-----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, NYbzsy/aGo24GnhnlHkEvJBPfb9e7ZLM/3EPOw9Y+VKyYoo7qvEPEAKpo63dtm/X xHDQIp+ccCGUyTV9+HwEjw== 0000026987-96-000018.txt : 19961029 0000026987-96-000018.hdr.sgml : 19961029 ACCESSION NUMBER: 0000026987-96-000018 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19961028 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/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-08101 FILM NUMBER: 96648758 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/A 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A (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. EXHIBIT INDEX See page 27 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 EMS 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 45,000 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 45,000 Leased Craigavon, Northern Ireland 63,000 Owned Craigavon, Northern Ireland 67,000 Owned Craigavon, Northern Ireland 9,000 Owned The Northern Ireland properties are pledged as security for installment loans payable to the Industrial Development Board for Northern Ireland, from which the properties were purchased. These loans had an aggregate outstanding balance of approximately $1,265,000 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" ("MD&A") in the Company's 1996 Annual Report to Stockholders is incorporated herein by reference and made a part hereof. Certain statements made in the MD&A, in the president's letter to stockholders which appears on page 1 of the Company's 1996 Annual Report to Stockholders, and elsewhere in the notes to consolidated financial statements included in such Annual Report to Stockholders, are forward- looking in nature and reflect the Company's forecasts, current expectations and anticipated future plans. Such statements involve various risks and uncertainties that could cause actual results to differ materially from those forecast in the statements. Factors that might cause such differences would include, without limitation, the factors described as "Risk Factors" in the Company's Registration Statement on Form S-3 (No. 333-02969) on file with the Securities and Exchange Commission. 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 DIRECTORS AND EXECUTIVE OFFICERS Principal occupation and Year first business experience including elected a Name service on other boards Age Director -------- ------------------------------ --- -------- Class I Directors to Continue in Office Until the 1996 Annual Meeting: Melvin Foster Principal and attorney, Melvin 70 1995 Foster & Associates, Boston, Massachusetts Robert G. Wilson Director, Brandevor Enterprises, 52 1995 Ltd. and Amusements International, Ltd. Class II Directors to Continue in Office Until the 1997 Annual Meeting: Bernee D.L. Strom President, USA Digital Radio; 49 1995 Director, Polaroid Corporation, Software Publishing Corporation, Quantum Development Corporation and Krug International Gregory L. Horton Chief Executive Officer, 40 1996 President and Chairman of the Board of Directors, DDL Electronics, Inc. Class III Directors to Continue in Office Until the 1998 Annual Meeting: Karen Beth Brenner Registered investment advisor, 43 1996 President, Fortuna Advisors, Inc., Director, Krug International Richard K. Vitelle Vice President-Finance and 43 1996 Administration, Chief Financial Officer, Treasurer and Secretary, DDL Electronics, Inc. Mr. Foster was appointed to the Board subsequent to the May 31, 1995 annual stockholders meeting. Mr. Foster is a member of the Compensation Committee of the Board of Directors. He is an attorney and principal in Melvin Foster & Associates in Boston, Massachusetts. Mr. Wilson was appointed to the Board and made an Interim Vice President subsequent to the May 31, 1995 annual stockholders meeting. Mr. Wilson is a member of the Audit committee and the Compensation Committee. He is also chief financial officer and a director of Brandevor Enterprises, Ltd., a Toronto Stock Exchange-listed company, and a director of Amusements International Ltd., an Alberta Stock Exchange-listed company. Ms. Strom was elected to the Board at the May 31, 1995 annual stockholders meeting. Ms. Strom is a member of the Audit Committee and the Compensation Committee. Ms. Strom is President of USA Digital Radio, a private limited partnership. She also serves on the Board of Directors of Polaroid Corporation, a New York Stock Exchange-listed company, Software Publishing Corporation, a Nasdaq-traded company, Krug International, a Nasdaq-traded company, and is Chairman of the Board of Quantum Development Corporation, a privately-held company. Mr. Horton