-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KRA4eB1MYJxShsnZj2PEuVztfrpZlBkVcpJCeN+fYk95oSBz4tNz3JmBk2S8CEEu w27LlAi9IxIREAABsXo7LQ== 0000026987-97-000013.txt : 19980331 0000026987-97-000013.hdr.sgml : 19980331 ACCESSION NUMBER: 0000026987-97-000013 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19971010 SROS: NYSE SROS: PCX FILER: COMPANY DATA: COMPANY CONFORMED NAME: DDL ELECTRONICS INC CENTRAL INDEX KEY: 0000026987 STANDARD INDUSTRIAL CLASSIFICATION: 3672 IRS NUMBER: 330213512 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-08101 FILM NUMBER: 97694094 BUSINESS ADDRESS: STREET 1: 2151 ANCHOR COURT CITY: NEWBURY PARK STATE: CA ZIP: 91320 BUSINESS PHONE: 805-376-9415 MAIL ADDRESS: STREET 1: 2151 ANCHOR COURT CITY: NEWBURY PARK STATE: CA ZIP: 91320 FORMER COMPANY: FORMER CONFORMED NAME: DATA DESIGN LABORATORIES INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: DATA DESIGN LABORATORIES DATE OF NAME CHANGE: 19880817 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ___________ ___________ Commission File Number 1-8101 ___________ Exact Name of Registrant as Specified in Its Charter: DDL ELECTRONICS, INC. ______________________________ DELAWARE 33-0213512 _____________________________ _____________ State or Other Jurisdiction of I.R.S. Employer Incorporation or Organization No. Identification Address of Principal Executive Offices: 2151 Anchor Court Newbury Park, CA 91320 _________________________ Registrant's Telephone Number: (805) 376-9415 _________________________ Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered _________________________ ________________________________________ Common Stock, $.01 Par Value New York Stock Exchange Pacific Exchange 7% Convertible Subordinated Debentures due May 15, 2001 New York Stock Exchange 8-1/2% Convertible Subordinated Debentures due August 1, 2008 New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant based on the closing price as reported by the New York Stock Exchange on October 9, 1997 was $20,580,000. The registrant had 24,591,858 shares of Common Stock outstanding as of October 8, 1997. DOCUMENTS INCORPORATED BY REFERENCE Specified parts of the registrant's Annual Report to Stockholders for its fiscal year ended June 30, 1997 are incorporated by reference into Parts I and II hereof. Specified parts of the registrant's Proxy Statement for its 1997 Annual Meeting of Stockholders are incorporated by reference into Part III hereof. EXHIBIT INDEX See page 14 PART I Item 1. Business The Company provides customized, integrated electronic manufacturing services ("EMS") to original equipment manufacturers ("OEMs") in the compewer, telecommunications, instrumentation, medical, industrial and aerospace industries. The Company also fabricates multilayer printed circuit boards ("PCBs") for use primarily in the computer, communications and instrumentation industries. The Company's EMS operations are located in Southern California and Northern Ireland. Its PCB facilities are located in Northern Ireland. The Company entered the EMS business by acquiring its domestic EMS operations in 1985 and by organizing its European EMS operations in 1990. Since 1985, the Company has made substantial capital expenditures in its Northern Ireland EMS and PCB fabrication facilities. In fiscal 1995, the Company liquidated or sold all assets associated with its PCB and EMS operations in the United States. In fiscal 1996, the Company acquired SMTEK, Inc. ("SMTEK") as the first step toward rebuilding a domestic presence in the EMS industry. RECENT DEVELOPMENTS On May 29, 1997, the Company signed a letter of intent (the "Letter of Intent") to merge with Century Electronics Manufacturing, Inc. ("CEMI"). Pursuant to the Letter of Intent, CEMI was to provide a loan up to $3.3 million to the Company by June 1, 1997 for retirement of the Company's 10% Senior Secured Notes in the aggregate principal amount of $5,300,000 (the "Senior Notes"). However, such financing was not made available by CEMI. As a result, on June 30, 1997 the Company obtained alternate financing which enabled it to repay its Senior Notes. On September 22, 1997, the Company filed a lawsuit against CEMI, alleging breach of contract and fraud and seeking $5,000,000 in actual damages plus punitive damages. CEMI has not yet answered the Company's complaint or made an appearance in the case. The Company, with the authorization of its Board of Directors, implemented a quasi-reorganization effective June 27, 1997. The quasi- reorganization, which did not require the approval of the Company's stockholders, resulted in an elimination of the accumulated deficit of $23,678,000 by a transfer from additional paid-in capital of an equivalent amount. This deficit was attributable primarily to operations which were divested or discontinued in prior years. Following a review and evaluation by management, no adjustment was made to the carrying values of the Company's assets and liabilities because such amounts were deemed to be not in excess of estimated fair values. On June 30, 1997, in order to raise the balance of the funds necessary to repay the Senior Notes, the Company borrowed $2 million from Thomas M. Wheeler, a private investor, under a note payable bearing 8% interest. The note matures on February 1, 1999, and is secured by a pledge of the common stock of SMTEK. The Company agreed to give Mr. Wheeler two seats on its Board of Directors, which seats were filled by Mr. Wheeler and Charlene A. Gondek. The Company also agreed to acquire all of the issued and outstanding shares of Jolt Technology, Inc. ("Jolt"), a privately-held electronics manufacturing company owned by Mr. Wheeler, Ms. Gondek and a third individual, for nine million shares of the Company's common stock. Upon consummation of the Jolt acquisition, the maturity date of the $2,000,000 note payable will be extended from February 1, 1999 to October 31, 1999. The Company is currently negotiating a definitive agreement and other legal documents relating to its acquisition of Jolt. The specific terms of such documents are subject to negotiation, and the closing of the Jolt acquisition will be subject to many conditions, some of which are beyond the Company's control, including obtaining a fairness opinion and stockholder approval. There can be no assurance that the Jolt acquisition will be completed on the terms described herein, or at all. FINANCIAL INFORMATION BY BUSINESS SEGMENT AND GEOGRAPHICAL AREA The Company is engaged in two lines of business -- electronic manufacturing services and PCB fabrication. Information with respect to these segments' sales, operating income, identifiable assets, depreciation and amortization, and capital expenditures for each of the last three fiscal years is set forth in Note 13 to the consolidated financial statements of the accompanying 1997 Annual Report to Stockholders. Such information is incorporated herein by reference and is made a part hereof. ELECTRONIC MANUFACTURING SERVICES AND PRINTED CIRCUIT BOARD FABRICATION BUSINESSES The basis for the growth of the electronic manufacturing services industry in recent years has been the increasing reliance by OEMs on contract manufacturing specialists such as the Company for the manufacture of printed circuit board assemblies. As a result of outsourcing manufacturing services, the EMS industry in the United States grew at a compound annual rate of 20% from 1990 through 1996, according to the Institute for Interconnecting and Packaging Electronic Circuits ("IPC"). The IPC estimated the size of the United States EMS industry for 1996 in terms of sales to be $13.5 billion. The Company expects the trend toward outsourcing to continue and to result in continued growth in the EMS industry. The PCB fabrication market is highly fragmented. Numerous factors, however, have caused a shift toward consolidation in the PCB fabrication industry, including extreme competition, substantial excess production capacity experienced by the industry prior to the current fiscal year, the greatly increased capital and technical requirements to service the advanced multilayer PCB fabrication market and the inability of many PCB fabricators to keep up with the changing demands and expectations of customers on matters such as technical board characteristics, quality and timely delivery of product. Description of Products and Services--EMS Production of electronic assemblies for a customer is only performed when a firm order is received. Customer cancellations of orders are infrequent and are subject to cancellation charges. More often, a customer will delay shipment of orders based on its actual or anticipated needs. Customer orders are produced based on one of two production methods, either "turnkey" (where the Company provides all materials, labor and equipment associated with producing the customers' product) or "consigned" (the Company provides labor and equipment only for manufacturing product). The Company's EMS operations provide turnkey electronic manufacturing services using both surface mount and through-hole interconnection technologies. The Company conducts the EMS portion of its business through its SMTEK subsidiary in Southern California, which serves customers primarily on the West Coast of the U.S., and through its DDL Electronics Limited ("DDL-E") subsidiary, which serves customers primarily in Western Europe. SMTEK and DDL-E do not fabricate any of the components or PCBs used in these processes, but from time to time they have procured PCBs from the Company's PCB fabricator, Irlandus Circuits Limited ("Irlandus"). EMS sales represented approximately 79%, 67% and 47% of the Company's consolidated sales for the fiscal years ended June 30, 1997, 1996 and 1995, respectively. Since turnkey electronic contract manufacturing may be a substitute for all or some portion of a customer's captive EMS capability, continuous communication between the Company and the customer is critical. To facilitate such communication, the Company's EMS businesses maintain customer service departments whose personnel work closely with the customer throughout the assembly process. The Company's engineering and service personnel coordinate with the customer on the implementation of new and re- engineered products, thereby providing the customer with feedback on such issues as ease of assembly and anticipated production lead times. Component procurement is commenced after component specifications are verified and approved sources are confirmed with the customer. Concurrently, assembly routing and procedures for conformance with the workmanship standards of the IPC are defined and planned. Additionally, in-circuit test fixtures are designed and developed. In-circuit tests are normally performed on all assembled circuit boards for turnkey projects. Such tests verify that components have been properly inserted and meet certain functional standards and that electrical circuits are properly completed. In addition, under protocols specified by the customer, the Company performs customized functional tests designed to ensure that the board or assembly will perform its intended function. The Company's personnel monitor all stages of the assembly process in an effort to provide flexible and rapid responses to the customer's requirements, including changes in design, order size and delivery schedule. The materials procurement element of the Company's turnkey services consists of the planning, purchasing, expediting and financing of the components and materials required to assemble a board-level or system-level assembly. Customers have increasingly required the Company and other independent providers of electronic manufacturing services to purchase some or all components directly from component manufacturers or distributors and to finance the components and materials. In establishing a turnkey relationship with an independent provider of electronic manufacturing services, a customer typically incurs costs in qualifying that EMS provider and, in some cases, its sources of component supply, refining product design and developing mutually compatible information and reporting systems. With this relationship established, the Company believes that customers experience significant difficulty in expeditiously and effectively reassigning a turnkey project to a new assembler or in taking on the project themselves. At the same time, the Company faces the obstacle of attracting new customers away from existing EMS providers or from performing services in-house. Description of Products and Services--PCB Fabrication The Company fabricates and sells advanced, multilayer PCBs based on designs and specifications provided by the Company's customers. These specifications are developed either solely through the design efforts of the customer or through the design efforts of the customer working together with the Company's design and engineering staff. Customers submit requests for quotations on each job and the Company prepares bids based on its own cost estimates. The Company conducts its PCB fabrication business through its Irlandus subsidiary located in Northern Ireland. The Company's fabrication facilities in Anaheim, California were shut down in fiscal year 1992 and its Beaverton, Oregon facility was sold in fiscal 1995. PCB sales represented approximately 21%, 33% and 53% of the Company's consolidated sales for the fiscal years ended June 30, 1997, 1996 and 1995, respectively, with multilayer boards constituting a substantial portion of the sales. PCBs range from simple single- and double-sided boards to multilayer boards with more than 20 layers. When PCBs are joined with electronic components in the assembly process, they comprise the basic building blocks for electronic equipment. Single-sided PCBs are used in electronic games and automobile ignition systems, whereas multilayer PCBs are used in more advanced applications such as computers, office equipment, communications, instrumentation and defense systems. PCBs consist of fine lines of a conductive material, such as copper, which are bonded to a non-conductive panel, typically rigid laminated epoxy glass. The conductive pathways in the PCBs form electrical circuits and replace wire as a means of connecting electronic components. On technologically advanced multilayer boards, conductive pathways between layers are connected with traditional plated through-holes and may incorporate surface mount technology. "Through-holes" are holes drilled entirely through the board that are plated with a conductive material and constitute the primary connection between the circuitry on the different layers of the board and the electronic components attached to the boards later. "Surface mount" boards are boards on which electrical components are soldered onto the surface instead of being inserted into through-holes. Although substantially more complex and difficult to produce, surface mount boards can substantially reduce wasted space associated with through-hole technology and permit greatly increased surface and inner layer densities. The development of increasingly sophisticated electronic equipment, which combines higher performance and reliability with reduced size and cost, has created a demand for increased complexity, miniaturization and density in electronic circuitry. In response to this demand, multilayer technology is advancing rapidly on many fronts, including the widespread use of surface mount technology. More sophisticated boards are being created by decreasing the width of the tracks on the board and increasing the amount of circuitry that can be placed on each layer. Fabricating advanced multilayer PCBs requires high levels of capital investment and complex, rapidly changing production processes. As the sophistication and complexity of PCBs increase, manufacturing yields typically fall. Historically, the Company relied on tactical quality procedures, in which defects are assumed to exist and quality inspectors examine product lot by lot and board by board to identify deficiencies, using automated optical inspection and electrical test equipment. This traditional approach to quality control is not adequate, however, to produce acceptably high yields in an advanced multilayer PCB fabrication environment, as it focuses on identifying, rather than preventing, defects. In recognition of this limitation, Irlandus is striving to create a positive environment encompassing management's awareness, process understanding, and operator involvement in identifying and correcting production problems before defects occur. Quality standards The International Standards Organization ("ISO") has published internationally recognized standards of workmanship and quality. Both Irlandus and DDL-E have achieved ISO 9002 certification, which the Company believes will be increasingly necessary to attract business. SMTEK attained ISO 9001 certification in April 1997. In addition, SMTEK has been certified for Mil-Q-9858A, which is the highest military quality standard, and NHB-5300.4, which is the primary quality standard for products used in the U.S. space program. EMS Facilities 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 $29,700 during fiscal 1997 and is subject to a 4% increase each year. SMTEK has the option to extend the lease term for three renewal periods of three years each. The lease rate during the renewal periods is subject to adjustment based on changes in the Consumer Price Index for the local area. DDL-E conducts its operations from a 67,000 square foot facility in Northern Ireland that was purchased in 1989. Prior to DDL-E commencing operations in the spring of 1990, approximately 1.6 million pounds sterling (approximately $2,700,000) was expended on auto-insertion equipment, surface mount device placement equipment, wave solder equipment, visual inspection equipment and automated test equipment. The Company believes that this facility possesses the technology required to compete effectively and that the facility is capable of supporting projected growth for up to the next two years. Fabrication Facilities Irlandus occupies a 63,000 square foot production facility and an adjacent 9,000 square foot office and storage facility. Irlandus' existing capacity is expected to be adequate to meet anticipated order levels for the next three years. Markets and Customers The Company's sales in the EMS and PCB fabrication businesses and the percentage of its consolidated sales to the principal end-user markets it serves for the last three fiscal years were as follows (dollars in thousands): Year Ended June 30, ---------------------------------------------------- Markets 1997 1996 1995 ------------ ------------ ------------ ------------ Computer $ 4,322 8.8% $ 4,049 12.2% $ 7,115 24.1% Telecommunications 7,103 14.5 4,189 12.6 6,926 23.4 Commercial avionics 9,702 19.8 2,277 6.9 - - Space and satellites 2,065 4.2 949 2.9 - - Banking automation 8,089 16.5 3,155 9.5 2,607 7.0 Industrial controls & instrumentation 7,189 14.7 7,621 23.0 6,044 20.4 Medical 1,906 3.9 4,429 13.4 4,668 15.8 Defense 4,666 9.6 3,897 11.8 1,362 4.6 Other 3,877 8.0 2,569 7.8 1,394 4.7 ------ ----- ------ ----- ------ ----- Total $48,919 100.0% $33,136 100.0% $29,576 100.0% ====== ===== ====== ===== ====== ===== The Company markets its EMS and PCB fabrication services through both a direct sales force and independent manufacturers' representatives. The Company's marketing strategy is to develop close relationships with, and to increase sales to, certain existing and new major EMS and PCB fabrication customers. This includes becoming involved at an early stage in the design of PCBs for these customers' new products. The Company believes that this strategy is necessary to keep abreast of rapidly changing technological needs and to develop new EMS and PCB fabrication processes, thereby enhancing the Company's EMS and PCB capabilities and its position in the industry. As a result of this strategy, however, fluctuations experienced by one or more of these customers in demand for their products may have and have had adverse effects on the Company's sales and profitability. During fiscal 1997, the Company's EMS and PCB businesses served approximately 60 and 150 customers, respectively. The Company's five largest customers accounted for 47%, 37% and 21% of consolidated sales during fiscal years 1997, 1996 and 1995, respectively. In fiscal 1997 the Company's two largest customers accounted for approximately 18.4% and 16.5% of consolidated sales, respectively. No other customer accounted for more than 10% of consolidated sales. Raw Materials and Suppliers In its EMS business, the Company uses numerous suppliers