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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
___________ ___________
Commission File Number 1-8101
___________
Exact Name of Registrant as
Specified in Its Charter: DDL ELECTRONICS, INC.
______________________________
DELAWARE 33-0213512
_____________________________ _____________
State or Other Jurisdiction of I.R.S. Employer
Incorporation or Organization No. Identification
Address of Principal Executive Offices: 2151 Anchor Court
Newbury Park, CA 91320
_________________________
Registrant's Telephone Number: (805) 376-9415
_________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
_________________________ ________________________________________
Common Stock, $.01 Par Value New York Stock Exchange
Pacific Stock Exchange
7% Convertible Subordinated
Debentures due May 15, 2001 New York Stock Exchange
8-1/2% Convertible Subordinated
Debentures due August 1, 2008 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant based on the closing price as reported by the New York Stock
Exchange on October 9, 1996 was $20,448,000. The registrant had 23,046,914
shares of Common Stock outstanding as of October 9, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
Specified parts of the registrant's Annual Report to Stockholders for its
fiscal year ended June 30, 1996 are incorporated by reference into Parts I
and II hereof. Specified parts of the registrant's Proxy Statement for its
1996 Annual Meeting of Stockholders are incorporated by reference into Part
III hereof.
EXHIBIT INDEX
See page 14
<PAGE>
PART I
Item 1. Business
The Company provides customized, integrated electronic manufacturing
services ("EMS") to original equipment manufacturers ("OEMs") in the
computer, telecommunications, instrumentation, medical, industrial and
aerospace industries. The Company also fabricates multilayer printed circuit
boards ("PCBs") for use primarily in the computer, communications and
instrumentation industries. The Company's EMS operations are located in
Southern California and Northern Ireland. Its PCB facilities are located in
Northern Ireland.
The Company entered the EMS business by acquiring its domestic EMS
operations in 1985 and by organizing its European EMS operations in 1990.
Since 1985, the Company has made substantial capital expenditures in its
Northern Ireland EMS and PCB fabrication facilities. In fiscal 1995, the
Company liquidated or sold all assets associated with its PCB and ECM
operations in the United States.
RECENT DEVELOPMENTS
Acquisition of SMTEK, Inc.
In January 1996, as the first step toward rebuilding a domestic
presence in the EMS industry, the Company acquired SMTEK, Inc. ("SMTEK"), a
provider of integrated electronic manufacturing services. SMTEK specializes
in the design and manufacture of complex printed circuit board assemblies
and modules utilizing surface mount technology ("SMT") for sale to
government-related and commercial customers. In conjunction with this
acquisition, Gregory L. Horton, SMTEK's Chief Executive Officer and
President, was appointed Chief Executive Officer and President of the
Company. In addition, the Company's principal corporate office was
relocated from Oregon to SMTEK's facility in Newbury Park, California.
The consideration paid by the Company to purchase SMTEK consisted of
1,000,000 shares of common stock and $7,199,000 in cash. The cash portion
of the purchase price was financed principally by short-term bridge loans
extended to the Company in November 1995 and January 1996 in the aggregate
amount of $7,000,000, bearing interest at 10% per annum (the "Bridge
Loans"). The Company refinanced the Bridge Loans in February 1996 by issuing
$5,300,000 in aggregate amount of 10% Senior Secured Notes due July 1, 1997
(the "10% Senior Notes") and $3,500,000 in aggregate amount of 10%
Cumulative Convertible Debentures due February 28, 1997 (the "10%
Convertible Debentures"). As compensation for placing the Notes and the
Debentures, the Company paid to Rickel & Associates, Inc. ("Rickel") a fee
of $352,000 and issued to Rickel 572,683 shares of common stock valued at
$716,000. Rickel also received certain compensation for making and
arranging the Bridge Loans.
Changes in the Company's capitalization
The 10% Convertible Debentures, which were sold to offshore investors,
were convertible into common stock at any time after 60 days at a conversion
price equal to 82% of the market price of the Company's common stock at the
time of conversion. In May and June 1996, the holders of all of the 10%
Convertible Debentures elected to convert such debentures into common stock.
As a result of these conversions, a total of 2,698,275 new shares of common
stock were issued, and stockholders' equity increased by $3,188,000, net of
remaining unamortized issue costs.
Primarily as a result of the common stock issued in connection with
the acquisition of SMTEK and the conversion of the 10% Convertible
Debentures, the Company's outstanding common stock at June 30, 1996 amounted
to 22,998,879 shares, compared to 16,062,979 shares at the end of fiscal
1995.
Reduction of certain obligations
In March 1996, the Company entered into a settlement agreement with
certain of its former officers, key employees and directors (the
"Participants") to restructure its outstanding obligations under several
consulting programs and deferred fee arrangements which had provided for
payments to the Participants after their retirement from the Company or from
its board of directors. Under terms of the settlement, the Participants
agreed to relinquish all future payments due them under these consulting
programs and deferred fee arrangements in return for an aggregate of 595,872
common stock purchase warrants, Series G. The exercise price of these
warrants is $2.50 per warrant. The Company will subsidize the exercise of
warrants by crediting the Participants with $2.50 for each warrant
exercised. The warrants may be called for redemption by the Company at any
time after June 1, 1996, if DDL's common stock closes above $4.00 per share,
at a redemption price of $.05 per warrant. The Company is obligated to pay
the Participants $2.50 for each warrant which remains unexercised on the
June 1, 1998 warrant expiration date, payable in semiannual installments
over two to ten years.
The Company has recorded a liability for the present value of these
future payments, which amounted to $941,000 at June 30, 1996. As a result
of this settlement agreement, the Company recorded an extraordinary gain of
$2,356,000, net of $197,000 of compensation expense related to the "call"
feature of the warrants.
FINANCIAL INFORMATION BY BUSINESS SEGMENT AND GEOGRAPHICAL AREA
The Company is engaged in two lines of business -- electronic
manufacturing services and printed circuit board fabrication. Information
with respect to these segments' sales, operating income (loss), identifiable
assets, depreciation and amortization, and capital expenditures for each of
the last three fiscal years is set forth in Note 11 to the consolidated
financial statements of the accompanying 1996 Annual Report to Stockholders.
Such information is incorporated herein by this reference and is made a part
hereof.
ELECTRONIC MANUFACTURING SERVICES AND PRINTED CIRCUIT BOARD
FABRICATION BUSINESSES
The EMS and PCB fabrication industries and the markets in which the
Company's customers compete are characterized by rapid technological
change and product obsolescence. As a result, the end services provided
and products made by the Company's EMS and PCB fabrication customers
have relatively short product lives. The Company believes that its
future success in these industries is dependent on its ability to
continue to incorporate new technology into its EMS and PCB fabrication
processes, to satisfy increasing customer demands for quality and timely
delivery and to be responsive to future changes in this dynamic market.
The EMS industry, in general, has experienced increased customer demand
as customers move away from captive or in-house EMS capabilities and
out-source production. At the same time, the number of EMS providers is
growing, thus increasing competition, keeping margins low and forcing
sudden changes in the EMS customer base.
The PCB fabrication market is highly fragmented. Numerous factors,
however, have caused a shift toward consolidation in the PCB fabrication
industry, including extreme competition, substantial excess production
capacity experienced by the industry prior to the current fiscal year, the
greatly increased capital and technical requirements to service the advanced
multilayer PCB fabrication market and the inability of many PCB fabricators
to keep up with the changing demands and expectations of customers on
matters such as technical board characteristics, quality and timely delivery
of product.
Description of Products and Services--EMS
Production of electronic assemblies for a customer is only performed
when a firm order is received. Customer cancellations of orders are
infrequent and are subject to cancellation charges. More often, a customer
will delay shipment of orders based on its actual or anticipated needs.
Customer orders are produced based on one of two production methods, either
"turnkey" (where the Company provides all materials, labor and equipment
associated with producing the customers' product) or "consigned" (the
Company provides labor and equipment only for manufacturing product).
The Company's EMS operations provide turnkey electronic manufacturing
services using both surface mount and through-hole interconnection
technologies. The Company conducts the EMS portion of its business through
its SMTEK subsidiary in Southern California, which serves customers
primarily on the West Coast of the U.S., and through its DDL Electronics
Limited ("DDL-E") subsidiary, which serves customers primarily in Western
Europe. SMTEK and DDL-E do not fabricate any of the components or PCBs used
in these processes, but from time to time they have procured PCBs from the
Company's PCB fabricator, Irlandus Circuits Limited ("Irlandus"). EMS sales
represented approximately 67%, 47% and 59% of the Company's consolidated
sales for the fiscal years ended June 30, 1996, 1995 and 1994, respectively.
Since turnkey electronic contract manufacturing may be a substitute for
all or some portion of a customer's captive EMS capability, continuous
communication between the Company and the customer is critical. To
facilitate such communication, the Company's EMS businesses maintain
customer service departments whose personnel work closely with the customer
throughout the assembly process. The Company's engineering and service
personnel coordinate with the customer on the implementation of new and re-
engineered products, thereby providing the customer with feedback on such
issues as ease of assembly and anticipated production lead times. Component
procurement is commenced after component specifications are verified and
approved sources are confirmed with the customer. Concurrently, assembly
routing and procedures for conformance with the workmanship standards of the
Institute for Interconnecting and Packaging Electronic Circuits are defined
and planned. Additionally, in-circuit test fixtures are designed and
developed. In-circuit tests are normally performed on all assembled circuit
boards for turnkey projects. Such tests verify that components have been
properly inserted and meet certain functional standards and that electrical
circuits are properly completed. In addition, under protocols specified by
the customer, the Company performs customized functional tests designed to
ensure that the board or assembly will perform its intended function. The
Company's personnel monitor all stages of the assembly process in an effort
to provide flexible and rapid responses to the customer's requirements,
including changes in design, order size and delivery schedule.
The materials procurement element of the Company's turnkey services
consists of the planning, purchasing, expediting and financing of the
components and materials required to assemble a board-level or system-level
assembly. Customers have increasingly required the Company and other
independent providers of electronic manufacturing services to purchase some
or all components directly from component manufacturers or distributors and
to finance the components and materials. In establishing a turnkey
relationship with an independent provider of electronic manufacturing
services, a customer typically incurs costs in qualifying that EMS provider
and, in some cases, its sources of component supply, refining product design
and developing mutually compatible information and reporting systems. With
this relationship established, the Company believes that customers
experience significant difficulty in expeditiously and effectively
reassigning a turnkey project to a new assembler or in taking on the project
themselves. At the same time, the Company faces the obstacle of attracting
new customers away from existing EMS providers or from performing services
in-house.
Description of Products and Services--PCB Fabrication
The Company fabricates and sells advanced, multilayer PCBs based on
designs and specifications provided by the Company's customers. These
specifications are developed either solely through the design efforts of the
customer or through the design efforts of the customer working together with
the Company's design and engineering staff. Customers submit requests for
quotations on each job and the Company prepares bids based on its own cost
estimates. The Company conducts its PCB fabrication business through its
Irlandus subsidiary located in Northern Ireland. The Company's fabrication
facilities in Anaheim, California were shut down in fiscal year 1992 and its
Beaverton, Oregon facility was sold in fiscal 1995. PCB sales represented
approximately 33%, 53% and 41% of the Company's consolidated sales for the
fiscal years ended June 30, 1996, 1995 and 1994, respectively, with
multilayer boards constituting a substantial portion of the sales.
PCBs range from simple single- and double-sided boards to multilayer
boards with more than 20 layers. When PCBs are joined with electronic
components in the assembly process, they comprise the basic building blocks
for electronic equipment. Single-sided PCBs are used in electronic games
and automobile ignition systems, whereas multilayer PCBs are used in more
advanced applications such as computers, office equipment, communications,
instrumentation and defense systems.
PCBs consist of fine lines of a conductive material, such as copper,
which are bonded to a non-conductive panel, typically rigid laminated epoxy
glass. The conductive pathways in the PCBs form electrical circuits and
replace wire as a means of connecting electronic components. On
technologically advanced multilayer boards, conductive pathways between
layers are connected with traditional plated through-holes and may
incorporate surface mount technology. "Through-holes" are holes drilled
entirely through the board that are plated with a conductive material and
constitute the primary connection between the circuitry on the different
layers of the board and the electronic components attached to the boards
later. "Surface mount" boards are boards on which electrical components are
soldered onto the surface instead of being inserted into through-holes.
Although substantially more complex and difficult to produce, surface mount
boards can substantially reduce wasted space associated with through-hole
technology and permit greatly increased surface and inner layer densities.
Complex boards may also have "via" or "blind-via" holes that connect inner
layers of a multilayer board or connect an inner layer to the outside of the
board.
The development of increasingly sophisticated electronic equipment,
which combines higher performance and reliability with reduced size and
cost, has created a demand for increased complexity, miniaturization and
density in electronic circuitry. In response to this demand, multilayer
technology is advancing rapidly on many fronts, including the widespread use
of surface mount technology. More sophisticated boards are being created by
decreasing the width of the tracks on the board and increasing the amount of
circuitry that can be placed on each layer. Fabricating advanced multilayer
PCBs requires high levels of capital investment and complex, rapidly
changing production processes.
As the sophistication and complexity of PCBs increase, manufacturing
yields typically fall. Historically, the Company relied on tactical quality
procedures, in which defects are assumed to exist and quality inspectors
examine product lot by lot and board by board to identify deficiencies,
using automated optical inspection and electrical test equipment. This
traditional approach to quality control is not adequate, however, to produce
acceptably high yields in an advanced multilayer PCB fabrication
environment, as it focuses on identifying, rather than preventing, defects.
In recognition of this limitation, Irlandus is striving to create a positive
environment encompassing management's awareness, process understanding, and
operator involvement in identifying and correcting production problems
before defects occur.
Quality standards
The International Standards Organization ("ISO") has published
internationally recognized standards of workmanship and quality. Both
Irlandus and DDL-E have achieved ISO 9002 certification, which the Company
believes will be increasingly necessary to attract business. SMTEK has been
certified for Mil-Q-9858A, which is the highest military quality standard,
and NHB-5300.4, which is the primary quality standard for products used in
the U.S. space program. SMTEK is currently working to obtain ISO 9001
certification, which it expects to receive by February 1997.
EMS Facilities
SMTEK conducts its operations from a 78,000 square foot facility, which
is leased from an unaffiliated party through May 31, 2000. The monthly rent
was approximately $28,500 during fiscal 1996 and is subject to a 4% increase
each year. SMTEK has the option to extend the lease term for three renewal
periods of three years each. The lease rate during the renewal periods is
subject to adjustment based on changes in the Consumer Price Index for the
local area.
DDL-E conducts its operations from a 67,000 square foot facility in
Northern Ireland that was purchased in 1989. Prior to DDL-E commencing
operations in the spring of 1990, approximately 1,600,000 pounds sterling
(approximately $2,700,000) was expended on auto-insertion equipment, surface
mount device placement equipment, wave solder equipment, visual inspection
equipment and automated test equipment. The Company believes that this
facility possesses the technology required to compete effectively and that
the facility is capable of supporting projected growth for up to the next
two years.
Fabrication Facilities
Irlandus occupies a 63,000 square foot production facility and an
adjacent 9,000 square foot office and storage facility. Irlandus' existing
capacity is expected to be adequate to meet anticipated order levels for the
next three years.
Markets and Customers
The Company's sales in the EMS and PCB fabrication businesses and the
percentage of its consolidated sales to the principal end-user markets it
serves for the last three fiscal years were as follows (dollars in
thousands):
Year Ended June 30,
----------------------------------------------------
Markets 1996 1995 1994
------------ ------------ ------------ ------------
Computer $ 4,049 12.2% $ 7,115 24.1% $23,905 49.3%
Communications 4,189 12.6 6,926 23.4 8,396 17.3
Commercial
aviation 2,277 6.9 - - - -
Financial 3,155 9.5 2,067 7.0 - -
Industrial &
Instrumentation 7,621 23.0 6,044 20.4 6,196 12.8
Medical 4,429 13.4 4,668 15.8 6,533 13.4
Government/
Military 4,847 14.6 1,362 4.6 1,411 2.9
Automotive - - 175 .6 889 1.8
Other 2,569 7.8 1,219 4.1 1,199 2.5
------ ----- ------ ----- ------ -----
Total $33,136 100.0% $29,576 100.0% $48,529 100.0%
====== ===== ====== ===== ====== =====
The Company markets its EMS and PCB fabrication services through both a
direct sales force and independent manufacturers' representatives. The
Company's marketing strategy is to develop close relationships with, and to
increase sales to, certain existing and new major EMS and PCB fabrication
customers. This includes becoming involved at an early stage in the design
of PCBs for these customers' new products. The Company believes that this
strategy is necessary to keep abreast of rapidly changing technological
needs and to develop new EMS and PCB fabrication processes, thereby
enhancing the Company's EMS and PCB capabilities and its position in the
industry. As a result of this strategy, however, fluctuations experienced
by one or more of these customers in demand for their products may have and
have had adverse effects on the Company's sales and profitability.
During fiscal 1996, the Company's EMS and PCB businesses served
approximately 55 and 175 customers, respectively. The Company's five
largest customers accounted for 37%, 21% and 45% of consolidated sales
during fiscal years 1996, 1995 and 1994, respectively. The Company's largest
customer accounted for approximately 9.5% of consolidated sales in fiscal
1996.
Raw Materials and Suppliers
In its EMS business, the Company uses numerous suppliers of electronic
components and other materials. The Company's customers may specify the
particular manufacturers and components, such as the Intel 80486
microprocessor, to be used in the EMS process. To the extent these
components are not available on a timely basis or are in short supply
because of allocations imposed by the component manufacturer, and the
customer is unwilling to accept a substitute component, delays may occur.
Such delays are experienced in the EMS business from time to time and have
caused sales and inventory fluctuations in the Company's EMS business.
The principal materials used by the Company in its PCB fabrication
processes are copper laminate, epoxy glass, copper alloys, gold and various
chemicals, all of which are readily available to the Company from various
sources. The Company believes that its sources of materials for its
fabrication business are adequate for its needs and that it is not
substantially dependent upon any one supplier.
Industry Conditions and Competition
The markets in which the EMS and PCB fabrication businesses operate are
intensely competitive and have experienced excess production capacity during
the past few years. Seasonality is not a factor in the EMS and PCB
fabrication businesses. There has been significant downward pressure on the
prices that the Company is able to charge for its EMS and PCB fabrication
services. More recently, market conditions have improved, resulting in an
increase in product demand. While the Company believes that market
conditions will continue to improve, it does not believe that prices will
increase as quickly. EMS and PCB fabrication customers are increasing their
orders, but are reluctant to pay more for such services, primarily due to
the industry's excess capacity and price competition. Additionally,
competition is principally based on price, product quality, technical
capability and the ability to deliver products on schedule. Both the price
of and the demand for EMS and PCBs are sensitive to economic conditions,
changing technologies and other factors. The technology used in EMS and
fabrication of PCBs is widely available, and there are a large number of
domestic and foreign competitors. Many of these firms are larger than the
Company and have significantly greater financial, marketing and other
resources. In addition, the Company faces a competitive disadvantage
against better financed competitors because the Company's current financial
situation causes certain customers to be reluctant to do business with the
Company's operating units. Many of the Company's competitors have also made
substantial capital expenditures in recent years and operate technologically
advanced EMS and fabrication facilities. In addition, some of the Company's
customers have substantial in-house EMS capability, and to a lesser extent,
PCB fabrication capacity. There is a risk that when these customers are
operating at less than full capacity they will use their own facilities
rather than purchase from the Company. Despite this risk, management
believes that the Company has not experienced a significant loss of business
to in-house fabricators or assemblers. There also are risks that other
customers, particularly in the EMS market, will develop their own in-house
capabilities, that additional competitors will acquire the ability to
produce advanced, multilayer boards in commercial quantities, or the ability
to provide EMS, and that foreign firms, including large, technologically
advanced Japanese firms, will increase their share of the United States or
European market.
Price competition is particularly intense in the computer market, which
in fiscal years 1995 and 1994 was the Company's largest market segment.
This has caused price erosion and lower margins, particularly in the
Company's PCB fabrication business. Significant improvement in the
Company's PCB gross margins may not be achieved in the near future due to
excess PCB production capacity worldwide and substantial competitive
pressures in the Company's principal markets. Generally, the Company's
customers are reducing inventory levels and seeking lower prices from their
vendors, such as the Company, to compete effectively.
GENERAL
Backlog
At June 30, 1996, 1995 and 1994, the Company's EMS and PCB fabrication
businesses had combined backlogs of $17,669,000, $9,247,000 and $6,902,000,
respectively. Backlog is comprised of orders believed to be firm for
products that have scheduled shipment dates during the next 12 months. Some
orders in the backlog may be canceled under certain conditions.
Historically, a substantial portion of the Company's orders have been for
shipment within 90 days of the placement of the order and, therefore,
backlog information as of the end of a particular period is not necessarily
indicative of trends in the Company's business. In addition, the timing of
orders from major customers may result in significant fluctuations in the
Company's backlog and operating results from period to period.
Backlog at June 30, 1996 includes SMTEK, the EMS business acquired by
the Company in January 1996. The Company's backlog at June 30, 1995
consisted only of the backlog of the Company's European subsidiaries. The
increase from fiscal year 1994 to fiscal 1995 reflected higher order demand
from existing EMS customers and new outstanding orders from new EMS
customers.