became the Company's President and Chief Executive Officer in January 1996, following the Company's acquisition of SMTEK, and was appointed to the Board on February 2, 1996. He was a member of the Executive Committee until the Executive Committee was dissolved and was elected Chairman of the Board of Directors in July 1996. Mr. Horton has served as the President and Chief Executive Officer of SMTEK since 1986. Ms. Brenner was appointed to the Board in July 1996 and serves as a member of the Audit Committee and the Compensation Committee. Since January 1996 she has served as President of Fortuna Advisors, Inc., the successor to Karen Beth Brenner, registered investment advisor, a sole proprietorship which she headed from 1985 to 1995. She also serves on the Board of Directors of Krug International, a Nasdaq-traded company. Mr. Vitelle was appointed Vice President-Finance and Administration, Chief Financial Officer and Treasurer in January 1996, was appointed Secretary in May 1996 and was elected to the Board in July 1996. From 1993 to 1996, Mr. Vitelle served as Chief Financial Officer of InVitro International, a publicly-held company engaged in the development and marketing of in vitro diagnostic testing systems. From 1992 to 1993, he served as Chief Financial Officer of Chapin Medical Company, a privately-held distributor of critical care pharmaceutical products. From 1986 to 1992, Mr. Vitelle served as Corporate Controller of DDL Electronics, Inc. Mr. Vitelle is a certified public accountant. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Under Section 16(a) of the Exchange Act, the directors and executive officers of the Company and persons who own more than 10% of the Company's Common Stock ("statutory insiders") are required to file reports of their ownership of the Company's Common Stock on Form 3 and any subsequent changes in that ownership on Form 4 or Form 5 with the SEC and the New York Stock Exchange. To the Company's knowledge, based solely upon its review of the copies of such reports required to be furnished to the Company during or with respect to fiscal 1996, the Company believes that all Section 16(a) filing requirements applicable to its statutory insiders during or for such fiscal year were satisfied, except that Mr. Vitelle filed a late Form 3 which reported that no securities were beneficially owned by him at the time he became an executive officer. Item 11. Executive Compensation SUMMARY COMPENSATION TABLE The following table sets forth the compensation paid or accrued by the Company to the Chief Executive Officer and all other executive officers of the Company (together with the Chief Executive Officer, the "named executive officers") attributable to their services for each of the fiscal years in the three-year period ended June 30, 1996: Long-Term Name and Annual Compensation Compensation Principal -------------------------- Awards: Positions (1) Year Salary(2) Bonus Other Options (#) -------------- ---- ------ ----- ----- ------- Gregory S. Horton 1996 $ 69,000 $ -- (3) 400,000 Chief Executive Officer, President and Chairman Richard K. Vitelle 1996 $ 50,000 $ -- (3) 185,000 Vice President-Finance and Administration, Chief Financial Officer, Treasurer and Secretary John F. Coyne (4) 1996 $123,000 $ 6,000 $ 61,000 -- Former President and 1995 119,000 27,000 50,000 100,000 Former Chief Operating 1994 78,000 -- 67,000 -- Officer M. Charles Van Rossen (5) 1996 $ 45,000 $ -- $ 59,000 -- Former Chief 1995 90,000 $ -- -- -- Financial Officer 1994 73,000 $ -- 8,000 15,000 (1) Mr. Horton joined the Company as Chief Executive Officer and President on January 12, 1996. Mr. Vitelle joined the Company as Vice President-Finance and Administration, Chief Financial Officer and Treasurer on January 25, 1996. Mr. Coyne became Managing Director of DDL Europe, Ltd. effective June 28, 1995, and resigned from all positions of employment with the Company and its affiliates effective June 28, 1996. Mr. Van Rossen resigned from all positions with the Company effective November 30, 1995. (2) Amounts shown include compensation earned and received by each named executive officer, as well as amounts earned but deferred at the election of each such officer, in each case for such officer's period of employment during fiscal 1996. Amounts paid in British Pounds Sterling have been translated into the Company's functional currency using the average annual translation rate. (3) Total perquisites did not exceed the lesser of $50,000 or 10% of the executive's salary and bonus. (4) Amounts in the "Other Annual Compensation" column include statutory pension amounts as