of electronic components and other materials. The Company's customers may specify the particular manufacturers and components, such as the Intel Pentium microprocessor, to be used in the EMS process. To the extent these components are not available on a timely basis or are in short supply because of allocations imposed by the component manufacturer, and the customer is unwilling to accept a substitute component, delays may occur. Such delays are experienced in the EMS business from time to time and have caused sales and inventory fluctuations in the Company's EMS business. The principal materials used by the Company in its PCB fabrication processes are copper laminate, epoxy glass, copper alloys, gold and various chemicals, all of which are readily available to the Company from various sources. The Company believes that its sources of materials for its fabrication business are adequate for its needs and that it is not substantially dependent upon any one supplier. Industry Conditions and Competition The markets in which the EMS and PCB fabrication businesses operate are intensely competitive and have experienced excess production capacity during the past few years. Seasonality is not a significant factor in the EMS and PCB fabrication businesses. Competition is principally based on price, product quality, technical capability and the ability to deliver products on schedule. Both the price of and the demand for EMS and PCBs are sensitive to economic conditions, changing technologies and other factors. The technology used in EMS and fabrication of PCBs is widely available, and there are a large number of domestic and foreign competitors. Many of these firms are larger than the Company and have significantly greater financial, marketing and other resources. In addition, the Company faces a competitive disadvantage against better financed competitors because the Company's current financial situation causes certain customers to be reluctant to do business with the Company's operating units. Many of the Company's competitors have also made substantial capital expenditures in recent years and operate technologically advanced EMS and fabrication facilities. Furthermore, some of the Company's customers have substantial in-house EMS capability, and to a lesser extent, PCB fabrication capacity. There is a risk that when these customers are operating at less than full capacity they will use their own facilities rather than purchase from the Company. Despite this risk, management believes that the Company has not experienced a significant loss of business to in-house fabricators or assemblers. There also are risks that other customers, particularly in the EMS market, will develop their own in-house capabilities, that additional competitors will acquire the ability to produce advanced, multilayer boards in commercial quantities, or the ability to provide EMS, and that foreign firms, including large, technologically advanced Japanese firms, will increase their share of the United States or European market. Price competition is particularly intense in the computer market, which in fiscal year 1995 was the Company's largest market segment. This has caused price erosion and lower margins, particularly in the Company's PCB fabrication business. Significant improvement in the Company's PCB gross margins may not be achieved in the near future due to excess PCB production capacity worldwide and substantial competitive pressures in the Company's principal markets. Generally, the Company's customers are reducing inventory levels and seeking lower prices from their vendors, such as the Company, to compete effectively. GENERAL Backlog At June 30, 1997, 1996 and 1995, the Company's EMS and PCB fabrication businesses had combined backlogs of $28,587,000, $17,669,000 and $9,247,000, respectively. Backlog at June 30, 1997 and 1996 includes SMTEK, the EMS business acquired by the Company in January 1996. The Company's backlog at June 30, 1995 consisted only of the backlog of the Company's European subsidiaries. Backlog is comprised of orders believed to be firm for products that have scheduled shipment dates during the next 12 months. Some orders in the backlog may be canceled under certain conditions. Historically, a substantial portion of the Company's orders have been for shipment within 90 days of the placement of the order and, therefore, backlog information as of the end of a particular period is not necessarily indicative of trends in the Company's business. In addition, the timing of orders from major customers may result in significant fluctuations in the Company's backlog and operating results from period to period. Environmental Regulation In the early 1970s, one of the Company's former California-based PCB operating units, Aeroscientific Corp. ("Aero Anaheim"), disposed of certain quantities of waste at the Stringfellow hazardous waste disposal site in Riverside County, California, which was subsequently designated as a Superfund site by the U.S. Environmental Protections Agency ("EPA"). Aero Anaheim's waste accounted for less than three one-hundreds of one percent of the total waste deposited at this site. Aero Anaheim, which since 1991 has been an inactive, insolvent subsidiary of the Company, established a reserve of $120,000 as its share of the estimated environmental remediation costs based on its relative contribution to the total wastes disposed at this site. The EPA contends that site owners and operators and waste generators are jointly and severally liable under federal law. Nonetheless, the Company believes that the final allocation of liability will generally be made based on relative contributions of waste. Furthermore, even if joint liability were to be imposed, the Company believes that the risk is remote that Aero Anaheim's ultimate liability in this matter would exceed its reserve, because the other generators of wastes disposed at the Stringfellow site include numerous companies with assets and equity significantly greater than Aero Anaheim. The Company believes that Aero Anaheim's reserve is adequate to cover future costs associated with this matter. The Company is aware of certain chemicals that exist in the ground at Aero Anaheim's previously leased facility in Anaheim. The Company, which was a guarantor of Aero Anaheim's facility lease, has notified the appropriate governmental agencies and is proceeding with remediation and investigative studies regarding soil and groundwater contamination. The installation of water and soil extraction wells was completed in August 1994. In May 1995, the Company retained an environmental engineering firm to begin the vapor extraction of pollutant from the soil and to perform quarterly groundwater monitoring. In April 1997, the Company ceased soil vapor extraction procedures at this site because the pollutant recovery rate had declined to and stabilized at a very low level at which vapor extraction is no longer a cost effective recovery technique. The property owner is currently conducting a soil gas study at the site which is expected to provide information as to the remaining contamination in the soil. It is not yet known whether further soil remediation work will be necessary. Investigative work to determine the full extent of potential groundwater pollution has not yet been completed. Consequently, a complete and accurate estimate of the full and potential costs cannot be determined at this time. The Company believes, however, that the resolution of these matters could require a significant cash outlay. Initial estimates from environmental engineering firms indicate that it could cost from $1,000,000 to $3,000,000 to fully clean up the site and could take as long as ten years to complete. The Company and Aero Anaheim entered into an agreement to share the costs of environmental remediation with the owner of the Anaheim property. Under this agreement, the Company is obligated to pay 80% of the site's total remediation costs up to $725,000 (i.e., up to the Company's $580,000 share) with any costs above $725,000 being shared equally between the Company and the property owner. Through June 30, 1997, the Company has paid $538,000 as its share of the remediation costs (including cash placed in an escrow account for payment of expenses). At June 30, 1997, the Company has a reserve of $564,000, which represents its estimated share of future remediation costs at this site. Based on consultation with the environmental engineering firms, management believes that the Company has made adequate provision for the liability based on probable loss. It is possible, however, that the future remediation costs at this site could differ significantly from the estimates, and may exceed the amount of the reserve. Employees At June 30, 1997, the Company had approximately 500 employees. Item 2. Properties The following table lists principal plants and properties of the Company and its subsidiaries: Owned Square or Location Footage Leased ------------ ------ ------ Newbury Park, California 45,000 Leased Craigavon, Northern Ireland 63,000 Owned Craigavon, Northern Ireland 67,000 Owned Craigavon, Northern Ireland 9,000 Owned The Northern Ireland properties are pledged as security for installment loans payable to the Industrial Development Board for Northern Ireland, from which the properties were purchased. These loans had an aggregate outstanding balance of approximately $1,300,000 at June 30, 1997. Item 3. Legal Proceedings On September 22, 1997, the Company commenced litigation against CEMI in the Superior Court of the State of California for Ventura County over CEMI's breach of a financing agreement entered into in May 1997. See "Item 1. Business -- Recent Developments." The Company's complaint includes claims for breach of contract and fraud and seeks $5,000,000 in actual damages plus punitive damages. CEMI has not yet answered the complaint or made an appearance in the case. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The information set forth under the caption "Market and Dividend Information" in the Company's 1997 Annual Report to Stockholders is incorporated herein by reference and made a part hereof. Item 6. Selected Financial Data The information set forth under the caption "Five-Year Financial Summary" in the Company's 1997 Annual Report to Stockholders is incorporated herein by reference and made a part hereof. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information set forth under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" ("MD&A") in the Company's 1997 Annual Report to Stockholders is incorporated herein by reference and made a part hereof. Certain statements made in the MD&A, in the president's letter to stockholders which appears on page 1 of the Company's 1997 Annual Report to Stockholders, and elsewhere in the notes to consolidated financial statements included in such Annual Report to Stockholders, are forward- looking in nature and reflect the Company's forecasts, current expectations and anticipated future plans. Such statements involve various risks and uncertainties that could cause actual results to differ materially from those forecast in the statements. Factors that might cause such differences would include, without limitation, the factors described as "Risk Factors" in the Company's Registration Statement on Form S-3 filed with the Securities and Exchange Commission on July 16, 1997. Item 8. Financial Statements and Supplementary Data Reference is made to the financial statements later in this Report under Item 14. Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. PART III Item 10. Directors and Executive Officers of the Registrant This information is incorporated by reference to the Company's proxy statement for its 1997 Annual Meeting of Stockholders. Item 11. Executive Compensation This information is incorporated by reference to the Company's proxy statement for its 1997 Annual Meeting of Stockholders. Item 12. Security Ownership of Certain Beneficial Owners and Management This information is incorporated by reference to the Company's proxy statement for its 1997 Annual Meeting of Stockholders. Item 13. Certain Relationships and Related Transactions This information is incorporated by reference to the Company's proxy statement for its 1997 Annual Meeting of Stockholders. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 1997 Annual Report to Stockholders ------ (a)(1) List of Financial Statements List of data incorporated by reference: Report of KPMG Peat Marwick LLP on consolidated financial statements 12 Consolidated balance sheets as of June 30, 1997 and 1996 13 Consolidated statements of operations for the years ended June 30, 1997, 1996 and 1995 15 Consolidated statements of cash flows for the years ended June 30, 1997, 1996 and 1995 16 Consolidated statements of stockholders' equity (deficit) for the years ended June 30, 1997, 1996 and 1995 17 Notes to consolidated financial statements 18 (a)(2) Financial Statement Schedules The financial statement schedules are omitted because they are either not applicable or the information is included in the notes to consolidated financial statements. Form 10-K ------- (a)(3) List of Exhibits: Exhibit Index 14 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (continued) (b) Reports on Form 8-K: On June 11, 1997, a Form 8-K was filed regarding a letter of intent entered into on May 29, 1997 with Century Electronics Manufacturing, Inc. providing for the merger of Century with and into a wholly-owned subsidiary of DDL. On June 12, 1997, a Form 8-K was filed regarding the sale of 2,000,000 shares of Common Stock to a group of private investors. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on October 8, 1997. DDL ELECTRONICS, INC. /s/ Gregory L. Horton ----------------------- Gregory L. Horton Chief Executive Officer, President and Chairman of the Board of Directors Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Gregory L. Horton Chief Executive Officer, October 8, 1997 - - ----------------------- President and Chairman ------------------ Gregory L. Horton of the Board /s/ Richard K. Vitelle Vice President-Finance and October 8, 1997 - - ----------------------- Administration, Chief ------------------ Richard K. Vitelle Financial Officer, Treasurer, Secretary and Director /s/ Karen B. Brenner Director October 8, 1997 - - ----------------------- ------------------ Karen B. Brenner /s/ Melvin Foster Director October 8, 1997 - - ----------------------- ------------------ Melvin Foster /s/ Charlene A. Gondek Director October 8, 1997 - - ----------------------- ------------------ Charlene A. Gondek /s/ Thomas M. Wheeler Director October 8, 1997 - - ----------------------- ------------------ Thomas M. Wheeler /s/ Robert G. Wilson Director October 8, 1997 - - ----------------------- ------------------ Robert G. Wilson EXHIBIT INDEX Exhibit Number Description - - ------ ----------- 2.1 Jolt Technology Inc. Acquisition Term Sheet dated June 30, 1997. 2.2 Letter of intent dated as of May 29, 1997 between the Company and Century Electronics Manufacturing, Inc. concerning a possible merger (incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K filed on June 11, 1997). 3.1 Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 4.1 of the Company's Registration Statement on Form S-8, Commission File No. 33-7440). 3.2 Bylaws of the Company, amended and restated effective March 1995 (incorporated by reference to Exhibit 3-b of the Company's 1995 Annual Report on Form 10-K). 4.1 Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock of the Company (incorporated by reference to Exhibit 4.2 of the Company's Registration Statement on Form S-8, Commission File No. 33-7440). 4.2 Certificate of Designation, Preferences and Rights of Series B Convertible Preferred Stock of the Company (incorporated by reference to Exhibit 4.3 of the Company's Registration Statement on Form S-8, Commission File No. 33-7440). 4.3 Indenture dated July 15, 1988, applicable to the Company's 8-1/2% Convertible Subordinated Debentures due August 1, 2008 (incorporated by reference to Exhibit 4-c of the Company's 1988 Annual Report on Form 10-K). 4.3.1 Supplemental Indenture relating to the Company's 8-1/2% Convertible Subordinated Debentures due August 1, 2008 (incorporated by reference to Exhibit 4-b of the Company's 1991 Annual Report on Form 10-K). 4.4 Indenture relating to the Company's 7% Convertible Subordinated Debentures due 2001 (incorporated by reference to Exhibit 4-c of the Company's 1991 Annual Report on Form 10-K). 4.5 Rights Agreement dated as of June 10, 1989, between the Company and Bank of America, as Rights Agent (incorporated by reference to Exhibit 1 to the Company's Report on Form 8-K dated June 15, 1989). 4.5.1 Amendment to Rights Agreement dated as of February 21, 1991, amending the Rights Agreement dated as of June 10, 1989, between the Company and Bank of America, as Rights Agent (incorporated by reference to Exhibit 4.7 of Registration Statement No. 33-39115). 4.6 Series C Warrant Agreement dated as of July 1, 1995 between the Company and Fechtor, Detwiler & Co., Inc. covering 250,000 shares and expiring on June 30, 2000 (incorporated by reference to Exhibit 4-f of the Company's Registration Statement on Form S-3, Commission File No. 333-02969). 4.7 Series C Warrant Agreement dated as of July 1, 1995 between the Company and Fortuna Capital Management covering 100,000 shares and expiring on June 30, 2000 (incorporated by reference to Exhibit 4-g of the Company's Registration Statement on Form S-3, Commission File No. 333-02969). 4.8 Series C Warrant Agreement dated as of July 1, 1995 between the Company and Karen Brenner covering 50,000 shares and expiring on June 30, 2000 (incorporated by reference to Exhibit 4-h of the Company's Registration Statement on Form S-3, Commission File No. 333-02969). 4.9 Series C Warrant Agreement dated as of July 1, 1995 between the Company and Barry Kaplan covering 15,000 shares and expiring on June 30, 2000 (incorporated by reference to Exhibit 4-k of the Company's Registration Statement on Form S-3, Commission File No. 333-02969). 4.10 Series D Warrant Agreement dated as of July 1, 1995 between the Company and Charles Linn Haslam covering 250,000 shares and expiring on June 30, 2000 (incorporated by reference to Exhibit 4-i of the Company's Registration Statement on Form S-3, Commission File No. 333-02969). 4.11 Form of Series E Warrant dated February 29, 1996 covering an aggregate 1,500,000 shares and expiring on February 28, 2001 (incorporated by reference to Exhibit 4-n of the Company's Registration Statement on Form S-3, Commission File No. 333-02969). 4.12 Form of Warrant and Contingent Payment Agreement for Series G Warrants dated as of March 31, 1996 between the Company and each of several former officers, key employees and directors of the Company under various consulting agreements and deferred fee arrangements covering an aggregate 595,872 shares expiring on June 1, 1998 (incorporated by reference to Exhibit 4-l of the Company's Registration Statement on Form S-3, Commission File No. 333-02969). 4.13 Form of Warrant Agreement for Series H Warrants dated July 1, 1995 among the Company and each of several current or former non-employee directors covering an aggregate of 300,000 shares expiring on June 30, 2000 (incorporated by reference to Exhibit C of the Company's Proxy Statement for the fiscal 1995 Annual Stockholders Meeting). 4.14 Securities Purchase Agreement dated February 29, 1996 relating to the Company's 10% Senior Secured Notes due July 1, 1997 issued February 29, 1996 in the aggregate amount of $5,300,000 ("Securities Purchase Agreement") (incorporated by reference to Exhibit 4-m of the Company's Registration Statement on Form S-3, Commission File No. 333-02969). 4.15 Common Stock Purchase Agreement dated as of June 3, 1997 covering the sale of 2,000,000 shares of Common Stock to a group of private investors (incorporated by reference to Exhibit 4.1 of the Company's Current Report on Form 8-K filed on June 12, 1997). 4.16 Debt Term Sheet dated June 30, 1997 between the Company and Thomas M. Wheeler. 4.16.1 Secured promissory note dated June 30, 1997 in the principal amount of $2 million between the Company and Thomas M. Wheeler. 4.16.2 Collateral Security Stock Pledge Agreement dated June 30, 1997 between the Company and Thomas M. Wheeler. 10.1 1985 Stock Incentive Plan (incorporated by reference to Exhibit 4a of Registration Statement No. 33-3172). 10.2 1987 Stock Incentive Plan (incorporated by reference to Exhibit 4a of Registration Statement No. 33-18356) 10.3 1991 General Nonstatutory Stock Option Plan (incorporated by reference to Exhibit 10-cf of the Company's 1993 Annual Report on Form 10-K). 