Environmental Regulation
Federal, state and local provisions relating to the protection of the
environment affect the Company's PCB fabrication operations. In 1983, the
United States and the State of California filed a legal action against the
owners and operators of the Stringfellow hazardous waste disposal site
located near Riverside, California, as well as against a number of
generators and transporters of chemical substances who allegedly disposed of
waste at the site (the "Primary Defendants"). The action seeks to cause the
Primary Defendants to clean up the site, to reimburse government plaintiffs
for remediation costs incurred by them and to recover compensation for
alleged damage to natural resources. The Primary Defendants have initiated
a defense of the case. The State of California also has been found liable
for, among other things, its negligent selection, inspection, design,
construction, operation and failure to remedy the site. In 1988, the
Primary Defendants filed third-party complaints against the Company's
Anaheim, California-based Aeroscientific Corp. subsidiary ("Aero Anaheim")
and about 185 other alleged responsible parties. The U.S. Environmental
Protection Agency ("EPA") has estimated that about 34 million gallons of
waste were disposed of at the Stringfellow site and has estimated that Aero
Anaheim may have been responsible for having generated about 9,300 gallons
or 0.0273 percent of the total waste disposed. The government plaintiffs,
however, have been unable to estimate the value of their principal claims.
EPA's cleanup estimates have ranged from $400 million to $1 billion,
depending on which cleanup proposal is selected. At the present time, the
Company cannot determine how the allocation of responsibility in this case
will ultimately be made or what share of responsibility might be imposed on
state and local governments. The EPA contends that site owners and
operators and waste generators are jointly and severally liable under
federal law. In 1994, the Company was given the opportunity to participate
in a de minimis settlement negotiated with the EPA and the Primary
Defendants. The Company's share of the settlement and administration costs
would have been approximately $120,000. The Company decided not to
participate in the settlement at that time because of its limited cash
resources. However, the Company accrued this amount as its estimate of the
liability it will ultimately bear in this matter. The Company is currently
exploring the feasibility of entering into a settlement with the Primary
Defendants in which that same amount would be paid over several years. No
assurances can be given, however, that any such settlement will be achieved.
The Company is aware of certain chemicals that exist in the ground at
Aero Anaheim's previously leased facility in Anaheim. The Company has
notified the appropriate governmental agencies and is proceeding with
remediation and investigative studies regarding soil and groundwater
contamination. The Company believes that it will be required to implement a
continuing remedial program for the site. The installation of water and
soil extraction wells was completed in August 1994. A plan for soil
remediation was completed about the same time and was implemented beginning
in 1995. Investigative work to determine the full extent of potential
groundwater pollution has not yet been completed. The Company retained the
services of an environmental engineering firm in May 1995 to begin the vapor
extraction of pollutant from the soil and to perform exploratory hydro-punch
testing to determine the full extent and cost of the cleanup of the
potential groundwater contamination. These processes are in their
preliminary stages and a complete and accurate estimate of the full and
potential costs cannot be determined at this time. The Company believes,
however, that the resolution of these matters will require a significant
cash outlay. Initial estimates from environmental engineering firms
indicate that it could cost from $1,000,000 to $3,000,000 to fully clean up
the site and could take as long as ten years to complete. The Company and
Aero Anaheim entered into an agreement to share the costs of environmental
remediation with the owner of the Anaheim property. Under this agreement,
the Company is obligated to pay 80% of the site's total remediation costs up
to $725,000 (i.e., up to the Company's $580,000 share) with any costs above
$725,000 being shared equally between the Company and the property owner.
Through June 30, 1996, the Company has paid $420,000 as its share of the
remediation costs (including cash placed in an escrow account for payment of
expenses). At June 30, 1996, the Company has a reserve of $608,000, which
represents its estimated share of future remediation costs at this site.
Based on consultation with the environmental engineering firms, management
believes that the Company has made adequate provision for the liability
based on probable loss. It is possible, however, that the future remediation
costs at this site may differ significantly from the estimates, and may exceed
the amount of the reserve.
From time to time the Company is also involved in other waste disposal
remediation efforts and proceedings associated with its other facilities.
Based on information currently available to the Company, management does not
believe that the costs of such efforts and proceedings will have a material
adverse effect on the Company's business or financial condition.
Employees
At June 30, 1996, the Company had approximately 480 employees.
<PAGE>
Item 2. Properties
The following table lists principal plants and properties of the Company
and its subsidiaries:
Owned
Square or
Location Footage Leased
------------ ------ ------
Newbury Park, California 78,000 Leased
Craigavon, Northern Ireland 63,000 Owned
Craigavon, Northern Ireland 67,000 Owned
Craigavon, Northern Ireland 9,000 Owned
The Northern Ireland properties are pledged as security for installment
loans payable to the Industrial Development Board for Northern Ireland, from
which the properties were purchased. These loans had an aggregate
outstanding balance of approximately $1,265,000 at June 30, 1996.
Item 3. Legal Proceedings
As to other litigation matters that are not specifically described
under the caption "General - Environmental Regulation" in Item 1 above, no
material legal proceedings are presently pending to which the Company or any
of its property is subject, other than ordinary routine litigation
incidental to the Company's business.
Item 4. Submission of Matters to a Vote of Security Holders
At the 1995 Annual Meeting of Stockholders held on July 11, 1996,
Richard K. Vitelle was elected a Class III director by the stockholders.
Directors whose terms of office continued after the meeting were Erven P.
Tallman, Gregory L. Horton, Melvin Foster, Bernee D.L. Strom and Robert G.
Wilson. In addition to the election of a director, the stockholders approved
the Company's 1996 Stock Incentive Plan, the 1996 Non-Employee Directors
Stock Option Plan and a plan of warrant compensation for non-employee
directors who had joined the Board of Directors on May 31, 1995 and had
served since that date without other compensation from the Company.
Following is a summary of the voting:
Votes Votes
Votes For Against Abstained Unvoted
-------- ------- ------- -------
Election of Richard K. Vitelle
as Class III director 19,929,689 258,381 - -
Approval of 1996 Stock
Incentive Plan 10,303,288 841,857 93,126 8,949,799
Approval of 1996 Non-Employee
Directors Stock Option Plan 11,715,005 513,083 103,716 7,856,266
Approval of plan of warrant
compensation for non-employee
directors 11,088,984 526,350 111,489 8,461,247
At a Board of Directors meeting immediately following the 1995 Annual
Meeting, Mr. Tallman resigned from the board, and Karen Beth Brenner was
elected a director to fill Mr. Tallman's seat.
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
The information set forth under the caption "Market and Dividend
Information" in the Company's 1996 Annual Report to Stockholders is
incorporated herein by reference and made a part hereof.
Item 6. Selected Financial Data
The information set forth under the caption "Five-Year Financial
Summary" in the Company's 1996 Annual Report to Stockholders is incorporated
herein by reference and made a part hereof.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information set forth under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the
Company's 1996 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 and financial schedules
included later in this Report under Item 14.
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
This information is incorporated by reference to the Company's proxy
statement for its 1996 Annual Meeting of Stockholders.
Item 11. Executive Compensation
This information is incorporated by reference to the Company's proxy
statement for its 1996 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 1996 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 1996 Annual Meeting of Stockholders.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
1996 Annual
Report to
Stockholders
------
(a)(1) List of Financial Statements
List of data incorporated by reference:
Report of KPMG Peat Marwick LLP on consolidated
financial statements 12
Consolidated balance sheets as of June 30, 1996
and 1995 13
Consolidated statements of operations for the
years ended June 30, 1996, 1995 and 1994 15
Consolidated statements of cash flows for the
years ended June 30, 1996, 1995 and 1994 16
Consolidated statements of stockholders'
equity (deficit) for the years ended June 30,
1996, 1995 and 1994 17
Notes to consolidated financial statements 18
(a)(2) List of Financial Statement Schedules for the
years ended June 30, 1996, 1995 and 1994:*
VIII - Valuation and Qualifying
Accounts and Reserves 32
IX - Short-Term Bank Borrowings N/A
Form 10-K
-------
(a)(3) List of Exhibits:
Exhibit Index 14
(b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the quarter
ended June 30, 1996.
* Schedules other than those listed are omitted since they are
not applicable, not required, or the information required to be
set forth therein is included in the consolidated financial
statements or in the notes thereto.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, on
October 10, 1996.
DDL ELECTRONICS, INC.
/s/ Gregory L. Horton
-----------------------
Gregory L. Horton
Chief Executive Officer,
President and Chairman
of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
Signature Title Date
/s/ Gregory L. Horton Chief Executive Officer, October 10, 1996
- ----------------------- President and Chairman ------------------
Gregory L. Horton of the Board
/s/ Richard K. Vitelle Vice President-Finance and October 10, 1996
- ----------------------- Administration, Chief ------------------
Richard K. Vitelle Financial Officer, Treasurer,
Secretary and Director
/s/ Karen B. Brenner Director October 10, 1996
- ----------------------- ------------------
Karen B. Brenner
/s/ Melvin Foster Director October 10, 1996
- ----------------------- ------------------
Melvin Foster
Director
- ----------------------- ------------------
Robert G. Wilson
Director
- ----------------------- ------------------
Bernee D. L. Strom
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
3.1 Amended and Restated Certificate of Incorporation of the
Company (incorporated by reference to Exhibit 4.1 of the
Company's Registration Statement on Form S-8, Commission File
No. 33-7440).
3.2 Bylaws of the Company, amended and restated effective March
1995 (incorporated by reference to Exhibit 3-b of the
Company's 1995 Annual Report on Form 10-K).
4.1 Certificate of Designation, Preferences and Rights of Series A
Junior Participating Preferred Stock of the Company
(incorporated by reference to Exhibit 4.2 of the Company's
Registration Statement on Form S-8, Commission File No. 33-7440).
4.2 Certificate of Designation, Preferences and Rights of Series B
Convertible Preferred Stock of the Company (incorporated by
reference to Exhibit 4.3 of the Company's Registration
Statement on Form S-8, Commission File No. 33-7440).
4.3 Indenture dated July 15, 1988, applicable to the Company's
8-1/2% Convertible Subordinated Debentures due August 1, 2008
(incorporated by reference to Exhibit 4-c of the Company's 1988
Annual Report on Form 10-K).
4.3.1 Supplemental Indenture relating to the Company's 8-1/2%
Convertible Subordinated Debentures due August 1, 2008
(incorporated by reference to Exhibit 4-b of the Company's
1991 Annual Report on Form 10-K).
4.4 Indenture relating to the Company's 7% Convertible
Subordinated Debentures due 2001 (incorporated by reference to
Exhibit 4-c of the Company's 1991 Annual Report on Form 10-K).
4.5 Rights Agreement dated as of June 10, 1989, between the
Company and Bank of America, as Rights Agent (incorporated by
reference to Exhibit 1 to the Company's Report on Form 8-K
dated June 15, 1989).
4.5.1 Amendment to Rights Agreement dated as of February 21, 1991,
amending the Rights Agreement dated as of June 10, 1989,
between the Company and Bank of America, as Rights Agent
(incorporated by reference to Exhibit 4.7 of Registration
Statement No. 33-39115).
4.6 Warrant Agreement for Series A Warrants by and between the
Company and American Stock Transfer & Trust Company (the
"Transfer Agent") dated as of November 11, 1992 (incorporated
by reference to Exhibit 28.2 of the Company's Current Report
on Form 8-K dated January 7, 1993).
4.6.1 Second Amendment to the Warrant Agreement for Series A
Warrants by and between the Company and the Transfer Agent
dated as of July 31, 1995 (incorporated by reference to
Exhibit 4-e of the Company's Registration Statement on Form
S-3, Commission File No. 333-02969).
4.7 Series C Warrant Agreement dated as of July 1, 1995 between
the Company and Fechtor, Detwiler & Co., Inc. covering 250,000
shares and expiring on June 30, 2000 (incorporated by reference to
Exhibit 4-f of the Company's Registration Statement on Form
S-3, Commission File No. 333-02969).
4.8 Series C Warrant Agreement dated as of July 1, 1995 between
the Company and Fortuna Capital Management covering 100,000
shares and expiring on June 30, 2000 (incorporated by reference to
Exhibit 4-g of the Company's Registration Statement on Form
S-3, Commission File No. 333-02969).
4.9 Series C Warrant Agreement dated as of July 1, 1995 between
the Company and Karen Brenner covering 50,000 shares and expiring
on June 30, 2000 (incorporated by reference to Exhibit 4-h of
the Company's Registration Statement on Form S-3, Commission
File No. 333-02969).
4.10 Series C Warrant Agreement dated as of July 1, 1995 between
the Company and Barry Kaplan covering 15,000 shares and expiring
on June 30, 2000 (incorporated by reference to Exhibit 4-k of
the Company's Registration Statement on Form S-3, Commission
File No. 333-02969).
4.11 Series D Warrant Agreement dated as of July 1, 1995 between
the Company and Charles Linn Haslam covering 250,000 shares
and expiring on June 30, 2000 (incorporated by reference to
Exhibit 4-i of the Company's Registration Statement on Form
S-3, Commission File No. 333-02969).
4.12 Form of Warrant and Contingent Payment Agreement for Series G
Warrants dated as of March 31, 1996 between the Company and
each of several former officers, key employees and directors
of the Company under various consulting agreements and
deferred fee arrangements covering an aggregate 595,872 shares
expiring on June 1, 1998 (incorporated by reference to Exhibit
4-l of the Company's Registration Statement on Form S-3,
Commission File No. 333-02969).
4.13 Form of Warrant Agreement for Series H Warrants dated July 1,
1995 among the Company and each of several current or former
non-employee directors covering an aggregate of 300,000 shares
expiring on June 30, 2000 (incorporated by reference to
Exhibit C of the Company's Proxy Statement for the fiscal 1995
Annual Stockholders Meeting).
4.14 Securities Purchase Agreement dated February 29, 1996
relating to the Company's 10% Senior Secured Notes due July 1,
1997 issued February 29, 1996 in the aggregate amount of
$5,300,000 ("Securities Purchase Agreement") (incorporated by
reference to Exhibit 4-m of the Company's Registration
Statement on Form S-3, Commission File No. 333-02969).
4.14.1 Form of 10% Senior Secured Notes due July 1, 1997 in the
aggregate amount of $5,300,000 ("10% Senior Secured Notes")
(incorporated by reference to Exhibit 10.1 filed with the
Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996).
4.14.2 Form of Series E Warrant dated February 29, 1996 covering an
aggregate 1,500,000 shares and expiring on February 28, 2001
(incorporated by reference to Exhibit 4-n of the Company's
Registration Statement on Form S-3, Commission File No.
333-02969).
4.14.3 Form of Series F Warrant dated February 29, 1996 covering an
aggregate 1,060,000 shares and expiring on July 1, 1997,
exercisable in the event of default on the Company's 10%
Senior Secured Notes.
4.14.4 Registration Rights Agreement dated as of February 29, 1996
between the Company and Rickel & Associates, Inc. ("Rickel")
(incorporated by reference to Exhibit 4-o of the Company's
Registration Statement on Form S-3, Commission File No.
333-02969).
4.14.5 Registration Rights Agreement dated as of February 29, 1996
among the Company and each of the Purchasers referred to
therein (incorporated by reference to Exhibit 4-p of the
Company's Registration Statement on Form S-3, Commission File
No. 333-02969).
4.14.6 Pledge Agreement dated as of February 29, 1996 among Rickel,
First Union National Bank ("FUNB") and the Company
(incorporated by reference to Exhibit 4-q of the Company's
Registration Statement on Form S-3, Commission File No.
333-02969).
4.14.7 Collateral Agency Agreement dated as of February 29, 1996
among Rickel, each Purchaser under the Securities Purchase
Agreement, FUNB and the Company (incorporated by reference to
Exhibit 4-r of the Company's Registration Statement on Form
S-3, Commission File No. 333-02969).
4.14.8 Engagement Letter dated as of January 30, 1996 between Rickel
and the Company (incorporated by reference to Exhibit 4-s of
the Company's Registration Statement on Form S-3, Commission
File No. 333-02969).
4.15 Form of Offshore Securities Subscription Agreement and Form of
Debenture dated as of February 28, 1996 covering the offer and
sale under Regulation S of $3,500,000 aggregate amount of the
Company's 10% Cumulative Convertible Debentures due February
28, 1997 (incorporated by reference to Exhibit 10.2 filed with
the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1996).
4.16 Offshore Securities Subscription Agreement dated as of March
1, 1996 covering the offer and sale under Regulation S of 600,000
shares of the Company's Common Stock (incorporated by reference to
Exhibit 10.3 filed with the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1996).
10.1 1985 Stock Incentive Plan (incorporated by reference to
Exhibit 4a of Registration Statement No. 33-3172).
10.2 1987 Stock Incentive Plan (incorporated by reference to
Exhibit 4a of Registration Statement No. 33-18356)
10.3 1991 General Nonstatutory Stock Option Plan (incorporated by
reference to Exhibit 10-cf of the Company's 1993 Annual Report
on Form 10-K).
10.4 1993 Stock Incentive Plan (incorporated by reference to
Exhibit 4.7 of the Company's Registration Statement on Form
S-8, Commission file No. 33-74400).
10.5 1996 Stock Incentive Plan (incorporated by reference to
Exhibit A of the Company's Proxy Statement for the fiscal 1995
Annual Stockholders Meeting).
10.6 1996 Non-Employee Directors Stock Option Plan (incorporated by
reference to Exhibit B of the Company's Proxy Statement for the
fiscal 1995 Annual Stockholders Meeting).
10.7 Form of Indemnity Agreement with officers and directors
(incorporated by reference to Exhibit 10-o of the Company's
1987 Annual Report on Form 10-K).
10.8 Standard Industrial Lease-Net dated August 1, 1984, among the
Company, Aeroscientific Corp., and Bradmore Realty Investment
Company, Ltd. (incorporated by reference to Exhibit 10-w of
the Company's 1990 Annual Report on Form 10-K).
10.8.1 Second Amendment to Lease among Bradmore Realty Investment
Company, Ltd., the Company and the Company's Aeroscientific
Corp. subsidiary, dated July 2, 1993 (incorporated by
reference to Exhibit 10-cd of Registration Statement No.
33-63618).
10.9 Standard Industrial Lease - Net dated October 15, 1992,
between L.N.M. Corporation-Desert Land Managing Corp. and the
Company's A.J. Electronics, Inc. subsidiary (incorporated by
reference to Exhibit 10.2 of the Company's Quarterly Report on
Form 10-Q for the quarter ended October 2, 1993).
10.10 Grant Agreement dated September 16, 1987 between Irlandus
Circuits Limited and the Industrial Development Board for
Northern Ireland ("IDB") (incorporated by reference to Exhibit
10.13 of the Company's Registration Statement No. 33-22856).
10.10.1 Agreement dated March 10, 1992 between Irlandus Circuits
Limited and the IDB amending the Grant Agreement dated
September 16, 1987, between Irlandus and the IDB (incorporated
by reference to Exhibit 10-br of the Company's 1992 Annual
Report on Form 10-K).
10.11 Grant Agreement dated August 29, 1989, between DDL Electronics
Limited and the IDB (incorporated by reference to Exhibit 10.29
of the Company's Registration Statement No. 33-39115).
10.11.1 Agreement dated May 2, 1996, between DDL Electronics Limited
and the IDB amending the Grant Agreement dated August 29,
1989, between DDL Electronics and the IDB.
10.12 Form of Land Registry for the Company's Northern Ireland
subsidiaries dated November 4, 1993 (incorporated by reference
to Exhibit 10.1 of the Company's Quarterly Report of Form 10-Q
for the quarter ended September 30, 1993).
10.13 Agreement for Purchase of Shares dated October 6, 1995 between
DDL Electronics, Inc., as buyer, and the shareholders of SMTEK
(incorporated by reference to Exhibit 99.1 filed with the
Company's Current Report on Form 8-K dated January 12, 1996).
10.14 Employment Agreement and Letter of Understanding and Agreement
dated October 15, 1995 between the Company and Gregory L.
Horton (incorporated by reference to Exhibit 99.2 filed with
the Company's Current Report on Form 8-K dated January 12,
1996).
10.15 Employment Agreement dated September 12, 1996 between the
Company and Richard K. Vitelle.
11 Statement re Computation of Per Share Earnings.
13 Annual Report to security holders.
21 Subsidiaries of the Registrant.
23 Consent of KPMG Peat Marwick, LLP.
27 Financial Data Schedule.
99 Undertaking for Form S-8 Registration Statement.
[1996 ANNUAL REPORT TO STOCKHOLDERS]
DDL ELECTRONICS, INC. AND SUBSIDIARIES
FINANCIAL SUMMARY
(In thousands except per share amounts)
Year Ended June 30
--------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Sales $33,136 $29,576 $ 48,529 $ 57,883 $ 58,516
Operating Loss (1,167) (4,970) (6,948) (5,067) (22,703)
Extraordinary
Item 2,356 2,441 - 6,100 -
Net Income (Loss) 1,598 75 (8,354) 1,073 (22,305)
Earnings (Loss)
Per Share $ .09 $ .00 $ ( .55) $ .10 $ (3.34)
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 and Northern Ireland.
Its PCB facilities are located in Northern Ireland.
<PAGE>
To Our Stockholders:
These are very exciting times at DDL Electronics, Inc. With the
introduction of our new management team and the acquisition of SMTEK, Inc.,
a world class electronic manufacturing services (EMS) provider, DDL is
poised for continued revenue growth and improved earnings. DDL's difficult
history is well known and has presented some interesting challenges for the
new management team. A turnaround is clearly underway and we are on track
with our revitalization effort and rapid expansion into the EMS market.
For fiscal 1996, revenues were $33,136,000, an increase of 60% over
pro forma revenues for fiscal 1995 of $20,811,000 (after excluding 1995
sales of divested operations). DDL's balance sheet was strengthened
considerably during fiscal 1996, and we ended the year with stockholders'
equity at its highest level in nearly five years. And earlier this month
we obtained a $2.5 million bank line of credit for U.S. working capital
requirements.
