EXHIBIT 13
ANNUAL REPORT TO STOCKHOLDERS
DDL ELECTRONICS, INC. AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS
(In thousands except per share amounts)
Year Ended June 30
-----------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Revenues $ 53,265 $ 51,640 $ 35,490 $ 31,393 $ 49,798
Operating income (loss)
before acquisition
expenses $ 2,154 $ 1,036 $ (522) $ (4,592) $ (6,809)
Operating income (loss) $ 1,545 $ 1,036 $ (552) $ (4,592) $ (6,809)
Income (loss) before
income taxes $ 493 $ (868) $ (1,377) $ (2,145) $ (8,368)
Income tax benefit $ - $ - $ 1,110 $ - $ -
Extraordinary item - $ - $ 2,356 $ 2,441 $ -
Net income (loss) $ 493 $ (868) $ 2,089 $ 296 $ (8,368)
Earnings (loss)
per common share $ 0.02 $ (0.03) $ 0.09 $ 0.02 $ (0.45)
EBITDA, as adjusted (1) $ 5,176 $ 4,052 $ 1,673 $ 446 $ (4,035)
(1) "EBITDA, as adjusted" consists of pretax income (loss) plus net interest
expense, depreciation, amortization and, for fiscal 1998, non-recurring
acquisition expenses.
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, Florida and Northern Ireland. Its PCB facilities
are located in Northern Ireland.
PRESIDENT'S LETTER TO STOCKHOLDERS
President's letter to stockholders will be filed via amendment to the
Form 10-K.
DDL ELECTRONICS, INC. AND SUBSIDIARIES
FIVE-YEAR FINANCIAL SUMMARY
(In thousands except per share amounts)
Year ended June 30
--------------------------------------------
OPERATING DATA 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Revenues $ 53,265 $ 51,640 $ 35,490 $ 31,393 $ 49,798
------ ------ ------ ------ ------
Costs and expenses:
Cost of goods sold 43,933 43,894 30,906 27,598 48,791
Administrative and
selling expenses 5,910 5,442 4,502 6,854 7,816
Goodwill amortization 1,268 1,268 634 - -
Restructuring charges - - - 1,533 -
Acquisition expenses 609 - - - -
------ ------ ------ ------ ------
Total costs and expenses 51,720 50,604 36,042 35,985 56,607
------ ------ ------ ------ ------
Operating income (loss) 1,545 1,036 (552) (4,592) (6,809)
------ ------ ------ ------ ------
Non-operating income (expense):
Interest income 97 96 255 117 172
Interest expense (1,101) (1,227) (1,045) (1,048) (1,267)
Debt issue cost amortization - (937) (281) - -
Gain on sale of assets 22 142 - 3,317 2
Earthquake expenses - - - - (500)
Other income (expense), net (70) 22 246 61 34
------ ------ ------ ------ ------
Total non-operating
income (expense) (1,052) (1,904) (825) 2,447 (1,559)
------ ------ ------ ------ ------
Income (loss) before
income tax benefit 493 (868) (1,377) (2,145) (8,368)
Income tax benefit - - 1,110 - -
------ ------ ------ ------ ------
Income (loss) before
extraordinary item 493 (868) (267) (2,145) (8,368)
Extraordinary item - Gain
on debt extinguishment - - 2,356 2,441 -
------ ------ ------ ------ ------
Net income (loss) $ 493 $ (868) $ 2,089 $ 296 $ (8,368)
====== ====== ====== ====== ======
DDL ELECTRONICS, INC. AND SUBSIDIARIES
FIVE-YEAR FINANCIAL SUMMARY
(In thousands except per share amounts)
(Continued)
Year ended June 30
--------------------------------------------
OPERATING DATA 1998 1997 1996 1995 1994
(Continued) ---- ---- ---- ---- ----
Earnings (loss) per share:
Basic and diluted:
Income (loss) before
extraordinary item $ 0.02 $(0.03) $(0.01) $(0.11) $ (0.45)
Extraordinary item - - 0.10 0.13 -
----- ----- ----- ----- ------
Total $ 0.02 $(0.03) $ 0.09 $ 0.02 $ (0.45)
===== ===== ===== ===== ======
June 30
--------------------------------------------
BALANCE SHEET DATA 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Current assets $ 21,533 $ 21,673 $ 16,443 $ 9,778 $ 12,550
Current liabilities $ 17,088 $ 18,585 $ 12,301 $ 9,238 $ 21,390
Working capital (deficit) $ 4,445 $ 3,088 $ 4,142 $ 540 $ (8,840)
Current ratio 1.3 1.2 1.3 1.1 0.6
Total assets $ 31,830 $ 33,669 $ 29,498 $ 13,962 $ 24,148
Long-term debt $ 7,186 $ 9,445 $ 12,560 $ 8,772 $ 8,572
Stockholders' equity
(deficit) $ 7,556 $ 5,639 $ 4,637 $ (4,048) $ (5,814)
Equity (deficit) per share $ 0.22 $ 0.19 $ 0.18 $ (0.20) $ (0.31)
Shares outstanding (000s) 34,088 28,943 26,295 20,419 18,825
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Basis of Presentation
The Company utilizes a 52-53 week fiscal year ending on the Friday
closest to June 30 which, for fiscal years 1998, 1997 and 1996, fell on
July 3, June 27, and June 28, respectively. In the accompanying
consolidated financial statements, the fiscal year-end for all years is
shown as June 30 for clarity of presentation. Fiscal 1998 consisted of 53
weeks compared to 52 weeks for the fiscal years 1997 and 1996.
As more fully described in the accompanying financial statements, the
Company's acquisition of Jolt Technology, Inc. ("Jolt") on June 30, 1998
was accounted for under the pooling-of-interests method and, accordingly,
the consolidated financial statements for all periods presented have been
restated to include the accounts and results of operations of Jolt. All
significant intercompany transactions and accounts have been eliminated in
consolidation.
Results of Operations
The following table sets forth the Company's revenues and other
operating data as percentages of revenues:
Year Ended June 30
-----------------------------
1998 1997 1996
---- ---- ----
Revenues 100.0% 100.0% 100.0%
Cost of goods sold 82.5 85.0 87.1
----- ----- -----
Gross profit 17.5 15.0 12.9
Administrative and selling expenses 11.1 10.5 12.7
Goodwill amortization 2.4 2.5 1.8
Acquisition expenses 1.1 - -
----- ----- -----
Operating income (loss) 2.9 2.0 (1.6)
Interest income 0.2 0.2 0.7
Interest expense (2.1) (2.4) (2.9)
Debt issue cost amortization - (1.8) (0.8)
Gain on sale of assets - 0.3 -
Other income (expense), net (0.1) - 0.7
----- ----- -----
Income (loss) before income taxes 0.9 (1.7) (3.9)
Income tax benefit - - 3.1
----- ----- -----
Income (loss) before
extraordinary item 0.9 (1.7) (0.8)
Extraordinary item - Gain on
debt extinguishment - - 6.6
----- ----- -----
Net income (loss) 0.9% (1.7)% 5.8%
===== ===== =====
Fiscal 1998 vs. 1997
Consolidated revenues for fiscal 1998 were $53,265,000 compared to
$51,640,000 for fiscal 1997. Revenues for the Company's EMS operations for
fiscal 1998 increased by $3,355,000 over fiscal 1997, and such increase is
attributable primarily to higher levels of business with existing customers.
