EXHIBIT 13
ANNUAL REPORT TO STOCKHOLDERS
DDL ELECTRONICS, INC. AND SUBSIDIARIES
FINANCIAL SUMMARY
(In thousands except per share amounts)
Year Ended June 30
--------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Sales $ 48,919 $ 33,136 $ 29,576 $ 48,529 $ 57,883
Operating income (loss) $ 118 $ (1,167) $ (4,970) $ (6,948) $ (5,067)
Extraordinary item $ - $ 2,356 $ 2,441 $ - $ 6,100
Net income (loss) $ (1,678) $ 1,598 $ 75 $ (8,354) $ 1,073
Earnings (loss)
per share $ (0.07) $ 0.09 $ - $ (0.55) $ 0.10
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:
DDL Electronics is proud to announce that the Company has returned to
operating profitability for the first time in nearly a decade. This was
the first full fiscal year which included the operations of DDL's newest
subsidiary, SMTEK, Inc. The acquisition of SMTEK in January 1996
established DDL solidly in the U.S. electronics manufacturing services
(EMS) industry. Concurrent with the acquisition of SMTEK, DDL's new
management team came aboard with a plan to reposition and revitalize the
Company within 24 months.
Last year we reported that the lingering residue of DDL's historical
problems had presented significant challenges for the new management team.
On June 30, 1997, DDL retired its short-term senior debt of $5.3 million,
which was the culmination of a very difficult period of financial
restructuring and balance sheet improvement. Elimination of this onerous
debt and other balance sheet improvements position the Company well as we
move forward with a strategy of profitable growth in operations and
expansion through acquisitions of profitable EMS providers with solid
reputations and strong market presence in their geographic areas. Earlier
this year, the Company engaged Needham & Company, one of the leading
investment banking firms serving the EMS industry, to evaluate, develop and
negotiate acquisition and capital infusion opportunities.
Significant effort and investment was made this year to seek and close
acquisitions of other profitable EMS companies. We considered over a dozen
potential acquisitions and made offers to three different companies, one of
which is still in process. Our focus is on making acquisitions in key
geographic areas of the U.S. to build a stronger presence in the domestic
market. We view this acquisition strategy as an important element of our
plan to increase overall profitability. With additional operating units,
we will realize benefits from collective procurement, better utilization of
engineering and design services, more responsive local customer service,
increased sales and marketing penetration, enhanced banking relationships,
and broader allocation of corporate overhead costs associated with being a
publicly held company.
Sales and earnings improved substantially over last year. Total sales
of $48,919,000 in fiscal 1997 represented an increase of 48% over fiscal
1996 sales of $33,136,000, due in part to the fact that SMTEK's operations
were included for only one-half of fiscal 1996. Still, if SMTEK had been
included in fiscal 1996 for the entire year, the year-over-year sales
increase would have been a robust 20%. DDL's balance sheet continued to
strengthen this year with debt reduction and equity infusion.
Stockholders' equity has risen to its highest level in six years.
Operating profitability increased considerably from operating losses of
$4,970,000 and $1,167,000 in fiscal years 1995 and 1996, respectively, to
operating income of $118,000 in fiscal 1997. Our top priorities going
forward are bottom line growth and cash flow improvement.
We continued to invest in our facilities and equipment this year to
improve capabilities in technology and capacity where needed. The Company
is positioned to perform at much higher sales levels without substantial
investment in facilities and equipment. However, we will be investing
further in our printed circuit board fabrication facility, Irlandus
Circuits Ltd., to increase technology, increase capacity, improve yields
and to reduce operating costs. This investment will better enable Irlandus
to supply printed circuit boards to DDL's EMS operations.
During fiscal 1997, new management was installed in both of our
operating companies in Northern Ireland. These new managers have
implemented better internal performance measurements, organizational
improvements, strengthened cost controls, production tracking systems and
employee motivation programs. These two operating units are certified to
ISO-9002, and SMTEK has achieved ISO-9001 certification effective April
1997.
We significantly strengthened our sales and marketing efforts this
year to take advantage of strong market demand and to focus on key customer
partnerships with a high level of service during the development,
production and post-production support phases of our customer
relationships. We experienced strong bookings and bidding activity
throughout fiscal 1997 and ended the year with a backlog of $29 million, up
from $18 million at the end of fiscal 1996, which represents a 62%
increase. To further enhance early customer interaction, DDL has initiated
a marketing strategy that provides no-charge design services to production
partners who commit production to the Company. This allows us to leverage
our substantial design capability and help our customers get to market
faster, with less cost, and with a more producible and reliable product.
DDL is well positioned to take advantage of strong market demand in
the high complexity, high mix portion of the EMS industry. There are
relatively few players in this difficult market segment that are as well
equipped as DDL to address the design, engineering and production
challenges presented by high complexity, high mix electronic assembly work.
In this segment, the production volumes are typically medium to small and
the service level and customer interaction levels are very high, compared
to high volume, low margin commodity and consumer goods production
supported by the much larger EMS providers.
We are excited about the continued growth of our market and the
increasing emphasis on EMS production capability. DDL is well positioned
to grow through increases in current operations and with strategic
acquisitions of companies that fit well within our international
organization. Our success this past year in improving the balance sheet,
sales, backlog, and operations should bode well for continued success in
fiscal 1998 and beyond.
/s/Gregory L. Horton
Chairman, CEO and President
DDL ELECTRONICS, INC. AND SUBSIDIARIES
FIVE-YEAR FINANCIAL SUMMARY
(In thousands except per share amounts)
Year ended June 30
--------------------------------------------
OPERATING DATA 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Sales $ 48,919 $ 33,136 $ 29,576 $ 48,529 $ 57,883
------ ------ ------ ------ ------
Costs and expenses:
Cost of goods sold 42,475 29,494 26,516 47,860 55,052
Administrative and
selling expenses 5,058 4,175 6,497 7,617 7,898
Goodwill amortization 1,268 634 - - -
Restructuring charges - - 1,533 - -
------ ------ ------ ------ ------
Total costs and expenses 48,801 34,303 34,546 55,477 62,950
------ ------ ------ ------ ------
Operating income (loss) 118 (1,167) (4,970) (6,948) (5,067)
------ ------ ------ ------ ------
Non-operating income (expense):
Interest income 83 246 109 168 280
Interest expense (1,105) (911) (883) (1,110) (1,107)
Debt issue cost amortization (937) (281) - - -
Gain on sale of assets 142 - 3,317 2 264
Earthquake expenses - - - (500) -
Other income (expense), net 21 245 61 34 -
------ ------ ------ ------ ------
Total non-operating
income (expense) (1,796) (701) 2,604 (1,406) (563)
------ ------ ------ ------ ------
Loss from continuing
operations before
income taxes (1,678) (1,868) (2,366) (8,354) (5,630)
Income tax benefit - 1,110 - - -
------ ------ ------ ------ ------
Loss from continuing
operations (1,678) (758) (2,366) (8,354) (5,630)
Income from discontinued
operations, less applicable
income taxes - - - - 603
------ ------ ------ ------ ------
Loss before extraordinary
item (1,678) (758) (2,366) (8,354) (5,027)
Extraordinary item - Gain
on debt extinguishment - 2,356 2,441 - 6,100
------ ------ ------ ------ ------
Net income (loss) $ (1,678) $ 1,598 $ 75 $ (8,354) $ 1,073
====== ====== ====== ====== ======
DDL ELECTRONICS, INC. AND SUBSIDIARIES
FIVE-YEAR FINANCIAL SUMMARY
(In thousands except per share amounts)
(Continued)
Year ended June 30
--------------------------------------------
OPERATING DATA 1997 1996 1995 1994 1993
(Continued) ---- ---- ---- ---- ----
Earnings (loss) per share:
Primary:
Continuing operations $(0.07) $(0.04) $(0.15) $(0.55) $(0.56)
Discontinued operations - - - - 0.06
Extraordinary item - 0.13 0.15 - 0.60
----- ----- ----- ----- -----
Total $(0.07) $ 0.09 $ - $(0.55) $ 0.10
===== ===== ===== ===== =====
Fully diluted:
Continuing operations $(0.07) $(0.03) $(0.15) $(0.55) $(0.37)
Discontinued operations - - - - 0.04
Extraordinary item - 0.12 0.15 - 0.42
----- ----- ----- ----- -----
Total $ (0.07) $ 0.09 $ - $ (0.55) $ 0.09
===== ===== ===== ===== =====
Year ended June 30
--------------------------------------------
BALANCE SHEET DATA 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Current assets $ 20,420 $ 15,493 $ 8,876 $ 12,018 $ 20,085
Current liabilities $ 18,095 $ 11,979 $ 8,904 $ 21,277 $ 14,289
Working capital (deficit) $ 2,325 $ 3,514 $ (28) $ (9,259) $ 5,796
Current ratio 1.1 1.3 1.0 0.6 1.4
Total assets $ 31,880 $ 28,087 $ 12,590 $ 23,258 $ 33,739
Long-term debt $ 7,820 $ 10,935 $ 7,030 $ 6,870 $ 20,393
Stockholders' equity
(deficit) $ 5,965 $ 5,173 $ (3,344) $ (4,889) $ (943)
Equity (deficit) per share $ 0.24 $ 0.22 $ (0.21) $ (0.34) $ (0.08)
Shares outstanding (000s) 24,587 22,999 16,063 14,469 11,973
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.
