"). The income tax benefit from the U.K. NOL was $-0- in fiscal
1996 and 1995, and $455,000 in fiscal 1994 which, in accordance with SFAS
No. 109, has been treated as a reduction in the provision for income taxes.
At June 30, 1996, the U.K. NOL amounted to approximately $11,378,000.
Substantially all of these net operating losses from prior years can be
carried forward by the Company's Northern Ireland subsidiaries for an
indefinite period of time to reduce future taxable income.
Note 8 - STOCKHOLDERS' EQUITY
SALE OF COMMON STOCK
In March 1996, the Company sold 600,000 shares of common stock to an
offshore investor, generating net proceeds of $1,112,000.
STOCK OPTION PLANS
The Company has in effect several stock-based plans under which non-
qualified and incentive stock options and restricted stock awards have been
granted to directors, officers and other key employees. Subject to the
discretion of the Compensation Committee of the Board of Directors (the
"Committee"), employee stock options generally become exercisable in
installments of 33.3% per year, or over an alternative vesting period
determined by the Committee, and generally have a 10-year term when granted.
The exercise price of all incentive stock options must be equal to or
greater than the fair market value of the shares on the date of grant. The
exercise price of non-statutory stock options must be at least 85% of the
fair market value of the common stock on the date of grant.
Activity under the option plans for fiscal years 1996, 1995 and 1994
was as follows:
Shares Price per share
------ ---------------
Shares under option, June 30, 1993 1,683,593 .50 - 4.88
Granted 501,973 .50 - 1.88
Forfeited (225,810) .69 - 4.88
Exercised (95,190) .69 - 1.38
--------- ----- -----
Shares under option, June 30, 1994 1,864,566 .50 - 4.88
Granted 120,000 1.13 - 1.38
Forfeited (177,500) 1.38 - 2.38
Exercised (450,447) .50 - 1.06
--------- ----- -----
Shares under option, June 30, 1995 1,356,619 $ .50 - $ 4.88
Granted 906,042 1.63 - 1.75
Forfeited (33,928) 1.44
Exercised (595,442) .50 - 1.63
--------- ----- -----
Shares under option, June 30, 1996 1,633,291 $ .50 - $ 4.88
========= ===== =====
At June 30, 1996, options to purchase 637,955 shares were exercisable
and 1,602,027 shares were available for future grants.
PREFERRED STOCK PURCHASE RIGNTS
1,000 preferred stock purchase rights, which may be exercised to
purchase one-hundredth of a share of Series A Participating Junior Preferred
Stock at a purchase price of $30, subject to adjustment, are outstanding at
June 30, 1996. The rights may be exercised only after commencement or
public announcement that a person (other than a person receiving prior
approval from the Company) has acquired or obtained the right to acquire 20%
or more of the Company's outstanding common stock. The rights, which do not
have voting rights, may be redeemed by the Company at a price of $.01 per
right within ten days after the announcement that a person has acquired 20%
or more of the outstanding common stock of the Company and the redemption
period may be extended under certain circumstances. In the event that the
Company is acquired in a merger or other business combination transaction,
provision shall be made so that each holder of a right shall have the right
to receive that number of shares of common stock of the surviving company
which at the time of the transaction would have a market value of two times
the exercise price of the right. 150,000 shares of Series A Junior
Participating Preferred Stock, $1 par value, are authorized.
WARRANTS
In fiscal 1993, the Company exchanged a portion of its outstanding
convertible debentures for stock and common stock purchase warrants, Series
A. The remaining 223,500 of these Series A warrants were exercised during
fiscal 1996 at $1.42 per share.
In fiscal 1995, the Company issued 100,000 warrants, Series B, to
purchase common stock at $1.31 per share to offshore investors in connection
with an earlier offering of common stock. These warrants were exercised in
April 1996.
During fiscal 1996, the Company issued the following common stock
purchase warrants:
1. Series C warrants covering an aggregate of 455,000 shares were issued
to four parties, including an investment banking firm, for consulting
and financial advisory services. These warrants are exercisable at
$2.25 per share until June 30, 1998, and at $3.50 thereafter until
the warrant expiration date on June 30, 2000. Fifty-thousand of the
Series C warrants were issued to an individual who was subsequently
elected a director of the Company. Substantially all of these warrants
were granted in June and July 1995 and had no intrinsic value on the
date of grant.