Revenues for fiscal 1998 for the PCB operations declined by 17% from the
comparable period in the prior year as a result of a decline in business from
a major customer as well as the fact that fiscal 1997 revenues included a
relatively large quick-turn contract that was not recurring business.
Consolidated gross profit (revenues less cost of goods sold) for fiscal
1998 was $9,332,000 (17.5% of revenues) compared to $7,746,000 (15.0% of
revenues) for fiscal 1997. Gross profit of the EMS operations was $7,272,000
for fiscal 1998, compared to $5,662,000 for the prior year. A change in the
mix of business, with lower direct material costs as a percentage of revenues
in fiscal 1998, contributed to the increase in EMS gross profit, along with
higher sales volume and increased productivity. For fiscal 1998, gross profit
from PCB operations declined by $24,000 from fiscal 1997 as a result of the
decline in revenues. Gross profit as a percentage of revenues for the PCB
operations was 24.0% for fiscal 1998, compared to 20.2% for fiscal 1997. This
improvement is attributable primarily to an increase in higher margin quick-
turn orders, material price reductions and processing cost savings.
Administrative and selling expenses for fiscal 1998 were $5,910,000,
compared to $5,442,000 in the previous year. The increase is attributable to
the addition of a key management position in the European operations and other
increases in administrative staff.
In fiscal 1998, the Company incurred acquisition-related expenses of
$609,000 related to the acquisition of Jolt.
Operating income was $1,545,000 for fiscal 1998, compared to $1,036,000
for fiscal 1997. This improvement is primarily attributable to the increased
gross profit of the Company's EMS operations.
Net non-operating expense decreased from $1,904,000 for the year ended
June 30, 1997 to $1,052,000 for fiscal 1998. This decrease is primarily
attributable to non-recurring debt issue cost amortization expense of $937,000
in fiscal 1997 related to the 10% Senior Notes of $5,300,000 which were repaid
on June 30, 1997.
Net income for 1998 was $493,000, or $0.02 per share, compared to net
loss of ($868,000), or ($0.03) per share for fiscal 1997.
Fiscal 1997 vs. 1996
Consolidated revenues for fiscal 1997 were $51,640,000, compared to
$35,490,000 for fiscal 1996. The increase in revenues results primarily
from the acquisition of EMS-provider SMTEK, Inc. ("SMTEK") which
contributed sales 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 date are not included in the Company's results. Sales
growth at the Company's Northern Ireland EMS-provider DDL Electronics, Ltd.
("DDL-E") accounted for most of the remaining increase in consolidated
revenues. 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.
Consolidated gross profit for fiscal 1997 was $7,746,000 compared to
$4,584,000 for fiscal 1996. Gross profit for fiscal 1997 for the Company's
EMS operations increased by $2,323,000 from fiscal 1996, due to higher
sales volume and the fact that gross profit in fiscal 1996 was adversely
impacted by a ramp-up in the workforce and higher than normal equipment
costs. Gross profit for PCB operations increased primarily due to a
reduction of indirect costs. The Company's consolidated gross profit
margin increased from 12.9% in fiscal 1996 to 15.0% in fiscal 1997, due
primarily to improvement in the PCB operations gross profit margin from
11.4% in fiscal 1996 to 20.2% in fiscal 1997. The improvement in the PCB
operations 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.
Administrative and selling expenses increased from $4,502,000 for the
year ended June 30, 1996 to $5,442,000 for fiscal 1997. This increase is
principally the result of the acquisition of SMTEK in January 1996.
Operating income was $1,036,000 for fiscal 1997, compared to operating
loss of ($552,000) for fiscal 1996. This improvement is primarily
attributable to increased gross profit of the EMS operations.
Net non-operating expense increased from $825,000 in fiscal 1996 to
$1,904,000 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.
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 subsequent to
fiscal 1996. 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 ($868,000), or ($0.03) per share, compared
to net income of $2,089,000, 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 6 to the accompanying
consolidated financial statements.
Recent Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") issued Statement
No. 130, "Reporting Comprehensive Income" ("SFAS 130") in June 1997.
SFAS 130 establishes standards for reporting and display of
comprehensive income and its components in financial statements. SFAS
130 is effective for fiscal years beginning after December 15, 1997.
The Company will adopt SFAS 130 in the first quarter of its fiscal year
ending June 30, 1999. Management believes that the adoption of SFAS 130
will not have a material impact on the Company's financial position or
results of operations.
The FASB issued Statement No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS 131") in June 1997. SFAS
131 establishes standards for the way public business enterprises are to
report information about operating segments in annual financial
statements and requires enterprises to report selected information about
operating segments in interim financial reports issued to shareholders.
It also establishes standards for related disclosures about products and
services, geographic areas, and major customers. It replaces the
"industry segment" concept of Statement of Financial Accounting
Standards No. 14, "Financial Reporting for Segments of a Business
Enterprise", with a "management approach" basis for identifying
reportable segments. SFAS 131 is effective for financial statements for
fiscal years beginning after December 15, 1997. The Company will adopt
SFAS 131 in its fiscal year ending June 30, 1999. Management believes
that the adoption of SFAS 131 will not have a material impact on the
Company's financial position or results of operations.
In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133") which will
require recognition of all derivatives as either assets or liabilities
on the balance sheet at fair value. The Company will adopt SFAS 133 in
the first quarter of its fiscal year ending June 30, 2000. Management
has not completed an evaluation of the effects this standard will have
on the Company's consolidated financial statements.
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 $4,413,000 at the end of fiscal 1998, and
its bank lines of credit. During fiscal 1998, cash and cash equivalents
decreased by $985,000. This net cash outflow consisted of capital
expenditures of $785,000, debt repayments of $6,232,000 and S Corporation
dividends of $529,000 paid to Jolt shareholders prior to the acquisition of
Jolt, partially offset by cash provided by operating activities of
$1,122,000, cash proceeds from new borrowings of $5,074,000, cash proceeds
from the issuance of common stock of $138,000, proceeds from government
grants of $123,000, proceeds from the sale of assets of $16,000 and the
effect of exchange rate changes on cash of $88,000.
Components of operating working capital increased by $2,178,000 during
fiscal 1998, which consisted of a $333,000 increase in accounts receivable,
a $1,624,000 increase in costs and estimated earnings in excess of billings
on uncompleted contracts, and a $1,234,000 decrease in accounts payable,
partially offset by a $846,000 decrease in inventories, a $36,000 decrease
in prepaid expenses, a $74,000 increase in accrued payroll and employee
benefits, and a $57,000 increase in other accrued liabilities.
