1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): January 12, 1996
Exact Name of Registrant as
Specified in Its Charter: DDL ELECTRONICS, INC.
DELAWARE 1-8101 33-0213512
State or Other Jurisdiction of Commission I.R.S. Employer
Incorporation or Organization File Number Identification No.
Address of Principal Executive Offices: 2151 Anchor Court
Newbury Park, CA 91320
Registrant's Telephone Number: (805) 376-2595
Former Name - Former Address and Former
Fiscal Year, if Changed Since Last Report: 7320 SW Hunziker Road Suite #300
Tigard, Oregon 97223-2302
2
This report is an amendment to the Registrant's report on Form 8-K dated
January 12, 1996 that was filed with the Securities and Exchange Commission on
January 29, 1996 (the "Initial Form 8-K Report"). This amending report contains
the required audited financial statements and unaudited pro forma financial
information referenced previously in the Initial Form 8-K Report.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements:
The audited financial statements of SMTEK, Inc. for the years ended
March 31, 1995 and 1994, including the report thereon of Arthur Andersen
LLP, independent public accountants, are attached hereto as pages F-1
through F-12.
The audited financial statements of SMTEK, Inc. for the year ended March
31, 1993, including the report thereon of Gary Janke, CPA, independent
accountant, are attached hereto as pages F-13 through F-22.
(b) Pro Forma Financial Information:
The unaudited pro forma condensed consolidated balance sheet of DDL
Electronics, Inc. ("DDL") and SMTEK, Inc. ("SMTEK") as of December 31,
1995, and the unaudited pro forma condensed consolidated statements of
operations of DDL and SMTEK for the year ended June 30, 1995 and the six
months ended December 31, 1995, are attached hereto as pages F-23
through F-29.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
March 27, 1996 /s/ Richard K. Vitelle
- --------------------------------- -----------------------------------
Date Richard K. Vitelle
Vice President -Finance
(Principal Financial Officer)
1
3
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
SMTEK, Inc.:
We have audited the accompanying balance sheets of SMTEK, INC. (a California
corporation) as of March 31, 1995 and 1994, and the related statements of
income, shareholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 audit 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 financial statements referred to above present fairly, in
all material respects, the financial position of SMTEK, Inc. as of March 31,
1995 and 1994, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
August 15, 1995
F-1
4
SMTEK, INC.
BALANCE SHEETS - MARCH 31, 1995 AND 1994
ASSETS
1995 1994
---------- ----------
CURRENT ASSETS:
Cash $ 125,000 $ 368,000
Accounts receivable, net of allowance
for doubtful accounts of $95,000 in
1995 and $12,000 in 1994 1,470,000 1,282,000
Costs and estimated earnings in excess
of billings on uncompleted contracts,
net of progress payments of
$1,934,000 in 1995 and $622,000 in 1994 3,472,000 818,000
Prepaid expenses 43,000 68,000
Other current assets 5,000 31,000
---------- ----------
Total current assets 5,115,000 2,567,000
---------- ----------
PROPERTY AND EQUIPMENT, at cost:
Machinery and equipment 2,635,000 1,505,000
Furniture and fixtures 224,000 191,000
Leasehold improvements 264,000 244,000
Equipment under capital leases 579,000 579,000
---------- ----------
3,702,000 2,519,000
Less--Accumulated depreciation 1,705,000 1,285,000
---------- ----------
1,997,000 1,234,000
---------- ----------
OTHER ASSETS 76,000 55,000
---------- ----------
$7,188,000 $3,856,000
========== ==========
The accompanying notes are an integral part of these balance sheets.
F-2
5
SMTEK, INC.
BALANCE SHEETS - MARCH 31, 1995 AND 1994
LIABILITIES AND SHAREHOLDERS' EQUITY
1995 1994
---------- ----------
CURRENT LIABILITIES:
Accounts payable $2,336,000 $ 585,000
Accrued expenses 430,000 268,000
Current portion of long-term debt 1,045,000 426,000
Current portion of obligations
under capital leases 89,000 150,000
---------- ----------
Total current liabilities 3,900,000 1,429,000
---------- ----------
LONG-TERM LIABILITIES:
Long-term debt, net of current portion 991,000 44,000
Obligations under capital leases,
net of current portion 17,000 106,000
---------- ----------
Total long-term liabilities 1,008,000 150,000
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 3)
SHAREHOLDERS' EQUITY:
Common stock--
197,568 shares authorized,
issued and outstanding 2,510,000 2,510,000
Accumulated deficit (230,000) (233,000)
---------- ----------
Total shareholders' equity 2,280,000 2,277,000
---------- ----------
$7,188,000 $3,856,000
========== ==========
The accompanying notes are an integral part of these balance sheets.
