-----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, UUjraqa/vOP07U1WrldZPik7JONzIfVhytb6etkNiBq9bG7K3ZArvDLXSJQdyfLW oH3DtvAFI7A+HSAqUBclKg== 0000026987-98-000029.txt : 19980901 0000026987-98-000029.hdr.sgml : 19980901 ACCESSION NUMBER: 0000026987-98-000029 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980831 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-K SEC ACT: SEC FILE NUMBER: 001-08101 FILM NUMBER: 98701449 BUSINESS ADDRESS: STREET 1: 2151 ANCHOR COURT CITY: NEWBURY PARK STATE: CA ZIP: 91320 BUSINESS PHONE: 805-376-94 MAIL ADDRESS: STREET 1: 2151 ANCHOR COURT CITY: NEWBURY PARK STATE: CA ZIP: 91320 FORMER COMPANY: FORMER CONFORMED NAME: DATA DESIGN LABORATORIES INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: DATA DESIGN LABORATORIES DATE OF NAME CHANGE: 19880817 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1998 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 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 August 21, 1998 was $13,472,000. The registrant had 34,088,128 shares of Common Stock outstanding as of August 21, 1998. DOCUMENTS INCORPORATED BY REFERENCE Specified parts of the registrant's Annual Report to Stockholders for its fiscal year ended June 30, 1998 are incorporated by reference into Parts I and II hereof. Specified parts of the registrant's Proxy Statement for its 1998 Annual Meeting of Stockholders are incorporated by reference into Part III hereof. EXHIBIT INDEX See page 11 THIS ANNUAL REPORT ON FORM 10-K, INCLUDING EXHIBITS THERETO, CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THESE FORWARD-LOOKING STATEMENT ARE TYPICALLY IDENTIFIED BY THE WORDS "ANTICIPATES", "BELIEVES", "EXPECTS", "INTENDS", "FORECASTS", "PLANS", "FUTURE", "STRATEGY", OR WORDS OF SIMILAR MEANING. VARIOUS IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN THE FORWARD-LOOKING STATEMENTS ARE DESCRIBED AS "RISK FACTORS" IN THE COMPANY'S DEFINITIVE PROXY STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 12, 1998 AND IN OTHER DOCUMENTS THE COMPANY HAS FILED AND FILES, FROM TIME TO TIME, WITH THE SECURITIES AND EXCHANGE COMMISSION. PART I Item 1. BUSINESS GENERAL The Company is an independent provider of electronic manufacturing services ("EMS") to original equipment manufacturers ("OEMs") in the computer, telecommunications, instrumentation, medical, industrial and aerospace industries. The Company also fabricates printed circuit boards ("PCBs") for use primarily in the computer, communications and instrumentation industries. Its EMS facilities are located in Southern California, Florida and Northern Ireland. Its PCB facilities are located in Northern Ireland and primarily serve customers in Western Europe. The Company acquired its European PCB operation in 1984. In 1985, the Company entered the EMS business by acquiring its first domestic EMS operation, and in 1990 it started up its European EMS operation. In fiscal 1995, the Company liquidated or sold all assets associated with its PCB and EMS operations in the United States. In fiscal 1996, the Company acquired SMTEK, Inc. ("SMTEK") as the first step toward rebuilding a domestic presence in the EMS industry. On June 29, 1998, the Company acquired Jolt Technology, Inc. ("Jolt"), an EMS provider located in Fort Lauderdale, Florida. The acquisition of Jolt brings the Company an East Coast presence, has broadened the Company's customer base, and has expanded its involvement in the quick-turn segment of the EMS market. The acquisition of Jolt was recorded under the pooling- of-interests method of accounting. The Company was incorporated in California in 1959 and was reincorporated in Delaware in 1986. The Company's principal executive offices are located at 2151 Anchor Court, Newbury Park, California 91320, telephone (805) 376-9415. FINANCIAL INFORMATION BY BUSINESS SEGMENT AND GEOGRAPHICAL AREA As indicated above, the Company operates in two business segments: electronic manufacturing services and printed circuit board fabrication. Information with respect to these segments' sales, operating income, 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 1998 Annual Report to Stockholders. Such information is incorporated herein by reference and is made a part hereof. INDUSTRY OVERVIEW Electronic Manufacturing Services Industry The EMS industry's revenues in the United States were estimated by the Institute for Interconnecting and Packaging Electronic Circuits (known as the "IPC") to be $18 billion in 1997. As a result of the continued trend toward outsourcing manufacturing services on the part of electronic equipment OEMs, the EMS industry in the United States grew in excess of 20% annually from 1990 to 1997, according to IPC estimates. The Company expects the trend toward outsourcing to continue and to result in continued growth in the EMS industry. The EMS industry can be classified into three segments: high-volume, medium-volume and low-volume. The Company focuses on the medium-volume segment. Manufacturers in this segment are highly fragmented and competitive. Customer bases tend to be highly concentrated, with two or three customers typically accounting for a significant portion of an EMS provider's total revenue. Two principal assembly techniques are employed in providing higher- margin, higher-complexity contract manufacturing in the medium-volume EMS market segment: surface mount technology ("SMT"), which accounts for the majority of manufacturing; and through-hole technology. Management believes that the medium-volume EMS market is continuing to move toward SMT as the preferred manufacturing technique, mainly because semiconductors have continued to decline in size, thereby lowering manufacturing tolerances. 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. Electronic assemblies are produced based on one of two general 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 both turnkey and consignment electronic manufacturing services using surface mount and through-hole interconnection technologies. The Company conducts the EMS portion of its business through its SMTEK and Jolt subsidiaries in the U.S. and through its DDL Electronics Limited ("DDL-E") subsidiary in Europe. SMTEK, Jolt and DDL-E do not fabricate any of the components or PCBs used in these processes. EMS sales represented approximately 84%, 80% and 69% of the Company's consolidated sales for the fiscal years ended June 30, 1998, 1997 and 1996, 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 IPC 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. Printed Circuit Board Industry The PCB fabrication industry historically served as additional capacity to electronic equipment OEMs' captive manufacturing facilities. However, as electronic products have become more sophisticated, the board manufacturing processes have become much more advanced, requiring greater capital investment and manufacturing expertise. As a result, OEMs have outsourced substantially all of their PCB manufacturing requirements. Description of Products and Services--PCB Fabrication Printed circuit boards are the basic platforms used to interconnect microprocessors, integrated circuits and other components essential to the functioning of electronic products. PCBs range from simple single- and double-sided boards to multilayer boards with more than 20 layers. 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. 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 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. The Company conducts its PCB fabrication business through its Irlandus Circuits Limited ("Irlandus") subsidiary located in Northern Ireland. PCB sales represented approximately 16%, 20% and 31% of the Company's consolidated sales for the fiscal years ended June 30, 1998, 1997 and 1996, respectively, with multilayer boards constituting a substantial portion of the sales. 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 1998 1997 1996 ------------ ------------ ------------ ------------ Computer $ 4,935 9.3% $ 4,622 9.0% $ 4,457 12.5% Telecommunications 10,062 18.9 7,233 14.0 4,268 12.0 Commercial avionics 11,333 21.3 9,838 19.1 2,329 6.6 Space and satellites 2,729 5.1 2,065 4.0 949 2.7 Banking automation 7,344 13.8 8,089 15.6 3,155 8.9 Industrial controls & instrumentation 3,934 7.4 7,189 13.9 4,767 13.4 Medical 3,428 6.4 2,609 5.1 4,880 13.8 Defense 4,802 9.0 4,666 9.0 3,897 11.0 Other 4,698 8.8 5,329 10.3 6,788 19.1 ------ ----- ------ ----- ------ ----- Total $53,265 100.0% $51,640 100.0% $35,490 100.0% ====== ===== ====== ===== ====== ===== 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 1998, the Company's EMS and PCB businesses served approximately 96 and 133 customers, respectively. The Company's five largest customers accounted for 55%, 46% and 35% of consolidated sales during fiscal years 1998, 1997 and 1996, respectively. In fiscal 1998, the Company's three largest customers accounted for 19.9%, 13.8% and 13.8% of consolidated sales, respectively. No other customer accounted for more than 10% of consolidated sales. 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 Pentium 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 significant factor in the EMS and PCB fabrication businesses. 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. Many of the Company's competitors have also made substantial capital expenditures in recent years and operate technologically advanced EMS and PCB fabrication facilities. Furthermore, some of the Company's customers have substantial in-house EMS capabilities. There is a risk that when these customers are operating at less than full capacity they will use their own facilities rather than contract with the Company. Despite this risk, management believes that the Company has not experienced a significant loss of business to OEMs' captive assembly operations. BACKLOG At June 30, 1998, 1997 and 1996, the Company's backlog was $36,209,000, $28,587,000 and $17,669,000, 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. ENVIRONMENTAL REGULATION The Company is currently involved in certain remediation and investigative studies regarding soil and groundwater contamination at the site of a former printed circuit board manufacturing plant in Anaheim, California which was leased by one of the Company's subsidiaries, Aeroscientific Corp., which is now an inactive, insolvent subsidiary. Management, based in part on consultations with outside environmental engineers and scientists, believes that the total remaining costs to clean up this site will not exceed $600,000. The remaining costs to be incurred to remediate this site will be borne partially by the property owner under a cost sharing agreement entered into several years ago. At June 30, 1998, the Company had a reserve of $528,000, which management believes is adequate to cover its share of future remediation costs at this site. It is possible, however, that these future remediation costs could differ significantly from the estimates, and that the Company's portion could exceed the amount of its reserve. The Company's liability for remediation in excess of its reserve could have a material adverse impact on its business, financial condition and results of operations. EMPLOYEES At June 30, 1998, the Company had approximately 530 employees. Item 2. PROPERTIES SMTEK conducts its operations from a 45,000 square foot facility which is leased through May 31, 2000. The monthly rent was approximately $29,000 during fiscal 1998 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. Jolt occupies an 8,400 square foot facility which is leased through October 31, 1998 for $7,100 per month. Jolt management is currently in negotiations with the landlord concerning an extension of the lease, and management expects that the lease will be renewed for an additional one year term. In the event the lease is not renewed, management believes that there is sufficient vacant industrial space in the local vicinity to enable Jolt to relocate without unduly disrupting its operations. 