-----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, SQBbFGnPmpfRWLGq2GlBSir3zqsjw6Arc9C8e+RHAOd8YAYkfIjp2y3R1GMcDFpw xpfkBhhGFVXu27MeZoisGQ== 0000026987-97-000005.txt : 19970513 0000026987-97-000005.hdr.sgml : 19970513 ACCESSION NUMBER: 0000026987-97-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970512 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08101 FILM NUMBER: 97600851 BUSINESS ADDRESS: STREET 1: 2151 ANCHOR COURT CITY: NEWBURY PARK STATE: CA ZIP: 91320 BUSINESS PHONE: 805-376-9415 MAIL ADDRESS: STREET 1: 2151 ANCHOR COURT CITY: NEWBURY PARK STATE: CA ZIP: 91320 FORMER COMPANY: FORMER CONFORMED NAME: DATA DESIGN LABORATORIES INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: DATA DESIGN LABORATORIES DATE OF NAME CHANGE: 19880817 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended: MARCH 31, 1997 [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to ----------- ------------ Commission File Number: 1-8101 Exact Name of Registrant as Specified in Its Charter: DDL ELECTRONICS, INC. State or Other Jurisdiction of I.R.S. Employer Incorporation or Organization: DELAWARE Identification No.: 33-0213512 Address of Principal Executive Offices: 2151 Anchor Court Newbury Park, CA 91320 Registrant's Telephone Number: (805) 376-9415 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The registrant had 23,102,047 shares of Common Stock outstanding as of May 5, 1997. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DDL ELECTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Unaudited, except June 30, 1996) March 31, June 30, 1997 1996 ------ ------ Assets Current assets: Cash and cash equivalents $ 1,429,000 $ 2,519,000 Accounts receivable 9,429,000 5,620,000 Costs and estimated earnings in excess of billings on uncompleted contracts 4,394,000 3,026,000 Inventories 3,433,000 4,014,000 Prepaid expenses and other current assets 210,000 314,000 ---------- ---------- Total current assets 18,895,000 15,493,000 ---------- ---------- Property, equipment and improvements, at cost: Buildings and improvements 5,926,000 5,604,000 Plant equipment 14,167,000 13,999,000 Office and other equipment 1,860,000 1,444,000 ---------- ---------- 21,953,000 21,047,000 Less: Accumulated depreciation and amortization (15,527,000) (15,130,000) ---------- ---------- Property, equipment and improvements, net 6,426,000 5,917,000 ---------- ---------- Other assets: Goodwill, net 4,756,000 5,708,000 Debt issue costs 162,000 533,000 Deposits and other assets 216,000 436,000 ---------- ----------- 5,134,000 6,677,000 ---------- ----------- $ 30,455,000 $ 28,087,000 ========== =========== DDL ELECTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Continued) (Unaudited, except June 30, 1996) March 31, June 30, 1997 1996 ------ ------ Liabilities and Stockholders' Equity Current liabilities: Bank lines of credit payable $ 1,969,000 $ - Current portion of long-term debt 5,960,000 603,000 Accounts payable 8,989,000 7,485,000 Accrued payroll and employee benefits 774,000 777,000 Other accrued liabilities 2,601,000 3,114,000 ---------- ---------- Total current liabilities 20,293,000 11,979,000 ---------- ---------- Long-term debt: 10% Senior Secured Notes - 5,300,000 7% Convertible Subordinated Debentures, less current portion 409,000 443,000 8-1/2% Convertible Subordinated Debentures 1,580,000 1,580,000 Notes payable, capitalized lease obligations and other long-term debt, less current portion 3,734,000 3,612,000 ---------- ---------- Total long-term debt 5,723,000 10,935,000 ---------- ---------- Stockholders' equity: Common stock 231,000 230,000 Additional paid-in capital 29,456,000 29,304,000 Common stock held in escrow (1,325,000) (1,325,000) Accumulated deficit (23,122,000) (22,000,000) Foreign currency translation adjustment (801,000) (1,036,000) ---------- ---------- Total stockholders' equity 4,439,000 5,173,000 ---------- ---------- $ 30,455,000 $ 28,087,000 ========== ========== See accompanying Notes to Unaudited Consolidated Financial Statements DDL ELECTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) Three Months Ended March 31, ----------------------- 1997 1996 ------ ------ Sales $13,580,000 $10,501,000 Cost of goods sold 11,600,000 9,147,000 ---------- --------- Gross profit 1,980,000 1,354,000 ---------- --------- Operating expenses: Administrative and selling 1,290,000 1,042,000 Goodwill amortization 317,000 317,000 ---------- --------- 1,607,000 1,359,000 ---------- --------- Operating income (loss) 373,000 (5,000) ---------- --------- Non-operating income (expense): Investment income 16,000 8,000 Interest expense (279,000) (355,000) Other income (expense) 24,000 (53,000) ---------- --------- (239,000) (400,000) ---------- --------- Income (loss) before taxes 