-----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, OSN/za98uHJfhDSPTLHqeVwjv/IS/oFzd5v4D33n46YhUF5TulKZE2tFRPCYh7UV Bygs6Bej8YS09sbolALb4Q== 0000026987-96-000016.txt : 19961015 0000026987-96-000016.hdr.sgml : 19961015 ACCESSION NUMBER: 0000026987-96-000016 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19961011 SROS: NYSE SROS: PSE 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08101 FILM NUMBER: 96642495 BUSINESS ADDRESS: STREET 1: 2151 ANCHOR COURT CITY: NEWBURY PARK STATE: CA ZIP: 91320 BUSINESS PHONE: 805-376-94 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, 1996 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 Stock 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, 1996 was $20,448,000. The registrant had 23,046,914 shares of Common Stock outstanding as of October 9, 1996. DOCUMENTS INCORPORATED BY REFERENCE Specified parts of the registrant's Annual Report to Stockholders for its fiscal year ended June 30, 1996 are incorporated by reference into Parts I and II hereof. Specified parts of the registrant's Proxy Statement for its 1996 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 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. 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 ECM operations in the United States. RECENT DEVELOPMENTS Acquisition of SMTEK, Inc. 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. 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 Oregon to SMTEK's facility in Newbury Park, California. The consideration paid by the Company to purchase SMTEK consisted of 1,000,000 shares of common stock and $7,199,000 in cash. The cash portion of the purchase price was financed principally by short-term bridge loans extended to the Company in November 1995 and January 1996 in the aggregate amount of $7,000,000, bearing interest at 10% per annum (the "Bridge Loans"). The Company refinanced the Bridge Loans in February 1996 by issuing $5,300,000 in aggregate amount of 10% Senior Secured Notes due July 1, 1997 (the "10% Senior Notes") and $3,500,000 in aggregate amount of 10% Cumulative Convertible Debentures due February 28, 1997 (the "10% Convertible Debentures"). As compensation for placing the Notes and the Debentures, the Company paid to Rickel & Associates, Inc. ("Rickel") a fee of $352,000 and issued to Rickel 572,683 shares of common stock valued at $716,000. Rickel also received certain compensation for making and arranging the Bridge Loans. Changes in the Company's capitalization 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% Convertible 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 remaining unamortized issue costs. Primarily as a result of the common stock issued in connection with the acquisition of SMTEK and the conversion of the 10% Convertible Debentures, the Company's outstanding common stock at June 30, 1996 amounted to 22,998,879 shares, compared to 16,062,979 shares at the end of fiscal 1995. Reduction of certain obligations In March 1996, the Company entered into a settlement agreement with certain of its former officers, key employees and directors (the "Participants") to restructure its outstanding obligations under several consulting programs and deferred fee arrangements which had provided for payments to the Participants after their retirement from the Company or from its board of directors. Under terms of the settlement, the Participants agreed to relinquish all future payments due them under these consulting programs and deferred fee arrangements in return for an aggregate of 595,872 common stock purchase warrants, Series G. The exercise price of these warrants 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 $941,000 at June 30, 1996. As a result of this settlement agreement, the Company recorded an extraordinary gain of $2,356,000, net of $197,000 of compensation expense related to the "call" feature of the warrants. FINANCIAL INFORMATION BY BUSINESS SEGMENT AND GEOGRAPHICAL AREA The Company is engaged in two lines of business -- electronic manufacturing services and printed circuit board fabrication. Information with respect to these segments' sales, operating income (loss), identifiable assets, depreciation and amortization, and capital expenditures for each of the last three fiscal years is set forth in Note 11 to the consolidated financial statements of the accompanying 1996 Annual Report to Stockholders. Such information is incorporated herein by this reference and is made a part hereof. ELECTRONIC MANUFACTURING SERVICES AND PRINTED CIRCUIT BOARD FABRICATION BUSINESSES The EMS and PCB fabrication industries and the markets in which the Company's customers compete are characterized by rapid technological change and product obsolescence. As a result, the end services provided and products made by the Company's EMS and PCB fabrication customers have relatively short product lives. The Company believes that its future success in these industries is dependent on its ability to continue to incorporate new technology into its EMS and PCB fabrication processes, to satisfy increasing customer demands for quality and timely delivery and to be responsive to future changes in this dynamic market. The EMS industry, in general, has experienced increased customer demand as customers move away from captive or in-house EMS capabilities and out-source production. At the same time, the number of EMS providers is growing, thus increasing competition, keeping margins low and forcing sudden changes in the EMS customer base. 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 67%, 47% and 59% of the Company's consolidated sales for the fiscal years ended June 30, 1996, 1995 and 1994, 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 Institute for Interconnecting and Packaging Electronic Circuits 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 33%, 53% and 41% of the Company's consolidated sales for the fiscal years ended June 30, 1996, 1995 and 1994, 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. Complex boards may also have "via" or "blind-via" holes that connect inner layers of a multilayer board or connect an inner layer to the outside of the board. 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 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. SMTEK is currently working to obtain ISO 9001 certification, which it expects to receive by February 1997. EMS Facilities SMTEK conducts its operations from a 78,000 square foot facility, which is leased from an unaffiliated party through May 31, 2000. The monthly rent was approximately $28,500 during fiscal 1996 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 1,600,000 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 1996 1995 1994 ------------ ------------ ------------ ------------ Computer $ 4,049 12.2% $ 7,115 24.1% $23,905 49.3% Communications 4,189 12.6 6,926 23.4 8,396 17.3 Commercial aviation 2,277 6.9 - - - - Financial 3,155 9.5 2,067 7.0 - - Industrial & Instrumentation 7,621 23.0 6,044 20.4 6,196 12.8 Medical 4,429 13.4 4,668 15.8 6,533 13.4 Government/ Military 4,847 14.6 1,362 4.6 1,411 2.9 Automotive - - 175 .6 889 1.8 Other 2,569 7.8 1,219 4.1 1,199 2.5 ------ ----- ------ ----- ------ ----- Total $33,136 100.0% $29,576 100.0% $48,529 100.0% ====== ===== ====== ===== ====== ===== 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 1996, the Company's EMS and PCB businesses served approximately 55 and 175 customers, respectively. The Company's five largest customers accounted for 37%, 21% and 45% of consolidated sales during fiscal years 1996, 1995 and 1994, respectively. The Company's largest customer accounted for approximately 9.5% of consolidated sales in fiscal 1996. 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 80486 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 factor in the EMS and PCB fabrication businesses. There has been significant downward pressure on the prices that the Company is able to charge for its EMS and PCB fabrication services. More recently, market conditions have improved, resulting in an increase in product demand. While the Company believes that market conditions will continue to improve, it does not believe that prices will increase as quickly. EMS and PCB fabrication customers are increasing their orders, but are reluctant to pay more for such services, primarily due to the industry's excess capacity and price competition. Additionally, 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. In addition, 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 years 1995 and 1994 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, 1996, 1995 and 1994, the Company's EMS and PCB fabrication businesses had combined backlogs of $17,669,000, $9,247,000 and $6,902,000, respectively. 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. Backlog at June 30, 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. The increase from fiscal year 1994 to fiscal 1995 reflected higher order demand from existing EMS customers and new outstanding orders from new EMS customers. Environmental Regulation Federal, state and local provisions relating to the protection of the environment affect the Company's PCB fabrication operations. In 1983, the United States and the State of California filed a legal action against the owners and operators of the Stringfellow hazardous waste disposal site located near Riverside, California, as well as against a number of generators and transporters of chemical substances who allegedly disposed of waste at the site (the "Primary Defendants"). The action seeks to cause the Primary Defendants to clean up the site, to reimburse government plaintiffs for remediation costs incurred by them and to recover compensation for alleged damage to natural resources. The Primary Defendants have initiated a defense of the case. The State of California also has been found liable for, among other things, its negligent selection, inspection, design, construction, operation and failure to remedy the site. In 1988, the Primary Defendants filed third-party complaints against the Company's Anaheim, California-based Aeroscientific Corp. subsidiary ("Aero Anaheim") and about 185 other alleged responsible parties. The U.S. Environmental Protection Agency ("EPA") has estimated that about 34 million gallons of waste were disposed of at the Stringfellow site and has estimated that Aero Anaheim may have been responsible for having generated about 9,300 gallons or 0.0273 percent of the total waste disposed. The government plaintiffs, however, have been unable to estimate the value of their principal claims. EPA's cleanup estimates have ranged from $400 million to $1 billion, depending on which cleanup proposal is selected. At the present time, the Company cannot determine how the allocation of responsibility in this case will ultimately be made or what share of responsibility might be imposed on state and local governments. The EPA contends that site owners and operators and waste generators are jointly and severally liable under federal law. In 1994, the Company was given the opportunity to participate in a de minimis settlement negotiated with the EPA and the Primary Defendants. The Company's share of the settlement and administration costs would have been approximately $120,000. The Company decided not to participate in the settlement at that time because of its limited cash resources. However, the Company accrued this amount as its estimate of the liability it will ultimately bear in this matter. The Company is currently exploring the feasibility of entering into a settlement with the Primary Defendants in which that same amount would be paid over several years. No assurances can be given, however, that any such settlement will be achieved. The Company is aware of certain chemicals that exist in the ground at Aero Anaheim's previously leased facility in Anaheim. 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 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 implemented beginning in 1995. Investigative work to determine the full extent of potential groundwater pollution has not yet been completed. The Company retained the services of an environmental engineering firm 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 cleanup of the potential groundwater 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, however, that the resolution of these matters will 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, 1996, the Company has paid $420,000 as its share of the remediation costs (including cash placed in an escrow account for payment of expenses). At June 30, 1996, the Company has a reserve of $608,000, 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 may differ significantly from the estimates, and may exceed the amount of the reserve. From time to time the Company is also involved in other waste disposal remediation efforts and proceedings associated with its other facilities. Based on information currently available to the Company, management does not believe that the costs of such efforts and proceedings will have a material adverse effect on the Company's business or financial condition. Employees At June 30, 1996, the Company had approximately 480 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 78,000 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 $1,265,000 at June 30, 1996. Item 3. Legal Proceedings As to other litigation matters that are not specifically described under the caption "General - Environmental Regulation" in Item 1 above, no material legal proceedings are presently pending to which the Company or any of its property is subject, other than ordinary routine litigation incidental to the Company's business. Item 4. Submission of Matters to a Vote of Security Holders At the 1995 Annual Meeting of Stockholders held on July 11, 1996, Richard K. Vitelle was elected a Class III director by the stockholders. Directors whose terms of office continued after the meeting were Erven P. Tallman, Gregory L. Horton, Melvin Foster, Bernee D.L. Strom and Robert G. Wilson. In addition to the election of a director, the stockholders approved the Company's 1996 Stock Incentive Plan, the 1996 Non-Employee Directors Stock Option Plan and a plan of warrant compensation for non-employee directors who had joined the Board of Directors on May 31, 1995 and had served since that date without other compensation from the Company. Following is a summary of the voting: Votes Votes Votes For Against Abstained Unvoted -------- ------- ------- ------- Election of Richard K. Vitelle as Class III director 19,929,689 258,381 - - Approval of 1996 Stock Incentive Plan 10,303,288 841,857 93,126 8,949,799 Approval of 1996 Non-Employee Directors Stock Option Plan 11,715,005 513,083 103,716 7,856,266 Approval of plan of warrant compensation for non-employee directors 11,088,984 526,350 111,489 8,461,247 At a Board of Directors meeting immediately following the 1995 Annual Meeting, Mr. Tallman resigned from the board, and Karen Beth Brenner was elected a director to fill Mr. Tallman's seat. 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 1996 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 1996 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" in the Company's 1996 Annual Report to Stockholders is incorporated herein by reference and made a part hereof. Item 8. Financial Statements and Supplementary Data Reference is made to the financial statements and financial schedules included 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 1996 Annual Meeting of Stockholders. Item 11. Executive Compensation This information is incorporated by reference to the Company's proxy statement for its 1996 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 1996 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 1996 Annual Meeting of Stockholders. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 1996 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, 1996 and 1995 13 Consolidated statements of operations for the years ended June 30, 1996, 1995 and 1994 15 Consolidated statements of cash flows for the years ended June 30, 1996, 1995 and 1994 16 Consolidated statements of stockholders' equity (deficit) for the years ended June 30, 1996, 1995 and 1994 17 Notes to consolidated financial statements 18 (a)(2) List of Financial Statement Schedules for the years ended June 30, 1996, 1995 and 1994:* VIII - Valuation and Qualifying Accounts and Reserves 32 IX - Short-Term Bank Borrowings N/A Form 10-K ------- (a)(3) List of Exhibits: Exhibit Index 14 (b) Reports on Form 8-K: The Company did not file any reports on Form 8-K during the quarter ended June 30, 1996. * Schedules other than those listed are omitted since they are not applicable, not required, or the information required to be set forth therein is included in the consolidated financial statements or in the notes thereto. 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 10, 1996. 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 10, 1996 - ----------------------- President and Chairman ------------------ Gregory L. Horton of the Board /s/ Richard K. Vitelle Vice President-Finance and October 10, 1996 - ----------------------- Administration, Chief ------------------ Richard K. Vitelle Financial Officer, Treasurer, Secretary and Director /s/ Karen B. Brenner Director October 10, 1996 - ----------------------- ------------------ Karen B. Brenner /s/ Melvin Foster Director October 10, 1996 - ----------------------- ------------------ Melvin Foster Director - ----------------------- ------------------ Robert G. Wilson Director - ----------------------- ------------------ Bernee D. L. Strom EXHIBIT INDEX Exhibit Number Description - ------ ----------- 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 Warrant Agreement for Series A Warrants by and between the Company and American Stock Transfer & Trust Company (the "Transfer Agent") dated as of November 11, 1992 (incorporated by reference to Exhibit 28.2 of the Company's Current Report on Form 8-K dated January 7, 1993). 4.6.1 Second Amendment to the Warrant Agreement for Series A Warrants by and between the Company and the Transfer Agent dated as of July 31, 1995 (incorporated by reference to Exhibit 4-e 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 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). 4.8 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). 4.9 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). 4.10 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). 4.11 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). 4.12 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). 4.14.1 Form of 10% Senior Secured Notes due July 1, 1997 in the aggregate amount of $5,300,000 ("10% Senior Secured Notes") (incorporated by reference to Exhibit 10.1 filed with the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996). 4.14.2 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). 4.14.3 Form of Series F Warrant dated February 29, 1996 covering an aggregate 1,060,000 shares and expiring on July 1, 1997, exercisable in the event of default on the Company's 10% Senior Secured Notes. 