2. Series D warrants covering 50,000 shares were issued to the Company's
former general counsel as partial consideration for legal services
rendered under an agreement entered into in the prior year. These
warrants are exercisable at $1.50 per share until June 30, 1998, and
at $2.50 thereafter until the warrant expiration date on June 30, 2000.
The warrants had no intrinsic value on the date of grant.
3. Series E warrants covering an aggregate of 1,500,000 shares were
issued to an investment banking firm which served as placement agent
for the 10% Senior Notes and the 10% Convertible Debentures. The
Series E warrants are exercisable until their expiration on February
28, 2001, and provided for an original exercise price of $2.50 per
share, subject to adjustment in the event the Company issues new
common stock at an effective price less than the effective exercise
price on the Series E warrants. Primarily as a result of the
conversion of the 10% Convertible Debentures in May and June 1996 at
an average price of approximately $1.30, the effective exercise price
on the Series E warrants was reduced to $2.33 as of June 30, 1996.
The Series E warrants were granted in September 1995 contingent upon
the placement of debt. The warrants had no intrinsic value on the
measurement date.
4. As further described in Note 6, the Series F warrants covering an
aggregate of 1,060,000 shares were issued as partial collateral for
the 10% Senior Notes. These warrants are exercisable in the event of
a default by the Company on the 10% Senior Notes, and are exercisable
only so long as the 10% Senior Notes remain outstanding.
5. As further described in Note 6, the Series G warrants covering an
aggregate of 595,872 shares were issued to former officers, key
employees and directors of the Company. The Series G warrants are
exercisable until their expiration on June 1, 1998.
6. Series H warrants covering an aggregate 300,000 shares were issued to
the Company's non-employee directors who served on the Company's
board without other compensation during the period from May 31, 1995
to June 30, 1996. The Series H warrants are exercisable at $1.50 per
share until June 30, 1998, and at $2.50 thereafter until the warrant
expiration date on June 30, 2000. There was no intrinsic value related
to the warrants on the date of grant.
Note 9 - OTHER FINANCIAL INFORMATION
INFORMATION RELATING TO CONSOLIDATED STATEMENTS OF CASH FLOWS
Net cash used by operating activities includes cash payments for
interest (in thousands):
Year ended June 30,
---------------------------
1996 1995 1994
---- ---- ----
Interest paid $ 732 $ 883 $ 1,110
Net (increase) decrease in operating working capital, net of the
effects of the business acquired, consists of the following (in thousands):
Year ended June 30,
---------------------------
1996 1995 1994
---- ---- ----
Decrease in accounts receivable $ 270 $ 2,030 $ 3,604
Increase in costs and estimated
earnings in excess of billings on
uncompleted contracts (726) - -
(Increase) decrease in inventories (1,881) 1,504 3,404
(Increase) decrease in prepaid expenses
and other current assets (86) 62 881
Increase (decrease) in accounts payable 278 111 (4,678)
Increase (decrease) in accrued payroll
and employee benefits 24 (406) (178)
Increase (decrease) in other
accrued liabilities 613 708 (385)
------ ------ ------
Net (increase) decrease $(1,508) $ 4,009 $ 2,648
====== ====== ======
Following is the supplemental schedule of non-cash investing and
financing activities (in thousands):
Year ended June 30,
--------------------------
1996 1995 1994
---- ---- ----
Capital expenditures financed by lease
obligations and notes payable $ 689 $ 96 $ 94
Debentures converted to equity 3,632 86 61
Common stock issued as partial
consideration for purchase of SMTEK, Inc. 801 - -
Common stock issued as debt placement fee 716 - -
Common stock issued as collateral for
10% Senior Notes 1,325 - -
Common stock issued to repay debt 35 - -
Conversion of preferred stock to
common stock - 3 -
OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following (in thousands):
June 30
------------------
1996 1995
---- ----
Environmental liabilities $ 728 $ 932
Accrued taxes payable 951 -
Other 1,435 1,455
------ ------
$ 3,114 $ 2,387
====== ======
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Following is the Company's schedule of valuation and qualifying
accounts and reserves for the last three years (in thousands):
Balance at Charged to Balance
Beginning Costs and at End
of Period Expenses Deductions of Period
--------- -------- --------- ---------
Allowance for doubtful accounts:
- -------------------------------
Fiscal 1994 $945 $293 $(705) $533
Fiscal 1995 533 95 (447) 181
Fiscal 1996 181 85 (134) 132
Inventory reserves
- ------------------
Fiscal 1994 $174 $266 $ (56) $384
Fiscal 1995 384 62 (290) 156
Fiscal 1996 156 250 (158) 248
Note 10 - COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
Future minimum lease payments at June 30, 1996, were as follows (in
thousands):
Capital Operating
leases leases
------ ------
Fiscal 1997 $ 77 $ 410
Fiscal 1998 48 399
Fiscal 1999 32 403
Fiscal 2000 20 375
Fiscal 2001 17 13
Thereafter 1 26
----- -----
Total 195 $ 1,626
=====
Less: Interest (28)
-----
Present value of minimum lease payments $ 167
=====
The capitalized cost of the related assets (primarily plant equipment),
which are pledged as security under the capital leases, was $370,000 and
$359,000 at June 30, 1996, and 1995, respectively. Accumulated amortization
on assets under capital leases amounted to $143,000 and $237,000 at June 30,
1996 and 1995, respectively.