required in Northern Ireland and other non-cash benefits. (5) Amounts in the "Other Annual Compensation" column consist of severance payments in 1996 and amounts credited to Mr. Van Rossen's 401(k) account from a suspense account within the Company's 401(k) plan in 1994. OPTION GRANTS IN FISCAL YEAR ENDED JUNE 30, 1996 The following table sets forth information concerning options granted to each of the named executive officers during fiscal 1996: Potential Realizable % of Total Value at Assumed Options Annual Rates of Stock Granted to Exercise Price Appreciation Employees or Base for Option Term Options in Fiscal Price Expiration --------------- Name Granted Year ($/Sh.) Date 5% 10% -------- ------- ---- ---- ---- ---- ---- Gregory L. Horton 90,000 9.9% $1.63 05/07/06 $ 92,000 $234,000 Gregory L. Horton 310,000(1) 34.2% $1.75 06/07/06 $341,000 $865,000 Richard K. Vitelle 85,000(2) 9.4% $1.63 05/07/06 $ 87,000 $221,000 Richard K. Vitelle 100,000(2) 11.0% $1.75 06/07/06 $110,000 $279,000 Richard K. Vitelle 20,000(3) 2.2% $1.50 01/25/01 $ 8,000 $ 18,000
(1) These options were repriced on October 3, 1996. See "Employment Agreements and Executive Severance Arrangements" below. The new exercise price is $1.25, the new expiration date is October 3, 2006, and the potential realizable values are $244,000 (at 5%) and $618,000 (at 10%). (2) These options were repriced on September 12, 1996. See "Employment Agreements and Executive Severance Arrangements" below. The new exercise price is $1.25, the new expiration date is September 12, 2006, and the potential realizable values for these 185,000 options are $145,000 (at 5%) and $369,000 (at 10%). (3) These shares underlie a warrant issued to Mr. Vitelle in lieu of cash reimbursement for moving expenses. On September 12, 1996, Mr. Vitelle agreed to cancel and annul such warrant and the Company agreed to reimburse him in cash for up to $25,000 in such expenses. AGGREGATED OPTION EXERCISES IN FISCAL 1996 AND FISCAL YEAR-END OPTION VALUES The following table sets forth information concerning options held by each of the named executive officers as of June 30, 1996: Value of Number of Unexercised Unexercised In-the-Money Options at Options at Shares Fiscal Year-End Fiscal Year-End Acquired on Value Exercisable/ Exercisable/ Name Exercise Realized Unexercisable(1) Unexercisable(2) ------ -------- -------- ------------- ------------- Gregory S. Horton - - - /400,000 $ - /$111,000 Richard K. Vitelle - - - /205,000 $ - /$ 67,000 John F. Coyne 50,000 $75,000 83,332/ 66,668 $25,000/$ 50,000 Charles Van Rossen 22,500 $23,000 17,500/ 5,000 $14,000/$ 4,000 (1) All options listed in the table are exercisable at option prices equal to fair market value on the date of grant. (2) The value of unexercised in-the-money options is based upon the fair market value for the Common Stock on June 30, 1996 of $2.00 per share less the applicable option exercise price EMPLOYMENT AGREEMENTS AND EXECUTIVE SEVERANCE ARRANGEMENTS On January 12, 1996, Gregory L. Horton was appointed President and Chief Executive Officer of the Company and, on February 2, 1996, was appointed a director of the Company. In connection therewith, he entered into an employment agreement dated October 16, 1995, which agreement would terminate in accordance with its terms on November 1, 1999. Under this agreement, the Company appointed Mr. Horton the President and Chief Executive Officer of the Company upon the Company's acquisition of SMTEK. Mr. Horton's employment agreement also provides for a base salary of $150,000 from SMTEK's acquisition date through June 30, 1996 and $150,000 for the fiscal year beginning July 1, 1996. This base salary is to be reviewed annually by the Compensation Committee, but is not to be adjusted downward without Mr. Horton's consent. Mr. Horton is also eligible to receive annual bonus compensation ranging up to 200% of his then-current base salary, although the Compensation Committee has taken no action to make an award of any size. Such bonus compensation is to be based in part on increases in the Company's revenues and profits and upon the achievement of other objectives and criteria as the Board may establish. Mr. Horton's employment is "at will." Should he voluntarily resign or be terminated for cause, Mr. Horton will not be entitled to severance pay. He is entitled to severance pay equal to 167% of his annual base salary if he is terminated without cause. Also in January 1996, Richard K. Vitelle was appointed Vice President-Finance and Administration, Treasurer and Chief Financial Officer pursuant to an employment agreement with the Company. Mr. Vitelle's