4.14.4 Registration Rights Agreement dated as of February 29, 1996 between the Company and Rickel & Associates, Inc. ("Rickel") (incorporated by reference to Exhibit 4-o of the Company's Registration Statement on Form S-3, Commission File No. 333-02969). 4.14.5 Registration Rights Agreement dated as of February 29, 1996 among the Company and each of the Purchasers referred to therein (incorporated by reference to Exhibit 4-p of the Company's Registration Statement on Form S-3, Commission File No. 333-02969). 4.14.6 Pledge Agreement dated as of February 29, 1996 among Rickel, First Union National Bank ("FUNB") and the Company (incorporated by reference to Exhibit 4-q of the Company's Registration Statement on Form S-3, Commission File No. 333-02969). 4.14.7 Collateral Agency Agreement dated as of February 29, 1996 among Rickel, each Purchaser under the Securities Purchase Agreement, FUNB and the Company (incorporated by reference to Exhibit 4-r of the Company's Registration Statement on Form S-3, Commission File No. 333-02969). 4.14.8 Engagement Letter dated as of January 30, 1996 between Rickel and the Company (incorporated by reference to Exhibit 4-s of the Company's Registration Statement on Form S-3, Commission File No. 333-02969). 4.15 Form of Offshore Securities Subscription Agreement and Form of Debenture dated as of February 28, 1996 covering the offer and sale under Regulation S of $3,500,000 aggregate amount of the Company's 10% Cumulative Convertible Debentures due February 28, 1997 (incorporated by reference to Exhibit 10.2 filed with the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996). 4.16 Offshore Securities Subscription Agreement dated as of March 1, 1996 covering the offer and sale under Regulation S of 600,000 shares of the Company's Common Stock (incorporated by reference to Exhibit 10.3 filed with the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996). 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. 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 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 99.1 filed with the Company's Current Report on Form 8-K dated January 12, 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. 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. EX-13 2 [1996 ANNUAL REPORT TO STOCKHOLDERS] DDL ELECTRONICS, INC. AND SUBSIDIARIES FINANCIAL SUMMARY (In thousands except per share amounts) Year Ended June 30 -------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Sales $33,136 $29,576 $ 48,529 $ 57,883 $ 58,516 Operating Loss (1,167) (4,970) (6,948) (5,067) (22,703) Extraordinary Item 2,356 2,441 - 6,100 - Net Income (Loss) 1,598 75 (8,354) 1,073 (22,305) Earnings (Loss) Per Share $ .09 $ .00 $ ( .55) $ .10 $ (3.34) 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: These are very exciting times at DDL Electronics, Inc. With the introduction of our new management team and the acquisition of SMTEK, Inc., a world class electronic manufacturing services (EMS) provider, DDL is poised for continued revenue growth and improved earnings. DDL's difficult history is well known and has presented some interesting challenges for the new management team. A turnaround is clearly underway and we are on track with our revitalization effort and rapid expansion into the EMS market. For fiscal 1996, revenues were $33,136,000, an increase of 60% over pro forma revenues for fiscal 1995 of $20,811,000 (after excluding 1995 sales of divested operations). DDL's balance sheet was strengthened considerably during fiscal 1996, and we ended the year with stockholders' equity at its highest level in nearly five years. And earlier this month we obtained a $2.5 million bank line of credit for U.S. working capital requirements. Investment in equipment and facilities has made our operating units capable of performing at a sales level several times greater than current revenues. We are strengthening our sales and marketing efforts in both the U.S. and Europe to take advantage of this available capacity. As we increase the use of these facilities, we expect to see improvement in profitability at each operating unit. Also encouraging is the fact that the European printed circuit board market is emerging from a five-month downturn. Strong bookings and bidding activity in the first quarter of fiscal 1997 bode well for improved operating performance. At the end of this latest quarter, total backlog exceeded $22 million. Growth in backlog is due to strong market demand and a focus on key customer partnerships, with a concerted effort to achieve total customer satisfaction. Repeat business is becoming our greatest source of new bookings. Growth in backlog has been accompanied by shortened cycle times and improved on-time delivery performance, which has accelerated the conversion of backlog into revenue. We are diligently pursuing strategic acquisitions in order to increase our purchasing power and more effectively utilize our capabilities in the areas of product engineering, design and test engineering. We are also taking steps to increase the degree of vertical integration between the Company's EMS and PCB operations, which should improve overall profitability. In the last six months, we have improved internal performance measures, implemented a business team approach to managing contracts and initiated employee motivation programs, the cumulative effect of which has been to strengthen our ability to provide high quality product engineering, design, automated production and post-production support services. Looking ahead, we will focus on a broad spectrum of operational improvements, including implementing paperless purchasing transactions and electronic data interchange with suppliers and customers, enhancing existing production tracking systems and statistical process controls, and developing more automated job cost accounting systems and tighter controls over material flows. We are excited about the market demand for EMS and PCBs worldwide. The Company has a diverse customer base, strong backlog, modern equipment, dedicated staff and an international presence. We are committed to meeting or exceeding customers' expectations, which we consider to be essential to enhancing shareholder value. /s/ GREGORY L. HORTON Chairman, CEO and President October 10, 1996 DDL ELECTRONICS, INC. AND SUBSIDIARIES FIVE-YEAR FINANCIAL SUMMARY (In thousands except per share amounts) Year ended June 30 -------------------------------------------- OPERATING DATA 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Sales $ 33,136 $ 29,576 $ 48,529 $ 57,883 $ 58,516 Costs and expenses: Cost of goods sold 29,494 26,516 47,860 55,052 57,688 Administrative and selling expenses 4,175 6,497 7,617 7,898 9,692 Goodwill amortization 634 - - - - Restructuring charges - 1,533 - - 13,839 ------ ------ ------ ------ ------ Total costs and expenses 34,303 34,546 55,477 62,950 81,219 ------ ------ ------ ------ ------ Operating loss (1,167) (4,970) (6,948) (5,067) (22,703) Non-operating income(expense): Investment income 246 109 168 280 639 Interest expense (911) (883) (1,110) (1,107) (1,830) Gain on sale of assets - 3,317 2 264 1,589 Earthquake expenses - - (500) - - Other income (expense), net (36) 61 34 - - ------ ------ ------ ------ ------ Total non-operating income (expense) (701) 2,604 (1,406) (563) 398 ------ ------ ------ ------ ------ Loss from continuing operations before income taxes (1,868) (2,366) (8,354) (5,630) (22,305) Income tax benefit 1,110 - - - - ------ ------ ------ ------ ------ Loss from continuing operations (758) (2,366) (8,354) (5,630) (22,305) Income (loss) from discontinued operations, less applicable income taxes - - - 603 - ------ ------ ------ ------ ------ Loss before extraordinary item (758) (2,366) (8,354) (5,027) (22,305) Extraordinary item - Gain on debt extinguishment 2,356 2,441 - 6,100 - ------ ------ ------ ------ ------ Net income (loss) $ 1,598 $ 75 $(8,354) $ 1,073 $(22,305) ====== ====== ====== ====== ====== Earnings (loss) per share: Primary: Continuing operations $(0.04) $(0.15) $(0.55) $(0.56) $(3.34) Discontinued operations - - - 0.06 - Extraordinary item 0.13 0.15 - 0.60 - ----- ----- ----- ----- ----- Total $ 0.09 $ - $(0.55) $ 0.10 $(3.34) ===== ===== ===== ===== ===== Fully diluted: Continuing operations $(0.03) $(0.15) $(0.55) $(0.37) $(3.34) Discontinued operations - - - 0.04 - Extraordinary item 0.12 0.15 - 0.42 - ----- ----- ----- ----- ----- Total $ 0.09 $ - $(0.55) $ 0.09 $(3.34) ===== ===== ===== ===== ===== June 30 ------------------------------------------ BALANCE SHEET DATA 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Current assets $15,493 $ 8,876 $12,018 $20,085 $23,116 Current liabilities $11,979 $ 8,904 $21,277 $14,289 $16,950 Working capital (deficit) $ 3,514 $ (28) $(9,259) $ 5,796 $ 6,166 Current ratio 1.3 1.0 0.6 1.4 1.4 Total assets $28,087 $12,590 $23,258 $33,739 $46,626 Long-term debt $10,935 $ 7,030 $ 6,870 $20,393 $35,959 Stockholders' equity (deficit) $ 5,173 $(3,344) $(4,889) $ (943) $(6,283) Equity (deficit) per share $ 0.22 $ (0.21) $ (0.34) $ (0.08) $ (0.92) Shares outstanding (000s) 22,999 16,063 14,469 11,973 6,863 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. 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 ECM operations in the United States. 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. Historically, DDL was a diversified holding company with operations in the areas of EMS and PCB fabrication, broadband communications equipment and other businesses. In the past several years, the Company focused its activities in the area of advanced EMS and PCB fabrication. During fiscal 1995 the Company sold substantially all the assets of its U.S. EMS and PCB operations. The sales enabled the Company to pay off senior debt, thereby reducing the Company's future financing costs. The Company has incurred operating losses in recent years. These operating losses amounted to $1,167,000, $4,970,000 and $6,948,000 in the fiscal years ended June 30, 1996, 1995 and 1994, 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's net income included an extraordinary gain of $2,356,000 and an income tax benefit of $1,110,000, while fiscal 1995's net income included an extraordinary gain of $2,441,000 and a gain of on sales of assets of $3,317,000. Results of Operations The following table sets forth the Company's sales and other operating data as percentages of revenues: Year Ended June 30 ----------------------- 1996 1995 1994 ---- ---- ---- Sales 100.0% 100.0% 100.0% Cost of goods sold 89.0 89.7 98.6 ----- ----- ----- Gross profit 11.0 10.3 1.4 Administrative and selling expenses 12.6 21.9 15.7 Goodwill amortization 1.9 - - Restructuring charges - 5.2 - ----- ----- ----- Operating loss (3.5) (16.8) (14.3) Investment income .8 .4 .3 Interest expense (2.8) (3.0) (2.3) Gain on sale of assets - 11.2 - Earthquake expenses - - (1.0) Other income (expense), net (.1) .2 .1 ----- ----- ----- Loss before income taxes (5.6) (8.0) (17.2) Income tax benefit 3.3 - - ----- ----- ----- Loss before extraordinary item (2.3) (8.0) (17.2) Extraordinary item - Gain on debt extinguishment 7.1 8.3 - ----- ----- ----- Net income (loss) 4.8% .3% (17.2)% ===== ===== ===== Earnings (loss) per share: Loss before extraordinary item $(0.04) $(0.15) $(0.55) Extraordinary item 0.13 0.15 - ---- ---- ---- $ 0.09 $ - $(0.55) ==== ==== ==== 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 years ended June 30, 1995 and 1994, 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 year ended June 30, 1996 (in thousands): Year ended June 30 ------------------------------- 1996 1995 1994 ---- ---- ---- (Pro forma) (Pro forma) Sales $33,136 $20,811 $20,958 ------ ------ ------ Cost of goods sold 29,494 17,873 19,653 Administrative and selling expenses 4,175 5,062 4,214 Goodwill amortization 634 - - ------ ------ ------ Total costs and expenses 34,303 23,037 23,867 ------ ------ ------ Operating loss (1,167) (2,226) (2,909) Non-operating expense, net (701) (538) (641) ------ ------ ------ Loss before income taxes (1,868) (2,764) (3,550) Income tax benefit 1,110 - - ------ ------ ------ Loss before extraordinary item (758) (2,764) (3,550) Extraordinary item - Gain on debt extinguishment 2,356 2,441 - ------ ------ ------ Net income (loss) $ 1,598 $ (323) $(3,550) ====== ====== ====== 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 prior year's 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 Electronics, Ltd. ("DDL-E") accounted for most of the remaining increase in consolidated sales. DDL-E added several new turnkey customers that have contributed to sales growth in 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. 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 (sales less cost of goods sold) 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 Circuits Limited ("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 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 $1,533,000 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. 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 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. For fiscal 1995, the loss before extraordinary item was $2,366,000, or ($0.15) per share. On a pro forma basis, excluding the non-recurring gain on sale of assets and the operations of A.J. and Aero Oregon, 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 6 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. Fiscal 1995 vs. 1994 Sales for fiscal 1995 were $29,576,000, a decrease of $18,953,000 from fiscal 1994. The reduction in sales resulted from the closure of A.J.'s operations in November 1994 and the sale of Aero Oregon's facility in December 1994. Approximately $13,550,000 and $5,256,000 of the decline in sales was due to the reduced business volume at A.J. and Aero Oregon, respectively. After giving effect to the pro forma adjustment of sales for fiscal years 1995 and 1994 to eliminate A.J. and Aero Oregon, sales declined by $147,000. Gross profit improved by $2,391,000 to $3,060,000 or, as a percentage of sales, to 10.3% in 1995 from 1.4% in 1994. The low gross profit percentage in fiscal 1994 was the result of disruptions to A.J.'s EMS operations caused by the Los Angeles earthquake in January 1994, and by the Company's decision to seek high volume, low margin orders in an effort to fill its PCB facilities during fiscal 1994. Subsequently, the Company refocused its PCB business to concentrate on higher margin, quick-turn prototype boards. A.J.'s continuing operations were severely damaged by the 1994 Los Angeles earthquake. After the earthquake A.J. met its existing customer commitments, but lost new business from existing customers and potential customers while the plant was being reconstructed. Because of A.J.'s substantial decline in business, cash outflow and no opportunity for relief financing, management ceased operations and liquidated A.J.'s assets in fiscal 1995. The Company's PCB business, in both the United States and Europe, continued to be adversely affected by underutilization of existing capacity which, together with intense competition from companies within the PCB industry, has contributed to a reduction in sales. The Company's domestic PCB production, formerly performed at Aero Oregon's facility, was particularly impacted by its underutilization. In late 1994, Aero Oregon changed its product mix and service strategy, concentrating on higher margin, quick-turn or prototype business. Aero Oregon's operating results improved but could not improve quickly enough to take advantage of improvements in the PCB industry's market. As a result, management decided to sell its Oregon facility to a Japanese PCB company interested in acquiring a production facility in the United States. Consideration for the sale of Aero Oregon's assets included approximately $9,200,000 in cash and assumption by the buyer of approximately $300,000 of capitalized lease obligations. The sale resulted in a gain of $3,317,000. Proceeds from the sale of Aero Oregon's assets were used to pay off all of the Company's senior debt with two banks. This included negotiating a reduction in the amount owed to one of the banks of $2,441,000, resulting in an extraordinary gain in that amount in fiscal 1995. The Company's operating loss for fiscal 1995 was lower by $1,978,000 than its fiscal 1994 operating loss. The fiscal 1995 operating loss included $1,533,000 in restructuring charges associated with the shut down and liquidation of A.J., and approximately $1,400,000 of non-recurring general and administrative expenses associated with the Company's change in board and management as the result of a proxy contest, increases in expected remediation costs associated with the Company's former Anaheim facility and an increase in the obligation to certain former officers, key employees and directors of the Company under consulting agreements and deferred fee arrangements. Investment income declined in fiscal 1995 by $59,000 due to a lower average monthly balance of investable funds, despite a higher ending cash balance. Interest expense declined during fiscal 1995 as compared to fiscal 1994 as a result of the payoff of the Company's senior debt. The current year's net loss before extraordinary item was $5,988,000 lower than in fiscal 1994 due to the $3,317,000 gain resulting from the sale of Aero Oregon's assets, and reduced interest expense resulting from the complete payoff of the Company's senior debt in December 1994. Improvement in the Company's loss before extraordinary item for fiscal 1995 was due to the Company's sale or liquidation of unprofitable operations, improved operating margins at the Company's continuing subsidiaries, lower debt costs resulting from payoff of the Company's senior debt and gain realized from the sale of Aero Oregon's facility and manufacturing assets. This was partially offset by restructuring charges associated with the liquidation of A.J. and additional general and administrative costs recorded in the last quarter of fiscal 1995. 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 source of liquidity is its cash and cash equivalents, which amounted to $2,519,000 at June 30, 1996. During the year ended June 30, 1996, cash and cash equivalents decreased by $398,000. This net cash outflow consisted of cash used to acquire SMTEK of $7,638,000, cash used by operating activities of $555,000, capital expenditures of $910,000, and the effect of exchange rate changes on cash of $79,000, partially offset by cash inflows of $6,558,000 from new borrowings net of debt repayments and debt issue costs, proceeds from issuances of common stock of $1,997,000, and proceeds from government grants of $229,000. Components of operating working capital, net of the effects of the business acquired, increased by $1,508,000 during fiscal 1996, which consisted of a $726,000 increase in costs and estimated earnings in excess of billings on uncompleted contracts, a $1,881,000 increase in inventories and an $86,000 increase in prepaid expenses and other current assets, partially offset by increases in current liabilities of $915,000 and a decrease in accounts receivable of $270,000. The increase in operating working capital is primarily the result of the acquisition of SMTEK in 1996. 