SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
X Quarterly Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended December 31, 1994 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
DDL Electronics, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 33-0213512
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
7320 SW Hunziker Road Suite #300, Tigard, Oregon 97223-2302
(Address of Principal Executive Offices)
(Zip Code)
503/620-1789
(Registrant's Telephone Number, Including Area Code)
Former address: 1270 NW 167th Place, Beaverton, Oregon 97006
(Former Name - Former Address and Former Fiscal Year, if Changed
Since Last Report)
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
The registrant had 15,257,663 shares of Common Stock
outstanding as of February 3, 1994.
<PAGE>
<TABLE>
PART I. FINANCIAL
INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DDL ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited, Except June 30, 1994)
<CAPTION>
December 31, June 30,
1994 1994
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalent $ 2,046,000 $ 2,540,000
Accounts receivable 4,851,000 5,600,000
Inventories 1,256,000 3,647,000
Prepaid expenses 325,000 231,000
Total current assets 8,478,000 12,018,000
PROPERTY, EQUIPMENT AND IMPROVEMENTS, AT COST
Land 0 1,101,000
Buildings and improvements 5,275,000 8,670,000
Plant equipment 13,778,000 22,499,000
Office and other equipment 1,529,000 1,508,000
Construction in progress 60,000 60,000
20,642,000 33,838,000
Less: accumulated depreciation
and amortization (16,552,000) (23,196,000)
Property, equipment
and improvements, net 4,090,000 10,642,000
OTHER ASSETS 448,000 598,000
$13,016,000 $23,258,000
<FN>
See accompanying Notes to Unaudited
Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
DDL ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Continued)
(Unaudited, Except June 30, 1994)
<CAPTION>
December 31, June 30,
1994 1994
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Current portion of long-term debt $ 1,215,000 $13,524,000
Accounts payable 5,034,000 5,086,000
Accrued payroll and employee benefits 685,000 994,000
Other accrued liabilities 1,544,000 1,673,000
Total current liabilities 8,478,000 21,277,000
LONG-TERM DEBT
7% Convertible Subordinated
Debentures,less current portion 729,000 775,000
8-1/2% Convertible Subordinated
Debentures 1,580,000 1,580,000
Notes payable, capitalized lease
obligations and other long-term,
debt less current portion 4,327,000 4,515,000
Total long-term debt 6,636,000 6,870,000
STOCKHOLDERS' DEFICIT
Preferred stock 0 0
Common stock 153,000 145,000
Additional paid-in capital 20,647,000 19,646,000
Accumulated deficit (21,949,000) (23,673,000)
Foreign currency translation
adjustment (949,000) (1,007,000)
Total stockholders' deficit (2,098,000) (4,889,000)
$13,016,000 $23,258,000
<FN>
See accompanying Notes to Unaudited
Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
DDL ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
For the Six Months Ended December 31,
<CAPTION>
1994 1993
<S> <C> <C>
SALES $16,594,000 $28,169,000
COSTS AND EXPENSES
Cost of goods sold 15,713,000 27,912,000
Administrative and
selling expenses 3,233,000 3,734,000
Restructuring charges 1,173,000 0
20,119,000 31,646,000
OPERATING LOSS (3,525,000) (3,477,000)
NONOPERATING INCOME (EXPENSE)
Investment income 57,000 107,000
Interest expense (656,000) (557,000)
Gain on sale of assets 3,374,000 1,000
Other income 33,000 33,000
2,808,000 (416,000)
LOSS BEFORE INCOME TAXES (717,000) (3,893,000)
INCOME TAXES 0 0
LOSS BEFORE EXTRAORDINARY ITEM (717,000) (3,893,000)
EXTRAORDINARY ITEM
Gain on debt extinguishment 2,441,000 0
NET INCOME (LOSS) $ 1,724,000 $(3,893,000)
PRIMARY EARNINGS (LOSS) PER SHARE:
Loss before extraordinary item ($0.05) ($0.26)
Extraordinary item $0.16 0
$0.11 $(0.26)
AVERAGE NUMBER OF COMMON AND COMMON
SHARE EQUIVALENTS 15,673,270 15,004,390
<FN>
See accompanying Notes to Unaudited
Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
DDL ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
FOR THE THREE MONTHS ENDED DECEMBER 31,
<CAPTION>
1994 1993
<S> <C> <C>
SALES $ 7,654,000 $13,920,000
COSTS AND EXPENSES
Cost of goods sold 7,097,000 14,069,000
Administrative and
selling expenses 1,505,000 1,954,000
8,602,000 16,023,000
OPERATING LOSS (948,000) (2,103,000)
NONOPERATING INCOME (EXPENSE)
Investment income 35,000 60,000
Interest expense (316,000) (282,000)
Gain on sale of assets 3,374,000 1,000
3,093,000 (221,000)
INCOME (LOSS) BEFORE INCOME TAXES 2,145,000 (2,324,000)
INCOME TAXES 0 0
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM 2,145,000 (2,324,000)
EXTRAORDINARY ITEM
Gain on debt extinguishment 2,441,000 0
NET INCOME (LOSS) $ 4,586,000 $(2,324,000)
PRIMARY EARNINGS (LOSS) PER SHARE:
Income (loss) before
extraordinary item $0.13 ($0.15)
Extraordinary item 0.15 0
$0.28 ($0.15)
AVERAGE NUMBER OF COMMON AND
COMMON SHARE EQUIVALENTS 15,966,408 15,293,327
<FN>
See accompanying Notes to Unaudited
Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
DDL ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
FOR SIX MONTHS ENDED DECEMBER 31,
<CAPTION>
1994 1993
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,724,000 $(3,893,000)
Adjustments to reconcile net loss to
net cash used by operating activities
Depreciation and amortization 887,000 1,538,000
Gain on debt extinguishment (2,348,000) (33,000)
Gain on sale of property and
other assets (3,377,000) (1,000)
Net decrease in operating working
capital 2,392,000 626,000
Decrease (Increase) in deposits
and other asset 2,000 26,000
Non-cash pension charge 0 8,000
Benefit of noncapital grants 0 (117,000)
Net cash used by operating activities (719,000) (1,846,000)
Cash flows from investing activities:
Capital expenditures (146,000) (473,000)
Proceeds from disposition of
capital assets 9,303,000 14,000
Net cash provided (used) by
investing activities 9,157,000 (459,000)
Cash flows from financing activities:
Proceeds from long term debt 119,000 54,000
Reductions of long-term debt (10,228,000) (1,203,000)
Net proceeds from exercise
of stock warrants 980,000 3,455,000
Proceeds from stock option exercise 9,000 47,000
Proceeds from government grants 192,000 115,000
Proceeds from issue of Series-B
Preferred stock 0 675,000
Net cash provided (used) by financing
activities (8,928,000) 3,143,000
Effect of exchange rate changes on cash (3,000) (17,000)
Increase (decrease) in cash and cash
equivalents (494,000) 821,000
Cash and cash equivalents at
beginning of period 2,540,000 2,768,000
Cash and cash equivalents at
end of period $ 2,046,000 $ 3,589,000
<FN>
See accompanying Notes to Unaudited
Consolidated Financial Statements.