134,000 (405,000) Income tax benefit - - ---------- --------- Income (loss) before extraordinary item 134,000 (405,000) Extraordinary item - gain on debt extinguishment - 2,356,000 ---------- --------- Net income $ 134,000 $ 1,951,000 ========== ========= Earnings per share: Income (loss) before extraordinary item $ 0.01 $ (0.02) Extraordinary item - 0.12 ---- ---- Total earnings per share $ 0.01 $ 0.10 ==== ==== Shares used in computing earnings per share 23,285,231 19,064,501 ========== ========== See accompanying Notes to Unaudited Consolidated Financial Statements DDL ELECTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) Nine Months Ended March 31, ----------------------- 1997 1996 ------ ------ Sales $34,660,000 $22,722,000 Cost of goods sold 30,161,000 19,985,000 ---------- ---------- Gross profit 4,499,000 2,737,000 ---------- ---------- Operating expenses: Administrative and selling 3,653,000 2,937,000 Goodwill amortization 951,000 317,000 ---------- ---------- 4,604,000 3,254,000 ---------- ---------- Operating loss (105,000) (517,000) ---------- ---------- Non-operating income (expense): Investment income 59,000 208,000 Interest expense (844,000) (584,000) Other income (expense) (232,000) 114,000 ---------- ---------- (1,017,000) (262,000) ---------- ---------- Loss before income taxes (1,122,000) (779,000) Income tax benefit - 1,110,000 ---------- ---------- Income (loss) before extraordinary item (1,122,000) 331,000 Extraordinary item - gain on debt extinguishment - 2,356,000 ---------- --------- Net income (loss) $(1,122,000) $ 2,687,000 ========== ========== Earnings (loss) per share: Income (loss) before extraordinary item $ (0.05) $ 0.02 Extraordinary item - 0.13 ---- ---- Total earnings (loss) per share $ (0.05) $ 0.15 ==== ==== Shares used in computing earnings (loss) per share 23,046,615 17,677,831 ========== ========== See accompanying Notes to Unaudited Consolidated Financial Statements DDL ELECTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) Nine Months Ended March 31, ----------------------- 1997 1996 ------ ------ Cash flows from operating activities: Net income (loss) $(1,122,000) $ 2,687,000 Adjustments to reconcile net income (loss) to net cash used by operating activities: Depreciation and amortization 2,356,000 1,152,000 Gain on debt extinguishment - (2,356,000) Gain on sale of assets (128,000) - Net increase in operating working capital (3,595,000) (1,773,000) (Increase) decrease in deposits and other assets 100,000 (500,000) Benefit of noncapital grants (181,000) (207,000) Other 65,000 6,000 --------- --------- Net cash used by operating activities (2,505,000) (991,000) --------- --------- Cash flows from investing activities: Capital expenditures (697,000) (696,000) Proceeds from sale of assets 202,000 - Purchase of SMTEK, Inc., net of cash acquired - (7,638,000) --------- --------- Net cash used by investing activities (495,000) (8,334,000) Cash flows from financing activities: Proceeds from bank lines of credit 1,955,000 - Proceeds from long-term debt - 8,800,000 Payments of long-term debt (556,000) (1,445,000) Debt issue costs - (352,000) Proceeds from issuance of common stock, net - 1,112,000 Proceeds from exercise of stock options - 492,000 Proceeds from exercise of warrants - 317,000 Proceeds from foreign government grants 467,000 231,000 --------- --------- Net cash provided by financing activities 1,866,000 9,155,000 --------- --------- Effect of exchange rate changes on cash 44,000 (98,000) --------- --------- Decrease in cash and cash equivalents (1,090,000) (268,000) Cash and cash equivalents at beginning of period 2,519,000 2,917,000 --------- --------- Cash and cash equivalents at end of period $ 1,429,000 $ 2,649,000 ========= ========= See accompanying Notes to Unaudited Consolidated Financial Statements DDL ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 1 - DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION DDL Electronics, Inc. provides integrated design and 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 accompanying consolidated financial statements, which have not been audited by independent accountants (except for the balance sheet as of June 30, 1996), include the accounts of DDL Electronics, Inc. and its subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation. In the opinion of the Company's management, the accompanying consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) necessary to present fairly the Company's financial position at March 31, 1997 and its results of operations and cash flows for the nine months ended March 31, 1997 and 1996. The Company uses a 52-53 week fiscal year ending on the Friday closest to June 30. In the accompanying interim consolidated financial statements, the