-----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, VtiNumxfBezPio+1sHoaXS2svW3dHv62AWgo8D1RcaPKgH0Zdyg1K9GLrPFguUbr wrmaHt1wvmIlRh3RAzlFNg== 0000026987-98-000012.txt : 19980528 0000026987-98-000012.hdr.sgml : 19980528 ACCESSION NUMBER: 0000026987-98-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980526 SROS: NYSE SROS: PCX 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: SEC FILE NUMBER: 001-08101 FILM NUMBER: 98631741 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-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, 1998 [ ] 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 24,613,666 shares of Common Stock outstanding as of May 15, 1998. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DDL ELECTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited, except June 30, 1997) March 31, June 30, 1998 1997 ------ ------ Assets Current assets: Cash and cash equivalents $ 2,019,000 $ 4,718,000 Accounts receivable, net 8,751,000 9,198,000 Costs and estimated earnings in excess of billings on uncompleted contracts 4,413,000 3,161,000 Inventories, net 2,515,000 3,211,000 Prepaid expenses 441,000 132,000 ---------- ---------- Total current assets 18,139,000 20,420,000 ---------- ---------- Property, equipment and improvements, at cost: Buildings and improvements 6,080,000 6,037,000 Plant equipment 14,947,000 14,962,000 Office and other equipment 2,136,000 1,952,000 ---------- ---------- 23,163,000 22,951,000 Less: Accumulated depreciation and amortization (16,946,000) (16,161,000) ---------- ---------- Property, equipment and improvements, net 6,217,000 6,790,000 ---------- ---------- Other assets: Goodwill, net 3,488,000 4,439,000 Deposits and other assets 234,000 231,000 ---------- ----------- 3,722,000 4,670,000 ---------- ----------- $ 28,078,000 $ 31,880,000 ========== ========== DDL ELECTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued) (Unaudited, except June 30, 1997) March 31, June 30, 1998 1997 ------ ------ Liabilities and Stockholders' Equity Current liabilities: Bank lines of credit payable $ 3,272,000 $ 1,378,000 Current portion of long-term debt 2,993,000 4,167,000 Accounts payable 6,837,000 9,084,000 Accrued payroll and employee benefits 1,120,000 1,145,000 Other accrued liabilities 2,288,000 2,321,000 ---------- ---------- Total current liabilities 16,510,000 18,095,000 ---------- ---------- Long-term debt: 7% Convertible Subordinated Debentures, less current portion 387,000 398,000 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 3,284,000 5,842,000 ---------- ---------- Total long-term debt 5,251,000 7,820,000 ---------- ---------- Stockholders' equity: Common stock 246,000 246,000 Additional paid-in capital 6,884,000 6,410,000 Accumulated deficit since June 27, 1997 (204,000) - Foreign currency translation adjustment (609,000) (691,000) ---------- ---------- Total stockholders' equity 6,317,000 5,965,000 ---------- ---------- $ 28,078,000 $ 31,880,000 ========== ========== See accompanying Notes to Unaudited Consolidated Financial Statements DDL ELECTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended March 31, ----------------------- 1998 1997 ------ ------ Sales $ 12,855,000 $ 13,580,000 Cost of goods sold 10,829,000 11,600,000 ---------- ---------- Gross profit 2,026,000 1,980,000 ---------- ---------- Operating expenses: Administrative and selling 1,444,000 1,290,000 Goodwill amortization 317,000 317,000 ---------- ---------- 1,761,000 1,607,000 ---------- ---------- Operating income 265,000 373,000 ---------- ---------- Non-operating income (expense): Interest income 22,000 16,000 Interest expense (251,000) (279,000) Debt issue cost amortization - (124,000) Other income (expense), net (45,000) 148,000 ---------- ---------- (274,000) (239,000) ---------- ---------- Income (loss) before taxes (9,000) 134,000 Provision for income taxes (105,000) - ---------- ---------- Net income (loss) $ (114,000) $ 134,000 ========== ========== Basic and diluted earnings (loss) per share $ - $ .01 ==== ==== Shares used in computing earnings per share: Basic 24,610,000 23,074,000 ========== ========== Diluted 24,610,000 23,595,000 ========== ========== See accompanying Notes to Unaudited Consolidated Financial Statements DDL ELECTRONICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Nine Months Ended March 31, ----------------------- 1998 1997 ------ ------ Sales $ 37,576,000 $ 34,660,000 Cost of goods sold 31,615,000 30,161,000 ---------- ---------- Gross profit 5,961,000 4,499,000 ---------- ---------- Operating expenses: Administrative and selling 4,048,000 3,653,000 Goodwill amortization 951,000 951,000 ---------- ---------- 4,999,000 4,604,000 ---------- ---------- Operating income (loss) 962,000 (105,000) ---------- ---------- Non-operating income (expense): Interest income 51,000 59,000 Interest expense (724,000) (844,000) Debt issue cost amortization - (372,000) Other income (expense), net (63,000) 140,000 ---------- ---------- (736,000) (1,017,000) ---------- ---------- Income (loss) before taxes 226,000 (1,122,000) Provision for income taxes (430,000) - ---------- ---------- Net loss $ (204,000) $ (1,122,000) ========== ========== Basic and diluted