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 investments in its facilities. Capital expenditures during fiscal 1996, 1995 and 1994 were approximately $1,599,000, $643,000 and $805,000, respectively. The Company anticipates it will need to increase its capital spending in the coming years in order to stay competitive as technology improves. Management estimates that capital expenditures of as much as $1,500,000 may be required in fiscal 1997. Of that amount, the substantial majority is expected to be financed by a combination of capital leases, secured loans and other borrowings. In February 1996, the Company issued 10% Senior Secured Notes due July 1, 1997 in the aggregate amount of $5,300,000 (the "10% Senior Notes") and 10% Cumulative Convertible Debentures due February 28, 1997 in the aggregate amount of $3,500,000 (the "10% Convertible Debentures"). The proceeds of these borrowings were used to pay off the principal of and accrued interest on the $7,000,000 bridge loans which had been taken out to finance the acquisition of SMTEK, to pay acquisition costs and to provide working capital for SMTEK. In March 1996, to raise additional working capital for SMTEK, the Company sold 600,000 shares of common stock to an offshore investor which generated net proceeds of $1,112,000. The 10% Senior Notes are secured by (i) 1,060,000 shares of common stock and (ii) warrants, Series F, to purchase 1,060,000 shares of common stock (the "Collateral Warrants"), all of which have been placed into an escrow account. In the event the Collateral Warrants are required to retire the 10% Senior Notes, each warrant would be exercisable into one share of common stock at a price which is 6% less than the market value of the Company's common stock at the time of exercise. If the 10% Senior Notes are repaid from sources other than the Collateral Warrants, then the Collateral Warrants expire and can no longer be exercised. The Company also deposited $375,000 into a restricted cash account maintained by an escrow agent, such amount to be used for interest payments on the 10% Senior Notes. At June 30, 1996, this restricted cash amounted to $208,000, and is included in prepaid expenses and other current assets in the accompanying Consolidated Balance Sheet. 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% Convertible 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. As indicated above, the 10% Senior Notes mature on July 1, 1997. The Company plans to retire this $5,300,000 indebtedness at or prior to maturity by issuing new common stock. The note holders have the option to accept common stock in lieu of cash. If the note holders do not so elect, then the Company plans to issue stock to other parties to raise the payoff amount. Under certain circumstances, as set forth in the agreements governing the 10% Senior Notes, the Company can apply some or all of the 1,060,000 common stock shares held in escrow toward the payoff of these notes. The total number of new shares of common stock which will need to be issued to fund the retirement of these notes depends on several factors, including: (i) whether the notes are paid off prior to the maturity date; (ii) if paid prior to maturity, whether the prepayment is partial or complete; and (iii) the market price of the Company's common stock at the time of issuance. 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 losses of $1,167,000, $4,970,000 and $6,948,000 and negative cash flows from operating activities of $555,000, $264,000 and $2,710,000 for the years ended June 30, 1996, 1995 and 1994, respectively. The achievement of sustained operating 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 operating profitability 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. Management anticipates that the Company will continue to incur operating losses for at least the near term future due to its current level of fixed costs for manufacturing overhead relative to its current sales volume, as well as amortization expense of the goodwill arising from the acquisition of SMTEK. Operating losses are expected to continue until such time as sales increase to a level necessary to absorb fixed costs and offset goodwill amortization. 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. At June 30, 1996, the Company's total cash and cash equivalents amounted to $2,519,000. As of September 30, 1996, total cash and cash equivalents had declined to $1,349,000 due primarily to working capital requirements at the Company's EMS operation in Northern Ireland. In October 1996, the Company finalized an accounts receivable-based working capital bank line of credit for its U.S. EMS operation, which provides for borrowings of up to $2,500,000 at an interest rate of prime plus 1.25%. 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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the results of their operations and cash flows for each of the years in the three-year period ended June 30, 1996 in conformity with generally accepted accounting principles. /s/ KPMG PEAT MARWICK LLP Los Angeles, California September 6, 1996, except for the last paragraph of Note 12, which is as of October 9, 1996 DDL ELECTRONICS, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands) June 30 ----------------- 1996 1995 ---- ---- Assets Current assets: Cash and cash equivalents $ 2,519 $ 2,917 Accounts receivable, net (Note 3) 5,620 3,600 Costs and estimated earnings in excess of billings on uncompleted contracts (Note 4) 3,026 - Inventories (Note 5) 4,014 2,188 Prepaid expenses and other current assets 314 171 ------ ------ Total current assets 15,493 8,876 ------ ------ Property, equipment and improvements, at cost (Notes 6 and 10): Buildings and improvements 5,604 5,217 Plant equipment 13,999 9,486 Office and other equipment 1,444 1,268 ------ ------ 21,047 15,971 Less: Accumulated depreciation and amortization (15,130) (12,662) ------ ------ Property, equipment and improvements, net 5,917 3,309 ------ ------ Other assets: Goodwill, net 5,708 - Debt issue costs 533 44 Deposits and other assets 436 361 ------ ------ 6,677 405 ------ ------ $28,087 $12,590 ====== ====== DDL ELECTRONICS, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands except share amounts) (continued) June 30 ----------------- 1996 1995 ---- ---- Liabilities and Stockholders' Equity (Deficit) Current liabilities: Current portion of long-term debt (Note 6) $ 603 $ 633 Accounts payable 7,485 5,283 Accrued payroll and employee benefits 777 601 Other accrued liabilities (Note 9) 3,114 2,387 ------ ------ Total current liabilities 11,979 8,904 ------ ------ Long-term debt, less current portion (Note 6) 10,935 7,030 ------ ------ Commitments and contingencies (Note 10) Stockholders' equity (deficit) (Notes 6 and 8): 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; 22,998,879 and 16,062,979 shares issued and outstanding at June 30, 1996 and 1995, respectively 230 161 Additional paid-in capital 29,304 20,983 Common stock held in escrow (1,325) - Accumulated deficit (22,000) (23,598) Foreign currency translation adjustment (1,036) (890) ------ ------ Total stockholders' equity (deficit) 5,173 (3,344) ------ ------ $28,087 $12,590 ====== ====== 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 ------------------------------ 1996 1995 1994 ---- ---- ---- Sales $33,136 $29,576 $48,529 ------ ------ ------ Costs and expenses: Cost of goods sold 29,494 26,516 47,860 Administrative and selling expenses 4,175 6,497 7,617 Goodwill amortization 634 - - Restructuring charges (Note 2) - 1,533 - ------ ------ ------ 34,303 34,546 55,477 ------ ------ ------ Operating loss (1,167) (4,970) (6,948) ------ ------ ------ Non-operating income (expense): Interest income 246 109 168 Interest expense (911) (883) (1,110) Gain on sale of assets (Note 2) - 3,317 2 Earthquake expenses - - (500) Other income (expense), net (36) 61 34 ------ ------ ------ (701) 2,604 (1,406) ------ ------ ------ Loss before income taxes (1,868) (2,366) (8,354) Income tax benefit (Note 7) 1,110 - - ------ ------ ------ Loss before extraordinary item (758) (2,366) (8,354) Extraordinary item - Gain on debt extinguishment (Notes 2 and 6) 2,356 2,441 - ------ ------ ------ Net income (loss) $ 1,598 $ 75 $(8,354) ====== ====== ====== Earnings (loss) per share: Loss before extraordinary item $ (0.04) $ (0.15) $ (0.55) Extraordinary item 0.13 0.15 - ------ ------ ------ Earnings (loss) per share $ 0.09 $ - $ (0.55) ====== ====== ====== Share used in computing earnings (loss) per share 18,807 15,971 15,097 ====== ====== ====== See accompanying notes to consolidated financial statements. DDL ELECTRONICS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands) Year ended June 30 ------------------------------ 1996 1995 1994 ---- ---- ---- Cash flows from operating activities: Net income (loss) $ 1,598 $ 75 $(8,354) Adjustments to reconcile net income (loss) to net cash used by operating activities: Depreciation and amortization 2,028 1,505 3,120 Gain on debt extinguishment (2,356) (2,441) - Gain on sale of assets - (3,317) (2) Net (increase) decrease in operating working capital, net of effects of business acquired (Note 9) (1,508) 4,009 2,648 (Increase) decrease in deposits and other assets (93) 2 27 Benefit of non-capital grants (265) (139) (150) Other 41 42 1 ------ ------ ------ Net cash used by operating activities (555) (264) (2,710) ------ ------ ------ Cash flows from investing activities: Capital expenditures (910) (547) (711) Purchase of SMTEK, Inc., net of cash acquired (Note 2) (7,638) - - Proceeds from sale of assets (Note 2) - 9,936 18 ------ ------ ------ Net cash provided by (used in) investing activities (8,548) 9,389 (693) ------ ------ ------ Cash flows from financing activities: Proceeds from long-term debt 8,800 612 272 Payments of long-term debt (1,870) (10,819) (1,633) Debt issue costs (372) - - Proceeds from issuance of common stock, net 1,112 980 - Proceeds from exercise of stock options 437 287 94 Proceeds from exercise of stock warrants 448 - 3,455 Proceeds from issuance of preferred stock - - 675 Proceeds from foreign government grants 229 202 268 ------ ------ ------ Net cash provided by (used in) financing activities 8,784 (8,738) 3,131 ------ ------ ------ Effect of exchange rate changes on cash (79) (10) 44 ------ ------ ------ Increase (decrease) in cash and cash equivalents (398) 377 (228) Cash and cash equivalents at beginning of year 2,917 2,540 2,768 ------ ------ ------ Cash and cash equivalents at end of year $ 2,519 $ 2,917 $ 2,540 ====== ====== ====== See accompanying notes to consolidated financial statements.
DDL ELECTRONICS, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity (Deficit) Years ended June 30, 1996, 1995 and 1994 (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, 1993 - 11,972,880 $ 120 - $ - $ 15,380 $(15,319) $(1,124) $ (943) Net loss - - - - - - (8,354) - (8,354) Exercise of warrants - 2,370,148 24 - - 3,431 - - 3,455 Issuance of preferred stock 450 - - - - 675 - - 675 Conversion of debentures - 30,500 - - - 61 - - 61 Exercise of stock options - 95,190 1 - - 93 - - 94 Compensation expense on stock option grants - - - - - 6 - - 6 Translation adjustments - - - - - - - 117 117 ---- ---------- ---- --------- ----- ------ ------ ------ ------ 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 Series B preferred stock to common (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% senior 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 - 595,442 6 - - 431 - - 437 Exercise of warrants - 323,500 3 - - 445 - - 448 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 ==== ========== ==== ========= ===== ====== ====== ====== ====== 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 1996, 1995 and 1994, fell on June 28, June 30 and July 1, respectively. In these consolidated financial statements, the fiscal year-end for all years is shown as June 30 for clarity of presentation. 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, 1996, the carrying amount of the Company's cash and cash equivalents, accounts receivable and accounts payable approximate their fair value because of the short maturity of those instruments. The carrying amount of long-term debt was $11,538,000 and the fair value was $11,159,000 as of June 30, 1996. 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 Manufacturing 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, which is the expected period of benefit. Statement of Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of," 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 Effective July 1, 1993, the Company adopted, on a prospective basis, Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes." SFAS 109 is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, SFAS 109 generally considers all expected future events other than enactments of changes in tax law or statutorily imposed rates. 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). 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 carried 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. RECENT ACCOUNTING PRONOUNCEMENT Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," becomes effective for the Company's fiscal year 1997. SFAS 123 establishes new financial accounting and reporting standards for stock-based compensation plans. Entities will be allowed to measure compensation expense for stock-based compensation to employees under SFAS 123 or the existing standard, which is Accounting Principles Board Opinion (APBO) No. 25, "Accounting for Stock Issued to Employees." Entities electing to remain with the APBO 25 accounting method will be required to make pro forma disclosures of net income and earnings per share as if the SFAS 123 accounting method had been applied. The Company plans to adopt only the disclosure requirements of SFAS 123; accordingly, such adoption will not affect the Company's financial position, results of operations or cash flows. CHANGES IN CLASSIFICATION Certain reclassifications have been made to the fiscal 1995 and 1994 financial statements to conform with the fiscal 1996 financial statement presentation. Such reclassifications had no effect on the Company's results of operations or stockholders' equity (deficit). Note 2 - 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, Inc. ("SMTEK"), a provider of integrated electronic contract 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 short-term 10% bridge loans in the aggregate amount of $7,000,000 (the "Bridge Loans"). The Bridge Loans were repaid in February 1996 through the issuance of 10% Senior Secured Notes in the aggregate amount of $5,300,000 and 10% Cumulative Convertible Debentures in the aggregate amount of $3,500,000. As further described in Note 6, in May and June 1996 the holders of the 10% Cumulative Convertible Debentures converted these debentures to equity. The acquisition of SMTEK has been 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 has been 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 $634,000 as of June 30, 1996. 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 3 - ACCOUNTS RECEIVABLE The components of accounts receivable are as follows (in thousands): June 30 ------------------ 1996 1995 ---- ---- Trade receivables $ 5,456 $ 3,511 Other receivables 296 270 Less allowance for doubtful accounts (132) (181) ------ ------ $ 5,620 $ 3,600 ====== ====== Included in other receivables at June 30, 1996 and 1995 are grants due from the Industrial Development Board for Northern Ireland of $251,000 and $140,000, respectively (Note 10). Note 4 - COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED CONTRACTS The components of costs and estimated earnings in excess of billings on uncompleted contracts at June 30, 1996 are as follows (in thousands): Costs incurred on uncompleted contracts $11,181 Estimated earnings 1,544 ------ 12,725 Less: Billings to date (9,613) Customer advances and progress payments (86) ------ $ 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 $52,000 of billings in excess of costs and estimated earnings. Essentially all of the unbilled receivables are expected to be billed within 90 days of the balance sheet date. Note 5 - INVENTORIES Inventories consist of the following (in thousands): June 30 ------------------ 1996 1995 ---- ---- Raw materials $ 2,853 $ 1,634 Work in process 1,263 710 Finished goods 146 - Less reserves (248) (156) ------ ------ $ 4,014 $ 2,188 ====== ====== Note 6 - FINANCING ARRANGEMENTS BANK CREDIT AGREEMENT: In December 1995, the Company entered into an agreement with Ulster Bank Markets 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 the Bank's base rate (5.75% at June 30, 1996) plus 1.50%. The credit facilities are available to the Company until November 30, 1996, and are subject to renewal thereafter. At June 30, 1996, there were no borrowings outstanding under this credit facility. ACQUISITION INDEBTEDNESS: In February 1996 the Company issued 10% Senior Secured Notes due July 1, 1997 in the aggregate amount of $5,300,000 (the "10% Senior Notes") and 10% Cumulative Convertible Debentures due February 28, 1997 in the aggregate amount of $3,500,000 (the "10% Convertible Debentures"). The proceeds of these borrowings were used to pay off the principal and accrued interest of the $7,000,000 Bridge Loans which had been taken out to finance the acquisition of SMTEK, pay acquisition costs, and provide working capital for SMTEK. 