Investment in equipment and facilities has made our operating units
capable of performing at a sales level several times greater than current
revenues. We are strengthening our sales and marketing efforts in both the
U.S. and Europe to take advantage of this available capacity. As we
increase the use of these facilities, we expect to see improvement in
profitability at each operating unit. Also encouraging is the fact that
the European printed circuit board market is emerging from a five-month
downturn.
Strong bookings and bidding activity in the first quarter of fiscal
1997 bode well for improved operating performance. At the end of this
latest quarter, total backlog exceeded $22 million. Growth in backlog is
due to strong market demand and a focus on key customer partnerships, with
a concerted effort to achieve total customer satisfaction. Repeat business
is becoming our greatest source of new bookings. Growth in backlog has
been accompanied by shortened cycle times and improved on-time delivery
performance, which has accelerated the conversion of backlog into revenue.
We are diligently pursuing strategic acquisitions in order to increase
our purchasing power and more effectively utilize our capabilities in the
areas of product engineering, design and test engineering. We are also
taking steps to increase the degree of vertical integration between the
Company's EMS and PCB operations, which should improve overall
profitability.
In the last six months, we have improved internal performance
measures, implemented a business team approach to managing contracts and
initiated employee motivation programs, the cumulative effect of which has
been to strengthen our ability to provide high quality product engineering,
design, automated production and post-production support services.
Looking ahead, we will focus on a broad spectrum of operational
improvements, including implementing paperless purchasing transactions and
electronic data interchange with suppliers and customers, enhancing
existing production tracking systems and statistical process controls, and
developing more automated job cost accounting systems and tighter controls
over material flows.
We are excited about the market demand for EMS and PCBs worldwide.
The Company has a diverse customer base, strong backlog, modern equipment,
dedicated staff and an international presence. We are committed to meeting
or exceeding customers' expectations, which we consider to be essential to
enhancing shareholder value.
/s/ GREGORY L. HORTON
Chairman, CEO and President
October 10, 1996
<PAGE>
DDL ELECTRONICS, INC. AND SUBSIDIARIES
FIVE-YEAR FINANCIAL SUMMARY
(In thousands except per share amounts)
Year ended June 30
--------------------------------------------
OPERATING DATA 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Sales $ 33,136 $ 29,576 $ 48,529 $ 57,883 $ 58,516
Costs and expenses:
Cost of goods sold 29,494 26,516 47,860 55,052 57,688
Administrative and
selling expenses 4,175 6,497 7,617 7,898 9,692
Goodwill amortization 634 - - - -
Restructuring charges - 1,533 - - 13,839
------ ------ ------ ------ ------
Total costs and expenses 34,303 34,546 55,477 62,950 81,219
------ ------ ------ ------ ------
Operating loss (1,167) (4,970) (6,948) (5,067) (22,703)
Non-operating income(expense):
Investment income 246 109 168 280 639
Interest expense (911) (883) (1,110) (1,107) (1,830)
Gain on sale of assets - 3,317 2 264 1,589
Earthquake expenses - - (500) - -
Other income (expense), net (36) 61 34 - -
------ ------ ------ ------ ------
Total non-operating
income (expense) (701) 2,604 (1,406) (563) 398
------ ------ ------ ------ ------
Loss from continuing
operations before
income taxes (1,868) (2,366) (8,354) (5,630) (22,305)
Income tax benefit 1,110 - - - -
------ ------ ------ ------ ------
Loss from continuing
operations (758) (2,366) (8,354) (5,630) (22,305)
Income (loss) from
discontinued operations,
less applicable income
taxes - - - 603 -
------ ------ ------ ------ ------
Loss before extraordinary
item (758) (2,366) (8,354) (5,027) (22,305)
Extraordinary item - Gain
on debt extinguishment 2,356 2,441 - 6,100 -
------ ------ ------ ------ ------
Net income (loss) $ 1,598 $ 75 $(8,354) $ 1,073 $(22,305)
====== ====== ====== ====== ======
Earnings (loss) per share:
Primary:
Continuing operations $(0.04) $(0.15) $(0.55) $(0.56) $(3.34)
Discontinued operations - - - 0.06 -
Extraordinary item 0.13 0.15 - 0.60 -
----- ----- ----- ----- -----
Total $ 0.09 $ - $(0.55) $ 0.10 $(3.34)
===== ===== ===== ===== =====
Fully diluted:
Continuing operations $(0.03) $(0.15) $(0.55) $(0.37) $(3.34)
Discontinued operations - - - 0.04 -
Extraordinary item 0.12 0.15 - 0.42 -
----- ----- ----- ----- -----
Total $ 0.09 $ - $(0.55) $ 0.09 $(3.34)
===== ===== ===== ===== =====
June 30
------------------------------------------
BALANCE SHEET DATA 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Current assets $15,493 $ 8,876 $12,018 $20,085 $23,116
Current liabilities $11,979 $ 8,904 $21,277 $14,289 $16,950
Working capital (deficit) $ 3,514 $ (28) $(9,259) $ 5,796 $ 6,166
Current ratio 1.3 1.0 0.6 1.4 1.4
Total assets $28,087 $12,590 $23,258 $33,739 $46,626
Long-term debt $10,935 $ 7,030 $ 6,870 $20,393 $35,959
Stockholders' equity
(deficit) $ 5,173 $(3,344) $(4,889) $ (943) $(6,283)
Equity (deficit)
per share $ 0.22 $ (0.21) $ (0.34) $ (0.08) $ (0.92)
Shares outstanding (000s) 22,999 16,063 14,469 11,973 6,863
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Introductory Statement
The Company provides customized, integrated electronic manufacturing
services ("EMS") to original equipment manufacturers ("OEMs") in the
computer, telecommunications, instrumentation, medical, industrial and
aerospace industries. The Company also fabricates multilayer printed circuit
boards ("PCBs") for use primarily in the computer, communications and
instrumentation industries. The Company's EMS operations are located in
Southern California and Northern Ireland. Its PCB facilities are located in
Northern Ireland.
The Company entered the EMS business by acquiring its domestic EMS
operations in 1985 and by organizing its European EMS operations in 1990.
Since 1985, the Company has made substantial capital expenditures in its
Northern Ireland EMS and PCB fabrication facilities. In fiscal 1995, the
Company liquidated or sold all assets associated with its PCB and ECM
operations in the United States.
In January 1996, as the first step toward rebuilding a domestic
presence in the EMS industry, the Company acquired SMTEK, Inc. ("SMTEK"), a
provider of integrated electronic manufacturing services. SMTEK specializes
in the design and manufacture of complex printed circuit board assemblies
and modules utilizing surface mount technology ("SMT") for sale to
government-related and commercial customers.
Historically, DDL was a diversified holding company with operations
in the areas of EMS and PCB fabrication, broadband communications
equipment and other businesses. In the past several years, the Company
focused its activities in the area of advanced EMS and PCB fabrication.
During fiscal 1995 the Company sold substantially all the assets of its
U.S. EMS and PCB operations. The sales enabled the Company to pay off
senior debt, thereby reducing the Company's future financing costs.
The Company has incurred operating losses in recent years. These
operating losses amounted to $1,167,000, $4,970,000 and $6,948,000 in
the fiscal years ended June 30, 1996, 1995 and 1994, respectively.
Although the Company had net income for the years ended June 30, 1996
and 1995 of $1,598,000 and $75,000, respectively, fiscal 1996's net
income included an extraordinary gain of $2,356,000 and an income tax
benefit of $1,110,000, while fiscal 1995's net income included an
extraordinary gain of $2,441,000 and a gain of on sales of assets of
$3,317,000.
Results of Operations
The following table sets forth the Company's sales and other
operating data as percentages of revenues:
Year Ended June 30
-----------------------
1996 1995 1994
---- ---- ----
Sales 100.0% 100.0% 100.0%
Cost of goods sold 89.0 89.7 98.6
----- ----- -----
Gross profit 11.0 10.3 1.4
Administrative and selling expenses 12.6 21.9 15.7
Goodwill amortization 1.9 - -
Restructuring charges - 5.2 -
----- ----- -----
Operating loss (3.5) (16.8) (14.3)
Investment income .8 .4 .3
Interest expense (2.8) (3.0) (2.3)
Gain on sale of assets - 11.2 -
Earthquake expenses - - (1.0)
Other income (expense), net (.1) .2 .1
----- ----- -----
Loss before income taxes (5.6) (8.0) (17.2)
Income tax benefit 3.3 - -
----- ----- -----
Loss before extraordinary item (2.3) (8.0) (17.2)
Extraordinary item - Gain on
debt extinguishment 7.1 8.3 -
----- ----- -----
Net income (loss) 4.8% .3% (17.2)%
===== ===== =====
Earnings (loss) per share:
Loss before extraordinary
item $(0.04) $(0.15) $(0.55)
Extraordinary item 0.13 0.15 -
---- ---- ----
$ 0.09 $ - $(0.55)
==== ==== ====
During fiscal 1995, the Company closed the operations of its A.J.
Electronics, Inc. subsidiary ("A.J."). The Company recorded restructuring
charges of $1,533,000 for the costs associated with the shut down and
disposal of the assets of A.J., including asset write-downs of $552,000,
additional bad debt write-offs of $136,000, lease termination costs of
$211,000 and all other exit costs totaling $634,000. Substantially all of
the operating assets of A.J. were sold in January 1995 for total
consideration, in the form of cash and debt assumption, of approximately
$1,041,000.
In December 1994, the Company sold essentially all the assets of its
Aeroscientific Oregon subsidiary ("Aero Oregon") for proceeds of
approximately $9,200,000 in cash and the assumption by the purchaser of
approximately $300,000 of capitalized lease obligations, which resulted in a
gain of $3,317,000. With the proceeds of this sale, the Company
paid off $5,300,000 of industrial revenue bonds and settled a $6,941,000
bank term loan for a cash payment of $4,500,000, which resulted in an
extraordinary gain on debt extinguishment of $2,441,000.
Following are the Company's unaudited pro forma consolidated
operating results for the years ended June 30, 1995 and 1994, which
exclude the operations of Aero Oregon and A.J., the gain on sale of
Aero Oregon's assets and the A.J. restructuring charges, as compared
with actual operating results for the year ended June 30, 1996 (in
thousands):
Year ended June 30
-------------------------------
1996 1995 1994
---- ---- ----
(Pro forma) (Pro forma)
Sales $33,136 $20,811 $20,958
------ ------ ------
Cost of goods sold 29,494 17,873 19,653
Administrative and
selling expenses 4,175 5,062 4,214
Goodwill amortization 634 - -
------ ------ ------
Total costs and expenses 34,303 23,037 23,867
------ ------ ------
Operating loss (1,167) (2,226) (2,909)
Non-operating expense, net (701) (538) (641)
------ ------ ------
Loss before income taxes (1,868) (2,764) (3,550)
Income tax benefit 1,110 - -
------ ------ ------
Loss before extraordinary item (758) (2,764) (3,550)
Extraordinary item - Gain on
debt extinguishment 2,356 2,441 -
------ ------ ------
Net income (loss) $ 1,598 $ (323) $(3,550)
====== ====== ======
Fiscal 1996 vs. 1995
Sales for fiscal 1996 were $33,136,000, compared to $29,576,000
for fiscal 1995. Included in fiscal 1995 sales are revenues from A.J.
and Aero Oregon. A.J.'s operations were discontinued and ultimately
liquidated in fiscal 1995, and Aero Oregon's manufacturing facility and
related assets were sold in December 1994. Aero Oregon and A.J.
represented $8,765,000 of fiscal 1995 sales. After giving effect to a
pro forma adjustment to exclude sales of Aero Oregon and A.J. from
prior year's revenues, sales in fiscal 1996 increased $12,325,000 over
sales of fiscal 1995. Of this increase, $8,668,000 represents revenues
of SMTEK, which was acquired in January 1996. Sales growth at DDL
Electronics, Ltd. ("DDL-E") accounted for most of the remaining
increase in consolidated sales. DDL-E added several new turnkey
customers that have contributed to sales growth in fiscal 1996 and have
reduced the relative volume of sales made on a consignment basis. For
"turnkey" sales, DDL-E provides all materials, labor and equipment
associated with producing the customers' products, while "consigned"
sales are those in which the customers furnish the materials and DDL-E
provides only the labor and equipment to manufacture the product.
Material costs typically represent about 70% of the turnkey method's
sales price. Thus, a shift in order mix from consigned to turnkey can
result in higher sales but lower gross profit margins.
Gross profit (sales less cost of goods sold) for fiscal 1996
improved by $582,000 compared to fiscal 1995. The acquisition of SMTEK
in January 1996 accounted for $1,600,000 of the increase, offset by a
decline in gross profit of the Northern Ireland operations of
approximately $800,000. Gross profit as a percentage of sales declined
from 14.1% (on a pro forma basis without Aero Oregon and A.J.) for
fiscal 1995 to 11.0% for fiscal 1996. DDL-E's gross profit declined by
$705,000, and its gross profit as a percentage of sales declined from
14.5% in fiscal 1995 to 5.9% in fiscal 1996 due to a decrease in
consignment sales and an increase in turnkey sales volume. Also, the
cost of direct materials as a percent of turnkey sales in fiscal 1996
was higher than in fiscal 1995. An increase in the number of
production employees handling the higher sales volume and additional
costs incurred for previously deferred equipment maintenance further
contributed to the decline in DDL-E's gross profit percentage. Gross
profit of Irlandus Circuits Limited ("Irlandus") decreased by $88,000
and its gross profit percentage declined from 12.7% to 11.4% from 1995
to 1996. Irlandus' gross profit declined primarily due to changes in
product mix.
The operating loss for fiscal 1996 improved by $3,803,000, from a
loss in fiscal 1995 of $4,970,000 to a loss of $1,167,000 in fiscal
1996. The fiscal 1996 operating loss includes goodwill amortization
expense of $634,000 arising from the acquisition of SMTEK in January
1996. On a pro forma basis, after giving effect to the exclusion of
Aero Oregon and A.J. from fiscal 1995 operating results, the
improvement in the operating loss was $1,059,000. A substantial portion
of fiscal 1995's operating costs were attributable to accrual of
restructuring charges associated with the discontinuance of A.J.'s
operations and disposal of its assets. The restructuring charge of
$1,533,000 in fiscal 1995 was comprised of a writedown of assets to
liquidation value, accrual of expected lease termination costs and
provision for operating expenses through A.J.'s ultimate and final
disposal.
Net non-operating income (expense) declined from $2,604,000 in
fiscal 1995 to ($701,000) in fiscal 1996. This change is attributable
principally to a non-recurring gain of $3,317,000 on the sale of assets
of Aero Oregon in fiscal 1995.
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 of the possibility that the
tax returns underlying these refunds may be subject to audit by the
Internal Revenue Service and a portion of the refunds disallowed, the
Company has not yet recognized a tax benefit for the remainder of the
refunds received to date, or for the refunds still expected to be
received. Nonetheless, the Company feels that its claim for refund and
carry back of net operating losses can be substantiated and is
supported by law, and that the Company will ultimately collect and
retain a substantial portion of the refunds applied for.
For fiscal 1995, the loss before extraordinary item was
$2,366,000, or ($0.15) per share. On a pro forma basis, excluding the
non-recurring gain on sale of assets and the operations of A.J. and
Aero Oregon, fiscal 1995 would have shown a loss before extraordinary
item of $2,764,000. For fiscal 1996, the loss before extraordinary item
was $758,000, or ($0.04) per share, which includes the effect of the
$1,110,000 income tax benefit discussed above.
Net income for fiscal 1996 was $1,598,000, or $0.09 per share,
compared to $75,000, or $0.00 per share, for fiscal 1995. 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. Net income for fiscal
1995 includes an extraordinary gain on debt extinguishment of
$2,441,000 associated with the retirement of the Company's senior bank
debt in December 1994.
Fiscal 1995 vs. 1994
Sales for fiscal 1995 were $29,576,000, a decrease of $18,953,000
from fiscal 1994. The reduction in sales resulted from the closure of
A.J.'s operations in November 1994 and the sale of Aero Oregon's
facility in December 1994. Approximately $13,550,000 and $5,256,000 of
the decline in sales was due to the reduced business volume at A.J. and
Aero Oregon, respectively. After giving effect to the pro forma
adjustment of sales for fiscal years 1995 and 1994 to eliminate A.J. and
Aero Oregon, sales declined by $147,000. Gross profit improved by
$2,391,000 to $3,060,000 or, as a percentage of sales, to 10.3% in 1995
from 1.4% in 1994. The low gross profit percentage in fiscal 1994 was
the result of disruptions to A.J.'s EMS operations caused by the Los
Angeles earthquake in January 1994, and by the Company's decision to
seek high volume, low margin orders in an effort to fill its PCB
facilities during fiscal 1994. Subsequently, the Company refocused its
PCB business to concentrate on higher margin, quick-turn prototype
boards.
A.J.'s continuing operations were severely damaged by the 1994 Los
Angeles earthquake. After 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. Because of A.J.'s
substantial decline in business, cash outflow and no opportunity for
relief financing, management ceased operations and liquidated A.J.'s
assets in fiscal 1995.
The Company's PCB business, in both the United States and Europe,
continued to be adversely affected by underutilization of existing
capacity which, together with intense competition from companies within
the PCB industry, has contributed to a reduction in sales. The
Company's domestic PCB production, formerly performed at Aero Oregon's
facility, was particularly impacted by its underutilization. In late
1994, Aero Oregon changed its product mix and service strategy,
concentrating on higher margin, quick-turn or prototype business. Aero
Oregon's operating results improved but could not improve quickly enough
to take advantage of improvements in the PCB industry's market. As a
result, management decided to sell its Oregon facility to a Japanese PCB
company interested in acquiring a production facility in the United
States. Consideration for the sale of Aero Oregon's assets included
approximately $9,200,000 in cash and assumption by the buyer of
approximately $300,000 of capitalized lease obligations. The sale
resulted in a gain of $3,317,000. Proceeds from the sale of Aero
Oregon's assets were used to pay off all of the Company's senior debt
with two banks. This included negotiating a reduction in the amount
owed to one of the banks of $2,441,000, resulting in an extraordinary
gain in that amount in fiscal 1995.
The Company's operating loss for fiscal 1995 was lower by
$1,978,000 than its fiscal 1994 operating loss. The fiscal 1995
operating loss included $1,533,000 in restructuring charges associated
with the shut down and liquidation of A.J., and approximately $1,400,000
of non-recurring general and administrative expenses associated with the
Company's change in board and management as the result of a proxy
contest, increases in expected remediation costs associated with the
Company's former Anaheim facility and an increase in the obligation to
certain former officers, key employees and directors of the Company
under consulting agreements and deferred fee arrangements.
Investment income declined in fiscal 1995 by $59,000 due to a lower
average monthly balance of investable funds, despite a higher ending
cash balance. Interest expense declined during fiscal 1995 as compared
to fiscal 1994 as a result of the payoff of the Company's senior debt.
The current year's net loss before extraordinary item was
$5,988,000 lower than in fiscal 1994 due to the $3,317,000 gain
resulting from the sale of Aero Oregon's assets, and reduced interest
expense resulting from the complete payoff of the Company's senior debt
in December 1994.
Improvement in the Company's loss before extraordinary item for
fiscal 1995 was due to the Company's sale or liquidation of
unprofitable operations, improved operating margins at the Company's
continuing subsidiaries, lower debt costs resulting from payoff of the
Company's senior debt and gain realized from the sale of Aero Oregon's
facility and manufacturing assets. This was partially offset by
restructuring charges associated with the liquidation of A.J. and
additional general and administrative costs recorded in the last quarter
of fiscal 1995.
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 source of liquidity is its cash and cash
equivalents, which amounted to $2,519,000 at June 30, 1996. During the
year ended June 30, 1996, cash and cash equivalents decreased by
$398,000. This net cash outflow consisted of cash used to acquire SMTEK
of $7,638,000, cash used by operating activities of $555,000, capital
expenditures of $910,000, and the effect of exchange rate changes on
cash of $79,000, partially offset by cash inflows of $6,558,000 from new
borrowings net of debt repayments and debt issue costs, proceeds from
issuances of common stock of $1,997,000, and proceeds from government
grants of $229,000.
Components of operating working capital, net of the effects of the
business acquired, increased by $1,508,000 during fiscal 1996, which
consisted of a $726,000 increase in costs and estimated earnings in
excess of billings on uncompleted contracts, a $1,881,000 increase in
inventories and an $86,000 increase in prepaid expenses and other
current assets, partially offset by increases in current liabilities of
$915,000 and a decrease in accounts receivable of $270,000. The
increase in operating working capital is primarily the result of the
acquisition of SMTEK in 1996.
The Company's EMS and PCB fabrication businesses require continuing
investment in plant and equipment to remain competitive. Recently,
however, the Company's financial position has severely restricted its
ability to make capital investments in its facilities. Capital
expenditures during fiscal 1996, 1995 and 1994 were approximately
$1,599,000, $643,000 and $805,000, respectively. The Company
anticipates it will need to increase its capital spending in the coming
years in order to stay competitive as technology improves. Management
estimates that capital expenditures of as much as $1,500,000 may be
required in fiscal 1997. Of that amount, the substantial majority is
expected to be financed by a combination of capital leases, secured
loans and other borrowings.
In February 1996, the Company issued 10% Senior Secured Notes due
July 1, 1997 in the aggregate amount of $5,300,000 (the "10% Senior
Notes") and 10% Cumulative Convertible Debentures due February 28, 1997
in the aggregate amount of $3,500,000 (the "10% Convertible
Debentures"). The proceeds of these borrowings were used to pay off the
principal of and accrued interest on the $7,000,000 bridge loans which
had been taken out to finance the acquisition of SMTEK, to pay
acquisition costs and to provide working capital for SMTEK. In March
1996, to raise additional working capital for SMTEK, the Company sold
600,000 shares of common stock to an offshore investor which generated
net proceeds of $1,112,000.