10.4 1993 Stock Incentive Plan (incorporated by reference to Exhibit 4.7 of the Company's Registration Statement on Form S-8, Commission file No. 33-74400). 10.5 1996 Stock Incentive Plan (incorporated by reference to Exhibit A of the Company's Proxy Statement for the fiscal 1995 Annual Stockholders Meeting). 10.6 1996 Non-Employee Directors Stock Option Plan (incorporated by reference to Exhibit B of the Company's Proxy Statement for the fiscal 1995 Annual Stockholders Meeting). 10.7 Form of Indemnity Agreement with officers and directors (incorporated by reference to Exhibit 10-o of the Company's 1987 Annual Report on Form 10-K). 10.8 Standard Industrial Lease-Net dated August 1, 1984, among the Company, Aeroscientific Corp., and Bradmore Realty Investment Company, Ltd. (incorporated by reference to Exhibit 10-w of the Company's 1990 Annual Report on Form 10-K). 10.8.1 Second Amendment to Lease among Bradmore Realty Investment Company, Ltd., the Company and the Company's Aeroscientific Corp. subsidiary, dated July 2, 1993 (incorporated by reference to Exhibit 10-cd of Registration Statement No. 33-63618). 10.9 Standard Industrial Lease - Net dated October 15, 1992, between L.N.M. Corporation-Desert Land Managing Corp. and the Company's A.J. Electronics, Inc. subsidiary (incorporated by reference to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended October 2, 1993). 10.10 Grant Agreement dated September 16, 1987 between Irlandus Circuits Limited and the Industrial Development Board for Northern Ireland ("IDB") (incorporated by reference to Exhibit 10.13 of the Company's Registration Statement No. 33-22856). 10.10.1 Agreement dated March 10, 1992 between Irlandus Circuits Limited and the IDB amending the Grant Agreement dated September 16, 1987, between Irlandus and the IDB (incorporated by reference to Exhibit 10-br of the Company's 1992 Annual Report on Form 10-K). 10.11 Grant Agreement dated August 29, 1989, between DDL Electronics Limited and the IDB (incorporated by reference to Exhibit 10.29 of the Company's Registration Statement No. 33-39115). 10.11.1 Agreement dated May 2, 1996, between DDL Electronics Limited and the IDB amending the Grant Agreement dated August 29, 1989, between DDL Electronics and the IDB (incorporated by reference to Exhibit 10.11.1 filed with the Company's 1996 Annual Report on Form 10-K). 10.12 Form of Land Registry for the Company's Northern Ireland subsidiaries dated November 4, 1993 (incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report of Form 10-Q for the quarter ended September 30, 1993). 10.13 Business Financing Agreement dated August 21, 1996 between SMTEK, Inc. and Deutsche Financial Services Corporation (incorporated by reference to Exhibit 10 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996). 10.14 Employment Agreement and Letter of Understanding and Agreement dated October 15, 1995 between the Company and Gregory L. Horton (incorporated by reference to Exhibit 99.2 filed with the Company's Current Report on Form 8-K dated January 12, 1996). 10.15 Employment Agreement dated September 12, 1996 between the Company and Richard K. Vitelle (incorporated by reference to Exhibit 10.15 filed with the Company's 1996 Annual Report on Form 10-K) 11 Statement re Computation of Per Share Earnings.* 13 Annual Report to security holders.* 21 Subsidiaries of the Registrant.* 23 Consent of KPMG Peat Marwick, LLP.* 27 Financial Data Schedule.* 99 Undertaking for Form S-8 Registration Statement.* * These exhibits are incorporated by reference to the Company's 1997 Annual Report on Form 10-K filed with the Securities and Exchange Commission on October 10, 1997. EX-2 2 EXHIBIT 2.1 JOLT ACQUISITION TERM SHEET When signed by all parties, this Term Sheet will memorialize the terms and conditions of a binding agreement between Thomas M. Wheeler ("Wheeler") and DDL Electronics, Inc. ("DDL") as to all of the terms herein set forth. This agreement may be supplemented by additional definitive agreements, instruments and other documents including terms and conditions customary in transactions of this nature but not inconsistent herewith. The terms set forth herein shall not be further modified or negotiated without the consent of both parties and shall be included in the definitive agreements. 1. DDL will acquire all of the issued and outstanding shares of Jolt Technology, Inc. in exchange for nine million shares of DDL common stock. 2. Registration Requirement: DDL will register these shares on the next available registration of stock, but not later than twelve months from closing. 3. Lock-up Period: A lock-up period of three months from closing will be established in the final documents. 4. Closing: This transaction will close as soon as possible after approval of the issuance of the 9 million shares of common stock by DDL stockholders. Stockholder approval will be requested at the next scheduled stockholder meeting. Management and the Board of Directors agree to support stockholder approval. If stockholder approval is not obtained, this transaction shall terminate without liability to either party. 5. Jolt will have at closing, book value of at least $1.5 million of which not less than $600,000 will be in cash. There will be no shareholder debt on the Company's books. 6. DDL will seek a fairness opinion for this transaction. If such an opinion cannot be obtained after reasonable attempts to do so in which representatives of Jolt may participate this transaction shall terminate without liability to either party. 7. If it is determined that the consummation of this transaction will violate any securities laws or regulations or the rules of the New York Stock Exchange, this transaction shall terminate without liability to either party. Agreed as of June 30, 1997: DDL ELECTRONICS, INC. By: /s/ Gregory L. Horton ---------------------------------- Gregory L. Horton President & CEO /s/ Thomas M. Wheeler ----------------------------------- Thomas M. Wheeler /s/ Charlene Ann Gondek ----------------------------------- Charlene Ann Gondek EX-4 3 EXHIBIT 4.16 DEBT TERM SHEET When signed by all parties, this Term Sheet will memorialize the terms and conditions of a binding agreement between Thomas M. Wheeler ("Wheeler") and DDL Electronics, Inc. ("DDL") as to all of the terms herein set forth. This agreement may be supplemented by additional definitive agreements, instruments and other documents including terms and conditions customary in transactions of this nature but not inconsistent herewith. The terms set forth herein shall not be further modified or negotiated without the consent of both parties and shall be included in the definitive agreements. 1. Wheeler's Advance: Not later than June 30, 1997, Wheeler will advance $2 million to DDL in immediately available funds for the purpose of prepaying DDL's outstanding senior secured notes on June 30, 1997. 2. Promissory Note: DDL will issue to Wheeler a secured non- negotiable Promissory Note bearing simple interest, payable at maturity, at eight percent (8%) per annum, in the form attached hereto as Exhibit "A" and made a part hereof by this reference. Said Promissory Note shall have an initial maturity date of February 1, 1999, which is subject to extension to October 31, 1999, upon the fulfillment of the condition set forth in the Note. 3. Prepayment Option: Provisions will be included in the final documents for prepayment of the note any time after sixty days from closing. Prepayment will require thirty (30) days advance written notice from DDL. 4. Security: The note will be secured by a pledge of all of the outstanding common stock of SMTEK, Inc. as collateral. 5. Corporate Governance: Wheeler will be given the right to select two representatives on DDL's Board of Directors immediately upon funding. DDL will reconstitute its Board to make two Director positions available within the seven existing positions. Gregory L. Horton and Richard K. Vitelle will remain on the Board. Agreed as of June 30, 1997: DDL ELECTRONICS, INC. By: /s/ Gregory L. Horton /s/ Thomas M. Wheeler ---------------------------------- ------------------------- Gregory L. Horton, President & CEO Thomas M. Wheeler EX-4 4 EXHIBIT 4.16.1 EXHIBIT A NEITHER THIS NOTE, NOR THE SECURITIES BY WHICH THIS NOTE HAS BEEN SECURED, HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933 OR WITH ANY STATE SECURITIES COMMISSIONER OR AUTHORITY. NEITHER THIS NOTE NOR SUCH SECURITIES MAY BE SOLD OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR AN APPLICABLE EXEMPTION TO THE REGISTRATIONS REQUIREMENTS OF SUCH ACT OR SUCH LAWS. SECURED, FULL RECOURSE, NON-NEGOTIABLE PROMISSORY NOTE Los Angeles, California June 30, 1997 $2,000,000.00 FOR VALUE RECEIVED, DDL ELECTRONICS, INC., a Delaware Corporation ("Maker" or "DDL") hereby promises to pay to THOMAS M. WHEELER ("Holder") the principal sum of Two Million and No/100 Dollars ($2,000,000.00), together with simple interest on the principal amount outstanding from the date of this Note, until paid, at the rate of eight percent (8%) per annum. Principal and interest shall be payable in lawful money of the United States at Los Angeles, California, or such other place as the Holder hereof may designate in writing to Maker. All interest will be calculated on the basis of a year of three hundred and sixty five days. The principal amount of this Note and all accrued interest shall be due and payable in full on February 1, 1999, except that such principal and interest shall instead be payable in full on October 31, 1999 (rather than February 1, 1999) if but only if prior to February 1, 1999: (1) the Maker acquires all of the issued and outstanding shares of Jolt Technology, Inc. in exchange for shares of DDL common stock and such common stock has been registered with the Securities and Exchange Commission; and (2) Thomas M. Wheeler is not prevented by agreement with the Maker from transferring to a charitable foundation selected by him the DDL common stock received by him in the transaction contemplated by clause (1). The satisfaction of the conditions articulated in clauses (1) and (2) of the immediately preceding sentence shall be determined by the Maker in its sole discretion. Any and all payments shall be applied first to accrued interest and second to reduction of principal. If any installment of principal or interest is not paid within fifteen (l5) days after the mailing of written notice to the Maker to the effect that the installment is due and has not been paid or that the Maker is in default in the performance of any of its other covenants or agreements in this Note, in the Stock Pledge Agreement of even date herewith or in any instrument now or hereafter evidencing or securing this Note or the obligation represented hereby, then the entire indebtedness evidenced hereby (principal and interest) remaining unpaid shall, at the option of the Holder, become immediately due, payable and collectable. Overdue principal and interest shall bear interest at the maximum rate permitted by law from maturity until paid, accruing at such rate even after entry of final judgment for payment of same. The Maker waives notice of dishonor, protest, and notice of protest of this Note. The Maker further agrees to pay all costs of collection, including reasonable attorneys' fees and disbursements of the Holder (including fees on appeal), in case the principal of or any interest on this Note is not paid when due, or in case it becomes necessary to protect the security hereof, whether suit be brought or not. This Note is issued pursuant to and secured by a Stock Pledge Agreement of even date herewith, and all of the terms and conditions set forth in such Stock Pledge Agreement are hereby made a part of this Note. A breach of any obligation created by such Stock Pledge Agreement shall constitute a breach of DDL's obligations under this Note and shall result in the acceleration of any amounts due hereunder as and to the extent specified above. This Note may be prepaid by DDL in whole or in part at any time and from time to time after August 29, 1997, provided that DDL shall have given Holder at least thirty (30) days' advance written notice in each instance of its intention to prepay. In addition to the acceleration rights set forth hereinabove, the Holder hereof shall be entitled to accelerate the entire unpaid principal amount hereof and any accrued interest thereon forthwith against the Maker hereof upon the occurrence of any of the following events: (a) the Maker shall make a general assignment for the benefit of creditors or if any bankruptcy, insolvency or reorganization proceeding of any nature under federal or state statutes shall be commenced by or against the Maker, or a receiver shall be appointed, or a writ or order of attachment or garnishment shall be issued or made against any of the property, assets or income of the Maker; or (b) the failure of the Maker to do all things necessary to preserve and maintain the collectability of any collateral now or hereafter securing the obligations created hereunder. This Note shall be governed and construed in all respects in accordance with the internal laws of the State of California, exclusive of its choice of laws principles, and the Maker hereby submits and consents to the personal jurisdiction of any court of competent subject matter jurisdiction therein for the sole and limited purpose of enforcing this Note. The total charges for interest and in the nature of interest under this Note shall not exceed the maximum amount allowed by law. Should any interest paid by Maker result in the computation or earning of interest in excess of the maximum lawful rate, any excess portion of such charges shall be credited against and in reduction of the principal balance, or any portion of the excess that exceeds the principal balance shall be refunded to the Maker, as elected by the Maker. No delay by the Holder in enforcing any covenant or right hereunder shall be deemed a waiver of such covenant or right, and no waiver by the Holder of any particular provision hereof shall be deemed a waiver of any other provisions or a continuing waiver of such particular provision and, except as so expressly waived, all provisions hereof shall continue in full force and effect. [SEAL] "Maker" DDL ELECTRONICS, INC. /s/ Gregory L. Horton -------------------------- By: GREGORY L. HORTON President ATTEST: /s/ Richard K. Vitelle -------------------------- By: RICHARD K. VITELLE Secretary EX-4 5 EXHIBIT 4.16.2 COLLATERAL SECURITY STOCK PLEDGE AGREEMENT This AGREEMENT is made and entered into on June 30, 1997, by and between DDL ELECTRONICS, INC. ("Pledgor" and "Debtor"), and THOMAS M. WHEELER ("Pledgee" and "Creditor"). RECITALS At the time of the execution of this Agreement the Pledgee lent the Debtor, TWO MILLION DOLLARS ($2,000,000.00) evidenced by the promissory note of the Pledgor dated June 30, 1997. To induce the Pledgee to make the loan, the Pledgor has agreed to pledge certain stock to the Pledgee as security for the repayment of the loan. It is therefore agreed: PLEDGE 1. In consideration of the sum TWO MILLION DOLLARS ($2,000,000.00) lent to the Pledgor by the Pledgee, receipt of which is acknowledged, the Pledgor grants a security interest to the Pledgee in instruments of the following describe description: ALL OF THE ISSUED AND OUTSTANDING COMMON AND PREFERRED STOCK OF SMTEK, INC. A CALIFORNIA CORPORATION, EVIDENCED BY CERTIFICATE NUMBER 50 STANDING IN THE NAME OF DDL ELECTRONICS, INC. AND REPRESENTING 250,000 SHARES OF THE COMMON STOCK OF SMTEK, INC. Said certificates shall be duly endorsed in blank and delivered to the Pledgee with this Agreement. The Pledgor appoints the Pledgee as his attorney-in-fact to arrange for the transfer of the pledged shares on the books of the issuer to the name of the Pledgee. The Pledgee shall hold the pledged shares as security for the repayment of the loan, and shall not encumber or dispose of the shares except in accordance with the provisions of Paragraph 8 of this Agreement. DIVIDENDS 2. During the term of this pledge, all dividends and other amounts received by the Pledgee as a result of the Pledgee's record ownership of the pledged shares shall be applied to the payment of the principal and interest on the loan. This provision shall not apply to intercompany transfers in the ordinary course of business. VOTING RIGHTS 3. During the term of this pledge, and as long as the Pledgor not in default in the performance of any of the terms of this Agreement or in the payment of the principal or interest of the loan, the Pledgor shall have the right to vote the pledged shares on all corporate questions. The Pledgee shall execute due and timely proxies in favor of the Pledgor to this end. REPRESENTATIONS 4. The Pledgor warrants and represents that there are no restrictions on the transfer of any of the pledged shares, other than may appear on the face of the certificates and that the Pledgor has the right to transfer the shares free of any encumbrances and without obtaining the consents of the over shareholders. ADJUSTMENT 5. In the event that, during the term of this pledge, any share dividend, reclassification, readjustment, or other change is declared or made in the capital structure of the company that has issued the pledged shares, all new, substituted, and additional shares or other securities issued by reason of any change shall be held by the Pledgee in the same manner as the shares originally pledged under this Agreement. WARRANTS AND RIGHTS 6. In the event that during the term of this pledge, subscription warrants or any other tights or options shall be issued in connection with the pledged shares, the warrants, rights, and options shall be immediately assigned by the Pledgee to the Pledgor, and if exercised by the Pledgor, all new shares or other securities so acquired by the Pledgor shall be immediately assigned to the Pledgee to be held in the same manner as the shares originally pledged under this Agreement. PAYMENT OF LOAN 7. On payment at or before maturity of the principal and interest of the loan, less amounts received and applied by the Pledgee in reduction of the loan, the Pledgee shall transfer to the Pledgor all the pledged shares and all rights received by the Pledgee as a result of the Pledgee's record ownership of the pledged shares. DEFAULT 8. In the event that the Pledgor defaults in the performance of any of the terms of this Agreement, or in the payment at maturity of the principal or interest of the loan, the Pledgee shall have the rights and remedies provided in the California Commercial Code. In this connection, the Pledgee may, on five days' written notice to the Pledgor and without liability for any diminution in price that may have occurred, sell all the pledged shares in the manner and for the price that the Pledgee may determine at either public or private sale. At any bona fide public or private sale the Pledgee shall be free to, purchase all or any part of the pledged shares. In the event that Pledgee purchases the shares at a private sale, the minimum bid by the Pledgee shall be the then outstanding balance of principal and interest on the loan. Out of the proceeds of any sale the Pledgee may retain an amount equal to the principal and interest then due on the loan, plus the amount of the expenses of the sale, and shall pay any balance of the proceeds of any sale to the Pledgor. If the proceeds of the sale are insufficient to cover the principal and interest of the loan plus expenses of the sale, the Pledgor shall remain liable to the Pledgee for any deficiency in accordance with the provisions set forth in Commercial Code Section 9504. DATED: JUNE 30, 1997 PLEDGOR PLEDGEE DDL ELECTRONICS, INC. THOMAS M. WHEELER /s/ Gregory L. Horton /s/ Thomas M. Wheeler ------------------------- ----------------------- GREGORY HORTON, PRESIDENT THOMAS M. WHEELER EX-11 6 EXHIBIT 11 (1 of 2) DDL ELECTRONICS, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE Year Ended June 30 ------------------------------------ 1997 1996 1995 ---- ---- ---- PRIMARY EARNINGS PER SHARE: Loss before extraordinary item $(1,678,000) $ (758,000) $(2,366,000) Extraordinary item - 2,356,000 2,441,000 ---------- ---------- ---------- Net income (loss) $(1,678,000) $ 1,598,000 $ 75,000 ========== ========== ========== Weighted average number of common shares outstanding 23,150,071 18,180,034 15,149,968 Assumed exercise of options and warrants net of shares assumed reacquired 247,537 626,830 820,549 ---------- ---------- ---------- Average common shares and common share equivalents 