</TABLE>
<PAGE>
DDL ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994
NOTE 1 - PRINCIPLES OF CONSOLIDATION
In the opinion of the Company's management, the accompanying
consolidated financial statements, which have not been audited by
independent accountants (except for the balance sheet as of June
30, 1994), reflect all adjustments (consisting of normal
recurring
accruals) necessary to present fairly the Company's financial
position at December 31, 1994 and June 30, 1994, and the results
of
operations and the cash flows for the three month and six month
periods ended December 31, 1994 and 1993.
The Company uses a 52-53 week fiscal year ending on the Friday
closest to June 30. In the accompanying interim consolidated
financial statements, the interim period end for both years is
shown as December 31 for clarity of presentation. The actual
periods ended on December 30, 1994 and December 31, 1993.
Certain
notes and other information are condensed or omitted from the
interim financial statements presented in this Quarterly Report
on
Form 10-Q. Therefore, these financial statements should be read
in
conjunction with the Company's 1994 Annual Report to Stockholders
as filed with the Securities and Exchange Commission on or about
September 30, 1994.
Certain reclassifications have been made to the fiscal 1994
interim
financial statements included herein to conform with presentation
for fiscal 1995.
Retirement of the Company's Senior Debt:
On December 29, 1994 DDL Electronics, Inc. ("DDL")
successfully consummated an integrated plan to pay off all of the
Company's Senior Debt. The retirement of over $12,000,000 in
debt
was completed in conjunction with the Company's sale of certain
assets of its Aeroscientific Corp. Oregon
("Aeroscientific-Oregon")
subsidiary to Yamamoto Manufacturing (USA), Inc. ("Yamamoto")
The
termination agreements with Sanwa Bank California ("Sanwa")
covering Sanwa's term loan to the Company, and The Tokai Bank
Ltd.
("Tokai") for its letter of credit issued to First Interstate
Bank
of Oregon, N.A. ("IRB Trustee"), as trustee for the state of
Oregon
on the Industrial Revenue Bonds ("IRBs") issued by
Aeroscientific-
Oregon, eliminated all liens that the senior lenders had against
the Company.
<PAGE>
As described in the Company's filing with the Securities and
Exchange Commission on Form 8-K, consideration for the sale of
Aeroscientific-Oregon's assets to Yamamoto included approximately
$9,200,000 in cash and assumption of approximately $300,000 of
capitalized lease obligations. Aeroscientific-Oregon retained
its
trade accounts receivable and trade accounts payable.
Disposal of the Company's A.J. Electronics, Inc.'s operation:
In
August 1994, after three months of arduous review, the Small
Business Administration Disaster Assistance Division ("SBA")
denied
A.J. Electronics, Inc.'s ("A.J.") request for economic financial
assistance that was made as a result of physical damage suffered
in
the January 1994 Northridge earthquake. Costs incurred as result
of the earthquake exceeded $500,000 not including the impact from
lost business and costs to rebuild new business. A.J. was unable
to recover from the disastrous effects of the Northridge,
California earthquake and incurred substantial operating losses
and
cash outlays since the January earthquake. In A.J.'s financial
plan it predicted that it would not fully recover economically
until sometime in fiscal 1996. Management reviewed the situation
at A.J. immediately after the decision by the SBA and concluded
that A.J. would be a substantial economic burden on the
consolidated group without financial assistance considering the
limited working capital available to the Company.
As a result, management committed to a formal plan to liquidate
and
sell the Company's A.J. segment. The proposed plan included
preparing revised forecasts that show an eventual sale of the
business, preparation of "WARN" Act notices to all employees,
preliminary discussions with landlords for termination of
property
lease commitments and contracting with an investment banking
source
to act as agent to find a potential buyer for A.J. The plan for
disposal was reviewed and approved by DDL's Board of directors in
its September 1, 1994 board meeting.
At December 31, the Company had negotiated an agreement to sell
virtually all of A.J.'s operating assets to Raven Technologies,
Inc. (Raven). The sale was completed on January 17, 1995. As
described in the Company's filing with the Securities and
Exchange
Commission on Form 8-K, A.J. sold substantially all of its assets
to Raven for a purchase price of approximately $662,000 and
Raven's
assumption of approximately $300,000 in capitalized lease
obligations. Raven also assumed the sales tax obligation
associated with the sale that approximated $79,000. A.J. entered
into a non-competition agreement with Raven that prevents A.J.,
but
not the Company or any of its other subsidiaries, from engaging
in
contract manufacturing in competition with Raven.