The 10% Senior Notes are secured by (i) 1,060,000 shares of common
stock and (ii) warrants, Series F, to purchase 1,060,000 shares of common
stock (the "Collateral Warrants"), all of which have been placed into an
escrow account. In the event the Collateral Warrants are required to retire
the 10% Senior Notes, each warrant would be exercisable into one share of
common stock at a price which is 6% less than the market value of the
Company's common stock at the time of exercise. If the 10% Senior Notes are
repaid from sources other than the Collateral Warrants, then the Collateral
Warrants expire and can no longer be exercised. The Company also deposited
$375,000 into a restricted cash account maintained by an escrow agent, such
amount to be used for interest payments on the 10% Senior Notes. At June
30, 1996, this restricted cash amounted to $208,000, and is included in
prepaid expenses and other current assets in the accompanying Consolidated
Balance Sheet.
The 10% Convertible Debentures, which were sold to offshore
investors, were convertible into common stock at any time after 60 days
at a conversion price equal to 82% of the market price of the Company's
common stock at the time of conversion. In May and June 1996, the
holders of all of the 10% Convertible Debentures elected to convert such
debentures into common stock. As a result of these conversions, a total
of 2,698,275 new shares of common stock were issued, and stockholders'
equity increased by $3,188,000, net of the remaining unamortized issue
costs.
As indicated above, the 10% Senior Notes mature on July 1, 1997. The
Company plans to retire this $5,300,000 indebtedness at or prior to maturity
by issuing new common stock. The note holders have the option to accept
common stock in lieu of cash. If the note holders do not so elect, then the
Company plans to issue stock to other parties to raise the payoff amount.
Under certain circumstances, as set forth in the agreements governing the
10% Senior Notes, the Company can apply some or all of the 1,060,000 common
stock shares held in escrow toward the payoff of these notes. The total
number of new shares of common stock which will need to be issued to fund
the retirement of these notes depends on several factors, including: (i)
whether the notes are paid off prior to the maturity date; (ii) if paid
prior to maturity, whether the prepayment is partial or complete; and (iii)
the market price of the Company's common stock at the time of issuance.
The Company's financial statements are presented on a going concern
basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. The Company incurred
operating losses of $1,167,000, $4,970,000 and $6,948,000 and negative cash
flows from operating activities of $555,000, $264,000 and $2,710,000 for the
years ended June 30, 1996, 1995 and 1994, respectively.
The achievement of sustained operating profitability is the most
significant internal factor bearing on the Company's long-term viability. No
assurance can be given that the Company will attain operating profitability
or that cash generated from non-operating sources will be adequate to fund
future cash needs. As a necessary step to improve the Company's results of
operations, the Company is actively pursuing strategic acquisition
candidates that might better assure growth of the Company in the markets and
industries in which it has expertise.
Management anticipates that the Company will continue to incur
operating losses for at least the near term future due to its current level
of fixed costs for manufacturing overhead relative to its current sales
volume, as well as amortization expense of the goodwill arising from the
acquisition of SMTEK. Operating losses are expected to continue until such
time as sales increase to a level necessary to absorb fixed costs and offset
goodwill amortization. No assurance can be given as to whether or when
sales increases may be achieved. Sales increases will depend in part upon
strengthening the Company's sales and marketing functions for its existing
operations and improving its price competitiveness in the EMS industry by
achieving economies of scale in the procurement of electronic components.
At June 30, 1996, the Company's total cash and cash equivalents
amounted to $2,519,000. As of September 30, 1996, total cash and cash
equivalents had declined to $1,349,000 due primarily to working capital
requirements at the Company's EMS operation in Northern Ireland. In
October 1996, the Company finalized an accounts receivable-based working
capital bank line of credit for its U.S. EMS operation, which provides
for borrowings of up to $2,500,000 at an interest rate of prime plus
1.25%. 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.
<PAGE>
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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the
results of their operations and cash flows for each of the years in the
three-year period ended June 30, 1996 in conformity with generally
accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
Los Angeles, California
September 6, 1996, except for
the last paragraph of Note 12,
which is as of October 9, 1996
<PAGE>
DDL ELECTRONICS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
June 30
-----------------
1996 1995
---- ----
Assets
Current assets:
Cash and cash equivalents $ 2,519 $ 2,917
Accounts receivable, net (Note 3) 5,620 3,600
Costs and estimated earnings
in excess of billings on
uncompleted contracts (Note 4) 3,026 -
Inventories (Note 5) 4,014 2,188
Prepaid expenses and other
current assets 314 171
------ ------
Total current assets 15,493 8,876
------ ------
Property, equipment and improvements,
at cost (Notes 6 and 10):
Buildings and improvements 5,604 5,217
Plant equipment 13,999 9,486
Office and other equipment 1,444 1,268
------ ------
21,047 15,971
Less: Accumulated depreciation
and amortization (15,130) (12,662)
------ ------
Property, equipment and
improvements, net 5,917 3,309
------ ------
Other assets:
Goodwill, net 5,708 -
Debt issue costs 533 44
Deposits and other assets 436 361
------ ------
6,677 405
------ ------
$28,087 $12,590
====== ======
<PAGE>
DDL ELECTRONICS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands except share amounts)
(continued)
June 30
-----------------
1996 1995
---- ----
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Current portion of long-term debt (Note 6) $ 603 $ 633
Accounts payable 7,485 5,283
Accrued payroll and employee benefits 777 601
Other accrued liabilities (Note 9) 3,114 2,387
------ ------
Total current liabilities 11,979 8,904
------ ------
Long-term debt, less current
portion (Note 6) 10,935 7,030
------ ------
Commitments and contingencies (Note 10)
Stockholders' equity (deficit) (Notes 6 and 8):
Preferred stock, $1 par value; 1,000,000
shares authorized; no shares issued
or outstanding - -
Common stock, $.01 par value; 50,000,000
shares authorized; 22,998,879 and
16,062,979 shares issued and outstanding
at June 30, 1996 and 1995, respectively 230 161
Additional paid-in capital 29,304 20,983
Common stock held in escrow (1,325) -
Accumulated deficit (22,000) (23,598)
Foreign currency translation adjustment (1,036) (890)
------ ------
Total stockholders' equity (deficit) 5,173 (3,344)
------ ------
$28,087 $12,590
====== ======
See accompanying notes to consolidated financial statements.
<PAGE>
DDL ELECTRONICS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands except per share amounts)
Year ended June 30
------------------------------
1996 1995 1994
---- ---- ----
Sales $33,136 $29,576 $48,529
------ ------ ------
Costs and expenses:
Cost of goods sold 29,494 26,516 47,860
Administrative and selling expenses 4,175 6,497 7,617
Goodwill amortization 634 - -
Restructuring charges (Note 2) - 1,533 -
------ ------ ------
34,303 34,546 55,477
------ ------ ------
Operating loss (1,167) (4,970) (6,948)
------ ------ ------
Non-operating income (expense):
Interest income 246 109 168
Interest expense (911) (883) (1,110)
Gain on sale of assets (Note 2) - 3,317 2
Earthquake expenses - - (500)
Other income (expense), net (36) 61 34
------ ------ ------
(701) 2,604 (1,406)
------ ------ ------
Loss before income taxes (1,868) (2,366) (8,354)
Income tax benefit (Note 7) 1,110 - -
------ ------ ------
Loss before extraordinary item (758) (2,366) (8,354)
Extraordinary item -
Gain on debt extinguishment
(Notes 2 and 6) 2,356 2,441 -
------ ------ ------
Net income (loss) $ 1,598 $ 75 $(8,354)
====== ====== ======
Earnings (loss) per share:
Loss before extraordinary item $ (0.04) $ (0.15) $ (0.55)
Extraordinary item 0.13 0.15 -
------ ------ ------
Earnings (loss) per share $ 0.09 $ - $ (0.55)
====== ====== ======
Share used in computing
earnings (loss) per share 18,807 15,971 15,097
====== ====== ======
See accompanying notes to consolidated financial statements.
<PAGE>
DDL ELECTRONICS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Year ended June 30
------------------------------
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ 1,598 $ 75 $(8,354)
Adjustments to reconcile net income
(loss) to net cash used by operating
activities:
Depreciation and amortization 2,028 1,505 3,120
Gain on debt extinguishment (2,356) (2,441) -
Gain on sale of assets - (3,317) (2)
Net (increase) decrease in operating
working capital, net of effects
of business acquired (Note 9) (1,508) 4,009 2,648
(Increase) decrease in deposits and
other assets (93) 2 27
Benefit of non-capital grants (265) (139) (150)
Other 41 42 1
------ ------ ------
Net cash used by operating activities (555) (264) (2,710)
------ ------ ------
Cash flows from investing activities:
Capital expenditures (910) (547) (711)
Purchase of SMTEK, Inc., net of
cash acquired (Note 2) (7,638) - -
Proceeds from sale of assets (Note 2) - 9,936 18
------ ------ ------
Net cash provided by (used in)
investing activities (8,548) 9,389 (693)
------ ------ ------
Cash flows from financing activities:
Proceeds from long-term debt 8,800 612 272
Payments of long-term debt (1,870) (10,819) (1,633)
Debt issue costs (372) - -
Proceeds from issuance of common
stock, net 1,112 980 -
Proceeds from exercise of stock options 437 287 94
Proceeds from exercise of stock warrants 448 - 3,455
Proceeds from issuance of preferred stock - - 675
Proceeds from foreign government grants 229 202 268
------ ------ ------
Net cash provided by (used in)
financing activities 8,784 (8,738) 3,131
------ ------ ------
Effect of exchange rate changes on cash (79) (10) 44
------ ------ ------
Increase (decrease) in cash
and cash equivalents (398) 377 (228)
Cash and cash equivalents at
beginning of year 2,917 2,540 2,768
------ ------ ------
Cash and cash equivalents at end of year $ 2,519 $ 2,917 $ 2,540
====== ====== ======
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
DDL ELECTRONICS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Years ended June 30, 1996, 1995 and 1994
(In thousands except share amounts)
Common Stock Common Stock Foreign Total
Preferred -------------- held in escrow Additional currency stockholders'
Stock Par --------------- paid-in Accumulated translation equity
shares Shares value Shares Value capital deficit adjustment (deficit)
------ ------ ----- ------ ----- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1993 - 11,972,880 $ 120 - $ - $ 15,380 $(15,319) $(1,124) $ (943)
Net loss - - - - - - (8,354) - (8,354)
Exercise of warrants - 2,370,148 24 - - 3,431 - - 3,455
Issuance of preferred stock 450 - - - - 675 - - 675
Conversion of debentures - 30,500 - - - 61 - - 61
Exercise of stock options - 95,190 1 - - 93 - - 94
Compensation expense on
stock option grants - - - - - 6 - - 6
Translation adjustments - - - - - - - 117 117
---- ---------- ---- --------- ----- ------ ------ ------ ------
Balance at June 30, 1994 450 14,468,718 145 - - 19,646 (23,673) (1,007) (4,889)
Net income - - - - - - 75 - 75
Issuance of common stock - 760,000 8 - - 972 - - 980
Conversion of debentures - 43,000 - - - 86 - - 86
Exercise of stock options - 450,447 5 - - 282 - - 287
Shares retired - (27) - - - - - - -
Conversion of Series B
preferred stock to common (450) 340,841 3 - - (3) - - -
Translation adjustments - - - - - - - 117 117
---- ---------- ---- --------- ----- ------ ------ ------ ------
Balance at June 30, 1995 - 16,062,979 161 - - 20,983 (23,598) (890) (3,344)
Net income - - - - - - 1,598 - 1,598
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
Stock issued as collateral
for 10% senior notes - 1,060,000 10 (1,060,000) (1,325) 1,315 - - -
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 - 595,442 6 - - 431 - - 437
Exercise of warrants - 323,500 3 - - 445 - - 448
Warrant compensation costs - - - - - 196 - - 196
Other stock transactions - 20,000 - - - 35 - - 35
Translation adjustments - - - - - - - (146) (146)
---- ---------- ---- --------- ----- ------ ------ ------ ------
Balance at June 30, 1996 - 22,998,879 $ 230 (1,060,000) $(1,325) $29,304 $(22,000) $(1,036) $ 5,173
==== ========== ==== ========= ===== ====== ====== ====== ======
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
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 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"). 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 1996, 1995 and 1994, fell on June
28, June 30 and July 1, respectively. In these consolidated financial
statements, the fiscal year-end for all years is shown as June 30 for
clarity of presentation.
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, 1996, the carrying amount of the Company's cash and cash
equivalents, accounts receivable and accounts payable approximate their fair
value because of the short maturity of those instruments. The carrying
amount of long-term debt was $11,538,000 and the fair value was $11,159,000
as of June 30, 1996. 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
Manufacturing 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; 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, which is the expected period of benefit.
Statement of Financial Accounting Standards No. 121 (SFAS 121),
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to
be Disposed Of," was issued in March 1995. SFAS 121 requires that long-
lived assets and certain intangible assets be reviewed for impairment in
value, based upon undiscounted future cash flows, and that appropriate
losses be recognized whenever it is determined that the carrying amount of
an asset may not be recovered. The Company adopted SFAS 121 in fiscal year
1996 and such adoption did not have a material effect on the Company's
financial position or results of operations.
REVENUE AND COST RECOGNITION
The Company's Northern Ireland operating units recognize sales and cost
of sales upon shipment of products.
SMTEK, the Company's U.S. operating unit which was acquired during
1996, has historically generated the majority 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 sales and cost of sales. SMTEK determines percentage
complete on the basis of costs incurred to total estimated costs. Contract
costs include all direct material and labor costs and those indirect costs
related to contract performance, such as indirect labor, supplies, tools,
repairs and depreciation costs. Selling, general and administrative costs
are charged to expense as incurred. In the period in which it is determined
that a loss will result from the performance of a contract, the entire
amount of the estimated loss is charged to income. Other changes in
contract price and estimates of costs and profits at completion are
recognized prospectively. This method recognizes in the current period the
cumulative effect of the changes on current and prior periods. The asset
"Costs and estimated earnings in excess of billings on uncompleted
contracts" represents revenues recognized in excess of amounts billed.
Included in SMTEK's sales and cost of sales amounts are revenues from
engineering design and test services, which are immaterial in relation to
consolidated revenue from product sales.
INCOME TAXES
Effective July 1, 1993, the Company adopted, on a prospective basis,
Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting
for Income Taxes." SFAS 109 is an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, SFAS 109 generally considers all expected future events other
than enactments of changes in tax law or statutorily imposed rates. 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
Earnings (loss) per share is computed by dividing net income by the
weighted average number of shares of common stock outstanding and common
stock equivalents. The determination of common stock equivalents assumes
exercise of those outstanding stock options and warrants to purchase stock
that have a dilutive effect on earnings per share (calculated by the
treasury stock method).
FOREIGN CURRENCY TRANSLATION
The financial statements of DDL's Northern Ireland 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 carried 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.
RECENT ACCOUNTING PRONOUNCEMENT
Statement of Financial Accounting Standards No. 123 (SFAS 123),
"Accounting for Stock-Based Compensation," becomes effective for the
Company's fiscal year 1997. SFAS 123 establishes new financial accounting
and reporting standards for stock-based compensation plans. Entities will
be allowed to measure compensation expense for stock-based compensation to
employees under SFAS 123 or the existing standard, which is Accounting
Principles Board Opinion (APBO) No. 25, "Accounting for Stock Issued to
Employees." Entities electing to remain with the APBO 25 accounting method
will be required to make pro forma disclosures of net income and earnings
per share as if the SFAS 123 accounting method had been applied. The
Company plans to adopt only the disclosure requirements of SFAS 123;
accordingly, such adoption will not affect the Company's financial position,
results of operations or cash flows.
CHANGES IN CLASSIFICATION
Certain reclassifications have been made to the fiscal 1995 and 1994
financial statements to conform with the fiscal 1996 financial statement
presentation. Such reclassifications had no effect on the Company's results
of operations or stockholders' equity (deficit).
Note 2 - BUSINESS ACQUISITION, LIQUIDATION AND DIVESTITURE
LIQUIDATION AND DIVESTITURE
During fiscal 1995, the Company closed the operations of its A.J.
Electronics, Inc. subsidiary ("A.J."). The Company recorded restructuring
charges of $1,533,000 for the costs associated with the shut down and
disposal of the assets of A.J., including asset write-downs of $552,000,
additional bad debt write-offs of $136,000, lease termination costs of
$211,000, and all other exit costs totaling $634,000. Substantially all of
the operating assets of A.J. were sold in January 1995 for total
consideration, in the form of cash and debt assumption, of approximately
$1,041,000.
In December 1994, the Company sold essentially all the assets of its
Aeroscientific Oregon subsidiary ("Aero Oregon") for proceeds of
approximately $9,200,000 in cash and the assumption by the purchaser of
approximately $300,000 of capitalized lease obligations, which resulted in a
gain of $3,317,000. With the proceeds of this sale, the Company
paid off $5,300,000 of industrial revenue bonds and settled a $6,941,000
bank term loan for a cash payment of $4,500,000, which resulted in an
extraordinary gain on debt extinguishment of $2,441,000.
ACQUISITION
On January 12, 1996, the Company acquired 100% of the outstanding stock
of SMTEK, Inc. ("SMTEK"), a provider of integrated electronic contract
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 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 short-term 10% bridge loans in the
aggregate amount of $7,000,000 (the "Bridge Loans"). The Bridge Loans were
repaid in February 1996 through the issuance of 10% Senior Secured Notes in
the aggregate amount of $5,300,000 and 10% Cumulative Convertible Debentures
in the aggregate amount of $3,500,000. As further described in Note 6, in
May and June 1996 the holders of the 10% Cumulative Convertible Debentures
converted these debentures to equity.
The acquisition of SMTEK has been 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 has been 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 $634,000 as of June
30, 1996.
Following is unaudited pro forma information presented as if the
acquisition of SMTEK had occurred on July 1, 1995 and on July 1, 1994,
respectively (in thousands except per share amounts):
Year ended June 30
------------------
1996 1995 (A)
---- ----
Sales $ 40,918 $ 43,776
Loss before
extraordinary item $ (1,792) $ (4,793)
Net income (loss) $ 564 $ (2,352)
Earnings (loss) per share $ 0.03 $ (0.11)
(A) These pro forma results include the operations of Aero Oregon and
A.J., the assets of which were sold in fiscal 1995. Excluding
the fiscal 1995 operating results of Aero Oregon and A.J., and the
related gain on sale of Aero Oregon's assets and the A.J.
restructuring charges, the fiscal 1995 pro forma sales, loss before
extraordinary item, net loss and loss per share are $34,960,000,
$(5,191,000), $(2,750,000) and $(0.13), respectively.
Note 3 - ACCOUNTS RECEIVABLE
The components of accounts receivable are as follows (in thousands):
June 30
------------------
1996 1995
---- ----
Trade receivables $ 5,456 $ 3,511
Other receivables 296 270
Less allowance for doubtful accounts (132) (181)
------ ------
$ 5,620 $ 3,600
====== ======
Included in other receivables at June 30, 1996 and 1995 are grants due
from the Industrial Development Board for Northern Ireland of $251,000 and
$140,000, respectively (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 at June 30, 1996 are as follows (in thousands):
Costs incurred on uncompleted
contracts $11,181
Estimated earnings 1,544
------
12,725
Less: Billings to date (9,613)
Customer advances and
progress payments (86)
------
$ 3,026
======
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
$52,000 of billings in excess of costs and estimated earnings. Essentially
all of the unbilled receivables are expected to be billed within 90 days of
the balance sheet date.
Note 5 - INVENTORIES
Inventories consist of the following (in thousands):
June 30
------------------
1996 1995
---- ----
Raw materials $ 2,853 $ 1,634
Work in process 1,263 710
Finished goods 146 -
Less reserves (248) (156)
------ ------
$ 4,014 $ 2,188
====== ======
Note 6 - FINANCING ARRANGEMENTS
BANK CREDIT AGREEMENT:
In December 1995, the Company entered into an agreement with Ulster
Bank Markets which provides for multiple credit facilities for its Northern
Ireland operations. This agreement includes a working capital line of
credit of 500,000 pounds sterling (approximately $750,000), and provides for
interest on borrowings at the Bank's base rate (5.75% at June 30, 1996) plus
1.50%. The credit facilities are available to the Company until November 30,
1996, and are subject to renewal thereafter. At June 30, 1996, there were no
borrowings outstanding under this credit facility.
ACQUISITION INDEBTEDNESS:
In February 1996 the Company issued 10% Senior Secured Notes due July
1, 1997 in the aggregate amount of $5,300,000 (the "10% Senior Notes") and
10% Cumulative Convertible Debentures due February 28, 1997 in the aggregate
amount of $3,500,000 (the "10% Convertible Debentures"). The proceeds of
these borrowings were used to pay off the principal and accrued interest of
the $7,000,000 Bridge Loans which had been taken out to finance the
acquisition of SMTEK, pay acquisition costs, and provide working capital for
SMTEK.
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 new 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 are secured by (i) 1,060,000 shares of common
stock and (ii) warrants, Series F, to purchase 1,060,000 shares of common
stock (the "Collateral Warrants"), all of which have been placed into an
escrow account. In the event the Collateral Warrants are required to redeem
the 10% Senior Notes, each warrant would be exercisable into one share of
common stock at a price which is 6% less than the market value of the
Company's common stock at the time of exercise. If the 10% Senior Notes are
repaid from sources other than the Collateral Warrants, then the Collateral
Warrants expire and can no longer be exercised. The Company also deposited
$375,000 into a restricted cash account maintained by an escrow agent, such
amount to be used for interest payments on the 10% Senior Notes. At June
30, 1996, this restricted cash amounted to $208,000, and is included in
prepaid expenses and other current assets in the accompanying Consolidated
Balance Sheet.