The Company has a working capital bank line of credit for SMTEK,
based upon and secured by accounts receivable and inventory, which
provides for borrowings of up to $2,750,000 at an interest rate of prime
(8.50% at June 30, 1998) plus 1.25%. At June 30, 1998, borrowings
outstanding under this credit facility amounted to $2,583,000. SMTEK's
line of credit expires on September 1, 1999. 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 3,000,000 pounds sterling (approximately $4,900,000), and
provides for interest on borrowings at the bank's base rate (6.77% at
June 30, 1998) plus 1.50%. At June 30, 1998, borrowings outstanding
under this credit facility amounted to $1,858,000. The credit facility
agreement with Ulster Bank Markets expires August 31, 1998. Management
is currently in discussions with Ulster Bank Markets and believes that
the credit facility agreement will be extended in the normal course of
business for at least one year.
The Company's EMS and PCB fabrication businesses require continuing
investment in plant and equipment to remain competitive. Capital
expenditures during fiscal 1998, 1997 and 1996 were approximately
$1,424,000, $2,372,000 and $1,825,000, 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 $3 million may be
required in fiscal 1999. Of that amount, the substantial majority is
expected to be financed by a combination of capital leases, secured loans
and foreign government grants.
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.
Year 2000 Issues.
Many existing computer programs use only two digits to identify a
year in the date field. These programs were designed and developed
without considering the impact of the upcoming change in the century.
If not corrected, many computer applications could fail or create
erroneous results by or at the year 2000. The global extent of the
potential impact of the Year 2000 problem is not yet known, and if not
timely corrected, it could affect the economy and the Company. The
Company uses computer information systems and manufacturing equipment
which may be affected. It also relies on suppliers and customers who
are also dependent on systems and equipment which use date dependent
software.
The Company's Year 2000 compliance program includes the following
phases: identifying systems that need to be replaced or fixed; carrying
out remediation work to modify existing systems or convert to new
systems; and conducting validation testing of systems and applications
to ensure compliance. The Company has essentially completed the first
phase of the program and is now primarily in the remediation phase. The
amount of remediation work required is not expected to be extensive,
because the Company has replaced certain of its financial and
operational systems in the normal course of business during the last two
years to enhance or better meet its functional business and operational
requirements. Management believes that such replacements substantially
meet or address its Year 2000 issues. In addition to such normal
replacement, the Company may be required to modify some of the existing
software and hardware in order for its computer systems to function
properly with respect to dates in the year 2000 and thereafter. The
estimated cost of the remaining replacement and modification for the
Year 2000 issue is not considered material to the Company's earnings or
financial position. The Company also has contacted its major suppliers
to assess their preparations for the year 2000. Similar contacts also
are planned for major customers. These actions are intended to help
mitigate the possible external impact of Year 2000 issues. Even so, it
is impossible to fully assess the potential consequences if service
interruptions occur from suppliers or in such infrastructure areas as
utilities, communications, transportation, banking and government.
The Company anticipates that the remediation and validation phases
will be completed not later than December 31, 1998. The Company has not
yet developed a contingency plan to provide for continuity of processing
in the event of various problem scenarios, but will assess the need to
develop such a plan based on the outcome of its validation phase and the
results of surveying its major suppliers and customers. If the Company
is unsuccessful or if the remediation efforts of its key suppliers or
customers are unsuccessful in dealing with Year 2000 problems, there may
be a material adverse impact on the Company's consolidated results and
financial condition. The Company is unable to quantify any potential
adverse impact at this time, but will continue to monitor and evaluate
the situation.
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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in
the three-year period ended June 30, 1998 in conformity with generally
accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
Los Angeles, California
August 21, 1998
DDL ELECTRONICS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands except share amounts)
June 30
-----------------
1998 1997
---- ----
Assets
Current assets:
Cash and cash equivalents $ 4,413 $ 5,398
Accounts receivable, net (Notes 3 and 6) 9,786 9,647
Costs and estimated earnings in excess
of billings on uncompleted
contracts (Notes 4 and 6) 4,785 3,161
Inventories, net (Note 5) 2,446 3,327
Prepaid expenses 103 140
------ ------
Total current assets 21,533 21,673
------ ------
Property, equipment and improvements,
at cost (Notes 6 and 10):
Buildings and improvements 6,084 6,101
Plant equipment 15,646 16,352
Office and other equipment 2,180 1,982
------ ------
23,910 24,435
Less: Accumulated depreciation
and amortization (17,035) (17,188)
------ ------
Property, equipment and
improvements, net 6,875 7,247
------ ------
Other assets:
Goodwill, net (Note 2) 3,171 4,439
Deposits and other assets (Note 6) 251 310
------ ------
3,422 4,749
------ ------
$ 31,830 $ 33,669
====== ======
DDL ELECTRONICS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands except share amounts)
(Continued)
June 30
-----------------
1998 1997
---- ----
Liabilities and Stockholders' Equity
Current liabilities:
Bank lines of credit payable (Note 6) $ 4,441 $ 1,378
Current portion of long-term
debt (Note 6) 1,214 4,167
Accounts payable 7,795 9,093
Accrued payroll and employee benefits 1,211 1,145
Other accrued liabilities (Note 9) 2,427 2,802
------ ------
Total current liabilities 17,088 18,585
------ ------
Long-term debt (Note 6):
Notes payable to related party 2,000 1,625
Other long-term debt, less current
portion 5,186 7,820
------ ------
Total long-term debt 7,186 9,445
------ ------
Commitments and contingencies (Note 10)
Stockholders' equity (Note 8):
Preferred stock, $1 par value; 1,000,000
shares authorized; no shares issued
or outstanding - -
Common stock, $.01 par value; 75,000,000
shares authorized; 34,088,128 and
28,943,102 shares issued and outstanding
in 1998 and 1997, respectively 341 289
Additional paid-in capital 32,159 29,719
Accumulated deficit (24,294) (23,678)
Foreign currency translation adjustment (650) (691)
------ ------
Total stockholders' equity 7,556 5,639
------ ------
$ 31,830 $ 33,669
====== ======
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
-----------------------------
1998 1997 1996
---- ---- ----
Revenues $ 53,265 $ 51,640 $ 35,490
------ ------ ------
Costs and expenses:
Cost of goods sold 43,933 43,894 30,906
Administrative and selling expenses 5,910 5,442 4,502
Goodwill amortization 1,268 1,268 634
Acquisition expenses (Note 2) 609 - -
------ ------ ------
51,720 50,604 36,042
------ ------ ------
Operating income (loss) 1,545 1,036 (552)
------ ------ ------
Non-operating income (expense):
Interest income 97 96 255
Interest expense (1,101) (1,227) (1,045)
Debt issue cost amortization - (937) (281)
Gain on sale of assets 22 142 -
Other income (expense), net (70) 22 246
------ ------ ------
(1,052) (1,904) (825)
------ ------ ------
Income (loss) before income benefit 493 (868) (1,377)
Income tax benefit (Note 7) - - 1,110
------ ------ ------
Income (loss) before extraordinary item 493 (868) (267)
Extraordinary item - Gain on debt
extinguishment (Note 6) - - 2,356
------ ------ ------
Net income (loss) $ 493 $ (868) $ 2,089
====== ====== ======
Basic and diluted earnings (loss)
per share:
Income (loss) before
extraordinary item $ 0.02 $ (0.03) $ (0.01)
Extraordinary item - - 0.10
------ ------ ------
Basic and diluted earnings (loss)
per share $ 0.02 $ (0.03) $ 0.09
====== ====== ======
Shares used in computing basic and
diluted earnings (loss) per share:
Basic 29,026 27,506 22,536
====== ====== ======
Diluted 29,443 27,506 22,536
====== ====== ======
See accompanying notes to consolidated financial statements.
