-----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, HjOCfXGUaTdEsKYN4g4FXjw9w2KDhZOmXzRBwy6+fphxLpnNc1lxei/fR6yD2OI/ ymmlZkdnnVsPitbF0iSKAw== 0000026987-96-000003.txt : 19960213 0000026987-96-000003.hdr.sgml : 19960213 ACCESSION NUMBER: 0000026987-96-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960212 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DDL ELECTRONICS INC CENTRAL INDEX KEY: 0000026987 STANDARD INDUSTRIAL CLASSIFICATION: PRINTED CIRCUIT BOARDS [3672] IRS NUMBER: 330213512 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08101 FILM NUMBER: 96515430 BUSINESS ADDRESS: STREET 1: 2151 ANCHOR COURT CITY: NEWBURY PARK STATE: CA ZIP: 91320 BUSINESS PHONE: 805-376-2595 MAIL ADDRESS: STREET 1: 7320 SW HUNZIKER ROAD #300 CITY: TIGARD STATE: OR ZIP: 97223-2302 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-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended: DECEMBER 31, 1995 [ ] 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. State or Other Jurisdiction of IRS Employer No.: 33-0213512 Incorporation or Organization: DELAWARE Address of Principal Executive Offices: 2151 Anchor Court Newbury Park, CA 91320 Registrant's Telephone Number: (805) 376-2595 Former Name - Former Address and Former Fiscal Year, if Changed Since Last Report: 7320 SW Hunziker Road, #300 Tigard, Oregon 97223-2302 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 [ ] The registrant had 18,847,849 shares of Common Stock outstanding as of February 9, 1996. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DDL ELECTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Unaudited, except June 30, 1995) December 31, June 30, 1995 1995 ASSETS CURRENT ASSETS Cash and cash equivalents $ 2,828,000 $ 2,917,000 Accounts receivable 3,837,000 3,600,000 Inventories 2,687,000 2,188,000 Prepaid expenses and deposits 1,274,000 171,000 Total current assets 10,626,000 8,876,000 PROPERTY, EQUIPMENT AND IMPROVEMENTS, AT COST Buildings and improvements 5,198,000 5,217,000 Plant equipment 9,301,000 9,486,000 Office and other equipment 1,401,000 1,268,000 15,900,000 15,971,000 Less: accumulated depreciation and amortization (12,672,000) (12,662,000) Property, equipment and improvements, net 3,228,000 3,309,000 OTHER ASSETS Total other assets 396,000 405,000 Total assets $ 14,250,000 $ 12,590,000 See accompanying Notes to Unaudited Consolidated Financial Statements. DDL ELECTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Continued) (Unaudited, except June 30, 1995) December 31, June 30, 1995 1995 LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES Current portion of long-term debt $ 280,000 $ 633,000 Short-term borrowings 1,000,000 - Accounts payable 4,735,000 5,283,000 Accrued payroll and employee benefits 474,000 601,000 Other accrued liabilities 2,363,000 2,387,000 Income taxes payable 761,000 - Total current liabilities 9,613,000 8,904,000 LONG-TERM DEBT 7% Convertible Subordinated Debentures, less current portion 469,000 621,000 8-1/2% Convertible Subordinated Debentures 1,580,000 1,580,000 Notes payable, capitalized lease obligations and other long-term debt, less current portion 4,833,000 4,829,000 Total long-term debt 6,882,000 7,030,000 STOCKHOLDERS' DEFICIT Common stock 166,000 161,000 Additional paid-in capital 21,480,000 20,983,000 Accumulated deficit (22,862,000) (23,598,000) Foreign currency translation adjustment (1,029,000) (890,000) Total stockholders' deficit (2,245,000) (3,344,000) Total liabilities and stockholders' deficit $ 14,250,000 $ 12,590,000 See accompanying Notes to Unaudited Consolidated Financial Statements. DDL ELECTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) Six Months Ended December 31, 1995 1994 SALES $ 12,221,000 $ 16,594,000 COSTS AND EXPENSES Cost of goods sold 10,838,000 15,713,000 Administrative and selling expenses 1,895,000 3,233,000 Restructuring charges - 1,173,000 Total costs and expenses 12,733,000 20,119,000 OPERATING LOSS (512,000) (3,525,000) NONOPERATING INCOME (EXPENSE) Investment income 200,000 57,000 Interest expense (229,000) (656,000) Gain on sale of assets - 3,374,000 Other income 167,000 33,000 Nonoperating income, net 138,000 2,808,000 LOSS BEFORE INCOME TAX BENEFIT (374,000) (717,000) BENEFIT FROM INCOME TAXES 1,110,000 - INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 736,000 (717,000) EXTRAORDINARY ITEM Gain on debt extinguishment - 2,441,000 NET INCOME $ 736,000 $ 1,724,000 PRIMARY EARNINGS (LOSS) PER SHARE Income (loss) before extraordinary item $0.04 ($0.05) Extraordinary item - 0.16 Earnings per share $0.04 $0.11 AVERAGE NUMBER OF PRIMARY COMMON AND COMMON SHARE EQUIVALENTS 16,985,366 15,673,270 See accompanying Notes to Unaudited Consolidated Financial Statements. DDL ELECTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) Three Months Ended December 31, 1995 1994 SALES $ 6,029,000 $ 7,654,000 