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.
LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
June 30
------------------
1996 1995
---- ----
10% Senior Secured Notes, interest payable
quarterly beginning on June 1, 1996,
secured by 1,060,000 shares of common
stock and 1,060,000 warrants, due
July 1, 1997 $ 5,300 $ -
Mortgage notes payable secured by real
property at the Northern Ireland
operations, with interest at variable
rates (8.375% at June 30, 1996) 1,265 1,346
Notes payable secured by equipment,
interest at 7.95% to 10.9%, payable
in monthly installments through
April 2001 1,523 -
Capitalized lease obligations (Note 10) 167 124
8-1/2% Convertible Subordinated Debentures
("CSDs"), due 2008, interest payable
semi-annually and convertible at holders'
option at a price of $10-5/8 per share
at any time prior to maturity; redeemable
by the Company at 101.7% of the principal
amount during the 12 months ending July 31,
1997 and subsequently at prices declining
to 100% at August 1, 1998, and thereafter 1,580 1,580
7% Convertible Subordinated Debentures, due
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 443 653
Obligations to former officers, employees and
directors under consulting and deferred fee
agreements 965 3,255
Other 295 705
------ ------
11,538 7,663
Less current maturities 603 633
------ ------
$10,935 $ 7,030
====== ======
At June 30, 1996, 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, 1996.
The aggregate amounts of minimum maturities of long-term debt for the
indicated fiscal years (other than capitalized lease obligations, as
described in Note 10) are as follows: 1997 - $537,000; 1998 - $5,862,000;
1999 - $965,000; 2000 - $540,000; 2001 - $776,000; and thereafter -
$2,691,000.
During fiscal 1996, 1995 and 1994, holders of $132,000 $86,000 and
$61,000, respectively, in principal of 7% CSDs exchanged such CSDs for
common stock of 66,000, 43,000 and 30,500 shares, respectively. 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 is $2.50 per
warrant. The Company will subsidize the exercise of warrants by crediting
the Participants with $2.50 for each warrant exercised. The warrants may be
called for redemption by the Company at any time after June 1, 1996, if
DDL's common stock closes above $4.00 per share, at a redemption price of
$.05 per warrant. The Company is obligated to pay the Participants $2.50
for each warrant which remains unexercised on the June 1, 1998 warrant
expiration date, payable in semiannual installments over two to ten years.
The Company has recorded a liability for the present value of these future
payments, which amounted to $941,000 at June 30, 1996. As the result of
this settlement agreement, the Company recorded an extraordinary gain of
$2,356,000, net of $197,000 of compensation expense related to the "call"
feature of the warrants.
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
---------------------
1996 1995
---- ----
Deferred tax assets:
Accrued employee benefits $ 394 $ 1,228
Warranty and loss reserves 547 780
Net operating loss carryforwards 13,240 19,890
Other 272 148
------ ------
Total deferred tax assets 14,453 22,046
Deferred tax liabilities:
Depreciation (53) (1,200)
------ ------
Net deferred tax assets before allowance 14,400 20,846
Less valuation allowance (14,400) (20,846)
------ ------
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 taxable
income of approximately $36,000,000 prior to the expiration of the net
operating loss carryforwards. At June 30, 1996, the Company is uncertain
whether it will realize the benefits of the net deferred tax assets and,
therefore, has recorded a 100% valuation allowance to offset the assets.
Based on a carryback of prior year net operating losses and a current year
extraordinary gain on extinguishment of debt, the Company reduced its
valuation allowance by $6,446,000 during fiscal 1996. This change in
estimate regarding the realizability of certain net operating losses has
been reflected in the income tax benefit for fiscal 1996.
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
------------------------
1996 1995 1994
---- ---- ----
Federal tax benefit computed at
statutory rate $ (635) $ (804) $(2,840)
State income tax, net of federal benefit - 5 -
Differences in taxation of foreign
earnings, net 114 (155) 807
Amortization of debt issue costs (108) - -
Utilization of net operating losses (1,110) - -
Deferred tax effect of temporary
differences 7,086 1,438 -
Net change in valuation allowance (6,446) (484) 2,049
Other (11) - (16)
------ ------ ------
Income tax 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 of the possibility that the tax returns underlying these refunds may
be subject to audit by the Internal Revenue Service and a portion of the
refunds disallowed, the Company has not yet recognized a tax benefit for the
remainder of the refunds received to date, or for the refunds still expected
to be received. Nonetheless, the Company feels that its claim for refund
and carry back of net operating losses ("NOL") 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, 1996, the Company has U.S. federal and state net
operating loss carryforwards of $35,307,000 and $29,909,000, respectively,
expiring in 2001 through 2011. The NOL carryforward for federal alternative
minimum tax purposes is approximately $26,998,000.
The Company's ability to use its NOL carryforwards to offset future
taxable income is subject to annual limitations due to certain substantial
stock ownership changes. Utilization of NOLs incurred through July 1993
became limited due to an ownership change. NOLs incurred subsequent to July
1993 are not subject to limitation. The amount of the NOL carryforward
arising prior to July 1993 which is subject to limitation is approximately
$21,877,000. The annual limitation is approximately $1,222,000.
Pretax income (loss) from foreign operations for fiscal 1996, 1995 and
1994 was $(338,000), $443,000 and $(5,430,000), respectively. It is not
practicable to estimate the amount of tax that might be payable on the
eventual remittance of such earnings. 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.
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 $-0- in fiscal
1996 and 1995, and $455,000 in fiscal 1994 which, in accordance with SFAS
No. 109, has been treated as a reduction in the provision for income taxes.
At June 30, 1996, the U.K. NOL amounted to approximately $11,378,000.
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.
Note 8 - STOCKHOLDERS' EQUITY
SALE OF COMMON STOCK
In March 1996, the Company sold 600,000 shares of common stock to an
offshore investor, generating net proceeds of $1,112,000.
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 directors, officers and other key employees. 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.
Activity under the option plans for fiscal years 1996, 1995 and 1994
was as follows:
Shares Price per share
------ ---------------
Shares under option, June 30, 1993 1,683,593 .50 - 4.88
Granted 501,973 .50 - 1.88
Forfeited (225,810) .69 - 4.88
Exercised (95,190) .69 - 1.38
--------- ----- -----
Shares under option, June 30, 1994 1,864,566 .50 - 4.88
Granted 120,000 1.13 - 1.38
Forfeited (177,500) 1.38 - 2.38
Exercised (450,447) .50 - 1.06
--------- ----- -----
Shares under option, June 30, 1995 1,356,619 $ .50 - $ 4.88
Granted 906,042 1.63 - 1.75
Forfeited (33,928) 1.44
Exercised (595,442) .50 - 1.63
--------- ----- -----
Shares under option, June 30, 1996 1,633,291 $ .50 - $ 4.88
========= ===== =====
At June 30, 1996, options to purchase 637,955 shares were exercisable
and 1,602,027 shares were available for future grants.
PREFERRED STOCK PURCHASE RIGNTS
1,000 preferred stock purchase rights, which 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, are outstanding at
June 30, 1996. 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 the following common stock
purchase warrants:
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
$2.25 per share until June 30, 1998, and at $3.50 thereafter 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 the prior year. These
warrants are exercisable at $1.50 per share until June 30, 1998, and
at $2.50 thereafter 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. Primarily as a result of the
conversion of the 10% Convertible Debentures in May and June 1996 at
an average price of approximately $1.30, the effective exercise price
on the Series E warrants was reduced to $2.33 as of June 30, 1996.
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. As further described in Note 6, the Series F warrants covering an
aggregate of 1,060,000 shares were issued as partial collateral for
the 10% Senior Notes. These warrants are exercisable in the event of
a default by the Company on the 10% Senior Notes, and are exercisable
only so long as the 10% Senior Notes remain outstanding.
5. As further described in Note 6, the Series G warrants covering an
aggregate of 595,872 shares were issued to former officers, key
employees and directors of the Company. The Series G warrants are
exercisable until their expiration 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 exercisable at $1.50 per
share until June 30, 1998, and at $2.50 thereafter 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
INFORMATION RELATING TO CONSOLIDATED STATEMENTS OF CASH FLOWS
Net cash used by operating activities includes cash payments for
interest (in thousands):
Year ended June 30,
---------------------------
1996 1995 1994
---- ---- ----
Interest paid $ 732 $ 883 $ 1,110
Net (increase) decrease in operating working capital, net of the
effects of the business acquired, consists of the following (in thousands):
Year ended June 30,
---------------------------
1996 1995 1994
---- ---- ----
Decrease in accounts receivable $ 270 $ 2,030 $ 3,604
Increase in costs and estimated
earnings in excess of billings on
uncompleted contracts (726) - -
(Increase) decrease in inventories (1,881) 1,504 3,404
(Increase) decrease in prepaid expenses
and other current assets (86) 62 881
Increase (decrease) in accounts payable 278 111 (4,678)
Increase (decrease) in accrued payroll
and employee benefits 24 (406) (178)
Increase (decrease) in other
accrued liabilities 613 708 (385)
------ ------ ------
Net (increase) decrease $(1,508) $ 4,009 $ 2,648
====== ====== ======
Following is the supplemental schedule of non-cash investing and
financing activities (in thousands):
Year ended June 30,
--------------------------
1996 1995 1994
---- ---- ----
Capital expenditures financed by lease
obligations and notes payable $ 689 $ 96 $ 94
Debentures converted to equity 3,632 86 61
Common stock issued as partial
consideration for purchase of SMTEK, Inc. 801 - -
Common stock issued as debt placement fee 716 - -
Common stock issued as collateral for
10% Senior Notes 1,325 - -
Common stock issued to repay debt 35 - -
Conversion of preferred stock to
common stock - 3 -
OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following (in thousands):
June 30
------------------
1996 1995
---- ----
Environmental liabilities $ 728 $ 932
Accrued taxes payable 951 -
Other 1,435 1,455
------ ------
$ 3,114 $ 2,387
====== ======
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 1994 $945 $293 $(705) $533
Fiscal 1995 533 95 (447) 181
Fiscal 1996 181 85 (134) 132
Inventory reserves
- ------------------
Fiscal 1994 $174 $266 $ (56) $384
Fiscal 1995 384 62 (290) 156
Fiscal 1996 156 250 (158) 248
Note 10 - COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
Future minimum lease payments at June 30, 1996, were as follows (in
thousands):
Capital Operating
leases leases
------ ------
Fiscal 1997 $ 77 $ 410
Fiscal 1998 48 399
Fiscal 1999 32 403
Fiscal 2000 20 375
Fiscal 2001 17 13
Thereafter 1 26
----- -----
Total 195 $ 1,626
=====
Less: Interest (28)
-----
Present value of minimum lease payments $ 167
=====
The capitalized cost of the related assets (primarily plant equipment),
which are pledged as security under the capital leases, was $370,000 and
$359,000 at June 30, 1996, and 1995, respectively. Accumulated amortization
on assets under capital leases amounted to $143,000 and $237,000 at June 30,
1996 and 1995, respectively.
Rental expense for operating leases amounted to $229,000, $238,000 and
$478,000 for fiscal 1996, 1995 and 1994, respectively. The Company's
principal operating leases are renewable at the fair rental value on the
expiration dates.
SMTEK conducts its operations from a 78,000 square foot facility, which
is leased from an unaffiliated party through May 31, 2000. The monthly rent
was approximately $28,500 during fiscal 1996 and is subject to a 4% increase
each year. SMTEK has the option to extend the lease term for three renewal
periods of three years each. The lease rate during the renewal periods is
subject to adjustment based on changes in the Consumer Price Index for the
local area.
GOVERNMENT GRANTS
Pursuant to government grant agreements with the Industrial Development
Board for Northern Ireland ("IDB"), the Company's Northern Ireland
subsidiaries have been reimbursed for a portion of qualifying capital
expenditures and for certain employment and interest costs. Approximately
$480,000 of the government grants received by the Company's DDL Electronics
Limited subsidiary ("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 180 employees. Management does not expect the employment at
DDL-E to drop below the level that would give rise to a grant repayment
obligation. Irlandus Circuits Limited ("Irlandus"), the Company's other
Northern Ireland-based operating company, no longer has a grant repayment
obligation based on maintenance of minimum employment levels.
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 and/or Irlandus cease business, permanently discontinue
production, or fail to pay to the IDB any amounts due under the mortgage
notes payable (Note 6). These contingent repayment obligations amount to
approximately $650,000 and $406,000 for DDL-E and Irlandus, respectively.
Management does not expect that the Company will have any grant repayment
obligation 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 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.
ENVIRONMENTAL MATTERS AND LITIGATION
Federal, state and local provisions relating to the protection of the
environment affect the Company's PCB fabrication operations. In 1983, the
United States and the State of California filed a legal action against the
owners and operators of the Stringfellow hazardous waste disposal site
located near Riverside, California, as well as against a number of
generators and transporters of chemical substances who allegedly disposed of
waste at the site (the "Primary Defendants"). The action seeks to cause the
Primary Defendants to clean up the site, to reimburse government plaintiffs
for remediation costs incurred by them and to recover compensation for
alleged damage to natural resources. The Primary Defendants have initiated
a defense of the case. The State of California also has been found liable
for, among other things, its negligent selection, inspection, design,
construction, operation and failure to remedy the site. In 1988, the
Primary Defendants filed third-party complaints against the Company's
Anaheim, California-based Aeroscientific Corp. subsidiary ("Aero Anaheim")
and about 185 other alleged responsible parties. The U.S. Environmental
Protection Agency ("EPA") has estimated that about 34 million gallons of
waste were disposed of at the Stringfellow site and has estimated that Aero
Anaheim may have been responsible for having generated about 9,300 gallons
or 0.0273 percent of the total waste disposed. The government plaintiffs,
however, have been unable to estimate the value of their principal claims.
EPA's cleanup estimates have ranged from $400 million to $1 billion,
depending on which cleanup proposal is selected. At the present time, the
Company cannot determine how the allocation of responsibility in this case
will ultimately be made or what share of responsibility might be imposed on
state and local governments. The EPA contends that site owners and
operators and waste generators are jointly and severally liable under
federal law. In 1994, the Company was given the opportunity to participate
in a de minimis settlement negotiated with the EPA and the Primary
Defendants. The Company's share of the settlement and administration costs
would have been approximately $120,000. The Company decided not to
participate in the settlement at that time because of its limited cash
resources. However, the Company accrued this amount as its estimate of the
liability it will ultimately bear in this matter. The Company is currently
exploring the feasibility of entering into a settlement with the Primary
Defendants in which that same amount would be paid over several years. No
assurances can be given, however, that any such settlement will be achieved.
The Company is aware of certain chemicals that exist in the ground at
Aero Anaheim's previously leased facility in Anaheim. The Company has
notified the appropriate governmental agencies and is proceeding with
remediation and investigative studies regarding soil and groundwater
contamination. The Company believes that it will be required to implement a
continuing remedial program for the site. The installation of water and
soil extraction wells was completed in August 1994. A plan for soil
remediation was completed about the same time and was implemented beginning
in 1995. Investigative work to determine the full extent of potential
groundwater pollution has not yet been completed. The Company retained the
services of an environmental engineering firm in May 1995 to begin the vapor
extraction of pollutant from the soil and to perform exploratory hydro-punch
testing to determine the full extent and cost of the cleanup of the
potential groundwater contamination. These processes are in their
preliminary stages and a complete and accurate estimate of the full and
potential costs cannot be determined at this time. The Company believes,
however, that the resolution of these matters will require a significant
cash outlay. Initial estimates from environmental engineering firms
indicate that it could cost from $1,000,000 to $3,000,000 to fully clean up
the site and could take as long as ten years to complete. The Company and
Aero Anaheim entered into an agreement to share the costs of environmental
remediation with the owner of the Anaheim property. Under this agreement,
the Company is obligated to pay 80% of the site's total remediation costs up
to $725,000 (i.e., up to the Company's $580,000 share) with any costs above
$725,000 being shared equally between the Company and the property owner.
Through June 30, 1996, the Company has paid $420,000 as its share of the
remediation costs (including cash placed in an escrow account for payment of
expenses). At June 30, 1996, the Company has a reserve of $608,000, which
represents its estimated share of future remediation costs at this site.
Based on consultation with the environmental engineering firms, management
believes that the Company has made adequate provision for the liability
based on probable loss. It is possible, however, that the future
remediation costs at this site may differ significantly from the estimates,
and may exceed the amount of the reserve.
In addition to the environmental litigation described above, the
Company is involved in other litigation matters resulting from the ordinary
course of business. At the current time, management believes that all such
other actions, in the aggregate, will not have a material adverse effect on
the Company.
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,
------------------------------
1996 1995 1994
---- ---- ----
Sales:
Electronic Manufacturing Services $22,245 $13,842 $28,620
Printed Circuit Boards 10,891 15,734 19,909
------ ------ ------
$33,136 $29,576 $48,529
====== ====== ======
Operating income (loss):
Electronic Manufacturing Services $ (267) $(1,892) $(2,990)
Printed Circuit Boards (20) (646) (4,505)
General Corporate (880) (2,432) 547
------ ------ ------
$(1,167) $(4,970) $(6,948)
====== ====== ======
Identifiable assets:
Electronic Manufacturing Services $20,321 $ 6,162 $ 9,097
Printed Circuit Boards 5,266 5,543 13,012
General Corporate 2,500 885 1,149
------ ------ ------
$28,087 $12,590 $23,258
====== ====== ======
Depreciation and amortization:
Electronic Manufacturing Services $ 1,195 $ 568 $ 1,122
Printed Circuit Boards 548 924 1,975
General Corporate 285 13 23
------ ------ ------
$ 2,028 $ 1,505 $ 3,120
====== ====== ======
Capital expenditures:*
Electronic Manufacturing Services $ 1,013 $ 210 $ 551
Printed Circuit Boards 586 433 254
------ ------ ------
$ 1,599 $ 643 $ 805
====== ====== ======
* Capital expenditures includes equipment additions financed with capital
leases and notes payable.
Sales, operating loss, and identifiable assets by geographic area are as
follows (in thousands):
Year ended June 30,
------------------------------
1996 1995 1994
---- ---- ----
Sales:
United States $ 8,668 $ 8,765 $27,571
Northern Ireland 24,468 20,811 20,958
------ ------ ------
Total $33,136 $29,576 $48,529
====== ====== ======
Operating:
United States $ (748) $(2,226) $(2,909)
Northern Ireland (419) (2,744) (4,039)
------ ------ ------
Total $(1,167) $(4,970) $(6,948)
====== ====== ======
Identifiable assets:
United States $16,133 $ 1,003 $12,990
Northern Ireland 11,954 11,587 10,268
------ ------ ------
Total $28,087 $12,590 $23,258
====== ====== ======
No single customer accounted for 10% or more of consolidated sales in
fiscal 1996 or 1995. The Company had sales to a single customer which
accounted for approximately 13.0% of sales in fiscal 1994.
Note 12 - LIQUIDITY
The Company's financial statements are presented on a going concern
basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. The Company incurred
operating losses of $1,167,000, $4,970,000 and $6,948,000 and negative cash
flows from operating activities of $555,000, $264,000 and $2,710,000 for the
years ended June 30, 1996, 1995 and 1994, respectively.
In response to the large operating losses incurred prior to fiscal
1996, the Company liquidated its U.S. EMS operation and divested its U.S.
PCB operation during fiscal 1995. The U.S. EMS operation had been severely
damaged in the January 1994 Los Angeles earthquake. In fiscal 1996, the
Company reestablished a domestic operating presence by acquiring SMTEK.
Management anticipates that the Company will continue to incur
operating losses for at least the near term future due to its current level
of fixed costs for manufacturing overhead relative to its current sales
volume, as well as amortization expense of the goodwill arising from the
acquisition of SMTEK. Operating losses are expected to continue until such
time as sales increase to a level necessary to absorb fixed costs and offset
goodwill amortization. No assurance can be given as to whether or when
sales increases may be achieved. Sales increases will depend in part upon
strengthening the Company's sales and marketing functions for its existing
operations, and improving its price competitiveness in the EMS industry by
achieving economies of scale in the procurement of electronic components.
At June 30, 1996, the Company's total cash and cash equivalents
amounted to $2,519,000. In October 1996, the Company finalized an accounts
receivable-based working capital bank line of credit for its U.S. EMS
operation, which provides for borrowings of up to $2,500,000 at an interest
rate of prime plus 1.25%. Management believes that the Company's cash
resources and borrowing capacity on this working capital line of credit are
sufficient to fund operations for at least the next year.