<PAGE>
A.J. is a separate corporation and is DDL's only U.S. electronic
contract manufacturing (ECM) operation. Although DDL has an ECM
operation in Europe, the two ECM companies do not co-mingle
significant amounts of business due to substantial geographic
boundaries, industries served and/or services provided. A.J.'s
current period loss and expected losses to be incurred up to and
through the ultimate liquidation of all of A.J.'s assets, were
recorded as a restructuring charge of approximately $140,000.
This
includes, as of December 31, 1994, costs associated with the
write
down of A.J.'s inventories and fixed assets to their value as
provided in the Raven Purchase Agreement, and accrual of
liquidation costs of approximately $233,000. Virtually all
employees of A.J. were terminated as a result of the sale.
NOTE 2 - INVENTORIES
Inventories are comprised of the following:
December 31, June 30,
1994 1994
Raw materials $1,096,000 $3,167,000
Work in process 296,000 864,000
Less reserves (136,000) (384,000)
$1,256,000 $3,647,000
NOTE 3 - FINANCING ARRANGEMENTS
Subordinated debt:
The Company has previously issued 7% and 8-1/2% Convertible
Subordinated Debentures ("CSDs"). On December 31, 1992 and in
May
and June, 1993, pursuant to privately negotiated transactions,
holders of $5,411,000 principal amount of the Company's 7% CSDs
and
$3,294,000 principal amount of its 8-1/2% CSDs exchanged the CSDs
for units consisting of common stock and warrants to purchase
stock
in the future. The exchanges resulted in the issuance of
5,034,136
shares of common stock and 2,593,657 warrants to purchase common
stock. In July 1993, holders of 91% of the outstanding warrants
exercised such warrants generating net cash proceeds of
approximately $3,450,000. The remaining 223,509 warrants
outstanding are exercisable at $2.25 per share and originally
were
to expire on October 31, 1994, which date was extended to August
31, 1995. The Company can accelerate the termination date of the
warrants if the closing market price of the common stock for 10
business days within any 20 business day trading period is at
least
$3.00 per share. The warrants are separately tradable. The
Company may effect similar exchanges with holders of the
remaining
outstanding debentures in the future.
<PAGE>
Senior debt agreements:
Amended term loan and IRB agreements: In June 1992, long-term
amendments to Sanwa's term loan and Tokai's letter of credit
agreements were finalized, eliminating default conditions and
extending the due date of the term loan owed to Sanwa until May
1,
1995 and ultimately extending Tokai's letter of credit until May
1,
1995.
As previously noted, Sanwa's term loan was paid off and a
termination agreement was entered into as of December 29, 1994
that
released all of Sanwa's liens against the Company. As part of
the
pay off Sanwa accepted a cash payment of $4,500,000 in full and
complete satisfaction of outstanding debt owed by the Company to
Sanwa; such debt included approximately $6,848,000 of principal,
approximately $93,000 of accrued but unpaid interest and any
other
accrued but unpaid costs and expenses associated with Sanwa's
financing. Sanwa's payoff was accounted for in accordance with
Financial Accounting Standard No. 15, "Accounting by Debtors and
Creditors in Troubled Debt Restructuring" (FAS 15). Under FAS 15
the payoff resulted in an extraordinary gain of $2,441,000,
representing the difference between Sanwa's outstanding balance
and
what was paid by the Company as settlement.
The Company offset the full $5,300,000 of IRBs through defeasance
and redeemed the bonds effective February 1, 1995. The defeased
funds, plus approximately $68,000 for prepaid interest, was
invested in treasury securities that provided a return that
slightly exceeded the interest charged on the defeased bonds.
The
Company received full return of the prepaid interest. Both Tokai
and the IRB Trustee signed termination agreements that released
liens on all assets owned by the Company.
Series B Convertible Preferred Stock:
On October 18, 1993, the Company and the Industrial Development
Board for Northern Ireland ("IDB-NI") entered into and
consummated
an agreement whereby the IDB-NI purchased 450 shares of the
Company's Series B preferred stock for 450,000 British pounds
sterling (approximately
$675,500). The preferred stock is convertible into the Company's
common stock at $2.02 per common share, will accrue no dividend
and
will have a preference in liquidation of $1,530 per share, or a
total of $688,500. Proceeds from the IDB-NI's investment were
used
to support working capital needs of the Company's Northern
Ireland
operations.
Private Placement of Common Stock Under Regulation S:
In October 1994, the Company privately placed 760,000 shares of
its
common stock with a foreign investor. The sale of stock was
exempt
from registration under Regulation S of the Securities Act of
1933
as well as other available exemptions. Net proceeds from the
transaction were approximately $980,000. The Company plans to
use
the proceeds for general operating purposes.
<PAGE>
NOTE 4 - INFORMATION RELATING TO STATEMENT OF CASH FLOWS
"Net cash used by operating activities" includes cash payments
for
interest as follows:
Six months ended
December 31,
1994 1993
Interest paid $656,000 $540,000
"Net change in operating working capital" is comprised of the
following: (Changes in operating working capital accounts may not
equal differences derived by comparing balance sheet accounts due
to fluctuations in the exchange rate between reported balance
sheet
dates.)