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. The 10% Senior Notes are secured by (i) 1,060,000 shares of common stock and (ii) warrants, Series F, to purchase 1,060,000 shares of common stock (the "Collateral Warrants"), all of which have been placed into an escrow account. In the event the Collateral Warrants are required to redeem the 10% Senior Notes, each warrant would be exercisable into one share of common stock at a price which is 6% less than the market value of the Company's common stock at the time of exercise. If the 10% Senior Notes are repaid from sources other than the Collateral Warrants, then the Collateral Warrants expire and can no longer be exercised. The Company also deposited $375,000 into a restricted cash account maintained by an escrow agent, such amount to be used for interest payments on the 10% Senior Notes. At June 30, 1996, this restricted cash amounted to $208,000, and is included in prepaid expenses and other current assets in the accompanying Consolidated Balance Sheet. In connection with the sale of the 10% Senior Notes and 10% Convertible Debentures, the Company paid $352,000 as a fee to the placement agent for these financings. The Company also issued to the placement agent as additional compensation 572,683 shares of common stock valued at $716,000 and warrants, Series E, to purchase 1,500,000 shares of common stock for $2.50 per share which are exercisable for five years. As further described in Note 8, the Series E warrants contain an antidilution provision which has lowered the exercise price. LONG-TERM DEBT Long-term debt consists of the following (in thousands): June 30 ------------------ 1996 1995 ---- ---- 10% Senior Secured 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 $ 5,300 $ - Mortgage notes payable secured by real property at the Northern Ireland operations, with interest at variable rates (8.375% at June 30, 1996) 1,265 1,346 Notes payable secured by equipment, interest at 7.95% to 10.9%, payable in monthly installments through April 2001 1,523 - Capitalized lease obligations (Note 10) 167 124 8-1/2% Convertible Subordinated Debentures ("CSDs"), due 2008, interest payable semi-annually and convertible at holders' option at a price of $10-5/8 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, 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 443 653 Obligations to former officers, employees and directors under consulting and deferred fee agreements 965 3,255 Other 295 705 ------ ------ 11,538 7,663 Less current maturities 603 633 ------ ------ $10,935 $ 7,030 ====== ====== At June 30, 1996, 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, 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 10) are as follows: 1997 - $537,000; 1998 - $5,862,000; 1999 - $965,000; 2000 - $540,000; 2001 - $776,000; and thereafter - $2,691,000. During fiscal 1996, 1995 and 1994, holders of $132,000 $86,000 and $61,000, respectively, in principal of 7% CSDs exchanged such CSDs for common stock of 66,000, 43,000 and 30,500 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 $941,000 at June 30, 1996. As the result of this settlement agreement, the Company recorded an extraordinary gain of $2,356,000, net of $197,000 of compensation expense related to the "call" feature of the warrants. Note 7 - INCOME TAXES Temporary differences between financial statement carrying amounts and the tax bases of assets and liabilities that give rise to significant portions of the deferred tax assets and liabilities relate to the following (in thousands): June 30 --------------------- 1996 1995 ---- ---- Deferred tax assets: Accrued employee benefits $ 394 $ 1,228 Warranty and loss reserves 547 780 Net operating loss carryforwards 13,240 19,890 Other 272 148 ------ ------ Total deferred tax assets 14,453 22,046 Deferred tax liabilities: Depreciation (53) (1,200) ------ ------ Net deferred tax assets before allowance 14,400 20,846 Less valuation allowance (14,400) (20,846) ------ ------ 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 $36,000,000 prior to the expiration of the net operating loss carryforwards. At June 30, 1996, the Company is uncertain whether it will realize the benefits of the net deferred tax assets and, therefore, has recorded a 100% valuation allowance to offset the assets. Based on a carryback of prior year net operating losses and a current year extraordinary gain on extinguishment of debt, the Company reduced its valuation allowance by $6,446,000 during fiscal 1996. 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 ------------------------ 1996 1995 1994 ---- ---- ---- Federal tax benefit computed at statutory rate $ (635) $ (804) $(2,840) State income tax, net of federal benefit - 5 - Differences in taxation of foreign earnings, net 114 (155) 807 Amortization of debt issue costs (108) - - Utilization of net operating losses (1,110) - - Deferred tax effect of temporary differences 7,086 1,438 - Net change in valuation allowance (6,446) (484) 2,049 Other (11) - (16) ------ ------ ------ Income tax 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 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 ("NOL") 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, 1996, the Company has U.S. federal and state net operating loss carryforwards of $35,307,000 and $29,909,000, respectively, expiring in 2001 through 2011. The NOL carryforward for federal alternative minimum tax purposes is approximately $26,998,000. 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. Pretax income (loss) from foreign operations for fiscal 1996, 1995 and 1994 was $(338,000), $443,000 and $(5,430,000), 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. 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 $-0- in fiscal 1996 and 1995, and $455,000 in fiscal 1994 which, in accordance with SFAS No. 109, has been treated as a reduction in the provision for income taxes. At June 30, 1996, the U.K. NOL amounted to approximately $11,378,000. 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. Note 8 - STOCKHOLDERS' EQUITY SALE OF COMMON STOCK In March 1996, the Company sold 600,000 shares of common stock to an offshore investor, generating net proceeds of $1,112,000. 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. Activity under the option plans for fiscal years 1996, 1995 and 1994 was as follows: Shares Price per share ------ --------------- Shares under option, June 30, 1993 1,683,593 .50 - 4.88 Granted 501,973 .50 - 1.88 Forfeited (225,810) .69 - 4.88 Exercised (95,190) .69 - 1.38 --------- ----- ----- Shares under option, June 30, 1994 1,864,566 .50 - 4.88 Granted 120,000 1.13 - 1.38 Forfeited (177,500) 1.38 - 2.38 Exercised (450,447) .50 - 1.06 --------- ----- ----- Shares under option, June 30, 1995 1,356,619 $ .50 - $ 4.88 Granted 906,042 1.63 - 1.75 Forfeited (33,928) 1.44 Exercised (595,442) .50 - 1.63 --------- ----- ----- Shares under option, June 30, 1996 1,633,291 $ .50 - $ 4.88 ========= ===== ===== At June 30, 1996, options to purchase 637,955 shares were exercisable and 1,602,027 shares were available for future grants. PREFERRED STOCK PURCHASE RIGNTS 1,000 preferred stock purchase rights, which 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, are outstanding at June 30, 1996. 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 the following common stock purchase warrants: 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 the prior year. 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, the effective exercise price on the Series E warrants was reduced to $2.33 as of June 30, 1996. 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. As further described in Note 6, the Series F warrants covering an aggregate of 1,060,000 shares were issued as partial collateral for the 10% Senior Notes. These warrants are exercisable in the event of a default by the Company on the 10% Senior Notes, and are exercisable only so long as the 10% Senior Notes remain outstanding. 5. As further described in Note 6, the Series G warrants covering an aggregate of 595,872 shares were issued to former officers, key employees and directors of the Company. The Series G warrants are exercisable until their expiration on June 1, 1998. 6. Series H warrants covering an aggregate 300,000 shares were issued to the Company's non-employee directors who served on the Company's board without other compensation during the period from May 31, 1995 to June 30, 1996. The Series H warrants are 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 9 - OTHER FINANCIAL INFORMATION INFORMATION RELATING TO CONSOLIDATED STATEMENTS OF CASH FLOWS Net cash used by operating activities includes cash payments for interest (in thousands): Year ended June 30, --------------------------- 1996 1995 1994 ---- ---- ---- Interest paid $ 732 $ 883 $ 1,110 Net (increase) decrease in operating working capital, net of the effects of the business acquired, consists of the following (in thousands): Year ended June 30, --------------------------- 1996 1995 1994 ---- ---- ---- Decrease in accounts receivable $ 270 $ 2,030 $ 3,604 Increase in costs and estimated earnings in excess of billings on uncompleted contracts (726) - - (Increase) decrease in inventories (1,881) 1,504 3,404 (Increase) decrease in prepaid expenses and other current assets (86) 62 881 Increase (decrease) in accounts payable 278 111 (4,678) Increase (decrease) in accrued payroll and employee benefits 24 (406) (178) Increase (decrease) in other accrued liabilities 613 708 (385) ------ ------ ------ Net (increase) decrease $(1,508) $ 4,009 $ 2,648 ====== ====== ====== Following is the supplemental schedule of non-cash investing and financing activities (in thousands): Year ended June 30, -------------------------- 1996 1995 1994 ---- ---- ---- Capital expenditures financed by lease obligations and notes payable $ 689 $ 96 $ 94 Debentures converted to equity 3,632 86 61 Common stock issued as partial consideration for purchase of SMTEK, Inc. 801 - - Common stock issued as debt placement fee 716 - - Common stock issued as collateral for 10% Senior Notes 1,325 - - Common stock issued to repay debt 35 - - Conversion of preferred stock to common stock - 3 - OTHER ACCRUED LIABILITIES Other accrued liabilities consist of the following (in thousands): June 30 ------------------ 1996 1995 ---- ---- Environmental liabilities $ 728 $ 932 Accrued taxes payable 951 - Other 1,435 1,455 ------ ------ $ 3,114 $ 2,387 ====== ====== 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 1994 $945 $293 $(705) $533 Fiscal 1995 533 95 (447) 181 Fiscal 1996 181 85 (134) 132 Inventory reserves - ------------------ Fiscal 1994 $174 $266 $ (56) $384 Fiscal 1995 384 62 (290) 156 Fiscal 1996 156 250 (158) 248 Note 10 - COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS Future minimum lease payments at June 30, 1996, were as follows (in thousands): Capital Operating leases leases ------ ------ Fiscal 1997 $ 77 $ 410 Fiscal 1998 48 399 Fiscal 1999 32 403 Fiscal 2000 20 375 Fiscal 2001 17 13 Thereafter 1 26 ----- ----- Total 195 $ 1,626 ===== Less: Interest (28) ----- Present value of minimum lease payments $ 167 ===== The capitalized cost of the related assets (primarily plant equipment), which are pledged as security under the capital leases, was $370,000 and $359,000 at June 30, 1996, and 1995, respectively. Accumulated amortization on assets under capital leases amounted to $143,000 and $237,000 at June 30, 1996 and 1995, respectively. Rental expense for operating leases amounted to $229,000, $238,000 and $478,000 for fiscal 1996, 1995 and 1994, respectively. The Company's principal operating leases are renewable at the fair rental value on the expiration dates. SMTEK conducts its operations from a 78,000 square foot facility, which is leased from an unaffiliated party through May 31, 2000. The monthly rent was approximately $28,500 during fiscal 1996 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 Northern Ireland subsidiaries have been reimbursed for a portion of qualifying capital expenditures and for certain employment and interest costs. Approximately $480,000 of the government grants received by the Company's DDL Electronics Limited subsidiary ("DDL-E") are subject to repayment if the employment level at this subsidiary falls below 134 employees during the two year period beginning on January 1, 1997. At the present time, DDL-E has approximately 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. Irlandus Circuits Limited ("Irlandus"), the Company's other Northern Ireland-based operating company, no longer has a grant repayment obligation based on maintenance of minimum employment levels. 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 and/or Irlandus cease business, permanently discontinue production, or fail to pay to the IDB any amounts due under the mortgage notes payable (Note 6). These contingent repayment obligations amount to approximately $650,000 and $406,000 for DDL-E and Irlandus, respectively. Management does not expect that the Company will have any grant repayment obligation 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 AND LITIGATION Federal, state and local provisions relating to the protection of the environment affect the Company's PCB fabrication operations. In 1983, the United States and the State of California filed a legal action against the owners and operators of the Stringfellow hazardous waste disposal site located near Riverside, California, as well as against a number of generators and transporters of chemical substances who allegedly disposed of waste at the site (the "Primary Defendants"). The action seeks to cause the Primary Defendants to clean up the site, to reimburse government plaintiffs for remediation costs incurred by them and to recover compensation for alleged damage to natural resources. The Primary Defendants have initiated a defense of the case. The State of California also has been found liable for, among other things, its negligent selection, inspection, design, construction, operation and failure to remedy the site. In 1988, the Primary Defendants filed third-party complaints against the Company's Anaheim, California-based Aeroscientific Corp. subsidiary ("Aero Anaheim") and about 185 other alleged responsible parties. The U.S. Environmental Protection Agency ("EPA") has estimated that about 34 million gallons of waste were disposed of at the Stringfellow site and has estimated that Aero Anaheim may have been responsible for having generated about 9,300 gallons or 0.0273 percent of the total waste disposed. The government plaintiffs, however, have been unable to estimate the value of their principal claims. EPA's cleanup estimates have ranged from $400 million to $1 billion, depending on which cleanup proposal is selected. At the present time, the Company cannot determine how the allocation of responsibility in this case will ultimately be made or what share of responsibility might be imposed on state and local governments. The EPA contends that site owners and operators and waste generators are jointly and severally liable under federal law. In 1994, the Company was given the opportunity to participate in a de minimis settlement negotiated with the EPA and the Primary Defendants. The Company's share of the settlement and administration costs would have been approximately $120,000. The Company decided not to participate in the settlement at that time because of its limited cash resources. However, the Company accrued this amount as its estimate of the liability it will ultimately bear in this matter. The Company is currently exploring the feasibility of entering into a settlement with the Primary Defendants in which that same amount would be paid over several years. No assurances can be given, however, that any such settlement will be achieved. The Company is aware of certain chemicals that exist in the ground at Aero Anaheim's previously leased facility in Anaheim. 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 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 implemented beginning in 1995. Investigative work to determine the full extent of potential groundwater pollution has not yet been completed. The Company retained the services of an environmental engineering firm 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 cleanup of the potential groundwater 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, however, that the resolution of these matters will 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, 1996, the Company has paid $420,000 as its share of the remediation costs (including cash placed in an escrow account for payment of expenses). At June 30, 1996, the Company has a reserve of $608,000, 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 may differ significantly from the estimates, and may exceed the amount of the reserve. In addition to the environmental litigation described above, the Company is involved in other litigation matters resulting from the ordinary course of business. At the current time, management believes that all such other actions, in the aggregate, will not have a material adverse effect on the Company. Note 11 - BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION The Company operates in two primary industry segments providing electronic manufacturing services and printed circuit boards principally to the computer, communications, instrumentation and medical equipment markets. A summary of the Company's operations by segment follows (in thousands): Year ended June 30, ------------------------------ 1996 1995 1994 ---- ---- ---- Sales: Electronic Manufacturing Services $22,245 $13,842 $28,620 Printed Circuit Boards 10,891 15,734 19,909 ------ ------ ------ $33,136 $29,576 $48,529 ====== ====== ====== Operating income (loss): Electronic Manufacturing Services $ (267) $(1,892) $(2,990) Printed Circuit Boards (20) (646) (4,505) General Corporate (880) (2,432) 547 ------ ------ ------ $(1,167) $(4,970) $(6,948) ====== ====== ====== Identifiable assets: Electronic Manufacturing Services $20,321 $ 6,162 $ 9,097 Printed Circuit Boards 5,266 5,543 13,012 General Corporate 2,500 885 1,149 ------ ------ ------ $28,087 $12,590 $23,258 ====== ====== ====== Depreciation and amortization: Electronic Manufacturing Services $ 1,195 $ 568 $ 1,122 Printed Circuit Boards 548 924 1,975 General Corporate 285 13 23 ------ ------ ------ $ 2,028 $ 1,505 $ 3,120 ====== ====== ====== Capital expenditures:* Electronic Manufacturing Services $ 1,013 $ 210 $ 551 Printed Circuit Boards 586 433 254 ------ ------ ------ $ 1,599 $ 643 $ 805 ====== ====== ====== * Capital expenditures includes equipment additions financed with capital leases and notes payable. Sales, operating loss, and identifiable assets by geographic area are as follows (in thousands): Year ended June 30, ------------------------------ 1996 1995 1994 ---- ---- ---- Sales: United States $ 8,668 $ 8,765 $27,571 Northern Ireland 24,468 20,811 20,958 ------ ------ ------ Total $33,136 $29,576 $48,529 ====== ====== ====== Operating: United States $ (748) $(2,226) $(2,909) Northern Ireland (419) (2,744) (4,039) ------ ------ ------ Total $(1,167) $(4,970) $(6,948) ====== ====== ====== Identifiable assets: United States $16,133 $ 1,003 $12,990 Northern Ireland 11,954 11,587 10,268 ------ ------ ------ Total $28,087 $12,590 $23,258 ====== ====== ====== No single customer accounted for 10% or more of consolidated sales in fiscal 1996 or 1995. The Company had sales to a single customer which accounted for approximately 13.0% of sales in fiscal 1994. Note 12 - 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 losses of $1,167,000, $4,970,000 and $6,948,000 and negative cash flows from operating activities of $555,000, $264,000 and $2,710,000 for the years ended June 30, 1996, 1995 and 1994, respectively. In response to the large operating losses incurred prior to fiscal 1996, 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. Management anticipates that the Company will continue to incur operating losses for at least the near term future due to its current level of fixed costs for manufacturing overhead relative to its current sales volume, as well as amortization expense of the goodwill arising from the acquisition of SMTEK. Operating losses are expected to continue until such time as sales increase to a level necessary to absorb fixed costs and offset goodwill amortization. 