Rental expense for operating leases amounted to $229,000, $238,000 and
$478,000 for fiscal 1996, 1995 and 1994, respectively. The Company's
principal operating leases are renewable at the fair rental value on the
expiration dates.
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.
GOVERNMENT GRANTS
Pursuant to government grant agreements with the Industrial Development
Board for Northern Ireland ("IDB"), the Company's Northern Ireland
subsidiaries have been reimbursed for a portion of qualifying capital
expenditures and for certain employment and interest costs. Approximately
$480,000 of the government grants received by the Company's DDL Electronics
Limited subsidiary ("DDL-E") are subject to repayment if the employment
level at this subsidiary falls below 134 employees during the two year
period beginning on January 1, 1997. At the present time, DDL-E has
approximately 180 employees. Management does not expect the employment at
DDL-E to drop below the level that would give rise to a grant repayment
obligation. Irlandus Circuits Limited ("Irlandus"), the Company's other
Northern Ireland-based operating company, no longer has a grant repayment
obligation based on maintenance of minimum employment levels.
In addition to the contingent grant repayment liability based on DDL-
E's employment level, the Company would be obligated to repay grants in the
event that DDL-E and/or Irlandus cease business, permanently discontinue
production, or fail to pay to the IDB any amounts due under the mortgage
notes payable (Note 6). These contingent repayment obligations amount to
approximately $650,000 and $406,000 for DDL-E and Irlandus, respectively.
Management does not expect that the Company will have any grant repayment
obligation under these provisions.
FOREIGN CURRENCY EXPOSURE
The Company's investment in its Northern Ireland subsidiaries is
represented by operating assets and liabilities denominated in these
subsidiaries' functional currency of British pounds sterling. In addition,
in the normal course of business these operating units enter into
transactions denominated in European currencies other than British pounds
sterling. As a result, the Company is subject to transaction and
translation exposure from fluctuations in foreign currency exchange rates.
The Company uses a variety of strategies, including foreign currency forward
contracts and internal hedging, to minimize or eliminate foreign currency
exchange rate risk associated with substantially all of its foreign currency
transactions. Gains and losses on these hedging transactions are generally
recorded in earnings in the same period as they are realized, which is
usually in the same period as the underlying or originating transactions.
The Company does not enter into speculative foreign currency transactions.
ENVIRONMENTAL MATTERS AND LITIGATION
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.
In addition to the environmental litigation described above, the
Company is involved in other litigation matters resulting from the ordinary
course of business. At the current time, management believes that all such
other actions, in the aggregate, will not have a material adverse effect on
the Company.
Note 11 - BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in two primary industry segments providing
electronic manufacturing services and printed circuit boards principally to
the computer, communications, instrumentation and medical equipment markets.