F-3
6
SMTEK, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED MARCH 31, 1995 AND 1994
1995 1994
----------- -----------
NET SALES $14,200,000 $11,317,000
COST OF SALES 12,445,000 9,383,000
----------- -----------
Gross profit 1,755,000 1,934,000
----------- -----------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,412,000 1,308,000
----------- -----------
Income from operations 343,000 626,000
----------- -----------
OTHER INCOME (EXPENSE), net (139,000) 4,000
----------- -----------
Income before unusual item--legal
settlement 204,000 630,000
LEGAL SETTLEMENT (200,000) -
----------- -----------
Income before provision
for income taxes 4,000 630,000
PROVISION FOR INCOME TAXES 1,000 61,000
----------- -----------
Net income $ 3,000 $ 569,000
=========== ===========
The accompanying notes are an integral part of these statements.
F-4
7
SMTEK, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1995 AND 1994
Common Stock
-------------------------------
Accumulated
Shares Amount Deficit Total
------- ---------- ---------- ----------
BALANCE, March 31, 1993 100,000 $ 104,000 $(802,000) $ (698,000)
Conversion of shareholders'
investment (Note 7) 97,568 2,406,000 - 2,406,000
Net income - - 569,000 569,000
------- ---------- --------- ----------
BALANCE, March 31, 1994 197,568 2,510,000 (233,000) 2,277,000
Net income - - 3,000 3,000
------- ---------- --------- ----------
BALANCE, March 31, 1995 197,568 $2,510,000 $(230,000) $2,280,000
======= ========== ========= ==========
The accompanying notes are an integral part of these statements.
F-5
8
SMTEK, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1995 and 1994
1995 1994
------------ ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,000 $ 569,000
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Depreciation and amortization 420,000 200,000
Provision for doubtful accounts 83,000 12,000
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable (271,000) 639,000
Costs and estimated earnings in
excess of billings on uncompleted
contracts (2,654,000) 56,000
Prepaid expenses 25,000 (47,000)
Other assets 5,000 (45,000)
Increase (decrease) in:
Accounts payable 1,751,000 (662,000)
Accrued expenses 162,000 (109,000)
------------ ---------
Net cash provided by (used in)
operating activities (476,000) 613,000
------------ ---------
CASH FLOWS FROM INVESTING ACTIVITIES--
Purchases of property and equipment (1,183,000) (531,000)
------------ ---------
Net cash used in investing
activities (1,183,000) (531,000)
------------ ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under long-term debt 2,120,000 430,000
Repayment of long-term debt (704,000) (300,000)
------------ ---------
Net cash provided by financing
activities 1,416,000 130,000
------------ ---------
NET INCREASE (DECREASE) IN CASH (243,000) 212,000
CASH, beginning of year 368,000 156,000
------------ ---------
CASH, end of year $ 125,000 $ 368,000
============ =========
The accompanying notes are an integral part of these statements.
F-6
9
SMTEK, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31,1995
1. Line of Business and Summary of Significant Accounting Policies
---------------------------------------------------------------
a. Line of Business
----------------
SMTEK, Inc. (the Company), a California corporation, specializes in
the design and manufacture of complete printed circuit boards and
modules utilizing surface mount technology. Its customers include
government related and commercial customers.
The Company derived 74 and 83 percent of net sales from contracts with
intelligence and military agencies of government prime contractors for
the years ended March 31, 1995 and 1994, respectively.
b. Depreciation and Amortization
-----------------------------
Depreciation and amortization are provided over the estimated useful
lives of the assets or lease terms, using primarily the straight- line
method. Estimated useful lives are as follows:
Machinery and equipment 5 to 7 years
Furniture and fixtures 3 to 5 years
Leasehold improvements Lesser of useful life or
lease term
Equipment under capital leases Lesser of useful life or
lease term
Maintenance and repairs are charged to operations as incurred, while
significant improvements are capitalized. Upon retirement or
disposition of property, the asset and related accumulated
depreciation or amortization are removed from the accounts and any
resulting gain or loss is charged to operations.
As of April 1, 1994, the Company prospectively revised the remaining
lives of certain machinery and equipment from five to seven years.
This change increased income for fiscal year 1995 by approximately
$58,000.
c. Revenue Recognition
-------------------
Contract revenues are recorded under the percentage-of-completion
method of accounting, primarily on the basis of costs incurred to
total estimated costs.
In the period in which it is determined that a loss will result from
the performance of a contract, the entire amount of the estimated loss
is charged to income. Other changes in contract price and estimates
of costs and profits at completion are recognized prospectively. This
method recognizes in the current period the cumulative effect of the
changes on current and prior periods.
Certain government agencies have audited the Company's contract costs
through the fiscal year ended March 31, 1993. Subsequent years remain
open for audit.
F-7
10
Progress payments on contracts in process are shown as an offset to
costs and estimated earnings in excess of billings on uncompleted
contracts on the balance sheet. As completed boards are shipped,
billings to the customer are reduced by the amount of progress
payments related to the boards shipped.
d. Statement of Cash Flows
-----------------------
For purposes of the statement of cash flows, the Company considers all
highly liquid investments with an original maturity of three months or
less to be cash equivalents.
During fiscal 1994, the Company added equipment with a cost of
$579,000 which was financed with a capital lease and converted its
capital investment of $2,406,000 to common stock (see Note 7). These
non-cash transactions are excluded from the statement of cash flows.