interim period end for both years is shown as March 31 for clarity of presentation. The actual periods ended on March 28, 1997 and March 29, 1996. Certain notes and other information are condensed or omitted from the interim financial statements presented in this Quarterly Report on Form 10-Q. Therefore, these financial statements should be read in conjunction with the Company's 1996 Annual Report to Stockholders as filed with the Securities and Exchange Commission on October 11, 1996. Certain reclassifications have been made to the interim fiscal 1996 financial statements to conform with the fiscal 1997 financial statement presentation. Such reclassifications had no effect on the Company's results of operations or stockholders' equity. Note 2 - 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 in January 1996, has historically generated the majority of its revenue through long-term contracts with suppliers of electronic assemblies 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. Note 3 - ACCOUNTS RECEIVABLE The components of accounts receivable are as follows: March 31, June 30, 1997 1996 ---- ---- Trade receivables $9,022,000 $5,456,000 Other receivables 568,000 296,000 Less allowance for doubtful accounts (161,000) (132,000) --------- --------- $9,429,000 $5,620,000 ========= ========= Included in other receivables at March 31, 1997 and June 30, 1996 are grants due from the Industrial Development Board for Northern Ireland of $61,000 and $251,000, respectively. 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 are as follows: March 31, June 30, 1997 1996 ---- ---- Costs incurred on uncompleted contracts $20,004,000 $11,181,000 Estimated earnings 2,024,000 1,544,000 ---------- ---------- 22,028,000 12,725,000 Less: Billings to date (17,327,000) (9,613,000) Customer advances and progress payments (307,000) (86,000) ---------- ---------- $ 4,934,000 $ 3,026,000 ========== ========== 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. 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: March 31, June 30, 1997 1996 ---- ---- Raw materials $2,782,000 $2,853,000 Work in process 953,000 1,263,000 Finished goods 65,000 146,000 Less reserves (367,000) (248,000) --------- --------- $3,433,000 $4,014,000 ========= ========= Note 6 - OTHER ACCRUED LIABILITIES Other accrued liabilities consist of the following: March 31, June 30, 1997 1996 ---- ---- Environmental liabilities $ 649,000 $ 728,000 Accrued taxes payable 795,000 951,000 Other 1,157,000 1,435,000 --------- --------- $2,601,000 $3,114,000 ========= ========= Note 7 - FINANCING ARRANGEMENTS Bank line of credit agreements: The Company has an accounts receivable-based working capital bank line of credit for SMTEK, its U.S. EMS operation, which provides for borrowings of up to $2,500,000 at an interest rate of prime plus 1.25%. At March 31, 1997, borrowings outstanding under this credit facility amounted to $863,000. The Company also has a credit facility agreement with Ulster Bank Markets for its Northern Ireland operations. This agreement includes a working capital line of credit of 1,150,000 pounds sterling (approximately $1,875,000), and provides for interest on borrowings at 1-1/2% over the bank's base rate. At March 31, 1997, borrowings outstanding under this credit facility amounted to $1,106,000. 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") as partial financing for the acquisition of SMTEK. The 10% Senior Notes are secured by (i) 1,060,000 shares of common stock and (ii) warrants 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 plans to retire the 10% Senior Notes 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 will endeavor to issue stock to other parties to raise the payoff amount. No assurance can be given that the Company will be able to sell stock on acceptable terms or at all. Under certain circumstances, as set forth in the agreements governing the 10% Senior Notes, the Company can apply approximately 700,000 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 would 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. Note 8 - INFORMATION RELATING TO STATEMENT OF CASH FLOWS "Net cash used by operating activities" includes cash payments for interest as follows: Nine months ended March 31, --------------------- 1997 1996 ------ ------ Interest paid $ 834,000 $ 433,000 ======= ======= "Net increase in operating working capital" is comprised of the following: Nine months ended March 31, --------------------- 1997 1996 ------ ------ (Increase) decrease in accounts receivable $(3,736,000) $ 226,000 Increase in costs and estimated earnings in excess of billings on uncompleted contracts (1,418,000) (1,621,000) (Increase) decrease in inventories 779,000 (1,625,000) Decrease in prepaid