COSTS AND EXPENSES Cost of goods sold 5,372,000 7,097,000 Administrative and selling expenses 1,031,000 1,505,000 Total costs and expenses 6,403,000 8,602,000 OPERATING LOSS (374,000) (948,000) NONOPERATING INCOME (EXPENSE) Investment income 73,000 35,000 Interest expense (114,000) (316,000) Gain on sale of assets - 3,374,000 Other income 67,000 - Nonoperating income, net 26,000 3,093,000 INCOME (LOSS) BEFORE INCOME TAXES (348,000) 2,145,000 INCOME TAXES - - INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (348,000) 2,145,000 EXTRAORDINARY ITEM Gain on debt extinguishment - 2,441,000 NET INCOME (LOSS) $ (348,000) $ 4,586,000 PRIMARY EARNINGS (LOSS) PER SHARE Income (loss) before extraordinary item ($0.02) $0.13 Extraordinary item - 0.15 Earnings (loss) per share ($0.02) $0.28 AVERAGE NUMBER OF PRIMARY COMMON AND COMMON SHARE EQUIVALENTS 17,131,125 15,966,408 See accompanying Notes to Unaudited Consolidated Financial Statements. DDL ELECTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) Six Months Ended December 31, 1995 1994 Cash flows from operating activities: Net income $ 736,000 $ 1,724,000 Adjustments to reconcile net income to net cash provided (used) by operating activities - Depreciation and amortization 382,000 887,000 Gain on debt extinguishment - (2,348,000) Gain on sale of property and other assets - (3,377,000) Net (increase) decrease in operating working capital (755,000) 2,392,000 Decrease in deposits and other assets 7,000 2,000 Benefit of noncapital grants (151,000) - Net cash provided (used) by operating activities 219,000 (720,000) Cash flows from investing activities: Capital expenditures (380,000) (146,000) Proceeds from disposition of capital assets - 9,303,000 Net cash provided (used) by investing activities (380,000) 9,157,000 Cash flows from financing activities: Proceeds from long-term debt 80,000 119,000 Reductions of long-term debt (488,000) (10,228,000) Proceeds from issuance of common stock - 980,000 Proceeds from stock option exercise 377,000 9,000 Net proceeds from exercise of stock warrants 21,000 - Proceeds from government grants 139,000 192,000 Net cash provided (used) by financing activities 129,000 (8,928,000) Effect of exchange rate changes on cash (57,000) (3,000) Decrease in cash and cash equivalents (89,000) (494,000) Cash and cash equivalents at beginning of period 2,917,000 2,540,000 Cash and cash equivalents at end of period $ 2,828,000 $ 2,046,000 See accompanying Notes to Unaudited Consolidated Financial Statements. DDL ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - PRINCIPLES OF CONSOLIDATION In the opinion of the Company's management, the accompanying consolidated financial statements, which have not been audited by independent accountants (except for the balance sheet as of June 30, 1995), reflect all adjustments (consisting of normal recurring accruals) necessary to present fairly the Company's financial position at December 31, 1995 and June 30, 1995, the results of operations for the three and six month periods ended December 31, 1995 and 1994, and the cash flows for the six months ended December 31, 1995 and 1994. The Company uses a 52-53 week fiscal year ending on the Friday closest to June 30. In the accompanying interim consolidated financial statements, the interim period end for both years is shown as December 31 for clarity of presentation. The actual periods ended on December 29, 1995 and December 30, 1994. Certain notes and other information are condensed or omitted from the interim financial statements presented in this Quarterly Report on Form 10-Q. Therefore, these financial statements should be read in conjunction with the Company's 1995 Annual Report to Stockholders as filed with the Securities and Exchange Commission on or about September 30, 1995. NOTE 2 - INVENTORIES Inventories are comprised of the following: December 31, June 30, 1995 1995 Raw materials $2,011,000 $1,634,000 Work in process 846,000 710,000 Less reserves (170,000) (156,000) $2,687,000 $2,188,000 NOTE 3 - FINANCING ARRANGEMENTS Subordinated debt and stock purchase warrants: The Company carries previously issued 7% and 8-1/2% Convertible Subordinated Debentures ("CSDs"). In fiscal 1993, the Company exchanged a portion of the CSDs for stock and common stock purchase warrants. Of the 223,500 warrants outstanding at September 30, 1995, 15,000 warrants were exercised during December 1995 at $1.42 per share, and the remaining 208,500 warrants were effectively exercised on December 29, 1995 at $1.42 per share. However, as the Company received the proceeds from the exercise of the 208,500 warrants in January 1996, the issuance of stock and the receipt of proceeds were recorded in January 1996. The Company may effect similar exchanges with holders of the remaining outstanding CSDs in the future. Bank Credit Agreement: In December 