Note 13 - 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 1996
Sales $ 6,192 $ 6,029 $10,501 $10,414 $33,136
====== ====== ====== ====== ======
Income (loss) before
extraordinary item $ 1,084 $ (348) $ (405) $(1,089) $ (758)
Extraordinary item -
Gain on debt
extinguishment - - 2,356 - 2,356
------ ------ ------ ------ ------
Net income (loss) $ 1,084 $ (348) $ 1,951 $(1,089) $ 1,598
====== ====== ====== ====== ======
Earnings (loss) per share:
Income (loss) before
extraordinary item $ 0.06 $(0.02) $(0.02) $(0.05) $(0.04)
Extraordinary item - - 0.12 - 0.13
----- ----- ----- ----- -----
Total earnings (loss)
per share $ 0.06 $(0.02) $ 0.10 $(0.05) $ 0.09
====== ===== ===== ===== =====
Fiscal 1995
Sales $ 8,940 $ 7,654 $ 6,079 $ 6,903 $ 29,576
====== ====== ====== ====== =======
Income (loss) before
extraordinary item $(2,862) $ 2,145 $ 167 $(1,816) $(2,366)
Extraordinary item -
Gain on debt
extinguishment - 2,441 - - 2,441
------ ------ ------ ------ ------
Net income (loss) $(2,862) $ 4,586 $ 167 $(1,816) $ 75
====== ====== ====== ====== ======
Earnings (loss) per share:
Income (loss) before
extraordinary item $(0.19) $ 0.13 $ 0.01 $(0.11) $(0.15)
Extraordinary item - 0.15 - - 0.15
----- ----- ----- ----- -----
Total earnings (loss)
per share $(0.19) $ 0.28 $ 0.01 $(0.11) $ -
====== ===== ===== ===== =====
<PAGE>
DDL ELECTRONICS, INC. AND SUBSIDIARIES
Market and Dividend Information
The Company's common shares are traded on the New York Stock and
Pacific Stock Exchanges (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 1996 Fiscal 1995
------------- -------------
High Low High Low
---- ---- ---- ----
1st Quarter 2-1/8 1-1/2 1-7/8 1
2nd Quarter 3 1-7/8 2-1/2 1
3rd Quarter 2-3/4 2-1/4 1-1/2 1
4th Quarter 2-1/2 1-5/8 2 1-1/8
There were approximately 1,500 stockholders of record at October 7,
1996.
The Company suspended dividend payments effective March 31, 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.
<PAGE>
DDL ELECTRONICS, INC. AND SUBSIDIARIES
DIRECTORS, EXECUTIVE OFFICERS, OPERATING UNITS
AND OTHER CORPORATE INFORMATION
DIRECTORS OPERATING UNITS
- --------- ---------------
Karen Beth Brenner SMTEK, Inc.
Investment Manager Newbury Park, California
Newport Beach, California
Melvin Foster DDL Electronics Limited
Attorney at Law Craigavon, Northern Ireland
Boston, Massachusetts
Gregory L. Horton Irlandus Circuits Limited
Chairman of the Board, Craigavon, Northern Ireland
President and Chief Executive Officer
DDL Electronics, Inc.
Newbury Park, California
Bernee D. L. Strom TRANSFER AGENT AND REGISTRAR
President and Chief Executive Officer ----------------------------
USA Digital Radio American Stock Transfer &
Chicago, Illinois Trust Company
40 Wall Street
Richard K. Vitelle New York, New York 10005
Vice President and Chief Financial Officer
DDL Electronics, Inc.
Newbury Park, California INDEPENDENT AUDITORS
--------------------
Robert G. Wilson KPMG Peat Marwick LLP
Private Investor Los Angeles, California
Vancouver BC, Canada
(formerly Interim Vice President
of DDL Electronics, Inc.) LEGAL COUNSEL
-------------
Nelson, Mullins, Riley &
EXECUTIVE OFFICERS Scarborough, L.L.P.
- ------------------ Charlotte, North Carolina
Gregory L. Horton
President and Chief Executive Officer
Richard K. Vitelle
Vice President - Finance and Administration,
Chief Financial Officer, Treasurer and
Secretary
[FORM OF SERIES F WARRANTS - COLLATERAL WARRANTS]
NEITHER THE WARRANTS REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES ISSUABLE UPON EXERCISE HEREOF
HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR UNDER ANY STATE SECURITIES LAWS
AND MAY NOT BE TRANSFERRED
IN VIOLATION OF SUCH ACT OR LAWS, THE RULES AND
REGULATIONS THEREUNDER OR THE PROVISIONS
OF THIS WARRANT CERTIFICATE.
No. [ ] [ ] Warrants
WARRANTS TO PURCHASE AN AGGREGATE OF [ ] SHARES
OF COMMON STOCK OF
DDL ELECTRONICS, INC.
(INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE)
ISSUED TO
[ ]
DATED: February 29, 1996
THIS IS TO CERTIFY that, for value received, [ ], or [its] [his] [their]
registered assigns (herein collectively referred to as the "Warrantholder"),
is entitled to the number of Warrants (the "Warrants") set forth above, each
of which represents the right, upon the due exercise hereof, at any time
commencing upon and after (the "Commencement Date") the occurrence of an Event
of Default (as hereinafter defined) and ending upon (the "Expiration Date")
the payment in full by the Company of all amounts now or hereafter due to the
Warrantholder under the Operative Documents (as hereinafter defined), whether
for principal, interest, fees, costs, expenses or otherwise (including,
without limitation, any and all expenses (including reasonable attorneys' fees
and legal expenses) incurred by the Warrantholder in the collection of the
Notes and in the enforcement and protection of its rights hereunder and under
the other Operative Documents (collectively, the "Obligations"), to purchase
from DDL Electronics, Inc., a Delaware corporation (the "Company"), one share
of common stock, par value $.01 per share (the "Common Stock"), of the Company
upon surrender hereof, with the form of election to purchase included herein
(the "Election to Purchase") completed and duly executed, at the principal
executive office of the Company, and upon simultaneous payment therefor (as
set forth in Section 1 below) of an exercise price per share equal to the
Purchase Price (as defined in Section 1 below). The number of shares of
Common Stock issuable upon exercise of the Warrants (individually, a "Share"
and collectively, the "Shares") is subject to adjustment as provided herein.
This warrant certificate is one of a series of warrant certificates
issued by the Company in connection with its issuance of 10% Senior Secured
Notes due July 1, 1997 (the "Notes") pursuant to the Securities Purchase
Agreement, dated as of February 29, 1996 (the "Securities Purchase
Agreement"), by and among the Company and each of the Purchasers who are
signatories thereto. All capitalized terms used herein without definition
(including, without limitation, Event of Default, Operative Documents, Pledge
Agreement and Collateral Agency Agreement) shall have the respective meanings
given such terms as set forth in the Securities Purchase Agreement.
Pursuant to Section 4.3 of the Securities Purchase Agreement, the Company
has the right, but not the obligation, to fund the optional prepayment of all,
but not less than all, of the amounts outstanding under the Notes with the net
proceeds of the sale of the Shares. Upon prepayment of all amounts
outstanding under the Notes and the satisfaction in full of all of the
Obligations, this warrant certificate will become void and all rights
evidenced hereby will terminate after such time. The number of Shares
purchasable hereunder shall not be adjusted or otherwise adversely affected as
a result of any partial prepayment of any amounts outstanding under the Notes.
Pursuant to Section 14.10 of the Securities Purchase Agreement, all
actions required or permitted to be taken by the Warrantholder hereunder,
including, without limitation, the exercise hereof, shall be taken by the
Majority Noteholders (individually or by a trustee or other agent designated
by the Majority Noteholders to act on behalf of the Majority Noteholders); and
the decision of the Majority Noteholders (or such trustee or agent, as
applicable) shall be binding on the Warrantholder.
1. Purchase Price; Method of Payment
The purchase price for the Shares purchasable hereunder (the "Purchase
Price") shall be equal to (a) in the case of the Warrantholder's sale (whether
public or private) of the Shares to satisfy the Obligations, the net proceeds
of such sale realized by the Warrantholder and (b) in the case of the
Warrantholder's retention of the Shares to satisfy the Obligations, the lower
of (x) the average of the daily closing sale prices of the Common Stock for
the twenty (20) consecutive trading days preceding the date the Warrants were
exercised by the Warrantholder, less a discount of 6% of such amount or (y)
the closing sale price of the Common Stock on the date the Warrants were
exercised by the Warrantholder, less a discount of 6% of such amount. If the
date the Warrants are exercised by the Warrantholder is not a day that the New
York Stock Exchange is open, then such closing sale price shall be as of the
first day the New York Stock Exchange is open preceding the day on which the
Warrants are exercised. The closing sale price of the Common Stock for each
trading day as used herein shall be the "Market Price" (as defined in Section
2 below).
The Warrantholder shall pay the Purchase Price for exercising the
Warrants by the cancellation of all or a portion of the Obligations in lieu of
cash. The Obligations shall be reduced by $1.00 for each $1.00 of the
Purchase Price for the Shares being purchased hereunder. If the dollar value
of the Obligations exceeds the Purchase Price for the Shares being purchased
hereunder, then the Obligations will be cancelled in the following priority:
(a) first, all fees, costs and expenses due to the Warrantholder under the
Notes, (b) second, all interest due to the Warrantholder under the Notes and
(c) third, all principal due to the Warrantholder under the Notes. Upon any
exercise of the Warrants, the Warrantholder shall present its Note(s) to the
Company for notation thereon of the cancellation of the Obligations, or
portion thereof, as a result of such exercise.
Notwithstanding anything contained herein to the contrary, the exercise of the
Warrants and the payment of the Purchase Price therefor shall be deemed to
take place simultaneously.
2. Definition of Market Price
Unless otherwise provided herein, for purposes of any computations made
hereunder, "Market Price" per share of Common Stock on any date shall be: (a)
if the Common Stock is listed or admitted for trading on any national
securities exchange or included in the Nasdaq National Market or Nasdaq Small-
Cap Market, the last reported sales price as reported on such exchange or
market, as the case may be; (b) if the Common Stock is not listed or admitted
for trading on any national securities exchange or included in the Nasdaq
National Market or Nasdaq Small-Cap Market, the average of the last reported
closing bid and asked quotation for the Common Stock as reported on the
Automated Quotation System of NASDAQ or a similar service if NASDAQ is not
reporting such information; (c) if the Common Stock is not listed or admitted
for trading on any national securities exchange or included in the Nasdaq
National Market or Nasdaq Small-Cap Market or quoted by NASDAQ or a similar
service, the average of the last reported bid and asked quotation for the
Common Stock as quoted by a market maker in the Common Stock (or if there is
more than one market maker, the bid and asked quotation shall be obtained from
two market makers and the average of the lowest bid and highest asked
quotation shall be the "Market Price"); or (d) if the Common Stock is not
listed or admitted for trading on any national securities exchange or included
in the Nasdaq National Market or Nasdaq Small-Cap Market or quoted by NASDAQ
and there is no market maker in the Common Stock, the fair market value of
such shares as determined jointly by the Company and the Majority Noteholders,
or if no such determination can be reached within fifteen (15) days, such
determination shall be made by an appraiser who shall be mutually selected by
the Company and the Majority Noteholders, the costs of such appraiser to be
borne by the Company.
3. Registration, Transfer and Exchange of the Warrants
The Company will keep at its principal executive office a warrant
register in which, subject to such reasonable regulations as it may prescribe
but at its expense, it will provide for the registration, transfer and
exchange of the Warrants.
The Warrants may not be pledged, sold, assigned, hypothecated or
otherwise transferred until (a) a registration statement with respect thereto
is effective under the Securities Act and any applicable state securities laws
or (b) the Company receives an opinion of counsel to the Company or other
counsel to the Warrantholder, which other counsel is reasonably satisfactory
to the Company, that the Warrants may be pledged, sold, assigned, hypothecated
or transferred without an effective registration statement under the
Securities Act or applicable state securities laws.
The Warrantholder, at its option, may surrender this warrant certificate
for transfer or exchange at the principal executive office of the Company,
accompanied in the case of a transfer or assignment by a written instrument of
transfer or assignment in form satisfactory to the Company duly executed by
the registered Warrantholder thereof or by such Warrantholder's attorney duly
authorized in writing. In case any Warrantholder shall so request the
transfer, assignment or exchange of any warrant certificate, the Company, at
its expense, will execute and deliver (in each case insured to the
Warrantholder's reasonable satisfaction) in exchange therefor one or more new
warrant certificates, as may be requested by such Warrantholder, to purchase
the same aggregate number of Shares as are purchasable upon exercise of the
warrant certificate so surrendered.
Prior to due presentment for registration of transfer of this warrant
certificate, the Company shall deem and treat the Warrantholder as the
absolute owner of the Warrants (notwithstanding any notation of ownership or
other writing on this warrant certificate made by anyone other than the
Company) for the purpose of any exercise hereof or any distribution to the
Warrantholder and for all other purposes, and the Company shall not be
affected by any notice to the contrary.
4. Issuance of Shares
Subject to the restrictions set forth in Section 5 below, upon surrender
of the Warrants and payment of the Purchase Price as aforesaid, the Company
shall issue and deliver with all reasonable dispatch the certificate(s) for
the Shares to or upon the written order of the Warrantholder and in such name
or names as the Warrantholder may designate. Such certificate(s) shall
represent the number of Shares issuable upon the exercise of the Warrants,
together with a cash amount in respect of any fraction of a Share otherwise
issuable upon such exercise.
Certificates representing the Shares shall be deemed to have been issued
and the person so designated to be named therein shall be deemed to have
become a holder of record of such Shares simultaneously with the surrender of
the Warrants and payment of the Purchase Price as aforesaid; notwithstanding
that the transfer books for the shares of Common Stock or other classes of
stock purchasable upon the exercise of the Warrants shall then be closed or
the certificate(s) for the Shares in respect of which the Warrants is then
exercised shall not then have been actually delivered to the Warrantholder.
As soon as practicable after each such exercise of the Warrants, the Company
shall issue and deliver the certificate(s) for the Shares issuable upon such
exercise, registered as requested. The Warrants shall be exercisable, at the
election of the registered holder hereof, either as an entirety or from time
to time for part of the number of Shares specified herein. In the event that
only a portion of the Warrants is exercised at any time prior to the
Expiration Date, a new warrant certificate shall be issued to the
Warrantholder for the remaining number of Shares purchasable pursuant hereto.
In no event shall fractional Shares be issued with regard to the exercise of
the Warrants. The Company shall cancel the Warrants when they are surrendered
upon exercise.
5. Payment of Expenses, Taxes, etc. upon Exercise
The Company shall pay all documentary stamp taxes, if any, attributable
to the initial issuance of the Shares issuable upon the exercise of the
Warrants; including, without limitation, any tax or taxes which may be payable
in respect of any transfer involved in the issue or delivery of any
certificates for Shares in a name other than that of the Warrantholder upon
the exercise of the Warrants.
6. Lost, Stolen, or Mutilated Warrant Certificate
In case this warrant certificate shall be mutilated, lost, stolen or
destroyed, the Company shall issue and deliver, in exchange and substitution
for and upon cancellation of the mutilated warrant certificate, or in lieu of
and substitution for the warrant certificate lost, stolen or destroyed, a new
warrant certificate of like tenor and representing an equivalent number of
Shares purchasable upon exercise, but only upon receipt of evidence reasonably
satisfactory to the Company of such loss, theft or destruction of such warrant
certificate and reasonable indemnity, if requested, also reasonably
satisfactory to the Company. No bond or other security shall be required from
the original Warrantholder in connection with the replacement by the Company
of a lost, stolen or mutilated warrant certificate.
7. Covenants of the Company
(a) The Company shall at all times through the Expiration Date
reserve and keep available, free from pre-emptive rights and out of its
aggregate authorized but unissued shares of Common Stock, the number of Shares
deliverable upon the exercise of the Warrants.
(b) The Company covenants that all Shares issued upon exercise of
the Warrants shall, upon issuance in accordance with the terms hereof, be
fully paid and nonassessable and free and clear of all Liens, claims, security
interests, pledges, charges, encumbrances, stockholders' agreements and voting
trusts created by the Company with respect to the issuance and holding
thereof.
8. Rights Upon Expiration
Unless the Warrants are surrendered and payment made for the Shares as
herein provided prior to the Expiration Date, this warrant certificate will
become wholly void and all rights evidenced hereby will terminate after such
time.
9. Adjustment for Certain Events
(a) In case the Company shall at any time after the date the
Warrants are first issued (i) declare a dividend on the Common Stock payable
in shares of the Company's capital stock (whether in shares of Common Stock or
of capital stock of any other class), (ii) subdivide the outstanding Common
Stock, (iii) reverse split the outstanding Common Stock into a smaller number
of shares, or (iv) issue any shares of the Company's capital stock in a
reclassification of the Common Stock (including any such reclassification in
connection with a consolidation or merger in which the Company is the
continuing corporation), then, in each case, the number and kind of shares of
capital stock issuable upon exercise of the Warrants on such date shall be
proportionately adjusted so that the holder of any Warrant exercised after
such time shall be entitled to receive the aggregate number and kind of
securities which, if such Warrant had been exercised immediately prior to such
date, such holder would have owned upon such exercise and been entitled to
receive by virtue of such dividend, subdivision, reverse split or
reclassification. Such adjustments shall be made successively whenever any
event listed above shall occur.
(b) In the event that at any time, as a result of an adjustment
made pursuant to Section 9 hereof, the holder of any Warrant thereafter
exercised shall become entitled to receive any shares of capital stock or
warrants or other securities of the Company other than the Shares, thereafter
the number of such other shares of capital stock or warrants or other
securities so receivable upon exercise of this Warrant shall be subject to
adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Shares contained in this
Section 9, and the provisions of this warrant certificate with respect to the
Shares shall apply, to the extent applicable, on like terms to any such other
shares of capital stock or warrants or other securities.
(c) In case of any capital reorganization of the Company or of
any reclassification of the Common Stock (other than a change in par value or
from a specified par value to no par value or from no par value to a specified
par value or as a result of subdivision or combination) or in case of the
consolidation of the Company with, or the merger of the Company into, any
other corporation (other than a consolidation or merger in which the Company
is the continuing corporation) or of the sale of the properties and assets of
the Company as, or substantially as, an entirety, each Warrant shall, after
such reorganization, reclassification, consolidation, merger or sale, be
exercisable, upon the terms and conditions specified herein, for the number of
shares of Common Stock or other capital stock or warrants or other securities
or property to which a holder of the number of shares of Common Stock
purchasable (at the time of such reorganization, reclassification,
consolidation, merger or sale) upon exercise of such Warrant would have been
entitled upon such reorganization, reclassification, consolidation, merger or
sale; and in any such case, if necessary, the provisions set forth in this
Section 9(c) with respect to the rights and interests thereafter of the
registered holders of all Warrants shall be appropriately adjusted so as to be
applicable, as nearly as may reasonably be, to any shares of Common Stock or
other capital stock or warrants or other securities or property thereafter
deliverable on the exercise of the Warrants. The subdivision, reverse split
or combination of shares of Common Stock at any time outstanding into a
greater or lesser number of shares shall not be deemed to be a
reclassification of the Common Stock for the purposes of this Section 9(c).
(d) In any case in which this Section 9 shall require that an
adjustment in the number of Shares purchasable hereunder be made effective as
of a record date for a specified event, the Company may elect to defer until
the occurrence of such event issuing to the Warrantholder, if such
Warrantholder exercised any Warrant after such record date, shares of capital
stock or warrants or other securities of the Company, if any, issuable upon
such exercise over and above the Shares issuable prior to such adjustment;
provided, however, that the Company shall deliver to the holder a due bill or
other appropriate instrument evidencing such holder's right to receive such
shares of capital stock or warrants or other securities upon the occurrence of
the event requiring such adjustment.
10. Fractional Shares
Upon exercise of the Warrants the Company shall not be required to issue
fractional shares of Common Stock or other capital stock. In lieu of such
fractional shares, the Warrantholder shall receive an amount in cash equal to
the same fraction of the (i) current Market Price of one whole Share if clause
(a), (b) or (c) in the definition of Market Price in Section 2 above is
applicable or (ii) book value of one whole Share as reported in the Company's
most recent audited financial statements if clause (d) in the definition of
Market Price in Section 2 above is applicable. All calculations under this
Section 10 shall be made to the nearest cent.
11. Securities Act Legend
The Warrantholder shall not be entitled to any rights of a stockholder of
the Company with respect to any Shares purchasable upon the exercise hereof,
including voting, dividend or dissolution rights, until such Shares have been
paid for in full. As soon as practicable after such exercise, the Company
shall deliver a certificate or certificates for the securities issuable upon
such exercise, all of which shall be fully paid and nonassessable, to the
person or persons entitled to receive the same; provided, however, that, if
applicable, such certificate or certificates delivered to the holder of the
surrendered Warrants shall bear a legend reading substantially as follows:
"These securities have not been registered under the
Securities Act of 1933, as amended, or the securities
laws of any state and may not be sold or transferred
in the absence of such registration or any exemption
therefrom under such Act and laws, if applicable. The
Company, prior to permitting a transfer of these
securities, may require an opinion of counsel or other
assurances satisfactory to it as to compliance with or
exemption from such Act and laws."
12. Notice of Adjustment
(a) Upon any adjustment of the number of Shares issuable upon
exercise of the Warrants pursuant to Section 9 above, the Company, within
thirty (30) calendar days thereafter, shall have on file for inspection by the
Warrantholder a certificate of the Board of Directors of the Company setting
forth the number of Shares issuable upon exercise of the Warrants after such
adjustment, the method of calculation thereof in reasonable detail and the
facts upon which such calculations were based, which certificate shall be
conclusive evidence of the correctness of the matters set forth therein.