expenses 109,000 57,000 Increase in accounts payable 1,225,000 312,000 Decrease in accrued payroll and employee benefits (30,000) (23,000) Increase (decrease) in other liabilities (524,000) 901,000 --------- --------- Net increase in operating working capital $(3,595,000) $(1,773,000) ========= ========= Following is the supplemental schedule of non-cash investing and financing activities: Nine months ended March 31, --------------------- 1997 1996 ------ ------ Capital expenditures financed by lease obligations $ 710,000 $ 619,000 Conversion of debt to equity $ 153,000 $ 124,000 Common stock issued as partial consideration for purchase of SMTEK, Inc. - $ 801,000 Common stock issued as debt placement fee - $ 716,000 Common stock issued as collateral for 10% Senior Notes - $1,325,000 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements made below are forward-looking in nature and reflect the Company's current expectations and plans. Such statements involve various risks and uncertainties that could cause actual results to differ materially from those currently expected by the Company. Meaningful factors that might cause such differences include, but are not limited to, significant historical losses, limited capital resources and a continuing need for financing, dependence on key personnel, concentration of revenues among major customers, historical dependence on government business on the part of the Company's U.S. operating unit and a recent shift into commercial business, industry conditions, competition, environmental matters, dependence on suppliers and other factors discussed in the Company's Securities and Exchange Commission filings, including other factors described as "Risk Factors" in the Company's Registration Statement on Form S-3 (No. 333-02969). DESCRIPTION OF THE BUSINESS The Company provides integrated design and 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. 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. In fiscal 1995, the Company liquidated or sold all assets associated with its PCB and EMS 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 design and electronic manufacturing services. RESULTS OF OPERATIONS Consolidated sales for the three months ended March 31, 1997 were $13,580,000, compared to $10,501,000 for the same period in the previous fiscal year. Sales of DDL Electronics, Ltd. ("DDL-E"), the Company's Northern Ireland EMS operation, increased $2,522,000 in the latest quarter compared to the third quarter of last year. For the three months ended March 31, 1997, sales of SMTEK and Irlandus Circuits, Ltd. ("Irlandus"), the Company's PCB operation, increased approximately 11% and 10%, respectively, over sales for the comparable period of the prior year. Consolidated sales for the nine months ended March 31, 1997 were $34,660,000, compared to $22,722,000 for the same period in the previous fiscal year. The sales increase results primarily from the acquisition of SMTEK, which contributed revenues of $13,120,000 in the nine months ended March 31, 1997, compared to $4,871,000 for the same period in the previous fiscal year. Because the acquisition of SMTEK in January 1996 was accounted for using the purchase method, SMTEK's operations prior to the acquisition are not included in the Company's results. For the nine months ended March 31, 1997, sales of DDL-E and Irlandus increased 40% and 5%, respectively, over sales for the comparable period of the prior year. Consolidated gross profit for the three months ended March 31, 1997 was $1,980,000, compared to $1,354,000 for the comparable period of the prior year. SMTEK's gross profit declined from $979,000 for the three months ended March 31, 1996 to $689,000 for the three months ended March 31, 1997, despite higher sales, due to higher direct material costs as a percentage of sales, as well as an increase in the number of production employees handling the higher sales volume. DDL-E's gross profit increased by $496,000 between these two periods due to higher sales volume in the latest quarter and the fact that DDL-E's gross profit in last year's third quarter was adversely impacted by a ramp-up in the workforce and higher than normal equipment maintenance costs. Irlandus' gross profit increased by $402,000 between these two periods, due primarily to a reduction of indirect costs. The Company's consolidated gross profit margin increased from 12.9% in the three months ended March 31, 1996 to 14.6% in the latest quarter as a result of the increase in gross profit margin of Irlandus and DDL-E. Consolidated gross profit for the nine months ended March 31, 1997 improved by $1,762,000 compared to the same period of the prior year. SMTEK's gross profit of $1,861,000 for the latest nine month period, compared