1995, the Company entered into an agreement with Ulster Bank Group which provides for multiple credit facilities for its Northern Ireland operations. This agreement includes a working capital line of credit of 500,000 pounds sterling (approximately $750,000), and provides for interest on borrowings at 1-1/2% over the Bank's base rate. The credit facilities are available to the Company until November 30, 1996, and are subject to renewal thereafter. Bridge notes payable: On November 10, 1995, the Company issued 10% Senior Bridge Notes in the aggregate principal amount of $1,000,000 to fund the down payment in connection with the acquisition of SMTEK, Inc., which purchase was consummated on January 12, 1996. See Note 6 below for additional details concerning this acquisition. The proceeds from the 10% Senior Bridge Notes were deposited into an escrow account, pending completion of the acquisition. The escrow deposit and the 10% Senior Bridge Notes, both in the amount of $1,000,000, are included in Prepaid Expenses and Deposits and in Short-term Borrowings, respectively, in the accompanying consolidated balance sheet as of December 31, 1995. NOTE 4 - INFORMATION RELATING TO STATEMENT OF CASH FLOWS "Net cash used by operating activities" includes cash payments for interest as follows: Six months ended December 31, 1995 1994 Interest paid $ 225,000 $ 656,000 "Net (increase) decrease in operating working capital" is comprised of the following: Six months ended December 31, 1995 1994 (Increase) decrease in accounts receivable $ (425,000) $ 602,000 (Increase) decrease in inventories (561,000) 2,411,000 Increase in prepaid expenses (956,000) (94,000) Decrease in accounts payable (441,000) (83,000) Decrease in accrued payroll and employee benefits (115,000) (313,000) Increase (decrease) in other liabilities 1,743,000 (131,000) Net (increase) decrease in operating working capital $ (755,000) $2,392,000 Changes in operating working capital accounts may not equal differences derived by comparing balance sheet accounts due to fluctuations in the exchange rate between reported balance sheet dates. Supplemental schedule of noncash investing and financing activities: Six months ended December 31, 1995 1994 Capital expenditures financed by lease obligations $ 47,000 $ 54,000 7% Convertible Subordinated Debentures converted to equity $104,000 $ 20,000 NOTE 5 - PRO FORMA FINANCIAL INFORMATION: Following are the Company's restated pro forma consolidated operating results for the three and six month periods ended December 31, 1994, excluding results of operations for the Company's Aeroscientific Corp. and A.J. Electronics, Inc. subsidiaries, and excluding any gain from sale of these subsidiaries' assets, as compared with actual operating results for the three and six month periods ended December 31, 1995 (in thousands except per share amounts): 3 Mos. ended Dec. 31, 6 Mos. ended Dec. 31, 1995 1994 1995 1994 Sales $ 6,029 $ 4,313 $12,221 $ 7,829 Total operating costs 6,403 4,545 12,733 8,705 Operating loss (374) (232) (512) (876) Nonoperating income (expense), net 26 (210) 138 (389) Loss before income tax benefit (348) (442) (374) (1,265) Benefit from income taxes - - 1,110 - Income (loss) before extraordinary item (348) (442) 736 (1,265) Extraordinary item - gain on debt extinguishment - 2,441 - 2,441 Net income (loss) $ (348) $ 1,999 $ 736 $ 1,176 Earnings (loss) per share: Income (loss) before extraordinary item ($0.02) ($0.03) $0.04 ($0.08) Extraordinary item - 0.15 - 0.16 ($0.02) $0.12 $0.04 $0.08 NOTE 6 - SUBSEQUENT EVENT: Effective January 12, 1996, the Company acquired 100% of the capital stock of SMTEK, Inc., an electronics contract manufacturer, for $6.8 million in cash and 1,000,000 unregistered shares of the Company's common stock. The acquisition of SMTEK was financed by short-term bridge loans totaling $7.0 million, comprised of $1.0 million in aggregate principal amount of 10% Senior Bridge Notes dated November 10, 1995 and $6.0 million in aggregate principal amount of unsecured loans bearing interest at 10% that were advanced to the Company by an investment banking firm on January 5 and 12, 1996. The Company is currently working to arrange longer term financing through the issuance and private placement of convertible debt and/or equity securities, the proceeds of which would be used to retire the $7.0 million in bridge loans. However, no assurance can be given that the Company will be successful in arranging financing to retire the bridge loans. Reference is made to the Company's Form 8-K filed with the Securities and Exchange Commission on January 29, 1996 for additional details of this transaction. The historical financial statements of SMTEK and the pro forma financial information required by SEC regulations will be filed as an amendment to the Form 8-K on or before March 27, 1996. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS DEVELOPMENT OF THE BUSINESS The Company is an independent provider of electronic contract manufacturing ("ECM") services and a fabricator of printed circuit boards ("PCBs")for use primarily in the computer, communications, and instrumentation industries. The Company provides ECM services for manufacturers of electronic equipment and fabricates multilayer PCBs at its operations in Northern Ireland, primarily for customers in Europe. The Company entered the ECM business by acquiring its domestic ECM operations in 1985 and by organizing its European ECM operations in 1990. Since 1985, the Company has made substantial capital expenditures in its Northern Ireland ECM and PCB fabrication facilities. In fiscal 1995, the Company liquidated or sold all assets associated with its PCB and ECM operations in the United States, which essentially eliminated its U.S.-based operations. Effective January 12, 1996, as the first step toward reestablishing a domestic presence in the electronic interconnect industry, the Company acquired SMTEK, Inc., an electronics contract manufacturer. In conjunction with this acquisition, Gregory L. Horton, SMTEK's Chief Executive Officer and President, was appointed Chief Executive Officer and President of the Company. In addition, the Company's principal corporate office was relocated from Tigard, Oregon to SMTEK's corporate office in Newbury Park, California. See further discussion of this acquisition under "Recent Developments" below. RESULTS OF OPERATIONS THREE AND SIX MONTH PERIODS ENDED DECEMBER 31, 1995, AND 1994 Consolidated sales for the three and six months ended December 31, 1995 were $6,029,000 and $12,221,000, respectively, compared to $7,654,000 and $16,594,000 for the same periods in the previous fiscal year. Included in prior year's sales are revenues from the Company's former U.S. ECM operation, A.J. Electronics, Inc. ("A.J."), and Printed Circuit Board ("PCB") operation, Aeroscientific Corp. ("Aero"). A.J.'s operations were discontinued and ultimately liquidated in fiscal 1995, and Aero's operating facility was sold December 30, 1994. Aero and A.J. represented $3,341,000 and $8,765,000 of sales for the three and six months ended December 31, 1994, respectively. Pro forma operating results for the Company's remaining operations, excluding A.J. and Aero, show sales increases in the three and six month periods of the current year compared to the prior year of $1,716,000 and $4,392,000, respectively. Current fiscal year sales are generated from the Company's Northern Ireland PCB and ECM operations, Irlandus Circuits, Ltd. ("Irlandus") and DDL Electronics, Ltd. ("DDL-E"), respectively. Irlandus' sales for the first six months of the current fiscal year increased by $280,000 to $4,924,000 and DDL-E's sales increased nearly 130% to $7,297,000. The Company ended fiscal 1995 with the highest backlog ever for its two European subsidiaries. This has translated into higher sales in the first six months of fiscal 1996. DDL-E, in particular, has seen growth in contracts from existing customers as well as sales to new customers. In the first six months of fiscal 1995, DDL-E sales to two of its largest customers were substantially reduced as a result of lower demand for these customers' products in the European market. Sales to these two customers increased in the second half of fiscal 1995 and have continued strong into the first half of fiscal 1996. Also, DDL-E has added several new significant turnkey customers that have contributed to sales growth in the first half of fiscal 1996 and have reduced the relative volume of sales made on a consignment basis. For "turnkey" sales, DDL-E provides all materials, labor and equipment associated with producing the customers' products, while "consigned" sales are those in which the customers furnish the materials and DDL-E provides only the labor and equipment to manufacture the product. Consolidated gross profit (sales less cost of goods sold) for the first half of fiscal 1996 improved by $502,000 compared with the first half of fiscal 1995. Also, the consolidated gross percentage improved from 8.4% (on a pro forma basis without Aero and A.J.) for the first six months of fiscal 1995 to 11.3% for the first six months of fiscal 1996. DDL-E's gross profit improved by $384,000, but its gross profit percentage declined from 13.3% to 11.1% 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. Irlandus' gross profit improved by $339,000 and its gross profit percentage improved from 5.1% to 11.7%. Improved margins at Irlandus were due to improved product yields and higher profit margins on new business. Part of this improvement in profit margin results from Irlandus' successful effort to market to customers needing prototype PCBs, quick-turn PCBs (produced in ten days or less) and short