The following were cash payments for:
1995 1994
-------- -------
Interest $117,000 $14,000
Income taxes 33,000 10,000
e. Reclassifications
-----------------
Certain prior year balances have been reclassified to conform to the
current year's presentation.
2. Income Taxes
------------
Effective April 1, 1993, the Company changed its method of accounting for
income taxes to comply with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 109. This change had a minimal effect on the Company's
financial statements.
Under SFAS No. 109, deferred income tax assets or liabilities are computed
based on the temporary difference between the financial statement and income
tax bases of assets and liabilities using the statutory marginal income tax
rate in effect for the year in which the differences are expected to reverse.
Deferred income tax expenses or credits are based on the changes in the
deferred income tax assets or liabilities from period to period.
The net deferred income tax asset at March 31, 1995 and 1994 consists primarily
of accruals and differences in depreciation for financial and tax reporting
purposes and is fully reserved.
F-8
11
The components of the provision for income taxes for the years ended March 31,
1995 and 1994 are as follows:
Current Deferred Total
------- -------- -------
1995:
Federal $ - $ - $ -
State 1,000 - 1,000
------- ------- -------
$ 1,000 $ - $ 1,000
------- ------- -------
1994:
Federal $ - $ - $ -
State 61,000 - 61,000
------- ------- -------
$61,000 $ - $61,000
======= ======= =======
The Company's tax provision for the period ended March 31, 1994 benefited from
the utilization of federal and state net operating loss carryforwards totaling
$735,000 and $80,000, respectively. The Company has no federal or state net
operating loss carryforwards.
3. Commitments and Contingencies
-----------------------------
The Company leases certain property and equipment under capital and operating
lease agreements. The leases expire at various dates through 1999. The charge
to income for rental expense on operating leases was approximately $172,000 and
$162,000 for fiscal 1995 and 1994, respectively.
The minimum aggregate rental commitments under both capital and operating
leases with noncancellable terms of more than one year at March 31, 1995 are as
follows:
Year Ending Capital Operating
March 31, Leases Leases Total
----------- --------- ---------- ---------
1996 $ 97,000 $187,000 $284,000
1997 18,000 100,000 118,000
1998 - 5,000 5,000
-------- -------- --------
115,000 $292,000 $407,000
======== ========
Less--Amount representing
interest (9,000)
--------
Present value of minimum
capital lease payments 106,000
Less--Current portion (89,000)
--------
$ 17,000
========
F-9
12
As discussed, in 1.a. above, a significant portion of the Company's revenue is
derived from contracts with government prime contractors. Most of these
contracts are subject to review and audit by the DCAA and various government
agencies. During fiscal year 1995, the Company settled a false claim action
with the United States Government for $200,000. This settlement, which was
paid subsequent to year-end, is accrued in the 1995 financial statements.
The Company is party to certain legal proceedings incidental to its business.
Certain claims, suits or complaints arising out of the normal course of
business have been filed or are pending against the Company. Based on the
facts known to the Company, management believes although it is not possible to
predict the outcome of any litigation, management, after consultation with
counsel, does not expect that such litigation will have a material adverse
effect on its financial position or results of operations.
4. Retirement Plan
---------------
Effective April 1, 1991, the Company adopted a 401(k) plan (the Plan) which
covers substantially all employees meeting certain eligibility requirements.
Employees may defer up to 15% of their compensation. Employer contributions to
the Plan are made at the discretion of the Company and vest after five years of
service. The 401(k) contribution expense charged to operations was $30,000
during fiscal 1994. No contribution was made for fiscal year 1995.
5. Related Party Transactions
--------------------------
During fiscal 1995 and 1994, the Company borrowed $800,000 and $426,000,
respectively, from a company controlled by a shareholder and a shareholder for
the purchase of equipment (see Note 6).
6. Long-Term Debt and Line of Credit
---------------------------------
In March 1995, the Company entered into a credit arrangement with a financial
institution for a working capital line of credit up to $1,000,000, subject to
certain collateral limitations, extending through September 1995 at an interest
rate of prime plus .75 percent (9.75 percent at March 31, 1995). The
arrangement is collateralized by the Company's raw material and accounts
receivable and contains certain financial and non-financial covenants. As of
March 31, 1995, the Company had not drawn on the line of credit.