Six months ended
December 31,
1994 1993
Decrease in accounts receivable $ 602,000 $1,680,000
Decrease in inventories 2,411,000 2,027,000
Decrease (increase) in prepaid expenses (94,000) 689,000
Decrease in accounts payable (83,000)
(3,411,000)
Decrease in accrued payroll and
employee benefits (313,000)
(314,000)
Decrease in other accrued liabilities (131,000)
(45,000)
Net decrease in operating working
capital $2,392,000 $ 626,000
Supplemental schedule of noncash investing and financing
activities:
Six months ended
December 31,
1994 1993
Capital expenditures financed by
lease obligations $ 54,000 $ 94,000
7% Convertible Subordinated Debentures
converted to equity 20,000 59,000
<PAGE>
NOTE 5 - PROFORMA FINANCIAL INFORMATION:
If the Company's December 31, 1994 consolidated balance sheet
were
restated to reflect the impact of A.J.'s sale on a proforma
basis,
total other assets would increase by $481,000 representing A.J.'s
net assets held for sale. Correspondingly, inventories would
reduce by $100,000, and net property plant and equipment would
decrease by $693,000. Reductions in consolidated liabilities for
capitalized lease obligations assumed by Raven include $113,000
in
current portion of long-term debt and $199,000 of long term debt.
The following is the Company's restated pro forma consolidated
operating results for the three month and six month periods ended
December 31, 1994 and 1993, respectively, excluding
Aeroscientific-
Oregon's and A.J.'s results of operations and excluding any gain
from the subsidiaries' sale of assets:
Numbers in thousands, except per share amounts:
3 Months 6 Months 3 Months
6 Months
Sales $ 4,313 $ 7,829 $ 5,354 $10,953
Total operating costs 4,545 8,705 5,725 11,802
Operating loss (232) (876) (371)
(849)
Nonoperating Income &
expense net (210) (389) (149)
(268)
Loss before
extraordinary item (442) (1,265) (520) (1,117)
Extraordinary Item - Gain
on debt extinguishment 2,441 2,441 0 0
Net Income (loss) $ 1,999 1,176 (520)
(1,117)
Earnings (loss) per share:
Loss before
extraordinary item ($0.03) ($0.08) ($0.03) ($0.07)
Extraordinary item 0.15 0.16 0 0
$0.12 $0.08 ($0.03)
($0.07)
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Three Month and Six Month Periods Ended December 31, 1994, and
1993
Consolidated sales for the three month and six month periods
ended
December 31, 1994 were $7,654,000, and $16,594,000, respectively.
This represents a decrease over the same periods last year of
$6,266,000 and $11,575,000 respectively. The Company's sales
decrease for the quarter and the year to date are due to lower
sales volume at the Company's domestic and European Electronic
Contract Manufacturing ("ECM") operations.
The Company's ECM group experienced a $6,197,000 sales decrease
for
the current quarter and a sales decrease for the six months of
$12,244,000. Most of the decline was from A.J. Electronics, Inc.
("A.J."), the Company's United States ECM operation. A.J.'s
continuing operations were severely damaged by the January 17,
1994
Northridge earthquake. Since the earthquake A.J. met its
existing
customer commitments, but lost new business from existing
customers
and potential customers while the plant was being reconstructed.
The Company filed for disaster relief financing from the Small
Business Administration's ("SBA") Disaster Assistance Division,
but
that was denied in August of 1994. Because of A.J.'s substantial
decline in business, cash outflow and no opportunity for relief
financing, Management committed to the shutdown and liquidation
and
sale of A.J. in August 1994. A.J. ceased all business activities
in November. During the period sales also declined at the
Company's European ECM operation because of an interruption in
business from a major customer. However, backlog at the end of
the
quarter for existing and new customers more than doubled since
the
end of the first fiscal quarter. The ECM industry, in general,
has
experienced increased customer demand as customers move away from
captive or in house ECM capabilities and out source production.
At
the same time, the number of ECM service providers is growing,
thus
increasing competition, keeping margins low and forcing sudden
changes in the ECM groups customer base.
Sales at the Company's printed circuit board ("PCB") operations
improved for the six month period, but worsened in the second
quarter entirely due to sales declines at the Company's domestic
PCB facility. Sales for the six month period were better by
$357,000, while sales for the quarter were $189,000 lower than
the
same period last year. The Company's PCB business continued to
be
adversely affected by underutilization of its existing capacity.
<PAGE>
Consolidated gross margin (sales less cost of goods sold)
improved
by $706,000 to $557,000 in the current quarter as compared to
last
year's second quarter. Gross margin for the six month period
improved by $624,000 to $881,000 compared to the same period last
year. Increases in gross margins are due to changes made at the
Company's PCB operations. The Company's PCB operations gross
margins for the second quarter and six months were $213,000 and
$593,000, respectively, improvements over the same periods last
year of $819,000 and $1,407,000, respectively. The PCB group's
improvements in gross margin reflect managements efforts to
increase margins on new orders and improve plant efficiency. ECM
gross margins for the quarter and six month period were down due
to
sales declines and lost capacity mainly attributable to A.J.'s
shutdown. These declines resulted in a drop in the ECM groups
gross margin for the quarter and six months of $114,000 and
$783,000, respectively as compared to prior year. ECM gross
margins are expected to improve with the elimination of A.J.'s
operations and increased shipments from greater backlog at the
Company's European ECM operation.
The Company's consolidated operating loss for the quarter and six
months were $948,000 and $3,525,000, respectively. This
represents
an improvement for the quarter of $1,155,000 compared to last
year's second quarter operating loss, and reflects improved
margins
in the Company's PCB segment. For the six months, the Company's
operating loss was $48,000 worse than in fiscal 1994. The
current
period operating loss includes $1,173,000 of restructuring
charges
recognized for A.J.'s shutdown and ultimate disposal of assets.