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. At June 30, 1996, the Company's total cash and cash equivalents amounted to $2,519,000. In October 1996, the Company finalized an accounts receivable-based working capital bank line of credit for its U.S. EMS operation, which provides for borrowings of up to $2,500,000 at an interest rate of prime plus 1.25%. Management believes that the Company's cash resources and borrowing capacity on this working capital line of credit are sufficient to fund operations for at least the next year. Note 13 - 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 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 extraordinary 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 ====== ===== ===== ===== ===== Fiscal 1995 Sales $ 8,940 $ 7,654 $ 6,079 $ 6,903 $ 29,576 ====== ====== ====== ====== ======= Income (loss) before extraordinary item $(2,862) $ 2,145 $ 167 $(1,816) $(2,366) Extraordinary item - Gain on debt extinguishment - 2,441 - - 2,441 ------ ------ ------ ------ ------ Net income (loss) $(2,862) $ 4,586 $ 167 $(1,816) $ 75 ====== ====== ====== ====== ====== Earnings (loss) per share: Income (loss) before extraordinary item $(0.19) $ 0.13 $ 0.01 $(0.11) $(0.15) Extraordinary item - 0.15 - - 0.15 ----- ----- ----- ----- ----- Total earnings (loss) per share $(0.19) $ 0.28 $ 0.01 $(0.11) $ - ====== ===== ===== ===== ===== DDL ELECTRONICS, INC. AND SUBSIDIARIES Market and Dividend Information The Company's common shares are traded on the New York Stock and Pacific Stock Exchanges (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 1996 Fiscal 1995 ------------- ------------- High Low High Low ---- ---- ---- ---- 1st Quarter 2-1/8 1-1/2 1-7/8 1 2nd Quarter 3 1-7/8 2-1/2 1 3rd Quarter 2-3/4 2-1/4 1-1/2 1 4th Quarter 2-1/2 1-5/8 2 1-1/8 There were approximately 1,500 stockholders of record at October 7, 1996. 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 OPERATING UNITS - --------- --------------- Karen Beth Brenner SMTEK, Inc. Investment Manager Newbury Park, California Newport Beach, California Melvin Foster DDL Electronics Limited Attorney at Law Craigavon, Northern Ireland Boston, Massachusetts Gregory L. Horton Irlandus Circuits Limited Chairman of the Board, Craigavon, Northern Ireland President and Chief Executive Officer DDL Electronics, Inc. Newbury Park, California Bernee D. L. Strom TRANSFER AGENT AND REGISTRAR President and Chief Executive Officer ---------------------------- USA Digital Radio American Stock Transfer & Chicago, Illinois Trust Company 40 Wall Street Richard K. Vitelle New York, New York 10005 Vice President and Chief Financial Officer DDL Electronics, Inc. Newbury Park, California INDEPENDENT AUDITORS -------------------- Robert G. Wilson KPMG Peat Marwick LLP Private Investor Los Angeles, California Vancouver BC, Canada (formerly Interim Vice President of DDL Electronics, Inc.) LEGAL COUNSEL ------------- Nelson, Mullins, Riley & EXECUTIVE OFFICERS Scarborough, L.L.P. - ------------------ Charlotte, North Carolina Gregory L. Horton President and Chief Executive Officer Richard K. Vitelle Vice President - Finance and Administration, Chief Financial Officer, Treasurer and Secretary EX-4.14.3 3 [FORM OF SERIES F WARRANTS - COLLATERAL WARRANTS] NEITHER THE WARRANTS REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY STATE SECURITIES LAWS AND MAY NOT BE TRANSFERRED IN VIOLATION OF SUCH ACT OR LAWS, THE RULES AND REGULATIONS THEREUNDER OR THE PROVISIONS OF THIS WARRANT CERTIFICATE. No. [ ] [ ] Warrants WARRANTS TO PURCHASE AN AGGREGATE OF [ ] SHARES OF COMMON STOCK OF DDL ELECTRONICS, INC. (INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE) ISSUED TO [ ] DATED: February 29, 1996 THIS IS TO CERTIFY that, for value received, [ ], or [its] [his] [their] registered assigns (herein collectively referred to as the "Warrantholder"), is entitled to the number of Warrants (the "Warrants") set forth above, each of which represents the right, upon the due exercise hereof, at any time commencing upon and after (the "Commencement Date") the occurrence of an Event of Default (as hereinafter defined) and ending upon (the "Expiration Date") the payment in full by the Company of all amounts now or hereafter due to the Warrantholder under the Operative Documents (as hereinafter defined), whether for principal, interest, fees, costs, expenses or otherwise (including, without limitation, any and all expenses (including reasonable attorneys' fees and legal expenses) incurred by the Warrantholder in the collection of the Notes and in the enforcement and protection of its rights hereunder and under the other Operative Documents (collectively, the "Obligations"), to purchase from DDL Electronics, Inc., a Delaware corporation (the "Company"), one share of common stock, par value $.01 per share (the "Common Stock"), of the Company upon surrender hereof, with the form of election to purchase included herein (the "Election to Purchase") completed and duly executed, at the principal executive office of the Company, and upon simultaneous payment therefor (as set forth in Section 1 below) of an exercise price per share equal to the Purchase Price (as defined in Section 1 below). The number of shares of Common Stock issuable upon exercise of the Warrants (individually, a "Share" and collectively, the "Shares") is subject to adjustment as provided herein. This warrant certificate is one of a series of warrant certificates issued by the Company in connection with its issuance of 10% Senior Secured Notes due July 1, 1997 (the "Notes") pursuant to the Securities Purchase Agreement, dated as of February 29, 1996 (the "Securities Purchase Agreement"), by and among the Company and each of the Purchasers who are signatories thereto. All capitalized terms used herein without definition (including, without limitation, Event of Default, Operative Documents, Pledge Agreement and Collateral Agency Agreement) shall have the respective meanings given such terms as set forth in the Securities Purchase Agreement. Pursuant to Section 4.3 of the Securities Purchase Agreement, the Company has the right, but not the obligation, to fund the optional prepayment of all, but not less than all, of the amounts outstanding under the Notes with the net proceeds of the sale of the Shares. Upon prepayment of all amounts outstanding under the Notes and the satisfaction in full of all of the Obligations, this warrant certificate will become void and all rights evidenced hereby will terminate after such time. The number of Shares purchasable hereunder shall not be adjusted or otherwise adversely affected as a result of any partial prepayment of any amounts outstanding under the Notes. Pursuant to Section 14.10 of the Securities Purchase Agreement, all actions required or permitted to be taken by the Warrantholder hereunder, including, without limitation, the exercise hereof, shall be taken by the Majority Noteholders (individually or by a trustee or other agent designated by the Majority Noteholders to act on behalf of the Majority Noteholders); and the decision of the Majority Noteholders (or such trustee or agent, as applicable) shall be binding on the Warrantholder. 1. Purchase Price; Method of Payment The purchase price for the Shares purchasable hereunder (the "Purchase Price") shall be equal to (a) in the case of the Warrantholder's sale (whether public or private) of the Shares to satisfy the Obligations, the net proceeds of such sale realized by the Warrantholder and (b) in the case of the Warrantholder's retention of the Shares to satisfy the Obligations, the lower of (x) the average of the daily closing sale prices of the Common Stock for the twenty (20) consecutive trading days preceding the date the Warrants were exercised by the Warrantholder, less a discount of 6% of such amount or (y) the closing sale price of the Common Stock on the date the Warrants were exercised by the Warrantholder, less a discount of 6% of such amount. If the date the Warrants are exercised by the Warrantholder is not a day that the New York Stock Exchange is open, then such closing sale price shall be as of the first day the New York Stock Exchange is open preceding the day on which the Warrants are exercised. The closing sale price of the Common Stock for each trading day as used herein shall be the "Market Price" (as defined in Section 2 below). The Warrantholder shall pay the Purchase Price for exercising the Warrants by the cancellation of all or a portion of the Obligations in lieu of cash. The Obligations shall be reduced by $1.00 for each $1.00 of the Purchase Price for the Shares being purchased hereunder. If the dollar value of the Obligations exceeds the Purchase Price for the Shares being purchased hereunder, then the Obligations will be cancelled in the following priority: (a) first, all fees, costs and expenses due to the Warrantholder under the Notes, (b) second, all interest due to the Warrantholder under the Notes and (c) third, all principal due to the Warrantholder under the Notes. Upon any exercise of the Warrants, the Warrantholder shall present its Note(s) to the Company for notation thereon of the cancellation of the Obligations, or portion thereof, as a result of such exercise. Notwithstanding anything contained herein to the contrary, the exercise of the Warrants and the payment of the Purchase Price therefor shall be deemed to take place simultaneously. 2. Definition of Market Price Unless otherwise provided herein, for purposes of any computations made hereunder, "Market Price" per share of Common Stock on any date shall be: (a) if the Common Stock is listed or admitted for trading on any national securities exchange or included in the Nasdaq National Market or Nasdaq Small- Cap Market, the last reported sales price as reported on such exchange or market, as the case may be; (b) if the Common Stock is not listed or admitted for trading on any national securities exchange or included in the Nasdaq National Market or Nasdaq Small-Cap Market, the average of the last reported closing bid and asked quotation for the Common Stock as reported on the Automated Quotation System of NASDAQ or a similar service if NASDAQ is not reporting such information; (c) if the Common Stock is not listed or admitted for trading on any national securities exchange or included in the Nasdaq National Market or Nasdaq Small-Cap Market or quoted by NASDAQ or a similar service, the average of the last reported bid and asked quotation for the Common Stock as quoted by a market maker in the Common Stock (or if there is more than one market maker, the bid and asked quotation shall be obtained from two market makers and the average of the lowest bid and highest asked quotation shall be the "Market Price"); or (d) if the Common Stock is not listed or admitted for trading on any national securities exchange or included in the Nasdaq National Market or Nasdaq Small-Cap Market or quoted by NASDAQ and there is no market maker in the Common Stock, the fair market value of such shares as determined jointly by the Company and the Majority Noteholders, or if no such determination can be reached within fifteen (15) days, such determination shall be made by an appraiser who shall be mutually selected by the Company and the Majority Noteholders, the costs of such appraiser to be borne by the Company. 3. Registration, Transfer and Exchange of the Warrants The Company will keep at its principal executive office a warrant register in which, subject to such reasonable regulations as it may prescribe but at its expense, it will provide for the registration, transfer and exchange of the Warrants. The Warrants may not be pledged, sold, assigned, hypothecated or otherwise transferred until (a) a registration statement with respect thereto is effective under the Securities Act and any applicable state securities laws or (b) the Company receives an opinion of counsel to the Company or other counsel to the Warrantholder, which other counsel is reasonably satisfactory to the Company, that the Warrants may be pledged, sold, assigned, hypothecated or transferred without an effective registration statement under the Securities Act or applicable state securities laws. The Warrantholder, at its option, may surrender this warrant certificate for transfer or exchange at the principal executive office of the Company, accompanied in the case of a transfer or assignment by a written instrument of transfer or assignment in form satisfactory to the Company duly executed by the registered Warrantholder thereof or by such Warrantholder's attorney duly authorized in writing. In case any Warrantholder shall so request the transfer, assignment or exchange of any warrant certificate, the Company, at its expense, will execute and deliver (in each case insured to the Warrantholder's reasonable satisfaction) in exchange therefor one or more new warrant certificates, as may be requested by such Warrantholder, to purchase the same aggregate number of Shares as are purchasable upon exercise of the warrant certificate so surrendered. Prior to due presentment for registration of transfer of this warrant certificate, the Company shall deem and treat the Warrantholder as the absolute owner of the Warrants (notwithstanding any notation of ownership or other writing on this warrant certificate made by anyone other than the Company) for the purpose of any exercise hereof or any distribution to the Warrantholder and for all other purposes, and the Company shall not be affected by any notice to the contrary. 4. Issuance of Shares Subject to the restrictions set forth in Section 5 below, upon surrender of the Warrants and payment of the Purchase Price as aforesaid, the Company shall issue and deliver with all reasonable dispatch the certificate(s) for the Shares to or upon the written order of the Warrantholder and in such name or names as the Warrantholder may designate. Such certificate(s) shall represent the number of Shares issuable upon the exercise of the Warrants, together with a cash amount in respect of any fraction of a Share otherwise issuable upon such exercise. Certificates representing the Shares shall be deemed to have been issued and the person so designated to be named therein shall be deemed to have become a holder of record of such Shares simultaneously with the surrender of the Warrants and payment of the Purchase Price as aforesaid; notwithstanding that the transfer books for the shares of Common Stock or other classes of stock purchasable upon the exercise of the Warrants shall then be closed or the certificate(s) for the Shares in respect of which the Warrants is then exercised shall not then have been actually delivered to the Warrantholder. As soon as practicable after each such exercise of the Warrants, the Company shall issue and deliver the certificate(s) for the Shares issuable upon such exercise, registered as requested. The Warrants shall be exercisable, at the election of the registered holder hereof, either as an entirety or from time to time for part of the number of Shares specified herein. In the event that only a portion of the Warrants is exercised at any time prior to the Expiration Date, a new warrant certificate shall be issued to the Warrantholder for the remaining number of Shares purchasable pursuant hereto. In no event shall fractional Shares be issued with regard to the exercise of the Warrants. The Company shall cancel the Warrants when they are surrendered upon exercise. 5. Payment of Expenses, Taxes, etc. upon Exercise The Company shall pay all documentary stamp taxes, if any, attributable to the initial issuance of the Shares issuable upon the exercise of the Warrants; including, without limitation, any tax or taxes which may be payable in respect of any transfer involved in the issue or delivery of any certificates for Shares in a name other than that of the Warrantholder upon the exercise of the Warrants. 6. Lost, Stolen, or Mutilated Warrant Certificate In case this warrant certificate shall be mutilated, lost, stolen or destroyed, the Company shall issue and deliver, in exchange and substitution for and upon cancellation of the mutilated warrant certificate, or in lieu of and substitution for the warrant certificate lost, stolen or destroyed, a new warrant certificate of like tenor and representing an equivalent number of Shares purchasable upon exercise, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction of such warrant certificate and reasonable indemnity, if requested, also reasonably satisfactory to the Company. No bond or other security shall be required from the original Warrantholder in connection with the replacement by the Company of a lost, stolen or mutilated warrant certificate. 7. Covenants of the Company (a) The Company shall at all times through the Expiration Date reserve and keep available, free from pre-emptive rights and out of its aggregate authorized but unissued shares of Common Stock, the number of Shares deliverable upon the exercise of the Warrants. (b) The Company covenants that all Shares issued upon exercise of the Warrants shall, upon issuance in accordance with the terms hereof, be fully paid and nonassessable and free and clear of all Liens, claims, security interests, pledges, charges, encumbrances, stockholders' agreements and voting trusts created by the Company with respect to the issuance and holding thereof. 