23,397,608 18,806,864 15,970,517 ========== ========== ========== Primary earnings per share: Loss before extraordinary item $(0.07) $(0.04) $(0.15) Extraordinary item - 0.13 0.15 ---- ---- ---- Earnings (loss) per share $(0.07) $ 0.09 $ - ==== ==== ==== EXHIBIT 11 (2 of 2) DDL ELECTRONICS, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE Year Ended June 30 ------------------------------------ 1997 1996 1995 ---- ---- ---- FULLY DILUTED EARNINGS PER SHARE: Loss before extraordinary item $(1,678,000) $ (758,000) $(2,366,000) Add back net interest related to convertible subordinated debentures 134,000 204,000 134,000 ---------- ---------- ---------- Loss before extraordinary item for fully diluted computation (1,544,000) (554,000) (2,232,000) Extraordinary item - 2,356,000 2,441,000 ---------- ---------- ---------- Net income (loss) for fully diluted computation $(1,544,000) $ 1,802,000 $ 209,000 ========== ========== ========== Weighted average number of common shares outstanding 23,150,071 18,180,034 15,149,968 Assumed exercise of options and warrants net of shares assumed reacquired under treasury stock method using period end market price, if higher than average market price 306,016 658,841 1,008,566 Assumed conversion of convertible subordinated debentures 310,206 893,332 748,632 ---------- ---------- ---------- Average fully diluted shares 23,766,293 19,732,207 16,907,166 ========== ========== ========== Fully diluted earnings per share: Loss before extraordinary item $(0.07) $(0.03) $(0.13) Extraordinary item - .12 .14 ---- ---- ---- Earnings (loss) per share $(0.07) $ 0.09 $ 0.01 ==== ==== ==== Note: The calculated fully diluted earnings per share are antidilutive for 1995. EX-13 7 EXHIBIT 13 ANNUAL REPORT TO STOCKHOLDERS DDL ELECTRONICS, INC. AND SUBSIDIARIES FINANCIAL SUMMARY (In thousands except per share amounts) Year Ended June 30 -------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Sales $ 48,919 $ 33,136 $ 29,576 $ 48,529 $ 57,883 Operating income (loss) $ 118 $ (1,167) $ (4,970) $ (6,948) $ (5,067) Extraordinary item $ - $ 2,356 $ 2,441 $ - $ 6,100 Net income (loss) $ (1,678) $ 1,598 $ 75 $ (8,354) $ 1,073 Earnings (loss) per share $ (0.07) $ 0.09 $ - $ (0.55) $ 0.10 DESCRIPTION OF BUSINESS DDL Electronics, Inc. provides customized, integrated electronic manufacturing services ("EMS") to original equipment manufacturers ("OEMs") in the computer, telecommunications, instrumentation, medical, industrial and aerospace industries. The Company also fabricates multilayer printed circuit boards ("PCBs") for use primarily in the computer, communications and instrumentation industries. The Company's EMS operations are located in Southern California and Northern Ireland. Its PCB facilities are located in Northern Ireland. To Our Stockholders: DDL Electronics is proud to announce that the Company has returned to operating profitability for the first time in nearly a decade. This was the first full fiscal year which included the operations of DDL's newest subsidiary, SMTEK, Inc. The acquisition of SMTEK in January 1996 established DDL solidly in the U.S. electronics manufacturing services (EMS) industry. Concurrent with the acquisition of SMTEK, DDL's new management team came aboard with a plan to reposition and revitalize the Company within 24 months. Last year we reported that the lingering residue of DDL's historical problems had presented significant challenges for the new management team. On June 30, 1997, DDL retired its short-term senior debt of $5.3 million, which was the culmination of a very difficult period of financial restructuring and balance sheet improvement. Elimination of this onerous debt and other balance sheet improvements position the Company well as we move forward with a strategy of profitable growth in operations and expansion through acquisitions of profitable EMS providers with solid reputations and strong market presence in their geographic areas. Earlier this year, the Company engaged Needham & Company, one of the leading investment banking firms serving the EMS industry, to evaluate, develop and negotiate acquisition and capital infusion opportunities. Significant effort and investment was made this year to seek and close acquisitions of other profitable EMS companies. We considered over a dozen potential acquisitions and made offers to three different companies, one of which is still in process. Our focus is on making acquisitions in key geographic areas of the U.S. to build a stronger presence in the domestic market. We view this acquisition strategy as an important element of our plan to increase overall profitability. With additional operating units, we will realize benefits from collective procurement, better utilization of engineering and design services, more responsive local customer service, increased sales and marketing penetration, enhanced banking relationships, and broader allocation of corporate overhead costs associated with being a publicly held company. Sales and earnings improved substantially over last year. Total sales of $48,919,000 in fiscal 1997 represented an increase of 48% over fiscal 1996 sales of $33,136,000, due in part to the fact that SMTEK's operations were included for only one-half of fiscal 1996. Still, if SMTEK had been included in fiscal 1996 for the entire year, the year-over-year sales increase would have been a robust 20%. DDL's balance sheet continued to strengthen this year with debt reduction and equity infusion. Stockholders' equity has risen to its highest level in six years. Operating profitability increased considerably from operating losses of $4,970,000 and $1,167,000 in fiscal years 1995 and 1996, respectively, to operating income of $118,000 in fiscal 1997. Our top priorities going forward are bottom line growth and cash flow improvement. We continued to invest in our facilities and equipment this year to improve capabilities in technology and capacity where needed. The Company is positioned to perform at much higher sales levels without substantial investment in facilities and equipment. However, we will be investing further in our printed circuit board fabrication facility, Irlandus Circuits Ltd., to increase technology, increase capacity, improve yields and to reduce operating costs. This investment will better enable Irlandus to supply printed circuit boards to DDL's EMS operations. During fiscal 1997, new management was installed in both of our operating companies in Northern Ireland. These new managers have implemented better internal performance measurements, organizational improvements, strengthened cost controls, production tracking systems and employee motivation programs. These two operating units are certified to ISO-9002, and SMTEK has achieved ISO-9001 certification effective April 1997. We significantly strengthened our sales and marketing efforts this year to take advantage of strong market demand and to focus on key customer partnerships with a high level of service during the development, production and post-production support phases of our customer relationships. We experienced strong bookings and bidding activity throughout fiscal 1997 and ended the year with a backlog of $29 million, up from $18 million at the end of fiscal 1996, which represents a 62% increase. To further enhance early customer interaction, DDL has initiated a marketing strategy that provides no-charge design services to production partners who commit production to the Company. This allows us to leverage our substantial design capability and help our customers get to market faster, with less cost, and with a more producible and reliable product. DDL is well positioned to take advantage of strong market demand in the high complexity, high mix portion of the EMS industry. There are relatively few players in this difficult market segment that are as well equipped as DDL to address the design, engineering and production challenges presented by high complexity, high mix electronic assembly work. In this segment, the production volumes are typically medium to small and the service level and customer interaction levels are very high, compared to high volume, low margin commodity and consumer goods production supported by the much larger EMS providers. We are excited about the continued growth of our market and the increasing emphasis on EMS production capability. DDL is well positioned to grow through increases in current operations and with strategic acquisitions of companies that fit well within our international organization. Our success this past year in improving the balance sheet, sales, backlog, and operations should bode well for continued success in fiscal 1998 and beyond. /s/Gregory L. Horton Chairman, CEO and President DDL ELECTRONICS, INC. AND SUBSIDIARIES FIVE-YEAR FINANCIAL SUMMARY (In thousands except per share amounts) Year ended June 30 -------------------------------------------- OPERATING DATA 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Sales $ 48,919 $ 33,136 $ 29,576 $ 48,529 $ 57,883 ------ ------ ------ ------ ------ Costs and expenses: Cost of goods sold 42,475 29,494 26,516 47,860 55,052 Administrative and selling expenses 5,058 4,175 6,497 7,617 7,898 Goodwill amortization 1,268 634 - - - Restructuring charges - - 1,533 - - ------ ------ ------ ------ ------ Total costs and expenses 48,801 34,303 34,546 55,477 62,950 ------ ------ ------ ------ ------ Operating income (loss) 118 (1,167) (4,970) (6,948) (5,067) ------ ------ ------ ------ ------ Non-operating income (expense): Interest income 83 246 109 168 280 Interest expense (1,105) (911) (883) (1,110) (1,107) Debt issue cost amortization (937) (281) - - - Gain on sale of assets 142 - 3,317 2 264 Earthquake expenses - - - (500) - Other income (expense), net 21 245 61 34 - ------ ------ ------ ------ ------ Total non-operating income (expense) (1,796) (701) 2,604 (1,406) (563) ------ ------ ------ ------ ------ Loss from continuing operations before income taxes (1,678) (1,868) (2,366) (8,354) (5,630) Income tax benefit - 1,110 - - - ------ ------ ------ ------ ------ Loss from continuing operations (1,678) (758) (2,366) (8,354) (5,630) Income from discontinued operations, less applicable income taxes - - - - 603 ------ ------ ------ ------ ------ Loss before extraordinary item (1,678) (758) (2,366) (8,354) (5,027) Extraordinary item - Gain on debt extinguishment - 2,356 2,441 - 6,100 ------ ------ ------ ------ ------ Net income (loss) $ (1,678) $ 1,598 $ 75 $ (8,354) $ 1,073 ====== ====== ====== ====== ====== DDL ELECTRONICS, INC. AND SUBSIDIARIES FIVE-YEAR FINANCIAL SUMMARY (In thousands except per share amounts) (Continued) Year ended June 30 -------------------------------------------- OPERATING DATA 1997 1996 1995 1994 1993 (Continued) ---- ---- ---- ---- ---- Earnings (loss) per share: Primary: Continuing operations $(0.07) $(0.04) $(0.15) $(0.55) $(0.56) Discontinued operations - - - - 0.06 Extraordinary item - 0.13 0.15 - 0.60 ----- ----- ----- ----- ----- Total $(0.07) $ 0.09 $ - $(0.55) $ 0.10 ===== ===== ===== ===== ===== Fully diluted: Continuing operations $(0.07) $(0.03) $(0.15) $(0.55) $(0.37) Discontinued operations - - - - 0.04 Extraordinary item - 0.12 0.15 - 0.42 ----- ----- ----- ----- ----- Total $ (0.07) $ 0.09 $ - $ (0.55) $ 0.09 ===== ===== ===== ===== ===== Year ended June 30 -------------------------------------------- BALANCE SHEET DATA 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Current assets $ 20,420 $ 15,493 $ 8,876 $ 12,018 $ 20,085 Current liabilities $ 18,095 $ 11,979 $ 8,904 $ 21,277 $ 14,289 Working capital (deficit) $ 2,325 $ 3,514 $ (28) $ (9,259) $ 5,796 Current ratio 1.1 1.3 1.0 0.6 1.4 Total assets $ 31,880 $ 28,087 $ 12,590 $ 23,258 $ 33,739 Long-term debt $ 7,820 $ 10,935 $ 7,030 $ 6,870 $ 20,393 Stockholders' equity (deficit) $ 5,965 $ 5,173 $ (3,344) $ (4,889) $ (943) Equity (deficit) per share $ 0.24 $ 0.22 $ (0.21) $ (0.34) $ (0.08) Shares outstanding (000s) 24,587 22,999 16,063 14,469 11,973 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introductory Statement The Company provides customized, integrated electronic manufacturing services ("EMS") to original equipment manufacturers ("OEMs") in the computer, telecommunications, instrumentation, medical, industrial and aerospace industries. The Company also fabricates multilayer printed circuit boards ("PCBs") for use primarily in the computer, communications and instrumentation industries. The Company's EMS operations are located in Southern California and Northern Ireland. Its PCB facilities are located in Northern Ireland. Historically, DDL was a diversified holding company with operations in the areas of EMS and PCB fabrication, broadband communications equipment and other businesses. The Company entered the EMS business by acquiring its domestic EMS operations in 1985 and by organizing its European EMS operations in 1990. The Company divested its non-EMS/PCB operations during 1989 to 1993. In December 1994 and January 1995, the Company sold substantially all the assets of its U.S. EMS and PCB operations, and used the proceeds to pay off debt. In January 1996, as the first step toward rebuilding a domestic presence in the EMS industry, the Company acquired SMTEK, Inc. ("SMTEK"), a provider of integrated electronic manufacturing services. SMTEK specializes in the design and manufacture of complex printed circuit board assemblies and modules utilizing surface mount technology ("SMT") for sale to government-related and commercial customers. With the exception of the year ended June 30, 1997, during which the Company generated operating income of $118,000, the Company has incurred operating losses for a number of years. These operating losses amounted to $1,167,000 and $4,970,000 in the fiscal years ended June 30, 1996 and 1995, respectively. Although the Company had net income for the years ended June 30, 1996 and 1995 of $1,598,000 and $75,000, respectively, fiscal 1996 net income included an extraordinary gain of $2,356,000 and an income tax benefit of $1,110,000, while fiscal 1995 net income included an extraordinary gain of $2,441,000 and a gain of on sales of assets of $3,317,000. The Company utilizes a 52-53 week fiscal year ending on the Friday closest to June 30 which, for fiscal years 1997, 1996 and 1995, fell on June 27, June 28 and June 30, respectively. Throughout this Annual Report to Stockholders, the fiscal year-end for all years is shown as June 30 for clarity of presentation, except where the context dictates a more specific reference to the actual year-end date. Quasi-reorganization The Company, with the authorization of its Board of Directors, implemented a quasi-reorganization effective June 27, 1997. The quasi- reorganization, which did not require the approval of the Company's stockholders, resulted in an elimination of the accumulated deficit of $23,678,000 by a transfer from additional paid-in capital of an equivalent amount. This deficit was attributable primarily to operations which were divested or discontinued in prior years. Following a review and evaluation by management, no adjustment was made to the carrying values of the Company's assets and liabilities because such amounts were deemed to be not in excess of estimated fair values. Results of Operations The following table sets forth the Company's sales and other operating data as percentages of revenues: Year Ended June 30 ----------------------------- 1997 1996 1995 ---- ---- ---- Sales 100.0% 100.0% 100.0% Cost of goods sold 86.8 89.0 89.7 ----- ----- ----- Gross profit 13.2 11.0 10.3 Administrative and selling expenses 10.3 12.6 21.9 Goodwill amortization 2.6 1.9 - Restructuring charges - - 5.2 ----- ----- ----- Operating income (loss) 0.3 (3.5) (16.8) Interest income 0.2 0.8 0.4 Interest expense (2.3) (2.8) (3.0) Debt issue cost amortization (1.9) (0.2) - Gain on sale of assets - - 11.2 Other income, net 0.3 0.1 0.2 ----- ----- ----- Loss before income taxes (3.4) (5.6) (8.0) Income tax benefit - 3.3 - ----- ----- ----- Loss before extraordinary item (3.4) (2.3) (8.0) Extraordinary item - Gain on debt extinguishment - 7.1 8.3 ----- ----- ----- Net income (loss) (3.4)% 4.8% 0.3% ===== ===== ===== During fiscal 1995, the Company closed the operations of its A.J. Electronics, Inc. subsidiary ("A.J."). The Company recorded restructuring charges of $1,533,000 for the costs associated with the shut down and disposal of the assets of A.J., including asset write-downs of $552,000, additional bad debt write-offs of $136,000, lease termination costs of $211,000 and all other exit costs totaling $634,000. Substantially all of the operating assets of A.J. were sold in January 1995 for total consideration, in the form of cash and debt assumption, of approximately $1,041,000. In December 1994, the Company sold essentially all the assets of its Aeroscientific Oregon subsidiary ("Aero Oregon") for proceeds of approximately $9,200,000 in cash and the assumption by the purchaser of approximately $300,000 of capitalized lease obligations, which resulted in a gain of $3,317,000. With the proceeds of this sale, the Company paid off $5,300,000 of industrial revenue bonds and settled a $6,941,000 bank term loan for a cash payment of $4,500,000, which resulted in an extraordinary gain on debt extinguishment of $2,441,000. Following are the Company's unaudited pro forma consolidated operating results for the year ended June 30, 1995, which exclude the operations of Aero Oregon and A.J., the gain on sale of Aero Oregon's assets and the A.J. restructuring charges, as compared with actual operating results for the years ended June 30, 1997 and 1996 (in thousands): Year Ended June 30 ----------------------------- 1997 1996 1995 ---- ---- ---- (Pro forma) Sales $ 48,919 $ 33,136 $ 20,811 ------- ------- ------- Cost of goods sold 42,475 29,494 17,873 Administrative and selling expenses 5,058 4,175 5,062 Goodwill amortization 1,268 634 - ------- ------- ------- Total costs and operating expenses 48,801 34,303 23,037 ------- ------- ------- Operating income (loss) 118 (1,167) (2,226) Non-operating expense, net (1,796) (701) (538) ------- ------- ------- Loss before income taxes (1,678) (1,868) (2,764) Income tax benefit - 1,110 - ------- ------- ------- Loss before extraordinary item (1,678) (758) (2,764) Extraordinary item - Gain on debt extinguishment - 2,356 2,441 ------- ------- ------- Net income (loss) $ (1,678) $ 1,598 $ (323) ======= ======= ======= Fiscal 1997 vs. 1996 Sales for fiscal 1997 were $48,919,000, compared to $33,136,000 for fiscal 1996. The sales increase results primarily from the acquisition of SMTEK, which contributed revenues of $19,267,000 in the year ended June 30, 1997 compared to $8,668,000 in fiscal 1996. Because the acquisition of SMTEK in January 1996 was accounted for using the purchase method, SMTEK's operations prior to the acquisition are not included in the Company's results. Sales growth at DDL Electronics, Ltd. ("DDL-E") accounted for most of the remaining increase in consolidated sales. DDL-E added several new customers that have contributed to sales growth and significantly increased sales to one of its existing customers during fiscal 1997. Gross profit (sales less cost of goods sold) for fiscal 1997 was $6,444,000 compared to $3,642,000 for fiscal 1996. SMTEK's gross profit of $2,774,000 for fiscal 1997, compared to $1,600,000 for fiscal 1996, accounted for $1,174,000 of the increase. Gross profit of DDL-E and Irlandus Circuits Ltd. ("Irlandus") increased by $810,000 and $821,000, respectively, compared to fiscal 1996. DDL-E's gross profit increased due to higher sales volume and the fact that DDL-E's gross profit in fiscal 1996 was adversely impacted by a ramp-up in the workforce and higher than normal equipment costs. Irlandus' gross profit increased primarily due to a reduction of indirect costs. The Company's consolidated gross profit margin increased from 11.0% in fiscal 1996 to 13.2% in fiscal 1997, due primarily to improvement in Irlandus' gross profit margin from 11.4% in fiscal 1996 to 18.6% in fiscal 1997. The improvement in Irlandus' gross profit margin is attributable to an increase in higher margin quick-turn orders and a reduction of indirect costs as a percentage of sales. SMTEK's gross profit margin declined from 18.5% in fiscal 1996 to 14.4% in fiscal 1997 due to higher direct material costs as a percentage of sales, as well as an increase in the number of production employees handling the higher sales volume. Administrative and selling expenses increased from $4,175,000 for the year ended June 30, 1996 to $5,058,000 for fiscal 1997. This increase is principally the result of the acquisition of