lead time production for PCBs. Consolidated gross profit for the three months ended December 31, 1995 was $657,000, compared to $557,000 for the comparable period of the prior year. Gross profit at Irlandus and DDL-E increased approximately $40,000 and $60,000, respectively, in the current quarter compared to the second quarter of fiscal 1995. Irlandus' gross profit percentage improved from 8.4% to 10.0%, while DDL-E's declined from 20.6% to 12.6% between these two quarterly periods. The lower gross profit percentage at DDL-E was attributable to the factors cited above for the six month periods. The consolidated gross percentage declined from 13.7% (on a pro forma basis without Aero and A.J.) in the second quarter of fiscal 1995 to 10.9% in the second quarter of fiscal 1996, primarily due to the decline in gross profit percentage at DDL-E. The operating loss for the first six months of fiscal 1996 improved over the comparable period of fiscal 1995 by $3,013,000, from a loss in fiscal 1995 of $3,525,000 to a loss of $512,000 in fiscal 1996. On a consolidated pro forma basis the improvement in the operating loss was only $364,000. A substantial portion of fiscal 1995's operating costs were attributable to accrual of restructuring charges associated with the discontinuance of A.J.'s operations and disposal of its assets. The restructuring charge of $1,173,000 in the first half of 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. The decline in net nonoperating income in the three and six month periods ended December 31, 1994 of $3,093,000 and $2,808,000, respectively, to $26,000 and $138,000, respectively, in the three and six month periods ended December 31, 1995 is due principally to a nonrecurring gain on the sale of assets of Aero and A.J. of $3,374,000 in the earlier three and six month periods. Also, the Company's interest expense for these three and six month periods declined by $202,000 and $427,000, respectively, from fiscal 1995 to fiscal 1996 due to the payoff of the Company's senior debt at the end of December 1994. For the second quarter of fiscal 1996, the loss before extraordinary item was $348,000 or ($0.02) per share, compared to income before extraordinary item of $2,145,000 or $0.13 per share for the second quarter of fiscal 1995. On a pro forma basis, excluding the nonrecurring gain on sale of assets and the operations of A.J. and Aero, the fiscal 1995 second quarter would have shown a loss before extraordinary item of $442,000. The lower loss in the fiscal 1996 second quarter, compared to the pro forma results for the second quarter of fiscal 1995, is due primarily to a reduction of interest expense in fiscal 1996. Consolidated net income for the first six months of fiscal 1996 was $736,000 or $0.04 per share, compared to $1,724,000 or $0.11 per share for the same period of fiscal 1995. Net income for the first half of fiscal 1995 includes the extraordinary gain on debt extinguishment of $2,441,000 associated with the retirement of the Company's senior debt. Net income for the first half of fiscal 1996 includes $1,110,000 in net tax benefits associated with 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 December 31, 1995, the Company has received $1,871,000 of net refunds plus interest on such refunds of $106,000, and has recognized as an income tax benefit $1,110,000 net of certain expenses. Because of the possibility that the tax returns underlying these refunds may be subject to audit by the Internal Revenue Service and a portion of the refunds disallowed, the Company has not yet recognized a tax benefit for the remainder of the refunds received to date, or for the refunds still expected to be received. Nonetheless, the Company feels that its claim for refund and carry back of net operating losses can be substantiated and is supported by law, and that the Company will ultimately collect and retain a substantial portion of the refunds applied for. LIQUIDITY AND CAPITAL RESOURCES The Company's primary source of liquidity are its cash and cash equivalents which amounted to $2,828,000 at December 31, 1995. During the six months ended December 31, 1995, cash and cash equivalents decreased by $89,000 due primarily to capital expenditures of $380,000 and the effect of exchange rate changes on cash of $57,000, partially offset by cash provided from operations of $219,000 and cash provided through financing activities of $129,000. Components of operating working capital increased by $755,000 during the first half of fiscal 1995, comprised of a $425,000 increase in accounts receivable, a $561,000 increase in inventory and a $956,000 increase in prepaid expenses and deposits, partially offset by an increase current liabilities of $1,187,000. The increase in working capital is primarily the result of increased sales volume at the Company's Northern Ireland