8. Rights Upon Expiration Unless the Warrants are surrendered and payment made for the Shares as herein provided prior to the Expiration Date, this warrant certificate will become wholly void and all rights evidenced hereby will terminate after such time. 9. Adjustment for Certain Events (a) In case the Company shall at any time after the date the Warrants are first issued (i) declare a dividend on the Common Stock payable in shares of the Company's capital stock (whether in shares of Common Stock or of capital stock of any other class), (ii) subdivide the outstanding Common Stock, (iii) reverse split the outstanding Common Stock into a smaller number of shares, or (iv) issue any shares of the Company's capital stock in a reclassification of the Common Stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing corporation), then, in each case, the number and kind of shares of capital stock issuable upon exercise of the Warrants on such date shall be proportionately adjusted so that the holder of any Warrant exercised after such time shall be entitled to receive the aggregate number and kind of securities which, if such Warrant had been exercised immediately prior to such date, such holder would have owned upon such exercise and been entitled to receive by virtue of such dividend, subdivision, reverse split or reclassification. Such adjustments shall be made successively whenever any event listed above shall occur. (b) In the event that at any time, as a result of an adjustment made pursuant to Section 9 hereof, the holder of any Warrant thereafter exercised shall become entitled to receive any shares of capital stock or warrants or other securities of the Company other than the Shares, thereafter the number of such other shares of capital stock or warrants or other securities so receivable upon exercise of this Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Shares contained in this Section 9, and the provisions of this warrant certificate with respect to the Shares shall apply, to the extent applicable, on like terms to any such other shares of capital stock or warrants or other securities. (c) In case of any capital reorganization of the Company or of any reclassification of the Common Stock (other than a change in par value or from a specified par value to no par value or from no par value to a specified par value or as a result of subdivision or combination) or in case of the consolidation of the Company with, or the merger of the Company into, any other corporation (other than a consolidation or merger in which the Company is the continuing corporation) or of the sale of the properties and assets of the Company as, or substantially as, an entirety, each Warrant shall, after such reorganization, reclassification, consolidation, merger or sale, be exercisable, upon the terms and conditions specified herein, for the number of shares of Common Stock or other capital stock or warrants or other securities or property to which a holder of the number of shares of Common Stock purchasable (at the time of such reorganization, reclassification, consolidation, merger or sale) upon exercise of such Warrant would have been entitled upon such reorganization, reclassification, consolidation, merger or sale; and in any such case, if necessary, the provisions set forth in this Section 9(c) with respect to the rights and interests thereafter of the registered holders of all Warrants shall be appropriately adjusted so as to be applicable, as nearly as may reasonably be, to any shares of Common Stock or other capital stock or warrants or other securities or property thereafter deliverable on the exercise of the Warrants. The subdivision, reverse split or combination of shares of Common Stock at any time outstanding into a greater or lesser number of shares shall not be deemed to be a reclassification of the Common Stock for the purposes of this Section 9(c). (d) In any case in which this Section 9 shall require that an adjustment in the number of Shares purchasable hereunder be made effective as of a record date for a specified event, the Company may elect to defer until the occurrence of such event issuing to the Warrantholder, if such Warrantholder exercised any Warrant after such record date, shares of capital stock or warrants or other securities of the Company, if any, issuable upon such exercise over and above the Shares issuable prior to such adjustment; provided, however, that the Company shall deliver to the holder a due bill or other appropriate instrument evidencing such holder's right to receive such shares of capital stock or warrants or other securities upon the occurrence of the event requiring such adjustment. 10. Fractional Shares Upon exercise of the Warrants the Company shall not be required to issue fractional shares of Common Stock or other capital stock. In lieu of such fractional shares, the Warrantholder shall receive an amount in cash equal to the same fraction of the (i) current Market Price of one whole Share if clause (a), (b) or (c) in the definition of Market Price in Section 2 above is applicable or (ii) book value of one whole Share as reported in the Company's most recent audited financial statements if clause (d) in the definition of Market Price in Section 2 above is applicable. All calculations under this Section 10 shall be made to the nearest cent. 11. Securities Act Legend The Warrantholder shall not be entitled to any rights of a stockholder of the Company with respect to any Shares purchasable upon the exercise hereof, including voting, dividend or dissolution rights, until such Shares have been paid for in full. As soon as practicable after such exercise, the Company shall deliver a certificate or certificates for the securities issuable upon such exercise, all of which shall be fully paid and nonassessable, to the person or persons entitled to receive the same; provided, however, that, if applicable, such certificate or certificates delivered to the holder of the surrendered Warrants shall bear a legend reading substantially as follows: "These securities have not been registered under the Securities Act of 1933, as amended, or the securities laws of any state and may not be sold or transferred in the absence of such registration or any exemption therefrom under such Act and laws, if applicable. The Company, prior to permitting a transfer of these securities, may require an opinion of counsel or other assurances satisfactory to it as to compliance with or exemption from such Act and laws." 12. Notice of Adjustment (a) Upon any adjustment of the number of Shares issuable upon exercise of the Warrants pursuant to Section 9 above, the Company, within thirty (30) calendar days thereafter, shall have on file for inspection by the Warrantholder a certificate of the Board of Directors of the Company setting forth the number of Shares issuable upon exercise of the Warrants after such adjustment, the method of calculation thereof in reasonable detail and the facts upon which such calculations were based, which certificate shall be conclusive evidence of the correctness of the matters set forth therein. (b) In case: (i) the Company shall authorize the issuance to all holders of Common Stock of rights, options or warrants to subscribe for or purchase capital stock of the Company or of any other subscription rights, options or warrants; or (ii) the Company shall authorize the distribution to all holders of Common Stock of evidences of its indebtedness or assets (including, without limitation, cash dividends or cash distributions payable out of earnings, consolidated earnings, if the Company shall have one or more subsidiaries, or earned surplus, or dividends payable in Common Stock); or (iii) of any consolidation or merger to which the Company is a party and for which approval of any stockholders of the Company is required, of the conveyance or transfer of the properties and assets of the Company substantially as an entirety or of any capital reorganization or any reclassification of the Common Stock (other than a change in par value or from a specified par value to no par value or from no par value to a specified par value or as a result of a subdivision or combination); or (iv) of the voluntary or involuntary dissolution, liquidation or winding up of the Company; or (v) the Company proposes to take any other action which would require an adjustment of the number of Shares issuable upon exercise of the Warrants pursuant to Section 9 above; then, in each such case, the Company shall give to the Warrantholder at its address appearing below at least twenty (20) calendar days prior to the applicable record date hereinafter specified in (A), (B) or (C) below, by first class mail, postage prepaid, a written notice stating (A) the date as of which the holders of record of shares of Common Stock to be entitled to receive any such rights, options, warrants or distribution are to be determined or (B) the date on which any such consolidation, merger, conveyance, transfer, reorganization, reclassification, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of record of shares of Common Stock shall be entitled to exchange such shares for securities or other property, if any, deliverable upon such consolidation, merger, conveyance, transfer, reorganization, reclassification, dissolution, liquidation or winding up or (C) the date of such action which would require an adjustment of the number of Shares issuable upon exercise of the Warrants. The failure to give the notice required by this Section 12(b) or any defect therein shall not affect the legality or validity of any such issuance, distribution, consolidation, merger, conveyance, transfer, reorganization, reclassification, dissolution, liquidation, winding up or other action or the vote upon any such action. Except as provided herein, nothing contained herein shall be construed as conferring upon the Warrantholder the right to vote on any matter submitted to the stockholders of the Company for their vote or to receive notice of meetings of stockholders or the election of directors of the Company or any other proceedings of the Company, or any rights whatsoever as a stockholder of the Company. 13. Notices All notices and other communications provided for or permitted hereunder shall be in writing and shall be deemed to have been duly given if delivered personally or sent by telex or telecopier, registered or certified mail (return receipt requested), postage prepaid or courier to the parties at the following address (or at such other address for any party as shall be specified by like notice, provided that notices of a change of address shall be effective only upon receipt thereof). Notices sent by mail shall be effective two (2) days after mailing; notices sent by telex shall be effective when answered back, notices sent by telecopier shall be effective when receipt is acknowledged, and notices sent by courier guaranteeing next day delivery shall be effective on the next business day after timely delivery to the courier. (i) if to the Company: DDL ELECTRONICS, INC. 2151 Anchor Court Newbury Park, CA 91320 Attention: Chief Executive Officer Telephone: (805) 376-9415 Telecopy: (805) 376-9015 (ii) if to the Warrantholder, at the address of such Warrantholder as it appears on the warrant register. 14. Miscellaneous (a) The Warrantholder shall be entitled to all the registration and other rights, benefits and privileges set forth in the Registration Rights Agreement and the Securities Purchase Agreement. (b) All the covenants and provisions herein by or for the benefit of the Company shall bind and inure to the benefit of and be enforceable by the Company and its successors or assigns, and all of the covenants and provisions herein for the benefit of the Warrantholder hereof shall inure to the benefit of and be enforceable by the Warrantholder and its successors or assigns. (c) This warrant certificate shall be governed by, and construed in accordance with, the laws of the State of New York applicable to contracts made and to be performed entirely in the State of New York the internal laws of such State. The Company (i) hereby irrevocably submits to the jurisdiction of the state courts of the State of New York and the jurisdiction of the United States District Court for the Southern District of New York, for the purpose of any suit, action or other proceeding arising out of or based upon this warrant certificate or the subject matter hereof brought by the Warrantholder, (ii) hereby waives and agrees not to assert, by way of motion, as a defense or otherwise, in any such suit, action or proceeding, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that the suit, action or proceeding is brought in an inconvenient forum, that the venue of the suit, action or proceeding is improper or that this warrant certificate or the subject matter hereof may not be enforced in or by such court and (iii) hereby waives in any such action, suit, or proceeding any offsets or counterclaims. The Company hereby consents to service of process by certified mail at the address set forth herein and agrees that its submission to jurisdiction and its consent to service of process by mail is made for the express benefit of the Warrantholder. Final judgment against the Company in any such action, suit or proceeding shall be conclusive and may be enforced in other jurisdictions (A) by suit, action or proceeding on the conclusive evidence of the fact and of the amount of any indebtedness or liability of the Company therein described or (B) in any other manner provided by or pursuant to the laws of such other jurisdiction; provided, however, that the Warrantholder may at its option bring suit, or institute other judicial proceedings, against the Company or any of its assets in any state or Federal court of the United States or of any country or place where the Company or its assets may be found. (d) Nothing in this warrant certificate shall be construed to give any person or corporation other than the Company and the Warrantholder and its permitted transferees any legal or equitable right, remedy or claim under this warrant certificate; but this warrant certificate shall be for the sole and exclusive benefit of the Company and the Warrantholder and its permitted transferees. IN WITNESS WHEREOF, an authorized officer of the Company has signed and delivered to the Warrantholder this warrant certificate as of the date first written above. DDL ELECTRONICS, INC. By: _______________________________ Gregory L. Horton President and Chief Executive Officer ATTEST: By: _________________________ C.L. Haslam Secretary [CORPORATE SEAL] ELECTION TO PURCHASE (To be executed by the registered holder if such holder desires to exercise the within warrant certificate) To: DDL Electronics, Inc. 2151 Anchor Court Newbury Park, CA 91320 The undersigned hereby (1) irrevocably elects to exercise his or its rights to purchase ____ shares of Common Stock covered by the within warrant certificate, (2) makes payment in full of the Purchase Price by enclosure of certain 10% Senior Secured Notes due June __, 1997, (3) requests that certificates for such shares be issued in the name of: Please print name, address and Social Security or Tax Identification Number: _________________________________________________ _________________________________________________ _________________________________________________ and (4) if said number of shares shall not be all the shares evidenced by the within warrant certificate, requests that a new warrant certificate for the balance of the shares covered by the within warrant certificate be registered in the name of, and delivered to: Please print name and address: __________________________________________________ __________________________________________________ __________________________________________________ In lieu of receipt of a fractional share of Common Stock, the undersigned will receive a check representing payment therefor. Dated:___________________ ________________________________ By: ____________________________ ____________________________ By: ____________________________ President EX-10.11.1 4 [AMENDMENT TO GRANT AGREEMENT BETWEEN THE INDUSTRIAL DEVELOPMENT BOARD FOR NORTHERN IRELAND AND DDL ELECTRONICS LIMITED] RESTRICTED COMMERCIAL [ON LETTERHEAD OF THE INDUSTRIAL DEVELOPMENT BOARD FOR NORTHERN IRELAND] The Secretary The Secretary DDL Electronics Limited DDL Electronics Inc 3 Annesborough Industrial Estate 2151 Anchor Court CRAIGAVON NEWBURY PARK CO Armagh California 91320 BT67 9JJ United States of America Our Ref: Al 543/19/L001/0054 2 May 1996 Dear Sir 1. The Department of Economic Development, (acting through the Executive of the Industrial Development Board for Northern Ireland and hereinafter called "IDB") hereby amends the offer of financial assistance contained in IBD's letter to DDL Electronics Limited (hereinafter called "the Company") dated 29 August 1989 as follows:- the wording "The Secretary, Data-Design Laboratories, Inc." 7925 Centre Avenue, Cugamonga, CALIFORNIA 91730, United States of America" shall be deleted and the following substituted therefor; "The Secretary, DDL Electronics Inc, 2151 Anchor Court, NEWBURY PARK, California 91320, United States of America"; wheresoever the wording "Data-Design Laboratories, Inc", appears throughout the letter and any of the annexes to the letter it shall be deleted and the wording "DDL Electronics Inc" substituted therefor: sub-paragraph 1(a) shall be deleted and the following substituted therefor: "(a) a grant not exceeding 861,650 pounds sterling of 30% of vouched and approved expenditure: (i) by the Company in respect of the qualifying expenditure as set out in sub-paragraph 1(b) of Annex A ("the capital grant"); and/;or (ii) by a Lessor approved by the IDB on the purchase of new machinery and equipment leased to the Company upon the terms and conditions of an agreement to the entered into between the company, the Lessor and the IDB, a specimen copy of which is attached hereto;"; at line 1 of sub-paragraph 1(e) delete the figure "250,000 pounds sterling" and insert the figure "380,000 pounds sterling"; two new sub-paragraphs shall be added to paragraph 1 as follows: "(f) an employment grant not exceeding 135,000 pounds sterling ("the fourth employment grant"); (g) an employment grant not exceeding 300,000 pounds sterling ("the fifth employment grant")."; paragraphs 8 and 9 shall be renumbered 10 and 11 respectively, the remaining paragraphs renumbered accordingly and new paragraphs 8 and 9 inserted as follows: "8. THE FOURTH EMPLOYMENT GRANT: The provisions of Annex F shall apply to the fourth Employment grant.; 9. THE FIFTH EMPLOYMENT GRANT: The provisions of Annex G shall apply to the fifth employment grant."; at lines 5, 6, 7 and 8 of sub-paragraph 12(b) delete the dates "30 June 1991,", "31 December 1991,", "30 June 1992," and "31 December 1992," and insert the dates "30 June 1993,", "31 December 1993,", "30 June 1994," and "31 December 1994," respectively; at line 3 of sub-paragraph 12(n) after the word "project" insert the following "for a period of 4 years commencing on the date of acceptance of this offer."; at lines 4 and 5 of sub-paragraph 13(a) delete the figures "10" and "13" respectively and insert the figures "12" and "15" respectively; at line 4 of sub-paragraph 13(b) delete the figure "10" and insert the figure "12"; at line 5 of paragraph 14 delete the date "1 January 1995" and insert the date "1 January 1997"; a new sub-paragraph shall be added to paragraph 15 as follows: "(g) an administration order is made in relation to the Company;"; at line 7 of paragraph 15 delete the figure "12" and insert the figure "14"; at line 3 of sub-paragraph 1(b) of Annex A delete the date "31 December 1994" and insert the date "31 December 1996"; at line 7 of sub-paragraph 1(b) of Annex A after the word "factory" insert the following " and on the purchase and installation of approved second-hand machinery and equipment installed at the factory provided that the purchase thereof shall be an arm's length transaction at a cost which shall not exceed the valuation of the machinery and equipment by an independent valuer approved by IDB, such valuation to be at the instigation and expense of the Company and to be undertaken prior to installation of the machinery and equipment at the factory."; at line 8 of paragraph 1 of Annex C delete the date "31 December 1991" and insert the date "31 December 1995"; at line 8 of paragraph 1 of Annex D delete the date "31 December 1993" and insert the date "31 December 1995"; at line 3 of paragraph 1 of Annex E delete the figure "3" and insert the figure "4". At line 5 of paragraph 1 of Annex E after the wording "borrowing facilities" insert the wording "and/or inter-company borrowing facilities"; Paragraph 4 of Annex E shall be deleted; at line 5 of paragraph 5 of Annex E delete the figure "50,000 pounds sterling" and insert the figure "180,000 pounds sterling"; " ANNEX F THE FOURTH EMPLOYMENT GRANT 1. Grant Rate: The fourth employment grant shall be payable at the rate of 2,700 pounds sterling per worker for a maximum of 50 workers employed by the company at the factory and shall (a) as respects the 6 month period commencing on 1 January 1989 be payable on the average (as ascertained in accordance with paragraph 2 below) number of workers employed during any such period such additional number being calculated by reference to the previous highest 6 monthly average number of workers in respect of which the fourth employment grant has been paid. 2. Claims: Claims for payment of the fourth employment grant shall be in writing and shall be accompanied by a report prepared by the Company's auditors in the form required by the IDB reporting the average number of workers employed at the factory during the 6 month period to which such report relates. 