DDL ELECTRONICS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Year ended June 30
-----------------------------
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ 493 $ (868) $ 2,089
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation 1,720 1,584 1,345
Amortization 1,272 2,205 915
Acquisition expenses settled with stock 138 - -
Eliminate duplicate period of pooled
company to conform year ends (464) - -
Gain on debt extinguishment - - (2,356)
Gain on sale of assets (22) (142) -
Net increase in operating working capital,
net of effects of business acquired (2,178) (1,655) (1,330)
(Increase) decrease in deposits
and other assets 55 124 (93)
Benefit of non-capital grants - (242) (265)
Other 108 84 44
------ ------ ------
Net cash provided by operating activities 1,122 1,090 349
------ ------ ------
Cash flows from investing activities:
Capital expenditures (785) (1,151) (1,136)
Purchase of SMTEK, Inc., net of cash acquired - - (7,638)
Proceeds from sale of assets 16 202 -
------ ------ ------
Net cash used in investing activities (769) (949) (8,774)
------ ------ ------
Cash flows from financing activities:
Proceeds from bank lines of credit 3,074 1,366 -
Proceeds from long-term debt 2,000 - 8,800
Payments of long-term debt (6,232) (787) (2,041)
Debt issue costs - - (372)
Proceeds from issuance of common stock, net - 1,385 1,112
Proceeds from exercise of stock options 138 75 437
Proceeds from exercise of stock warrants - - 448
Proceeds from foreign government grants 123 605 229
S Corporation dividends paid (529) (600) (325)
------ ------ ------
Net cash provided by (used in)
financing activities (1,426) 2,044 8,288
------ ------ ------
Effect of exchange rate changes on cash 88 80 (79)
------ ------ ------
Increase (decrease) in cash and cash equivalents (985) 2,265 (216)
Cash and cash equivalents at beginning of year 5,398 3,133 3,349
------ ------ ------
Cash and cash equivalents at end of year $ 4,413 $ 5,398 $ 3,133
====== ====== ======
See accompanying notes to consolidated financial statements.
DDL ELECTRONICS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Years ended June 30, 1998, 1997 and 1996
(In thousands except share amounts)
Common Stock Foreign Total
-------------- Additional currency stockholders'
Par paid-in Accumulated translation equity
Shares value capital deficit adjustment (deficit)
------ ------ ----- ------- ------- -------
Balance at June 30, 1995 20,419,223 $204 $20,238 $(23,598) $(890) $(4,046)
Net income - - - 2,089 - 2,089
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
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
S Corporation dividends and
other equity transactions
of pooled company - - 166 (491) - (325)
Translation adjustments - - - - (146) (146)
---------- ---- ------ ------ ----- -----
Balance at June 30, 1996 26,295,123 263 27,410 (22,000) (1,036) 4,637
Net loss - - - (868) - (868)
Stock issued as debt
placement fee 353,333 3 439 - - 442
Sale of common stock 2,000,000 20 1,365 - - 1,385
Exercise of stock options
and warrants 294,646 3 295 - - 298
S Corporation dividends and
other equity transactions
of pooled company - - 210 (810) - (600)
Translation adjustments - - - - 345 345
---------- ---- ------ ------ ----- -----
Balance at June 30, 1997 28,943,102 289 29,719 (23,678) (691) 5,639
Net income - - - 493 - 493
Conversion of debt of
pooled company 4,643,756 47 2,008 - - 2,055
Stock issued as brokerage fee 200,000 2 136 - - 138
Exercise of stock options
and warrants 301,270 3 180 - - 183
Elimination of duplicate
period of pooled company
to conform year ends - - - (464) - (464)
S Corporation dividends and
other equity transactions
of pooled company - - 116 (645) - (529)
Translation adjustments - - - - 41 41
---------- ---- ------- ------- ------ ------
Balance at June 30, 1998 34,088,128 $341 $32,159 $(24,294) $ (650) $7,556
========== ==== ======= ======= ====== ======
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, Florida 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" or
"DDL"). As more fully described in Note 2, the Company's acquisition of
Jolt Technology, Inc. on June 30, 1998 was accounted for under the pooling-
of-interests method and, accordingly, the consolidated financial statements
prior to the acquisition have been restated to include the accounts and
results of operations of Jolt for all periods presented. 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 1998, 1997 and 1996, fell on July
3, June 27, and June 28, 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. Fiscal 1998 consisted of 53 weeks
compared to 52 weeks for the fiscal years 1997 and 1996.
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, 1998, 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. At June 30, 1998 and 1997, the carrying amount of long-term
debt (including current portion thereof) was $8,400,000 and $13,612,000,
respectively, and the fair value was $8,222,000 and $13,138,000,
respectively. 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; and 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.
The Company periodically reviews the carrying value of long-lived
assets, and if future undiscounted cash flows are believed insufficient
to recover the remaining carrying value of the asset, the carrying value
is written down to fair market value in the period the impairment is
identified.
Revenue and Cost Recognition
All of the Company's operating units except SMTEK, Inc. ("SMTEK")
recognize revenues and cost of sales upon shipment of products.
SMTEK has historically generated a significant portion 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 revenues 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 cost of
goods sold. 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 revenues and cost of sales amounts
are sales and cost of sales from engineering design and test services, which
are immaterial.
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
In 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 replaced
the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Basic earnings per share
represents income available to common shareholders divided by the
weighted average number of common shares outstanding for the period.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants, and convertible securities.
Diluted earnings per share is very similar to the previously reported
fully diluted earnings per share. All earnings per share amounts for
all periods have been presented, and where necessary, restated to
conform to SFAS 128 requirements.
Foreign Currency Translation
The financial statements of DDL's foreign 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.
Recent Accounting Pronouncements
The FASB issued Statement No. 130, "Reporting Comprehensive Income"
("SFAS 130") in June 1997. SFAS 130 establishes standards for reporting
and display of comprehensive income and its components in financial
statements. SFAS 130 is effective for fiscal years beginning after
December 15, 1997. The Company will adopt SFAS 130 in the first quarter
of its fiscal year ending June 30, 1999. Management believes that the
adoption of SFAS 130 will not have a material impact on the Company's
financial position or results of operations.