earnings (loss) per share $ (.01) $ (.05) ==== ==== Shares used in computing basic and diluted earnings per share 24,598,000 23,047,000 ========== ========== See accompanying Notes to Unaudited Consolidated Financial Statements CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended March 31, ----------------------- 1998 1997 ------ ------ Cash flows from operating activities: Net loss $ (204,000) $(1,122,000) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation expense 1,214,000 1,030,000 Amortization of goodwill and debt issue costs 954,000 1,326,000 Gain on sale of assets (22,000) (128,000) Utilization of pre-quasi- reorganization tax benefits 430,000 - Net increase in operating working capital (2,837,000) (3,595,000) Increase in deposits and other assets (6,000) 100,000 Benefit of non-capital grants - (181,000) Other 89,000 65,000 --------- --------- Net cash used by operating activities (382,000) (2,505,000) --------- --------- Cash flows from investing activities: Capital expenditures (431,000) (697,000) Proceeds from sale of assets 16,000 202,000 --------- --------- Net cash used by investing activities (415,000) (495,000) --------- --------- Cash flows from financing activities: Proceeds from bank lines of credit 1,883,000 1,955,000 Proceeds from long-term debt 2,000,000 - Payments of long-term debt (5,995,000) (556,000) Proceeds from foreign government grants 123,000 467,000 --------- --------- Net cash provided by (used in) financing activities (1,989,000) 1,866,000 --------- --------- Effect of exchange rate changes on cash 87,000 44,000 --------- --------- Decrease in cash and cash equivalents (2,699,000) (1,090,000) Cash and cash equivalents at beginning of period 4,718,000 2,519,000 --------- --------- Cash and cash equivalents at end of period $2,019,000 $1,429,000 ========= ========= 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 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, 1997), 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, 1998 and its results of operations and cash flows for the nine months ended March 31, 1998 and 1997. The Company uses a 52-53 week fiscal year ending on the Friday closest to June 30, which for fiscal year 1997 fell on June 27, 1997. In the accompanying consolidated financial statements, the 1997 fiscal year end is shown as June 30 and the interim period end for both years is shown as March 31 for clarity of presentation. The actual interim periods ended on April 3, 1998 and March 28, 1997. The nine month period of fiscal 1998 consisted of 40 weeks compared to 39 weeks for the same period of fiscal 1997. 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 1997 Annual Report to Stockholders as filed with the Securities and Exchange Commission on October 10, 1997. Certain reclassifications have been made to the interim fiscal 1997 financial statements to conform with the fiscal 1998 financial statement presentation. Such reclassifications had no effect on the Company's results of operations or stockholders' equity. Note 2 - EARNINGS (LOSS) PER SHARE In 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Basic earnings per share represents income available to common shareholders divided by the weighted average number of common shares outstanding for the period. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants, and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where necessary, restated to conform to SFAS 128 requirements. A reconciliation of the numerator and denominator used in the computation of diluted earnings per share follows: Three Months Ended March 31, 1997 ------ NUMERATOR: Net income $ 134,000 Add back net interest related to convertible subordinated debentures 34,000 ---------- Net income for diluted earnings computation $ 168,000 ========== DENOMINATOR: Weighted average number of common shares outstanding 23,074,156 Assumed exercise of options and warrants net of shares assumed reacquired under treasury stock method 211,078 Assumed conversion of convertible subordinated debentures 310,206 ---------- Total diluted shares 23,595,440 ========== The company reported net losses for the three and nine months ended March 31, 1998 and for the nine months ended March 31, 1997; hence, diluted earnings per share for these periods as presented in the statements of operations included herein is computed on the same basis as basic earnings per share. For the nine months ended March 31, 1998 and 1997, the following securities were outstanding but were not included in the computation of diluted earnings per as they would have an antidilutive effect on earnings per share: subordinated debentures convertible into 310,206 shares of common stock; and options and warrants to purchase 5,421,809 and 4,988,128 shares of common stock, respectively, at prices ranging from $0.50 to $2.25. Note 3 - ACCOUNTS RECEIVABLE The components of accounts receivable are as follows: March 31, June 30, 1998 1997 ---- ---- Trade receivables $8,925,000 $8,810,000 Other receivables 21,000 546,000 Less allowance for doubtful accounts (195,000) (158,000) --------- --------- $8,751,000 $9,198,000 ========= ========= 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, 