Historically, DDL was a diversified holding company with operations in
the areas of EMS and PCB fabrication, broadband communications equipment
and other businesses. The Company entered the EMS business by acquiring
its domestic EMS operations in 1985 and by organizing its European EMS
operations in 1990. The Company divested its non-EMS/PCB operations during
1989 to 1993. In December 1994 and January 1995, the Company sold
substantially all the assets of its U.S. EMS and PCB operations, and used
the proceeds to pay off debt.
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.
With the exception of the year ended June 30, 1997, during which the
Company generated operating income of $118,000, the Company has incurred
operating losses for a number of years. These operating losses amounted to
$1,167,000 and $4,970,000 in the fiscal years ended June 30, 1996 and 1995,
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 net
income included an extraordinary gain of $2,356,000 and an income tax
benefit of $1,110,000, while fiscal 1995 net income included an
extraordinary gain of $2,441,000 and a gain of on sales of assets of
$3,317,000.
The Company utilizes a 52-53 week fiscal year ending on the Friday
closest to June 30 which, for fiscal years 1997, 1996 and 1995, fell on
June 27, June 28 and June 30, respectively. Throughout this Annual Report
to Stockholders, the fiscal year-end for all years is shown as June 30 for
clarity of presentation, except where the context dictates a more specific
reference to the actual year-end date.
Quasi-reorganization
The Company, with the authorization of its Board of Directors,
implemented a quasi-reorganization effective June 27, 1997. The quasi-
reorganization, which did not require the approval of the Company's
stockholders, resulted in an elimination of the accumulated deficit of
$23,678,000 by a transfer from additional paid-in capital of an equivalent
amount. This deficit was attributable primarily to operations which were
divested or discontinued in prior years. Following a review and evaluation
by management, no adjustment was made to the carrying values of the
Company's assets and liabilities because such amounts were deemed to be not
in excess of estimated fair values.
Results of Operations
The following table sets forth the Company's sales and other operating
data as percentages of revenues:
Year Ended June 30
-----------------------------
1997 1996 1995
---- ---- ----
Sales 100.0% 100.0% 100.0%
Cost of goods sold 86.8 89.0 89.7
----- ----- -----
Gross profit 13.2 11.0 10.3
Administrative and selling expenses 10.3 12.6 21.9
Goodwill amortization 2.6 1.9 -
Restructuring charges - - 5.2
----- ----- -----
Operating income (loss) 0.3 (3.5) (16.8)
Interest income 0.2 0.8 0.4
Interest expense (2.3) (2.8) (3.0)
Debt issue cost amortization (1.9) (0.2) -
Gain on sale of assets - - 11.2
Other income, net 0.3 0.1 0.2
----- ----- -----
Loss before income taxes (3.4) (5.6) (8.0)
Income tax benefit - 3.3 -
----- ----- -----
Loss before extraordinary item (3.4) (2.3) (8.0)
Extraordinary item - Gain on
debt extinguishment - 7.1 8.3
----- ----- -----
Net income (loss) (3.4)% 4.8% 0.3%
===== ===== =====
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 year ended June 30, 1995, 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
years ended June 30, 1997 and 1996 (in thousands):
Year Ended June 30
-----------------------------
1997 1996 1995
---- ---- ----
(Pro forma)
Sales $ 48,919 $ 33,136 $ 20,811
------- ------- -------
Cost of goods sold 42,475 29,494 17,873
Administrative and
selling expenses 5,058 4,175 5,062
Goodwill amortization 1,268 634 -
------- ------- -------
Total costs and operating expenses 48,801 34,303 23,037
------- ------- -------
Operating income (loss) 118 (1,167) (2,226)
Non-operating expense, net (1,796) (701) (538)
------- ------- -------
Loss before income taxes (1,678) (1,868) (2,764)
Income tax benefit - 1,110 -
------- ------- -------
Loss before extraordinary item (1,678) (758) (2,764)
Extraordinary item - Gain on
debt extinguishment - 2,356 2,441
------- ------- -------
Net income (loss) $ (1,678) $ 1,598 $ (323)
======= ======= =======
Fiscal 1997 vs. 1996
Sales for fiscal 1997 were $48,919,000, compared to $33,136,000 for
fiscal 1996. The sales increase results primarily from the acquisition of
SMTEK, which contributed revenues of $19,267,000 in the year ended June 30,
1997 compared to $8,668,000 in fiscal 1996. Because the acquisition of
SMTEK in January 1996 was accounted for using the purchase method, SMTEK's
operations prior to the acquisition are not included in the Company's
results. Sales growth at DDL Electronics, Ltd. ("DDL-E") accounted for
most of the remaining increase in consolidated sales. DDL-E added several
new customers that have contributed to sales growth and significantly
increased sales to one of its existing customers during fiscal 1997.
Gross profit (sales less cost of goods sold) for fiscal 1997 was
$6,444,000 compared to $3,642,000 for fiscal 1996. SMTEK's gross profit of
$2,774,000 for fiscal 1997, compared to $1,600,000 for fiscal 1996,
accounted for $1,174,000 of the increase. Gross profit of DDL-E and
Irlandus Circuits Ltd. ("Irlandus") increased by $810,000 and $821,000,
respectively, compared to fiscal 1996. DDL-E's gross profit increased due
to higher sales volume and the fact that DDL-E's gross profit in fiscal
1996 was adversely impacted by a ramp-up in the workforce and higher than
normal equipment costs. Irlandus' gross profit increased primarily due to
a reduction of indirect costs. The Company's consolidated gross profit
margin increased from 11.0% in fiscal 1996 to 13.2% in fiscal 1997, due
primarily to improvement in Irlandus' gross profit margin from 11.4% in
fiscal 1996 to 18.6% in fiscal 1997. The improvement in Irlandus' gross
profit margin is attributable to an increase in higher margin quick-turn
orders and a reduction of indirect costs as a percentage of sales. SMTEK's
gross profit margin declined from 18.5% in fiscal 1996 to 14.4% in fiscal
1997 due to higher direct material costs as a percentage of sales, as well
as an increase in the number of production employees handling the higher
sales volume.