employment agreement was renegotiated in September. His new employment agreement provides for a base annual salary of $125,000. For the fiscal year commencing July 1, 1996, he also is entitled to be paid a cash bonus quarterly in arrears in an amount per annum equal to 30% of such base annual salary. Pursuant to his new employment agreement, Mr. Vitelle was granted a stock option with a stated term of ten years covering 200,000 shares at $1.25 per share, which was the fair market value on the grant date. Of such optioned shares, 50,000 became exercisable on September 12, 1996, and 50,000 will become exercisable on the next three anniversaries of such date, provided that Mr. Vitelle is employed by the Company on the particular vesting date. As part of the renegotiation of Mr. Vitelle's employment agreement, the options that he held to purchase 185,000 additional shares were surrendered and annulled and replacement incentive stock options were issued. The replacement options were identical to the surrendered options in all respects, except that the replacement options are exercisable at $1.25 per share. Such options become exercisable in three equal annual installments on January 25, 1997, 1998, and 1999, and their stated termination date is September 12, 2006. Mr. Vitelle's employment is "at will." If his employment is terminated by the Company for cause, then he is not entitled to severance pay. However, he is entitled to twelve months' base salary and benefits as severance if he is terminated by the Company without cause, or if he is terminated as the result of a Change in Control of the Company. A "Change in Control of the Company" would include, among other things, any merger or consolidation of the Company with or into any person other than an Affiliate, any sale of all or substantially all the assets of the Company to any person other than an Affiliate or the acquisition by any person other than the Company or an Affiliate of 30% or more of the outstanding Common Stock. (The term "Affiliate" includes any member of the 13D "group" identified in note (1) to the "Principal Stockholders" table included in Item 12 below.) In addition, if the principal place of Mr. Vitelle's employment is relocated to any site beyond the 35-mile radius of the Company's present headquarters, then he may resign at any time within the following twelve months, whereupon he will be entitled to twelve months' severance payments and benefits. In December 1994, the Company entered into severance agreements with each of M. Charles Van Rossen, then Chief Financial Officer for the Company, and John F. Coyne, then President and Chief Operating Officer of the Company. Under these agreements, if a participant's employment were terminated other than for cause or voluntary resignation ("Involuntary Termination"), then he would be entitled to severance pay in the form of monthly payments equal to his then-current monthly salary, less applicable withholdings, and welfare benefits from his termination date until the earlier of (i) the date on which he accepted other full-time employment or (ii) 180 days following the date of Involuntary Termination. Each agreement also provided that, for up to one year after the occurrence of a "change in control" of the Company, each participant would be entitled to the severance provisions of the agreement upon voluntary resignation. Such a change in control was triggered by events at the Company's May 31, 1995 annual stockholders meeting. Mr. Van Rossen's employment by the Company was terminated on November 30, 1995. He received severance benefits through June 30, 1996 pursuant to his severance agreement. Mr. Coyne resigned from his offices and employment with the Company and its affiliates on May 31, 1996. Upon resigning, he promised to assist the Company during a transitional period, not to exceed six months in duration, in consideration of receiving the same salary per annum and other benefits (excluding post-employment benefits) that he had been receiving as Managing Director of DDL Europe, Ltd. The Company also agreed to make a pension fund contribution of 10,000 British Pounds Sterling on behalf of Mr. Coyne, to pay him 30,000 British Pounds Sterling as severance and to continue for and to vest in him certain fringe benefits, including transfer to him of title to his company car. DIRECTOR COMPENSATION Directors who are also employees of the Company receive no additional compensation for serving on the Board. Directors who are not also officers previously received $750 per month, $1,000 for each meeting of the Board attended and $1,000 for attendance at each