subsidiaries, which has increased working capital requirements. In the past, the Company has successfully raised capital from private placement of equity instruments. In December 1995, the Company finalized a renewable one year credit facility with a European bank to provide a working capital line of credit of 500,000 pounds sterling (approximately $750,000) for use in financing the growth of the Company's Northern Ireland operations. There were no borrowings outstanding under this credit facility at December 31, 1995. In fiscal 1993 the Company privately negotiated the exchange of a portion of the 7% and 8-1/2% convertible subordinated debentures for common stock and warrants of which 223,500 warrants remained unexercised at September 30, 1995. Of these, 15,000 warrants were exercised during December 1995 at $1.42 per share, and the remaining 208,500 warrants were effectively exercised on December 29, 1995 at $1.42 per share. However, as the Company did not receive the proceeds from the exercise of the 208,500 warrants until January 1996, the issuance of stock and the $296,000 proceeds therefrom have been recorded in January 1996. The Company also has outstanding warrants to purchase 100,000 shares of common stock at an exercise price of $1.31 until May 24, 1997. The achievement of continued operating profitability is the most significant internal factor to ensure the Company's long-term viability. No assurance can be given that the Company will maintain operating profitability, or that cash generated from non-operating sources will be adequate to fund future cash needs. As a necessary step to ensure the Company's increased profitability the Company is actively pursuing strategic acquisition candidates that will help ensure growth of the Company in the markets and industries in which it has expertise. On November 10, 1995, the Company issued 10% Senior Bridge Notes in the aggregate principal amount of $1,000,000 to fund the down payment in connection with the acquisition of SMTEK, Inc., which purchase was consummated on January 12, 1996. See "Recent Developments" below for additional details concerning this acquisition. The proceeds from the 10% Senior Bridge Notes were deposited into an escrow account, pending completion of the acquisition. The escrow deposit and the 10% Senior Bridge Notes, both in the amount of $1,000,000, are included in Prepaid Expenses and Deposits and in Short-term Borrowings, respectively, in the accompanying consolidated balance as of December 31, 1995. Recent Developments Effective January 12, 1996, the Company acquired SMTEK, Inc. for $6.8 million in cash and 1,000,000 shares of the Company's common stock. SMTEK is a ten-year old electronics contract manufacturer that specializes in surface mount technology (SMT) assembly and full production implementation of circuit boards, from analysis and design to complex manufacture of the product. SMTEK provides services to the military, medical, avionics, industrial, space and high-end commercial product markets. Areas of core competence include: (i) mechanical thermal engineering analysis and design of printed circuit boards; (ii) full procurement of all materials, components and up-screening; and (iii) full in-circuit and functional testing capabilities. These areas of specialization are integrated with a state-of-the-art turnkey contract manufacturing capability which utilizes a high degree of factory automation. SMTEK has approximately 125 employees and conducts its operations in a 45,000 square foot facility located in Ventura County, California. The acquisition of SMTEK is expected to be an important step in the expansion of the technical capabilities and marketing force of the Company in Europe and the United States. The SMTEK acquisition will bring to the Company a fully automated robotic SMT assembly operation, mechanical engineering program managers, and a team with experience in printed circuit board and mechanical design technology. SMTEK also has substantial experience in the design and production of printed circuit boards used in wireless communication products. The acquisition has been financed by short-term bridge loans totaling $7.0 million, comprised of $1.0 million in aggregate principal amount of 10% Senior Bridge Notes dated November 10, 1995 and $6.0 million in aggregate principal amount of unsecured loans bearing interest at 10% that were advanced to the Company by an investment banking firm on January 5 and 12, 1996. The Company is currently working to arrange longer term financing through the issuance and private placement of convertible debt and/or equity securities, the proceeds of which would be used to retire the $7.0 million in bridge loans. However, no assurance can be given that the Company will be successful in arranging financing to retire the bridge loans. PART II OTHER INFORMATION