F-10
13
At March 31, 1995 and 1994, long-term debt consists of the following:
1995 1994
---------- ---------
Unsecured, non-interest bearing note
payable to a related party, payable
in three annual installments of
$20,000 with the last payment due
on August 5, 1998. This note had been
discounted by $34,000. $ 48,000 $ 44,000
Note payable to a shareholder, payable
on or before April 10, 1994, bearing
interest at prime plus four percent. - 426,000
Note payable to a finance company, bearing
interest at 10.9 percent, with 60
installments of $3,316 through April 2000,
secured by certain equipment. 153,000 -
Note payable to a finance company, bearing
interest at 9.5 percent, with 60
installments of $9,156 through July 1999,
secured by certain equipment. 390,000 -
Note payable to a finance company, bearing
interest at 7.95 percent, with 60
installments of $8,629 through April 1999,
secured by certain equipment. 360,000 -
Note payable to a finance company, bearing
interest at 9.5 percent, with 48
installments of $5,133 through December
1998, secured by certain equipment. 194,000 -
Note payable to a finance company, bearing
interest at 9.5 percent, with 48
installments of $2,422 through December
1998, secured by certain equipment. 91,000 -
Unsecured note payable to a company
controlled by a shareholder, bearing
interest at prime plus 4 percent,
payable on demand. 800,000 -
---------- --------
2,036,000 470,000
Less--current portion 1,045,000 426,000
---------- --------
$ 991,000 $ 44,000
========== ========
F-11
14
Future principal maturities of long-term debt as of March 31, 1995 are as
follows:
Year ending
March 31,
1996 $1,045,000
1997 285,000
1998 310,000
1999 314,000
2000 82,000
----------
$2,036,000
==========
7. Equity
------
In January 1995, the Company finalized the treatment of equity funds previously
put into the Company by the Diversified Equity Group. The finalization and
formalization of the equity transaction resulted in the issuance of 97,568
additional shares of common stock. This transaction has been reflected in the
accompanying financial statements as of March 31, 1994.
F-12
15
Gary W. Janke
- --------------------------------------------------------------------------------
CERTIFIED PUBLIC ACCOUNTANT 15650 DEVONSHIRE STREET - SUITE 200
GRANADA HILLS, CALIFORNIA 91344-7241
(818) 893-9674 (310) 276-8470
FAX (818) 893-1246
To the Board of Directors of
SMTEK, Inc.
I have audited the accompanying balance sheet of SMTEK, Inc. (A California
Corporation) as of March 31, 1993, and the related statements of income,
shareholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. My
responsibility is to express an opinion on these financial statements based on
my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audit 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. I believe that my audit provides a reasonable basis
for my opinion.
In my opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SMTEK, Inc. as of March 31,
1993, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
/s/ Gary W. Janke
Granada Hills, California
March 21, 1996
F-13
16
SMTEK, INC.
BALANCE SHEET
March 31, 1993
ASSETS
CURRENT ASSETS:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 156,000
Accounts receivable, net of allowance for
doubtful accounts of $ 0 . . . . . . . . . . . . . . . . . . . . . 1,933,000
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,560,000
Costs and estimated earnings in excess of
billings on uncompleted contracts . . . . . . . . . . . . . . . . . 863,000
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,000
----------
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . $4,533,000
----------
PROPERTY AND EQUIPMENT, at cost:
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . $ 993,000
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . 159,000
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . 243,000
Property under capital leases . . . . . . . . . . . . . . . . . . . . 492,000
----------
$1,887,000
Less-Accumulated depreciation . . . . . . . . . . . . . . . . . . . . 975,000
----------
Net Property and Equipment . . . . . . . . . . . . . . . . . . . $ 912,000
----------
OTHER ASSETS:
Security deposits . . . . . . . . . . . . . . . . . . . . . . . . . . $ 35,000
Software license fees, net of amortization of $59,000 . . . . . . . . 6,000
----------
Total Other Assets . . . . . . . . . . . . . . . . . . . . . . . $ 41,000
----------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . $5,486,000
==========
The accompanying notes are an integral part of these financial statements.
F-14
17
SMTEK, INC.
BALANCE SHEET
March 31, 1993
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,247,000
Short-term loan payable . . . . . . . . . . . . . . . . . . . . . . . . 300,000
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 345,000
Progress payments on contracts in process . . . . . . . . . . . . . . . 1,549,000
Current portion of obligations under capital leases . . . . . . . . . . 104,000
----------
Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . $3,545,000
----------
LONG-TERM LIABILITIES:
Long-term debt, net of current portion . . . . . . . . . . . . . . . . . $ 40,000
Obligations under capital leases, net of current
portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193,000
Loans payable - stockholders . . . . . . . . . . . . . . . . . . . . . . 2,406,000
----------
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . $6,184,000
----------
SHAREHOLDERS' EQUITY:
Common stock: no par value
100,000 shares authorized, issued and outstanding . . . . . . . . . . $ 104,000
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . (802,000)
----------
Total Shareholders' Equity . . . . . . . . . . . . . . . . . . . . $ (698,000)
----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY . . . . . . . . . . . . $5,486,000
==========
The accompanying notes are an integral part of these financial statements.
F-15
18
SMTEK, INC.
STATEMENT OF INCOME
FOR THE YEAR ENDED MARCH 31, 1993
Net Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $9,285,000
Cost of Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,144,000
----------
Gross Profit . . . . . . . . . . . . . . . . . . . . . . . . . $1,141,000
Selling, General and Administrative . . . . . . . . . . . . . . . . 1,037,000
----------
Income from Operations . . . . . . . . . . . . . . . . . . . . $ 104,000
Other Income (Expense) . . . . . . . . . . . . . . . . . . . . . . . (43,000)
----------
Income Before Provision for Income Taxes . . . . . . . . . . . $ 61,000
Provision for Income Taxes . . . . . . . . . . . . . . . . . . . . . 7,000
----------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . $ 54,000
==========
The accompanying notes are an integral part of these financial statements.
F-16
19
SMTEK, INC.