1998 1997 ---- ---- Costs incurred on uncompleted contracts $30,801,000 $20,455,000 Estimated earnings 3,003,000 2,714,000 ---------- ---------- 33,804,000 23,169,000 Less: Billings to date (29,391,000) (20,008,000) ---------- ---------- $ 4,413,000 $ 3,161,000 ========== ========== 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, 1998 1997 ---- ---- Raw materials $2,239,000 $2,889,000 Work in process 475,000 654,000 Finished goods 310,000 160,000 Less reserves (509,000) (492,000) --------- --------- $2,515,000 $3,211,000 ========= ========= Note 6- OTHER ACCRUED LIABILITIES Other accrued liabilities consist of the following: March 31, June 30, 1998 1997 ---- ---- Environmental liabilities $ 651,000 $ 684,000 Accrued taxes payable 790,000 794,000 Other 847,000 843,000 --------- --------- $2,288,000 $2,321,000 ========= ========= Note 7- FINANCING ARRANGEMENTS AND ACQUISITION COMMITMENT 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 (8.50% at March 31, 1998) plus 1.25%. At March 31, 1998, borrowings outstanding under this credit facility amounted to $1,763,000. 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 3,000,000 pounds sterling (approximately $5,000,000), and provides for interest on borrowings at the bank's base rate (7.59% at March 31, 1998) plus 1.50%. At March 31, 1998, borrowings outstanding under this credit facility amounted to $1,509,000. On June 30, 1997 (which is subsequent to the year ended June 27, 1997), the Company repaid its 10% Senior Notes due July 1, 1997 in the amount of $5,300,000 plus accrued interest of $43,000. Of the funds used to repay the 10% Senior Notes, $2,000,000 was borrowed from a private investor (the "Investor") on June 30, 1997 under an 8% note payable due February 1, 1999 which is secured by the common stock of SMTEK. Following is pro forma information for certain consolidated balance sheet line items presented as if the issuance of the $2,000,000 note payable and repayment of the 10% Senior Notes had occurred on June 27, 1997: June 27, 1997 --------------------------- As Reported Pro forma ----------- ----------- Assets: Cash and cash equivalents $4,718,000 $1,375,000 Liabilities: Current portion of long-term debt $4,167,000 $ 867,000 Other accrued liabilities $2,321,000 $2,278,000 Concurrent with issuing the $2,000,000 note payable on June 30, 1997, the Company agreed to acquire all of the issued and outstanding shares of Jolt Technology, Inc. ("Jolt"), a privately-held electronic manufacturing services company controlled by the Investor, for nine million shares of the Company's common stock. The acquisition of Jolt is subject to obtaining the approval of the Company's stockholders. Upon consummation of the Jolt acquisition, the maturity date of the $2,000,000 note payable will be extended from February 1, 1999 to October 31, 1999. 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, --------------------- 1998 1997 ------ ------ Interest paid $ 610,000 $ 834,000 ======= ======= "Net increase in operating working capital" is comprised of the following: Nine months ended March 31, --------------------- 1998 1997 ------ ------ (Increase) decrease in accounts receivable $ 324,000 $ (3,736,000) Increase in costs and estimated earnings in excess of billings on uncompleted contracts (1,251,000) (1,418,000) Decrease in inventories 689,000 779,000 (Increase) decrease in prepaid expenses (309,000) 109,000 Increase (decrease) in accounts payable (2,232,000) 1,225,000 Decrease in accrued payroll and employee benefits (24,000) (30,000) Decrease in other liabilities (34,000) (524,000) --------- --------- Net increase in operating working capital $(2,837,000) $(3,595,000) ========= ========= Following is the supplemental schedule of non-cash investing and financing activities: Nine months ended March 31, --------------------- 1998 1997 ------ ------ Capital expenditures financed by lease obligations $ 237,000 $ 710,000 Conversion of debt to equity $ 44,000 $ 153,000 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 as 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. 333-31349). DESCRIPTION OF THE BUSINESS The Company provides 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. QUASI-REORGANIZATION The Company, with the authorization of its Board of Directors, implemented a quasi-reorganization effective June 27, 1997. The quasi-reorganization, which did not require the approval of the Company's stockholders, resulted in an elimination of the accumulated deficit of $23,678,000 by a transfer from additional paid-in capital of an equivalent amount. This deficit was attributable primarily to operations which were divested or discontinued in prior years. Following a review and evaluation by management, no adjustment was made to the carrying values of the Company's assets and liabilities because such amounts were deemed to be not in excess of estimated fair values. RESULTS OF OPERATIONS The Company uses a 52-53 week fiscal year ending on the Friday closest to June 30. In the accompanying consolidated financial statements, the interim period end for both years is shown as March 31 for clarity of presentation. The actual periods ended on April 3, 1998 and March 