Item 1. LEGAL PROCEEDINGS None. Item 5. OTHER INFORMATION Federal, state, and local provisions relating to the protection of the environment affect the Company's printed circuit board fabrication operations. The Company's U.S. printed circuit board plants generate hazardous waste, some of which was treated on site and some of which was removed from the Company's facilities and disposed of elsewhere by arrangement with the owners or operators of disposal sites. The Company's Aeroscientific-Anaheim subsidiary received notice from the United States Environmental Protection Agency that it is regarded as a potentially responsible party ("PRP") under federal environmental laws in connection with a waste disposal Site known as the "Stringfellow Superfund site" in Riverside County, California, which is presently being considered by governmental authorities for remediation. Aeroscientific has been named as a third party defendant by other PRPs in a case brought by the United States Government concerning this site. Aeroscientific was also named as a defendant together with a large number of PRPs in a civil action filed by the residents and homeowners adjacent to the Stringfellow site which was settled out of court. The information developed during discovery and investigation thus far indicates that Aeroscientific supplied relatively small amounts of waste to the site as compared to the many other defendants. As part of the currently proposed Settlement Agreement, small polluters would pay a fixed amount plus an amount that varies based on volume of material dumped at the site. Under these guidelines, the Company's probable liability will be $120,000. Final settlement and timing of payment are currently indeterminable, and no assurances can be given that any settlement will be achieved. The Company, however, has accrued a sufficient liability to cover the proposed settlement as of fiscal year end 1995. Any further remedial costs or damage awards in these cases may be significant and management believes that the Company's allocated share of such costs or damages could have a material adverse effect on the Company's business or financial condition. The actions are still in the pre-trial and discovery stages and a prediction of outcome is difficult. There is, as in the case of most environmental litigation, the theoretical possibility of joint and several liability being imposed upon Aeroscientific for damages which may be awarded. Total cleanup costs for the Stringfellow site have been estimated at $600 million. The Company's possible range of liability is indeterminable, and the reliability and precision of estimated cleanup costs are subject to a myriad of factors which are not currently measurable. The Company is aware of certain chemicals that exist in the ground at its previously leased facility in Anaheim, California. The Company has notified the appropriate governmental agencies and is proceeding with remediation and investigative studies regarding soil and groundwater contamination. The Company believes that it will be required to implement a continuing remedial program for the site, the cost of which is currently unknown. The installation of water and soil extraction wells was completed in August 1994. A plan for soil remediation was completed about the same time and was submitted to regulatory authorities. The full extent of potential ground water pollution could not be determined given preliminary estimates. The Company retained the services of Harding Lawson and Associates in May 1995 to begin the vapor extraction of pollutant from the soil and to perform exploratory hydro- punch testing to determine the full extent and cost of the potential ground water contamination. These processes are in their preliminary stages and a complete and accurate estimate of the full and potential costs cannot be determined at this time. The Company believes that the resolution of these matters will require a significant cash outlay. Initial estimates form Harding Lawson indicate that it could cost as much as $3,000,000 to fully clean-up the site and take over ten years to complete. The Company and Aeroscientific Corp. entered into an agreement to share the costs of environmental remediation with the landlord at the Anaheim facility. 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 share of $580,000) with any costs above $725,000 being shared equally between the Company and the landlord. Through December 31, 1995, the Company has paid $328,000 as its share of the remediation costs, and at that date the Company had an accrued liability of $721,000 which represents its estimated share of the future discounted remediation costs. Item 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits: 10.1 Agreement for Purchase of Shares dated October 6, 1995 between DDL Electronics, Inc., as buyer, and the shareholders of SMTEK (incorporated by reference to Exhibit No. 99.1 of the Company's Form 8-K filed with the Securities and Exchange Commission on January 29, 1996). 