Administrative and selling expenses increased from $4,175,000 for the
year ended June 30, 1996 to $5,058,000 for fiscal 1997. This increase is
principally the result of the acquisition of SMTEK in January 1996.
Operating income was $118,000 for fiscal 1997, compared to operating
loss of $1,167,000 for fiscal 1996. This improvement is primarily
attributable to increased gross profit of DDL-E and Irlandus.
Net non-operating expense increased from $701,000 in fiscal 1996 to
$1,796,000 in fiscal 1997. This change is attributable to increases in
debt issue cost amortization and interest expense, as the result of debt
issued in February 1996 to finance the SMTEK acquisition. Debt issue cost
amortization expense amounted to $937,000 in fiscal 1997 compared to
$281,000 in fiscal 1996. Nearly all of the fiscal 1997 debt issue cost
amortization relates to the 10% Senior Notes of $5,300,000 which were
repaid on June 30, 1997 (which is subsequent to the year ended June 27,
1997), as further discussed under "Liquidity and Capital Resources" below.
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 the tax returns underlying these refunds are subject to audit by
the Internal Revenue Service and a portion of the refunds could be
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. No additional refunds were received during fiscal
1997. 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.
The net loss for 1997 was $1,678,000, or ($0.07) per share, compared
to net income of $1,598,000, or $0.09 per share for fiscal 1996. 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 8 to the accompanying
consolidated financial statements.
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 fiscal 1995 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-E accounted for most of the remaining
increase in consolidated sales. DDL-E added several new turnkey customers
that contributed to sales growth in fiscal 1996 and 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. For DDL-E, 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 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 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 expenses
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.
As discussed further above, during fiscal 1996 the Company recognized
an income tax benefit of $1,110,000 net of certain expenses associated with
its application for federal tax refunds as permitted under section 172(f)
of the Internal Revenue Code.
For fiscal 1995, the loss before extraordinary item was $2,366,000, or
($0.15) per share. On a pro forma basis, excluding the operations of A.J.
and Aero Oregon and the non-recurring gain on the sale of Aero Oregon's
assets, 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 8 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.
Recent Accounting Pronouncement
The Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share" ("SFAS 128") in February 1997. SFAS 128 is effective
for both interim and annual periods ending after December 15, 1997. The
Company will adopt SFAS 128 in the second quarter of fiscal 1998. SFAS 128
requires the presentation of "Basic" earnings per share which represents
income available to common shareholders divided by the weighted average
number of common shares outstanding for the period. A dual presentation of
"Diluted" earnings per share will also be required. Management believes
the adoption of SFAS 128 will not have a material impact on the Company's
financial position or results of operations.
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 sources of liquidity are its cash and cash
equivalents, which amounted to $4,718,000 at the end of fiscal 1997, and its
bank lines of credit. During fiscal 1997, cash and cash equivalents
increased by $2,199,000. This net cash inflow consisted of cash proceeds
from the issuance of common stock of $1,460,000, proceeds from new
borrowings net of debt repayments of $611,000, proceeds from government
grants of $605,000, cash provided by operating activities of $230,000,
proceeds from the sale of assets of $202,000 and the effect of exchange
rate changes on cash of $80,000, partially offset by capital expenditures
of $989,000.
On June 30, 1997 (which is subsequent to the year ended June 27, 1997,
as the Company utilizes a 52-53 week fiscal year), the Company repaid its
10% Senior Notes due July 1, 1997 in the amount of $5,300,000 plus accrued
interest of $43,000. Of the funds used to repay the 10% Senior Notes,
$2,000,000 was borrowed from a private investor on June 30, 1997 under a
note payable due February 1, 1999 which is secured by the common stock of
SMTEK. After giving effect to these two subsequent events (the proceeds from
the $2,000,000 note payable and the payoff of the 10% Senior Notes), the
Company's total cash and cash equivalents amounted to $1,375,000 at June
30, 1997.
Components of operating working capital increased by $1,547,000 during
fiscal 1997, which consisted of a $3,396,000 increase in accounts
receivable, a $136,000 increase in costs and estimated earnings in excess
of billings on uncompleted contracts, and a $808,000 decrease in other
liabilities, partially offset by a $1,054,000 decrease in inventories, a
$189,000 decrease in prepaid expenses and other current assets, a
$1,222,000 increase in accounts payable, and a $328,000 increase in accrued
payroll and employee benefits.
The Company has an accounts receivable-based working capital bank line
of credit for SMTEK which provided for borrowings of up to $2,500,000 at an
interest rate of prime (8.5% at June 30, 1997) plus 1.25%. At the end of
fiscal 1997, borrowings outstanding under this credit facility amounted to
$977,000. The Company also has a credit facility agreement with Ulster
Bank Markets for its Northern Ireland operations. This agreement includes
a working capital line of credit of 1,150,000 pounds sterling (approximately
$1,900,000), and provides for interest on borrowings at the Bank's base
rate (6.50% at June 30, 1997) plus 1.50%. At the end of fiscal 1997,
borrowings outstanding under this credit facility amounted to $401,000.
In September 1997, Ulster Bank Markets increased the Northern Ireland
line of credit to 3,000,000 pounds sterling (approximately $4,900,000) and
extended the credit facility through August 31, 1998.
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 improvements in its facilities. Capital
expenditures during fiscal 1997, 1996 and 1995 were approximately
$2,210,000, $1,599,000 and $643,000, respectively. The Company anticipates
it will need to increase its capital spending in the coming years in order
to stay competitive as technology evolves. Management estimates that
capital expenditures of as much as $2 million may be required in fiscal
1998. Of that amount, the substantial majority is expected to be financed
by a combination of capital leases, secured loans and foreign government
grants.
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 income (losses) of $118,000, $(1,167,000) and $(4,970,000), and
cash inflows (outflows) from operating activities of $242,000, $(555,000)
and $(264,000) in fiscal years 1997, 1996 and 1995, respectively.
The achievement of sustained 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 profitable operations 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.
With the exception of fiscal 1997, during which the Company generated
operating income of $118,000, the Company has incurred operating losses for
a number of years. Operating losses could continue until such time as
sales increase to a level sufficient to cover costs and operating expenses.
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.
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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the
results of their operations and cash flows for each of the years in the
three-year period ended June 30, 1997 in conformity with generally accepted
accounting principles.