(b) In case:
(i) the Company shall authorize the issuance to all holders
of Common Stock of rights, options or warrants to subscribe for or purchase
capital stock of the Company or of any other subscription rights, options or
warrants; or
(ii) the Company shall authorize the distribution to all
holders of Common Stock of evidences of its indebtedness or assets (including,
without limitation, cash dividends or cash distributions payable out of
earnings, consolidated earnings, if the Company shall have one or more
subsidiaries, or earned surplus, or dividends payable in Common Stock); or
(iii) of any consolidation or merger to which the Company
is a party and for which approval of any stockholders of the Company is
required, of the conveyance or transfer of the properties and assets of the
Company substantially as an entirety or of any capital reorganization or any
reclassification of the Common Stock (other than a change in par value or from
a specified par value to no par value or from no par value to a specified par
value or as a result of a subdivision or combination); or
(iv) of the voluntary or involuntary dissolution,
liquidation or winding up of the Company; or
(v) the Company proposes to take any other action which
would require an adjustment of the number of Shares issuable upon exercise of
the Warrants pursuant to Section 9 above;
then, in each such case, the Company shall give to the Warrantholder at its
address appearing below at least twenty (20) calendar days prior to the
applicable record date hereinafter specified in (A), (B) or (C) below, by
first class mail, postage prepaid, a written notice stating (A) the date as of
which the holders of record of shares of Common Stock to be entitled to
receive any such rights, options, warrants or distribution are to be
determined or (B) the date on which any such consolidation, merger,
conveyance, transfer, reorganization, reclassification, dissolution,
liquidation or winding up is expected to become effective, and the date as of
which it is expected that holders of record of shares of Common Stock shall be
entitled to exchange such shares for securities or other property, if any,
deliverable upon such consolidation, merger, conveyance, transfer,
reorganization, reclassification, dissolution, liquidation or winding up or
(C) the date of such action which would require an adjustment of the number of
Shares issuable upon exercise of the Warrants. The failure to give the notice
required by this Section 12(b) or any defect therein shall not affect the
legality or validity of any such issuance, distribution, consolidation,
merger, conveyance, transfer, reorganization, reclassification, dissolution,
liquidation, winding up or other action or the vote upon any such action.
Except as provided herein, nothing contained herein shall be construed as
conferring upon the Warrantholder the right to vote on any matter submitted to
the stockholders of the Company for their vote or to receive notice of
meetings of stockholders or the election of directors of the Company or any
other proceedings of the Company, or any rights whatsoever as a stockholder of
the Company.
13. Notices
All notices and other communications provided for or permitted hereunder
shall be in writing and shall be deemed to have been duly given if delivered
personally or sent by telex or telecopier, registered or certified mail
(return receipt requested), postage prepaid or courier to the parties at the
following address (or at such other address for any party as shall be
specified by like notice, provided that notices of a change of address shall
be effective only upon receipt thereof). Notices sent by mail shall be
effective two (2) days after mailing; notices sent by telex shall be effective
when answered back, notices sent by telecopier shall be effective when receipt
is acknowledged, and notices sent by courier guaranteeing next day delivery
shall be effective on the next business day after timely delivery to the
courier.
(i) if to the Company:
DDL ELECTRONICS, INC.
2151 Anchor Court
Newbury Park, CA 91320
Attention: Chief Executive Officer
Telephone: (805) 376-9415
Telecopy: (805) 376-9015
(ii) if to the Warrantholder, at the address of such
Warrantholder as it appears on the warrant register.
14. Miscellaneous
(a) The Warrantholder shall be entitled to all the registration
and other rights, benefits and privileges set forth in the Registration Rights
Agreement and the Securities Purchase Agreement.
(b) All the covenants and provisions herein by or for the
benefit of the Company shall bind and inure to the benefit of and be
enforceable by the Company and its successors or assigns, and all of the
covenants and provisions herein for the benefit of the Warrantholder hereof
shall inure to the benefit of and be enforceable by the Warrantholder and its
successors or assigns.
(c) This warrant certificate shall be governed by, and construed
in accordance with, the laws of the State of New York applicable to contracts
made and to be performed entirely in the State of New York the internal laws
of such State.
The Company (i) hereby irrevocably submits to the jurisdiction of the
state courts of the State of New York and the jurisdiction of the United
States District Court for the Southern District of New York, for the purpose
of any suit, action or other proceeding arising out of or based upon this
warrant certificate or the subject matter hereof brought by the Warrantholder,
(ii) hereby waives and agrees not to assert, by way of motion, as a defense or
otherwise, in any such suit, action or proceeding, any claim that it is not
subject personally to the jurisdiction of the above-named courts, that its
property is exempt or immune from attachment or execution, that the suit,
action or proceeding is brought in an inconvenient forum, that the venue of
the suit, action or proceeding is improper or that this warrant certificate or
the subject matter hereof may not be enforced in or by such court and (iii)
hereby waives in any such action, suit, or proceeding any offsets or
counterclaims. The Company hereby consents to service of process by certified
mail at the address set forth herein and agrees that its submission to
jurisdiction and its consent to service of process by mail is made for the
express benefit of the Warrantholder. Final judgment against the Company in
any such action, suit or proceeding shall be conclusive and may be enforced in
other jurisdictions (A) by suit, action or proceeding on the conclusive
evidence of the fact and of the amount of any indebtedness or liability of the
Company therein described or (B) in any other manner provided by or pursuant
to the laws of such other jurisdiction; provided, however, that the
Warrantholder may at its option bring suit, or institute other judicial
proceedings, against the Company or any of its assets in any state or Federal
court of the United States or of any country or place where the Company or its
assets may be found.
(d) Nothing in this warrant certificate shall be construed to
give any person or corporation other than the Company and the Warrantholder
and its permitted transferees any legal or equitable right, remedy or claim
under this warrant certificate; but this warrant certificate shall be for the
sole and exclusive benefit of the Company and the Warrantholder and its
permitted transferees.
IN WITNESS WHEREOF, an authorized officer of the Company has signed and
delivered to the Warrantholder this warrant certificate as of the date first
written above.
DDL ELECTRONICS, INC.
By: _______________________________
Gregory L. Horton
President and Chief Executive Officer
ATTEST:
By: _________________________
C.L. Haslam
Secretary
[CORPORATE SEAL]
ELECTION TO PURCHASE
(To be executed by the registered holder if such holder desires to exercise
the within warrant certificate)
To: DDL Electronics, Inc.
2151 Anchor Court
Newbury Park, CA 91320
The undersigned hereby (1) irrevocably elects to exercise his or its
rights to purchase ____ shares of Common Stock covered by the within warrant
certificate, (2) makes payment in full of the Purchase Price by enclosure of
certain 10% Senior Secured Notes due June __, 1997, (3) requests that
certificates for such shares be issued in the name of:
Please print name, address and Social Security or Tax Identification Number:
_________________________________________________
_________________________________________________
_________________________________________________
and (4) if said number of shares shall not be all the shares evidenced by the
within warrant certificate, requests that a new warrant certificate for the
balance of the shares covered by the within warrant certificate be registered
in the name of, and delivered to:
Please print name and address:
__________________________________________________
__________________________________________________
__________________________________________________
In lieu of receipt of a fractional share of Common Stock, the
undersigned will receive a check representing payment therefor.
Dated:___________________ ________________________________
By: ____________________________
____________________________
By: ____________________________
President
[AMENDMENT TO GRANT AGREEMENT BETWEEN THE INDUSTRIAL DEVELOPMENT
BOARD FOR NORTHERN IRELAND AND DDL ELECTRONICS LIMITED]
RESTRICTED COMMERCIAL [ON LETTERHEAD OF THE
INDUSTRIAL
DEVELOPMENT BOARD FOR
NORTHERN IRELAND]
The Secretary The Secretary
DDL Electronics Limited DDL Electronics Inc
3 Annesborough Industrial Estate 2151 Anchor Court
CRAIGAVON NEWBURY PARK
CO Armagh California 91320
BT67 9JJ United States of America
Our Ref: Al 543/19/L001/0054 2 May 1996
Dear Sir
1. The Department of Economic Development, (acting through the
Executive of the Industrial Development Board for Northern Ireland and
hereinafter called "IDB") hereby amends the offer of financial
assistance contained in IBD's letter to DDL Electronics Limited
(hereinafter called "the Company") dated 29 August 1989 as follows:-
the wording "The Secretary, Data-Design Laboratories, Inc." 7925
Centre Avenue, Cugamonga, CALIFORNIA 91730, United States of America"
shall be deleted and the following substituted therefor;
"The Secretary, DDL Electronics Inc, 2151 Anchor Court, NEWBURY PARK,
California 91320, United States of America";
wheresoever the wording "Data-Design Laboratories, Inc", appears
throughout the letter and any of the annexes to the letter it shall
be deleted and the wording "DDL Electronics Inc" substituted
therefor:
sub-paragraph 1(a) shall be deleted and the following substituted
therefor:
"(a) a grant not exceeding 861,650 pounds sterling of 30% of
vouched and approved expenditure:
(i) by the Company in respect of the qualifying expenditure
as set out in sub-paragraph 1(b) of Annex A ("the
capital grant"); and/;or
(ii) by a Lessor approved by the IDB on the purchase of new
machinery and equipment leased to the Company upon the
terms and conditions of an agreement to the entered
into between the company, the Lessor and the IDB, a
specimen copy of which is attached hereto;";
at line 1 of sub-paragraph 1(e) delete the figure "250,000 pounds
sterling" and insert the figure "380,000 pounds sterling";
two new sub-paragraphs shall be added to paragraph 1 as
follows:
"(f) an employment grant not exceeding 135,000 pounds sterling
("the fourth employment grant");
(g) an employment grant not exceeding 300,000 pounds sterling
("the fifth employment grant").";
paragraphs 8 and 9 shall be renumbered 10 and 11 respectively, the
remaining paragraphs renumbered accordingly and new paragraphs 8 and
9 inserted as follows:
"8. THE FOURTH EMPLOYMENT GRANT: The provisions of Annex F shall
apply to the fourth Employment grant.;
9. THE FIFTH EMPLOYMENT GRANT: The provisions of Annex G shall
apply to the fifth employment grant.";
at lines 5, 6, 7 and 8 of sub-paragraph 12(b) delete the dates "30
June 1991,", "31 December 1991,", "30 June 1992," and "31 December
1992," and insert the dates "30 June 1993,", "31 December 1993,", "30
June 1994," and "31 December 1994," respectively;
at line 3 of sub-paragraph 12(n) after the word "project" insert the
following "for a period of 4 years commencing on the date of
acceptance of this offer.";
at lines 4 and 5 of sub-paragraph 13(a) delete the figures "10" and
"13" respectively and insert the figures "12" and "15" respectively;
at line 4 of sub-paragraph 13(b) delete the figure "10" and insert
the figure "12";
at line 5 of paragraph 14 delete the date "1 January 1995" and insert
the date "1 January 1997";
a new sub-paragraph shall be added to paragraph 15 as follows:
"(g) an administration order is made in relation to the
Company;";
at line 7 of paragraph 15 delete the figure "12" and insert the
figure "14";
at line 3 of sub-paragraph 1(b) of Annex A delete the date "31
December 1994" and insert the date "31 December 1996";
at line 7 of sub-paragraph 1(b) of Annex A after the word "factory"
insert the following " and on the purchase and installation of
approved second-hand machinery and equipment installed at the factory
provided that the purchase thereof shall be an arm's length
transaction at a cost which shall not exceed the valuation of the
machinery and equipment by an independent valuer approved by IDB,
such valuation to be at the instigation and expense of the Company
and to be undertaken prior to installation of the machinery and
equipment at the factory.";
at line 8 of paragraph 1 of Annex C delete the date "31 December
1991" and insert the date "31 December 1995";
at line 8 of paragraph 1 of Annex D delete the date "31 December
1993" and insert the date "31 December 1995";
at line 3 of paragraph 1 of Annex E delete the figure "3" and insert
the figure "4".
At line 5 of paragraph 1 of Annex E after the wording "borrowing
facilities" insert the wording "and/or inter-company borrowing
facilities";
Paragraph 4 of Annex E shall be deleted;
at line 5 of paragraph 5 of Annex E delete the figure "50,000 pounds
sterling" and insert the figure "180,000 pounds sterling";
" ANNEX F
THE FOURTH EMPLOYMENT GRANT
1. Grant Rate: The fourth employment grant shall be payable at
the rate of 2,700 pounds sterling per worker for a maximum of 50 workers
employed by the company at the factory and shall (a) as respects the
6 month period commencing on 1 January 1989 be payable on the average (as
ascertained in accordance with paragraph 2 below) number of workers
employed during any such period such additional number being
calculated by reference to the previous highest 6 monthly average
number of workers in respect of which the fourth employment grant has
been paid.
2. Claims: Claims for payment of the fourth employment grant
shall be in writing and shall be accompanied by a report prepared by
the Company's auditors in the form required by the IDB reporting the
average number of workers employed at the factory during the 6 month
period to which such report relates.
3. Instalments: The fourth employment grant in respect of any 6
month period shall be payable (subject to paragraphs 4 and 5 below)
by means of 2 instalments as follows provided always that the
135,000 pounds sterling of the fourth employment grant earned by the
Company shall from the date the IDB authorises payment be offset against
the Company's outstanding indebtedness to the IDB under the Leasing
Agreement dated 1 January 1990 and Debenture dated 1 January 1990
between the Department of Economic Development and the Company:
(a) the first instalment following acceptance by IDB of the claim
in respect of the period to which it relates;
(b) the second instalment (subject to paragraph 4 below) not less
than 6 months after the end of the period to which the first
instalment relates.
4. Acceptance of a claim for payment: A claim shall be regarded
subject to paragraph 5 below) as accepted for payment by the IDB for
the purposes of paragraph 3 above at the time the IDB having carried
out all such investigations it considers appropriate with respect to
the claim and the Company having satisfied the IDB in respect of any
matters arising in connection with the claim whether in relation to
the documents referred to in paragraph 2 above or otherwise, is
satisfied that payment in respect of the claim should be made.
5. Power to withhold or reduce: the IDB shall be entitled to
withhold or reduce payment of the second, third and fourth
instalments referred to in paragraph 3 above if there has been any
decrease in the average number of workers employed at the factory (by
comparison with the average number for the period to which the claim
relates) as respects the second instalment during the first 6 month
period following the expiry of the period to which the claim relates.
6. Retrospective adjustment: There shall be excluded from any
computation of the average number of workers, any worker who either
being on statutory maternity leave or not working by reason of
sickness resigns without returning to work. The IDB shall be
entitled to make retrospective adjustments in any amount of the
fourth employment grant payable by the IDB or recoverable from the
Company and/or DDL Electronics Inc in any case where it is not
evident at the date of any such computation that any worker should be
excluded therefrom.
ANNEX G
THE FIFTH EMPLOYMENT GRANT
1. Grant Rate: The fifth employment grant shall be payable at the
rate of 6,122.45 pounds sterling per worker for a maximum of 49 workers
over and above a base figure of 100 workers employed by the Company at
the factory and shall (a) as respects the 6 month period commencing 1
July 1995 be payable on the average (as ascertained in accordance
with paragraph 2 below) number of workers employed during such period
over and above the base figure of 100 workers.
2. Claims: Claims for payment of the fifth employment grant shall
be in writing and shall be accompanied by a report prepared by the
Company's auditors in the form required by the IDB reporting the
average number of workers employed at the factory during the 6 month
period to which such report relates.
3. Instalments: The employment grant in respect of the 6 month
2period shall be payable (subject to acceptance of a claim in respect
thereof by the IDB in accordance with paragraph 4 below) by means of
4 instalments as follows:
(a) the first instalment following acceptance by the IDB of the
claim in respect of the period to which it relates;
(b) the second instalment (subject to paragraph 4 below) not less
than 6 months after the end of the period to which the first
instalment relates;
(c) the third instalment (subject to paragraph 4 below) not less
than 12 months after the end of the period to which the first
instalment relates;
(d) the fourth instalment (subject to paragraph 4 below) not less
than 18 months after the end of the period to which the first
instalment relates.
4. Acceptance of a claim for payment: A claim shall be regarded
(subject to paragraph 5 below) as accepted for payment by the IDB for
the purposes of paragraph 3 above at the time the IDB having carried
out all such investigations it considers appropriate with respect to
the claim and the Company having satisfied the IDB in respect of any
matters arising in connection with the claim whether in relation to
the documents referred to in paragraph 2 above or otherwise, is
satisfied that payment in respect of the claim should be made.
5. Power to withhold or reduce: The IDB shall be entitled to
withhold or reduce payment of the second, third and fourth instalments
referred to in paragraph 3 above if there has been any decrease in the
average number of workers employed at the factory (by comparison with
the average number for the period to which the claim relates) as
respects the second instalment during the first 6 month period
following the expiry of the period to which the claim relates, as
respects the third instalment during the second 6 month period
following the expiry of the period to which the claim relates, as
respects the fourth instalment during the third 6 month period
following the expiry of the period to which the claim relates.
6. Retrospective adjustment: There shall be excluded from any
computation of the average number of workers, any worker who either
being on statutory maternity leave or not working by reason of
sickness resigns without returning to work. The IDB shall be entitled
to make retrospective adjustments in any amount of the fifth
employment grant payable by the IDB or recoverable from the Company
and/or DDL Electronics Inc, in any case where it is not evident at the
date of nay such computation that any worker should be excluded
therefrom.".
2. CONDITION PRECEDENT: It is a condition precedent to the payment of
any further financial assistance under IDB's letter of offer dated 29
August 1989 as amended by this letter that the company shall procure
that DDL Electronics Inc, shall provide IDB with an Opinion by Counsel
on Counsel's headed paper, substantially in the terms of the draft
comprised in the Appendix attached hereto.
3. ACCEPTANCE: This letter is issued in triplicate. If you are
prepared to accept the foregoing amendment, the Form of Acceptance
should be completed on the counterpart of this letter in accordance
with the Articles of Association of the Company, together with the
form of Acceptance completed by DDL Electronics Inc and returned to IDB.
4. AVAILABILITY: The foregoing amendment shall remain open for a
period of one month from the date of this letter after which, if not
accepted by the Company and DDL Electronics Inc, it shall be deemed to
have been withdrawn.
5. WITHDRAWAL: On acceptance of this letter IDB's letters dated 22
June 1992, 16 June 1993 and 24 August 1995 shall be deemed to have been
withdrawn and cancelled.
Yours faithfully
/s/ D. McKeown
FORM OF ACCEPTANCE
The foregoing amendment to IDB's letter dated 29 August 1989 is hereby
accepted by DDL Electronics Limited.
The Common Seal of DDL Electronics Limited
was affixed hereto this 7th
day of May one thousand nine
hundred and ninety-six in the presence
of:-
/s/ John Coyne - Director
__________________________________
/s/ Sean Ritchie - Secretary
__________________________________
FORM OF ACCEPTANCE
The foregoing amendment to IDB's letter
dated 29 August 1989 is hereby accepted by
DDL Electronics Inc this 1st
day of June one thousand nine
hundred and ninety-six in the presence of:-
/s/ Gregory L. Horton - CEO
__________________________________
/s/ Richard K. Vitelle - Secretary
___________________________________
Duly authorised representatives of DDL Electronics Inc
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT, dated as of the 12th day of September,
1996, is between DDL ELECTRONICS, INC., a Delaware corporation (the
"Company"), and RICHARD K. VITELLE ("Vitelle").
WHEREAS, the Company, being well satisfied with Vitelle's services as
Vice President of Finance and Chief Financial Officer (referred to herein
together as "Chief Financial Officer"), desires to retain him in an
executive capacity for the period and upon the other terms and conditions
herein provided; and
WHEREAS, Vitelle is willing to continue in employment by the Company
pursuant to the terms and conditions of this Agreement;
NOW, THEREFORE, in consideration of the premises, the mutual covenants
and obligations herein contained, and for other good and valuable
consideration, the receipt, adequacy, and sufficiency of which are hereby
acknowledged, the parties hereto do hereby covenant and agree as follows:
1. EMPLOYMENT
1.1 Position. The Company hereby confirms Vitelle's employment as
its Chief Financial Officer. From time to time during the term of this
Agreement, Vitelle may be offered, and (in his discretion) may accept or
reject, the duties associated with additional offices in the Company and
its subsidiaries. Vitelle shall report directly to the Company's Chief
Operating Officer, or, if at any time the Company has no Chief Operating
Officer, then directly to the Company's President, or, if at any time the
Company has no President, then directly to the Company's Chief Executive
Officer, and in any case shall perform the duties described in Section 1.2
hereof, subject to such limitations of authority as may be established from
time to time by the Company's Chief Operating Officer (or President, if the
Company has no Chief Operating Officer (or Chief Executive Officer, if the
Company has no President)) and applicable law. Notwithstanding any other
provision of this Agreement, Vitelle shall at all times during the term of
this Agreement function as an executive officer of the Company, with duties
that require the performance of policy making functions as contemplated by
Rule 3b-7 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act").
1.2 Duties. Vitelle's duties will include all those duties
customarily associated with the position of Chief Financial Officer in an
emerging growth company, subject to the direction of the Company's Chief
Operating Officer (or President, if the Company has no Chief Operating
Officer (or Chief Executive Officer, if the Company has no President)).
Such duties shall include management of all financial functions and
financial facilities required of and maintained by the Company and its
subsidiaries. Vitelle agrees to devote substantially his entire business
time and attention to the performance of his duties hereunder and to serve
the Company diligently and to the best of his abilities. Notwithstanding
the foregoing, Vitelle shall have the continuing right (a) to make passive
investments in the securities of any publicly-owned corporation, (b) to
make any other passive investments with respect to which he is not
obligated or required to, and does not in fact, devote any substantial
managerial efforts that interfere with the fulfillment of his duties to the
Company, and, (c) subject to the prior written approval of the Company's
Board of Directors (the "Board of Directors"), to serve as a director of or
consultant to other companies and entities. Vitelle represents that he is
under no actual or alleged restriction, limitation or other prohibition
(whether as a result of prior employment or otherwise) to perform his
duties as described herein.
2. COMPENSATION AND BENEFITS
2.1 Base Annual Salary. The Company shall pay Vitelle a base annual
salary of $125,000 (the "Base Annual Salary") periodically throughout the
year, commencing the date hereof, in accordance with its customary payroll
practices, as modified from time to time, subject to all payroll and
withholding deductions required by applicable law. Base Annual Salary
shall be reviewed at least annually by the Compensation Committee of the
Board of Directors (the "Compensation Committee"), but shall not be
decreased without Vitelle's prior written consent.
2.2 Cash Bonuses. For the Company's fiscal year commencing July 1,
1996, the Company will pay Vitelle a cash bonus quarterly, in arrears, in
an amount per annum equal to 30% of his initial Base Annual Salary (as
stated above).