STATEMENT OF RETAINED EARNINGS
FOR THE YEAR ENDED MARCH 31, 1993
Accumulated Deficit, beginning of year . . . . . . . . . . . . . . . $(856,000)
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,000
---------
ACCUMULATED DEFICIT, END OF YEAR . . . . . . . . . . . . . . . $(802,000)
=========
The accompanying notes are an integral part of these financial statements.
F-17
20
SMTEK, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED MARCH 31, 1993
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 54,000
Adjustments to reconcile net income to
cash used by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . 310,000
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable . . . . . . . . . . . . . . . . . . . (726,000)
Inventories . . . . . . . . . . . . . . . . . . . . . . . (648,000)
Costs and estimated earnings in excess
of billings . . . . . . . . . . . . . . . . . . . . . . . (225,000)
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . 13,000
Other assets . . . . . . . . . . . . . . . . . . . . . . . 25,000
Increase (decrease) in:
Accounts payable . . . . . . . . . . . . . . . . . . . . . 436,000
Accrued expenses . . . . . . . . . . . . . . . . . . . . . (216,000)
Progress payments on contracts in process . . . . . . . . 520,000
---------
Net Cash Used by Operating Activities . . . . . . . . . . $(457,000)
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment . . . . . . . . . . . . . . . . . $ (89,000)
---------
Net Cash Used by Investing Activities . . . . . . . . . . $ (89,000)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term debt . . . . . . . . . . . . . . . . . . . . $ 300,000
Increase in note payable . . . . . . . . . . . . . . . . . . . . . . . 4,000
Repayment of long-term debt . . . . . . . . . . . . . . . . . . . . . (88,000)
---------
Net Cash Provided by Financing Activities . . . . . . . . $ 216,000
---------
NET (DECREASE) IN CASH . . . . . . . . . . . . . . . . . $(330,000)
Cash, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . 486,000
---------
CASH, END OF YEAR . . . . . . . . . . . . . . . . . . . . $ 156,000
=========
The accompanying notes are an integral part of these financial statements.
F-18
21
SMTEK, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1993
1. Line of Business and Summary of Significant Accounting Policies
a. Line of Business
SMTEK, Inc. is engaged in the design and manufacture of complete
printed circuit boards and modules utilizing surface mount technology.
Its customers include government related and commercial customers.
The Company derived 84 percent of revenues from contracts with
intelligence and military agencies of government prime contractors for
the year ended March 31, 1993.
b. Inventories
Inventories, consisting of materials not yet applied to contracts, are
stated at the lower of cost (first-in, first-out) or market.
c. Depreciation and Amortization
Depreciation and amortization are provided over the estimated useful
lives of the assets or lease terms, using primarily the straight-line
method. Estimated useful lives are as follows:
Machinery and equipment 5 to 10 years
Furniture and fixtures 3 to 5 years
Leasehold improvements Lesser of asset life or lease term
Property under capital leases Lesser of asset life or lease term
Maintenance and repairs are charged to operations as incurred, while
significant improvements are capitalized. Upon retirement or
disposition of property, the asset and related accumulated
depreciation or amortization are removed from the accounts and any
resultant gain or loss is charged to operations.
d. Revenue Recognition
Contract revenues are recorded under the percentage-of-completion
method of accounting. Work in process is valued using managements
estimates of the progress on various contracts which have not been
completed or fully invoiced as of the balance sheet date.
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.
F-19
22
Progress payments on contracts in process are shown as a liability on
the balance sheet. As various portions of the contract are completed
and accepted by the customer, the progress payments are reduced by the
revenue recognized from the completed portion of the contract.
e. Statement of Cash Flows
For purposes of the statement of cash flows, the Company considers all
highly liquid investments with an original maturity of three months or
less to be cash equivalents.
Cash paid for interest and income taxes during fiscal 1993 was $64,000
and $2000 respectively.
f. Reclassifications
Certain reclassifications have been made to the 1993 financial
statements to conform with current financial statement presentation.
2. Income Taxes
The provision for income taxes is based on elements of income, costs
and expenses as reported in the statement of income. The Company has
a federal net operating loss carryforward of $747,000 and a state loss
carryforward of $87,000 to offset against future taxable income.
The components of the provision for income taxes for the year ended
March 31, 1993 is as follows:
Current Deferred Total
------- -------- -----
Federal $ 0 $ 0 $ O
State 5,000 2,000 7,000
------ ------ ------
$5,000 $2,000 $7,000
====== ====== ======
3. Commitments and Contingencies
a. Lease Commitments
The Company leases certain property and equipment under capital and
operating lease agreements. The leases expire at various dates
through 1996. The charge to income for rental expense on operating
leases was approximately $269,000 for fiscal 1993.