Committee meeting not scheduled in conjunction with a meeting of the Board. These fees were terminated as to all directors after July 31, 1995. No such amounts have been paid to the Company's directors elected or appointed since the May 31, 1995 annual meeting of stockholders. On July 11, 1996, the Company's stockholders approved the 1996 Non- Employee Directors Stock Option Plan (the "Directors Plan"), which provides for automatic yearly grants of non-qualified stock options to purchase 30,000 shares of Common Stock to each eligible director serving on the Board at the time of grant. A director is generally eligible to receive grants under the Directors Plan if, at the grant date, he or she is a member of the Board but is not and has not since the beginning of the Company's most recently completed fiscal year been an employee of the Company or any of its affiliates. Under the terms of the Directors Plan, each option granted becomes exercisable six months after the grant date. Each option grant as a ten-year term and permits the holder to purchase shares at their fair market value on the grant date. Option grants under the Directors Plan were made initially on July 15, 1996 to each of Mses. Brenner and Strom and Messrs. Foster and Wilson. Subsequent grants will be made on July 1 (or the first business day thereafter) of each year so long as the Directors Plan remains in effect and a sufficient number of shares are available for the granting of options thereunder. The Directors Plan covers 900,000 shares of Common Stock, including the 120,000 shares optioned in July 1996. REPORT OF THE COMPENSATION COMMITTEE The Compensation Committee of the Board administers the Company's executive compensation programs and reviews and approves salaries of all elected officers, including those of the named executive officers. The Compensation Committee is also responsible for administering the Company's stock option plans (except for the non-discretionary 1993 Non-Employee Directors Stock Option Plan) and for making incentive awards. The Company's executive compensation programs are designed to: - provide competitive levels of base compensation in order to attract, retain and motivate high-quality employees; - tie individual total compensation to individual performance and the success of the Company; and - align the interests of the Company's executive officers with those of its stockholders. Base Salary. Base salary is targeted to be moderate yet competitive in relation to salaries commanded by those in similar positions in comparable companies. Additional consideration is to be made in the form of bonuses or stock options, the latter through potential increases in the price of the Company's stock. The Compensation Committee reviews management recommendations for executives' salaries and examines survey data for executives with similar responsibilities in comparable companies to the extent such data is available. Individual salary determinations are based on experience, sustained performance and comparison to peers inside and outside the Company. Incentive Compensation Program. The Company maintains an incentive compensation program for substantially all officers and executives designed to reward such individuals for their contributions to corporate and individual objectives. In the past, this program has provided additional compensation based on performance and profits of those operations for which the various executives have responsibility. For fiscal 1996, no amounts were paid to the Company's officers or executives under this program due to cash constraints. Stock Options. The Compensation Committee administers the Company's 1993 Stock Incentive Plan and 1996 Stock Incentive Plan, which are designed to align the interests of management and other key employees with those of the Company's stockholders. The number of stock options granted is related to the recipient's base compensation and level of responsibility. To date, all options have been granted with an option exercise price equal to the fair market value of the Common Stock on the date of grant. The tables above set forth information concerning options granted to named executives during fiscal 1996. Because of the Company's financial condition and the importance of conserving cash, the Company has tended to limit the level of cash remuneration paid to executive officers and to increase the level of stock option grants. Particularly during a period focused on operational and financial turnaround, the Compensation Committee believes that stock options closely align the objectives of management and the stockholders and