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 1.6 million 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. Irlandus owns and 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. 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 Fort Lauderdale, Florida 8,400 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 $1,214,000 at June 30, 1998. Item 3. LEGAL PROCEEDINGS No material legal proceedings are presently pending as to which the Company or any of its properties is subject. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the 1997 Annual Meeting of Stockholders held on June 29, 1998, Charlene A. Gondek was elected a Class I director and Gregory L. Horton was elected a Class II director. Directors whose terms of office continued after the meeting were Karen Beth Brenner, Richard K. Vitelle and Thomas M. Wheeler. In addition to the election of directors, the stockholders approved the acquisition of Jolt Technology, Inc. for 9 million shares of the Company's common stock and an amendment to the Certificate of Incorporation to increase the number of authorized shares of common stock from 50 million to 75 million shares. There were 24,613,666 shares of common stock outstanding and entitled to vote at this meeting. Following is a summary of the voting: Votes Against or Votes Votes For Withheld Abstained Unvoted -------- ------- ------- ------- Election of Charlene A. Gondek as Class I director 19,641,063 170,580 Election of Gregory L. Horton as Class II director 20,890,231 170,580 Approval of acquisition of Jolt Technology, Inc. 12,325,393 179,561 93,968 12,014,744 Approval of increase in authorized shares of common stock 18,958,705 1,640,573 86,949 3,927,439 The acquisition of Jolt Technology, Inc. required the affirmative vote of a majority of the shares actually voted, while the increase in authorized shares required the affirmative vote of all outstanding shares of common stock. 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 1998 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 1998 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 1998 Annual Report to Stockholders is incorporated herein by reference and made a part hereof. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Reference is made to the financial statements later in this Report under Item 14(a)(1). Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT This information is incorporated by reference to the Company's proxy statement for its 1998 Annual Meeting of Stockholders. Item 11. EXECUTIVE COMPENSATION This information is incorporated by reference to the Company's proxy statement for its 1998 Annual Meeting of Stockholders. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT This information is incorporated by reference to the Company's proxy statement for its 1998 Annual Meeting of Stockholders. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS This information is incorporated by reference to the Company's proxy statement for its 1998 Annual Meeting of Stockholders. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS OF FORM 8-K 1998 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 10 Consolidated balance sheets as of June 30, 1998 and 1997 11 Consolidated statements of operations for the years ended June 30, 1998, 1997 and 1996 13 Consolidated statements of cash flows for the years ended June 30, 1998, 1997 and 1996 14 Consolidated statements of stockholders' equity (deficit) for the years ended June 30, 1998, 1997 and 1996 15 Notes to consolidated financial statements 16 (a)(2) Financial Statement Schedules The financial statement schedules are omitted because they are either not applicable or the information is included in the notes to consolidated financial statements. Form 10-K ------- (a)(3) List of Exhibits: Exhibit Index 11 (b) Reports on Form 8-K: On July 15, 1998, the Company filed a Current Report on Form 8-K regarding the acquisition of Jolt Technology, Inc. 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 August 27, 1998. 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, August 27, 1998 - ----------------------- President and Chairman ------------------ Gregory L. Horton of the Board /s/ Richard K. Vitelle Vice President-Finance and August 27, 1998 - ----------------------- Administration, Chief ------------------ Richard K. Vitelle Financial Officer, Treasurer, Secretary and Director /s/ Karen B. Brenner Director August 27, 1998 - ----------------------- ------------------ Karen B. Brenner /s/ Charlene A. Gondek Director August 27, 1998 - ----------------------- ------------------ Charlene A. Gondek /s/ Thomas M. Wheeler Director August 27, 1998 - ----------------------- ------------------ Thomas M. Wheeler EXHIBIT INDEX Exhibit Number Description - ------ ----------- 2.1 Agreement and Plan of Merger dated May 28, 1998 among the Company, Jolt Technology, Inc. and the shareholders of Jolt Technology, Inc. (incorporated by reference to Appendix A of the Company's Definitive Proxy Statement dated June 12, 1998). 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 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). 4.7 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). 4.8 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). 4.9 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). 4.10 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). 4.11 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). 4.12 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 Definitive Proxy Statement dated June 14, 1996). 4.14 Debt Term Sheet dated June 30, 1997 between the Company and Thomas M. Wheeler (incorporated by reference to Exhibit 4.16 of the Company's 1997 Annual Report on Form 10-K). 4.14.1 Secured promissory note dated June 30, 1997 in the principal amount of $2 million between the Company and Thomas M. Wheeler (incorporated by reference to Exhibit 4.16.1 of the Company's 1997 Annual Report on Form 10-K). 4.14.2 Collateral Security Stock Pledge Agreement dated June 30, 1997 between the Company and Thomas M. Wheeler (incorporated by reference to Exhibit 4.16.2 of the Company's 1997 Annual Report on Form 10-K). 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 August 29, 1989, between DDL Electronics Limited and the Industrial Development Board for Northern Ireland ("IDB") (incorporated by reference to Exhibit 10.29 of the Company's Registration Statement No. 33-39115). 10.10.1 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). 10.11 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). 10.12 Business Financing Agreement dated August 21, 1996 between SMTEK, Inc. and Deutsche Financial Services Corporation (incorporated by reference to Exhibit 10 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996). 10.13 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). 10.14 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 (incorporated by reference to Note 9 to the consolidated financial statements of the 1998 Annual Report to Stockholders). 13 Annual Report to security holders. 21 Subsidiaries of the Registrant. 23 Consent of KPMG Peat Marwick LLP. 27 Financial Data Schedule. 99 Undertaking for Form S-8 Registration Statement. EX-13 2 EXHIBIT 13 ANNUAL REPORT TO STOCKHOLDERS DDL ELECTRONICS, INC. AND SUBSIDIARIES FINANCIAL HIGHLIGHTS (In thousands except per share amounts) Year Ended June 30 ----------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Revenues $ 53,265 $ 51,640 $ 35,490 $ 31,393 $ 49,798 Operating income (loss) before acquisition expenses $ 2,154 $ 1,036 $ (522) $ (4,592) $ (6,809) Operating income (loss) $ 1,545 $ 1,036 $ (552) $ (4,592) $ (6,809) Income (loss) before income taxes $ 493 $ (868) $ (1,377) $ (2,145) $ (8,368) Income tax benefit $ - $ - $ 1,110 $ - $ - Extraordinary item - $ - $ 2,356 $ 2,441 $ - Net income (loss) $ 493 $ (868) $ 2,089 $ 296 $ (8,368) Earnings (loss) per common share $ 0.02 $ (0.03) $ 0.09 $ 0.02 $ (0.45) EBITDA, as adjusted (1) $ 5,176 $ 4,052 $ 1,673 $ 446 $ (4,035) (1) "EBITDA, as adjusted" consists of pretax income (loss) plus net interest expense, depreciation, amortization and, for fiscal 1998, non-recurring acquisition expenses. DESCRIPTION OF BUSINESS DDL Electronics, Inc. provides customized, integrated electronic manufacturing services ("EMS") to original equipment manufacturers ("OEMs") in the computer, telecommunications, instrumentation, medical, industrial and aerospace industries. The Company also fabricates multilayer printed circuit boards ("PCBs") for use primarily in the computer, communications and instrumentation industries. The Company's EMS operations are located in Southern California, Florida and Northern Ireland. Its PCB facilities are located in Northern Ireland. PRESIDENT'S LETTER TO STOCKHOLDERS President's letter to stockholders will be filed via amendment to the Form 10-K. DDL ELECTRONICS, INC. AND SUBSIDIARIES FIVE-YEAR FINANCIAL SUMMARY (In thousands except per share amounts) Year ended June 30 -------------------------------------------- OPERATING DATA 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Revenues $ 53,265 $ 51,640 $ 35,490 $ 31,393 $ 49,798 ------ ------ ------ ------ ------ Costs and expenses: Cost of goods sold 43,933 43,894 30,906 27,598 48,791 Administrative and selling expenses 5,910 5,442 4,502 6,854 7,816 Goodwill amortization 1,268 1,268 634 - - Restructuring charges - - - 1,533 - Acquisition expenses 609 - - - - ------ ------ ------ ------ ------ Total costs and expenses 51,720 50,604 36,042 35,985 56,607 ------ ------ ------ ------ ------ Operating income (loss) 1,545 1,036 (552) (4,592) (6,809) ------ ------ ------ ------ ------ Non-operating income (expense): Interest income 97 96 255 117 172 Interest expense (1,101) (1,227) (1,045) (1,048) (1,267) Debt issue cost amortization - (937) (281) - - Gain on sale of assets 22 142 - 3,317 2 Earthquake expenses - - - - (500) Other income (expense), net (70) 22 246 61 34 ------ ------ ------ ------ ------ Total non-operating income (expense) (1,052) (1,904) (825) 2,447 (1,559) ------ ------ ------ ------ ------ Income (loss) before income tax benefit 493 (868) (1,377) (2,145) (8,368) Income tax benefit - - 1,110 - - ------ ------ ------ ------ ------ Income (loss) before extraordinary item 493 (868) (267) (2,145) (8,368) Extraordinary item - Gain on debt extinguishment - - 2,356 2,441 - ------ ------ ------ ------ ------ Net income (loss) $ 493 $ (868) $ 2,089 $ 296 $ (8,368) ====== ====== ====== ====== ====== DDL ELECTRONICS, INC. AND SUBSIDIARIES FIVE-YEAR FINANCIAL SUMMARY (In thousands except per share amounts) (Continued) Year ended June 30 -------------------------------------------- OPERATING DATA 1998 1997 1996 1995 1994 (Continued) ---- ---- ---- ---- ---- Earnings (loss) per share: Basic and diluted: Income (loss) before extraordinary item $ 0.02 $(0.03) $(0.01) $(0.11) $ (0.45) Extraordinary item - - 0.10 0.13 - ----- ----- ----- ----- ------ Total $ 0.02 $(0.03) $ 0.09 $ 0.02 $ (0.45) ===== ===== ===== ===== ====== June 30 -------------------------------------------- BALANCE SHEET DATA 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Current assets $ 21,533 $ 21,673 $ 16,443 $ 9,778 $ 12,550 Current liabilities $ 17,088 $ 18,585 $ 12,301 $ 9,238 $ 21,390 Working capital (deficit) $ 4,445 $ 3,088 $ 4,142 $ 540 $ (8,840) Current ratio 1.3 1.2 1.3 1.1 0.6 Total assets $ 31,830 $ 33,669 $ 29,498 $ 13,962 $ 24,148 Long-term debt $ 7,186 $ 9,445 $ 12,560 $ 8,772 $ 8,572 Stockholders' equity (deficit) $ 7,556 $ 5,639 $ 4,637 $ (4,048) $ (5,814) Equity (deficit) per share $ 0.22 $ 0.19 $ 0.18 $ (0.20) $ (0.31) Shares outstanding (000s) 34,088 28,943 26,295 20,419 18,825 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Basis of Presentation The Company utilizes a 52-53 week fiscal year ending on the Friday closest to June 30 which, for fiscal years 1998, 1997 and 1996, fell on July 3, June 27, and June 28, respectively. In the accompanying consolidated financial statements, the fiscal year-end for all years is shown as June 30 for clarity of presentation. Fiscal 1998 consisted of 53 weeks compared to 52 weeks for the fiscal years 1997 and 1996. As more fully described in the accompanying financial statements, the Company's acquisition of Jolt Technology, Inc. ("Jolt") on June 30, 1998 was accounted for under the pooling-of-interests method and, accordingly, the consolidated financial statements for all periods presented have been restated to include the accounts and results of operations of Jolt. All significant intercompany transactions and accounts have been eliminated in consolidation. Results of Operations The following table sets forth the Company's revenues and other operating data as percentages of revenues: Year Ended June 30 ----------------------------- 1998 1997 1996 ---- ---- ---- Revenues 100.0% 100.0% 100.0% Cost of goods sold 82.5 85.0 87.1 ----- ----- ----- Gross profit 17.5 15.0 12.9 Administrative and selling expenses 11.1 10.5 12.7 Goodwill amortization 2.4 2.5 1.8 Acquisition expenses 1.1 - - ----- ----- ----- Operating income (loss) 2.9 2.0 (1.6) Interest income 0.2 0.2 0.7 Interest expense (2.1) (2.4) (2.9) Debt issue cost amortization - (1.8) (0.8) Gain on sale of assets - 0.3 - Other income (expense), net (0.1) - 0.7 ----- ----- ----- Income (loss) before income taxes 0.9 (1.7) (3.9) Income tax benefit - - 3.1 ----- ----- ----- Income (loss) before extraordinary item 0.9 (1.7) (0.8) Extraordinary item - Gain on debt extinguishment - - 6.6 ----- ----- ----- Net income (loss) 0.9% (1.7)% 5.8% ===== ===== ===== Fiscal 1998 vs. 1997 Consolidated revenues for fiscal 1998 were $53,265,000 compared to $51,640,000 for fiscal 1997. Revenues for the Company's EMS operations for fiscal 1998 increased by $3,355,000 over fiscal 1997, and such increase is attributable primarily to higher levels of business with existing customers. Revenues for fiscal 1998 for the PCB operations declined by 17% from the comparable period in the prior year as a result of a decline in business from a major customer as well as the fact that fiscal 1997 revenues included a relatively large quick-turn contract that was not recurring business. Consolidated gross profit (revenues less cost of goods sold) for fiscal 1998 was $9,332,000 (17.5% of revenues) compared to $7,746,000 (15.0% of revenues) for fiscal 1997. Gross profit of the EMS operations was $7,272,000 for fiscal 1998, compared to $5,662,000 for the prior year. A change in the mix of business, with lower direct material costs as a percentage of revenues in fiscal 1998, contributed to the increase in EMS gross profit, along with higher sales volume and increased productivity. For fiscal 1998, gross profit from PCB operations declined by $24,000 from fiscal 1997 as a result of the decline in revenues. Gross profit as a percentage of revenues for the PCB operations was 24.0% for fiscal 1998, compared to 20.2% for fiscal 1997. 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 fiscal 1998 were $5,910,000, compared to $5,442,000 in the previous year. The increase is attributable to the addition of a key management position in the European operations and other increases in administrative staff. In fiscal 1998, the Company incurred acquisition-related expenses of $609,000 related to the acquisition of Jolt. Operating income was $1,545,000 for fiscal 1998, compared to $1,036,000 for fiscal 1997. This improvement is primarily attributable to the increased gross profit of the Company's EMS operations. Net non-operating expense decreased from $1,904,000 for the year ended June 30, 1997 to $1,052,000 for fiscal 1998. This decrease is primarily attributable to non-recurring debt issue cost amortization expense of $937,000 in fiscal 1997 related to the 10% Senior Notes of $5,300,000 which were repaid on June 30, 1997. Net income for 1998 was $493,000, or $0.02 per share, compared to net loss of ($868,000), or ($0.03) per share for fiscal 1997. Fiscal 1997 vs. 1996 Consolidated revenues for fiscal 1997 were $51,640,000, compared to $35,490,000 for fiscal 1996. The increase in revenues results primarily from the acquisition of EMS-provider SMTEK, Inc. ("SMTEK") which contributed sales of $19,267,000 in the year ended June 30, 1997 compared to $8,668,000 in fiscal 1996. Because the acquisition of SMTEK in January 1996 was accounted for using the purchase method, SMTEK's operations prior to the acquisition date are not included in the Company's results. Sales growth at the Company's Northern Ireland EMS-provider DDL Electronics, Ltd. ("DDL-E") accounted for most of the remaining increase in consolidated revenues. DDL-E added several new customers that have contributed to sales growth and significantly increased sales to one of its existing customers during fiscal 1997. Consolidated gross profit for fiscal 1997 was $7,746,000 compared to $4,584,000 for fiscal 1996. Gross profit for fiscal 1997 for the Company's EMS operations increased by $2,323,000 from fiscal 1996, due to higher sales volume and the fact that gross profit in fiscal 1996 was adversely impacted by a ramp-up in the workforce and higher than normal equipment costs. Gross profit for PCB operations increased primarily due to a reduction of indirect costs. The Company's consolidated gross profit margin increased from 12.9% in fiscal 1996 to 15.0% in fiscal 1997, due primarily to improvement in the PCB operations gross profit margin from 11.4% in fiscal 1996 to 20.2% in fiscal 1997. The improvement in the PCB operations 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 $4,502,000 for the year ended June 30, 1996 to $5,442,000 for fiscal 1997. This increase is principally the result of the acquisition of SMTEK in January 1996. Operating income was $1,036,000 for fiscal 1997, compared to operating loss of ($552,000) for fiscal 1996. This improvement is primarily attributable to increased gross profit of the EMS operations. Net non-operating expense increased from $825,000 in fiscal 1996 to $1,904,000 in fiscal 1997. This change is attributable to increases in debt issue cost amortization and interest expense, as the result of debt issued in February 1996 to finance the SMTEK acquisition. Debt issue cost amortization expense amounted to $937,000 in fiscal 1997 compared to $281,000 in fiscal 1996. Nearly all of the fiscal 1997 debt issue cost amortization relates to the 10% Senior Notes of $5,300,000 which were repaid on June 30, 1997. During fiscal 1996, the Company recognized an income tax benefit associated with its application for federal tax refunds as permitted under section 172(f) of the Internal Revenue Code. In the aggregate, the Company applied for federal tax refunds of $2,175,000, net of costs associated with applying for such refunds. Through June 30, 1996, the Company had received $1,871,000 of net refunds plus interest on such refunds of $106,000, and has recognized as an income tax benefit $1,110,000 net of certain expenses. Because the tax returns underlying these refunds are subject to audit by the Internal Revenue Service and a portion of the refunds could be 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. No additional refunds were received subsequent to fiscal 1996. 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. The net loss for 1997 was ($868,000), or ($0.03) per share, compared to net income of $2,089,000, or $0.09 per share for fiscal 1996. Net income for fiscal 1996 includes an extraordinary gain on debt extinguishment of $2,356,000 associated with the reduction of the Company's outstanding obligations to certain former officers, employees and directors in March 1996, as further described in Note 6 to the accompanying consolidated financial statements. Recent Accounting Pronouncements The Financial Accounting Standards Board ("FASB") 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 FASB 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. In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") which will require recognition of all derivatives as either assets or liabilities on the balance sheet at fair value. The Company will adopt SFAS 133 in the first quarter of its fiscal year ending June 30, 2000. Management has not completed an evaluation of the effects this standard will have on the Company's consolidated financial statements. Inflation Changes in product mix from year to year and highly competitive markets make it difficult to accurately assess the impact of inflation on profit margins. Management generally believes that business has not been affected materially and adversely by inflationary increases in costs and expenses. On the other hand, the current low inflationary environment has inhibited the Company's ability to increase the price of its products and services. Liquidity and Capital Resources The Company's primary sources of liquidity are its cash and cash equivalents, which amounted to $4,413,000 at the end of fiscal 1998, and its bank lines of credit. During fiscal 1998, cash and cash equivalents decreased by $985,000. This net cash outflow consisted of capital expenditures of $785,000, debt repayments of $6,232,000 and S Corporation dividends of $529,000 paid to Jolt shareholders prior to the acquisition of Jolt, partially offset by cash provided by operating activities of $1,122,000, cash proceeds from new borrowings of $5,074,000, cash proceeds from the issuance of common stock of $138,000, proceeds from government grants of $123,000, proceeds from the sale of assets of $16,000 and the effect of exchange rate changes on cash of $88,000. Components of operating working capital increased by $2,178,000 during fiscal 1998, which consisted of a $333,000 increase in accounts receivable, a $1,624,000 increase in costs and estimated earnings in excess of billings on uncompleted contracts, and a $1,234,000 decrease in accounts payable, partially offset by a $846,000 decrease in inventories, a $36,000 decrease in prepaid expenses, a $74,000 increase in accrued payroll and employee benefits, and a $57,000 increase in other accrued liabilities. The Company has a working capital bank line of credit for SMTEK, based upon and secured by accounts receivable and inventory, which provides for borrowings of up to $2,750,000 at an interest rate of prime (8.50% at June 30, 1998) plus 1.25%. At June 30, 1998, borrowings outstanding under this credit facility amounted to $2,583,000. SMTEK's line of credit expires on September 1, 1999. 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 $4,900,000), and provides for interest on borrowings at the bank's base rate (6.77% at June 30, 1998) plus 1.50%. At June 30, 1998, borrowings outstanding under this credit facility amounted to $1,858,000. The credit facility agreement with Ulster Bank Markets expires August 31, 1998. Management is currently in discussions with Ulster Bank Markets and believes that the credit facility agreement will be extended in the normal course of business for at least one year. The Company's EMS and PCB fabrication businesses require continuing investment in plant and equipment to remain competitive. Capital expenditures during fiscal 1998, 1997 and 1996 were approximately $1,424,000, $2,372,000 and $1,825,000, respectively. The Company anticipates it will need to increase its capital spending in the coming years in order to stay competitive as technology evolves. Management estimates that capital expenditures of as much as $3 million may be required in fiscal 1999. 