/s/ KPMG PEAT MARWICK LLP
Los Angeles, California
August 15, 1997, except for the second
paragraph of note 12, which is as of
September 22, 1997
DDL ELECTRONICS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands except share amounts)
June 30
-----------------
1997 1996
---- ----
Assets
Current assets:
Cash and cash equivalents (Note 3) $ 4,718 $ 2,519
Accounts receivable, net (Note 5) 9,198 5,620
Costs and estimated earnings in excess of
billings on uncompleted contracts (Note 6) 3,161 3,026
Inventories, net (Note 7) 3,211 4,014
Prepaid expenses 132 314
------ ------
Total current assets 20,420 15,493
------ ------
Property, equipment and improvements,
at cost (Notes 8 and 12):
Buildings and improvements 6,037 5,604
Plant equipment 14,962 13,999
Office and other equipment 1,952 1,444
------ ------
22,951 21,047
Less: Accumulated depreciation
and amortization (16,161) (15,130)
------ ------
Property, equipment and
improvements, net 6,790 5,917
------ ------
Other assets:
Goodwill, net (Note 4) 4,439 5,708
Debt issue costs, net 38 533
Deposits and other assets 193 436
------ ------
4,670 6,677
------ ------
$ 31,880 $ 28,087
====== ======
DDL ELECTRONICS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands except share amounts)
(Continued)
June 30
-----------------
1997 1996
---- ----
Liabilities and Stockholders' Equity
Current liabilities:
Bank lines of credit payable $ 1,378 $ -
Current portion of long-term
debt (Notes 3 and 8) 4,167 603
Accounts payable 9,084 7,485
Accrued payroll and employee benefits 1,145 777
Other accrued liabilities (Notes 3 and 11) 2,321 3,114
------ ------
Total current liabilities 18,095 11,979
------ ------
Long-term debt, less current
portion (Notes 3 and 8) 7,820 10,935
------ ------
Commitments and contingencies (Note 12)
Stockholders' equity (Notes 2, 8 and 10):
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; 24,586,858 and
22,998,879 shares issued and outstanding
in 1997 and 1996, respectively 246 230
Additional paid-in capital 6,410 29,304
Common stock held in escrow - (1,325)
Accumulated deficit (deficit of $23,678,000
eliminated effective June 27, 1997) - (22,000)
Foreign currency translation adjustment (691) (1,036)
------ ------
Total stockholders' equity 5,965 5,173
------ ------
$ 31,880 $ 28,087
====== ======
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
-----------------------------
1997 1996 1995
---- ---- ----
Sales $ 48,919 $ 33,136 $ 29,576
------ ------ ------
Costs and expenses:
Cost of goods sold 42,475 29,494 26,516
Administrative and selling expenses 5,058 4,175 6,497
Goodwill amortization 1,268 634 -
Restructuring charges (Note 4) - - 1,533
------ ------ ------
48,801 34,303 34,546
------ ------ ------
Operating income (loss) 118 (1,167) (4,970)
------ ------ ------
Non-operating income (expense):
Interest income 83 246 109
Interest expense (1,105) (911) (883)
Debt issue cost amortization (937) (281) -
Gain on sale of assets (Note 4) 142 - 3,317
Other income (expense), net 21 245 61
------ ------ ------
(1,796) (701) 2,604
------ ------ ------
Loss before income taxes (1,678) (1,868) (2,366)
Income tax benefit (Note 9) - 1,110 -
------ ------ ------
Loss before extraordinary item (1,678) (758) ( 2,366)
Extraordinary item - Gain on debt
extinguishment (Notes 4 and 8) - 2,356 2,441
------ ------ ------
Net income (loss) $ (1,678) $ 1,598 $ 75
====== ====== ======
Earnings (loss) per share:
Loss before extraordinary item $ (0.07) $ (0.04) $ (0.15)
Extraordinary item - 0.13 0.15
------ ------ ------
Earnings (loss) per share $ (0.07) $ 0.09 $ -
====== ====== ======
Shares used in computing
earnings (loss) per share 23,398 18,807 15,971
====== ====== ======
See accompanying notes to consolidated financial statements.
DDL ELECTRONICS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Year ended June 30
-----------------------------
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ (1,678) $ 1,598 $ 75
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 3,631 2,028 1,505
Gain on debt extinguishment - (2,356) (2,441)
Gain on sale of assets (142) - (3,317)
Net (increase) decrease in
operating working capital, net
of effects of business acquired (1,547) (1,508) 4,009
(Increase) decrease in deposits
and other assets 124 (93) 2
Benefit of non-capital grants (242) (265) (139)
Other 84 41 42
------ ------ ------
Net cash provided by (used in)
operating activities 230 (555) (264)
------ ------ ------
Cash flows from investing activities:
Capital expenditures (989) (910) (547)
Purchase of SMTEK, Inc., net of
cash acquired - (7,638) -
Proceeds from sale of assets 202 - 9,936
------ ------ ------
Net cash provided by (used in)
investing activities (787) (8,548) 9,389
------ ------ ------
Cash flows from financing activities:
Proceeds from bank lines of credit 1,366 - -
Proceeds from long-term debt - 8,800 612
Payments of long-term debt (755) (1,870) (10,819)
Debt issue costs - (372) -
Proceeds from issuance of common
stock, net 1,385 1,112 980
Proceeds from exercise of stock
options 75 437 287
Proceeds from exercise of stock
warrants - 448 -
Proceeds from foreign government
grants 605 229 202
------ ------ ------
Net cash provided by (used in)
financing activities 2,676 8,784 (8,738)
------ ------ ------
Effect of exchange rate changes on cash 80 (79) (10)
------ ------ ------
Increase (decrease) in cash
and cash equivalents 2,199 (398) 377
Cash and cash equivalents at
beginning of year 2,519 2,917 2,540
------ ------ ------
Cash and cash equivalents at end of year $ 4,718 $ 2,519 $ 2,917
====== ====== ======
See accompanying notes to consolidated financial statements.
DDL ELECTRONICS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Years ended June 30, 1997, 1996 and 1995
(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, 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 preferred
stock (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% 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
and warrants - 918,942 9 - - 876 - - 885
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
Net loss - - - - - - (1,678) - (1,678)
Stock released from escrow
account - - - 1,060,000 1,325 - - - 1,325
Shares retired - (706,667) (7) - - (876) - - (883)
Sale of common stock - 2,000,000 20 - - 1,365 - - 1,385
Exercise of stock options
and warrants - 294,646 3 - - 295 - - 298
Translation adjustments - - - - - - - 345 345
Quasi-reorganization
transfer - - - - - (23,678) 23,678 - -
---- ---------- ---- --------- ----- ------ ------ ------ ------
Balance at June 30, 1997 - 24,586,858 $ 246 - $ - $ 6,410 $ - $ (691) $ 5,965
==== ========== ==== ========= ===== ====== ======
====== ======
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 1997, 1996 and 1995, fell on June
27, June 28 and June 30, respectively. In these consolidated financial
statements, the fiscal year-end for all years is shown as June 30 for
clarity of presentation, except where the context dictates a more specific
reference to the actual year-end date.
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, 1997, the carrying amount of the Company's cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities
approximate their fair value because of the short maturity of those
instruments. The carrying amount of long-term debt (including current
portion thereof) was $11,987,000 and the fair value was $11,513,000 as of
June 30, 1997. 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
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.
Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of"
("SFAS 121") 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
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the expected future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and credit carryforwards. In estimating future tax
consequences, all expected future events other than enactments of changes in
tax law or statutorily imposed rates are considered. 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).
The Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share" ("SFAS 128") in February 1997. SFAS 128 is effective
for both interim and annual periods ending after December 15, 1997. The
Company will adopt SFAS 128 in the second quarter of fiscal 1998. SFAS 128
requires the presentation of "Basic" earnings per share which represents
income available to common shareholders divided by the weighted average
number of common shares outstanding for the period. A dual presentation of
"Diluted" earnings per share will also be required. Management believes the
adoption of SFAS 128 will not have a material impact on the Company's
financial position or results of operations. If SFAS 128 had been
retroactively applied effective July 1, 1994, the impact on earnings per
share would have been negligible, because "primary earnings per share" as
presented for the three years ended June 30, 1997 approximates "basic
earnings per share" calculated under the provisions of SFAS 128, and
"fully diluted earnings per share" as presented approximates "diluted
earnings per share" calculated under the provisions of SFAS 128.
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 recorded 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.
Stock Based Compensation
Prior to July 1, 1996, the Company accounted for its employee stock
compensation plans in accordance with Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense would be recorded only if,
on the date of grant, the current market price of the underlying stock
exceeded the exercise price. On July 1, 1996, the Company adopted Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") which permits entities to recognize as expense
over the vesting period the fair value of all stock-based awards on the date
of grant. Alternatively, SFAS 123 also allows entities to continue to apply
the provisions of APB Opinion No. 25 and provide pro forma net income and
pro forma earnings per share disclosures for stock-based awards made in
fiscal 1996 and future years as if the fair-value-based method defined in
SFAS 123 had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS 123.
Changes in Classification
Certain reclassifications have been made to the fiscal 1996 and 1995
financial statements to conform with the fiscal 1997 financial statement
presentation. Such reclassifications had no effect on the Company's results
of operations or stockholders' equity (deficit).
Note 2 - QUASI-REORGANIZATION
The Company, with the authorization of its Board of Directors,
implemented a quasi-reorganization effective June 27, 1997. The quasi-
reorganization, which did not require the approval of the Company's
stockholders, resulted in an elimination of the accumulated deficit of
$23,678,000 by a transfer from additional paid-in capital of an equivalent
amount. This deficit was attributable primarily to operations which were
divested or discontinued in prior years. Following a review and evaluation
by management, no adjustment was made to the carrying values of the
Company's assets and liabilities because such amounts were deemed to be not
in excess of estimated fair values.
Note 3 - SUBSEQUENT EVENTS
On June 30, 1997 (which is subsequent to the year ended June 27, 1997,
as the Company utilizes a 52-53 week fiscal year), the Company repaid its
10% Senior Notes due July 1, 1997 in the amount of $5,300,000 plus accrued
interest of $43,000. Of the funds used to repay the 10% Senior Notes,
$2,000,000 was borrowed from a private investor (the "Investor") on June 30,
1997 under a note payable due February 1, 1999 which is secured by the
common stock of SMTEK. Because the Company borrowed $2,000,000
under a long-term note to raise a portion of the funds needed to pay off the
10% Senior Notes, $2,000,000 of the 10% Senior Notes has been classified
as long-term debt in the accompanying consolidated balance sheet.
Following is pro forma information for certain consolidated balance
sheet line items presented as if the issuance of the $2,000,000 note payable
and repayment of the 10% Senior Notes had occurred on June 27, 1997:
June 27, 1997
----------------------------
As Reported Pro forma
----------- -----------
Assets:
Cash and cash equivalents $4,718,000 $1,375,000
Liabilities:
Current portion of
long-term debt $4,167,000 $ 867,000
Other accrued liabilities $2,321,000 $2,278,000
Concurrent with issuing the $2,000,000 note payable on June 30, 1997,
the Company agreed to acquire all of the issued and outstanding shares of
Jolt Technology, Inc. ("Jolt"), a privately-held electronic manufacturing
services company controlled by the Investor, for nine million shares of the
Company's common stock. The acquisition of Jolt is subject to executing a
definitive agreement, obtaining a fairness opinion on the transaction, and
obtaining the approval of the Company's stockholders. Upon consummation
of the Jolt acquisition, the maturity date of the $2,000,000 note payable will
be extended from February 1, 1999 to October 31, 1999. If consummated,
the acquisition will be accounted for under the purchase method of accounting
for business combinations.
Note 4 - 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, a provider of integrated electronic manufacturing services. The
purchase price of $8,000,000 was paid in cash of $7,199,000 and 1,000,000
shares of unregistered common stock 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 10% Senior Notes in the aggregate amount of $5,300,000 and
10% Cumulative Convertible Debentures in the aggregate amount of $3,500,000.
The 10% Senior Notes were repaid on June 30, 1997, as discussed in Note 3.
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.
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 10, the Series E warrants contain an antidilution provision which
has lowered the exercise price.
The acquisition of SMTEK was 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 was 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 $1,903,000 and $634,000 as of June 30, 1997 and
1996, respectively.
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 5 - ACCOUNTS RECEIVABLE
The components of accounts receivable are as follows (in thousands):
June 30
--------------------
1997 1996
---- ----
Trade receivables $ 8,810 $ 5,456
Other receivables 546 296
Less allowance for doubtful
accounts (158) (132)
------ ------
$ 9,198 $ 5,620
====== ======
Included in other receivables at June 30, 1997 and 1996 are grants due
from the Industrial Development Board for Northern Ireland of $125,000 and
$251,000, respectively (Note 12).
Note 6 - 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 are as follows (in thousands):
June 30
--------------------
1997 1996
---- ----
Costs incurred on uncompleted
contracts $20,455 $11,181
Estimated earnings 2,714 1,544
------ ------
23,169 12,725
Less: Billings to date (20,008) (9,699)
------ ------
$ 3,161 $ 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
$149,000 and $64,000 of billings in excess of costs and estimated earnings
at June 30, 1997 and 1996, respectively. Essentially all of the unbilled
receivables are expected to be billed within 90 days of the balance sheet
date.
Note 7 - INVENTORIES
Inventories consist of the following (in thousands):
June 30
------------------
1997 1996
---- ----
Raw materials $2,889 $2,853
Work in process 654 1,263
Finished goods 160 146
Less reserves (492) (248)
----- -----
$3,211 $4,014
====== ======
Note 8 - FINANCING ARRANGEMENTS
Bank Credit Agreements
The Company has an accounts receivable-based working capital bank line
of credit for SMTEK which provides for borrowings of up to $2,500,000 at an
interest rate of prime (8.5% at June 30, 1997) plus 1.25%. At June 30,
1997, borrowings outstanding under this credit facility amounted to
$977,000. SMTEK's line of credit expires on September 1, 1998. The Company
also has a credit facility agreement with Ulster Bank Markets for its
Northern Ireland operations. This agreement includes a working capital line
of credit of 1,150,000 pounds sterling (approximately $1,900,000), and
provides for interest on borrowings at the Bank's base rate (6.50% at June
30, 1997) plus 1.50%. At June 30, 1997, borrowings outstanding under this
credit facility amounted to $401,000. In September 1997, Ulster Bank
Markets increased the Northern Ireland line of credit to 3,000,000 pounds
sterling (approximately $4,900,000) and extended the credit facility through
August 31, 1998.
Long-Term Debt
Long-term debt consists of the following (in thousands):
June 30
------------------
1997 1996
---- ----
10% Senior 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 (Note 3) $ 5,300 $ 5,300
Mortgage notes secured by real property at the
Northern Ireland operations, with interest at
variable rates (7-7/8% at June 30, 1997),
payable in semiannual installments through 2009 1,300 1,265
Notes payable secured by equipment, interest
at 7.95% to 10.9%, payable in monthly
installments through April 2001 1,129 1,523
Capitalized lease obligations (Note 12) 1,197 167
8-1/2% Convertible Subordinated Debentures, due 2008,
interest payable semi-annually and convertible at
holders' option at a price of $10.63 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 ("CSDs"),
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 421 443
Obligations to former officers, employees and directors
under consulting and deferred fee agreements 826 965
Other 234 295
------ ------
11,987 11,538
Less current maturities 4,167 603
------ ------
$ 7,820 $10,935
====== ======
At June 30, 1997, 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, 1997 and 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 12) are as follows: 1998 - $3,867,000; 1999 - $2,954,000;
2000 - $400,000; 2001 - $659,000; 2002 - $172,000; and thereafter -
$2,738,000.