A summary of the Company's operations by segment follows (in thousands):
Year ended June 30,
------------------------------
1996 1995 1994
---- ---- ----
Sales:
Electronic Manufacturing Services $22,245 $13,842 $28,620
Printed Circuit Boards 10,891 15,734 19,909
------ ------ ------
$33,136 $29,576 $48,529
====== ====== ======
Operating income (loss):
Electronic Manufacturing Services $ (267) $(1,892) $(2,990)
Printed Circuit Boards (20) (646) (4,505)
General Corporate (880) (2,432) 547
------ ------ ------
$(1,167) $(4,970) $(6,948)
====== ====== ======
Identifiable assets:
Electronic Manufacturing Services $20,321 $ 6,162 $ 9,097
Printed Circuit Boards 5,266 5,543 13,012
General Corporate 2,500 885 1,149
------ ------ ------
$28,087 $12,590 $23,258
====== ====== ======
Depreciation and amortization:
Electronic Manufacturing Services $ 1,195 $ 568 $ 1,122
Printed Circuit Boards 548 924 1,975
General Corporate 285 13 23
------ ------ ------
$ 2,028 $ 1,505 $ 3,120
====== ====== ======
Capital expenditures:*
Electronic Manufacturing Services $ 1,013 $ 210 $ 551
Printed Circuit Boards 586 433 254
------ ------ ------
$ 1,599 $ 643 $ 805
====== ====== ======
* Capital expenditures includes equipment additions financed with capital
leases and notes payable.
Sales, operating loss, and identifiable assets by geographic area are as
follows (in thousands):
Year ended June 30,
------------------------------
1996 1995 1994
---- ---- ----
Sales:
United States $ 8,668 $ 8,765 $27,571
Northern Ireland 24,468 20,811 20,958
------ ------ ------
Total $33,136 $29,576 $48,529
====== ====== ======
Operating:
United States $ (748) $(2,226) $(2,909)
Northern Ireland (419) (2,744) (4,039)
------ ------ ------
Total $(1,167) $(4,970) $(6,948)
====== ====== ======
Identifiable assets:
United States $16,133 $ 1,003 $12,990
Northern Ireland 11,954 11,587 10,268
------ ------ ------
Total $28,087 $12,590 $23,258
====== ====== ======
No single customer accounted for 10% or more of consolidated sales in
fiscal 1996 or 1995. The Company had sales to a single customer which
accounted for approximately 13.0% of sales in fiscal 1994.
Note 12 - LIQUIDITY
The Company's financial statements are presented on a going concern
basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. The Company incurred
operating losses of $1,167,000, $4,970,000 and $6,948,000 and negative cash
flows from operating activities of $555,000, $264,000 and $2,710,000 for the
years ended June 30, 1996, 1995 and 1994, respectively.
In response to the large operating losses incurred prior to fiscal
1996, the Company liquidated its U.S. EMS operation and divested its U.S.
PCB operation during fiscal 1995. The U.S. EMS operation had been severely
damaged in the January 1994 Los Angeles earthquake. In fiscal 1996, the
Company reestablished a domestic operating presence by acquiring SMTEK.
Management anticipates that the Company will continue to incur
operating losses for at least the near term future due to its current level
of fixed costs for manufacturing overhead relative to its current sales
volume, as well as amortization expense of the goodwill arising from the
acquisition of SMTEK. Operating losses are expected to continue until such
time as sales increase to a level necessary to absorb fixed costs and offset
goodwill amortization. No assurance can be given as to whether or when
sales increases may be achieved. Sales increases will depend in part upon
strengthening the Company's sales and marketing functions for its existing
operations, and improving its price competitiveness in the EMS industry by
achieving economies of scale in the procurement of electronic components.
At June 30, 1996, the Company's total cash and cash equivalents
amounted to $2,519,000. In October 1996, the Company finalized an accounts
receivable-based working capital bank line of credit for its U.S. EMS
operation, which provides for borrowings of up to $2,500,000 at an interest
rate of prime plus 1.25%. Management believes that the Company's cash
resources and borrowing capacity on this working capital line of credit are
sufficient to fund operations for at least the next year.