provide a balance given the limits placed on cash remuneration. In the future, the Compensation Committee will continue to evaluate cash and stock incentive compensation alternatives to best achieve the objectives of the Company's executive compensation program. Compensation of Chief Executive Officer. On January 12, 1996, Gregory L. Horton was appointed President and Chief Executive Officer of the Company. Mr. Horton's compensation package is designed to focus his efforts toward the objectives of (i) integrating the Company's existing operations with those of SMTEK, which was acquired in January 1996, (ii) strengthening the Company's existing European operations, (iii) making the Company profitable and competitive as a technologically advanced firm in its lines of business and (iv) developing and implementing a growth strategy for the Company through internal operations and acquisition alternatives. Mr. Horton's cash compensation was negotiated with the Board and is described above under the caption "Employment Agreements and Executive Severance Arrangements." In May 1996, Mr. Horton was granted a stock option under the Company's 1993 Stock Incentive Plan covering 90,000 shares. These options are exercisable at $1.625, the fair market value on the grant date. The shares covered by this option become exercisable in three equal installments on January 12, 1997 and on the next two anniversaries thereof. In June 1996, as an additional incentive to Mr. Horton and in order to further align his interests directly with the interests of the stockholders, Mr. Horton was granted a stock option under the Company's 1996 Stock Incentive Plan covering 310,000 shares at an exercise price of $1.75 per share. On October 3, 1996, these options were repriced to $1.25 per share, which was the fair market value of the stock on that date. These options become exercisable in equal annual installments on the next three anniversaries of the grant date. The number of shares underlying Mr. Horton's options may change pursuant to certain anti-dilution provisions of the option agreements. Compensation of Acting or Interim Executive Officers. Since their appointment after the May 31, 1995 annual stockholders meeting and through the date of their resignations, none of the acting or interim executive officers of the Company received cash compensation other than reimbursement for out-of-pocket expenses incurred during the conduct of their duties. Submitted by the Compensation Committee: Karen Beth Brenner, Melvin Foster, Bernee D.L. Strom and Robert G. Wilson COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Mr. Wilson was appointed to the Compensation Committee in June 1995. Ms. Strom was appointed to the Compensation Committee in February 1996. Ms. Brenner and Mr. Foster were appointed to the Compensation Committee in July 1996. There are no interlocks between the Company and other entities involving the Company's executive officer and directors who serve as executive officers or directors of other entities. STOCK PERFORMANCE GRAPH The following performance table compares the cumulative total return for the period from June 30, 1991 through June 30, 1996, from an investment of $100 in (i) the Company's Common Stock, (ii) the Dow Jones Industrials as a group and (iii) the Dow Jones Computer Industry group of companies (the Company's peer group). For each group, an initial investment of $100 is assumed on July 1, 1990. The total return calculation assumes reinvestment of all dividends for the indices. The Company did not pay dividends on its Common Stock during the time frame set forth below. (stock performance graph - omitted) The data points depicted on the graph are as follows: Dow Jones Dow Jones Date Industrial Ave. Computer Index DDL Electronics 06/30/91 100.00 100.00 100.00 06/30/92 114.17 103.24 150.00 06/30/93 120.96 77.93 225.00 06/30/94 124.71 79.02 112.50 06/30/95 156.74 136.29 162.50 06/30/96 194.53 153.78 200.00 Item 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth as of October 24, 1996, except as otherwise indicated, the number of shares and percentage of outstanding Common Stock known by the Company to be beneficially owned by (i) each person who is known by the Company to own beneficially more than 5% of the Company's outstanding Common Stock, (ii) each of the Company's directors, (iii) each named executive officer and (iv) all executive officers and directors of the Company as a group. Unless otherwise noted, shares are held with sole voting and investment power. Stockholdings include, where applicable, shares held by the spouses and minor children, including shares