F-20
23
The minimum aggregate rental commitment under both capital and
operating leases with noncancellable terms of more than one year at
March 31, 1993 is as follows:
Capital Operating
Fiscal Year Leases Leases Total
----------- ------- --------- ----------
1994 . . . . . . . . . . . $147,000 $273,000 $ 420,000
1995 . . . . . . . . . . . 147,000 199,000 346,000
1996 . . . . . . . . . . . 73,000 181,000 254,000
1997 . . . . . . . . . . . 95,000 95,000
-------- -------- ----------
$367,000 $748,000 $1,115,000
======== ==========
Less-Amount representing
interest . . . . . . . . . . 70,000
--------
Present value of minimum
capital lease payments . . . $297,000
Less-Current portion . . . . . 104,000
--------
$193,000
========
b. Contingency
A significant portion of the Company's revenue is derived from
contracts with government prime contractors. Most of these contracts
are subject to review and audit by various government agencies. The
Company believes that it has made adequate provisions for any matters
that could arise as a result of these reviews or audits. (Note 7)
4. Retirement Plan
Effective April 1, 1991, the Company adopted a 401 (k) plan (the Plan)
which covers substantially all employees meeting certain eligibility
requirements. Employees may defer up to 15% of their compensation.
Employer contributions to the Plan are made at the discretion of the
Company and vest after five years of service. The 401 (k) contribution
expense charged to operations was $12,000 during fiscal 1993.
5. Long-Term Debt
At March 31, 1993, long-term debt consists of the following:
Notes payable to shareholders - subsequently converted
to common stock ( Note 7) . . . . . . . . . . . . . . . . . . . . . . $2,406,000
Unsecured note payable, payable in three annual
installments of $20,000 with the last payment due on
August 5, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
----------
Total Long-Term Debt . . . . . . . . . . . . . . . . . . . . . . $2,446,000
==========
F-21
24
Future principal maturities of long-term debt as of March 31. 1993 are
as follows:
Year ending March 31
--------------------
1997 $ 15,000
1998 13,000
1999 12,000
--------
$ 40,000
========
7. Subsequent Events
In January 1995, the Company finalized the treatment of funds
previously put into the Company by the Diversified Equity Group. The
finalization and formalization of the equity transaction resulted in
the issuance of 97,568 additional shares of common stock. The entire
long-term liability of $2,406,000, reflected on the balance sheet at
March 31, 1993, was converted to equity.
Subsequent to year-end, the Company's performance under two contracts
was audited by the federal government. The government made certain
claims against the Company which the Company settled for $200,000.
This settlement has not been reflected in these financial statements.
In January 1996, SMTEK, Inc. was acquired by DDL Electronics, Inc. and
became a wholly owned subsidiary.
F-22
25
DESCRIPTION OF UNAUDITED PRO FORMA CONDENSED FINANCIAL
STATEMENTS REFLECTING THE ACQUISITION OF
SMTEK, INC. BY DDL ELECTRONICS, INC.
The following unaudited pro forma condensed consolidated financial
statements have been prepared giving effect to the acquisition of SMTEK, Inc.
("SMTEK") as if the transaction had taken place at December 31, 1995 for the pro
forma condensed consolidated balance sheet and, in the case of the income
statement data, as of July 1, 1994.
On January 12, 1996, DDL Electronics, Inc. ( "DDL") acquired 100% of the
outstanding stock of SMTEK. The purchase price of $8,000,000 million was paid
in cash of $7,199,000 and 1,000,000 shares of common stock. The cash portion
of the purchase price was financed through the issuance of short-term 10%
bridge loans in the aggregate amount of $7,000,000 (the "Bridge Loans"). The
Bridge Loans were repaid in February 1996 through the issuance of 10% Senior
Secured Notes due July 1, 1997 in the aggregate amount of $5,300,000 (the
"Notes") and 10% Cumulative Convertible Debentures due February 27, 1997 in the
aggregate amount of $3,500,000 (the "Debentures"). In connection with the sale
of the Notes and Debentures, DDL paid $352,000 as a fee to the placement agent
for these financings, and issued 572,683 shares of common stock to the
placement agent as additional compensation. The accompanying pro forma
financial statements give effect to the Notes and Debentures as if they had
been issued at the time the SMTEK acquisition was consummated.
The acquisition has been accounted for using the purchase method. In
accordance with Accounting Principles Board Opinion No. 16, the purchase price
will be allocated to the assets and liabilities acquired at their estimated fair
values at acquisition date. Based on current information, DDL's management does
not expect the final allocation of the purchase price to be materially different
from that used in the following pro forma balance sheet and pro forma statements
of operation.
The unaudited pro forma financial information is not necessarily indicative
of the results of operations or the financial position which would have been
attained had the acquisition been consummated at any of the foregoing assumed
dates, or which may be attained in the future. The pro forma financial
information should be read in conjunction with the historical financial
statements of DDL and SMTEK.