2.3 Other Incentive Compensation. Subject to the satisfaction of
such criteria and the achievement of such objectives as the Compensation
Committee may establish, Vitelle may receive additional cash bonuses and
other incentive compensation (including stock options), it being understood
that the Compensation Committee shall at least once annually consider the
payment of a cash bonus to Vitelle.
2.4 Other Benefits. Vitelle shall be entitled to other benefits and
perquisites no less favorable than those provided to the Company's
employees generally, as such benefits and perquisites may be modified from
time to time in the Company's discretion. Such benefits shall in all
events include health insurance, a 401(k) plan and 11 paid holidays
annually. Such perquisites shall in all events include three weeks of
vacation annually, disability insurance and group term life insurance (in
an amount equal to at least two times Base Annual Salary). To assist with
the commuting and business travel essential to conducting business in
greater Los Angeles, throughout the term of this Agreement the Company will
provide Vitelle with an automobile allowance of $500 per month or, at his
election, will provide him with a company-acquired and -maintained
automobile the expense of which shall not exceed $500 per month or such
higher amount as may be authorized in writing by the Company's Chief
Operating Officer, President or Chief Executive Officer.
2.5 Expense Reimbursement. Vitelle shall be reimbursed by the
Company for his reasonable out-of-pocket business expenses in accordance
with the Company's established policies applicable to executive officers
generally. In addition, the Company will reimburse Vitelle for all
customary expenses, not to exceed $25,000 in the aggregate, incurred by
Vitelle and his wife to relocate their principal residence to Ventura
County, California.
2.6 Stock Options. Vitelle and the Company acknowledge that, as of
September 11, 1996, there were issued and outstanding and owned by Vitelle
options to purchase 185,000 shares (the "Old Options") of the Company's
Common Stock, par value $.01 per share ("Common Stock"). Effective the
date hereof, the Old Options are annulled and void and have no further
force or effect; in furtherance thereof, Vitelle agrees promptly to tender
to the Company, for cancellation, any and all certificates evidencing Old
Options. The parties further acknowledge that, subject to Vitelle's tender
of said certificates, the Compensation Committee has granted to Vitelle, on
and as of the date hereof, incentive stock options to purchase 185,000
shares of Common Stock at an exercise price of $1.25 per share ("New
Options"). The parties further acknowledge that the Compensation Committee
also has granted to Vitelle, on and as of the date hereof, incentive stock
options to purchase an additional 200,000 shares of Common Stock at an
exercise price of $1.25 per share ("Additional Options"). The New Options
and the Additional Options are evidenced by three separate agreements
between Vitelle and the Company dated the date hereof and referred to
herein collectively as the "Option Agreements."
3. TERMINATION AND SEVERANCE PAY
3.1 At Will. Vitelle and the Company acknowledge and agree that
Vitelle's employment with the Company is "at will" during the term of this
Agreement. Accordingly, either party may terminate Vitelle's employment by
the Company, with or without cause, in which case Vitelle shall have no
claim for lost wages, although termination of Vitelle's employment shall be
subject to the terms and conditions of this Agreement regarding severance
pay, benefits and other obligations. Vitelle and the Company are not party
to any oral agreement relating to Vitelle's employment by the Company.
3.2 Voluntary Resignation. In the event that Vitelle's employment
with the Company terminates as a result of his voluntary resignation,
Vitelle shall be entitled to no severance pay or benefits. If at any time
the principal place of Vitelle's employment is relocated to any site beyond
the 35-mile radius of 2151 Anchor Court, Newbury Park, California, then
Vitelle may resign at any time within the following twelve months,
whereupon his resignation shall be treated as termination by the Company
other than For Just Cause and he shall be entitled to severance payments
and benefits for twelve months as and in the manner, and to the extent,
contemplated by Sections 3.3(a) and 3.3(b) hereof. For purposes of this
Agreement, the term "voluntary resignation" shall not include a resignation
tendered by Vitelle pursuant to a written request of the Chief Operating
Officer, the President, the Chief Executive Officer or the Board of
Directors, provided that a copy of such request is delivered to the
Chairman of the Board of Directors promptly following its delivery to
Vitelle, and provided further that the Board of Directors does not overrule
such request within one week of its Chairman's receipt of such copy. A
resignation tendered by Vitelle pursuant to a written request of the Chief
Operating Officer, the President, the Chief Executive Officer or the Board
of Directors shall, for purposes of this Agreement, be treated as an
involuntary termination, and Vitelle's entitlement to severance pay and
additional benefits in accordance with Sections 3.3(a) and 3.3(b) hereof
shall depend upon whether such request or suggestion was For Just Cause (as
defined in Section 3.3(c) hereof).
3.3 Involuntary Termination.
(a) Severance Pay. In the event that Vitelle's employment
with the Company is terminated by the Company For Just Cause (as defined in
Section 3.3(c) hereof), Vitelle shall not be entitled to severance pay or
benefits. In the event that Vitelle's employment with the Company is
terminated by the Company other than For Just Cause, Vitelle shall be
entitled to severance pay in the form of continuation of Base Annual Salary
for twelve months from the effective date of the termination. Vitelle
shall have no duty to mitigate such payments by seeking or accepting other
employment; accordingly, such payments shall not be reduced due to
Vitelle's receipt of other compensation from such other employment as he
may obtain during the term of his severance payments.
(b) Additional Benefits. In the event that Vitelle's
employment with the Company is terminated by the Company other than For
Just Cause, Vitelle shall be entitled to continue to participate in the
Company's employee benefit programs as and to the extent theretofore made
available to them pursuant to Section 2.4 above. Such benefits shall be
continued at no additional cost to Vitelle, except to the extent, if any,
that tax laws require the inclusion of the value of such benefits in his
gross income. Such benefits shall continue for the benefit of Vitelle for
the entire period of his severance pay continuation as provided in Section
3.3(a) above, in the same manner and at the same level as in effect
immediately prior to Vitelle's termination. In addition, upon any
termination of Vitelle by the Company other than For Just Cause, (i) any
and all employee stock options, stock appreciation rights, restricted stock
and other similar rights and financial assets held by Vitelle shall become
fully vested and exercisable immediately, and (ii) any and all cash bonuses
that would be payable to Vitelle at the end of a period but for his earlier
termination shall be payable to him immediately and pro rata (in accordance
with the percentage of completion of the period in question and with
reference to the best available financial information proximate to the time
of termination).
(c) For Just Cause. For purposes of this Agreement, the term
"For Just Cause" shall mean any termination of employment of Vitelle for
one or more of the following reasons: (i) the substantial failure by such
person, for any reason other than his death or Disability (as defined
below), to comply with a lawful, written instruction of the Company's Chief
Operating Officer, President, Chief Executive Officer or Board of
Directors, which instruction is consistent with his duties as elsewhere
provided in this Agreement, which instruction is not overruled by higher
corporate authority and which failure continues without interruption for
the 30 days immediately following Vitelle's receipt of such instruction;
(ii) the substantial and continuing failure of Vitelle, for any reason
other than his death or Disability, to render vital service to the Company
in execution of his essential duties, as determined by the Board of
Directors in good faith with reference to such person's employment
agreement then in effect after giving written notice to such person and an
opportunity for him to remedy such failure within 30 days of receiving such
notice; (iii) the conviction of such person for a felony involving an act
of moral turpitude, which conviction has become final and non-appealable;
(iv) recklessness in the performance of such person's duties to the Company
causing material harm to the Company; or (v) material dishonesty, material
breach of fiduciary duty or material breach by Vitelle of any
representation, covenant or other agreement contained in this Agreement.
(d) Constructive Termination. If Vitelle, without his prior
written consent, is removed from the position of Chief Financial Officer,
or if Vitelle's duties are restricted or reduced in such a manner as to
result in his position with the Company no longer including duties
requiring the performance of policy making functions by an executive
officer within the meaning of Rule 3b-7 of the Exchange Act, then, in
either such case, the employment of Vitelle shall be deemed, in his
discretion, involuntarily terminated by the Company other than For Just
Cause, it being understood that Vitelle must exercise his discretion under
this Section 3.3(d) in writing to the Board of Directors within sixty days
following the latest to occur of any event constituting involuntary
termination pursuant to this Section 3.3(d).
3.4 Death. In the event of Vitelle's death, this Agreement shall
automatically terminate and shall be of no further force or effect, it
being understood that the Company shall be obligated to make all the
payments and to provide all the benefits due to Vitelle hereunder to the
time of his death.
3.5 Disability. In the event of Vitelle's Disability (as defined
below) during the term of this Agreement for any period of at least three
consecutive months, the Company shall have the right, exercisable in its
discretion, to terminate this Agreement. In the event that the Company
does elect to terminate this Agreement, Vitelle shall not be entitled to
any severance pay but shall be entitled to normal disability benefits in
accordance with such policies of the Company as may then be in effect. For
purposes of this Agreement, "Disability" shall mean the inability of
Vitelle to perform the essential functions of his employment hereunder by
reason of physical or mental illness or incapacity as determined by a
physician chosen by the Company and reasonably satisfactory to Vitelle or
his legal representative.
4. TERM
This Agreement shall become effective as of the date hereof and shall
terminate on the date that is five years after the date hereof, unless
earlier terminated pursuant to Article 3 hereof.
5. NONDISCLOSURE, NON-SOLICITATION, NON-COMPETE AND NON-DISPARAGEMENT
5.1 Nondisclosure. Except as is reasonably necessary in the
performance of his duties hereunder, Vitelle shall not disclose to any
person or entity or use for his own direct or indirect benefit any
Confidential Information (as defined below) pertaining to the Company
obtained by him in connection with his employment with the Company. For
purposes of this Agreement, the term "Confidential Information" shall
include information with respect to the Company's products, services,
processes, suppliers, customers, customers' account executives, financial,
sales and distribution information, price lists, identity and list of
actual and potential customers, trade secrets, technical information,
business plans and strategies; provided, however, that such information
shall not be treated as Confidential Information to the extent that it has
been publicly disclosed by the Company (other than by Vitelle through a
breach of this Section 5.1).
5.2 Non-Solicitation. Vitelle agrees that, so long as he is
employed by the Company and for a period of one year after termination of
his employment for any reason other than involuntary termination not For
Just Cause, he shall not (a) directly or indirectly solicit, induce or
attempt to solicit or induce any Company employee to discontinue such
employee's employment by the Company, (b) usurp any opportunity of the
Company of which he became aware during his tenure at the Company, or that
was made available to him on the basis of a mistaken belief that he was
still employed by the Company, or (c) directly or indirectly solicit or
induce or attempt to influence any person or business that is an account,
customer or client of the Company to reduce or cancel the business of any
such account, customer or client with the Company.
5.3 Non-Compete. Vitelle agrees that, so long as he is employed by
the Company and for a period of one year after termination of his
employment for any reason other than involuntary termination not For Just
Cause, he shall not, without prior written consent of the Company's Chief
Operating Officer (or President, if the Company has no Chief Operating
Officer (or Chief Executive Officer, if the Company has no President)),
either directly or indirectly (including, without limitation, through a
partnership, joint venture, corporation or other entity or as a consultant,
director or employee), engage in the business engaged in by the Company as
of the date hereof within any of those geographical areas in which the
Company currently conducts active business operations. The parties hereto
agree that the scope and the nature of such covenant, and the duration and
the area within which such covenant is to be effective, are reasonable in
light of all facts and circumstances.
5.4 Non-Disparagement. Vitelle agrees that, so long as he is
employed by the Company and for a period of one year after termination of
his employment for any reason other than involuntary termination not For
Just Cause, he shall not make any public comment (whether written or oral)
concerning or touching upon the Company or any of its Affiliates, including
but not limited to any or all of the Company's executive officers and
directors, which comment would tend to disparage the personal, financial or
business reputation of such other person or persons, except for such
comments as may be required by law and except for such comments as may be
made in litigation, arbitration or mediation with such person or persons.
6. CERTAIN COVENANTS OF THE COMPANY
6.1 Amendments of Charter or By-laws. The Company covenants with
Vitelle that it shall not permit the indemnification provisions of the
charter or the by-laws of the Company to be amended in any manner that is
or may be construed as adverse to his interests without his prior written
consent. The Company agrees and acknowledges that Vitelle's remedy at law
for any breach of this Section 6.1 would be inadequate. The Company agrees
that, for breach of any such provision, in addition to such other remedies
as may be available to him at law or in equity, Vitelle shall be entitled
to injunctive relief and to a judicial order of specific performance. The
Company agrees not to oppose any formal request by Vitelle for such relief
or such order.
6.2 Legal Fees. The Company agrees to pay any and all reasonable
legal fees and other expenses that may be incurred by Vitelle in connection
with his efforts to seek a resolution of any dispute with the Company
arising under this Agreement or the Option Agreements, but only if Vitelle
shall have obtained a judgment in his favor against the Company.
7. CHANGE IN CONTROL
(a) If (1) a Change in Control of the Company (as defined below)
shall occur and (2) Vitelle's employment shall be terminated (including,
without limitation, any constructive termination pursuant to Section
3.3(d)) for any reason other than For Just Cause or his voluntary
resignation within six months after such Change in Control of the Company,
then the Company shall pay to Vitelle, (A) upon demand delivered to the
Company at any time during the six months immediately following such
termination, an amount in cash equal to his Base Annual Salary in effect
immediately preceding such termination, plus (B) upon demand delivered to
the Company at any time during the six months immediately following such
termination, an amount equal to the fair market value of any and all stock
options held by him that remain unexercised at the time of such demand for
payment; provided that: (i) for the purposes of this Article 7 and
notwithstanding any provision in the Option Agreements, any and all
unexpired stock options held by Vitelle upon his termination shall be
considered vested and exercisable in full at any time during the six months
immediately following such termination; (ii) for the purposes of this
Article 7, any and all stock options held by Vitelle that remain
unexercised at the time of his demand for payment under clause (B) hereof
shall be valued by an independent public accountant selected by the Company
and approved by Vitelle (whose approval shall not be withheld arbitrarily)
using the Black-Scholes option valuation formula; (iii) the amount payable
to Vitelle pursuant to clause (A) hereof shall be in substitution for, and
not in addition to, any amount otherwise payable to him under Section
3.3(a); (iv) upon payment to Vitelle of the full amount due to him pursuant
to this Article 7, any and all unexercised stock options then held by
Vitelle shall be considered expired and of no further force or effect; and
(v) the total cash payment to Vitelle pursuant to this Article 7 shall be
reduced by any amount necessary to avoid the creation of a nondeductible
"excess parachute payment" by the Company as defined in Section 280G of the
Internal Revenue Code of 1986, as amended, and the regulations promulgated
thereunder.
(b) For the purposes of this Article 7: (1) a "Change in Control of
the Company" shall have occurred if (A) any person (within the meaning of
Section 13(d) of the Exchange Act) other than the Company or an Affiliate
shall become the beneficial owner (as that term is defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of 35% or more of the
outstanding Common Stock (such person's beneficial ownership to be
determined, in the case of warrants, options or rights to acquire Common
Stock, pursuant to paragraph (d) of Rule 13d-3 under the Exchange Act), (B)
the stockholders of the Company shall approve (i) a merger or consolidation
of the Company with or into any person other than an Affiliate, (ii) any
sale, lease, exchange or other transfer of all or substantially all the
assets of the Company to any person other than an Affiliate or (iii) the
dissolution of the Company or (C) at the end of any period commencing one
month prior to the consummation of any of the events described in clauses
(i), (ii) and (iii) above and ending five months after such consummation,
individuals who at the commencement of such period were directors of the
Company (the "Original Directors") shall have resigned or retired or
otherwise shall have been removed from the Board of Directors, or during
such period the number of directors shall have been increased, or both,
with the result that, at the end of such period, the Original Directors who
remain directors of the Company constitute less than 50% of the entire
Board of Directors; (2) an "Affiliate" shall mean any person who is, at the
date hereof, controlling or controlled by, or under common control with,
the Company, including, without limitation, any person with a Schedule 13D
on file with the Securities and Exchange Commission with respect to the
Common Stock on the date hereof; and (3) "person" shall mean any
individual, group, corporation, partnership, joint venture, association,
joint-stock company, limited partnership, limited liability company, trust,
unincorporated organization, government or agency or political subdivision
of any government and shall also have the meaning assigned to it in Section
13(d) of the Exchange Act.
8. MISCELLANEOUS
8.1 Directors' And Officers' Liability Insurance. The Company shall
use its best efforts at all times to maintain in effect a directors' and
officers' liability insurance policy in an amount, and with such coverages,
as are customary in the Company's industry, which policy shall be
underwritten by an insurer reasonably satisfactory to Vitelle.
8.2 No Waiver. The waiver by either party of a breach of any
provision of this Agreement shall not operate as or be construed as a
waiver of any subsequent breach thereof.
8.3 Notices. Any and all notices referred to herein shall be
furnished in writing and shall be delivered by hand or sent by registered
or certified mail, postage prepaid, to the respective parties at the
following addresses (or at such other address as either party may from time
to time designate to the other by like notice):
To the Company: DDL Electronics, Inc.
2151 Anchor Court
Newbury Park, CA 91320
Attention: President
To Vitelle: Mr. Richard K. Vitelle
Chief Financial Officer
DDL Electronics, Inc.
2151 Anchor Court
Newbury Park, CA 91320
8.4 Assignment. This Agreement may not be assigned by Vitelle and
may not be assigned by the Company otherwise than by operation of law.
This Agreement shall be binding upon the Company's successors and assigns.
8.5 Entire Agreement. This Agreement supersedes any and all prior
written or oral agreements between Vitelle and the Company and, together
with the Option Agreements, evidences the entire understanding of the
parties hereto with respect to the terms and conditions of Vitelle's
employment with the Company.
8.6 Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of California without
regard to the choice of law rules of the State of California or any other
jurisdiction.
8.7 Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed to constitute an original, but all of which
shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement as of the day and year first above written.
DDL ELECTRONICS, INC.
By: /s/ Gregory L. Horton
----------------------------
Gregory L. Horton
President and CEO
/s/ Richard K. Vitelle (L.S.)
----------------------------
Richard K. Vitelle
EXHIBIT 11
(1 of 2)
DDL ELECTRONICS, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
Year Ended June 30
------------------------------------
1996 1995 1994
---- ---- ----
PRIMARY EARNINGS PER SHARE:
Loss before
extraordinary item $ (758,000) $(2,366,000) $(8,354,000)
Extraordinary item 2,356,000 2,441,000 -
---------- ---------- ----------
Net income $ 1,598,000 $ 75,000 $(8,354,000)
========== ========== ==========
Weighted average number of
common shares outstanding 18,180,034 15,149,968 14,239,292
Assumed exercise of options
and warrants net of shares
assumed reacquired 626,830 820,549 857,883
---------- ---------- ----------
Average common shares and
common share equivalents 18,806,864 15,970,517 15,097,175
========== ========== ==========
Primary earnings per share:
Income (loss) before
extraordinary item $(0.04) $(0.15) $(0.55)
Extraordinary item 0.13 0.15 -
---- ---- ----
Earnings (loss) per share $ 0.09 $ - $(0.55)
==== ==== ====
<PAGE>
EXHIBIT 11
(2 of 2)
DDL ELECTRONICS, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
Year Ended June 30
------------------------------------
1996 1995 1994
---- ---- ----
FULLY DILUTED EARNINGS PER SHARE:
Income (loss) before
extraordinary item $ (758,000) $(2,366,000) $(8,354,000)
Add back net interest
related to convertible
subordinated debentures 204,000 134,000 135,000
---------- ---------- ----------
Income (loss) before
extraordinary item for
fully diluted computation (554,000) (2,232,000) (8,219,000)
Extraordinary item 2,356,000 2,441,000 -
---------- ---------- ----------
Net income for fully
diluted computation $ 1,802,000 $ 209,000 $(8,219,000)
========== ========== ==========
Weighted average number of
common shares outstanding 18,180,034 15,149,968 14,239,292
Assumed exercise of options
and warrants net of shares
assumed reacquired under
treasury stock method
using period end market
price, if higher than
average market price 658,841 1,008,566 852,650
Assumed conversion of
convertible subordinated
debentures 893,332 748,632 764,964
---------- ---------- ----------
Average fully diluted shares 19,732,207 16,907,166 15,856,906
========== ========== ==========
Fully diluted earnings
per share:
Income (loss) before
extraordinary item $(0.03) $(0.13) $(0.52)
Extraordinary item .12 .14 -
---- ---- ----
Earnings (loss) per share $ 0.09 $ 0.01 $(0.52)
==== ==== ====
Note: The calculated fully diluted earnings per share
are antidilutive for 1995 and 1994.
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.
Aeroscientific Corp. (California)
(99.9%-owned by DDL Electronics, Inc.)
California
Aeroscientific Corp. (Oregon)
(100%-owned by Aeroscientific Corp.(California))
Oregon
A.J. Electronics, Inc.
California
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
SMTEK, Inc.
California
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
DDL Electronics, Inc.
We consent to the incorporation by reference in the Registration
Statement on Form S-3 (No. 333-02969) and the Registration Statements on
Form S-8 (Nos. 33-18356, 33-45102, 33-74400 and 333-08689) of DDL
Electronics, Inc. of our report dated September 6, 1996, except for the
last paragraph of Note 12, which is as of October 9, 1996, relating to
the consolidated balance sheets of DDL Electronics, Inc. and
subsidiaries as of June 30, 1996 and 1995 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, 1996,
which report appears in the June 30, 1996 Annual Report on
Form 10-K of DDL Electronics, Inc.
/s/ KPMG PEAT MARWICK LLP
Los Angeles, California
October 9, 1996
<TABLE> <S> <C>
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<S> <C>
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<PERIOD-END> JUN-30-1996
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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.