SMTEK in January 1996. Operating income was $118,000 for fiscal 1997, compared to operating loss of $1,167,000 for fiscal 1996. This improvement is primarily attributable to increased gross profit of DDL-E and Irlandus. Net non-operating expense increased from $701,000 in fiscal 1996 to $1,796,000 in fiscal 1997. This change is attributable to increases in debt issue cost amortization and interest expense, as the result of debt issued in February 1996 to finance the SMTEK acquisition. Debt issue cost amortization expense amounted to $937,000 in fiscal 1997 compared to $281,000 in fiscal 1996. Nearly all of the fiscal 1997 debt issue cost amortization relates to the 10% Senior Notes of $5,300,000 which were repaid on June 30, 1997 (which is subsequent to the year ended June 27, 1997), as further discussed under "Liquidity and Capital Resources" below. During fiscal 1996, the Company recognized an income tax benefit associated with its application for federal tax refunds as permitted under section 172(f) of the Internal Revenue Code. In the aggregate, the Company applied for federal tax refunds of $2,175,000, net of costs associated with applying for such refunds. Through June 30, 1996, the Company had received $1,871,000 of net refunds plus interest on such refunds of $106,000, and has recognized as an income tax benefit $1,110,000 net of certain expenses. Because the tax returns underlying these refunds are subject to audit by the Internal Revenue Service and a portion of the refunds could be disallowed, the Company has not yet recognized a tax benefit for the remainder of the refunds received to date, or for the refunds still expected to be received. No additional refunds were received during fiscal 1997. Nonetheless, the Company feels that its claim for refund and carry back of net operating losses can be substantiated and is supported by law, and that the Company will ultimately collect and retain a substantial portion of the refunds applied for. The net loss for 1997 was $1,678,000, or ($0.07) per share, compared to net income of $1,598,000, or $0.09 per share for fiscal 1996. Net income for fiscal 1996 includes an extraordinary gain on debt extinguishment of $2,356,000 associated with the reduction of the Company's outstanding obligations to certain former officers, employees and directors in March 1996, as further described in Note 8 to the accompanying consolidated financial statements. Fiscal 1996 vs. 1995 Sales for fiscal 1996 were $33,136,000, compared to $29,576,000 for fiscal 1995. Included in fiscal 1995 sales are revenues from A.J. and Aero Oregon. A.J.'s operations were discontinued and ultimately liquidated in fiscal 1995, and Aero Oregon's manufacturing facility and related assets were sold in December 1994. Aero Oregon and A.J. represented $8,765,000 of fiscal 1995 sales. After giving effect to a pro forma adjustment to exclude sales of Aero Oregon and A.J. from fiscal 1995 revenues, sales in fiscal 1996 increased $12,325,000 over sales of fiscal 1995. Of this increase, $8,668,000 represents revenues of SMTEK, which was acquired in January 1996. Sales growth at DDL-E accounted for most of the remaining increase in consolidated sales. DDL-E added several new turnkey customers that contributed to sales growth in fiscal 1996 and reduced the relative volume of sales made on a consignment basis. For "turnkey" sales, DDL-E provides all materials, labor and equipment associated with producing the customers' products, while "consigned" sales are those in which the customers furnish the materials and DDL-E provides only the labor and equipment to manufacture the product. For DDL-E, material costs typically represent about 70% of the turnkey method's sales price. Thus, a shift in order mix from consigned to turnkey can result in higher sales but lower gross profit margins. Gross profit for fiscal 1996 improved by $582,000 compared to fiscal 1995. The acquisition of SMTEK in January 1996 accounted for $1,600,000 of the increase, offset by a decline in gross profit of the Northern Ireland operations of approximately $800,000. Gross profit as a percentage of sales declined from 14.1% (on a pro forma basis without Aero Oregon and A.J.) for fiscal 1995 to 11.0% for fiscal 1996. DDL-E's gross profit declined by $705,000, and its gross profit as a percentage of sales declined from 14.5% in fiscal 1995 to 5.9% in fiscal 1996 due to a decrease in consignment sales and an increase in turnkey sales volume. Also, the cost of direct materials as a percent of turnkey sales in fiscal 1996 was higher than in fiscal 1995. An increase in the number of production employees handling the higher sales volume and additional costs incurred for previously deferred equipment maintenance further contributed to the decline in DDL- E's gross profit percentage. Gross profit of Irlandus decreased by $88,000 and its gross profit percentage declined from 12.7% to 11.4% from 1995 to 1996. Irlandus' gross profit declined primarily due to changes in product mix. The operating loss for fiscal 1996 improved by $3,803,000, from a loss in fiscal 1995 of $4,970,000 to a loss of $1,167,000 in fiscal 1996. The fiscal 1996 operating loss includes goodwill amortization expense of $634,000 arising from the acquisition of SMTEK in January 1996. On a pro forma basis, after giving effect to the exclusion of Aero Oregon and A.J. from fiscal 1995 operating results, the improvement in the operating loss was $1,059,000. A substantial portion of fiscal 1995's operating expenses were attributable to accrual of restructuring charges associated with the discontinuance of A.J.'s operations and disposal of its assets. The restructuring charge of $1,533,000 in fiscal 1995 was comprised of a writedown of assets to liquidation value, accrual of expected lease termination costs and provision for operating expenses through A.J.'s ultimate and final disposal. Net non-operating income (expense) declined from $2,604,000 in fiscal 1995 to ($701,000) in fiscal 1996. This change is attributable principally to a non-recurring gain of $3,317,000 on the sale of assets of Aero Oregon in fiscal 1995. As discussed further above, during fiscal 1996 the Company recognized an income tax benefit of $1,110,000 net of certain expenses associated with its application for federal tax refunds as permitted under section 172(f) of the Internal Revenue Code. For fiscal 1995, the loss before extraordinary item was $2,366,000, or ($0.15) per share. On a pro forma basis, excluding the operations of A.J. and Aero Oregon and the non-recurring gain on the sale of Aero Oregon's assets, fiscal 1995 would have shown a loss before extraordinary item of $2,764,000. For fiscal 1996, the loss before extraordinary item was $758,000, or ($0.04) per share, which includes the effect of the $1,110,000 income tax benefit discussed above. Net income for fiscal 1996 was $1,598,000, or $0.09 per share, compared to $75,000, or $0.00 per share, for fiscal 1995. Net income for fiscal 1996 includes an extraordinary gain on debt extinguishment of $2,356,000 associated with the reduction of the Company's outstanding obligations to certain former officers, employees and directors in March 1996, as further described in Note 8 to the accompanying consolidated financial statements. Net income for fiscal 1995 includes an extraordinary gain on debt extinguishment of $2,441,000 associated with the retirement of the Company's senior bank debt in December 1994. Recent Accounting Pronouncement The Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share" ("SFAS 128") in February 1997. SFAS 128 is effective for both interim and annual periods ending after December 15, 1997. The Company will adopt SFAS 128 in the second quarter of fiscal 1998. SFAS 128 requires the presentation of "Basic" earnings per share which represents income available to common shareholders divided by the weighted average number of common shares outstanding for the period. A dual presentation of "Diluted" earnings per share will also be required. Management believes the adoption of SFAS 128 will not have a material impact on the Company's financial position or results of operations. Inflation Changes in product mix from year to year and highly competitive markets make it difficult to accurately assess the impact of inflation on profit margins. Management generally believes that business has not been affected materially and adversely by inflationary increases in costs and expenses. On the other hand, the current low inflationary environment has inhibited the Company's ability to increase the price of its products and services. Liquidity and Capital Resources The Company's primary sources of liquidity are its cash and cash equivalents, which amounted to $4,718,000 at the end of fiscal 1997, and its bank lines of credit. During fiscal 1997, cash and cash equivalents increased by $2,199,000. This net cash inflow consisted of cash proceeds from the issuance of common stock of $1,460,000, proceeds from new borrowings net of debt repayments of $611,000, proceeds from government grants of $605,000, cash provided by operating activities of $230,000, proceeds from the sale of assets of $202,000 and the effect of exchange rate changes on cash of $80,000, partially offset by capital expenditures of $989,000. On June 30, 1997 (which is subsequent to the year ended June 27, 1997, as the Company utilizes a 52-53 week fiscal year), the Company repaid its 10% Senior Notes due July 1, 1997 in the amount of $5,300,000 plus accrued interest of $43,000. Of the funds used to repay the 10% Senior Notes, $2,000,000 was borrowed from a private investor on June 30, 1997 under a note payable due February 1, 1999 which is secured by the common stock of SMTEK. After giving effect to these two subsequent events (the proceeds from the $2,000,000 note payable and the payoff of the 10% Senior Notes), the Company's total cash and cash equivalents amounted to $1,375,000 at June 30, 1997. Components of operating working capital increased by $1,547,000 during fiscal 1997, which consisted of a $3,396,000 increase in accounts receivable, a $136,000 increase in costs and estimated earnings in excess of billings on uncompleted contracts, and a $808,000 decrease in other liabilities, partially offset by a $1,054,000 decrease in inventories, a $189,000 decrease in prepaid expenses and other current assets, a $1,222,000 increase in accounts payable, and a $328,000 increase in accrued payroll and employee benefits. The Company has an accounts receivable-based working capital bank line of credit for SMTEK which provided for borrowings of up to $2,500,000 at an interest rate of prime (8.5% at June 30, 1997) plus 1.25%. At the end of fiscal 1997, borrowings outstanding under this credit facility amounted to $977,000. The Company also has a credit facility agreement with Ulster Bank Markets for its Northern Ireland operations. This agreement includes a working capital line of credit of 1,150,000 pounds sterling (approximately $1,900,000), and provides for interest on borrowings at the Bank's base rate (6.50% at June 30, 1997) plus 1.50%. At the end of fiscal 1997, borrowings outstanding under this credit facility amounted to $401,000. In September 1997, Ulster Bank Markets increased the Northern Ireland line of credit to 3,000,000 pounds sterling (approximately $4,900,000) and extended the credit facility through August 31, 1998. The Company's EMS and PCB fabrication businesses require continuing investment in plant and equipment to remain competitive. Recently, however, the Company's financial position has severely restricted its ability to make capital improvements in its facilities. Capital expenditures during fiscal 1997, 1996 and 1995 were approximately $2,210,000, $1,599,000 and $643,000, respectively. The Company anticipates it will need to increase its capital spending in the coming years in order to stay competitive as technology evolves. Management estimates that capital expenditures of as much as $2 million may be required in fiscal 1998. Of that amount, the substantial majority is expected to be financed by a combination of capital leases, secured loans and foreign government grants. The Company's financial statements are presented on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company incurred operating income (losses) of $118,000, $(1,167,000) and $(4,970,000), and cash inflows (outflows) from operating activities of $242,000, $(555,000) and $(264,000) in fiscal years 1997, 1996 and 1995, respectively. The achievement of sustained profitability is the most significant internal factor bearing on the Company's long-term viability. No assurance can be given that the Company will attain profitable operations or that cash generated from non-operating sources will be adequate to fund future cash needs. As a necessary step to improve the Company's results of operations, the Company is actively pursuing strategic acquisition candidates that might better assure growth of the Company in the markets and industries in which it has expertise. With the exception of fiscal 1997, during which the Company generated operating income of $118,000, the Company has incurred operating losses for a number of years. Operating losses could continue until such time as sales increase to a level sufficient to cover costs and operating expenses. No assurance can be given as to whether or when sales increases may be achieved. Sales increases will depend in part upon strengthening the Company's sales and marketing functions for its existing operations and improving its price competitiveness in the EMS industry by achieving economies of scale in the procurement of electronic components. Management believes that the Company's cash resources and borrowing capacity on its working capital lines of credit are sufficient to fund operations for at least the next year. Independent Auditors' Report The Board of Directors and Stockholders DDL Electronics, Inc.: We have audited the accompanying consolidated balance sheets of DDL Electronics, Inc. and subsidiaries as of June 30, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the years in the three-year period ended June 30, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of DDL Electronics, Inc. and subsidiaries as of June 30, 1997 and 1996, and the results of their operations and cash flows for each of the years in the three-year period ended June 30, 1997 in conformity with generally accepted accounting principles. /s/ KPMG PEAT MARWICK LLP Los Angeles, California August 15, 1997, except for the second paragraph of note 12, which is as of September 22, 1997 DDL ELECTRONICS, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands except share amounts) June 30 ----------------- 1997 1996 ---- ---- Assets Current assets: Cash and cash equivalents (Note 3) $ 4,718 $ 2,519 Accounts receivable, net (Note 5) 9,198 5,620 Costs and estimated earnings in excess of billings on uncompleted contracts (Note 6) 3,161 3,026 Inventories, net (Note 7) 3,211 4,014 Prepaid expenses 132 314 ------ ------ Total current assets 20,420 15,493 ------ ------ Property, equipment and improvements, at cost (Notes 8 and 12): Buildings and improvements 6,037 5,604 Plant equipment 14,962 13,999 Office and other equipment 1,952 1,444 ------ ------ 22,951 21,047 Less: Accumulated depreciation and amortization (16,161) (15,130) ------ ------ Property, equipment and improvements, net 6,790 5,917 ------ ------ Other assets: Goodwill, net (Note 4) 4,439 5,708 Debt issue costs, net 38 533 Deposits and other assets 193 436 ------ ------ 4,670 6,677 ------ ------ $ 31,880 $ 28,087 ====== ====== DDL ELECTRONICS, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands except share amounts) (Continued) June 30 ----------------- 1997 1996 ---- ---- Liabilities and Stockholders' Equity Current liabilities: Bank lines of credit payable $ 1,378 $ - Current portion of long-term debt (Notes 3 and 8) 4,167 603 Accounts payable 9,084 7,485 Accrued payroll and employee benefits 1,145 777 Other accrued liabilities (Notes 3 and 11) 2,321 3,114 ------ ------ Total current liabilities 18,095 11,979 ------ ------ Long-term debt, less current portion (Notes 3 and 8) 7,820 10,935 ------ ------ Commitments and contingencies (Note 12) Stockholders' equity (Notes 2, 8 and 10): Preferred stock, $1 par value; 1,000,000 shares authorized; no shares issued or outstanding - - Common stock, $.01 par value; 50,000,000 shares authorized; 24,586,858 and 22,998,879 shares issued and outstanding in 1997 and 1996, respectively 246 230 Additional paid-in capital 6,410 29,304 Common stock held in escrow - (1,325) Accumulated deficit (deficit of $23,678,000 eliminated effective June 27, 1997) - (22,000) Foreign currency translation adjustment (691) (1,036) ------ ------ Total stockholders' equity 5,965 5,173 ------ ------ $ 31,880 $ 28,087 ====== ====== See accompanying notes to consolidated financial statements. DDL ELECTRONICS, INC. AND SUBSIDIARIES Consolidated Statements of Operations (In thousands except per share amounts) Year ended June 30 ----------------------------- 1997 1996 1995 ---- ---- ---- Sales $ 48,919 $ 33,136 $ 29,576 ------ ------ ------ Costs and expenses: Cost of goods sold 42,475 29,494 26,516 Administrative and selling expenses 5,058 4,175 6,497 Goodwill amortization 1,268 634 - Restructuring charges (Note 4) - - 1,533 ------ ------ ------ 48,801 34,303 34,546 ------ ------ ------ Operating income (loss) 118 (1,167) (4,970) ------ ------ ------ Non-operating income (expense): Interest income 83 246 109 Interest expense (1,105) (911) (883) Debt issue cost amortization (937) (281) - Gain on sale of assets (Note 4) 142 - 3,317 Other income (expense), net 21 245 61 ------ ------ ------ (1,796) (701) 2,604 ------ ------ ------ Loss before income taxes (1,678) (1,868) (2,366) Income tax benefit (Note 9) - 1,110 - ------ ------ ------ Loss before extraordinary item (1,678) (758) ( 2,366) Extraordinary item - Gain on debt extinguishment (Notes 4 and 8) - 2,356 2,441 ------ ------ ------ Net income (loss) $ (1,678) $ 1,598 $ 75 ====== ====== ====== Earnings (loss) per share: Loss before extraordinary item $ (0.07) $ (0.04) $ (0.15) Extraordinary item - 0.13 0.15 ------ ------ ------ Earnings (loss) per share $ (0.07) $ 0.09 $ - ====== ====== ====== Shares used in computing earnings (loss) per share 23,398 18,807 15,971 ====== ====== ====== See accompanying notes to consolidated financial statements. DDL ELECTRONICS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands) Year ended June 30 ----------------------------- 1997 1996 1995 ---- ---- ---- Cash flows from operating activities: Net income (loss) $ (1,678) $ 1,598 $ 75 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 3,631 2,028 1,505 Gain on debt extinguishment - (2,356) (2,441) Gain on sale of assets (142) - (3,317) Net (increase) decrease in operating working capital, net of effects of business acquired (1,547) (1,508) 4,009 (Increase) decrease in deposits and other assets 124 (93) 2 Benefit of non-capital grants (242) (265) (139) Other 84 41 42 ------ ------ ------ Net cash provided by (used in) operating activities 230 (555) (264) ------ ------ ------ Cash flows from investing activities: Capital expenditures (989) (910) (547) Purchase of SMTEK, Inc., net of cash acquired - (7,638) - Proceeds from sale of assets 202 - 9,936 ------ ------ ------ Net cash provided by (used in) investing activities (787) (8,548) 9,389 ------ ------ ------ Cash flows from financing activities: Proceeds from bank lines of credit 1,366 - - Proceeds from long-term debt - 8,800 612 Payments of long-term debt (755) (1,870) (10,819) Debt issue costs - (372) - Proceeds from issuance of common stock, net 1,385 1,112 980 Proceeds from exercise of stock options 75 437 287 Proceeds from exercise of stock warrants - 448 - Proceeds from foreign government grants 605 229 202 ------ ------ ------ Net cash provided by (used in) financing activities 2,676 8,784 (8,738) ------ ------ ------ Effect of exchange rate changes on cash 80 (79) (10) ------ ------ ------ Increase (decrease) in cash and cash equivalents 2,199 (398) 377 Cash and cash equivalents at beginning of year 2,519 2,917 2,540 ------ ------ ------ Cash and cash equivalents at end of year $ 4,718 $ 2,519 $ 2,917 ====== ====== ====== See accompanying notes to consolidated financial statements.