The year to date fiscal 1995 consolidated operating loss is lower
than last year's loss by $1,125,000 when A.J.'s restructuring
charge is excluded from the Company's operating loss. This lower
operating loss is the result of improved gross margins at the
Company's PCB operations and lower selling, general and
administrative costs at the Company's subsidiaries.
The Company's domestic PCB production formerly took place in its
Beaverton, Oregon Aeroscientific Corp. ("Oregon") facility.
Oregon
sold its facility, all equipment and inventory to Yamamoto
Manufacturing (USA), Inc. ("Yamamoto") on December 29, 1994. The
sale resulted in a gain of $3,374,000. That offset Oregon's year
to date net loss and provided Oregon net income for the year of
$2,599,000. Oregon's fiscal 1995 revenues, up to its sale to
Yamamoto, were $5,309,000, a decline of $421,000 from last year.
Competitive market conditions and Oregon's drive for increased
margins limited growth in sales volume. Oregon's operating loss
for
the six month period was $617,000, a $1,160,000 improvement over
the same period in fiscal 1994. The improved operating margin is
partly attributed to a change in Oregon's production management
team that has generated improved yields and higher margins since
the end of the Company's fiscal year. Improved margins are also
due to a change in customer mix, where Oregon concentrated its
marketing efforts on higher margin prototype and quick turn
business.
<PAGE>
Sales for A.J. were $3,507,000, from July 1, 1994 through its
shut
down in November. This represents a decline of $8,343,000 from
the
six month period last year. A.J. struggled with the effects from
last January's earthquake which temporarily impaired A.J.'s
ability
to service existing customers and win new business. In addition,
A.J.'s major customer, Dataproducts, materially reduced its firm
order requirements and subsequently terminated all remaining
order
requirements in fiscal 1994. Sales to Dataproducts in the first
half of fiscal 1994 represented 47.5% of A.J.'s first half sales.
The loss of Dataproducts, A.J.'s inability to successfully secure
new business and its ultimate shut down account for the
substantial
reduction in fiscal 1995 sales. A.J. previously filed a claim
against Dataproducts for recovery of costs associated with excess
inventory that resulted from Dataproducts' cancellation of
contractual purchase orders. Approximately $250,000 was in
dispute. Dataproducts filed a counter claim that, among other
things, asserted that A.J. breached its contract with
Dataproducts
and sought approximately $400,000. The Dataproducts litigation
was
settled on February 10, 1995 with Dataproducts dismissing its
counter claim and paying A.J. $150,000 in settlement of A.J.'s
claim.
Sales in U.S. dollars at the Company's Northern Ireland PCB
facility, Irlandus Circuits, Ltd. ("Irlandus"), were $2,429,000
in
the second quarter of fiscal 1995, an improvement of $260,000, or
12%, from the same period last year. Year to date sales are up
$778,000 to $4,644,000 or a 20% increase over last year. Fiscal
1995 second quarter sales at the Company's Northern Ireland ECM
facility, DDL Electronics, Ltd. ("DDL-E"), were $1,833,000, a
decline of $1,301,000, or 40.9% from last year's second quarter.
Year to date sales are down $3,901,000 or 55% compared to last
year. Despite this decline in sales volume, DDL-E has improved
its
operating efficiencies and margins creating a $21,000 second
quarter profit. DDL-E increased its consigned orders in fiscal
1995. Consigned business uses more of the ECM's service without
requiring the ECM to acquire material for production. This
correspondingly reduces sales and cost of sales without affecting
gross margin. Margins have also improved due to improved
materials
acquisition pricing and increased productivity. Combined
European
sales for the quarter and the first six months, as stated in
dollars, were 19.4% lower and 28.5% lower, respectively, than in
the same periods last year. Combined sales in pounds sterling
for
the second quarter and first half of the year were 24.5% lower
and
31.8% lower, respectively, than last year with the additional
difference caused by the change in translation rate from last
year.
Irlandus' and DDL-E's combined gross margin (after government
grant
subsidies) for the second quarter and six months were $592,000
and
$660,000, respectively. This is a $165,000 improvement for the
current quarter and almost no change for the six month period.
DDL-E experienced a $327,000 decline in gross margin for the
first
six months caused by absorption of operating costs over a lower
sales volume. Irlandus' gross margin for the same period
improved
by $339,000 on higher sales and improved product pricing. The
average U.S. dollar/pound sterling translation rates for the six
month periods ended December 31, 1994 and 1993 were $1.57/British
pound sterling and $1.50/British pound sterling, respectively.
<PAGE>
Consolidated administrative and selling expenses for the second
quarter and six months of fiscal 1995 declined by $449,000 and
$501,000, respectively, as compared to the same periods last
year.
Reduced operating expenses for the period were primarily due to
reduced employee costs at A.J. as that operation was down sized,
and lower employee costs at DDL-E caused by reduced staffing
levels
as a result of lower sales activity. The Company's Corporate
costs
are also lower due to lower legal costs and continued cost
containment measures.
Nonoperating income and expense items include the gain from sale
of
Oregon's facility. Other components include interest income that
declined for the year due to lower levels of investible funds,
and
interest expense that has increased due to a 2% rise in the prime
lending rate over last year. As a result of the Company's payoff
of senior debt at December 31, future quarterly interest expense
is
expected to decline by approximately $200,000.
The Company's consolidated net income for the current period
includes an extraordinary gain of $2,441,000, or $0.16 per share.
The extraordinary gain resulted from Sanwa's partial forgiveness
of
the Company's debt obligation as part of the senior debt payoff
and
termination. The transaction was accounted for in accordance
with
Statement of Financial Accounting No. 15, "Accounting by Debtors
and Creditors in Troubled Debt Restructuring," and accordingly,
the
gain was treated as extraordinary. Improvements, before
extraordinary gain, in the second quarter net income and six
month
net loss are impacted by Oregon's gain on sale of assets.