The FASB issued Statement No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS 131") in June 1997. SFAS
131 establishes standards for the way public business enterprises are to
report information about operating segments in annual financial
statements and requires enterprises to report selected information about
operating segments in interim financial reports issued to shareholders.
It also establishes standards for related disclosures about products and
services, geographic areas, and major customers. It replaces the
"industry segment" concept of Statement of Financial Accounting
Standards No. 14, "Financial Reporting for Segments of a Business
Enterprise", with a "management approach" basis for identifying
reportable segments. SFAS 131 is effective for financial statements for
fiscal years beginning after December 15, 1997. The Company will adopt
SFAS 131 in its fiscal year ending June 30, 1999. Management believes
that the adoption of SFAS 131 will not have a material impact on the
Company's financial position or results of operations.
In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133") which will
require recognition of all derivatives as either assets or liabilities
on the balance sheet at fair value. The Company will adopt SFAS 133 in
the first quarter of its fiscal year ending June 30, 2000. Management
has not completed an evaluation of the effects this standard will have
on the Company's consolidated financial statements.
Note 2 - ACQUISITIONS
Jolt - Pooling-of-Interests Method
On June 30, 1998, the Company issued 9,000,000 shares of Common Stock
in exchange for all of the outstanding shares of Jolt, a provider of
electronic manufacturing services located in Fort Lauderdale, Florida. This
acquisition has been accounted for under the pooling-of-interests method.
The results of operations previously reported by the separate
enterprises, and the combined amounts presented in the accompanying
consolidated financial statements, are summarized below (in thousands):
Nine months Year ended June 30,
ended ---------------------------------------------------
March 31, 1998 1997 1996
----------------------- ----------------------- -----------------------
(Unaudited) Net income
Revenues Net income Revenues (loss) Revenues Net income
-------- ---------- -------- ---------- -------- ----------
DDL without Jolt $ 37,576 $ 226 $ 48,919 $ (1,678) $ 33,136 $ 1,598
Jolt 2,257 764 2,721 810 2,354 491
------- ------- ------- ------- ------- -------
Restated DDL $ 39,833 $ 990 $ 51,640 $ (868) $ 35,490 $ 2,089
======= ======= ======= ======= ======= =======
Certain reclassifications have been made to the financial statements of
Jolt to conform to the Company's financial presentation.
Prior to the combination, Jolt's fiscal year ended on December 31. In
recording the pooling-of-interests combination, Jolt's financial statements
for the twelve months ended June 30, 1998 were combined with DDL's financial
statements for the same period. Jolt's financial statements for the years
ended December 31, 1997 and 1996 were combined with DDL's financial
statements for the years ended June 30, 1997 and 1996. An adjustment of
$464,000 has been made to stockholders' equity as of June 30, 1998 to
eliminate the effect of including Jolt's results of operations for the six
months ended December 31, 1997 in both the fiscal years ended June 30, 1998
June 30, 1997.
Jolt's S Corporation status terminated upon consummation of the
acquisition. Jolt's undistributed earnings at June 30, 1998, and all prior
periods, have been reclassified to additional paid-in-capital in the
accompanying consolidated financial statements in accordance with pooling-
of-interests accounting. Accordingly, dividend distributions by Jolt to
Jolt shareholders have been charged to additional paid-in-capital.
Acquisition expenses of $609,000 related to the combination with Jolt
were recognized upon consummation of the transaction, and are included in
the accompanying 1998 consolidated statement of operations.
Concurrent with the acquisition of Jolt, the Company reversed the
quasi-reorganization it implemented effective June 27, 1997 as required by
the pooling-of-interests accounting method.
SMTEK - Purchase Method
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 of the Company 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% Convertible Debentures in the aggregate amount of
$3,500,000.
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 shares of common stock
were issued and stockholders' equity increased by $3,188,000, net of the
remaining unamortized issue costs associated with these debentures.
The 10% Senior Notes were repaid on June 30, 1997. Because the
Company's 1997 fiscal year ended on June 27, 1997 under its 52-53 week
convention, this debt repayment was a fiscal 1998 transaction.
In connection with the sale of the 10% Senior Notes and 10% Convertible
Debentures, the Company paid $352,000 as a fee to the placement agent for
these financings. The Company also issued to the placement agent as
additional compensation 572,683 shares of common stock valued at $716,000
and warrants, Series E, to purchase 1,500,000 shares of common stock for
$2.50 per share which are exercisable for five years. As further described
in Note 8, the Series E warrants contain an antidilution provision which has
lowered the exercise price.
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 $3,171,000 and $1,903,000 as of June 30, 1998
and 1997, respectively. SMTEK's operations have been included in the
consolidated financial statements of DDL since the date of acquisition,
January 12, 1996.
Note 3 - ACCOUNTS RECEIVABLE
The components of accounts receivable are as follows (in thousands):
June 30
--------------------
1998 1997
---- ----
Trade receivables $ 9,890 $ 9,262
Other receivables 63 548
Less allowance for doubtful
accounts (167) (163)
------ ------
$ 9,786 $ 9,647
====== ======
Included in other receivables at June 30, 1997 are grants due from the
Industrial Development Board for Northern Ireland of $125,000 (Note 10).
Note 4 - COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON
UNCOMPLETED CONTRACTS
The components of costs and estimated earnings in excess of billings on
uncompleted contracts are as follows (in thousands):
June 30
--------------------
1998 1997
---- ----
Costs incurred on uncompleted
contracts $32,324 $20,455
Estimated earnings 5,802 2,714
------ ------
38,126 23,169
Less: Billings to date (33,341) (20,008)
------ ------
$ 4,785 $ 3,161
====== ======
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
$71,000 and $149,000 of billings in excess of costs and estimated earnings
at June 30, 1998 and 1997, respectively. Essentially all of the unbilled
amount is expected to be billed within 90 days of the balance sheet date.
Note 5 - INVENTORIES
Inventories consist of the following (in thousands):
June 30
------------------
1998 1997
---- ----
Raw materials $2,014 $2,964
Work in process 643 695
Finished goods 278 160
Less reserves (489) (492)
----- -----
$2,446 $3,327
====== ======
Note 6 - FINANCING ARRANGEMENTS
Bank Credit Agreements
The Company has a working capital bank line of credit for SMTEK,
based upon and secured by accounts receivable and inventory, which
provides for borrowings of up to $2,750,000 at an interest rate of prime
(8.50% at June 30, 1998) plus 1.25%. At June 30, 1998, borrowings
outstanding under this credit facility amounted to $2,583,000. SMTEK's
line of credit expires on September 1, 1999. 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 3,000,000 pounds sterling (approximately $4,900,000), and
provides for interest on borrowings at the bank's base rate (6.77% at
June 30, 1998) plus 1.50%. At June 30, 1998, borrowings outstanding
under this credit facility amounted to $1,858,000. The credit facility
agreement with Ulster Bank Markets expires August 31, 1998. Management
is currently in discussions with Ulster Bank Markets and believes that
the credit facility agreement will be extended in the normal course of
business for at least one year.