held in trust. Shares of Common Stock Name and Address of ---------------------- Beneficial Owner* Number Percent of Class ---------------- -------- ---------------- Karen Beth Brenner 107,400 (1)(2) ** P.O. Box 9109 Newport Beach, CA 92658 Fortuna Advisors, Inc. 1,364,954 (1)(3) 5.9% P.O. Box 9109 Newport Beach, CA 92658 Richard Fechtor 457,050 (1)(4) 1.9% 17 Emily Road Framington, MA 01701 Fortuna Investment Partners, L.P. 1,354,390 (1)(5) 5.9% 100 Wilshire Blvd., 15th Floor Santa Monica, CA 90401 Fortuna Capital Management 150,000 (1)(6) ** 100 Wilshire Blvd., 15th Floor Santa Monica, CA 90401 Ronald J. Vannuki 3,500 (1)(7) ** 100 Wilshire Blvd., 15th Floor Santa Monica, CA 90401 Joseph Vannuki 64,409 (1)(8) ** 100 Wilshire Blvd., 15th Floor Santa Monica, CA 90401 Robert G. Wilson 641,427 (1)(9) 2.8% 1917 W. 4th Avenue Vancouver, British Columbia V6J 1M7 Canada Shares of Common Stock Name and Address of ---------------------- Beneficial Owner* Number Percent of Class ---------------- -------- ---------------- John F. Coyne 83,332 (10) ** 2 Dundanion Court Black Rock Cork, Ireland M. Charles Van Rossen 17,500 (11) ** 2110 SW Jefferson St. Portland, OR 97201 Melvin Foster 259,500 (12) 1.1% Bernee D.L. Strom 75,000 (13) ** Gregory L. Horton 1,000,000 (14) 4.3% Richard K. Vitelle 55,000 (15) ** Directors and Executive Officers as a Group (6 persons) 2,128,327 (16) 9.1% * Unless otherwise noted, the persons listed can be contacted at DDL Electronics, Inc., 2151 Anchor Court, Newbury Park, CA 91320. ** Represents less than 1% of the outstanding shares. (1) This information is based upon certain information provided to the Company in connection with the preparation of a second amendment (the "Group 13D") to the Schedule 13D dated February 23, 1995, previously amended April 1, 1995. The Company has been advised that the Group 13D is expected to be filed with the Securities and Exchange Commission within the next two weeks. The Group 13D states that the beneficial owner is a member of a "group," as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), comprised of Karen Beth Brenner, Fortuna Advisors, Inc., Richard Fechtor, Fortuna Investment Partners, L.P. ("Fortuna Partners"), Fortuna Capital Management, Ronald J. Vannuki and Joseph Vannuki. The members of such group are said to own beneficially 4,068,130 shares of Common Stock (17.4%) in the aggregate, of which 225,000 shares underlie currently exercisable warrants and 88,284 represent shares issuable upon the conversion of debentures. (2) Of the shares beneficially owned by Ms. Brenner, 75,000 shares underlie currently exercisable warrants. The Group 13D indicates that this beneficial owner has sole voting and dispositive power as to all 107,400 shares. (3) Of the shares beneficially owned by Fortuna Advisors, Inc., 46,495 represent shares issuable upon the conversion of debentures. The Group 13D indicates that this beneficial owner has no voting power but shared dispositive power as to all 1,364,954 shares. (4) The Group 13D indicates that this beneficial owner has sole voting and dispositive power as to all 457,050 shares. Fechtor Detwiler & Co., Inc., an investment banking firm in which Mr. Fechtor is a shareholder and principal, beneficially owns warrants to purchase 250,000 shares of the Company's stock. Mr. Fechtor as an individual does not have direct beneficial ownership or dispositive power over these warrants, and accordingly the shares which underlie these warrants are not included in Mr. Fechtor's total beneficial ownership in this table. (5) Of the shares beneficially owned by Fortuna Partners, 39,530 represent shares issuable upon the conversion of debentures. The Group 13D indicates that Fortuna Partners has voting and dispositive power as to all 1,354,390 shares which is shared with Fortuna Capital Management, the general partner of Fortuna Partners. (6) The shares beneficially owned by Fortuna Capital Management underlie exercisable warrants to purchase 150,000 shares. Fortuna Capital Management, whose President and sole shareholder is Ronald J. Vannuki, also has shared voting and dispositive over the 1,354,390 shares beneficially owned by Fortuna Partners. (7) The Group 13D indicates that this beneficial owner has sole voting and dispositive power as to all 3,500 shares. (8) Of the shares beneficially owned by Joseph Vannuki, 2,259 represent shares issuable upon the conversion of debentures. The Group 13D indicates that this beneficial owner has sole voting and dispositive power as to all 64,409 shares. (9) Of the shares beneficially owned by Mr. Wilson, 75,000 shares underlie currently exercisable