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 year. 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. The global extent of the potential impact of the Year 2000 problem is not yet known, and if not timely corrected, it could affect the economy and the Company. The Company uses computer information systems and manufacturing equipment which may be affected. It also relies on suppliers and customers who are also dependent on systems and equipment which use date dependent software. The Company's Year 2000 compliance program includes the following phases: identifying systems that need to be replaced or fixed; carrying out remediation work to modify existing systems or convert to new systems; and conducting validation testing of systems and applications to ensure compliance. The Company has essentially completed the first phase of the program and is now primarily in the remediation phase. The amount of remediation work required is not expected to be extensive, because the Company has replaced certain of its financial and operational systems in the normal course of business during the last two years to enhance or better meet its functional business and operational requirements. Management believes that such replacements substantially meet or address its Year 2000 issues. In addition to such normal replacement, the Company may be required to modify some of the existing software and hardware in order for its computer systems to function properly with respect to dates in the year 2000 and thereafter. The estimated cost of the remaining replacement and modification for the Year 2000 issue is not considered material to the Company's earnings or financial position. The Company also has contacted its major suppliers to assess their preparations for the year 2000. Similar contacts also are planned for major customers. These actions are intended to help mitigate the possible external impact of Year 2000 issues. Even so, it is impossible to fully assess the potential consequences if service interruptions occur from suppliers or in such infrastructure areas as utilities, communications, transportation, banking and government. The Company anticipates that the remediation and validation phases will be completed not later than December 31, 1998. The Company has not yet developed a contingency plan to provide for continuity of processing in the event of various problem scenarios, but will assess the need to develop such a plan based on the outcome of its validation phase and the results of surveying its major suppliers and customers. If the Company is unsuccessful or if the remediation efforts of its key suppliers or customers are unsuccessful in dealing with Year 2000 problems, there may be a material adverse impact on the Company's consolidated results and financial condition. The Company is unable to quantify any potential adverse impact at this time, but will continue to monitor and evaluate the situation. Independent Auditors' Report The Board of Directors and Stockholders DDL Electronics, Inc.: We have audited the accompanying consolidated balance sheets of DDL Electronics, Inc. and subsidiaries as of June 30, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the years in the three-year period ended June 30, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of DDL Electronics, Inc. and subsidiaries as of June 30, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 1998 in conformity with generally accepted accounting principles. /s/ KPMG PEAT MARWICK LLP Los Angeles, California August 21, 1998 DDL ELECTRONICS, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands except share amounts) June 30 ----------------- 1998 1997 ---- ---- Assets Current assets: Cash and cash equivalents $ 4,413 $ 5,398 Accounts receivable, net (Notes 3 and 6) 9,786 9,647 Costs and estimated earnings in excess of billings on uncompleted contracts (Notes 4 and 6) 4,785 3,161 Inventories, net (Note 5) 2,446 3,327 Prepaid expenses 103 140 ------ ------ Total current assets 21,533 21,673 ------ ------ Property, equipment and improvements, at cost (Notes 6 and 10): Buildings and improvements 6,084 6,101 Plant equipment 15,646 16,352 Office and other equipment 2,180 1,982 ------ ------ 23,910 24,435 Less: Accumulated depreciation and amortization (17,035) (17,188) ------ ------ Property, equipment and improvements, net 6,875 7,247 ------ ------ Other assets: Goodwill, net (Note 2) 3,171 4,439 Deposits and other assets (Note 6) 251 310 ------ ------ 3,422 4,749 ------ ------ $ 31,830 $ 33,669 ====== ====== DDL ELECTRONICS, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands except share amounts) (Continued) June 30 ----------------- 1998 1997 ---- ---- Liabilities and Stockholders' Equity Current liabilities: Bank lines of credit payable (Note 6) $ 4,441 $ 1,378 Current portion of long-term debt (Note 6) 1,214 4,167 Accounts payable 7,795 9,093 Accrued payroll and employee benefits 1,211 1,145 Other accrued liabilities (Note 9) 2,427 2,802 ------ ------ Total current liabilities 17,088 18,585 ------ ------ Long-term debt (Note 6): Notes payable to related party 2,000 1,625 Other long-term debt, less current portion 5,186 7,820 ------ ------ Total long-term debt 7,186 9,445 ------ ------ Commitments and contingencies (Note 10) Stockholders' equity (Note 8): Preferred stock, $1 par value; 1,000,000 shares authorized; no shares issued or outstanding - - Common stock, $.01 par value; 75,000,000 shares authorized; 34,088,128 and 28,943,102 shares issued and outstanding in 1998 and 1997, respectively 341 289 Additional paid-in capital 32,159 29,719 Accumulated deficit (24,294) (23,678) Foreign currency translation adjustment (650) (691) ------ ------ Total stockholders' equity 7,556 5,639 ------ ------ $ 31,830 $ 33,669 ====== ====== See accompanying notes to consolidated financial statements. DDL ELECTRONICS, INC. AND SUBSIDIARIES Consolidated Statements of Operations (In thousands except per share amounts) Year ended June 30 ----------------------------- 1998 1997 1996 ---- ---- ---- Revenues $ 53,265 $ 51,640 $ 35,490 ------ ------ ------ Costs and expenses: Cost of goods sold 43,933 43,894 30,906 Administrative and selling expenses 5,910 5,442 4,502 Goodwill amortization 1,268 1,268 634 Acquisition expenses (Note 2) 609 - - ------ ------ ------ 51,720 50,604 36,042 ------ ------ ------ Operating income (loss) 1,545 1,036 (552) ------ ------ ------ Non-operating income (expense): Interest income 97 96 255 Interest expense (1,101) (1,227) (1,045) Debt issue cost amortization - (937) (281) Gain on sale of assets 22 142 - Other income (expense), net (70) 22 246 ------ ------ ------ (1,052) (1,904) (825) ------ ------ ------ Income (loss) before income benefit 493 (868) (1,377) Income tax benefit (Note 7) - - 1,110 ------ ------ ------ Income (loss) before extraordinary item 493 (868) (267) Extraordinary item - Gain on debt extinguishment (Note 6) - - 2,356 ------ ------ ------ Net income (loss) $ 493 $ (868) $ 2,089 ====== ====== ====== Basic and diluted earnings (loss) per share: Income (loss) before extraordinary item $ 0.02 $ (0.03) $ (0.01) Extraordinary item - - 0.10 ------ ------ ------ Basic and diluted earnings (loss) per share $ 0.02 $ (0.03) $ 0.09 ====== ====== ====== Shares used in computing basic and diluted earnings (loss) per share: Basic 29,026 27,506 22,536 ====== ====== ====== Diluted 29,443 27,506 22,536 ====== ====== ====== See accompanying notes to consolidated financial statements.
DDL ELECTRONICS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands) Year ended June 30 ----------------------------- 1998 1997 1996 ---- ---- ---- Cash flows from operating activities: Net income (loss) $ 493 $ (868) $ 2,089 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 1,720 1,584 1,345 Amortization 1,272 2,205 915 Acquisition expenses settled with stock 138 - - Eliminate duplicate period of pooled company to conform year ends (464) - - Gain on debt extinguishment - - (2,356) Gain on sale of assets (22) (142) - Net increase in operating working capital, net of effects of business acquired (2,178) (1,655) (1,330) (Increase) decrease in deposits and other assets 55 124 (93) Benefit of non-capital grants - (242) (265) Other 108 84 44 ------ ------ ------ Net cash provided by operating activities 1,122 1,090 349 ------ ------ ------ Cash flows from investing activities: Capital expenditures (785) (1,151) (1,136) Purchase of SMTEK, Inc., net of cash acquired - - (7,638) Proceeds from sale of assets 16 202 - ------ ------ ------ Net cash used in investing activities (769) (949) (8,774) ------ ------ ------ Cash flows from financing activities: Proceeds from bank lines of credit 3,074 1,366 - Proceeds from long-term debt 2,000 - 8,800 Payments of long-term debt (6,232) (787) (2,041) Debt issue costs - - (372) Proceeds from issuance of common stock, net - 1,385 1,112 Proceeds from exercise of stock options 138 75 437 Proceeds from exercise of stock warrants - - 448 Proceeds from foreign government grants 123 605 229 S Corporation dividends paid (529) (600) (325) ------ ------ ------ Net cash provided by (used in) financing activities (1,426) 2,044 8,288 ------ ------ ------ Effect of exchange rate changes on cash 88 80 (79) ------ ------ ------ Increase (decrease) in cash and cash equivalents (985) 2,265 (216) Cash and cash equivalents at beginning of year 5,398 3,133 3,349 ------ ------ ------ Cash and cash equivalents at end of year $ 4,413 $ 5,398 $ 3,133 ====== ====== ======
See accompanying notes to consolidated financial statements.
DDL ELECTRONICS, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity (Deficit) Years ended June 30, 1998, 1997 and 1996 (In thousands except share amounts) Common Stock Foreign Total -------------- Additional currency stockholders' Par paid-in Accumulated translation equity Shares value capital deficit adjustment (deficit) ------ ------ ----- ------- ------- ------- Balance at June 30, 1995 20,419,223 $204 $20,238 $(23,598) $(890) $(4,046) Net income - - - 2,089 - 2,089 Stock issued as partial pay- ment for SMTEK acquisition 1,000,000 10 791 - - 801 Stock issued as debt placement fee 572,683 6 710 - - 716 Sale of common stock 600,000 6 1,106 - - 1,112 Conversion of debentures 2,764,275 28 3,292 - - 3,320 Exercise of stock options and warrants 918,942 9 876 - - 885 Warrant compensation costs - - 196 - - 196 Other stock transactions 20,000 - 35 - - 35 S Corporation dividends and other equity transactions of pooled company - - 166 (491) - (325) Translation adjustments - - - - (146) (146) ---------- ---- ------ ------ ----- ----- Balance at June 30, 1996 26,295,123 263 27,410 (22,000) (1,036) 4,637 Net loss - - - (868) - (868) Stock issued as debt placement fee 353,333 3 439 - - 442 Sale of common stock 2,000,000 20 1,365 - - 1,385 Exercise of stock options and warrants 294,646 3 295 - - 298 S Corporation dividends and other equity transactions of pooled company - - 210 (810) - (600) Translation adjustments - - - - 345 345 ---------- ---- ------ ------ ----- ----- Balance at June 30, 1997 28,943,102 289 29,719 (23,678) (691) 5,639 Net income - - - 493 - 493 Conversion of debt of pooled company 4,643,756 47 2,008 - - 2,055 Stock issued as brokerage fee 200,000 2 136 - - 138 Exercise of stock options and warrants 301,270 3 180 - - 183 Elimination of duplicate period of pooled company to conform year ends - - - (464) - (464) S Corporation dividends and other equity transactions of pooled company - - 116 (645) - (529) Translation adjustments - - - - 41 41 ---------- ---- ------- ------- ------ ------ Balance at June 30, 1998 34,088,128 $341 $32,159 $(24,294) $ (650) $7,556 ========== ==== ======= ======= ====== ====== See accompanying notes to consolidated financial statements.