to $979,000 for the nine months ended March 31, 1996, accounted for $882,000 of the increase. Gross profit of DDL-E and Irlandus for the nine months ended March 31, 1997 increased $298,000 and $582,000, respectively, compared to the same period of the prior year. These increases were primarily attributable to the factors cited above for the three month comparative periods. The Company's consolidated gross profit margin increased from 12.0% in the nine months ended March 31, 1996 to 13.0% in the nine months ended March 31, 1997, due primarily to improvement in Irlandus' gross profit margin from 12.8% in the nine months ended March 31, 1996 to 19.3% in the latest nine month period. The improvement in Irlandus' gross profit margin is attributable to an increase in higher margin quick-turn orders and a reduction of indirect costs as a percentage of sales. Administrative and selling expenses increased from $1,042,000 for the three months ended March 31, 1996 to $1,290,000 for the three months ended March 31, 1997 due primarily to an increase in legal and consulting fees. Administrative and selling expenses for the nine months ended March 31, 1997 were $3,653,000, compared to $2,937,000 for the same period in the previous year. This increase is principally the result of the acquisition of SMTEK in January 1996. In the three months ended March 31, 1997, consolidated operating income was $373,000, compared to a consolidated operating loss of $5,000 in the three months ended March 31, 1996. This improvement is primarily attributable to increased gross profit of Irlandus and DDL-E. Consolidated operating losses were $105,000 and $517,000 for the nine months ended March 31, 1997 and 1996, respectively. A smaller operating loss was incurred in 1997 despite an increase in goodwill amortization expense from $317,000 in the earlier nine month period to $951,000 in the latest nine month period. This operating loss improvement is principally the result of increased gross profit in the latest nine month period. Investment income for the nine months ended March 31, 1997 and 1996 was $59,000 and $208,000, respectively. The 1996 amount includes nonrecurring interest income of $106,000 received on income tax refunds. Interest expense decreased from $355,000 in the three months ended March 31, 1996 to $279,000 in the three months ended March 31, 1997 because $3,500,000 of 10% convertible debentures issued in February 1996 were converted to equity in May and June 1996. In the nine months ended March 31, 1997 and 1996, interest expense was $844,000 and $584,000, respectively. This increase is attributable to interest on debt issued in 1996 to finance the SMTEK acquisition. Other income (expense) for the nine months ended March 31, 1997 and 1996 was ($232,000) and $114,000, respectively. The 1997 amount includes debt issue cost amortization expense of $372,000 associated with the debt issued to finance the SMTEK acquisition, offset by a gain on the sale of assets of $128,000. The 1996 amount includes a $100,000 gain recognized upon the negotiated settlement of a facility lease commitment at less than the amount previously reserved. In fiscal year 1996, the Company recognized an income tax benefit associated with application for federal tax refunds as permitted under section 172(f) of the Internal Revenue Code. In the aggregate the Company applied for federal tax refunds of $2,175,000, net of costs associated with applying for such refunds. To date, the Company has received $1,871,000 of net refunds plus interest on such refunds of $106,000, and has recognized as an income tax benefit $1,110,000 net of certain expenses. Because of the possibility that the tax returns underlying these refunds may be subject to audit by the Internal Revenue Service and a portion of the refunds disallowed, the Company has not yet recognized a tax benefit for the remainder of the refunds received to date, or for the refunds still expected to be received. Nonetheless, the Company feels that its claim for refund and carry back of net operating losses can be substantiated and is supported by law, and that the Company will ultimately collect and retain a substantial portion of the refunds applied for. Income (loss) before extraordinary item for the nine months ended March 31, 1997 was ($1,122,000) or ($0.05) per share, compared to $331,000 or $0.02 per share for the same period of fiscal 1996. Income (loss) before extraordinary item for the fiscal 1996 period includes the $1,110,000 income tax benefit discussed above. Net income (loss) for the nine months ended March 31, 1997 was ($1,122,000) or ($0.05) per share, compared to $2,687,000 or $0.15 per share for the same period of fiscal 1996. Net income (loss) for the first nine months of fiscal 1996 includes an extraordinary gain on debt extinguishment of $2,356,000 associated with the negotiated reduction in March 1996 of the Company's obligations under several consulting and deferred fee arrangements with certain former officers, employees and directors. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of liquidity are its cash and cash equivalents, which amounted to $1,429,000 at March 31, 1997, and its bank lines of credit. During the nine months ended March 31, 1997, cash and cash equivalents decreased by $1,090,000. This decrease consisted of cash used by operating activities of $2,505,000 and capital expenditures of $697,000, partially offset by cash inflows of $1,399,000 from new borrowings net of debt repayments, proceeds from government grants of $467,000, proceeds from the sale of assets of $202,000, and the effect of exchange rate changes on cash of $44,000. Components of operating working capital increased by $3,595,000 during the first nine months of fiscal 1997, comprised of a $3,736,000 increase in accounts receivable, a $1,418,000 increase in costs and earnings in excess of billings on uncompleted contracts and a $554,000 decrease in accrued liabilities, partially offset by a $1,225,000 increase in accounts payable, a $779,000 decrease in inventory and a $109,000 decrease in prepaid expenses and other current assets. Accounts receivable increased from $5,620,000 at June 30, 1996 to $9,429,000 at March 31, 1997. This increase results primarily from an increase in sales from $10,414,000 in the three months ended June 30, 1996 to $13,580,000 in the three months ended March 31, 1997. The Company has an accounts receivable-based working capital bank line of credit for SMTEK which provides for borrowings of up to $2,500,000 at an interest rate of prime plus 1.25%. At March 31, 1997, borrowings outstanding under this credit facility amounted to $863,000. The Company also has a credit facility agreement with Ulster Bank Markets for its Northern Ireland operations. This agreement includes a working capital line of credit of 1,150,000 pounds sterling (approximately $1,875,000), and provides for interest at 1-1/2% over the bank's base rate. At March 31, 1997, borrowings outstanding under this credit facility amounted to $1,106,000. 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") as partial financing for the acquisition of SMTEK. The 10% Senior Notes are secured by (i) 1,060,000 shares of common stock and (ii) warrants 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 plans to retire the 10% Senior Notes 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 will endeavor to issue stock to other parties to raise the payoff amount. No assurance can be given that the Company will be able to sell stock on acceptable terms or at all. Under certain circumstances, as set forth in the agreements governing the 10% Senior Notes, the Company can apply approximately 700,000 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 would 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. Cash and cash equivalents have declined steadily over the last nine months, primarily to fund increases in working capital necessitated by higher sales and backlog levels. The cash decline is a matter of concern to management and the Board of Directors, who are considering several means of addressing the situation. 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 an operating loss of $105,000 and negative cash flow from operating activities of $2,505,000 during the nine months ended March 31, 1997. In addition, at March 31, 1997 the Company had a working capital deficit of $1,398,000 as a result of transferring the $5,300,000 10% Senior Notes maturing July 1997 from long- term debt to current liabilities. With the exception of the latest quarter, during which the Company generated operating income of $373,000, the Company has incurred operating losses for a number of years. Management anticipates that the Company could incur further operating losses for at least the near term future due to the goodwill amortization expense arising from the acquisition of SMTEK. Operating losses could continue until such time as sales increase to a level sufficient to offset goodwill amortization. No assurance can be given as to whether or when such 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. The achievement of sustained operating profitability is the most significant internal factor to ensure the Company's long-term viability. No assurance can be given that the Company will attain operating profitability or that cash generated from non-operating sources will be adequate to fund future cash needs. As a necessary step to ensure the Company's increased profit- ability, the Company is actively pursuing strategic merger and acquisition candidates that will help ensure growth of the Company in the markets and industries in which it has expertise. No assurance can be given that any such merger or acquisition will occur. Management believes that the Company's cash resources and borrowing capacity on its bank lines of credit are sufficient to fund operations at current levels for at least the next 12 months. PART II. OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits: 11 Computation of Earnings Per Share 27 Financial Data Schedule (electronic filing only) b. Reports on Form 8-K: There were no reports filed on Form 8-K during the three months ended March 31, 1997. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. May 12, 1997 /s/ Richard K. Vitelle - --------------------------------- ----------------------------------- Date Richard K. Vitelle Vice President -Finance (Principal Financial Officer) EX-11 2 EXHIBIT 11 DDL ELECTRONICS, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE (Unaudited) Three Months Ended March 31, 1997 1996 ------ ------ PRIMARY EARNINGS PER SHARE: Income (loss) before extraordinary item $ 134,000 $ (405,000) Extraordinary item - 2,356,000 ---------- ---------- Net income $ 134,000 $ 1,951,000 ========== ========== Weighted average number of common shares outstanding 23,074,156 18,476,959 Assumed exercise of options and warrants net of shares assumed reacquired 211,075 587,542 ---------- ---------- Average common shares and common share equivalents 23,285,231 19,064,501 ========== ========== Primary earnings per share: Income (loss) before extraordinary item $ 0.01 $ (0.02) Extraordinary item - 0.12 ---- ---- Earnings per share $ 0.01 $ 0.10 ==== ==== FULLY DILUTED EARNINGS PER SHARE: Income (loss) before extraordinary item $ 134,000 $ (405,000) Add back net interest related to convertible subordinated debentures 34,000 64,000 ---------- ---------- Income (loss) before extraordinary item for fully diluted computation 168,000 (341,000) Extraordinary item - 2,356,000 ---------- ---------- Net income for fully diluted computation $ 168,000 $ 2,015,000 ========== ========== Weighted average number of common shares outstanding 23,074,156 18,476,959 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 211,294 588,438 Assumed conversion of convertible subordinated debentures 310,206 989,084 ---------- ---------- Average fully diluted shares 23,595,656 20,054,481 ========== ========== Fully diluted earnings per share: Income (loss) before extraordinary item $ 0.01 $ (0.02) Extraordinary item - 0.12 ---- ---- Earnings per share $ 0.01 $ 0.10 ==== ==== EXHIBIT 11 DDL ELECTRONICS, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE (Unaudited) Nine Months Ended March 31, 1997 1996 ------ ------ PRIMARY EARNINGS PER SHARE: Income (loss) before extraordinary item $(1,122,000) $ 331,000 Extraordinary item - 2,356,000 ---------- ---------- Net income (loss) $(1,122,000) $ 2,687,000 ========== ========== Weighted average number of common shares outstanding 23,046,615 17,053,331 Assumed exercise of options and warrants net of shares assumed reacquired - 624,500 ---------- ---------- Average common shares and common share equivalents 23,046,615 17,677,831 ========== ========== Primary earnings (loss) per share: Income (loss) before extraordinary item $(0.05) $ 0.02 Extraordinary item - 0.13 ---- ---- Earnings (loss) per share $(0.05) $ 0.15 ==== ==== FULLY DILUTED EARNINGS PER SHARE: Income (loss) before extraordinary item $(1,122,000) $ 331,000 Add back net interest related to convertible subordinated debentures 101,000 131,000 ---------- ---------- Income (loss) before extraordinary item for fully diluted computation (1,021,000) 462,000 Extraordinary item - 2,356,000 ---------- ---------- Net income (loss) for fully diluted computation $(1,021,000) $ 2,818,000 ========== ========== Weighted average number of common shares outstanding 23,046,615 17,053,331 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 248,285 722,213 Assumed conversion of convertible subordinated debentures 310,206 545,876 ---------- ---------- Average fully diluted shares 23,605,106 18,321,420 ========== ========== Fully diluted earnings (loss) per share: Income (loss) before extraordinary item $(0.04) $ 0.02 Extraordinary item - 0.13 ---- ---- Earnings (loss) per share $(0.04) $ 0.15 ==== ==== Note: Fully diluted earnings per share are anti-dilutive for 1997. EX-27 3
5 9-MOS JUN-30-1997 MAR-31-1997 1429000 0 9022000 161000 3433000 18895000 21953000 15527000 30455000 20293000 5723000 231000 0 0 4208000 30455000 34660000 34660000 30161000 30161000 0 0 844000 (1122000) 0 (1122000) 0 0 0 (1122000) (0.05) (0.05)
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