Note 13 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Following is a summary of the quarterly results of operations (in
thousands except per share amounts):
Quarter ended
-------------------------------------------------
Sep 30 Dec 31 Mar 31 Jun 30 Total
------ ------ ------ ------ -----
Fiscal 1996
Sales $ 6,192 $ 6,029 $10,501 $10,414 $33,136
====== ====== ====== ====== ======
Income (loss) before
extraordinary item $ 1,084 $ (348) $ (405) $(1,089) $ (758)
Extraordinary item -
Gain on debt
extinguishment - - 2,356 - 2,356
------ ------ ------ ------ ------
Net income (loss) $ 1,084 $ (348) $ 1,951 $(1,089) $ 1,598
====== ====== ====== ====== ======
Earnings (loss) per share:
Income (loss) before
extraordinary item $ 0.06 $(0.02) $(0.02) $(0.05) $(0.04)
Extraordinary item - - 0.12 - 0.13
----- ----- ----- ----- -----
Total earnings (loss)
per share $ 0.06 $(0.02) $ 0.10 $(0.05) $ 0.09
====== ===== ===== ===== =====
Fiscal 1995
Sales $ 8,940 $ 7,654 $ 6,079 $ 6,903 $ 29,576
====== ====== ====== ====== =======
Income (loss) before
extraordinary item $(2,862) $ 2,145 $ 167 $(1,816) $(2,366)
Extraordinary item -
Gain on debt
extinguishment - 2,441 - - 2,441
------ ------ ------ ------ ------
Net income (loss) $(2,862) $ 4,586 $ 167 $(1,816) $ 75
====== ====== ====== ====== ======
Earnings (loss) per share:
Income (loss) before
extraordinary item $(0.19) $ 0.13 $ 0.01 $(0.11) $(0.15)
Extraordinary item - 0.15 - - 0.15
----- ----- ----- ----- -----
Total earnings (loss)
per share $(0.19) $ 0.28 $ 0.01 $(0.11) $ -
====== ===== ===== ===== =====
DDL ELECTRONICS, INC. AND SUBSIDIARIES
Market and Dividend Information
The Company's common shares are traded on the New York Stock and
Pacific Stock Exchanges (ticker symbol "DDL"). The high and low closing
sales prices for the common stock for the last two fiscal years, as reported
on the composite tape, are set forth in the following table.
Fiscal 1996 Fiscal 1995
------------- -------------
High Low High Low
---- ---- ---- ----
1st Quarter 2-1/8 1-1/2 1-7/8 1
2nd Quarter 3 1-7/8 2-1/2 1
3rd Quarter 2-3/4 2-1/4 1-1/2 1
4th Quarter 2-1/2 1-5/8 2 1-1/8
There were approximately 1,500 stockholders of record at October 7,
1996.
The Company suspended dividend payments effective March 31, 1989. A
resumption of dividend payments is not anticipated in the foreseeable
future.
Form 10-K Annual Report
A copy of the Annual Report on Form 10-K (without exhibits) may be
obtained free of charge upon written request to DDL Electronics, Inc., 2151
Anchor Court, Newbury Park, California 91320.
DDL ELECTRONICS, INC. AND SUBSIDIARIES
DIRECTORS, EXECUTIVE OFFICERS, OPERATING UNITS
AND OTHER CORPORATE INFORMATION
DIRECTORS OPERATING UNITS
- --------- ---------------
Karen Beth Brenner SMTEK, Inc.
Investment Manager Newbury Park, California
Newport Beach, California
Melvin Foster DDL Electronics Limited
Attorney at Law Craigavon, Northern Ireland
Boston, Massachusetts
Gregory L. Horton Irlandus Circuits Limited
Chairman of the Board, Craigavon, Northern Ireland
President and Chief Executive Officer
DDL Electronics, Inc.
Newbury Park, California
Bernee D. L. Strom TRANSFER AGENT AND REGISTRAR
President and Chief Executive Officer ----------------------------
USA Digital Radio American Stock Transfer &
Chicago, Illinois Trust Company
40 Wall Street
Richard K. Vitelle New York, New York 10005
Vice President and Chief Financial Officer
DDL Electronics, Inc.
Newbury Park, California INDEPENDENT AUDITORS
--------------------
Robert G. Wilson KPMG Peat Marwick LLP
Private Investor Los Angeles, California
Vancouver BC, Canada
(formerly Interim Vice President
of DDL Electronics, Inc.) LEGAL COUNSEL
-------------
Nelson, Mullins, Riley &
EXECUTIVE OFFICERS Scarborough, L.L.P.
- ------------------ Charlotte, North Carolina
Gregory L. Horton
President and Chief Executive Officer
Richard K. Vitelle
Vice President - Finance and Administration,
Chief Financial Officer, Treasurer and
Secretary