28, 1997. The nine month period of fiscal 1998 consisted of 40 weeks compared to 39 weeks for the comparable period of fiscal 1997. Consolidated sales for the three months ended March 31, 1998 were $12,855,000, compared to $13,580,000 for the same period in the previous fiscal year. This decrease is attributable to the Company's PCB operations, for which sales decreased by 25% from the third quarter of last year. PCB sales in the 1997 quarter included a relatively large quick-turn contract that was not recurring business. Sales of the EMS operations for the three months ended March 31, 1998 remained level from the prior year quarter. Consolidated sales increased from $34,660,000 for the nine months ended March 31, 1997 to $37,576,000 for the latest nine months. Sales for the Company's EMS operations for the latest nine months increased by $3,628,000 over the comparable prior year period, and is attributable primarily to higher levels of business with existing customers. Sales for the nine months ended March 31, 1998 for the PCB operations declined by 9% from the comparable period in the prior year as a result of a fluctuation in business from a major customer as well as the aforementioned quick-turn contract in the prior year period that was not recurring business. Consolidated gross profit for the nine months ended March 31, 1998 was $5,961,000 (15.9% of sales), compared to $4,499,000 (13.0% of sales) for the same period of the prior year. Gross profit of the EMS operations was $4,244,000 for the nine months ended March 31, 1998, compared to $2,911,000 for the prior year. A change in the mix of business with lower direct material costs as a percentage of sales contributed to the increase in EMS gross profit, along with higher sales volume and increased productivity. For the nine months ended March 31, 1998, gross profit from PCB operations increased approximately 8% over gross profit for the comparable period of the prior year despite the level volume of sales. This improvement is attributable primarily to an increase in higher margin quick-turn orders, material price reductions and processing cost savings. Administrative and selling expenses for the three months ended March 31, 1998 were $1,444,000 compared to $1,290,000 for the same period in the previous year. The increase is attributable to the addition of a key management position at Irlandus Circuits, Ltd. in the fourth quarter of fiscal 1997, a difference in the timing of a discretionary employer contribution to SMTEK's 401(k) plan, and an increase in corporate overhead expenses for the 1998 third quarter compared to the 1997 third quarter. Administrative and selling expenses for the nine months ended March 31, 1998 and 1997 were $4,048,000 and $3,653,000, respectively. The increase is attributable to the key management position addition noted above and other increases in administrative staff. The additional week of operations included in the period ended March 31, 1998 as a result of the Company's 52-53 week fiscal year also contributed to the increased administrative and selling expenses in the latest nine-month period. In the three and nine months ended March 31, 1998, consolidated operating income was $265,000 and $962,000, respectively, compared to consolidated operating income (loss) of $373,000 and ($105,000), respectively, for the same periods in the previous fiscal year. Interest expense decreased from $844,000 in the nine months ended March 31, 1997 to $724,000 in the nine months ended March 31, 1998 because the Company repaid its 10% Senior Notes in the amount of $5,300,000 on June 30, 1997. Of the funds used to repay the 10% Senior Notes, $2,000,000 was borrowed on June 30, 1997 under an 8% promissory note due February 1, 1999. Debt issue cost amortization expense of $372,000 for the nine months ended March 31, 1997 related to the 10% Senior Notes. There is no such amortization expense in the latest quarter because these debt issue costs were fully amortized as of June 30, 1997. The provision for income taxes of $430,000 for the nine months ended March 31, 1998 arises as a result of the quasi-reorganization which was effected on June 30, 1997. Pursuant to quasi-reorganization accounting, as the portion of net operating loss carryforwards and deferred tax benefits originating prior to the effective date of the quasi-reorganization are utilized, the corresponding tax effect ($430,000 for the nine months ended March 31, 1998) is credited to paid-in capital instead of being treated as a reduction of the provision for income taxes. Additionally, because the Company's goodwill amortization expense is not deductible for income taxes, the provision for income taxes in the three and nine months ended March 31, 1998 is greater than the amount which would result from applying statutory tax rates to pretax income. The net loss for the nine months ended March 31, 1998 was $204,000 or $.01 per share, compared to $1,122,000 or $.05 per share for the nine months ended March 31, 1997. RECENT ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board issued Statement No. 130, "Reporting Comprehensive Income" ("SFAS 130") in June 1997. SFAS 130 establishes standards