DDL ELECTRONICS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business DDL Electronics, Inc. provides customized, integrated electronic manufacturing services ("EMS") to original equipment manufacturers ("OEMs") in the computer, telecommunications, instrumentation, medical, industrial and aerospace industries. The Company also manufactures multilayer printed circuit boards ("PCBs") for use primarily in the computer, communications and instrumentation industries. The Company's EMS operations are located in Southern California, Florida and Northern Ireland. The Company's PCB facilities are located in Northern Ireland. The consolidated financial statements include the accounts of DDL Electronics, Inc. and its subsidiaries (collectively, the "Company" or "DDL"). As more fully described in Note 2, the Company's acquisition of Jolt Technology, Inc. on June 30, 1998 was accounted for under the pooling- of-interests method and, accordingly, the consolidated financial statements prior to the acquisition have been restated to include the accounts and results of operations of Jolt for all periods presented. All significant intercompany transactions and accounts have been eliminated in consolidation. Accounting Period The Company utilizes a 52-53 week fiscal year ending on the Friday closest to June 30 which, for fiscal years 1998, 1997 and 1996, fell on July 3, June 27, and June 28, respectively. In these consolidated financial statements, the fiscal year-end for all years is shown as June 30 for clarity of presentation, except where the context dictates a more specific reference to the actual year-end date. Fiscal 1998 consisted of 53 weeks compared to 52 weeks for the fiscal years 1997 and 1996. Cash Equivalents For financial reporting purposes, cash equivalents consist primarily of money market instruments and bank certificates of deposit that have original maturities of three months or less. Fair Value of Financial Instruments As of June 30, 1998, the carrying amount of the Company's cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair value because of the short maturity of those instruments. At June 30, 1998 and 1997, the carrying amount of long-term debt (including current portion thereof) was $8,400,000 and $13,612,000, respectively, and the fair value was $8,222,000 and $13,138,000, respectively. The fair value of the Company's long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. All financial instruments are held for purposes other than trading. Concentrations of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of money market instruments and trade receivables. The Company invests its excess cash in money market instruments and certificates of deposit with high credit quality financial institutions and, by policy, limits the amount of credit exposure to any one issuer. Concentrations of credit risk with respect to trade receivables exist because the Company's EMS and PCB operations rely heavily on a relatively small number of customers. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company maintains reserves for potential credit losses and such losses, to date, have been within management's expectations. Inventories Inventories are stated at the lower of cost or net realizable value, with cost determined principally by use of the first-in, first-out method. Long-Lived Assets Property, equipment and improvements are stated at cost. Depreciation and amortization are computed on the straight-line and declining balance methods. The principal estimated useful lives are: buildings - 20 years; improvements - 10 years; and plant, office and other equipment - 3 to 7 years. Upon the retirement of assets, costs and the related accumulated depreciation are eliminated from the accounts and any gain or loss is included in income. Property, equipment and improvements acquired by the Company's foreign subsidiaries are recorded net of capital grants received from the Industrial Development Board for Northern Ireland. Goodwill represents the excess of acquisition cost over the fair value of net assets of a purchased business, and is being amortized over five years. The Company periodically reviews the carrying value of long-lived assets, and if future undiscounted cash flows are believed insufficient to recover the remaining carrying value of the asset, the carrying value is written down to fair market value in the period the impairment is identified. Revenue and Cost Recognition All of the Company's operating units except SMTEK, Inc. ("SMTEK") recognize revenues and cost of sales upon shipment of products. SMTEK has historically generated a significant portion of its revenue through long-term contracts with suppliers of electronic components and products to the federal government. Consequently, SMTEK uses the percentage of completion method to recognize revenues 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 cost of goods sold. Other changes in contract price and estimates of costs and profits at completion are recognized prospectively. This method recognizes in the current period the cumulative effect of the changes on current and prior periods. The asset "Costs and estimated earnings in excess of billings on uncompleted contracts" represents revenues recognized in excess of amounts billed. Included in SMTEK's revenues and cost of sales amounts are sales and cost of sales from engineering design and test services, which are immaterial. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and credit carryforwards. In estimating future tax consequences, all expected future events other than enactments of changes in tax law or statutorily imposed rates are considered. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Earnings (Loss) Per Share In 1997, the Financial Accounting Standards Board ("FASB") 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. Foreign Currency Translation The financial statements of DDL's foreign subsidiaries have been translated into U.S. dollars from their functional currency, British pounds sterling, in the accompanying statements in accordance with Statement of Financial Accounting Standards No. 52. Balance sheet amounts have been translated at the exchange rate on the balance sheet date and income statement amounts have been translated at average exchange rates in effect during the period. The net translation adjustment is recorded as a component of stockholders' equity. Use Of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Stock Based Compensation Prior to July 1, 1996, the Company accounted for its employee stock compensation plans in accordance with Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. As such, compensation expense would be recorded only if, on the date of grant, the current market price of the underlying stock exceeded the exercise price. On July 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for stock-based awards made in fiscal 1996 and future years as if the fair-value-based method defined in SFAS 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS 123. Recent Accounting Pronouncements The FASB 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 FASB 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. In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") which will require recognition of all derivatives as either assets or liabilities on the balance sheet at fair value. The Company will adopt SFAS 133 in the first quarter of its fiscal year ending June 30, 2000. Management has not completed an evaluation of the effects this standard will have on the Company's consolidated financial statements. Note 2 - ACQUISITIONS Jolt - Pooling-of-Interests Method On June 30, 1998, the Company issued 9,000,000 shares of Common Stock in exchange for all of the outstanding shares of Jolt, a provider of electronic manufacturing services located in Fort Lauderdale, Florida. This acquisition has been accounted for under the pooling-of-interests method. The results of operations previously reported by the separate enterprises, and the combined amounts presented in the accompanying consolidated financial statements, are summarized below (in thousands):
Nine months Year ended June 30, ended --------------------------------------------------- March 31, 1998 1997 1996 ----------------------- ----------------------- ----------------------- (Unaudited) Net income Revenues Net income Revenues (loss) Revenues Net income -------- ---------- -------- ---------- -------- ---------- DDL without Jolt $ 37,576 $ 226 $ 48,919 $ (1,678) $ 33,136 $ 1,598 Jolt 2,257 764 2,721 810 2,354 491 ------- ------- ------- ------- ------- ------- Restated DDL $ 39,833 $ 990 $ 51,640 $ (868) $ 35,490 $ 2,089 ======= ======= ======= ======= ======= =======
Certain reclassifications have been made to the financial statements of Jolt to conform to the Company's financial presentation. Prior to the combination, Jolt's fiscal year ended on December 31. In recording the pooling-of-interests combination, Jolt's financial statements for the twelve months ended June 30, 1998 were combined with DDL's financial statements for the same period. Jolt's financial statements for the years ended December 31, 1997 and 1996 were combined with DDL's financial statements for the years ended June 30, 1997 and 1996. An adjustment of $464,000 has been made to stockholders' equity as of June 30, 1998 to eliminate the effect of including Jolt's results of operations for the six months ended December 31, 1997 in both the fiscal years ended June 30, 1998 June 30, 1997. Jolt's S Corporation status terminated upon consummation of the acquisition. Jolt's undistributed earnings at June 30, 1998, and all prior periods, have been reclassified to additional paid-in-capital in the accompanying consolidated financial statements in accordance with pooling- of-interests accounting. Accordingly, dividend distributions by Jolt to Jolt shareholders have been charged to additional paid-in-capital. Acquisition expenses of $609,000 related to the combination with Jolt were recognized upon consummation of the transaction, and are included in the accompanying 1998 consolidated statement of operations. Concurrent with the acquisition of Jolt, the Company reversed the quasi-reorganization it implemented effective June 27, 1997 as required by the pooling-of-interests accounting method. SMTEK - Purchase Method On January 12, 1996, the Company acquired 100% of the outstanding stock of SMTEK, a provider of integrated electronic manufacturing services. The purchase price of $8,000,000 was paid in cash of $7,199,000 and 1,000,000 shares of unregistered common stock of the Company which was valued at $801,000. The Company also incurred acquisition-related fees and other costs totaling $495,000. The cash portion of the purchase price was financed through the issuance of 10% Senior Notes in the aggregate amount of $5,300,000 and 10% Convertible Debentures in the aggregate amount of $3,500,000. The 10% Convertible Debentures, which were sold to offshore investors, were convertible into common stock at any time after 60 days at a conversion price equal to 82% of the market price of the Company's common stock at the time of conversion. In May and June 1996, the holders of all of the 10% Debentures elected to convert such debentures into common stock. As a result of these conversions, a total of 2,698,275 shares of common stock were issued and stockholders' equity increased by $3,188,000, net of the remaining unamortized issue costs associated with these debentures. The 10% Senior Notes were repaid on June 30, 1997. Because the Company's 1997 fiscal year ended on June 27, 1997 under its 52-53 week convention, this debt repayment was a fiscal 1998 transaction. In connection with the sale of the 10% Senior Notes and 10% Convertible Debentures, the Company paid $352,000 as a fee to the placement agent for these financings. The Company also issued to the placement agent as additional compensation 572,683 shares of common stock valued at $716,000 and warrants, Series E, to purchase 1,500,000 shares of common stock for $2.50 per share which are exercisable for five years. As further described in Note 8, the Series E warrants contain an antidilution provision which has lowered the exercise price. The acquisition of SMTEK was accounted for using the purchase method. In accordance with Accounting Principles Board Opinion No. 16, the total investment made in SMTEK of $8,495,000 was allocated to the assets and liabilities acquired at their estimated fair values at the acquisition date, which resulted in the recognition of goodwill of $6,342,000. Accumulated amortization of goodwill was $3,171,000 and $1,903,000 as of June 30, 1998 and 1997, respectively. SMTEK's operations have been included in the consolidated financial statements of DDL since the date of acquisition, January 12, 1996. Note 3 - ACCOUNTS RECEIVABLE The components of accounts receivable are as follows (in thousands): June 30 -------------------- 1998 1997 ---- ---- Trade receivables $ 9,890 $ 9,262 Other receivables 63 548 Less allowance for doubtful accounts (167) (163) ------ ------ $ 9,786 $ 9,647 ====== ====== Included in other receivables at June 30, 1997 are grants due from the Industrial Development Board for Northern Ireland of $125,000 (Note 10). Note 4 - COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED CONTRACTS The components of costs and estimated earnings in excess of billings on uncompleted contracts are as follows (in thousands): June 30 -------------------- 1998 1997 ---- ---- Costs incurred on uncompleted contracts $32,324 $20,455 Estimated earnings 5,802 2,714 ------ ------ 38,126 23,169 Less: Billings to date (33,341) (20,008) ------ ------ $ 4,785 $ 3,161 ====== ====== Costs and estimated earnings in excess of billings on uncompleted contracts consists of revenue recognized under electronics assembly contracts which amounts were not billable at the balance sheet date, net of $71,000 and $149,000 of billings in excess of costs and estimated earnings at June 30, 1998 and 1997, respectively. Essentially all of the unbilled amount is expected to be billed within 90 days of the balance sheet date. Note 5 - INVENTORIES Inventories consist of the following (in thousands): June 30 ------------------ 1998 1997 ---- ---- Raw materials $2,014 $2,964 Work in process 643 695 Finished goods 278 160 Less reserves (489) (492) ----- ----- $2,446 $3,327 ====== ====== Note 6 - FINANCING ARRANGEMENTS Bank Credit Agreements The Company has a working capital bank line of credit for SMTEK, based upon and secured by accounts receivable and inventory, which provides for borrowings of up to $2,750,000 at an interest rate of prime (8.50% at June 30, 1998) plus 1.25%. At June 30, 1998, borrowings outstanding under this credit facility amounted to $2,583,000. SMTEK's line of credit expires on September 1, 1999. 