Excluding
the extraordinary gain and gain from the sale of Oregon assets,
the
second quarter is better than last year's by $1,095,000. For the
six months the loss is worse than last year's by $198,000.
Overall
the Company saw significant improvements in operations in the
second quarter in Europe and continued improvement at Oregon.
A.J.
had little impact on opera-tions, except for the $1,173,000
restructuring charge recognized as of the first quarter.
<PAGE>
Liquidity and Capital Resources
For the six months ended December 31, 1994, cash and cash
equivalents decreased by $494,000. As illustrated in the
Consolidated Statement of Cash Flows, this decrease in cash
included the following:
1. $754,000 was used for operating activities, principally
to
fund continued operating losses, offset by cash provided
by
a reduction in working capital (mostly from a reduction
in
current assets attributable to the sale of the Company's
domestic subsidiaries' assets).
2. Investing activities provided $9,157,000 which resulted
primarily from the sale of capital equipment at
Aeroscientific-Oregon.
3. Financing activities required $8,928,000 of cash which
was
used for payoff of debt obligations (primarily senior
debt
as previously discussed). Funds were provided from
financing activities through issuance of common stock
pursuant to Regulation S.
The Company currently has no working capital lines of credit. In
July 1993, the Company raised $3.45 million (net of expenses)
from
the exercise of outstanding warrants to purchase the Company's
common stock. In October 1993, the Company and the IDB-NI
reached
an agreement whereby the IDB-NI purchased 450 shares of a new
Series B Preferred Stock for 450,000 British pounds sterling
(approximately $675,000).
The funds invested by the IDB-NI were used for working capital
and
other needs of the Company's Northern Ireland subsidiaries. In
October 1994 the Company privately placed 760,000 shares of its
common stock with a foreign investor. The sale of stock was
exempt
from registration under Regulation S of the Securities Act of
1933
and other available exemptions. Net proceeds from the
transaction
were approximately $980,000. The Company plans to use the
proceeds
for general operating purposes.
The Company's primary source of liquidity is its cash balances
which amounted to $2,046,000 at December 31, 1994. Components of
working capital decreased by $2,485,000 during the first six
months
ended December 31, 1994. The resulting increase in funds
available
for use in operations came principally from a decrease in
inventories and accounts receivable as a result of the sales of
assets at both Aeroscientific and A.J (Although accounts
receivable
were not sold, they did decline as a result of the disposition of
the businesses). The sale of Aeroscientific Oregon's assets to
Yamamoto generated $9,200,000 in cash proceeds. These funds plus
the Company's own cash balances were used to retire approximately
$9,800,000 of the Company's senior debt. The payoff of senior
debt
combined with the $2,241,000 extraordinary gain from debt
forgiveness completely retired the $12,241,000 owed to the
Company's senior lenders.
<PAGE>
Additionally, the Company reached a non-binding agreement to
exchange the debt of participants of a supplemental retirement
program for 600,000 warrants to purchase common stock in
1996-1998
under certain defined contract rights. The initial impact of a
completed transaction would be a reduction of DDL's long term
debt
by approximately $1,800,000 with the final impact of up to
$3,000,000 of long term debt reduction. While the agreement is
non-binding, the Company expects it would seek to consummate such
a transaction on consummation of a separate transaction involving
a merger, sale of assets or the like.
At June 30, 1990, the Company had a $13,000,000 line of credit
with
Sanwa. There were no outstanding borrowings under the line at
that
date. The Sanwa line of credit agreement was scheduled to expire
on October 31, 1990. Prior to the expiration date, the Company
borrowed $12,889,000 under this line and, as permitted by the
credit agreement, exercised its option to convert the total
borrowings to a five-year term loan. The term loan bore interest
at Sanwa's prime rate, and required monthly payments equal to
1/60th of the original principal balance (approximately $215,000)
plus accrued interest, commencing in November 1990.
In May 1986, $9,100,000 of industrial revenue bonds ("IRBs") were
issued on behalf of Aeroscientific-Oregon to finance construction
of a PCB fabrication plant in Beaverton, Oregon. Payment of
interest and principal on the IRBs was made pursuant to the terms
of a letter of credit issued by The Tokai Bank, Ltd. ("Tokai") to
First Interstate Bank of Oregon, N.A. ("IRB Trustee").
Aeroscientific-Oregon's obligation to reimburse Tokai for
interest
and principal drawdowns on the letter of credit was secured by a
first trust deed on its property in Beaverton and was guaranteed
by
the Company.
In June 1992, the Sanwa and Tokai agreements were amended,
eliminating covenants the Company was not able to meet. The due
date of the term loan owed to Sanwa was ultimately extended until
May 1, 1995. The Tokai letter of credit was extended until May
1,
1995.
Sanwa's term loan was paid off and a termination agreement
entered
as of December 29, 1994 that released all of Sanwa's liens
against
the Company. As part of the pay off Sanwa accepted a cash
payment
of $4,500,000 in full and complete satisfaction of outstanding
debt owed by the Company to Sanwa; such debt included
approximately
$6,848,000 of principal, approximately $93,000 of accrued but
unpaid interest and any other accrued but unpaid costs and
expenses
associated with Sanwa's financing. Sanwa's payoff was accounted
for in accordance with Financial Accounting Standard No. 15,
"Accounting by Debtors and Creditors in Troubled Debt
Restructuring" (FAS 15). Under FAS 15 the payoff resulted in an
extraordinary gain of $2,441,000, representing the difference
between Sanwa's outstanding balance and what was paid by the
Company as settlement.