warrants. Mr. Wilson's beneficial ownership of 566,427 shares represents shares held in a brokerage account over which Ronald J. Vannuki has dispositive power. Such shares are included in the total Group 13D beneficial ownership, even though the Company has been advised that Mr. Wilson is not deemed to be a member of the Group. Mr. Wilson is also a partner in the Fortuna Investment Partners L.P. investment fund, through which he has an indirect interest in approximately 188,125 shares of the Company. Mr. Wilson does not have direct beneficial ownership or dispositive power over these shares, and accordingly these shares are not included in Mr. Wilson's total beneficial ownership in this table. (10) The shares beneficially owned by Mr. Coyne underlie exercisable options to purchase 83,332 shares. (11) The shares beneficially owned by Mr. Van Rossen underlie presently exercisable options to purchase 17,500 shares. (12) Of the shares beneficially owned by Mr. Foster, 75,000 shares underlie currently exercisable warrants. (13) Represents shares which underlie currently exercisable warrants. (14) Mr. Horton is the beneficial owner of 1,000,000 shares, with sole voting and dispositive power as to all shares. He received such shares as consideration for his stock ownership in SMTEK, which was acquired by the Company on January 12, 1996. (15) Of the shares beneficially owned by Mr. Vitelle, 50,000 shares underlie currently exercisable options. (16) Such shares include presently exercisable options and warrants to purchase 350,000 shares. Item 13. Certain Relationships and Related Transactions On June 28, 1995, the Company entered into consulting agreements with Fechtor, Detwiler & Co., Inc. ("Fechtor Detwiler") and Fortuna Capital Management, Inc. ("Fortuna Capital"). Richard Fechtor, principal with Fechtor Detwiler, and Ronald J. Vannuki, President of Fortuna Capital and a general partner of Fortuna Partners, are also principal stockholders of the Company and are members of the "group" identified in note (1) to the "Principal Stockholders" table included in Item 12 above. In April 1996, as compensation for the consulting services provided pursuant these agreements and for consulting services provided by Karen Beth Brenner, another principal stockholder of the Company and a member of the aforementioned "group," such consulting services having been rendered in connection with the Company's acquisition of SMTEK, the Company issued warrants to Fechtor Detwiler, Fortuna Capital and Ms. Brenner to purchase 250,000, 150,000 and 50,000 shares of Common Stock, respectively, at $2.25 per share. After June 30, 1998, the exercise price of these warrants is to be $3.50 per share until the warrants expire on June 30, 2000. 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 27 (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 28, 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 28, 1996 - ----------------------- President and Chairman ------------------ Gregory L. Horton of the Board /s/ Richard K. Vitelle Vice President-Finance and October 28, 1996 - ----------------------- Administration, Chief ------------------ Richard K. Vitelle Financial Officer, Treasurer, Secretary and Director /s/ Karen B. Brenner Director October 28, 1996 - ----------------------- ------------------ Karen B. Brenner /s/ Melvin Foster Director October 28, 1996 - ----------------------- ------------------ Melvin Foster /s/ Robert G. Wilson Director October 28, 1996 - ----------------------- ------------------ 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 (incorporated by reference to Exhibit 4.14.3 filed with the Company's 1996 Annual Report on Form 10-K). 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 (incorporated by reference to Exhibit 10.11.1 filed with the Company's 1996 Annual Report on Form 10-K). 10.12 Form of Land Registry for the Company's Northern Ireland subsidiaries dated November 4, 1993 (incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report of Form 10-Q for the quarter ended September 30, 1993). 10.13 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 (incorporated by reference to Exhibit 10.15 filed with the Company's 1996 Annual Report on Form 10-K) 11 Statement re Computation of Per Share Earnings.* 13 Annual Report to security holders.* 21 Subsidiaries of the Registrant.* 23 Consent of KPMG Peat Marwick, LLP.* 27 Financial Data Schedule.* 99 Undertaking for Form S-8 Registration Statement.* * These exhibits are incorporated by reference to the Company's 1996 Annual Report on Form 10-K filed on October 11, 1996. -----END PRIVACY-ENHANCED MESSAGE-----