During fiscal 1996 and 1995, holders of $132,000 and $86,000,
respectively, in principal of 7% CSDs exchanged such CSDs for common stock
of 66,000 and 43,000 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 $802,000 and $941,000 at June 30, 1997 and 1996,
respectively. As the result of this settlement agreement, the Company
recorded an extraordinary gain in fiscal 1996 of $2,356,000, net of $197,000
of compensation expense related to the "call" feature of the warrants.
During fiscal 1997, 144,646 Series G warrants were exercised.
Note 9 - 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
---------------------
1997 1996
---- ----
Deferred tax assets:
Accrued employee benefits $ 346 $ 394
Loss reserves 452 547
Net operating loss carryforwards 14,102 13,240
Other 74 272
------ ------
Total deferred tax assets 14,974 14,453
Deferred tax liabilities:
Depreciation (118) (53)
------ ------
Net deferred tax assets before allowance 14,856 14,400
Less valuation allowance (14,856) (14,400)
------ ------
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 $37,000,000 prior to the expiration of the net
operating loss carryforwards. Based on the level of historical losses and
projections for future taxable income, management believes that it is more
likely than not that the deferred tax assets will not be recognized, and
therefore, has recorded a 100% valuation allowance to offset the assets.
The valuation allowance was $14,400,000 and $20,846,000 as of July 1, 1996
and 1995, respectively. The net change in the total valuation allowance for
the years ended June 30, 1997 and 1996 was an increase of $456,000 and a
decrease of $6,446,000, respectively. The reduction of the valuation
allowance for fiscal 1996 was based on a carryback of prior year net
operating losses and an extraordinary gain on extinguishment of debt. 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
---------------------------
1997 1996 1995
---- ---- ----
Federal tax benefit computed at
statutory rate $ (569) $(635) $(804)
State income tax, net of
federal benefit - - 5
Differences in taxation of
foreign earnings, net (263) 114 (155)
Amortization of debt issue costs - (108) -
Amortization of goodwill 431 215 -
Utilization of net operating losses - (1,110) -
Deferred tax effect of temporary
differences (102) 6,871 1,438
Net change in valuation allowance 456 (6,446) (484)
Other 47 (11) -
----- ----- -----
Income tax expense (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 the tax returns underlying these refunds are subject to audit by the
Internal Revenue Service and a portion of the refunds could be 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.
No additional refunds were received during fiscal 1997. 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.
As of June 30, 1997, the Company has U.S. federal and state net
operating loss ("NOL") carryforwards of $37,408,000 and $27,709,000,
respectively, expiring in 2004 through 2012. The NOL carryforward for
federal alternative minimum tax purposes is approximately $28,558,000.
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.
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 $244,000 in
fiscal 1997 and has been treated as a reduction in the provision for income
taxes. There was no income tax benefit from the U.K. NOL in fiscal 1996 and
1995. At June 30, 1997, the U.K. NOL amounted to approximately $11,300,000.
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.
As discussed in Note 2, the Company effected a quasi-reorganization as
of June 27, 1997. In the future, income tax benefits, if any, realized upon
the utilization of U.S. or U.K. net operating losses generated prior to the
effective date of the quasi-reorganization will be credited to additional
paid-in capital.
Pretax income (loss) from foreign operations for fiscal 1997, 1996 and
1995 was $772,000, ($338,000) and $443,000, 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.
Note 10 - STOCKHOLDERS' EQUITY
Sales of Common Stock
In June 1997, the Company sold 2,000,000 shares of common stock to
various investors, generating proceeds of $1,385,000, which is net of
issuance costs of $115,000.
In March 1996, the Company sold 600,000 shares of common stock
to an offshore investor, generating proceeds of $1,112,000, which is net
of issuance costs of $58,000.
Common Stock Held in Escrow
In February 1996, 1,060,000 shares of common stock (the "Escrow
Shares") were placed into an escrow account to secure the 10% Senior Notes.
In June 1997, in connection with the payoff of the 10% Senior Notes, 353,333
of the Escrow Shares were released to the placement agent of the 10% Senior
Notes as a deferred fee and the remaining 706,667 Escrow Shares were
returned to the Company and canceled. The carrying value of the 353,333
shares of $442,000 was expensed in June 1997 and is included in debt issue
cost amortization expense in the accompanying consolidated statement of
operations.
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.
In July 1996, following stockholder approval, the Company adopted a
stock option plan for non-employee directors. Under this plan, annually on
July 1 each non-employee director will be granted a non-statutory stock
option to purchase 30,000 shares of common stock. In July 1996, options to
purchase a total of 120,000 shares at an exercise price of $1.63 were
granted to the Company's four non-employee directors.
Activity under the employee and non-employee director stock option
plans for fiscal years 1997, 1996 and 1995 was as follows:
Weighted average
exercise price
Shares per share
------ ---------
Shares under option, June 30, 1994 1,864,566 $0.87
Granted 120,000 1.23
Expired or canceled (177,500) 1.71
Exercised (450,447) 0.64
--------- -----
Shares under option, June 30, 1995 1,356,619 0.87
Granted 906,042 1.72
Expired or canceled (33,928) 1.44
Exercised (595,442) 0.75
--------- -----
Shares under option, June 30, 1996 1,633,291 1.37
Granted 1,852,758 1.23
Expired or canceled (1,139,058) 1.66
Exercised (150,000) 0.50
--------- -----
Shares under option, June 30, 1997 2,196,991 $1.16
========= =====
In fiscal 1997, pursuant to resolutions of the Compensation Committee
of the Board of Directors, 762,329 options with exercise prices of $1.63 to
$4.88 were canceled and were replaced by new options for the same number of
shares at an exercise price of $1.25.
The following table summarizes information about shares under option at
June 30, 1997:
Options Outstanding Options Exercisable
------------------------------------- ----------------------
Weighted
average Weighted Weighted
Range of remaining average average
exercise Number contractual exercise Number exercise
prices outstanding life price exercisable price
- - --------- --------- --------- --------- --------- --------
$0.50-$0.69 274,462 4.4 years $0.50 274,462 $.50
1.00- 1.25 1,670,529 9.3 1.20 184,999 1.25
1.63 252,000 9.0 1.63 163,997 1.63
--------- ---- -------
2,196,991 $1.16 623,458
========= ==== =======
At June 30, 1997, under the employee and non-employee director stock
option plans there were 857,998 and 780,000 shares, respectively, available
for future grants.
Stock Based Compensation
The Company applies the provisions of APB Opinion No. 25 and related
interpretations in accounting for its stock option plans and the Series H
warrants granted to non-employee directors (see "Warrants" below).