3. Instalments: The fourth employment grant in respect of any 6 month period shall be payable (subject to paragraphs 4 and 5 below) by means of 2 instalments as follows provided always that the 135,000 pounds sterling of the fourth employment grant earned by the Company shall from the date the IDB authorises payment be offset against the Company's outstanding indebtedness to the IDB under the Leasing Agreement dated 1 January 1990 and Debenture dated 1 January 1990 between the Department of Economic Development and the Company: (a) the first instalment following acceptance by IDB of the claim in respect of the period to which it relates; (b) the second instalment (subject to paragraph 4 below) not less than 6 months after the end of the period to which the first instalment relates. 4. Acceptance of a claim for payment: A claim shall be regarded subject to paragraph 5 below) as accepted for payment by the IDB for the purposes of paragraph 3 above at the time the IDB having carried out all such investigations it considers appropriate with respect to the claim and the Company having satisfied the IDB in respect of any matters arising in connection with the claim whether in relation to the documents referred to in paragraph 2 above or otherwise, is satisfied that payment in respect of the claim should be made. 5. Power to withhold or reduce: the IDB shall be entitled to withhold or reduce payment of the second, third and fourth instalments referred to in paragraph 3 above if there has been any decrease in the average number of workers employed at the factory (by comparison with the average number for the period to which the claim relates) as respects the second instalment during the first 6 month period following the expiry of the period to which the claim relates. 6. Retrospective adjustment: There shall be excluded from any computation of the average number of workers, any worker who either being on statutory maternity leave or not working by reason of sickness resigns without returning to work. The IDB shall be entitled to make retrospective adjustments in any amount of the fourth employment grant payable by the IDB or recoverable from the Company and/or DDL Electronics Inc in any case where it is not evident at the date of any such computation that any worker should be excluded therefrom. ANNEX G THE FIFTH EMPLOYMENT GRANT 1. Grant Rate: The fifth employment grant shall be payable at the rate of 6,122.45 pounds sterling per worker for a maximum of 49 workers over and above a base figure of 100 workers employed by the Company at the factory and shall (a) as respects the 6 month period commencing 1 July 1995 be payable on the average (as ascertained in accordance with paragraph 2 below) number of workers employed during such period over and above the base figure of 100 workers. 2. Claims: Claims for payment of the fifth employment grant shall be in writing and shall be accompanied by a report prepared by the Company's auditors in the form required by the IDB reporting the average number of workers employed at the factory during the 6 month period to which such report relates. 3. Instalments: The employment grant in respect of the 6 month 2period shall be payable (subject to acceptance of a claim in respect thereof by the IDB in accordance with paragraph 4 below) by means of 4 instalments as follows: (a) the first instalment following acceptance by the IDB of the claim in respect of the period to which it relates; (b) the second instalment (subject to paragraph 4 below) not less than 6 months after the end of the period to which the first instalment relates; (c) the third instalment (subject to paragraph 4 below) not less than 12 months after the end of the period to which the first instalment relates; (d) the fourth instalment (subject to paragraph 4 below) not less than 18 months after the end of the period to which the first instalment relates. 4. Acceptance of a claim for payment: A claim shall be regarded (subject to paragraph 5 below) as accepted for payment by the IDB for the purposes of paragraph 3 above at the time the IDB having carried out all such investigations it considers appropriate with respect to the claim and the Company having satisfied the IDB in respect of any matters arising in connection with the claim whether in relation to the documents referred to in paragraph 2 above or otherwise, is satisfied that payment in respect of the claim should be made. 5. Power to withhold or reduce: The IDB shall be entitled to withhold or reduce payment of the second, third and fourth instalments referred to in paragraph 3 above if there has been any decrease in the average number of workers employed at the factory (by comparison with the average number for the period to which the claim relates) as respects the second instalment during the first 6 month period following the expiry of the period to which the claim relates, as respects the third instalment during the second 6 month period following the expiry of the period to which the claim relates, as respects the fourth instalment during the third 6 month period following the expiry of the period to which the claim relates. 6. Retrospective adjustment: There shall be excluded from any computation of the average number of workers, any worker who either being on statutory maternity leave or not working by reason of sickness resigns without returning to work. The IDB shall be entitled to make retrospective adjustments in any amount of the fifth employment grant payable by the IDB or recoverable from the Company and/or DDL Electronics Inc, in any case where it is not evident at the date of nay such computation that any worker should be excluded therefrom.". 2. CONDITION PRECEDENT: It is a condition precedent to the payment of any further financial assistance under IDB's letter of offer dated 29 August 1989 as amended by this letter that the company shall procure that DDL Electronics Inc, shall provide IDB with an Opinion by Counsel on Counsel's headed paper, substantially in the terms of the draft comprised in the Appendix attached hereto. 3. ACCEPTANCE: This letter is issued in triplicate. If you are prepared to accept the foregoing amendment, the Form of Acceptance should be completed on the counterpart of this letter in accordance with the Articles of Association of the Company, together with the form of Acceptance completed by DDL Electronics Inc and returned to IDB. 4. AVAILABILITY: The foregoing amendment shall remain open for a period of one month from the date of this letter after which, if not accepted by the Company and DDL Electronics Inc, it shall be deemed to have been withdrawn. 5. WITHDRAWAL: On acceptance of this letter IDB's letters dated 22 June 1992, 16 June 1993 and 24 August 1995 shall be deemed to have been withdrawn and cancelled. Yours faithfully /s/ D. McKeown FORM OF ACCEPTANCE The foregoing amendment to IDB's letter dated 29 August 1989 is hereby accepted by DDL Electronics Limited. The Common Seal of DDL Electronics Limited was affixed hereto this 7th day of May one thousand nine hundred and ninety-six in the presence of:- /s/ John Coyne - Director __________________________________ /s/ Sean Ritchie - Secretary __________________________________ FORM OF ACCEPTANCE The foregoing amendment to IDB's letter dated 29 August 1989 is hereby accepted by DDL Electronics Inc this 1st day of June one thousand nine hundred and ninety-six in the presence of:- /s/ Gregory L. Horton - CEO __________________________________ /s/ Richard K. Vitelle - Secretary ___________________________________ Duly authorised representatives of DDL Electronics Inc EX-10.15 5 EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT, dated as of the 12th day of September, 1996, is between DDL ELECTRONICS, INC., a Delaware corporation (the "Company"), and RICHARD K. VITELLE ("Vitelle"). WHEREAS, the Company, being well satisfied with Vitelle's services as Vice President of Finance and Chief Financial Officer (referred to herein together as "Chief Financial Officer"), desires to retain him in an executive capacity for the period and upon the other terms and conditions herein provided; and WHEREAS, Vitelle is willing to continue in employment by the Company pursuant to the terms and conditions of this Agreement; NOW, THEREFORE, in consideration of the premises, the mutual covenants and obligations herein contained, and for other good and valuable consideration, the receipt, adequacy, and sufficiency of which are hereby acknowledged, the parties hereto do hereby covenant and agree as follows: 1. EMPLOYMENT 1.1 Position. The Company hereby confirms Vitelle's employment as its Chief Financial Officer. From time to time during the term of this Agreement, Vitelle may be offered, and (in his discretion) may accept or reject, the duties associated with additional offices in the Company and its subsidiaries. Vitelle shall report directly to the Company's Chief Operating Officer, or, if at any time the Company has no Chief Operating Officer, then directly to the Company's President, or, if at any time the Company has no President, then directly to the Company's Chief Executive Officer, and in any case shall perform the duties described in Section 1.2 hereof, subject to such limitations of authority as may be established from time to time by the Company's Chief Operating Officer (or President, if the Company has no Chief Operating Officer (or Chief Executive Officer, if the Company has no President)) and applicable law. Notwithstanding any other provision of this Agreement, Vitelle shall at all times during the term of this Agreement function as an executive officer of the Company, with duties that require the performance of policy making functions as contemplated by Rule 3b-7 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). 1.2 Duties. Vitelle's duties will include all those duties customarily associated with the position of Chief Financial Officer in an emerging growth company, subject to the direction of the Company's Chief Operating Officer (or President, if the Company has no Chief Operating Officer (or Chief Executive Officer, if the Company has no President)). Such duties shall include management of all financial functions and financial facilities required of and maintained by the Company and its subsidiaries. Vitelle agrees to devote substantially his entire business time and attention to the performance of his duties hereunder and to serve the Company diligently and to the best of his abilities. Notwithstanding the foregoing, Vitelle shall have the continuing right (a) to make passive investments in the securities of any publicly-owned corporation, (b) to make any other passive investments with respect to which he is not obligated or required to, and does not in fact, devote any substantial managerial efforts that interfere with the fulfillment of his duties to the Company, and, (c) subject to the prior written approval of the Company's Board of Directors (the "Board of Directors"), to serve as a director of or consultant to other companies and entities. Vitelle represents that he is under no actual or alleged restriction, limitation or other prohibition (whether as a result of prior employment or otherwise) to perform his duties as described herein. 2. COMPENSATION AND BENEFITS 2.1 Base Annual Salary. The Company shall pay Vitelle a base annual salary of $125,000 (the "Base Annual Salary") periodically throughout the year, commencing the date hereof, in accordance with its customary payroll practices, as modified from time to time, subject to all payroll and withholding deductions required by applicable law. Base Annual Salary shall be reviewed at least annually by the Compensation Committee of the Board of Directors (the "Compensation Committee"), but shall not be decreased without Vitelle's prior written consent. 2.2 Cash Bonuses. For the Company's fiscal year commencing July 1, 1996, the Company will pay Vitelle a cash bonus quarterly, in arrears, in an amount per annum equal to 30% of his initial Base Annual Salary (as stated above). 2.3 Other Incentive Compensation. Subject to the satisfaction of such criteria and the achievement of such objectives as the Compensation Committee may establish, Vitelle may receive additional cash bonuses and other incentive compensation (including stock options), it being understood that the Compensation Committee shall at least once annually consider the payment of a cash bonus to Vitelle. 2.4 Other Benefits. Vitelle shall be entitled to other benefits and perquisites no less favorable than those provided to the Company's employees generally, as such benefits and perquisites may be modified from time to time in the Company's discretion. Such benefits shall in all events include health insurance, a 401(k) plan and 11 paid holidays annually. Such perquisites shall in all events include three weeks of vacation annually, disability insurance and group term life insurance (in an amount equal to at least two times Base Annual Salary). To assist with the commuting and business travel essential to conducting business in greater Los Angeles, throughout the term of this Agreement the Company will provide Vitelle with an automobile allowance of $500 per month or, at his election, will provide him with a company-acquired and -maintained automobile the expense of which shall not exceed $500 per month or such higher amount as may be authorized in writing by the Company's Chief Operating Officer, President or Chief Executive Officer. 2.5 Expense Reimbursement. Vitelle shall be reimbursed by the Company for his reasonable out-of-pocket business expenses in accordance with the Company's established policies applicable to executive officers generally. In addition, the Company will reimburse Vitelle for all customary expenses, not to exceed $25,000 in the aggregate, incurred by Vitelle and his wife to relocate their principal residence to Ventura County, California. 2.6 Stock Options. Vitelle and the Company acknowledge that, as of September 11, 1996, there were issued and outstanding and owned by Vitelle options to purchase 185,000 shares (the "Old Options") of the Company's Common Stock, par value $.01 per share ("Common Stock"). Effective the date hereof, the Old Options are annulled and void and have no further force or effect; in furtherance thereof, Vitelle agrees promptly to tender to the Company, for cancellation, any and all certificates evidencing Old Options. The parties further acknowledge that, subject to Vitelle's tender of said certificates, the Compensation Committee has granted to Vitelle, on and as of the date hereof, incentive stock options to purchase 185,000 shares of Common Stock at an exercise price of $1.25 per share ("New Options"). The parties further acknowledge that the Compensation Committee also has granted to Vitelle, on and as of the date hereof, incentive stock options to purchase an additional 200,000 shares of Common Stock at an exercise price of $1.25 per share ("Additional Options"). The New Options and the Additional Options are evidenced by three separate agreements between Vitelle and the Company dated the date hereof and referred to herein collectively as the "Option Agreements." 3. TERMINATION AND SEVERANCE PAY 3.1 At Will. Vitelle and the Company acknowledge and agree that Vitelle's employment with the Company is "at will" during the term of this Agreement. Accordingly, either party may terminate Vitelle's employment by the Company, with or without cause, in which case Vitelle shall have no claim for lost wages, although termination of Vitelle's employment shall be subject to the terms and conditions of this Agreement regarding severance pay, benefits and other obligations. Vitelle and the Company are not party to any oral agreement relating to Vitelle's employment by the Company. 3.2 Voluntary Resignation. In the event that Vitelle's employment with the Company terminates as a result of his voluntary resignation, Vitelle shall be entitled to no severance pay or benefits. If at any time the principal place of Vitelle's employment is relocated to any site beyond the 35-mile radius of 2151 Anchor Court, Newbury Park, California, then Vitelle may resign at any time within the following twelve months, whereupon his resignation shall be treated as termination by the Company other than For Just Cause and he shall be entitled to severance payments and benefits for twelve months as and in the manner, and to the extent, contemplated by Sections 3.3(a) and 3.3(b) hereof. For purposes of this Agreement, the term "voluntary resignation" shall not include a resignation tendered by Vitelle pursuant to a written request of the Chief Operating Officer, the President, the Chief Executive Officer or the Board of Directors, provided that a copy of such request is delivered to the Chairman of the Board of Directors promptly following its delivery to Vitelle, and provided further that the Board of Directors does not overrule such request within one week of its Chairman's receipt of such copy. A resignation tendered by Vitelle pursuant to a written request of the Chief Operating Officer, the President, the Chief Executive Officer or the Board of Directors shall, for purposes of this Agreement, be treated as an involuntary termination, and Vitelle's entitlement to severance pay and additional benefits in accordance with Sections 3.3(a) and 3.3(b) hereof shall depend upon whether such request or suggestion was For Just Cause (as defined in Section 3.3(c) hereof). 