for reporting and display of comprehensive income and its components in financial statements. SFAS 130 is effective for fiscal years beginning after December 15, 1997. The Company will adopt SFAS 130 in the first quarter of its fiscal year ending June 30, 1999. Management believes that the adoption of SFAS 130 will not have a material impact on the Company's financial position or results of operations. The Financial Accounting Standards Board issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131") in June 1997. SFAS 131 establishes standards for the way public business enterprises are to report information about operating segments in annual financial statements and requires enterprises to report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. It replaces the "industry segment" concept of Statement of Financial Accounting Standards No. 14, "Financial Reporting for Segments of a Business Enterprise", with a "management approach" basis for identifying reportable segments. SFAS 131 is effective for financial statements for fiscal years beginning after December 15, 1997. The Company will adopt SFAS 131 in its fiscal year ending June 30, 1999. Management believes that the adoption of SFAS 131 will not have a material impact on the Company's financial position or results of operations. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of liquidity are its cash and cash equivalents, which amounted to $2,019,000 at March 31, 1998, and its bank lines of credit. During the nine months ended March 31, 1998, cash and cash equivalents decreased by $2,699,000. This decrease consisted of cash used by operating activities of $382,000, capital expenditures of $431,000, and net reductions of long-term debt of $3,995,000, partially offset by cash proceeds from the sale of assets of $16,000, bank lines of credit of $1,883,000, government grants of $123,000 and the effect of exchange rate changes on cash of $87,000. Components of operating working capital increased by $2,837,000 during the first nine months of fiscal 1998, comprised of a $1,251,000 increase in costs and earnings in excess of billings on uncompleted contracts, a $309,000 increase in prepaid expenses, and a $2,290,000 decrease in accounts payable and other accrued liabilities, partially offset by a $324,000 decrease in accounts receivable and a $689,000 decrease in inventories. The Company has an accounts receivable-based working capital bank line of credit for SMTEK which provides for borrowings of up to $2,500,000 at an interest rate of prime (8.50% at March 31, 1998) plus 1.25%. At March 31, 1998, borrowings outstanding under this credit facility amounted to $1,763,000. 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 3,000,000 pounds sterling (approximately $5,000,000), and provides for interest on borrowings at the bank's base rate (7.59% at March 31, 1998) plus 1.50%. At March 31, 1998, borrowings outstanding under this credit facility amounted to $1,509,000. The Company's EMS and PCB fabrication businesses require continuing investment in plant and equipment to remain competitive. In recent years, however, the Company's financial position has severely restricted its ability to make capital improvements in its facilities. Capital expenditures during fiscal 1997, 1996 and 1995 were approximately $2,210,000, $1,599,000 and $643,000, respectively. The Company anticipates it will need to increase its capital spending in the coming years in order to stay competitive as technology evolves. Capital expenditures for the nine months ended March 31, 1998 were $668,000. Management estimates that capital expenditures of as much as $2 million may be required in fiscal 1998. Of that amount, the substantial majority is expected to be financed by a combination of capital leases, secured loans and foreign government grants. Management believes that the Company's cash resources and borrowing capacity on its working capital lines of credit are sufficient to fund operations for at least the next 12 months. "YEAR 2000" ISSUES Many existing computer programs use only two digits to identify a year in the date field. These programs were designed and developed without considering the impact of the upcoming change in the century. If not corrected, many computer applications could fail or create erroneous results by or at the year 2000. "Year 2000" issues affect virtually all companies and organizations, including the Company. The Company is studying its information systems with a view to upgrading and improving such systems. The Company's management expects to identify and resolve its specific "Year 2000" issues as part of this study, and believes that the resolution of these issues will not have a material effect on its financial position or results of operations. PART II. OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits: 27 Financial Data Schedule (electronic filing only) 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 26, 1998 /s/ Richard K. Vitelle - --------------------------------- ----------------------------------- Date Richard K. Vitelle Vice President -Finance (Principal Financial Officer) EX-27 2
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