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 $4,900,000), and provides for interest on borrowings at the bank's base rate (6.77% at June 30, 1998) plus 1.50%. At June 30, 1998, borrowings outstanding under this credit facility amounted to $1,858,000. The credit facility agreement with Ulster Bank Markets expires August 31, 1998. Management is currently in discussions with Ulster Bank Markets and believes that the credit facility agreement will be extended in the normal course of business for at least one year. Notes Payable to Related Party The note payable to related party of $2,000,000 at June 30, 1998, is payable to Thomas M. Wheeler, a member of the Company's Board of Directors and the Company's largest stockholder. The note bears interest at 8%, matures on October 31, 1999, and is secured by the common stock of SMTEK. The notes payable to related party aggregating $1,625,000 at June 30, 1997, were due from Jolt to Mr. Wheeler, prior to the consummation of the acquisition of Jolt (Note 2). The notes payable consisted of two notes of $1,525,000 and $100,000, bearing interest at 7.1% and 8.25%, respectively. As a condition of and prior to the consummation of the Jolt acquisition, the $1,625,000 notes payable and accrued interest thereon of $430,000, were converted to common stock of Jolt. Mr. Wheeler received 4,643,756 shares of common stock of the Company as a result of the conversion of the debt into common stock of Jolt. Other Long-Term Debt Other long-term debt consists of the following (in thousands): June 30 ------------------ 1998 1997 ---- ---- 10% Senior Notes (Note 2) $ - $ 5,300 Mortgage notes secured by real property at the Northern Ireland operations, with interest at variable rates (8.0% at June 30, 1998), payable in semiannual installments through 2009 1,214 1,300 Notes payable secured by equipment, interest at 7.95% to 10.9%, payable in monthly installments through June 2003 951 1,129 Capitalized lease obligations (Note 10) 1,215 1,197 8-1/2% Convertible Subordinated Debentures, due 2008, interest payable semi-annually and convertible at holders' option at a price of $10.63 per share at any time prior to maturity 1,580 1,580 7% Convertible Subordinated Debentures ("CSDs"), due May 15, 2001, interest payable semi-annually and convertible at holders' option at a conversion price of $2.00 per share at any time prior to maturity 398 421 Obligations to former officers, employees and directors under consulting and deferred fee agreements 859 826 Other 183 234 ------ ------ 6,400 11,987 Less current maturities 1,214 4,167 ------ ------ $ 5,186 $ 7,820 ====== ====== At June 30, 1998, one of the notes payable secured by equipment was further collateralized by an irrevocable standby letter of credit, which in turn is secured by the Company's restricted cash deposit of $145,000. This amount is included in deposits and other assets in the accompanying consolidated balance sheet at June 30, 1998 and 1997. The aggregate amounts of minimum maturities of other long-term debt for the indicated fiscal years (other than capitalized lease obligations, as described in Note 10) are as follows: 1999 - $837,000; 2000 - $586,000; 2001 - $729,000; 2002 - $240,000; 2003 - $244,000; and thereafter - $2,549,000. During fiscal 1996, holders of $132,000 in principal of 7% CSDs exchanged such CSDs for common stock of 66,000 shares. Accrued interest related to the converted debentures was credited to income. In March 1996, the Company entered into a settlement agreement with certain of its former officers, key employees and directors (the "Participants") to restructure its outstanding obligations under several consulting programs and deferred fee arrangements which had provided for payments to the Participants after their retirement from the Company or from its Board of Directors. Under terms of the settlement, the Participants agreed to relinquish all future payments due them under these consulting programs and deferred fee arrangements in return for an aggregate of 595,872 common stock purchase warrants, Series G. The exercise price of the warrants, which expired June 1, 1998, was $2.50 per warrant. Pursuant to the terms of the settlement agreement, the Company subsidized the exercise of warrants by crediting the Participants with $2.50 for each warrant exercised. During fiscal 1998 and 1997, 26,808 and 144,646 Series G warrants, respectively, were exercised. The Company is obligated to pay the Participants $2.50 for each warrant which remained 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 $836,000 and $802,000 at June 30, 1998 and 1997, respectively. As a result of this settlement agreement, the Company recorded an extraordinary gain in fiscal 1996 of $2,356,000, net of $197,000 of compensation expense related to the "call" feature of the warrants. Note 7 - INCOME TAXES Temporary differences between financial statement carrying amounts and the tax bases of assets and liabilities that give rise to significant portions of the deferred tax assets and liabilities relate to the following (in thousands): June 30 --------------------- 1998 1997 ---- ---- Deferred tax assets: Accrued employee benefits $ 479 $ 346 Loss reserves 416 452 Domestic net operating loss carryforwards 14,338 14,102 Foreign net operating loss carryforwards 3,582 3,955 Other 57 74 ------ ------ Total deferred tax assets 18,872 18,929 Deferred tax liabilities: Depreciation (130) (118) ------ ------ Net deferred tax assets before allowance 18,742 18,811 Less valuation allowance (18,742) (18,811) ------ ------ Net deferred tax assets after allowance $ - $ - ====== ====== In assessing the realizability of net deferred tax assets, management considers whether it is more likely than not that some portion or all of the net deferred tax assets will be realized. The ultimate realization of net deferred tax assets is dependent upon the generation of future domestic and foreign taxable income of approximately $38,000,000 and $10,233,000, respectively, prior to the expiration of the net operating loss carryforwards. Based on the level of historical losses and projections for future taxable income, management believes that it is not more likely than not that the deferred tax assets will be realized, and therefore, has recorded a 100% valuation allowance to offset the assets. The valuation allowance was $18,811,000 and $18,382,000 as of July 1, 1997 and 1996, respectively. The net change in the total valuation allowance for the years ended June 30, 1998 and 1997 was a decrease of $69,000 and an increase of $429,000, respectively. The provision (benefit) for income taxes differs from an amount computed using the statutory federal income tax rate as follows (in thousands): Year ended June 30 --------------------------- 1998 1997 1996 ---- ---- ---- Federal tax expense (benefit) computed at statutory rate $ 168 $(293) $(468) Differences in taxation of foreign earnings, net (538) (263) 114 Untaxed S Corporation earnings (377) (275) (167) Amortization of debt issue costs - - (108) Amortization of goodwill 431 431 215 Utilization of net operating losses - - (1,110) Deferred tax effect of domestic temporary differences 36 (102) 6,871 Deferred tax effect of foreign temporary difference 373 27 (1,252) Net change in valuation allowance (69) 429 (5,194) Other (24) 46 (11) ----- ----- ----- Income tax expense (benefit) $ - $ - $(1,110) ===== ===== ===== During fiscal 1996, the Company recognized an income tax benefit associated with its application for federal tax refunds as permitted under section 172(f) of the Internal Revenue Code. In the aggregate, the Company applied for federal tax refunds of $2,175,000, net of costs associated with applying for such refunds. Through June 30, 1996, the Company had received $1,871,000 of net refunds plus interest on such refunds of $106,000, and has recognized as an income tax benefit $1,110,000 net of certain expenses. Because the tax returns underlying these refunds are subject to audit by the Internal Revenue Service and a portion of the refunds could be 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. No additional refunds were received subsequent to fiscal 1996. 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. As of June 30, 1998, the Company has U.S. federal net operating loss ("NOL") carryforwards of $38,200,000, expiring in 2004 through 2013, and state NOL carryforwards of $27,300,000, expiring in 1999 through 2013. The NOL carryforward for federal alternative minimum tax purposes is approximately $24,000,000. The Company's ability to use its NOL carryforwards to offset future taxable income may be subject to annual limitations due to certain substantial stock ownership changes which have occurred in the current and prior years. The Company is currently studying this matter to determine if the future utilization of the NOLs will be limited due to these ownership changes. Income of the Company's Northern Ireland subsidiaries is sheltered by operating loss carryforwards for United Kingdom income tax purposes (the "U.K. NOL"). The income tax benefit from the U.K. NOL was $322,000 and $244,000 in fiscal 1998 and 1997, respectively, and has been treated as a reduction in the provision for income taxes. There was no income tax benefit from the U.K. NOL in fiscal 1996. At June 30, 1998, the U.K. NOL amounted to approximately $10,233,000. Substantially all of these net operating losses from prior years can be carried forward by the Company's Northern Ireland subsidiaries for an indefinite period of time to reduce future taxable income. Pretax income (loss) from foreign operations for fiscal 1998, 1997 and 1996 was $1,480,000, $772,000, and ($338,000), respectively. It is not practicable to estimate the amount of tax that might be payable on the eventual remittance of such earnings to the U.S. parent company. On remittance, the United Kingdom imposes withholding taxes that would then be available for use as a credit against the U.S. tax liability, if any, subject to certain limitations. Effective June 30, 1998, the Company acquired Jolt, which was an S Corporation for income tax purposes prior to its acquisition by the Company. Following are pro forma consolidated operating results, which present state income taxes (the Company's federal NOLs are assumed to be utilized to shelter Jolt's federal taxable income) as a pro forma adjustment as if Jolt had filed C Corporation tax returns for the pre-acquisition periods (in thousands): Year ended June 30 ------------------------ 1998 1997 1996 ---- ---- ---- Net income (loss) before pro forma adjustments, per consolidated statements of operations $493 $(868) $2,089 Pro forma provision for income taxes 61 45 27 ---- ----- ------ Pro forma net income (loss) $432 $(913) $2,062 ==== ===== ====== Note 8 - STOCKHOLDERS' EQUITY Sales of Common Stock In June 1997, the Company sold 2,000,000 shares of common stock to various investors, generating proceeds of $1,385,000, which is net of issuance costs of $115,000. In March 1996, the Company sold 600,000 shares of common stock to an offshore investor, generating proceeds of $1,112,000, which is net of issuance costs of $58,000. Common Stock Issued as Brokerage Fee In June 1998, 200,000 shares of common stock were issued as a brokerage fee in conjunction with the closing of the