DDL ELECTRONICS, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity (Deficit) Years ended June 30, 1997, 1996 and 1995 (In thousands except share amounts) Common Stock Common Stock Foreign Total Preferred -------------- held in escrow Additional currency stockholders' Stock Par --------------- paid-in Accumulated translation equity shares Shares value Shares Value capital deficit adjustment (deficit) ------ ------ ----- ------ ----- ------- ------- ------- ------- Balance at June 30, 1994 450 14,468,718 $ 145 - $ - $ 19,646 $(23,673) $(1,007) $(4,889) Net income - - - - - - 75 - 75 Issuance of common stock - 760,000 8 - - 972 - - 980 Conversion of debentures - 43,000 - - - 86 - - 86 Exercise of stock options - 450,447 5 - - 282 - - 287 Shares retired - (27) - - - - - - - Conversion of preferred stock (450) 340,841 3 - - (3) - - - Translation adjustments - - - - - - - 117 117 ---- ---------- ---- --------- ----- ------ ------ ------ ------ Balance at June 30, 1995 - 16,062,979 161 - - 20,983 (23,598) (890) (3,344) Net income - - - - - - 1,598 - 1,598 Stock issued as partial pay- ment for SMTEK acquisition - 1,000,000 10 - - 791 - - 801 Stock issued as debt placement fee - 572,683 6 - - 710 - - 716 Stock issued as collateral for 10% notes - 1,060,000 10 (1,060,000) (1,325) 1,315 - - - Sale of common stock - 600,000 6 - - 1,106 - - 1,112 Conversion of debentures - 2,764,275 28 - - 3,292 - - 3,320 Exercise of stock options and warrants - 918,942 9 - - 876 - - 885 Warrant compensation costs - - - - - 196 - - 196 Other stock transactions - 20,000 - - - 35 - - 35 Translation adjustments - - - - - - - (146) (146) ---- ---------- ---- --------- ----- ------ ------ ------ ------ Balance at June 30, 1996 - 22,998,879 230 (1,060,000) (1,325) 29,304 (22,000) (1,036) 5,173 Net loss - - - - - - (1,678) - (1,678) Stock released from escrow account - - - 1,060,000 1,325 - - - 1,325 Shares retired - (706,667) (7) - - (876) - - (883) Sale of common stock - 2,000,000 20 - - 1,365 - - 1,385 Exercise of stock options and warrants - 294,646 3 - - 295 - - 298 Translation adjustments - - - - - - - 345 345 Quasi-reorganization transfer - - - - - (23,678) 23,678 - - ---- ---------- ---- --------- ----- ------ ------ ------ ------ Balance at June 30, 1997 - 24,586,858 $ 246 - $ - $ 6,410 $ - $ (691) $ 5,965 ==== ========== ==== ========= ===== ====== ====== ====== ====== See accompanying notes to consolidated financial statements.
DDL ELECTRONICS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business DDL Electronics, Inc. provides customized, integrated electronic manufacturing services ("EMS") to original equipment manufacturers ("OEMs") in the computer, telecommunications, instrumentation, medical, industrial and aerospace industries. The Company also manufactures multilayer printed circuit boards ("PCBs") for use primarily in the computer, communications and instrumentation industries. The Company's EMS operations are located in Southern California and Northern Ireland. The Company's PCB facilities are located in Northern Ireland. The consolidated financial statements include the accounts of DDL Electronics, Inc. and its subsidiaries (collectively, the "Company"). All significant intercompany transactions and accounts have been eliminated in consolidation. Accounting Period The Company utilizes a 52-53 week fiscal year ending on the Friday closest to June 30 which, for fiscal years 1997, 1996 and 1995, fell on June 27, June 28 and June 30, respectively. In these consolidated financial statements, the fiscal year-end for all years is shown as June 30 for clarity of presentation, except where the context dictates a more specific reference to the actual year-end date. Cash Equivalents For financial reporting purposes, cash equivalents consist primarily of money market instruments and bank certificates of deposit that have original maturities of three months or less. Fair Value of Financial Instruments As of June 30, 1997, the carrying amount of the Company's cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair value because of the short maturity of those instruments. The carrying amount of long-term debt (including current portion thereof) was $11,987,000 and the fair value was $11,513,000 as of June 30, 1997. The fair value of the Company's long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. All financial instruments are held for purposes other than trading. Concentrations of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of money market instruments and trade receivables. The Company invests its excess cash in money market instruments and certificates of deposit with high credit quality financial institutions and, by policy, limits the amount of credit exposure to any one issuer. Concentrations of credit risk with respect to trade receivables exist because the Company's EMS and PCB operations rely heavily on a relatively small number of customers. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company maintains reserves for potential credit losses and such losses, to date, have been within management's expectations. Inventories Inventories are stated at the lower of cost or net realizable value, with cost determined principally by use of the first-in, first-out method. Long-Lived Assets Property, equipment and improvements are stated at cost. Depreciation and amortization are computed on the straight-line and declining balance methods. The principal estimated useful lives are: buildings - 20 years; improvements - 10 years; plant, office and other equipment - 3 to 7 years. Upon the retirement of assets, costs and the related accumulated depreciation are eliminated from the accounts and any gain or loss is included in income. Property, equipment and improvements acquired by the Company's foreign subsidiaries are recorded net of capital grants received from the Industrial Development Board for Northern Ireland. Goodwill represents the excess of acquisition cost over the fair value of net assets of a purchased business, and is being amortized over five years. Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of" ("SFAS 121") was issued in March 1995. SFAS 121 requires that long-lived assets and certain intangible assets be reviewed for impairment in value, based upon undiscounted future cash flows, and that appropriate losses be recognized whenever it is determined that the carrying amount of an asset may not be recovered. The Company adopted SFAS 121 in fiscal year 1996 and such adoption did not have a material effect on the Company's financial position or results of operations. Revenue and Cost Recognition The Company's Northern Ireland operating units recognize sales and cost of sales upon shipment of products. SMTEK, the Company's U.S. operating unit which was acquired during 1996, has historically generated the majority of its revenue through long- term contracts with suppliers of electronic components and products to the federal government. Consequently, SMTEK uses the percentage of completion method to recognize sales and cost of sales. SMTEK determines percentage complete on the basis of costs incurred to total estimated costs. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation costs. Selling, general and administrative costs are charged to expense as incurred. In the period in which it is determined that a loss will result from the performance of a contract, the entire amount of the estimated loss is charged to income. Other changes in contract price and estimates of costs and profits at completion are recognized prospectively. This method recognizes in the current period the cumulative effect of the changes on current and prior periods. The asset "Costs and estimated earnings in excess of billings on uncompleted contracts" represents revenues recognized in excess of amounts billed. Included in SMTEK's sales and cost of sales amounts are revenues from engineering design and test services, which are immaterial in relation to consolidated revenue from product sales. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and credit carryforwards. In estimating future tax consequences, all expected future events other than enactments of changes in tax law or statutorily imposed rates are considered. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Earnings (Loss) Per Share Earnings (loss) per share is computed by dividing net income by the weighted average number of shares of common stock outstanding and common stock equivalents. The determination of common stock equivalents assumes exercise of those outstanding stock options and warrants to purchase stock that have a dilutive effect on earnings per share (calculated by the treasury stock method). The Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share" ("SFAS 128") in February 1997. SFAS 128 is effective for both interim and annual periods ending after December 15, 1997. The Company will adopt SFAS 128 in the second quarter of fiscal 1998. SFAS 128 requires the presentation of "Basic" earnings per share which represents income available to common shareholders divided by the weighted average number of common shares outstanding for the period. A dual presentation of "Diluted" earnings per share will also be required. Management believes the adoption of SFAS 128 will not have a material impact on the Company's financial position or results of operations. If SFAS 128 had been retroactively applied effective July 1, 1994, the impact on earnings per share would have been negligible, because "primary earnings per share" as presented for the three years ended June 30, 1997 approximates "basic earnings per share" calculated under the provisions of SFAS 128, and "fully diluted earnings per share" as presented approximates "diluted earnings per share" calculated under the provisions of SFAS 128. Foreign Currency Translation The financial statements of DDL's Northern Ireland subsidiaries have been translated into U.S. dollars from their functional currency, British pounds sterling, in the accompanying statements in accordance with Statement of Financial Accounting Standards No. 52. Balance sheet amounts have been translated at the exchange rate on the balance sheet date and income statement amounts have been translated at average exchange rates in effect during the period. The net translation adjustment is recorded as a component of stockholders' equity. Use Of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Stock Based Compensation Prior to July 1, 1996, the Company accounted for its employee stock compensation plans in accordance with Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. As such, compensation expense would be recorded only if, on the date of grant, the current market price of the underlying stock exceeded the exercise price. On July 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for stock-based awards made in fiscal 1996 and future years as if the fair-value-based method defined in SFAS 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS 123. Changes in Classification Certain reclassifications have been made to the fiscal 1996 and 1995 financial statements to conform with the fiscal 1997 financial statement presentation. Such reclassifications had no effect on the Company's results of operations or stockholders' equity (deficit). Note 2 - QUASI-REORGANIZATION The Company, with the authorization of its Board of Directors, implemented a quasi-reorganization effective June 27, 1997. The quasi- reorganization, which did not require the approval of the Company's stockholders, resulted in an elimination of the accumulated deficit of $23,678,000 by a transfer from additional paid-in capital of an equivalent amount. This deficit was attributable primarily to operations which were divested or discontinued in prior years. Following a review and evaluation by management, no adjustment was made to the carrying values of the Company's assets and liabilities because such amounts were deemed to be not in excess of estimated fair values. Note 3 - SUBSEQUENT EVENTS On June 30, 1997 (which is subsequent to the year ended June 27, 1997, as the Company utilizes a 52-53 week fiscal year), the Company repaid its 10% Senior Notes due July 1, 1997 in the amount of $5,300,000 plus accrued interest of $43,000. Of the funds used to repay the 10% Senior Notes, $2,000,000 was borrowed from a private investor (the "Investor") on June 30, 1997 under a note payable due February 1, 1999 which is secured by the common stock of SMTEK. Because the Company borrowed $2,000,000 under a long-term note to raise a portion of the funds needed to pay off the 10% Senior Notes, $2,000,000 of the 10% Senior Notes has been classified as long-term debt in the accompanying consolidated balance sheet. Following is pro forma information for certain consolidated balance sheet line items presented as if the issuance of the $2,000,000 note payable and repayment of the 10% Senior Notes had occurred on June 27, 1997: June 27, 1997 ---------------------------- As Reported Pro forma ----------- ----------- Assets: Cash and cash equivalents $4,718,000 $1,375,000 Liabilities: Current portion of long-term debt $4,167,000 $ 867,000 Other accrued liabilities $2,321,000 $2,278,000 Concurrent with issuing the $2,000,000 note payable on June 30, 1997, the Company agreed to acquire all of the issued and outstanding shares of Jolt Technology, Inc. ("Jolt"), a privately-held electronic manufacturing services company controlled by the Investor, for nine million shares of the Company's common stock. The acquisition of Jolt is subject to executing a definitive agreement, obtaining a fairness opinion on the transaction, and obtaining the approval of the Company's stockholders. Upon consummation of the Jolt acquisition, the maturity date of the $2,000,000 note payable will be extended from February 1, 1999 to October 31, 1999. If consummated, the acquisition will be accounted for under the purchase method of accounting for business combinations. Note 4 - BUSINESS ACQUISITION, LIQUIDATION AND DIVESTITURE Liquidation and Divestiture During fiscal 1995, the Company closed the operations of its A.J. Electronics, Inc. subsidiary ("A.J."). The Company recorded restructuring charges of $1,533,000 for the costs associated with the shut down and disposal of the assets of A.J., including asset write-downs of $552,000, additional bad debt write-offs of $136,000, lease termination costs of $211,000, and all other exit costs totaling $634,000. Substantially all of the operating assets of A.J. were sold in January 1995 for total consideration, in the form of cash and debt assumption, of approximately $1,041,000. In December 1994, the Company sold essentially all the assets of its Aeroscientific Oregon subsidiary ("Aero Oregon") for proceeds of approximately $9,200,000 in cash and the assumption by the purchaser of approximately $300,000 of capitalized lease obligations, which resulted in a gain of $3,317,000. With the proceeds of this sale, the Company paid off $5,300,000 of industrial revenue bonds and settled a $6,941,000 bank term loan for a cash payment of $4,500,000, which resulted in an extraordinary gain on debt extinguishment of $2,441,000. Acquisition On January 12, 1996, the Company acquired 100% of the outstanding stock of SMTEK, a provider of integrated electronic manufacturing services. The purchase price of $8,000,000 was paid in cash of $7,199,000 and 1,000,000 shares of unregistered common stock which was valued at $801,000. The Company also incurred acquisition-related fees and other costs totaling $495,000. The cash portion of the purchase price was financed through the issuance of 10% Senior Notes in the aggregate amount of $5,300,000 and 10% Cumulative Convertible Debentures in the aggregate amount of $3,500,000. The 10% Senior Notes were repaid on June 30, 1997, as discussed in Note 3. The 10% Convertible Debentures, which were sold to offshore investors, were convertible into common stock at any time after 60 days at a conversion price equal to 82% of the market price of the Company's common stock at the time of conversion. In May and June 1996, the holders of all of the 10% Debentures elected to convert such debentures into common stock. As a result of these conversions, a total of 2,698,275 new shares of common stock were issued and stockholders' equity increased by $3,188,000, net of the remaining unamortized issue costs associated with these debentures. In connection with the sale of the 10% Senior Notes and 10% Convertible Debentures, the Company paid $352,000 as a fee to the placement agent for these financings. The Company also issued to the placement agent as additional compensation 572,683 shares of common stock valued at $716,000 and warrants, Series E, to purchase 1,500,000 shares of common stock for $2.50 per share which are exercisable for five years. As further described in Note 10, the Series E warrants contain an antidilution provision which has lowered the exercise price. The acquisition of SMTEK was accounted for using the purchase method. In accordance with Accounting Principles Board Opinion No. 16, the total investment made in SMTEK of $8,495,000 was allocated to the assets and liabilities acquired at their estimated fair values at the acquisition date, which resulted in the recognition of goodwill of $6,342,000. Accumulated amortization of goodwill was $1,903,000 and $634,000 as of June 30, 1997 and 1996, respectively. Following is unaudited pro forma information presented as if the acquisition of SMTEK had occurred on July 1, 1995 and on July 1, 1994, respectively (in thousands except per share amounts): Year ended June 30 ------------------ 1996 1995 (A) ---- ---- Sales $ 40,918 $ 43,776 Loss before extraordinary item $ (1,792) $ (4,793) Net income (loss) $ 564 $ (2,352) Earnings (loss) per share $ 0.03 $ (0.11) (A) These pro forma results include the operations of Aero Oregon and A.J., the assets of which were sold in fiscal 1995. Excluding the fiscal 1995 operating results of Aero Oregon and A.J., and the related gain on sale of Aero Oregon's assets and the A.J. restructuring charges, the fiscal 1995 pro forma sales, loss before extraordinary item, net loss and loss per share are $34,960,000, $(5,191,000), $(2,750,000) and $(0.13), respectively. Note 5 - ACCOUNTS RECEIVABLE The components of accounts receivable are as follows (in thousands): June 30 -------------------- 1997 1996 ---- ---- Trade receivables $ 8,810 $ 5,456 Other receivables 546 296 Less allowance for doubtful accounts (158) (132) ------ ------ $ 9,198 $ 5,620 ====== ====== Included in other receivables at June 30, 1997 and 1996 are grants due from the Industrial Development Board for Northern Ireland of $125,000 and $251,000, respectively (Note 12). Note 6 - COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED CONTRACTS The components of costs and estimated earnings in excess of billings on uncompleted contracts are as follows (in thousands): June 30 -------------------- 1997 1996 ---- ---- Costs incurred on uncompleted contracts $20,455 $11,181 Estimated earnings 2,714 1,544 ------ ------ 23,169 12,725 Less: Billings to date (20,008) (9,699) ------ ------ $ 3,161 $ 3,026 ====== ====== Costs and estimated earnings in excess of billings on uncompleted contracts consists of revenue recognized under electronics assembly contracts which amounts were not billable at the balance sheet date, net of $149,000 and $64,000 of billings in excess of costs and estimated earnings at June 30, 1997 and 1996, respectively. Essentially all of the unbilled receivables are expected to be billed within 90 days of the balance sheet date. Note 7 - INVENTORIES Inventories consist of the following (in thousands): June 30 ------------------ 1997 1996 ---- ---- Raw materials $2,889 $2,853 Work in process 654 1,263 Finished goods 160 146 Less reserves (492) (248) ----- ----- $3,211 $4,014 ====== ====== Note 8 - FINANCING ARRANGEMENTS Bank Credit Agreements The Company has an accounts receivable-based working capital bank line of credit for SMTEK which provides for borrowings of up to $2,500,000 at an interest rate of prime (8.5% at June 30, 1997) plus 1.25%. At June 30, 1997, borrowings outstanding under this credit facility amounted to $977,000. SMTEK's line of credit expires on September 1, 1998. The Company also has a credit facility agreement with Ulster Bank Markets for its Northern Ireland operations. This agreement includes a working capital line of credit of 1,150,000 pounds sterling (approximately $1,900,000), and provides for interest on borrowings at the Bank's base rate (6.50% at June 30, 1997) plus 1.50%. At June 30, 1997, borrowings outstanding under this credit facility amounted to $401,000. In September 1997, Ulster Bank Markets increased the Northern Ireland line of credit to 3,000,000 pounds sterling (approximately $4,900,000) and extended the credit facility through August 31, 1998. Long-Term Debt Long-term debt consists of the following (in thousands): June 30 ------------------ 1997 1996 ---- ---- 10% Senior Notes, interest payable quarterly beginning on June 1, 1996, secured by 1,060,000 shares of common stock and 1,060,000 warrants, due July 1, 1997 (Note 3) $ 5,300 $ 5,300 Mortgage notes secured by real property at the Northern Ireland operations, with interest at variable rates (7-7/8% at June 30, 1997), payable in semiannual installments through 2009 1,300 1,265 Notes payable secured by equipment, interest at 7.95% to 10.9%, payable in monthly installments through April 2001 1,129 1,523 Capitalized lease obligations (Note 12) 1,197 167 8-1/2% Convertible Subordinated Debentures, due 2008, interest payable semi-annually and convertible at holders' option at a price of $10.63 per share at any time prior to maturity; redeemable by the Company at 101.7% of the principal amount during the 12 months ending July 31, 1997 and subsequently at prices declining to 100% at August 1, 1998, and thereafter 1,580 1,580 7% Convertible Subordinated Debentures ("CSDs"), due 2001, interest payable semi-annually and convertible at holders' option at a conversion price of $2.00 per share at any time prior to maturity 421 443 Obligations to former officers, employees and directors under consulting and deferred fee agreements 826 965 Other 234 295 ------ ------ 11,987 11,538 Less current maturities 4,167 603 ------ ------ $ 7,820 $10,935 ====== ====== At June 30, 1997, one of the notes payable secured by equipment was further collateralized by an irrevocable standby letter of credit, which in turn is secured by the Company's restricted cash deposit of $145,000. This amount is included in deposits and other assets in the accompanying consolidated balance sheet at June 30, 1997 and 1996. The aggregate amounts of minimum maturities of long-term debt for the indicated fiscal years (other than capitalized lease obligations, as described in Note 12) are as follows: 1998 - $3,867,000; 1999 - $2,954,000; 2000 - $400,000; 2001 - $659,000; 2002 - $172,000; and thereafter - $2,738,000. During fiscal 1996 and 1995, holders of $132,000 and $86,000, respectively, in principal of 7% CSDs exchanged such CSDs for common stock of 66,000 and 43,000 shares, respectively. Accrued interest related to the converted debentures was credited to income. In March 1996, the Company entered into a settlement agreement with certain of its former officers, key employees and directors (the "Participants") to restructure its outstanding obligations under several consulting programs and deferred fee arrangements which had provided for payments to the Participants after their retirement from the Company or from its Board of Directors. Under terms of the settlement, the Participants agreed to relinquish all future payments due them under these consulting programs and deferred fee arrangements in return for an aggregate of 595,872 common stock purchase warrants, Series G. The exercise price is $2.50 per warrant. The Company will subsidize the exercise of warrants by crediting the Participants with $2.50 for each warrant exercised. The warrants may be called for redemption by the Company at any time after June 1, 1996, if DDL's common stock closes above $4.00 per share, at a redemption price of $.05 per warrant. The Company is obligated to pay the Participants $2.50 for each warrant which remains unexercised on the June 1, 1998 warrant expiration date, payable in semiannual installments over two to ten years. The Company has recorded a liability for the present value of these future payments, which amounted to $802,000 and $941,000 at June 30, 1997 and 1996, respectively. As the result of this settlement agreement, the Company recorded an extraordinary gain in fiscal 1996 of $2,356,000, net of $197,000 of compensation expense related to the "call" feature of the warrants. During fiscal 1997, 144,646 Series G warrants were exercised. Note 9 - INCOME TAXES Temporary differences between financial statement carrying amounts and the tax bases of assets and liabilities that give rise to significant portions of the deferred tax assets and liabilities relate to the following (in thousands): June 30 --------------------- 1997 1996 ---- ---- Deferred tax assets: Accrued employee benefits $ 346 $ 394 Loss reserves 452 547 Net operating loss carryforwards 14,102 13,240 Other 74 272 ------ ------ Total deferred tax assets 14,974 14,453 Deferred tax liabilities: Depreciation (118) (53) ------ ------ Net deferred tax assets before allowance 14,856 14,400 Less valuation allowance (14,856) (14,400) ------ ------ Net deferred tax assets after allowance $ - $ - ====== ====== In assessing the realizability of net deferred tax assets, management considers whether it is more likely than not that some portion or all of the net deferred tax assets will be realized. The ultimate realization of net deferred tax assets is dependent upon the generation of future taxable income of approximately $37,000,000 prior to the expiration of the net operating loss carryforwards. Based on the level of historical losses and projections for future taxable income, management believes that it is more likely than not that the deferred tax assets will not be recognized, and therefore, has recorded a 100% valuation allowance to offset the assets. The valuation allowance was $14,400,000 and $20,846,000 as of July 1, 1996 and 1995, respectively. The net change in the total valuation allowance for the years ended June 30, 1997 and 1996 was an increase of $456,000 and a decrease of $6,446,000, respectively. The reduction of the valuation allowance for fiscal 1996 was based on a carryback of prior year net operating losses and an extraordinary gain on extinguishment of debt. This change in estimate regarding the realizability of certain net operating losses has been reflected in the income tax benefit for fiscal 1996. The provision (benefit) for income taxes differs from an amount computed using the statutory federal income tax rate as follows (in thousands): Year ended June 30 --------------------------- 1997 1996 1995 ---- ---- ---- Federal tax benefit computed at statutory rate $ (569) $(635) $(804) State income tax, net of federal benefit - - 5 Differences in taxation of foreign earnings, net (263) 114 (155) Amortization of debt issue costs - (108) - Amortization of goodwill 431 215 - Utilization of net operating losses - (1,110) - Deferred tax effect of temporary differences (102) 6,871 1,438 Net change in valuation allowance 456 (6,446) (484) Other 47 (11) - ----- ----- ----- Income tax expense (benefit) $ - $(1,110) $ - ===== ===== ===== During fiscal 1996, the Company recognized an income tax benefit associated with its application for federal tax refunds as permitted under section 172(f) of the Internal Revenue Code. In the aggregate, the Company applied for federal tax refunds of $2,175,000, net of costs associated with applying for such refunds. Through June 30, 1996, the Company had received $1,871,000 of net refunds plus interest on such refunds of $106,000, and has recognized as an income tax benefit $1,110,000 net of certain expenses. Because the tax returns underlying these refunds are subject to audit by the Internal Revenue Service and a portion of the refunds could be disallowed, the Company has not yet recognized a tax benefit for the remainder of the refunds received to date, or for the refunds still expected to be received. No additional refunds were received during fiscal 1997. Nonetheless, the Company feels that its claim for refund and carry back of net operating losses can be substantiated and is supported by law, and that the Company will ultimately collect and retain a substantial portion of the refunds applied for. As of June 30, 1997, the Company has U.S. federal and state net operating loss ("NOL") carryforwards of $37,408,000 and $27,709,000, respectively, expiring in 2004 through 2012. The NOL carryforward for federal alternative minimum tax purposes is approximately $28,558,000. The Company's ability to use its NOL carryforwards to offset future taxable income is subject to annual limitations due to certain substantial stock ownership changes. Utilization of NOLs incurred through July 1993 became limited due to an ownership change. NOLs incurred subsequent to July 1993 are not subject to limitation. The amount of the NOL carryforward arising prior to July 1993 which is subject to limitation is approximately $21,877,000. The annual limitation is approximately $1,222,000. Income of the Company's Northern Ireland subsidiaries is sheltered by operating loss carryforwards for United Kingdom income tax purposes (the "U.K. NOL"). The income tax benefit from the U.K. NOL was $244,000 in fiscal 1997 and has been treated as a reduction in the provision for income taxes. There was no income tax benefit from the U.K. NOL in fiscal 1996 and 1995. At June 30, 1997, the U.K. NOL amounted to approximately $11,300,000. Substantially all of these net operating losses from prior years can be carried forward by the Company's Northern Ireland subsidiaries for an indefinite period of time to reduce future taxable income. As discussed in Note 2, the Company effected a quasi-reorganization as of June 27, 1997. In the future, income tax benefits, if any, realized upon the utilization of U.S. or U.K. net operating losses generated prior to the effective date of the quasi-reorganization will be credited to additional paid-in capital. Pretax income (loss) from foreign operations for fiscal 1997, 1996 and 1995 was $772,000, ($338,000) and $443,000, respectively. It is not practicable to estimate the amount of tax that might be payable on the eventual remittance of such earnings. On remittance, the United Kingdom imposes withholding taxes that would then be available for use as a credit against the U.S. tax liability, if any, subject to certain limitations. Note 10 - STOCKHOLDERS' EQUITY Sales of Common Stock In June 1997, the Company sold 2,000,000 shares of common stock to various investors, generating proceeds of $1,385,000, which is net of issuance costs of $115,000. In March 1996, the Company sold 600,000 shares of common stock to an offshore investor, generating proceeds of $1,112,000, which is net of issuance costs of $58,000. Common Stock Held in Escrow In February 1996, 1,060,000 shares of common stock (the "Escrow Shares") were placed into an escrow account to secure the 10% Senior Notes. In June 1997, in connection with the payoff of the 10% Senior Notes, 353,333 of the Escrow Shares were released to the placement agent of the 10% Senior Notes as a deferred fee and the remaining 706,667 Escrow Shares were returned to the Company and canceled. The carrying value of the 353,333 shares of $442,000 was expensed in June 1997 and is included in debt issue cost amortization expense in the accompanying consolidated statement of operations. Stock Option Plans The Company has in effect several stock-based plans under which non- qualified and incentive stock options and restricted stock awards have been granted to directors, officers and other key employees. Subject to the discretion of the Compensation Committee of the Board of Directors (the "Committee"), employee stock options generally become exercisable in installments of 33.3% per year, or over an alternative vesting period determined by the Committee, and generally have a 10-year term when granted. The exercise price of all incentive stock options must be equal to or greater than the fair market value of the shares on the date of grant. The exercise price of non-statutory stock options must be at least 85% of the fair market value of the common stock on the date of grant. In July 1996, following stockholder approval, the Company adopted a stock option plan for non-employee directors. Under this plan, annually on July 1 each non-employee director will be granted a non-statutory stock option to purchase 30,000 shares of common stock. In July 1996, options to purchase a total of 120,000 shares at an exercise price of $1.63 were granted to the Company's four non-employee directors. Activity under the employee and non-employee director stock option plans for fiscal years 1997, 1996 and 1995 was as follows: Weighted average exercise price Shares per share ------ --------- Shares under option, June 30, 1994 1,864,566 $0.87 Granted 120,000 1.23 Expired or canceled (177,500) 1.71 Exercised (450,447) 0.64 --------- ----- Shares under option, June 30, 1995 1,356,619 0.87 Granted 906,042 1.72 Expired or canceled (33,928) 1.44 Exercised (595,442) 0.75 --------- ----- Shares under option, June 30, 1996 1,633,291 1.37 Granted 1,852,758 1.23 Expired or canceled (1,139,058) 1.66 Exercised (150,000) 0.50 --------- ----- Shares under option, June 30, 1997 2,196,991 $1.16 ========= ===== In fiscal 1997, pursuant to resolutions of the Compensation Committee of the Board of Directors, 762,329 options with exercise prices of $1.63 to $4.88 were canceled and were replaced by new options for the same number of shares at an exercise price of $1.25. The following table summarizes information about shares under option at June 30, 1997: Options Outstanding Options Exercisable ------------------------------------- ---------------------- Weighted average Weighted Weighted Range of remaining average average exercise Number contractual exercise Number exercise prices outstanding life price exercisable price - - --------- --------- --------- --------- --------- -------- $0.50-$0.69 274,462 4.4 years $0.50 274,462 $.50 1.00- 1.25 1,670,529 9.3 1.20 184,999 1.25 1.63 252,000 9.0 1.63 163,997 1.63 --------- ---- ------- 2,196,991 $1.16 623,458 ========= ==== ======= At June 30, 1997, under the employee and non-employee director stock option plans there were 857,998 and 780,000 shares, respectively, available for future grants. Stock Based Compensation The Company applies the provisions of APB Opinion No. 25 and related interpretations in accounting for its stock option plans and the Series H warrants granted to non-employee directors (see "Warrants" below). Accordingly, no compensation cost has been recognized for its stock option plans and awards of warrants to non-employee directors. Had compensation cost for stock-based awards been determined consistent with SFAS 123, the Company's results of operations would have been reduced to the pro forma amounts indicated below: Year Ended June 30 ----------------------- 1997 1996 ------- ------- Net income (loss): As reported $(1,678,000) $ 1,598,000 Pro forma $(2,251,000) $ 1,339,000 Earnings (loss) per share: As reported $ (0.07) $ 0.09 Pro forma $ (0.10) $ 0.07 The weighted average fair value of options granted during the years ended June 30, 1997 and 1996 was $0.76 and $1.06, respectively. The weighted average fair value of Series H warrants granted to non-employee directors in fiscal 1996 was $0.84 per warrant. The fair value of each option and warrant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 1997 and 1996, respectively: dividend yield of 0.0% percent for both years; expected volatility of 68% and 67%, respectively; risk-free interest rates ranging from 6.1% to 6.8% for 1997 and 6.6% to 6.7% for 1996; and expected lives of five years for both years. Preferred Stock Purchase Rights At June 30, 1997, 1,000 preferred stock purchase rights are outstanding. Each right may be exercised to purchase one-hundredth of a share of Series A Participating Junior Preferred Stock at a purchase price of $30, subject to adjustment. The rights may be exercised only after commencement or public announcement that a person (other than a person receiving prior approval from the Company) has acquired or obtained the right to acquire 20% or more of the Company's outstanding common stock. The rights, which do not have voting rights, may be redeemed by the Company at a price of $.01 per right within ten days after the announcement that a person has acquired 20% or more of the outstanding common stock of the Company and the redemption period may be extended under certain circumstances. In the event that the Company is acquired in a merger or other business combination transaction, provision shall be made so that each holder of a right shall have the right to receive that number of shares of common stock of the surviving company which at the time of the transaction would have a market value of two times the exercise price of the right. 150,000 shares of Series A Junior Participating Preferred Stock, $1 par value, are authorized. Warrants In fiscal 1993, the Company exchanged a portion of its outstanding convertible debentures for stock and common stock purchase warrants, Series A. The remaining 223,500 of these Series A warrants were exercised during fiscal 1996 at $1.42 per share. In fiscal 1995, the Company issued 100,000 warrants, Series B, to purchase common stock at $1.31 per share to offshore investors in connection with an earlier offering of common stock. These warrants were exercised in April 1996. During fiscal 1996, the Company issued Series C, D, E, F, G and H common stock purchase warrants. The provisions and activity of these warrants are as follows: 1. Series C warrants covering an aggregate of 455,000 shares were issued to four parties, including an investment banking firm, for consulting and financial advisory services. These warrants are exercisable at $2.25 per share until June 30, 1998, and at $3.50 thereafter until the warrant expiration date on June 30, 2000. Fifty-thousand of the Series C warrants were issued to an individual who was subsequently elected a director of the Company. Substantially all of these warrants were granted in June and July 1995 and had no intrinsic value on the date of grant. 2. Series D warrants covering 50,000 shares were issued to the Company's former general counsel as partial consideration for legal services rendered under an agreement entered into in fiscal 1995. These warrants are exercisable at $1.50 per share until June 30, 1998, and at $2.50 thereafter until the warrant expiration date on June 30, 2000. The warrants had no intrinsic value on the date of grant. 3. Series E warrants covering an aggregate of 1,500,000 shares were issued to an investment banking firm which served as placement agent for the 10% Senior Notes and the 10% Convertible Debentures. The Series E warrants are exercisable until their expiration on February 28, 2001, and provided for an original exercise price of $2.50 per share, subject to adjustment in the event the Company issues new common stock at an effective price less than the effective exercise price on the Series E warrants. Primarily as a result of the conversion of the 10% Convertible Debentures in May and June 1996 at an average price of approximately $1.30 and the issuance of 2,000,000 shares of common stock at a price of $0.75 in June 1997, the effective exercise price on the Series E warrants was reduced to $2.19 as of June 30, 1997. The Series E warrants were granted in September 1995 contingent upon the placement of debt. The warrants had no intrinsic value on the measurement date. 4. In February 1996, the Series F warrants covering an aggregate of 1,060,000 shares were issued as partial collateral for the 10% Senior Notes. These warrants were canceled effective June 30, 1997, concurrent with the repayment of the 10% Senior Notes. 5. As further described in Note 8, the Series G warrants covering an aggregate of 595,872 shares were issued in March 1996 to certain former officers, key employees and directors of the Company. The Series G warrants are exercisable until their expiration on June 1, 1998. At June 30, 1997, 451,226 Series G warrants were outstanding. 