F-23
26
DDL ELECTRONICS, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995
(Unaudited)
(In thousands)
Historical
--------------------
DDL Pro Forma Pro Forma
Electronics SMTEK Adjustments Total
----------- ------ ----------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 2,828 $ 55 $ (621)(A) $ 2,262
Accounts receivable, net 3,837 2,236 6,073
Costs and estimated earnings in excess
of billings on uncompleted contracts,
net of progress billings 2,357 2,357
Inventories 2,687 2,687
Prepaid expenses 1,274 67 1,341
-------- ------ ------- --------
Total current assets 10,626 4,715 (621) 14,720
Property and equipment, net 3,228 2,096 0 (B) 5,324
Goodwill 6,391 (C) 6,391
Debt issuance costs 1,068 (D) 1,068
Deposits and other assets 396 62 375 (E) 833
-------- ------ ------- --------
$ 14,250 $6,873 $ 7,213 $ 28,336
======== ====== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank line of credit payable $1,000 $ 1,000
Current portion of long-term debt $ 280 441 721
Short-term borrowings 1,000 $ 2,500 (F) 3,500
Accounts payable 4,735 2,283 7,018
Other current liabilities 3,598 170 3,768
-------- ------ ------- --------
Total current liabilities 9,613 3,894 2,500 16,007
-------- ------ ------- --------
Long-term debt 6,882 875 5,300 (G) 13,057
-------- ------ ------- --------
Stockholders' equity:
Common stock and additional
paid-in capital 21,646 1,517 (H) 23,163
Retained earnings (22,862) (22,862)
Foreign currency translation adjustment (1,029) (1,029)
Net assets of acquired company 2,104 (2,104)(I) 0
-------- ------ ------- --------
Total stockholders' equity (deficit) (2,245) 2,104 (587) (728)
-------- ------ ------- --------
$ 14,250 $6,873 $ 7,213 $ 28,336
======== ====== ======= ========
F-24
27
DDL ELECTRONICS, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)
(A) Proceeds of new debt, less cash paid for direct costs of
acquisition and debt issuance costs, as follows:
Proceeds of 10% Senior Secured Notes. . . . . . . . . . . . $ 5,300
Proceeds of 10% Cumulative Convertible Debentures . . . . . 3,500
Cash paid to SMTEK shareholders . . . . . . . . . . . . . . (7,199)
Repayment of short-term bridge loan . . . . . . . . . . . . (1,000)
Cash paid for finders fee . . . . . . .. . . . . . . . . . (150)
Cash paid for debt placement agent fee . . . . . . . . . . (352)
Cash deposited to interest impound account. . . . . . . . . (375)
Cash paid for other direct costs of SMTEK acquisition . . . (345)
-------
$ (621)
=======
(B) The fair market value of SMTEK's property and equipment is
considered to approximate its net book value in SMTEK's
historical financial statements, hence no adjustment in basis
of property and equipment is shown.
(C) To record excess of cost over value assigned to net assets
acquired (goodwill) . . . . . . . . . . . . . . . . . . . . . . $ 6,391
=======
(D) To record debt issuance costs paid in cash and stock. . . . . . $ 1,068
=======
(E) To record deposit to interest impound with escrow agent . . . . $ 375
=======
(F) To record 10% Cumulative Convertible Debentures issued to
finance SMTEK acquisition, net of bridge loan repayment . . . . $ 2,500
=======
(G) To record 10% Senior Secured Notes issued to finance
SMTEK acquisition . . . . . . . . . . . . . . . . . . . . . . . $ 5,300
=======
(H) To record issuance of DDL Electronics' common stock for:
Purchase consideration for SMTEK acquisition - 1,000,000 shares $ 801
Fee to placement agent for financing - 572,683 shares . . . . . 716
-------
$ 1,517
=======
(I) To eliminate historical equity of SMTEK . . . . . . . . . . . . $(2,104)
=======
(J) The following is a computation of the purchase price:
Cash paid at closing . . . . . . . . . . . . . . . . . . . . $ 7,199
Issuance of 1,000,000 unregistered shares of DDL common
stock, valued at $0.801 per share . . . . . . . . . . . . 801
Direct costs of acquisition including finders fee,
legal and accounting . . . . . . . . . . . . . . . . . . . 495
-------
$ 8,495
=======
The purchase price is allocated as follows:
Book value of net assets acquired . . . . . . . . . . . . . $ 2,104
Excess of cost over value assigned (goodwill) . . . . . . . 6,391
-------
$ 8,495
=======
F-25
28
DDL ELECTRONICS, INC.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1995
(Unaudited)
(In thousands except per share amounts)
Historical
----------------------------------------------
Adjustments DDL
DDL to Exclude without
as Originally Divested Divested Pro Forma Pro Forma
Reported Operations Operations SMTEK Adjustments Total
------------- ----------- ---------- ------- ----------- ---------
(A) (B)
Sales $29,576 $ (8,765) $20,811 $14,200 $35,011
------- -------- ------- ------- -------
Costs and expenses:
Cost of goods sold 26,516 (8,592) 17,924 12,445 30,369
Administrative and selling 6,497 (1,435) 5,062 1,412 6,474
Restructuring charges 1,533 (1,533) 0 0
Amortization of goodwill $ 1,278 (C) 1,278
Amortization of debt issuance costs 907 (D) 907
------- -------- ------- ------- ------- -------
34,546 (11,560) 22,986 13,857 2,185 39,028
------- -------- ------- ------- ------- -------
Operating income (loss) (4,970) 2,795 (2,175) 343 (2,185) (4,017)
------- -------- ------- ------- ------- -------
Non-operating income (expense):
Interest expense (883) 175 (708) (139) (880)(E) (1,727)
Gain on sale of assets 3,317 (3,317) 0 0
Other income (expense) 170 170 (200) (30)
------- -------- ------- ------- ------- -------
2,604 (3,142) (538) (339) (880) (1,757)
------- -------- ------- ------- ------- -------
Income (loss) before income taxes (2,366) (347) (2,713) 4 (3,065) (5,774)
Provision for income taxes 0 0 (1) (1)
------- -------- ------- ------- ------- -------
Income (loss) before extraordinary item $(2,366) $ (347) $(2,713) $ 3 $(3,065) $(5,775)
======= ======== ======= ======= ======= =======
Per share information:
Income (loss) before extraordinary item $ (0.15) $ (0.17) $ (0.33)
======= ======= =======
Shares used in computing income (loss)
per share 15,971 15,971 1,573 17,544
======= ======= ======= =======
F-26
29
DDL ELECTRONICS, INC.