Notes Payable to Related Party
The note payable to related party of $2,000,000 at June 30, 1998,
is payable to Thomas M. Wheeler, a member of the Company's Board of
Directors and the Company's largest stockholder. The note bears
interest at 8%, matures on October 31, 1999, and is secured by the
common stock of SMTEK.
The notes payable to related party aggregating $1,625,000 at June
30, 1997, were due from Jolt to Mr. Wheeler, prior to the consummation
of the acquisition of Jolt (Note 2). The notes payable consisted of two
notes of $1,525,000 and $100,000, bearing interest at 7.1% and 8.25%,
respectively. As a condition of and prior to the consummation of the
Jolt acquisition, the $1,625,000 notes payable and accrued interest
thereon of $430,000, were converted to common stock of Jolt. Mr.
Wheeler received 4,643,756 shares of common stock of the Company as a
result of the conversion of the debt into common stock of Jolt.
Other Long-Term Debt
Other long-term debt consists of the following (in thousands):
June 30
------------------
1998 1997
---- ----
10% Senior Notes (Note 2) $ - $ 5,300
Mortgage notes secured by real property at the
Northern Ireland operations, with interest at
variable rates (8.0% at June 30, 1998),
payable in semiannual installments through 2009 1,214 1,300
Notes payable secured by equipment, interest
at 7.95% to 10.9%, payable in monthly
installments through June 2003 951 1,129
Capitalized lease obligations (Note 10) 1,215 1,197
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 1,580 1,580
7% Convertible Subordinated Debentures ("CSDs"),
due May 15, 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 398 421
Obligations to former officers, employees and directors
under consulting and deferred fee agreements 859 826
Other 183 234
------ ------
6,400 11,987
Less current maturities 1,214 4,167
------ ------
$ 5,186 $ 7,820
====== ======
At June 30, 1998, 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, 1998 and 1997.
The aggregate amounts of minimum maturities of other long-term debt for
the indicated fiscal years (other than capitalized lease obligations, as
described in Note 10) are as follows: 1999 - $837,000; 2000 - $586,000;
2001 - $729,000; 2002 - $240,000; 2003 - $244,000; and thereafter -
$2,549,000.
During fiscal 1996, holders of $132,000 in principal of 7% CSDs
exchanged such CSDs for common stock of 66,000 shares. 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 of the
warrants, which expired June 1, 1998, was $2.50 per warrant. Pursuant to
the terms of the settlement agreement, the Company subsidized the exercise
of warrants by crediting the Participants with $2.50 for each warrant
exercised. During fiscal 1998 and 1997, 26,808 and 144,646 Series G
warrants, respectively, were exercised. The Company is obligated to pay the
Participants $2.50 for each warrant which remained 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 $836,000 and $802,000 at June 30,
1998 and 1997, respectively. As a 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.
Note 7 - INCOME TAXES
Temporary differences between financial statement carrying amounts and
the tax bases of assets and liabilities that give rise to significant
portions of the deferred tax assets and liabilities relate to the following
(in thousands):
June 30
---------------------
1998 1997
---- ----
Deferred tax assets:
Accrued employee benefits $ 479 $ 346
Loss reserves 416 452
Domestic net operating loss carryforwards 14,338 14,102
Foreign net operating loss carryforwards 3,582 3,955
Other 57 74
------ ------
Total deferred tax assets 18,872 18,929
Deferred tax liabilities:
Depreciation (130) (118)
------ ------
Net deferred tax assets before allowance 18,742 18,811
Less valuation allowance (18,742) (18,811)
------ ------
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 domestic and
foreign taxable income of approximately $38,000,000 and $10,233,000,
respectively, 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 not more likely than
not that the deferred tax assets will be realized, and therefore, has
recorded a 100% valuation allowance to offset the assets. The valuation
allowance was $18,811,000 and $18,382,000 as of July 1, 1997 and 1996,
respectively. The net change in the total valuation allowance for the years
ended June 30, 1998 and 1997 was a decrease of $69,000 and an increase of
$429,000, respectively.
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
---------------------------
1998 1997 1996
---- ---- ----
Federal tax expense (benefit)
computed at statutory rate $ 168 $(293) $(468)
Differences in taxation of
foreign earnings, net (538) (263) 114
Untaxed S Corporation earnings (377) (275) (167)
Amortization of debt issue costs - - (108)
Amortization of goodwill 431 431 215
Utilization of net operating losses - - (1,110)
Deferred tax effect of domestic
temporary differences 36 (102) 6,871
Deferred tax effect of foreign
temporary difference 373 27 (1,252)
Net change in valuation allowance (69) 429 (5,194)
Other (24) 46 (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 subsequent to fiscal 1996. 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, 1998, the Company has U.S. federal net operating loss
("NOL") carryforwards of $38,200,000, expiring in 2004 through 2013, and
state NOL carryforwards of $27,300,000, expiring in 1999 through 2013. The
NOL carryforward for federal alternative minimum tax purposes is
approximately $24,000,000.
The Company's ability to use its NOL carryforwards to offset future
taxable income may be subject to annual limitations due to certain
substantial stock ownership changes which have occurred in the current and
prior years. The Company is currently studying this matter to determine if
the future utilization of the NOLs will be limited due to these ownership
changes.
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 $322,000 and
$244,000 in fiscal 1998 and 1997, respectively, 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. At June 30, 1998, the U.K. NOL
amounted to approximately $10,233,000. 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.
Pretax income (loss) from foreign operations for fiscal 1998, 1997 and
1996 was $1,480,000, $772,000, and ($338,000), respectively. It is not
practicable to estimate the amount of tax that might be payable on the
eventual remittance of such earnings to the U.S. parent company. 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.
Effective June 30, 1998, the Company acquired Jolt, which was an S
Corporation for income tax purposes prior to its acquisition by the Company.
Following are pro forma consolidated operating results, which present state
income taxes (the Company's federal NOLs are assumed to be utilized to
shelter Jolt's federal taxable income) as a pro forma adjustment as if Jolt
had filed C Corporation tax returns for the pre-acquisition periods (in
thousands):
Year ended June 30
------------------------
1998 1997 1996
---- ---- ----
Net income (loss) before pro forma
adjustments, per consolidated
statements of operations $493 $(868) $2,089
Pro forma provision for income taxes 61 45 27
---- ----- ------
Pro forma net income (loss) $432 $(913) $2,062
==== ===== ======
Note 8 - 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 Issued as Brokerage Fee
In June 1998, 200,000 shares of common stock were issued as a brokerage
fee in conjunction with the closing of the acquisition of Jolt. The
ascribed value of the 200,000 shares of $138,000 is included in acquisition
expenses in the accompanying 1998 consolidated statement of operations.
Common Stock Issued as Debt Placement Fee
In June 1997, in connection with the payoff of the 10% Senior Notes,
353,333 shares of common stock were issued to the placement agent of the 10%
Senior Notes as a debt placement fee. The ascribed value of the 353,333
shares of $442,000 was expensed in June 1997 and is included in fiscal 1997
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 employees and directors. 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 1998, 1997 and
1996, options to purchase a total of 90,000, 150,000 and 120,000 shares,
respectively, were granted to the Company's non-employee directors at
exercise prices of $0.81, $1.06, and $1.63, respectively.