<PAGE>
The Company offset the full $5,300,000 of IRBs through defeasance
and redeemed the bonds on February 1, 1995. The defeased funds,
plus approximately $68,000 for prepaid interest, is being
invested
in treasury securities that provide a return that slightly
exceeds
the interest charged on the defeased bonds. The Company expects
full return of the prepaid interest. Both Tokai and the IRB
Trustee signed termination agreements that released liens on all
assets owned by the Company.
On December 31, 1992, and in May and June 1993, pursuant to
privately negotiated transactions, holders of $5,411,000
principal
amount of the Company's 7% CSDs and $3,294,000 principal amount
of
its 8-1/2% CSDs exchanged the CSDs for units consisting of common
stock and warrants to purchase stock in the future. The
contracts
also eliminated the interest payment due November 16, 1992, on
the
exchanged 7% CSDs. The exchanges resulted in the issuance of
5,034,136 shares of common stock and 2,593,657 warrants to
purchase
common stock. In July 1993, holders of 91% of the outstanding
warrants exercised such warrants generating net cash proceeds of
approximately $3,450,000. The remaining 223,509 warrants
outstanding are exercisable at $2.25 per share and were
originally
scheduled to expire on October 31, 1994, which date was extended
to
August 31, 1995. The Company can accelerate the termination date
of the warrants if the closing market price of the common stock
for
10 business days within any 20 business day trading period is at
least $3.00 per share. The warrants are separately tradable.
The
Company may effect similar exchanges with holders of the
remaining
outstanding debentures in the future.
In January 1994, the Company announced that its Board of
Directors
had approved a plan to identify and pursue strategic acquisition,
merger and consolidation candidates. The Company has proceeded
to
initiate discussions with private and public opportunities
identified after this announcement.
The achievement of operating profitability remains the most
significant challenge in generating sufficient cash to ensure the
Company's long-term viability. No assurance can be given that
the
Company will reach operating profitability, or that cash
generated
from asset sales or other means will be adequate to fund future
cash needs. It is important for the Company to succeed in an
operations turnaround and/or acquire an entity that will provide
positive cash flow if the Company is to achieve the liquidity
necessary to ensure continuance of operations for the longer
term.
Management believes that recent debt reductions and progress
towards profitable operation will greatly improve prospects for
completion of a merger or acquisition transaction.
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company currently has pending a lawsuit filed by the former
landlord of one of the Company's subsidiaries. The lawsuit was
filed to recover approximately $280,000 representing amounts owed
under a settlement agreement for a terminated building lease.
The Company has previously recorded on its books the full amount
owing under the settlement agreement and is negotiating payment
terms to avoid protracted litigation.
ITEM 5. OTHER INFORMATION
The Company's Aeroscientific Corp. subsidiaries have used
chemicals in the manufacture of its products that are classified
by the United States Environmental Protection Agency ("EPA") as
hazardous substances. The Company is aware of certain chemicals
that exist in the ground at its leased 1240-1244 South Claudina
Street, Anaheim, California, facility. The Company has notified
the appropriate governmental agencies and is proceeding with
remediation and investigative studies regarding soil and
groundwater contamination. The Company believes that it will be
required to implement a continuing remedial program for the site,
the cost of which is currently unknown. The Company believes
that the resolution of these matters will require a significant
cash outlay and the Company has reserved $340,000 in its
financial statements at December 31, 1994, as an estimate of its
portion of the clean-up costs. On July 2, 1993, the Company and
Aeroscientific Corp. entered into an agreement to share the costs
of environmental remediation with the landlord at the Anaheim
facility.
The Company's Aeroscientific-Anaheim subsidiary has received
notice from the EPA, that it is regarded as a potentially
responsible party ("PRP") under federal environmental laws in
connection with a waste disposal site known as the "Stringfellow
Superfund Site" in Riverside County, California, which is
presently
being considered by governmental authorities for remediation.
Aeroscientific has been named as a third party defendant by other
PRPs in a case brought by the United States Government concerning
this site. Aeroscientific has also been named as a defendant
together with a large number of PRPs in a civil action filed by
the
residents and homeowners adjacent to the Stringfellow site. The
information developed during discovery and investigation thus far
indicates that Aeroscientific supplied relatively small amounts
of
waste to the site as compared to the many other defendants. The
Company and other small polluters, as a separate class, have
entered into settlement negotiations with the EPA. As part of
the
currently proposed Settlement Agreement, small polluters would
pay
a fixed amount plus an amount that varies based on volume of
material dumped at the site. Under these guidelines, the
Company's
probable liability will be $128,000. Final settlement and timing
of payment are currently undeterminable, and no assurances can be
given that any settlement will be achieved. The Company has
accrued a liability of $120,000 to cover the expected settlement
costs. Any further remedial costs or damage awards in these
cases
may be significant and management believes that the Company's
allocated share of such costs or damages could have a material
adverse effect on the Company's business or financial condition.
The actions are still in the pre-trial and discovery stages and a
prediction of outcome is difficult. There is, as in the case of
most environmental litigation, the theoretical possibility of
joint
and several liability being imposed upon Aeroscientific for
damages
which may be awarded. Total estimated cleanup costs for the
Stringfellow site have been estimated at $600 million. The
Company's possible range of liability is undeterminable, and the
reliability and precision of estimated cleanup costs are subject
to
a myriad of factors which are not currently measurable. The
timing
of any future payments are uncertain at this time, except for
that
amount already recorded by the Company.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
Sequentially
Exhibit
Numbered
Number Description
Page
11 Statement regarding computation of earnings per
share
19
27 Financial data schedule submitted by electronic filer
______
b. Reports on Form 8-K:
On December 29, 1994, a Form 8-K was filed pursuant to Item 2,
Acquisition or Disposition of Assets, for the sale of
substantially all the assets of the Company's subsidiary,
Aeroscientific Corp. to Yamamoto Manufacturing (USA), Inc. The
filing also included Item 5, Other Events, regarding the
termination and payoff of amounts owed to the Company's senior
lenders.