10.2 Employment Agreement and Letter of Understanding and Agreement dated October 6, 1995 between DDL Electronics, Inc. and Gregory L. Horton (incorporated by reference to Exhibit No. 99.2 of the Company's Form 8-K filed with the Securities and Exchange Commission on January 29, 1996). 10.3 Note Purchase Agreement dated as of November 10, 1995 among DDL Electronics, Inc. and the various purchasers of 10% Senior Bridge Notes (incorporated by reference to Exhibit No. 99.3 of the Company's Form 8-K filed with the Securities and Exchange Commission on January 29, 1996). 11 Computation of Earnings Per Share 27 Financial Data Schedule (included in electronic filing) b. Reports on Form 8-K: There were no reports on Form 8-K filed during the three months ended December 31, 1995. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. February 12, 1996 /s/ Gregory L. Horton - --------------------------------- ------------------------------- Date Gregory L. Horton Chief Executive Officer and President February 12, 1996 /s/ Richard K. Vitelle - --------------------------------- ------------------------------- Date Richard K. Vitelle Vice President -Finance (Principal Financial Officer) EX-11 2 EXHIBIT 11 DDL ELECTRONICS, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE (Unaudited) Six Months Ended December 31 1995 1994 PRIMARY EARNINGS PER SHARE: Income (loss) before extraordinary item $ 736,000 $ (717,000) Extraordinary item - 2,441,000 Net income $ 736,00 $1,724,000 Weighted average number of common shares outstanding 16,341,517 14,738,652 Assumed exercise of stock options net of shares assumed reacquired 643,849 934,618 Average common shares and common share equivalents 16,985,366 15,673,270 Primary earnings per share: Income (loss) before extraordinary item $0.04 ($0.05) Extraordinary item - .16 Earnings per share $0.04 $0.11 FULLY DILUTED EARNINGS PER SHARE: Income (loss) before extraordinary item $ 736,000 $(717,000) Add back net interest related to convertible subordinated debentures 67,000 67,000 Income (loss) before extraordinary item for fully diluted computation 803,000 (650,000) Extraordinary item - 2,441,000 Net income for fully diluted computation $ 803,000 $1,791,000 Weighted average number of common shares outstanding 16,341,517 14,738,652 Assumed exercise of stock options net of shares assumed reacquired under treasury stock method using period end market price, if higher than average market price 704,683 991,572 Assumed conversion of convertible subordinated debentures 673,135 762,971 Average fully diluted shares 17,719,335 16,493,195 Fully diluted earnings per share: (1) Income (loss) before extraordinary item $0.05 ($0.04) Extraordinary item - .15 Earnings per share $0.05 $0.11 Note: (1) The calculated fully diluted earnings per share are antidilutive. EXHIBIT 11 DDL ELECTRONICS, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE (Unaudited) Three Months Ended December 31 1995 1994 PRIMARY EARNINGS PER SHARE: Income (loss) before extraordinary item $ (348,000) $ 2,145,000 Extraordinary item - 2,441,000 Net income (loss) $ (348,000) $ 4,586,000 Weighted average number of common shares outstanding 16,485,249 15,002,325 Assumed exercise of stock options net of shares assumed reacquired 645,876 964,083 Average common shares and common share equivalents 17,131,125 15,966,408 Primary earnings (loss) per share: Income (loss) before extraordinary item ($0.02) $0.13 Extraordinary item - .15 Earnings (loss) per share ($0.02) $0.28 FULLY DILUTED EARNINGS PER SHARE: Income (loss) before extraordinary item $ (348,000) $ 2,145,000 Add back net interest related to convertible subordinated debentures 34,000 34,000 Income (loss) before extraordinary item for fully diluted computation (314,000) 2,179,000 Extraordinary item - 2,441,000 Net income (loss) for fully diluted computation $ (314,000) $ 4,620,000 Weighted average number of common shares outstanding 16,485,249 15,002,325 Assumed exercise of stock options net of shares assumed reacquired under treasury stock method using period end market price, if higher than average market price 815,175 986,457 Assumed conversion of convertible subordinated debentures 663,992 761,048 Average fully diluted shares 17,964,416 16,749,830 Fully diluted earnings (loss) per share: Income (loss) before extraordinary item ($0.02) $0.13 Extraordinary item - .15 Earnings (loss) per share ($0.02) .28 EX-27 3
5 6-MOS JUN-30-1996 DEC-31-1995 2828000 0 3837000 0 2687000 10626000 15900000 12672000 14250000 9613000 2049000 166000 0 0 (2411000) 14250000 12221000 12221000 10838000 12733000 0 0 229000 (374000) (1110000) 736000 0 0 0 736000 0.04 0.04
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