Accordingly, no compensation cost has been recognized for its stock option
plans and awards of warrants to non-employee directors. Had compensation
cost for stock-based awards been determined consistent with SFAS 123, the
Company's results of operations would have been reduced to the pro forma
amounts indicated below:
Year Ended June 30
-----------------------
1997 1996
------- -------
Net income (loss):
As reported $(1,678,000) $ 1,598,000
Pro forma $(2,251,000) $ 1,339,000
Earnings (loss) per share:
As reported $ (0.07) $ 0.09
Pro forma $ (0.10) $ 0.07
The weighted average fair value of options granted during the years
ended June 30, 1997 and 1996 was $0.76 and $1.06, respectively. The
weighted average fair value of Series H warrants granted to non-employee
directors in fiscal 1996 was $0.84 per warrant.
The fair value of each option and warrant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions used for grants in 1997 and 1996, respectively: dividend yield
of 0.0% percent for both years; expected volatility of 68% and 67%,
respectively; risk-free interest rates ranging from 6.1% to 6.8% for 1997
and 6.6% to 6.7% for 1996; and expected lives of five years for both years.
Preferred Stock Purchase Rights
At June 30, 1997, 1,000 preferred stock purchase rights are
outstanding. Each right 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. 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 Series C, D, E, F, G and H
common stock purchase warrants. The provisions and activity of these
warrants are as follows:
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 fiscal 1995.
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 and the issuance of
2,000,000 shares of common stock at a price of $0.75 in June 1997,
the effective exercise price on the Series E warrants was reduced to
$2.19 as of June 30, 1997. 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. In February 1996, the Series F warrants covering an aggregate of
1,060,000 shares were issued as partial collateral for the 10%
Senior Notes. These warrants were canceled effective June 30, 1997,
concurrent with the repayment of the 10% Senior Notes.
5. As further described in Note 8, the Series G warrants covering an
aggregate of 595,872 shares were issued in March 1996 to certain
former officers, key employees and directors of the Company. The
Series G warrants are exercisable until their expiration on June 1,
1998. At June 30, 1997, 451,226 Series G warrants were outstanding.
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 11 - OTHER FINANCIAL INFORMATION
Information Relating to Consolidated Statements of Cash Flows
"Net cash provided by (used in) operating activities" includes cash
payments for interest (in thousands):
Year ended June 30
---------------------------
1997 1996 1995
---- ---- ----
Interest paid $ 1,077 $ 732 $ 883
"Net (increase) decrease in operating working capital, net of effects
of business acquired" consists of the following (in thousands):
Year ended June 30
---------------------------
1997 1996 1995
---- ---- ----
(Increase) decrease in
accounts receivable $(3,397) $ 270 $ 2,030
Increase in costs and estimated
earnings in excess of billings
on uncompleted contracts (135) (726) -
(Increase) decrease in inventories 1,054 (1,881) 1,504
(Increase) decrease in prepaid expenses 189 (86) 62
Increase in accounts payable 1,222 278 111
Increase (decrease) in accrued payroll
and employee benefits 328 24 (406)
Increase (decrease) in other
accrued liabilities (808) 613 708
------ ------ ------
Net (increase) decrease $(1,547) $(1,508) $ 4,009
====== ====== ======
Following is the supplemental schedule of non-cash investing and
financing activities (in thousands):
Year ended June 30
--------------------------
1997 1996 1995
---- ---- ----
Capital expenditures financed by lease
obligations and notes payable $ 1,221 $ 689 $ 96
Conversion of debt to equity 223 3,667 86
Common stock issued as partial
consideration for purchase of SMTEK, Inc. - 801 -
Common stock issued as debt placement fee - 716 -
Common stock deposited to (returned from)
escrow account for 10% Senior Notes (883) 1,325 -
Conversion of preferred stock to
common stock - - 3
Other Accrued Liabilities
Other accrued liabilities consist of the following (in thousands):
June 30
------------------
1997 1996
---- ----
Environmental liabilities $ 684 $ 728
Accrued taxes payable 794 951
Other 843 1,435
------ ------
$2,321 $3,114
====== ======
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 1995 $533 $ 95 $(447) $181
Fiscal 1996 181 85 (134) 132
Fiscal 1997 132 74 (48) 158
Inventory reserves
- - ------------------
Fiscal 1995 $384 $ 62 $(290) $156
Fiscal 1996 156 250 (158) 248
Fiscal 1997 248 443 (199) 492
Note 12 - COMMITMENTS AND CONTINGENCIES
Acquisition and Merger Commitments
On May 29, 1997, the Company signed a letter of intent (the "Letter of
Intent") to merge with Century Electronics Manufacturing, Inc. ("CEMI").
Pursuant to the Letter of Intent, CEMI was to provide a loan up to
$3.3 million to the Company by June 1, 1997 for retirement of the Company's
10% Senior Notes in the aggregate principal amount of $5,300,000. However,
such financing was not made available by CEMI. As a result, on June 30,
1997 the Company obtained alternate financing which enabled it to repay
the 10% Senior Notes.
On September 22, 1997, the Company filed a lawsuit against CEMI alleging
breach of contract and fraud and seeking $5,000,000 in actual damages plus
punitive damages. CEMI has not yet answered the Company's complaint or
made an appearance in the case. In the circumstances, management currently
believes that the likelihood of consummating a merger with CEMI is remote.
As described in Note 3, the Company has entered into an agreement to
acquire Jolt Technology, Inc., a privately held electronic manufacturing
services company, for nine million shares of common stock. The acquisition
of Jolt Technology, Inc. is subject to executing a definitive agreement,
obtaining a fairness opinion on the transaction, and obtaining the approval
of the Company's stockholders.
Lease Commitments
Future minimum lease payments at June 30, 1997 were as follows (in
thousands):
Capital Operating
leases leases
------ ------
Fiscal 1998 $ 393 $ 415
Fiscal 1999 372 420
Fiscal 2000 335 386
Fiscal 2001 278 22
Fiscal 2002 50 16
Thereafter - 21
----- -----
Total 1,428 $1,280
=====
Less: Interest (231)
-----
Present value of minimum
lease payments $1,197
======
The capitalized cost of the related assets (primarily plant equipment),
which are pledged as security under the capital leases, was $1,726,000 and
$370,000 at June 30, 1997, and 1996, respectively. Accumulated amortization
on assets under capital leases amounted to $264,000 and $143,000 at June 30,
1997 and 1996, respectively.
Rental expense for operating leases amounted to $408,000, $229,000 and
$238,000 for fiscal 1997, 1996 and 1995, respectively. The Company's
principal operating leases are renewable at the fair rental value on the
expiration dates.
SMTEK conducts its operations from a 45,000 square foot facility, which
is leased from an unaffiliated party through May 31, 2000. The monthly rent
was approximately $30,000 during fiscal 1997 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 subsidiary, DDL
Electronics Limited ("DDL-E"), has been reimbursed for a portion of
qualifying capital expenditures and for certain employment and interest
costs. Approximately $869,000 of the government grants received by DDL-E
are subject to repayment if the employment level at this subsidiary falls
below 134 employees during the two year period beginning on July 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.