NOTES TO PRO FORMA CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1995
(In thousands)
(A) During the year ended June 30, 1995, DDL sold the assets of its
Aeroscientific Corp. ("Aero") and A.J. Electronics ("A.J.") subsidiaries.
DDL realized a gain of $3,317 on the sale of Aero's assets, and recognized
restructuring charges of $1,533 in connection with the liquidation and
disposal of A.J. Because of the materiality of these transactions and of
Aero's and A.J.'s operations during the period prior to the disposal of
these assets, all in relation to DDL's consolidated operations, inclusion of
such amounts in the pro forma statement of operations would not be
representative of the combined DDL/SMTEK entity as it now exists.
Accordingly, the accompanying pro forma consolidated condensed statement of
operations has been adjusted to exclude Aero's and A.J.'s operating results,
the gain on sale of Aero's assets and the A.J. restructuring charges.
(B) The revenues and expenses shown for SMTEK are the historical amounts for
SMTEK's fiscal year ended March 31, 1995.
(C) To amortize goodwill on a straight-line basis over five years . . . . $1,278
======
(D) To amortize debt issuance costs over the respective terms of the
10% Senior Secured Notes (16 months) and the 10% Cumulative
Convertible Debentures (12 months) . . . . . . . . . . . . . . . . . $ 907
======
(E) To record interest expense on the new indebtness incurred to
finance the acquisiton of SMTEK . . . . . . . . . . . . . . . . . . . $ (880)
======
F-27
30
DDL ELECTRONICS, INC.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1995
(Unaudited)
(In thousands except per share amounts)
Historical
------------------
DDL Pro Forma Pro Forma
Electronics SMTEK Adjustments Total
----------- ----- ----------- ---------
(A)
Sales $12,221 $7,782 $20,003
------- ------ -------
Costs and expenses:
Cost of goods sold 10,838 6,813 17,651
Administrative and selling 1,895 726 2,621
Amortization of goodwill $ 639 (B) 639
Amortization of debt issuance costs 161 (C) 161
------- ------ ------- -------
12,733 7,539 800 21,072
------- ------ ------- -------
Operating income (loss) (512) 243 (800) (1,069)
------- ------ ------- -------
Non-operating income (expense):
Interest expense (229) (60) (440)(D) (729)
Other income (expense) 367 13 380
------- ------ ------- -------
138 (47) (440) (349)
------- ------ ------- -------
Income (loss) before income taxes (374) 196 (1,240) (1,418)
Income tax benefit 1,110 (E) 1,110
------- ------ ------- -------
Net income (loss) $ 736 $ 196 $(1,240) $ (308)
======= ====== ======= =======
Net income (loss) per share $ 0.04 $ (0.02)
======= =======
Shares used in computing income (loss)
per share 16,985 1,573 18,558
======= ======= =======
F-28
31
DDL ELECTRONICS, INC.
NOTES TO PRO FORMA CONDENSED STATEMENT OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1995
(In thousands)
(A) The revenues and expenses shown for SMTEK are the historical amounts for the
six months ended December 31, 1995. Because the accompanying pro forma
statement of operations for the year ended June 30, 1995 includes SMTEK's
historical operating results for its fiscal year ended March 31, 1995,
SMTEK's operating results for the three months ended June 30, 1995 are not
included in either of the accompanying pro forma statements of operations.
SMTEK's summary financial information for this three month stub period ended
June 30, 1995 is as follows:
Sales . . . . . . . . . . . . . . . . . . . . . . . $3,359
Costs and expenses . . . . . . . . . . . . . . . . . 3,708
------
Operating loss . . . . . . . . . . . . . . . . . . (349)
Non-operating expense. . . . . . . . . . . . . . . . (23)
------
Net loss . . . . . . . . . . . . . . . . . . . . . . $ (372)
======
(B) To amortize goodwill on a straight-line basis over five years. $ 639
======
(C) To amortize debt issuance costs. . . . . . . . . . . . . . . . $ 161
======
(D) To record interest expense on the new indebtness incurred to
finance the acquisiton of SMTEK. . . . . . . . . . . . . . . . $ (440)
======
(E) DDL recognized an income tax benefit of $1,110 in September 1995 as the
result of federal tax refunds received under Section 172(f) of the Internal
Revenue Code.
F-29