3.3 Involuntary Termination. (a) Severance Pay. In the event that Vitelle's employment with the Company is terminated by the Company For Just Cause (as defined in Section 3.3(c) hereof), Vitelle shall not be entitled to severance pay or benefits. In the event that Vitelle's employment with the Company is terminated by the Company other than For Just Cause, Vitelle shall be entitled to severance pay in the form of continuation of Base Annual Salary for twelve months from the effective date of the termination. Vitelle shall have no duty to mitigate such payments by seeking or accepting other employment; accordingly, such payments shall not be reduced due to Vitelle's receipt of other compensation from such other employment as he may obtain during the term of his severance payments. (b) Additional Benefits. In the event that Vitelle's employment with the Company is terminated by the Company other than For Just Cause, Vitelle shall be entitled to continue to participate in the Company's employee benefit programs as and to the extent theretofore made available to them pursuant to Section 2.4 above. Such benefits shall be continued at no additional cost to Vitelle, except to the extent, if any, that tax laws require the inclusion of the value of such benefits in his gross income. Such benefits shall continue for the benefit of Vitelle for the entire period of his severance pay continuation as provided in Section 3.3(a) above, in the same manner and at the same level as in effect immediately prior to Vitelle's termination. In addition, upon any termination of Vitelle by the Company other than For Just Cause, (i) any and all employee stock options, stock appreciation rights, restricted stock and other similar rights and financial assets held by Vitelle shall become fully vested and exercisable immediately, and (ii) any and all cash bonuses that would be payable to Vitelle at the end of a period but for his earlier termination shall be payable to him immediately and pro rata (in accordance with the percentage of completion of the period in question and with reference to the best available financial information proximate to the time of termination). (c) For Just Cause. For purposes of this Agreement, the term "For Just Cause" shall mean any termination of employment of Vitelle for one or more of the following reasons: (i) the substantial failure by such person, for any reason other than his death or Disability (as defined below), to comply with a lawful, written instruction of the Company's Chief Operating Officer, President, Chief Executive Officer or Board of Directors, which instruction is consistent with his duties as elsewhere provided in this Agreement, which instruction is not overruled by higher corporate authority and which failure continues without interruption for the 30 days immediately following Vitelle's receipt of such instruction; (ii) the substantial and continuing failure of Vitelle, for any reason other than his death or Disability, to render vital service to the Company in execution of his essential duties, as determined by the Board of Directors in good faith with reference to such person's employment agreement then in effect after giving written notice to such person and an opportunity for him to remedy such failure within 30 days of receiving such notice; (iii) the conviction of such person for a felony involving an act of moral turpitude, which conviction has become final and non-appealable; (iv) recklessness in the performance of such person's duties to the Company causing material harm to the Company; or (v) material dishonesty, material breach of fiduciary duty or material breach by Vitelle of any representation, covenant or other agreement contained in this Agreement. (d) Constructive Termination. If Vitelle, without his prior written consent, is removed from the position of Chief Financial Officer, or if Vitelle's duties are restricted or reduced in such a manner as to result in his position with the Company no longer including duties requiring the performance of policy making functions by an executive officer within the meaning of Rule 3b-7 of the Exchange Act, then, in either such case, the employment of Vitelle shall be deemed, in his discretion, involuntarily terminated by the Company other than For Just Cause, it being understood that Vitelle must exercise his discretion under this Section 3.3(d) in writing to the Board of Directors within sixty days following the latest to occur of any event constituting involuntary termination pursuant to this Section 3.3(d). 3.4 Death. In the event of Vitelle's death, this Agreement shall automatically terminate and shall be of no further force or effect, it being understood that the Company shall be obligated to make all the payments and to provide all the benefits due to Vitelle hereunder to the time of his death. 3.5 Disability. In the event of Vitelle's Disability (as defined below) during the term of this Agreement for any period of at least three consecutive months, the Company shall have the right, exercisable in its discretion, to terminate this Agreement. In the event that the Company does elect to terminate this Agreement, Vitelle shall not be entitled to any severance pay but shall be entitled to normal disability benefits in accordance with such policies of the Company as may then be in effect. For purposes of this Agreement, "Disability" shall mean the inability of Vitelle to perform the essential functions of his employment hereunder by reason of physical or mental illness or incapacity as determined by a physician chosen by the Company and reasonably satisfactory to Vitelle or his legal representative. 4. TERM This Agreement shall become effective as of the date hereof and shall terminate on the date that is five years after the date hereof, unless earlier terminated pursuant to Article 3 hereof. 5. NONDISCLOSURE, NON-SOLICITATION, NON-COMPETE AND NON-DISPARAGEMENT 5.1 Nondisclosure. Except as is reasonably necessary in the performance of his duties hereunder, Vitelle shall not disclose to any person or entity or use for his own direct or indirect benefit any Confidential Information (as defined below) pertaining to the Company obtained by him in connection with his employment with the Company. For purposes of this Agreement, the term "Confidential Information" shall include information with respect to the Company's products, services, processes, suppliers, customers, customers' account executives, financial, sales and distribution information, price lists, identity and list of actual and potential customers, trade secrets, technical information, business plans and strategies; provided, however, that such information shall not be treated as Confidential Information to the extent that it has been publicly disclosed by the Company (other than by Vitelle through a breach of this Section 5.1). 5.2 Non-Solicitation. Vitelle agrees that, so long as he is employed by the Company and for a period of one year after termination of his employment for any reason other than involuntary termination not For Just Cause, he shall not (a) directly or indirectly solicit, induce or attempt to solicit or induce any Company employee to discontinue such employee's employment by the Company, (b) usurp any opportunity of the Company of which he became aware during his tenure at the Company, or that was made available to him on the basis of a mistaken belief that he was still employed by the Company, or (c) directly or indirectly solicit or induce or attempt to influence any person or business that is an account, customer or client of the Company to reduce or cancel the business of any such account, customer or client with the Company. 5.3 Non-Compete. Vitelle agrees that, so long as he is employed by the Company and for a period of one year after termination of his employment for any reason other than involuntary termination not For Just Cause, he shall not, without prior written consent of the Company's Chief Operating Officer (or President, if the Company has no Chief Operating Officer (or Chief Executive Officer, if the Company has no President)), either directly or indirectly (including, without limitation, through a partnership, joint venture, corporation or other entity or as a consultant, director or employee), engage in the business engaged in by the Company as of the date hereof within any of those geographical areas in which the Company currently conducts active business operations. The parties hereto agree that the scope and the nature of such covenant, and the duration and the area within which such covenant is to be effective, are reasonable in light of all facts and circumstances. 5.4 Non-Disparagement. Vitelle agrees that, so long as he is employed by the Company and for a period of one year after termination of his employment for any reason other than involuntary termination not For Just Cause, he shall not make any public comment (whether written or oral) concerning or touching upon the Company or any of its Affiliates, including but not limited to any or all of the Company's executive officers and directors, which comment would tend to disparage the personal, financial or business reputation of such other person or persons, except for such comments as may be required by law and except for such comments as may be made in litigation, arbitration or mediation with such person or persons. 6. CERTAIN COVENANTS OF THE COMPANY 6.1 Amendments of Charter or By-laws. The Company covenants with Vitelle that it shall not permit the indemnification provisions of the charter or the by-laws of the Company to be amended in any manner that is or may be construed as adverse to his interests without his prior written consent. The Company agrees and acknowledges that Vitelle's remedy at law for any breach of this Section 6.1 would be inadequate. The Company agrees that, for breach of any such provision, in addition to such other remedies as may be available to him at law or in equity, Vitelle shall be entitled to injunctive relief and to a judicial order of specific performance. The Company agrees not to oppose any formal request by Vitelle for such relief or such order. 6.2 Legal Fees. The Company agrees to pay any and all reasonable legal fees and other expenses that may be incurred by Vitelle in connection with his efforts to seek a resolution of any dispute with the Company arising under this Agreement or the Option Agreements, but only if Vitelle shall have obtained a judgment in his favor against the Company. 7. CHANGE IN CONTROL (a) If (1) a Change in Control of the Company (as defined below) shall occur and (2) Vitelle's employment shall be terminated (including, without limitation, any constructive termination pursuant to Section 3.3(d)) for any reason other than For Just Cause or his voluntary resignation within six months after such Change in Control of the Company, then the Company shall pay to Vitelle, (A) upon demand delivered to the Company at any time during the six months immediately following such termination, an amount in cash equal to his Base Annual Salary in effect immediately preceding such termination, plus (B) upon demand delivered to the Company at any time during the six months immediately following such termination, an amount equal to the fair market value of any and all stock options held by him that remain unexercised at the time of such demand for payment; provided that: (i) for the purposes of this Article 7 and notwithstanding any provision in the Option Agreements, any and all unexpired stock options held by Vitelle upon his termination shall be considered vested and exercisable in full at any time during the six months immediately following such termination; (ii) for the purposes of this Article 7, any and all stock options held by Vitelle that remain unexercised at the time of his demand for payment under clause (B) hereof shall be valued by an independent public accountant selected by the Company and approved by Vitelle (whose approval shall not be withheld arbitrarily) using the Black-Scholes option valuation formula; (iii) the amount payable to Vitelle pursuant to clause (A) hereof shall be in substitution for, and not in addition to, any amount otherwise payable to him under Section 3.3(a); (iv) upon payment to Vitelle of the full amount due to him pursuant to this Article 7, any and all unexercised stock options then held by Vitelle shall be considered expired and of no further force or effect; and (v) the total cash payment to Vitelle pursuant to this Article 7 shall be reduced by any amount necessary to avoid the creation of a nondeductible "excess parachute payment" by the Company as defined in Section 280G of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder. (b) For the purposes of this Article 7: (1) a "Change in Control of the Company" shall have occurred if (A) any person (within the meaning of Section 13(d) of the Exchange Act) other than the Company or an Affiliate shall become the beneficial owner (as that term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 35% or more of the outstanding Common Stock (such person's beneficial ownership to be determined, in the case of warrants, options or rights to acquire Common Stock, pursuant to paragraph (d) of Rule 13d-3 under the Exchange Act), (B) the stockholders of the Company shall approve (i) a merger or consolidation of the Company with or into any person other than an Affiliate, (ii) any sale, lease, exchange or other transfer of all or substantially all the assets of the Company to any person other than an Affiliate or (iii) the dissolution of the Company or (C) at the end of any period commencing one month prior to the consummation of any of the events described in clauses (i), (ii) and (iii) above and ending five months after such consummation, individuals who at the commencement of such period were directors of the Company (the "Original Directors") shall have resigned or retired or otherwise shall have been removed from the Board of Directors, or during such period the number of directors shall have been increased, or both, with the result that, at the end of such period, the Original Directors who remain directors of the Company constitute less than 50% of the entire Board of Directors; (2) an "Affiliate" shall mean any person who is, at the date hereof, controlling or controlled by, or under common control with, the Company, including, without limitation, any person with a Schedule 13D on file with the Securities and Exchange Commission with respect to the Common Stock on the date hereof; and (3) "person" shall mean any individual, group, corporation, partnership, joint venture, association, joint-stock company, limited partnership, limited liability company, trust, unincorporated organization, government or agency or political subdivision of any government and shall also have the meaning assigned to it in Section 13(d) of the Exchange Act. 8. MISCELLANEOUS 8.1 Directors' And Officers' Liability Insurance. The Company shall use its best efforts at all times to maintain in effect a directors' and officers' liability insurance policy in an amount, and with such coverages, as are customary in the Company's industry, which policy shall be underwritten by an insurer reasonably satisfactory to Vitelle. 8.2 No Waiver. The waiver by either party of a breach of any provision of this Agreement shall not operate as or be construed as a waiver of any subsequent breach thereof. 8.3 Notices. Any and all notices referred to herein shall be furnished in writing and shall be delivered by hand or sent by registered or certified mail, postage prepaid, to the respective parties at the following addresses (or at such other address as either party may from time to time designate to the other by like notice): To the Company: DDL Electronics, Inc. 2151 Anchor Court Newbury Park, CA 91320 Attention: President To Vitelle: Mr. Richard K. Vitelle Chief Financial Officer DDL Electronics, Inc. 2151 Anchor Court Newbury Park, CA 91320 8.4 Assignment. This Agreement may not be assigned by Vitelle and may not be assigned by the Company otherwise than by operation of law. This Agreement shall be binding upon the Company's successors and assigns. 8.5 Entire Agreement. This Agreement supersedes any and all prior written or oral agreements between Vitelle and the Company and, together with the Option Agreements, evidences the entire understanding of the parties hereto with respect to the terms and conditions of Vitelle's employment with the Company. 8.6 Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California without regard to the choice of law rules of the State of California or any other jurisdiction. 8.7 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to constitute an original, but all of which shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the day and year first above written. DDL ELECTRONICS, INC. By: /s/ Gregory L. Horton ---------------------------- Gregory L. Horton President and CEO /s/ Richard K. Vitelle (L.S.) ---------------------------- Richard K. Vitelle EX-11 6 EXHIBIT 11 (1 of 2) DDL ELECTRONICS, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE Year Ended June 30 ------------------------------------ 1996 1995 1994 ---- ---- ---- PRIMARY EARNINGS PER SHARE: Loss before extraordinary item $ (758,000) $(2,366,000) $(8,354,000) Extraordinary item 2,356,000 2,441,000 - ---------- ---------- ---------- Net income $ 1,598,000 $ 75,000 $(8,354,000) ========== ========== ========== Weighted average number of common shares outstanding 18,180,034 15,149,968 14,239,292 Assumed exercise of options and warrants net of shares assumed reacquired 626,830 820,549 857,883 ---------- ---------- ---------- Average common shares and common share equivalents 18,806,864 15,970,517 15,097,175 ========== ========== ========== Primary earnings per share: Income (loss) before extraordinary item $(0.04) $(0.15) $(0.55) Extraordinary item 0.13 0.15 - ---- ---- ---- Earnings (loss) per share $ 0.09 $ - $(0.55) ==== ==== ==== EXHIBIT 11 (2 of 2) DDL ELECTRONICS, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE Year Ended June 30 ------------------------------------ 1996 1995 1994 ---- ---- ---- FULLY DILUTED EARNINGS PER SHARE: Income (loss) before extraordinary item $ (758,000) $(2,366,000) $(8,354,000) Add back net interest related to convertible subordinated debentures 204,000 134,000 135,000 ---------- ---------- ---------- Income (loss) before extraordinary item for fully diluted computation (554,000) (2,232,000) (8,219,000) Extraordinary item 2,356,000 2,441,000 - ---------- ---------- ---------- Net income for fully diluted computation $ 1,802,000 $ 209,000 $(8,219,000) ========== ========== ========== Weighted average number of common shares outstanding 18,180,034 15,149,968 14,239,292 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 658,841 1,008,566 852,650 Assumed conversion of convertible subordinated debentures 893,332 748,632 764,964 ---------- ---------- ---------- Average fully diluted shares 19,732,207 16,907,166 15,856,906 ========== ========== ========== Fully diluted earnings per share: Income (loss) before extraordinary item $(0.03) $(0.13) $(0.52) Extraordinary item .12 .14 - ---- ---- ---- Earnings (loss) per share $ 0.09 $ 0.01 $(0.52) ==== ==== ==== Note: The calculated fully diluted earnings per share are antidilutive for 1995 and 1994. EX-21 7 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 8 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 September 6, 1996, except for the last paragraph of Note 12, which is as of October 9, 1996, relating to the consolidated balance sheets of DDL Electronics, Inc. and subsidiaries as of June 30, 1996 and 1995 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, 1996, which report appears in the June 30, 1996 Annual Report on Form 10-K of DDL Electronics, Inc. /s/ KPMG PEAT MARWICK LLP Los Angeles, California October 9, 1996 EX-27 9
5 YEAR JUN-30-1996 JUN-30-1996 2519000 0 5620000 0 4014000 15493000 21047000 15130000 28087000 11979000 2023000 230000 0 0 4943000 28087000 33136000 33136000 29494000 34303000 0 0 911000 (1868000) (1110000) (758000) 0 2552000 0 1598000 0.09 0.09
EX-99 10 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-----