acquisition of Jolt. The ascribed value of the 200,000 shares of $138,000 is included in acquisition expenses in the accompanying 1998 consolidated statement of operations. Common Stock Issued as Debt Placement Fee In June 1997, in connection with the payoff of the 10% Senior Notes, 353,333 shares of common stock were issued to the placement agent of the 10% Senior Notes as a debt placement fee. The ascribed value of the 353,333 shares of $442,000 was expensed in June 1997 and is included in fiscal 1997 debt issue cost amortization expense in the accompanying consolidated statement of operations. Stock Option Plans The Company has in effect several stock-based plans under which non- qualified and incentive stock options and restricted stock awards have been granted to employees and directors. Subject to the discretion of the Compensation Committee of the Board of Directors (the "Committee"), employee stock options generally become exercisable in installments of 33.3% per year, or over an alternative vesting period determined by the Committee, and generally have a 10-year term when granted. The exercise price of all incentive stock options must be equal to or greater than the fair market value of the shares on the date of grant. The exercise price of non-statutory stock options must be at least 85% of the fair market value of the common stock on the date of grant. In July 1996, following stockholder approval, the Company adopted a stock option plan for non-employee directors. Under this plan, annually on July 1 each non-employee director will be granted a non-statutory stock option to purchase 30,000 shares of common stock. In July 1998, 1997 and 1996, options to purchase a total of 90,000, 150,000 and 120,000 shares, respectively, were granted to the Company's non-employee directors at exercise prices of $0.81, $1.06, and $1.63, respectively. Activity under the employee and non-employee director stock option plans for fiscal years 1998, 1997 and 1996 was as follows: Weighted average exercise price Shares per share ------ --------- Shares under option, June 30, 1995 1,356,619 $0.87 Granted 906,042 1.72 Expired or canceled (33,928) 1.44 Exercised (595,442) 0.75 --------- ----- Shares under option, June 30, 1996 1,633,291 1.37 Granted 1,852,758 1.23 Expired or canceled (1,139,058) 1.66 Exercised (150,000) 0.50 --------- ----- Shares under option, June 30, 1997 2,196,991 1.16 Granted 611,200 0.85 Expired or canceled (185,849) 1.04 Exercised (274,462) 0.50 --------- ----- Shares under option, June 30, 1998 2,347,880 $1.17 ========= ===== In fiscal 1997, pursuant to resolutions of the Compensation Committee of the Board of Directors, 762,329 options with exercise prices of $1.63 to $4.88 were canceled and were replaced by new options for the same number of shares at an exercise price of $1.25, the then fair market value of the common stock. The following table summarizes information about shares under option at June 30, 1998: Outstanding Exercisable ------------------------------------- ----------------------- Weighted average Weighted Weighted Range of remaining average average exercise Options contractual exercise Options exercise prices outstanding life price exercisable price - --------- --------- --------- --------- --------- -------- $0.75- 0.81 362,380 9.5 years $0.77 137,280 $0.79 1.00- 1.25 1,741,500 8.4 1.18 915,426 1.16 1.63 244,000 8.0 1.63 202,665 1.63 --------- --------- 2,347,880 $1.17 1,255,371 $1.20 ========= ========= At June 30, 1998, under the employee and non-employee director stock option plans there were 660,147 and 540,000 shares, respectively, available for future grants. Stock Based Compensation The Company applies the provisions of APB Opinion No. 25 and related interpretations in accounting for its stock option plans and the Series H warrants granted to non-employee directors (see "Warrants" below). Accordingly, no compensation cost has been recognized for its stock option plans and awards of warrants to non-employee directors. Had compensation cost for stock-based awards been determined consistent with SFAS 123, the Company's results of operations would have been reduced to the pro forma amounts indicated below: Year ended June 30 -------------------------------------- 1998 1997 1996 ------ ------- ------- Net income (loss): As reported $ 493,000 $ (868,000) $2,089,000 Pro forma $ 28,000 $(1,441,000) $1,830,000 Earnings (loss) per share: As reported $ 0.02 $(0.03) $ 0.09 Pro forma $ -- $(0.05) $ 0.08 For purposes of this pro forma disclosure, the "fair value" of each option and warrant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 1998, 1997 and 1996: dividend yield of 0.0% percent for all years; expected volatility 65%, 68% and 67% for 1998, 1997 and 1996, respectively; risk- free interest rates ranging from 5.4% to 6.3% for 1998, 6.1% to 6.8% for 1997 and 6.6% to 6.7% for 1996; and expected lives of five years for all years. The weighted average fair value of options granted during the years ended June 30, 1998, 1997 and 1996 was $0.51, $0.76 and $1.06, respectively. The weighted average fair value of Series H warrants granted to non-employee directors in fiscal 1996 was $0.84 per warrant. Preferred Stock Purchase Rights At June 30, 1998, 1,000 preferred stock purchase rights are outstanding. Each right may be exercised to purchase one-hundredth of a share of Series A Participating Junior Preferred Stock at a purchase price of $30, subject to adjustment. The rights may be exercised only after commencement or public announcement that a person (other than a person receiving prior approval from the Company) has acquired or obtained the right to acquire 20% or more of the Company's outstanding common stock. The rights, which do not have voting rights, may be redeemed by the Company at a price of $.01 per right within ten days after the announcement that a person has acquired 20% or more of the outstanding common stock of the Company and the redemption period may be extended under certain circumstances. In the event that the Company is acquired in a merger or other business combination transaction, provision shall be made so that each holder of a right shall have the right to receive that number of shares of common stock of the surviving company which at the time of the transaction would have a market value of two times the exercise price of the right. 150,000 shares of Series A Junior Participating Preferred Stock, $1 par value, are authorized. Warrants In fiscal 1993, the Company exchanged a portion of its outstanding convertible debentures for stock and common stock purchase warrants, Series A. The remaining 223,500 of these Series A warrants were exercised during fiscal 1996 at $1.42 per share. In fiscal 1995, the Company issued 100,000 warrants, Series B, to purchase common stock at $1.31 per share to offshore investors in connection with an earlier offering of common stock. These warrants were exercised in April 1996. During fiscal 1996, the Company issued Series C, D, E, F, G and H common stock purchase warrants. The provisions and activity of these warrants are as follows: 1. Series C warrants covering an aggregate of 455,000 shares were issued to four parties, including an investment banking firm, for consulting and financial advisory services. These warrants are exercisable at $3.50 until the warrant expiration date on June 30, 2000. Fifty-thousand of the Series C warrants were issued to an individual who was subsequently elected a director of the Company. Substantially all of these warrants were granted in June and July 1995 and had no intrinsic value on the date of grant. 2. Series D warrants covering 50,000 shares were issued to the Company's former general counsel as partial consideration for legal services rendered under an agreement entered into in fiscal 1995. These warrants are exercisable at $2.50 until the warrant expiration date on June 30, 2000. The warrants had no intrinsic value on the date of grant. 3. Series E warrants covering an aggregate of 1,500,000 shares were issued to an investment banking firm which served as placement agent for the 10% Senior Notes and the 10% Convertible Debentures. The Series E warrants are exercisable until their expiration on February 28, 2001, and provided for an original exercise price of $2.50 per share, subject to adjustment in the event the Company issues new common stock at an effective price less than the effective exercise price on the Series E warrants. The effective exercise price on the Series E warrants was $1.88 as of June 30, 1998. The Series E warrants were granted in September 1995 contingent upon the placement of debt. The warrants had no intrinsic value on the measurement date. 4. In February 1996, the Series F warrants covering an aggregate of 1,060,000 shares were issued as partial collateral for the 10% Senior Notes. These warrants were canceled effective June 30, 1997, concurrent with the repayment of the 10% Senior Notes. 5. As further described in Note 6, the Series G warrants covering an aggregate of 595,872 shares were issued in March 1996 to certain former officers, key employees and directors of the Company. During fiscal 1998 and 1997, 26,808 and 144,646 Series G warrants, respectively, were exercised. The remaining unexercised Series G warrants expired on June 1, 1998. 6. Series H warrants covering an aggregate 300,000 shares were issued to the Company's non-employee directors who served on the Company's board without other compensation during the period from May 31, 1995 to June 30, 1996. The Series H warrants are at $2.50 until the warrant expiration date on June 30, 2000. There was no intrinsic value related to the warrants on the date of grant. Note 9 - OTHER FINANCIAL INFORMATION Earnings (Loss) Per Share As the Company reported a net loss for the year ended June 30, 1997 and a loss before extraordinary item for the year ended June 30, 1996, the shares used in computing diluted earnings (loss) per share for these years is equal to the weighted average number of common shares outstanding for the period and excludes the dilutive effect of options, warrants and convertible securities. A reconciliation of the numerator and denominator used in the computation of fiscal 1998 diluted earnings per share follows: Year ended June 30, 1998 ------ NUMERATOR: Net income $ 493,000 Add back net interest related to convertible subordinated debentures 134,000 ---------- Net income for diluted earnings computation $ 627,000 ========== DENOMINATOR: Weighted average number of common shares outstanding 29,026,467 Assumed exercise of options and warrants net of shares assumed reacquired under treasury stock method 106,491 Assumed conversion of convertible subordinated debentures 310,206 ---------- Total diluted shares 29,443,164 ========== Options and warrants to purchase 4,652,880 shares of common stock at prices ranging from $0.75 to $3.50 were outstanding during the year ended June 30, 1998, but were not included in the computation of diluted earnings per share because the option and warrant exercise prices were greater than the average market price of the common shares, and would therefore be antidilutive. Information Relating to Consolidated Statements of Cash Flows "Net cash provided by operating activities" includes cash payments for interest (in thousands): Year ended June 30 --------------------------- 1998 1997 1996 ---- ---- ---- Interest paid $ 1,294 $ 1,081 $ 751 "Net increase in operating working capital, net of effects of business acquired" consists of the following (in thousands): Year ended June 30 --------------------------- 1998 1997 1996 ---- ---- ---- (Increase) decrease in accounts receivable $ (333) $(3,565) $ 402 Increase in costs and estimated earnings in excess of billings on uncompleted contracts (1,624) (135) (726) (Increase) decrease in inventories 846 993 (1,879) (Increase) decrease in prepaid expenses 36 181 (86) Increase (decrease)in accounts payable (1,234) 1,220 259 Increase in accrued payroll and employee benefits 74 328 24 Increase (decrease) in other accrued liabilities 57 (677) 676 ------ ------ ------ Net increase $(2,178) $(1,655) $(1,330) ====== ====== ====== Following is the supplemental schedule of non-cash investing and financing activities (in thousands): Year ended June 30 -------------------------- 1998 1997 1996 ---- ---- ---- Capital expenditures financed by lease obligations and notes payable $ 639 $1,221 $ 689 Conversion of debt to equity 2,100 223 3,667 Common stock issued as partial consideration for purchase of SMTEK, Inc. - - 801 Common stock issued as debt placement fee - 442 716 Other Accrued Liabilities Other accrued liabilities consist of the following (in thousands): June 30 ------------------ 1998 1997 ---- ---- Environmental liabilities $ 528 $ 684 Accrued taxes payable 810 794 Other 1,089 1,324 ------ ------ $2,427 $2,802 ====== ====== Valuation and Qualifying Accounts and Reserves Following is the Company's schedule of valuation and qualifying accounts and reserves for the last three years (in thousands): Balance at Charged to Balance beginning costs and at end of period expenses Deductions of period --------- -------- --------- --------- Allowance for doubtful accounts: - ------------------------------- Fiscal 1996 $186 $ 85 $(134) $137 Fiscal 1997 137 74 (48) 163 Fiscal 1998 163 57 (53) 167 Inventory reserves - ------------------ Fiscal 1996 $156 $250 $(158) $248 Fiscal 1997 248 443 (199) 492 Fiscal 1998 492 386 (389) 489 Note 10 - COMMITMENTS AND CONTINGENCIES Lease Commitments Future minimum lease payments at June 30, 1998 were as follows (in thousands): Capital Operating leases leases ------ ------ Fiscal 1999 $ 467 $ 481 Fiscal 2000 434 408 Fiscal 2001 360 33 Fiscal 2002 122 19 Fiscal 2003 35 14 Thereafter - 9 ----- ----- Total 1,418 $ 964 ===== Less: Interest (203) ----- Present value of minimum lease payments $1,215 ====== The capitalized cost of the related assets (primarily plant equipment), which are pledged as security under the capital leases, was $1,483,000 and $1,726,000 at June 30, 1998, and 1997, respectively. Accumulated amortization on assets under capital leases amounted to $447,000 and $264,000 at June 30, 1998 and 1997, respectively. Rental expense for operating leases amounted to $524,000, $489,000 and $302,000 for fiscal 1998, 1997 and 1996, respectively. 