6. Series H warrants covering an aggregate 300,000 shares were issued to the Company's non-employee directors who served on the Company's board without other compensation during the period from May 31, 1995 to June 30, 1996. The Series H warrants are exercisable at $1.50 per share until June 30, 1998, and at $2.50 thereafter until the warrant expiration date on June 30, 2000. There was no intrinsic value related to the warrants on the date of grant. Note 11 - OTHER FINANCIAL INFORMATION Information Relating to Consolidated Statements of Cash Flows "Net cash provided by (used in) operating activities" includes cash payments for interest (in thousands): Year ended June 30 --------------------------- 1997 1996 1995 ---- ---- ---- Interest paid $ 1,077 $ 732 $ 883 "Net (increase) decrease in operating working capital, net of effects of business acquired" consists of the following (in thousands): Year ended June 30 --------------------------- 1997 1996 1995 ---- ---- ---- (Increase) decrease in accounts receivable $(3,397) $ 270 $ 2,030 Increase in costs and estimated earnings in excess of billings on uncompleted contracts (135) (726) - (Increase) decrease in inventories 1,054 (1,881) 1,504 (Increase) decrease in prepaid expenses 189 (86) 62 Increase in accounts payable 1,222 278 111 Increase (decrease) in accrued payroll and employee benefits 328 24 (406) Increase (decrease) in other accrued liabilities (808) 613 708 ------ ------ ------ Net (increase) decrease $(1,547) $(1,508) $ 4,009 ====== ====== ====== Following is the supplemental schedule of non-cash investing and financing activities (in thousands): Year ended June 30 -------------------------- 1997 1996 1995 ---- ---- ---- Capital expenditures financed by lease obligations and notes payable $ 1,221 $ 689 $ 96 Conversion of debt to equity 223 3,667 86 Common stock issued as partial consideration for purchase of SMTEK, Inc. - 801 - Common stock issued as debt placement fee - 716 - Common stock deposited to (returned from) escrow account for 10% Senior Notes (883) 1,325 - Conversion of preferred stock to common stock - - 3 Other Accrued Liabilities Other accrued liabilities consist of the following (in thousands): June 30 ------------------ 1997 1996 ---- ---- Environmental liabilities $ 684 $ 728 Accrued taxes payable 794 951 Other 843 1,435 ------ ------ $2,321 $3,114 ====== ====== Valuation and Qualifying Accounts and Reserves Following is the Company's schedule of valuation and qualifying accounts and reserves for the last three years (in thousands): Balance at Charged to Balance Beginning Costs and at End of Period Expenses Deductions of Period --------- -------- --------- --------- Allowance for doubtful accounts: - - ------------------------------- Fiscal 1995 $533 $ 95 $(447) $181 Fiscal 1996 181 85 (134) 132 Fiscal 1997 132 74 (48) 158 Inventory reserves - - ------------------ Fiscal 1995 $384 $ 62 $(290) $156 Fiscal 1996 156 250 (158) 248 Fiscal 1997 248 443 (199) 492 Note 12 - COMMITMENTS AND CONTINGENCIES Acquisition and Merger Commitments On May 29, 1997, the Company signed a letter of intent (the "Letter of Intent") to merge with Century Electronics Manufacturing, Inc. ("CEMI"). Pursuant to the Letter of Intent, CEMI was to provide a loan up to $3.3 million to the Company by June 1, 1997 for retirement of the Company's 10% Senior Notes in the aggregate principal amount of $5,300,000. However, such financing was not made available by CEMI. As a result, on June 30, 1997 the Company obtained alternate financing which enabled it to repay the 10% Senior Notes. On September 22, 1997, the Company filed a lawsuit against CEMI alleging breach of contract and fraud and seeking $5,000,000 in actual damages plus punitive damages. CEMI has not yet answered the Company's complaint or made an appearance in the case. In the circumstances, management currently believes that the likelihood of consummating a merger with CEMI is remote. As described in Note 3, the Company has entered into an agreement to acquire Jolt Technology, Inc., a privately held electronic manufacturing services company, for nine million shares of common stock. The acquisition of Jolt Technology, Inc. is subject to executing a definitive agreement, obtaining a fairness opinion on the transaction, and obtaining the approval of the Company's stockholders. Lease Commitments Future minimum lease payments at June 30, 1997 were as follows (in thousands): Capital Operating leases leases ------ ------ Fiscal 1998 $ 393 $ 415 Fiscal 1999 372 420 Fiscal 2000 335 386 Fiscal 2001 278 22 Fiscal 2002 50 16 Thereafter - 21 ----- ----- Total 1,428 $1,280 ===== Less: Interest (231) ----- Present value of minimum lease payments $1,197 ====== The capitalized cost of the related assets (primarily plant equipment), which are pledged as security under the capital leases, was $1,726,000 and $370,000 at June 30, 1997, and 1996, respectively. Accumulated amortization on assets under capital leases amounted to $264,000 and $143,000 at June 30, 1997 and 1996, respectively. Rental expense for operating leases amounted to $408,000, $229,000 and $238,000 for fiscal 1997, 1996 and 1995, respectively. The Company's principal operating leases are renewable at the fair rental value on the expiration dates. SMTEK conducts its operations from a 45,000 square foot facility, which is leased from an unaffiliated party through May 31, 2000. The monthly rent was approximately $30,000 during fiscal 1997 and is subject to a 4% increase each year. SMTEK has the option to extend the lease term for three renewal periods of three years each. The lease rate during the renewal periods is subject to adjustment based on changes in the Consumer Price Index for the local area. Government Grants Pursuant to government grant agreements with the Industrial Development Board for Northern Ireland ("IDB"), the Company's subsidiary, DDL Electronics Limited ("DDL-E"), has been reimbursed for a portion of qualifying capital expenditures and for certain employment and interest costs. Approximately $869,000 of the government grants received by DDL-E are subject to repayment if the employment level at this subsidiary falls below 134 employees during the two year period beginning on July 1, 1997. At the present time, DDL-E has approximately 180 employees. Management does not expect the employment at DDL-E to drop below the level that would give rise to a grant repayment obligation. In addition to the contingent grant repayment liability based on DDL- E's employment level, the Company would be obligated to repay grants in the event that DDL-E ceases business, permanently discontinues production, or fails to pay to the IDB any amounts due under its mortgage note payable (Note 8). DDL-E's contingent grant repayment obligations amount to approximately $1,377,000 at June 30, 1997. Management does not expect that the Company will be required to repay any grants under these provisions. Foreign Currency Exposure The Company's investment in its Northern Ireland subsidiaries is represented by operating assets and liabilities denominated in these subsidiaries' functional currency of British pounds sterling. In addition, in the normal course of business these operating units enter into transactions denominated in European currencies other than British pounds sterling. As a result, the Company is subject to transaction and translation exposure from fluctuations in foreign currency exchange rates. The Company uses a variety of strategies, including foreign currency forward contracts and internal hedging, to minimize or eliminate foreign currency exchange rate risk associated with substantially all of its foreign currency transactions. Gains and losses on these hedging transactions are generally recorded in earnings in the same period as they are realized, which is usually in the same period as the underlying or originating transactions. The Company does not enter into speculative foreign currency transactions. Environmental Matters In the early 1970s, one of the Company's former California-based PCB operating units, Aeroscientific Corp. ("Aero Anaheim"), disposed of certain quantities of waste at the Stringfellow hazardous waste disposal site in Riverside County, California, which was subsequently designated as a Superfund site by the U.S. Environmental Protections Agency ("EPA"). Aero Anaheim's waste accounted for less than three one-hundreds of one percent of the total waste deposited at this site. Aero Anaheim, which since 1991 has been an inactive, insolvent subsidiary of the Company, established a reserve of $120,000 as its share of the estimated environmental remediation costs based on its relative contribution to the total wastes disposed at this site. The EPA contends that site owners and operators and waste generators are jointly and severally liable under federal law. Nonetheless, the Company believes that the final allocation of liability will generally be made based on relative contributions of waste. Furthermore, even if joint liability were to be imposed, the Company believes that the risk is remote that Aero Anaheim's ultimate liability in this matter would exceed its reserve, because the other generators of wastes disposed at the Stringfellow site include numerous companies with assets and equity significantly greater than Aero Anaheim. The Company believes that Aero Anaheim's reserve is adequate to cover future costs associated with this matter. The Company is aware of certain chemicals that exist in the ground at Aero Anaheim's previously leased facility in Anaheim. The Company, which was a guarantor of Aero Anaheim's facility lease, has notified the appropriate governmental agencies and is proceeding with remediation and investigative studies regarding soil and groundwater contamination. The installation of water and soil extraction wells was completed in August 1994. In May 1995, the Company retained an environmental engineering firm to begin the vapor extraction of pollutant from the soil and to perform quarterly groundwater monitoring. In April 1997, the Company ceased soil vapor extraction procedures at this site because the pollutant recovery rate had declined to and stabilized at a very low level at which vapor extraction is no longer a cost effective recovery technique. The property owner is currently conducting a soil gas study at the site which is expected to provide information as to the remaining contamination in the soil. It is not yet known whether further soil remediation work will be necessary. Investigative work to determine the full extent of potential groundwater pollution has not yet been completed. Consequently, a complete and accurate estimate of the full and potential costs cannot be determined at this time. The Company believes, however, that the resolution of these matters could require a significant cash outlay. Initial estimates from environmental engineering firms indicate that it could cost from $1,000,000 to $3,000,000 to fully clean up the site and could take as long as ten years to complete. The Company and Aero Anaheim entered into an agreement to share the costs of environmental remediation with the owner of the Anaheim property. Under this agreement, the Company is obligated to pay 80% of the site's total remediation costs up to $725,000 (i.e., up to the Company's $580,000 share) with any costs above $725,000 being shared equally between the Company and the property owner. Through June 30, 1997, the Company has paid $538,000 as its share of the remediation costs (including cash placed in an escrow account for payment of expenses). At June 30, 1997, the Company has a reserve of $564,000, which represents its estimated share of future remediation costs at this site. Based on consultation with the environmental engineering firms, management believes that the Company has made adequate provision for the liability based on probable loss. It is possible, however, that the future remediation costs at this site could differ significantly from the estimates, and may exceed the amount of the reserve. Note 13 - BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION The Company operates in two primary industry segments providing electronic manufacturing services and printed circuit boards principally to the computer, communications, instrumentation and medical equipment markets. A summary of the Company's operations by segment follows (in thousands): Year ended June 30 ------------------------------ 1997 1996 1995 ---- ---- ---- Sales: Electronic Manufacturing Services $38,614 $22,245 $13,842 Printed Circuit Boards 10,305 10,891 15,734 ------ ------ ------ $48,919 $33,136 $29,576 ====== ====== ====== Operating income (loss): Electronic Manufacturing Services $ 70 $ (267) $(1,892) Printed Circuit Boards 589 (20) (646) General Corporate (541) (880) (2,432) ------ ------ ------ $ 118 $(1,167) $(4,970) ====== ====== ====== Identifiable assets: Electronic Manufacturing Services $22,248 $20,321 $ 6,162 Printed Circuit Boards 5,881 5,266 5,543 General Corporate 3,751 2,500 885 ------ ------ ------ $31,880 $28,087 $12,590 ====== ====== ====== Depreciation and amortization: Electronic Manufacturing Services $ 2,195 $ 1,195 $ 568 Printed Circuit Boards 498 548 924 General Corporate 938 285 13 ------ ------ ------ $ 3,631 $ 2,028 $ 1,505 ====== ====== ====== Capital expenditures:* Electronic Manufacturing Services $ 1,143 $ 1,013 $ 210 Printed Circuit Boards 1,060 586 433 General Corporate 7 - - ------ ------ ------ $ 2,210 $ 1,599 $ 643 ====== ====== ====== * Capital expenditures include equipment additions financed with capital leases and notes payable. Sales, operating income (loss), and identifiable assets by geographic area are as follows (in thousands): Year ended June 30 ------------------------------ 1997 1996 1995 ---- ---- ---- Sales: United States $19,170 $ 8,668 $ 8,765 Northern Ireland 29,749 24,468 20,811 ------ ------ ------ Total $48,919 $33,136 $29,576 ====== ====== ====== Operating income (loss): United States $ (819) $ (748) $(2,226) Northern Ireland 937 (419) (2,744) ------ ------ ------ Total $ 118 $(1,167) $(4,970) ====== ====== ====== Identifiable assets: United States $17,425 $16,133 $ 1,003 Northern Ireland 14,455 11,954 11,587 ------ ------ ------ Total $31,880 $28,087 $12,590 ====== ====== ====== The Company had sales to two customers which accounted for approximately 18.4% and 16.5% of sales, respectively, in fiscal 1997. No single customer accounted for 10% or more of consolidated sales in fiscal 1996 or 1995. Note 14 - LIQUIDITY The Company's financial statements are presented on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company incurred operating income (losses) of $118,000, $(1,167,000) and $(4,970,000) and cash inflows (outflows) from operating activities of $230,000, $(555,000) and $(264,000) for the years ended June 30, 1997, 1996 and 1995, respectively. In response to the large operating losses incurred up through fiscal 1995, the Company liquidated its U.S. EMS operation and divested its U.S. PCB operation during fiscal 1995. The U.S. EMS operation had been severely damaged in the January 1994 Los Angeles earthquake. In fiscal 1996, the Company reestablished a domestic operating presence by acquiring SMTEK. With the exception of fiscal 1997, during which the Company generated operating income of $118,000, the Company has incurred operating losses for a number of years. Operating losses could continue until such time as sales increase to a level sufficient to cover costs and operating expenses. No assurance can be given as to whether or when sales increases may be achieved. Sales increases will depend in part upon strengthening the Company's sales and marketing functions for its existing operations, and improving its price competitiveness in the EMS industry by achieving economies of scale in the procurement of electronic components. Management believes that the Company's cash resources and borrowing capacity on its working capital lines of credit are sufficient to fund operations for at least the next year. Note 15 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) Following is a summary of the quarterly results of operations (in thousands except per share amounts): Quarter ended ------------------------------------------------- Sep 30 Dec 31 Mar 31 Jun 30 Total ------ ------ ------ ------ ----- Fiscal 1997 Sales $ 9,895 $11,185 $13,580 $14,259 $48,919 ====== ====== ====== ====== ====== Net income (loss) $ (725) $ (531) $ 134 $ (556) $(1,678) ====== ====== ====== ====== ====== Earnings (loss) per share $ (0.03) $ (0.02) $ 0.01 $ (0.02) $ (0.07) ====== ====== ====== ====== ====== Fiscal 1996 Sales $ 6,192 $ 6,029 $10,501 $10,414 $33,136 ====== ====== ====== ====== ====== Income (loss) before extraordinary item $ 1,084 $ (348) $ (405) $(1,089) $ (758) Extraordinary item - Gain on debt extinguishment - - 2,356 - 2,356 ------ ------ ------ ------ ------ Net income (loss) $ 1,084 $ (348) $ 1,951 $(1,089) $ 1,598 ====== ====== ====== ====== ====== Earnings (loss) per share: Income (loss) before extra- ordinary item $ 0.06 $ (0.02) $ (0.02) $ (0.05) $ (0.04) Extraordinary item - - 0.12 - 0.13 ------ ------ ------ ------ ------ Total earnings (loss) per share $ 0.06 $ (0.02) $ 0.10 $ (0.05) $ 0.09 ====== ====== ====== ====== ====== DDL ELECTRONICS, INC. AND SUBSIDIARIES Market and Dividend Information The Company's common shares are traded on the New York Stock Exchange and Pacific Exchange (ticker symbol "DDL"). The high and low closing sales prices for the common stock for the last two fiscal years, as reported on the composite tape, are set forth in the following table. Fiscal 1997 Fiscal 1996 -------------- -------------- High Low High Low ----- ----- ----- ----- 1st Quarter 2 1-1/8 2-1/8 1-1/2 2nd Quarter 1-1/4 15/16 3 1-7/8 3rd Quarter 1-1/4 7/8 2-3/4 2-1/4 4th Quarter 1-5/8 15/16 2-1/2 1-5/8 There were approximately 1500 stockholders of record at August 28, 1997. The Company suspended dividend payments effective March 31, 1989. A resumption of dividend payments is not anticipated in the foreseeable future. Form 10-K Annual Report A copy of the Annual Report on Form 10-K (without exhibits) may be obtained free of charge upon written request to DDL Electronics, Inc., 2151 Anchor Court, Newbury Park, California 91320. DDL ELECTRONICS, INC. AND SUBSIDIARIES DIRECTORS, EXECUTIVE OFFICERS, OPERATING UNITS AND OTHER CORPORATE INFORMATION DIRECTORS EXECUTIVE OFFICERS Karen Beth Brenner Gregory L. Horton Investment Manager President and Chief Executive Officer Newport Beach, California Richard K. Vitelle Melvin Foster Vice President - Finance and Attorney at Law Administration, Chief Financial Officer, Boston, Massachusetts Treasurer and Secretary Charlene Gondek OPERATING UNITS Investor SMTEK, Inc. Aspen, Colorado Newbury Park, California DDL Electronics Limited Gregory L. Horton Craigavon, Northern Ireland Chairman of the Board, United Kingdom President and Chief Executive Officer Irlandus Circuits Limited DDL Electronics, Inc. Craigavon, Northern Ireland Newbury Park, California United Kingdom Richard K. Vitelle Vice President and Chief Financial Officer TRANSFER AGENT & REGISTRAR DDL Electronics, Inc. American Stock Transfer & Newbury Park, California Trust Company 40 Wall Street New York, New York 10005 Thomas M. Wheeler Investor Troy, Michigan INDEPENDENT AUDITORS KPMG Peat Marwick LLP Los Angeles, California Robert G. Wilson Independent Businessman Vancouver BC, Canada LEGAL COUNSEL Nelson, Mullins, Riley & Scarborough, L.L.P. Charlotte, North Carolina EX-21 8 EXHIBIT 21 DDL ELECTRONICS, INC. SUBSIDIARIES OF THE REGISTRANT All subsidiaries are 100% owned by DDL Electronics, Inc., except as otherwise indicated, and are included in the consolidated financial statements. Each subsidiary was organized in the jurisdiction specified under its name in the following list. Aeroscientific Corp. (California) (99.9%-owned by DDL Electronics, Inc.) California Aeroscientific Corp. (Oregon) (100%-owned by Aeroscientific Corp.(California)) Oregon A.J. Electronics, Inc. California DDL Europe Limited Northern Ireland DDL Electronics Limited (100%-owned by DDL Europe Limited) Northern Ireland Irlandus Circuits Limited (100% owned by DDL Europe Limited) Northern Ireland SMTEK, Inc. California EX-23 9 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS The Board of Directors DDL Electronics, Inc. We consent to the incorporation by reference in the Registration Statement on Form S-3 (No. 333-02969) and the Registration Statements on Form S-8 (Nos. 33-18356, 33-45102, 33-74400 and 333-08689) of DDL Electronics, Inc. of our report dated August 15, 1997, except for the second paragraph of note 12, which is as of September 22, 1997, relating to the consolidated balance sheets of DDL Electronics, Inc. and subsidiaries as of June 30, 1997 and 1996 and the related consolidated statements of operations, cash flows and stockholders' equity (deficit) for each of the years in the three-year period ended June 30, 1997, which report appears in the June 30, 1997 Annual Report on Form 10-K of DDL Electronics, Inc. /s/ KPMG PEAT MARWICK LLP Los Angeles, California October 9, 1997 EX-27 10
5 YEAR JUN-30-1997 JUN-30-1997 4718000 0 9198000 0 3211000 20420000 22951000 16161000 31880000 18095000 2001000 246000 0 0 5719000 31880000 48919000 48919000 42475000 48801000 0 0 1105000 (1678000) 0 (1678000) 0 0 0 (1678000) (0.07) (0.07)
EX-99 11 EXHIBIT 99 UNDERTAKING FOR FORM S-8 REGISTRATION STATEMENT With respect to the Registration Statement previously filed by the Company on Form S-8, the Company hereby undertakes as follows: Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding), is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. -----END PRIVACY-ENHANCED MESSAGE-----