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 ceases business, permanently discontinues production, or
fails to pay to the IDB any amounts due under its mortgage note payable
(Note 8). DDL-E's contingent grant repayment obligations amount to
approximately $1,377,000 at June 30, 1997. Management does not expect that
the Company will be required to repay any grants 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
In the early 1970s, one of the Company's former California-based PCB
operating units, Aeroscientific Corp. ("Aero Anaheim"), disposed of certain
quantities of waste at the Stringfellow hazardous waste disposal site in
Riverside County, California, which was subsequently designated as a
Superfund site by the U.S. Environmental Protections Agency ("EPA"). Aero
Anaheim's waste accounted for less than three one-hundreds of one percent of
the total waste deposited at this site. Aero Anaheim, which since 1991 has
been an inactive, insolvent subsidiary of the Company, established a reserve
of $120,000 as its share of the estimated environmental remediation costs
based on its relative contribution to the total wastes disposed at this
site. The EPA contends that site owners and operators and waste generators
are jointly and severally liable under federal law. Nonetheless, the
Company believes that the final allocation of liability will generally be
made based on relative contributions of waste. Furthermore, even if joint
liability were to be imposed, the Company believes that the risk is remote
that Aero Anaheim's ultimate liability in this matter would exceed its
reserve, because the other generators of wastes disposed at the
Stringfellow site include numerous companies with assets and equity
significantly greater than Aero Anaheim. The Company believes that Aero
Anaheim's reserve is adequate to cover future costs associated with this
matter.
The Company is aware of certain chemicals that exist in the ground at
Aero Anaheim's previously leased facility in Anaheim. The Company, which
was a guarantor of Aero Anaheim's facility lease, has notified the
appropriate governmental agencies and is proceeding with remediation and
investigative studies regarding soil and groundwater contamination. The
installation of water and soil extraction wells was completed in August
1994. In May 1995, the Company retained an environmental engineering firm
to begin the vapor extraction of pollutant from the soil and to perform
quarterly groundwater monitoring. In April 1997, the Company ceased soil
vapor extraction procedures at this site because the pollutant recovery rate
had declined to and stabilized at a very low level at which vapor extraction
is no longer a cost effective recovery technique. The property owner is
currently conducting a soil gas study at the site which is expected to
provide information as to the remaining contamination in the soil. It is
not yet known whether further soil remediation work will be necessary.
Investigative work to determine the full extent of potential groundwater
pollution has not yet been completed. Consequently, 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 could 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, 1997, the Company has
paid $538,000 as its share of the remediation costs (including cash placed
in an escrow account for payment of expenses). At June 30, 1997, the
Company has a reserve of $564,000, 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 could
differ significantly from the estimates, and may exceed the amount of the
reserve.
Note 13 - 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
------------------------------
1997 1996 1995
---- ---- ----
Sales:
Electronic Manufacturing Services $38,614 $22,245 $13,842
Printed Circuit Boards 10,305 10,891 15,734
------ ------ ------
$48,919 $33,136 $29,576
====== ====== ======
Operating income (loss):
Electronic Manufacturing Services $ 70 $ (267) $(1,892)
Printed Circuit Boards 589 (20) (646)
General Corporate (541) (880) (2,432)
------ ------ ------
$ 118 $(1,167) $(4,970)
====== ====== ======
Identifiable assets:
Electronic Manufacturing Services $22,248 $20,321 $ 6,162
Printed Circuit Boards 5,881 5,266 5,543
General Corporate 3,751 2,500 885
------ ------ ------
$31,880 $28,087 $12,590
====== ====== ======
Depreciation and amortization:
Electronic Manufacturing Services $ 2,195 $ 1,195 $ 568
Printed Circuit Boards 498 548 924
General Corporate 938 285 13
------ ------ ------
$ 3,631 $ 2,028 $ 1,505
====== ====== ======
Capital expenditures:*
Electronic Manufacturing Services $ 1,143 $ 1,013 $ 210
Printed Circuit Boards 1,060 586 433
General Corporate 7 - -
------ ------ ------
$ 2,210 $ 1,599 $ 643
====== ====== ======
* Capital expenditures include equipment additions financed with capital
leases and notes payable.
Sales, operating income (loss), and identifiable assets by geographic
area are as follows (in thousands):
Year ended June 30
------------------------------
1997 1996 1995
---- ---- ----
Sales:
United States $19,170 $ 8,668 $ 8,765
Northern Ireland 29,749 24,468 20,811
------ ------ ------
Total $48,919 $33,136 $29,576
====== ====== ======
Operating income (loss):
United States $ (819) $ (748) $(2,226)
Northern Ireland 937 (419) (2,744)
------ ------ ------
Total $ 118 $(1,167) $(4,970)
====== ====== ======
Identifiable assets:
United States $17,425 $16,133 $ 1,003
Northern Ireland 14,455 11,954 11,587
------ ------ ------
Total $31,880 $28,087 $12,590
====== ====== ======
The Company had sales to two customers which accounted for
approximately 18.4% and 16.5% of sales, respectively, in fiscal 1997. No
single customer accounted for 10% or more of consolidated sales in fiscal
1996 or 1995.
Note 14 - 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 income (losses) of $118,000, $(1,167,000) and $(4,970,000) and
cash inflows (outflows) from operating activities of $230,000, $(555,000)
and $(264,000) for the years ended June 30, 1997, 1996 and 1995,
respectively.
In response to the large operating losses incurred up through fiscal
1995, 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.
With the exception of fiscal 1997, during which the Company generated
operating income of $118,000, the Company has incurred operating losses for
a number of years. Operating losses could continue until such time as sales
increase to a level sufficient to cover costs and operating expenses. 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.
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.
Note 15 - 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 1997
Sales $ 9,895 $11,185 $13,580 $14,259 $48,919
====== ====== ====== ====== ======
Net income (loss) $ (725) $ (531) $ 134 $ (556) $(1,678)
====== ====== ====== ====== ======
Earnings (loss) per
share $ (0.03) $ (0.02) $ 0.01 $ (0.02) $ (0.07)
====== ====== ====== ====== ======
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 extra-
ordinary 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
====== ====== ====== ====== ======
DDL ELECTRONICS, INC. AND SUBSIDIARIES
Market and Dividend Information
The Company's common shares are traded on the New York Stock Exchange
and Pacific Exchange (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 1997 Fiscal 1996
-------------- --------------
High Low High Low
----- ----- ----- -----
1st Quarter 2 1-1/8 2-1/8 1-1/2
2nd Quarter 1-1/4 15/16 3 1-7/8
3rd Quarter 1-1/4 7/8 2-3/4 2-1/4
4th Quarter 1-5/8 15/16 2-1/2 1-5/8
There were approximately 1500 stockholders of record at August 28,
1997.
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 EXECUTIVE OFFICERS
Karen Beth Brenner Gregory L. Horton
Investment Manager President and Chief Executive Officer
Newport Beach, California
Richard K. Vitelle
Melvin Foster Vice President - Finance and
Attorney at Law Administration, Chief Financial Officer,
Boston, Massachusetts Treasurer and Secretary
Charlene Gondek OPERATING UNITS
Investor SMTEK, Inc.
Aspen, Colorado Newbury Park, California
DDL Electronics Limited
Gregory L. Horton Craigavon, Northern Ireland
Chairman of the Board, United Kingdom
President and Chief
Executive Officer Irlandus Circuits Limited
DDL Electronics, Inc. Craigavon, Northern Ireland
Newbury Park, California United Kingdom
Richard K. Vitelle
Vice President and
Chief Financial Officer TRANSFER AGENT & REGISTRAR
DDL Electronics, Inc. American Stock Transfer &
Newbury Park, California Trust Company
40 Wall Street
New York, New York 10005
Thomas M. Wheeler
Investor
Troy, Michigan INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
Los Angeles, California
Robert G. Wilson
Independent Businessman
Vancouver BC, Canada LEGAL COUNSEL
Nelson, Mullins, Riley &
Scarborough, L.L.P.
Charlotte, North Carolina