Activity under the employee and non-employee director stock option
plans for fiscal years 1998, 1997 and 1996 was as follows:
Weighted average
exercise price
Shares per share
------ ---------
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
Granted 611,200 0.85
Expired or canceled (185,849) 1.04
Exercised (274,462) 0.50
--------- -----
Shares under option, June 30, 1998 2,347,880 $1.17
========= =====
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 then fair market value of the
common stock.
The following table summarizes information about shares under option at
June 30, 1998:
Outstanding Exercisable
------------------------------------- -----------------------
Weighted
average Weighted Weighted
Range of remaining average average
exercise Options contractual exercise Options exercise
prices outstanding life price exercisable price
- --------- --------- --------- --------- --------- --------
$0.75- 0.81 362,380 9.5 years $0.77 137,280 $0.79
1.00- 1.25 1,741,500 8.4 1.18 915,426 1.16
1.63 244,000 8.0 1.63 202,665 1.63
--------- ---------
2,347,880 $1.17 1,255,371 $1.20
========= =========
At June 30, 1998, under the employee and non-employee director stock
option plans there were 660,147 and 540,000 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
--------------------------------------
1998 1997 1996
------ ------- -------
Net income (loss):
As reported $ 493,000 $ (868,000) $2,089,000
Pro forma $ 28,000 $(1,441,000) $1,830,000
Earnings (loss) per share:
As reported $ 0.02 $(0.03) $ 0.09
Pro forma $ -- $(0.05) $ 0.08
For purposes of this pro forma disclosure, 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 1998,
1997 and 1996: dividend yield of 0.0% percent for all years; expected
volatility 65%, 68% and 67% for 1998, 1997 and 1996, respectively; risk-
free interest rates ranging from 5.4% to 6.3% for 1998, 6.1% to 6.8% for
1997 and 6.6% to 6.7% for 1996; and expected lives of five years for all
years.
The weighted average fair value of options granted during the years
ended June 30, 1998, 1997 and 1996 was $0.51, $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.
Preferred Stock Purchase Rights
At June 30, 1998, 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 $3.50 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 $2.50 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. The effective exercise price on the
Series E warrants was $1.88 as of June 30, 1998. 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 6, 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. During
fiscal 1998 and 1997, 26,808 and 144,646 Series G warrants,
respectively, were exercised. The remaining unexercised Series G
warrants expired on June 1, 1998.
6. Series H warrants covering an aggregate 300,000 shares were issued
to the Company's non-employee directors who served on the Company's
board without other compensation during the period from May 31, 1995
to June 30, 1996. The Series H warrants are at $2.50 until the
warrant expiration date on June 30, 2000. There was no intrinsic
value related to the warrants on the date of grant.
Note 9 - OTHER FINANCIAL INFORMATION
Earnings (Loss) Per Share
As the Company reported a net loss for the year ended June 30, 1997
and a loss before extraordinary item for the year ended June 30, 1996,
the shares used in computing diluted earnings (loss) per share for these
years is equal to the weighted average number of common shares
outstanding for the period and excludes the dilutive effect of options,
warrants and convertible securities.
A reconciliation of the numerator and denominator used in the
computation of fiscal 1998 diluted earnings per share follows:
Year ended
June 30,
1998
------
NUMERATOR:
Net income $ 493,000
Add back net interest related to
convertible subordinated debentures 134,000
----------
Net income for diluted earnings computation $ 627,000
==========
DENOMINATOR:
Weighted average number of common
shares outstanding 29,026,467
Assumed exercise of options and warrants
net of shares assumed reacquired under
treasury stock method 106,491
Assumed conversion of convertible
subordinated debentures 310,206
----------
Total diluted shares 29,443,164
==========
Options and warrants to purchase 4,652,880 shares of common stock
at prices ranging from $0.75 to $3.50 were outstanding during the year
ended June 30, 1998, but were not included in the computation of diluted
earnings per share because the option and warrant exercise prices were
greater than the average market price of the common shares, and would
therefore be antidilutive.
Information Relating to Consolidated Statements of Cash Flows
"Net cash provided by operating activities" includes cash payments for
interest (in thousands):
Year ended June 30
---------------------------
1998 1997 1996
---- ---- ----
Interest paid $ 1,294 $ 1,081 $ 751
"Net increase in operating working capital, net of effects of business
acquired" consists of the following (in thousands):
Year ended June 30
---------------------------
1998 1997 1996
---- ---- ----
(Increase) decrease in
accounts receivable $ (333) $(3,565) $ 402
Increase in costs and estimated
earnings in excess of billings
on uncompleted contracts (1,624) (135) (726)
(Increase) decrease in inventories 846 993 (1,879)
(Increase) decrease in prepaid expenses 36 181 (86)
Increase (decrease)in accounts payable (1,234) 1,220 259
Increase in accrued payroll
and employee benefits 74 328 24
Increase (decrease) in other
accrued liabilities 57 (677) 676
------ ------ ------
Net increase $(2,178) $(1,655) $(1,330)
====== ====== ======
Following is the supplemental schedule of non-cash investing and
financing activities (in thousands):
Year ended June 30
--------------------------
1998 1997 1996
---- ---- ----
Capital expenditures financed by lease
obligations and notes payable $ 639 $1,221 $ 689
Conversion of debt to equity 2,100 223 3,667
Common stock issued as partial
consideration for purchase of SMTEK, Inc. - - 801
Common stock issued as debt placement fee - 442 716
Other Accrued Liabilities
Other accrued liabilities consist of the following (in thousands):
June 30
------------------
1998 1997
---- ----
Environmental liabilities $ 528 $ 684
Accrued taxes payable 810 794
Other 1,089 1,324
------ ------
$2,427 $2,802
====== ======
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 1996 $186 $ 85 $(134) $137
Fiscal 1997 137 74 (48) 163
Fiscal 1998 163 57 (53) 167
Inventory reserves
- ------------------
Fiscal 1996 $156 $250 $(158) $248
Fiscal 1997 248 443 (199) 492
Fiscal 1998 492 386 (389) 489
Note 10 - COMMITMENTS AND CONTINGENCIES
Lease Commitments
Future minimum lease payments at June 30, 1998 were as follows (in
thousands):
Capital Operating
leases leases
------ ------
Fiscal 1999 $ 467 $ 481
Fiscal 2000 434 408
Fiscal 2001 360 33
Fiscal 2002 122 19
Fiscal 2003 35 14
Thereafter - 9
----- -----
Total 1,418 $ 964
=====
Less: Interest (203)
-----
Present value of minimum
lease payments $1,215
======
The capitalized cost of the related assets (primarily plant equipment),
which are pledged as security under the capital leases, was $1,483,000 and
$1,726,000 at June 30, 1998, and 1997, respectively. Accumulated
amortization on assets under capital leases amounted to $447,000 and
$264,000 at June 30, 1998 and 1997, respectively.