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 $30,000 during fiscal 1998 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. Jolt occupies an 8,400 square foot facility which is leased through October 31, 1998 for $7,100 per month. Jolt management is currently in negotiations with the landlord concerning an extension of the lease, and management expects that the lease will be renewed for an additional one year term. In the event the lease is not renewed, management believes that there is sufficient vacant industrial space in the local vicinity to enable Jolt to relocate without unduly disrupting its operations. Government Grants Pursuant to government grant agreements with the Industrial Development Board for Northern Ireland ("IDB"), the Company's subsidiary, DDL Electronics Limited ("DDL-E"), has been reimbursed for a portion of qualifying capital expenditures and for certain employment and interest costs. Approximately $966,000 of the government grants received by DDL-E are subject to repayment if the employment level at this subsidiary falls below 134 employees during the two year period beginning on January 1, 1997. At the present time, DDL-E has approximately 160 employees. Management does not expect the employment at DDL-E to drop below the level that would give rise to a grant repayment obligation. In addition to the contingent grant repayment liability based on DDL- E's employment level, the Company would be obligated to repay grants in the event that DDL-E ceases business, permanently discontinues production, or fails to pay to the IDB any amounts due under its mortgage note payable (Note 6). DDL-E's contingent grant repayment obligations amount to approximately $1,175,000 at June 30, 1998. Management does not expect that the Company will be required to repay any grants under these provisions. Foreign Currency Exposure The Company's investment in its Northern Ireland subsidiaries is represented by operating assets and liabilities denominated in these subsidiaries' functional currency of British pounds sterling. In addition, in the normal course of business these operating units enter into transactions denominated in European currencies other than British pounds sterling. As a result, the Company is subject to transaction and translation exposure from fluctuations in foreign currency exchange rates. The Company uses a variety of strategies, including foreign currency forward contracts and internal hedging, to minimize or eliminate foreign currency exchange rate risk associated with substantially all of its foreign currency transactions. Gains and losses on these hedging transactions, which were immaterial for 1998, 1997 and 1996, are generally recorded in earnings in the same period as they are realized, which is usually in the same period as the underlying or originating transactions. The Company does not enter into speculative foreign currency transactions. At June 30, 1998, the Company did not have any open foreign currency forward contracts. Environmental Matters The Company is currently involved in certain remediation and investigative studies regarding soil and groundwater contamination at the site of a former printed circuit board manufacturing plant in Anaheim, California which was leased by one of the Company's subsidiaries, Aeroscientific Corp., which is now an inactive, insolvent subsidiary. Management, based in part on consultations with outside environmental engineers and scientists, believes that the total remaining costs to clean up this site will not exceed $600,000. The remaining costs to be incurred to remediate this site will be borne partially by the property owner under a cost sharing agreement entered into several years ago. At June 30, 1998, the Company had a reserve of $528,000, which management believes is adequate to cover its share of future remediation costs at this site. It is possible, however, that these future remediation costs could differ significantly from the estimates, and that the Company's portion could exceed the amount of its reserve. The Company's liability for remediation in excess of its reserve could have a material adverse impact on its business, financial condition and results of operations. Note 11 - BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION The Company operates in two primary industry segments providing electronic manufacturing services and printed circuit boards principally to the computer, communications, instrumentation and medical equipment markets. A summary of the Company's operations by segment follows (in thousands): Year ended June 30 ------------------------------ 1998 1997 1996 ---- ---- ---- Revenues: Electronic Manufacturing Services $44,690 $41,335 $24,599 Printed Circuit Boards 8,575 10,305 10,891 ------ ------ ------ $53,265 $51,640 $35,490 ====== ====== ====== Operating income (loss): Electronic Manufacturing Services $ 1,886 $ 988 $ 348 Printed Circuit Boards 677 589 (20) General Corporate (409) (541) (880) Acquisition expenses (609) - - ------ ------ ------ $ 1,545 $ 1,036 $ (552) ====== ====== ====== Identifiable assets: Electronic Manufacturing Services $25,205 $24,037 $21,732 Printed Circuit Boards 5,712 5,881 5,266 General Corporate 913 3,751 2,500 ------ ------ ------ $31,830 $33,669 $29,498 ====== ====== ====== Depreciation and amortization: Electronic Manufacturing Services $ 2,482 $ 2,353 $ 1,427 Printed Circuit Boards 579 498 548 General Corporate 6 938 285 ------ ------ ------ $ 3,067 $ 3,789 $ 2,260 ====== ====== ====== Capital expenditures: (1) Electronic Manufacturing Services $ 802 $ 1,306 $ 1,239 Printed Circuit Boards 617 1,060 586 General Corporate 5 6 - ------ ------ ------ $ 1,424 $ 2,372 $ 1,825 ====== ====== ====== (1) Capital expenditures include equipment additions financed with capital leases and notes payable. Revenues, operating income (loss), and identifiable assets by geographic area are as follows (in thousands): Year ended June 30 ------------------------------ 1998 1997 1996 ---- ---- ---- Revenues: United States $23,029 $21,891 $11,022 Northern Ireland 30,236 29,749 24,468 ------ ------ ------ Total $53,265 $51,640 $35,490 ====== ====== ====== Operating income (loss): United States $ (202) $ 99 $ (133) Northern Ireland 1,747 937 (419) ------ ------ ------ Total $ 1,545 $ 1,036 $ (552) ====== ====== ====== Identifiable assets: United States $17,311 $19,214 $17,544 Northern Ireland 14,519 14,455 11,954 ------ ------ ------ Total $31,830 $33,669 $29,498 ====== ====== ====== The Company had sales to three customers which accounted for 19.9%, 13.8% and 13.8% of revenues in fiscal 1998 and sales to two customers which accounted for 17.8% and 15.7% of revenues in fiscal 1997. No single customer accounted for 10% or more of consolidated revenues in fiscal 1996. Note 12 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) Following is a summary of the quarterly results of operations (in thousands except per share amounts): Quarter ended ------------------------------------------------- Sep 30 Dec 31 Mar 31 Jun 30 Total ------ ------ ------ ------ ----- Fiscal 1998: Revenues $13,413 $12,820 $13,600 $13,432 $53,265 Net income (loss)(1) $ 301 $ 398 $ 291 $ (497) $ 493 Earnings (loss) per share $ 0.01 $ 0.01 $ 0.01 $ (0.02) $ 0.02 Fiscal 1997: Revenues $10,413 $11,877 $14,387 $14,963 $51,640 Net income (loss) $ (594) $ (315) $ 455 $ (414) $ (868) Earnings (loss) per share $ (0.02) $(0.01) $ 0.02 $ (0.01) $ (0.03) (1) Included in the net loss of $497,000 for the three months ended June 30, 1998 are non-recurring acquisition expenses of $609,000 related to the acquisition of Jolt on June 30, 1998, as discussed in Note 2. DDL ELECTRONICS, INC. AND SUBSIDIARIES Market and Dividend Information The Company's common shares are traded on the New York Stock Exchange and Pacific Exchange (ticker symbol "DDL"). The high and low closing sales prices for the common stock for the last two fiscal years, as reported on the composite tape, are set forth in the following table. Fiscal 1998 Fiscal 1997 ------------- -------------- High Low High Low ----- ----- ----- ----- 1st Quarter 1-3/16 13/16 2 1-1/8 2nd Quarter 1 11/16 1-1/4 15/16 3rd Quarter 13/16 5/8 1-1/4 7/8 4th Quarter 7/8 5/8 1-5/8 15/16 There were approximately 1500 stockholders of record at August 21, 1998. The Company suspended dividend payments in 1989. A resumption of dividend payments is not anticipated in the foreseeable future. Form 10-K Annual Report A copy of the Annual Report on Form 10-K (without exhibits) may be obtained free of charge upon written request to DDL Electronics, Inc., 2151 Anchor Court, Newbury Park, California 91320. DDL ELECTRONICS, INC. AND SUBSIDIARIES DIRECTORS, EXECUTIVE OFFICERS, OPERATING UNITS AND OTHER CORPORATE INFORMATION DIRECTORS EXECUTIVE OFFICERS Karen Beth Brenner Gregory L. Horton Investment Manager President and Chief Executive Officer Newport Beach, California Richard K. Vitelle Charlene Gondek Vice President - Finance and Independent Businesswoman Administration, Chief Financial Officer, Aspen, Colorado Treasurer and Secretary Gregory L. Horton OPERATING UNITS Chairman of the Board, SMTEK, Inc. President and Chief Newbury Park, California Executive Officer DDL Electronics, Inc. Jolt Technology, Inc. Fort Lauderdale, Florida Richard K. Vitelle DDL Electronics Limited Vice President and Craigavon, Northern Ireland Chief Financial Officer United Kingdom DDL Electronics, Inc. Irlandus Circuits Limited Craigavon, Northern Ireland Thomas M. Wheeler United Kingdom Chairman of the Board, TMW Enterprises, Inc. Troy, Michigan TRANSFER AGENT & REGISTRAR American Stock Transfer & Trust Company 40 Wall Street New York, New York 10005 INDEPENDENT AUDITORS LEGAL COUNSEL KPMG Peat Marwick LLP Berry Moorman, PC Los Angeles, California Detroit, Michigan EX-21 3 EXHIBIT 21 DDL ELECTRONICS, INC. SUBSIDIARIES OF THE REGISTRANT All subsidiaries are 100% owned by DDL Electronics, Inc., except as otherwise indicated, and are included in the consolidated financial statements. Each subsidiary was organized in the jurisdiction specified under its name in the following list. DDL Europe Limited Northern Ireland DDL Electronics Limited (100%-owned by DDL Europe Limited) Northern Ireland Irlandus Circuits Limited (100% owned by DDL Europe Limited) Northern Ireland Jolt Techology, Inc. Delaware SMTEK, Inc. California Aeroscientific Corp. (California) (99.9%-owned by DDL Electronics, Inc.) California (Inactive) A.J. Electronics, Inc. California (Inactive) EX-23 4 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS The Board of Directors DDL Electronics, Inc. We consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-02969 and 333-31349) and the Registration Statements on Form S-8 (Nos. 33-74400 and 333-08689) of DDL Electronics, Inc. of our report dated August 21, 1998, relating to the consolidated balance sheets of DDL Electronics, Inc. and subsidiaries as of June 30, 1998 and 1997 and the related consolidated statements of operations, cash flows and stockholders' equity (deficit) for each of the years in the three-year period ended June 30, 1998, which report appears in the June 30, 1998 Annual Report on Form 10-K of DDL Electronics, Inc. /s/ KPMG PEAT MARWICK LLP Los Angeles, California August 27, 1998 EX-27 5
5 YEAR JUN-30-1998 JUN-30-1998 4413000 0 9890000 167000 2446000 21533000 23910000 17035000 31830000 17088000 0 341000 0 0 7215000 31830000 53265000 53265000 43933000 51719000 0 0 1101000 493000 0 493000 0 0 0 493000 0.02 0.02
EX-99 6 EXHIBIT 99 UNDERTAKING FOR FORM S-8 REGISTRATION STATEMENT With respect to the Registration Statement previously filed by the Company on Form S-8, the Company hereby undertakes as follows: Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding), is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. -----END PRIVACY-ENHANCED MESSAGE-----