On January 3, 1995, a Form 8-K was filed regarding a press
release announcing that the Company had retired its senior debt
and had sold its Beaverton, Oregon printed circuit operations to
Yamamoto Manufacturing (USA), Inc.
On January 17, 1995, a Form 8-K was filed pursuant to Item 2,
Acquisition or Disposition of Assets, for the sale of
substantially all of the assets of the Company's subsidiary, A.J.
Electronics, Inc., to Raven Technologies, Inc. The 8-K also
included Item 5, Other Events, for the press release announcing
such sale.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
February 13, 1995 /s/ M. Charles Van Rossen
Date M. Charles Van Rossen
(Principal Financial Officer
and duly Authorized Officer)
<TABLE>
EXHIBIT 11
DDL ELECTRONICS, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE (Unaudited)
Six Months Ended December 31,
<CAPTION>
1994 1993
<S> <C> <C>
PRIMARY EARNINGS PER SHARE:
Loss before extraordinary
item $(717,000) $(3,893,000)
Extraordinary item 2,441,000 0
Net income (loss) $ 1,724,000 $(3,893,000)
Weighted average number of
common shares outstanding 14,738,652 14,025,197
Assumed exercise of stock
options net of shares assumed
reacquired 934,618 979,193
Average common shares and common
share equivalents 15,673,270 15,004,390
Primary earnings (loss) per share:
Loss before extraordinary item ($0.05) ($0.26)
Extraordinary item 0.16 0
Net earnings (loss) per share $0.11 ($0.26)
FULLY DILUTED EARNINGS PER SHARE:
Loss before extraordinary
item $ (717,000) $(3,893,000)
Add back net interest
related to convertible
subordinated debentures 67,000 67,000
Loss before extraordinary
item for fully diluted
computation (650,000) (3,826,000)
Extraordinary item 2,441,000 0
Net income (loss) or
fully diluted computation $ 1,791,000 $(3,826,000)
Weighted average number of
common shares outstanding 14,738,652 14,025,197
Assumed exercise of stock
options net of shares
assumed reacquired under
treasury stock method
using period end market
price, if higher than
average market price 991,572 971,197
Assumed conversion of
convertible subordinated
debentures 762,971 426,305
Average fully diluted shares 16,493,195 15,422,699
Fully diluted earnings
(loss) per share:
Loss before extraordinary item ($0.04) ($0.25)
Extraordinary item 0.15 0
Net earnings (loss) per share $0.11 ($0.25)
<FN>
Note: The calculated fully diluted earnings per share are
antidilutive for fiscal 1994
</TABLE>
<PAGE>
EXHIBIT 11
DDL ELECTRONICS, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE (Unaudited)
Three Months Ended December 31
[CAPTION]
1994 1993
[S] [C] [C]
PRIMARY EARNINGS PER SHARE:
Income (loss) before
extraordinary item $ 2,145,000 $(2,324,000)
Extraordinary item 2,441,000
0
Net income (loss) $ 4,586,000 $
(2,324,000)
Weighted average number of
common shares outstanding 15,002,325
14,416,153
Assumed exercise of stock options net of
shares assumed reacquired 964,083
877,174
Average common shares and common
share equivalents 15,966,408
15,293,327
Primary earnings (loss) per share:
Income (loss) before extraordinary item $0.13
($0.15)
Extraordinary item 0.15
0.00
Net earnings (loss) per share $0.28
($0.15)
FULLY DILUTED EARNINGS PER SHARE:
Income (loss) before extraordinary item $2,145,000
$(2,324,000)
Add back net interest related to
convertible subordinated debentures 34,000
34,000
Income (loss) before extraordinary item
for fully diluted computation 2,179,000
(2,290,000)
Extraordinary item 2,441,000
0
Net income (loss) for fully diluted
computation $ 4,620,000
$
(2,290,000)
Weighted average number of common
shares outstanding 15,002,325
14,416,153
Assumed exercise of stock options
net of shares assumed reacquired
under treasury stock method using
period end market price, if higher
than average market price 986,457
876,928
Assumed conversion of convertible
subordinated debentures 761,048
420,206
Average fully diluted shares 16,749,830
15,713,287
Fully diluted earnings (loss) per share:
Income (loss) before extraordinary item $0.13
($0.15)
Extraordinary item 0.15
0
Net earnings (loss) per share $0.28
($0.15)
Note: The calculated fully diluted earnings per share are
antidilutive for fiscal 1994
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<FISCAL-YEAR-END> Jun-30-1995
<PERIOD-START> Jul-01-1994
<PERIOD-END> Dec-31-1994
<PERIOD-TYPE> 6-mos
<CASH> 2046
<SECURITIES> 0
<RECEIVABLES> 4851
<ALLOWANCES> 0
<INVENTORY> 1256
<CURRENT-ASSETS> 8478
<PP&E> 20642
<DEPRECIATION> 16552
<TOTAL-ASSETS> 13016
<CURRENT-LIABILITIES> 8478
<BONDS> 2309
0
0
<COMMON> 153
<OTHER-SE> (2251)
<TOTAL-LIABILITY-AND-EQUITY> 13016
<SALES> 16594
<TOTAL-REVENUES> 16594
<CGS> 15713
<TOTAL-COSTS> 20119
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 656
<INCOME-PRETAX> (717)
<INCOME-TAX> 0
<INCOME-CONTINUING> (717)
<DISCONTINUED> 0
<EXTRAORDINARY> 2441
<CHANGES> 0
<NET-INCOME> 1724
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
</TABLE>