Rental expense for operating leases amounted to $524,000, $489,000 and
$302,000 for fiscal 1998, 1997 and 1996, respectively.
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 1998 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.
Jolt occupies an 8,400 square foot facility which is leased through
October 31, 1998 for $7,100 per month. Jolt management is currently in
negotiations with the landlord concerning an extension of the lease, and
management expects that the lease will be renewed for an additional one
year term. In the event the lease is not renewed, management believes that
there is sufficient vacant industrial space in the local vicinity to enable
Jolt to relocate without unduly disrupting its operations.
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 $966,000 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 January 1, 1997.
At the present time, DDL-E has approximately 160 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 6). DDL-E's contingent grant repayment obligations amount to
approximately $1,175,000 at June 30, 1998. 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, which were
immaterial for 1998, 1997 and 1996, 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. At June 30, 1998, the Company
did not have any open foreign currency forward contracts.
Environmental Matters
The Company is currently involved in certain remediation and
investigative studies regarding soil and groundwater contamination at
the site of a former printed circuit board manufacturing plant in
Anaheim, California which was leased by one of the Company's
subsidiaries, Aeroscientific Corp., which is now an inactive,
insolvent subsidiary. Management, based in part on consultations
with outside environmental engineers and scientists, believes that
the total remaining costs to clean up this site will not exceed
$600,000. The remaining costs to be incurred to remediate this site
will be borne partially by the property owner under a cost sharing
agreement entered into several years ago. At June 30, 1998, the
Company had a reserve of $528,000, which management believes is
adequate to cover its share of future remediation costs at this site.
It is possible, however, that these future remediation costs could
differ significantly from the estimates, and that the Company's
portion could exceed the amount of its reserve. The Company's
liability for remediation in excess of its reserve could have a
material adverse impact on its business, financial condition and
results of operations.
Note 11 - BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in two primary industry segments providing
electronic manufacturing services and printed circuit boards principally to
the computer, communications, instrumentation and medical equipment markets.
A summary of the Company's operations by segment follows (in thousands):
Year ended June 30
------------------------------
1998 1997 1996
---- ---- ----
Revenues:
Electronic Manufacturing Services $44,690 $41,335 $24,599
Printed Circuit Boards 8,575 10,305 10,891
------ ------ ------
$53,265 $51,640 $35,490
====== ====== ======
Operating income (loss):
Electronic Manufacturing Services $ 1,886 $ 988 $ 348
Printed Circuit Boards 677 589 (20)
General Corporate (409) (541) (880)
Acquisition expenses (609) - -
------ ------ ------
$ 1,545 $ 1,036 $ (552)
====== ====== ======
Identifiable assets:
Electronic Manufacturing Services $25,205 $24,037 $21,732
Printed Circuit Boards 5,712 5,881 5,266
General Corporate 913 3,751 2,500
------ ------ ------
$31,830 $33,669 $29,498
====== ====== ======
Depreciation and amortization:
Electronic Manufacturing Services $ 2,482 $ 2,353 $ 1,427
Printed Circuit Boards 579 498 548
General Corporate 6 938 285
------ ------ ------
$ 3,067 $ 3,789 $ 2,260
====== ====== ======
Capital expenditures: (1)
Electronic Manufacturing Services $ 802 $ 1,306 $ 1,239
Printed Circuit Boards 617 1,060 586
General Corporate 5 6 -
------ ------ ------
$ 1,424 $ 2,372 $ 1,825
====== ====== ======
(1) Capital expenditures include equipment additions financed with capital
leases and notes payable.
Revenues, operating income (loss), and identifiable assets by
geographic area are as follows (in thousands):
Year ended June 30
------------------------------
1998 1997 1996
---- ---- ----
Revenues:
United States $23,029 $21,891 $11,022
Northern Ireland 30,236 29,749 24,468
------ ------ ------
Total $53,265 $51,640 $35,490
====== ====== ======
Operating income (loss):
United States $ (202) $ 99 $ (133)
Northern Ireland 1,747 937 (419)
------ ------ ------
Total $ 1,545 $ 1,036 $ (552)
====== ====== ======
Identifiable assets:
United States $17,311 $19,214 $17,544
Northern Ireland 14,519 14,455 11,954
------ ------ ------
Total $31,830 $33,669 $29,498
====== ====== ======
The Company had sales to three customers which accounted for 19.9%,
13.8% and 13.8% of revenues in fiscal 1998 and sales to two customers which
accounted for 17.8% and 15.7% of revenues in fiscal 1997. No single
customer accounted for 10% or more of consolidated revenues in fiscal 1996.
Note 12 - 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 1998:
Revenues $13,413 $12,820 $13,600 $13,432 $53,265
Net income (loss)(1) $ 301 $ 398 $ 291 $ (497) $ 493
Earnings (loss) per
share $ 0.01 $ 0.01 $ 0.01 $ (0.02) $ 0.02
Fiscal 1997:
Revenues $10,413 $11,877 $14,387 $14,963 $51,640
Net income (loss) $ (594) $ (315) $ 455 $ (414) $ (868)
Earnings (loss) per
share $ (0.02) $(0.01) $ 0.02 $ (0.01) $ (0.03)
(1) Included in the net loss of $497,000 for the three months ended June
30, 1998 are non-recurring acquisition expenses of $609,000 related to the
acquisition of Jolt on June 30, 1998, as discussed in Note 2.
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 1998 Fiscal 1997
------------- --------------
High Low High Low
----- ----- ----- -----
1st Quarter 1-3/16 13/16 2 1-1/8
2nd Quarter 1 11/16 1-1/4 15/16
3rd Quarter 13/16 5/8 1-1/4 7/8
4th Quarter 7/8 5/8 1-5/8 15/16
There were approximately 1500 stockholders of record at August 21,
1998.
The Company suspended dividend payments in 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
Charlene Gondek Vice President - Finance and
Independent Businesswoman Administration, Chief Financial Officer,
Aspen, Colorado Treasurer and Secretary
Gregory L. Horton OPERATING UNITS
Chairman of the Board, SMTEK, Inc.
President and Chief Newbury Park, California
Executive Officer
DDL Electronics, Inc. Jolt Technology, Inc.
Fort Lauderdale, Florida
Richard K. Vitelle DDL Electronics Limited
Vice President and Craigavon, Northern Ireland
Chief Financial Officer United Kingdom
DDL Electronics, Inc.
Irlandus Circuits Limited
Craigavon, Northern Ireland
Thomas M. Wheeler United Kingdom
Chairman of the Board,
TMW Enterprises, Inc.
Troy, Michigan TRANSFER AGENT & REGISTRAR
American Stock Transfer &
Trust Company
40 Wall Street
New York, New York 10005
INDEPENDENT AUDITORS LEGAL COUNSEL
KPMG Peat Marwick LLP Berry Moorman, PC
Los Angeles, California Detroit, Michigan